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STCK > SEC Filings for STCK > Form 10-Q on 31-Oct-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, our conversion to a corporation 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." Business and executive 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 component design, product specification and installation management services. We serve a broad customer base, including large-scale production homebuilders, custom homebuilders and repair and remodel 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 2012 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, which states accounted for approximately 48% of 2012 U.S. single-family housing permits according to the U.S. Census Bureau. In these 13 states, we operate in 20 metropolitan areas that we believe have an attractive potential for economic growth based on population trends, increasing business activity and above-average employment growth.
Demand for our products correlates with the level of residential construction activity in the U.S., particularly new single-family construction, which has historically been cyclical. As of August 2013, the seasonally adjusted annual rate for single-family housing starts in the U.S. was 0.63 million units, compared with actual housing starts of 0.54 million in 2012 and 0.43 million in 2011, as reported by the U.S. Census Bureau. These amounts, while improving, are below historical trends of approximately 1.1 million units per year over the 25 years prior to 2013.

Unemployment rates in the U.S. improved to 7.2% as of September 30, 2013, from 7.8% as of September 30, 2012. We believe continued employment growth and improved consumer confidence will be necessary to increase household formation rates. Improved household formation rates generally help stimulate new construction. In the near-term, we expect to continue to experience demand below 25-year average historical levels for the products and services we sell. However, the housing industry has shown signs of improvement in the U.S. and we believe that the recent improvement in demand for our products will continue.

Primarily as a result of the improving conditions in the residential construction market, our net sales for the three months ended September 30, 2013 increased 28.4%. We estimate sales increased 23.4% due to volume, including acquisitions, and 5.0% due to commodity price inflation. Our gross profit as a percentage of net sales of 22.9% for the three months ended September 30, 2013 was unchanged compared to the three months ended September 30, 2012. Our selling, general and administrative expenses as a percentage of our net sales declined to 20.4% for the three months ended September 30, 2013 as compared to 21.9% for the three months ended September 30, 2012 as we successfully leveraged the increase in our net sales across the fixed elements of our operating cost base.

We recorded a loss from operations of $2.9 million during the three months ended September 30, 2013, compared with income from operations of $0.2 million during the three months ended September 30, 2012. The loss from operations for the three months ended September 30, 2013 included $9.3 million in IPO transaction-related expenses as compared to $0 for the three months ended September 30, 2012. Our third quarter results are discussed further in "-Operating Results" below.

On August 14, 2013, we issued 4,411,765 shares of common stock in our IPO. In connection with our IPO, we received proceeds of $55.8 million, net of underwriting discounts and offering expenses. At September 30, 2013, we had $10.5 million of cash and cash equivalents and $81.5 million of unused borrowing capacity under our Revolver. We generated $7.8 million of cash during the nine months ended September 30, 2013, as cash provided by net proceeds from our IPO was partially offset by cash used for operations of $34.5 million, and net repayments on our Revolver of $12.1 million. These changes are discussed further in "-Liquidity and Capital Resources" below.

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 3 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 $0.2 million and increased additional paid-in capital by $0.5 million. 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, among others, conditions in the housing market and economic conditions generally, changes in the cost of the products we sell (particularly commodity products), pricing policies of our competitors, production schedules of our customers and seasonality. Some of 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 remodel 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. There remains uncertainty regarding the timing and extent of any recovery in construction and repair and remodel activity and resulting product demand levels. Many industry forecasters expect to see continued improvement in housing demand over the next few years. For example, as of September 2013, McGraw-Hill Construction forecasts that U.S. single-family housing starts will increase to 1.1 million by 2015. 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 we believe are typically indicative of housing market strength, include declining unemployment rates, rising home values, rebounding household formations 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.

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 reflects 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 September 30,         Nine months ended September 30,
                                                                 2013 average                             2013 average
                                         2013 versus 2012           price         2013 versus 2012           price
Increase in framing lumber prices                7.1  %                 $354              21.6 %                 $382
Increase (decrease) in structural panel
prices                                          (8.8 )%                 $381              20.4 %                 $445

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 nine months ended September 30, 2013, compared with the same period in 2012, was one component of our improved net sales and gross profit for the nine months ended September 30, 2013, which increased $201.5 million and $43.7 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 approximately 38% on a year-over-year basis during the nine months ended September 30, 2013, compared to a 19.3% increase in actual U.S. single-family housing starts during the eight months ended August 31, 2013 compared to same period in the prior year. 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 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 $3.94 and $3.95 for the nine months ended September 30, 2013 and 2012, respectively. For the nine months ended September 30, 2013, we incurred costs of approximately $7.3 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.
Seasonality and other factors
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.

