Builders FirstSource (BLDR) 10-K risk factor changes: FY2018 vs FY2017

[added: In addition, the building industry is subject to various local, state,] and [added: federal statutes, ordinances, and] regulations concerning zoning, building design and safety, construction, energy and water conservation and similar matters, including regulations that impose restrictive zoning and density requirements in order to limit the number of homes that can be built within the boundaries of a particular area or in order to maintain certain areas as primarily or exclusively residential.

According to the U.S. Census Bureau, annual U.S. total and single-family housing starts were [removed: 1,202,900] [added: 1.2 million] and [removed: 848,900,] [added: 0.9 million,] respectively, [removed: in 2017.][added: for the year ended December 31, 2018.]

However, both total and single-family housing starts remain well below the normalized historical averages (from 1959 through [removed: 2017)] [added: 2018)] of 1.5 million and [removed: 1.0] [added: 1.1] million, respectively.

Due to the lower levels in housing [removed: starts and] [added: starts,] increased competition for homebuilder [removed: business,] [added: business and cyclical fluctuations in commodity prices,] we have seen and may continue to experience [removed: downward competitive] pressure on our gross margins.

Our lumber and lumber sheet goods product category represented [removed: 35.7%] [added: 37.6%] of total sales for the year ended December 31, [removed: 2017.][added: 2018.]

The homebuilding industry has experienced growth in recent years and industry forecasters expect to see continued [removed: improvement] [added: growth] in the housing market in the near term.

However, it is [removed: likely] [added: likely, based on historical experience,] that we will face future downturns in the homebuilding industry which could have an adverse effect on our operating results, financial condition or cash flows.

Production homebuilders and multi-family builders historically have exerted and will continue to exert significant pressure on their outside suppliers to keep prices low because of their market share and their ability to leverage such market share in the highly [added: fragmented building products supply industry.]

As of December 31, [removed: 2017,] [added: 2018,] our debt totaled [removed: $1,803.5] [added: $1,577.1] million, which includes [removed: $240.5] [added: $243.5] million of [removed: lease finance obligations and] capital lease [added: and other finance] obligations.

We also have a $900.0 million revolving credit facility (“2022 [removed: facility”).][added: facility”), under which we had $179.0 million of outstanding borrowings and $82.2 million of letters of credit outstanding as of December 31, 2018.]

| | • | exposing us to the risk of increased interest rates, and corresponding increased interest expense, because borrowings under the 2022 facility and the [removed: $467.7] [added: $458.3] million senior secured term loan facility due 2024 (“2024 term loan”) are at variable rates of interest; |

In such event, it is [removed: unlikely] [added: possible] that we would [added: not] be able to satisfy our obligations under all of such accelerated indebtedness simultaneously.

Our financial condition and operating [removed: performance] [added: performance,] including that of our [removed: subsidiaries] [added: subsidiaries,] are also subject to prevailing economic and competitive conditions and to certain financial, business and other factors beyond our control.

We are substantially reliant on cash on hand and borrowing availability under the 2022 facility, which totaled [removed: $494.3] [added: $595.5] million at December 31, [removed: 2017,] [added: 2018,] to provide working capital and fund our operations.

Our working capital requirements are likely to grow assuming the housing industry continues to [removed: improve.][added: grow.]

[added: Our ability to secure additional financing, if available, and to satisfy our financial obligations] under indebtedness outstanding from time to time will depend upon our future operating performance, the availability of credit, economic conditions and financial, business and other factors, many of which are beyond our control.

[removed: Any] [added: Significant] worsening of current housing market conditions or the macroeconomic factors that affect our industry could require us to seek additional capital and have a material adverse effect on our ability to secure such capital on favorable terms, if at all.

The agreement governing the 2022 facility 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 [removed: $87.2] [added: $84.7] million as of December 31, [removed: 2017.][added: 2018.]

As of December 31, [removed: 2017,] [added: 2018,] we had approximately [removed: $813.0] [added: $637.3] million, or [removed: 45.1%,] [added: 40.4%,] of our outstanding debt at variable interest rates.

[removed: At December 31, 2017, a] [added: A] 1.0% increase in interest rates on the 2024 term loan [removed: would, subject to the interest rate floor specified in the agreement,] [added: outstanding as of December 31, 2018 would] result in approximately $4.6 million in additional interest expense annually.

[removed: At December 31, 2017, a] [added: A] 1.0% increase in interest rates on the 2022 facility would result in approximately [removed: $3.5] [added: $1.8] million in additional interest expense [removed: annually.][added: annually as we had $179.0 million in outstanding borrowings as of December 31, 2018.]

Our ten largest customers generated approximately [removed: 16.0%] [added: 16.8%] of our sales for the year ended December 31, [removed: 2017.][added: 2018.]

Short-term changes in the cost of these materials, some of which are subject to significant fluctuations, are [removed: sometimes,] [added: oftentimes,] but not always passed on to our customers.

We believe that leases we enter into in the future will likely be [removed: of the same] [added: for similar] terms (five to 15 years), will be non-cancelable and will feature similar renewal options.

During the period from 2007 through [removed: 2017,] [added: 2018,] we closed or idled a number of facilities for which we continue to remain liable.

At the end of a lease [removed: term and any renewal period for a leased facility,] [added: term,] for those locations where we have no renewal options remaining, we may be unable to renew the lease without additional cost, if at all.

The ability of our subsidiaries to pay dividends or make other payments or distributions to us will depend on their respective operating results and may be restricted by, among other things, the laws of their jurisdiction of organization (which may limit the amount of funds available for the payment of dividends and other distributions to us), the terms of existing and future indebtedness and other agreements of our subsidiaries, the [added: 2022 facility, the 2024 term loan, the terms of the indentures governing the 2024 notes and the covenants of any future outstanding indebtedness we or our subsidiaries incur.]

We are in the process of integrating [added: certain of] ProBuild’s systems with ours and are expecting to complete that process in 2019.

We rely upon our information technology systems to [added: run critical accounting and financial information systems, process receivables,] manage and replenish inventory, [removed: to] fill and ship customer orders on a timely basis, and [removed: to] coordinate our sales activities across all [removed: of our] products and services.

A substantial disruption in our information technology systems for any prolonged time period (arising from, for example, system capacity limits from unexpected increases in our volume of business, outages, [added: natural] or [removed: delays] [added: other disasters, or disruptions] in our service) could result in [added: problems and] delays in [added: generating critical financial and operational information, processing receivables,] receiving inventory and supplies [removed: or filling customer orders] and [removed: adversely affect our] [added: filling] customer [removed: service and relationships.][added: orders.]

Our [removed: systems] [added: systems, or those of our significant customers or suppliers,] might be damaged or interrupted by natural or man-made events or by computer viruses, physical or electronic break-ins, or similar disruptions affecting the global Internet.

There can be no assurance that such [added: disruptions,] delays, problems, or associated costs [removed: will] [added: relating to our systems or those of our significant customers, suppliers or third-party providers would] not have a material adverse effect on our financial condition, operating results and cash flows.

We are subject to cybersecurity risks and [removed: may] [added: expect to] incur increasing costs in an effort to minimize those risks.

Our business employs systems that allow for the secure storage and transmission of [removed: customers’] [added: customers’, vendors’] and employees’ proprietary information.

These events could compromise [added: ours’ and] our [added: customers’ and suppliers’] confidential information, impede or interrupt our business operations, and [removed: may] [added: could] result in other negative consequences, including remediation costs, loss of revenue, litigation and reputational damage.

To [removed: date,] [added: our knowledge,] we have not experienced a material cybersecurity [removed: breach.][added: breach to date.]

As cyber-attacks become more [removed: sophisticated] [added: sophisticated,] we [removed: may be required] [added: expect] to incur [removed: significant] [added: increasing] costs to strengthen our systems from outside intrusions [removed: and/or] [added: and have purchased and expect to] maintain insurance coverage related to the threat of such attacks.

We currently maintain a broad network of distribution and manufacturing facilities throughout the U.S. Any widespread disruption to our [removed: facilities] [added: operations] resulting from fire, earthquake, weather-related events, an act of terrorism or any other cause could damage [added: multiple facilities and] a significant portion of our inventory and could materially impair our ability to distribute our products to customers.

Moreover, we could incur significantly higher costs and longer lead times associated with distributing our products to our customers during the time [added: that it takes for us to reopen or replace a damaged facility.]

We may also be required to incur additional debt [added: or issue additional shares of our common stock] in order to consummate acquisitions in the future.

Homebuyer demand may shift towards smaller homes creating fluctuations in demand for our products.

Home affordability can be a key driver in demand for our products.

Home affordability is influenced by a number of economic factors, such as the level of employment, consumer confidence, consumer income, supply of houses, the availability of financing and interest rates.

Changes in the inventory of available homes as well as economic factors relative to home prices may result in homes becoming less affordable.

This could cause homebuyer demand to shift towards smaller homes which could have an adverse impact on our financial condition, operating results and cash flows.

Further, an increase in interest rates could also trigger a limitation on the deductibility of those interest costs, increasing our tax expense thereby further decreasing our net income and cash flows.

Since 2016, the Company has executed several debt transactions designed to reduce debt, extend maturities or lower our interest rates.

The Company is likely to execute similar debt transactions in the future.

However, there can be no assurance that we will be successful in anticipating the direction of interest rates or changes in market conditions, which could result in future debt transactions having a material adverse impact on our financial condition, operating results and cash flows.

These disruptions could adversely affect our operating results as well as our customer service and relationships.

In addition, we rely on a number of third-party service providers to execute certain business processes and maintain certain information technology systems and infrastructure, and any breach of security or disruption in their systems could impair our ability to operate effectively.

The issuance of new shares of our common stock could dilute the equity value of our existing shareholders.

The 2017 Tax Act also modified the existing 162(m) limitations, creating additional limitations on the deductibility of executive compensation.

In addition, the building industry is subject to various local, state, and federal statutes, ordinances,

We believe the housing industry is currently experiencing a shortage of skilled construction labor, which is constraining housing activity.

fragmented building products supply industry.

As of December 31, 2017, we had $350.0 million of outstanding borrowings and $84.9 million of letters of credit outstanding under the 2022 facility.

Our ability to secure additional financing, if available, and to satisfy our financial obligations

2022 facility, the 2024 term loan, the terms of the indentures governing the 2024 notes and the covenants of any future outstanding indebtedness we or our subsidiaries incur.

that it takes for us to reopen or replace a damaged facility.

As a

The Company operates [removed: 402] [added: 401] locations in [removed: 40] [added: 39] states across the United States.

Our full range of construction-related services includes professional installation, turn-key framing and shell construction, and spans [added: products across] all [added: of] our product categories.

