Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion of our financial condition and results of operations should be read in conjunction with the selected financial data and the consolidated financial statements and related notes contained in Item 6. Selected Financial Data and Item 8. Financial Statements and Supplementary Data of this annual report on Form 10-K, respectively. See “Risk Factors” contained in Item 1A. Risk Factors of this annual report on Form 10-K and “Cautionary Statement” contained in Item 1. Business of this annual report on Form 10-K for a discussion of the uncertainties, risks and assumptions associated with these statements.

OVERVIEW

We are a leading supplier of building materials, manufactured components and construction services to professional contractors, sub-contractors, and consumers. Following our acquisition of ProBuild in July 2015, the Company operates 400 locations in 40 states across the United States. We offer an integrated solution to our customers providing manufacturing, supply and installation of a full range of structural and related building products. Our manufactured products include our factory-built roof and floor trusses, wall panels and stairs, vinyl windows, custom millwork and trim, as well as engineered wood that we design, cut, and assemble for each home. We also assemble interior and exterior doors into pre-hung units. Additionally, we supply our customers with a broad offering of professional grade building products not manufactured by us, such as dimensional lumber and lumber sheet goods and various window, door and millwork lines. Our full range of construction-related services includes professional installation, turn-key framing and shell construction, and spans all our product categories.

We group our building products into six product categories:

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

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

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

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

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

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

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

	•	Homebuilding Industry. Our business is driven primarily by the residential new construction market, which is in turn dependent upon a number of factors, including demographic trends, interest rates, consumer confidence, employment rates, foreclosure rates, the availability of skilled construction labor, and the health of the economy and mortgage markets. During the housing downturn, which began in 2006, many homebuilders significantly decreased their starts because of lower demand and an excess of home inventory. The housing market started to strengthen in 2011. According to the U.S. Census Bureau, annual U.S. single-family housing starts were 781,500 in 2016. However, single-family housing starts remain well below the historical average (from 1959 through 2016) of 1.0 million per year. The housing industry is currently experiencing a shortage of skilled construction labor, which we believe is constraining housing activity. Due to the lower levels in housing starts and increased competition for homebuilder business, we have and will continue to experience pressure on our gross margins. In addition to these factors, there has been a trend of consolidation within the building products supply industry. However, our industry remains highly fragmented and competitive and we will continue to face significant competition from local and regional suppliers. We still believe there are several meaningful trends that indicate U.S. housing demand will recover to the historical average in the long term and that the downturn in the housing industry was a trough in the cyclical nature of the residential construction industry. These trends include relatively low interest rates, the aging of housing stock, and normal population growth due to immigration and birthrate exceeding death rate. Industry forecasters, including the National Association of Homebuilders (“NAHB”), expect to see continued improvement in housing demand over the next few years.

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

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

	•	Use of Prefabricated Components. Homebuilders are increasingly using prefabricated components in order to realize increased efficiency and improved quality. Shortening cycle time from start to completion is a key imperative of the homebuilders during periods of strong consumer demand. While the conversion of customers to this product offering slowed during the downturn we see the demand for prefabricated components increasing as the residential new construction market continues to strengthen and the availability of skilled construction labor remains limited.

	•	Economic Conditions. Economic changes both nationally and locally in our markets impact our financial performance. The building products supply industry is highly dependent upon new home construction and subject to cyclical market changes. Our operations are subject to fluctuations arising from changes in supply and demand, national and local economic conditions, labor costs and availability, competition, government regulation, trade policies and other factors that affect the homebuilding industry such as demographic trends, interest rates, single-family housing starts, employment levels, consumer confidence, and the availability of credit to homebuilders, contractors, and homeowners. During the downturn mortgage financing and commercial credit for smaller homebuilders was severely constrained and continues to slow a recovery in our industry despite some recent improvement. As the housing industry is dependent upon the economy as well as potential homebuyers’ access to mortgage financing and homebuilders’ access to commercial credit, it is likely that the housing industry will not fully recover to the historical average until conditions in the economy and the credit markets further improve.

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

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

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

	▪	Successful integration of the ProBuild business: The acquisition of ProBuild has substantially increased the scale of our company. Successfully integrating ProBuild will be critical to achieving our future objectives. Combining our two companies may be more difficult, costly, or time consuming than expected, which could result in the acquisition not achieving its intended results, including the expected operational synergies and cost savings. In addition, as a result of the ProBuild acquisition we have substantially increased indebtedness. Reduction of our outstanding debt will be a key imperative as we work to achieve the intended results of the acquisition.

RECENT DEVELOPMENTS

During the year ended December 31, 2016, the Company executed several debt transactions which are described in more detail below. These transactions include two debt exchanges, complete extinguishment of our 7.625% senior secured notes due 2021 (“2021 notes”), as well as repricing and partially repaying our $600.0 million term loan facility due 2022 (“2015 term loan”) and the repurchase of $50.0 million in aggregate principal amount of our 2023 notes. These transactions have extended our debt maturity profile and reduced our annual cash interest on a go forward basis.

On February 12, 2016, we completed separate privately negotiated note exchange transactions in which $218.6 million in outstanding aggregate principal amount of our 10.75% senior unsecured notes due 2023 (“2023 notes”) was exchanged for $207.6 million in aggregate principal amount of our 2021 notes. On February 29, 2016, we completed additional separate privately negotiated note exchange transactions in which $63.8 million in outstanding aggregate principal amount of our 2023 notes was exchanged for $60.0 million in aggregate principal amount of our 2021 notes. The additional 2021 notes were issued under the existing indenture dated as of May 29, 2013. These transactions resulted in a $7.8 million net gain on debt extinguishment, reducing interest expense in the first quarter of 2016.

In May 2016, the Company exercised its contractual right to redeem $35.0 million in aggregate principal amount of 2021 notes at a price of 103.0%. This transaction resulted in a $1.7 million loss on debt extinguishment, which increased interest expense in the second quarter of 2016.

