S-1/A 1 d520315ds1a.htm AMENDMENT NO. 3 TO FORM S-1 Amendment No. 3 to Form S-1
Table of Contents

As filed with the Securities and Exchange Commission on July 30, 2013

Registration No. 333-189368

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

AMENDMENT NO. 3

TO

FORM S-1

REGISTRATION STATEMENT

UNDER THE SECURITIES ACT OF 1933

 

 

STOCK BUILDING SUPPLY HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   5211         26-4687975
(State or other jurisdiction
of incorporation or organization)
 

(Primary Standard Industrial        

Classification Code Number)      

  (I.R.S. Employer Identification No.)

8020 Arco Corporate Drive, Suite 400

Raleigh, North Carolina 27617

Phone: (919) 431-1000

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

Bryan J. Yeazel

Executive Vice President, Chief Administrative Officer and General Counsel

8020 Arco Corporate Drive, Suite 400

Raleigh, North Carolina 27617

Phone: (919) 431-1000

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

 

Copies of all communications, including communications sent to agent for service, should be sent to:

 

Carol Anne Huff

Kirkland & Ellis LLP

300 North LaSalle

Chicago, Illinois 60654

(312) 862-2000

 

Michael Kaplan

Davis Polk & Wardwell LLP

450 Lexington Avenue

New York, New York 10017

(212) 450-4000

 

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement becomes effective.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box:  ¨

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer  ¨   Accelerated filer   ¨    Non-accelerated filer   x   Smaller reporting company  ¨
     (Do not check if a smaller reporting company)

 

 

CALCULATION OF REGISTRATION FEE

 

 

Title of Each Class of

Securities to be Registered

 

Amount to be
Registered(1)

  Proposed Maximum
Offering Price per
Share(2)
 

Proposed Maximum

Aggregate Offering
Price(2)(3)

   Amount of
Registration
Fee(3)(4)

Common Stock, $0.01 par value per share

  10,147,060   $18.00   $182,647,080    $24,913.07

 

 

(1) Includes 1,323,530 additional shares of common stock that the underwriters have the option to purchase.
(2) Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(a) of the Securities Act of 1933, as amended.
(3) Calculated by multiplying 0.00013640 by the proposed maximum aggregate offering price.
(4) $23,870 was previously paid with the initial filing of this registration statement.

 

 

The registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until this Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


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The information in this preliminary prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell nor does it seek an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

Subject to Completion. Dated July 30, 2013.

8,823,530 Shares

 

LOGO

Stock Building Supply Holdings, Inc.

Common Stock

 

 

This is an initial public offering of shares of common stock of Stock Building Supply Holdings, Inc. We are offering 4,411,765 shares of common stock. The selling stockholders identified in this prospectus are selling an additional 4,411,765 shares of common stock. We will not receive any proceeds from the sale of shares of common stock by the selling stockholders.

Prior to this offering, there has been no public market for the common stock. It is currently estimated that the initial public offering price per share will be between $16.00 and $18.00. We have been approved to list the common stock on the NASDAQ Stock Market under the symbol “STCK.”

We are an “emerging growth company” as defined in Section 2(a)(19) of the Securities Act of 1933, as amended, and, as such, are allowed to provide in this prospectus more limited disclosures than an issuer that would not so qualify. In addition, for so long as we remain an emerging growth company, we will qualify for certain limited exceptions from investor protection laws such as the Sarbanes-Oxley Act of 2002. Please read “Risk Factors—Risks Related to this Offering and Our Common Stock—We are an ‘emerging growth company’ and we cannot be certain if the reduced disclosure requirements applicable to emerging growth companies will make our common stock less attractive to investors.”

 

 

See “Risk Factors” on page 20 to read about factors you should consider before buying shares of the common stock.

 

 

Neither the Securities and Exchange Commission nor any other state securities commission has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.

 

 

 

     Per Share      Total  

Initial public offering price

   $                    $                

Underwriting discount(1)

   $                    $                

Proceeds, before expenses, to us

   $                    $                

Proceeds, before expenses, to the selling stockholders

   $                    $                

 

(1) See “Underwriting.”

To the extent that the underwriters sell more than 8,823,530 shares of common stock, the underwriters have the option to purchase up to an additional 1,323,530 shares from the selling stockholders at the initial public offering price less the underwriting discount.

The underwriters expect to deliver the shares against payment in New York, New York on                     , 2013.

 

 

Goldman, Sachs & Co.
                  Barclays
        Citigroup

 

Baird   Stephens Inc.   Wells Fargo Securities

Prospectus dated                     , 2013.


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LOGO


Table of Contents

TABLE OF CONTENTS

 

PROSPECTUS SUMMARY

     1   

RISK FACTORS

     20   

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

     40   

USE OF PROCEEDS

     42   

DIVIDEND POLICY

     43   

CAPITALIZATION

     44   

DILUTION

     47   

SELECTED CONSOLIDATED FINANCIAL DATA

     49   

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     53   

BUSINESS

     86   

MANAGEMENT

     102   

EXECUTIVE COMPENSATION

     111   

PRINCIPAL AND SELLING STOCKHOLDERS

     123   

CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

     126   

DESCRIPTION OF CAPITAL STOCK

     131   

SHARES ELIGIBLE FOR FUTURE SALE

     136   

CERTAIN U.S. FEDERAL INCOME TAX CONSIDERATIONS TO NON-U.S. HOLDERS

     138   

UNDERWRITING (CONFLICTS OF INTEREST)

     142   

LEGAL MATTERS

     147   

EXPERTS

     147   

WHERE YOU CAN FIND MORE INFORMATION

     147   

INDEX TO FINANCIAL STATEMENTS

     F-1   

Through and including                     , 2013 (the 25th day after the date of this prospectus), all dealers effecting transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to a dealer’s obligation to deliver a prospectus when acting as an underwriter and with respect to an unsold allotment or subscription.

 

 

We have not authorized anyone to provide any information or to make any representations other than those contained in this prospectus or in any free writing prospectuses we have prepared. We take no responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. This prospectus is an offer to sell only the shares offered hereby, but only under circumstances and in jurisdictions where it is lawful to do so. The information contained in this prospectus is current only as of its date.

Persons who come into possession of this prospectus and any such free writing prospectus in jurisdictions outside the United States are required to inform themselves about and to observe any restrictions as to this offering and the distribution of this prospectus and any such free writing prospectus applicable to that jurisdiction.

 

 

 

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Market and industry data

We obtained the industry, market and competitive position data used throughout this prospectus from our own internal estimates and research as well as from industry publications and research, surveys and studies conducted by third-parties. Third-party industry publications include the Home Improvement Research Institute’s (“HIRI”) Home Improvement Products Market Forecast Update (published in March 2013), the National Association of Homebuilders’ (“NAHB”) Housing and Interest Rate Forecast (published in July 2013), the Harvard Joint Center for Housing Studies’ (“HJCHS”) The U.S. Housing Stock: Ready for Renewal (published in January 2013), McGraw-Hill Construction’s (“McGraw-Hill Construction”) Market Forecasting Service Report (published in June 2013), Random Lengths’ Yardstick (published in December 2012), as well as data published by Standard & Poor’s Financial Services LLC as of June 2013, the Bureau of Labor Statistics as of December 2012 and January 2013, the U.S. Census Bureau as of December 2012 and June 2013 and The Wall Street Journal as of July 2013. Industry publications, studies and surveys generally state that they have been obtained from sources believed to be reliable, although they do not guarantee the accuracy or completeness of such information. The information derived from the sources cited in this prospectus represents the most recently available data and, therefore, we believe such data remain reliable. While we believe our internal company research is reliable and the market definitions are appropriate, neither such research nor these definitions have been verified by any independent source.

 

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PROSPECTUS SUMMARY

This summary highlights information contained elsewhere in this prospectus. It does not contain all of the information that may be important to you and your investment decision. You should carefully read the following summary together with the entire prospectus. In this prospectus, unless the context otherwise requires, references to the “Company,” “we,” “us” and “our” refer to Stock Building Supply Holdings, Inc., together with its consolidated subsidiaries.

Overview

We are a large, diversified lumber and building materials (“LBM”) distributor and solutions provider that sells to new construction and repair and remodel contractors. Our primary products are lumber & lumber sheet goods, millwork, doors, flooring, windows, structural components, such as engineered wood products (“EWP”), trusses, wall panels and other exterior products. We serve a broad customer base, including large-scale production homebuilders, custom homebuilders and repair and remodeling contractors, and we believe we are among the top three LBM suppliers for residential construction in 80% of the geographic markets in which we operate, based on net sales. We offer over 39,000 products sourced through our strategic network of suppliers, which together with our various solution-based services, represent approximately 50% of the construction cost of a typical new home. By enabling our customers to source a significant portion of their materials and services from one supplier, we have positioned ourselves as the supply partner of choice for many of our customers.

We have operations in 13 states that accounted for approximately 48% of 2012 U.S. single-family housing permits according to the U.S. Census Bureau. Our primary operating regions include the South and West regions of the United States (as defined by the U.S. Census Bureau), with a significant portion of our net sales derived from markets within Texas, North Carolina, California and Utah. Following our acquisition by an affiliate of The Gores Group, LLC (“Gores”) in 2009, we aggressively and strategically reduced our footprint to improve our profitability. Today, our facilities are strategically located in 20 metropolitan areas in these 13 states that we believe have an attractive potential for economic growth based on population trends, increasing business activity and above-average employment growth. The following map shows our current operating footprint.

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We provide a balanced mix of products and services to U.S. production and custom homebuilders and repair and remodel, multi-family and commercial contractors. The charts below summarize our 2012 revenues by product category and customer segment.

 

2012 revenues
by product category

  

2012 revenues
by customer segment

 

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The following table demonstrates the favorable demographic trends in the metropolitan areas in which we operate and the capabilities of our facilities.

 

Market

  2012 single
family
permits
    Year over
year single
family
permit
change
    December 2012
unemployment
rate
    2012 total
employment
year over
year change
    Distribution
& retail
operations
    Millwork
fabrication
    Structural
components
fabrication
    Flooring
operations
 

Houston, TX

    28,628        25.1     6.0     4.0     4        1        2     

Washington, DC

    10,980        13.9     5.3     1.1     3        2          3 (7) 

Atlanta, GA

    9,167        47.5     8.4     2.3     3        2        2     

Austin, TX

    8,229        32.1     5.0     3.9     1        1        1     

Raleigh-Durham,
NC(1)

    8,020        27.7     7.4     2.8     4        1        1        3 (8) 

Charlotte, NC

    6,703        36.5     9.4     3.2     1          2        1   

Eastern PA(2)

    5,956        14.8     8.2     1.0     1          1        1   

San Antonio, TX

    5,102        15.7     5.7     2.6     1         

Salt Lake City, UT(3)

    5,052        40.6     4.9     4.4     5        3        2     

Los Angeles, CA

    4,946        20.7     9.4     2.2     11        2        1     

Richmond, VA

    2,840        20.7     6.0     1.1     1        1        1     

Columbia, SC

    2,791        16.8     7.5     1.2     2        1          2 (9) 

Greenville, SC

    2,246        37.0     7.0     1.4     1            1   

Greensboro, NC(4)

    2,014        2.0     9.4     0.9     1            1   

Northwest AR(5)

    1,763        52.2     5.1     3.3     1        1          1   

Southern Utah(6)

    1,317        54.2     6.6     5.1     1        1       

Albuquerque, NM

    1,259        (7.0 %)      6.7     0.2     1        1        1     

Spokane, WA

    963        30.1     8.4     1.9     2        1       

Lubbock, TX

    752        8.7     4.7     1.6     2        1       

Amarillo, TX

    653        (0.5 %)      4.3     0.4     2         
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total for Stock Building Supply markets

    109,381        25.3     7.5     2.2     48        19        14        13   

U.S. Total

    518,695        23.9     7.8     1.7        

 

Source: U.S. Census Bureau and Bureau of Labor Statistics

 

 

(1) Durham-Chapel Hill, NC and Raleigh-Cary, NC metropolitan statistical areas (“MSAs”)
(2) Philadelphia-Camden-Wilmington, PA-NJ-DE-MD and Lancaster, PA MSAs
(3) Salt Lake City, UT and Provo-Orem, UT MSAs
(4) Greensboro-High Point, NC and Winston-Salem, NC MSAs
(5) Fayetteville-Springdale-Rogers, AR-MO MSA
(6) St. George, UT MSA
(7) Includes flooring location in Baltimore, MD
(8) Includes flooring location in Fayetteville, NC
(9) Includes flooring location in Charleston, SC

 

Since 2010, we have acquired four businesses and, through investments in a proprietary information technology (“IT”) and operational platform, have improved our distribution service capability. We have also integrated each of our local branches with our headquarters in Raleigh, North Carolina. Additionally, we have undertaken efforts to streamline and improve significantly our business processes by adopting a “LEAN” business philosophy to reduce waste and add value. These initiatives allowed us to reduce selling, general and administrative expense by $25.1 million while net sales increased 25.4% from 2010 to 2012. We believe that, as we continue to pursue these initiatives, we will further improve the service and support we provide to our customers, increase the effectiveness of our employees and contractors and improve efficiency across all aspects of our business.

In 2006, our current footprint of facilities generated approximately $1.8 billion in net sales, and we believe that we will achieve attractive growth as our markets recover to normalized levels of new home construction. From 2010 to 2012, our net sales increased $190.7 million, from $751.7 million to $942.4 million. Over the same period, our Adjusted EBITDA increased $60.0 million, from $(58.0) million to $2.0 million, while our net loss decreased $55.5 million, from $70.0 million to $14.5 million. For a reconciliation of

 

 

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net loss to Adjusted EBITDA, see “—Summary consolidated financial data.” We believe that the housing recovery in our markets will continue to drive significant increases in demand for our products and the significant growth in net sales and Adjusted EBITDA that we have experienced since 2010.

Our industry

The LBM distribution industry in the United States is highly fragmented, with a number of retailers and distributors offering a broad range of products and services. Demand for our products is principally influenced by new residential construction and residential repair and remodeling activity. Following several challenging years, single-family housing starts increased in 2012 to 0.54 million and, as a result, demand for the products we distribute and for our services has also increased. From 2005 to 2011, single-family housing starts in the United States declined by approximately 75%. According to the U.S. Census Bureau, single-family housing starts in 2009, 2010 and 2011 were 0.44 million, 0.47 million and 0.43 million, respectively, which are significantly less than the 50-year average rate of 1.0 million. Approximately 67% of the 52 economists named in the May 2013 Economic Forecasting Survey conducted by The Wall Street Journal expect housing starts in 2013 to reach or exceed 1.0 million for the first time since 2007 and recent national housing statistics confirm that a robust housing recovery is already underway. For example, U.S. single-family housing starts increased 20.2% year-over-year for the six months ended June 30, 2013. Additionally, the Case-Shiller Index, a leading measure of pricing for the U.S. residential housing market, has increased on a year-over-year basis for 11 straight months and is at its highest levels since November 2008.

We believe that there is considerable growth potential in the U.S. housing sector. As of June 2013, McGraw-Hill Construction forecasts that U.S. single-family housing starts will increase to 1.1 million by 2015. Many publicly-traded homebuilders, including Lennar Corporation, D.R. Horton, Inc. and Beazer Homes USA, Inc., have reported strong earnings results and positive financial outlooks in the near-term, confirming the momentum of the housing recovery. For example, net new orders for publicly-traded homebuilders increased 24% year-over-year in the three months ended March 31, 2013, with some publicly-traded homebuilders reporting order increases of over 49%.

The products we distribute are also used in professional remodeling projects. According to the HJCHS, the U.S. remodeling market reached a peak of $328 billion in 2007 before declining approximately 16% to $275 billion in 2011. Despite this decline, factors, including the overall age of the U.S. housing stock, heightened focus on energy efficiency, rising home prices and availability of consumer capital at low interest rates, are expected to drive long-term growth in repair and remodeling expenditures. As of March 2013, HIRI estimates that total U.S. sales of home maintenance, repair and improvement products to the professional market will grow at a rate of 5.0% in 2013, 6.2% in 2014 and 4.9% in 2015.

Our competitive strengths

We believe the following key competitive strengths have contributed to our success and will position us for significant growth as part of a multi-year recovery in our end markets.

Leading distributor of building products to U.S. residential construction markets

We believe we are one of the leading LBM distributors in the United States. We serve all segments of the residential construction industry, including large-scale production homebuilders, custom homebuilders and repair and remodeling contractors. We believe that we are among the top three LBM participants in 80% of the geographic markets in which we operate based on net sales. Because of our leading market position, we believe we are well-positioned to take advantage of the projected recovery in the residential construction market.

 

 

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Low cost distribution platform with strong operating leverage

Through aggressive cost management and strategic restructuring activities implemented during the global economic downturn, we have driven significant productivity gains and positioned our company for profitable growth. Since 2009, we have closed or sold over 100 facilities in locations that we determined would not provide us with sufficient scale, or where we would otherwise not be able to compete effectively and profitably.