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 nine months ended September 30, 2013 increased by approximately $8.2 million and $21.5 million, respectively, compared to the three and nine months ended September 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 September 30,                         Nine months ended September 30,
(dollars in
thousands)                    2013                        2012                        2013                        2012
Net sales           $ 328,468        100.0  %   $ 255,833        100.0  %   $ 891,847        100.0  %   $ 690,264        100.0  %
Cost of goods sold    253,087         77.1  %     197,317         77.1  %     691,166         77.5  %     533,263         77.3  %
Gross profit           75,381         22.9  %      58,516         22.9  %     200,681         22.5  %     157,001         22.7  %
Operating expenses:
Selling, general
and administrative
expenses               66,931         20.4  %      55,962         21.9  %     188,458         21.1  %     163,567         23.7  %
expense                 1,456          0.4  %       1,803          0.7  %       4,716          0.5  %       5,902          0.9  %
expense                   563          0.2  %         364          0.1  %       1,672          0.2  %       1,093          0.2  %
costs                   9,322          2.8  %           -          0.0  %      10,008          1.1  %           -          0.0  %
expense                    31          0.0  %         145          0.1  %         130          0.0  %         166          0.0  %
Income (loss) from
operations             (2,922 )       (0.9 )%         242          0.1  %      (4,303 )       (0.5 )%     (13,727 )       (2.0 )%
Other income, net
Interest expense         (892 )       (0.3 )%      (1,022 )       (0.4 )%      (3,150 )       (0.4 )%      (3,070 )       (0.4 )%
Other income, net         200          0.1  %         137          0.1  %         596          0.1  %          36          0.0  %
Loss from
operations before
income taxes           (3,614 )       (1.1 )%        (643 )       (0.3 )%      (6,857 )       (0.8 )%     (16,761 )       (2.4 )%
Income tax benefit
(expense)              (1,989 )       (0.6 )%         394          0.2  %      (1,076 )       (0.1 )%       5,950          0.9  %
Loss from
operations             (5,603 )       (1.7 )%        (249 )       (0.1 )%      (7,933 )       (0.9 )%     (10,811 )       (1.6 )%
Income from
operations, net of
tax provision of
($54), ($168),
($237) and ($25),
respectively               90          0.0  %         289          0.1  %         341          0.0  %          48          0.0  %
Net income (loss)   $  (5,513 )       (1.7 )%   $      40          0.0  %   $  (7,592 )       (0.9 )%   $ (10,763 )       (1.6 )%

Three months ended September 30, 2013 compared to three months ended September 30, 2012
Net sales
For the three months ended September 30, 2013, net sales increased $72.7 million, or 28.4%, to $328.5 million from $255.8 million during the three months ended September 30, 2012. We estimate our sales volume increased approximately 23.4% while commodity price inflation resulted in an additional 5.0% increase in net sales. The increase in sales volume was driven primarily by increased single-family housing starts (as described below), $8.2 million in net sales from the acquisitions of TBSG and Chesapeake and increases in demand from higher repair and remodel activity. According to the U.S. Census Bureau, single-family housing starts, which were the primary driver for approximately 75% of our sales for the three months ended September 30, 2013, increased 15.1% for the two months ended August 31, 2013 as compared to the same period in the prior year.

The following table shows sales classified by major product category:

                              Three months ended             Three months ended
                              September 30, 2013             September 30, 2012
(dollars in thousands)       Sales        % of Sales        Sales        % of Sales     % Change
Structural components    $     46,335          14.1 %   $     28,978          11.3 %        59.9 %
Millwork & other
interior products              58,215          17.7 %         47,956          18.7 %        21.4 %
Lumber & lumber sheet
goods                         114,147          34.8 %         91,394          35.7 %        24.9 %
Windows & other exterior
products                       71,463          21.8 %         54,803          21.4 %        30.4 %
Other building
products & services            38,308          11.6 %         32,702          12.9 %        17.1 %
Total sales              $    328,468         100.0 %   $    255,833         100.0 %        28.4 %

Increased sales volume was achieved across all product categories. Average selling prices for lumber & lumber sheet goods were approximately 14.0% higher during the three months ended September 30, 2013, compared to the three months ended September 30, 2012. Structural components growth exceeded that of our other product categories primarily as a result of acquisitions. Cost of goods sold
For the three months ended September 30, 2013, cost of goods sold increased $55.8 million, or 28.3%, to $253.1 million from $197.3 million during the three months ended September 30, 2012. We estimate our cost of sales increased approximately 23.3% as a result of increased sales volumes, while commodity cost inflation resulted in an additional 5.0% increase in cost of goods sold. Gross profit
For the three months ended September 30, 2013, gross profit increased $16.9 million, or 28.8%, to $75.4 million from $58.5 million for the three months ended September 30, 2012, driven primarily by increased sales volumes. Our gross profit as a percentage of net sales ("gross margin") was 22.9% for the three months ended September 30, 2013 and the three months ended September 30, 2012. Operating expenses
For the three months ended September 30, 2013, selling, general and administrative expenses increased $10.9 million, or 19.6%, to $66.9 million from $56.0 million for the three months ended September 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 $5.8 million in the aggregate for the three months ended September 30, 2013 as compared to the three months ended September 30, 2012. For the three months ended September 30, 2013, the acquisitions of TBSG and Chesapeake added . . .

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