STOCK BUILDING SUPPLY HOLDINGS, INC. (Form: 10-Q, Received: 10/28/2014 17:32:01)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

_____________________________

Form 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2014

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ___ to ___

Commission file number 001-36050

Stock Building Supply Holdings, Inc.

(Exact name of Registrant as specified in its charter)



Delaware	26-4687975
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
8020 Arco Corporate Drive, Suite 400 Raleigh, North Carolina	27617
(Address of principal executive offices)	(Zip Code)

(919) 431-1000

(Registrant’s telephone number, including area code)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

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

Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files). Yes x No o

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



Large accelerated filer	o	Accelerated filer	o
Non-accelerated filer	x (Do not check if a smaller reporting company)	Smaller reporting company	o

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

The number of shares outstanding of the Registrant’s common stock, par value $0.01 per share, at October 27, 2014 was 26,176,056 shares.

STOCK BUILDING SUPPLY HOLDINGS, INC. AND SUBSIDIARIES

Table of Contents to Form 10-Q



	PART I - FINANCIAL INFORMATION
Item 1	Unaudited Condensed Consolidated Financial Statements
	Condensed Consolidated Balance Sheets as of September 30, 2014 and December 31, 2013	1
	Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2014 and 2013	2
	Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2014 and 2013	3
	Notes to Condensed Consolidated Financial Statements	4
Item 2	Management's Discussion and Analysis of Financial Condition and Results of Operations	12
Item 3	Quantitative and Qualitative Disclosures About Market Risk	20
Item 4	Controls and Procedures	21
	PART II - OTHER INFORMATION
Item 1	Legal Proceedings	22
Item 1A	Risk Factors	22
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	22
Item 3	Defaults Upon Senior Securities	22
Item 4	Mine Safety Disclosures	22
Item 5	Other Information	22
Item 6	Exhibits	23
	Signature	24

PART I. FINANCIAL INFORMATION

ITEM 1 FINANCIAL STATEMENTS

STOCK BUILDING SUPPLY HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)



(in thousands, except share and per share amounts)	September 30, 2014			December 31, 2013
Assets
Current assets
Cash and cash equivalents	$	8,244		$	1,138
Restricted assets	956			460
Accounts receivable, net	130,624			111,285
Inventories, net	114,748			91,303
Costs in excess of billings on uncompleted contracts	10,163			7,921
Assets held for sale	—			2,363
Prepaid expenses and other current assets	11,818			9,332
Deferred income taxes	5,561			3,332
Total current assets	282,114			227,134
Property and equipment, net of accumulated depreciation	71,085			56,039
Intangible assets, net of accumulated amortization	23,099			24,789
Goodwill	7,186			7,186
Restricted assets	861			1,359
Other assets	1,878			2,033
Total assets	$	386,223		$	318,540
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable	$	89,167		$	64,984
Accrued expenses and other liabilities	40,693			30,528
Income taxes payable	5,704			2,989
Current portion of restructuring reserve	998			1,594
Current portion of capital lease obligation	1,676			1,240
Billings in excess of costs on uncompleted contracts	1,798			1,599
Total current liabilities	140,036			102,934
Revolving line of credit	81,816			59,072
Long-term portion of capital lease obligation	6,176			6,011
Deferred income taxes	13,695			15,496
Other long-term liabilities	7,548			7,346
Total liabilities	249,271			190,859
Commitments and contingencies (Note 9)
Stockholders' equity
Preferred stock, $0.01 par value, 50,000,000 shares authorized, no shares issued and outstanding at September 30, 2014 and December 31, 2013	—			—
Common stock, $0.01 par value, 300,000,000 shares authorized, 26,176,056 and 26,112,007 shares issued and outstanding at September 30, 2014 and December 31, 2013, respectively	262			261
Additional paid-in capital	146,527			144,570
Retained deficit	(9,837		)	(17,150		)
Total stockholders' equity	136,952			127,681
Total liabilities and stockholders' equity	$	386,223		$	318,540

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

STOCK BUILDING SUPPLY HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)



	Three Months Ended September 30,						Nine Months Ended September 30,
(in thousands, except share and per share amounts)	2014			2013			2014			2013
Net sales	$	354,060		$	328,468		$	978,629		$	891,847
Cost of goods sold	269,668			253,087			746,781			691,166
Gross profit	84,392			75,381			231,848			200,681
Selling, general and administrative expenses	73,665			66,931			211,878			188,458
Depreciation expense	1,681			1,456			4,790			4,716
Amortization expense	563			563			1,690			1,672
Impairment of assets held for sale	—			—			48			—
Public offering transaction-related costs	60			9,322			508			10,008
Restructuring expense	2			31			11			130
	75,971			78,303			218,925			204,984
Income (loss) from operations	8,421			(2,922		)	12,923			(4,303		)
Other income (expense)
Interest expense	(712		)	(892		)	(2,011		)	(3,150		)
Other income, net	197			200			610			596
Income (loss) from continuing operations before income taxes	7,906			(3,614		)	11,522			(6,857		)
Income tax expense	(2,972		)	(1,989		)	(4,417		)	(1,076		)
Income (loss) from continuing operations	4,934			(5,603		)	7,105			(7,933		)
Income from discontinued operations, net of income tax expense of $25, $54, $133 and $237, respectively	40			90			208			341
Net income (loss)	4,974			(5,513		)	7,313			(7,592		)
Redeemable Class B Senior Preferred stock deemed dividend	—			(363		)	—			(1,836		)
Income (loss) attributable to common stockholders	$	4,974		$	(5,876	)	$	7,313		$	(9,428	)
Weighted average common shares outstanding
Basic	25,733,833			19,813,209			25,713,688			15,718,667
Diluted	26,229,323			19,813,209			26,218,405			15,718,667

Basic income (loss) per share
Income (loss) from continuing operations	$	0.19		$	(0.30	)	$	0.27		$	(0.62	)
Income from discontinued operations	—			—			0.01			0.02
Net income (loss) per share	$	0.19		$	(0.30	)	$	0.28		$	(0.60	)

Diluted income (loss) per share
Income (loss) from continuing operations	$	0.19		$	(0.30	)	$	0.27		$	(0.62	)
Income from discontinued operations	—			—			0.01			0.02
Net income (loss) per share	$	0.19		$	(0.30	)	$	0.28		$	(0.60	)

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

STOCK BUILDING SUPPLY HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)



	Nine Months Ended September 30,
(in thousands)	2014			2013
Cash flows from operating activities
Net income (loss)	$	7,313		$	(7,592	)
Adjustments to reconcile net income (loss) to net cash used in operating activities
Depreciation expense	8,054			7,389
Amortization of intangible assets	1,690			1,672
Amortization of debt issuance costs	353			465
Deferred income taxes	(4,030		)	(3,723		)
Non-cash stock compensation expense	1,848			573
Impairment of assets held for sale	96			—
Gain on sale of property, equipment and real estate	(1,076		)	(270		)
Bad debt expense	417			1,316
Change in assets and liabilities
Accounts receivable	(19,756		)	(35,401		)
Inventories, net	(23,445		)	(20,598		)
Accounts payable	26,951			14,735
Other assets and liabilities	6,396			6,904
Net cash provided by (used in) operating activities	4,811			(34,530		)
Cash flows from investing activities
Purchases of property and equipment	(20,795		)	(2,574		)
Proceeds from sale of property, equipment and real estate	3,493			3,070
Change in restricted assets	2			3,223
Purchase of business	—			(2,373		)
Net cash (used in) provided by investing activities	(17,300		)	1,346
Cash flows from financing activities
Proceeds from revolving line of credit	1,046,220			961,160
Repayments of proceeds from revolving line of credit	(1,023,476		)	(973,305		)
Proceeds from issuance of common stock, net of offering costs	—			55,821
Other financing activities	(3,149		)	(2,657		)
Net cash provided by financing activities	19,595			41,019
Net increase in cash and cash equivalents	7,106			7,835
Cash and cash equivalents
Beginning of period	1,138			2,691
End of period	$	8,244		$	10,526

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

STOCK BUILDING SUPPLY HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1. Organization

Stock Building Supply Holdings, Inc. and its subsidiaries (the “Company,” “we,” “us” and “our”) distributes lumber and building materials to new construction and repair and remodeling contractors. Additionally, we provide solution-based services to our customers, including component design, product specification and installation management services.

