BMC STOCK HOLDINGS, INC. (Form: 10-Q, Received: 11/09/2017 11:53:19)

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, 2017

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

BMC Stock 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.)
Two Lakeside Commons 980 Hammond Drive NE, Suite 500 Atlanta, Georgia	30328
(Address of principal executive offices)	(Zip Code)

(678) 222-1219

(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 (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 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, a 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.



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

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. 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 November 8, 2017 was 67,037,404 shares.

BMC STOCK 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, 2017 and December 31, 2016	1
	Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2017 and 2016	2
	Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2017 and 2016	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	23
Item 4	Controls and Procedures	23
	PART II - OTHER INFORMATION
Item 1	Legal Proceedings	24
Item 1A	Risk Factors	24
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	24
Item 3	Defaults Upon Senior Securities	24
Item 4	Mine Safety Disclosures	24
Item 5	Other Information	24
Item 6	Exhibits	25
	Signature	26

PART I. FINANCIAL INFORMATION

ITEM 1 FINANCIAL STATEMENTS

BMC STOCK HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)



(in thousands, except share and per share amounts)	September 30, 2017			December 31, 2016
Assets
Current assets
Cash and cash equivalents	$	12,117		$	8,917
Accounts receivable, net of allowances	365,989			313,304
Inventories, net	307,685			272,276
Costs in excess of billings on uncompleted contracts	27,415			26,373
Income taxes receivable	—			2,437
Prepaid expenses and other current assets	57,209			43,635
Total current assets	770,415			666,942
Property and equipment, net of accumulated depreciation	303,314			286,741
Deferred income taxes	—			550
Customer relationship intangible assets, net of accumulated amortization	169,637			164,191
Other intangible assets, net of accumulated amortization	1,831			3,024
Goodwill	262,042			254,832
Other long-term assets	15,323			18,734
Total assets	$	1,522,562		$	1,395,014
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable	$	187,519		$	165,540
Accrued expenses and other liabilities	91,620			88,786
Billings in excess of costs on uncompleted contracts	20,021			15,691
Income taxes payable	4,329			—
Interest payable	9,707			5,619
Current portion:
Long-term debt and capital lease obligations	8,137			11,155
Insurance reserves	14,464			16,021
Total current liabilities	335,797			302,812
Insurance reserves	38,006			39,184
Long-term debt	396,246			344,827
Long-term portion of capital lease obligations	16,601			20,581
Deferred income taxes	1,205			—
Other long-term liabilities	7,261			7,009
Total liabilities	795,116			714,413
Commitments and contingencies (Note 8)
Stockholders' equity
Preferred stock, $0.01 par value, 50.0 million shares authorized, no shares issued and outstanding at September 30, 2017 and December 31, 2016	—			—
Common stock, $0.01 par value, 300.0 million shares authorized, 67.1 million and 66.8 million shares issued, and 66.9 million and 66.7 million outstanding at September 30, 2017 and December 31, 2016, respectively	671			668
Additional paid-in capital	656,688			649,280
Retained earnings	72,965			33,182
Treasury stock, at cost, 0.2 million and 0.1 million shares at September 30, 2017 and December 31, 2016, respectively	(2,878		)	(2,529		)
Total stockholders' equity	727,446			680,601
Total liabilities and stockholders' equity	$	1,522,562		$	1,395,014

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

BMC STOCK HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)



	Three Months Ended September 30,						Nine Months Ended September 30,
(in thousands, except per share amounts)	2017			2016			2017			2016
Net sales
Building products	$	671,316		$	613,763		$	1,919,923		$	1,768,834
Construction services	209,696			207,441			605,164			577,335
	881,012			821,204			2,525,087			2,346,169
Cost of sales
Building products	499,182			446,028			1,427,253			1,309,925
Construction services	172,285			172,210			498,405			475,006
	671,467			618,238			1,925,658			1,784,931
Gross profit	209,545			202,966			599,429			561,238

Selling, general and administrative expenses	158,193			149,498			464,870			431,176
Depreciation expense	11,053			9,784			32,555			27,866
Amortization expense	4,026			5,349			11,947			15,882
Merger and integration costs	2,574			4,655			13,339			11,088
Impairment of assets	409			—			435			11,883
	176,255			169,286			523,146			497,895
Income from operations	33,290			33,680			76,283			63,343
Other income (expense)
Interest expense	(6,377		)	(7,668		)	(18,960		)	(24,020		)
Loss on debt extinguishment	—			(12,529		)	—			(12,529		)
Other income, net	1,083			735			2,366			3,601
Income before income taxes	27,996			14,218			59,689			30,395
Income tax expense	9,553			4,982			19,906			9,933
Net income	$	18,443		$	9,236		$	39,783		$	20,462

Weighted average common shares outstanding
Basic	66,958			66,435			66,860			65,873
Diluted	67,442			67,085			67,341			66,455

Net income per common share
Basic	$	0.28		$	0.14		$	0.60		$	0.31
Diluted	$	0.27		$	0.14		$	0.59		$	0.31

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

BMC STOCK HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)



	Nine Months Ended September 30,
(in thousands)	2017			2016
Cash flows from operating activities
Net income	$	39,783		$	20,462
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation expense	40,049			35,215
Amortization of intangible assets	11,947			15,882
Amortization of debt issuance costs	1,263			2,690
Deferred income taxes	1,755			(4,638		)
Non-cash stock compensation expense	4,751			5,544
Loss (gain) on sale of property, equipment and real estate	301			(363		)
Impairment of assets	435			11,883
Loss on debt extinguishment	—			12,529
Amortization of inventory step-up charges	—			2,884
Gain on insurance proceeds	—			(1,003		)
Other non-cash adjustments	463			121
Change in assets and liabilities, net of effects of acquisitions
Accounts receivable, net of allowances	(46,591		)	(43,739		)
Inventories, net	(30,837		)	(35,718		)
Accounts payable	22,633			49,462
Other assets and liabilities	2,228			(7,390		)
Net cash provided by operating activities	48,180			63,821
Cash flows from investing activities
Purchases of property, equipment and real estate	(51,292		)	(26,126		)
Purchases of businesses, net of cash acquired	(38,737		)	—
Proceeds from sale of property, equipment and real estate	3,545			1,066
Insurance proceeds	—			1,151
Net cash used in investing activities	(86,484		)	(23,909		)
Cash flows from financing activities
Proceeds from revolving line of credit	769,458			1,227,050
Repayments of proceeds from revolving line of credit	(717,626		)	(1,352,408		)
Principal payments on other notes	(2,603		)	(2,900		)
Payments on capital lease obligations	(7,753		)	(6,300		)
Payments of debt issuance costs	(38		)	(5,824		)
Proceeds from issuance of senior secured notes	—			350,000
Redemption of senior secured notes	—			(250,000		)
Proceeds from issuance of common stock, net of offering costs	—			13,776
Payments of debt extinguishment costs	—			(8,438		)
Other financing activities, net	66			793
Net cash provided by (used in) financing activities	41,504			(34,251		)
Net increase in cash and cash equivalents	3,200			5,661
Cash and cash equivalents
Beginning of period	8,917			1,089
End of period	$	12,117		$	6,750

Supplemental disclosure of non-cash investing and financing transactions
Assets acquired under capital lease obligations	2,481			8,493

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

BMC STOCK HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1. Organization

These unaudited financial statements represent the financial statements of BMC Stock Holdings, Inc., and its subsidiaries. All references to “BMC,” “we,” “us,” “our” or the “Company” mean BMC Stock Holdings, Inc.

The Company 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 services.

2. Basis of Presentation

The unaudited 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, 2016 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 Annual Report on Form 10-K for the year ended December 31, 2016 (“ 2016 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.

Reclassifications

Certain prior year amounts have been reclassified to conform to the current year presentation.

Comprehensive income

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

Recently adopted accounting pronouncements

In July 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update 2015-11, Simplifying the Measurement of Inventory (“ASU 2015-11”). ASU 2015-11 requires that inventory within the scope of the guidance be measured at the lower of cost and net realizable value. Prior to the issuance of the standard, inventory was measured at the lower of cost or market, where market was defined as replacement cost, with a ceiling of net realizable value and floor of net realizable value less a normal profit margin. Inventory measured using last-in, first-out (LIFO) and the retail inventory method are not impacted by the new guidance. Prospective application is required and early adoption is permitted. ASU 2015-11 became effective for the Company’s annual and interim periods beginning on January 1, 2017. The adoption of the guidance did not have a material impact on our financial statements.