In August 2016, the Company issued $750.0 million in aggregate principal amount of 5.625% senior secured notes due 2024 (“2024 notes”) in a private offering. At the same time the Company also repriced its $600.0 million term loan facility (“2015 term loan”). This repricing lowered the margin to 3.75% in the case of Eurodollar loans and 2.75% in the case of base rate loans. This reduction represents a 1.25% decrease in the applicable margin for both Eurodollar and base rate loans. The proceeds from the issuance of the 2024 notes were used, together with cash on hand and borrowings on our $800.0 million senior secured revolving credit facility (“2015 facility”), to fully redeem the $582.6 million in aggregate outstanding principal amount of 2021 notes, to pay down $125.9 million of the 2015 term loan and to pay related transaction fees and expenses. We recognized a $43.9 million loss on extinguishment of the 2021 notes and $8.2 million in write off of debt discount and debt issuance costs related to the 2015 term loan repricing as components of interest expense in the third quarter of 2016.

In October 2016, we repurchased $50.0 million in aggregate principal amount of our 2023 notes pursuant to the terms of a cash tender offer at a price of 117.0% of par value plus accrued and unpaid interest. The purchase of the 2023 notes was funded with cash on hand and borrowings under our 2015 facility. This transaction resulted in a $9.7 million loss on debt extinguishment which was recognized in interest expense in the fourth quarter of 2016. Following this transaction, we have $367.6 million in 2023 notes outstanding.

On February 23, 2017, we repriced our existing 2015 term loan through an amendment and extension of the term loan credit agreement providing for a $467.7 million senior secured term loan facility due 2024 (“2024 term loan”). This repricing reduces the interest rate by 0.75% and extends the maturity by 19 months to February 29, 2024.

The transactions described above will allow the Company to reduce its annual cash interest expense by approximately $37 million going forward.

CURRENT OPERATING CONDITIONS AND OUTLOOK

Though the level of housing starts remains below the historical average, the homebuilding industry has shown improvement since 2011. According to the U.S. Census Bureau, actual U.S. single-family housing starts for 2016 were 781,500, an increase of 9.4% compared to 2015. U.S single-family units under construction increased 12.4% during this same time period. While the housing industry has strengthened over the past few years, the limited availability of credit to smaller homebuilders and potential homebuyers, as well as the high demand for a limited supply of skilled construction labor and the slow economic recovery, among other factors, have hampered a stronger recovery. A composite of third party sources, including the NAHB, are forecasting 847,000 U.S. single-family housing starts for 2017, which is an increase of 8.4% from 2016. In addition the Home Improvement Research Institute (“HIRI”) is forecasting sales in the professional repair and remodel end market to increase approximately 4.2% in 2017 compared to 2016.

Our net sales for the year ended December 31, 2016 were up 78.6% over the same period last year largely due to the acquisition of ProBuild. Our gross margin percentage decreased by 0.2% during the year ended December 31, 2016 compared to the year ended December 31, 2015. Our gross margin percentage decreased primarily due to the impact of commodity price inflation relative to our short-term customer pricing commitments during the year ended December 31, 2016. However, this decrease was mostly offset by an increase in our gross margin percentage largely attributable to the ProBuild acquisition, the result of ProBuild’s higher mix of higher margin repair & remodel and retail sales. We continue to invest in our business to improve our operating efficiency, which has allowed us to better leverage our operating costs against changes in net sales. Our selling, general and administrative expenses, as a percentage of net sales, were 21.4% for the year ended December 31, 2016, a 1.3% decrease from 22.7% in 2015. The decrease in selling, general and administrative expenses, as a percentage of net sales, was largely due to the benefit of synergy cost savings. Synergy cost savings were primarily attributable to reduced payroll and benefits expense, as well as decreased delivery costs and location consolidations.

We still believe the long-term outlook for the housing industry is positive due to growth in the underlying demographics. We feel we are well-positioned to take advantage of the construction activity in our markets and to increase our market share, which may include strategic acquisitions. We will continue to focus on working capital by closely monitoring the credit exposure of our customers and by working with our vendors to improve our payment terms and pricing on our products. We will also continue to work diligently to achieve the appropriate balance of short-term expense control while maintaining the expertise and capacity to grow the business as market conditions improve. In addition, debt reduction will continue to be a key area of focus for the Company. We want to create long-term shareholder value and avoid taking steps that will limit our ability to compete.

RESULTS OF OPERATIONS

The following table sets forth the percentage relationship to sales of certain costs, expenses and income items for the years ended December 31:

		2016				2015				2014
Sales			100.0	%			100.0	%			100.0	%
Cost of sales			74.9	%			74.7	%			77.7	%
Gross margin			25.1	%			25.3	%			22.3	%
Selling, general and administrative expenses			21.4	%			22.7	%			19.2	%
Income from operations			3.7	%			2.6	%			3.1	%
Interest expense, net			3.3	%			3.1	%			1.9	%
Income tax expense (benefit)			(1.9	)%			0.1	%			0.1	%
Net income (loss)			2.3	%			(0.6	)%			1.1	%

2016 Compared with 2015

Sales. Sales for the year ended December 31, 2016 were $6,367.3 million, a 78.6% increase from sales of $3,564.4 million for 2015. Net sales increased $2,659.1 million, or approximately 75%, due to the ProBuild acquisition. Excluding the impact of the ProBuild acquisition, we estimate net sales increased $143.8 million, or approximately 4% due to increased volume. According to the U.S. Census Bureau, actual U.S. single-family housing starts increased 9.4% and single-family units under construction increased 12.4% in 2016 compared to 2015.

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

		2016								2015
		Sales				% of Sales				Sales				% of Sales				% Change
Lumber & lumber sheet goods		$	2,131.4				33.5	%		$	1,129.7				31.7	%			88.7	%
Windows, doors & millwork			1,286.2				20.2	%			818.1				23.0	%			57.2	%
Manufactured products			1,097.7				17.2	%			635.3				17.8	%			72.8	%
Gypsum, roofing & insulation			520.0				8.2	%			264.9				7.4	%			96.3	%
Siding, metal & concrete products			622.3				9.8	%			319.6				9.0	%			94.7	%
Other building products & services			709.7				11.1	%			396.8				11.1	%			78.9	%
Total sales		$	6,367.3				100.0	%		$	3,564.4				100.0	%			78.6	%

Due to the ProBuild acquisition, we achieved increased net sales across all product categories. Our sales classification by product categories has shifted as we diversified our product offerings to support a broader customer base across 40 states through the ProBuild acquisition.