Due to the seasonal nature of our industry, sales are usually lower in the first and fourth quarters than in the second and third quarters.

2. Basis of Presentation

The condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) that permit reduced disclosure for interim periods. The condensed consolidated balance sheet as of December 31, 2013 was derived from audited financial statements, but does not include all necessary disclosures required by accounting principles generally accepted in the United States of America (“GAAP”). The unaudited condensed consolidated financial statements include all accounts of the Company and its subsidiaries and, in the opinion of management, 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. These unaudited financial statements should be read in conjunction with the Company’s 2013 Annual Report on Form 10-K. 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. All material intercompany accounts and transactions have been eliminated in consolidation.

Comprehensive income (loss)

Comprehensive income (loss) is equal to the net income (loss) for all periods presented.

Recently issued accounting pronouncements

In July 2013, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update No. 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists (“ASU 2013-11"). The guidance requires entities to present an unrecognized tax benefit as a reduction of a deferred tax asset for a net operating loss (“NOL”) carryforward or tax credit carryforward whenever the NOL or tax credit carryforward would be available to reduce the additional taxable income or tax due if the tax position is disallowed. This ASU requires entities to assess whether to net the unrecognized tax benefit with a deferred tax asset as of the reporting date. ASU 2013-11 became effective and was adopted by the Company in fiscal year 2014. As of September 30, 2014, the Company recognized $0.4 million of an unrecognized tax benefit as a reduction of its deferred tax asset for state tax NOL carryforwards in accordance with ASU 2013-11.

In May 2014, the FASB issued Accounting Standards Update 2014-09, Revenue from Contracts with Customers ("ASU 2014-09"). ASU 2014-09 provides a comprehensive revenue recognition model requiring companies to recognize revenue for the transfer of goods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services. The guidance also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts. ASU 2014-09 is effective for the Company's annual and interim periods beginning on January 1, 2017. Early application is not permitted. The guidance permits the use of either a retrospective or cumulative effect transition method. We have not yet selected a transition method and are currently evaluating the impact of the standard on our current accounting policies.

3. Acquisitions

For all acquisitions, the Company allocates the purchase price to the estimated fair values of the assets acquired and liabilities assumed as of the date of the acquisition. The market approach, which indicates value based on available market pricing for comparable assets, is utilized to estimate the fair value of inventory, property and equipment. The income approach, which indicates value based on the present value of future cash flows, is primarily used to value intangible assets. The cost approach, which estimates values by determining the current cost of replacing an asset with another of equivalent utility, is used, as appropriate, for certain assets for which the market and income approaches could not be applied due to the nature of the asset.

Chesapeake Structural Systems

On April 8, 2013 , Commonwealth Acquisition Holdings, LLC, a wholly-owned subsidiary of the Company, purchased certain assets and assumed certain liabilities of Chesapeake Structural Systems, Inc., Creative Wood Products, LLC and Chestruc, LLC (collectively “Chesapeake”) for an adjusted purchase price of $2.6 million. This amount included an initial holdback amount of $0.2 million, which was paid to the sellers during the nine months ended September 30, 2014. The acquisition provides the Company with component manufacturing capability to serve customers in the Central and Northern Virginia markets. The Company incurred transaction costs of $0 and $0.2 million during the three and nine months ended September 30, 2013, respectively, which are included in selling, general and administrative expenses on the condensed consolidated statements of operations. The impact of this acquisition on our operating results was not considered material for the reporting of pro forma financial information.

The Company acquired total assets of $3.1 million and assumed liabilities of $1.4 million. The assets acquired include a customer relationship intangible asset of $1.2 million. Goodwill of $0.7 million arising from the acquisition consists of expected synergies and cost savings from excess purchase price over identifiable intangible net assets, as well as intangible assets that do not qualify for separate recognition, such as assembled workforce. All of the goodwill from this transaction is expected to be deductible for income tax purposes.

4. Discontinued Operations

During certain prior years, the Company ceased operations in certain geographic markets. The Company will have no further significant continuing involvement in sold operations and exited geographic markets. The cessation of operations in these markets has been treated as discontinued operations as the markets had distinguishable cash flows and operations that have been eliminated from ongoing operations. To determine if cash flows have been (or will be) eliminated from ongoing operations, we evaluate a number of qualitative and quantitative factors, including, but not limited to, proximity of a closing store to any remaining open stores and the potential sales migration from the closed store to any stores remaining open.

The operating results of the discontinued operations for the three and nine months ended September 30, 2014 and 2013 are as follows:



	Three Months Ended September 30,						Nine Months Ended September 30,
(in thousands)	2014			2013			2014			2013
Net sales	$	—		$	—		$	—		$	—
Restructuring charges	(3		)	(7		)	(18		)	(25		)
Gain before income taxes	65			144			341			578
Income tax expense	(25		)	(54		)	(133		)	(237		)
Net income	40			90			208			341

The assets and liabilities of discontinued operations reflected on the consolidated balance sheets at September 30, 2014 and December 31, 2013 are as follows:



(in thousands)	September 30, 2014		December 31, 2013
Real estate held for sale	$	—	$	700
Prepaid expenses and other current assets	7		8
Current assets of discontinued operations	7		708
Accrued expenses and other liabilities	265		37
Current portion of restructuring reserve	141		295
Current liabilities of discontinued operations	406		332
Long-term portion of restructuring reserve	—		89
Long-term liabilities of discontinued operations	$	—	$	89

5. Restructuring Costs

In addition to discontinuing operations in certain markets, the Company instituted store closures and reductions in headcount in continuing markets (collectively, the “Restructurings”) in certain prior years in an effort to: (i) strengthen the Company’s competitive position; (ii) reduce costs and (iii) improve operating margins within existing markets that management believes have favorable long-term growth demographics. No additional costs, other than interest accretion, are expected to be incurred related to the Restructurings.

The following table summarizes the restructuring expenses incurred in connection with the Restructurings and the remaining reserves as of September 30, 2014 :



(in thousands)	Work Force Reductions			Store Closures			Total
Restructuring reserves, December 31, 2013	$	190		$	3,412		$	3,602
Restructuring charges incurred	—			29			29
Cash payments	(129		)	(1,366		)	(1,495		)
Restructuring reserves, September 30, 2014	$	61		$	2,075		$	2,136

The remaining accrual for work force reduction of $0.1 million is expected to be fully paid by January 2015 . The remaining accrual for store closures of $2.1 million is expected to be fully paid by January 2017 as the related leases expire.

The restructuring reserve at September 30, 2014 consists of a current portion of $1.0 million and a long-term portion of $1.1 million. The long-term portion is included in other long-term liabilities on the consolidated balance sheets.

6. Accounts Receivable

Accounts receivable consist of the following at September 30, 2014 and December 31, 2013 :



(in thousands)	September 30, 2014			December 31, 2013
Trade receivables	$	135,556		$	115,876
Allowance for doubtful accounts	(2,501		)	(2,707		)
Allowance for sales returns and discounts	(2,431		)	(1,884		)
	$	130,624		$	111,285

7. Secured Credit Agreement

On June 30, 2009, the Company entered into a Secured Credit Agreement (the “Credit Agreement”) with Wells Fargo Capital Finance ("WFCF"), which includes a revolving line of credit (the “Revolver”). The Revolver was amended during 2013 and 2014 for changes in financial covenants, maximum availability, maturity date and interest rate. The following is a summary of the significant terms of the Revolver as of September 30, 2014 :



Maturity	December 31, 2017
Interest/Usage Rate	Company’s option of Base Rate ^(a) plus a Base Rate Margin (ranges from 0.50%–1.00% based on Revolver availability) or London Inter Bank Offered Rate ("LIBOR") plus a LIBOR Rate Margin (ranges from 1.50%–2.00% based on Revolver availability)
Maximum Availability	Lesser of $200 million or the borrowing base ^(b)
Periodic Principal Payments	None


(a)	Base Rate is the higher of (i) the Federal Funds Rate plus 0.5% or (ii) the prime rate.