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

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

| | • | Homebuilding Industry. Our business is driven primarily by the residential new construction market and the residential repair and remodel market, which are in turn dependent upon a number of factors, including demographic trends, interest rates, consumer confidence, employment rates, foreclosure rates, the availability of skilled construction labor, and the health of the economy and mortgage markets. According to the U.S. Census Bureau, annual U.S. total and single-family housing starts were [removed: 1,202,900] [added: 1.2 million] and [removed: 848,900,] [added: 0.9 million,] respectively, in [removed: 2017.] [added: 2018.] However, both total and single-family housing starts remain well below the normalized historical averages (from 1959 through [removed: 2017)] [added: 2018)] of 1.5 million and 1.1 million, respectively. We believe the housing industry is currently experiencing a shortage of skilled construction labor, which is constraining housing activity. Due to the lower levels in housing starts [removed: and] [added: versus historical norms,] increased competition for homebuilder [removed: business,] [added: business and cyclical fluctuations in commodity prices] we have seen and may continue to experience [removed: downward competitive] pressure on our gross margins. In addition to these factors, there has been a trend of consolidation within the building products supply industry. However, our industry remains highly fragmented and competitive and we will continue to face significant competition from local and regional suppliers. We still believe there are several meaningful trends that indicate U.S. housing demand will [removed: recover] [added: continue] to [added: trend towards recovering to] the historical [removed: average in the long term and that the downturn in the housing industry was a trough in the cyclical nature of the residential construction industry.] [added: average.] These trends include relatively low interest rates, the aging of housing stock, and normal population growth due to immigration and birthrate exceeding death rate. [removed: Industry] [added: While the rate of market growth has recently eased, industry] forecasters, including the [added: National Association of Homebuilders (“NAHB”), expect to see continued increases in housing demand over the next year.] |

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

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

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

| | • | Economic Conditions. Economic changes both nationally and locally in our markets impact our financial performance. The building products supply industry is highly dependent upon new home construction and subject to cyclical market changes. Our operations are subject to fluctuations arising from changes in supply and demand, national and local economic conditions, labor costs and availability, competition, government regulation, trade policies and other factors that affect the homebuilding industry such as demographic trends, interest rates, housing starts, the [removed: availability] [added: high cost] of [removed: suitable building lots,] [added: land development,] employment levels, consumer confidence, and the availability of credit to homebuilders, contractors, and homeowners. |

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

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

[removed: During the year ended December 31, 2017, the Company executed three debt transactions which] [added: These repurchases] are described in Note 8 to the consolidated financial statements included in Item 8 of this annual report on Form 10-K.

According to the U.S. Census Bureau, actual U.S. total housing starts for [removed: 2017] [added: the year ended ended December 31, 2018] were [removed: 1,202,900,] [added: 1.2 million,] an increase of [removed: 2.5%] [added: 3.6%] compared to [removed: 2016.][added: the year ended December 31, 2017.]

Actual U.S. single-family housing starts for [removed: 2017] [added: the year ended December 31, 2018] were [removed: 848,900,] [added: 0.9 million,] an increase of [removed: 8.6%] [added: 2.8%] compared to [removed: 2016.][added: the year ended December 31 2017.]

While the housing industry has strengthened over the past few years, the limited availability of credit to smaller homebuilders and potential homebuyers, [removed: as well as] the high [added: cost of land development in many major metropolitan areas, the high] demand for a limited supply of skilled construction labor, [added: and increasing costs for materials and labor,] among other factors, have hampered a stronger recovery.

A composite of third party sources, including the NAHB, are forecasting [removed: 1,292,000] [added: 1.3 million] U.S. total housing starts and [removed: 921,000] [added: 0.9 million] U.S. single-family housing starts for [removed: 2018,] [added: 2019,] which are increases of [removed: 7.4%] [added: 3.1%] and [removed: 8.5%,] [added: 3.1%,] respectively, from [removed: 2017.][added: 2018.]

In addition, the Home Improvement Research Institute (“HIRI”) is forecasting sales in the professional repair and remodel end market to increase approximately [removed: 2.5%] [added: 6.8%] in [removed: 2018] [added: 2019] compared to [removed: 2017.][added: 2018.]

Our net sales for the year ended December 31, [removed: 2017] [added: 2018] were up [removed: 10.5%] [added: 9.8%] over the same period last year.

We estimate that [removed: our sales volume increased 4.3%, while] [added: 6.2% of this increase is attributable to the impact of] commodity price inflation [removed: resulted in an additional 6.2% increase in] [added: on] sales in 2017 compared to 2016.

For the year ended December 31, [removed: 2017] [added: 2017,] sales [added: unit] volume growth in single-family and the repair and remodel end market were partially offset by declines in multi-family.

Our gross margin percentage [removed: decreased] [added: increased] by [removed: 0.5%] [added: 0.3%] during the year ended December 31, [removed: 2017] [added: 2018] compared to the year ended December 31, [removed: 2016.][added: 2017.]

We continue to invest in our business to improve our operating efficiency, [removed: which] [added: which, along with operating leverage and disciplined cost management,] has allowed us to better leverage our operating costs against changes in net sales.

Our selling, general and administrative expenses, as a percentage of net sales, were [removed: 20.5%] [added: 20.1%] for the year ended December 31, [removed: 2017,] [added: 2018,] a [removed: 0.9%] [added: 0.4%] decrease from [removed: 21.4%] [added: 20.5%] in [removed: 2016.][added: 2017.]

[removed: We] [added: While the rate of market growth has recently eased we still] believe the long-term outlook for the housing industry is positive due to growth [added: and trends] in the underlying demographics.

We feel we are well-positioned to take advantage of the construction activity in our markets and to increase our market share, which may include strategic [removed: acquisitions.][added: acquisitions or investments in organic growth opportunities.]

We will continue to focus on working capital by closely monitoring the credit exposure of our [removed: customers] [added: customers, remaining focused on maintaining the right level of inventory] and by working with our vendors to improve [removed: our] payment terms and pricing on our products.

| | | [removed: 2017] [added: 2018] | | | | [removed: 2016] [added: 2017] | | | | [removed: 2015] [added: 2016] | | |

| Cost of sales | | | [removed: 75.4] [added: 75.1] | % | | | [removed: 74.9] [added: 75.4] | % | | | [removed: 74.7] [added: 74.9] | % |

| Gross margin | | | [removed: 24.6] [added: 24.9] | % | | | [removed: 25.1] [added: 24.6] | % | | | [removed: 25.3] [added: 25.1] | % |

| Selling, general and administrative expenses | | | [removed: 20.5] [added: 20.1] | % | | | [removed: 21.4] [added: 20.5] | % | | | [removed: 22.7] [added: 21.4] | % |

| Income from operations | | | [removed: 4.1] [added: 4.8] | % | | | [removed: 3.7] [added: 4.1] | % | | | [removed: 2.6] [added: 3.7] | % |

| Interest expense, net | | | [removed: 2.7] [added: 1.4] | % | | | [removed: 3.3] [added: 2.7] | % | | | [removed: 3.1] [added: 3.3] | % |

| Income tax expense (benefit) | | | [removed: 0.8] [added: 0.7] | % | | | [removed: (1.9] [added: 0.8] | [removed: )%] [added: %] | | | [removed: 0.1] [added: (1.9] | [removed: %] [added: )%] |

| Net income [removed: (loss)] | | | [removed: 0.6] [added: 2.7] | % | | | [removed: 2.3] [added: 0.6] | % | | | [removed: (0.6] [added: 2.3] | [removed: )%] [added: %] |

[added: Net] Sales.

[removed: For the year ended December 31, 2017, sales volume growth in single-family] [added: Single-family] and [removed: the] repair and [removed: remodel] [added: remodel/other] end market [removed: were] [added: sales volume growth in 2018 was] partially offset by declines in multi-family.

Interest expense for the years ended December 31, 2017 and 2016 included one-time charges related to the debt [removed: financing] transactions of $58.7 million and $57.0 million, respectively.

[removed: 2016] [added: 2017] Compared with [removed: 2015][added: 2016]

Sales for the year ended December 31, [removed: 2016] [added: 2018] were [removed: $6,367.3] [added: $7,724.8] million, a [removed: 78.6%] [added: 9.8%] increase from sales of [removed: $3,564.4] [added: $7,034.2] million for [removed: 2015.][added: 2017.]

Gross margin increased [removed: $695.3] [added: $195.5] million to [removed: $1,596.7] [added: $1,922.9] million.

| | • | Housing Affordability. The affordability of housing can be a key driver in demand for our products. Home affordability is influenced by a number of economic factors, such as the level of employment, consumer confidence, consumer income, supply of houses, the availability of financing and interest rates. Changes in the inventory of available homes as well as economic factors relative to home prices could result in changes to the affordability of homes. As a result, homebuyer demand may shift towards smaller, or larger, homes creating fluctuations in demand for our products. |

| | • | Capital Structure: As a result of our historical growth through acquisitions, we have substantial indebtedness. We strive to optimize our capital structure to ensure that our financial needs are met in light of economic conditions, business activities, organic investments, opportunities for growth through acquisition and the overall risk characteristics of our underlying assets. We evaluate our capital structure on the basis of our leverage ratio as well as the factors described above. While debt reduction will continue to be a key area of focus for the Company, we may adjust debt or equity levels in order to appropriately manage and optimize our capital structure. |

During the fourth quarter of 2018, the Company repurchased $53.6 million in aggregate principal amount of its 5.625% senior secured notes due 2024 (“2024 notes”) and in February 2019 we repurchased an additional $20.4 million in aggregate principal amount of the 2024 notes.

Following these repurchases we have $675.9 million of 2024 notes which remain outstanding.

We estimate that 6.7% of this increase is attributable to the impact of commodity price inflation on sales in 2018 compared to 2017.

The pressure we experienced on our gross margins in the first half of 2018 due to rising commodity costs relative to our customer pricing commitments was more than offset by the sharp decline in these commodity costs during the second half of 2018.

This improvement was primarily driven by cost leverage.

However, this decrease was partially offset by increased commissions due to increased sales and margins as well as increased incentives and operating costs related to our profitable growth in 2018.

2018 Compared with 2017

We estimate that 6.7% of this increase is attributable to the impact of commodity price inflation on sales in 2018 compared to 2017.

Single-family and repair and remodel/other end market sales unit volume growth in 2018 was partially offset by declines in multi-family.

| | | 2018 | | | | | | | | 2017 | | | | | | | | | | |

| Lumber & lumber sheet goods | | $ | 2,902.2 | | | | 37.6 | % | | $ | 2,510.9 | | | | 35.7 | % | | | 15.6 | % |

| Manufactured products | | | 1,392.0 | | | | 18.0 | % | | | 1,208.5 | | | | 17.2 | % | | | 15.2 | % |

| Windows, doors & millwork | | | 1,445.9 | | | | 18.7 | % | | | 1,360.6 | | | | 19.4 | % | | | 6.3 | % |

| Gypsum, roofing & insulation | | | 528.4 | | | | 6.9 | % | | | 538.4 | | | | 7.6 | % | | | (1.8 | )% |

| Siding, metal & concrete products | | | 697.8 | | | | 9.0 | % | | | 655.9 | | | | 9.3 | % | | | 6.4 | % |

| Other building products & services | | | 758.5 | | | | 9.8 | % | | | 759.9 | | | | 10.8 | % | | | (0.2 | )% |

| Total sales | | $ | 7,724.8 | | | | 100.0 | % | | $ | 7,034.2 | | | | 100.0 | % | | | 9.8 | % |

The impact of commodity price inflation in 2018 resulted in the sales growth of our lumber and lumber sheet goods and manufactured products categories exceeding the sales growth of our other product categories.

Our gross margin percentage increased to 24.9% in 2018 from 24.6% in 2017, a 0.3% increase.

The pressure we experienced on our gross margins in the first half of 2018 due to rising commodity costs relative to our customer pricing commitments was more than offset by the sharp decline in these commodity costs during the second half of 2018.