Gross Margin. Gross margin increased $695.3 million to $1,596.7 million. Of this increase, $656.8 million is due to the ProBuild acquisition. Our gross margin percentage decreased to 25.1% in 2016 from 25.3% in 2015, a 0.2% decrease. Our gross margin percentage decreased primarily due to the impact of commodity price inflation relative to our short-term customer pricing commitments during the year ended December 31, 2016. However, this decrease was mostly offset by an increase in our gross margin percentage largely attributable to the ProBuild acquisition, the result of ProBuild’s higher mix of higher margin repair & remodel and retail sales.

Selling, General and Administrative Expenses. Selling, general and administrative expenses increased $549.7 million, or 67.8%, largely due to the ProBuild acquisition. Our salaries and benefits expense was $894.3 million, an increase of $383.7 million from 2015, largely due to increased full-time equivalent employees following the ProBuild acquisition. Delivery expense increased $65.9 million, office general and administrative expense increased $46.5 million, occupancy expense increased $45.9 million and intangible asset amortization increased $10.7 million. These increases were primarily a result of the ProBuild acquisition, the related integration activities and increased sales volume. These increases were partially offset by a $4.2 million decrease in facility closure costs.

As a percentage of net sales, selling, general and administrative expenses decreased from 22.7% in 2015 to 21.4% in 2016 largely due to the benefit of synergy cost savings. Synergy cost savings were primarily attributable to reduced payroll and benefits expense, as well as decreased delivery costs and location consolidations. As a percentage of net sales, salaries and benefits expense decreased 0.3%, office general and administrative expense decreased 0.6% and delivery expense decreased 0.4%. These decreases were partially offset by occupancy expense, as a percentage of net sales, increasing 0.1%.

Interest Expense, net. Interest expense was $214.7 million in 2016, an increase of $105.5 million from 2015. Of the $105.5 million increase, $49.6 million was attributable to increased interest expense associated with our increased debt balances following the ProBuild acquisition financing and subsequent refinancing transactions, $28.1 million was attributable to losses on debt extinguishment largely due to the payment of redemption premiums on our 2021 and 2023 notes, $17.6 million was related to increased amortization and write-off of debt discount and debt issuance costs largely due to our debt transactions during the year ended December 31, 2016, and $14.2 million was due to interest expense primarily related to lease obligations assumed in the ProBuild acquisition. These increases were partially offset by a $4.6 million decrease in interest expense due to non-cash fair value adjustments related to the exercise of all remaining stock warrants in 2015.

Income Tax Expense. We recorded an income tax benefit of $122.7 million during the year ended December 31, 2016 compared to income tax expense of $4.4 million during the year ended December 31, 2015. In the third quarter of 2016, we released the valuation allowance against our net federal and some state deferred tax assets. We recorded a reduction of the after-tax, non-cash valuation allowance on our net deferred tax assets of $131.7 million during the year ended December 31, 2016 compared to an increase of $9.7 million during the year ended December 31, 2015. Absent the valuation allowance our effective tax rate would have been 41.8% and 28.5% for the years ended December 31, 2016 and 2015, respectively.

2015 Compared with 2014

Sales. Sales for the year ended December 31, 2015 were $3,564.4 million, a 122.2% increase from sales of $1,604.1 million for 2014. Net sales increased $1,910.9 million, or 119.1%, due to recent acquisitions, primarily ProBuild. Excluding the impact of acquisitions, net sales increased $49.4 million, or 8.5% due to increased volume, which was partially offset by a 5.4% decrease due to the impact of commodity price deflation on net sales. According to the U.S. Census Bureau, actual U.S. single-family housing starts increased 10.3% and single-family units under construction increased 11.1% in 2015 compared to 2014.

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

		2015								2014
		Sales				% of Sales				Sales				% of Sales				% Change
Lumber & lumber sheet goods		$	1,129.7				31.7	%		$	535.3				33.4	%			111.0	%
Windows, doors & millwork			818.1				23.0	%			446.4				27.8	%			83.3	%
Manufactured products			635.3				17.8	%			312.0				19.5	%			103.6	%
Gypsum, roofing & insulation			264.9				7.4	%			61.1				3.8	%			333.4	%
Siding, metal & concrete products			319.6				9.0	%			81.9				5.1	%			290.3	%
Other building products & services			396.8				11.1	%			167.4				10.4	%			137.0	%
Total sales		$	3,564.4				100.0	%		$	1,604.1				100.0	%			122.2	%

Due to the ProBuild acquisition, we achieved increased net sales across all product categories. Our sales classification by product categories has shifted as we diversified our product offerings to support a broader customer base across 40 states through the ProBuild acquisition. Excluding ProBuild, net sales increased across all product categories, except lumber & lumber sheet goods, which decreased $12.4 million. This decline in net sales of lumber and lumber sheet goods, excluding ProBuild, was largely due to an 11.1% decrease in market prices for such commodities in 2015 compared to 2014, which was mostly offset by an increase in sales volume.

Gross Margin. Gross margin increased $544.5 million to $901.5 million. Of this increase, $493.3 million is due to the ProBuild acquisition. Excluding ProBuild, gross margin increased $51.2 million. Our gross margin percentage increased to 25.3% in 2015 from 22.3% in 2014, a 3.0% increase. Excluding ProBuild, our gross margin percentage increased 1.7%, primarily due to improved customer pricing relative to our costs and a higher mix of value-added sales from our manufactured products categories in 2015 compared to 2014.

Selling, General and Administrative Expenses. Selling, general and administrative expenses increased $503.9 million, or 164.1%. Excluding ProBuild, our selling, general, and administrative expense increased $68.0 million or 22.2%. Excluding ProBuild, our salaries and benefits expense was $218.4 million, an increase of $27.3 million from 2014, largely due to a 6.2% increase in full-time equivalent employees related to increased sales volume and other recent acquisitions. Office general and administrative expense increased $31.2 million, primarily due to a $30.2 million increase in professional service fees largely attributable to acquisition and integration costs related to the ProBuild acquisition. Facility closure costs increased $3.6 million primarily due to costs associated with location consolidations following the ProBuild acquisition. Intangible asset amortization increased $1.6 million due to other recent acquisitions. Delivery expense increased $1.7 million largely due to increased sales volume.

