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

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

OVERVIEW

We are a leading supplier and manufacturer of building materials, manufactured components and construction services to professional contractors, sub-contractors and consumers. The Company operates approximately 400 locations in 40 states across the United States. 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, and these are further aggregated into four reportable segments: Northeast, Southeast, South and West. All of our segments have similar customers, products and services, and distribution methods. Our financial statements contain additional information regarding segment performance which is discussed in Note 15 to the consolidated financial statements included in Item 8 of this annual report on Form 10-K.

We offer an integrated solution to our customers providing manufacturing, supply and installation of a full range of structural and related building products. Our manufactured products include our factory-built roof and floor trusses, wall panels and stairs, vinyl windows, custom millwork and trim, as well as engineered wood that we design, cut, and assemble for each home. We also assemble interior and exterior doors into pre-hung units. Additionally, we supply our customers with a broad offering of professional grade building products not manufactured by us, such as dimensional lumber and lumber sheet goods and various window, door and millwork lines. Our full range of construction-related services includes professional installation, turn-key framing and shell construction, and spans all our product categories.

We group our building products into six product categories:

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

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

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

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

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

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

Our operating results are dependent on the following trends, 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, housing affordability, household formation, land development costs, 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 1.3 million and 0.9 million, respectively, in 2019. However, both total and single-family housing starts remain below the normalized historical averages (from 1959 through 2019) of 1.5 million and 1.1 million, respectively. Due to the lower levels in housing starts versus historical norms, increased competition for homebuilder business and cyclical fluctuations in commodity prices, we may experience pressure on our gross margins. In addition to these factors, there has been a trend of consolidation within the building products supply industry. However, our industry remains highly fragmented and competitive and we will continue to face significant competition from local and regional suppliers. We still believe there are several meaningful trends that indicate U.S. housing demand will continue to trend towards recovering to the historical 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. While the rate of market growth has recently eased, industry forecasters, including the National Association of Homebuilders (“NAHB”), expect to see continued increases in housing demand over the next year.

	•	Targeting Large Production Homebuilders. 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. 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 and the health of the economy and home financing markets. We expect that our ability to remain competitive in this space will depend on our continued ability to provide a high level of customer service coupled with a broad product offering.

	•	Use of Prefabricated Components. Homebuilders are increasingly using prefabricated components in order to realize increased efficiency, overcome skilled construction labor shortages and improve quality. Shortening cycle time from start to completion is a key imperative of the homebuilders during periods of strong consumer demand. We continue to see the demand for prefabricated components increasing within the residential new construction market as 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 high cost of land development, employment levels, consumer confidence, and the availability of credit to homebuilders, contractors, and homeowners.

	•	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, the 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.

	•	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 oftentimes passed on to our customers, but our pricing quotation periods and market competition 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 a low-cost building materials supplier in the markets we serve. We pay close attention to managing our working capital and operating expenses. Further, we pay careful attention to our logistics function and its effect on our shipping and handling costs.

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

	•	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. In addition to these factors, we also evaluate our capital structure on the basis of our leverage ratio, our liquidity position, our debt maturity profile and market interest rates. As such, we may enter into various debt or equity transactions in order to appropriately manage and optimize our capital structure.

RECENT DEVELOPMENTS

Debt Transactions

During the year ended December 31, 2019, the Company executed several debt transactions, including extending the maturity of our $900.0 million revolving credit facility (“2023 facility”), redemption and repurchase of $192.4 million in aggregate principal amount of our 5.625% senior secured notes due 2024 (“2024 notes”), and repayment of $406.3 million of our senior secured term loan facility due 2024 (“2024 term loan”). The repayments of our 2024 notes and 2024 term loan were funded with the proceeds from the issuance of $475.0 million in aggregate principal amount of our 6.75% senior secured notes due 2027 (“2027 notes”) and cash on hand.

In February 2020, we completed a private offering of $550.0 million in aggregate principal amount of 5.0% unsecured senior notes due 2030 (“2030 notes”) at an issue price equal to 100% of their par value. The proceeds from this offering were used together with borrowing under our 2023 facility to redeem the remaining $503.9 million in aggregate principal amount of 2024 notes outstanding at a redemption price of 104.2% of their par value and $47.5 million in aggregate principal amount of 2027 notes at a redemption price of 103.0% of their par value.

