Builders FirstSource, Inc. (Form: 10-Q, Received: 11/02/2018 13:44:41)

Large accelerated filer

Accelerated filer

Non-accelerated filer

Small reporting company

Emerging growth company

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2018

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number 0-51357

BUILDERS FIRSTSOURCE, INC.

(Exact name of registrant as specified in its charter)

Delaware		52-2084569
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

2001 Bryan Street, Suite 1600
Dallas, Texas		75201
(Address of principal executive offices)		(Zip Code)

(214) 880-3500

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

The number of shares of the issuer’s common stock, par value $0.01, outstanding as of October 30, 2018 was 114,724,995.

BUILDERS FIRSTSOURCE, INC.

Index to Form 10-Q

		Page
	PART I — FINANCIAL INFORMATION
Item 1.	Financial Statements	3
	Condensed Consolidated Statement of Operations and Comprehensive Income (Unaudited) for the Three and Nine Months Ended September 30, 2018 and 2017	3
	Condensed Consolidated Balance Sheet (Unaudited) as of September 30, 2018 and December 31, 2017	4
	Condensed Consolidated Statement of Cash Flows (Unaudited) for the Nine Months Ended September 30, 2018 and 2017	5
	Condensed Consolidated Statement of Changes in Stockholders’ Equity (Unaudited) for the Nine Months Ended September 30, 2018	6
	Notes to Condensed Consolidated Financial Statements (Unaudited)	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	15
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	23
Item 4.	Controls and Procedures	23
	PART II — OTHER INFORMATION
Item 1.	Legal Proceedings	25
Item 1A.	Risk Factors	25
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	25
Item 3.	Defaults Upon Senior Securities	25
Item 4.	Mine Safety Disclosures	25
Item 5.	Other Information	26
Item 6.	Exhibits	27

P ART I — FINANCIAL INFORMATION

Item 1. Financial Statements (unaudited)

BUILDERS FIRSTSOURCE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME

	Three Months Ended September 30,				Nine Months Ended September 30,
	2018		2017		2018		2017
	(Unaudited) (In thousands, except per share amounts)
Sales	$	2,118,467	$	1,878,909	$	5,908,791	$	5,255,270
Cost of sales		1,595,686		1,419,587		4,478,630		3,959,099
Gross margin		522,781		459,322		1,430,161		1,296,171
Selling, general and administrative expenses		400,993		370,638		1,151,670		1,075,869
Income from operations		121,788		88,684		278,491		220,302
Interest expense, net		29,106		33,836		84,805		103,703
Income before income taxes		92,682		54,848		193,686		116,599
Income tax expense		19,354		15,098		40,516		35,117
Net income	$	73,328	$	39,750	$	153,170	$	81,482
Comprehensive income	$	73,328	$	39,750	$	153,170	$	81,482
Net income per share:
Basic	$	0.64	$	0.35	$	1.34	$	0.73
Diluted	$	0.63	$	0.34	$	1.31	$	0.71
Weighted average common shares:
Basic		114,707		112,688		114,480		112,368
Diluted		116,456		115,871		116,614		115,310

The accompanying notes are an integral part of these condensed consolidated financial statements.

BUILDERS FIRSTSOURCE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEET

	September 30, 2018			December 31, 2017
	(Unaudited) (In thousands, except per share amounts)
ASSETS
Current assets:
Cash and cash equivalents	$	34,446		$	57,533
Accounts receivable, less allowances of $13,470 and $11,771 at September 30, 2018 and December 31, 2017, respectively		805,317			631,992
Other receivables		59,389			71,232
Inventories, net		679,471			601,547
Other current assets		35,351			33,564
Total current assets		1,613,974			1,395,868
Property, plant and equipment, net		665,732			639,303
Assets held for sale		7,874			5,273
Goodwill		740,411			740,411
Intangible assets, net		111,266			132,567
Deferred income taxes		38,760			75,105
Other assets, net		15,568			17,597
Total assets	$	3,193,585		$	3,006,124
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Checks outstanding	$	13,531		$	—
Accounts payable		487,775			514,282
Accrued liabilities		255,836			271,597
Current maturities of long-term debt and lease obligations		14,620			12,475
Total current liabilities		771,762			798,354
Long-term debt and lease obligations, net of current maturities, debt discount and debt issuance costs		1,826,962			1,771,945
Other long-term liabilities		56,546			59,616
Total liabilities		2,655,270			2,629,915
Commitments and contingencies (Note 7)
Stockholders' equity:
Preferred stock, $0.01 par value, 10,000 shares authorized; zero shares issued and outstanding		—			—
Common stock, $0.01 par value, 200,000 shares authorized; 114,725 and 113,572 shares issued and outstanding at September 30, 2018 and December 31, 2017, respectively		1,147			1,136
Additional paid-in capital		554,223			546,766
Accumulated deficit		(17,055	)		(171,693	)
Total stockholders' equity		538,315			376,209
Total liabilities and stockholders' equity	$	3, 193,585		$	3,006,124

The accompanying notes are an integral part of these condensed consolidated financial statements.

BUILDERS FIRSTSOURCE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

	Nine Months Ended September 30,
	2018			2017
	(Unaudited) (In thousands)
Cash flows from operating activities:
Net income	$	153,170		$	81,482
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization		72,691			70,796
Amortization and write-off of debt issuance costs and debt discount		3,479			5,163
Deferred income taxes		35,829			29,060
Stock compensation expense		9,929			9,916
Net (gain) loss on sale of assets and asset impairments		(480	)		5,079
Changes in assets and liabilities:
Receivables		(151,092	)		(158,617	)
Inventories		(86,639	)		(85,313	)
Other current assets		(1,786	)		2,837
Other assets and liabilities		1,442			3,776
Accounts payable and checks outstanding		(12,792	)		71,247
Accrued liabilities		(14,219	)		(43,024	)
Net cash provided by (used in) operating activities		9,532			(7,598	)
Cash flows from investing activities:
Purchases of property, plant and equipment		(78,693	)		(48,060	)
Proceeds from sale of property, plant and equipment		1,890			4,802
Net cash used in investing activities		(76,803	)		(43,258	)
Cash flows from financing activities:
Borrowings under revolving credit facility		1,243,000			894,000
Repayments under revolving credit facility		(1,189,000	)		(839,000	)
Repayments of long-term debt and other loans		(11,173	)		(8,555	)
Proceeds from long-term debt and other loans		3,818			—
Payments of loan costs		—			(2,799	)
Exercise of stock options		2,394			4,574
Repurchase of common stock		(4,855	)		(2,476	)
Net cash provided by financing activities		44,184			45,744
Net change in cash and cash equivalents		(23,087	)		(5,112	)
Cash and cash equivalents at beginning of period		57,533			14,449
Cash and cash equivalents at end of period	$	34,446		$	9,337

Supplemental disclosure of non-cash activities

For the nine months ended September 30, 2018 and 2017, the Company retired assets subject to lease finance obligations of $0.6 million and $15.0 million and extinguished the related lease finance obligation of $0.7 million and $12.9 million, respectively.

The Company purchased equipment which was financed through capital lease obligations of $9.0 million and $14.2 million in the nine months ended September 30, 2018 and 2017, respectively. In addition, purchases of property, plant and equipment included in accounts payable were $2.5 million and $1.0 million for the nine months ended September 30, 2018 and 2017, respectively.

The accompanying notes are an integral part of these condensed consolidated financial statements.

BUILDERS FIRSTSOURCE, INC. AND SUBSIDIARIES

CONDENSED C ONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

							Additional Paid
	Common Stock						in			Accumulated
	Shares			Amount			Capital			Deficit			Total
	(Unaudited)
	(In thousands)
Balance at December 31, 2017		113,572		$	1,136		$	546,766		$	(171,693	)	$	376,209
Vesting of restricted stock units		821			8			(8	)		—			—
Stock compensation expense		—			—			9,929			—			9,929
Exercise of stock options		568			5			2,389			—			2,394
Repurchase of common stock		(236	)		(2	)		(4,853	)		—			(4,855	)
Cumulative effect adjustment (Note 1)		—			—			—			1,468			1,468
Net income		—			—			—			153,170			153,170
Balance at September 30, 2018		114,725		$	1,147		$	554,223		$	(17,055	)	$	538,315

The accompanying notes are an integral part of these condensed consolidated financial statements.

BUILDERS FIRSTSOURCE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

1. Basis of Presentation

Builders FirstSource, Inc., a Delaware corporation formed in 1998, is a leading supplier and manufacturer of building materials, manufactured components and construction services to professional homebuilders, sub-contractors, remodelers and consumers. The Company operates 403 locations in 40 states across the United States. In this quarterly report, references to the “Company,” “we,” “our,” “ours” or “us” refer to Builders FirstSource, Inc. and its consolidated subsidiaries unless otherwise stated or the context otherwise requires.

In the opinion of management, the accompanying unaudited condensed consolidated financial statements include all recurring adjustments and normal accruals necessary for a fair statement of the Company’s financial position, results of operations and cash flows for the dates and periods presented. Results for interim periods are not necessarily indicative of the results to be expected during the remainder of the current year or for any future period. Intercompany transactions are eliminated in consolidation.

The condensed consolidated balance sheet as of December 31, 2017 is derived from the audited consolidated financial statements but does not include all disclosures required by accounting principles generally accepted in the United States of America. This condensed consolidated balance sheet as of December 31, 2017 and the unaudited condensed consolidated financial statements included herein should be read in conjunction with the more detailed audited consolidated financial statements for the year ended December 31, 2017 included in our most recent annual report on Form 10-K. Accounting policies used in the preparation of these unaudited condensed consolidated financial statements are consistent with the accounting policies described in the Notes to Consolidated Financial Statements included in our Form 10-K.

Recent Accounting Pronouncements

In August 2018, the Financial Accounting Standards Board (“FASB”) issued an update to the existing guidance under the Intangibles-Goodwill and Other topic of the Accounting Standards Codification (“Codification”) which aligns the requirements for capitalizing implementation costs of a cloud computing arrangement service contract with the requirements for capitalizing implementation costs incurred for an internal-use software license. This update is effective for public companies for annual and interim periods beginning after December 15, 2019, with early adoption permitted. This guidance permits either prospective or retrospective adoption. In the third quarter of 2018, we elected to adopt this guidance on a prospective basis. As such, implementation costs related to cloud computing arrangements will now be capitalized and amortized on a straight-line basis over the term of the associated agreement. The adoption of this guidance did not have a material impact on our financial statements.

In May 2017, the FASB issued an update to the existing guidance under the Compensation-Stock Compensation topic of the Codification to clarify when modification accounting would be applied for a change to the terms or conditions of a share-based award. Under this new guidance modification accounting is required only if the fair value, the vesting conditions, or the classification of the award changes as a result of the change in terms or conditions. This guidance was required to be adopted on a prospective basis for annual periods beginning on or after December 15, 2017. As such, the Company adopted this guidance on January 1, 2018. The adoption of this guidance did not have an impact on our financial statements.

In January 2017, the FASB issued an update to the existing guidance under the Business Combinations topic of the Codification. This update revises the definition of a business. Under this guidance when substantially all of the assets acquired are concentrated in a single asset (or group of similar assets) the assets acquired would not be considered a business. If this initial screen is met, the need for further assessment is eliminated. If this screen is not met, in order to be considered a business an acquisition would have to include an input and a substantive process that together significantly contribute to the ability to create outputs. This update was required to be adopted by public companies on a prospective basis for annual and interim reporting periods beginning after December 15, 2017. As such, the Company adopted this guidance on January 1, 2018. The adoption of this guidance did not have an impact on our financial statements.

