Item 8. Financial Statements and Supplementary Data

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Report of Independent Registered Public Accounting Firm		35
Consolidated Statement of Operations and Comprehensive Income (Loss) for the years ended December 31, 2017, 2016 and 2015		37
Consolidated Balance Sheet at December 31, 2017 and 2016		38
Consolidated Statement of Cash Flows for the years ended December 31, 2017, 2016 and 2015		39
Consolidated Statement of Changes in Stockholders’ Equity for the years ended December 31, 2017, 2016 and 2015		40
Notes to Consolidated Financial Statements		41

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders of Builders FirstSource, Inc.

Opinions on the Financial Statements and Internal Control over Financial Reporting

We have audited the accompanying consolidated balance sheets of Builders FirstSource, Inc. and its subsidiaries (the “Company”) as of December 31, 2017 and 2016, and the related consolidated statements of operations and comprehensive income (loss), of changes in stockholders’ equity and of cash flows for each of the three years in the period ended December 31, 2017, including the related notes (collectively referred to as the “consolidated financial statements”). We also have audited the Company's internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2017 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.

Basis for Opinions

The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management's Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.

Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

Definition and Limitations of Internal Control over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ PricewaterhouseCoopers LLP

Dallas, Texas

March 1, 2018

We have served as the Company’s auditor since 1999.

BUILDERS FIRSTSOURCE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

		Years Ended December 31,
		2017				2016				2015
		(In thousands, except per share amounts)
Sales		$	7,034,209			$	6,367,284			$	3,564,425
Cost of sales			5,306,818				4,770,536				2,662,967
Gross margin			1,727,391				1,596,748				901,458
Selling, general and administrative expenses			1,442,288				1,360,412				810,703
Income from operations			285,103				236,336				90,755
Interest expense, net			193,174				214,667				109,199
Income (loss) before income taxes			91,929				21,669				(18,444	)
Income tax expense (benefit)			53,148				(122,672	)			4,387
Net income (loss)		$	38,781			$	144,341			$	(22,831	)
Comprehensive income (loss)		$	38,781			$	144,341			$	(22,831	)
Net income (loss) per share:
Basic		$	0.34			$	1.30			$	(0.22	)
Diluted		$	0.34			$	1.27			$	(0.22	)
Weighted average common shares outstanding:
Basic			112,587				110,754				103,190
Diluted			115,597				113,585				103,190

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

BUILDERS FIRSTSOURCE, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEET

		December 31,
		2017				2016
		(In thousands, except per share amounts)
ASSETS
Current assets:
Cash and cash equivalents		$	57,533			$	14,449
Accounts receivable, less allowances of $11,771 and $11,571 at December 31, 2017 and 2016, respectively			631,992				569,208
Other receivables			71,232				55,781
Inventories, net			601,547				541,771
Other current assets			33,564				34,772
Total current assets			1,395,868				1,215,981
Property, plant and equipment, net			639,303				656,101
Assets held for sale			5,273				4,361
Goodwill			740,411				740,411
Intangible assets, net			132,567				159,373
Deferred income taxes			75,105				115,320
Other assets, net			17,597				18,340
Total assets		$	3,006,124			$	2,909,887
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Checks outstanding		$	—			$	35,606
Accounts payable			514,282				409,759
Accrued liabilities			271,597				293,115
Current maturities of long-term debt and lease obligations			12,475				16,217
Total current liabilities			798,354				754,697
Long-term debt and lease obligations, net of current maturities, debt discount, and debt issuance costs			1,771,945				1,785,835
Other long-term liabilities			59,616				59,735
Total liabilities			2,629,915				2,600,267
Commitments and contingencies (Note 13)
Stockholders’ equity:
Preferred stock, $0.01 par value, 10,000 shares authorized; zero shares issued and outstanding at December 31, 2017 and 2016			—				—
Common stock, $0.01 par value, 200,000 shares authorized; 113,572 and 111,564 shares issued and outstanding at December 31, 2017 and 2016, respectively			1,136				1,115
Additional paid-in capital			546,766				527,868
Accumulated deficit			(171,693	)			(219,363	)
Total stockholders’ equity			376,209				309,620
Total liabilities and stockholders’ equity		$	3,006,124			$	2,909,887

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

BUILDERS FIRSTSOURCE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CASH FLOWS

		Years Ended December 31,
		2017				2016				2015
		(In thousands)
Cash flows from operating activities:
Net income (loss)		$	38,781			$	144,341			$	(22,831	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization			92,993				109,793				58,280
Amortization and write-off of debt issuance costs and debt discount			6,092				7,502				18,929
Loss on extinguishment of debt			56,657				55,776				—
Payment of original issue discount			—				(1,259	)			—
Fair value adjustment of stock warrants			—				—				4,563
Deferred income taxes			49,104				(124,787	)			3,287
Bad debt expense			197				1,390				2,285
Stock compensation expense			13,508				10,549				6,848
Net loss (gain) on sales of assets and asset impairments			6,965				(336	)			1,313
Changes in assets and liabilities, net of assets acquired and liabilities assumed:
Receivables			(75,870	)			(45,942	)			74,089
Inventories			(60,645	)			(33,965	)			46,854
Other current assets			8				(4,873	)			(6,320	)
Other assets and liabilities			8,315				(828	)			5,314
Accounts payable and checks outstanding			65,764				36,585				(45,286	)
Accrued liabilities			(23,341	)			4,281				29,709
Net cash provided by operating activities			178,528				158,227				177,034
Cash flows from investing activities:
Purchases of property, plant and equipment			(62,407	)			(42,662	)			(43,811	)
Proceeds from sale of property, plant and equipment			2,981				8,305				4,275
Cash used for acquisitions, net			—				(3,970	)			(1,468,511	)
Net cash used in investing activities			(59,426	)			(38,327	)			(1,508,047	)
Cash flows from financing activities:
Borrowings under revolving credit facility			1,370,000				907,000				320,000
Payments under revolving credit facility			(1,020,000	)			(967,000	)			(290,000	)
Proceeds from issuance of notes			—				750,000				700,000
Proceeds from term loan			—				—				594,000
Repayments of long-term debt and other loans			(379,926	)			(807,517	)			(4,213	)
Payments of debt extinguishment costs			(48,704	)			(42,869	)			—
Payments of loan costs			(2,799	)			(15,663	)			(58,525	)
Proceeds from public offering of common stock, net of issuance costs			—				—				111,309
Exercise of stock options			8,055				6,627				6,718
Repurchase of common stock			(2,644	)			(1,092	)			(986	)
Net cash provided by (used in) financing activities			(76,018	)			(170,514	)			1,378,303
Net increase (decrease) in cash and cash equivalents			43,084				(50,614	)			47,290
Cash and cash equivalents at beginning of period			14,449				65,063				17,773
Cash and cash equivalents at end of period		$	57,533			$	14,449			$	65,063

Supplemental disclosure of non-cash activities

For the years ended December 31, 2017, 2016 and 2015, the Company retired assets subject to lease finance obligations of $14.0 million, $38.1 million and $1.4 million and extinguished the related lease finance obligations of $11.7 million $41.2 million and $1.5 million, respectively.

The Company purchased equipment which was financed through capital lease obligations of $14.2 million $8.1 million and $1.6 million in the years ended December 31, 2017, 2016 and 2015, respectively.

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

BUILDERS FIRSTSOURCE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

										Additional Paid
		Common Stock								in				Accumulated
		Shares				Amount				Capital				Deficit				Total
		(In thousands)
Balance at December 31, 2014			98,226			$	982			$	380,091			$	(340,873	)		$	40,200
Issuance of common stock from public offering, net of issuance costs			9,200				92				111,217				—				111,309
Vesting of restricted stock units			495				5				(5	)			—				—
Stock compensation expense			—				—				6,848				—				6,848
Exercise of stock options			1,388				14				6,704				—				6,718
Exercise of stock warrants			569				6				7,931				—				7,937
Repurchase of common stock			(152	)			(2	)			(984	)			—				(986	)
Net loss			—				—				—				(22,831	)			(22,831	)
Balance at December 31, 2015			109,726				1,097				511,802				(363,704	)			149,195
Vesting of restricted stock units			505				5				(5	)			—				—
Stock compensation expense			—				—				10,549				—				10,549
Exercise of stock options			1,496				15				6,612				—				6,627
Repurchase of common stock			(163	)			(2	)			(1,090	)			—				(1,092	)
Net income			—				—				—				144,341				144,341
Balance at December 31, 2016			111,564				1,115				527,868				(219,363	)			309,620
Vesting of restricted stock units			772				8				(8	)			—				—
Stock compensation expense			—				—				13,508				—				13,508
Exercise of stock options			1,449				15				8,040				—				8,055
Repurchase of common stock			(213	)			(2	)			(2,642	)			—				(2,644	)
Cumulative effect adjustment (Note 2)			—				—				—				8,889				8,889
Net income			—				—				—				38,781				38,781
Balance at December 31, 2017			113,572			$	1,136			$	546,766			$	(171,693	)		$	376,209

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

BUILDERS FIRSTSOURCE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Description of the Business

Builders FirstSource, Inc., a Delaware corporation formed in 1998, is a leading supplier of building materials, manufactured components and construction services to professional contractors, sub-contractors, and consumers. The company operates 402 locations in 40 states across the United States.

In this annual report, references to the “Company,” “we,” “our,” “ours” or “us” refer to Builders FirstSource, Inc. and its consolidated subsidiaries (including ProBuild Holdings LLC (“ProBuild”) as of July 31, 2015), unless otherwise stated or the context otherwise requires.

2. Summary of Significant Accounting Policies

Principles of Consolidation

The consolidated financial statements present the results of operations, financial position, and cash flows of Builders FirstSource, Inc. and its wholly-owned subsidiaries. All intercompany transactions have been eliminated in consolidation.

Accounting Estimates

The preparation of financial statements in conformity with generally accepted accounting principles (“GAAP”) in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could materially differ from those estimates.

Estimates are used when accounting for items such as revenue, vendor rebates, allowance for returns, discounts and doubtful accounts, employee compensation programs, depreciation and amortization periods, income taxes, inventory values, insurance programs, goodwill, other intangible assets and long-lived assets.

Sales Recognition

We recognize sales of building products upon delivery to the customer. For contracts with service elements, sales are generally recognized on the completed contract method as these contracts are usually completed within 30 days with the percentage of completion method applied to the remaining contracts with service elements. Contract costs include all direct material and labor, equipment costs and those indirect costs related to contract performance. Provisions for estimated losses on uncompleted contracts are recognized in the period in which such losses are determined. Prepayments for materials or services are deferred until such materials have been delivered or services have been provided. All sales recognized are net of allowances for discounts and estimated returns, based on historical experience. We present all sales tax on a net basis in our consolidated financial statements. The Company records sales incentives provided to customers as a reduction of revenue.