These transactions are described in Notes 9 and 18 to the consolidated financial statements included in Item 8 of this annual report on Form 10-K. Collectively, these transactions have extended our debt maturity profile and reduced the amount of long-term debt outstanding. From time to time, based on market conditions and other factors and subject to compliance with applicable laws and regulations, the Company may repurchase or call our notes, repay debt, repurchase shares of our common stock or otherwise enter into transactions regarding its capital structure.

Business Combinations

On July 1, 2019, we acquired certain assets and the operations of Sun State Components (“Sun State”) for $42.5 million in cash. Sun State is comprised of three truss locations, which are located in Las Vegas, Nevada; Surprise, Arizona; and Kingman, Arizona. Sun State manufactures roof trusses and floor trusses and distributes lumber and related products to residential homebuilders and commercial contractors.

On December 9, 2019, we acquired certain assets and the operations of Raney Components, LLC and Raney Construction, Inc. (collectively “Raney”) for $59.0 million in cash, subject to certain adjustments. Located in Groveland, Florida, Raney is a vertically-integrated manufacturer and installer of residential structures for production builder customers. Raney combines sub-contractor labor and material supply to place concrete slabs, install masonry block for exterior walls, set wall panels and roof trusses, frame interior walls and install roof decking.

On January 9, 2020, we acquired certain assets and the operations of Bianchi & Company, Inc. (“Bianchi”) for $17.2 million in cash, subject to certain adjustments. Located in Charlotte, North Carolina, Bianchi is a supplier and installer of interior and exterior doors, crown moldings, open stair rail, chair rail, wainscoting, commercial hollow metal frames and doors and other custom millwork.

These acquisitions are described in Notes 5 and 18 to the consolidated financial statements included in Item 8 of this annual report on Form 10-K.

Retirement of President and Chief Executive Officer

On January 10, 2020, Mr. Crow notified our Board of his decision to retire as President and Chief Executive Officer of the Company during 2020 after assisting the Board in hiring his replacement. Mr. Crow has agreed to continue with the Company in a consulting capacity for a period of time following the appointment of a new Chief Executive Officer to assist in the transition. The Board has retained a leading global executive search firm to help identify a successor.

CURRENT OPERATING CONDITIONS AND OUTLOOK

According to the U.S. Census Bureau, actual U.S. total housing starts for the year ended December 31, 2019 were 1.3 million, an increase of 3.3% compared to the year ended December 31, 2018. Actual U.S. single-family housing starts for the year ended December 31, 2019 were 0.9 million, an increase of 1.4% compared to the year ended December 31 2018. A composite of third party sources, including the NAHB, are forecasting 1.3 million U.S. total housing starts and 0.9 million U.S. single-family housing starts for 2020, which are increases of 1.0% and 5.8%, respectively, from 2019. In addition, in its September 2019 semi-annual forecast, the Home Improvement Research Institute (“HIRI”) forecasted sales in the professional repair and remodel end market to increase approximately 0.9% in 2020 compared to 2019.

Our net sales for the year ended December 31, 2019 decreased 5.8% over the same period last year. Commodity price deflation decreased our net sales in 2019 by an estimated 12.3%. Excluding the impact of commodity price deflation, we achieved 6.5% net sales growth in the single-family, multi-family and repair and remodel/other end markets, primarily as a result of sales volume growth in our manufactured products and windows, doors & millwork categories. Our gross margin percentage increased by 2.3% during the year ended December 31, 2019 compared to the year ended December 31, 2018. This increase in gross margin percentage is primarily attributable to an improved product mix, the decline in the cost of commodities relative to our customer pricing commitments and continued pricing discipline. In addition, sales growth in our value-add higher margin product categories, primarily our manufactured products and windows, doors & millwork categories, contributed to increased gross profit dollars and percentage compared to the year ended December 31, 2018. Our selling, general and administrative expenses, as a percentage of net sales, were 21.8% in 2019, a 1.7% increase from 20.1% in 2018. This increase was largely due to the effects of commodity price deflation on our net sales and an increase in variable compensation related to increased sales volume and gross margin for the year ended December 31, 2019 compared to the year ended December 31, 2018.

We believe the long-term outlook for the housing industry is positive due to growth in the underlying demographics. We feel we are well-positioned to take advantage of the construction activity in our markets and to increase our market share, which may include strategic acquisitions. We will continue to focus on working capital by closely monitoring the credit exposure of our customers, remaining focused on maintaining the right level of inventory and by working with our vendors to improve payment terms and pricing on our products. We strive to achieve the appropriate balance of short-term expense control while maintaining the expertise and capacity to grow the business as market conditions warrant. In addition, optimization of our capital structure will continue to be a key area of focus for the Company.