Our salaries and benefits expense was $1,021.5 million, an increase of $86.0 million from 2017, primarily due to increases in variable compensation attributable to the increase in sales as well as an increase in group health insurance costs.

Largely due to our sales growth in 2018 fuel expense increased $9.9 million, office general and administrative expenses increased $10.3 million and bad debt expense increased $3.2 million.

As a percentage of net sales, selling, general and administrative expenses decreased from 20.5% in 2017 to 20.1% in 2018, a 0.4% decrease.

This improvement was primarily driven by cost leverage.

However, this decrease was partially offset by increased commissions due to increased sales and margins as well as increased incentives and operating costs related to our profitable growth in 2018.

Interest expense was $108.2 million in 2018, a decrease of $85.0 million from 2017.

Interest expense declined $88.5 million due to the positive results of our debt transactions executed in fiscal years 2018 and 2017, and was slightly offset by increased interest expense of $4.0 million on our variable rate debt instruments due to increased market interest rates in 2018 compared to 2017.

Interest expense for the year ended December 31, 2018 included a $3.2 million gain on debt extinguishment.

Interest expense for the year ended December 31, 2017 included one-time charges of $58.7 million related to the debt transactions executed in that period.

Due to the enactment of the 2017 Tax Act, we recorded income tax expense of $29.0 million for the year ended December 31, 2017 related to revaluation of our deferred tax assets.

Our effective tax rate was 21.3% for the year ended December 31, 2018 compared to 57.8% for the year ended December 31, 2017, largely due to the impact of the additional income tax expense recognized in connection with the enactment of the 2017 Tax Act.

Net Sales.

| | | 2018 | | | | sales | | | | 2017 | | | | sales | | | | % change | | | | 2018 | | | | Sales | | | | 2017 | | | | sales | | | | % change | | |

| Northeast | | $ | 1,340,637 | | | | 17.7 | % | | $ | 1,285,286 | | | | 18.7 | % | | | 4.3 | % | | $ | 33,496 | | | | 2.5 | % | | $ | 40,358 | | | | 3.1 | % | | | (17.0 | )% |

| Southeast | | | 1,704,313 | | | | 22.6 | % | | | 1,542,330 | | | | 22.4 | % | | | 10.5 | % | | | 66,191 | | | | 3.9 | % | | | 49,738 | | | | 3.2 | % | | | 33.1 | % |

| South | | | 2,050,961 | | | | 27.1 | % | | | 1,855,425 | | | | 27.0 | % | | | 10.5 | % | | | 110,613 | | | | 5.4 | % | | | 90,230 | | | | 4.9 | % | | | 22.6 | % |

| West | | | 2,461,585 | | | | 32.6 | % | | | 2,188,696 | | | | 31.9 | % | | | 12.5 | % | | | 105,906 | | | | 4.3 | % | | | 85,629 | | | | 3.9 | % | | | 23.7 | % |

| | | $ | 7,557,496 | | | | 100.0 | % | | $ | 6,871,737 | | | | 100.0 | % | | | | | | $ | 316,206 | | | | 4.2 | % | | $ | 265,955 | | | | 3.9 | % | | | | |

| | | National Association of Homebuilders (“NAHB”), expect to see continued improvement in housing demand over the next few years. |

| | • | Reduction of Debt: As a result of our historical growth through acquisitions, we have substantial indebtedness. Debt reduction will continue to be a key area of focus for the Company. |

These transactions further extended our debt maturity profile and reduced our annual cash interest on a go forward basis.

On December 22, 2017, the 2017 Tax Act became enacted law.

The effects of the 2017 Tax Act on our financial statements for the year ended December 31, 2017 are discussed in more detail below as well as in Note 11 to the consolidated financial statements included in Item 8 of this annual report on Form 10-K.

The 2017 Tax Act, among several other substantial changes, reduces the statutory federal income tax rate from 35% to 21% for periods beginning after December 31, 2017.

We generally expect the 2017 Tax Act to have a positive impact on our business due to the anticipated reduction in federal cash tax payments.

Our gross margin percentage decreased primarily due to gross profit margin compression on commodity products resulting from inflation in the lumber and lumber sheet goods markets during most of 2017.

The decrease in selling, general and administrative expenses, as a percentage of net sales, was due to cost leverage as well as the decline in depreciation and amortization on acquired ProBuild assets, partially offset by investments the Company made towards growth initiatives, including additional sales associates and new locations.

Net sales increased $2,659.1 million, or approximately 75%, due to the ProBuild acquisition.

Excluding the impact of the ProBuild acquisition, we estimate net sales increased $143.8 million, or approximately 4% due to increased volume.

| | | 2016 | | | | | | | | 2015 | | | | | | | | | | |

| Lumber & lumber sheet goods | | $ | 2,131.4 | | | | 33.5 | % | | $ | 1,129.7 | | | | 31.7 | % | | | 88.7 | % |

| Manufactured products | | | 1,097.7 | | | | 17.2 | % | | | 635.3 | | | | 17.8 | % | | | 72.8 | % |

| Windows, doors & millwork | | | 1,286.2 | | | | 20.2 | % | | | 818.1 | | | | 23.0 | % | | | 57.2 | % |

| Gypsum, roofing & insulation | | | 520.0 | | | | 8.2 | % | | | 264.9 | | | | 7.4 | % | | | 96.3 | % |

| Siding, metal & concrete products | | | 622.3 | | | | 9.8 | % | | | 319.6 | | | | 9.0 | % | | | 94.7 | % |

| Other building products & services | | | 709.7 | | | | 11.1 | % | | | 396.8 | | | | 11.1 | % | | | 78.9 | % |

| Total sales | | $ | 6,367.3 | | | | 100.0 | % | | $ | 3,564.4 | | | | 100.0 | % | | | 78.6 | % |

Due to the ProBuild acquisition, we achieved increased net sales across all product categories.

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

Of this increase, $656.8 million is due to the ProBuild acquisition.

Our gross margin percentage decreased to 25.1% in 2016 from 25.3% in 2015, a 0.2% decrease.

Our gross margin percentage decreased primarily due to the impact of commodity price inflation relative to our short-term customer pricing commitments during the year ended December 31, 2016.

However, this decrease was mostly offset by an increase in our gross margin percentage largely attributable to the ProBuild acquisition, the result of ProBuild’s higher mix of higher margin repair & remodel and retail sales.

Our salaries and benefits expense was $894.3 million, an increase of $383.7 million from 2015, largely due to increased full-time equivalent employees following the ProBuild acquisition.

Delivery expense increased $65.9 million, office general and administrative expense increased $46.5 million, occupancy expense increased $45.9 million and intangible asset amortization increased $10.7 million.

These increases were primarily a result of the ProBuild acquisition, the related integration activities and increased sales volume.

These increases were partially offset by a $4.2 million decrease in facility closure costs.

As a percentage of net sales, selling, general and administrative expenses decreased from 22.7% in 2015 to 21.4% in 2016 largely due to the benefit of synergy cost savings.

Synergy cost savings were primarily attributable to reduced payroll and benefits expense, as well as decreased delivery costs and location consolidations.

Interest expense was $214.7 million in 2016, an increase of $105.5 million from 2015.

Of the $105.5 million increase, $49.6 million was attributable to increased interest expense associated with our increased debt balances following the ProBuild acquisition financing and subsequent refinancing transactions, $28.1 million was attributable to losses on debt extinguishment largely due to the payment of redemption premiums on our 2021 and 2023 notes, $17.6 million was related to increased amortization and write-off of debt discount and debt issuance costs largely due to our debt transactions during the year ended December 31, 2016, and $14.2 million was due to interest expense primarily related to lease obligations assumed in the ProBuild acquisition.

These increases were partially offset by a $4.6 million decrease in interest expense due to non-cash fair value adjustments related to the exercise of all remaining stock warrants in 2015.

In the third quarter of 2016, we released the valuation allowance against our net federal and some state deferred tax assets.

We recorded a reduction of the after-tax, non-cash valuation allowance on our net deferred tax assets of $131.7 million during the year ended December 31, 2016 compared to an increase of $9.7 million during the year ended December 31, 2015.

| | | 2016 | | | | sales | | | | 2015 | | | | sales | | | | % change | | | | 2016 | | | | sales | | | | 2015 | | | | sales | | | | % change | | |

| Northeast | | $ | 1,204,100 | | | | 19.4 | % | | $ | 626,985 | | | | 18.9 | % | | | 92.0 | % | | $ | 35,347 | | | | 2.9 | % | | $ | 28,843 | | | | 4.6 | % | | | 22.5 | % |

| Southeast | | | 1,362,259 | | | | 22.0 | % | | | 890,164 | | | | 26.8 | % | | | 53.0 | % | | | 40,261 | | | | 3.0 | % | | | 17,193 | | | | 1.9 | % | | | 134.2 | % |

| South | | | 1,699,371 | | | | 27.4 | % | | | 1,015,556 | | | | 30.6 | % | | | 67.3 | % | | | 72,183 | | | | 4.2 | % | | | 53,435 | | | | 5.3 | % | | | 35.1 | % |

[removed: At December 31, 2017, a] [added: A] 1.0% increase in interest rates on the 2024 term loan [removed: would, subject to the interest rate floor specified in the agreement,] [added: would] result in approximately $4.6 million in additional interest expense [removed: annually.][added: annually as of December 31, 2018.]

[removed: At December 31, 2017, a] [added: A] 1.0% increase in interest rates on the 2022 facility would result in approximately [removed: $3.5] [added: $1.8] million in additional interest expense [removed: annually.][added: annually as we had $179.0 million in outstanding borrowings as of December 31, 2018.]

[removed: As with the forward-looking statements included in this report, these forward-looking] [added: Forward-looking] statements are by nature inherently uncertain, and actual results [added: or events] may differ materially [added: from the results or events described in the forward-looking statements] as a result of many factors.

[removed: Builders FirstSource, Inc.] [added: The Company] undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

Any forward-looking statements involve risks and [removed: uncertainties] [added: uncertainties, many of which are beyond the Company’s control or may be currently unknown to the Company,] that could cause actual events or results to differ materially from the events or results described in the forward-looking statements, including risks or uncertainties related to the Company’s growth strategies, including gaining market share, or the Company’s revenues and operating results being highly dependent on, among other things, the homebuilding industry, lumber prices and the economy.

[removed: Builders FirstSource, Inc.] [added: The Company] may not succeed in addressing these and other risks.

Further information regarding the risk factors that could affect our financial and other results are included as Item 1A of this annual report on Form [removed: 10-K.][added: 10-K and may also be described from time to time in the other reports the Company files with the Securities and Exchange Commission (“SEC”).]

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

The Company operates [removed: 402] [added: 401] locations in [removed: 40] [added: 39] states across the United States.

We offer an integrated solution to our customers [added: by] providing manufacturing, supply and installation of a full range of structural and related building products.

Our manufactured products include our factory-built roof and floor trusses, wall panels and stairs, vinyl windows, custom millwork and trim, as well as engineered wood that we design, cut, and assemble [added: specifically] for each home.

Our full range of construction-related services [removed: includes] [added: include] professional installation, turn-key framing and shell construction, [removed: and spans] [added: spanning] all [added: of] our product categories.