Cash and Cash Equivalents & Checks Outstanding

Cash and cash equivalents consist of cash on hand and all highly liquid investments with an original maturity date of three months or less. Also included in cash and cash equivalents are proceeds due from credit card transactions that generally settle within two business days. We maintain cash at financial institutions in excess of federally insured limits. Further, we maintain various banking relationships with different financial institutions. Accordingly, when there is a negative net book cash balance resulting from outstanding checks that had not yet been paid by any single financial institution, they are reflected in checks outstanding on the accompanying consolidated balance sheets.

Accounts Receivable

We extend credit to qualified professional homebuilders and contractors, in many cases on a non-collateralized basis. Accounts receivable potentially expose us to concentrations of credit risk. Because our customers are dispersed among our various markets, our credit risk to any one customer or geographic economy is not significant.

Our customer mix is a balance of large national homebuilders, regional homebuilders, local homebuilders and repair and remodeling contractors. For the year ended December 31, 2017, our top 10 customers accounted for approximately 16.0% of our sales, and no single customer accounted for more than 5% of sales.

The allowance for doubtful accounts is based on management’s assessment of the amount which may become uncollectible in the future and is estimated using specific review of problem accounts, overall portfolio quality, current economic conditions that may affect the borrower’s ability to pay, and historical experience. Accounts receivable are written off when deemed uncollectible. Other receivables consist primarily of vendor rebates receivable.

We also establish reserves for credit memos and customer returns. The reserve balance was $6.8 million and $5.6 million at December 31, 2017 and 2016, respectively. The activity in this reserve was not significant for each year presented.

Accounts receivable consisted of the following at December 31:

		2017				2016
		(In thousands)
Accounts Receivable		$	643,763			$	580,779
Less: allowances for returns and doubtful accounts			11,771				11,571
Accounts receivable, net		$	631,992			$	569,208

The following table shows the changes in our allowance for doubtful accounts:

		2017				2016				2015
		(In thousands)
Balance at January 1,		$	5,922			$	4,245			$	1,734
Additions			197				1,390				2,285
Deductions (write-offs, net of recoveries)			(1,146	)			287				226
Balance at December 31,		$	4,973			$	5,922			$	4,245

Inventories

Inventories consist principally of materials purchased for resale, including lumber, sheet goods, windows, doors and millwork, as well as certain manufactured products and are stated at the lower of cost and net realizable value. Cost is determined using the weighted average method, the use of which approximates the first-in, first-out method. We accrue for shrink based on the actual historical shrink results of our most recent physical inventories adjusted, if necessary, for current economic conditions. These estimates are compared with actual results as physical inventory counts are taken and reconciled to the general ledger.

During the year, we monitor our inventory levels by market and record provisions for excess inventories based on slower moving inventory. We define potential excess inventory as the amount of inventory on hand in excess of the historical usage, excluding special order items purchased in the last six months. We then apply our judgment as to forecasted demand and other factors, including liquidation value, to determine the required adjustments to net realizable value. Our inventories are generally not susceptible to technological obsolescence.

Our arrangements with vendors provide for rebates of a specified amount of consideration, payable when certain measures, generally related to a stipulated level of purchases, have been achieved. We account for estimated rebates as a reduction of the prices of the vendor’s inventory until the product is sold, at which time such rebates reduce cost of sales in the accompanying consolidated statement of operations and comprehensive income (loss). Throughout the year we estimate the amount of the rebates based upon the expected level of purchases. We continually revise these estimates based on actual purchase levels.

We source products from a large number of suppliers. No materials purchased from any single supplier represented more than 8% of our total materials purchased in 2017.

Shipping and Handling Costs

Handling costs incurred in manufacturing activities are included in cost of sales. All other shipping and handling costs are included in selling, general and administrative expenses in the accompanying consolidated statement of operations and comprehensive income (loss) and totaled $296.2 million, $269.8 million and $171.9 million in 2017, 2016 and 2015, respectively.

Income Taxes

We account for income taxes utilizing the liability method described in the Income Taxes topic of the FASB Accounting Standards Codification (“Codification”). Deferred income taxes are recorded to reflect consequences on future years of differences between the tax basis of assets and liabilities and their financial reporting amounts at each year-end based on enacted tax laws and statutory tax rates applicable to the periods in which differences are expected to affect taxable earnings. We record a valuation allowance to reduce deferred tax assets if it is more likely than not that some portion or all of the deferred tax assets will not be realized.

Warranty Expense

We have warranty obligations with respect to most manufactured products; however, the liability for the warranty obligations is not significant as a result of third-party inspection and acceptance processes.

Debt Issuance Costs and Debt Discount

Loan costs are capitalized upon the issuance of long-term debt and amortized over the life of the related debt. Debt issuance costs associated with term debt are presented as a reduction to long-term debt. Debt issuance costs associated with revolving debt arrangements are presented as a component of other assets. Debt issuance costs incurred in connection with revolving debt arrangements are amortized using the straight-line method. Debt issuance costs incurred in connection with term debt are amortized using the effective interest method. Debt discount is amortized over the life of the related debt using the effective interest method. Amortization of debt issuance costs and the debt discount are included in interest expense. Upon changes to our debt structure, we evaluate debt issuance costs in accordance with the Debt topic of the Codification. We adjust debt issuance costs as necessary based on the results of this evaluation, as discussed in Note 8.

Property, Plant and Equipment

Property, plant and equipment are recorded at cost and depreciated using the straight-line method over the estimated useful lives of the assets. The estimated lives of the various classes of assets are as follows:

		Buildings and improvements		10 to 40 years
		Machinery and equipment		3 to 10 years
		Furniture and fixtures		3 to 5 years
		Leasehold improvements		The shorter of the estimated useful life or the remaining lease term

Major additions and improvements are capitalized, while maintenance and repairs that do not extend the useful life of the property are charged to expense as incurred. Gains or losses from dispositions of property, plant and equipment are recorded in the period incurred. We also capitalize certain costs of computer software developed or obtained for internal use, including interest, provided that those costs are not research and development, and certain other criteria are met. Internal use computer software costs are included in machinery and equipment and generally depreciated using the straight-line method over the estimated useful lives of the assets, generally three years.

We periodically evaluate the commercial and strategic operation of the land, related buildings and improvements of our facilities. In connection with these evaluations, some facilities may be consolidated, and others may be sold or leased. Nonoperating assets primarily related to land and building real estate assets associated with location closures that are actively being marketed for sale within a year are classified as assets held for sale and recorded at fair value, usually the quoted market price obtained from an independent third-party less the cost to sell. Until the assets are sold, an estimate of the fair value is reassessed at each reporting period. Net gains or losses related to the sale of real estate and equipment or impairment adjustments related to assets held for sale are recorded as selling, general and administrative expenses in the accompanying consolidated statement of operations and comprehensive income (loss).

Long-Lived Assets

We evaluate our long-lived assets, other than goodwill, for impairment when events or changes in circumstances indicate, in our judgment, that the carrying value of such assets may not be recoverable. The determination of whether or not impairment exists is based on our estimate of undiscounted future cash flows before interest attributable to the assets as compared to the net carrying value of the assets. If impairment is indicated, the amount of the impairment recognized is determined by estimating the fair value of the assets based on estimated discounted future cash flows and recording a provision for loss if the carrying value is greater than estimated fair value. The net carrying value of assets identified to be disposed of in the future is compared to their estimated fair value, usually the quoted market price obtained from an independent third-party less the cost to sell, to determine if impairment exists. Until the assets are disposed of, an estimate of the fair value is reassessed when related events or circumstances change.

Insurance

We have established insurance programs to cover certain insurable risks consisting primarily of physical loss to property, business interruptions resulting from such loss, workers’ compensation, employee healthcare, and comprehensive general and auto liability. Third party insurance coverage is obtained for exposures above predetermined deductibles as well as for those risks required to be insured by law or contract. On a quarterly basis, we engage an external actuarial professional to independently assess and estimate the total liability outstanding. Provisions for losses are developed from these valuations which rely upon our past claims experience, which considers both the frequency and settlement of claims. We discount our workers’ compensation liability based upon estimated future payment streams at our risk-free rate. Our total insurance reserve balances were $78.0 million and $80.4 million as of December 31, 2017 and 2016, respectively. Of these balances $45.6 million and $43.6 million were recorded as other long-term liabilities as of December 31, 2017 and 2016, respectively. Included in these reserve balances as of December 31, 2017 and 2016, were approximately $8.9 million and $9.4 million, respectively, of claims that exceeded stop-loss limits and are expected to be recovered under insurance policies which are also recorded as other receivables and other assets in the accompanying consolidated balance sheet.

Net Income (Loss) per Common Share

Net income (loss) per common share, or earnings per share (“EPS”), is calculated in accordance with the Earnings per Share topic of the Codification which requires the presentation of basic and diluted EPS. Basic EPS is computed using the weighted average number of common shares outstanding during the period. Diluted EPS is computed using the weighted average number of common shares outstanding during the period, plus the dilutive effect of potential common shares.

The table below presents a reconciliation of weighted average common shares used in the calculation of basic and diluted EPS for the years ended December 31:

		2017				2016				2015
		(In thousands)
Weighted average shares for basic EPS			112,587				110,754				103,190
Dilutive effect of options and RSUs			3,010				2,831				—
Weighted average shares for diluted EPS			115,597				113,585				103,190

For the purpose of computing diluted EPS, weighted average shares outstanding have been adjusted for common shares underlying 2,104,000 options to purchase common stock and 2,249,000 restricted stock units (“RSUs”) for 2017. Weighted average shares outstanding have been adjusted for common shares underlying 3,515,000 options and 2,177,000 RSUs for 2016. Options to purchase 4,998,000 shares of common stock and 1,516,000 RSUs were not included in the computation of diluted EPS for 2015 because their effect was anti-dilutive. Incremental shares attributable to average warrants outstanding during 2015 were not included in the computation of diluted EPS for 2015 as their effect was anti-dilutive.

Goodwill and Other Intangible Assets

Intangibles subject to amortization

We recognize an acquired intangible asset apart from goodwill whenever the intangible asset arises from contractual or other legal rights, or whenever it can be separated or divided from the acquired entity and sold, transferred, licensed, rented, or exchanged, either individually or in combination with a related contract, asset or liability. Impairment losses are recognized if the carrying value of an intangible asset subject to amortization is not recoverable from expected future cash flows and its carrying amount exceeds its estimated fair value.