Beginning in 2011, our management team began implementing LEAN business practices to improve customer service, reduce waste and increase productivity. These LEAN initiatives have improved our sourcing practices and streamlined our supply chain and, along with other cost reduction efforts, have reduced our selling, general and administrative expenses as a percent of net sales from 32.8% for the fiscal year ended December 31, 2010 to 23.5% for the fiscal year ended December 31, 2012. Over the same period we have significantly increased productivity and operating leverage as net sales increased by $190.7 million, while selling, general and administrative expenses decreased by $25.1 million. We believe that our current low fixed cost position will help us to generate increased profitability as the market continues to recover.

We have also developed several innovative and proprietary eBusiness systems. These services have enabled us to track our supply chain more accurately, significantly improve customer service and reduce waste. Due in part to our LEAN initiatives and focus on efficiency, our Adjusted EBITDA has increased $60.0 million, from ($58.0) million in 2010 to $2.0 million in 2012, while our net loss has decreased $55.5 million, from $70.0 million in 2010 to $14.5 million in 2012. We believe that our Adjusted EBITDA will continue to increase as a percent of net sales as the residential construction sector rebounds.

Leading local businesses in attractive geographic markets

We operate in 20 metropolitan areas in 13 states that we believe have attractive potential for economic growth, with strong LBM product capabilities in each market we serve. We believe we are one of the top three LBM suppliers in 80% of these markets, based on net sales, with strong customer relationships and a professional team to serve our customers as they grow. Our primary operating regions include the South and West regions of the United States (as defined by the U.S. Census Bureau), which we believe are markets that are well-positioned to grow as the residential construction market recovers. McGraw-Hill Construction forecasts that the compounded annual growth rate for single-family housing starts in our 20 markets will be 24.1% from 2012 to 2015.

Proven ability to acquire and integrate complementary businesses

Our management has demonstrated a core competency in identifying, acquiring and successfully integrating businesses to provide us greater scale in our current markets and opportunities to grow in new markets. Since 2010, we have acquired the assets of four businesses with core LBM capabilities, three of which were in our current markets and one of which provided us with a strategic position in a new market.

While we have significant growth potential in our current operational footprint, we plan to continue to evaluate and acquire attractive businesses in our current geographic markets as well as new geographies to expand service capabilities and customer share to accelerate increases in profitability.

 

 

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Extensive offering of building materials and services

We offer a comprehensive line of residential building products that are used in the construction of homes, including windows, doors and trim, and many of the products used in the interior and exterior finishing of homes. We also provide manufactured products such as roof and floor trusses, wall panels and various millwork products. We offer over 39,000 different products sourced through our strategic network of suppliers and have access to a wide range of special order products. Additionally, we provide solution-based services to our customers as needed, including design, product specification and installation management services. We believe that the breadth of the products we offer our customers provides us with a strategic advantage and enables us to forge deeper relationships with customers than smaller competitors who may be unable to supply a similar product range and lack access to the broad resources of a national company.

Superior customer service and value-added capabilities

We complement our line of building products with superior customer service and value-added capabilities. Our experienced customer service professionals provide a full range of services, including customized design and installation services specific to each job site and type. We believe that the breadth of our services, our focus on individual customer needs and the integration of our supply chain and fulfillment capabilities set us apart from many of our competitors.

We offer training programs and advanced service tools for our employees in order to assist them in providing solutions for our customers. Our innovative Stock Logistics Solutions capability, in which we provide real-time delivery information and confirmation via the Internet and to mobile devices, is one example of customer service capabilities that have increased customer loyalty and helped us drive growth in our markets.

Integrated supply chain that increases efficiency and benefits customers and suppliers

Although we operate facilities in 20 metropolitan areas across 13 states, we maintain an integrated, national supply chain that we believe enables us to provide our customers with superior services, timely delivery and more favorable pricing. We have integrated our sourcing and purchasing operations into a central procurement function. Over the last ten years, we have invested in an Enterprise Resource Planning (“ERP”) system that integrates each of our local branches with our headquarters operation. Our ERP system allows us to manage customer orders and deliver efficiently across our entire organization. It also enables central product replenishment and optimizes inventory management to improve working capital requirements. Through Stock Logistics Solutions, which includes a mobile Global Positioning System (“GPS”) application on our delivery trucks that is integrated with our ERP software, our sales and service professionals can better schedule, dispatch and manage customer deliveries.

Our integrated sourcing and purchasing operations have enabled us to develop cost-effective national sourcing agreements with key suppliers that provide us with product delivery certainty and favorable terms. Through these sourcing agreements we are also able to realize stronger gross margins (defined as gross profit as a percentage of net sales) and achieve superior inventory management, especially during periods of market growth as product supply in the industry becomes more limited. Additionally, our broad reach, efficient operations and significant growth potential offer our suppliers an opportunity to strategically partner with us for growth, which further strengthens their loyalty to us.

 

 

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Experienced management team and principal equity holder

Our senior management team has more than 120 years of combined experience in manufacturing and distribution with a track record of financial and operational excellence in both favorable and challenging market conditions. Since 1987, our equity sponsor Gores has acquired and operated more than 80 companies while employing a consistent, operationally-oriented approach to create value in its businesses.

Our strategy

We intend to capitalize on our strong market position in LBM distribution to increase revenues and profits and maximize operating cash flow as the U.S. housing market recovers. We seek to achieve this by executing on the following strategies:

Expand our business with existing customers by offering additional value

We plan to continue to grow our net sales by increasing our share of our existing customers’ business. Products and services we intend to expand organically include millwork and structural components manufacturing, enhanced specification and design services, and additional LEAN eBusiness solutions for our customers and our sales and service professionals.

Expand in existing, adjacent and new geographies

We plan to expand our business through organic and acquisitive means in order to take advantage of our national supply chain and broad LBM capabilities. In addition, while we have operations in 13 states that accounted for approximately 48% of 2012 U.S. single-family housing permits, our markets within those states accounted for less than half of those permits according to the U.S. Census Bureau, providing significant opportunity for growth into markets adjacent to our current markets within these states. We believe that our scale, integrated supply chain, product knowledge, eBusiness solutions and professional customer service will enable us to grow significantly as we expand in our existing markets and in markets adjacent to our existing markets within the states where we currently operate, as well as into additional states as market and competitive conditions support further growth. We believe that our balance sheet and liquidity position will support our growth strategy.

Deliver leading customer service, productivity and operational excellence as our business grows

We strive for continued operational excellence. We have implemented a talent training and development program focused on specific skills training, business development and LEAN initiatives. We believe that the customer service and productivity gains we realized from these initiatives will continue to improve as they are implemented more broadly across our organization.

We completed an ERP implementation across all branches, and our proprietary eBusiness system, which includes Stock Logistics Solutions, will provide the platform for continued service improvements. We believe that there is an opportunity for further margin improvement as we expand our business and continue to implement LEAN initiatives that bring value to our customers.

Selectively pursue strategic acquisitions

Our industry remains highly fragmented. We intend to focus on using our operating platform and proven integration capabilities to pursue additional acquisition opportunities while minimizing execution

 

 

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risk. We will focus on investments in markets adjacent to our existing operations or acquisitions that enhance our presence and capabilities in our 20 existing metropolitan areas. Additionally, we will consider acquiring operations or companies to enter new geographic regions. We believe our capital structure positions us to acquire businesses we find strategically attractive.

Selected risks associated with our business

There are a number of risks and uncertainties that may affect our financial and operating performance and our growth prospects. You should carefully consider all of the risks discussed in “Risk Factors” before investing in our common stock. These risks include, but are not limited to, the following:

 

  Ÿ  

the state of the homebuilding industry and repair and remodeling activity;

 

  Ÿ  

seasonality and cyclicality of the building products supply and services industry;

 

  Ÿ  

competitive industry pressures and competitive pricing pressure from our customers;

 

  Ÿ  

inflation or deflation of commodity prices;

 

  Ÿ  

litigation or warranty claims relating to our products and services;

 

  Ÿ  

our ability to maintain profitability;

 

  Ÿ  

our ability to attract and retain key employees; and

 

  Ÿ  

product shortages and relationships with key suppliers.

Corporate changes

On May 2, 2013, we converted from a Delaware limited liability company into a Delaware corporation by filing a certificate of conversion in Delaware and changed our name from Saturn Acquisition Holdings, LLC to Stock Building Supply Holdings, Inc. and on July 29, 2013, we effected a 25.972-for-1 split of our Class A voting common stock and Class B non-voting common stock.

Upon consummation of this offering, our authorized capital stock will consist of 300,000,000 shares of a single class of common stock and 50,000,000 shares of preferred stock. Immediately prior to such time, upon the effectiveness of our amended and restated certificate of incorporation, all outstanding shares of our Class A voting common stock and Class B non-voting common stock will convert into an equal number of shares of a single class of common stock, all outstanding options to purchase Class B non-voting common stock held by certain members of our management will convert into options to purchase an equal number of shares of our common stock and all outstanding shares of our Class A junior preferred stock, Class B senior preferred stock and Class C convertible preferred stock will convert into an aggregate of 6,707,898 shares of common stock (assuming an initial public offering price of $17.00 per share, which is the midpoint of the price range set forth on the cover of this prospectus, and assuming a closing date of August 12, 2013, as applicable). See “—The offering” and “Capitalization—Conversion of Preferred Stock.”

Preliminary financial results for the three months and six months ended June 30, 2013

Set forth below are certain preliminary estimates of our results of operations for our three and six month periods ended June 30, 2013. We have not yet closed our books and finalized our financial results for the three and six months ended June 30, 2013, and our consolidated financial statements and related notes as of and for the three and six months ended June 30, 2013 are not expected to be filed with the SEC until after this offering is completed. Since we have not closed our books, our final results for the period may differ from estimates set forth below due to the completion of our financial

 

 

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closing procedures, final adjustments and other developments that may arise between now and the time when we issue our financial results for the second quarter. Any changes could be material. See “Special Note Regarding Forward-Looking Statements.”

The preliminary financial data included below has been prepared by, and is the responsibility of, our management. PricewaterhouseCoopers LLP has not audited, reviewed, compiled or performed any procedures with respect to such preliminary financial data. Accordingly, PricewaterhouseCoopers LLP does not express an opinion or any other form of assurance with respect thereto.

We are providing the following preliminary estimates of our financial results and operating metrics for the three and six months ended June 30, 2013:

 

  Ÿ  

For the three months ended June 30, 2013, we expect net sales to be between $313.7 million and $315.3 million, as compared to net sales of $246.5 million for the three months ended June 30, 2012. For the six months ended June 30, 2013, we expect net sales to be between $562.4 million and $564.0 million, as compared to net sales of $434.4 million for the six months ended June 30, 2012. The estimated increase in net sales for both periods was primarily the result of increased sales volumes associated with the improving residential construction market and increased selling prices for lumber and lumber sheet goods.

 

  Ÿ  

For the three months ended June 30, 2013, we expect gross profit to be between $70.5 million and $71.3 million, as compared to gross profit of $55.1 million for the three months ended June 30, 2012. For the six months ended June 30, 2013, we expect gross profit to be between $124.3 million and $125.1 million, as compared to gross profit of $98.5 million for the six months ended June 30, 2012. The estimated increase in gross profit for both periods was primarily the result of increased sales volumes and selling prices as described above.

 

  Ÿ  

For the three months ended June 30, 2013, we expect Adjusted EBITDA to be between $8.5 million and $9.5 million, as compared to Adjusted EBITDA of $2.3 million for the three months ended June 30, 2012, and net income to be between $1.3 million and $2.3 million, as compared to net loss of $2.2 million for the three months ended June 30, 2012, in each case primarily due to the higher gross profits described above. For the six months ended June 30, 2013, we expect Adjusted EBITDA to be between $7.3 million and $8.3 million as compared to Adjusted EBITDA of $(5.3) million for the six months ended June 30, 2012 and we expect net loss to be between $1.7 million and $2.7 million, as compared to net loss of $10.8 million for the six months ended June 30, 2012.

As of June 30, 2013, we had outstanding borrowings of $117.7 million, with estimated net availability of $22.3 million, under our revolving line of credit (the “Revolver”) under our secured credit agreement (the “Credit Agreement”). The increase in outstanding borrowings of $25.2 million from March 31, 2013 to June 30, 2013 was primarily due to seasonal and other increases in working capital associated with the increase in our net sales. As of June 30, 2013, cash and cash equivalents totaled approximately $9.1 million.

 

 

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The following is a reconciliation of estimated net income (loss) to estimated EBITDA and Adjusted EBITDA. See “—Summary consolidated financial data” for the definition of Adjusted EBITDA and the reasons for providing these financial measures and the limitations of these measures, which do not reflect all items of income and expense as reported under GAAP.

 

     Three months ended June 30,     Six months ended June 30,  
(dollars in thousands)    2012     2013-Low     2013-High     2012     2013-Low      2013-High  
     (as restated)(e)     (estimated)     (estimated)     (as restated)(e)     (estimated)      (estimated)  

Net income (loss)

   $ (2,237   $ 1,320      $ 2,320      $ (10,803   $ (2,737    $ (1,737

Interest expense

     1,085        1,300        1,200        2,048        2,325         2,225   

Income tax expense (benefit)

     (1,293     880        1,290        (5,556     (999      (589

Depreciation and amortization

     3,031        3,150        3,050        6,061        6,109         6,009   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

EBITDA

   $ 586      $ 6,650      $ 7,860      $ (8,250   $ 4,698       $ 5,908   

Restructuring, severance, other expense related to store closures and business optimization (a)

     538        420        350        825        653         583   

Discontinued operations, net of tax benefit(b)

     128        (90     (100     241        (247      (257

Management fees(c)

     362        600        560        767        1,006         966   

Non-cash compensation expense

     351        125        115        679        271         261   

Acquisition costs

     —          125        100        46        228         203   

Reduction of tax indemnification asset(d)

     347        —          —          347        —           —     

Non-capitalizable expenses associated with the offering

     —          670        615        —          670         615   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Adjusted EBITDA

   $ 2,312      $ 8,500      $ 9,500      $ (5,345   $ 7,279       $ 8,279   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

 

(a) Represents (i) $0.1 million of restructuring expense related to store closures for the six months ended June 30, 2013, (ii) $0.2 million, $0.1 million, $0.3 million and $0.1 million of severance expense for the three months ended June 30, 2012 and 2013 and the six months ended June 30, 2012 and 2013, respectively, and (iii) $0.3 million, $0.2 million, $0.5 million and $0.4 million related to closed locations, consisting of post-closure expenses for the three months ended June 30, 2012 and 2013 and the six months ended June 30, 2012 and 2013, respectively.

 

(b) During the year ended December 31, 2012, we ceased operations in certain geographic markets due to declines in residential homebuilding throughout the United States. The cessation of operations in these markets has been treated as discontinued operations as the markets had distinguishable cash flows and operations that have been eliminated from ongoing operations.

 

(c) Represents the expense for management services provided by Gores and its affiliates.

 

 

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(d) Includes $0.3 million of expense related to the reduction of a tax indemnification asset, with a corresponding increase in income tax benefit, for the three months ended June 30, 2012 and the six months ended June 30, 2012. This indemnification asset corresponds to the long-term liability related to uncertain tax positions for which Wolseley had indemnified the Company, which was reduced upon the expiration of the statute of limitations for certain tax periods.

 

(e) Our consolidated financial statements and related footnotes as of December 31, 2012 and March 31, 2013, for the year ended December 31, 2012 and for the three months ended March 31, 2012 and 2013 have been restated. See note (2) to our audited and unaudited financial statements included elsewhere in this prospectus.

Company background and corporate information

The Company’s predecessor was founded as Carolina Builders Corporation in Raleigh, North Carolina in 1922 and began operating under the Stock Building Supply name in 2003.

In May 2009, Gores Building Holdings, LLC (“Gores Holdings”), an affiliate of Gores, formed the Company as a new subsidiary and the Company acquired our subsidiary, Stock Building Supply Holdings, LLC, from an affiliate of Wolseley plc (“Wolseley”). In connection with the acquisition, Gores Holdings retained 51% of the Company’s equity interests and issued the remaining interests to Wolseley. Following the acquisition, our subsidiary immediately entered into a prepackaged reorganization plan pursuant to Chapter 11 of the Bankruptcy Code. The prepackaged reorganization was pursuant to a pre-arranged plan with the Company’s creditors, which took effect upon filing and enabled us to terminate certain real property leases in undesirable locations in exchange for payment of a statutory amount of damages. In November 2011, Gores Holdings purchased the remaining minority interest in us from Wolseley. On May 2, 2013, the Company converted to a corporation and changed its name to Stock Building Supply Holdings, Inc. from Saturn Acquisition Holdings, LLC. We are currently owned by Gores Holdings and its affiliates and members of our senior management. Stock Building Supply Holdings, Inc. is a holding company that derives all of its operating income from its subsidiaries.