(b)

The Revolver’s borrowing base is calculated as the sum of (i) 85% of the Company’s eligible accounts receivable plus (ii) the lesser of 90% of the eligible credit card receivables and $5 million plus (iii) the lesser of $150 million, 65% of the eligible inventory or 85% of the net liquidation value of eligible inventory as defined in the Credit Agreement plus (iv) the lesser of $30 million, 85% of the net liquidation value of eligible fixed assets or the net book value of fixed assets, all as defined in the Credit Agreement, minus (v) reserves from time to time set by the administrative agent. The Company’s borrowing base can also be increased pursuant to certain terms outlined in the Credit Agreement.

The Credit Agreement provides that the Company can use the Revolver availability to issue letters of credit. The fees on any outstanding letters of credit issued under the Revolver include a participation fee equal to the LIBOR Rate Margin. The fee on the unused portion of the Revolver is 0.25% . The Revolver includes a financial covenant that requires the Company to maintain a minimum Fixed Charge Coverage Ratio of 1.00 :1.00 as defined by the Credit Agreement. The Fixed Charge Coverage Ratio requirement is only applicable if the sum of (i) availability under the Revolver and (ii) qualified cash ("Adjusted Liquidity") is less than $20 million, and remains in effect until the date on which Adjusted Liquidity has been greater than or equal to $20 million

for a period of 30 consecutive days. While there can be no assurances, based upon the Company’s forecast, the Company does not expect the financial covenants to become applicable during the year ending December 31, 2014.

The Company had outstanding borrowings of $81.8 million and $59.1 million with net availability of $100.4 million and $71.0 million as of September 30, 2014 and December 31, 2013 , respectively. The interest rate on outstanding LIBOR Rate borrowings of $81.0 million was 1.7% and the interest rate on outstanding Base Rate borrowings of $0.8 million was 3.8% as of September 30, 2014 . The interest rate on outstanding LIBOR Rate borrowings of $52.0 million was 1.9% and the interest rate on outstanding Base Rate borrowings of $7.1 million was 4.0% as of December 31, 2013 . The Company had $9.2 million and $8.9 million in letters of credit outstanding under the Credit Agreement as of September 30, 2014 and December 31, 2013 , respectively. The Revolver is collateralized by substantially all assets of the Company. The carrying value of the Revolver at September 30, 2014 and December 31, 2013 approximates fair value as the Revolver contains a variable interest rate. As such, the fair value of the Revolver was classified as a Level 2 measurement in accordance with ASC 820.

8. Income Taxes

The Company evaluates its deferred tax assets quarterly to determine if valuation allowances are required. In assessing the realizability of deferred tax assets, the Company considers both positive and negative evidence in determining whether it is more likely than not that some portion or all of the deferred tax assets will not be realized.

The Company recognized valuation allowances of $1.7 million and $1.9 million against its deferred tax assets related to certain state tax jurisdictions as of September 30, 2014 and December 31, 2013 , respectively. During the three and nine months ended September 30, 2014 , the Company reduced its valuation allowances by $0.1 million and $0.2 million, respectively, against deferred tax assets related to continuing operations. During the three and nine months ended September 30, 2013 , the Company recorded additional valuation allowances of $0.2 million against deferred tax assets related to continuing operations. To the extent the Company generates sufficient taxable income in the future to utilize the tax benefits of the net deferred tax assets on which a valuation allowance is recorded, the effective tax rate may decrease as the valuation allowance is reversed. The Company is not permitted to carry back any of its existing tax net operating losses related to certain state tax jurisdictions; therefore, to the extent the Company generates future tax net operating losses, the Company may be required to increase the valuation allowance on net deferred tax assets, which may increase the effective tax rate.

For the three and nine months ended September 30, 2014 , the Company’s effective income tax rate including discontinued operations and other discrete items was 37.6% and 38.4% , respectively, which varied from the federal statutory rate of 35% primarily due to state taxes. For the three and nine months ended September 30, 2013 , the Company’s effective income tax rate including discontinued operations and other discrete items was (58.9)% and (20.9)% , respectively, which varied from the federal statutory rate of 35% primarily due to the non-deductibility of the termination fee of $9.0 million related to our management services agreement with The Gores Group, LLC (“Gores”) (the "Gores Termination Fee") and of certain capitalized costs.

The effective income tax rate on continuing operations for the three months ended September 30, 2014 was 37.6% compared to an effective income tax rate on continuing operations of (55.0)% for the three months ended September 30, 2013 . The effective income tax rate on continuing operations for the nine months ended September 30, 2014 was 38.3% compared to an effective income tax rate on continuing operations of (15.7)% for the nine months ended September 30, 2013 . The increase in the tax rates for the comparative three-month and nine-month periods is primarily due to the adverse effect of the non-deductible Gores Termination Fee and of certain capitalized costs creating tax expense against the Company's pre-tax losses for the three months and nine months ended September 30, 2013.

As of September 30, 2014, the Company has recognized a liability for uncertain tax positions of $2.9 million within accrued expenses and other liabilities on the condensed consolidated balance sheets related to the deductibility of certain management service fees. The Company anticipates that it is reasonably possible that the total unrecognized tax benefits may be settled and recognized within the next twelve months, which could impact the effective tax rate. The Company did not have material uncertain tax positions as of December 31, 2013.

9. Commitments and Contingencies

From time to time, various claims, legal proceedings and litigation are asserted or commenced against the Company principally arising from alleged product liability, warranty, casualty, construction defect, contract, tort, employment and other disputes. In determining loss contingencies, management considers the likelihood of loss as well as the ability to reasonably estimate the amount of such loss or liability. An estimated loss is recorded when it is considered probable that such a liability has been incurred and when the amount of loss can be reasonably estimated. It is not certain that the Company will prevail in these matters. However,

the Company does not believe that the ultimate outcome of any pending matters will have a material adverse effect on its consolidated financial position, results of operations or cash flows.

10. Stock Based Compensation

The following table highlights the expense related to stock based compensation for the three and nine months ended September 30, 2014 and 2013 :



	Three Months Ended September 30,				Nine Months Ended September 30,
(in thousands)	2014		2013		2014		2013
Nonvested stock	$	263	$	171	$	651	$	307
Stock options	537		129		1,072		257
Restricted stock units	68		9		125		9
Stock based compensation	$	868	$	309	$	1,848	$	573

The following is a summary of nonvested stock, restricted stock unit and stock option activity for the nine months ended September 30, 2014 :



	Nonvested Stock				Restricted Stock Units				Stock Options
	Number of Shares Outstanding		Weighted Average Grant Date Fair Value		Number of Units Outstanding		Weighted Average Grant Date Fair Value		Number of Options Outstanding		Weighted Average Exercise Price
December 31, 2013	427,993		$	15.72	10,000		$	13.96	714,484		$	9.98
Granted	44,245		20.34		11,124		18.39		362,939		20.29
Vested/exercised	(35,566	)	4.62		(5,000	)	13.96		(14,804	)	0.97
Forfeited	—		—		—		—		(27,000	)	14.00
September 30, 2014	436,672		$	17.09	16,124		$	17.02	1,035,619		$	13.62

11. Segments

ASC 280, Segment Reporting, defines operating segments as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance.

The Company's operating segments consist of the East and West divisions along with Coleman Floor, which offers professional flooring installation services. Due to the similar economic characteristics, nature of products, distribution methods and customers, the Company has aggregated our East and West operating segments into one reportable segment, "Geographic divisions."

In addition to our reportable segment, the Company's consolidated results include "Coleman Floor" and "Other reconciling items." Other reconciling items is comprised of our corporate activities.

The following tables present Net Sales, Adjusted EBITDA and certain other measures for the reportable segment and total continuing operations for the three and nine months ended September 30, 2014 and 2013 .