As a percentage of net sales, selling, general and administrative expenses increased from 19.2% in 2014 to 22.7% in 2015. Excluding ProBuild, selling, general and administrative expenses were 22.0% of net sales. As a percentage of net sales, salaries and benefits expense increased 0.9%, office general and administrative expense increased 1.7%, facility closure costs increased 0.2%, intangible asset amortization increased 0.1% and delivery expenses decreased 0.1%. The increase in selling, general and administrative expenses, as a percentage of net sales, was primarily due to the factors discussed above, and to a lesser degree, the negative impact of commodity price deflation on our net sales.

Interest Expense, net. Interest expense was $109.2 million in 2015, an increase of $78.9 million from 2014. Excluding interest expense attributable to ProBuild, which is primarily related to interest expense associated with lease finance obligations, our interest expense was $101.0 million, an increase of $70.7 million. The increase was primarily related to the financing transactions associated with the acquisition of ProBuild. Of the $70.7 million increase, $49.5 million was attributable primarily to increased interest expense related to our 2023 notes, 2015 term loan and 2015 facility, $13.2 million was due to commitment fees related to unutilized bridge and backstop facilities, $8.3 million was related to non-cash interest expense from the amortization of debt discount and deferred loan costs, and fair value adjustments related to our previously outstanding stock warrants in 2014.

Income Tax Expense. We recorded income tax expense of $4.4 million and $1.1 million during 2015 and 2014, respectively. We recorded an increase in the after-tax, non-cash valuation allowance on our net deferred tax assets of $9.7 million in 2015 and a $7.2 million reduction in the after-tax, non-cash valuation allowance on our net deferred tax assets in 2014. Absent the valuation allowance, our effective tax rate would have been 28.5% and 42.1% for 2015 and 2014, respectively. Absent the valuation allowance the change in our effective rate is largely attributable to permanent differences related to fair value adjustments on our previously outstanding stock warrants and 162(m) limitations.

Results by Reportable Segment

The following tables show net sales and income before income taxes by reportable segment (dollars in thousands):

		Year ended December 31,
		Net sales																				Income before income taxes
						% of net								% of net												% of net								% of net
		2016				sales				2015				sales				% change				2016				sales				2015				sales				% change
Northeast		$	1,204,099				19.4	%		$	626,985				18.4	%			92.0	%		$	35,356				2.9	%		$	28,862				4.6	%			22.5	%
Southeast			1,367,933				22.0	%			917,022				27.0	%			49.2	%			37,158				2.7	%			14,607				1.6	%			154.4	%
South			1,704,753				27.4	%			1,073,240				31.5	%			58.8	%			69,846				4.1	%			50,878				4.7	%			37.3	%
West			1,939,206				31.2	%			786,476				23.1	%			146.6	%			72,649				3.7	%			35,170				4.5	%			106.6	%
		$	6,215,991				100.0	%		$	3,403,723				100.0	%						$	215,009				3.5	%		$	129,517				3.8	%

		Year ended December 31,
		Net sales																				Income before income taxes
						% of net								% of net												% of net								% of net
		2015				sales				2014				sales				% change				2015				sales				2014				sales				% change
Northeast		$	626,985				18.4	%		$	229,998				15.8	%			172.6	%		$	28,862				4.6	%		$	3,464				1.5	%			733.2	%
Southeast			917,022				27.0	%			672,059				46.0	%			36.4	%			14,607				1.6	%			5,465				0.8	%			167.3	%
South			1,073,240				31.5	%			558,446				38.2	%			92.2	%			50,878				4.7	%			17,804				3.2	%			185.8	%
West			786,476				23.1	%		—				—				—					35,170				4.5	%		—				—				—
		$	3,403,723				100.0	%		$	1,460,503				100.0	%						$	129,517				3.8	%		$	26,733				1.8	%

As a result of our reorganization following the ProBuild acquisition, we have four reportable segments based on an aggregation of the geographic regions in which we operate. Our reportable segments do not necessarily align with any single region as defined by the U.S Census Bureau.

According to the U.S. Census Bureau, actual single-family housing starts during the year ended December 31, 2016 increased 8.8%, 9.5%, 8.7% and 12.8% in the South region, Northeast region, West region and Midwest region, respectively. For the year ended December 31, 2016, we achieved increased net sales and profitability across all our reportable segments, primarily due to the ProBuild acquisition and sales volume increases.

Excluding the impact of recent acquisitions, net sales for the year ended December 31, 2015 compared to the year ended December 31, 2014 increased 4.5% and 5.9% in our legacy Southeast and South reportable segments, respectively, primarily due to volume increases, which were partially offset by commodity price deflation. According to the U.S Census Bureau, the actual U.S. single-family housing starts increased 10.3% in 2015 as compared to 2014, with single family starts in the South region increasing 12.0% compared to 2014. Excluding ProBuild, net sales for our Northeast reportable segment decreased 2.7% for the year ended December 31, 2015 compared to 2014 due to slower regional sales growth, which was not enough to overcome the impact of commodity price deflation.

LIQUIDITY AND CAPITAL RESOURCES

Our primary capital requirements are to fund working capital needs and operating expenses, meet required interest and principal payments, and to fund capital expenditures and potential future acquisitions. Our capital resources at December 31, 2016 consist of cash on hand and borrowing availability under our 2015 facility.

Our 2015 facility will be primarily used for working capital, general corporate purposes, and funding acquisitions. In addition, we may use the 2015 facility to facilitate debt repayment and consolidation. Availability under the 2015 facility is determined by a borrowing base. Our borrowing base consists of trade accounts receivable, inventory, other receivables, including progress billings and credit card receivables, and qualified cash that all meet specific criteria contained within the credit agreement, minus agent specified reserves. Net excess borrowing availability is equal to the maximum borrowing amount minus outstanding borrowings and letters of credit.