Recently issued accounting pronouncements not yet adopted

In May 2014, the FASB issued Accounting Standards Update 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”), and issued subsequent amendments to the initial guidance within Accounting Standards Update 2016-08, Revenue from Contracts with Customers, Principal versus Agent Considerations (“ASU 2016-08”) issued in March 2016, Accounting Standards Update 2016-10, Revenue from Contracts with Customers, Identifying Performance Obligations and Licensing (“ASU 2016-10”) issued in April 2016, Accounting Standards Update 2016-12, Revenue from Contracts with Customers, Narrow-Scope Improvements and Practical Expedients (“ASU 2016-12”) issued in May 2016 and Accounting Standards Update 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers (“ASU 2016-20”) issued in December 2016 (ASU 2014-09, ASU 2016-08, ASU 2016-10, ASU 2016-12 and ASU 2016-20 collectively “Topic 606”). Topic 606 provides a comprehensive revenue recognition 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. In July 2015, the FASB voted to defer the effective date of ASU 2014-09 by one year, and therefore, the standard is effective for the Company’s annual and interim periods beginning on January 1, 2018. The guidance permits the use of either a full retrospective or modified retrospective transition method. We expect to adopt the standard on January 1, 2018 using the modified retrospective transition method, which recognizes the cumulative effect of initially applying the standard in retained earnings on the date of adoption, with the option to utilize certain practical expedients as defined in Topic 606. We do not expect the adoption of the standard to have a material impact on the timing of revenue recognition nor the amount of revenue recognized

from our building products contracts. Revenue for our building products contracts will continue to be recognized at a point in time, when control of the promised goods is transferred to our customers, with the exception of certain product offerings which are customized to customer specifications and meet the criteria to be recognized over time, which is consistent with the Company’s current accounting. We are continuing to evaluate the impact of the standard on our contracts with a service element but based on our current assessment, we expect that revenue for our construction services contracts will generally continue to be recognized over time as the Company satisfies the performance obligations in the contracts. We also continue to evaluate the disclosure requirements of the standard, which are expected to be significant and incremental to the current disclosures.

In February 2016, the FASB issued Accounting Standards Update 2016-02, Leases (“ASU 2016-02”). The new standard establishes a right-of-use (“ROU”) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. ASU 2016-02 is effective for the Company’s annual and interim periods beginning on January 1, 2019. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. We are in the process of evaluating the impact of the standard on our financial statements. As a lessee, certain of our various leases under existing guidance are classified as operating leases that are not recorded on the balance sheet but are recorded in the statement of operations as expense is incurred. Upon adoption of the standard, we will be required to record substantially all leases on the balance sheet as a ROU asset and a lease liability. The timing of expense recognition and classification in the statement of operations could change based on the classification of leases as either operating or financing.

In August 2016, the FASB issued Accounting Standards Update 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (“ASU 2016-15”). ASU 2016-15 was issued to decrease the diversity in practice of how certain cash receipts and cash payments are presented and classified in the statement of cash flows by providing guidance on eight specific cash flow issues. ASU 2016-15 is effective for the Company’s annual and interim periods beginning on January 1, 2018, with early adoption permitted and retrospective application required. The adoption of the standard is not expected to have a material impact on our financial statements.

In November 2016, the FASB issued Accounting Standards Update 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (“ASU 2016-18”). ASU 2016-18 requires that the statement of cash flows include restricted cash in the beginning and end-of-period total amounts shown and that the statement of cash flows explain the changes in restricted cash during the period. ASU 2016-18 is effective for the Company's annual and interim periods beginning on January 1, 2018. Retrospective application is required and early adoption is permitted. The adoption of the standard is not expected to have a material impact on our financial statements.

In January 2017, the FASB issued Accounting Standards Update 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business (“ASU 2017-01”). ASU 2017-01 provides guidance in determining when a set of assets and activities meets the definition of a business. ASU 2017-01 is effective for the Company's annual and interim periods beginning on January 1, 2018. Early application is permitted for transactions meeting certain criteria and prospective application is required. The adoption of the standard is not expected to have a material impact on our financial statements.

In January 2017, the FASB issued Accounting Standards Update 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment (“ASU 2017-04”). ASU 2017-04 simplifies the accounting for goodwill impairment by removing Step 2 of the goodwill impairment test, which requires computation of the implied fair value of a reporting unit's goodwill. The amount of a goodwill impairment will now be the amount by which a reporting unit's carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. ASU 2017-04 is effective for the Company's annual goodwill impairment test and any interim tests during the Company's annual and interim periods beginning on January 1, 2020. Early adoption is permitted for goodwill impairment tests performed on testing dates after January 1, 2017. Prospective application is required. The adoption of the standard is not expected to have a material impact on our financial statements.

In February 2017, the FASB issued Accounting Standards Update 2017-05, Other Income - Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20): Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets (“ASU 2017-05”). ASU 2017-05 clarifies the scope of Subtopic 610-20, which provides guidance for recognizing gains and losses from the sale or transfer of nonfinancial assets in contracts with noncustomers. ASU 2017-05 also provides guidance for partial sales of nonfinancial assets. ASU 2017-05 is effective for the Company’s annual and interim periods beginning on January 1, 2018 and we are required to adopt ASU 2017-05 at the same time that we adopt ASU 2014-09. The guidance permits the use of either a retrospective or cumulative effect transition method. The adoption of the standard is not expected to have a material impact on our financial statements.

In May 2017, the FASB issued Accounting Standards Update 2017-09, Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting (“ASU 2017-09”). ASU 2017-09 provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting under ASC 718. ASU 2017-09 is effective for the Company’s annual and interim periods beginning on January 1, 2018, with early adoption permitted. ASU 2017-09 is to be applied prospectively to an award modified on or after the adoption date. The adoption of the standard is not expected to have a material impact on our financial statements.

3. Acquisitions

For all acquisitions, the Company allocates the purchase price to assets acquired and liabilities assumed as of the date of acquisition based on the estimated fair values at the date of acquisition. The excess of the fair value of the purchase consideration over the fair values of the identifiable assets and liabilities is recorded as goodwill. Management makes significant estimates and assumptions when determining the fair value of assets acquired and liabilities assumed. These estimates include, but are not limited to, discount rates, projected future net sales, projected future expected cash flows and useful lives.

Acquisition of Code Plus Components, LLC

On March 27, 2017 , the Company acquired substantially all of the assets and assumed certain liabilities of Code Plus Components, LLC (“Code Plus”), a manufacturer of structural components located in Martinsburg, West Virginia, for a purchase price of $7.1 million . This acquisition allowed the Company to add truss manufacturing capability to its value-added offerings in the Washington, DC metro area. The purchase price includes an initial holdback of $0.4 million due to the sellers one year from the closing date. The holdback amount may be reduced under certain circumstances. Additionally, the acquisition includes an earnout provision that would require the Company to pay the sellers up to an additional $0.8 million upon the acquired operations achieving certain performance targets from the acquisition date through December 31, 2018. The Company funded the transaction through borrowings on the Company’s revolving line of credit.

The acquisition was accounted for using the acquisition method of accounting under ASC 805, Business Combinations, whereby the results of operations of Code Plus are included in the Company’s consolidated financial statements beginning on the acquisition date. The preliminary purchase price allocation resulted in the recognition of goodwill of $3.4 million , a customer relationship intangible asset of $2.3 million and a non-compete agreement intangible asset of $0.5 million , as well as other operating assets and liabilities. The customer relationship intangible asset and non-compete agreement intangible asset have useful lives of 12 years and 5 years , respectively. Goodwill represents the future economic benefits expected to arise from other intangible assets acquired that do not qualify for separate recognition, including assembled workforce and non-contractual relationships, as well as expected future synergies. All of the goodwill recognized is expected to be deductible for tax purposes.

For the year ended December 31, 2016, Code Plus generated net sales of approximately $14.2 million . The Company incurred transaction costs of $0 and $0.1 million for the three and nine months ended September 30, 2017 , respectively, which are included in selling, general and administrative expenses in the unaudited condensed consolidated statements of operations.

Acquisition of Texas Plywood & Lumber Company, Inc.