In June 2016, the FASB issued an update to existing guidance under the Investments topic of the Codification. This update introduces a new impairment model for financial assets, known as the current expected credit losses (“CECL”) model that is based on expected losses rather than incurred losses. The CECL model requires an entity to estimate credit losses on financial assets, including trade accounts receivable, based on historical information, current information and reasonable and supportable forecasts. Under this guidance companies will record an allowance through earnings for expected credit losses upon initial recognition of the financial asset. The aspects of this guidance applicable to us will be required to be adopted on a modified retrospective basis. This update is

effec tive for public companies for annual and interim periods beginning after December 15, 2019, with early adoption permitted for annual and interim periods beginning after December 15, 2018. While we are still evaluating the impact of this guidance on our fi nancial statements we do not currently expect it to have a material impact .

In February 2016, the FASB issued an update to the existing guidance under the Leases topic of the Codification. Under the new guidance, lessees will be required to recognize the following for all leases, with the exception of short-term leases, at the commencement date: (1) a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and (2) a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. This update is effective for public companies for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, with early adoption permitted.

The Company intends to adopt this guidance on January 1, 2019 by applying the transition provisions on a modified retrospective basis as of the effective date. As such, comparative periods will not be restated and will continue to be reported under current guidance. We also intend to elect certain of the transition practical expedients permitted under this new guidance, including the package of practical expedients whereby we will not be required to: i) reassess whether any expired or existing contracts are or contain leases, ii) reassess the lease classification of existing leases and iii) reassess initial direct costs for any existing leases.

The Company has a significant number of leases, primarily related to real estate and rolling stock, which are primarily accounted for as operating leases under existing guidance. While we are currently evaluating the impact of this new guidance on our financial statements, we are expecting a significant impact to our balance sheet upon adoption related to the establishment of lease liabilities and the corresponding right-of-use assets. We are also currently assessing and updating our business processes, systems and controls to ensure compliance with the accounting and disclosure requirements of the new standard upon adoption.

Through the issuance of a series of updates, the FASB modified the guidance under the Revenue Recognition topic of the Codification which provided for a comprehensive new revenue recognition model requiring a company to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Under previous guidance, we recognized sales from contracts with service elements on the completed contract method when these contracts were completed within 30 days. The remaining contracts with service elements were recognized under the percentage of completion method.

On January 1, 2018 we adopted this guidance on a modified retrospective basis for contracts which were not completed as of January 1, 2018. Under this updated guidance, revenue related to our contracts with service elements is now recognized over time based on the extent of progress towards completion of the performance obligation because of continuous transfer of control to the customer. We have assessed and updated our business processes, systems and controls to ensure compliance with the recognition and disclosure requirements of the new standard.

Results for periods beginning on or after January 1, 2018 are presented in accordance with this new guidance. Results for prior periods have not been adjusted and continue to be presented under previous guidance. Upon adoption, the Company recognized a $2.0 million ($1.5 million net of taxes) impact to the beginning balance of our accumulated deficit through a cumulative effect adjustment related to the unrecognized portion of contracts previously accounted for under the completed contract method of revenue recognition.

2. Revenue

We recognize revenue as performance obligations are satisfied by transferring control of a promised good or service to a customer in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services. We generally classify our revenues into two types: (i) distribution sales; or (ii) sales related to contracts with service elements. Sales related to contracts with service elements represents less than 10% of the Company’s net sales for each period presented.

Distribution sales typically consist of the sale of building products we manufacture and the resale of purchased building products. We recognize revenue related to distribution sales at a point in time upon delivery of the ordered goods to our customers. Payment terms related to distribution sales are not significant as payment is generally received shortly after the point of sale.

Our contracts with service elements primarily relate to installation and construction services. We evaluate whether multiple c ontracts should be combined and accounted for as a single contract and whether a single or combined contract should be accounted for as a single performance obligation or multiple performance obligations. If a contract is separated into more than one perfo rmance obligation, we allocate the transaction price to each performance obligation generally based on observable standalone selling prices of the underlying goods or services. Revenue related to contracts with service elements is generally recognized over time based on the extent of progress towards completion of the performance obligation because of continuous transfer of control to the customer. We consider costs incurred to be indicative of goods and services delivered to the customer. As such, we use a cost based input method to recognize revenue on our contracts with service elements as it best depicts the transfer of assets to our customers. Payment terms related to sales for contracts with service elements are specific to each customer and contract. However, they are considered to be short-term in nature as payments are normally received either throughout the life of the contract or shortly after the contract is complete.

Contract costs include all direct material and labor, equipment costs and those indirect costs related to contract performance. Provisions for estimated losses on uncompleted contracts are recognized in the period in which such losses are determinable. Prepayments for materials or services are deferred until such materials have been delivered or services have been provided. All sales recognized are net of allowances for discounts and estimated returns, based on historical experience. The Company records sales incentives provided to customers as a reduction of revenue. We present all sales tax on a net basis in our consolidated financial statements.

Costs to obtain contracts are expensed as incurred as our contracts are typically completed in one year or less, and where applicable, we generally would incur these costs whether or not we ultimately obtain the contract. We do not disclose the value of our remaining performance obligations on uncompleted contracts as our contracts generally have a duration of one year or less.

The following table disaggregates our sales by product category (in thousands):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2018		2017		2018		2017
Lumber & lumber sheet goods	$	818,693	$	679,902	$	2,273,761	$	1,867,613
Manufactured products		385,894		318,565		1,050,963		900,880
Windows, doors & millwork		372,453		347,462		1,080,120		1,016,674
Gypsum, roofing & insulation		146,648		147,960		400,797		409,417
Siding, metal & concrete products		196,591		183,517		528,290		498,935
Other building products & services		198,188		201,503		574,860		561,751
Net sales	$	2,118,467	$	1,878,909	$	5,908,791	$	5,255,270

Information regarding disaggregation of sales by segment is discussed in Note 8 to the condensed consolidated financial statements.

The timing of revenue recognition, billings and cash collections results in accounts receivable, unbilled receivables, contract assets and contract liabilities. Contract asset balances were not significant as of September 30, 2018 or December 31, 2017. Contract liabilities consist of deferred revenue and customer advances and deposits. Contract liability balances are included in accrued liabilities on our consolidated balance sheet and were $47.4 million and $37.2 million as of September 30, 2018 and December 31, 2017, respectively.

3. Net Income per Common Share

Net income per common share (“EPS”) is calculated in accordance with the Earnings per Share topic of the Codification, which requires the presentation of basic and diluted EPS. Basic EPS is computed using the weighted average number of common shares outstanding during the period. Diluted EPS is computed using the weighted average number of common shares outstanding during the period, plus the dilutive effect of potential common shares.

For the purpose of computing diluted EPS, weighted average shares outstanding have been adjusted for common shares underlying 1.5 million options and 2.1 million restricted stock units (“RSUs”) outstanding as of September 30, 2018. Weighted average shares outstanding have been adjusted for common shares underlying 2.7 million options and 2.2 million RSUs outstanding as of September 30, 2017.

The table below presents a reconciliation of weighted average common shares used in the calculation of basic and diluted EPS (in thousands):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2018		2017		2018		2017
Weighted average shares for basic EPS		114,707		112,688		114,480		112,368
Dilutive effect of options and RSUs		1,749		3,183		2,134		2,942
Weighted average shares for diluted EPS		116,456		115,871		116,614		115,310

4. Debt

Long-term debt and lease obligations consisted of the following (in thousands):

	September 30, 2018			December 31, 2017
2022 facility (1)	$	404,000		$	350,000
2024 notes		750,000			750,000
2024 term loan (2)		459,425			462,950
Lease finance obligations		227,390			225,070
Capital lease obligations		17,837			15,431
		1,858,652			1,803,451
Unamortized debt discount and debt issuance costs		(17,070	)		(19,031	)
		1,841,582			1,784,420
Less: current maturities of long-term debt and lease obligations		14,620			12,475
Long-term debt and lease obligations, net of current maturities	$	1,826,962		$	1,771,945

(1)

The weighted average interest rate was 3.9% and 2.9% as of September 30, 2018 and December 31, 2017, respectively.

(2)

The weighted average interest rate was 5.1% and 4.3% as of September 30, 2018 and December 31, 2017, respectively.

Fair Value

As of September 30, 2018 and December 31, 2017 the Company does not have any financial instruments which are measured at fair value on a recurring basis. We have elected to report the value of our 5.625% senior secured notes due 2024 (“2024 notes”), senior secured term loan facility due 2024 (“2024 term loan”) and $900.0 million revolving credit facility (“2022 facility”) at amortized cost. The fair values of the 2024 notes and the 2024 term loan at September 30, 2018 were approximately $722.5 million and $460.4 million, respectively, and were determined using Level 2 inputs based on market prices. The carrying value of the 2022 facility at September 30, 2018 approximates fair value as the rates are comparable to those at which we could currently borrow under similar terms, are variable and incorporate a measure of our credit risk. As such, the fair value of the 2022 facility was also classified as Level 2 in the hierarchy.

We were not in violation of any covenants or restrictions imposed by any of our debt agreements at September 30, 2018.

5. Employee Stock-Based Compensation

Time Based Restricted Stock Unit Grants

In the first nine months of 2018, our board of directors granted 461,000 RSUs to employees and eligible directors under our 2014 Incentive Plan for which vesting is based solely on continuous employment over the requisite service period. 269,000 of the RSUs vest at 33% per year at each anniversary of the grant date over the next three years, 74,000 RSUs cliff vest on the third anniversary of the grant date, 64,000 of the RSUs cliff vest on the fourth anniversary of the grant date and 54,000 of the RSUs cliff vest on the first anniversary of the grant date. The weighted average grant date fair value for these RSUs was $20.33 per unit, which was based on the closing stock price on the grant date.

Performance and Service Condition Based Restricted Stock Unit Grants

In the first nine months of 2018, our board of directors granted 135,000 RSUs to employees under our 2014 Incentive Plan, that vest if the compound annual growth rate of the Company’s total sales in 2020 over 2017 exceeds a composite annual growth rate based on single-family housing starts, multi-family housing starts, and growth in repair and remodeling sales over the same period. Assuming continued employment and if the performance vesting condition is achieved, these awards will cliff vest on the third anniversary of the grant date. The weighted average grant date fair value for these RSUs was $21.19 per unit, which was based on the closing stock price on the grant date.

Market and Service Condition Based Restricted Stock Unit Grants

In the first nine months of 2018, our board of directors granted 135,000 RSUs to employees under our 2014 Incentive Plan for which vesting is contingent upon the Company’s total shareholder return being equal to or exceeding 75% of the median total shareholder return of the Company’s peer group if the median return of the Company’s peer group is positive, or being equal to or better than 125% of the median total shareholder return if the median return of the Company’s peer group is negative. In each case, the measurement will take place over a three year period. Assuming continued employment and if the market vesting condition is met, these awards will cliff vest on the third anniversary of the grant date. The actual number of shares of common stock that may be earned ranges from zero to a maximum of 150% of the RSUs granted. The average grant date fair value for these RSUs was $22.57 per unit, which was determined using the Monte Carlo simulation model using the following assumptions:

Expected volatility (company)	53.9%
Expected volatility (peer group median)	28.4%
Correlation between the company and peer group median	0.39
Expected dividend yield	0.00%
Risk-free rate	2.3%

The expected volatilities and correlation are based on the historical daily returns of our common stock and the common stocks of the constituents of the Company’s peer group over the most recent period equal to the measurement period. The expected dividend yield is based on our history of not paying regular dividends in the past and our current intention to not pay regular dividends in the foreseeable future. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant and has a term equal to the measurement period.