There were only seven building product suppliers with manufacturing capabilities in the Pro Segment that generated more than $500 million in sales, according to ProSales magazine’s [removed: 2016] [added: 2018] ProSales 100 list.

| | • | Consolidation of suppliers by homebuilders: We believe that homebuilders are increasingly looking to consolidate their supplier base. Many homebuilders are seeking a more strategic relationship with suppliers that are able to offer a broad range of products and services and, as a result, are allocating a greater share of wallet to a select number of larger, full service suppliers. We believe this trend [removed: accelerated during the downturn which began in 2006 and] continues in the current housing market recovery. |

According to the U.S. Census Bureau, the single-family residential construction market was an estimated [removed: $264.1] [added: $285.4] billion in [removed: 2017,] [added: 2018,] which was [removed: 8.9%] [added: 5.8%] higher than [removed: 2016,] [added: 2017,] though still down significantly from the historical high of $413.2 billion in 2006.

Further, according to the Home Improvement Research Institute (“HIRI”), the professional repair and remodel end market was an estimated [removed: $103.4] [added: $121.9] billion in [removed: 2017,] [added: 2018,] which was [removed: 3.4%] [added: 9.9%] higher than [removed: 2016.][added: 2017.]

We serve a broad customer base [removed: in 40 states] across the United States.

We have a diverse geographic footprint as we have operations in 75 of the top 100 U.S. Metropolitan Statistical Areas (“MSAs”), as ranked by single family housing permits based on [removed: 2017] [added: available 2018] U.S. Census data.

In addition, approximately [removed: 83%] [added: 84%] of U.S. single-family housing permits in [removed: 2017] [added: 2018] were issued in MSAs in which we operate.

For the year ended December 31, [removed: 2017,] [added: 2018,] our top 10 customers accounted for approximately [removed: 16.0%] [added: 16.8%] of sales, and no single customer accounted for more than 5% of sales.

Our top 10 customers are comprised primarily of the largest production homebuilders, including publicly traded companies such as D.R. Horton, Inc., Pulte Homes, Inc., Lennar Corporation, Beazer Homes USA, Inc., Hovnanian Enterprises, Inc., Taylor Morrison Home Corporation and [removed: M/I Homes,] [added: Toll Brothers,] Inc.

In addition to the largest production homebuilders, we also service and supply regional production and local custom homebuilders as well as repair and remodeling [removed: contractors.][added: contractors and multi-family builders.]

Millwork includes interior trim and custom features [added: including those] that we manufacture under the Synboard ® brand name.

Our manufacturing facilities utilize the latest industry leading technology and [removed: the highest] [added: high] quality materials to improve product quality, increase efficiency, reduce lead times and minimize production errors.

We maintain an electronic master file of trusses and wall panels for each builder’s prototype [added: houses.]

For [removed: these] [added: custom] builders, the components are designed individually for each house.

In addition, we sell many of these custom millwork products in a synthetic material [removed: that we sell] under our Synboard brand name.

Our comprehensive product offering, [removed: best in class] [added: experienced] sales force, strong strategic vendor relationships, and tenured senior management team position us well to capitalize on strong demand in the new home construction market and the repair and remodel segment.

Our comprehensive network of products, services and facilities provides a strategically advantaged service model which enhances our value to our customers and provides a strong platform to [removed: capture above market] [added: drive] growth.

We believe our national manufacturing footprint and differentiated capabilities will allow us to capture [removed: above market] growth in our higher margin value-added products with single family homebuilders.

This operational platform often will make us a preferred distributor for large scale national homebuilders [removed: while still providing value to] [added: as well as] local and custom homebuilders looking for more efficient ways to build a home.

We believe that customers [removed: will] continue to place an increased value on these capabilities, which further differentiates us from our competitors.

We strive to add value for the homebuilders through shorter lead times, lower [removed: material] [added: project] costs, faster project completion and higher quality.

At December 31, [removed: 2017,] [added: 2018,] we employed approximately 1,900 sales representatives, who are typically paid a commission based on gross margin dollars collected and work with approximately 1,600 sales coordinators and product specialists.

We currently source products from approximately [removed: 6,000] [added: 10,300] suppliers in order to reduce our dependence on any single company and to maximize purchasing leverage.

Although no purchases from any single supplier represented more than 8% of our total materials purchases for the year ended December 31, [removed: 2017,] [added: 2018,] we believe we are one of the largest customers for many suppliers, and therefore have significant purchasing leverage.

The principal methods of competition in the Pro Segment are the development of long-term relationships with professional builders and retaining such customers by (i) delivering a full range of high-quality products on time, and (ii) offering trade credit, competitive pricing and integrated service and product packages, such as turn-key framing and shell [removed: construction, as well as manufactured components and installation.]

At December 31, [removed: 2017,] [added: 2018,] we had approximately 15,000 employees.

[removed: Approximately] [added: Less than] 2% of the workforce at our company are members of [removed: nine] [added: eight] different unions.

We believe that we have good relations with our [removed: employees.][added: employees, as evidenced by our recent Forbes “America’s Best Large Employers” awards.]

Our primary enterprise resource planning (“ERP”) system, which we currently use for operations representing [removed: approximately 72%] [added: the majority] of [added: our sales, is a proprietary system that has been highly customized by our computer programmers.]

We are in the process of integrating [added: certain of] the legacy ProBuild information technology systems with ours which is an ongoing, multi-year process.

All forward-looking statements are based upon currently available information and the Company’s current assumptions, expectations and projections about future events.

Consequently, all forward-looking statements in this report are qualified by the factors, risks and uncertainties contained therein.

construction, as well as manufactured components and installation.

David E.

Mr. Rush was appointed to his current position on November 29, 2018.

Mr. Rush previously served as Senior Vice President of Strategy and Business Development of the Company since August 2017.

Prior to that, Mr. Rush served as Senior Vice President of Integration after the acquisition of ProBuild Holdings LLC in July 2015.

From 2003 to 2015, Mr. Rush was an Area Vice President, with responsibility for more than 18 Company locations in three states.

He joined the Company as Vice President of Finance of the Southeast Group in 1999.

Before joining Builders FirstSource, Mr. Rush worked in various accounting and finance positions, primarily with multi-location distribution companies, including as Chief Financial Officer of the Bojangles Restaurant chain.

He holds a B.A. in accounting from the University of North Carolina at Chapel Hill.

All forward-looking statements are based upon information available to Builders FirstSource, Inc. on the date this report was submitted.

Given the span and depth of our geographical reach, our locations are organized into nine geographical regions (Regions 1 through 9), which are also our operating segments, further aggregated into four reportable segments: Northeast, Southeast, South and West.

All of our segments have similar customers, products and services, and distribution methods as discussed below.

Our financial statements contain additional information regarding segment performance which is discussed in Note 14 to the consolidated financial statements included in Item 8 of this annual report on Form 10-K.

The homebuilding industry experienced a significant downturn which began in 2006.

During the downturn, many homebuilders significantly decreased their housing starts because of lower demand and a surplus of both existing and new home inventory.

The weakness in the homebuilding industry resulted in a significant reduction in demand for our products and services.

Beginning in late 2011, the industry began to stabilize and housing and remodeling activity has steadily strengthened since then.

The number of changes made to a given prototype house, and the number of prototype houses used, varies by builder and their construction and sales philosophy.

houses.

There are three primary benefits to master filing.

First, master filing is cost effective as the electronic master file is used rather than designing the components individually each time the prototype house is built.

Second, it improves design quality as a house’s design is based on the proven prototype except for any minor builder modifications.

Third, master filing allows us to change one file and update all related prototype house designs automatically as we improve the design over time or as the builder modifies the base prototype house.

We do not maintain a master file for custom builders who do not replicate houses, as it is not cost effective.

After we design shop drawings for a given house, we download the shop drawings into a proprietary software system to review the design for potential errors and to schedule the job for production.

The fabrication process begins by cutting individual pieces of lumber to required lengths in accordance with the shop drawings.

We generate fabrication time standards for each component during the design step.

We use these standards to measure efficiency by comparing actual production time with the calculated standard.

Each plant’s performance is benchmarked by comparing efficiency across plants.

We produce exterior trim boards by cutting the Synboard into the same industry-standard dimensions used for wood-based exterior trim boards.

We form exterior features by assembling pieces of Synboard and other PVC-based moldings that have been cut, heated and bent over forms to achieve the desired shape.

For custom windows, we build the frame from Synboard and glaze the glass into place.

We fabricate box columns from sections of PVC that are cut on a 45 degree angle and mitered together.

Additionally, our national footprint provides customers with a consistent partner on projects regardless of where they are located.

our sales, is a proprietary system that has been highly customized by our computer programmers.

In addition to our website, you may read and copy public reports we file with or furnish to the SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, DC 20549.

You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.

Morris E.

Mr. Tolly has served as a Senior Vice President and Chief Operating Officer- East since February 2018.

Prior to that he had served as Senior Vice President-Operations of the Company since January 2007.

Mr. Tolly has been with Builders FirstSource since 1998 when the Company acquired Pelican Companies, Inc. (“Pelican”) and has over 40 years of experience in the building products industry.

He served in a myriad of roles at Pelican, including sales, Sales Manager and General Manager.

Mr. Tolly was an Area Vice President responsible for 12 locations at the time of Pelican’s acquisition.

In 2000, he was promoted to President of the company’s Southeast Group, with responsibility for 48 locations.

10-K 1 [removed: bldr-10k_20171231.htm] [added: bldr-10k_20181231.htm] 10-K

For the fiscal year ended December 31, [removed: 2017][added: 2018]

Indicate by check mark whether the registrant has submitted electronically [removed: and posted on its corporate Web site, if any,] every Interactive Data File required to be submitted [removed: and posted] pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit [removed: and post] such files).

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, [removed: or] a smaller reporting [added: company, or an emerging growth] company.

See the definitions of “large accelerated filer,” “accelerated [removed: filer” and] [added: filer,”] “smaller reporting [added: company,” and “emerging growth] company” in Rule 12b-2 of the Exchange Act.

| Emerging growth company ☐ | | [removed: (Do not check if a smaller reporting company)] | | | | |

The aggregate market value of the registrant’s common stock held by non-affiliates of the registrant as of June 30, [removed: 2017] [added: 2018] was approximately [removed: $1,486.8] [added: $2,058.5] million based on the closing price per share on that date of [removed: $15.32] [added: $18.29] as reported on the NASDAQ Stock Market LLC.

The number of shares of the registrant’s common stock, par value $0.01, outstanding as of February 26, [removed: 2018] [added: 2019] was [removed: 114,120,308.][added: 115,359,616.]

Portions of the registrant’s definitive proxy statement for its annual meeting of stockholders to be held on May [removed: 23, 2018] [added: 22, 2019] are incorporated by reference into Part II and Part III of this Form 10-K.

| Item 2. | | [Properties](#Item_2_Properties) | | [removed: 19] [added: 20] |

| Item 7A. | | [Quantitative and Qualitative Disclosures About Market Risk](#Item_7A) | | [removed: 33] [added: 34] |

| Item 8. | | [Financial Statements and Supplementary Data](#Item_8) | | [removed: 34] [added: 35] |

(Check one):

We have a broad network of distribution and manufacturing facilities in [removed: 40] [added: 39] states throughout the U.S. Based on [removed: 2017] [added: available 2018] U.S. Census data, we have operations in 75 of the top 100 U.S. Metropolitan Statistical Areas, as ranked by single family housing permits in [removed: 2017.][added: 2018.]