On April 3, 2017 , the Company acquired substantially all of the assets and assumed certain liabilities of Texas Plywood & Lumber Company, Inc. (“TexPly”), a supplier of production millwork and doors in the Dallas-Fort Worth area, for a preliminary purchase price of $32.0 million , of which $2.5 million was deposited in an escrow account to fund post-closing adjustments and other indemnification obligations for a period of one year from the closing date of the acquisition. This acquisition enhances the Company’s value-added offerings and footprint in the Dallas-Fort Worth market.

The acquisition was accounted for using the acquisition method of accounting under ASC 805, Business Combinations, whereby the results of operations of TexPly are included in the Company’s consolidated financial statements beginning on the acquisition date. The preliminary purchase price allocation resulted in the initial recognition of goodwill of $3.8 million , a customer relationship intangible asset of $13.4 million , accounts receivable of $5.2 million , inventory of $4.0 million and real property of $5.4 million , as well as other operating assets and liabilities. The customer relationship intangible asset has a useful life of 13 years . Goodwill represents the future economic benefits expected to arise from other intangible assets acquired that do not qualify for separate recognition, including assembled workforce and non-contractual relationships, as well as expected future synergies. All of the goodwill recognized is expected to be deductible for tax purposes.

For the year ended December 31, 2016, TexPly generated net sales of approximately $55.2 million . The Company incurred transaction costs of $0 and $0.2 million for the three and nine months ended September 30, 2017 , respectively, which are included in selling, general and administrative expenses in the unaudited condensed consolidated statements of operations.

The purchase price allocations of Code Plus and TexPly are preliminary and based upon all information available to the Company at the present time, and are subject to change. The Company is in the process of finalizing its valuation of the acquired intangible assets, property and equipment and inventory and therefore, the initial purchase accounting is not complete. As we receive additional information during the measurement period, the fair values assigned to the assets and liabilities may be adjusted.

Net sales for Code Plus and TexPly, in aggregate, included in the unaudited condensed consolidated statements of operations were $18.5 million and $38.0 million for the three and nine months ended September 30, 2017 , respectively. Estimated pre-tax earnings of Code Plus and TexPly, in aggregate, included in the unaudited condensed consolidated statements of operations were $1.5 million and $2.6 million for the three and nine months ended September 30, 2017 , respectively. The impact of the acquisitions was not considered significant for the reporting of pro forma financial information.

4. Accounts Receivable

Accounts receivable consist of the following at September 30, 2017 and December 31, 2016 :



(in thousands)	September 30, 2017			December 31, 2016
Trade receivables	$	378,104		$	323,725
Allowance for doubtful accounts	(4,436		)	(4,162		)
Other allowances	(7,679		)	(6,259		)
	$	365,989		$	313,304

5. Impairment of BMHC ERP System

During 2013, Building Materials Holding Corporation (“BMHC” or “Legacy BMHC”) selected a new third-party software vendor for its planned Enterprise Resource Planning (“New ERP”) system and began incurring costs related to design, development and implementation of the New ERP. BMHC also began paying an annual licensing fee. During March 2016, the Company decided to integrate all operations under the Enterprise Resource Planning system utilized by Stock Building Supply Holdings, Inc. (“SBS” and the “Legacy SBS ERP system”) and to discontinue use of the New ERP. In connection with this decision, the Company recorded asset impairment charges of approximately $11.9 million in its unaudited condensed consolidated statement of operations for the nine months ended September 30, 2016 related to capitalized software development costs for New ERP functionality that the Company had intended to implement in future periods. These costs had previously been recorded as construction-in-progress within property and equipment on the condensed consolidated balance sheets.

During June 2017, the Company determined that it had ceased receiving economic benefit from certain non-cancellable license and service contracts related to the New ERP. In accordance with ASC 420, Exit or Disposal Cost Obligations, as of the cease use date, the Company recognized approximately $2.8 million of expense within merger and integration costs in its unaudited condensed consolidated statements of operations for the nine months ended September 30, 2017 , consisting of $2.1 million for contractual payments due subsequent to the cease use date, all of which have been paid as of September 30, 2017, and the acceleration of expense recognition of unamortized prepaid costs of $0.7 million .

6. Debt

Long-term debt as of September 30, 2017 and December 31, 2016 consists of the following:



(in thousands)	September 30, 2017			December 31, 2016
Senior secured notes, due 2024	$	350,000		$	350,000
Revolving credit agreement	51,832			—
Other	360			2,963
	402,192			352,963
Unamortized debt issuance costs related to senior secured notes	(5,848		)	(6,474		)
	396,344			346,489
Less: Current portion of long-term debt	98			1,662
	$	396,246		$	344,827

Senior Secured Notes

On September 15, 2016 , the Company issued $350.0 million of senior secured notes due 2024 (the “Senior Notes”) under an unregistered private placement not subject to the registration requirements of the Securities Act of 1933, as amended (the “Securities Act”). The Senior Notes were issued by BMC East, LLC, a 100% owned subsidiary of the Company, and are guaranteed by the Company and the other subsidiaries that guarantee our Credit Agreement (as defined below). Each of the subsidiary guarantors is 100% owned, directly or indirectly, by the Company, and all guarantees are full and unconditional and joint and several. The interest rate is fixed at 5.5% and is payable semiannually on April 1 and October 1 .

The net cash proceeds from the Senior Notes were used to redeem in full $250.0 million of 9.0% senior secured notes that were issued by BMHC in September 2013 and that were scheduled to mature in September 2018 (the “Extinguished Senior Notes”). In connection with the redemption of the Extinguished Senior Notes, the Company incurred a loss on debt extinguishment of $12.5 million for the nine months ended September 30, 2016 , consisting of a call premium of $8.4 million , and the write-off of unamortized debt issuance costs and original issue discount of $4.1 million .

As of September 30, 2017 , the estimated market value of the Senior Notes was $16.6 million higher than the carrying amount. The fair value is based on institutional trading activity and was classified as a Level 2 measurement in accordance with ASC 820.

Revolving Credit Agreement

On December 1, 2015 , we entered into a senior secured credit agreement with Wells Fargo Capital Finance, as administrative agent, and certain other lenders (the “Credit Agreement”), which includes a revolving line of credit (the “Revolver”). The Credit Agreement, as amended, has an aggregate commitment of $375.0 million . We had outstanding borrowings under the Revolver of $51.8 million with net availability of $256.4 million as of September 30, 2017 . The weighted average interest rate on outstanding LIBOR Rate borrowings of $40.0 million was 2.74% and the interest rate on Base Rate borrowings of $11.8 million was 4.75% as of September 30, 2017 . We had $66.8 million in letters of credit outstanding under the Credit Agreement as of September 30, 2017 .

The carrying value of the Revolver at September 30, 2017 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 Revolver was classified as a Level 2 measurement in accordance with ASC 820.

Other

Other long-term debt as of September 30, 2017 consists of a $0.4 million term note secured by real property with a maturity of February 2021 . The interest rate is 7.0% and is paid monthly. The estimated market value of other long-term debt approximates the carrying amount.

7. 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 had a valuation allowance of $0.1 million against its deferred tax assets related to certain state tax jurisdictions as of September 30, 2017 and December 31, 2016 . To the extent the Company generates future tax net operating losses, the Company may be required to increase the valuation allowance on deferred tax assets, which may unfavorably impact the effective tax rate.

The Company has no material uncertain tax positions as of September 30, 2017 and December 31, 2016 .

For the three and nine months ended September 30, 2017 , the Company’s effective tax rate was 34.1% and 33.3% , respectively, which varied from the federal statutory rate of 35% primarily due to excess tax windfall benefits from stock compensation and a permanent domestic manufacturing deduction under Internal Revenue Code Section 199 (the “Manufacturing Deduction”). For the three and nine months ended September 30, 2016 , the effective tax rate was 35.0% and 32.7% , respectively, which varied from the federal statutory rate of 35% primarily due to the excess tax windfall benefit from stock compensation and the Manufacturing Deduction.

8. 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 currently 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. The Company recorded $3.0 million of expense within selling, general and administrative expenses in its unaudited condensed consolidated statements of operations for the three and nine months ended September 30, 2017 in relation to pending litigation. The amount accrued is based upon currently available information, however, the ultimate obligation may be higher.