6. Income Taxes

A reconciliation of the statutory federal income tax rate to our effective rate for continuing operations is provided below:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2018			2017			2018			2017
Statutory federal income tax rate		21. 0	%		35.0	%		21 .0	%		35.0	%
State income taxes, net of federal income tax		5.0			8.1			5.0			6.5
Valuation allowance		—			(0.3	)		—			(3.3	)
Stock compensation windfall benefit		—			(1.7	)		(2.2	)		(2.6	)
Permanent differences - credits		(6.3	)		(14.5	)		(3.9	)		(6.9	)
Permanent differences – other		1.0			0.9			0.9			1.2
Other		0.2			—			0.1			0.2
		20.9	%		27.5	%		20.9	%		30.1	%

We base our estimate of deferred tax assets and liabilities on current tax laws and rates. In certain cases, we also base our estimate on business plan forecasts and other expectations about future outcomes. Changes in existing tax laws or rates could affect our actual tax results, and future business results may affect the amount of our deferred tax liabilities or the valuation of our deferred tax assets over time. Due to uncertainties in the estimation process, particularly with respect to changes in facts and circumstances in future reporting periods, as well as the residential homebuilding industry’s cyclicality and sensitivity to changes in economic conditions, it is possible that actual results could differ from the estimates used in previous analyses.

Accounting for deferred taxes is based upon estimates of future results. Differences between the anticipated and actual outcomes of these future results could have a material impact on our consolidated results of operations or financial position.

7. Commitments and Contingencies

The Company has a number of known and threatened construction defect legal claims. While these claims are generally covered under the Company’s existing insurance programs to the extent any loss exceeds the deductible, there is a reasonable possibility of loss that is not able to be estimated at this time because (i) many of the proceedings are in the discovery stage, (ii) the outcome of future litigation is uncertain, and/or (iii) the complex nature of the claims. Although the Company cannot estimate a reasonable range of loss based on currently available information, the resolution of these matters could have a material adverse effect on the Company's financial position, results of operations or cash flows.

In addition, we are involved in various other claims and lawsuits incidental to the conduct of our business in the ordinary course. We carry insurance coverage in such amounts in excess of our self-insured retention as we believe to be reasonable under the circumstances and that may or may not cover any or all of our liabilities in respect of such claims and lawsuits. Although the ultimate disposition of these other proceedings cannot be predicted with certainty, management believes the outcome of any such claims that are pending or threatened, either individually or on a combined basis, will not have a material adverse effect on our consolidated financial position, cash flows or results of operations. However, there can be no assurances that future adverse judgments and costs would not be material to our results of operations or liquidity for a particular period.

8. Segment Information

We offer an integrated solution to our customers providing manufacturing, supply, and installation of a full range of structural and related building products. We provide a wide variety of building products and services directly to homebuilder customers. We manufacture floor trusses, roof trusses, wall panels, stairs, millwork, windows, and doors. We also provide a full range of construction services. These product and service offerings are distributed across 403 locations operating in 40 states across the United States, which are organized into nine geographical regions. Centralized financial and operational oversight, including resource allocation and assessment of performance on an income (loss) before income taxes basis, is performed by our CEO, whom we have determined to be our chief operating decision maker (“CODM”).

The Company has nine operating segments aligned with its nine geographical regions (Regions 1 through 9). While all of our operating segments have products, distribution methods and customers of a similar nature, certain of our operating segments have been aggregated due to also containing similar economic characteristics, resulting in the following composition of reportable segments:

•

Regions 1 and 2 have been aggregated to form the “Northeast” reportable segment

•

Regions 3 and 5 have been aggregated to form the “Southeast” reportable segment

•

Regions 4 and 6 have been aggregated to form the “South” reportable segment

•

Region 7, 8 and 9 have been aggregated to form the “West” reportable segment

In addition to our reportable segments, our consolidated results include corporate overhead, other various operating activities that are not internally allocated to a geographical region nor separately reported as a single unit to the CODM, and certain reconciling items primarily related to allocations of corporate overhead and rent expense, which have collectively been presented as “All Other”. The accounting policies of the segments are consistent with those referenced in Note 1, except for noted reconciling items.

The following tables present Net sales, income before income taxes and certain other measures for the reportab le segments, reconciled to total consolidated operations, for the periods indicated (in thousands):

	Three months ended September 30, 2018
Reportable segments	Net Sales		Depreciation & Amortization		Interest			Income before income taxes
Northeast	$	366,179	$	3,454	$	6,614		$	13,304
Southeast		456,313		3,073		6,985			19,646
South		547,173		5,428		7,099			33,391
West		705,170		7,014		11,414			38,871
Total reportable segments		2,074,835		18,969		32,112			105,212
All other		43,632		6,135		(3,006	)		(12,530	)
Total consolidated	$	2,118,467	$	25,104	$	29,106		$	92,682

	Three months ended September 30, 2017
Reportable segments	Net Sales		Depreciation & Amortization		Interest			Income before income taxes
Northeast	$	341,188	$	3,233	$	5,442		$	11,875
Southeast		389,431		2,688		6,078			10,613
South		463,645		4,993		5,898			21,451
West		635,573		6,600		8,610			34,489
Total reportable segments		1,829,837		17,514		26,028			78,428
All other		49,072		5,517		7,808			(23,580	)
Total consolidated	$	1,878,909	$	23,031	$	33,836		$	54,848

	Nine months ended September 30, 2018
Reportable segments	Net Sales		Depreciation & Amortization		Interest			Income before income taxes
Northeast	$	1,022,131	$	10,259	$	18,446		$	25,830
Southeast		1,303,126		8,627		19,467			46,789
South		1,564,446		15,935		19,986			76,254
West		1,894,311		20,179		31,073			83,954
Total reportable segments		5,784,014		55,000		88,972			232,827
All other		124,777		17,691		(4,167	)		(39,141	)
Total consolidated	$	5,908,791	$	72,691	$	84,805		$	193,686

	Nine months ended September 30, 2017
Reportable segments	Net Sales		Depreciation & Amortization		Interest			Income before income taxes
Northeast	$	949,484	$	10,186	$	15,694		$	26,665
Southeast		1,133,575		7,881		17,275			34,964
South		1,394,597		14,799		17,659			67,779
West		1,633,851		20,663		23,774			67,702
Total reportable segments		5,111,507		53,529		74,402			197,110
All other		143,763		17,267		29,301			(80,511	)
Total consolidated	$	5,255,270	$	70,796	$	103,703		$	116,599

Asset information by segment is not reported internally or otherwise reviewed by the CODM nor does the Company earn revenues or have long-lived assets located in foreign countries.

9. Related Party Transactions

Transactions between the Company and related parties occur in the ordinary course of business. Certain members of the Company’s board of directors serve on the board of directors for one of our suppliers, PGT, Inc. Further, the Company has entered into certain leases of land and buildings with certain employees or non-affiliate stockholders. However, the Company carefully monitors and assesses related party relationships. Management does not believe that any of its transactions with related parties had a material impact on the Company’s results for the three and nine months ended September 30, 2018 or 2017.

I tem 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion of our financial condition and results of operations should be read in conjunction with the Management’s Discussion and Analysis of Financial Condition and Results of Operations and the consolidated financial statements and notes thereto for the year ended December 31, 2017 included in our most recent annual report on Form 10-K. The following discussion and analysis should also be read in conjunction with the unaudited condensed consolidated financial statements appearing elsewhere in this report. In this quarterly report on Form 10-Q, references to the “company,” “we,” “our,” “ours” or “us” refer to Builders FirstSource, Inc. and its consolidated subsidiaries unless otherwise stated or the context otherwise requires.

Cautionary Statement

Statements in this report and the schedules hereto that are not purely historical facts or that necessarily depend upon future events, including statements about expected market share gains, forecasted financial performance or other statements about anticipations, beliefs, expectations, hopes, intentions or strategies for the future, may be forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. Readers are cautioned not to place undue reliance on forward-looking statements. In addition, oral statements made by our directors, officers and employees to the investor and analyst communities, media representatives and others, depending upon their nature, may also constitute forward-looking statements. All forward-looking statements are based upon currently available information and the Company’s current assumptions, expectations and projections about future events. Forward-looking statements are by nature inherently uncertain, and actual results or events may differ materially from the results or events described in the forward-looking statements as a result of many factors. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Any forward-looking statements involve risks and uncertainties, many of which are beyond the Company’s control or may be currently unknown to the Company, that could cause actual events or results to differ materially from the events or results described in the forward-looking statements, including risks or uncertainties related to the Company’s growth strategies, including gaining market share, or the Company’s revenues and operating results being highly dependent on, among other things, the homebuilding industry, lumber prices and the economy. The Company may not succeed in addressing these and other risks. Further information regarding factors that could affect our financial and other results can be found in the risk factors section of the Company’s most recent annual report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) and may also be described from time to time in the other reports the Company files with the SEC. Consequently, all forward-looking statements in this report are qualified by the factors, risks and uncertainties contained therein.

COMPANY OVERVIEW

We are a leading supplier and manufacturer of building materials, manufactured components and construction services to professional contractors, sub-contractors and consumers. The Company operates 403 locations in 40 states across the United States. Given the span and depth of our geographical reach, our locations are organized into nine geographical regions (Regions 1 through 9), which are also our operating segments, and these are further aggregated into four reportable segments: Northeast, Southeast, South and West. All of our segments have similar customers, products and services, and distribution methods. Our financial statements contain additional information regarding segment performance which is discussed in Note 8 to the condensed consolidated financial statements included in Item 1 of this quarterly report on Form 10-Q.

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

We group our building products into six product categories:

•

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

•

Manufactured Products. Manufactured products consist of wood floor and roof trusses, steel roof trusses, wall panels, stairs, and engineered wood.

•

Windows, Door & Millwork. Windows & doors are comprised of the manufacturing, assembly, and distribution of windows and the assembly and distribution of interior and exterior door units. Millwork includes interior trim and custom features including those that we manufacture under the Synboard ^® brand name.

•

Gypsum, Roofing & Insulation. Gypsum, roofing, & insulation include wallboard, ceilings, joint treatment and finishes.

•

Siding, Metal, and Concrete. Siding, metal, and concrete includes vinyl, composite, and wood siding, exterior trim, other exteriors, metal studs and cement.

•

Other Building Products & Services. Other building products & services are comprised of products such as cabinets and hardware as well as services such as turn-key framing, shell construction, design assistance, and professional installation spanning the majority of our product categories.

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

•

Homebuilding Industry. Our business is driven primarily by the residential new construction market and the residential repair and remodel market, which are in turn dependent upon a number of factors, including demographic trends, interest rates, consumer confidence, employment rates, the high cost of land development, the availability of skilled construction labor, and the health of the economy and mortgage markets. According to the U.S. Census Bureau, the seasonally adjusted annualized rate for U.S. total housing starts was 1,201,000 as of September 30, 2018. The seasonally adjusted annualized rate for U.S. single-family housing starts was 871,000 as of September 30, 2018. However, both total and single-family housing starts remain well below the normalized historical annual averages (from 1959 through 2017) of 1.5 million and 1.1 million, respectively. We believe the housing industry is currently experiencing a shortage of skilled construction labor, which is constraining housing activity. Due to the lower levels in housing starts, increased competition for homebuilder business and cyclical fluctuations in commodity prices we have seen and may continue to experience pressure on our gross margins. In addition to these factors, there has been a trend of consolidation within the building products supply industry. However, our industry remains highly fragmented and competitive and we will continue to face significant competition from local and regional suppliers. We still believe there are several meaningful trends that indicate U.S. housing demand will continue to trend towards recovering to the historical average. These trends include relatively low interest rates, the aging of housing stock, and normal population growth due to immigration and birthrate exceeding death rate. Industry forecasters, including the National Association of Homebuilders (“NAHB”), expect to see continued increases in housing demand over the next year.

•

Targeting Large Production Homebuilders. In recent years, the homebuilding industry has undergone consolidation, and the larger homebuilders have increased their market share. We expect that trend to continue as larger homebuilders have better liquidity and land positions relative to the smaller, less capitalized homebuilders. Our focus is on maintaining relationships and market share with these customers while balancing the competitive pressures we are facing in servicing large homebuilders with certain profitability expectations. We expect that our ability to maintain strong relationships with the largest builders will be vital to our ability to expand into new markets as well as grow our market share. Additionally, we have been successful in expanding our custom homebuilder base while maintaining acceptable credit standards.