The following table shows our borrowing base and excess availability as of December 31, 2016 and 2015 (in millions):

	As of
	December 31, 2016				December 31, 2015
Accounts Receivable Availability	$	403.5			$	384.5
Inventory Availability		332.0				314.3
Other Receivables Availability		27.9				27.0
Gross Availability		763.4				725.8
Less:
Agent Reserves		(26.9	)			(23.5	)
Plus:
Cash in Qualified Accounts		15.5				55.5
Borrowing Base		752.0				757.8
Aggregate Revolving Commitments		800.0				800.0
Maximum Borrowing Amount (lesser of Borrowing Base and Aggregate Revolving Commitments)		752.0				757.8
Less:
Outstanding Borrowings		—				(60.0	)
Letters of Credit		(84.8	)			(79.1	)
Net Excess Borrowing Availability on Revolving Facility	$	667.2			$	618.7

As of December 31, 2016, we had no outstanding borrowings under our 2015 facility and our net excess borrowing availability was $667.2 million after being reduced by outstanding letters of credit of approximately $84.8 million. Excess availability must equal or exceed a minimum specified amount, currently $80.0 million, or we are required to meet a fixed charge coverage ratio of 1:00 to 1:00. We were not in violation of any covenants or restrictions imposed by any of our debt agreements at December 31, 2016.

Liquidity

Our liquidity at December 31, 2016 was $681.6 million, which consists of net borrowing availability under the 2015 facility and cash on hand. We are expecting continued improvement in the housing industry in 2017. Beyond 2017, it is difficult for us to predict what will happen as our industry is dependent on a number of factors, including national economic conditions, employment levels, the availability of credit for homebuilders and potential home buyers, the level of foreclosures, existing home inventory, and interest rates.

We substantially increased our indebtedness following completion of the ProBuild acquisition in comparison to our indebtedness on a recent historical basis, which increased our interest expense and could have the effect of, among other things, reducing our flexibility to make acquisitions or to respond to changing business and economic conditions. From time to time, based on market conditions and other factors and subject to compliance with applicable laws and regulations, the Company may repurchase or call the 2023 notes or 2024 notes, repay debt, or otherwise enter into transactions regarding its capital structure.

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

Consolidated Cash Flows

Cash provided by operating activities was $158.2 million and $177.0 million in 2016 and 2015, respectively. Our working capital increased $43.9 million in 2016 compared to a decrease of $99.0 million in 2015. The change in working capital is largely due to the ProBuild acquisition, as well as increases in receivables and inventory and increased customer demand. These increases were partially offset by increases in accounts payable and accrued liabilities largely due to increased purchases and increased accounts payable days. Cash interest payments increased $99.5 million in 2016 compared to 2015. The remaining change is due to an increase in cash provided by operations primarily related to increased sales and profitability during the year ended December 31, 2016 as a result of the ProBuild acquisition and higher sales volume. In August 2016, the FASB issued an update to the existing guidance under the Statement of Cash Flows topic of the Codification. As a result of the Company’s election to early adopt this updated guidance in the fourth quarter of 2016, $42.9 million in payments of debt extinguishment costs made in 2016 which were previously reflected as operating cash outflows on our 2016 quarterly reports on Form 10-Q are now presented as financing cash outflows. Adoption of this guidance resulted in $1.1 million from the second quarter of 2016, $33.3 million from the third quarter of 2016 and $8.5 million from the fourth quarter of 2016 in payments of debt extinguishment costs being presented as cash outflows from financing activities for the year ended December 31, 2016. The adoption of this guidance had no impact to our statement of cash flows for the years ended December 31, 2015 or 2014. This updated guidance is described more fully in Note 2 to the consolidated financial statements included in Item 8 of this annual report on Form 10-K.

Cash provided by operating activities was $177.0 million and $27.5 million in 2015 and 2014, respectively. Our working capital decreased $99.0 million in 2015 compared to an increase of $7.8 million in 2014. The decrease in working capital is primarily due to a decrease in accounts receivable and an increase in accrued liabilities. The decrease in accounts receivable is due to increased collections largely attributable to the ProBuild acquisition in the fourth quarter of 2015. The increase in accrued liabilities is largely due to increased interest payable following the ProBuild acquisition financing transactions. The decrease in working capital was partially offset by an increase in cash interest payments of $26.7 million in 2015 compared to 2014. In addition, during 2015 we had $13.2 million in one-time cash interest payments attributable to commitment fees related to unutilized bridge and backstop financing facilities. The remaining increase in cash provided by operations is primarily related to increased sales and profitability during 2015 as a result of higher sales volume and the acquisition of ProBuild.

Cash used in investing activities was $38.3 million and $1,508.0 million in 2016 and 2015, respectively. The change is primarily due to $1,462.7 million in cash used for the ProBuild acquisition in 2015. The remaining change is largely due to an increase in proceeds from the sale of property, plant and equipment and a decrease in capital expenditures in 2016 compared to 2015.

Cash used in investing activities increased $1,413.2 million in 2015 compared to 2014. The change is primarily due to the $1,462.7 million ProBuild acquisition. In addition, we acquired Timber Tech for $5.8 million during 2015. In 2014, $69.3 million of cash was used for acquisitions. Capital expenditures for 2015 were $43.8 million compared to $25.7 million in 2014. The increase in capital expenditures primarily relates to purchasing machinery, equipment and vehicles to support sales growth and to increase capacity at existing locations.

Cash used in financing activities was $170.5 million in 2016 compared to cash provided by financing activities of $1,378.3 million in 2015. Cash used in financing activities in 2016 was primarily attributable to $807.5 million in payments of long-term debt, largely due to the extinguishment of our 2021 notes, the partial pay down of the 2015 term loan and 2023 notes. In addition, we repaid $60.0 million, net, under the 2015 facility, paid $42.9 million of debt extinguishment costs and $15.7 million in debt issuance costs. These payments were partially offset by $750.0 million in proceeds from the 2024 notes issuance.