	Three Months Ended September 30, 2014									September 30, 2014
(in thousands)	Net Sales		Gross Profit		Depreciation & Amortization		Adjusted EBITDA			Total Assets
Geographic divisions	$	338,998	$	81,844	$	2,963	$	21,684		$	350,891
Coleman Floor	15,062		2,548		30		208			9,966
Other reconciling items	—		—		305		(8,684		)	25,366
	$	354,060	$	84,392	$	3,298				$	386,223



	Three Months Ended September 30, 2013
(in thousands)	Net Sales		Gross Profit		Depreciation & Amortization		Adjusted EBITDA
Geographic divisions	$	315,918	$	72,908	$	2,829	$	16,757
Coleman Floor	12,550		2,473		28		581
Other reconciling items	—		—		175		(6,898		)
	$	328,468	$	75,381	$	3,032



	Nine Months Ended September 30, 2014
(in thousands)	Net Sales		Gross Profit		Depreciation & Amortization		Adjusted EBITDA
Geographic divisions	$	938,841	$	224,964	$	8,927	$	51,872
Coleman Floor	39,788		6,884		84		(389		)
Other reconciling items	—		—		733		(25,225		)
	$	978,629	$	231,848	$	9,744



	Nine Months Ended September 30, 2013
(in thousands)	Net Sales		Gross Profit		Depreciation & Amortization		Adjusted EBITDA
Geographic divisions	$	857,101	$	193,526	$	8,377	$	36,129
Coleman Floor	34,746		7,155		93		1,405
Other reconciling items	—		—		588		(19,289		)
	$	891,847	$	200,681	$	9,058

Reconciliation to consolidated financial statements:



	Three Months Ended September 30,						Nine Months Ended September 30,
(in thousands)	2014			2013			2014			2013
Net income (loss), as reported	$	4,974		$	(5,513	)	$	7,313		$	(7,592	)
Interest expense	712			892			2,011			3,150
Income tax expense	2,972			1,989			4,417			1,076
Depreciation and amortization	3,298			3,032			9,744			9,058
Impairment of assets held for sale	—			—			48			—
Public offering transaction-related costs	60			9,322			508			10,008
Restructuring expense	2			31			11			130
Discontinued operations, net of taxes	(40		)	(90		)	(208		)	(341		)
Management fees	37			239			126			1,205
Non-cash compensation expense	868			309			1,848			573
Acquisition costs	—			—			—			257
Severance and other items related to store closures	325			229			440			721
Adjusted EBITDA of Coleman Floor	(208		)	(581		)	389			(1,405		)
Adjusted EBITDA of other reconciling items	8,684			6,898			25,225			19,289
Adjusted EBITDA of geographic divisions reportable segment	$	21,684		$	16,757		$	51,872		$	36,129

12. Income (Loss) Per Common Share

Basic net income (loss) per share (“EPS”) is calculated by dividing net income (loss) attributable to common stockholders by the weighted average shares outstanding during the period. Diluted EPS is calculated by adjusting weighted average shares outstanding for the dilutive effect of potential common shares, determined using the treasury-stock method. For purposes of the diluted EPS calculation, stock options, nonvested stock and restricted stock unit awards are considered to be potential common shares. During periods of net income, participating securities are allocated a proportional share of net income determined by dividing total weighted average participating securities by the sum of total weighted average common shares and participating securities (“the two-class method”). During periods of net loss, no effect is given to participating securities since they do not share in the losses of the Company.

The basic and diluted EPS calculations for the three and nine months ended September 30, 2014 and 2013 are presented below:

Basic EPS



	Three Months Ended September 30,					Nine Months Ended September 30,
(in thousands, except share and per share amounts)	2014		2013			2014		2013
Income (loss) from continuing operations	$	4,934	$	(5,603	)	$	7,105	$	(7,933	)
Redeemable Class B Senior Preferred stock deemed dividend	—		(363		)	—		(1,836		)
Income (loss) attributable to common stockholders, from continuing operations	4,934		(5,966		)	7,105		(9,769		)
Income from discontinued operations, net of tax	40		90			208		341
Income (loss) attributable to common stockholders	$	4,974	$	(5,876	)	$	7,313	$	(9,428	)

Weighted average outstanding shares of common stock	25,733,833		19,813,209			25,713,688		15,718,667
Basic EPS
Income (loss) from continuing operations	$	0.19	$	(0.30	)	$	0.27	$	(0.62	)
Income from discontinued operations	—		—			0.01		0.02
Net income (loss) per share	$	0.19	$	(0.30	)	$	0.28	$	(0.60	)

Diluted EPS



	Three Months Ended September 30,					Nine Months Ended September 30,
(in thousands, except share and per share amounts)	2014		2013			2014		2013
Income (loss) from continuing operations	$	4,934	$	(5,603	)	$	7,105	$	(7,933	)
Redeemable Class B Senior Preferred stock deemed dividend	—		(363		)	—		(1,836		)
Income (loss) attributable to common stockholders, from continuing operations	4,934		(5,966		)	7,105		(9,769		)
Income from discontinued operations, net of tax	40		90			208		341
Income (loss) attributable to common stockholders	$	4,974	$	(5,876	)	$	7,313	$	(9,428	)

Weighted average outstanding shares of common stock	25,733,833		19,813,209			25,713,688		15,718,667
Effect of dilutive securities:
Nonvested stock	357,177		—			359,941		—
Stock options	133,604		—			140,395		—
Restricted stock units	4,709		—			4,381		—
Weighted average shares and dilutive shares	26,229,323		19,813,209			26,218,405		15,718,667
Diluted EPS
Income (loss) from continuing operations	$	0.19	$	(0.30	)	$	0.27	$	(0.62	)
Income from discontinued operations	—		—			0.01		0.02
Net income (loss) per share	$	0.19	$	(0.30	)	$	0.28	$	(0.60	)

The following table provides the securities that could potentially dilute basic earnings per share in the future, but were not included in the computation of diluted earnings per share because to do so would have been anti-dilutive:



	Three Months Ended September 30,		Nine Months Ended September 30,
	2014	2013	2014	2013
Stock options	823,566	689,713	820,517	689,713
Nonvested stock	44,245	618,319	44,245	618,319
Restricted stock units	—	10,000	—	10,000

13. Subsequent Events

During October 2014, the Company entered into a contract to purchase a facility that it currently leases . Of the $14.8 million total purchase price, $0.8 million was paid as a deposit in October 2014 with the balance due upon closing of the transaction, which is expected to occur in the fourth quarter of 2014 or the first quarter of 2015. The deposit is fully refundable through the end of the Company's inspection period and partially refundable thereafter until the closing, at which time the entire deposit will be applied to the purchase price.

ITEM 2 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read this discussion and analysis in conjunction with our historical consolidated financial statements and the notes thereto included elsewhere in this Quarterly Report on Form 10-Q and with our audited financial statements included in our 2013 Annual Report on Form 10-K. This discussion and analysis covers periods prior to our initial public offering ("IPO") and related transactions. As a result, the discussion and analysis of certain historical periods does not reflect the impact that the IPO, our conversion to a corporation and other related transactions have had and will continue to have on us. Our historical results may not be indicative of our future performance. This discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results may differ from those anticipated in these forward-looking statements as a result of many factors. Our risk factors are set forth in “Part II, Item 1A. Risk Factors.”

Business and Executive Overview

We are a large, diversified lumber and building materials distributor and solutions provider that sells to new construction and repair and remodeling contractors. We carry a broad line of products and have operations throughout the United States. Our primary products are lumber & lumber sheet goods, millwork, doors, flooring, windows, structural components such as engineered wood products, trusses and wall panels and other exterior products. Additionally, we provide solution-based services to our customers, including design, product specification and installation management services. We serve a broad customer base, including large-scale production homebuilders, custom homebuilders and repair and remodeling contractors. We offer a broad range of products sourced through a strategic network of suppliers, which together with our various solution-based services, represent approximately 50% of the construction cost of a typical new home. By enabling our customers to source a significant portion of their materials and services from one supplier, we have positioned ourselves as the supply partner of choice for many of our customers.

We have operations in 14 states, which states accounted for approximately 58% of 2013 U.S. single-family housing permits according to the U.S. Census Bureau. In these 14 states, we operate in 21 metropolitan areas that we believe have an attractive potential for economic growth based on population trends and above-average employment growth.