•

Repair and remodel end market . Although the repair and remodel end market is influenced by housing starts to a lesser degree than the homebuilding market, the repair and remodel end market is still dependent upon some of the same factors as the homebuilding market, including demographic trends, interest rates, consumer confidence, employment rates, the availability of skilled labor and the health of the economy and home financing markets. We expect that our ability to remain competitive in this space as well as grow our market share will depend on our continued ability to provide a high level of customer service coupled with a broad product offering.

•

Use of Prefabricated Components. Homebuilders are increasingly using prefabricated components in order to realize increased efficiency, overcome skilled construction labor shortages and improve quality. Shortening cycle time from start to completion is a key imperative of the homebuilders during periods of strong consumer demand. We see the demand for prefabricated components increasing as the residential new construction market continues to strengthen and the availability of skilled construction labor remains limited.

•

Economic Conditions. Economic changes both nationally and locally in our markets impact our financial performance. The building products supply industry is highly dependent upon new home construction and subject to cyclical market changes. Our operations are subject to fluctuations arising from changes in supply and demand, national and local economic conditions, labor costs and availability, competition, government regulation, trade policies and other factors that affect the homebuilding industry such as demographic trends, interest rates, housing starts, the high cost of land development, employment levels, consumer confidence, and the availability of credit to homebuilders, contractors, and homeowners.

•

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

•

Controlling Expenses. Another important aspect of our strategy is controlling costs and striving to be the low-cost building materials supplier in the markets we serve. We pay close attention to managing our working capital and operating expenses. Further, we pay careful attention to our logistics function and its effect on our shipping and handling costs.

•

Multi-Family and Light Commercial Business. Our primary focus has been, and continues to be, on single-family residential new construction and the repair and remodel end market. However, we will continue to identify opportunities for profitable growth in the multi-family and light commercial markets.

•

Capital Structure. As a result of our historical growth through acquisitions, we have substantial indebtedness. We strive to optimize our capital structure to ensure that our financial needs are met in light of economic conditions, business activities, organic investments, opportunities for growth through acquisition and the overall risk characteristics of our underlying assets. We evaluate our capital structure on the basis of our leverage ratio as well as the factors described above. While debt reduction will continue to be a key area of focus for the Company, we may adjust debt or equity levels in order to appropriately manage and optimize our capital structure.

CURRENT OPERATING CONDITIONS AND OUTLOOK

Though the level of housing starts remains below the historical average, the homebuilding industry has shown improvement since 2011. For the third quarter of 2018, actual U.S. total housing starts were 330,600, a 3.5% increase compared to the third quarter of 2017. Actual U.S. single-family starts were 235,600 in the third quarter of 2018, a 2.4% increase compared to the same quarter a year ago. For the nine months ended September 30, 2018, actual U.S. total housing starts were 972,200, a 6.4% increase compared to the nine months ended September 30, 2017. Actual U.S. single-family starts were 687,700 in the first nine months of 2018, a 6.0% increase compared to the same period a year ago. While the housing industry has strengthened over the past few years, the limited availability of credit to smaller homebuilders and potential homebuyers, the high cost of land development in many major metropolitan areas and the high demand for a limited supply of skilled construction labor, among other factors, have hampered a stronger recovery. A composite of third party sources, including the NAHB, are forecasting 1,278,000 U.S. total housing starts and 891,000 U.S single family housing starts for 2018, which are increases of 6.2% and 5.0%, respectively, from 2017. In addition, the Home Improvement Research Institute (“HIRI”) is forecasting sales in the professional repair and remodel end market to increase approximately 9.9%, inclusive of commodity price inflation, in 2018 compared to 2017.

Our net sales for the third quarter of 2018 were up 12.7% over the same period last year. We estimate that 11.2% of this increase is attributable to the impact of commodity price inflation on sales during the third quarter of 2018 compared to the third quarter of 2017. Increases in single-family and multi-family sales volume were partially offset by declines in the repair and remodel/other end market. Our gross margin percentage increased by 0.3% during the third quarter of 2018 compared to the third quarter of 2017, primarily due to the sharp decline in commodity costs during the third quarter of 2018 relative to our customer pricing. We continue to invest in our business to improve our operating efficiency, which, along with operating leverage and disciplined cost management, has allowed us to better leverage our operating costs against changes in net sales. Our selling, general and administrative expenses, as a percentage of net sales, were 18.9% in the third quarter of 2018, a 0.8% decrease from 19.7% in the third quarter of 2017. This decrease in selling, general and administrative expenses, as a percentage of net sales on a year over year basis, was primarily driven by cost leverage as well as continued cost management.

While the rate of market growth has recently eased we still believe the long-term outlook for the housing industry is positive due to growth in the underlying demographics. We feel we are well-positioned to take advantage of the construction activity in our markets and to increase our market share, which may include strategic acquisitions or investments in organic growth opportunities. We will continue to focus on working capital by closely monitoring the credit exposure of our customers and by working with our vendors to improve our payment terms and pricing on our products. We strive to achieve the appropriate balance of short-term expense control while maintaining the expertise and capacity to grow the business as market conditions improve. In addition, debt reduction will continue to be a key area of focus for the Company.

SEASONALITY AND OTHER FACTORS

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

•

The volatility of lumber prices;

•

The cyclical nature of the homebuilding industry;

•

General economic conditions in the markets in which we compete;

•

The pricing policies of our competitors;

•

The production schedules of our customers; and

•

The effects of weather.

The composition and level of working capital typically change during periods of increasing sales as we carry more inventory and receivables. Working capital levels typically increase in the first and second quarters of the year in anticipation of higher sales during the peak residential construction season. These increases have in the past resulted in negative operating cash flows during this peak season, which historically have been financed through available cash and borrowing availability under credit facilities. Collection of receivables and reduction in inventory levels following the peak building and construction season have in the past positively impacted cash flow and resulted in seasonal debt reduction, primarily in the fourth quarter.

RESULTS OF OPERATIONS

The following table sets forth, for the three and nine months ended September 30, 2018 and 2017, the percentage relationship to net sales of certain costs, expenses and income items:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2018			2017			2018			2017
Net sales		100.0	%		100.0	%		100.0	%		100.0	%
Cost of sales		75.3	%		75.6	%		75.8	%		75.3	%
Gross margin		24.7	%		24.4	%		24.2	%		24.7	%
Selling, general and administrative expenses		18.9	%		19.7	%		19.5	%		20.5	%
Income from operations		5.8	%		4.7	%		4.7	%		4.2	%
Interest expense, net		1.4	%		1.8	%		1.4	%		2.0	%
Income tax expense		0.9	%		0.8	%		0.7	%		0.7	%
Net income		3.5	%		2.1	%		2.6	%		1.5	%

Three Months Ended September 30, 2018 Compared with the Three Months Ended September 30, 2017

Net Sales. Net sales for the three months ended September 30, 2018 were $2,118.5 million, a 12.7% increase over net sales of $1,878.9 million for the three months ended September 30, 2017. We estimate that 11.2% of this increase is attributable to the impact of commodity price inflation on sales during the third quarter of 2018 compared to the third quarter of 2017. Single-family and multi-family sales volume growth in the third quarter of 2018 was partially offset by declines in the repair and remodel/other end markets.

The following table shows net sales classified by product category (dollars in millions):

	Three Months Ended September 30,
	2018					2017
	Net Sales		% of Net Sales			Net Sales		% of Net Sales			% Change
Lumber & lumber sheet goods	$	818.7		38.6	%	$	679.9		36.2	%		20.4	%
Manufactured products		385.9		18.2	%		318.6		16.9	%		21.1	%
Windows, doors & millwork		372.5		17.6	%		347.5		18.5	%		7.2	%
Gypsum, roofing & insulation		146.6		6.9	%		147.9		7.9	%		(0.9	)%
Siding, metal & concrete products		196.6		9.3	%		183.5		9.8	%		7.1	%
Other building products & services		198.2		9.4	%		201.5		10.7	%		(1.6	)%
Net sales	$	2,118.5		100.0	%	$	1,878.9		100.0	%		12.7	%

The impact of commodity price inflation in the third quarter of 2018 resulted in the sales growth of our lumber and lumber sheet goods and manufactured products categories exceeding the sales growth of our other product categories.

Gross Margin. Gross margin increased $63.5 million to $522.8 million. Our gross margin percentage increased to 24.7% in the third quarter of 2018 from 24.4% in the third quarter of 2017, a 0.3% increase. Our gross margin percentage increased primarily due to the sharp decline in commodity costs during the third quarter of 2018 relative to our customer pricing.

Selling, General and Administrative Expenses. Selling, general and administrative expenses increased $30.4 million, or 8.2%. Largely due to our increase in sales, our salaries and benefits expense was $267.6 million, an increase of $28.6 million from the third quarter of 2017. In addition, our fuel expense increased of $2.9 million in the third quarter of 2018 compared to the third quarter of 2017.

As a percentage of net sales, selling, general and administrative expenses decreased to 18.9% in the third quarter of 2018 from 19.7% in the third quarter of 2017, a 0.8% decrease. This improvement was primarily driven by cost leverage as well as continued cost management.

Interest Expense, Net. Interest expense was $29.1 million in the third quarter of 2018, a decrease of $4.7 million from the third quarter of 2017. This decrease, which is largely attributable to the positive results of our debt transactions executed in fiscal year 2017, was partially offset by increased interest expense on our variable rate debt instruments due to increased market interest rates in the third quarter of 2018 compared to the third quarter of 2017.

Income Tax Expense. We recorded income tax expense of $19.4 million and $15.1 million in the third quarters of 2018 and 2017, respectively. Our effective tax rate was 20.9% in the third quarter of 2018, largely due to the Tax Cut and Jobs Act (“the 2017 Tax Act”), compared to 27.5% in the third quarter of 2017.

Nine Mont hs Ended September 30, 2018 Compared with the Nine Months Ended September 30, 2017

Net Sales. Net sales for the nine months ended September 30, 2018 were $5,908.8 million, a 12.4% increase over net sales of $5,255.3 million for the nine months ended September 30, 2017. We estimate that 9.9% of this increase is attributable to the impact of commodity price inflation on sales during the first nine months of 2018 compared to the first nine months of 2017. Single-family and repair and remodel/other end market sales volume growth in the first nine months of 2018 was partially offset by declines in multi-family.

The following table shows net sales classified by product category (dollars in millions):

	Nine Months Ended September 30,
	2018					2017
	Net Sales		% of Net Sales			Net Sales		% of Net Sales			% Change
Lumber & lumber sheet goods	$	2,273.8		38.5	%	$	1,867.6		35.5	%		21.7	%
Manufactured products		1,051.0		17.8	%		900.9		17.2	%		16.7	%
Windows, doors & millwork		1,080.1		18.3	%		1,016.7		19.3	%		6.2	%
Gypsum, roofing & insulation		400.8		6.8	%		409.4		7.8	%		(2.1	)%
Siding, metal & concrete products		528.3		8.9	%		498.9		9.5	%		5.9	%
Other building products & services		574.8		9.7	%		561.8		10.7	%		2.3	%
Net sales	$	5,908.8		100.0	%	$	5,255.3		100.0	%		12.4	%

The impact of commodity price inflation in the first nine months of 2018 resulted in the sales growth of our lumber and lumber sheet goods categories exceeding the sales growth of our other product categories. The decrease in net sales in our gypsum, roofing & insulation category was largely associated with declines in multi-family and light commercial sales in the first nine months of 2018 compared to the first nine months of 2017.

Gross Margin. Gross margin increased $134.0 million to $1,430.2 million. Our gross margin percentage decreased to 24.2% in the first nine months of 2018 from 24.7% in the first nine months of 2017, a 0.5% decrease. Our gross margin percentage decreased primarily due to the impact of commodity price inflation during the nine months ended September 30, 2018 relative to our customer pricing commitments.