Our principal executive offices are located at 8020 Arco Corporate Drive, Suite 400, Raleigh, North Carolina 27617. Our telephone number at that location is (919) 431-1000. Our website address is www.stocksupply.com. The reference to our website is a textual reference only. We do not incorporate the information on or accessible through our website into this prospectus and you should not consider any information on, or that can be accessed through our website as part of this prospectus.

Our equity sponsor

Gores is a control oriented private equity firm specializing in acquiring and partnering with businesses that can benefit from its operational expertise and flexible capital base. Gores combines the operational and due diligence capabilities of a strategic buyer with the seasoned mergers and acquisitions team of a traditional financial buyer. Since 1987, Gores has acquired and operated more than 80 companies while employing a consistent, operationally-oriented approach to create value in its businesses alongside management. Its current portfolio includes companies across diverse industries in which its partners have considerable experience, including technology, telecommunications, business services, industrial, healthcare, media and entertainment, and consumer products. Headquartered in Los Angeles, as of December 31, 2012, Gores had approximately $3.6 billion in assets under management.

 

 

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The offering

 

Common stock offered by us

4,411,765 shares

 

Common stock offered by the selling stockholders

4,411,765 shares

 

Common stock outstanding immediately after this offering

25,580,380 shares

 

Option to purchase additional shares

The selling stockholders have agreed to allow the underwriters to purchase up to an additional 1,323,530 shares from the selling stockholders, at the public offering price, less the underwriting discount, within 30 days of the date of this prospectus.

 

Use of proceeds

We expect to receive net proceeds from this offering of approximately $67.5 million, based upon an assumed initial public offering price of $17.00 per share, which is the midpoint of the price range set forth on the cover of this prospectus, and after deducting underwriting discounts and estimated offering expenses payable by us. We will not receive any of the proceeds from the sale of shares of our common stock by the selling stockholders.

 

  We intend to use the net proceeds from this offering to pay approximately $58.5 million of the outstanding balances under our Revolver and to pay a fee of $9.0 million to Gores to terminate our management services agreement with Gores. We will not receive any of the proceeds from the sale of shares of common stock by the selling stockholders. See “Use of Proceeds.”

 

Dividend policy

We do not plan to pay dividends on our common stock. The declaration and payment of all future dividends, if any, will be at the discretion of our board of directors and will depend upon our financial condition, earnings, contractual conditions, restrictions imposed by our Credit Agreement and other factors that our board of directors may deem relevant. See “Dividend Policy.”

 

Risk factors

See “Risk Factors” and the other information in this prospectus for a discussion of the factors you should consider before you decide to invest in our common stock.

 

Conflicts of interest

The offering is being conducted in accordance with the applicable provisions of Rule 5121 of the Conduct Rules of the Financial Industry Regulatory Authority, Inc. (“FINRA”), because Wells Fargo Securities, LLC will have a “conflict of interest” pursuant to Rule 5121(f)(5)(C)(i) by virtue of the role of its affiliate as a lender under our Revolver, since a portion of the net proceeds of this offering will be received by such affiliate according to its proportionate share in its capacity as lender. See “Underwriting—Conflicts of interest.”

 

 

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Directed share program

At our request, the underwriters have reserved up to 5% of the shares offered hereby for sale at the initial public offering price to persons who are directors, officers or other employees, or who are otherwise associated with us, through a directed share program. The number of shares available for sale to the general public will be reduced by the number of directed shares purchased by participants in the program. See “Underwriting.”

 

Proposed symbol for trading on NASDAQ

We have been approved to list our common stock on the NASDAQ Stock Market (“NASDAQ”) under the symbol “STCK.”

Unless otherwise indicated, all information in this prospectus relating to the number of shares of our common stock to be outstanding immediately after this offering:

 

  Ÿ  

gives effect to the conversion of Saturn Acquisition Holdings, LLC into Stock Building Supply Holdings, Inc. on May 2, 2013 and the 25.972-for-1 split of our Class A voting common stock and Class B non-voting common stock effected on July 29, 2013;

 

  Ÿ  

assumes the effectiveness of our amended and restated certificate of incorporation, which we will adopt immediately prior to the completion of this offering;

 

  Ÿ  

gives effect to the conversion of all outstanding shares of our Class A voting common stock and Class B non-voting common stock into an aggregate of 14,460,717 shares of a single class of common stock immediately prior to the completion of this offering;

 

  Ÿ  

gives effect to the conversion immediately prior to completion of this offering of all outstanding: (i) Class A junior preferred stock into an aggregate of 300 shares of common stock (assuming an initial public offering price of $17.00 per share, which is the midpoint of the price range set forth on the cover of this prospectus); (ii) Class B senior preferred stock into an aggregate of 2,252,709 shares of common stock (assuming an initial public offering price of $17.00 per share, which is the midpoint of the price range set forth on the cover of this prospectus, and assuming a closing date of August 12, 2013); and (iii) Class C convertible preferred stock into an aggregate of 4,454,889 shares of common stock, in each case, as further described under “Capitalization—Conversion of Preferred Stock;”

 

  Ÿ  

assumes (i) no exercise of the underwriters of their option to purchase up to 1,323,530 additional shares and (ii) an initial public offering price of $17.00 per share, which is the midpoint of the price range set forth on the cover of this prospectus; and

 

  Ÿ  

excludes (i) options to purchase 226,607 shares of common stock that will be outstanding upon completion of this offering with an average exercise price of $0.97, (ii) approximately $0.6 million worth of restricted stock valued at the initial public offering price to be awarded upon completion of the offering to certain executive officers and directors (35,294 shares assuming an initial offering price of $17.00 per share), (iii) restricted shares or options to purchase an amount of shares of our common stock collectively equal to 600,000 shares, less the restricted shares and options to purchase an amount of shares awarded to our executive officers and directors described in item (ii) above, to be awarded to executive officers and other employees upon completion of the offering with an exercise price set at the initial public offering price and (iv) an aggregate of 1,200,000 additional shares of our common stock reserved for issuance under the new equity incentive plan we intend to adopt in connection with this offering (the “2013 Incentive Plan”) as described in “Executive Compensation—2013 Incentive Plan.”

 

 

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A $1.00 increase in the assumed initial public offering price of $17.00 per share, which is the midpoint of the price range set forth on the cover of this prospectus, would decrease the aggregate number of shares of common stock issuable upon conversion of our Class A junior preferred stock and Class B senior preferred stock by 125,167 shares (assuming a closing date of August 12, 2013). A $1.00 decrease in the assumed initial public offering price of $17.00 per share, which is the midpoint of the range set forth on the cover of this prospectus, would increase the aggregate number of shares of common stock issuable upon conversion of our Class A junior preferred stock and Class B senior preferred stock by 140,813 shares (assuming a closing date of August 12, 2013). Each one-day later (earlier) change in the closing date would increase (decrease) the aggregate number of shares by 496 shares (assuming an initial public offering price of $17.00 per share, which is the midpoint of the price range set forth on the cover of this prospectus).

 

 

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Summary consolidated financial data

The following tables set forth our summary consolidated financial data. The summary consolidated financial data as of December 31, 2011 and 2012 and for the years ended December 31, 2010, 2011 and 2012 have been derived from our audited consolidated financial statements included elsewhere in this prospectus. The summary consolidated financial data as of December 31, 2010 have been derived from our audited consolidated financial statements, which are not included in this prospectus. The summary consolidated financial data as of March 31, 2013 and for the three-month periods ended March 31, 2012 and 2013 have been derived from our unaudited consolidated financial statements. The unaudited consolidated financial statements include all of our accounts and the accounts of our subsidiaries and, in the opinion of management, include all recurring adjustments and normal accruals necessary for a fair presentation of our financial position, results of operations and cash flows for the dates and periods presented. These financial statements should be read in conjunction with our most recent audited annual financial statements. Results for interim periods are not necessarily indicative of the results to be expected during the remainder of the current year or for any future period.

You should read the information set forth below in conjunction with “Use of Proceeds,” “Capitalization,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and notes thereto included elsewhere in this prospectus. Our historical consolidated financial data may not be indicative of our future performance.

 

     Year ended December 31,     Three months ended March 31,  
(in thousands, except shares and per share
data)
   2010     2011     2012     2012     2013  
                 (as restated)(11)     (as restated)(11)     (as restated)(11)  

Statement of operations information:

          

Net sales

   $ 751,706      $ 759,982      $ 942,398      $ 187,939      $ 248,726   

Cost of goods sold(1)

     587,692        591,017        727,670        144,508        194,936   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     164,014        168,965        214,728        43,431        53,790   

Operating expenses:

          

Selling, general and administrative expenses(2)

     246,338        213,036        221,192        52,834        56,802   

Depreciation expense

     29,337        11,844        7,759        2,067        1,639   

Amortization expense

     1,140        1,457        1,470        365        547   

Impairment of assets held for sale(3)

     2,944        580        361                 

Restructuring expense(4)

     7,089        1,349        2,853        44        60   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

     (122,834     (59,301     (18,907     (11,879     (5,258

Other income (expenses):

          

Bargain purchase gain(5)

     11,223                               

Interest expense

     (1,575     (2,842     (4,037     (963     (1,025

Other income (expense), net(6)

     (57     (2,120     278        126        190   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from continuing operations before income taxes

     (113,243     (64,263     (22,666     (12,716     (6,093

Income tax benefit(6)

     47,463        22,332        8,084        4,263        1,879   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from continuing operations

     (65,780     (41,931     (14,582     (8,453     (4,214
          

Income (loss) from discontinued operations, net of tax benefit (provision) of $4,038, $(658), $(52), 79 and (109), respectively(7)

     (4,214     (202     49        (113     157   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

     (69,994     (42,133     (14,533     (8,566     (4,057

Redeemable Class B Senior Preferred stock dividend

     (5,079     (4,188     (4,480     (1,100     (729

Accretion of beneficial conversion feature on Convertible Class C Preferred stock

                   (5,000     (5,000       
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss attributable to common stockholders

   $ (75,073   $ (46,321   $ (24,013   $ (14,666   $ (4,786
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Basic and diluted loss per common share(8):

          

Loss from continuing operations

   $ (3.01   $ (2.07   $ (1.83   $ (1.15   $ (0.36

Income (loss) from discontinued operations

     (0.18     (0.01            (0.01     0.01   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

   $ (3.19   $ (2.08   $ (1.83   $ (1.16   $ (0.35
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

 

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    Year ended December 31,     Three months ended March 31,  
(in thousands, except shares and per
share data)
  2010     2011     2012     2012     2013  
               

(as restated)(11)

    (as restated)(11)     (as restated)(11)  

Weighted average number of common shares outstanding, basic and diluted(8)

    23,502,470        22,262,337        13,153,446        12,662,556        13,523,270   

Pro forma (as adjusted) basic and diluted loss per common share(9):

         

Loss from continuing operations

  

  $ (0.58   $ (0.34   $ (0.16

Income (loss) from discontinued operations

  

           (0.01       
     

 

 

   

 

 

   

 

 

 

Net loss

  

  $ (0.58   $ (0.35   $ (0.16
     

 

 

   

 

 

   

 

 

 

Weighted average common shares used in computing pro forma (as adjusted) basic and diluted loss per common share

   

    25,255,523        24,764,633        25,625,347   

Statements of cash flows data:

         

Net cash provided by (used in):

         

Operating activities

  $ (57,999   $ (7,001   $ (12,243   $ (10,900   $ (17,641

Investing activities

    8,093        7,322        (4,861     1,165        1,466   

Financing activities

    (20,415     138        14,838        10,039        19,239   

Other financial data:

         

Depreciation and amortization

  $ 36,149      $ 16,188      $ 11,718      $ 3,030      $ 2,959   

Capital expenditures

    2,506        1,339        2,741        705        374   

EBITDA(10)

    (79,733     (45,435     (6,862     (8,836     (1,952

Adjusted EBITDA(10)

    (57,987     (30,799     1,993        (7,657     (1,221

Balance sheet data (at period end):

         

Cash and cash equivalents

  $ 4,498      $ 4,957      $ 2,691      $ 5,261      $ 5,755   

Total current assets

    188,227        155,455        194,345        189,509        230,255   

Property and equipment, net of accumulated depreciation

    72,821        57,759        55,076        55,492        54,302   

Total assets

    294,970        254,641        286,012        283,423        320,499   

Total debt

    15,174        35,915        79,182        45,787        100,292   

Redeemable preferred stock

    50,809        54,997        41,477        61,097        42,206   

Total stockholders’ equity(8)

    122,229        51,426        34,164        42,213        29,522   

 

(1) Includes depreciation expense of $5.7 million, $2.9 million, $2.5 million, $0.6 million and $0.8 million for the years ended December 31, 2010, 2011 and 2012, and the three months ended March 31, 2012 and 2013, respectively.
(2) Includes severance expense of $1.6 million, $2.0 million, $0.5 million, $0.1 million and $0 for the years ended December 31, 2010, 2011 and 2012, and the three months ended March 31, 2012 and 2013, respectively.
(3) Impairment of assets held for sale represents the write down of such assets to the lower of depreciated cost or estimated fair value less expected disposition costs. See note (9) to our audited financial statements included elsewhere in this prospectus.
(4) Relates to store closures and workforce reductions in continuing markets.
(5) Represents the excess of the net assets acquired over the purchase price of certain assets and liabilities of National Home Centers, Inc. (“NHC”) in April 2010. See note (4) to our audited financial statements included elsewhere in this prospectus.
(6) Includes $3.1 million, $1.9 million and $0.4 million of expense related to the reduction of a tax indemnification asset, with a corresponding increase in income tax benefit, for the years ended December 31, 2010, 2011 and 2012, respectively. This indemnification asset corresponds to the long-term liability related to uncertain tax positions for which Wolseley had indemnified the Company, which was reduced upon the expiration of the statute of limitations for certain tax periods. See note (15) to our audited financial statements included elsewhere in this prospectus.
(7) During the years ended December 31, 2010, 2011 and 2012, we ceased operations in certain geographic markets due to declines in residential homebuilding throughout the United States. The cessation of operations in these markets has been treated as discontinued operations as the markets had distinguishable cash flows and operations that have been eliminated from ongoing operations. See note (5) to our audited financial statements included elsewhere in this prospectus.

 

 

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(8) We have adjusted our historical financial statements to retroactively reflect the conversion from a limited liability company to a corporation on May 2, 2013 and the change of members’ equity to stockholders’ equity and the 25.972 -for-1 split of our Class A voting common stock and Class B non-voting common stock effected on July 29, 2013.
(9) Pro forma (as adjusted) basic and diluted loss per common share and number of weighted average common shares used in computing pro forma (as adjusted) basic and diluted loss per common share in the table above give effect to (i) this offering and (ii) the conversion of all of our outstanding preferred stock into common stock upon the closing of this offering as if such conversion had occurred as of January 1, 2012, and assuming an initial public offering price of $17.00 per share, which is the midpoint of the price range set forth on the cover of this prospectus, with respect to the Class A junior preferred stock and Class B senior preferred stock. See “Capitalization—Conversion of Preferred Stock.”
(10) EBITDA is defined as net loss before interest, income taxes and depreciation and amortization. Adjusted EBITDA is defined as EBITDA plus impairment of assets held for sale, restructuring, severance and other expenses related to store closures and business optimization, bargain purchase gain, discontinued operations, management fees, non-cash compensation, acquisition costs, other expense resulting from the reduction of a tax indemnification asset and certain other items. Adjusted EBITDA is intended as a supplemental measure of our performance that is not required by, or presented in accordance with, generally accepted accounting principles in the United States (“GAAP”). We believe that EBITDA and Adjusted EBITDA provide useful information to management and investors regarding certain financial and business trends relating to our financial condition and operating results. Our management uses EBITDA and Adjusted EBITDA to compare the Company’s performance to that of prior periods for trend analyses, for purposes of determining management incentive compensation, and for budgeting and planning purposes. These measures are used in monthly financial reports prepared for management and our board of directors. We believe that the use of EBITDA and Adjusted EBITDA provides an additional tool for investors to use in evaluating ongoing operating results and trends and in comparing the Company’s financial measures with other distribution and retail companies, which may present similar non-GAAP financial measures to investors. Our management does not consider EBITDA or Adjusted EBITDA in isolation or as an alternative to financial measures determined in accordance with GAAP. The principal limitation of EBITDA and Adjusted EBITDA is that they exclude significant expenses and income that are required by GAAP to be recorded in the Company’s financial statements. Some of these limitations are: (i) EBITDA and Adjusted EBITDA do not reflect changes in, or cash requirements for, our working capital needs; (ii) EBITDA and Adjusted EBITDA do not reflect our interest expense, or the requirements necessary to service interest or principal payments on our debt; (iii) EBITDA and Adjusted EBITDA do not reflect our income tax expenses or the cash requirements to pay our taxes; (iv) EBITDA and Adjusted EBITDA do not reflect historical cash expenditures or future requirements for capital expenditure or contractual commitments; and (v) although depreciation and amortization charges are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future and EBITDA and Adjusted EBITDA do not reflect any cash requirements for such replacements. In order to compensate for these limitations, management presents EBITDA and Adjusted EBITDA in connection with GAAP results. You should review the reconciliation of net loss to EBITDA and Adjusted EBITDA below, and not rely on any single financial measure to evaluate our business.