9. Stock Based Compensation

The following table highlights the expense related to stock based compensation for the three and nine months ended September 30, 2017 and 2016 :



	Three Months Ended September 30,				Nine Months Ended September 30,
(in thousands)	2017		2016		2017		2016
Restricted stock units	$	1,157	$	1,200	$	4,139	$	3,338
Restricted stock	113		400		339		1,376
Stock options	96		251		273		830
Stock based compensation	$	1,366	$	1,851	$	4,751	$	5,544

During the nine months ended September 30, 2017 , in addition to grants of service-based restricted stock unit awards, the Company granted performance-based restricted stock units that vest on Ma rch 15, 2020 . The weighted average grant date fair value of the performance-based restricted stock units was $21.94 . Currently, the number of performance-based restricted stock units that are issued on the vesting date could range from zero to a maximum of 246,337 , based 50% upon the Company’s average return on invested capital over the three year period from January 1, 2017 through December 31, 2019 and 50% upon the Company’s cumulative adjusted earnings per share (“Adjusted EPS”) over the same three year period.

During the nine months ended September 30, 2016 , in addition to grants of service-based restricted stock unit awards, the Company granted performance-based restricted stock units that vest on March 15, 2019 . The number of performance-based restricted stock units that are issued on the vesting date could range from zero to a maximum of 206,250 , based upon the Company’s cumulative Adjusted EBITDA over the three year period from January 1, 2016 through December 31, 2018 .

10. 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 (“CODM”) in deciding how to allocate resources and in assessing performance.

Beginning January 1, 2017, the Company’s operating segments consist of the Mid-Atlantic, Southeast, Texas, Intermountain and Western divisions after the Company realigned certain of its markets, which resulted in the consolidation of the Company’s historical Mountain West division into the Intermountain division. Following the realignment, the CODM continues to review aggregate information to allocate resources and assess performance. Based on this, as well as the similar economic characteristics, nature of products, distribution methods and customers of the divisions both before and after the realignment, the Company has aggregated its operating segments into one reportable segment, “Geographic divisions.”

In addition to our reportable segment, the Company’s consolidated results include “Other reconciling items.” Other reconciling items is comprised of our corporate activities and other income and expenses not allocated to the operating segments.

The following tables present Net Sales, Adjusted EBITDA and certain other measures for the reportable segment and total Company operations for the three and nine months ended September 30, 2017 and 2016 . Adjusted EBITDA is used as a performance metric by the CODM in determining how to allocate resources and assess performance.



	Three Months Ended September 30, 2017
(in thousands)	Net Sales		Gross Profit		Depreciation & Amortization		Adjusted EBITDA
Geographic divisions	$	881,012	$	209,545	$	16,996	$	70,158
Other reconciling items	—		—		629		(10,861		)
	$	881,012	$	209,545	$	17,625



	Three Months Ended September 30, 2016
(in thousands)	Net Sales		Gross Profit		Depreciation & Amortization		Adjusted EBITDA
Geographic divisions	$	821,204	$	202,966	$	16,011	$	69,381
Other reconciling items	—		—		1,265		(11,184		)
	$	821,204	$	202,966	$	17,276



	Nine Months Ended September 30, 2017
(in thousands)	Net Sales		Gross Profit		Depreciation & Amortization		Adjusted EBITDA
Geographic divisions	$	2,525,087	$	599,429	$	50,167	$	188,882
Other reconciling items	—		—		1,829		(36,445		)
	$	2,525,087	$	599,429	$	51,996



	Nine Months Ended September 30, 2016
(in thousands)	Net Sales		Gross Profit		Depreciation & Amortization		Adjusted EBITDA
Geographic divisions	$	2,346,169	$	561,238	$	47,562	$	190,077
Other reconciling items	—		—		3,535		(40,637		)
	$	2,346,169	$	561,238	$	51,097

Reconciliation to consolidated financial statements:



	Three Months Ended September 30,				Nine Months Ended September 30,
(in thousands)	2017		2016		2017		2016
Income before income taxes	$	27,996	$	14,218	$	59,689	$	30,395
Interest expense	6,377		7,668		18,960		24,020
Depreciation and amortization	17,625		17,276		51,996		51,097
Merger and integration costs	2,574		4,655		13,339		11,088
Non-cash stock compensation expense	1,366		1,851		4,751		5,544
Impairment of assets	409		—		435		11,883
Acquisition costs	—		—		317		—
Loss on debt extinguishment	—		12,529		—		12,529
Inventory step-up charges	—		—		—		2,884
Other items (a)	2,950		—		2,950		—
Adjusted EBITDA of other reconciling items	10,861		11,184		36,445		40,637
Adjusted EBITDA of geographic divisions reportable segment	$	70,158	$	69,381	$	188,882	$	190,077

(a) Represents expense incurred during the three and nine months ended September 30, 2017 related to pending litigation.

11. Earnings Per Share

Basic net income per share (“EPS”) is calculated by dividing net income 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, restricted stock and restricted stock unit awards are considered to be potential common shares. Performance-based restricted stock units are not included in the calculation of diluted EPS until they are contingently issuable.

The basic and diluted EPS calculations for the three and nine months ended September 30, 2017 and 2016 are presented below:



	Three Months Ended September 30,				Nine Months Ended September 30,
(in thousands, except per share amounts)	2017		2016		2017		2016
Income attributable to common stockholders	$	18,443	$	9,236	$	39,783	$	20,462

Weighted average common shares outstanding, basic	66,958		66,435		66,860		65,873
Effect of dilutive securities:
Restricted stock	61		233		68		250
Restricted stock units	248		194		212		109
Stock options	175		223		201		223
Weighted average common shares outstanding, diluted	67,442		67,085		67,341		66,455

Basic income per common share	$	0.28	$	0.14	$	0.60	$	0.31
Diluted income per common share	$	0.27	$	0.14	$	0.59	$	0.31

The following table provides the securities that could potentially dilute EPS in the future, but were not included in the computation of diluted EPS for the periods presented because to do so would have been anti-dilutive. The amounts included in this table exclude performance-based restricted stock units. As of September 30, 2017 , the number of currently outstanding performance-based restricted stock units that are issued upon vesting could range from zero to a maximum of 452,587 .



	Three Months Ended September 30,		Nine Months Ended September 30,
(in thousands)	2017	2016	2017	2016
Restricted stock units	13	—	13	—
Stock options	1	490	1	490

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

The following discussion and analysis should be read 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 2016 Annual Report on Form 10-K.

Cautionary Statement with Respect to Forward-Looking Statements

Some of the statements contained in this Quarterly Report on Form 10-Q constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements relate to expectations, beliefs, projections, future plans and strategies, anticipated events or trends and similar expressions concerning matters that are not historical facts or present facts or conditions. In many cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential” or the negative of these terms or other comparable terminology.

The forward-looking statements reflect our views about future events and are subject to risks, uncertainties, assumptions and changes in circumstances that may cause events or our actual activities or results to differ significantly from those expressed in any forward-looking statement. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future events, results, actions, levels of activity, performance or achievements. A number of important factors could cause actual results to differ materially from those indicated by the forward-looking statements. These factors include without limitation:


•	the state of the homebuilding industry and repair and remodeling activity, the economy and the credit markets;


•	seasonality and cyclicality of the building products supply and services industry;


•	competitive industry pressures and competitive pricing pressure from our customers and competitors;


•	inflation or deflation of prices of our products;


•	our exposure to product liability, warranty, casualty, construction defect, contract, tort, employment and other claims and legal proceedings;


•	our ability to maintain profitability;


•	the impact of our indebtedness;


•	the various financial covenants in our secured credit agreement and senior secured notes indenture;


•	our concentration of business in the Texas, California and Georgia markets;


•	the potential negative impacts from the significant decline in oil prices on employment, home construction and remodeling activity in Texas (particularly the Houston metropolitan area) and other markets dependent on the energy industry;


•	our ability to retain our key employees and to attract and retain new qualified employees, while controlling our labor costs;


•	product shortages, loss of key suppliers or failure to develop relationships with qualified suppliers, and our dependence on third-party suppliers and manufacturers;


•	the implementation of our supply chain and technology initiatives;


•	the impact a housing market decline may have on our business, including the potential for impairment losses or the closing or idling of under-performing locations;


•	the impact of long-term non-cancelable leases at our facilities;


•	our ability to effectively manage inventory and working capital;


•	the credit risk from our customers;


•	the impact of pricing pressure from our customers;


•	our ability to identify or respond effectively to consumer needs, expectations or trends;


•	our ability to successfully implement our growth strategy;


•	the impact of federal, state, local and other laws and regulations;


•	the impact of changes in legislation and government policy;


•	the impact of unexpected changes in our tax provisions and adoption of new tax legislation;


•	our ability to utilize our net operating loss carryforwards;


•	the potential loss of significant customers or a reduction in the quantity of products they purchase;


•	natural or man-made disruptions to our distribution and manufacturing facilities;


•	our exposure to environmental liabilities and subjection to environmental laws and regulation;


•	the impact of disruptions to our information technology systems;


•	cybersecurity risks;


•	risks related to the continued integration of Building Materials Holdings Corporation and Stock Building Supply Holdings, Inc. and successful operation of the post-merger company; and


•	our ability to operate on multiple ERP information systems and convert multiple systems to a single system.