Selling, General and Administrative Expenses. Selling, general and administrative expenses increased $75.8 million, or 7.0%. Largely due to our increase in sales, our salaries and benefits expense was $758.2 million, an increase of $62.1 million from the first nine months of 2017, and our fuel expense increased $8.4 million. In addition, office general and administrative expense increased $3.1 million, bad debt expense increased $1.8 million and occupancy expense increased $0.9 million. Further, we recognized a $4.4 million loss on the disposal of assets in the first nine months of 2017.

As a percentage of net sales, selling, general and administrative expenses decreased to 19.5% in the first nine months of 2018 from 20.5% in the first nine months of 2017, a 1.0% decrease. This improvement was primarily driven by cost leverage as well as continued cost management.

Interest Expense, Net. Interest expense was $84.8 million for the nine months ended September 30, 2018, a decrease of $18.9 million compared to the nine months ended September 30, 2017. This decrease, which is largely attributable to the positive results of our debt transactions executed in fiscal year 2017, was partially offset by increased interest expense on our variable rate debt instruments due to increased market interest rates in the first nine months of 2018 compared to the first nine months of 2017. Additionally, interest expense for the nine months ended September 30, 2017 included one-time charges of $2.4 million related to the debt financing transactions executed in that period.

Income Tax Expense. We recorded income tax expense of $40.5 million and $35.1 million for the nine months ended September 30, 2018 and 2017, respectively. Our effective tax rate was 20.9% for the nine months ended September 30, 2018, largely due to the 2017 Tax Act, compared to 30.1% for the nine months ended September 30, 2017.

Re sults by Reportable Segment

The following tables show net sales and income before income taxes by reportable segment excluding the “All Other” caption as shown in Note 8 to the condensed consolidated financial statements included in Item 1 of this quarterly report on Form 10-Q (dollars in thousands):

	Three months ended September 30,
	Net sales													Income before income taxes
	2018		% of net sales			2017		% of net sales			% change			2018		% of net sales			2017		% of net sales			% change
Northeast	$	366,179		17.6	%	$	341,188		18.7	%		7.3	%	$	13,304		3.6	%	$	11,875		3.5	%		12.0	%
Southeast		456,313		22.0	%		389,431		21.3	%		17.2	%		19,646		4.3	%		10,613		2.7	%		85.1	%
South		547,173		26.4	%		463,645		25.3	%		18.0	%		33,391		6.1	%		21,451		4.6	%		55.7	%
West		705,170		34.0	%		635,573		34.7	%		11.0	%		38,871		5.5	%		34,489		5.4	%		12.7	%
	$	2,074,835		100.0	%	$	1,829,837		100.0	%				$	105,212		5.1	%	$	78,428		4.3	%

	Nine months ended September 30,
	Net sales													Income before income taxes
	2018		% of net sales			2017		% of net sales			% change			2018		% of net sales			2017		% of net sales			% change
Northeast	$	1,022,131		17.7	%	$	949,484		18.6	%		7.7	%	$	25,830		2.5	%	$	26,665		2.8	%		(3.1	)%
Southeast		1,303,126		22.5	%		1,133,575		22.1	%		15.0	%		46,789		3.6	%		34,964		3.1	%		33.8	%
South		1,564,446		27.0	%		1,394,597		27.3	%		12.2	%		76,254		4.9	%		67,779		4.9	%		12.5	%
West		1,894,311		32.8	%		1,633,851		32.0	%		15.9	%		83,954		4.4	%		67,702		4.1	%		24.0	%
	$	5,784,014		100.0	%	$	5,111,507		100.0	%				$	232,827		4.0	%	$	197,110		3.9	%

We have four reportable segments based on an aggregation of the geographic regions in which we operate. While there is some geographic similarity between our reportable segments and the regions as defined by the U.S. Census Bureau, our reportable segments do not necessarily fully align with any single U.S. Census Bureau region.

According to the U.S. Census Bureau, actual single-family housing starts in the third quarter of 2018 increased 7.1%, 1.1% and 8.2% in the Midwest, South and West regions, respectively, compared to the third quarter of 2017. However, single-family housing starts decreased 13.1% in the Northeast region over the same period. For the third quarter of 2018, we achieved increased net sales and profitability across all of our reportable segments.

According to the U.S. Census Bureau, actual single-family housing starts for the nine months ended September 30, 2018 increased 0.2%, 4.9% and 14.7% in the Northeast, South and West regions, respectively, compared to the nine months ended September 30, 2017. However, single-family housing starts decreased 1.0% in the Midwest region over the same period. For the first nine months of 2018, we achieved increased net sales and profitability in our Southeast, South and West reportable segments. While we also achieved increased net sales in our Northeast reportable segment, profitability for that segment declined largely due to the impact of commodity price inflation relative to our costs.

LIQUIDITY AND CAPITAL RESOURCES

Our primary capital requirements are to fund working capital needs and operating expenses, meet required interest and principal payments, and to fund capital expenditures and potential future growth opportunities. Our capital resources at September 30, 2018 consist of cash on hand and borrowing availability under our 2022 facility.

Our 2022 facility will be primarily used for working capital, general corporate purposes, and funding growth opportunities. In addition, we may use the 2022 facility to facilitate debt consolidation. Availability under the 2022 facility is determined by a borrowing base. Our borrowing base consists of trade accounts receivable, inventory, other receivables which include progress billings and credit card receivables, and qualified cash that all meet specific criteria contained within the credit agreement, minus agent specified reserves. Net excess borrowing availability is equal to the maximum borrowing amount minus outstanding borrowings and letters of credit.

The following table shows our borrowing base and excess availability as of September 30, 2018 and December 31, 2017 (in millions):

	As of
	September 30, 2018			December 31, 2017
Accounts Receivable Availability	$	554.8		$	437.2
Inventory Availability		451.8			380.8
Other Receivables Availability		35.2			39.2
Gross Availability		1,041.8			857.2
Less:
Agent Reserves		(28.6	)		(24.9	)
Plus:
Cash in Qualified Accounts		38.3			39.4
Borrowing Base		1,051.5			871.7
Aggregate Revolving Commitments		900.0			900.0
Maximum Borrowing Amount (lesser of Borrowing Base and Aggregate Revolving Commitments)		900.0			871.7
Less:
Outstanding Borrowings		(404.0	)		(350.0	)
Letters of Credit		(82.2	)		(84.9	)
Net Excess Borrowing Availability on Revolving Facility	$	413.8		$	436.8

As of September 30, 2018, we had $404.0 million in outstanding borrowings under our 2022 facility and our net excess borrowing availability was $413.8 million after being reduced by outstanding letters of credit of approximately $82.2 million. Excess availability must equal or exceed a minimum specified amount, currently $90.0 million, or we are required to meet a fixed charge coverage ratio of 1:00 to 1:00. We were not in violation of any covenants or restrictions imposed by any of our debt agreements at September 30, 2018.

Liquidity

Our liquidity at September 30, 2018 was $448.2 million, which consists of net borrowing availability under the 2022 facility and cash on hand.

We have substantial indebtedness following our recent historical acquisitions, which increased our interest expense and could have the effect of, among other things, reducing our flexibility to respond to changing business and economic conditions. From time to time, based on market conditions and other factors and subject to compliance with applicable laws and regulations, the Company may repurchase or call the 2024 notes, repay debt, or otherwise enter into transactions regarding its capital structure.

Should the current industry conditions deteriorate or we pursue additional growth opportunities, we may be required to raise additional funds through the sale of capital stock or debt in the public capital markets or in privately negotiated transactions. There can be no assurance that any of these financing options would be available on favorable terms, if at all. Alternatives to help supplement our liquidity position could include, but are not limited to, idling or permanently closing additional facilities, adjusting our headcount in response to current business conditions, attempts to renegotiate leases, managing our working capital and/or divesting of non-core businesses. There are no assurances that these steps would prove successful or materially improve our liquidity position.

Consolidated Cash Flows

Cash provided by operating activities was $9.5 million for the nine months ended September 30, 2018 compared to cash used in operating activities of $7.6 million for the nine months ended September 30, 2017. The increase in cash provided by operating activities is largely due to increased sales and profitability during the nine months ended September 30, 2018 compared to the prior year. In addition, cash interest payments for the first nine months of 2018 decreased $29.2 million compared to the first nine months of 2017. However, the increase in cash provided by operating activities was mostly offset by the working capital increase of $266.5 million in 2018 exceeding the working capital increase of $212.9 million in 2017. This change in working capital was primarily due to the timing of both inventory purchases and cash paid to vendors during the nine months ended September 30, 2018 compared to the nine months ended September 30, 2017.

Cash used in investing activities was $76.8 million and $43.3 million for the nine months ended September 30, 2018 and 2017 , respectively. The change is primarily due to an increase in capital expenditures in the first nine months of 2018 compared to the first nine months of 2017. The increase in capital expenditures in 2018 largely relates to facility improvements and the pur chase of machinery and rolling stock to support sales growth.

Cash provided by financing activities was $44.2 million and $45.7 million for the nine months ended September 30, 2018 and 2017, respectively. Our net borrowing activity under our long-term debt arrangements for the first nine months of 2018 was largely unchanged from the first nine months of 2017. The decrease in cash provided by financing activities is primarily due to a $2.4 million increase in repurchases of common stock related to restricted stock tendered in order to meet minimum withholding tax requirements for shares vested and a $2.2 million decrease in cash received from employee option exercises in 2018 compared to 2017. These decreases were partially offset by $2.8 million in payments of debt issuance costs in 2017.

RECENT ACCOUNTING PRONOUNCEMENTS

Information regarding recent accounting pronouncements is discussed in Note 1 to the condensed consolidated financial statements included in Item 1 of this quarterly report on Form 10-Q.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

We may experience changes in interest expense if changes in our debt occur. Changes in market interest rates could also affect our interest expense. Our 2024 notes bear interest at a fixed rate, therefore, our interest expense related to these notes would not be affected by an increase in market interest rates. Borrowings under the 2022 facility and the 2024 term loan bear interest at either a base rate or eurodollar rate, plus, in each case, an applicable margin. A 1.0% increase in interest rates on the 2022 facility would result in approximately $4.0 million in additional interest expense annually as we had $404.0 million in outstanding borrowings as of September 30, 2018. The 2022 facility also assesses variable commitment and outstanding letter of credit fees based on quarterly average loan utilization. A 1.0% increase in interest rates on the 2024 term loan would result in approximately $4.6 million in additional interest expense annually as of September 30, 2018.

We purchase certain materials, including lumber products, which are then sold to customers as well as used as direct production inputs for our manufactured products that we deliver. Short-term changes in the cost of these materials and the related in-bound freight costs, some of which are subject to significant fluctuations, are sometimes, but not always, passed on to our customers. Delays in our ability to pass on material price increases to our customers can adversely impact our operating results.

Item 4. Controls and Procedures

Disclosure Controls Evaluation and Related CEO and CFO Certifications. Our management, with the participation of our principal executive officer (“CEO”) and principal financial officer (“CFO”), conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this quarterly report.

Certifications of our CEO and our CFO, which are required in accordance with Rule 13a-14 of the Securities Exchange Act of 1934, as amended (“Exchange Act”), are attached as exhibits to this quarterly report. This “Controls and Procedures” section includes the information concerning the controls evaluation referred to in the certifications, and it should be read in conjunction with the certifications for a more complete understanding of the topics presented.

Limitations on the Effectiveness of Controls. We do not expect that our disclosure controls and procedures will prevent all errors and all fraud. A system of controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the system are met. Because of the limitations in all such systems, no evaluation can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. Furthermore, the design of any system of controls and procedures is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how unlikely. Because of these inherent limitations in a cost-effective system of controls and procedures, misstatements or omissions due to error or fraud may occur and not be detected.

Scope of the Controls Evaluation. The evaluation of our disclosure controls and pro cedures included a review of their objectives and design, and the effect of the controls and procedures on the information generated for use in this quarterly report. In the course of the evaluation, we sought to identify whether we had any data errors, co ntrol problems or acts of fraud and to confirm that appropriate corrective action, including process improvements, were being undertaken if needed. This type of evaluation is performed on a quarterly basis so that conclusions concerning the effectiveness o f our disclosure controls and procedures can be reported in our quarterly reports on Form 10-Q. Many of the components of our disclosure controls and procedures are also evaluated by our internal audit department, our legal department and by personnel in o ur finance organization. The overall goals of these various evaluation activities are to monitor our disclosure controls and procedures on an ongoing basis, and to maintain them as dynamic systems that change as conditions warrant.

