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STCK > SEC Filings for STCK > Form 10-Q on 6-Sep-2013All Recent SEC Filings




Quarterly Report

You should read this discussion and analysis in conjunction with our historical consolidated financial statements and the notes thereto included elsewhere in this Quarterly Report on Form 10-Q and with our audited financial statements included in our prospectus filed pursuant to Rule 424(b) under the Securities Act of 1933, as amended, with the Securities and Exchange Commission on August 9, 2013 (the "Prospectus"). This discussion and analysis covers periods prior to our initial public offering and related transactions. As a result, the discussion and analysis of historical periods does not reflect the impact that the offering, such conversion and other related transactions will have on us. Our historical results may not be indicative of our future performance. This discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results may differ from those anticipated in these forward-looking statements as a result of many factors. Our risk factors are set forth in "Part II, Item 1A. Risk Factors." Overview
We are a large, diversified lumber and building materials ("LBM") distributor and solutions provider that sells to construction and repair and remodel contractors. We carry a broad line of products and have operations throughout the United States. Our primary products are lumber & lumber sheet goods and structural components, including engineered wood, trusses and wall panels, millwork, doors, flooring, windows & other exterior products. Additionally, we provide solution-based services to our customers, including design, product specification and installation management services. We serve a broad customer base, including large-scale production homebuilders, custom homebuilders and repair and remodeling contractors, and we believe we are among the top three LBM suppliers for residential construction in 80% of the geographic markets in which we operate, based on net sales. We offer over 39,000 products sourced through our strategic network of suppliers, which together with our various solution-based services represent approximately 50% of the construction cost of a typical new home. By enabling our customers to source a significant portion of their materials and services from one supplier, we have positioned ourselves as the supply partner of choice for many of our customers.
We have operations in 13 states that accounted for approximately 48% of 2012 U.S. single-family housing permits according to the U.S. Census Bureau. We operate in 20 metropolitan areas in these 13 states that we believe have an attractive potential for economic growth based on population trends, increasing business activity and above-average employment growth. Restatement of previously issued consolidated financial statements In connection with the IPO, we restated our previously issued consolidated financial statements and related footnotes as of December 31, 2012. For additional information regarding this restatement, see note (2) to our unaudited financial statements included in this Quarterly Report on Form 10-Q. We restated our consolidated financial statements to account for a beneficial conversion feature for our Convertible Class C Preferred stock and related dividends for the year ended December 31, 2012. The Company recorded additional compensation expense related to the modification of the exercise price of outstanding stock options, the issuance of new options and the purchase of shares of Class B common stock by management. The Company determined that the increase in the estimated fair value of the Class B Common stock increased the Company's total compensation expense recognized as a result of these transactions. Accordingly, in the restated consolidated financial statements as of December 31, 2012, the Company decreased income tax payable by $177 and increased additional paid-in capital by $506. All data included in "Management's Discussion and Analysis of Financial Condition and Results of Operations" as of December 31, 2012 are derived from our restated consolidated financial statements as of that date. Factors affecting our operating results
Our operating results and financial performance are influenced by a variety of factors, including conditions in the housing market and economic conditions generally, changes in the cost of the products we sell (particularly commodity products), pricing policies of our competitors, production schedules of our customers and seasonality. Some of the more important factors are briefly discussed below.
Conditions in the housing and construction market The building products supply and services industry is highly dependent on new home construction and repair and remodeling activity, which in turn are dependent upon a number of factors, including interest rates, consumer confidence, employment rates, foreclosure rates, housing inventory levels, housing demand, the availability of land, the availability of construction financing and the health of the economy and mortgage markets. The homebuilding industry underwent a