Certain of these and other factors are discussed in more detail in “Item 1A. Risk Factors” of our 2016 Annual Report on Form 10-K and subsequent Quarterly Reports on Form 10-Q. The forward-looking statements included herein are made only as of the date of this Quarterly Report on Form 10-Q and we undertake no obligation to publicly update or review any forward-looking statement made by us or on our behalf, whether as a result of new information, future developments, subsequent events or circumstances or otherwise, unless otherwise required by law.

Overview

We are one of the leading providers of diversified building products and services in the U.S. residential construction market. Our objective is to provide best-in-class customer service and value-added products to our customers, which are primarily single- and multi-family home builders and professional remodelers. Our product offerings include lumber and lumber sheet goods and an array of value-added products including millwork, doors, windows and structural components such as engineered wood products, floor and roof trusses and wall panels. Our whole-house framing solution, Ready-Frame ®, which is one of our fastest growing product offerings, saves builders both time and money and improves job site safety. We also offer our customers important services such as design, product specification, installation and installation management.

The 18 states in which we operate accounted for approximately 64% of 2016 U.S. single-family housing permits according to the U.S. Census Bureau. In these 18 states, we operate in 43 metropolitan areas.

Our net sales for the three months ended September 30, 2017 increased 7.3% compared to the prior year period. Our gross margin was 23.8% for the three months ended September 30, 2017 compared to 24.7% for the prior year period. We recorded income from operations of $33.3 million during the three months ended September 30, 2017 compared to $33.7 million during the three months ended September 30, 2016 . See further discussion in “-Operating Results” below.

Factors Affecting Our Operating Results

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

Acquisitions

On March 27, 2017, the Company completed the acquisition of Code Plus, a truss manufacturer located in Martinsburg, West Virginia serving the Washington DC market, for a purchase price of $7.1 million. On April 3, 2017, the Company completed the acquisition of TexPly, a supplier of production millwork and doors in the Dallas-Fort Worth area, for a preliminary purchase price of $32.0 million.

Approximately $18.5 million and $38.0 million of the sales increase for the three and nine months ended September 30, 2017 , respectively, compared to the prior year period is a result of the Code Plus and TexPly acquisitions.

See Note 3 to the unaudited condensed consolidated financial statements included in Item 1 of this Quarterly Report on Form 10-Q for further discussion of the Company’s 2017 acquisitions.

Conditions in the housing and construction market

The building products supply and services industry is highly dependent on new single-family home and multi-family construction and repair and remodeling activity, which in turn are dependent upon a number of factors, including, among other things, 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 in the South and West regions of the United States, which are our primary operating regions, increased approximately 11.2% for the three months ended September 30, 2017 as compared to the same period in the prior year.

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 will 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 the average composite framing lumber prices (per thousand board feet) and average composite structural panel prices (per thousand square feet). These prices represent transactions between manufacturers and their customers as reported by Random Lengths and may differ 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,
	2017 versus 2016		2017 average price		2017 versus 2016		2017 average price
Framing lumber prices	16.8	%	$	418	18.1	%	$	405
Structural panel prices	20.3	%	$	468	14.3	%	$	423

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” below.

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. We expect that our ability to maintain strong relationships with the larger builders will be vital to our ability to expand into new markets as well as grow our market share. While we generate significant sales from these homebuilders, our gross margins on sales to them tend to be lower than our gross margins on sales to other market segments. 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-enabled telematics technology across our delivery fleet 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, doors & windows 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 customer sales mix

Our operating results may vary according to the amount and type of products we sell to each of our primary customer types: new single-family homebuilders, professional remodeling contractors, and multi-family builders and light commercial builders. We tend to realize higher gross margins on sales to remodeling contractors due to the smaller product volumes purchased by those customers, as well as the more customized nature of the projects those customers generally undertake. Gross margins on sales to single-family, multi-family and light commercial customers 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.

Seasonality

Our first and fourth quarters have historically been, and are generally expected to continue to be, adversely affected by weather patterns in some of our markets, causing reduced construction activity. As a result, sales are usually lower in the first and fourth quarters than in the second and third quarters.

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)	2017					2016					2017					2016
Net sales	$	881,012		100.0	%	$	821,204		100.0	%	$	2,525,087		100.0	%	$	2,346,169		100.0	%
Cost of sales	671,467			76.2	%	618,238			75.3	%	1,925,658			76.3	%	1,784,931			76.1	%
Gross profit	209,545			23.8	%	202,966			24.7	%	599,429			23.7	%	561,238			23.9	%
Operating expenses:
Selling, general and administrative expenses	158,193			18.0	%	149,498			18.2	%	464,870			18.4	%	431,176			18.4	%
Depreciation expense	11,053			1.3	%	9,784			1.2	%	32,555			1.3	%	27,866			1.2	%
Amortization expense	4,026			0.5	%	5,349			0.7	%	11,947			0.5	%	15,882			0.7	%
Merger and integration costs	2,574			0.3	%	4,655			0.6	%	13,339			0.5	%	11,088			0.5	%
Impairment of assets	409			0.0	%	—			0.0	%	435			0.0	%	11,883			0.5	%
Income from operations	33,290			3.8	%	33,680			4.1	%	76,283			3.0	%	63,343			2.7	%
Other income (expense)
Interest expense	(6,377		)	(0.7	)%	(7,668		)	(0.9	)%	(18,960		)	(0.8	)%	(24,020		)	(1.0	)%
Loss on debt extinguishment	—			0.0	%	(12,529		)	(1.5	)%	—			0.0	%	(12,529		)	(0.5	)%
Other income, net	1,083			0.1	%	735			0.1	%	2,366			0.1	%	3,601			0.2	%
Income before income taxes	27,996			3.2	%	14,218			1.7	%	59,689			2.4	%	30,395			1.3	%
Income tax expense	9,553			1.1	%	4,982			0.6	%	19,906			0.8	%	9,933			0.4	%
Net income	$	18,443		2.1	%	$	9,236		1.1	%	$	39,783		1.6	%	$	20,462		0.9	%

Three months ended September 30, 2017 compared to three months ended September 30, 2016

Net sales

For the three months ended September 30, 2017 , net sales increased $59.8 million , or 7.3% , to $881.0 million from $821.2 million during the three months ended September 30, 2016 . The increase in net sales was primarily driven by increased volume of approximately 0.5% related to existing operations and the impact of commodity price inflation of approximately 4.5% , while the acquisitions of Code Plus and TexPly increased net sales by approximately 2.3% . The increase in sales volume was negatively impacted by one less selling day during the three months ended September 30, 2017 as compared to the three months ended September 30, 2016, which impacted net sales by approximately 1.6% , and the impact of Hurricanes Harvey and Irma, which is estimated to have decreased net sales by approximately $12.0 million to $15.0 million.

We estimate approximately 77% of our net sales for the three months ended September 30, 2017 were to customers engaged in new single-family construction. According to the U.S. Census Bureau, single-family housing starts in the South and West regions of the United States, which are our primary operating regions, increased approximately 11.2% for the three months ended September 30, 2017 as compared to the same period in the prior year, while single-family houses completed increased approximately 7.3% during the same period. Increases in net sales from Texas and California accounted for approximately half of the total increase in net sales for the three months ended September 30, 2017 , while the Company experienced a decrease in net sales in Georgia of less than 1% of overall net sales.

The following table shows net sales classified by major product category. Certain prior year amounts have been reclassified to conform to the current year presentation.



	Three Months Ended September 30, 2017				Three Months Ended September 30, 2016
(in thousands)	Net Sales		% of Sales		Net Sales		% of Sales		% Change
Structural components	$	145,185	16.5	%	$	123,539	15.0	%	17.5	%
Lumber & lumber sheet goods	294,699		33.5	%	248,751		30.3	%	18.5	%
Millwork, doors & windows	225,804		25.6	%	232,292		28.3	%	(2.8	)%
Other building products & services	215,324		24.4	%	216,622		26.4	%	(0.6	)%
Total net sales	$	881,012	100.0	%	$	821,204	100.0	%	7.3	%

The impact of commodity price inflation during the three months ended September 30, 2017 contributed to the increase in net sales in our structural components product category. In addition to commodity price inflation, an increase in single-family home construction also contributed to the growth in our lumber & lumber sheet goods product category. The decrease in our millwork, doors & windows product category was primarily related to reduced sales in Texas and Georgia, in part related to the impact of Hurricanes Harvey and Irma, one less selling day versus the prior year period and a decrease in sales to multi-family contractors.