[added: Truss and panel manufacturing facilities] vary in size from 30,000 square feet to 60,000 square feet with 8 to 10 acres of outside storage for lumber and for finished goods.

We contractually lease 311 facilities and own [removed: 91] [added: 90] facilities.

These leases typically have an initial [removed: operating] lease term of 5 to 15 years and most provide options to renew for specified periods of time.

As described in Note [removed: 8] [added: 9] to the consolidated financial statements included in Item 8 of this annual report on Form 10-K, [removed: 141] [added: 140] of our leased facilities are subject to a sales-lease back transaction that is accounted for in our financial statements as owned assets with offsetting [removed: lease] financing obligations.

We operate a fleet of approximately [removed: 10,800] [added: 10,700] rolling stock units, which includes approximately [removed: 4,600] [added: 4,500] trucks as well as forklifts and trailers to deliver products from our distribution and manufacturing centers to our customer’s job sites.

Truss and panel manufacturing facilities

The approximate number of stockholders of record of our common stock [removed: on that date was 100, although we believe that the number of beneficial owners] [added: as] of [removed: our common stock is substantially greater.][added: February 26, 2019 was 89.]

The following table provides information with respect to our purchases of Builders FirstSource, Inc. common stock during the fourth quarter of fiscal year [removed: 2017:][added: 2018:]

The graph assumes that the value of the investment in our common stock, in each index, and in the peer group (including reinvestment of dividends) was $100 on [removed: 12/31/2012] [added: 12/31/2013] and tracks it through [removed: 12/31/2017.][added: 12/31/2018.]

[removed: ][added: ]

The information regarding securities authorized for issuance under equity compensation plans appears in our definitive proxy statement for our annual meeting of stockholders to be held on May [removed: 23, 2018] [added: 22, 2019] under the caption “Equity Compensation Plan Information,” which information is incorporated herein by reference.

We currently have no intention to pay dividends.

| October 1, 2018 — October 31, 2018 | | | 3,221 | | | $ | 12.38 | | | | — | | | | — | |

| November 1, 2018 — November 30, 2018 | | | — | | | | — | | | | — | | | | — | |

| December 1, 2018 — December 31, 2018 | | | — | | | | — | | | | — | | | | — | |

| Total | | | 3,221 | | | $ | 12.38 | | | | — | | | | — | |

| | | 12/13 | | | | 12/14 | | | | 12/15 | | | | 12/16 | | | | 12/17 | | | | 12/18 | | |

| Builders FirstSource, Inc. | | | 100.00 | | | | 96.35 | | | | 155.40 | | | | 153.86 | | | | 305.61 | | | | 153.02 | |

| Russell 2000 | | | 100.00 | | | | 104.89 | | | | 100.26 | | | | 121.63 | | | | 139.44 | | | | 124.09 | |

| S&P 600 Building Products Index | | | 100.00 | | | | 103.82 | | | | 121.71 | | | | 167.53 | | | | 201.53 | | | | 159.09 | |

On February 26, 2018, the closing price of our common stock as reported on the NASDAQ Stock Market LLC was $20.51.

The table below sets forth the high and low sales prices of our common stock for the periods indicated:

| | | High | | | | Low | | |

| --- | --- | --- | --- | --- | --- | --- | --- | --- |

| 2017 | | | | | | | | |

| First quarter | | $ | 15.85 | | | $ | 10.57 | |

| Second quarter | | $ | 16.50 | | | $ | 13.33 | |

| Third quarter | | $ | 18.08 | | | $ | 14.39 | |

| Fourth quarter | | $ | 22.08 | | | $ | 16.52 | |

| 2016 | | | | | | | | |

| First quarter | | $ | 11.34 | | | $ | 6.50 | |

| Second quarter | | $ | 12.77 | | | $ | 10.15 | |

| Third quarter | | $ | 14.09 | | | $ | 10.99 | |

| Fourth quarter | | $ | 12.28 | | | $ | 9.04 | |

We have not declared or paid cash dividends in the two most recent fiscal years.

| October 1, 2017 — October 31, 2017 | | | — | | | $ | — | | | | — | | | | — | |

| November 1, 2017 — November 30, 2017 | | | 9,214 | | | | 18.27 | | | | — | | | | — | |

| December 1, 2017 — December 31, 2017 | | | — | | | | — | | | | — | | | | — | |

| Total | | | 9,214 | | | $ | 18.27 | | | | — | | | | — | |

| | | 12/12 | | | | 12/13 | | | | 12/14 | | | | 12/15 | | | | 12/16 | | | | 12/17 | | |

| Builders FirstSource, Inc. | | | 100.00 | | | | 127.78 | | | | 123.12 | | | | 198.57 | | | | 196.60 | | | | 390.50 | |

| Russell 2000 | | | 100.00 | | | | 138.82 | | | | 145.62 | | | | 139.19 | | | | 168.85 | | | | 193.58 | |

| S&P 600 Building Products Index | | | 100.00 | | | | 145.13 | | | | 150.68 | | | | 176.65 | | | | 243.14 | | | | 292.49 | |

The following selected consolidated financial data for the years ended December 31, [removed: 2017, 2016] [added: 2018, 2017] and [removed: 2015] [added: 2016] and as of December 31, [removed: 2017] [added: 2018] and [removed: 2016] [added: 2017] were derived from our consolidated financial statements which are included in Item 8 of this annual report on Form 10-K.

Selected consolidated financial data as of December 31, [removed: 2015] [added: 2016] and as of and for the years ended December 31, [removed: 2014] [added: 2015] and [removed: 2013] [added: 2014] were derived from our consolidated financial statements, but are not included herein.

| | | [removed: 2017] [added: 2018] | | | | [removed: 2016] [added: 2017] | | | | [removed: 2015] [added: 2016] | | | | [removed: 2014] [added: 2015] | | | | [removed: 2013] [added: 2014] | | | |

| Sales [added: (1)] | | $ | [removed: 7,034,209] [added: 7,724,771] | | | $ | [removed: 6,367,284] [added: 7,034,209] | | | $ | [removed: 3,564,425] [added: 6,367,284] | | | $ | [removed: 1,604,096] [added: 3,564,425] | | | $ | [removed: 1,489,892] [added: 1,604,096] | | |

| Gross margin | | | [removed: 1,727,391] [added: 1,922,940] | | | | [removed: 1,596,748] [added: 1,727,391] | | | | [removed: 901,458] [added: 1,596,748] | | | | [removed: 356,997] [added: 901,458] | | | | [removed: 319,920] [added: 356,997] | | |

| Selling, general and administrative expenses | | | [removed: 1,442,288] [added: 1,553,972] | | | | [removed: 1,360,412] [added: 1,442,288] | | | | [removed: 810,703] [added: 1,360,412] | | | | [removed: 307,387] [added: 810,703] | | | | [removed: 272,204] [added: 307,387] | | |

| Net income (loss) [removed: (1)(2)] [added: (2)(3)] | | | [added: 205,191 | | | |] 38,781 | | | | 144,341 | | | | (22,831 | ) | | | 18,150 | | | [removed: | (42,691 | ) | |]

| Net income (loss) per share — basic | | $ | [removed: 0.34] [added: 1.79] | | | $ | [removed: 1.30] [added: 0.34] | | | $ | [removed: (0.22] [added: 1.30] | [removed: )] | | $ | [removed: 0.19] [added: (0.22] | [added: )] | | $ | [removed: (0.44] [added: 0.19] | [removed: )] | |

| Net income (loss) per share — diluted | | $ | [removed: 0.34] [added: 1.76] | | | $ | [removed: 1.27] [added: 0.34] | | | $ | [removed: (0.22] [added: 1.27] | [removed: )] | | $ | [removed: 0.18] [added: (0.22] | [added: )] | | $ | [removed: (0.44] [added: 0.18] | [removed: )] | |

| Cash and cash equivalents | | $ | [removed: 57,533] [added: 10,127] | | | $ | [removed: 14,449] [added: 57,533] | | | $ | [removed: 65,063] [added: 14,449] | | | $ | [removed: 17,773] [added: 65,063] | | | $ | [removed: 54,696] [added: 17,773] | | |

| Total assets | | | [removed: 3,006,124] [added: 2,932,309] | | | | [removed: 2,909,887] [added: 3,006,124] | | | | [removed: 2,882,038] [added: 2,909,887] | | | | [removed: 574,065] [added: 2,882,038] | | | | [removed: 505,436] [added: 574,065] | | |

| Total debt (including current portion) | | | [removed: 1,784,420] [added: 1,561,294] | | | | [removed: 1,802,052] [added: 1,784,420] | | | | [removed: 1,951,671] [added: 1,802,052] | | | | [removed: 374,903] [added: 1,951,671] | | | | [removed: 343,567] [added: 374,903] | | |

| Stockholders’ equity | | | [removed: 376,209] [added: 596,338] | | | | [removed: 309,620] [added: 376,209] | | | | [removed: 149,195] [added: 309,620] | | | | [removed: 40,200] [added: 149,195] | | | | [removed: 15,368] [added: 40,200] | | |

| Depreciation and amortization | | $ | [removed: 92,993] [added: 97,906] | | | $ | [removed: 109,793] [added: 92,993] | | | $ | [removed: 58,280] [added: 109,793] | | | $ | [removed: 9,519] [added: 58,280] | | | $ | [removed: 9,305] [added: 9,519] | | |

| [removed: (1)] [added: (2)] | As discussed in Note 11 to the consolidated financial statements included in Item 8 of this annual report on Form 10-K, net income [added: for the year ended December 31, 2017] includes $29.0 million in income tax expense attributable to revaluation of our net deferred tax assets resulting from the enactment of the 2017 Tax Act. Net income [added: for the year ended December 31, 2016] includes a reduction to our valuation allowance of $131.7 million as we released the valuation allowance against our net federal and certain state deferred tax assets [added: in that period. Net loss] for the year ended December 31, [removed: 2016. Net loss] [added: 2015] includes a valuation allowance of $9.7 million against primarily all of our deferred tax [removed: assets] [added: assets. Net income] for the year ended December 31, [removed: 2015. Net income] [added: 2014] includes a reduction to our valuation allowance of $7.2 million due to the utilization of net operating loss carryforwards to reduce taxable [removed: income for the year ended December 31, 2014. Net loss includes a valuation allowance of $15.3 million against primarily all of our deferred tax assets for the year ended December 31, 2013.] [added: income.] |

| [removed: (2)] [added: (3)] | Net income for the [added: year ended December 31, 2018 includes a gain on debt extinguishment of $3.2 million. Net income for the] years ended December 31, 2017 and 2016 includes losses on debt extinguishment and other financing costs of $58.7 million and $56.9 million, respectively, resulting from multiple debt transactions executed in 2017 and 2016. Our [added: 2018,] 2017 and 2016 debt transactions are discussed in detail in Note 8 to the consolidated financial statements included in Item 8 of this annual report on Form 10-K. Net loss for the year ended December 31, 2015 includes $38.6 million of acquisition and transaction related costs associated with the ProBuild acquisition, including $13.2 million in commitment fees related to bridge and backstop financing facilities incurred in connection with the financing of the ProBuild acquisition. In addition, net loss for the year ended December 31, 2015 also includes $10.3 million related to non-cash interest expense from the amortization of debt discount and deferred loan costs, and fair value adjustments related to [removed: our] [added: previously outstanding stock] warrants. [removed: Net loss for the year ended December 31, 2013 includes a $39.5 million prepayment penalty.] |