Goodwill

We recognize goodwill as the excess cost of an acquired entity over the net amount assigned to assets acquired and liabilities assumed. Goodwill is tested for impairment on an annual basis and between annual tests whenever impairment is indicated. This annual test takes place as of December 31 each year. Impairment losses are recognized whenever the carrying amount of a reporting unit exceeds its fair value.

Stock-based Compensation

We have four stock-based employee compensation plans, which are described more fully in Note 10. We issue new common stock shares upon exercises of stock options and vesting of RSUs. We recognize the effect of pre-vesting forfeitures in the period they actually occur.

The fair value of each option award is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions for the year ended December 31:

		2017			2016			2015
Expected life		6.0 years			6.0 years			6.0 years
Expected volatility		59.2%			60.9%			75.2%
Expected dividend yield		0.00%			0.00%			0.00%
Risk-free rate		2.20%			1.41%			1.75%

The expected life represents the period of time the options are expected to be outstanding. We used the simplified method for determining the expected life assumption due to limited historical exercise experience on our stock options. The expected volatility is based on the historical volatility of our common stock over the most recent period equal to the expected life of the option. 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 expected life of the options.

The fair value of RSU awards subject to market conditions is estimated on the date of grant using the Monte Carlo simulation model with the following weighted average assumptions for the year ended December 31:

		2017			2016
Expected volatility (company)		73.7%			53.6%
Expected volatility (peer group median)		33.8%			17.3%
Correlation between the company and peer group median		0.33			0.47
Expected dividend yield		0.00%			0.00%
Risk-free rate		1.50%			1.29%

The expected volatilities and correlation are based on the historical daily returns 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. We did not grant any RSUs subject to market conditions in 2015.

Fair Value

The Fair Value Measurements and Disclosures topic of the Codification provides a framework for measuring the fair value of assets and liabilities and establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The fair value hierarchy can be summarized as follows:

Level 1 — unadjusted quoted prices for identical assets or liabilities in active markets accessible by us

Level 2 — inputs that are observable in the marketplace other than those inputs classified as Level 1

Level 3 — inputs that are unobservable in the marketplace and significant to the valuation

If a financial instrument uses inputs that fall in different levels of the hierarchy, the instrument will be categorized based upon the lowest level of input that is significant to the fair value calculation. The only financial instruments measured at fair value on a recurring basis were our warrants as discussed in Note 8.

As of December 31, 2017 and 2016 the Company does not have any financial instruments which are measured at fair value on a recurring basis. We have elected to report the value of our 5.625% senior secured notes due 2024 (“2024 notes”), $467.7 million senior secured term loan facility due 2024 (“2024 term loan”) and $900.0 million revolving credit facility (“2022 facility”) at amortized cost. The fair values of the 2024 notes and the 2024 term loan at December 31, 2017 were approximately $777.3 million and $464.1 million, respectively, and were determined using Level 2 inputs based on market prices. The carrying value of the 2022 facility at December 31, 2017 approximates fair value as the rates are comparable to those at which we could currently borrow under similar terms, are variable and incorporate a measure of our credit risk. As such, the fair value of the 2022 facility was also classified as Level 2 in the hierarchy.

Supplemental Cash Flow Information

Supplemental cash flow information was as follows for the years ended December 31:

		2017				2016				2015
		(In thousands)
Cash payments for interest (1)		$	193,429			$	197,384			$	55,028
Cash payments for income taxes			5,643				2,875				1,409

	(1)	Includes $48.7 million and $42.9 million in payments of debt extinguishment costs which are classified as financing outflows in the accompanying consolidated statement of cash flows for the years ended December 31, 2017 and 2016, respectively. These payments were recorded to interest expense in the accompanying consolidated statement of operations and comprehensive income (loss) for their respective years.

Comprehensive Income (Loss)

Comprehensive income (loss) is defined as the change in equity (net assets) of a business enterprise during a period from transactions and other events and circumstances from non-owner sources. It consists of net income (loss) and other gains and losses affecting stockholders’ equity that, under GAAP, are excluded from net income. We had no items of other comprehensive income (loss) for the years ended December 31, 2017, 2016, and 2015.

Recently Issued Accounting Pronouncements

In May 2017, the Financial Accounting Standards Board (“FASB”) issued an update to the existing guidance under the Compensation-Stock Compensation topic of the Accounting Standards Codification (“Codification”) to clarify when modification accounting would be applied for a change to the terms or conditions of a share-based award. Under this new guidance modification accounting is required only if the fair value, the vesting conditions, or the classification of the award changes as a result of the change in terms or conditions. This guidance is required to be adopted on a prospective basis for annual periods beginning on or after December 15, 2017 with early adoption permitted. The Company will adopt this guidance on January 1, 2018. As we do not regularly modify the terms and conditions of our share-based awards we do not expect the adoption of this guidance to have a significant impact on our financial statements upon adoption.

In January 2017, the FASB issued an update to the existing guidance under the Intangibles-Goodwill and Other topic of the Codification to simplify the accounting for goodwill impairment. The guidance removes Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. All of the other goodwill impairment guidance will remain largely unchanged, including the option to perform a qualitative assessment to determine if a quantitative impairment test is necessary. This update is effective for annual and any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption of this guidance is permitted for annual or interim goodwill tests performed after January 1, 2017. As such, we adopted this guidance on a prospective basis in the fourth quarter of 2017 in connection with our annual goodwill impairment test. The adoption of this guidance did not have an impact on our financial statements.

In January 2017, the FASB issued an update to the existing guidance under the Business Combinations topic of the Codification. This update revises the definition of a business. Under this guidance when substantially all of the assets acquired are concentrated in a single asset (or group of similar assets) the assets acquired would not be considered a business. If this initial screen is met the need for further assessment is eliminated. If this screen is not met in order to be considered a business an acquisition would have to include an input and a substantive process that together significantly contribute to the ability to create outputs. This update is effective for public companies for annual and interim reporting periods beginning after December 15, 2017. Early adoption of this guidance is permitted. This guidance requires prospective application following adoption. The Company will adopt this guidance on January 1, 2018 and the impact on our financial statements will depend upon the occurrence of any future acquisition activity.

In March 2016, the FASB issued an update to the existing guidance under the Compensation-Stock Compensation topic of the Codification. This update simplifies several aspects of accounting for stock compensation including accounting for income taxes, classification of awards as liabilities or equity, forfeitures and classification on the statement of cash flows. This update was effective for public companies for annual and interim reporting periods beginning after December 15, 2016. As such, we adopted this guidance effective January 1, 2017. Upon adoption the Company recognized $8.9 million in previously unrecorded windfall benefits on a modified retrospective basis through a cumulative-effect adjustment to the beginning balance of our accumulated deficit. All windfalls or shortfalls are now recognized as a component of income tax expense in the period they occur. The Company elected to recognize the effect of pre-vesting forfeitures as they actually occur rather than estimating forfeitures each period.

In February 2016, the FASB issued an update to the existing guidance under the Leases topic of the Codification. Under the new guidance, lessees will be required to recognize the following for all leases, with the exception of short-term leases, at the commencement date: (1) a lease liability, which is a lessee‘s obligation to make lease payments arising from a lease, measured on a discounted basis; and (2) a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. This update requires a modified retrospective transition as of the beginning of the earliest comparative period presented in the financial statements. This update is effective for public companies for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, with early adoption permitted. The Company has a significant number of leases, primarily related to real estate and rolling stock, which are accounted for as operating leases under existing guidance. While we are currently evaluating the impact of this new guidance on our financial statements, we are expecting a significant impact to our balance sheet upon adoption related to the establishment of lease liabilities and the corresponding right-of-use assets.

In July 2015, the FASB issued an update to the existing guidance under the Inventory topic of the Codification. This update changes the subsequent measurement of inventory from lower of cost or market to lower of cost and net realizable value. We adopted this guidance effective January 1, 2017 on a prospective basis. The adoption of this guidance did not have an impact on our financial statements.

In May 2014, the FASB issued an update to the existing guidance under the Revenue Recognition topic of the Codification which is a comprehensive new revenue recognition model requiring a company to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Subsequent to issuance of the original update, the FASB issued several further updates amending this new guidance. In April 2016, the FASB issued an update clarifying issues related to identifying performance obligations and licensing. In May 2016, the FASB issued an update regarding the assessment of collectability criteria, presentation of sales taxes, measurement of noncash consideration and transition guidance for completed contracts and contract modifications. The Company will adopt this guidance beginning on January 1, 2018 on a modified retrospective basis. Under current guidance, we recognize sales from contracts with service elements on the completed contract method when these contracts are completed within 30 days. The remaining contracts with service elements are recognized under the percentage of completion method. Under this updated guidance, revenue related to our contracts with service elements will generally be recognized over time based on the extent of progress towards completion of the performance obligation because of continuous transfer of control to the customer. We have assessed and updated our business processes, systems and controls to ensure compliance with the recognition and disclosure requirements of the new standard upon adoption. The impact from adoption will primarily be associated with deferred revenue on contracts outstanding at December 31, 2017 accounted for under the completed contract method, which will be generally recognized earlier under this new guidance. The adoption of this guidance will not have a significant impact on our financial statements.

3. Acquisitions

On July 31, 2015, the Company acquired all of the operating affiliates of ProBuild through the purchase of all issued and outstanding equity interests in ProBuild for $1.63 billion in cash, subject to certain adjustments. The purchase price was funded by the net proceeds received from the financing transactions described in Note 8. Previously headquartered in Denver, Colorado, ProBuild is one of the nation’s largest professional building materials suppliers. As a result of the ProBuild acquisition, the Company has a greater diversification of products and services and a significantly improved geographic footprint.

This acquisition was accounted for by the acquisition method, and accordingly the results of operations were included in the Company’s consolidated financial statements from the acquisition date. The purchase price was allocated to the assets acquired based on estimated fair values at the acquisition date, with the excess of purchase price over the estimated fair value of the net assets acquired recorded as goodwill.

We incurred acquisition related costs of $20.9 million related to the ProBuild acquisition during the year ended December 31, 2015. These costs include due diligence costs and transaction costs to complete the acquisition, and have been recognized in selling,

general and administrative expense in the accompanying condensed consolidated statement of operations and comprehensive income (loss). We did not incur any acquisition costs related to this acquisition during the years ended December 31, 2017 and 2016.

The operating results of the ProBuild acquisition have been included in the consolidated statement of operations and comprehensive income (loss) from the acquisition date through December 31, 2017. Net sales and net income attributable to ProBuild were approximately $4,994 million and $212 million, respectively for the year ended December 31, 2017. Net sales and net income attributable to ProBuild were approximately $4,520 million and $190 million, respectively for the year ended December 31, 2016. Net sales and net income attributable to ProBuild were approximately $1,860 million and $50 million, respectively, for the period of August 1, 2015 through December 31, 2015. Net income attributable to ProBuild does not include an allocation of income tax expense or of the additional interest expense incurred by the Company as a result of the ProBuild acquisition financing transactions and is also impacted by changes in the business post-acquisition.