Our net sales for the three months ended September 30, 2014 increased 7.8% compared to the prior year period. We estimate sales increased 8.0% due to volume and decreased 0.2% due to commodity price deflation. Our gross profit as a percentage of net sales ("gross margin") was 23.8% for the three months ended September 30, 2014 compared to 22.9% for the prior year period. We recorded income from operations of $8.4 million during the three months ended September 30, 2014 , compared to a loss from operations of $2.9 million during the three months ended September 30, 2013 . For further discussion, see “-Operating Results.”

Factors Affecting Our Operating Results

Our operating results and financial performance are influenced by a variety of factors, including, among others, conditions in the housing market and economic conditions generally, changes in the cost of the products we sell (particularly commodity products), pricing policies of our competitors, production schedules of our customers and seasonality. Some of what we believe to be the more important factors are briefly discussed below.

Conditions in the housing and construction market

The building products supply and services industry is highly dependent on new home construction and repair and remodeling activity, which in turn are dependent upon a number of factors, including interest rates, consumer confidence, employment rates, foreclosure rates, housing inventory levels, housing demand, the availability of land, the availability of construction financing and the health of the economy and mortgage markets. According to the U.S. Census Bureau, single-family housing starts increased approximately 7.2% for the three months ended September 30, 2014 as compared to the same period in the prior year, while single-family houses under construction as of September 30, 2014 increased 8.0% as compared to September 30, 2013 .

Overall economic conditions in the markets where we operate

Economic changes both nationally and locally in our markets impact our financial performance. Unfavorable changes in demographics, credit markets, consumer confidence, health care costs, housing affordability, housing inventory levels, a weakening of the national economy or of any regional or local economy in which we operate and other factors beyond our control could adversely affect consumer spending, result in decreased demand for homes and adversely affect our business. We believe continued employment growth, prospective home buyers’ access to financing and improved consumer confidence will be necessary to increase household formation rates. We believe improved household formation rates in turn should increase demand for housing and stimulate new construction.

Commodity nature of our products

Many of the building products we distribute, including lumber, oriented strand board ("OSB"), plywood and particleboard, are commodities that are widely available from other manufacturers or distributors with prices and volumes determined frequently based on participants’ perceptions of short-term supply and demand factors.

The following table reflects changes in average composite framing lumber prices (per thousand board feet) and average composite structural panel prices (per thousand square feet). These prices represent transactions between manufacturers and their customers as reported by Random Lengths and may differ in magnitude or timing from the actual selling prices or cost of goods reported in our operating results. The average composite structural panel prices are based on index prices for OSB and plywood.



	Three Months Ended September 30,				Nine Months Ended September 30,
	2014 versus 2013		2014 average price		2014 versus 2013		2014 average price
Change in framing lumber prices	11	%	$	392	1	%	$	385
Change in structural panel prices	5	%	$	402	(15	)%	$	379

Periods of increasing prices provide the opportunity for higher sales and increased gross profit, while periods of declining prices may result in declines in sales and profitability. In particular, low market prices for wood products over a sustained period can adversely affect our financial condition, operating results and cash flows, as can excessive spikes in market prices. For further discussion of the impact of commodity prices on historical periods, see “-Operating Results.”

Consolidation of large homebuilders

Over the past ten years, the homebuilding industry has undergone consolidation and many larger homebuilders have increased their market share. We expect that trend to continue as larger homebuilders have better liquidity and land positions relative to the smaller, less capitalized homebuilders. Our focus is on maintaining relationships and market share with these customers while balancing the competitive pressures we face in our markets with certain profitability expectations. While we generate significant sales from these homebuilders, our gross margins on sales to them tend to be lower than our gross margins on sales to other market segments. This could impact our gross margins as homebuilding recovers if the market share held by the production homebuilders continues to increase.

Our ability to control expenses

We pay close attention to managing our working capital and operating expenses. We employ a LEAN process operating philosophy, which encourages continuous improvement in our core processes to minimize waste, improve customer service, increase expense productivity, improve working capital and maximize profitability and cash flow. We regularly analyze our workforce productivity to achieve the optimum, cost-efficient labor mix for our facilities. Further, we pay careful attention to our logistics function and have implemented GPS-based technology to improve customer service and improve productivity of our shipping and handling costs.

Mix of products sold

We typically realize greater gross margins on more highly engineered and customized products, or ancillary products that are often purchased based on convenience and are therefore less price sensitive to our customers. For example, sales of lumber & lumber sheet goods tend to generate lower gross margins due to their commodity nature and the relatively low switching costs of sourcing those products from different suppliers. Structural components and millwork & other interior products often generate higher gross margins relative to other products. Homebuilders often use structural components in order to realize increased efficiency and improved quality. We believe shortening cycle time from start to completion is a key goal of homebuilders during periods of strong consumer demand or limited availability of framing labor. As the residential new construction market continues to strengthen, we expect the use of structural components by homebuilders to increase.

Changes in sales mix among construction segments

Our operating results may vary according to the amount and type of products we sell to each of our four primary construction segments: new single-family construction; remodeling; multi-family and light commercial. We tend to realize higher gross margins on sales to the remodeling segment due to the smaller product volumes purchased by those customers, as well as the more customized nature of the projects those customers generally undertake. Gross margins within the new single-family, multi-family and light commercial construction segments can vary based on a variety of factors, including the purchase volumes of the individual customer,

the mix of products sold to that customer, the size and selling price of the project being constructed and the number of upgrades added to the project before or during its construction.

Operating Results

The following table sets forth our operating results in dollars and as a percentage of net sales for the periods indicated:



	Three Months Ended September 30,										Nine Months Ended September 30,
(in thousands)	2014					2013					2014					2013
Net sales	$	354,060		100.0	%	$	328,468		100.0	%	$	978,629		100.0	%	$	891,847		100.0	%
Cost of goods sold	269,668			76.2	%	253,087			77.1	%	746,781			76.3	%	691,166			77.5	%
Gross profit	84,392			23.8	%	75,381			22.9	%	231,848			23.7	%	200,681			22.5	%
Operating expenses:
Selling, general and administrative expenses	73,665			20.8	%	66,931			20.4	%	211,878			21.7	%	188,458			21.1	%
Depreciation expense	1,681			0.5	%	1,456			0.4	%	4,790			0.5	%	4,716			0.5	%
Amortization expense	563			0.2	%	563			0.2	%	1,690			0.2	%	1,672			0.2	%
Impairment of assets held for sale	—			0.0	%	—			0.0	%	48			0.0	%	—			0.0	%
Public offering transaction-related costs	60			0.0	%	9,322			2.8	%	508			0.1	%	10,008			1.1	%
Restructuring expense	2			0.0	%	31			0.0	%	11			0.0	%	130			0.0	%
Income (loss) from operations	8,421			2.4	%	(2,922		)	(0.9	)%	12,923			1.3	%	(4,303		)	(0.5	)%
Other income (expense)
Interest expense	(712		)	(0.2	)%	(892		)	(0.3	)%	(2,011		)	(0.2	)%	(3,150		)	(0.4	)%
Other income, net	197			0.1	%	200			0.1	%	610			0.1	%	596			0.1	%
Income (loss) from continuing operations before income taxes	7,906			2.2	%	(3,614		)	(1.1	)%	11,522			1.2	%	(6,857		)	(0.8	)%
Income tax expense	(2,972		)	(0.8	)%	(1,989		)	(0.6	)%	(4,417		)	(0.5	)%	(1,076		)	(0.1	)%
Income (loss) from continuing operations	4,934			1.4	%	(5,603		)	(1.7	)%	7,105			0.7	%	(7,933		)	(0.9	)%
Income from discontinued operations, net of income tax expense of $25, $54, $133 and $237, respectively	40			0.0	%	90			0.0	%	208			0.0	%	341			0.0	%
Net income (loss)	$	4,974		1.4	%	$	(5,513	)	(1.7	)%	$	7,313		0.7	%	$	(7,592	)	(0.9	)%

Three months ended September 30, 2014 compared to three months ended September 30, 2013

Net sales

For the three months ended September 30, 2014 , net sales increased $25.6 million, or 7.8% , to $354.1 million from $328.5 million during the three months ended September 30, 2013 . The increase in net sales was primarily driven by increased volume of approximately 8.0% , while the impact of commodity price deflation decreased net sales by approximately 0.2% . We estimate approximately 73% of our net sales for the three months ended September 30, 2014 were to customers engaged in new single-family construction. According to the U.S. Census Bureau, single-family housing starts increased approximately 7.2% for the three months ended September 30, 2014 as compared to the same period in the prior year, while single-family houses under construction as of September 30, 2014 increased 8.0% as compared to September 30, 2013 . Increases in net sales from North Carolina, Texas and California represented approximately 95% of the total net sales increase for the three months ended September 30, 2014 as compared to the prior year period.