Cost of sales

For the three months ended September 30, 2017 , cost of sales increased $53.2 million , or 8.6% , to $671.5 million from $618.2 million during the three months ended September 30, 2016 . We estimate our cost of sales increased approximately 1.4% as a result of increased sales volumes and 5.2% as a result of commodity cost inflation, while the acquisitions of Code Plus and TexPly increased our cost of sales by approximately 2.0%.

Gross profit

For the three months ended September 30, 2017 , gross profit increased $6.6 million , or 3.2% , to $209.5 million from $203.0 million for the three months ended September 30, 2016 , driven primarily by increased sales volumes. Our gross margin was 23.8% for the three months ended September 30, 2017 and 24.7% for the three months ended September 30, 2016 . This decrease primarily related to a decline in gross margin in the lumber & lumber sheet goods product category, and a higher percentage of total net sales being derived from lumber & lumber sheet goods.

Operating expenses

For the three months ended September 30, 2017 :


•	selling, general and administrative expenses were $158.2 million , up $8.7 million , or 5.8% , from $149.5 million for the three months ended September 30, 2016 . Approximately $4.4 million of this increase related to selling, general and administrative expenses of TexPly and Code Plus, $3.0 million related to pending litigation and $1.7 million related to increased health care costs.


•	depreciation expense was $11.1 million compared to $9.8 million for the three months ended September 30, 2016 . This increase primarily relates to replacements and additions of delivery fleet, material handling equipment and operating equipment.


•	amortization expense was $4.0 million compared to $5.3 million for the three months ended September 30, 2016 . This decrease resulted from certain intangible assets that became fully amortized, partially offset by the amortization of intangible assets acquired in the Code Plus and TexPly acquisitions.


•	the Company incurred $2.6 million of Merger and integration costs related to the ongoing integration of BMHC and SBS, consisting primarily of severance, system integration costs and professional fees, compared to $4.7 million for the three months ended September 30, 2016 .


•	the Company recognized asset impairment charges of $0.4 million related to the write down of real estate held for sale to the lower of depreciated cost or estimated fair value less expected disposition costs.

Interest expense

For the three months ended September 30, 2017 , interest expense was $6.4 million compared to $7.7 million for the three months ended September 30, 2016 . This decrease relates primarily to a decrease in interest expense on the Senior Notes after the Company redeemed $250.0 million of 9.0% senior secured notes with the proceeds from the issuance of $350.0 million of 5.5% Senior Notes during September 2016. Non-cash amortization of debt issuance costs, which is included in interest expense, was $0.4 million and $0.8 million for the three months ended September 30, 2017 and 2016 , respectively.

Loss on debt extinguishment

For the three months ended September 30, 2016, the Company incurred a loss on debt extinguishment of $12.5 million related to the redemption of the Extinguished Senior Notes. The loss is made up of a call premium of $8.4 million and the write off of unamortized debt issuance costs and original issue discount of $4.1 million.

Income tax

For the three months ended September 30, 2017 , income tax expense was $9.6 million compared to $5.0 million for the three months ended September 30, 2016 . The effective tax rate for the three months ended September 30, 2017 was 34.1% , which varied from the federal statutory rate of 35% primarily due to excess tax windfall benefits from stock compensation and the Manufacturing Deduction. The effective tax rate for the three months ended September 30, 2016 was 35.0% , which was consistent with the federal statutory rate of 35%.

Nine months ended September 30, 2017 compared to nine months ended September 30, 2016

Net sales

For the nine months ended September 30, 2017 , net sales increased $178.9 million , or 7.6% , to $2,525.1 million from $2,346.2 million during the nine months ended September 30, 2016 . The increase in net sales was primarily driven by increased volume of approximately 2.5% related to existing operations and the impact of commodity price inflation of approximately 3.5% , while the acquisitions of Code Plus and TexPly increased net sales by approximately 1.6% . The increase in sales volume was negatively impacted by one less selling day during the nine months ended September 30, 2017 as compared to the nine months ended September 30, 2016 and the impact of Hurricanes Harvey and Irma, which is estimated to have decreased net sales by approximately $12.0 million to $15.0 million.

We estimate approximately 75% of our net sales for the nine months ended September 30, 2017 were to customers engaged in new single-family construction. According to the U.S. Census Bureau, single-family housing starts in the South and West regions of the United States, which are our primary operating regions, increased approximately 9.7% for the nine months ended September 30, 2017 as compared to the same period in the prior year, while single-family houses completed increased approximately 10.0% during the same period. Increases in net sales from Texas accounted for approximately 41% of the total increase in net sales for the nine months ended September 30, 2017 , while the Company experienced a decrease in net sales in California and Georgia of less than 1% of overall net sales.

The following table shows net sales classified by major product category. Certain prior year amounts have been reclassified to conform to the current year presentation.



	Nine Months Ended September 30, 2017				Nine Months Ended September 30, 2016
(in thousands)	Net Sales		% of Sales		Net Sales		% of Sales		% Change
Structural components	$	393,382	15.6	%	$	353,616	15.1	%	11.2	%
Lumber & lumber sheet goods	829,634		32.9	%	707,113		30.1	%	17.3	%
Millwork, doors & windows	677,554		26.8	%	678,702		28.9	%	(0.2	)%
Other building products & services	624,517		24.7	%	606,738		25.9	%	2.9	%
Total net sales	$	2,525,087	100.0	%	$	2,346,169	100.0	%	7.6	%

The impact of commodity price inflation during the nine months ended September 30, 2017 contributed to the increase in net sales in our structural components product category. In addition to commodity price inflation, an increase in single-family home construction also contributed to the growth in our lumber & lumber sheet goods product category.

Cost of sales

For the nine months ended September 30, 2017 , cost of sales increased $140.7 million , or 7.9% , to $1,925.7 million from $1,784.9 million during the nine months ended September 30, 2016 . Cost of sales for the nine months ended September 30, 2016 includes $2.9 million of expense incurred in relation to the sell-through of inventory which was stepped up in value in connection with the Merger. We estimate our cost of sales increased approximately 4.1% as a result of commodity cost inflation, 2.5% as a result of increased sales volumes related to existing operations and 1.5% related to the acquisitions of Code Plus and TexPly, partially offset by a 0.2% decrease as a result of the sell-through of inventory which was stepped up in value.

Gross profit

For the nine months ended September 30, 2017 , gross profit increased $38.2 million , or 6.8% , to $599.4 million from $561.2 million for the nine months ended September 30, 2016 , driven primarily by increased sales volumes. Our gross margin was 23.7% for the nine months ended September 30, 2017 and 23.9% for the nine months ended September 30, 2016 . Gross profit for the nine months ended September 30, 2016 was impacted by $2.9 million, or 0.1% of net sales, in relation to the sell-through of inventory which was stepped up in value in connection with the Merger.

Operating expenses

For the nine months ended September 30, 2017 :

•

selling, general and administrative expenses were $464.9 million , up $33.7 million , or 7.8% , from $431.2 million for the nine months ended September 30, 2016 . Approximately $8.6 million of this increase related to selling, general and administrative expenses of TexPly and Code Plus, $3.0 million related to pending litigation and $2.0 million related to increased health care costs. The remaining increase was primarily due to costs associated with four newly-opened facilities and variable costs to serve higher sales volumes related to existing operations.


•	depreciation expense was $32.6 million compared to $27.9 million for the nine months ended September 30, 2016 . This increase primarily relates to replacements and additions of delivery fleet, material handling equipment and operating equipment.


•	amortization expense was $11.9 million compared to $15.9 million for the nine months ended September 30, 2016 . This decrease resulted from certain intangible assets that became fully amortized, partially offset by the amortization of intangible assets acquired in the Code Plus and TexPly acquisitions.