The following table reflects the pro forma operating results for the Company which gives effect to the acquisition of ProBuild as if it had occurred on January 1, 2014. The pro forma results are based on assumptions that the Company believes are reasonable under the circumstances. The pro forma results are not necessarily indicative of future results. The pro forma financial information includes the historical results of the Company and ProBuild adjusted for certain items, which are described below, and does not include the effects of any synergies or cost reduction initiatives related to the acquisition of ProBuild.

	Year Ended December 31, 2015
	(pro-forma) (in thousands, except per share amounts)
Net sales	$	6,066,791
Net loss	$	(10,433	)
Basic net loss per share	$	(0.10	)
Diluted net loss per share	$	(0.10	)

Pro forma net loss for the year ended December 31, 2015 reflects adjustments primarily related to depreciation and amortization, the conversion from last-in, first-out to first-in, first out inventory valuation, and interest expense. Pro forma net loss for 2015 was adjusted to exclude transaction-related expenses of $46.9 million ($34.6 million incurred by the Company and $12.3 million incurred by ProBuild).

4. Property, Plant and Equipment

Property, plant and equipment consisted of the following at December 31:

		2017				2016
		(In thousands)
Land		$	188,551			$	195,064
Buildings and improvements			337,536				331,498
Machinery and equipment			352,529				329,529
Furniture and fixtures			61,310				56,571
Construction in progress			24,228				12,771
Property, plant and equipment			964,154				925,433
Less: accumulated depreciation			324,851				269,332
Property, plant and equipment, net		$	639,303			$	656,101

Depreciation expense was $71.1 million, $87.2 million and $46.3 million, of which $9.8 million, $9.5 million and $5.3 million was included in cost of sales, in 2017, 2016, and 2015, respectively.

Included in property, plant and equipment are certain assets held under capital leases and lease finance obligations. These assets are recorded at the present value of minimum lease payments and include land, buildings and equipment. Amortization charges associated with assets held under capital leases and lease finance obligations are included in depreciation expense. The following balances held under capital lease and lease finance obligations are included on the accompanying consolidated balance sheet:

		2017				2016
		(In thousands)
Land		$	114,010			$	119,287
Buildings and improvements			142,941				151,862
Machinery and equipment			21,875				11,012
Assets held under capital leases and lease finance obligations			278,826				282,161
Less: accumulated amortization			15,367				9,213
Assets held under capital leases and lease finance obligations, net		$	263,459			$	272,948

5. Goodwill

The following table sets forth the changes in the carrying amount of goodwill by reportable segment for the years ended December 31, 2017 and 2016 (in thousands):

			Northeast			Southeast			South			West			Total
Balance as of December 31, 2016
Goodwill		$	97,102		$	60,691		$	329,662		$	297,592		$	785,047
Accumulated impairment losses			(494	)		(615	)		(43,527	)		—			(44,636	)
			96,608			60,076			286,135			297,592			740,411
Balance as of December 31, 2017
Goodwill		$	97,102		$	60,691		$	329,662		$	297,592		$	785,047
Accumulated impairment losses			(494	)		(615	)		(43,527	)		—			(44,636	)
		$	96,608		$	60,076		$	286,135		$	297,592		$	740,411

We closely monitor trends in economic factors and their effects on operating results to determine if an impairment trigger was present that would warrant a reassessment of the recoverability of the carrying amount of goodwill prior to the required annual impairment test in accordance with the Intangibles – Goodwill and Other topic of the Codification.

The process of evaluating goodwill for impairment involves the determination of fair value of our reporting units. Inherent in such fair value determinations are certain judgments and estimates relating to future cash flows, including our interpretation of current economic indicators and market valuations and assumptions about our strategic plans with regard to our operations. Due to the uncertainties associated with such estimates, actual results could differ from such estimates resulting in further impairment of goodwill.

In performing our impairment analysis, we developed a range of fair values for our reporting units using a discounted cash flow methodology. The discounted cash flow methodology establishes fair value by estimating the present value of the projected future cash flows to be generated from the reporting unit. The discount rate applied to the projected future cash flows to arrive at the present value is intended to reflect all risks of ownership and the associated risks of realizing the stream of projected future cash flows. The discounted cash flow methodology uses our projections of financial performance for a five-year period. The most significant assumptions used in the discounted cash flow methodology are the discount rate, the terminal value and the expected future revenues, gross margins and operating expenses, which vary among reporting units. Significant assumptions used in our financial projections include housing starts, lumber commodity prices, and market share gains.

We recorded no goodwill impairment charges in 2017, 2016, and 2015.

6. Intangible Assets

The following table presents intangible assets as of December 31:

		2017								2016
		Gross Carrying Amount				Accumulated Amortization				Gross Carrying Amount				Accumulated Amortization
		(In thousands)
Customer relationships		$	149,045			$	(48,925	)		$	149,045			$	(33,023	)
Non-compete agreements			1,379				(1,081	)			1,379				(375	)
Trade names			51,361				(22,554	)			51,361				(13,286	)
Favorable lease intangibles			6,409				(3,067	)			6,409				(2,137	)
Total intangible assets		$	208,194			$	(75,627	)		$	208,194			$	(48,821	)
Unfavorable lease obligations (included in Accrued liabilities and Other long-term liabilities)		$	(19,597	)		$	13,666			$	(19,597	)		$	8,746

During the years ended December 31, 2017, 2016, and 2015, we recorded amortization expense in relation to the above-listed intangible assets of $21.9 million, $22.6 million, and $11.9 million, respectively. In addition, as a result of the facility closure activities following the ProBuild acquisition, we recorded impairment charges of $1.7 million and $1.4 million against our intangible assets during the years ended December 31, 2016 and 2015, respectively. We did not record any impairment charges related to our intangible assets for the year ended December 31, 2017. We recognized these impairment charges in selling, general, and administrative expense in the accompanying consolidated statement of operations and comprehensive income (loss). The following table presents the estimated amortization expense for these intangible assets for the years ending December 31 (in thousands):

2018		$	21,003
2019			17,205
2020			13,010
2021			11,936
2022			10,926
Thereafter			52,556
Total future net intangible amortization expense		$	126,636

7. Accrued Liabilities

Accrued liabilities consisted of the following at December 31:

		2017				2016
		(In thousands)
Accrued payroll and other employee related expenses		$	127,745			$	127,485
Customer obligations			46,894				38,448
Self-insurance reserves			32,424				36,817
Accrued business taxes			28,460				30,177
Accrued interest			14,403				28,570
Unfavorable lease obligations (Note 6)			3,195				4,921
Facility closure reserves			3,097				3,910
Other			15,379				22,787
Total accrued liabilities		$	271,597			$	293,115

8. Long-Term Debt

Long-term debt and lease obligations consisted of the following (in thousands):

	December 31, 2017				December 31, 2016
2022 facility	$	350,000			$	—
2023 notes		—				367,608
2024 notes		750,000				750,000
2024 term loan		462,950				467,650
Lease finance obligations		225,070				238,539
Capital lease obligations (Note 9)		15,431				7,427
		1,803,451				1,831,224
Unamortized debt discount and debt issuance costs		(19,031	)			(29,172	)
		1,784,420				1,802,052
Less: current maturities of long-term debt and lease obligations		12,475				16,217
Long-term debt and lease obligations, net of current maturities	$	1,771,945			$	1,785,835

ProBuild Acquisition Financing

As described in Note 3, we acquired all of the operating affiliates of ProBuild on July 31, 2015 through the purchase of all issued and outstanding equity interests of ProBuild for $1.63 billion in cash, subject to certain adjustments. The purchase price was funded with the net cash proceeds from (i) the sale of $700.0 million in aggregate principal amount of 10.75% senior unsecured notes due 2023 (the “2023 notes”), (ii) entry into a $600.0 million term loan credit agreement (the “2015 term loan”), (iii) a $295.0 million draw on an amended and restated $800.0 million senior secured revolving credit facility (the “2015 facility”), and (iv) a public offering of 9.2 million new shares of our common stock at an offering price of $12.80 per share (the “equity offering”).

In connection with the financing transactions described above, we incurred approximately $65.0 million of various third-party fees and expenses. Of these costs, $18.1 million were allocated to the 2023 notes, $16.0 million were allocated to the 2015 term loan, $11.2 million were allocated to the 2015 facility and $6.5 million were allocated to the equity offering. The costs allocated to the 2023 notes and the 2015 term loan were recorded as reductions to long-term debt. The costs allocated to the 2015 facility were recorded as other assets. The costs allocated to the equity offering were recorded as a reduction to additional paid-in capital. In addition, $13.2 million in costs relate to commitment fees paid for bridge and backstop financing facilities entered into in connection with these financing transactions, neither of which was utilized. As such, these fees were recorded as interest expense for the year ended December 31, 2015. At the closing of these transactions, there were approximately $3.0 million in unamortized debt issuance costs associated with our previous revolving credit facility, of which approximately $0.9 million were recorded as interest expense for the year ended December 31, 2015. The remaining $2.1 million in unamortized costs associated with our previous revolving credit facility were carried over to the 2015 facility.

2016 Debt Transactions

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 (the “2021 notes”), repricing and partially repaying our 2015 term loan and a cash tender offer in which we further reduced the aggregate principal amount of outstanding 2023 notes.

Note Exchange Transactions

On February 12, 2016, we completed separate privately negotiated note exchange transactions in which $218.6 million in aggregate principal amount of our 2023 notes was exchanged for $207.6 million in aggregate principal amount of our previously outstanding 2021 notes. On February 29, 2016, we completed additional separate privately negotiated note exchange transactions in which $63.8 million in aggregate principal amount of our 2023 notes was exchanged for $60.0 million in aggregate principal amount of our previously outstanding 2021 notes.

The note exchange transactions were considered to be debt extinguishments. As such, we recognized a net gain of $7.8 million which was recorded as an offset to interest expense in the accompanying consolidated statement of operations and comprehensive income (loss) for the year ended December 31, 2016. Of this $7.8 million gain, $14.8 million was attributable to the reduction in outstanding principal which was partially offset by the write-off of $7.0 million of unamortized debt issuance costs associated with the 2023 notes which were extinguished in the exchange transactions.

In connection with issuance of the 2021 notes in the exchange transactions, we incurred $4.9 million of various third-party fees and expenses. These costs were previously recorded as a reduction to long-term debt and were subsequently written off to interest expense in the third quarter of 2016 in connection with the extinguishment of the 2021 notes as described in the “2016 Refinancing Transactions” section below.