The following table shows net sales classified by major product category:



	Three Months Ended September 30, 2014				Three Months Ended September 30, 2013
(in thousands)	Net Sales		% of Sales		Net Sales		% of Sales		% Change
Structural components	$	49,163	13.9	%	$	46,335	14.1	%	6.1	%
Millwork & other interior products	64,821		18.3	%	58,215		17.7	%	11.3	%
Lumber & lumber sheet goods	123,116		34.8	%	114,147		34.8	%	7.9	%
Windows & other exterior products	73,626		20.8	%	71,463		21.8	%	3.0	%
Other building products & services	43,334		12.2	%	38,308		11.6	%	13.1	%
Total net sales	$	354,060	100.0	%	$	328,468	100.0	%	7.8	%

Increased sales volume was achieved across all product categories. Average selling prices for lumber & lumber sheet goods were approximately 0.7% lower during the three months ended September 30, 2014 compared to the three months ended September 30, 2013 .

Cost of goods sold

For the three months ended September 30, 2014 , cost of goods sold increased $16.6 million, or 6.6% , to $269.7 million from $253.1 million during the three months ended September 30, 2013 . We estimate our cost of goods sold increased approximately 7.2% as a result of increased sales volumes, while commodity cost deflation resulted in a 0.6% decrease in cost of goods sold.

Gross profit

For the three months ended September 30, 2014 , gross profit increased $9.0 million, or 12.0% , to $84.4 million from $75.4 million for the three months ended September 30, 2013 , driven primarily by increased sales volumes. Our gross margin was 23.8% for the three months ended September 30, 2014 and 22.9% for the three months ended September 30, 2013 . This increase was primarily driven by improved gross margins on sales of structural components and lumber & lumber sheet goods and increases in supplier consideration due to higher purchase volumes.

Operating expenses

For the three months ended September 30, 2014 , selling, general and administrative expenses increased $6.8 million, or 10.1% , to $73.7 million, or 20.8% of net sales, from $66.9 million, or 20.4% of net sales, for the three months ended September 30, 2013 . Variable costs to serve higher sales volumes, such as sales commissions, shipping and handling costs and other variable compensation, increased by $1.7 million in the aggregate. Other salary, wage, benefit and employer taxation costs increased $4.2 million, primarily as a result of headcount additions to serve higher sales volume and generate future growth opportunities and increases in self-insured health costs and stock compensation expense.

For the three months ended September 30, 2013, the Company incurred $9.3 million of non-capitalizable costs associated with our IPO, which included a $9.0 million fee for terminating our management services agreement with Gores.

Other income (expenses)

Interest expense. For the three months ended September 30, 2014 , interest expense was $0.7 million compared to $0.9 million for the three months ended September 30, 2013 . This decrease relates primarily to a decrease in Revolver borrowings and lower average borrowing rates in 2014.

Income tax from continuing operations

For the three months ended September 30, 2014 , income tax expense from continuing operations was $3.0 million compared to $2.0 million for the three months ended September 30, 2013 . The effective tax rate from continuing operations for the three months ended September 30, 2014 was 37.6% compared to (55.0)% for the three months ended September 30, 2013 . The change in the tax rate from continuing operations is primarily due to the adverse effect of the non-deductible Gores Termination Fee and of certain capitalized costs creating tax expense against the Company's pre-tax loss for the three-months ended September 30, 2013.

Nine months ended September 30, 2014 compared to nine months ended September 30, 2013

Net sales

For the nine months ended September 30, 2014 , net sales increased $86.8 million, or 9.7% , to $978.6 million from $891.8 million during the nine months ended September 30, 2013 . The increase in net sales was primarily driven by increased volume of approximately 11.5% , while the impact of commodity price deflation decreased net sales by approximately 1.8% . We estimate approximately 74% of our net sales for the nine months ended September 30, 2014 were to customers engaged in new single-family construction. According to the U.S. Census Bureau, single-family housing starts increased approximately 3.8% for the nine months ended September 30, 2014 as compared to the same period in the prior year, while single-family houses under construction as of September 30, 2014 increased 8.0% as compared to September 30, 2013 . Increases in net sales from Texas, North Carolina and California represented approximately 76% of the total net sales increase for the nine months ended September 30, 2014 as compared to the prior year period.

The following table shows net sales classified by major product category:



	Nine Months Ended September 30, 2014				Nine Months Ended September 30, 2013
(in thousands)	Net Sales		% of Sales		Net Sales		% of Sales		% Change
Structural components	$	132,846	13.6	%	$	117,367	13.2	%	13.2	%
Millwork & other interior products	178,528		18.2	%	161,213		18.1	%	10.7	%
Lumber & lumber sheet goods	343,279		35.1	%	329,744		37.0	%	4.1	%
Windows & other exterior products	201,921		20.6	%	182,062		20.4	%	10.9	%
Other building products & services	122,055		12.5	%	101,461		11.3	%	20.3	%
Total net sales	$	978,629	100.0	%	$	891,847	100.0	%	9.7	%

Increased sales volume was achieved across all product categories. Average selling prices for lumber & lumber sheet goods were approximately 4.8% lower during the nine months ended September 30, 2014 compared to the nine months ended September 30, 2013 .

Cost of goods sold

For the nine months ended September 30, 2014 , cost of goods sold increased $55.6 million, or 8.0% , to $746.8 million from $691.2 million during the nine months ended September 30, 2013 . We estimate our cost of goods sold increased approximately 10.3% as a result of increased sales volumes, while commodity cost deflation resulted in a 2.3% decrease in cost of goods sold.

Gross profit

For the nine months ended September 30, 2014 , gross profit increased $31.1 million, or 15.5% , to $231.8 million from $200.7 million for the nine months ended September 30, 2013, driven primarily by increased sales volumes. Our gross margin was 23.7% for the nine months ended September 30, 2014 and 22.5% for the nine months ended September 30, 2013 . This increase was primarily driven by improved gross margins on sales of structural components and lumber & lumber sheet goods, a higher percentage of total net sales being derived from non-commodity product offerings and increases in supplier consideration due to higher purchase volumes.

Operating expenses

For the nine months ended September 30, 2014 , selling, general and administrative expenses increased $23.4 million, or 12.4% , to $211.9 million, or 21.7% of net sales, from $188.5 million, or 21.1% of net sales, for the nine months ended September 30, 2013 . Variable costs to serve higher sales volumes, such as sales commissions, shipping and handling costs and other variable compensation, increased by $8.8 million in the aggregate. Other salary, wage, benefit and employer taxation costs increased $11.6 million, primarily as a result of headcount additions to serve higher sales volume and generate future growth opportunities and increases in self-insured health costs and stock compensation expense. We estimate that general and administrative expenses increased by $1.2 million as a result of our transition to a public company.

For the nine months ended September 30, 2014 , the Company incurred $0.5 million of public offering transaction-related costs primarily in connection with a secondary offering in which shares were sold by certain stockholders. The Company did not receive any proceeds from the offering. For the nine months ended September 30, 2013 , the Company incurred $10.0 million of non-

capitalizable costs associated with our IPO, which included a $9.0 million fee for terminating our management services agreement with Gores.

Other income (expenses)

Interest expense. For the nine months ended September 30, 2014 , interest expense was $2.0 million compared to $3.2 million for the nine months ended September 30, 2013 . This decrease relates primarily to a decrease in Revolver borrowings and lower average borrowing rates in 2014.