RESULTS OF OPERATIONS

A discussion regarding our financial condition and results of operations for the year ended December 31, 2019 compared to the year ended December 31, 2018 is presented below. A discussion regarding our financial condition and results of operations for the year ended December 31, 2018 compared to the year ended December 31, 2017 can be found under Item 7 of Part II of our Annual Report on Form 10-K for the fiscal year ended December 31, 2018, filed with the SEC on March 1, 2019.

2019 Compared with 2018

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

		2019				2018
Net sales			100.0	%			100.0	%
Cost of sales			72.8	%			75.1	%
Gross margin			27.2	%			24.9	%
Selling, general and administrative expenses			21.8	%			20.1	%
Income from operations			5.4	%			4.8	%
Interest expense, net			1.5	%			1.4	%
Income tax expense			0.8	%			0.7	%
Net income			3.1	%			2.7	%

Net Sales. Net sales for the year ended December 31, 2019 were $7,280.4 million, a 5.8% decrease from net sales of $7,724.8 million for 2018. Commodity price deflation decreased our net sales in 2019 by an estimated 12.3%. Excluding the impact of commodity price deflation, we achieved 6.5% sales growth in the single-family, multi-family and repair and remodel/other end markets, primarily as a result of sales volume growth in our manufactured products and windows, doors & millwork categories.

The following table shows net sales classified by major product category for the years ended December 31, (dollars in millions):

		2019								2018
		Net sales				% of Sales				Net sales				% of Sales				% Change
Lumber & lumber sheet goods		$	2,251.6				30.9	%		$	2,902.2				37.6	%			(22.4	)%
Manufactured products			1,449.5				19.9	%			1,392.0				18.0	%			4.1	%
Windows, doors & millwork			1,542.9				21.2	%			1,445.9				18.7	%			6.7	%
Gypsum, roofing & insulation			528.6				7.3	%			528.4				6.9	%			0.0	%
Siding, metal & concrete products			712.6				9.8	%			697.8				9.0	%			2.1	%
Other building products & services			795.2				10.9	%			758.5				9.8	%			4.8	%
Total sales		$	7,280.4				100.0	%		$	7,724.8				100.0	%			(5.8	)%

The decrease in net sales in our lumber and lumber sheet goods category resulted from the impact of commodity price deflation in 2019 compared to the prior year, which offset increased volume in the category. We achieved increased net sales in our remaining product categories due to higher sales volume.

Gross Margin. Gross margin increased $53.9 million to $1,976.8 million. Our gross margin percentage increased to 27.2% in 2019 from 24.9% in 2018, a 2.3% increase. Our gross margin percentage increase was primarily attributable to an improved product mix, the decline in the cost of commodities relative to our customer pricing commitments and continued pricing discipline. In addition, sales growth in our value-add higher margin product categories, primarily our manufactured products and windows, doors & millwork categories, contributed to increased gross profit dollars and percentage compared to the year ended December 31, 2018.

Selling, General and Administrative Expenses. Selling, general and administrative expenses increased $30.6 million, or 2.0%, and as a percentage of net sales increased to 21.8% from 20.1% in 2018. This increase was primarily due to increases in variable compensation related to increased sales volume and gross margin. The increase as a percentage of net sales was also attributable to the effect of commodity price deflation on our net sales.

Interest Expense, net. Interest expense was $109.6 million in 2019, a decrease of $1.3 million from 2018. This decrease in interest expense is primarily due to lower outstanding debt balances in 2019 compared to 2018. However, offsetting the overall decrease were one-time charges of $10.2 million in 2019 related to the debt transactions executed in that period. In addition, interest expense for the year ended December 31, 2018 included a $3.2 million gain on debt extinguishment.

Income Tax Expense. We recorded income tax expense of $60.9 million during the year ended December 31, 2019 compared to income tax expense of $55.6 million during the year ended December 31, 2018. Our effective tax rate was 21.6% for the year ended December 31, 2019 compared to 21.3% for the year ended December 31, 2018.