Note Redemption Transaction

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%, plus accrued and unpaid interest. The redemption transaction was considered to be a debt extinguishment. As such, we recognized a loss of $1.7 million which was recorded as a component of interest expense in the accompanying consolidated statement of operations and comprehensive income (loss) for the year ended December 31, 2016. Of this $1.7 million loss, $1.1 million was attributable to the payment of the redemption premium and $0.6 million was attributable to the write-off of unamortized debt issuance costs associated with the redeemed notes.

2016 Refinancing Transactions

In August 2016, we completed a private offering of $750.0 million in aggregate principal amount of 5.625% senior secured notes due 2024 (“2024 notes”) at an issue price equal to 100% of their face value. At the same time the Company also repriced its 2015 term loan. This repricing lowered the applicable 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. In connection with the repricing, the mandatory quarterly principal repayments were reduced from $1.375 million to $1.175 million.

The proceeds from the issuance of the 2024 notes were used, together with cash on hand and borrowings on the 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.

The redemption of the 2021 notes was considered to be a debt extinguishment. As such, we recognized a loss of $43.9 million which was recorded as a component of interest expense in the accompanying consolidated statement of operations and comprehensive income (loss) for the year ended December 31, 2016. Of this $43.9 million loss, $33.3 million was attributable to the payment of the redemption premium and $10.6 million was attributable to the write-off of unamortized debt issuance costs associated with the redeemed notes. In addition, in connection with the repricing and pay down of the 2015 term loan we recognized $8.2 million in interest expense in the third quarter of 2016 related to the write-off of unamortized debt discount and debt issuance costs.

In connection with the issuance of the 2024 notes and the 2015 term loan repricing, we incurred approximately $12.0 million of various third-party fees and expenses. Of these costs $10.5 million were allocated to the 2024 notes and have been recorded as a reduction to long-term debt. These costs are being amortized over the contractual life of the 2024 notes using the effective interest method. The remaining $1.5 million in costs incurred were allocated to the 2015 term loan. Of this $1.5 million, $1.2 million was recorded to interest expense in the third quarter of 2016. The remaining $0.3 million of new third-party costs together with $10.9 million in remaining unamortized debt discount and debt issuance costs have been recorded as a reduction of long-term debt and are being be amortized over the remaining contractual life of the 2015 term loan using the effective interest method.

Tender Offer

In October 2016, we purchased $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.

The tender offer transaction was considered to be a debt extinguishment. As such, we recognized a loss on extinguishment of $9.7 million which was recorded as a component of interest expense in the accompanying consolidated statement of operations and comprehensive income (loss) for the year ended December 31, 2016. Of this loss, approximately $8.5 million was attributable to the purchase premium paid to the lenders and $1.2 million was attributable to the write-off of unamortized debt issuance costs associated with the redeemed notes. In addition to the loss described above, we incurred approximately $0.1 million in third party costs which were recorded to selling, general, and administrative expense in the fourth quarter of 2016.

2017 Debt Transactions

During the year ended December 31, 2017, the Company executed several debt transactions which are described in more detail below. These transactions included a repricing and extension of the 2015 term loan as well as increasing the borrowing capacity and

extending the maturity of our 2015 facility and the complete extinguishment of our 2023 notes. Our 2017 and 2016 debt transactions have extended our debt maturity profile and reduced our annual cash interest on a go forward basis.

Term Loan Amendment

On February 23, 2017, we repriced our 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. Deutsche Bank AG New York Branch continues to serve as administrative agent and collateral agent under the 2024 term loan agreement.

In connection with the 2024 term loan amendment we recognized $0.4 million in interest expense for the year ended December 31, 2017 related to the write-off of unamortized debt discount and debt issuance costs. We incurred $1.2 million in lender fees which, together with $10.0 million in remaining unamortized debt discount and debt issuance costs, have been recorded as a reduction of long-term debt and are being amortized over the remaining contractual life of the 2024 term loan using the effective interest method. In addition, we also incurred $1.4 million in various third-party fees and expenses related to the 2024 term loan amendment which were recorded to interest expense for the year ended December 31, 2017.

Revolving Credit Facility Amendment

On March 22, 2017, the Company extended the maturity date and increased the revolving commitments under its 2015 facility. This transaction resulted in an amended and restated $900.0 million revolving credit facility (“2022 facility”) and extended the maturity by 20 months to March 22, 2022. SunTrust Bank continues to serve as administrative agent and collateral agent under the 2022 facility agreement. All other material terms of the 2022 facility remain unchanged from those of the 2015 facility.

In connection with the 2022 facility amendment, we recognized $0.6 million in interest expense for the year ended December 31, 2017 related to the write-off of unamortized debt issuance costs. We incurred $1.6 million in lender and third-party fees which, together with $8.5 million in remaining unamortized debt issuance costs, have been recorded as other assets and are being amortized over the remaining contractual life of the 2022 facility on a straight-line basis.

2023 Notes Redemption

In December 2017, the Company exercised its contractual right to redeem $367.6 million in aggregate principal amount of 2023 Notes at a total redemption price of 113.249%, plus accrued and unpaid interest. The redemption of the 2023 Notes was funded with a combination of borrowings under the 2022 facility and cash on hand.

The redemption of the 2023 notes was considered to be a debt extinguishment. As such, we recognized a loss on extinguishment of $56.3 million which was recorded as a component of interest expense in the accompanying consolidated statement of operations and comprehensive income (loss) for the year ended December 31, 2017. Of this $56.3 million loss, $48.7 million was attributable to the payment of the redemption premium and $7.6 million was attributable to the write-off of unamortized debt issuance costs associated with the redeemed notes.

2024 Term Loan Credit Agreement

As of December 31, 2017, we have $463.0 million outstanding under the 2024 term loan, which matures on February 29, 2024. The 2024 term loan bears interest based on either a eurodollar or base rate (a rate equal to the highest of an agreed commercially available benchmark rate, the federal funds effective rate plus 0.50% or the eurodollar rate plus 1.0%, as selected by the Company) plus, in each case, an applicable margin. The applicable margin in the 2024 term loan is (x) 3% in the case of Eurodollar rate loans and (y) 2% in the case of base rate loans. The 2024 term loan has mandatory principal repayments of $1.175 million which are payable in March, June, September, and December of each year provided that each such payment is subject to reduction as a result of certain prepayments of the loans in accordance with the loan documentation. The weighted average interest rate of the term loan was 4.3% during the year ended December 31, 2017.

2022 Revolving Credit Facility

The 2022 facility provides for a $900.0 million revolving credit line to be used for working capital, general corporate purposes and funding acquisitions. In addition, we may use the 2022 facility to facilitate debt repayment and consolidation. The available borrowing capacity, or borrowing base, is derived from a percentage of the Company’s eligible receivables and inventory, as defined by the agreement, subject to certain reserves. As of December 31, 2017, we had $350.0 million in outstanding borrowings under our 2022 facility and our net excess borrowing availability was $436.8 million after being reduced by outstanding letters of credit of

approximately $84.9 million. During the year ended December 31, 2017, we borrowed $1,370.0 million and repaid $1,020.0 million at a weighted average interest rate of 2.9%. The 2022 facility matures on March 22, 2022.

Borrowings under the 2022 facility bear interest, at our option, at either a eurodollar rate or a base rate, plus, in each case an applicable margin. The applicable margin ranges from 1.25% to 1.75% per annum in the case of eurodollar rate loans and 0.25% to 0.75% per annum in the case of base rate loans. The margin in either case is based on a measure of availability under the 2022 facility. A variable commitment fee, currently 0.375% per annum, is charged on the unused amount of the revolver based on quarterly average loan utilization. Letters of credit under the 2022 facility are assessed at a rate equal to the applicable eurodollar margin, currently 1.25%, as well as a fronting fee at a rate of 0.125% per annum. These fees are payable quarterly in arrears at the end of March, June, September, and December.

All obligations under the 2024 term loan and 2022 facility will be guaranteed jointly and severally by the Company and all other subsidiaries that guarantee the 2024 notes. All obligations and the guarantees of those obligations will be secured by substantially all of the assets of the Company and the guarantors subject to certain exceptions and permitted liens, including (i) with respect to the 2024 term loan, a first-priority security interest in such assets that constitute Notes Collateral (as defined below) and a second priority security interest in such assets that constitute ABL Collateral (as defined below), and (ii) with respect to the 2022 facility, a first-priority security interest in such assets that constitute ABL Collateral and a second-priority security interest in such assets that constitute Notes Collateral.

“ABL Collateral” includes substantially all presently owned and after-acquired accounts receivable, inventory, rights of unpaid vendors with respect to inventory, deposit accounts, commodity accounts, securities accounts and lock boxes, investment property, cash and cash equivalents, and general intangibles, books and records, supporting obligations and documents and related letters of credit, commercial tort claims or other claims related to and proceeds of each of the foregoing. “Notes Collateral” includes all collateral which is not ABL collateral.

The 2024 term loan and the 2022 facility contain restrictive covenants which, among other things, limit the Company’s ability to incur additional indebtedness, incur liens, engage in mergers or other fundamental changes, sell certain assets, pay dividends, make acquisitions or investments, prepay certain indebtedness, change the nature of our business, and engage in certain transactions with affiliates. In addition, the 2022 facility also contains a financial covenant requiring the satisfaction of a minimum fixed charge ratio of 1.00 to 1.00 if our excess availability falls below the greater of $80.0 million or 10% of the maximum borrowing amount, which was $87.2 million as of December 31, 2017.

Senior Secured Notes due 2024

As of December 31, 2017 we have $750.0 million outstanding in aggregate principal amount of the 2024 notes which mature on September 1, 2024. Interest accrues on the 2024 notes at a rate of 5.625% per annum and is payable semi-annually on March 1 and September 1 of each year.

The terms of the 2024 notes are governed by the indenture, dated as of August 22, 2016 (the “Indenture”), among the Company, the guarantors named therein (the “Guarantors”) and Wilmington Trust, National Association, as trustee (the “Trustee”) and notes collateral agent (the “Notes Collateral Agent”). The 2024 notes, subject to certain exceptions, are guaranteed, jointly and severally, on a senior secured basis, by certain of our direct and indirect wholly owned subsidiaries. All obligations under the 2024 notes, and the guarantees of those obligations, are secured by substantially all of the assets of the Company and the Guarantors subject to certain exceptions and permitted liens, including a first-priority security interest in such assets that constitute Notes Collateral (as defined above) and a second-priority security interest in such assets that constitute ABL Collateral (as defined above).