significant downturn that began in mid-2006 and began to stabilize in late 2011. As of June 2013, McGraw-Hill Construction forecasts that U.S. single-family housing starts will increase to 1.1 million by 2015. There is significant uncertainty regarding the timing and extent of any recovery in construction and repair and remodel activity and resulting product demand levels. The positive impact of a recovery on our business may also be dampened to the extent the average selling price or size of new single family homes decreases, which could cause homebuilders to decrease spending. We believe that, over the long-term, there is considerable growth potential in the U.S. housing sector.
We view single-family housing starts as a leading indicator of future business, but an additional driver of our results in any period is the number of housing units under construction ("HUC"). HUC has increased in the last year as a result of the increase in housing starts, although the HUC as of June 30, 2013 remained significantly below long-term historical averages.
Due to the low levels of housing starts and HUC relative to historical averages, continued competition for homebuilder business and growth in share of production homebuilders (see "-Consolidation of large homebuilders"), we have and may continue to experience pressure on our gross margins. Many industry forecasters expect to see continued improvement in housing demand over the next few years. We believe there are several trends that indicate U.S. housing demand will likely recover in the long term and that the recent downturn in the housing industry is likely a trough in the cyclical nature of the residential construction industry. We believe that these trends are supported by positive economic and demographic indicators that are beginning to take hold in many of the markets in which we operate. These indicators, which are typically indicative of housing market strength, include:
declining unemployment rates;

rising home values and improving household finances;

rebounding household formations;

improving sentiment towards ownership of residential real estate;

declining levels of new and existing for-sale home inventory; and

a favorable consumer interest rate environment supporting affordability and home ownership.

Overall economic conditions in the markets where we operate Economic changes both nationally and locally in our markets impact our financial performance. Unfavorable changes in demographics, credit markets, consumer confidence, health care costs, housing affordability, housing inventory levels, a weakening of the national economy or of any regional or local economy in which we operate, and other factors beyond our control could adversely affect consumer spending, result in decreased demand for homes, and adversely affect our business. We believe continued employment growth, prospective home buyers' access to financing, and improved consumer confidence will be necessary to increase household formation rates. Improved household formation rates in turn will increase demand for housing and stimulate new construction. In addition, beginning in 2007, the mortgage markets experienced substantial disruption due to increased defaults, primarily as a result of credit quality deterioration. The disruption resulted in a stricter regulatory environment and reduced availability of mortgages for potential home buyers due to a tight credit market and stricter standards to qualify for mortgages. Mortgage financing and commercial credit for smaller homebuilders as well as for the development of new residential lots continue to be constrained. As the housing industry is dependent upon the economy and employment levels as well as potential home buyers' access to mortgage financing and homebuilders' access to commercial credit, it is likely that the housing industry will not fully recover until conditions in the economy and the credit markets improve and unemployment rates decline.
Commodity nature of our products
Many of the building products we distribute, including lumber, OSB, plywood and particleboard, are commodities that are widely available from other manufacturers or distributors with prices and volumes determined frequently based on participants' perceptions of short-term supply and demand factors. A shortage of capacity or excess capacity in the industry can result in significant increases or declines in market prices for those products, often within a short period of time. Prices of commodity products can also change as a result of national and international economic conditions, labor and freight costs, competition, market speculation, government regulation, and trade policies, as well as from periodic delays in the delivery of

lumber and other products. Short-term changes in the cost of these materials, some of which are subject to significant fluctuations, are sometimes passed on to our customers, but our pricing quotation periods and pricing pressure from our competitors may limit our ability to pass on such price changes. For example, from time to time we enter into extended pricing commitments, which could compress our gross margins in periods of inflation.
The following table provides changes in the average composite framing lumber prices (per thousand board feet) and average composite structural panel prices (per thousand square feet). This composite calculation is based on index prices for OSB and plywood as reported by Random Lengths for the periods noted below.

                                            Three months ended June 30,               Six months ended June 30,
                                                                2013 average                             2013 average
                                        2013 versus 2012           price         2013 versus 2012           price
Increase in framing lumber prices               43 %                   $413              29 %                   $396
Increase in structural panel prices             51 %                   $501              38 %                   $476