•

the Company incurred $13.3 million of Merger and integration costs related to the ongoing integration of BMHC and SBS, consisting primarily of severance, system integration costs and professional fees, compared to $11.1 million for the nine months ended September 30, 2016 . This increase relates to approximately $2.8 million of expense recognized during the nine months ended September 30, 2017 related to the discontinuance of the New ERP (see Note 5 to the unaudited condensed consolidated financial statements included in Item 1 of this Quarterly Report on Form 10-Q for further description of the New ERP).

•

the Company recognized asset impairment charges of $0.4 million related to the write down of real estate held for sale to the lower of depreciated cost or estimated fair value less expected disposition costs. During the nine months ended September 30, 2016 , the Company recognized asset impairment charges of $11.9 million . During the first quarter of 2016, the Company decided to integrate all operations under the Legacy SBS ERP system, and to discontinue use of the New ERP (see Note 5 to the unaudited condensed consolidated financial statements included in Item 1 of this Quarterly Report on Form 10-Q for further description of the New ERP). In connection with this decision, the Company impaired capitalized software costs that had previously been recorded as construction-in-progress within property and equipment on the unaudited condensed consolidated balance sheets.

Interest expense

For the nine months ended September 30, 2017 , interest expense was $19.0 million compared to $24.0 million for the nine months ended September 30, 2016 . This decrease relates primarily to reduced borrowings under the Revolver and a decrease in interest expense on the Senior Notes after the Company redeemed $250.0 million of 9.0% senior secured notes with the proceeds from the issuance of $350.0 million of 5.5% Senior Notes during September 2016. Non-cash amortization of debt issuance costs, which

is included in interest expense, was $1.3 million and $2.7 million for the nine months ended September 30, 2017 and 2016, respectively.

Loss on debt extinguishment

For the nine months ended September 30, 2016, the Company incurred a loss on debt extinguishment of $12.5 million related to the redemption of the Extinguished Senior Notes. The loss is made up of a call premium of $8.4 million and the write off of unamortized debt issuance costs and original issue discount of $4.1 million.

Other income, net

For the nine months ended September 30, 2017 , other income, net decreased $1.2 million compared to the nine months ended September 30, 2016 . This decrease primarily relates to insurance proceeds received during the nine months ended September 30, 2016 related to a fire at one of the Company’s facilities during 2015.

Income tax

For the nine months ended September 30, 2017 , income tax expense was $19.9 million compared to $9.9 million for the nine months ended September 30, 2016 . The effective tax rate for the nine months ended September 30, 2017 was 33.3% , which varied from the federal statutory rate of 35% primarily due to excess tax windfall benefits from stock compensation and the Manufacturing Deduction. The effective tax rate for the nine months ended September 30, 2016 was 32.7% , which varied from the federal statutory rate of 35% primarily due to excess tax windfall benefits from stock compensation and the Manufacturing Deduction.

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 2017 and 2016, our capital resources have primarily consisted of cash and cash equivalents generated through operating cash flows, proceeds from the September 2016 issuance of the Senior Notes and borrowings under our Revolver.

Our liquidity at September 30, 2017 was $268.5 million , which includes $12.1 million in cash and cash equivalents and $256.4 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

Net current assets

Net current assets (current assets less current liabilities) were $434.6 million and $364.1 million as of September 30, 2017 and December 31, 2016 , respectively, as summarized in the following table:



(in thousands)	September 30, 2017			December 31, 2016
Cash and cash equivalents	$	12,117		$	8,917
Accounts receivable, net of allowances	365,989			313,304
Inventories, net	307,685			272,276
Other current assets	84,624			72,445
Accounts payable, accrued expenses and other current liabilities	(327,660		)	(291,657		)
Current portion of long-term debt and capital lease obligations	(8,137		)	(11,155		)
Total net current assets	$	434,618		$	364,130

Accounts receivable, net, increased $52.7 million from December 31, 2016 to September 30, 2017 primarily due to seasonal increases in sales. Days sales outstanding (measured against net sales in the current fiscal quarter of each period) were 38 days at December 31, 2016 and September 30, 2017 .

Inventories, net, increased $35.4 million from December 31, 2016 to September 30, 2017 primarily due to commodity price inflation and seasonal increases in inventory purchases. Inventory days on hand (measured against cost of sales in the current fiscal quarter of each period) decreased from 43 days at December 31, 2016 to 41 days at September 30, 2017 .

Accounts payable, accrued expenses and other current liabilities increased $36.0 million from December 31, 2016 to September 30, 2017 primarily due to an increase in accounts payable related to increased inventory purchases in connection with higher sales volume.

Cash flows from operating activities

Net cash provided by operating activities was $48.2 million and $63.8 million for the nine months ended September 30, 2017 and 2016 , respectively, as summarized in the following table:



	Nine Months Ended September 30,
(in thousands)	2017			2016
Net income	$	39,783		$	20,462
Non-cash expenses	58,774			60,970
Change in deferred income taxes	1,755			(4,638		)
Impairment of assets	435			11,883
Loss on debt extinguishment	—			12,529
Change in working capital and other assets and liabilities	(52,567		)	(37,385		)
Net cash provided by operating activities	$	48,180		$	63,821

Net cash provided by operating activities declined by $15.6 million for the nine months ended September 30, 2017 as compared to the nine months ended September 30, 2016 primarily due to the following:


•	Net income increased by $19.3 million as discussed in “-Operating Results” above.


•	The change in deferred income taxes during the nine months ended September 30, 2017 and 2016 was primarily due to increases in the timing differences of capital lease obligations and accrued bonuses between our income before income taxes under GAAP and our taxable income.


•	The Company recognized asset impairment charges of $11.9 million during the nine months ended September 30, 2016 related to the New ERP as discussed in “-Operating Results” above.


•	The Company recognized a loss on debt extinguishment of $12.5 million during the nine months ended September 30, 2016 in relation to the redemption of the Extinguished Senior Notes as discussed in “-Operating Results” above.


•	Cash outflows from changes in working capital and other assets and liabilities of $52.6 million and $37.4 million for the nine months ended September 30, 2017 and September 30, 2016 , respectively, relate primarily to seasonal increases in accounts receivable and inventory offset by increases in accounts payable. See “- Net current assets” above for further discussion.

Cash flows from investing activities

Net cash used in investing activities was $86.5 million and $23.9 million for the nine months ended September 30, 2017 and 2016 , respectively, as summarized in the following table:



	Nine Months Ended September 30,
(in thousands)	2017			2016
Purchases of property, equipment and real estate	$	(51,292	)	$	(26,126	)
Purchases of businesses, net of cash acquired	(38,737		)	—
Proceeds from sale of property, equipment and real estate	3,545			1,066
Insurance proceeds	—			1,151
Net cash used in investing activities	$	(86,484	)	$	(23,909	)

Cash used for the purchase of property and equipment for the nine months ended September 30, 2017 and 2016 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. Proceeds from the sale of property, equipment and real estate during the nine months ended September 30, 2017 relates primarily to proceeds from the sale of real estate of $3.0 million .

Purchases of businesses, net of cash acquired, of $38.7 million relate to the acquisitions of Code Plus and TexPly discussed in “-Factors Affecting our Operating Results” above.

During the nine months ended September 30, 2016, the Company received insurance proceeds related to a fire at one of the Company’s facilities during 2015, of which $1.2 million related to property, plant and equipment damaged in the fire.

Cash flows from financing activities

Net cash provided by (used in) financing activities was $41.5 million and $(34.3) million for the nine months ended September 30, 2017 and 2016 , respectively, as summarized in the following table:



	Nine Months Ended September 30,
(in thousands)	2017			2016
Net borrowings (repayments) on Revolver	$	51,832		$	(125,358	)
Payments on capital lease obligations and other notes	(10,356		)	(9,200		)
Payments of debt issuance costs	(38		)	(5,824		)
Proceeds from issuance of Senior Notes	—			350,000
Redemption of Extinguished Senior Notes	—			(250,000		)
Proceeds from issuance of common stock, net of offering costs	—			13,776
Payments of debt extinguishment costs	—			(8,438		)
Other financing activities, net	66			793
Net cash provided by (used in) financing activities	$	41,504		$	(34,251	)

The Company made net borrowings of $51.8 million on the Revolver during the nine months ended September 30, 2017 , a portion of which was used to fund the acquisitions of Code Plus and TexPly during March 2017 and April 2017, respectively.

Payments on capital lease obligations and other notes increased by $1.2 million for the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016 due primarily to new financing of handling equipment to support higher sales volumes as well as one-time payments during the nine months ended September 30, 2017 related to the payoff of certain other notes.