Results by Reportable Segment

The following tables show net sales and income before income taxes by reportable segment excluding the “All Other” caption as shown in Note 15 to the consolidated financial statements included in Item 8 of this annual report on Form 10-K (dollars in thousands):

		Year ended December 31,
		Net sales																				Income before income taxes
						% of net								% of net												% of net								% of net
		2019				sales				2018				sales				% change				2019				sales				2018				sales				% change
Northeast		$	1,295,643				18.4	%		$	1,309,391				17.5	%			(1.0	)%		$	56,012				4.3	%		$	36,354				2.8	%			54.1	%
Southeast			1,610,156				22.9	%			1,700,317				22.7	%			(5.3	)%			83,466				5.2	%			67,465				4.0	%			23.7	%
South			1,866,891				26.6	%			2,020,258				27.0	%			(7.6	)%			113,550				6.1	%			111,515				5.5	%			1.8	%
West			2,253,854				32.1	%			2,448,581				32.8	%			(8.0	)%			86,144				3.8	%			106,525				4.4	%			(19.1	)%
		$	7,026,544				100.0	%		$	7,478,547				100.0	%						$	339,172				4.8	%		$	321,859				4.3	%

We have four reportable segments based on an aggregation of the geographic regions in which we operate. While there is some geographic similarity between our reportable segments and the regions as defined by the U.S. Census Bureau, our reportable segments do not necessarily fully align with any single U.S. Census Bureau region.

According to the U.S. Census Bureau, actual single-family housing starts during the year ended December 31, 2019 decreased 11.6%, 2.6% and 3.8% in the Northeast region, Midwest region and West region, respectively. Actual single-family starts increased 6.8% in the South region during the same period. For the year ended December 31, 2019, our net sales declined in all of our reportable segments primarily due to the impact of commodity price deflation. We achieved increased profitability in our Northeast, Southeast and South reportable segments largely due to an improved product mix, the decline in the cost of commodities relative to our customer pricing commitments and continued pricing discipline. However, profitability declined in our West reportable segment largely due the impact of commodity price deflation offsetting the improvement in gross margin percentage.

LIQUIDITY AND CAPITAL RESOURCES

Our primary capital requirements are to fund working capital needs and operating expenses, meet required interest and principal payments, and to fund capital expenditures and potential future growth opportunities. Our capital resources at December 31, 2019 consist of cash on hand and borrowing availability under our 2023 facility.

Our 2023 facility will be primarily used for working capital, general corporate purposes, and funding capital expenditures and growth opportunities. In addition, we may use the 2023 facility to facilitate debt consolidation. Availability under the 2023 facility is determined by a borrowing base. Our borrowing base consists of trade accounts receivable, inventory, other receivables which include progress billings and credit card receivables, and qualified cash that all meet specific criteria contained within the credit agreement, minus agent specified reserves. Net excess borrowing availability is equal to the maximum borrowing amount minus outstanding borrowings and letters of credit.

The following table shows our borrowing base and excess availability as of December 31, 2019 and 2018 (in millions):

	As of
	December 31, 2019				December 31, 2018
Accounts Receivable Availability	$	413.0			$	431.9
Inventory Availability		370.0				395.4
Other Receivables Availability		29.8				18.8
Gross Availability		812.8				846.1
Less:
Agent Reserves		(26.6	)			(25.5	)
Plus:
Cash in Qualified Accounts		4.2				26.0
Borrowing Base		790.4				846.6
Aggregate Revolving Commitments		900.0				900.0
Maximum Borrowing Amount (lesser of Borrowing Base and Aggregate Revolving Commitments)		790.4				846.6
Less:
Outstanding Borrowings		(27.0	)			(179.0	)
Letters of Credit		(82.2	)			(82.2	)
Net Excess Borrowing Availability on Revolving Facility	$	681.2			$	585.4

As of December 31, 2019, we had $27.0 million in outstanding borrowings under our 2023 facility and our net excess borrowing availability was $681.2 million after being reduced by outstanding letters of credit of approximately $82.2 million. We are required to meet a fixed charge coverage 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 $80.0 million as of December 31, 2019. We were not in violation of any covenants or restrictions imposed by any of our debt agreements at December 31, 2019.

Liquidity

Our liquidity at December 31, 2019 was $695.3 million, which consists of net borrowing availability under the 2023 facility and cash on hand.

We have substantial indebtedness, which results in significant interest expense and could have the effect of, among other things, reducing our flexibility to respond to changing business and economic conditions. From time to time, based on market conditions and other factors and subject to compliance with applicable laws and regulations, the Company may repurchase or call our notes, repay debt, or otherwise enter into transactions regarding its capital structure.