Cash provided by financing activities was $1,378.3 million and $30.4 million for 2015 and 2014, respectively. During 2015 cash provided by financing activities was primarily due to financing activities related to the ProBuild acquisition, including $700.0 million of proceeds from the issuance of notes, $594.0 million of proceeds from a new term loan agreement, $320.0 million of borrowings under the revolving credit facilities, and $111.3 million of proceeds from the public offering of common stock, net of issuance costs. Slightly offsetting this, we repaid $290.0 million under the revolving credit facilities during 2015. In addition, we paid $58.5 million of deferred loan costs in 2015.

Capital Expenditures

Capital expenditures vary depending on prevailing business factors, including current and anticipated market conditions. Historically, capital expenditures have for the most part remained at relatively low levels in comparison to the operating cash flows generated during the corresponding periods. We expect our 2017 capital expenditures to be approximately $80-$90 million primarily related to rolling stock, equipment and facility improvements to support our operations.

DISCLOSURES OF CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS

The following summarizes our contractual obligations as of December 31, 2016 (in thousands):

		Payments Due by Period
Contractual obligations		Total				Less than 1 year				1-3 years				3-5 years				More than 5 years
Long-term debt		$	1,585,258			$	4,700			$	9,400			$	9,400			$	1,561,758
Interest on long-term debt(1)			721,603				108,043				215,407				209,036				189,117
Lease finance obligations(2)			356,562				19,009				37,949				37,123				262,481
Capital lease obligations(2)			7,951				3,426				4,436				89				—
Operating leases			283,531				67,213				104,155				55,971				56,192
Total contractual cash obligations		$	2,954,905			$	202,391			$	371,347			$	311,619			$	2,069,548

(1)

We had no outstanding borrowings under the 2015 facility as of December 31, 2016. Borrowings under the 2015 facility bear interest at a variable rate. Therefore, actual interest may differ from the amounts presented above due to interest rate changes or any future borrowing activity under the 2015 facility. The 2015 term loan also bears interest at a variable rate, therefore actual interest may differ from the amounts presented above due to interest rate changes.

(2)	Future minimum commitments for lease finance obligations and capital lease obligations.

The amounts reflected in the table above for operating leases represent future minimum lease payments under non-cancelable operating leases with an initial or remaining term in excess of one year at December 31, 2016. Purchase orders entered into in the ordinary course of business are excluded from the above table because they are payable within one year. Amounts for which we are liable under purchase orders are reflected on our consolidated balance sheet as accounts payable and accrued liabilities. We plan to lease additional delivery equipment during 2017 to support anticipated sales growth. These operating leases are not included in the table above.

OTHER CASH OBLIGATIONS NOT REFLECTED IN THE BALANCE SHEET

In accordance with accounting principles generally accepted in the United States, commonly referred to as GAAP, our operating leases are not recorded in our balance sheet. In addition to the lease obligations included in the above table, we have residual value guarantees on certain equipment leases. Under these leases we have the option of (1) purchasing the equipment at the end of the lease term, (2) arranging for the sale of the equipment to a third party, or (3) returning the equipment to the lessor to sell the equipment. If the sales proceeds in either case are less than the residual value, then we are required to reimburse the lessor for the deficiency up to a specified level as stated in each lease agreement. The guarantees under these leases for the residual values of equipment at the end of the respective operating lease periods approximated $3.9 million as of December 31, 2016.

Based upon the expectation that none of these leased assets will have a residual value at the end of the lease term that is materially less than the value specified in the related operating lease agreement or that we will purchase the equipment at the end of the lease term, we do not believe it is probable that we will be required to fund any amounts under the terms of these guarantee arrangements. Accordingly, no accruals have been recognized for these guarantees.

In addition, the Company is party to certain agreements related to its lease finance obligations which commit the Company to perform certain repairs and maintenance obligations under the leases in a specified manner and timeframe that generally will occur throughout the next year.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Critical accounting policies are those that both are important to the accurate portrayal of a company’s financial condition and results, and require subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain.

In order to prepare financial statements that conform to GAAP, we make estimates and assumptions that affect the amounts reported in our financial statements and accompanying notes. Certain estimates are particularly sensitive due to their significance to the financial statements and the possibility that future events may be significantly different from our expectations.

We have identified the following accounting policies that require us to make the most subjective or complex judgments in order to fairly present our consolidated financial position and results of operations.

Vendor Rebates. Many of our arrangements with our vendors provide for us to receive a rebate of a specified amount payable to us when we achieve any of a number of measures, generally related to the volume of purchases from our vendors. We account for these rebates as a reduction of the prices of the vendor’s products, which reduces inventory until we sell the product, at which time these rebates reduce cost of sales. Throughout the year, we estimate the amount of rebates based upon our historical level of purchases. We continually revise these estimates to reflect actual purchase levels.

If market conditions were to change, vendors may change the terms of some or all of these programs. Although these changes would not affect the amounts which we have recorded related to product already purchased, it may impact our gross margins on products we sell or sales earned in future periods.

Allowance for Doubtful Accounts and Related Reserves. We maintain an allowance for doubtful accounts for estimated losses due to the failure of our customers to make required payments. We perform periodic credit evaluations of our customers and typically do not require collateral. However, we have, in some cases, required customers to collateralize their debt with us. Consistent with industry practices, we typically require payment from most customers within 30 days. As our business is seasonal in certain regions, our customers’ businesses are also seasonal. Sales are lowest in the winter months, and our past due accounts receivable balance as a percentage of total receivables generally increases during this time. Throughout the year, we record estimated reserves based upon our historical write-offs of uncollectible accounts, taking into consideration certain factors, such as aging statistics and trends, customer payment history, independent credit reports, and discussions with customers. We regularly perform a specific analysis of all accounts past due and write off account balances when we have exhausted reasonable collection efforts and determined that the likelihood of collection is remote. We charge these write-offs against our allowance for doubtful accounts. Any future decline in the macroeconomic factors that affect the overall housing industry or our specific customers’ business could cause us to revise our estimate of expected losses and increase our allowance for doubtful accounts. In addition, we also establish reserves for credit memos and customer returns.