Conclusions regarding Disclosure Controls. Based on the required evaluation of our disclosure controls and procedures, our CEO and CFO have concluded that, as of September 30, 2018, we maintain disclosure controls and procedures that are effective in providing reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting. During the period covered by this report, there have been no changes in our internal control over financial reporting identified in connection with the evaluation described above that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

P ART II — OTHER INFORMATION

Item 1. Legal Proceedings

Although our business and facilities are subject to federal, state and local environmental regulation, environmental regulation does not have a material impact on our operations. We believe that our facilities are in material compliance with such laws and regulations. As owners and lessees of real property, we can be held liable for the investigation or remediation of contamination on such properties, in some circumstances without regard to whether we knew of or were responsible for such contamination. Our current expenditures with respect to environmental investigation and remediation at our facilities are minimal, although no assurance can be provided that more significant remediation may not be required in the future as a result of spills or releases of petroleum products or hazardous substances or the discovery of unknown environmental conditions.

Item 1A. Risk Factors

In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part 1, “Item 1A. Risk Factors” in our annual report on Form 10-K for the year ended December 31, 2017, which could materially affect our business, financial condition or future results. The risks described in our annual report on Form 10-K are not the only risks facing our company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Unregistered Sales of Equity Securities

(a) None

Use of Proceeds

(b) Not applicable

Company Stock Repurchases

Item 3. Defaults Upon Senior Securities

(a) None

(b) None

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

(a) None

(b) None

Item 6. Exhibits

Exhibit

Number

Description

3.1

Amended and Restated Certificate of Incorporation of Builders FirstSource, Inc. (incorporated by reference to Exhibit 3.1 to Amendment No. 4 to the Registration Statement of the Company on Form S-1, filed with the Securities and Exchange Commission on June 6, 2005, File Number 333-122788)

3.2

Amended and Restated By-Laws of Builders FirstSource, Inc. (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on November 6, 2017, File Number 0-51357)

4.1

Indenture, dated as of August 22, 2016, among Builders FirstSource, Inc., the guarantors party thereto, and Wilmington Trust, National Association, as trustee and notes collateral agent (form of Note included therein) (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on August 23, 2016, File Number 0-51357)

10.1*

Employment Agreement between Builders FirstSource, Inc. and Scott L. Robins

31.1*

Certification of Chief Executive Officer pursuant to 17 CFR 240.13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, signed by M. Chad Crow as Chief Executive Officer

31.2*

Certification of Chief Financial Officer pursuant to 17 CFR 240.13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, signed by Peter M. Jackson as Chief Financial Officer

32.1**

Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, signed by M. Chad Crow as Chief Executive Officer and Peter M. Jackson as Chief Financial Officer

101*

The following financial information from Builders FirstSource, Inc.’s Form 10-Q filed on November 2, 2018 formatted in eXtensible Business Reporting Language (“XBRL”): (i) Condensed Consolidated Statement of Operations and Comprehensive Income for the three and nine months ended September 30, 2018 and 2017, (ii) Condensed Consolidated Balance Sheet as of September 30, 2018 and December 31, 2017, (iii) Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2018 and 2017, (iv) Condensed Consolidated Statements of Changes in Stockholders’ Equity for the nine months ended September 30, 2018 and (v) the Notes to Condensed Consolidated Financial Statements.

*	Filed herewith.

**	Builders FirstSource, Inc. is furnishing, but not filing, the written statement pursuant to Title 18 United States Code 1350, as added by Section 906 of the Sarbanes-Oxley Act of 2002, of M. Chad Crow our Chief Executive Officer, and Peter M. Jackson, our Chief Financial Officer.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

BUILDERS FIRSTSOURCE, INC.

/s/ M. CHAD CROW

M. Chad Crow

President and Chief Executive Officer

(Principal Executive Officer)

November 2, 2018

/s/ PETER M. JACKSON

Peter M. Jackson

Senior Vice President and Chief Financial Officer

(Principal Financial Officer)

November 2, 2018

/s/ JAMI COULTER

Jami Coulter

Vice President and Chief Accounting Officer

(Principal Accounting Officer)

November 2, 2018

Exhibit 10.1

Employment Agreement

This Employment Agreement (the “Agreement”) is made effective as of February 20, 2018, by and between Builders FirstSource, Inc., a Delaware corporation (the “Company”), and Scott L. Robins (“Executive”).

Whereas , Executive was appointed by the Board of Directors of the Company (the “Board”) to serve as Senior Vice President – Chief Operating Officer – West on February 20, 2018; and

Whereas , the Board has approved and authorized the Company to enter into this Agreement with Executive.

Now, therefore , in consideration of the mutual covenants and agreements set forth herein, and intending to be legally bound hereby, the parties agree as follows:

1. Employment . The Company hereby employs Executive, and Executive hereby accepts employment with the Company, upon the terms and subject to the conditions set forth herein.

2. Term .

(a) Subject to Section 2(b) hereof, the term of employment by the Company of Executive pursuant to this Agreement (as the same may be extended, the “Term”) shall commence on February 20, 2018 (the “Effective Date”), and terminate on the first anniversary thereof.

(b) Commencing on the first anniversary of the Effective Date and on each subsequent anniversary thereof, the Term shall automatically be extended for one (1) additional year unless, not later than ninety days (90) prior to any such anniversary date, either party hereto shall have notified the other party hereto in writing that such extension shall not take effect.

3. Position . During the Term, Executive shall serve as the Senior Vice President – Chief Operating Officer – West of the Company, supervising the operations and affairs of the Company in the western half of the United States and performing such other duties as the Company Board shall determine.

4. Duties . During the Term, Executive shall devote his full time and attention during normal business hours to the business and affairs of the Company, except vacations in accordance with the Company’s policies and for illness or incapacity, in accordance with Section 6 hereof.

5. Salary and Bonus .

(a) During the Term, the Company shall pay to Executive a base salary at the rate of $ 434,600 per year (the “ Base Salary ” ), subject to adjustments pursuant to the terms of Section 5(b) hereof.

(b) The Company Board or the Compensation Committee of the Company Board (the “Compensation Committee”) shall annually review the Base Salary and may, in its sole discretion, increase the Base Salary based upon performance and merit. Executive’s Base Salary shall not be decreased below the amount set forth in Section 5(a) hereof. The Base Salary shall be payable to Executive in substantially equal installments in accordance with the Company’s normal payroll practices, but in no event less often than semi-monthly.

(c) For each fiscal year during the Term hereof, Executive shall be eligible to receive an annual cash bonus equal to the amount provided for in the Company’s annual cash incentive plan (“Annual Incentive Plan”) (which currently provides for a target bonus percentage of 100% of Executive’s Base Salary), which Annual Incentive Plan is approved by the Company Board or the Compensation Committee thereof. Executive’s target bonus percentage under the Annual Incentive Plan shall not be reduced below 100% of his Base Salary. Annual cash bonuses shall be paid in the calendar year following the year to which the bonus relates, and not later than March 15 of such year.

6. Vacation, Holidays and Sick Leave . During the Term, Executive shall be entitled to paid vacation, paid holidays and sick leave in accordance with the Company’s standard policies for its senior executive officers.

7. Business Expenses . During the Term, Executive shall be reimbursed for all reasonable and necessary business expenses incurred by him in connection with his employment, including, without limitation, expenses for travel and entertainment incurred in conducting or promoting business for the Company upon timely submission by Executive of receipts and other documentation as required by the Internal Revenue Code of 1986, as amended (the “Code”), and in accordance with the Company’s normal expense reimbursement policies. With respect to Executive’s rights under this Section 7, (i) the amount reimbursable in any one calendar year shall not affect the amount reimbursable in any other calendar year, (ii) the reimbursement of an eligible business expense must be made no later than December 31 of the year after the year in which the business expense was incurred, and (iii) such rights shall not be subject to liquidation or exchange for another benefit.

8. Health, Welfare and Related Benefits . During the Term, Executive and eligible members of his family shall be eligible to participate fully in all (a) health and dental benefits and insurance programs; (b) life and short- and long-term disability benefits and insurance programs; and (c) defined contribution and equity compensation programs, all as available to senior executive officers of the Company generally.

9. Confidentiality, Non-Competition, Non-Solicitation .

(a) Executive acknowledges that: (i) the Executive has, and his employment hereunder will require that Executive continue to have, access to and knowledge of Confidential Information (as hereinafter defined); (ii) the direct and indirect disclosure of any such

Confidential Information to existing or potential competitors of the Company or its subsidiaries would place the Company at a competitive disadvantage and would do damage, monetary or otherwise, to the Company’s businesses; and (iii) the engaging by Executive in any of the activities prohibited by this Section 9 may constitute improper appropriation and/or use of such Confidential Information. Executive expressly acknowledges that the Confidential Information constitutes a protectable business interest of the Company.

As used herein, the term “Confidential Information” shall mean information of any kind, nature or description which is disclosed to or otherwise known to the Executive as a direct or indirect consequence of his association with the Company and its subsidiaries, which information is not generally known to the public or in the businesses in which such entities are engaged or which information relates to specific investment opportunities within the scope of their business which were considered by the Company or its subsidiaries during the Term. Assuming the foregoing criteria are met, Confidential Information includes, but is not limited to, information (including without limitation compilations) concerning the Company’s and its subsidiaries’ financial plans and performance, potential acquisitions, business plans and strategies, personnel information, information technology processes, research, development, and manufacturing of Company or its subsidiaries’ products, existing or prospective customers, proposals made to existing or prospective customers or other information contained in bids or offers to such customers, the terms of any arrangements or agreements with customers, including the amounts paid for services or how pricing was developed by the Company or its subsidiaries, the layout, design and implementation of customer specific projects, the identity of suppliers or subcontractors, information regarding supplier or subcontractor pricing or contract terms, the composition or description of future services that are or may be provided by the Company or any of its subsidiaries, the Company’s or any of its subsidiaries’ financial, marketing and sales information, and technical expertise, formulas, source codes and know how developed by the Company or any of its subsidiaries, including the unique manner in which the Company or any if its subsidiaries conducts its business. Confidential Information also includes information disclosed to the Company or any of its subsidiaries by a third party that the Company or such subsidiary is required to treat as confidential. Notwithstanding the foregoing, “Confidential Information” shall not be deemed to include information which (i) is or becomes generally available to the public other than as a result of a disclosure by the Executive, (ii) becomes available to the Executive on a non-confidential basis from a source other than the Company or any of its subsidiaries, provided that such source is not bound by any contractual, legal or fiduciary obligation with respect to such information or (iii) was in the Executive’s possession prior to being furnished by the Company or any of its subsidiaries.

(b) During the Term of this Agreement and for a period of one year after the termination of Executive’s employment hereunder (upon expiration of the Term or otherwise), Executive shall not, directly or indirectly, whether individually, as a director, stockholder, owner, manager, member, partner, employee, consultant, principal or agent of any business, or in any other capacity, use for his own account, utilize or make known, disclose, furnish or make available to any person, firm or corporation any of the Confidential Information, other than to authorized officers, directors and employees of the Company or its subsidiaries in the proper performance of the duties contemplated herein, or as required by a court of competent jurisdiction or other administrative or legislative body; provided that, prior to disclosing any of the Confidential Information to a court or other administrative or legislative body, Executive

shall promptly notify the Company so that the Company may seek a protective order or other appropriate remedy. Executive agrees to return all Confidential Information, including all photocopies, extracts and summaries thereof, and any such information stored electronically on tapes, computer disks or in any other manner to the Company at any time upon request by the Company and upon the termination of his employment for any reason. Notwithstanding the foregoing, nothing in this Agreement is intended to limit Executive’s right to : (i) make disclosures to, or participate in communications with, the Securities and Exchange Commission or any other government agency regarding possible violations of law, without prior notice to the Company ; (ii) disclose a trade secret (as defined by 18 U.S.C. § 1839) in confidence to a f ederal, s tate, or local government official, either directly or indirectly, or to an attorney , in either event solely for the purpose of reporting or investigating a suspected violation of law ; or (iii) disclose a trade secret (as defined by 18 U.S.C. § 1839) in a complaint or other document filed in a lawsuit or other proceeding, if such filing is made under seal .