 

 

 

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The following is a reconciliation of net loss to EBITDA and Adjusted EBITDA.

 

    Year ended December 31,     Three months ended
March 31,
 
(dollars in thousands)   2010     2011     2012     2012     2013  
                (as restated)(i)     (as restated)(i)     (as restated)(i)  

Net loss

  $ (69,994   $ (42,133   $ (14,533   $ (8,566   $ (4,057

Interest expense

    1,575        2,842        4,037        963        1,025   

Income tax benefit

    (47,463     (22,332     (8,084     (4,263     (1,879

Depreciation and amortization

    36,149        16,188        11,718        3,030        2,959   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

EBITDA

  $ (79,733   $ (45,435   $ (6,862   $ (8,836   $ (1,952

Impairment of assets held for sale(a)

    2,944        580        361                 

Restructuring, severance, other expense related to store closures and business optimization(b)

    19,731        8,110        5,228        287        233   

Bargain purchase gain(c)

    (11,223                            

Discontinued operations, net of tax benefit(d)

    4,214        202        (49     113        (157

Management fees(e)

    2,597        2,406        1,379        405        406   

Non-cash compensation expense

    288        384        1,305        328        146   

Acquisition costs(f)

    4,086        1,017        284        46        103   

Reduction of tax indemnification asset(g)

    3,056        1,937        347                 

Other items(h)

    (3,947                            
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

  $ (57,987   $ (30,799   $ 1,993      $ (7,657   $ (1,221
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

  (a) See note (3) above.
  (b) See notes (2) and (4) above. Also includes (i) $7.7 million, $3.9 million, $1.8 million, $0.2 million and $0.1 million for the years ended December 31, 2010, 2011 and 2012, and the three months ended March 31, 2012 and 2013, respectively, related to closed locations, consisting of pre-tax losses incurred during closure and post-closure expenses, (ii) a $1.4 million loss on the sale of land and buildings in the year ended December 31, 2010, and (iii) $1.9 million, $0.9 million and $0 of business optimization expenses, primarily consulting fees related to cost saving initiatives, for the years ended December 31, 2010, 2011 and 2012, respectively.
  (c) See note (5) above.
  (d) See note (7) above.
  (e) Represents the expense for management services provided by Gores and its affiliates and by Wolseley through November 2011, other than $0.5 million that is included in income (loss) from discontinued operations the year ended December 31, 2010.
  (f) Represents (i) $2.1 million and $2.0 million in the year ended December 31, 2010 related to the acquisition of NHC and Bison Building Materials, LLC (“Bison”), respectively, (ii) $0.8 million and $0.2 million in the year ended December 31, 2011 related to an abandoned acquisition and the acquisition of Bison, respectively, and (iii) $0.2 million and $0.1 million in the year ended December 31, 2012 related to the acquisitions of Total Building Services Group, LLC (“TBSG”) and Chesapeake Structural Systems, Inc. (“Chesapeake”), respectively, and (iv) $0.1 million in the three months ended March 31, 2013 related to the acquisition of TBSG.
  (g) See note (6) above.

 

 

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  (h) Represents (i) $0.7 million of expenses related to the Company’s prepackaged reorganization and (ii) $4.6 million received as proceeds from the settlement of a legal proceeding.
  (i) See note (11) below.

 

(11) Our consolidated financial statements and related footnotes as of December 31, 2012 and March 31, 2013, for the year ended December 31, 2012 and for the three months ended March 31, 2012 and 2013 have been restated. See note (2) to our audited and unaudited financial statements included elsewhere in this prospectus.

 

 

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RISK FACTORS

An investment in our common stock involves a high degree of risk. You should carefully consider the risks described below, together with all of the other information included in this prospectus, before making an investment decision. If any of the following risks actually occurs, our business, financial condition and operating results could be materially and adversely affected. In that event, the trading price of our common stock could decline and you could lose all or part of your investment.

Risks related to our business

The industry in which we operate is dependent upon the homebuilding industry and repair and remodeling activity, the economy, the credit markets and other important factors.

The building products supply and services industry is highly dependent on new home construction and repair and remodeling activity, which in turn are dependent upon a number of factors, including interest rates, consumer confidence, employment rates, foreclosure rates, housing inventory levels, housing demand, the availability of land, the availability of construction financing and the health of the economy and mortgage markets. Unfavorable changes in demographics, credit markets, consumer confidence, health care costs, housing affordability, housing inventory levels, a weakening of the national economy or of any regional or local economy in which we operate, and other factors beyond our control could adversely affect consumer spending, result in decreased demand for homes, and adversely affect our business. Changes in federal income tax laws may also affect demand for new homes. Various proposals have been publicly discussed to limit mortgage interest deductions and to limit the exclusion of gain from the sale of a principal residence. Enactment of such proposals may have an adverse effect on the homebuilding industry in general. No meaningful prediction can be made as to whether any such proposals will be enacted and, if enacted, the particular form such laws would take. Because we have substantial fixed costs, relatively modest declines in our customers’ production levels could have a significant adverse effect on our financial condition, operating results and cash flows.

The homebuilding industry underwent a significant downturn that began in mid-2006 and began to stabilize in late 2011. The downturn in the homebuilding industry resulted in a substantial reduction in demand for our products and services, which in turn had a significant adverse effect on our business during fiscal years 2007 through 2012 and led to our filing for bankruptcy in 2009. The NAHB is forecasting approximately 644,000 U.S. single-family housing starts for 2013, which is an increase of 20% from 2012, but still well below historical averages. There is significant uncertainty regarding the timing and extent of any recovery in construction and repair and remodel activity and resulting product demand levels. The positive impact of a recovery on our business may also be dampened to the extent the average selling price or average size of new single family homes decreases, which could cause homebuilders to decrease spending on our products and services.

In addition, beginning in 2007, the mortgage markets experienced substantial disruption due to increased defaults, primarily as a result of credit quality deterioration. The disruption resulted in a stricter regulatory environment and reduced availability of mortgages for potential home buyers due to a tight credit market and stricter standards to qualify for mortgages. Mortgage financing and commercial credit for smaller homebuilders, as well as for the development of new residential lots, continue to be constrained. As the housing industry is dependent upon the economy and employment levels as well as potential home buyers’ access to mortgage financing and homebuilders’ access to commercial credit, it is likely that the housing industry will not fully recover until conditions in the economy and the credit markets improve and unemployment rates decline. Prolonged weakness in the homebuilding industry would have a significant adverse effect on our business, financial condition and operating results.

 

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In addition, as a result of the homebuilding industry downturn, there has been a trend of significant consolidation as smaller, private homebuilders have gone out of business. We refer to the large homebuilders as “production homebuilders.” While we generate significant business from these homebuilders, our gross margins on sales to them tend to be lower than our gross margins on sales to other market segments. This could impact our gross margins as homebuilding recovers if the market share held by the production homebuilders increases.

The building products supply and services industry is seasonal and cyclical.

Our industry is seasonal. Although weather patterns affect our operating results throughout the year, our first and fourth quarters have historically been, and are generally expected to continue to be, adversely affected by weather patterns in some of our markets, causing reduced construction activity. To the extent that hurricanes, severe storms, earthquakes, floods, fires, other natural disasters or similar events occur in the markets in which we operate, our business may be adversely affected.

The building products supply and services industry is also subject to cyclical market pressures. Quarterly results historically have reflected, and are expected to continue to reflect, fluctuations from period to period arising from the following: the volatility of lumber prices; the cyclical nature of the homebuilding industry; general economic conditions in the markets in which we compete; the pricing policies of our competitors; and the production schedules of our customers.

Our industry is highly fragmented and competitive, and increased competitive pressure may adversely affect our results.

The building products supply and services industry is highly fragmented and competitive. We face significant competition from local, regional and national building materials chains, as well as from privately-owned single site enterprises. Any of these competitors may (i) foresee the course of market development more accurately than we do, (ii) provide superior service and sell superior products, (iii) have the ability to produce or supply similar products and services at a lower cost, (iv) develop stronger relationships with our customers, (v) adapt more quickly to new technologies or evolving customer requirements than we do, (vi) develop a superior branch network in our markets or (vii) have access to financing on more favorable terms that we can obtain. As a result, we may not be able to compete successfully with them. In addition, home center retailers, which have historically concentrated their sales efforts on retail consumers and small contractors, may in the future intensify their marketing efforts to professional homebuilders. Furthermore, certain product manufacturers sell and distribute their products directly to production homebuilders. The volume of such direct sales could increase in the future. Additionally, manufacturers and specialty distributors who sell products to us may elect to sell and distribute directly to homebuilders in the future or enter into exclusive supplier arrangements with other distributors. Consolidation of production homebuilders may result in increased competition for their business. Finally, we may not be able to maintain our operating costs or product prices at a level sufficiently low for us to compete effectively. If we are unable to compete effectively, our financial condition, operating results and cash flows may be adversely affected.

Certain of our products are commodities and fluctuations in prices of these commodities could affect our operating results.

Many of the building products we distribute, including oriented strand board (“OSB”), plywood, lumber and particleboard, are commodities that are widely available from other manufacturers or distributors with prices and volumes determined frequently based on participants’ perceptions of short-term supply and demand factors. A shortage of capacity or excess capacity in the industry can result in significant increases or declines in market prices for those products, often within a short period of time.

 

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Prices of commodity products can also change as a result of national and international economic conditions, labor and freight costs, competition, market speculation, government regulation, and trade policies, as well as from periodic delays in the delivery of lumber and other products. Short-term changes in the cost of these materials, some of which are subject to significant fluctuations, are sometimes passed on to our customers, but our pricing quotation periods and pricing pressure from our competitors may limit our ability to pass on such price changes. For example, we frequently enter into extended pricing commitments, which may compress our gross margins in periods of inflation. At times, the price at which we can charge our customers for any one or more products may even fall below the price at which we can purchase such products, requiring us to incur short-term losses on product sales. We may also be limited in our ability to pass on increases in freight costs on our products due to the price of fuel.

Periods of generally increasing prices provide the opportunity for higher sales and increased gross profit (subject to the extended pricing commitments described above), while generally declining price environments may result in declines in sales and profitability. In particular, low market prices for wood products over a sustained period can adversely affect our financial condition, operating results and cash flows, as can excessive spikes in market prices. We have generally experienced increasing prices as the homebuilding market has recovered. For the year ended December 31, 2012, average composite framing lumber prices and average composite structural panel prices (a composite calculation based on index prices for OSB and plywood) as reflected by Random Lengths were 18% and 32% higher than the prior year. Our lumber & lumber sheet goods product category represented 35.5% of net sales for that period. Lumber prices remain slightly above prior year levels through June 2013 but have declined from their highs achieved earlier in 2013. However, if lumber or structural panel prices were to decline significantly from current levels, our sales and profits would be negatively affected.

We are exposed to product liability, product warranty, casualty, construction defect and other claims and legal proceedings related to our products and services as well as services provided for us through third parties.

We are from time to time involved in product liability, product warranty, casualty, construction defect, and other claims relating to the products we manufacture, distribute or install, and services we provide, either directly or through third parties, that, if adversely determined, could adversely affect our financial condition, operating results and cash flows if we were unable to seek indemnification for such claims or were not adequately insured for such claims. We rely on manufacturers and other suppliers to provide us with many of the products we sell, distribute or install. Because we do not have direct control over the quality of such products manufactured or supplied by such third-party suppliers, we are exposed to risks relating to the quality of such products. In addition, we are exposed to potential claims arising from the conduct of our employees, homebuilders and their subcontractors, and third-party installers for which we may be liable. We and they are subject to regulatory requirements and risks applicable to general contractors, which include management of licensing, permitting and quality of our third-party installers. If we fail to manage these processes effectively or provide proper oversight of these services, we could suffer lost sales, fines and lawsuits, as well as damage to our reputation, which could adversely affect our business.

Although we currently maintain what we believe to be suitable and adequate insurance in excess of our self-insured amounts, there can be no assurance that we will be able to maintain such insurance on acceptable terms or that such insurance will provide adequate protection against potential liabilities. Product liability, product warranty, casualty, construction defect, and other claims can be expensive to defend and can divert the attention of management and other personnel for significant periods, regardless of the ultimate outcome. Claims of this nature could also have a negative impact on customer confidence in our products and our Company. We cannot assure you that any current or future claims will not adversely affect our financial condition, operating results and cash flows.

 

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Pursuant to the restructuring and investment agreement, Wolseley agreed to indemnify us for, among other things, losses arising from any third-party claim (i) existing as of May 5, 2009 or (ii) brought or asserted against the Company arising from actions taken by Wolseley or the Company prior to May 5, 2009. In the event Wolseley is unable or unwilling to satisfy its indemnification obligations to us, we would be responsible for any liabilities arising from actions taken prior to May 5, 2009 and the costs of defending claims related thereto. The resulting increase in our liabilities or litigation expenses could have a material adverse effect on our financial results.

We may be unable to achieve or maintain profitability or positive cash flows from operations.

We have set goals to progressively improve our profitability over time by growing our sales, increasing our gross margin and reducing our expenses as a percentage of sales. For the fiscal years 2011 and 2012 we had net losses of $42.1 million and $14.5 million, respectively, and used cash from operations of $7.0 million and $12.2 million, respectively. There can be no assurance that we will achieve our enhanced profitability goals or generate positive cash flow from operations. Factors that could significantly adversely affect our efforts to achieve these goals include, but are not limited to, the failure to:

 

  Ÿ  

grow our revenue through organic growth or through acquisitions;

 

  Ÿ  

improve our revenue mix by investing (including through acquisitions) in businesses that provide higher gross margins than we have been able to generate historically;

 

  Ÿ  

achieve improvements in purchasing or to maintain or increase our rebates from suppliers through our supplier consolidation and/or low-cost country initiatives;

 

  Ÿ  

improve our gross margins through the utilization of improved pricing practices and technology and sourcing savings;

 

  Ÿ  

maintain or reduce our overhead and support expenses as we grow;

 

  Ÿ  

effectively evaluate future inventory reserves;

 

  Ÿ  

collect monies owed from customers;

 

  Ÿ  

maintain relationships with our significant customers; and

 

  Ÿ  

integrate any businesses acquired.

Any of these failures or delays may adversely affect our ability to increase our profitability.

Residential renovation and improvement activity levels may not return to historic levels which may negatively impact our business, liquidity and results of operations.

Our business relies on residential renovation and improvement (including repair and remodeling) activity levels. Unlike most previous cyclical declines in new home construction in which we did not experience comparable declines in our sales related to home improvement, the recent economic decline adversely affected our home improvement business as well. According to the U.S. Census Bureau, residential improvement project spending in the United States increased 10% in 2012, but remains 14% below its peak in 2007. Continued high unemployment levels, high mortgage delinquency and foreclosure rates, limitations in the availability of mortgage and home improvement financing and significantly lower housing turnover, may continue to limit consumers’ spending, particularly on discretionary items, and affect their confidence level leading to continued reduced spending on home improvement projects.

We cannot predict the timing or strength of a significant recovery, if any, in these markets. Continued depressed activity levels in consumer spending for home improvement and new home

 

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construction will continue to adversely affect our results of operations and our financial position. Furthermore, continued economic weakness may cause unanticipated shifts in consumer preferences and purchasing practices and in the business models and strategies of our customers. Such shifts may alter the nature and prices of products demanded by the end consumer and our customers and could adversely affect our operating performance.

Our continued success will depend on our ability to retain our key employees and to attract and retain new qualified employees, while controlling our labor costs.

Our success depends in part on our ability to attract, hire, train, and retain qualified managerial, operational, sales, and other personnel, while at the same time controlling our labor costs. We face significant competition for these types of employees in our industry and from other industries. We may be unsuccessful in attracting and retaining the personnel we require to conduct and expand our operations successfully. In addition, key personnel, including sales force employees with key customer relationships, may leave us and compete against us. Our success also depends to a significant extent on the continued service of our senior management team. Our senior management team has more than 120 years of combined experience in manufacturing and distribution, and has been integral to our successful acquisition and integration of businesses to gain scale in our current markets. These factors make our current senior management team uniquely qualified to execute our business strategy. The loss of any member of our senior management team or other experienced, senior employees or sales force employees could impair our ability to execute our business plan, cause us to lose customers and reduce our net sales, or lead to employee morale problems and/or the loss of other key employees. In any such event, our financial condition, operating results and cash flows could be adversely affected.