During September 2016, the Company completed an issuance of $350.0 million of Senior Notes and utilized a portion of the cash proceeds from the issuance to redeem in full the $250.0 million Extinguished Senior Notes. The Company incurred $6.3 million of debt issuance costs related to the Senior Notes, of which $5.5 million was paid prior to September 30, 2016, and paid a call premium of $8.4 million related to the Extinguished Senior Notes. The remaining proceeds from the issuance of the Senior Notes were used to repay borrowings on the Revolver.

During May 2016, the Company commenced a public offering of 5,700,000 shares of its common stock by certain stockholders. In connection with the offering, the Company granted the underwriters an option to purchase up to an additional 855,000 shares of common stock. The underwriters exercised this option, which generated gross proceeds of $14.5 million and net proceeds of $13.8 million, after subtracting $0.7 million of underwriting commissions and other fees.

Proceeds from the exercise of stock options, which are included in other financing activities, net, were $2.7 million for the nine months ended September 30, 2017 compared to $1.1 million for the nine months ended September 30, 2016 . Additionally, other financing activities for the nine months ended September 30, 2017 and 2016 include net repayments of secured borrowings and purchases of treasury shares.

Capital expenditures

Capital expenditures vary depending on prevailing business factors, including current and anticipated market conditions. We expect our 2017 capital expenditures, including the incurrence of capital lease obligations and net of proceeds from the sale of property, equipment and real estate, to be approximately $65.0 million to $75.0 million primarily related to vehicles and equipment, including lease buyouts, and facility and technology investments to support our operations. For the nine months ended September 30, 2017 , capital expenditures, including the incurrence of capital lease obligations and net of proceeds from the sale of property, equipment and real estate, were $50.2 million .

Senior secured notes

On September 15, 2016, the Company issued $350.0 million of Senior Notes under an unregistered private placement not subject to the registration requirements of the Securities Act. The Senior Notes mature on October 1, 2024 and are secured by a first priority lien on certain assets of the Company and a second priority lien on the collateral that secures the Credit Agreement, which collectively approximates substantially all assets of the Company. The interest rate is fixed at 5.5% and is payable semiannually on April 1 and October 1. The Indenture contains customary nonfinancial covenants, including restrictions on new indebtedness, issuance of liens and guarantees, investments, distributions to equityholders, asset sales and affiliate transactions. The Senior Notes were issued by BMC East, LLC, a 100% owned subsidiary of the Company, and are guaranteed by the Company and the other subsidiaries that guarantee the Credit Agreement. Each of the subsidiary guarantors is 100% owned, directly or indirectly, by the Company, and all guarantees are full and unconditional and joint and several. We were in compliance with all covenants as of September 30, 2017 .

Revolving credit agreement

On December 1, 2015, in connection with the Merger, the Company entered into the Credit Agreement with Wells Fargo Capital Finance, as administrative agent, and certain other lenders. The Credit Agreement, as amended, which includes the Revolver, has an aggregate commitment of $375.0 million and a letters of credit sublimit of $100.0 million. The Revolver matures at the earlier of (i) December 1, 2020 and (ii) the date that is three months prior to the maturity of the Senior Notes, or if the Senior Notes are refinanced or repaid, the date that is three months prior to the new maturity date of the replacement notes or other indebtedness that replaced or refinanced the Senior Notes. The Revolver is subject to an asset-based borrowing formula on eligible accounts receivable, credit card receivables and inventory, in each case reduced by certain reserves.

Borrowings under the Revolver bear interest, at our option, at either the Base Rate (which means the higher of (i) the Federal Funds Rate plus 0.5%, (ii) the LIBOR rate plus 1.0% or (iii) the prime rate) plus a Base Rate Margin (which ranges from 0.25% to 0.75% based on Revolver availability) or LIBOR plus a LIBOR Rate Margin (which ranges from 1.25% to 1.75% based on Revolver availability).

The fee on any outstanding letters of credit issued under the Revolver ranges from 0.75% to 1.25%, depending on whether the letters of credit are fully cash collateralized. The fee on the unused portion of the Revolver is 0.25%. The Credit Agreement contains customary nonfinancial covenants, including restrictions on new indebtedness, issuance of liens, investments, distributions to equityholders, asset sales and affiliate transactions. The Credit Agreement includes a financial covenant that requires us to maintain a minimum Fixed Charge Coverage Ratio of 1.00:1:00, as defined therein. However, the covenant is only applicable if excess availability under the Credit Agreement is less than or equal to the greater of (i) $33.3 million and (ii) 10% of the line cap, and remains in effect until excess availability has been greater than the greater of (i) $33.3 million and (ii) 10% of the line cap for 30 consecutive days. While there can be no assurances, based upon our forecast, we do not expect the financial covenant to become applicable during the year ended December 31, 2017. We were in compliance with all covenants as of September 30, 2017 .

We had outstanding borrowings of $51.8 million with net availability of $256.4 million as of September 30, 2017 . We had $66.8 million in letters of credit outstanding under the Credit Agreement as of September 30, 2017 .

Contractual Obligations and Commercial Commitments

Outstanding borrowings under the Revolver increased to $51.8 million at September 30, 2017 from $0 at December 31, 2016 .

During the nine months ended September 30, 2017 , the Company acquired assets under capital leases totaling $2.5 million .

The Company was obligated under certain purchase commitments totaling approximately $5.7 million at September 30, 2017 that are non-cancellable, enforceable and legally binding on us. These purchase commitments consist primarily of obligations to purchase vehicles.

Off-Balance Sheet Arrangements

At September 30, 2017 and December 31, 2016 , 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

See Note 2 to the unaudited condensed consolidated financial statements included in Item 1 of this Quarterly Report on Form 10-Q for a summary of recently issued accounting pronouncements.

Critical Accounting Policies

There have been no material changes to the critical accounting policies as disclosed in the Company’s 2016 Annual Report on Form 10-K.

ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There have been no material changes to the market risks as disclosed in the Company’s 2016 Annual Report on Form 10-K.

ITEM 4 CONTROLS AND PROCEDURES

Disclosure controls and procedures

Our management is responsible for establishing and maintaining disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These disclosure controls and procedures 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 and principal financial officer, 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 Quarterly Report on Form 10-Q, 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, 2017 .

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, 2017 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Limitations in control systems

The design of any system of control is based upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated objectives under all future events, no matter how remote, or that the degree of compliance with the policies or procedures may not deteriorate. Because of their inherent limitations, disclosure controls and procedures may not prevent or detect all misstatements. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives.

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 or deductibles 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 currently believe that the ultimate resolution of these matters will have a material adverse effect on our consolidated financial position, cash flows or operating results.

On August 30, 2017, Region 10 of the U.S. Environmental Protection Agency (the “EPA”) sent a notice of intent to us, alleging certain violations of the Clean Water Act with respect to industrial stormwater permitting regarding monitoring, inspections, benchmarks and record keeping at our Everett, Washington facility. The EPA has asserted that the alleged violations may subject us to administrative or civil penalties. We are in discussions with the EPA to explore a potential resolution of this matter. We are unable to predict the outcome of this matter, including potential administrative or civil penalties, remedial measures, or other relief, if any, or the potential impact on operations of the Everett facility, including increased capital or operational costs, if any.

ITEM 1A RISK FACTORS

There have been no material changes to our risk factors from the risk factors disclosed in our 2016 Annual Report on Form 10-K. The risks described in our 2016 Annual Report on Form 10-K, in addition to the other information set forth in this Quarterly Report on Form 10-Q, 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

None.

ITEM 4 MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5 OTHER INFORMATION

None.

ITEM 6 EXHIBITS

EXHIBIT INDEX



Exhibit No.		Description
10.1		Form of Indemnification Agreement Entered into with Certain Directors and Officers
10.2#		Consulting Agreement with Paul Street dated September 16, 2017 (incorporated by reference to Exhibit 99.1 to the Registrant’s Form 8-K filed with the Commission on September 19, 2017 in Commission File No. 001-36050)
31.1		Certification by Peter C. Alexander, 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

_________________

# Denotes management compensatory plan or arrangement.

* 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 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.



	BMC STOCK HOLDINGS, INC.
Date: November 9, 2017	By:	/s/ James F. Major, Jr.
		Executive Vice President, Chief Financial Officer and Treasurer
		(Principal financial and accounting officer and duly authorized officer)


1.	I have reviewed this quarterly report on Form 10-Q of BMC Stock 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)) 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


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.