(c) During the Term of this Agreement and for a period of one year after termination of Executive’s employment hereunder (upon expiration of the Term or otherwise), Executive shall not engage in competition (or assist any other Person in engaging in competition) with the Company or any of its subsidiaries, directly or indirectly (either individually, by any form of ownership, or as a director, manager, member, officer, principal, agent, employee, employer, advisor, consultant, lender, member, shareholder, partner, or other representative in a Competing Business), in the Business of the Company in a Prohibited Location by either (i) performing services that are the same as or substantially similar to those services Executive performed for the Company or its subsidiaries at any time during the last two years of Executive’s employment with the Company or its subsidiaries or (ii) serving as the chief executive officer, president, chief operating officer, chief financial officer, or regional vice president (or similar role) in charge of any operational region of any entity engaged in competition in the Business of the Company in a Prohibited Location. “Person” means any individual, corporation, limited liability company, partnership, joint venture, association, joint-stock company, trust, unincorporated organization or other entity. “Competing Business” means any business, regardless of form, that is directly engaged, in whole or in relevant part, in any business or enterprise that is the same as, or substantially the same as, the Business of the Company. The “Business of the Company” means the business of supplying, manufacturing, designing, constructing or installing structural and related building products, including without limitation roof and floor trusses, wall panels, stairs, windows, doors, engineered wood products, lumber and lumber sheet goods, millwork, kitchen cabinets, gypsum, siding, roofing, insulation, hardware and other building products. A “Prohibited Location” means any location within fifty (50) miles of any of the Company’s or any of its subsidiaries’ physical locations. For the purposes of this Agreement, the parties agree that homebuilders and any vendors supplying building products or services to the Company shall be deemed to be Competing Businesses.

(d) During the Term of this Agreement and for a period of two years after termination of Executive’s employment hereunder (upon expiration of the Term or otherwise), Executive shall not directly or indirectly solicit or divert, or attempt to solicit or divert, (either on behalf of the Executive or any other Person) any person employed by the Company or any of its subsidiaries with whom Executive had contact in the course of his employment with the Company or its subsidiaries (each, a “Company Employee“) to leave or reduce their employment with the Company or any of its subsidiaries or to work for Executive or any other Person,

including, without limitation, a Competing Business. During the Term of this Agreement and for a period of two years after termination of Executive’s employment hereunder (upon expiration of the Term or otherwise), Executive shall not directly or indirectly (either on behalf of the Executive or any other Person) hire any Company Employee or respond to inquiries seeking employment from any Company Employee. This paragraph only applies to persons who are actively employed as Company Employees or were Company Employees within one (1) year of the time of any such actual or attempted solicitation, hiring or inquiry.

(e) Executive acknowledges that (A) in connection with rendering the services to be rendered by Executive hereunder, Executive will have access to and knowledge of Confidential Information, the disclosure of which would place the Company or its subsidiaries at a competitive disadvantage, causing irreparable injury, and (B) the services to be rendered by Executive hereunder are of a special and unique character, which gives this Agreement a peculiar value to the Company, the loss of which may not be reasonably or adequately compensated for by damages in an action at law, and that a material breach or threatened breach by Executive of any of the provisions contained in this Section 9 will cause the Company irreparable injury. Executive, therefore, agrees that the Company shall be entitled, in addition to any other right or remedy, to a temporary, preliminary and permanent injunction, without the necessity of proving the inadequacy of monetary damages or the posting of any bond or security, enjoining or restraining Executive from any such violation or threatened violations.

(f) Executive further acknowledges and agrees that due to the uniqueness of his services and confidential nature of the information he will possess, the covenants set forth herein are reasonable and necessary for the protection of the business and goodwill of the Company; and it is the intent of the parties hereto that if, in the opinion of any court of competent jurisdiction, any provision set forth in this Section 9 is not reasonable in any respect, such court shall have the right, power and authority to modify any and all such provisions in such a manner as to such court shall appear not unreasonable and to enforce the remainder of this Section 9 as so modified.

10. Termination of Agreement . The employment by the Company of Executive pursuant to this Agreement shall not be terminated prior to the end of the Term, except as set forth in this Section 10.

(a) By Mutual Consent .

(i) The employment by the Company of Executive pursuant to this Agreement may be terminated at any time by the mutual written agreement of the Company and Executive.

(ii) In the event that (i) Executive’s employment is terminated by mutual consent pursuant to this Section 10(a), and (ii) Executive and the Company determine at that time that it is in their mutual best interest for Executive to continue to be bound after his termination by the provisions of Section 9 of this Agreement for the periods set forth therein, then the parties may enter into an agreement to that effect, in exchange for which Executive would be entitled to the compensation provided for in Section 10(e) hereof.

(b) Death . The employment by the Company of Executive pursuant to this Agreement shall be terminated upon the death of Executive, in which event Executive’s spouse or heirs shall receive the following , subject to Section 24 hereof : (i) Executive’s Base Salary and benefits to be paid or provided to Executive under this Agreement through the Date of Termination (“Accrued Obligations”), payable no later than thirty (30) days after the Date of Termination, (ii) continuation of Executive’s Base Salary for a period of one (1) year after the Date of Termination, and (iii) continuation of the health benefits provided for pursuant to Section 8(a) hereof at active employee rates (“Health Benefits”) and welfare benefits provided for pursuant to Section 8(b) hereof (“Welfare Benefits”) for a period of one (1) year after the Date of Termination .

(c) Disability . The employment by the Company of Executive pursuant to this Agreement may be terminated by written notice to Executive at the option of the Company in the event that as a result of the Executive’s incapacity due to physical or mental illness (which physical or mental illness shall be confirmed in writing by a physician or other medical expert acceptable to both parties), the Executive is unable to perform his duties, services and responsibilities hereunder or shall have been absent from his duties hereunder on a full-time basis for ninety (90) consecutive days or for an aggregate of ninety (90) days or more in any six (6) month period, and within thirty (30) days after notice is given by the Company (which notice may be delivered no earlier than thirty days prior to the expiration of such ninety (90) consecutive days or six month period, as the case may be), the Executive shall not have returned to the performance of his duties hereunder on a full-time basis. In the event the employment by the Company of Executive is terminated pursuant to this Section 10(c), Executive shall be entitled to receive the following, subject to Section 24 hereof, but only if, with respect to the payments and benefits described in clauses (ii) through (iv), within 45 days after the Date of Termination, Executive shall have executed and not revoked a full release of claims in a form satisfactory to the Company (the “Release”): (i) the Accrued Obligations, payable no later than thirty (30) days after the Date of Termination, (ii) continuation of his Base Salary for a period of one (1) year after the Date of Termination, (iii) continuation of Health Benefits for a period of one (1) year after the Date of Termination, and (iv) continuation of Welfare Benefits for a period of one (1) year after the Date of Termination; provided, however, that amounts payable to Executive under this Section 10(c) shall be reduced by the proceeds of any short- and/or long-term disability payments under the Company plans referred to in Section 8 hereof to which Executive may be entitled during such period.

(d) By the Company for Cause . The employment of Executive pursuant to this Agreement may be terminated by the Company by written notice to Executive (“Notice of Termination”) for Cause (as hereafter defined). In the event the employment by the Company of Executive is terminated pursuant to this Section 10(d), Executive shall be entitled to receive the Accrued Obligations through the Date of Termination, payable no later than thirty (30) days after the Date of Termination, and no more.

(e) By the Company Without Cause . The employment by the Company of Executive pursuant to this Agreement may be terminated by the Company at any time without Cause by delivery of a Notice of Termination to Executive. In the event the employment by the Company of Executive is terminated pursuant to this Section 10(e), Executive shall be entitled to receive the following, subject to Section 24 hereof, but only if, with respect to the payments and

benefits described in clauses (ii) through (v), within 45 days after the Date of Termination, Executive shall have executed and not revoked the Release : (i) the Accrued Obligations, payable no later than thirty (30) days after the Date of Termination, (ii) continuation of his Base Salary for a period of one (1) year after the Date of Termination, (iii) continuation of Health Benefits for a period of one (1) year after the Date of Termination, (iv) continuation of Welfare Benefits for a period of one (1) year after the Date of Termination, and (v) an amount equal to his Average Bonus Compensation (as hereafter defined), payable in accordance with Section 10(j) .

(f) By Executive . The employment of Executive by the Company pursuant to this Agreement may be terminated by Executive by written notice to the Company of his resignation (a “Notice of Resignation”) at any time. In the event the employment by the Company of Executive is terminated pursuant to this Section 10(f), Executive shall be entitled to receive the Accrued Obligations, payable no later than thirty (30) days after the Date of Termination, and no more; provided, however, that if Executive terminates his employment due to (i) a material adverse diminution of Executive’s job title or responsibilities from those currently in effect; or (ii) a relocation of Executive’s principal place of employment more than 100 miles from its current location without his consent, then Executive shall instead be entitled to the compensation provided for in Section 10(e) hereof, subject to the requirement set forth therein to execute and not revoke the Release.

(g) Non-Renewal . In the event that at any time during the Term (as it may be extended) the Company notifies Executive of its intent not to renew this Agreement pursuant to Section 2(b) hereof, and Executive then delivers a Notice of Resignation to the Company within ninety (90) days of receipt of such notice of non-renewal, Executive shall be entitled to receive the following, subject to Section 24 hereof, but only if, with respect to the payments and benefits described in clauses (ii) through (v), within 45 days after the Date of Termination, Executive shall have executed the Release and not revoked the Release within the time specified therein: (i) the Accrued Obligations, payable no later than thirty (30) days after the Date of Termination, (ii) continuation of his Base Salary for a period of one (1) year after the Date of Termination, (iii) continuation of Health Benefits for a period of one (1) year after the Date of Termination, (iv) continuation of Welfare Benefits for a period of one (1) year after the Date of Termination, and (v) an amount equal to his Average Bonus Compensation (as hereafter defined), payable in accordance with Section 10(j).

(h) Previously Earned Bonus . Notwithstanding any other provision of this Section 10, in the event that Executive’s employment pursuant to this Agreement is terminated at a time when Executive shall have earned a bonus under the Annual Incentive Plan for performance during the prior fiscal year which has not yet been paid, Executive shall be paid such bonus in addition to the amounts otherwise provided for in this Section 10. Such bonus shall be paid in the fiscal year following the fiscal year for which it is earned, and not later than March 15 of such year, in accordance with the Company’s normal practices. For the sake of clarity, any bonus of Executive under the Company’s Annual Incentive Plan shall deemed to have been earned on December 31 of the year upon whose performance such bonus is based if Executive has been continuously employed by the Company through December 31 of such year.

(i) Date of Termination . Executive’s Date of Termination shall be: (i) if the parties hereto mutually agree to terminate this Agreement pursuant to Section 10(a) hereof, the

date designated by the parties in such agreement; (ii) if Executive ’ s employment by the Company is terminated pursuant to Section 1 0 (b), the date of Executive ’ s death; (iii) if Executive ’ s employment by the Company is terminated pursuant to Section 1 0 (c), the last day of the applicable period referred to in Section 1 0 (c) hereof; (iv) if Executive ’ s employment by the Company is terminated pursuant to Section 1 0 (d), the date on which a Notice of Termination is given; and (v) if Executive ’ s employment by the Company is terminated pursuant to Section s 1 0 (e) , 1 0 (f) or 10(g) , the date the Notice of Termination or Notice of Resignation, as the case may be, is given .