The Notes Collateral Agent became a party to the ABL/Bond Intercreditor Agreement, dated as of May 29, 2013, among SunTrust Bank, as agent under the Company’s 2022 facility, the Wilmington Trust, National Association, the Company and the Guarantors, and the Pari Passu Intercreditor Agreement, dated as of July 31, 2015, among Deutsche Bank AG New York Branch, as term collateral agent under the Company’s 2024 term loan, Wilmington Trust, National Association, the Company and the Guarantors. These documents govern all arrangements in respect of the priority of the security interests in the ABL Collateral and the Notes Collateral among the parties to the Indenture, the 2022 facility and the 2024 term loan. The 2024 notes constitute senior secured obligations of the Company and Guarantors, rank senior in right of payment to all future debt of the Company and Guarantors that is expressly subordinated in right of payment to the 2024 notes, and rank equally in right of payment with all existing and future liabilities of the Company and Guarantors that are not so subordinated, including the 2022 facility.

The Indenture contains restrictive covenants that limit the ability of the Company and its restricted subsidiaries to, among other things, incur additional debt or issue preferred stock; create liens; create restrictions on the Company’s subsidiaries’ ability to make payments to the Company; pay dividends and make other distributions in respect of the Company’s and its subsidiaries’ capital stock;

make certain investments or certain other restricted payments; guarantee indebtedness; designate unrestricted subsidiaries; sell certain kinds of assets; enter into certain types of transactions with affiliates; and effect mergers and consolidations.

At any time prior to September 1, 2019, the Company may redeem the 2024 notes in whole or in part at a redemption price equal to 100% of the principal amount of the 2024 notes plus the “applicable premium” set forth in the Indenture. At any time on or after September 1, 2019, the Company may redeem the 2024 notes at the redemption prices set forth in the Indenture, plus accrued and unpaid interest, if any, to the redemption date. At any time and from time to time during the 36-month period following August 22, 2016 (“the Closing Date”), the Company may redeem up to 10% of the aggregate principal amount of the 2024 notes during each twelve-month period commencing on the Closing Date at a redemption price of 103% of the aggregate principal amount thereof plus accrued and unpaid interest to the redemption date. In addition, at any time prior to September 1, 2019, the Company may redeem up to 40% of the aggregate principal amount of the 2024 notes with the net cash proceeds of one or more equity offerings, as described in the Indenture, at a price equal to 105.625% of the principal amount thereof, plus accrued and unpaid interest, if any, to the redemption date. If the Company experiences certain change of control events, holders of the 2024 notes may require it to repurchase all or part of their 2024 notes at 101% of the principal amount thereof, plus accrued and unpaid interest, if any, to the repurchase date.

As of December 31, 2017 we were not in violation of any covenants or restrictions imposed by any of our debt agreements.

Future maturities of long-term debt as of December 31, 2017 were as follows (in thousands):

Year ending December 31,
2018		$	4,700
2019			4,700
2020			4,700
2021			4,700
2022			354,700
Thereafter			1,189,450
Total long-term debt (including current maturities)		$	1,562,950

Warrants

Our previous term loan included detachable warrants that allowed for the purchase of up to 1.6 million shares of our common stock at a price of $2.50 per share. In April 2015, the remaining 0.7 million of outstanding, detachable warrants were exercised. The warrants were considered to be derivative financial instruments and were classified as liabilities. As such, they were measured at fair value on a recurring basis. Our share price and, to a lesser extent, the historical volatility of our common stock were the primary factors in the changes to our fair value measurements related to the warrants. All other inputs being equal, an increase or decrease in our share price or volatility resulted in an increase or decrease in the fair value of our warrants and an increase or decrease in interest expense.

Non-cash fair value adjustments related to our derivative financial instrument recorded as interest expense in the consolidated statement of operations and comprehensive income (loss) for the years ended December 31 (in thousands) were as follows:

Derivative Not Designated as Hedging Instruments		Location of Loss Recognized in Income		Amount of Loss Recognized in Income
		2017				2016				2015
Warrants		Interest expense, net			—				—				(4,563	)

We used the income approach to value our warrants by using the Black-Scholes option-pricing model. Using this model, the risk-free interest rate was based on the U.S. Treasury yield curve in effect on the valuation date. The expected life was based on the period of time until the expiration of the warrants. Expected volatility was based on the historical volatility of our common stock over the most recent period equal to the expected life of the warrants. The expected dividend yield was based on our history of not paying regular dividends in the past.

These techniques incorporated Level 1 and Level 2 inputs. Significant inputs to the derivative valuation for the warrants were observable in the active markets and are classified as Level 2 in the hierarchy.

Lease Finance Obligations

The Company is party to 141 individual property lease agreements with a single lessor as of December 31, 2017. These lease agreements have initial terms ranging from nine to fifteen years (expiring through 2021) and renewal options in five-year increments providing for up to approximately 30-year remaining total lease terms. A related agreement between the lessor and the Company gives the Company the right to acquire a limited number of the leased facilities at fair market value. As a result of these purchase rights, the Company treats all of the properties that it leases from this lessor as a financing arrangement. The Company is also party to certain additional agreements with the same lessor which commit the Company to perform certain repair and maintenance obligations under the leases in a specified manner and timeframe.

In 2006, we completed construction on a new multi-purpose facility. Based on the evaluation of the construction project in accordance with the Leases topic of the Codification, we were deemed the owner of the facility during the construction period. Effectively, a sale and leaseback of the facility occurred when construction was completed and the lease term began. This transaction did not qualify for sale-leaseback accounting. As a result the Company treats the lease of this facility as a financing arrangement.

As of December 31, 2017, lease finance obligations consist of $225.1 million, with cash payments of $22.0 million for the year ended December 31, 2017. These lease finance obligations are included on the consolidated balance sheet as a component of long-term debt and lease obligations. The related assets are recorded as components of property, plant, and equipment on the consolidated balance sheet.

Future minimum commitments for lease finance obligations as of December 31, 2017 were as follows (in thousands):

Year ending December 31,
2018		$	18,418
2019			18,898
2020			17,973
2021			17,712
2022			17,650
Thereafter			238,310
Total		$	328,961

9. Capital Lease Obligations

The Company leases certain property and equipment under capital leases expiring through 2020. These leases require monthly payments of principal and interest, imputed at various interest rates. Future minimum lease payments as of December 31, 2017 are as follows (in thousands):

Years ending December 31,
2018		$	6,689
2019			5,127
2020			4,775
Thereafter			—
Total minimum lease payments			16,591
Less: amount representing interest			(1,160	)
Present value of net minimum payments			15,431
Less: current portion			(5,986	)
Long-term capital lease obligations, net of current portion		$	9,445

10. Employee Stock-Based Compensation

2014 Incentive Plan

Under our 2014 Incentive Plan (“2014 Plan”), the Company is authorized to grant awards in the form of incentive stock options, non-qualified stock options, restricted stock shares, restricted stock units, other common stock-based awards and cash-based awards. In May 2016, our shareholders approved an amendment to our 2014 Plan that increased the number of shares of common stock reserved for the grant of awards under the 2014 Plan from 5.0 million shares to 8.5 million shares, subject to adjustment as provided by the 2014 Plan. All 8.5 million shares under the Plan may be made subject to options, stock appreciation rights (“SARs”), or stock-based awards. Stock options and SARs granted under the 2014 Plan may not have a term exceeding 10 years from the date of grant. The 2014 Plan also provides that all awards will become fully vested and/or exercisable upon a change in control (as defined in the 2014 Plan) if those awards (i) are not assumed or equitably substituted by the surviving entity or (ii) have been assumed or equitably substituted by the surviving entity, and the grantee’s employment is terminated under certain circumstances. Other specific terms for awards granted under the 2014 Plan shall be determined by our Compensation Committee (or the board of directors if so determined by the board of directors). Awards granted under the 2014 Plan generally vest ratably over a three to four year period. As of December 31, 2017, 5.4 million shares were available for issuance under the 2014 Plan.

2007 Incentive Plan

Under our 2007 Incentive Plan (“2007 Plan”), the Company was authorized to grant awards in the form of incentive stock options, non-qualified stock options, restricted stock, other common stock-based awards and cash-based awards. Stock options and SARs granted under the 2007 Plan may not have a term exceeding 10 years from the date of grant. The 2007 Plan also provided that all awards will become fully vested and/or exercisable upon a change in control (as defined in the 2007 Plan). Historically, awards granted under the 2007 Plan generally vested ratably over a three to four-year period. As of May 24, 2017, no further grants will be made under the 2007 plan.

2005 Equity Incentive Plan

Under our 2005 Equity Incentive Plan (“2005 Plan”), we were authorized to grant stock-based awards in the form of incentive stock options, non-qualified stock options, restricted stock and other common stock-based awards. Stock options and SARs granted under the 2005 Plan could not have a term exceeding 10 years from the date of grant. The 2005 Plan also provided that all awards become fully vested and/or exercisable upon a change in control (as defined in the 2005 Plan). Historically, awards granted under the 2005 Plan generally vested ratably over a three-year period. As of June 27, 2015, no further grants will be made under the 2005 Plan.

1998 Stock Incentive Plan

Under the Builders FirstSource, Inc. 1998 Stock Incentive Plan (“1998 Plan”), we were authorized to issue shares of common stock pursuant to awards granted in various forms, including incentive stock options, non-qualified stock options and other stock-based awards. The 1998 Plan also authorized the sale of common stock on terms determined by our board of directors. Stock options granted under the 1998 Plan generally cliff vest after a period of seven to nine years with certain option grants subject to acceleration if certain financial targets were met. The expiration date is generally 10 years subsequent to date of issuance. As of January 1, 2005, no further grants will be made under the 1998 Plan.

Stock Options

The following table summarizes our stock option activity:

		Options				Weighted Average Exercise Price				Weighted Average Remaining Years				Aggregate Intrinsic Value
		(In thousands)												(In thousands)
Outstanding at December 31, 2016			3,515			$	5.51
Granted			57			$	12.94
Exercised			(1,449	)		$	5.56
Forfeited			(19	)		$	7.44
Outstanding at December 31, 2017			2,104			$	5.66				4.8			$	33,927
Exercisable at December 31, 2017			1,522			$	4.80				4.1			$	25,871

The outstanding options at December 31, 2017 include 210,000 options under the 2014 plan, 1,384,000 options under the 2007 Plan, 302,000 options under the 2005 Plan and 208,000 options under the 1998 Plan. As of December 31, 2017, 42,000 options under the 2014 Plan, 1,108,000 options under the 2007 Plan, 164,000 options under the 2005 Plan and 208,000 options under the 1998 Plan were exercisable. The weighted average grant date fair value of options granted during the years ended December 31, 2017, 2016 and 2015 were $7.26, $3.71 and $4.20, respectively. The total intrinsic value of options exercised during the years ended December 31, 2017, 2016, and 2015 were $16.4 million, $11.6 million and $12.8 million, respectively. Vesting of all of our stock options is contingent solely on continuous employment over the requisite service period.