Impairment of Long-Lived Assets. Long-lived assets, including property and equipment and intangible assets with finite lives, are reviewed for possible impairment whenever events or circumstances indicate that the carrying amount of an asset may not be recoverable. The carrying amount of a long-lived asset group is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset group. Our long-lived assets and liabilities are grouped at the lowest level for which identifiable cash flows are largely independent of the cash flows of other groups of assets and liabilities. Our facility related long-lived assets are grouped at a geographical location level, which is at a level below our operating segments. All of our other long-lived assets are grouped at a geographical region level, which is the equivalent of our operating segments. Our judgment regarding the existence of impairment indicators is based on market and operational performance. Determining whether impairment has occurred typically requires various estimates and assumptions, including determining which cash flows are directly related to the potentially impaired asset group, the useful life over which cash flows will occur, their amount, and the asset group’s residual value, if any. In turn, measurement of an impairment loss requires a determination of fair value, which is based on the best information available.

We use internal cash flow estimates, quoted market prices when available and independent appraisals, as appropriate, to determine fair value. We derive the required cash flow estimates from our historical experience and our internal business plans and apply an appropriate discount rate. These cash flow estimates are over the remaining useful lives of the asset groups. Forecasted housing starts are used to help estimate future revenue. Historical trends are then used to project gross margins and operating expenses based upon various revenue levels. If these projected cash flows are less than the carrying amount, an impairment loss is recognized based on the fair value of the asset group. Due to the uncertainties associated with these projections, actual results could differ from projected results, and further impairment of long-lived assets could be recorded. Future non-cash impairment of long-lived assets would have the effect of decreasing our earnings or increasing our losses in such period, but would not impact our current outstanding debt obligations or compliance with covenants contained in the related debt agreements.

For the year ended December 31, 2016 we recorded asset impairment charges on held-for-use assets of $2.7 million primarily related to intangible assets associated with a location closure and recorded $1.9 million related to fair value adjustments on held-for-sale assets during 2016. For the year ended December 31, 2015, we recorded asset impairment charges on held-for-use assets of $1.4 million related to customer relationship intangible assets associated with a location closure and recorded $0.7 million related to fair value adjustments on held-for-sale assets during 2015. We recorded no significant asset impairment charges in 2014.

Goodwill. Goodwill represents the excess of the amount we paid to acquire businesses over the estimated fair value of tangible assets and identifiable intangible assets acquired, less liabilities assumed. At December 31, 2016, our goodwill balance was $740.4 million, representing 25.4% of our total assets.

We test goodwill for impairment in the fourth quarter of each year or at any other time when impairment indicators exist by comparing the estimated implied value of a reporting units’ goodwill to its book value. Examples of such indicators that could cause us to test goodwill for impairment between annual tests include a significant change in the business climate, unexpected competition or a significant deterioration in market share. We may also consider market capitalization relative to our net assets. Housing starts are a significant sales driver for us. If there is a significant decline or an expected decline in housing starts, this could adversely affect our expectations for a reporting unit and the value of that reporting unit. We did not have any goodwill impairments in 2016, 2015 or 2014.

The process of evaluating goodwill for impairment involves the determination of the fair value of our reporting units. As a result of the reorganization following the ProBuild acquisition, our reporting units are aligned with our nine geographic regions which are also determined to be our operating segments. In evaluating goodwill for impairment, the Company first assesses qualitative factors to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying value. If it is concluded that it is not more likely than not that the fair value of the reporting unit is less than its carrying value, then no further testing of the goodwill is required.

However, if we determine that it is more likely than not that the fair value of the reporting unit is less than its carrying value, then we evaluate goodwill for impairment using a two-step process. The first step is to identify potential impairment by comparing the fair value of a reporting unit to the book value, including goodwill. If the fair value of a reporting unit exceeds the book value, goodwill is not impaired. If the book value exceeds the fair value, the second step of the process is performed to measure the amount of impairment. In step two, the estimated fair value of the reporting unit is allocated to all other assets and liabilities of that reporting unit based on their respective fair values. The excess of the fair value of the reporting unit over the amount allocated to its assets and liabilities is the implied fair value of goodwill. Goodwill impairment is measured as the excess of the carrying value over its implied fair value. The fair value of a reporting unit is estimated based upon the projected discounted cash flow expected to be generated from the reporting unit using a discounted cash flow methodology. Where available and appropriate, comparative market multiples are used to corroborate the results of the discounted cash flow.

In performing our annual impairment tests at December 31, 2016, we developed a range of fair values for our reporting units using a five-year discounted cash flow methodology. Inherent in such fair value determinations are estimates relating to future cash flows, including revenue growth, gross margins, operating expenses and long-term growth rates, and our interpretation of current economic indicators and market conditions and their impact on our strategic plans and operations. Due to the uncertainties associated with such estimates, interpretations and assumptions, actual results could differ from projected results, and further impairment of goodwill could be recorded.

Significant information and assumptions utilized in estimating future cash flows for our reporting units includes projections of market share gains as well as publicly available industry information on projected single-family housing starts and lumber commodity prices which are used to project revenue. Projected gross margins and operating expenses reflect current headcount levels and cost structure and are flexed in future years based upon historical trends at various revenue levels. Long-term growth was based upon terminal value earnings before interest, taxes, depreciation and amortization (EBITDA) multiples of 4.5x for all reporting units to reflect the relevant expected acquisition price. A discount rate of 12.5% was used for all reporting units and is intended to reflect the weighted average cost of capital for a potential market participant and includes all risks of ownership and the associated risks of realizing the stream of projected future cash flows. Decreasing the long-term growth to an EBITDA multiple of 3.5x, or increasing the discount rate by 1.0% to 13.5%, would not have changed the results of our impairment testing.

At December 31, 2016, the fair values of each of our reporting units were substantially in excess of their respective carrying values. The excess (or “cushion”) of the implied fair value of goodwill over the carrying value of goodwill for each of our nine reporting units ranged from $58.0 million to $238.0 million. Factors that could negatively impact the estimated fair value of our reporting units and potentially trigger additional impairment include, but are not limited to, unexpected competition, lower than expected housing starts, an increase in market participant weighted average cost of capital, increases in material or labor cost, and significant declines in our market capitalization. Future impairment of goodwill would have the effect of decreasing our earnings or increasing our losses in such period, but would not impact our current outstanding debt obligations or compliance with covenants contained in the related debt agreements.