Income tax from continuing operations

For the nine months ended September 30, 2014 , income tax expense from continuing operations was $4.4 million compared to $1.1 million for the nine months ended September 30, 2013 . The effective tax rate from continuing operations for the nine months ended September 30, 2014 was 38.3% compared to (15.7)% for the nine months ended September 30, 2013 . The change in the tax rate from continuing operations is primarily due to the adverse effect of the non-deductible Gores Termination Fee and of certain capitalized costs creating tax expense against the Company's pre-tax loss for the nine months ended September 30, 2013.

Liquidity and Capital Resources

Our primary capital requirements are to fund working capital needs and operating expenses, meet required interest and principal payments and fund capital expenditures. During 2013 and the first nine months of 2014, our capital resources have primarily consisted of cash and cash equivalents, borrowings under our Revolver and proceeds from our IPO.

Our liquidity at September 30, 2014 was $108.6 million, which includes $8.2 million in cash and cash equivalents and $100.4 million of unused borrowing capacity under our Revolver.

We believe that our cash flows from operations, combined with our current cash levels, and available borrowing capacity, will be adequate to fund debt service requirements and provide cash, as required, to support our ongoing operations, capital expenditures, lease obligations and working capital for at least the next 12 months.

Historical Cash Flow Information

Adjusted working capital* and net current assets

Adjusted working capital was $132.9 million and $122.6 million as of September 30, 2014 and December 31, 2013 , respectively, and net current assets (current assets less current liabilities) were $142.1 million and $124.2 million as of September 30, 2014 and December 31, 2013 , respectively, as summarized in the following table:



(in thousands)	September 30, 2014			December 31, 2013
Accounts receivable, net	$	130,624		$	111,285
Inventories, net	114,748			91,303
Other current assets	27,542			22,948
Income taxes payable	(5,704		)	(2,989		)
Accounts payable, accrued expenses and other current liabilities	(134,332		)	(99,945		)
Total adjusted working capital*	132,878			122,602
Cash and cash equivalents	8,244			1,138
Restricted assets	956			460
Total net current assets	$	142,078		$	124,200

*Adjusted working capital is a non-GAAP financial measure that management uses to assess the Company’s financial position and liquidity. Management believes adjusted working capital provides investors with an additional view of the Company’s liquidity and ability to repay current obligations. We calculate adjusted working capital as current assets, as determined under GAAP, excluding cash and cash equivalents and restricted assets, minus current liabilities, as determined under GAAP, excluding the Revolver. The presentation of this additional information is not meant to be considered superior to, in isolation of or as a substitute for results prepared in accordance with GAAP or as an indication of our performance. Our calculation of adjusted working capital is not necessarily comparable to similarly titled measures reported by other companies.

Accounts receivable, net, increased $19.3 million from December 31, 2013 to September 30, 2014 primarily due to seasonal increases in sales and days sales outstanding (measured against net sales in the current fiscal quarter of each period) was 33 days at December 31, 2013 and September 30, 2014 .

Inventories, net, increased $23.4 million from December 31, 2013 to September 30, 2014 and inventory days on hand (measured against cost of goods sold in the current fiscal quarter of each period) increased from 36 days at December 31, 2013 to 38 days at September 30, 2014 primarily due to seasonal increases in inventory during the third quarter of 2014.

Income taxes payable increased $2.7 million from December 31, 2013 to September 30, 2014 . Approximately $8.5 million of this increase related to year-to-date pre-tax earnings, which was offset by income tax payments, net of refunds, of $2.9 million and by the recognition of a liability for unrecognized tax benefits of $2.9 million.

Accounts payable, accrued expenses and other liabilities increased $34.4 million from December 31, 2013 to September 30, 2014 primarily due to an increase in the volume of inventory purchases.

Cash flows from operating activities

Net cash provided by (used in) operating activities was $4.8 million and $(34.5) million for the nine months ended September 30, 2014 and 2013 , respectively, as summarized in the following table:



	Nine Months Ended September 30,
(in thousands)	2014			2013
Net income (loss)	$	7,313		$	(7,592	)
Non-cash expenses	11,382			11,145
Change in deferred income taxes	(4,030		)	(3,723		)
Change in working capital and other	(9,854		)	(34,360		)
Net cash provided by (used in) operating activities	$	4,811		$	(34,530	)

Net cash provided by (used in) operating activities increased by $39.3 million for the nine months ended September 30, 2014 as compared to the nine months ended September 30, 2013 primarily due to the following:


•	Net income increased by $14.9 million as discussed in “-Operating Results,” above.

•

Cash used in operating activities related to working capital and other declined by $24.5 million. The increase in accounts receivable during the nine months ended September 30, 2014 was $15.6 million lower than the prior year period due primarily to a smaller increase in net sales during the nine months ended September 30, 2014 compared to the nine months ended September 30, 2013. The increase in accounts payable during the nine months ended September 30, 2014 was $12.2 million higher than the prior year period due primarily to purchases of commodity inventory in excess of immediate needs in the fourth quarter of 2012, which reduced the seasonal increase in accounts payable for the nine months ended September 30, 2013.

Cash flows from investing activities

Net cash (used in) provided by investing activities was $(17.3) million and $1.3 million for the nine months ended September 30, 2014 and 2013 , respectively, as summarized in the following table:



	Nine Months Ended September 30,
(in thousands)	2014			2013
Purchases of property and equipment	$	(20,795	)	$	(2,574	)
Proceeds from sale of property, equipment and real estate	3,493			3,070
Change in restricted assets	2			3,223
Purchase of business	—			(2,373		)
Net cash (used in) provided by investing activities	$	(17,300	)	$	1,346

Cash used for the purchase of property and equipment for the nine months ended September 30, 2014 and 2013 resulted primarily from the purchase of vehicles and equipment to support increased sales volume and replace aged assets, and facility and technology investments to support our operations.

Cash provided by the sale of property, equipment and real estate for the nine months ended September 30, 2014 and 2013 resulted primarily from the sale of real estate during those periods.

Cash provided by restricted assets during the nine months ended September 30, 2014 and 2013 resulted primarily from the release of escrow funds and excess deposits used to pre-fund expected losses for self-insured casualty and health claims incurred by the Company.

The Company acquired Chesapeake during the nine months ended September 30, 2013.

Cash flows from financing activities

Net cash provided by financing activities was $19.6 million and $41.0 million for the nine months ended September 30, 2014 and 2013 , respectively, as summarized in the following table:



	Nine Months Ended September 30,
(in thousands)	2014			2013
Proceeds from issuance of common stock, net of offering costs	$	—		$	55,821
Proceeds from Revolver, net of repayments	22,744			(12,145		)
Payments on capital leases	(1,177		)	(1,195		)
Other financing activities, net	(1,972		)	(1,462		)
Net cash provided by financing activities	$	19,595		$	41,019

Proceeds from the Revolver were primarily used to fund purchases of property and equipment for the nine months ended September 30, 2014 . During the nine months ended September 30, 2013 , the Company used $46.2 million of proceeds from the IPO to pay down outstanding balances under the Revolver, and used proceeds from the Revolver to fund cash used in operating activities and purchases of property and equipment.

Other financing activities, net, for the nine months ended September 30, 2014 and 2013 consist primarily of secured borrowings and debt issuance costs, and the payment of a holdback amount related to the Chesapeake acquisition during the nine months ended September 30, 2014 .

Capital expenditures

Capital expenditures vary depending on prevailing business factors, including current and anticipated market conditions. Historically, capital expenditures have for the most part remained at relatively low levels in comparison to the operating cash flows generated during the corresponding periods. We expect our 2014 capital expenditures to be approximately $45 to $55 million (including the incurrence of capital lease obligations) primarily related to vehicles and equipment, including lease buyouts, facility and technology investments to support our operations and the planned purchase of a currently leased facility for $14.8 million, assuming this transaction closes during the fourth quarter of 2014.