Our ability to control labor costs is subject to numerous external factors, including prevailing wage rates, the impact of legislation or regulations governing labor relations or healthcare benefits, and health and other insurance costs. In addition, we compete with other companies for many of our employees in hourly positions, and we invest significant resources in training and motivating them to maintain a high level of job satisfaction. These positions have historically had high turnover rates, which can lead to increased training and retention costs. If we are unable to attract or retain highly qualified employees in the future, it could adversely impact our operating results.

Product shortages, loss of key suppliers or failure to develop relationships with qualified suppliers, and our dependence on third-party suppliers and manufacturers could affect our financial health.

Our ability to offer a wide variety of products to our customers is dependent upon our ability to obtain adequate product supply from manufacturers and other suppliers. Generally, our products are obtainable from various sources and in sufficient quantities. Our ability to continue to identify and develop relationships with qualified suppliers who can satisfy our high standards for quality and our need to access products in a timely and efficient manner is a significant challenge. Our ability to access products also can be adversely affected by the financial instability of suppliers (particularly in light of continuing economic difficulties in various regions of the United States and the world), suppliers’ noncompliance with applicable laws, supply disruptions, shipping interruptions or costs, and other factors beyond our control. The loss of, or a substantial decrease in the availability of, products from our suppliers or the loss of key supplier arrangements could adversely impact our financial condition, operating results and cash flows.

Although in many instances we have agreements with our suppliers, these agreements are generally terminable by either party on limited notice. Many of our suppliers also offer us favorable terms based on the volume of our purchases. If market conditions change, suppliers may stop offering us favorable terms. Failure by our suppliers to continue to supply us with products on favorable terms,

 

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commercially reasonable terms, or at all, could put pressure on our operating margins or have a material adverse effect on our financial condition, operating results and cash flows.

A portion of the workforces of many of our suppliers, particularly our foreign suppliers, are represented by labor unions. Workforce disputes at these suppliers may result in work stoppages or slowdowns. For example, in recent years our suppliers in Chile (who provide a significant portion of certain of our products) have been subject to numerous labor stoppages. Such disruptions could have a material adverse effect on these suppliers ability to continue meeting our needs.

The implementation of our supply chain and technology initiatives could disrupt our operations, and these initiatives might not provide the anticipated benefits or might fail.

We have made, and we plan to continue to make, significant investments in our supply chain and technology. These initiatives are designed to streamline our operations to allow our employees to continue to provide high quality service to our customers, while simplifying customer interaction and providing our customers with a more interconnected purchasing experience. The cost and potential problems and interruptions associated with the implementation of these initiatives, including those associated with managing third-party service providers and employing new web-based tools and services, could disrupt or reduce the efficiency of our operations. In the event that we grow very rapidly, there can be no assurance that we will be able to keep up, expand or adapt our information technology infrastructure to meet evolving demand on a timely basis and at a commercially reasonable cost, or at all. In addition, our improved supply chain and new or upgraded technology might not provide the anticipated benefits, it might take longer than expected to realize the anticipated benefits, or the initiatives might fail altogether.

We occupy most of our facilities under long-term non-cancelable leases. We may be unable to renew leases at the end of their terms. If we close a facility, we are still obligated under the applicable lease.

Most of our facilities are located in leased premises. Many of our current leases are non-cancelable and typically have initial terms ranging from five to ten years and most provide options to renew for specified periods of time. We believe that leases we enter into in the future will likely be long-term and non-cancelable and have similar renewal options. If we close or idle a facility, most likely we remain committed to perform our obligations under the applicable lease, which would include, among other things, payment of the base rent, insurance, taxes, and other expenses on the leased property for the balance of the lease term. The inability to terminate leases when idling a facility or exiting a geographic market can have a significant adverse impact on our financial condition, operating results and cash flows. For example, in response to the significant downturn in the homebuilding industry that began in 2006, we determined that it was necessary to discontinue operations in certain unprofitable markets. Because we were unable to terminate leases in these locations and were no longer able to make required payments under the leases, we undertook a prepackaged reorganization under the bankruptcy code in order to terminate the real property leases in those markets in exchange for payment of a statutory amount of damages.

In addition, at the end of the lease term and any renewal period for a facility, we may be unable to renew the lease without substantial additional cost, if at all. If we are unable to renew our facility leases, we may close or relocate a facility, which could subject us to construction and other costs and risks, which in turn could have a material adverse effect on our business and operating results. In addition, we may not be able to secure a replacement facility in a location that is as commercially viable, including access to rail service, as the lease we are unable to renew. For example, closing a facility, even during the time of relocation, will reduce the sales that the facility would have contributed to our revenues. Additionally, the revenue and profit, if any, generated at a relocated facility may not equal the revenue and profit generated at the existing one.

 

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Homebuilding activities in the Texas, North Carolina, California and Utah markets have a large impact on our results of operations because we conduct a significant portion of our business in these markets.

We presently conduct a significant portion of our business in the Texas, North Carolina, California and Utah markets, which represented approximately 32%, 16%, 11% and 10%, respectively, of our 2012 total net sales. Home prices and sales activities in these markets and in most of the other markets in which we operate have declined from time to time, particularly as a result of slow economic growth. In the last several years, these markets have benefited from better than average employment growth, which has aided homebuilding activities, but we cannot assure you that these conditions will continue. Local economic conditions can depend on a variety of factors, including national economic conditions, local and state budget situations and the impact of federal cutbacks. If homebuilding activity declines in one or more of the markets in which we operate, our costs may not decline at all or at the same rate and may negatively impact our operating results.

We may be unable to manage effectively our inventory and working capital as our sales volume increases or material prices fluctuate, which could have a material adverse effect on our business, financial condition and operating results.

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. We must maintain, and have adequate working capital to purchase, sufficient inventory to meet customer demand. Due to the lead times required by our suppliers, we order products in advance of expected sales. This requires us to forecast our sales and purchase accordingly. In periods of growth, it can be especially difficult to accurately forecast sales. We must also manage our working capital to fund our inventory purchases. Excessive spikes in the market prices of certain building products, such as lumber, can put negative pressure on our operating cash flows by requiring us to invest more in inventory. In the future, if we are unable to manage effectively our inventory and working capital as we attempt to grow our business, our cash flows may be negatively affected, which could have a material adverse effect on our business, financial condition and operating results.

The majority of our net sales are credit sales which are made primarily to customers whose ability to pay is dependent, in part, upon the economic strength of the industry and geographic areas in which they operate, and the failure to collect or timely collect monies owed from customers could adversely affect our financial condition.

The majority of our net sales volume in fiscal 2012 was facilitated through the extension of credit to our customers whose ability to pay is dependent, in part, upon the economic strength of the industry in the areas where they operate. We offer credit to customers, either through unsecured credit that is based solely upon the creditworthiness of the customer, or secured credit for materials sold for a specific job where the security lies in lien rights associated with the material going into the job. The type of credit offered depends both on the financial strength of the customer and the nature of the business in which the customer is involved. End users, resellers and other non-contractor customers generally purchase more on unsecured credit than secured credit. The inability of our customers to pay off their credit lines in a timely manner, or at all, would adversely affect our financial condition, operating results and cash flows. Furthermore, our collections efforts with respect to non-paying or slow-paying customers could negatively impact our customer relations going forward.

Because we depend on the creditworthiness of certain of our customers, if the financial condition of our customers declines, our credit risk could increase. Significant contraction in our markets, coupled with tightened credit availability and financial institution underwriting standards, could adversely affect certain of our customers. Should one or more of our larger customers declare bankruptcy as has occurred in the past, it could adversely affect the collectability of our accounts receivable, bad debt reserves and net income.

 

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We are subject to competitive pricing pressure from our customers.

Production homebuilders historically have exerted significant pressure on their outside suppliers to keep prices low because of their market share and ability to leverage such market share in the highly fragmented building products supply and services industry. The housing industry downturn resulted in significantly increased pricing pressures from production homebuilders and other customers. These pricing pressures have adversely affected our operating results and cash flows. In addition, continued consolidation among homebuilders, and changes in homebuilders’ purchasing policies or payment practices, could result in additional pricing pressure. Moreover, during the housing downturn, several of our homebuilder customers defaulted on amounts owed to us or extended their payable days as a result of their financial condition. If such payment failures or delays were to recur, it could significantly adversely affect our financial condition, operating results and cash flows.

We may not timely identify or effectively respond to consumer needs, expectations or trends, which could adversely affect our relationship with customers, the demand for our products and services and our market share.

It is difficult to predict successfully the products and services our customers will demand. The success of our business depends in part on our ability to identify and respond promptly to changes in demographics, consumer preferences, expectations, needs and weather conditions, while also managing inventory levels. For example, an increased consumer focus on making homes energy efficient could require us to offer more energy efficient building materials and there can be no assurance that we would be able to identify appropriate suppliers on acceptable terms. Failure to identify timely or effectively respond to changing consumer preferences, expectations and building product needs could adversely affect our relationship with customers, the demand for our products and services and our market share.

We may be unable to implement successfully our growth strategy, which includes pursuing strategic acquisitions and opening new facilities.

Our long-term business plan provides for continued growth through strategic acquisitions and organic growth through the construction of new facilities or the expansion of existing facilities. Failure to identify and acquire suitable acquisition candidates on appropriate terms could have a material adverse effect on our growth strategy. Moreover, our reduced operating results during the housing downturn, our liquidity position, or the requirements of our Credit Agreement, could prevent us from obtaining the capital required to effect new acquisitions or expansions of existing facilities. Our failure to make successful acquisitions or to build or expand facilities, including manufacturing facilities, produce saleable product, or meet customer demand in a timely manner could result in damage to or loss of customer relationships, which could adversely affect our financial condition, operating results and cash flows.

In addition, we may not be able to integrate the operations of future acquired businesses in an efficient and cost-effective manner or without significant disruption to our existing operations. Acquisitions involve significant risks and uncertainties, including uncertainties as to the future financial performance of the acquired business, difficulties integrating acquired personnel and corporate cultures into our business, the potential loss of key employees, customers or suppliers, difficulties in integrating different computer and accounting systems, exposure to unknown or unforeseen liabilities of acquired companies, and the diversion of management attention and resources from existing operations. We may be unable to complete successfully potential acquisitions due to multiple factors, such as issues related to regulatory review of the proposed transactions. We may also be required to incur additional debt in order to consummate acquisitions in the future, which debt may be substantial and may limit our flexibility in using our cash flow from operations. Our failure to integrate future

 

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acquired businesses effectively or to manage other consequences of our acquisitions, including increased indebtedness, could prevent us from remaining competitive and, ultimately, could adversely affect our financial condition, operating results and cash flows.

Federal, state, local and other regulations could impose substantial costs and/or restrictions on our operations that would reduce our net income.

We are subject to various federal, state, local, and other regulations, including, among other things, regulations promulgated by the Department of Transportation (“DOT”), work safety regulations promulgated by the Department of Labor’s Occupational Safety and Health Administration (“OSHA”), employment regulations promulgated by the United States Equal Employment Opportunity Commission, accounting standards issued by the Financial Accounting Standards Board or similar entities, and state and local zoning restrictions, building codes and contractors’ licensing boards. More burdensome regulatory requirements in these or other areas may increase our general and administrative costs and adversely affect our financial condition, operating results and cash flows. Moreover, failure to comply with the regulatory requirements applicable to our business could expose us to substantial penalties that could adversely affect our financial condition, operating results and cash flows.

Our transportation operations are subject to the regulatory jurisdiction of the DOT. The DOT has broad administrative powers with respect to our transportation operations. More restrictive limitations on vehicle weight and size, trailer length and configuration, or driver hours of service would increase our costs, which, if we are unable to pass these cost increases on to our customers, may increase our selling, general and administrative expenses and adversely affect our financial condition, operating results and cash flows. If we fail to comply adequately with DOT regulations or regulations become more stringent, we could experience increased inspections, regulatory authorities could take remedial action including imposing fines or shutting down our operations or we could be subject to increased audit and compliance costs. If any of these events were to occur, our financial condition, operating results and cash flows would be adversely affected.

In addition, the homebuilding industry is subject to various local, state and federal statutes, ordinances, rules and regulations concerning zoning, building design and safety, construction, energy conservation, environmental protection and similar matters, including regulations that impose restrictive zoning and density requirements on our business or that limit the number of homes that can be built within the boundaries of a particular area. Regulatory restrictions may increase our operating expenses and limit the availability of suitable building lots for our customers, which could negatively affect our sales and earnings.

The loss of any of our significant customers could affect our financial health.

Our ten largest customers generated approximately 18.6% and 20.5% of our net sales for the years ended December 31, 2011 and 2012, respectively. We cannot guarantee that we will maintain or improve our relationships with these customers or that we will continue to supply these customers at historical levels. Due to the weak housing market over the past several years, many of our homebuilder customers substantially reduced their construction activity. Some homebuilder customers exited or severely curtailed building activity in certain of our markets.

In addition, production homebuilders and other customers may: (i) seek to purchase some of the products that we currently sell directly from manufacturers; (ii) elect to establish their own building products manufacturing and distribution facilities or (iii) give advantages to manufacturing or distribution intermediaries in which they have an economic stake. Continued consolidation among production homebuilders could also result in a loss of some of our present customers to our competitors. The loss of one or more of our significant customers or deterioration in our relations with

 

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any of them could adversely affect our financial condition, operating results and cash flows. Furthermore, our customers typically are not required to purchase any minimum amount of products from us. The contracts into which we have entered with most of our professional customers typically provide that we supply particular products or services for a certain period of time when and if ordered by the customer. Should our customers purchase our products in significantly lower quantities than they have in the past, such decreased purchases could have a material adverse effect on our financial condition, operating results and cash flows.

We may have future capital needs that require us to incur additional debt and may not be able to obtain additional financing on acceptable terms, if at all.

We are substantially reliant on liquidity provided by our Credit Agreement and cash on hand to provide working capital and fund our operations. Our working capital and capital expenditure requirements are likely to grow as the housing market improves. Economic and credit market conditions, the performance of the homebuilding industry, and our financial performance, as well as other factors, may constrain our financing abilities. 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. The prolonged continuation or worsening of current housing market conditions and 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.

We may be unable to secure additional financing or financing on favorable terms or our operating cash flow may be insufficient to satisfy our financial obligations under our outstanding indebtedness. If additional funds are raised through the issuance of additional equity or convertible debt securities, our stockholders may experience significant dilution. We may also incur additional indebtedness in the future, including collateralized debt, subject to the restrictions contained in the Credit Agreement. If new debt is added to our current debt levels, the related risks that we now face could intensify.

The Credit Agreement contains various financial covenants that could limit our ability to operate our business.

The Credit Agreement includes a financial covenant that requires us to maintain a minimum Fixed Charge Coverage Ratio of 1.0 as defined therein. However, the covenant is only applicable if the sum of availability under the Revolver plus Qualified Cash (which includes cash and cash equivalents in deposit accounts or securities accounts or any combination thereof that are subject to a control agreement) falls below $15 million at any time, and remains in effect until the sum of availability under the Revolver plus Qualified Cash exceeds $15 million for 30 consecutive days. While there can be no assurances, based upon our forecast, we do not expect the covenant to become applicable during the year ended December 31, 2013. However, while we would currently satisfy this covenant if it were applicable, should this not be the case, we would evaluate our liquidity options including amending the Credit Agreement, seeking alternative financing arrangements of debt and/or equity and/or selling assets. No assurances can be given that such alternative financing would be available, or if available, under terms similar to our existing Credit Agreement or that we would be able to sell assets on a timely basis.

We may be adversely affected by any disruption in our information technology systems.

Our operations are dependent upon our information technology systems, which encompass all of our major business functions. Our ERP system, which we use for operations representing virtually all of our sales, is a proprietary system that has been highly customized by our computer programmers. Our

 

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centralized financial reporting system currently draws data from our ERP system. We rely upon such information technology systems to manage and replenish inventory, to fill and ship customer orders on a timely basis, and to coordinate our sales and distribution activities across all 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, computer viruses, unauthorized access, or delays in our service) could result in delays in receiving inventory and supplies or filling customer orders and adversely affect our customer service and relationships. Our systems 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 delays, problems, or costs will not have a material adverse effect on our financial condition, operating results and cash flows.

We may be adversely affected by any natural or man-made disruptions to our distribution and manufacturing facilities.

We currently maintain a broad network of distribution and manufacturing facilities throughout the eastern, southern and western United States. Any widespread disruption to our facilities resulting from fire, earthquake, weather-related events, an act of terrorism, or any other cause could damage a significant portion of our inventory and could materially impair our ability to distribute our products to customers. We could incur significantly higher costs and longer lead times associated with distributing our products to our customers during the time that it takes for us to reopen or replace a damaged facility. In addition, any shortages of fuel or significant fuel cost increases could disrupt our ability to distribute products to our customers. Disruptions to the national or local transportation infrastructure systems including those related to a domestic terrorist attack may also affect our ability to keep our operations and services functioning properly. If any of these events were to occur, our financial condition, operating results and cash flows could be materially adversely affected.