Periods of increasing prices provide the opportunity for higher sales and increased gross profit, while periods of declining prices may result in declines in sales and profitability. In particular, low market prices for wood products over a sustained period can adversely affect our financial condition, operating results and cash flows, as can excessive spikes in market prices. The increase in lumber and panel prices during the six months ended June 30, 2013, compared with the same period in 2012, was one component of our improved net sales and gross profit for the six months ended June 30, 2013, which increased $128.9 million and $26.8 million, respectively. For further discussion of the impact of commodity prices on historical periods, see "-Operating results." Consolidation of large homebuilders
Over the past ten years, the homebuilding industry has undergone consolidation, and many larger homebuilders have increased their market share. We expect that trend to continue as larger homebuilders have better liquidity and land positions relative to the smaller, less capitalized homebuilders. Our focus is on maintaining relationships and market share with these customers while balancing the competitive pressures we face in our markets with certain profitability expectations. Our sales to production homebuilders, which include many of the country's largest 100 homebuilders, increased 44.7% on a year-over-year basis during the six months ended June 30, 2013, compared to a 20.9% increase in actual U.S. single-family housing starts during the same period. We expect that our ability to maintain strong relationships with the largest builders will be vital to our ability to expand into new markets as well as grow our market share. While we generate significant sales from these homebuilders, our gross margins on sales to them tend to be lower than our gross margins on sales to other market segments. This could impact our gross margins as homebuilding recovers if the market share held by the production homebuilders continues to increase.
Our first and fourth quarters have historically been, and are generally expected to continue to be, adversely affected by weather patterns in some of our markets, causing reduced construction activity. In addition, quarterly results historically have reflected, and are expected to continue to reflect, fluctuations from period to period arising from the following:
the volatility of lumber prices;

the cyclical nature of the homebuilding industry;

general economic conditions in the markets in which we compete;

the pricing policies of our competitors;

the production schedules of our customers; and

the effects of weather.

The composition and level of working capital typically change during periods of increasing sales as we carry more inventory and receivables, although this is generally offset in part by higher trade payables to our suppliers. Working capital levels typically increase in the second and third quarters of the year due to higher sales during the peak residential construction season. These increases have in the past resulted in negative operating cash flows during this peak season, which historically have been financed through available cash or excess availability on our Revolver. Collection of receivables and reduction in inventory levels following the peak building and construction season have in the past positively impacted cash flow. In the past, we have also utilized our borrowing availability under credit facilities to cover working capital needs. Our ability to control expenses
We pay close attention to managing our working capital and operating expenses. We employ a LEAN process operating philosophy, which encourages continuous improvement in our core processes to minimize waste, improve customer service, increase expense productivity, improve working capital, and maximize profitability and cash flow. We regularly analyze our workforce productivity to achieve the optimum, cost-efficient labor mix for our facilities. Further, we pay careful attention to our logistics function and have implemented GPS-based technology to improve customer service and improve productivity of our shipping and handling costs.
Mix of products sold
We typically realize greater gross margins on more highly engineered and customized products, or ancillary products that are often purchased based on convenience and are therefore less price sensitive to our customers. For example, sales of lumber & lumber sheet goods tend to generate lower gross margins due to their commodity nature and the relatively low switching costs of sourcing those products from different suppliers. Structural components and millwork & other interior products often generate higher gross profit dollars relative to other products. Prior to the housing downturn, homebuilders were increasingly using structural components in order to realize increased efficiency and improved quality. Shortening cycle time from start to completion was a key imperative of homebuilders during periods of strong consumer demand. During the housing downturn, that trend decelerated as cycle time had less relevance. Customers who traditionally used structural components, for the most part, still do. However, the conversion of customers to this product offering has slowed. We expect this trend to reverse as the residential new construction market continues to strengthen.
Changes in sales mix among construction segments Our operating results may vary according to the amount and type of products we sell to each of our four primary construction segments: new single-family construction, remodeling, multi-family and light commercial. We tend to realize higher gross margins on sales to the remodeling segment due to the smaller product volumes purchased by those customers, as well as the more customized nature of the projects those customers generally undertake. Gross margins within the new single-family, multi-family and light commercial construction segments can vary based on a variety of factors, including the purchase volumes of the individual customer, the mix of products sold to that customer, the size and selling price of the project being constructed, and the number of upgrades added to the project before or during its construction.
Freight costs and fuel charges
A portion of our shipping and handling costs is comprised of diesel or other fuels purchased for our delivery fleet. According to the U.S. Energy Information Administration, the average retail price per gallon for No. 2 diesel fuel was $3.96 for the six months ended June 30, 2013 and 2012. For the six months ended June 30, 2013, we incurred costs of approximately $4.9 million within selling, general and administrative expenses for diesel and other fuels. Future increases in the cost of fuel, or inbound freight costs for the products we purchase, could impact our operating results and cash flows if we are unable to pass along these cost increases to our customers through increased prices. Certain factors affecting our financial statements Discontinued operations and divestitures During the year ended December 31, 2012, we ceased operations in certain geographic markets due to declines in residential homebuilding throughout the United States and other strategic reasons. We will have no further significant continuing operations in the sold operations and exited geographic markets. The cessation of operations in these markets has been treated as discontinued operations as the markets had distinguishable cash flows and operations that have been eliminated from ongoing operations.