Outstanding and exercisable stock options at December 31, 2017 were as follows (shares in thousands):

		Outstanding												Exercisable
Range of Exercise Prices		Shares				Weighted Average Exercise Price				Weighted Average Remaining Years				Shares				Weighted Average Exercise Price
$3.15			208			$	3.15				5.9				208			$	3.15
$3.19			754			$	3.19				2.1				754			$	3.19
$6.35 - $6.70			161			$	6.45				7.2				48			$	6.47
$7.67- $12.94			981			$	7.97				6.3				512			$	7.67
$3.15 - $12.94			2,104			$	5.66				4.8				1,522			$	4.80

Restricted Stock Units

The outstanding restricted stock units (“RSUs”) at December 31, 2017 include 2,015,000 units granted under the 2014 Plan and 234,000 units granted under the 2007 Plan.

The following table summarizes activity for RSUs subject solely to service conditions for the year ended December 31, 2017 (shares in thousands):

		Shares				Weighted Average Grant Date Fair Value
Nonvested at December 31, 2016			1,657			$	8.77
Granted			468			$	14.60
Vested			(772	)		$	8.88
Forfeited			(22	)		$	7.96
Nonvested at December 31, 2017			1,331			$	10.77

The weighted average grant date fair value of RSUs for which vesting is subject solely to service conditions granted during the years ended December 31, 2017, 2016 and 2015 were $14.60, $10.68, and $7.26, respectively.

The following table summarizes activity for RSUs subject to both performance and service conditions for the year ended December 31, 2017 (shares in thousands):

		Shares				Weighted Average Grant Date Fair Value
Nonvested at December 31, 2016			260			$	10.95
Granted			230			$	15.38
Vested			—			$	—
Forfeited			(3	)		$	11.09
Nonvested at December 31, 2017			487			$	13.04

The weighted average grant date fair value of RSUs for which vesting is subject to both performance and service conditions granted during the years ended December 31, 2017 and 2016 were $15.38 and $10.96, respectively. There were no RSUs granted in 2015 which were subject to both performance and service conditions.

The following table summarizes activity for RSUs subject to both market and service conditions for the year ended December 31, 2017 (shares in thousands):

		Shares				Weighted Average Grant Date Fair Value
Nonvested at December 31, 2016			260			$	7.58
Granted			174			$	11.49
Vested			—			$	—
Forfeited			(3	)		$	7.72
Nonvested at December 31, 2017			431			$	9.16

The weighted average grant date fair value of RSUs for which vesting is subject to both market and service conditions granted during the years ended December 31, 2017 and 2016 were $11.49 and $7.58, respectively. There were no RSUs granted in 2015 which were subject to both market and service conditions.

Our results of operations include stock compensation expense of $13.5 million ($8.2 million net of taxes), $10.5 million ($6.3 million net of taxes) and $6.9 million ($6.9 million net of taxes) for the years ended December 31, 2017, 2016 and 2015, respectively. As a result of our adoption of the updated guidance related to stock compensation discussed in Note 2 we recognized excess tax benefits for stock options exercised and RSUs vested of $5.1 million for the year ended December 31, 2017. We recognized no excess tax benefits for stock options exercised or RSUs vested during the years ended December 31, 2016 and 2015. The total fair value of options vested during the years ended December 31, 2017, 2016, and 2015 were $2.7 million, $2.8 million and $2.7 million, respectively. The total fair value of RSUs vested during the years ended December 31, 2017, 2016 and 2015 were $6.9 million, $3.9 million and $3.7 million, respectively.

As of December 31, 2017, there was $14.0 million of total unrecognized compensation cost related to non-vested share-based compensation arrangements granted under the Plans. That cost is expected to be recognized over a weighted-average period of 1.9 years.

11. Income Taxes

The components of income tax expense (benefit) included in continuing operations were as follows for the years ended December 31:

		2017				2016				2015
		(In thousands)
Current:
Federal		$	1,831			$	—			$	—
State			2,213				2,115				1,100
			4,044				2,115				1,100
Deferred:
Federal			49,710				(110,720	)			2,530
State			(606	)			(14,067	)			757
			49,104				(124,787	)			3,287
Income tax expense (benefit)		$	53,148			$	(122,672	)		$	4,387

Temporary differences, which give rise to deferred tax assets and liabilities, were as follows as of December 31:

		2017				2016
		(In thousands)
Deferred tax assets related to:
Accrued expenses		$	9,615			$	13,664
Insurance reserves			11,299				15,128
Stock-based compensation expense			4,702				7,429
Accounts receivable			3,355				5,023
Inventories			11,370				24,628
Operating loss and credit carryforwards			68,066				87,610
			108,407				153,482
Valuation allowance			(2,409	)			(4,821	)
Total deferred tax assets			105,998				148,661
Deferred tax liabilities related to:
Prepaid expenses			(2,706	)			(3,799	)
Goodwill and other intangible assets			(19,431	)			(15,956	)
Property, plant and equipment			(8,593	)			(13,058	)
Other			(163	)			(528	)
Total deferred tax liabilities			(30,893	)			(33,341	)
Net deferred tax asset		$	75,105			$	115,320

A reconciliation of the statutory federal income tax rate to our effective rate for continuing operations is provided below for the years ended December 31:

		2017				2016				2015
Statutory federal income tax rate			35.0	%			35.0	%			35.0	%
State income taxes, net of federal income tax			7.7				6.1				8.3
Valuation allowance			(3.1	)			(607.9	)			(52.1	)
Stock compensation windfall benefit			(5.5	)			—				—
Enactment of federal income tax rate change			31.5				—				—
Permanent difference – 162(m) limitation			0.8				0.6				(5.4	)
Permanent difference – warrant mark to market			—				—				(8.6	)
Permanent difference – credits			(9.6	)			(1.2	)			1.9
Permanent difference – other			0.9				0.4				(2.8	)
Other			0.1				0.9				0.1
			57.8	%			(566.1	)%			(23.6	)%

As discussed in Note 2 the Company adopted updated guidance related to the accounting for stock compensation in 2017. As a result of this updated guidance all windfalls and shortfalls are now recognized as a component of income tax expense in the period they occur.

On December 22, 2017, the President signed into law the 2017 Tax Act, which includes a broad range of tax reform proposals affecting businesses, including corporate tax rates and business deductions. The 2017 Tax Act reduces the statutory federal corporate tax rate from 35% to 21% for periods beginning after December 31, 2017. The Income Taxes topic of the Codification requires that the effect of a tax rate change on deferred tax assets and liabilities be recognized in the period the rate change was enacted. As such, we recorded income tax expense of $29.0 million for the year ended December 31, 2017 related to the revaluation of our net deferred tax assets. We do not expect the 2017 Tax Act to impact the realizability of our deferred tax assets. There were no other material impacts recognized or unrecognized for the year ended December 31, 2017 as a result of the enactment of the 2017 Tax Act.

At December 31, 2017 and 2016, the Company had deferred tax assets, net of deferred tax liabilities, of $77.5 million and $120.1 million, respectively, offset by valuation allowances of $2.4 million and $4.8 million, respectively. We have $338.5 million of state net operating loss carryforwards and $2.8 million of state tax credit carryforwards expiring at various dates through 2037. We also have $190.8 million of federal net operating loss carryforwards and $11.4 million of federal tax credit carryforwards expiring at various dates through 2037. As of December 31, 2017, the Company needed to generate approximately $281.4 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 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 and make certain assumptions. 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 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. We remained in a cumulative three year loss position until the second quarter of 2016. In the third quarter of 2016, management determined that there was sufficient positive evidence to conclude that it was more likely than not that the valuation allowance should be released against our net federal and some state deferred tax assets. As a result, for the year ended December 31, 2016 we recorded a cumulative reduction to the valuation allowance against our net deferred tax assets of $131.7 million. During 2017, as a result of various activities and tax initiatives that impacted our assessment of the future utilization and realizability of our state net operating losses (“NOLs”) we recorded a reduction to the associated valuation allowance of $2.8 million for the year ended December 31, 2017. For the year ended December 31, 2015, we recorded a valuation allowance of $9.7 million related to our continuing operations.

Section 382 of the Internal Revenue Code imposes annual limitations on the utilization of NOL carryforwards, other tax carryforwards, and certain built-in losses upon an ownership change as defined under that section. In general terms, an ownership change may result from transactions that increase the aggregate ownership of certain stockholders in the Company’s stock by more than 50 percentage points over a three year testing period (“Section 382 Ownership Change”). In 2017, affiliates of a significant shareholder sold their investment in the Company, which triggered a Section 382 Ownership Change. As a result of triggering a Section 382 Ownership Change, an annual limitation is now imposed on the Company’s tax attributes, including its NOLs and other credits. The Company has evaluated the impact of this limitation on its NOLs and other credits and does not expect it to have a material impact on their future utilization or realizability.

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.

The following table shows the changes in our valuation allowance:

		2017				2016				2015
		(In thousands)
Balance at January 1,		$	4,821			$	136,548			$	133,183
Additions charged to expense			—				—				9,624
Reductions credited to expense			(2,839	)			(131,727	)			—
Enactment of federal income tax rate change			427				—				—
Deductions			—				—				(6,259	)
Balance at December 31,		$	2,409			$	4,821			$	136,548

The balance for uncertain tax positions, excluding penalties and interest, was $0.3 million, $0.2 million and $0.2 million as of December 31, 2017, 2016 and 2015, respectively with no significant impact recorded in the Company’s consolidated statement of operations and comprehensive income (loss) for the years ended December 31, 2017, 2016 or 2015. We accrue interest and penalties on our uncertain tax positions as a component of our provision for income taxes. We accrued no significant interest and penalties in 2017, 2016 or 2015.

We are subject to U.S. federal income tax as well as income tax of multiple state jurisdictions. Based on completed examinations and the expiration of statutes of limitations, we have concluded all U.S. federal income tax matters for years through 2013. We report in 41 states with various years open to examination.

12. Employee Benefit Plans

We maintain one active defined contribution 401(k) plan. Our employees are eligible to participate in the plans subject to certain employment eligibility provisions. Participants can contribute up to 75% of their annual compensation, subject to federally mandated maximums. Participants are immediately vested in their own contributions. We match a certain percentage of the contributions made by participating employees, subject to IRS limitations. Our matching contributions are subject to a pro-rata five-year vesting schedule. We recognized expense of $4.6 million, $4.6 million and $6.5 million in 2017, 2016 and 2015, respectively, for contributions to the plan.