Deferred Income Taxes. At December 31, 2016 and 2015, the Company had deferred tax assets, net of deferred tax liabilities, of $120.1 million and $127.1 million, respectively, offset by valuation allowances of $4.8 million and $136.5 million, respectively. We have $411.4 million of state net operating loss carry-forwards, which includes $2.5 million of state tax credit carry-forwards expiring at various dates through 2036. We also have $226.5 million of federal net operating loss carry-forwards that will expire at various dates through 2036. The federal and state net operating loss carry-forwards include approximately $23.3 million of gross windfall tax benefits from stock option exercises that have not been recorded as of December 31, 2016. At December 31, 2016, the Company needed to generate approximately $287.6 million of pre-tax income in future periods to realize its federal deferred tax assets.

We evaluate our deferred tax assets on a quarterly basis to determine whether a valuation allowance is required. In accordance with the Income Taxes topic of the Accounting Standards Codification (“Codification”), we assess whether it is more likely than not that some or all of our deferred tax assets will not be realized. Significant judgment is required in estimating valuation allowances for deferred tax assets and in making this determination, we consider all available positive and negative evidence. In the Company’s evaluation of its ability to realize its deferred tax assets, we gave more significant weight to evidence that was objective in nature as compared to subjective evidence. Also, more significant weight was given to evidence that relates to the Company’s current financial performance. The realization of a deferred tax asset ultimately depends on the existence of sufficient taxable income in the applicable carryback or carryforward periods. We consider the nature, frequency, and severity of current and cumulative losses, as well as historical and forecasted financial results, the overall business environment, our industry's historic cyclicality, the reversal of existing deferred tax liabilities, and tax planning strategies in our assessment. Changes in our estimates of future taxable income and tax planning strategies will affect our estimate of the realization of the tax benefits of these tax carryforwards.

We recorded a full valuation allowance in 2008 due to our cumulative three-year loss position at that time, compounded by the negative industry-wide business trends and outlook. At December 31, 2015, the Company had given significant weight to the negative objective evidence of the historically weak housing market conditions during the housing downturn that contributed to our three-year cumulative pre-tax loss position when reporting a valuation allowance of $136.5 million against our deferred income tax assets, representing a valuation allowance against substantially all of our net deferred income tax assets.

In the second quarter of 2016, we moved from a cumulative loss position over the previous three years to a cumulative income position for the first time since we established the full valuation allowance in 2008. We continued to maintain a cumulative income position over the previous three years into the third quarter of 2016. In the Company’s evaluation at September 30, 2016, we gave the most significant weight to this objective positive evidence related to its recent financial results. Additionally, even conservative projections of the Company’s estimated future annual pre-tax income would indicate realization of all of its federal net operating losses well in advance of the expiration of the Company’s NOL carryforwards and it would also absorb all federal deductible temporary differences as they reverse in future years. The Company considered, at a lower weighting, the subjective positive evidence that it expects to increase its pre-tax income in future years as the homebuilding industry continues to recover and strengthen as currently projected by a composite of third-party sources, including the NAHB. Therefore, at September 30, 2016, with this positive historical evidence and the projection of future profitability, management determined that there was sufficient positive evidence to conclude that it is more likely than not that we would realize our net federal and certain state deferred tax assets, resulting in $117.6 million and $3.2 million benefit being recognized in our provision for income taxes for the third and fourth quarter of 2016, respectively.

Prior to the quarter ended June 30, 2016, the Company had given significant weight to the negative objective evidence of its three-year cumulative pre-tax loss position as a result of losses incurred in prior years during the housing downturn. As of June 30, 2016 and September 30, 2016, the Company had generated positive cumulative pre-tax income for the past three years and therefore, the prior year losses were weighted less than the recent positive financial results in the Company’s evaluation at September 30, 2016. Other negative subjective evidence, such as the cyclical, slower-than-anticipated housing market recovery, was considered at a lower weighting because the Company’s recent financial performance has been achieved in this environment.

As of December 31, 2016, we have certain states where we are not currently projecting future taxable income levels that would be sufficient to utilize the carryover net operating losses and as such continue to maintain a valuation allowance against certain of these state deferred tax assets. We will continue to assess quarterly whether it is more likely than not that some or all of these state deferred tax assets will be realizable in the future. Changes in the positive and negative evidence, including differences in the Company’s future operating results as compared to the estimates utilized in the determination of the valuation allowance, could result in changes in the Company’s estimate of the valuation allowance related to its tax benefits for state net operating loss carryforwards.

In 2016 we recorded a reduction to the valuation allowance of $131.7 million against our net deferred tax assets as we released valuation allowances on our net deferred tax assets as noted above. In 2015, we recorded a valuation allowance of $9.7 million related to our continuing operations. In 2014, we reduced our valuation allowance by $7.2 million due to the utilization of net operating losses against federal and state taxable income.

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

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

Insurance. We are insured for general liability, auto liability and workers’ compensation exposures, subject to deductible amounts. The expected liability for unpaid claims, including incurred but not reported losses, is determined using the assistance of a third-party actuary and is reflected on our balance sheet as an accrued liability. The amount recoverable from our insurance provider is reflected as an other asset. Our accounting policy includes an internal evaluation and adjustment of our reserve for all insured losses on a quarterly basis. On a quarterly basis, we engage an external actuarial professional to independently assess and estimate the total liability outstanding, which is compared to the actual reserve balance at that time and adjusted accordingly.

Stock-Based Compensation. Calculating stock-based compensation expense requires the input of subjective assumptions. We determine the fair value of each restricted stock unit grant subject to market conditions using the Monte Carlo simulation model. Specific inputs to the model include the expected volatilities of our common stock and the expected volatilities of the common stocks of the constituents of the Company’s peer group, dividend yield and risk-free rate.

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

RECENTLY ISSUED ACCOUNTING STANDARDS

Information regarding recent accounting pronouncements is discussed in Note 2 to the consolidated financial statements included in Item 8 of this annual report on Form 10-K.