We are subject to exposure to environmental liabilities and are subject to environmental regulation.

We are subject to various federal, state and local environmental laws, ordinances, rules and regulations including those promulgated by the United States Environmental Protection Agency and analogous state agencies. As current and former owners, lessees and operators of real property, we can be held liable for the investigation or remediation of contamination at or from such properties, in some circumstances irrespective of whether we knew of or caused such contamination. No assurance can be provided that investigation and remediation will not be required in the future as a result of spills or releases of petroleum products or hazardous substances, the discovery of currently unknown environmental conditions, more stringent standards regarding existing contamination, or changes in legislation, laws, ordinances, rules or regulations or their interpretation or enforcement. More burdensome environmental regulatory requirements may increase our costs and adversely affect our financial condition, operating results and cash flows.

We are subject to cybersecurity risks and may incur increasing costs in an effort to minimize those risks.

Our business employs systems and a website that allow for the secure storage and transmission of customers’ proprietary information. Security breaches could expose us to a risk of loss or misuse of this information, litigation and potential liability. We may not have the resources or technical sophistication to anticipate or prevent rapidly evolving types of cyber attacks. Any compromise of our security could result in a violation of applicable privacy and other laws, significant legal and financial exposure, damage to our reputation, and a loss of confidence in our security measures, which could harm our business. The regulatory environment related to information security and privacy is

 

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increasingly rigorous, with new and constantly changing requirements applicable to our business, and compliance with those requirements could result in additional costs. Our computer systems have been, and will likely continue to be, subjected to computer viruses or other malicious codes, unauthorized access attempts, and cyber- or phishing-attacks. These events could compromise our confidential information, impede or interrupt our business operations, and may result in other negative consequences, including remediation costs, loss of revenue, litigation and reputational damage. To date, we have not experienced a material breach of cybersecurity. As cyber attacks become more sophisticated generally, and as we implement changes giving customers greater electronic access to our systems, we may be required to incur significant costs to strengthen our systems from outside intrusions and/or obtain insurance coverage related to the threat of such attacks, as we currently do not carry any such coverage. While we have implemented administrative and technical controls and have taken other preventive actions to reduce the risk of cyber incidents and protect our information technology, they may be insufficient to prevent physical and electronic break-ins, cyber-attacks or other security breaches to our computer systems.

Risks related to this offering and our common stock

Prior to this offering, there has been no public market for our common stock, and we do not know if one will develop to provide you with adequate liquidity to sell our common stock at prices equal to, or greater than, the price you paid in this offering.

Prior to this offering, there has not been a public market for our common stock. We cannot predict the extent to which investor interest in our Company will lead to the development of an active trading market on the exchange on which we list our common stock or how liquid that market might become. If an active trading market does not develop, you may have difficulty selling any of our common stock that you buy. The initial public offering price for the common stock has been determined by negotiations between us and the representatives of the underwriters and may not be indicative of prices that will prevail in the open market following this offering. Consequently, you may not be able to sell our common stock at prices equal to or greater than the price you paid in this offering, or at all.

The price of our common stock may fluctuate significantly, and you could lose all or part of your investment.

Volatility in the market price of our common stock may prevent you from being able to sell your shares at or above the price you paid for them. The market price for our common stock could fluctuate significantly for various reasons, including:

 

  Ÿ  

our operating and financial performance and prospects;

 

  Ÿ  

our quarterly or annual earnings or those of other companies in our industry;

 

  Ÿ  

the public’s reaction to our press releases, our other public announcements and our filings with the Securities and Exchange Commission (the “SEC”);

 

  Ÿ  

changes in, or failure to meet, earnings estimates or recommendations by research analysts who track our common stock or the stock of other companies in our industry;

 

  Ÿ  

the failure of research analysts to cover our common stock;

 

  Ÿ  

general economic, industry and market conditions;

 

  Ÿ  

strategic actions by us, our customers or our competitors, such as acquisitions or restructurings;

 

  Ÿ  

new laws or regulations or new interpretations of existing laws or regulations applicable to our business;

 

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changes in accounting standards, policies, guidance, interpretations or principles;

 

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  Ÿ  

material litigation or government investigations;

 

  Ÿ  

changes in general conditions in the United States and global economies or financial markets, including those resulting from war, incidents of terrorism or responses to such events;

 

  Ÿ  

changes in key personnel;

 

  Ÿ  

sales of common stock by us, our principal stockholder or members of our management team;

 

  Ÿ  

termination of lock-up agreements with our management team and principal stockholder;

 

  Ÿ  

the granting or exercise of employee stock options;

 

  Ÿ  

payment of liabilities for which we are self-insured;

 

  Ÿ  

volume of trading in our common stock;

 

  Ÿ  

threats to, or impairments of, our intellectual property; and

 

  Ÿ  

the impact of the factors described elsewhere in “Risk Factors.”

In addition, in recent years, the stock market has regularly experienced significant price and volume fluctuations. This volatility has had a significant impact on the market price of securities issued by many companies, including companies in our industry. The changes frequently appear to occur without regard to the operating performance of the affected companies. Hence, the price of our common stock could fluctuate based upon factors that have little or nothing to do with us and these fluctuations could materially reduce our share price.

The requirements of being a public company will increase certain of our costs and require significant management focus.

As a public company, our legal, accounting and other expenses associated with compliance-related and other activities will increase. For example, in connection with this offering, we will create new board of directors committees and appoint one or more independent directors to comply with the corporate governance requirements of the exchange on which we will list our common stock. Costs to obtain director and officer liability insurance will contribute to our increased costs. As a result of the associated liability, it may be more difficult for us to attract and retain qualified persons to serve on our board of directors or as executive officers. Advocacy efforts by stockholders and third parties may also prompt even more changes in governance and reporting requirements, which could further increase our compliance costs.

We are exempt from certain corporate governance requirements since we are a “controlled company” within the meaning of the rules of the exchange on which we will list our common stock and, as a result, you will not have the protections afforded by these corporate governance requirements.

Following the consummation of this offering, Gores Holdings will hold a majority of our common stock. As a result of the completion of this offering, we will be considered a “controlled company” for the purposes of the listing requirements of the exchange on which we will list our common stock. Under these rules, a company of which more than 50% of the voting power is held by a group is a “controlled company” and may elect not to comply with certain corporate governance requirements of the exchange on which we will list our common stock, including the requirements that our board of directors, our Compensation Committee and our Corporate Governance and Nominating Committee meet the standard of independence established by those corporate governance requirements. The independence standards are intended to ensure that directors who meet the independence standard are free of any conflicting interest that could influence their actions as directors. Accordingly, you may not have the same protections afforded to stockholders of companies that are subject to all of the corporate governance requirements of the exchange on which we will list our common stock.

 

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We are an ‘‘emerging growth company’’ and we cannot be certain if the reduced disclosure requirements applicable to emerging growth companies will make our common stock less attractive to investors.

We are an ‘‘emerging growth company’’ and we may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not ‘‘emerging growth companies.’’ We will remain an ‘‘emerging growth company’’ for up to five years following the completion of this offering or until we achieve total annual gross revenues in excess of $1 billion during a fiscal year or become a large accelerated filer as a result of achieving a public float of at least $700 million as of the end of a second fiscal quarter. If the housing market continues to strengthen, we could exceed annual gross revenues of $1 billion shortly after the date of this prospectus, as we had $967 million of total gross revenues in 2012. The exemptions include not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a non-binding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. If we choose not to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, our auditors will not be required to attest to the effectiveness of our internal controls over financial reporting. As a result, investors may become less comfortable with the effectiveness of our internal controls and the risk that material weaknesses or other deficiencies in our internal control go undetected may increase. If we choose to provide reduced disclosures in our periodic reports and proxy statements while we are an emerging growth company, investors would have access to less information and analysis about our executive compensation, which may make it difficult for investors to evaluate our executive compensation practices. We cannot predict if investors will find our common stock less attractive because we may rely on these exemptions and provide reduced disclosure. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile.

Our majority stockholder will have the ability to control significant corporate activities after the completion of this offering and our majority stockholder’s interests may not coincide with yours.

After the consummation of this offering, Gores Holdings and its affiliates will beneficially own approximately 57.6% of our common stock, assuming the underwriters do not exercise their option to purchase additional shares. If the underwriters exercise in full their option to purchase additional shares, Gores Holdings will beneficially own approximately 52.5% of our common stock. As a result of its ownership, Gores Holdings (and indirectly, Gores, given its control of Gores Holdings), so long as it holds a majority of our outstanding shares, will have the ability to control the outcome of matters submitted to a vote of stockholders and, through our board of directors, the ability to control decision-making with respect to our business direction and policies.

Matters over which Gores Holdings (and indirectly, Gores, given its control of Gores Holdings) will exercise control following this offering include:

 

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election of directors;

 

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mergers and other business combination transactions, including proposed transactions that would result in our stockholders receiving a premium price for their shares;

 

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other acquisitions or dispositions of businesses or assets;

 

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incurrence of indebtedness and the issuance of equity securities;

 

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repurchase of stock and payment of dividends; and

 

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the issuance of shares to management under the 2013 Incentive Plan.

 

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Even if Gores Holdings’ ownership of our shares falls below a majority, it may continue to be able to strongly influence or effectively control our decisions. In addition, Gores Holdings’ will have a contractual right to designate a number of directors proportionate to its stock ownership. See “Certain Relationships and Related Party Transactions—Director Nomination Agreement.”

Conflicts of interest may arise because some of our directors are affiliated with our largest stockholder.

Messrs. Freedman, Meyer, Wald and Yager, who are officers or employees of Gores or its affiliates, serve on our board of directors. Gores controls Gores Holdings, our majority stockholder (after giving effect to this offering). Gores or its affiliates may hold equity interests in entities that directly or indirectly compete with us, and companies in which it or one of its affiliates is an investor or may invest in the future may begin competing with us or become customers of or vendors to the Company. As a result of these relationships, when conflicts between the interests of Gores, on the one hand, and of our other stockholders, on the other hand, arise, these directors may not be disinterested. Although our directors and officers have a duty of loyalty to us under Delaware law and our amended and restated certificate of incorporation, transactions that we enter into in which a director or officer has a conflict of interest are generally permissible so long as (i) the material facts relating to the director’s or officer’s relationship or interest as to the transaction are disclosed to our board of directors and a majority of our disinterested directors approves the transaction, (ii) the material facts relating to the director’s or officer’s relationship or interest as to the transaction are disclosed to our stockholders and a majority of our disinterested stockholders approve the transaction or (iii) the transaction is otherwise fair to us. Our amended and restated certificate of incorporation also provides that any principal, officer, member, manager and/or employee of Gores or any entity that controls, is controlled by or under common control with Gores or any investment funds managed by Gores will not be required to offer any transaction opportunity of which they become aware to us and could take any such opportunity for themselves or offer it to other companies in which they have an investment, unless such opportunity is offered to them solely in their capacities as our directors.

If you purchase shares of common stock sold in this offering, you will incur immediate and substantial dilution.

If you purchase shares of common stock in this offering, you will incur immediate and substantial dilution in the amount of $13.15 per share, because the assumed initial public offering price of $17.00, which is the midpoint of the price range set forth on the cover of this prospectus, is substantially higher than the pro forma net tangible book value per share of our outstanding common stock. This dilution is due in large part to the fact that Gores Holdings paid substantially less than the initial public offering price when it acquired its shares of our capital stock in 2009. In addition, you may also experience additional dilution upon future equity issuances or the exercise of stock options to purchase common stock granted to our employees, directors and consultants under our stock option and equity incentive plans. For additional information, see “Dilution.”

We do not currently intend to pay dividends on our common stock following the offering.

We do not anticipate paying any cash dividends on our common stock for the foreseeable future. Instead, we intend to retain future earnings to fund our growth. In addition, our existing indebtedness restricts, and we anticipate our future indebtedness may restrict, our ability to pay dividends. Therefore, you may not receive a return on your investment in our common stock by receiving a payment of dividends. See “Dividend Policy.”

The issuer of common stock in this offering does not conduct any substantive operations and, as a result, its ability to pay dividends will be dependent upon the financial results and cash flows of its

 

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operating subsidiaries and the distribution or other payment of cash to it in the form of dividends or otherwise. The direct and indirect subsidiaries of the issuer are separate and distinct legal entities and have no obligation to make any funds available to the issuer.

Future sales of our common stock, or the perception in the public markets that these sales may occur, may depress our stock price.

Sales of substantial amounts of our common stock in the public market after this offering, or the perception that these sales could occur, could adversely affect the price of our common stock and could impair our ability to raise capital through the sale of additional shares. Upon completion of this offering, there will be 25,580,380 shares of our common stock outstanding. Of these, the 8,823,530 shares being sold in this offering (or 10,147,060 shares if the underwriters exercise their option to purchase additional shares in full) will be freely tradable immediately after this offering (except for any shares purchased by affiliates, if any) and approximately 16,756,850 shares (or 15,433,320 shares if the underwriters exercise their option to purchase additional shares in full) may be sold upon expiration of lock-up agreements 180 days after the date of this prospectus (subject in some cases to volume limitations). Sales by Gores Holdings of a substantial number of shares after this offering could significantly reduce the market price of our common stock. Gores Holdings and our other stockholders prior to this offering have the right to require us to register their shares of our common stock. See “Certain Relationships and Related Party Transactions—Plan of conversion and certificate of incorporation.”

We also intend to register all common stock that we may issue under the 2013 Incentive Plan, as described in “Executive Compensation—2013 Incentive Plan.” Effective upon the completion of this offering, an aggregate of 1,800,000 shares of our common stock will be reserved for future issuance under the 2013 Incentive Plan (including pursuant to the grants described below to be made in connection with this offering), in addition to 94,083 shares issuable upon exercise of existing options that have vested and 132,524 shares issuable upon exercise of existing options that have not vested. Upon completion of the offering, we also expect to award approximately $0.6 million worth of restricted stock to certain executive officers and directors (valued at the initial public offering price), and restricted shares or options to purchase a number of shares of our common stock collectively equal to 600,000 shares, less the restricted shares and options to purchase an amount of shares awarded to our executive officers and directors, with an exercise price set at the initial public offering price. Once we register these shares, which we plan to do shortly after the completion of this offering, they can be freely sold in the public market upon issuance, subject to the lock-up agreements referred to above. If a large number of these shares are sold in the public market, the sales could reduce the trading price of our common stock.

Our future operating results may fluctuate significantly and our current operating results may not be a good indication of our future performance. Fluctuations in our quarterly financial results could affect our stock price in the future.

Our revenues and operating results have historically varied from period-to-period and we expect that they will continue to do so as a result of a number of factors, many of which are outside of our control. If our quarterly financial results or our predictions of future financial results fail to meet the expectations of securities analysts and investors, our stock price could be negatively affected. Any volatility in our quarterly financial results may make it more difficult for us to raise capital in the future or pursue acquisitions that involve issuances of our stock. Our operating results for prior periods may not be effective predictors of future performance.

Factors associated with our industry, the operation of our business and the markets for our products and services may cause our quarterly financial results to fluctuate, including:

 

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the seasonal and cyclical nature of the homebuilding industry;

 

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the highly competitive nature of our industry;

 

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  Ÿ  

the volatility of prices, availability and affordability of raw materials, including lumber, wood products and other building products;

 

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shortages of skilled and technical labor, increased labor costs and labor disruptions;

 

  Ÿ  

the production schedules of our customers;

 

  Ÿ  

general economic conditions, including but not limited to housing starts, repair and remodel activity and light commercial construction, inventory levels of new and existing homes for sale, foreclosure rates, interest rates, unemployment rates, relative currency values, mortgage availability and pricing, as well as other consumer financing mechanisms, that ultimately affect demand for our products;

 

  Ÿ  

actions of suppliers, customers and competitors, including merger and acquisition activities, plant closures and financial failures;

 

  Ÿ  

the financial condition and creditworthiness of our customers;

 

  Ÿ  

cost of compliance with government laws and regulations;

 

  Ÿ  

weather patterns; and

 

  Ÿ  

severe weather phenomena such as drought, hurricanes, tornadoes and fire.

Any one of the factors above or the cumulative effect of some of the factors referred to above may result in significant fluctuations in our quarterly financial and other operating results, including fluctuations in our key metrics. The variability and unpredictability could result in our failing to meet our internal operating plan or the expectations of securities analysts or investors for any period. If we fail to meet or exceed such expectations for these or any other reasons, the market price of our shares could fall substantially and we could face costly lawsuits, including securities class action suits.

Certain provisions of our organizational documents and other contractual provisions may make it difficult for stockholders to change the composition of our board of directors and may discourage hostile takeover attempts that some of our stockholders may consider to be beneficial.