The Company contributes to multiple collectively bargained union retirement plans including multiemployer plans. The Company does not administer the multiemployer plans, and contributions are determined in accordance with the provisions of negotiated labor contracts. The risks of participating in multiemployer plans are different from single-employer plans. Assets contributed to the multiemployer plan by one employer may be used to provide benefits to employees of other participating employers. If a participating employer stops contributing to a multiemployer plan, the unfunded obligations of that multiemployer plan may be borne by the remaining participating employers. If the Company chooses to stop participating in a multiemployer plan, the Company may be required to pay that plan an amount (“withdrawal liability”) based on the plan’s formula and the underfunded status of the plan attributable to the Company. Contributions to the plans for the years ended December 31, 2017, 2016 and 2015 were not significant.

13. Commitments and Contingencies

We lease certain land, buildings and equipment used in operations. These leases are generally accounted for as operating leases with initial terms ranging from one to 20 years and they generally contain renewal options. Certain operating leases are subject to contingent rentals based on various measures, primarily consumer price index increases. We also lease certain properties from related parties, including current employees and non-affiliate stockholders. Total rent expense under operating leases was approximately $77.9 million, $68.7 million and $43.6 million for the years ended December 31, 2017, 2016, and 2015, respectively.

In addition, we have residual value guarantees on certain equipment leases. Under these leases we have the option of (a) purchasing the equipment at the end of the lease term, (b) arranging for the sale of the equipment to a third party, or (c) returning the equipment to the lessor to sell the equipment. If the sales proceeds in any case are less than the residual value, we are required to reimburse the lessor for the deficiency up to a specified level as stated in each lease agreement. If the sales proceeds exceed the residual value, we are entitled to all of such excess amounts. The guarantees under these leases for the residual values of equipment at the end of the respective operating lease periods approximated $5.6 million as of December 31, 2017. 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.

Future minimum commitments for noncancelable operating leases with initial or remaining lease terms in excess of one year are as follows:

		Related Party				Total*
		(In thousands)
Year ending December 31,
2018		$	852			$	76,565
2019			831				64,016
2020			852				50,562
2021			527				40,351
2022			406				27,446
Thereafter			633				60,927
		$	4,101			$	319,867

*	Includes related party future minimum commitments for noncancelable operating leases.

As of December 31, 2017, we had outstanding letters of credit totaling $84.9 million under our 2022 facility that principally support our self-insurance programs.

The Company has a number of known and threatened construction defect legal claims. While these claims are generally covered under the Company’s existing insurance programs to the extent any loss exceeds the deductible, there is a reasonable possibility of loss that is not able to be estimated at this time because (i) many of the proceedings are in the discovery stage, (ii) the outcome of future litigation is uncertain, and/or (iii) the complex nature of the claims. Although the Company cannot estimate a reasonable range of loss based on currently available information, the resolution of these matters could have a material adverse effect on the Company's financial position, results of operations or cash flows.

In addition, we are involved in various other claims and lawsuits incidental to the conduct of our business in the ordinary course. We carry insurance coverage in such amounts in excess of our self-insured retention as we believe to be reasonable under the circumstances and that may or may not cover any or all of our liabilities in respect of such claims and lawsuits. Although the ultimate disposition of these other proceedings cannot be predicted with certainty, management believes the outcome of any such claims that are pending or threatened, either individually or on a combined basis, will not have a material adverse effect on our consolidated financial position, cash flows or results of operations. However, there can be no assurances that future adverse judgments and costs would not be material to our results of operations or liquidity for a particular period.

14. Segment and Product Information

We offer an integrated solution to our customers providing manufacturing, supply, and installation of a full range of structural and related building products. We provide a wide variety of building products and services directly to homebuilder customers. We manufacture floor trusses, roof trusses, wall panels, stairs, millwork, windows, and doors. We also provide a full range of construction services. These product and service offerings are distributed across 402 locations operating in 40 states across the United States, which have been organized into nine geographical regions. Centralized financial and operational oversight, including resource allocation and assessment of performance on an income (loss) from continuing operations before income taxes basis, is performed by our CEO, whom we have determined to be our chief operating decision maker (“CODM”).

The Company has nine operating segments aligned with its nine geographical regions (Regions 1 through 9). While all of our operating segments have similar nature of products, distribution methods and customers, certain of our operating segments have been aggregated due to also containing similar economic characteristics, resulting in the following composition of reportable segments:

	•	Regions 1 and 2 have been aggregated to form the “Northeast” reportable segment

	•	Regions 3 and 5 have been aggregated to form the “Southeast” reportable segment

	•	Regions 4 and 6 have been aggregated to form the “South” reportable segment

	•	Region 7, 8 and 9 have been aggregated to form the “West” reportable segment

In addition to our reportable segments, our consolidated results include corporate overhead, other various operating activities that are not internally allocated to a geographical region nor separately reported to the CODM, and certain reconciling items primarily related to allocations of corporate overhead and rent expense, which have collectively been presented as “All Other”. The accounting policies of the segments are consistent with those described in Note 2, except for noted reconciling items.

The following tables present Net sales, Income (loss) before income taxes and certain other measures for the reportable segments, reconciled to consolidated total operations, for the years ended December 31, (in thousands):

		2017
Reportable segments		Net Sales				Depreciation & Amortization				Interest				Income (loss) before income taxes
Northeast		$	1,285,286			$	13,255			$	20,893			$	40,359
Southeast			1,542,330				10,457				22,939				49,735
South			1,855,425				19,573				23,320				90,551
West			2,188,696				26,902				32,058				85,628
Total reportable segments			6,871,737				70,187				99,210				266,273
All other			162,472				22,806				93,964				(174,344	)
Total consolidated		$	7,034,209			$	92,993			$	193,174			$	91,929
		2016
Reportable segments		Net Sales				Depreciation & Amortization				Interest				Income (loss) before income taxes
Northeast		$	1,204,100			$	18,220			$	18,660			$	35,347
Southeast			1,362,259				11,243				19,768				40,261
South			1,699,371				21,670				22,213				72,183
West			1,939,206				33,764				27,130				72,745
Total reportable segments			6,204,936				84,897				87,771				220,536
All other			162,348				24,896				126,896				(198,867	)
Total consolidated		$	6,367,284			$	109,793			$	214,667			$	21,669

		2015
Reportable segments		Net Sales				Depreciation & Amortization				Interest				Income (loss) before income taxes
Northeast		$	626,985			$	4,202			$	7,508			$	28,843
Southeast			890,164				5,072				14,214				17,193
South			1,015,556				9,351				12,058				53,435
West			785,370				5,811				6,109				35,230
Total reportable segments			3,318,075				24,436				39,889				134,701
All other			246,350				33,844				69,310				(153,145	)
Total consolidated		$	3,564,425			$	58,280			$	109,199			$	(18,444	)

Asset information by segment is not reported internally or otherwise reviewed by the CODM nor does the company earn revenues or have long-lived assets located in foreign countries. The Company’s net sales by product category for the periods indicated were as follows (in thousands):

Sales by product category were as follows for the years ended December 31:

		2017				2016				2015
		(In thousands)
Lumber & lumber sheet goods		$	2,510,945			$	2,131,394			$	1,129,684
Manufactured products			1,208,555				1,097,665				635,338
Windows, doors & millwork			1,360,567				1,286,151				818,131
Gypsum, roofing & insulation			538,378				520,007				264,894
Siding, metal & concrete products			655,889				622,344				319,618
Other building & product services			759,875				709,723				396,760
Total sales		$	7,034,209			$	6,367,284			$	3,564,425

15. Related Party Transactions

Certain members of the Company’s board of directors serve on the board of directors for one of our suppliers, PGT, Inc. Further, the Company has entered into certain leases of land and buildings with certain employees or non-affiliate stockholders. Activity associated with these related party transactions was not significant as of or for the years ended December 31, 2017, 2016 or 2015.

Transactions between the Company and other related parties occur in the ordinary course of business. However, the Company carefully monitors and assesses related party relationships. Management does not believe that any of these transactions with related parties had a material impact on the Company’s results for the years ended December 31, 2017, 2016 or 2015.

16. Unaudited Quarterly Financial Data

The following tables summarize the consolidated quarterly results of operations for 2017 and 2016 (in thousands, except per share amounts):

		2017
		First Quarter					Second Quarter				Third Quarter				Fourth Quarter
Net sales		$	1,533,064				$	1,843,297			$	1,878,909			$	1,778,939
Gross margin			376,052					460,797				459,322				431,220
Net income (loss)			3,822		(1)			37,910	(2)			39,750	(3)			(42,701	)(4)
Net income (loss) per share
Basic		$	0.03		(1)		$	0.34	(2)		$	0.35	(3)		$	(0.38	)(4)
Diluted		$	0.03		(1)		$	0.33	(2)		$	0.34	(3)		$	(0.38	)(4)

		2016
		First Quarter					Second Quarter				Third Quarter				Fourth Quarter
Net sales		$	1,397,114				$	1,677,300			$	1,745,958			$	1,546,912
Gross margin			349,748					418,331				437,094				391,575
Net income (loss)			(16,980	)	(5)			29,441	(6)			125,469		(7)		6,411		(8)
Net income (loss) per share
Basic		$	(0.15	)	(5)		$	0.27	(6)		$	1.13		(7)	$	0.06		(8)
Diluted		$	(0.15	)	(5)		$	0.26	(6)		$	1.10		(7)	$	0.06		(8)

(1)	Includes the write-off of debt discount and debt issuance costs of $1.0 million and financing costs of $1.4 million as discussed in Note 8.

(2)	Includes a valuation allowance of $(3.7) million as discussed in Note 11.

(3)	Includes a valuation allowance of $(0.1) million as discussed in Note 11.

(4)	Includes a loss on debt extinguishment of $56.3 million as discussed in Note 8, income tax expense of $29.0 million due to the enactment of a federal income tax rate change in December 2017, and a valuation allowance of $1.0 million as discussed in Note 11.

(5)	Includes a gain on debt extinguishment of $7.8 million as discussed in Note 8 and a valuation allowance of $5.1 million as discussed in Note 11.

(6)	Includes a loss on debt extinguishment of $1.7 million as discussed in Note 8 and a valuation allowance of $(16.0) million as discussed in Note 11.

(7)	Includes a loss on debt extinguishment and financing costs of $53.3 million as discussed in Note 8 and a valuation allowance of $(117.6) million as discussed in Note 11.

(8)	Includes a loss on debt extinguishment of $9.7 million as discussed in Note 8 and a valuation allowance of $(3.2) million as discussed in Note 11.

Earnings per share is computed independently for each of the quarters presented; therefore, the sum of the quarterly earnings per share may not equal the annual earnings per share.