Revolving credit facility

On June 30, 2009, we entered into the Credit Agreement with WFCF, which includes the Revolver. The Credit Agreement has subsequently been amended eleven times. We were in compliance with all debt covenants for the quarter ended September 30, 2014 . We are subject to a financial covenant requiring a minimum Fixed Charge Coverage Ratio of 1.00:1.00 if Adjusted Liquidity is less than $20 million. While there can be no assurances, based upon our forecast, we do not expect the financial covenant to become applicable during the year ended December 31, 2014.

We had outstanding borrowings of $81.8 million with net availability of $100.4 million as of September 30, 2014 . The interest rate on outstanding LIBOR Rate borrowings of $81.0 million was 1.7% and the interest rate on outstanding Base Rate borrowings of $0.8 million was 3.8% as of September 30, 2014 . We had $9.2 million in letters of credit outstanding under the Credit Agreement as of September 30, 2014 . The Revolver is collateralized by substantially all of our assets.

Contractual Obligations and Commercial Commitments

Outstanding borrowings under the Revolver increased to $81.8 million at September 30, 2014 from $59.1 million at December 31, 2013 .

The Company has entered into contracts to purchase fleet and certain equipment, which are non-cancellable, enforceable and legally binding on us. As of September 30, 2014 , these purchase obligations totaled $5.7 million. The Company expects to pay for these assets over the six-month period ending March 31, 2015.

During October 2014, the Company entered into a contract to purchase a facility that it currently leases. Of the $14.8 million total purchase price, $0.8 million was paid as a deposit in October 2014 with the balance due upon closing of the transaction, which is expected to occur in the fourth quarter of 2014 or the first quarter of 2015. The deposit is fully refundable through the end of the Company's inspection period and partially refundable thereafter until the closing, at which time the entire deposit will be applied to the purchase price.

Off-Balance Sheet Arrangements

At September 30, 2014 and December 31, 2013 , other than operating leases and letters of credit issued under the Credit Agreement, we had no material off-balance sheet arrangements with unconsolidated entities.

Recently Issued Accounting Pronouncements

In July 2013, the FASB issued ASU 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. The guidance requires entities to present an unrecognized tax benefit as a reduction of a deferred tax asset for an NOL carryforward or tax credit carryforward whenever the NOL or tax credit carryforward would be available to reduce the additional taxable income or tax due if the tax position is disallowed. This ASU requires entities to assess whether to net the unrecognized tax benefit with a deferred tax asset as of the reporting date. ASU 2013-11 became effective and was adopted by the Company in fiscal year 2014. As of September 30, 2014, the Company recognized $0.4 million of an unrecognized tax benefit as a reduction of its deferred tax asset for state tax NOL carryforwards in accordance with ASU 2013-11.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers. ASU 2014-09 provides a comprehensive revenue recognition model requiring companies to recognize revenue for the transfer of goods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services. The guidance also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts. ASU 2014-09 is effective for the Company's annual and interim periods beginning on January 1, 2017. Early application is not permitted. The guidance permits the use of either a retrospective or cumulative effect transition method. We have not yet selected a transition method and are currently evaluating the impact of the standard on our current accounting policies.

Critical Accounting Policies

There have been no significant material changes to the critical accounting policies as disclosed in the Company’s 2013 Annual Report on Form 10-K.

ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There have been no significant material changes to the market risks as disclosed in the Company’s 2013 Annual Report on Form 10-K.

ITEM 4 CONTROLS AND PROCEDURES

Disclosure controls and procedures

Our senior management is responsible for establishing and maintaining disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), which are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer’s management, including its principal executive officer or officers and principal financial officer or officers, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure.

We have evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report, with the participation of our Chief Executive Officer and Chief Financial Officer, as well as other key members of our management. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of September 30, 2014 .

Changes in internal control over financial reporting

There was no change in our internal control over financial reporting during the three months ended September 30, 2014 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1 LEGAL PROCEEDINGS

We are currently involved in various claims, legal proceedings and lawsuits incidental to the conduct of our business in the ordinary course. We are a defendant in various pending lawsuits, legal proceedings and claims arising from assertions of alleged product liability, warranty, casualty, construction defect, contract, tort, employment and other claims. We carry insurance in such amounts in excess of our self-insurance as we believe to be reasonable under the circumstances although insurance may or may not cover any or all of our liabilities in respect of claims and lawsuits. We do not believe that the ultimate resolution of these matters will have a material adverse effect on our consolidated financial position, cash flows or operating results.

ITEM 1A RISK FACTORS

There have been no material changes in our risk factors from those disclosed in "Part I, Item 1A Risk Factors" in our 2013 Annual Report on Form 10-K. The risks described in our 2013 Annual Report on Form 10-K, in addition to the other information set forth in this report, 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

None.

ITEM 3 DEFAULTS UPON SENIOR SECURITIES

Not applicable.

ITEM 4 MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5 OTHER INFORMATION

None.

ITEM 6 EXHIBITS

EXHIBIT INDEX



Exhibit No.		Description
10.1		Amended and Restated Employment Agreement, dated as of October 9, 2014, between Stock Building Supply Holdings, Inc. and Jeffrey G. Rea (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on October 10, 2014).
10.2		Amended and Restated Employment Agreement, dated as of October 9, 2014, between Stock Building Supply Holdings, Inc. and James F. Major, Jr. (incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on October 10, 2014).
10.3		Amended and Restated Employment Agreement, dated as of October 9, 2014, between Stock Building Supply Holdings, Inc. and Bryan J. Yeazel (incorporated by reference to Exhibit 10.3 to the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on October 10, 2014).
10.4		Employment Agreement, dated as of October 9, 2014, between Stock Building Supply Holdings, Inc. and Lisa M. Hamblet
10.5		Employment Agreement, dated as of October 9, 2014, between Stock Building Supply Holdings, Inc. and C. Lowell Ball
31.1		Certification by Jeffrey G. Rea, President and Chief Executive Officer, pursuant to Exchange Act Rule 13a-14, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2		Certification by James F. Major, Jr., Executive Vice President, Chief Financial Officer and Treasurer, pursuant to Exchange Act Rule 13a-14, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1		Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2		Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS*		XBRL Instance Document
101.SCH*		XBRL Taxonomy Extension Schema Document
101.CAL*		XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF*		XBRL Taxonomy Extension Definition Linkbase Document
101.LAB*		XBRL Taxonomy Extension Label Linkbase Document
101.PRE*		XBRL Taxonomy Extension Presentation Linkbase Document

_________________

* XBRL (Extensible Business Reporting Language) information is furnished and not filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.

SIGNATURE

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.



	STOCK BUILDING SUPPLY HOLDINGS, INC.
Date: October 28, 2014	By:	/s/ James F. Major, Jr.
		Executive Vice President, Chief Financial Officer and Treasurer
		(Principal financial and accounting officer and duly authorized officer)



COMPANY:		EXECUTIVE:

STOCK BUILDING SUPPLY HOLDINGS, INC.

By:	/s/ C. Lowell Ball	/s/ Lisa M. Hamblet
Name:	C. Lowell Ball	LISA M. HAMBLET
Its:	Senior Vice President, General Counsel and Corporate Secretary




	LISA M. HAMBLET

	STOCK BUILDING SUPPLY HOLDINGS, INC.

	By:
	Name:
	Title:



COMPANY:		EXECUTIVE:

STOCK BUILDING SUPPLY HOLDINGS, INC.

By:	/s/ Jeffrey G. Rea	/s/ C. Lowell Ball
Name:	Jeffrey G. Rea	C. LOWELL BALL
Its:	President and Chief Executive Officer




	C. LOWELL BALL

	STOCK BUILDING SUPPLY HOLDINGS, INC.

	By:
	Name:
	Title:


To the Company:	Stock Building Supply Holdings, Inc. 8020 Arco Corporate Drive, Ste. 400 Raleigh, NC 27617 Attn: General Counsel Fax:919-431-1180


To Executive:	at the home address of Executive maintained in the human resource records of the Company.


i	Executive has the right to consult with an attorney before signing this Agreement, and is hereby advised to do so;


1.	I have reviewed this quarterly report on Form 10-Q of Stock Building Supply Holdings, 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)) 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.	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


c.	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


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.


1.	The Report fully complies with the requirements of Section 13(a) or 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.