Certain provisions of our amended and restated certificate of incorporation and amended and restated bylaws may have the effect of delaying or preventing changes in control if our board of directors determines that such changes in control are not in the best interests of us and our stockholders. The provisions in our amended and restated certificate of incorporation and amended and restated bylaws include, among other things, the following:

 

  Ÿ  

a classified board of directors with three-year staggered terms;

 

  Ÿ  

the ability of our board of directors to issue shares of preferred stock and to determine the price and other terms, including preferences and voting rights, of those shares without stockholder approval;

 

  Ÿ  

stockholder action can only be taken at a special or regular meeting and not by written consent following the time that Gores Holdings and its affiliates cease to beneficially own a majority of our common stock;

 

  Ÿ  

advance notice procedures for nominating candidates to our board of directors or presenting matters at stockholder meetings;

 

  Ÿ  

removal of directors only for cause following the time that Gores Holdings and its affiliates cease to beneficially own a majority of our common stock;

 

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allowing only our board of directors to fill vacancies on our board of directors; and

 

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following the time that Gores Holdings and its affiliates cease to beneficially own a majority of our common stock, super-majority voting requirements to amend our amended and restated bylaws and certain provisions of our amended and restated certificate of incorporation.

In addition, in connection with this offering, we will enter into a Director Nomination Agreement with Gores Holdings that provides Gores Holdings the right to designate nominees for election to our board of directors for so long as Gores Holdings beneficially owns 10% or more of the total number of shares of our common stock then outstanding. For a description of the terms of the Director Nomination Agreement, see “Certain Relationships and Related Party Transactions—Director Nomination Agreement.”

We have elected in our amended and restated certificate of incorporation not to be subject to Section 203 of the Delaware General Corporation Law (“DGCL”), an anti-takeover law. In general, Section 203 prohibits a publicly held Delaware corporation from engaging in a business combination, such as a merger, with a person or group owning 15% or more of the corporation’s voting stock for a period of three years following the date the person became an interested stockholder, unless (with certain exceptions) the business combination or the transaction in which the person became an interested stockholder is approved in a prescribed manner. Accordingly, we are not subject to any anti-takeover effects of Section 203. However, our amended and restated certificate of incorporation contains provisions that have the same effect as Section 203, except that they provide that Gores Holdings, its affiliates (including any investment funds managed by Gores) and any person that becomes an interested stockholder as a result of a transfer of 5% or more of our voting stock by the forgoing persons to such person are excluded from the “interested stockholder” definition in our amended and restated certificate of incorporation and are therefore not subject to the restrictions set forth therein that have the same effect as Section 203. See “Description of Capital Stock—Anti-takeover effects of Delaware law and our amended and restated certificate of incorporation and amended and restated bylaws.”

While these provisions have the effect of encouraging persons seeking to acquire control of our Company to negotiate with our board of directors, they could enable the board of directors to hinder or frustrate a transaction that some, or a majority, of the stockholders might believe to be in their best interests and, in that case, may prevent or discourage attempts to remove and replace incumbent directors.

These provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace members of our board of directors, which is responsible for appointing the members of our management. For more information, see “Description of Capital Stock.”

Any issuance of preferred stock could make it difficult for another company to acquire us or could otherwise adversely affect holders of our common stock, which could depress the price of our common stock.

Our board of directors has the authority to issue preferred stock and to determine the preferences, limitations and relative rights of shares of preferred stock and to fix the number of shares constituting any series and the designation of such series, without any further vote or action by our stockholders. Our preferred stock could be issued with voting, liquidation, dividend and other rights superior to the rights of our common stock. The potential issuance of preferred stock may delay or prevent a change in control of us, discouraging bids for our common stock at a premium over the market price, and adversely affect the market price and the voting and other rights of the holders of our common stock.

 

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We have identified a material weakness in our internal control over financial reporting. If the material weakness persists or if we fail to establish and maintain effective internal control over financial reporting in the future, our ability to both timely and accurately report our financial results could be adversely affected.

We are not currently required to comply with the rules of the SEC implementing Section 404 of the Sarbanes-Oxley Act and therefore are not required to make a formal assessment of the effectiveness of our internal control over financial reporting for that purpose. Upon becoming a public company, we will be required to comply with the SEC’s rules implementing Sections 302 and 404 of the Sarbanes-Oxley Act, which will require management to certify financial and other information in our quarterly and annual reports and provide an annual management report on the effectiveness of controls over financial reporting. Though we will be required to disclose changes made in our internal controls and procedures on a quarterly basis, we will not be required to make our first annual assessment of our internal control over financial reporting pursuant to Section 404 until the year following our first annual report required to be filed with the SEC. To comply with the requirements of being a public company, we may need to undertake various actions, such as implementing new internal controls and procedures and hiring accounting or internal audit staff.

A material weakness in our internal control over financial reporting existed as of December 31, 2012 and March 31, 2013. A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented, detected and corrected on a timely basis. During the third quarter of 2013, we identified transactions that should have been considered in the January 1, 2012 valuation of the Company’s Class A and Class B common stock. The updated valuation of our Class A and Class B common stock led to the following restatements: (i) to correct compensation expense related to a modification of the exercise price of our outstanding stock options, the issuance of new stock options and shares purchased by management and (ii) to recognize a beneficial conversion feature for the Class C convertible preferred stock and related accretion of dividends. We determined that the error was caused by the fact that certain controls relating to the Company’s valuation process were not at a precise enough level to identify the proper accounting treatment for the beneficial conversion feature or its implications on the January 2012 valuation of our common stock.

The material weakness described above could result in a misstatement of our accounts or disclosures that would result in a material misstatement of our financial statements that would not be prevented or detected. We are taking steps to remediate the material weakness, including designing and implementing improved processes and controls related to the review of the underlying assumptions and inputs used by the valuation specialist and the evaluation of how different value outputs may give rise to different equity accounting treatments (such as the beneficial conversion feature noted above). We cannot assure you that the measures we have taken to date, or any measures we may take in the future, will be sufficient to remediate the material weakness described above or to avoid potential future material weaknesses. Following the completion of this offering, we will value our common stock based on the market price for such stock.

We may in the future discover areas of our internal controls that need improvement. Our internal control over financial reporting will not prevent or detect all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud will be detected.

If we are unable to maintain proper and effective internal controls, we may not be able to produce timely and accurate financial statements, and we or our independent registered public accounting firm

 

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may conclude that our internal control over financial reporting is not effective. If that were to happen, the market price of our stock could decline and we could be subject to sanctions or investigations by NASDAQ, the SEC or other regulatory authorities. Testing and maintaining internal controls could also divert our management’s attention from other matters that are important to the operation of our business.

Our business and stock price may suffer as a result of our lack of public company operating experience. In addition, if securities or industry analysts do not publish research or publish inaccurate or unfavorable research about our business, our stock price and trading volume could decline.

Prior to the completion of this offering, we have been a privately-held company. Our lack of public company operating experience may make it difficult to forecast and evaluate our future prospects. If we are unable to execute our business strategy, either as a result of our inability to manage effectively our business in a public company environment or for any other reason, our business, prospects, financial condition and operating results may be harmed. In addition, as a new public company we do not currently have and may never obtain research coverage by securities and industry analysts. If no securities or industry analysts commence coverage of our Company, the trading price for our stock would be negatively impacted. If we obtain securities or industry analyst coverage and if one or more of the analysts who covers us downgrades our stock or publishes inaccurate or unfavorable research about our business, our stock price would likely decline. If one or more of these analysts ceases coverage of us or fails to publish reports on us regularly, demand for our stock could decrease, which could cause our stock price and trading volume to decline.

We are a holding company and conduct all of our operations through our subsidiaries.

We are a holding company and derive all of our operating income from our subsidiaries. All of our assets are held by our direct and indirect subsidiaries. We rely on the earnings and cash flows of our subsidiaries, which are paid to us by our subsidiaries in the form of dividends and other payments or distributions, to meet our debt service obligations. 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 and the covenants of any future outstanding indebtedness we or our subsidiaries incur.

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

Some of the statements contained in this prospectus constitute forward-looking statements, including in the sections captioned “Prospectus Summary,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business.” Forward-looking statements relate to expectations, beliefs, projections, future plans and strategies, anticipated events or trends and similar expressions concerning matters that are not historical facts or present facts or conditions. In many cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential” or the negative of these terms or other comparable terminology.

The forward-looking statements contained in this prospectus reflect our views as of the date of this prospectus about future events and are subject to risks, uncertainties, assumptions and changes in circumstances that may cause events or our actual activities or results to differ significantly from those expressed in any forward-looking statement. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future events, results, actions, levels of activity, performance or achievements. A number of important factors could cause actual results to differ materially from those indicated by the forward-looking statements, including, but not limited to, those factors described in “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” These factors include without limitation:

 

  Ÿ  

the state of the homebuilding industry and repair and remodeling activity, the economy and the credit markets;

 

  Ÿ  

seasonality and cyclicality of the building products supply and services industry;

 

  Ÿ  

competitive industry pressures and competitive pricing pressure from our customers;

 

  Ÿ  

inflation or deflation of prices of our products;

 

  Ÿ  

our exposure to product liability, product warranty, casualty, construction defect and other claims and legal proceedings;

 

  Ÿ  

our ability to maintain profitability;

 

  Ÿ  

failure of the residential renovation and improvement activities to return to historic levels;

 

  Ÿ  

our ability to retain our key employees and to attract and retain new qualified employees while controlling our labor costs;

 

  Ÿ  

product shortages, loss of key suppliers or failure to develop relationships with qualified suppliers, and our dependence on third-party suppliers and manufacturers;

 

  Ÿ  

the implementation of our supply chain and technology initiatives;

 

  Ÿ  

the impact of long-term non-cancelable leases at our facilities;

 

  Ÿ  

our concentration of business in the Texas, North Carolina, California and Utah markets;

 

  Ÿ  

our ability to manage effectively inventory and working capital;

 

  Ÿ  

the credit risk from our customers;

 

  Ÿ  

pricing pressure from our customers and competitors;

 

  Ÿ  

our ability to identify or respond effectively to consumer needs, expectations or trends;

 

  Ÿ  

our ability to implement successfully our growth strategy;

 

  Ÿ  

the impact of federal, state, local and other laws and regulations;

 

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  Ÿ  

the potential loss of significant customers;

 

  Ÿ  

our ability to obtain additional financing on acceptable terms;

 

  Ÿ  

the various financial covenants in our Credit Agreement;

 

  Ÿ  

disruptions in our information technology systems;

 

  Ÿ  

natural or man-made disruptions to our distribution and manufacturing facilities;

 

  Ÿ  

our exposure to environmental liabilities and subjection to environmental laws and regulation; and

 

  Ÿ  

cybersecurity risks.

Certain of these and other factors are discussed in more detail in “Risk Factors” in this prospectus. These factors should not be construed as exhaustive and should be read in conjunction with the other cautionary statements that are included in this prospectus. The forward-looking statements included in this prospectus are made only as of the date of this prospectus and we undertake no obligation to publicly update or review any forward-looking statement made by us or on our behalf, whether as a result of new information, future developments, subsequent events or circumstances or otherwise.

 

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USE OF PROCEEDS

We estimate that the net proceeds from our issuance and sale of 4,411,765 shares of common stock in this offering will be approximately $67.5 million, assuming an initial public offering price of $17.00 per share, which is the midpoint of the price range set forth on the cover page of this prospectus, and after deducting underwriting discounts and commissions and estimated offering expenses payable by us. We will not receive any of the proceeds from the sale of shares of our common stock by the selling stockholders.

A $1.00 increase (decrease) in the assumed initial public offering price of $17.00 per share would increase (decrease) our net proceeds from this offering by approximately $4.1 million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us.

We intend to use the net proceeds to the Company from this offering to pay approximately $58.5 million of the outstanding balances under our Revolver and to pay a fee of $9.0 million to Gores to terminate our management services agreement with Gores.

Borrowings under the Revolver bear interest, at our option, at either a base rate (which means the higher of (i) the federal funds rate plus 0.5% or (ii) the prime rate) plus a base rate margin (which ranges from 0.50% to 1.00% based on Revolver availability) or LIBOR plus a LIBOR rate margin (which ranges from 1.50% to 2.00% based on Revolver availability). The Revolver matures in December 2016. An affiliate of Wells Fargo Securities, LLC is a lender under our Revolver. Accordingly, the affiliate will receive net proceeds from this offering in connection with the repayment of the Revolver. See “Underwriting—Conflicts of Interest.”

 

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DIVIDEND POLICY

Following the consummation of this offering, we do not plan to pay a regular dividend on our common stock. The declaration and payment of all future dividends, if any, will be at the discretion of our board of directors and will depend upon our financial condition, earnings, contractual conditions, restrictions imposed by the Credit Agreement or applicable laws and other factors that our board of directors may deem relevant.

Additionally, because we are a holding company, our ability to pay dividends on our common stock is limited by restrictions on the ability of our subsidiaries to pay dividends or make distributions to us, including restrictions under the terms of the agreements governing our indebtedness. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and capital resources—Revolving credit facility.” Any future determination to pay dividends will be at the discretion of our board of directors, subject to compliance with covenants in current and future agreements governing our indebtedness, and will depend upon our operating results, financial condition, capital requirements and other factors that our board of directors deems relevant.

 

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CAPITALIZATION

The following table sets forth our cash and cash equivalents and our consolidated capitalization as of March 31, 2013 on:

 

  Ÿ  

an actual basis, as adjusted to retroactively reflect the change of members’ equity to stockholders’ equity following our conversion to a corporation and the 25.972-for-1 split of our Class A voting common stock and Class B non-voting common stock effected on July 29, 2013;

 

  Ÿ  

a pro forma basis, to give effect to (i) the conversion of all outstanding shares of our Class A voting common stock and Class B non-voting common stock into an equal number of shares of a single class of common stock immediately prior to the completion of this offering; and (ii) the conversion of all outstanding shares of our Class A junior preferred stock, Class B senior preferred stock and Class C convertible preferred stock into an aggregate of 6,707,898 shares of common stock upon the completion of this offering (assuming an initial public offering price of $17.00 per share, which is the midpoint of the price range set forth on the cover of this prospectus, and assuming a closing date of August 12, 2013, as applicable); and

 

  Ÿ  

a pro forma, as adjusted basis, to give further effect to (i) our receipt of the estimated net proceeds from the issuance and sale of 4,411,765 shares of common stock in this offering at an assumed initial public offering of $17.00 per share, which is the midpoint of the price range set forth on the cover of this prospectus, and after deducting underwriting discounts and estimated offering expenses payable by us, (ii) the payment of $58.5 million of the outstanding balance under our Revolver with a portion of the net proceeds from this offering and (iii) the payment of a $9.0 million fee to Gores to terminate our management services agreement with Gores, with a portion of the net proceeds from this offering.

 

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You should read this table together with the sections entitled “Use of Proceeds,” “Selected Historical Consolidated Financial and Operating Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our financial statements and the related notes included elsewhere in this prospectus.

 

     As of March 31, 2013  
         Actual             Pro forma         Pro forma, as
         adjusted        
 
(in thousands, except share and per share amounts)    (as restated)(2)              

Cash and cash equivalents

   $ 5,755      $ 5,755      $ 5,755   
  

 

 

   

 

 

   

 

 

 

Long-term debt (including current maturities):

      

Revolving line of credit(1)

     92,484        92,484        33,984   

Capital lease obligations

     7,808        7,808        7,808   
  

 

 

   

 

 

   

 

 

 

Total debt

     100,292        100,292        41,792   

Class A Junior Preferred stock, $0.01 par value, 10,000 shares authorized and issued and 5,100 shares outstanding, actual; no shares authorized, issued and outstanding, pro forma and pro forma, as adjusted

                     

Class B Senior Preferred stock, $0.01 par value, 500,000 shares authorized, 75,000 shares issued, 36,388 shares outstanding, actual; no shares authorized, issued and outstanding, pro forma and pro forma, as adjusted

     37,206                 

Class C Convertible Preferred stock, pro forma and $0.01 par value, 5,000 shares authorized, issued and outstanding, actual; no shares authorized, issued and outstanding, pro forma and pro forma, as adjusted

     5,000                 

Stockholders’ equity:

      

Class A voting common stock, $0.01 par value, 22,725,500 shares authorized and issued, 11,590,005 shares outstanding, actual; no shares authorized, issued and outstanding, pro forma and pro forma, as adjusted

     116                 

Class B non-voting common stock, $0.01 par value, 3,246,500 shares authorized and 2,870,712 issued and outstanding, actual; no shares authorized, issued and outstanding, pro forma and pro forma, as adjusted

     29                 

Preferred stock, $0.01 par value, no shares authorized, issued and outstanding, actual and pro forma; 50,000,000 authorized and no shares issued and outstanding, pro forma, as adjusted

                     

Common stock, $0.01 par value, no shares authorized, issued and outstanding, actual; 300,000,000 shares authorized and 21,168,615 issued and outstanding, pro forma; 300,000,000 authorized and 25,580,380 issued and outstanding, pro forma, as adjusted

            212        256   

Additional paid-in capital

     45,949        88,088        155,544   

Retained deficit

     (16,572     (16,572     (25,572
  

 

 

   

 

 

   

 

 

 

Total stockholders’ equity

     29,522        71,728        130,228   
  

 

 

   

 

 

   

 

 

 

Total capitalization

   $ 172,020      $ 172,020      $ 172,020   
  

 

 

   

 

 

   

 

 

 

 

(1) We had outstanding borrowings of $92.5 million with net availability of $36.4 million under our Revolver at March 31, 2013. See “Summary—Preliminary Financial Results for the Three Months and Six Months Ended June 30, 2013.” The repayment of a portion of the Revolver with the proceeds of this offering will not reduce available commitments.
(2) Our consolidated financial statements and related footnotes as of March 31, 2013 have been restated. See note (2) to our unaudited financial statements included elsewhere in this prospectus.