| (1) | As discussed in Note 2 to the consolidated financial statements included in Item 8 of this annual report on Form 10-K we adopted updated revenue recognition guidance using the modified retrospective method as of January 1, 2018. As such, periods prior to the adoption date have not been restated and continue to be presented in accordance with previous guidance. |

| --- | --- |

| [Report of Independent Registered Public Accounting [removed: Firm](#Report_of_Independent_Registered_Public)] [added: Firm](#REPORT_INDEPENDENT_REGISTERED_PUBLIC_ACC)] | | [removed: 35] [added: 36] |

| [Consolidated Statement of Operations and Comprehensive Income [removed: (Loss)] for the years ended December 31, [removed: 2017, 2016] [added: 2018, 2017] and [removed: 2015](#COMPREHENSIVE_LOSS)] [added: 2016](#COMPREHENSIVE_LOSS)] | | [removed: 37] [added: 38] |

| [Consolidated Balance Sheet at December 31, [removed: 2017] [added: 2018] and [removed: 2016](#BALANCE_SHEETS)] [added: 2017](#BALANCE_SHEETS)] | | [removed: 38] [added: 39] |

| [Consolidated Statement of Cash Flows for the years ended December 31, [removed: 2017, 2016] [added: 2018, 2017] and [removed: 2015](#CASH_FLOWS)] [added: 2016](#CASH_FLOWS)] | | [removed: 39] [added: 40] |

| [Consolidated Statement of Changes in Stockholders’ Equity for the years ended December 31, [removed: 2017, 2016] [added: 2018, 2017] and [removed: 2015](#STOCKHOLDERS_EQUITY)] [added: 2016](#STOCKHOLDERS_EQUITY)] | | [removed: 40] [added: 41] |

| [Notes to Consolidated Financial Statements](#NOTES_TO) | | [removed: 41] [added: 42] |

We have audited the accompanying consolidated balance sheets of Builders FirstSource, Inc. and its subsidiaries (the “Company”) as of December 31, [removed: 2017] [added: 2018] and [removed: 2016,] [added: 2017,] and the related consolidated statements of operations and comprehensive [removed: income (loss),] [added: income,] of changes in stockholders’ equity and of cash flows for each of the three years in the period ended December 31, [removed: 2017,] [added: 2018,] 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, [removed: 2017,] [added: 2018,] 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, [removed: 2017] [added: 2018] and [removed: 2016,] [added: 2017,] and the results of [removed: their] [added: its] operations and [removed: their] [added: its] cash flows for each of the three years in the period ended December 31, [removed: 2017] [added: 2018] 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, [removed: 2017,] [added: 2018,] based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.

CONSOLIDATED STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME [removed: (LOSS)]

| | | [removed: 2017] [added: 2018] | | | | [removed: 2016] [added: 2017] | | | | [removed: 2015] [added: 2016] | | |

| Sales | | $ | [removed: 7,034,209] [added: 7,724,771] | | | $ | [removed: 6,367,284] [added: 7,034,209] | | | $ | [removed: 3,564,425] [added: 6,367,284] | |

| Cost of sales | | | [removed: 5,306,818] [added: 5,801,831] | | | | [removed: 4,770,536] [added: 5,306,818] | | | | [removed: 2,662,967] [added: 4,770,536] | |

| Gross margin | | | [removed: 1,727,391] [added: 1,922,940] | | | | [removed: 1,596,748] [added: 1,727,391] | | | | [removed: 901,458] [added: 1,596,748] | |

| Selling, general and administrative expenses | | | [removed: 1,442,288] [added: 1,553,972] | | | | [removed: 1,360,412] [added: 1,442,288] | | | | [removed: 810,703] [added: 1,360,412] | |

| Income from operations | | | [removed: 285,103] [added: 368,968] | | | | [removed: 236,336] [added: 285,103] | | | | [removed: 90,755] [added: 236,336] | |

| Interest expense, net | | | [removed: 193,174] [added: 108,213] | | | | [removed: 214,667] [added: 193,174] | | | | [removed: 109,199] [added: 214,667] | |

| Income [removed: (loss)] before income taxes | | | [removed: 91,929] [added: 260,755] | | | | [removed: 21,669] [added: 91,929] | | | | [removed: (18,444] [added: 21,669] | [removed: )] |

| Income tax expense (benefit) | | | [removed: 53,148] [added: 55,564] | | | | [removed: (122,672] [added: 53,148] | [removed: )] | | | [removed: 4,387] [added: (122,672] | [added: )] |

| Net income [removed: (loss)] | | $ | [removed: 38,781] [added: 205,191] | | | $ | [removed: 144,341] [added: 38,781] | | | $ | [removed: (22,831] [added: 144,341] | [removed: )] |

| Comprehensive income [removed: (loss)] | | $ | [removed: 38,781] [added: 205,191] | | | $ | [removed: 144,341] [added: 38,781] | | | $ | [removed: (22,831] [added: 144,341] | [removed: )] |

| Net income [removed: (loss)] per share: | | | | | | | | | | | | |

| Basic | | $ | [removed: 0.34] [added: 1.79] | | | $ | [removed: 1.30] [added: 0.34] | | | $ | [removed: (0.22] [added: 1.30] | [removed: )] |

| Diluted | | $ | [removed: 0.34] [added: 1.76] | | | $ | [removed: 1.27] [added: 0.34] | | | $ | [removed: (0.22] [added: 1.27] | [removed: )] |

| Basic | | | [removed: 112,587] [added: 114,586] | | | | [removed: 110,754] [added: 112,587] | | | | [removed: 103,190] [added: 110,754] | |

| Diluted | | | [removed: 115,597] [added: 116,554] | | | | [removed: 113,585] [added: 115,597] | | | | [removed: 103,190] [added: 113,585] | |

| | | [added: 2018 | | | |] 2017 | | | | 2016 | | |

| Cash and cash equivalents | | $ | [removed: 57,533] [added: 10,127] | | | $ | [removed: 14,449] [added: 57,533] | |

| Accounts receivable, less allowances of [removed: $11,771] [added: $13,054] and [removed: $11,571] [added: $11,771] at December 31, [removed: 2017] [added: 2018] and [removed: 2016,] [added: 2017,] respectively | | | [removed: 631,992] [added: 654,170] | | | | [removed: 569,208] [added: 631,992] | |

| Other receivables | | | [removed: 71,232] [added: 68,637] | | | | [removed: 55,781] [added: 71,232] | |

| Inventories, net | | | [removed: 601,547] [added: 596,896] | | | | [removed: 541,771] [added: 601,547] | |

| Other current assets | | | [removed: 33,564] [added: 43,921] | | | | [removed: 34,772] [added: 33,564] | |

| Total current assets | | | [removed: 1,395,868] [added: 1,373,751] | | | | [removed: 1,215,981] [added: 1,395,868] | |

| Property, plant and equipment, net | | | [removed: 639,303] [added: 670,075] | | | | [removed: 656,101] [added: 639,303] | |

| Intangible assets, net | | | [removed: 132,567] [added: 103,154] | | | | [removed: 159,373] [added: 132,567] | |

| Deferred income taxes | | | [removed: 75,105] [added: 22,766] | | | | [removed: 115,320] [added: 75,105] | |

| Other assets, net | | | [removed: 17,597] [added: 22,152] | | | | [removed: 18,340] [added: 22,870] | |

| Total assets | | $ | [removed: 3,006,124] [added: 2,932,309] | | | $ | [removed: 2,909,887] [added: 3,006,124] | |

| Accounts payable | | | [removed: 514,282] [added: 423,168] | | | | [removed: 409,759] [added: 514,282] | |

March 1, 2019

| | | 2018 | | | | 2017 | | |

| Net income | | $ | 205,191 | | | $ | 38,781 | | | $ | 144,341 | |

| Receivables | | | (9,221 | ) | | | (75,673 | ) | | | (44,552 | ) |

| Proceeds from long-term debt and other loans | | | 3,818 | | | | — | | | | — | |

In addition, purchases of property, plant and equipment included in accounts payable were $2.4 million, $3.9 million and $1.8 million for the years ended December 31, 2018, 2017 and 2016, respectively.

| | | | | | | | | | | | | | | | | | | | | |

| Repurchase of common stock | | | (239 | ) | | | (2 | ) | | | (4,893 | ) | | | — | | | | (4,895 | ) |

| Exercise of stock options | | | 770 | | | | 7 | | | | 3,938 | | | | — | | | | 3,945 | |

| Cumulative effect adjustment (Note 2) | | | — | | | | — | | | | — | | | | 1,468 | | | | 1,468 | |

| Net income | | | — | | | | — | | | | — | | | | 205,191 | | | | 205,191 | |

| Balance at December 31, 2018 | | | 115,078 | | | $ | 1,151 | | | $ | 560,221 | | | $ | 34,966 | | | $ | 596,338 | |

Revenue Recognition

We recognize revenue as performance obligations are satisfied by transferring control of a promised good or service to a customer in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services.

We generally classify our revenues into two types: (i) distribution sales; or (ii) sales related to contracts with service elements.

Distribution sales typically consist of the sale of building products we manufacture and the resale of purchased building products.

We recognize revenue related to distribution sales at a point in time upon delivery of the ordered goods to our customers.

Payment terms related to distribution sales are not significant as payment is generally received shortly after the point of sale.

Our contracts with service elements primarily relate to installation and construction services.

We evaluate whether multiple contracts should be combined and accounted for as a single contract and whether a single or combined contract should be accounted for as a single performance obligation or multiple performance obligations.

If a contract is separated into more than one performance obligation, we allocate the transaction price to each performance obligation generally based on observable standalone selling prices of the underlying goods or services.

Revenue related to contracts with service elements is generally 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 consider costs incurred to be indicative of goods and services delivered to the customer.

As such, we use a cost based input method to recognize revenue on our contracts with service elements as it best depicts the transfer of assets to our customers.

Payment terms related to sales for contracts with service elements are specific to each customer and contract.

However, they are considered to be short-term in nature as payments are normally received either throughout the life of the contract or shortly after the contract is complete.

Costs to obtain contracts are expensed as incurred as our contracts are typically completed in one year or less, and where applicable, we generally would incur these costs whether or not we ultimately obtain the contract.

We do not disclose the value of our remaining performance obligations on uncompleted contracts as our contracts generally have a duration of one year or less.

| | | 2018 | | | | 2017 | | |

| | | | | | | | | | | | | |

We did not grant any options during the year ended December 31, 2018.

| | | 2018 | | | | 2017 | | | | 2016 | | |

In August 2018, the Financial Accounting Standards Board (“FASB”) issued an update to the existing guidance under the Intangibles-Goodwill and Other topic of the Accounting Standards Codification (“Codification”) which aligns the requirements for capitalizing implementation costs of a cloud computing arrangement service contract with the requirements for capitalizing implementation costs incurred for an internal-use software license.

In the third quarter of 2018, we elected to adopt this guidance on a prospective basis.