Restructuring expenses
In addition to discontinuing operations in certain markets as described above, we have instituted store closures and reductions in headcount in continuing markets (the "Restructurings") in an effort to: (i) strengthen our competitive position; (ii) reduce costs and (iii) improve operating margins within existing markets that management believes have favorable long-term growth demographics. No additional costs are expected to be incurred related to the Restructurings for future periods, other than interest costs associated with remaining restructuring reserves.
The assets of Total Building Services Group, LLC ("TBSG") were acquired on December 21, 2012 and the assets of Chesapeake were acquired on April 8, 2013. Our revenues for the three and six months ended June 30, 2013 increased by approximately $8.8 million and $13.3 million, respectively, compared to the three and six months ended June 30, 2012 as a result of the TBSG and Chesapeake acquisitions.

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

                           Three months ended June 30,                            Six months ended June 30,
(dollars in
thousands)               2013                       2012                       2013                       2012
Net sales      $ 314,653       100.0  %   $ 246,492       100.0  %   $ 563,379       100.0  %   $ 434,431       100.0  %
Cost of goods
sold             243,143        77.3  %     191,438        77.7  %     438,079        77.8  %     335,946        77.3  %
Gross profit      71,510        22.7  %      55,054        22.3  %     125,300        22.2  %      98,485        22.7  %
general and
expenses          65,411        20.8  %      54,771        22.2  %     122,213        21.7  %     107,605        24.8  %
expense            1,621         0.5  %       2,032         0.8  %       3,260         0.6  %       4,099         0.9  %
expense              562         0.2  %         364         0.1  %       1,109         0.2  %         729         0.2  %
expense               39         0.0  %         (23 )       0.0  %          99         0.0  %          21         0.0  %
Income (loss)
operations         3,877         1.2  %      (2,090 )      (0.8 )%      (1,381 )      (0.3 )%     (13,969 )      (3.2 )%
Other income
expense, net      (1,233 )      (0.4 )%      (1,085 )      (0.4 )%      (2,258 )      (0.4 )%      (2,048 )      (0.5 )%
Other income
(expense), net       206         0.1  %        (227 )      (0.1 )%         396         0.1  %        (101 )       0.0  %
Income (loss)
before income
taxes              2,850         0.9  %      (3,402 )      (1.3 )%      (3,243 )      (0.6 )%     (16,118 )      (3.7 )%
Income tax
(expense)           (966 )      (0.3 )%       1,293         0.5  %         913         0.2  %       5,556         1.3  %
Income (loss)
operations         1,884         0.6  %      (2,109 )      (0.8 )%      (2,330 )      (0.4 )%     (10,562 )      (2.4 )%
Income (loss)
net of tax
(provision) of
($74), $64,
($183) and
respectively          94         0.0  %        (128 )      (0.1 )%         251         0.0  %        (241 )      (0.1 )%
Net income
(loss)         $   1,978         0.6  %   $  (2,237 )      (0.9 )%   $  (2,079 )      (0.4 )%   $ (10,803 )      (2.5 )%