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

Consolidated Cash Flows

A discussion regarding our consolidated cash flows for the year ended December 31, 2019 compared to the year ended December 31, 2018 is presented below. A discussion regarding our consolidated cash flows for the year ended December 31, 2018 compared to the year ended December 31, 2017 can be found under Item 7 of Part II of our Annual Report on Form 10-K for the fiscal year ended December 31, 2018, filed with the SEC on March 1, 2019.

2019 Compared with 2018

Cash provided by operating activities was $504.0 million and $282.8 million in 2019 and 2018, respectively. The $221.2 million increase in cash provided by operations was largely the result of a working capital decrease of $106.2 million in 2019 compared to a working capital increase of $92.2 million in 2018. This change in working capital was primarily due to the timing and impact of changes in commodity prices on the value of cash received from customers, inventory purchases and cash paid to vendors during the year ended December 31, 2018 compared to the year ended December 31, 2019.

Cash used in investing activities was $199.2 million and $96.7 million in 2019 and 2018, respectively. This increase in cash used in investing activities was primarily due to $92.9 million in cash used for our acquisitions of Sun State and Raney in 2019. In addition, our capital expenditures increased $11.5 million in 2019 compared to 2018. This increase in capital expenditures was largely due to the Company’s decision to purchase, rather than lease, more of its machinery and rolling stock units in 2019 compared to 2018.

Cash used in financing activities was $300.9 million and $233.6 million in 2019 and 2018, respectively. Cash used in financing activities for the year ended December 31, 2019 was primarily due to $610.8 million in long-term debt repayments, largely consisting of $406.3 million in repayments of the 2024 term loan and $191.5 million in cash repayments of our 2024 notes. In addition, we had $152.0 million in net repayments on our 2023 facility in 2019. These payments were offset by $478.4 million in proceeds received from the issuance of 2027 notes. In connection with our debt transactions executed in 2019 we paid $10.9 million in debt issuance and extinguishment costs. Further, in 2019 we paid $7.9 million to repurchase and retire 460,000 shares of our common stock pursuant to a repurchase program authorized by our board of directors. Cash used in financing activities for the year ended December 31, 2018 was primarily due to $171.0 million in net repayments on the 2023 facility as well as $61.5 million in net payments on long-term debt arrangements largely associated with repurchases of our 2024 notes.

Capital Expenditures

Capital expenditures vary depending on prevailing business factors, including current and anticipated market conditions. Historically, capital expenditures have for the most part remained at relatively low levels in comparison to the operating cash flows generated during the corresponding periods. We expect our 2020 capital expenditures to be in the range of approximately $110 million to $130 million primarily related to rolling stock, equipment and facility improvements to support our operations.

DISCLOSURES OF CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS

The following summarizes our contractual obligations as of December 31, 2019 (in thousands):

		Payments Due by Period
Contractual obligations		Total				Less than 1 year				1-3 years				3-5 years				More than 5 years
Long-term debt		$	1,057,923			$	—			$	—			$	582,923			$	475,000
Interest on long-term debt(1)			402,056				68,460				136,883				119,229				77,484
Other finance obligations(2)			288,666				18,091				35,066				34,947				200,562
Finance lease obligations(2)			22,011				11,331				10,029				651				—
Operating leases (2)			365,695				78,375				125,460				74,458				87,402
Total contractual cash obligations		$	2,136,352			$	176,257			$	307,439			$	812,208			$	840,448

(1)	We had $27.0 million in outstanding borrowings under the 2023 facility as of December 31, 2019. Borrowings under the 2023 facility bear interest at a variable rate. Therefore, actual interest may differ from the amounts presented above due to interest rate

	changes or any future borrowing activity under the 2023 facility. The 2024 term loan also bears interest at a variable rate, therefore actual interest may differ from the amounts presented above due to interest rate changes.

(2)	Future commitments for other finance obligations, finance lease obligations and operating lease obligations.

Purchase orders entered into in the ordinary course of business are excluded from the above table because they are payable within one year. Amounts for which we are liable under purchase orders are reflected on our consolidated balance sheet as accounts payable. Where it makes economic sense to do so, we plan to lease certain equipment during 2020 to support anticipated sales growth.

OTHER CASH OBLIGATIONS NOT REFLECTED IN THE BALANCE SHEET

In addition to the lease obligations included in the above table, we have residual value guarantees on certain equipment leases. Under these leases we have the option of (1) purchasing the equipment at the end of the lease term, (2) arranging for the sale of the equipment to a third party, or (3) returning the equipment to the lessor to sell the equipment. If the sales proceeds in either case are less than the residual value, then we are required to reimburse the lessor for the deficiency up to a specified level as stated in each lease agreement. The guarantees under these leases for the residual values of equipment at the end of the respective operating lease periods approximated $4.8 million as of December 31, 2019.