As such, implementation costs related to cloud computing arrangements will now be capitalized and amortized on a straight-line basis over the term of the associated agreement.

This update introduces a new impairment model for financial assets, known as the current expected credit losses (“CECL”) model that is based on expected losses rather than incurred losses.

The CECL model requires an entity to estimate credit losses on financial assets, including trade accounts receivable, based on historical information, current information and reasonable and supportable forecasts.

Under this guidance companies will record an allowance through earnings for expected credit losses upon initial recognition of the financial asset.

The aspects of this guidance applicable to us will be required to be adopted on a modified retrospective basis.

While we are still evaluating the impact of this guidance on our financial statements we do not currently expect it to have a material impact

March 1, 2018

| Assets held for sale | | | 5,273 | | | | 4,361 | |

| Checks outstanding | | $ | — | | | $ | 35,606 | |

| Fair value adjustment of stock warrants | | | — | | | | — | | | | 4,563 | |

| Bad debt expense | | | 197 | | | | 1,390 | | | | 2,285 | |

| Receivables | | | (75,870 | ) | | | (45,942 | ) | | | 74,089 | |

| Proceeds from term loan | | | — | | | | — | | | | 594,000 | |

| Proceeds from public offering of common stock, net of issuance costs | | | — | | | | — | | | | 111,309 | |

| | | | | | | | | | | Additional Paid | | | | | | | | | | |

| 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 | |

| 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 | ) |

Sales Recognition

We recognize sales of building products upon delivery to the customer.

| | | (In thousands) | | | | | | |

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.

We did not grant any RSUs subject to market conditions in 2015.

The only financial instruments measured at fair value on a recurring basis were our warrants as discussed in Note 8.

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.

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.

Early adoption of this guidance is permitted.

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.

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.

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.

This update requires a modified retrospective transition as of the beginning of the earliest comparative period presented in the financial statements.

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.

Subsequent to issuance of the original update, the FASB issued several further updates amending this new guidance.

Based on the required evaluation of our disclosure controls and procedures, our CEO and CFO have concluded that, as of December 31, [removed: 2017,] [added: 2018,] we maintained disclosure controls and procedures that were effective in providing reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure.

Based on our evaluation under the framework set forth in Internal Control — Integrated Framework (2013), our management concluded that our internal control over financial reporting was effective as of December 31, [removed: 2017.][added: 2018.]

The effectiveness of the Company’s internal control over financial reporting as of December 31, [removed: 2017,] [added: 2018,] has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which appears herein.

During the quarter ended December 31, [removed: 2017,] [added: 2018,] there were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

The information required by this item appears in our definitive proxy statement for our annual meeting of stockholders to be held May [removed: 23, 2018] [added: 22, 2019] under the captions “Proposal 1 — Election of Directors,” “Continuing Directors,” “Information Regarding the Board and Its Committees,” “Corporate Governance,” “Section 16(a) Beneficial Ownership Reporting Compliance,” and “Executive Officers of the Registrant,” which information is incorporated herein by reference.

Our board of directors approved a Code of Business Conduct and Ethics that applies to our directors, officers (including our principal executive officer, principal financial officer and [removed: controller)] [added: principal accounting officer)] and employees.

| | • | Any amendment to a provision of our Code of Business Conduct and Ethics or our Supplemental Code of Ethics for Chief Executive Officer, President and Senior Financial Officers of Builders FirstSource, Inc. that applies to our chief executive officer, [removed: our] chief financial officer or chief accounting officer as it relates to one or more of the items set forth in Item 406(b) of Regulation S-K; or |

The information required by this item appears in our definitive proxy statement for our annual meeting of stockholders to be held May [removed: 23, 2018] [added: 22, 2019] under the captions “Executive Compensation and Other Information,” “Information Regarding the Board and its Committees — Compensation of Directors,” and “Compensation Committee Interlocks and Insider Participation,” which information is incorporated herein by reference.

The information required by this item appears in our definitive proxy statement for our annual meeting of stockholders to be held on May [removed: 23, 2018] [added: 22, 2019] under the caption “Ownership of Securities” and “Equity Compensation Plan Information,” which information is incorporated herein by reference.

The information required by this item appears in our definitive proxy statement for our annual meeting of stockholders to be held May [removed: 23, 2018] [added: 22, 2019] under the caption “Election of Directors and Management Information,” “Information Regarding the Board and its Committees,” and “Certain Relationships and Related Party Transactions,” which information is incorporated herein by reference.

The information required by this item appears in our definitive proxy statement for our annual meeting of stockholders to be held May [removed: 23, 2018] [added: 22, 2019] under the caption “Proposal 3 — Ratification of Selection of Independent Registered Public Accounting Firm — Fees Paid to PricewaterhouseCoopers LLP,” which information is incorporated herein by reference.

| [removed: 10.20+] [added: 10.24+] | | [removed: [2010] [added: [2015] Form of Builders FirstSource, Inc. [removed: 2007] [added: 2014] Incentive Plan [removed: Nonqualified] [added: Non-Statutory] Stock Option [removed: Agreement for Employee Directors] [added: Award Certificate] (incorporated by reference to Exhibit [removed: 10.21] [added: 10.22] to the Company’s Annual Report on Form 10-K for the year ended December 31, [removed: 2009,] [added: 2014,] filed with the Securities and Exchange Commission on March [removed: 4, 2010,] [added: 3, 2015,] File Number [removed: 0-51357)](http://www.sec.gov/Archives/edgar/data/1316835/000095012310021074/d71342exv10w21.htm)] [added: 0-51357)](http://www.sec.gov/Archives/edgar/data/1316835/000156459015001235/bldr-ex1022_20141231219.htm)] |

| [removed: 10.21+] [added: 10.20+] | | [2014 Form of Builders FirstSource, Inc. 2007 Incentive Plan Restricted Stock Unit Award Certificate (incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2014, filed with the Securities and Exchange Commission on August 1, 2014, File Number 0-51357)](http://www.sec.gov/Archives/edgar/data/1316835/000156459014003053/bldr-ex10_2014063097.htm) |

| [removed: 10.22+] [added: 10.26+] | | [removed: [2014] [added: [2017] Form of Builders FirstSource, Inc. [removed: 2007] [added: 2014] Incentive Plan Director Restricted Stock Unit Award Certificate (incorporated by reference to Exhibit [removed: 10.1] [added: 10.2] to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, [removed: 2014,] [added: 2017,] filed with the Securities and Exchange Commission on November [removed: 5, 2014,] [added: 9, 2017,] File Number [removed: 0-51357)](http://www.sec.gov/Archives/edgar/data/1316835/000156459014005002/bldr-ex10_20140930103.htm)] [added: 0-51357)](http://www.sec.gov/Archives/edgar/data/1316835/000156459017023142/bldr-ex102_14.htm)] |

| [removed: 10.23+] [added: 10.21+] | | [Builders FirstSource, Inc. 2014 Incentive Plan (incorporated herein by reference to Appendix A of the Company’s Definitive Proxy Statement on Schedule 14A, filed with the Securities and Exchange Commission on April 11, 2014, File Number 0-51357)](http://www.sec.gov/Archives/edgar/data/1316835/000119312514140211/d709448ddef14a.htm) |

| [removed: 10.24+] [added: 10.22+] | | [Amendment to the Builders FirstSource, Inc. 2014 Incentive Plan (incorporated by reference to Appendix A of the Company’s Definitive Proxy Statement on Schedule 14A, filed with the Securities and Exchange Commission on April 14, 2016, File Number 0-51357)](http://www.sec.gov/Archives/edgar/data/1316835/000119312516541362/d169561ddef14a.htm) |

| [removed: 10.25+] [added: 10.23+] | | [2014 Form of Builders FirstSource, Inc. 2014 Incentive Plan Restricted Stock Unit Award Certificate (incorporated by reference to Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2014, filed with the Securities and Exchange Commission on August 1, 2014, File Number 0-51357)](http://www.sec.gov/Archives/edgar/data/1316835/000156459014003053/bldr-ex10_2014063098.htm) |

| [removed: 10.26+] [added: 10.27+] | | [removed: [2015] [added: [2017] Form of Builders FirstSource, Inc. 2014 Incentive Plan [removed: Non-Statutory] [added: Restricted] Stock [removed: Option] [added: Unit] Award Certificate (incorporated by reference to Exhibit [removed: 10.22] [added: 10.29] to the Company’s Annual Report on Form 10-K for the year ended December 31, [removed: 2014,] [added: 2017,] filed with the Securities and Exchange Commission on March [removed: 3, 2015,] [added: 1, 2018,] File Number [removed: 0-51357)](http://www.sec.gov/Archives/edgar/data/1316835/000156459015001235/bldr-ex1022_20141231219.htm)] [added: 0-51357)](http://www.sec.gov/Archives/edgar/data/1316835/000156459018004035/bldr-ex1029_236.htm)] |

| [removed: 10.27+] [added: 10.25+] | | [2016 Form of Builders FirstSource, Inc. 2014 Incentive Plan Restricted Stock Unit Award Certificate (incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2016, filed with the Securities and Exchange Commission on May 6, 2016, File Number 0-51357)](http://www.sec.gov/Archives/edgar/data/1316835/000156459016018235/bldr-ex102_83.htm) |

| [removed: 10.28+] [added: 10.36+] | | [removed: [2017 Form of] [added: [Employment Agreement between] Builders FirstSource, Inc. [removed: 2014 Incentive Plan Director Restricted Stock Unit Award Certificate] [added: and Scott L. Robins dated effective as of February 20, 2018] (incorporated by reference to Exhibit [removed: 10.2] [added: 10.1] to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, [removed: 2017,] [added: 2018,] filed with the Securities and Exchange Commission on November [removed: 9, 2017,] [added: 2, 2018,] File Number [removed: 0-51357)](http://www.sec.gov/Archives/edgar/data/1316835/000156459017023142/bldr-ex102_14.htm)] [added: 0-51357)](http://www.sec.gov/Archives/edgar/data/1316835/000156459018026435/bldr-ex101_89.htm)] |

| [removed: 10.30*+] [added: 10.28*+] | | [Builders FirstSource, Inc. [removed: Amended and Restated] Director Compensation [removed: Policy](https://www.sec.gov/Archives/edgar/data/1316835/000156459018004035/bldr-ex1030_239.htm)] [added: Policy](https://www.sec.gov/Archives/edgar/data/1316835/000156459019005770/bldr-ex1028_281.htm)] |

| [removed: 10.31+] [added: 10.29+] | | [Builders FirstSource, Inc. Form of Director Indemnification Agreement (incorporated by reference to Exhibit 10.13 to Amendment No. 3 to the Registration Statement of the Company on Form S-1, filed with the Securities and Exchange Commission on May 26, 2005, File Number 333-122788)](http://www.sec.gov/Archives/edgar/data/1316835/000095012305006750/e05301a3exv10w13.txt) |

| [removed: 10.32*+] [added: 10.30+] | | [Amended and Restated Employment Agreement, dated December 29, 2017, between Builders FirstSource, Inc. and M. Chad [removed: Crow](https://www.sec.gov/Archives/edgar/data/1316835/000156459018004035/bldr-ex1032_241.htm)] [added: Crow (incorporated by reference to Exhibit 10.32 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2017, filed with the Securities and Exchange Commission on March 1, 2018, File Number 0-51357)](http://www.sec.gov/Archives/edgar/data/1316835/000156459018004035/bldr-ex1032_241.htm)] |