(j) Payment of Post-Termination Compensation . After Executive’s Date of Termination, all payments of Base Salary and Average Bonus Compensation to Executive pursuant to this Section 10 shall be paid in accordance with the Company’s normal payroll practices, but in no event less often than semi-monthly. In the event of a breach by Executive of Section 9 of this Agreement during the applicable period following his Date of Termination, Executive agrees (i) that the Company shall have no further obligation to make any payments to Executive under Section 10 of the Agreement and (ii) that any payments of Base Salary or Average Bonus Compensation previously made to Executive after his Date of Termination shall be returned to the Company.

(k) Continuation of Welfare Benefits . With respect to Executive’s rights to continuation of Welfare Benefits provided for in Sections 10(b), (c), (e) and (g), (i) the benefits provided in any one calendar year shall not affect the benefits provided in any other calendar year, (ii) the reimbursement of an eligible expense must be made no later than December 31 of the year after the year in which the business expense was incurred, and (iii) such rights shall not be subject to liquidation or exchange for another benefit. Notwithstanding any other provision of this Agreement to the contrary, in lieu of providing continuation of any Welfare Benefit to Executive following his Date of Termination, the Company may elect to pay directly to Executive cash payments in an aggregate amount equal to the cost of providing such Welfare Benefit, payable in equal installments for a period of one (1) year after the Date of Termination.

11. Representations .

(a) The Company represents and warrants that this Agreement has been authorized by all necessary corporate action of the Company and is a valid and binding agreement of the Company enforceable against the Company in accordance with its terms.

(b) Executive represents and warrants that he is not a party to any agreement or instrument which would prevent him from entering into or performing his duties in any way under this Agreement and that this Agreement is a valid and binding agreement of Executive enforceable against Executive in accordance with its terms.

12. Successors . This Agreement is a personal contract and the rights and interests of Executive hereunder may not be sold, transferred, assigned, pledged, encumbered, or hypothecated by him, except as otherwise expressly permitted by the provisions of this Agreement. This Agreement shall inure to the benefit of and be enforceable by Executive and his personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If Executive should die while any amount would still be payable to him

hereunder had Executive continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to his devisee, legatee or other designee or, if there is no such designee, to his estate.

13. Entire Agreement . This Agreement contains all the understandings between the parties hereto pertaining to the matters referred to herein, and supersedes any other undertakings and agreements (other than any written stock option or restricted stock agreements between Executive and the Company), whether oral or in writing, previously entered into by them with respect thereto. Notwithstanding the foregoing, any non-competition, non-solicitation, and/or confidentiality obligations that Executive has previously entered into with the Company or its subsidiaries or predecessors shall continue in full force and effect in accordance with their terms and the Company and its subsidiaries shall be entitled to enforce, at the Company’s election, such provisions in this Agreement and/or any such prior agreement so that it is afforded the maximum level of protection. Executive represents that, in executing this Agreement, he does not rely and has not relied upon any representation or statement made by the Company not set forth herein with regard to the subject matter or effect of this Agreement or otherwise.

14. Termination; Amendment or Modification; Waiver .

(a) This Agreement may be terminated at any time by mutual written consent of the Company and Executive.

(b) No provision of this Agreement may be amended or waived unless such amendment or waiver is agreed to in writing, signed by Executive and by a duly authorized officer of the Company. No waiver by any party hereto of any breach by another party hereto of any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of a similar or dissimilar condition or provision at the same time, any prior time or any subsequent time.

15. Notices . All notices and other communications required or permitted to be given hereunder shall be in writing and shall be (i) delivered by hand, (ii) delivered by a nationally recognized commercial overnight delivery service, (iii) mailed postage prepaid by certified first class mail, return receipt requested, or (iv) transmitted by facsimile transmitted to the party concerned at the address or telecopier number set forth below:

To Executive at:

9120 Sunshine Meadow Place
Parker, CO 80134

To the Company at:

Builders FirstSource, Inc.
2001 Bryan Street, Suite 1600
Dallas, Texas 75201
Attention: General Counsel

Such notices shall be effective: (i) in the case of hand deliveries when received; (ii) in the

case of an overnight delivery service, on the next business day after being placed in the possession of such delivery service, with delivery charges prepaid; (iii) in the case of mail, seven (7) days after deposit in the postal system, certified first class mail, postage prepaid , return receipt requested ; and (iv) in the case of facsimile notices, when electronic confirmation of receipt is received by the sender. Any party may change its address and telecopy number by written notice to the other given in accordance with this Section 1 5 ; provided , however , that such change shall be effective when received.

16. Severability . If any provision or clause of this Agreement or the application of any such provision or clause to any party or circumstances shall be determined by any court of competent jurisdiction to be invalid and unenforceable to any extent, the remainder of this Agreement or the application of such provision or clause to such person or circumstances other than those to which it is so determined to be invalid and unenforceable, shall not be affected thereby, and each provision or clause hereof shall be validated and shall be enforced to the fullest extent permitted by law.

17. Survivorship . The respective rights and obligations of the parties hereunder shall survive any termination of this Agreement to the extent necessary to the intended preservation of such rights and obligations.

18. Governing Law . This Agreement will be governed by and construed in accordance with the laws of the State of Delaware, without regard to its conflicts of law principles.

19. Headings . All descriptive headings of sections and paragraphs in this Agreement are intended solely for convenience, and no provision of this Agreement is to be construed by reference to the heading of any section or paragraph.

20. Withholding . All payments to Executive under this Agreement shall be reduced by all applicable withholding required by federal, state or local law.

21. Specific Performance . Each party hereto acknowledges that money damages would be both incalculable and an insufficient remedy for any breach of this Agreement by such party and that any such breach would cause the other parties, irreparable harm. Accordingly, each party hereto also agrees that, in the event of any breach or threatened breach of the provisions of this Agreement by such party, the other parties shall be entitled to equitable relief without the requirement of posting a bond or other security, including in the form of injunctions and orders for specific performance, in addition to all other remedies available to such other parties at law or in equity.

22. Counterparts . This Agreement may be executed in counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.

23. Definitions .

(a) “ Cause ” means the determination, in good faith, by the Company Board, after notice to Executive, that one or more of the following events has occurred: (i) any

act of gross negligence, fraud , willful misconduct or moral turpitude by Execu tive materially injuring the interest, business or reputation of the Company, or any of its parents, subsidiaries or affiliates ; (ii) Executive ’ s commission or conviction of any felony; (iii) Executive ’s violation of the Company’s d rug p olicy or material violation of its Code of Conduct ; (iv) any m isappropriation or embezzlement of the property of the Company, or any of its parents, subsidiaries or affiliates; or (v) any material breach by Executive of this Agreement, including, without limitation, a material breach of Section 9 hereof, which breach, to the extent it is capable of being cured, remains uncorrected for a period of thirty (30) days after receipt by Executive of written notice from the Company setting forth such breach.

(b) “ Average Bonus Compensation ” shall mean an amount equal to the average of the annual bonus amounts earned by Executive under the Company’s Annual Incentive Plan during the two most recent fiscal years ended prior to Executive’s Date of Termination.

24. Code Section 409A .

(a) Notwithstanding anything in this Agreement to the contrary, to the extent that any amount or benefit that would constitute non-exempt “deferred compensation” for purposes of Section 409A of the Code would otherwise be payable or distributable hereunder by reason of the occurrence of Executive’s separation from service, such amount or benefit will not be payable or distributable to Executive by reason of such separation from service unless (i) the circumstances giving rise to such separation from service meet any description or definition of “separation from service” in Section 409A of the Code and applicable regulations (without giving effect to any elective provisions that may be available under such definition), or (ii) the payment or distribution of such amount or benefit would be exempt from the application of Section 409A of the Code by reason of the short-term deferral exemption or otherwise. This provision does not prohibit the vesting of any amount upon a separation from service, however defined. If this provision prevents the payment or distribution of any amount or benefit, such payment or distribution shall be made on the date, if any, on which an event occurs that constitutes a Section 409A-compliant “separation from service.”

(b) Notwithstanding anything in this Agreement to the contrary, if any amount or benefit specified herein as “subject to Section 24 hereof,” or any other amount or benefit that would otherwise constitute non-exempt “deferred compensation” for purposes of Section 409A of the Code would otherwise be payable or distributable under this Agreement by reason of the Executive’s separation from service during a period in which he is a Specified Employee (as defined below), then, subject to any permissible acceleration of payment by the Company under Treas. Reg. Section 1.409A-3(j)(4)(ii) (domestic relations order), (j)(4)(iii) (conflicts of interest), or (j)(4)(vi) (payment of employment taxes):

(i) if the payment or distribution is payable in a lump sum, Executive’s right to receive payment or distribution of such non-exempt deferred compensation will be delayed until the earlier of Executive’s death or the first day of the seventh month following Executive’s separation from service (the “Delay Period”); and

(ii) if the payment or distribution is payable over time, the amount of such

non-exempt deferred compensation that would otherwise be payable during the six-month period immediately following Executive’s separation from service will be accumulated and Executive’s right to receive payment or distribution of such accumulated amount will be delayed until the earlier of Executive’s death or the end of the Delay Period, whereupon the accumulated amount will be paid or distributed to Executive and the normal payment or distribution schedule for any remaining payments or distributions will resume; and

(iii) to the extent that this Section 24(b) applies to the provision of Welfare Benefits, Executive shall be entitled to pay the full cost of premiums to maintain the Welfare Benefits during the Delay Period, and the Company shall pay to Executive an amount equal to the amount of such premiums promptly following the end of the Delay Period.

For purposes of this Agreement, the term “Specified Employee” has the meaning given such term in Code Section 409A and the final regulations thereunder.

25. Forum Selection; Consent to Jurisdiction . The exclusive forum for any action to enforce this Agreement, as well as any action relating to or arising out of this Agreement, shall be the state or federal courts of the State of Texas. With respect to any such court action, Executive and the Company hereby (a) irrevocably submit to the personal jurisdiction of such courts; (b) consent to service of process; (c) consent to venue; and (d) waive any other requirement (whether imposed by statute, rule of court, or otherwise) with respect to personal jurisdiction, service of process, or venue. Executive and the Company further agree that the state and federal courts of the State of Texas are convenient forums for any dispute that may arise from this Agreement and that neither party shall raise as a defense that such courts are not convenient forums

[Signature Page Follows]

In witness whereof , the parties hereto have executed and delivered this Employment Agreement as of the date first above written.

Builders FirstSource, Inc.

By: /s/ Donald F. McAleenan
Name:  Donald F. McAleenan
Its:  Senior Vice President and General Counsel

Executive

/s/ Scott L. Robins

Scott L. Robins

Exhibit 31.1

Certification of Chief Executive Officer

Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, M. Chad Crow, certify that:

1. I have reviewed this report on Form 10-Q of Builders FirstSource, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

/s/ M. CHAD CROW

M. Chad Crow

President and Chief Executive Officer

Date: November 2, 2018

Exhibit 31.2

Certification of Chief Financial Officer

Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, Peter M. Jackson, certify that:

1. I have reviewed this report on Form 10-Q of Builders FirstSource, Inc.;

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

/s/ PETER M. JACKSON

Peter M. Jackson

Senior Vice President and Chief Financial Officer

Date: November 2, 2018

Exhibit 32.1

Certification of CEO and CFO Pursuant to 18 U.S.C. Section 1350

(Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002)

In connection with the quarterly report of Builders FirstSource, Inc. (the “Company”) on Form 10-Q for the period ended September 30, 2018 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), we, M. Chad Crow, as Chief Executive Officer of the Company, and Peter M. Jackson, as Senior Vice President and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to our knowledge:

(1) The Report fully complies with the requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ M. CHAD CROW

M. Chad Crow

President and Chief Executive Officer

/s/ PETER M. JACKSON

Peter M. Jackson

Senior Vice President and Chief Financial Officer

Date: November 2, 2018

A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.