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

In addition, the Company is party to certain agreements related to its other finance obligations which commit the Company to perform certain repairs and maintenance obligations under the leases in a specified manner and timeframe. As of December 31, 2019 our obligations under these agreements have largely been completed with the remainder expected to be completed within the next year.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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

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

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

Goodwill. Goodwill represents the excess of the amount we paid to acquire businesses over the estimated fair value of tangible assets and identifiable intangible assets acquired, less liabilities assumed. At December 31, 2019, our goodwill balance was $769.0 million, representing 23.7% of our total assets.

We test goodwill for impairment in the fourth quarter of each year or at any other time when impairment indicators exist. Examples of such indicators that could cause us to test goodwill for impairment between annual tests include a significant change in the business climate, unexpected competition or a significant deterioration in market share. We may also consider market capitalization relative to our net assets. Housing starts are a significant sales driver for us. If there is a significant decline or an expected decline in housing starts, this could adversely affect our expectations for a reporting unit and the value of that reporting unit.

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

However, if we determine that it is more likely than not that the fair value of the reporting unit is less than its carrying amount, we perform a quantitative goodwill impairment test. This test identifies both the existence of and the amount of goodwill impairment by comparing the fair value of a reporting unit to its carrying amount, including goodwill. If the fair value of a reporting unit exceeds its carrying amount goodwill is not impaired. If the carrying amount of a reporting unit exceeds its fair value an impairment loss is recognized in amount equal to that excess, limited to the amount of goodwill allocated to that reporting unit.

In performing our annual goodwill impairment tests at December 31, 2019, we first assessed qualitative factors relative to each of our reporting units to determine if it was more likely than not that the fair value of our reporting units were less than their carrying amounts. Examples of such factors we considered in this assessment included the amount of cushion from prior quantitative goodwill impairment tests, significant changes in the goodwill balance, the presence of any known or forecasted declines in operating performance, market conditions, market share or any other negative factors.

For reporting units where we determined that it was more likely than not that the fair values were less than their carrying amounts, we performed a quantitative goodwill impairment test. In evaluating our goodwill for impairment at December 31, 2019, $77.1 million of our goodwill balance was assessed utilizing a quantitative assessment. In performing the quantitative impairment test at December 31, 2019, we developed a range of fair values using a five-year discounted cash flow methodology. Inherent in such fair value determinations are significant assumptions relating to future cash flows, expected future revenues, expected future profitability, the discount rate, the terminal value, and our interpretation of current economic indicators and market conditions and their impact on our strategic plans and operations. Due to the uncertainties associated with such estimates, interpretations and assumptions, actual results could differ from projected results, which could result in impairment of goodwill being recorded.

Significant information and assumptions utilized in estimating future cash flows for quantitative goodwill impairment analyses include projections of revenue growth utilizing publicly available industry information such as lumber commodity prices and housing start forecasts developed by industry forecasters, including the NAHB. Expected future profitability reflects current headcount levels and cost structure and are flexed in future years based upon historical trends at various revenue levels. Long-term growth was based upon terminal value earnings before interest, taxes, depreciation and amortization (“EBITDA”) multiples of 6.0x to reflect the relevant expected acquisition price. A discount rate of 11.0% was used and is intended to reflect the weighted average cost of capital for a potential market participant and includes all risks of ownership and the associated risks of realizing the stream of projected future cash flows. Decreasing the long-term growth to an EBITDA multiple of 5.0x, or increasing the discount rate by 1.0% to 12.0%, would not have changed the results of our impairment testing.

At December 31, 2019, the fair values of each of our reporting units were substantially in excess of their respective carrying amounts. Factors that could negatively impact the estimated fair value of our reporting units and potentially trigger additional impairment include, but are not limited to, unexpected competition, lower than expected housing starts, an increase in market participant weighted average cost of capital, increases in material or labor cost, and significant declines in our market capitalization. Future impairment of goodwill would have the effect of decreasing our earnings or increasing our losses in such period, but would not impact our current outstanding debt obligations or compliance with covenants contained in the related debt agreements. We did not have any goodwill impairments in 2019, 2018 or 2017.

RECENTLY ISSUED ACCOUNTING STANDARDS

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