Three months ended June 30, 2013 compared to three months ended June 30, 2012 Net sales
For the three months ended June 30, 2013, net sales increased $68.2 million, or 27.7%, to $314.7 million from $246.5 million during the three months ended June 30, 2012, driven primarily by increases in housing starts in the markets we serve, as well as inflation in commodity products. According to the U.S. Census Bureau, single-family housing starts, which were the primary driver for approximately 76% of our sales for the three months ended June 30, 2013, increased 15.2% for the quarter, compared with 2012. We estimate our sales volume increased approximately 15.3%, including approximately $8.8 million in net sales from the acquisition of TBSG and Chesapeake, while commodity price inflation resulted in an additional 12.4% increase in sales during the three months ended June 30, 2013 compared to the three months ended June 30, 2012.

The following table shows sales classified by major product category:

                              Three months ended             Three months ended
                                June 30, 2013                  June 30, 2012
(dollars in thousands)       Sales        % of Sales        Sales        % of Sales     % Change
Structural components    $     40,467          12.9 %   $     27,263          11.1 %        48.4 %
Millwork & other
interior products              55,583          17.7 %         45,702          18.5 %        21.6 %
Lumber & lumber sheet
goods                         121,909          38.7 %         88,329          35.8 %        38.0 %
Windows & other exterior
products                       61,759          19.6 %         52,398          21.3 %        17.9 %
Other building
products & services            34,935          11.1 %         32,800          13.3 %         6.5 %
Total sales              $    314,653         100.0 %   $    246,492         100.0 %        27.7 %

Increased sales volume was achieved across all product categories. Average selling prices for lumber & lumber sheet goods were approximately 34.2% higher during the three months ended June 30, 2013, compared to the three months ended June 30, 2012. This commodity price inflation has resulted in sales growth for lumber & lumber sheet goods exceeding that of our other product categories excluding structural components, which was impacted by acquisitions. Windows & other exterior products, and other building products & services include subcategories, such as roofing, siding and hardware, which are driven more by the repair and remodeling market and therefore experienced slower growth in sales volumes than other product categories. Cost of goods sold
For the three months ended June 30, 2013, cost of goods sold increased $51.7 million, or 27.0%, to $243.1 million from $191.4 million during the three months ended June 30, 2012. We estimate our cost of sales increased approximately 14.8% as a result of increased sales volumes, while commodity cost inflation resulted in an additional 12.2% increase in cost of goods sold. Gross profit
For the three months ended June 30, 2013, gross profit increased $16.5 million, or 29.9%, to $71.5 million from $55.0 million for the three months ended June 30, 2012, driven primarily by increased sales volumes. Our gross profit as a percentage of net sales ("gross margin") increased to 22.7% for the three months ended June 30, 2013 from 22.3% for the three months ended June 30, 2012, primarily as a result of improved gross margins on the sale of lumber and lumber sheet goods and increased consideration from suppliers as a result of higher purchase volumes.
Operating expenses
For the three months ended June 30, 2013, selling, general and administrative expenses increased $10.6 million, or 19.4%, to $65.4 million from $54.8 million for the three months ended June 30, 2012. This was driven primarily by variable costs to serve higher sales volumes, such as sales commissions, shipping and handling costs and other variable compensation, which increased by $4.6 million in the aggregate for the three months ended June 30, 2013 as compared to the three months ended June 30, 2012. For the three months ended June 30, 2013, the acquisition of TBSG and Chesapeake added $1.8 million of selling, general and administrative expenses and the Company incurred approximately $0.8 million of acquisition and other non-capitalizable costs associated with our IPO. For the three months ended June 30, 2013, depreciation expense decreased $0.4 million, or 20.2%, to $1.6 million from $2.0 million during the three months ended June 30, 2012, driven primarily by the full depreciation of certain fixed assets.
For the three months ended June 30, 2013, amortization expense increased to $0.6 million from $0.4 million for the three months ended June 30, 2012, due primarily to amortization of intangible assets acquired in the TBSG and Chesapeake acquisitions.
Other income (expenses)
Interest expense. For the three months ended June 30, 2013, interest expense was $1.2 million compared to $1.1 million for the three months ended June 30, 2012. This increase relates primarily to increased average daily borrowings,

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