| [removed: 10.33+] [added: 10.32+] | | [removed: [Employment] [added: [Amendment to Employment] Agreement, dated [removed: January 15, 2004,] [added: October 29, 2008,] between Builders FirstSource, Inc. and [removed: Morris E. Tolly] [added: Donald F. McAleenan] (incorporated by reference to Exhibit [removed: 10.22] [added: 10.33] to the Company’s Annual Report on Form 10-K for the year ended December 31, [removed: 2007,] [added: 2008,] filed with the Securities and Exchange Commission on March [removed: 5, 2008,] [added: 2, 2009,] File Number [removed: 0-51357)](http://www.sec.gov/Archives/edgar/data/1316835/000095013408004136/d54408exv10w22.htm)] [added: 0-51357)](http://www.sec.gov/Archives/edgar/data/1316835/000095013409004066/d66600exv10w33.htm)] |

| 10.34+ | | [removed: [Amendment to Employment] [added: [Employment] Agreement, dated [removed: October 29, 2008,] [added: November 14, 2016,] between Builders FirstSource, Inc. and [removed: Morris E. Tolly] [added: Peter M. Jackson] (incorporated by reference to Exhibit [removed: 10.31] [added: 10.39] to the Company’s Annual Report on Form 10-K for the year ended December 31, [removed: 2008,] [added: 2016,] filed with the Securities and Exchange Commission on March [removed: 2, 2009,] [added: 1, 2017,] File Number [removed: 0-51357)](http://www.sec.gov/Archives/edgar/data/1316835/000095013409004066/d66600exv10w31.htm)] [added: 0-51357)](http://www.sec.gov/Archives/edgar/data/1316835/000156459017003114/bldr-ex1039_212.htm)] |

| 10.35+ | | [removed: [Second] [added: [First] Amendment to Employment Agreement, dated as of May 19, 2017, between Builders FirstSource, Inc. and [removed: Morris E. Tolly] [added: Peter M. Jackson] (incorporated by reference to Exhibit [removed: 10.3] [added: 10.5] to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2017, filed with the Securities Exchange Commission on August 4, 2017, File Number [removed: 0-51357)](http://www.sec.gov/Archives/edgar/data/1316835/000156459017015617/bldr-ex103_213.htm)] [added: 0-51357)](http://www.sec.gov/Archives/edgar/data/1316835/000156459017015617/bldr-ex105_211.htm)] |

| [removed: 10.36+] [added: 10.31+] | | [Employment Agreement, dated January 15, 2004, between Builders FirstSource, Inc. and Donald F. McAleenan (incorporated by reference to Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2005, filed with the Securities Exchange Commission on November 2, 2005, File Number 0-51357)](http://www.sec.gov/Archives/edgar/data/1316835/000095012305012962/y13890exv10w3.txt) |

| [removed: 10.37+] [added: 10.33+] | | [removed: [Amendment] [added: [Second Amendment] to Employment Agreement, dated [removed: October 29, 2008,] [added: as of May 19, 2017,] between Builders FirstSource, Inc. and Donald F. McAleenan (incorporated by reference to Exhibit [removed: 10.33] [added: 10.4] to the Company’s [removed: Annual] [added: Quarterly] Report on Form [removed: 10-K] [added: 10-Q] for the [removed: year] [added: quarter] ended [removed: December 31, 2008,] [added: June 30, 2017,] filed with the Securities [removed: and] Exchange Commission on [removed: March 2, 2009,] [added: August 4, 2017,] File Number [removed: 0-51357)](http://www.sec.gov/Archives/edgar/data/1316835/000095013409004066/d66600exv10w33.htm)] [added: 0-51357)](http://www.sec.gov/Archives/edgar/data/1316835/000156459017015617/bldr-ex104_212.htm)] |

| 10.38+ | | [removed: [Second Amendment to] [added: [Amended and Restated] Employment Agreement, dated [removed: as of May 19, 2017,] [added: January 1, 2018,] between Builders FirstSource, Inc. and [removed: Donald F. McAleenan] [added: Floyd Sherman] (incorporated by reference to Exhibit [removed: 10.4] [added: 10.41] to the Company’s [removed: Quarterly] [added: Annual] Report on Form [removed: 10-Q] [added: 10-K] for the [removed: quarter] [added: year] ended [removed: June 30,] [added: December 31,] 2017, filed with the Securities [added: and] Exchange Commission on [removed: August 4, 2017,] [added: March 1, 2018,] File Number [removed: 0-51357)](http://www.sec.gov/Archives/edgar/data/1316835/000156459017015617/bldr-ex104_212.htm)] [added: 0-51357)](http://www.sec.gov/Archives/edgar/data/1316835/000156459018004035/bldr-ex1041_242.htm)] |

| [removed: 10.39+] [added: 21.1] | | [removed: [Employment Agreement, dated November 14, 2016, between Builders FirstSource, Inc. and Peter M. Jackson] [added: [Subsidiaries of the Registrant] (incorporated by reference to Exhibit [removed: 10.39] [added: 21.1] to the Company’s Annual Report on Form 10-K for the year ended December 31, [removed: 2016,] [added: 2017,] filed with the Securities and Exchange Commission on March 1, [removed: 2017,] [added: 2018,] File Number [removed: 0-51357)](http://www.sec.gov/Archives/edgar/data/1316835/000156459017003114/bldr-ex1039_212.htm)] [added: 0-51357)](http://www.sec.gov/Archives/edgar/data/1316835/000156459018004035/bldr-ex211_240.htm)] |

| [removed: 10.41*+] [added: 10.37*+] | | [removed: [Amended and Restated Employment Agreement, dated January 1, 2018,] [added: [Employment Agreement] between Builders FirstSource, Inc. and [removed: Floyd Sherman](https://www.sec.gov/Archives/edgar/data/1316835/000156459018004035/bldr-ex1041_242.htm)] [added: David E. Rush dated effective as of November 29, 2018](https://www.sec.gov/Archives/edgar/data/1316835/000156459019005770/bldr-ex1037_152.htm)] |

| 14.1* | | [Builders FirstSource, Inc. Code of Business Conduct and [removed: Ethics](https://www.sec.gov/Archives/edgar/data/1316835/000156459018004035/bldr-ex141_237.htm)] [added: Ethics](https://www.sec.gov/Archives/edgar/data/1316835/000156459019005770/bldr-ex141_256.htm)] |

| 23.1* | | [Consent of PricewaterhouseCoopers LLP, Independent Registered Public Accounting [removed: Firm](https://www.sec.gov/Archives/edgar/data/1316835/000156459018004035/bldr-ex231_12.htm)] [added: Firm](https://www.sec.gov/Archives/edgar/data/1316835/000156459019005770/bldr-ex231_10.htm)] |

| 31.1* | | [Certification of Chief Executive Officer pursuant to 17 CFR 240.13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, signed by M. Chad Crow as Chief Executive [removed: Officer](https://www.sec.gov/Archives/edgar/data/1316835/000156459018004035/bldr-ex311_10.htm)] [added: Officer](https://www.sec.gov/Archives/edgar/data/1316835/000156459019005770/bldr-ex311_15.htm)] |

| 31.2* | | [Certification of Chief Financial Officer pursuant to 17 CFR 240.13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, signed by Peter M. Jackson as Chief Financial [removed: Officer](https://www.sec.gov/Archives/edgar/data/1316835/000156459018004035/bldr-ex312_11.htm)] [added: Officer](https://www.sec.gov/Archives/edgar/data/1316835/000156459019005770/bldr-ex312_12.htm)] |

| 32.1 | | [Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, signed by M. Chad Crow as Chief Executive Officer and Peter M. Jackson as Chief Financial [removed: Officer](https://www.sec.gov/Archives/edgar/data/1316835/000156459018004035/bldr-ex321_9.htm)] [added: Officer](https://www.sec.gov/Archives/edgar/data/1316835/000156459019005770/bldr-ex321_8.htm)] |

| 101* | | The following financial information from Builders FirstSource, Inc.’s Form 10-K filed on March 1, [removed: 2018,] [added: 2019,] formatted in eXtensible Business Reporting Language (“XBRL”): (i) Consolidated Statement of Operations and Comprehensive Income [removed: (Loss)] for the years ended December 31, [added: 2018,] 2017, [removed: 2016,] and [removed: 2015,] [added: 2016,] (ii) Consolidated Balance Sheet at December 31, [removed: 2017] [added: 2018] and [removed: 2016,] [added: 2017,] (iii) Consolidated Statement of Cash Flows for the years ended December 31, [added: 2018,] 2017, [removed: 2016,] and [removed: 2015,] [added: 2016,] (iv) Consolidated Statement of Changes in Stockholders’ Equity for the years ended December 31, [added: 2018,] 2017, [removed: 2016,] and [removed: 2015,] [added: 2016,] and (v) the Notes to Consolidated Financial Statements. |

| | | |

| 10.29*+ | | [2017 Form of Builders FirstSource, Inc. 2014 Incentive Plan Restricted Stock Unit Award Certificate](https://www.sec.gov/Archives/edgar/data/1316835/000156459018004035/bldr-ex1029_236.htm) |

| 10.40+ | | [First Amendment to Employment Agreement, dated as of May 19, 2017, between Builders FirstSource, Inc. and Peter M. Jackson (incorporated by reference to Exhibit 10.5 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2017, filed with the Securities Exchange Commission on August 4, 2017, File Number 0-51357)](http://www.sec.gov/Archives/edgar/data/1316835/000156459017015617/bldr-ex105_211.htm) |

| 21.1* | | [Subsidiaries of the Registrant](https://www.sec.gov/Archives/edgar/data/1316835/000156459018004035/bldr-ex211_240.htm) |

| /s/ M. CHAD CROW | | President, Chief Executive Officer and Director | | March 1, [removed: 2018] [added: 2019] |

| /s/ PETER M. JACKSON | | Senior Vice President and Chief Financial Officer | | March 1, [removed: 2018] [added: 2019] |

| /s/ JAMI COULTER | | [added: Senior] Vice President and Chief Accounting Officer | | March 1, [removed: 2018] [added: 2019] |

| /s/ PAUL S. LEVY | | Chairman and Director | | March 1, [removed: 2018] [added: 2019] |

| /s/ FLOYD F. SHERMAN | | Director | | March 1, [removed: 2018] [added: 2019] |

| /s/ CLEVELAND A. CHRISTOPHE | | Director | | March 1, [removed: 2018] [added: 2019] |

| /s/ DANIEL AGROSKIN | | Director | | March 1, [removed: 2018] [added: 2019] |

| /s/ ROBERT C. GRIFFIN | | Director | | March 1, [removed: 2018] [added: 2019] |

| /s/ KEVIN J. KRUSE | | Director | | March 1, [removed: 2018] [added: 2019] |

| /s/ BRETT N. MILGRIM | | Director | | March 1, [removed: 2018] [added: 2019] |

| /s/ CRAIG A. STEINKE | | Director | | March 1, [removed: 2018] [added: 2019] |

| /s/ DAVID A. BARR | | Director | | March 1, [removed: 2018] [added: 2019] |

March 1, 2019

| |

March 1, 2018

| (Principal Executive Officer) |