A $1.00 increase (decrease) in the assumed initial public offering price of $17.00 per share, which is the midpoint of the price range set forth on the cover of this prospectus, would increase (decrease) the pro forma, as adjusted amount for each of cash and cash equivalents, additional paid-in capital,

 

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total stockholders’ equity and total capitalization by approximately $4.1 million, assuming that the number of shares offered by us, as set forth on the cover of this prospectus, remains the same, and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

Conversion of Preferred Stock

Our amended and restated certificate of incorporation, which we will adopt immediately prior to consummation of this offering, provides that immediately prior to consummation of this offering, (i) each share of our Class A junior preferred stock will be automatically converted into a number of shares of common stock equal to the amount determined by dividing $1.00 by the initial public offering price per share, (ii) each share of our Class B senior preferred stock will automatically be converted into a number of shares of common stock equal to the amount determined by dividing the sum of (a) $1,000 plus (b) an amount equal to any accumulated and unpaid distributions on each share of Class B senior preferred stock from the date we converted to a corporation (May 2, 2013), to but excluding the date of the preferred conversion, by the initial public offering price per share, and (iii) each share of our Class C convertible preferred stock will automatically be converted into a number of shares of common stock equal to the amount determined by dividing $1,000 by $1.1223625 (which reflects our 25.972-for-1 stock split).

The dividends on our Class B senior preferred stock accumulate at the rate of 8% per annum, compounded quarterly, on the $1,000 liquidation preference from May 2, 2013, when we converted from a Delaware limited liability company to a Delaware corporation.

The number of shares of common stock issuable upon conversion of our Class A junior preferred stock and Class B senior preferred stock will depend on the actual price per share of the common stock in this offering and, in the case of the Class B senior preferred stock, the closing date. A $1.00 increase in the assumed initial public offering price of $17.00 per share, which is the midpoint of the range set forth on the cover of this prospectus, would decrease the aggregate number of shares of common stock issuable upon conversion of our Class A junior preferred stock and Class B senior preferred stock by 125,167 shares (assuming a closing date of August 12, 2013). A $1.00 decrease in the assumed initial public offering price of $17.00 per share, which is the midpoint of the range set forth on the cover of this prospectus, would increase the aggregate number of shares of common stock issuable upon conversion of our Class A junior preferred stock and Class B senior preferred stock by 140,813 shares (assuming a closing date of August 12, 2013). Each one-day later (earlier) change in the closing date would increase (decrease) the aggregate number of shares by 496 shares (assuming an initial public offering price of $17.00 per share, which is the midpoint of the price range set forth on the cover of this prospectus).

 

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DILUTION

Our pro forma net tangible book value as of March 31, 2013 was approximately $39.9 million, or approximately $1.89 per share. Pro forma net tangible book value per share represents the amount of our total tangible assets less the amount of our total liabilities, divided by the number of shares of common stock outstanding, prior to the sale by us of 4,411,765 shares of common stock offered in this offering. Pro forma net tangible book value as of March 31, 2013 gives pro forma effect to (i) the conversion of all outstanding shares of our Class A voting common and Class B non-voting common stock into an aggregate of 14,460,717 shares of a single class of common stock upon the completion of this offering and (ii) the conversion of all outstanding shares of our Class A junior preferred stock, Class B senior preferred stock and Class C convertible preferred stock into an aggregate of 6,707,898 shares of common stock upon the completion of this offering. Dilution in pro forma net tangible book value per share represents the difference between the amount per share paid by investors in this offering and the net tangible book value per share of our common stock outstanding immediately after this offering.

After giving effect to the items discussed above and the sale by us of 4,411,765 shares of common stock in this offering, based upon an assumed initial public offering price of $17.00 per share, which is the midpoint of the price range set forth on the cover of this prospectus, and after deducting underwriting discounts and commissions and estimated expenses payable by us in connection with this offering and the payment of a $9.0 million fee to Gores to terminate our management services agreement with Gores, our pro forma, as adjusted, net tangible book value as of March 31, 2013 would have been approximately $98.4 million, or $3.85 per share of common stock. This represents an immediate increase in pro forma net tangible book value of $1.96 per share to existing stockholders and immediate dilution of $13.15 per share to new investors purchasing shares of common stock in this offering at the initial public offering price.

The following table illustrates this per share dilution.

 

Assumed initial public offering price per share

      $ 17.00   
     

 

 

 

Pro forma net tangible book value per share as of March 31, 2013

   $ 1.89      

Increase in pro forma net tangible book value per share attributable to new investors in this offering

     1.96      
  

 

 

    

Pro forma, as adjusted, net tangible book value per share as of March 31, 2013 (after giving effect to this offering)

        3.85   
     

 

 

 

Dilution per share to new investors

      $ 13.15   
     

 

 

 

The following table summarizes, as of March 31, 2013, on a pro forma, as adjusted, basis giving pro forma effect to the items discussed above and the sale of 4,411,765 shares of common stock in this offering, the number of shares of our common stock purchased from us, the aggregate cash consideration paid to us and the average price per share paid to us by existing stockholders and to be paid by new investors purchasing shares of our common stock from us in this offering. The table assumes an initial public offering price of $17.00 per share, which is the midpoint of the price range set forth on the cover of this prospectus, before deducting estimated underwriting discounts and commissions and estimated expenses payable by us in connection with this offering and the payment of a $9.0 million fee to Gores to terminate our management agreement with Gores.

 

     Shares purchased     Total consideration     Average
price

per
share
 
     Number      Percent     Amount      Percent    
     (millions)  

Existing stockholders

     21,168,615         82.8   $ 41.8         35.8   $ 1.98   

New investors

     4,411,765         17.2        75.0         64.2        17.00   
  

 

 

    

 

 

   

 

 

    

 

 

   

Total

     25,580,380         100   $ 116.8         100  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

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A $1.00 increase (decrease) in the assumed initial public offering price of $17.00 per share, which is the midpoint of the price range set forth on the cover of this prospectus, would increase (decrease) the total consideration paid by investors participating in this offering by $4.4 million, or increase (decrease) the percent of total consideration paid by investors participating in this offering by 1.3% and 1.4%, respectively, assuming that the number of shares offered by us, as set forth on the cover of this prospectus, remains the same and before deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

To the extent that any options or other equity incentive grants are exercised or issued in the future (including pursuant to the 2013 Incentive Plan) with an exercise price or purchase price below the initial public offering price, new investors will experience further dilution.

 

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SELECTED CONSOLIDATED FINANCIAL DATA

The following tables set forth our selected consolidated financial data. The selected consolidated financial data as of December 31, 2011 and 2012 and for the years ended December 31, 2010, 2011 and 2012 have been derived from our audited consolidated financial statements included elsewhere in this prospectus. The selected consolidated financial data as of December 31, 2010 have been derived from our audited consolidated financial statements which are not included in this prospectus. The summary consolidated financial data as of March 31, 2013 and for the three-month periods ended March 31, 2012 and 2013 have been derived from our unaudited consolidated financial statements. The unaudited consolidated financial statements include all of our accounts and the accounts of our subsidiaries and, in the opinion of management, include all recurring adjustments and normal accruals necessary for a fair presentation of our financial position, results of operations and cash flows for the dates and periods presented. These financial statements should be read in conjunction with our most recent audited annual financial statements. Results for interim periods are not necessarily indicative of the results to be expected during the remainder of the current year or for any future period.

You should read the information set forth below in conjunction with “Use of Proceeds,” “Capitalization,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and our consolidated financial statements and notes thereto included elsewhere in this prospectus. Our historical consolidated financial data may not be indicative of our future performance.

 

    Year ended December 31,     Three months ended
March 31,
 
(in thousands, except shares and per share data)   2010     2011     2012     2012     2013  
                (as restated)(10)     (as restated)(10)     (as restated)(10)  

Statement of operations information:

         

Net sales

  $ 751,706      $ 759,982      $ 942,398      $ 187,939      $ 248,726   

Cost of goods sold(1)

    587,692        591,017        727,670        144,508        194,936   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    164,014        168,965        214,728        43,431        53,790   

Operating expenses:

         

Selling, general and administrative expenses(2)

    246,338        213,036        221,192        52,834        56,802   

Depreciation expense

    29,337        11,844        7,759        2,067        1,639   

Amortization expense

    1,140        1,457        1,470        365        547   

Impairment of assets held for sale(3)

    2,944        580        361                 

Restructuring expense(4)

    7,089        1,349        2,853        44        60   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

    (122,834     (59,301     (18,907     (11,879     (5,258

Other income (expenses):

         

Bargain purchase gain(5)

    11,223                               

Interest expense

    (1,575     (2,842     (4,037     (963     (1,025

Other income (expense), net(6)

    (57     (2,120     278        126        190   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from continuing operations before income taxes

    (113,243     (64,263     (22,666     (12,716     (6,093

Income tax benefit(6)

    47,463        22,332        8,084        4,263        1,879   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from continuing operations

    (65,780     (41,931     (14,582     (8,453     (4,214

Income (loss) from discontinued operations, net of tax benefit (provision) of $4,038, $(658), $(52), 79 and (109), respectively(7)

    (4,214     (202     49        (113     157   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

    (69,994     (42,133     (14,533     (8,566     (4,057

Redeemable Class B Senior Preferred stock dividend

    (5,079     (4,188     (4,480     (1,100     (729

Convertible Class C Preferred stock dividend

                  (5,000     (5,000       
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss attributable to common stockholders

  $ (75,073   $ (46,321   $ (24,013   $ (14,666   $ (4,786
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Basic and diluted loss per common share(8):

         

Loss from continuing operations

  $ (3.01   $ (2.07   $ (1.83   $ (1.15   $ (0.36

Income (loss) from discontinued operations

    (0.18     (0.01            (0.01     0.01   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

  $ (3.19   $ (2.08   $ (1.83   $ (1.16   $ (0.35
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average number of common shares outstanding, basic and diluted(8)

    23,502,470        22,262,337        13,153,446        12,662,556        13,523,270   

 

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    Year ended December 31,             Three months ended         
March 31,
 
(in thousands, except shares and per share data)   2010     2011     2012     2012      2013  
                (as restated)(10)    

(as restated)(10)

    

(as restated)(10)

 

Statements of cash flows data:

          

Net cash provided by (used in):

          

Operating activities

  $ (57,999   $ (7,001   $ (12,243   $ (10,900    $ (17,641

Investing activities

    8,093        7,322        (4,861     1,165         1,466   

Financing activities

    (20,415     138        14,838        10,039         19,239   

Other financial data:

          

Depreciation and amortization

  $ 36,149      $ 16,188      $ 11,718      $ 3,030       $ 2,959   

Capital expenditures

    2,506        1,339        2,741        705         374   

EBITDA(9)

    (79,733     (45,435     (6,862     (8,836      (1,952

Adjusted EBITDA(9)

    (57,987     (30,799     1,993        (7,657      (1,221

Balance sheet data (at period end):

          

Cash and cash equivalents

  $ 4,498      $ 4,957      $ 2,691      $ 5,261       $ 5,755   

Total current assets

    188,227        155,455        194,345        189,509         230,255   

Property and equipment, net of accumulated depreciation

    72,821        57,759        55,076        55,492         54,302   

Total assets

    294,970        254,641        286,012        283,423         320,499   

Total debt

    15,174        35,915        79,182        45,787         100,292   

Redeemable preferred stock

    50,809        54,997        41,477        61,097         42,206   

Total stockholders’ equity(8)

    122,229        51,426        34,164        42,213         29,522   

 

(1) Includes depreciation expense of $5.7 million, $2.9 million, $2.5 million, $0.6 million and $0.8 million for the years ended December 31, 2010, 2011 and 2012, and the three months ended March 31, 2012 and 2013, respectively.
(2) Includes severance expense of $1.6 million, $2.0 million, $0.5 million, $0.1 million and $0 for the years ended December 31, 2010, 2011 and 2012, and the three months ended March 31, 2012 and 2013, respectively.
(3) Impairment of assets held for sale represents the write down of such assets to the lower of depreciated cost or estimated fair value less expected disposition costs. See note (9) to our audited financial statements included elsewhere in this prospectus.
(4) Relates to store closures and workforce reductions in continuing markets.
(5) Represents the excess of the net assets acquired over the purchase price of certain assets and liabilities of NHC in April 2010. See note (4) to our audited financial statements included elsewhere in this prospectus.
(6) Includes $3.1 million, $1.9 million and $0.4 million of expense related to the reduction of a tax indemnification asset, with a corresponding increase in income tax benefit, for the years ended December 31, 2010, 2011 and 2012, respectively. This indemnification asset corresponds to the long-term liability related to uncertain tax positions for which Wolseley had indemnified the Company, which was reduced upon the expiration of the statute of limitations for certain tax periods. See note (15) to our audited financial statements included elsewhere in this prospectus.
(7) During the years ended December 31, 2010, 2011 and 2012, we ceased operations in certain geographic markets due to declines in residential homebuilding throughout the United States. The cessation of operations in these markets has been treated as discontinued operations as the markets had distinguishable cash flows and operations that have been eliminated from ongoing operations. See note (5) to our audited financial statements included elsewhere in this prospectus.
(8) We have adjusted our historical financial statements to retroactively reflect the conversion from a limited liability company to a corporation and the change of members’ equity to stockholders’ equity.
(9)

EBITDA is defined as net loss before interest, income taxes and depreciation and amortization. Adjusted EBITDA is defined as EBITDA plus impairment of assets held for sale, restructuring, severance and other expenses related to store closures and business optimization, bargain purchase gain, discontinued operations, management fees, non-cash compensation, acquisition costs, other expense resulting from the reduction of a tax indemnification asset and certain other items. Adjusted EBITDA is intended as a supplemental measure of our performance that is not required by, or presented in accordance with, GAAP. We believe that EBITDA and Adjusted EBITDA provide useful information to management and investors regarding certain financial and

 

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business trends relating to our financial condition and operating results. Our management uses EBITDA and Adjusted EBITDA to compare the Company’s performance to that of prior periods for trend analyses, for purposes of determining management incentive compensation, and for budgeting and planning purposes. These measures are used in monthly financial reports prepared for management and our board of directors. We believe that the use of EBITDA and Adjusted EBITDA provides an additional tool for investors to use in evaluating ongoing operating results and trends and in comparing the Company’s financial measures with other distribution and retail companies, which may present similar non-GAAP financial measures to investors. Our management does not consider EBITDA or Adjusted EBITDA in isolation or as an alternative to financial measures determined in accordance with GAAP. The principal limitation of EBITDA and Adjusted EBITDA is that they exclude significant expenses and income that are required by GAAP to be recorded in the Company’s financial statements. Some of these limitations are: (i) EBITDA and Adjusted EBITDA do not reflect changes in, or cash requirements for, our working capital needs; (ii) EBITDA and Adjusted EBITDA do not reflect our interest expense, or the requirements necessary to service interest or principal payments on our debt; (iii) EBITDA and Adjusted EBITDA do not reflect our income tax expenses or the cash requirements to pay our taxes; (iv) EBITDA and Adjusted EBITDA do not reflect historical cash expenditures or future requirements for capital expenditure or contractual commitments; and (v) although depreciation and amortization charges are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future and EBITDA and Adjusted EBITDA do not reflect any cash requirements for such replacements. In order to compensate for these limitations, management presents EBITDA and Adjusted EBITDA in connection with GAAP results. You should review the reconciliation of net loss to EBITDA and Adjusted EBITDA below, and not rely on any single financial measure to evaluate our business.

The following is a reconciliation of net loss to EBITDA and Adjusted EBITDA.

 

     Year ended December 31,     Three months ended
March 31,
 
(dollars in thousands)    2010     2011     2012     2012     2013  
                 (as restated)(i)     (as restated)(i)     (as restated)(i)  

Net loss

   $ (69,994   $ (42,133   $ (14,533   $ (8,566   $ (4,057

Interest expense

     1,575        2,842        4,037        963        1,025   

Income tax benefit

     (47,463     (22,332     (8,084     (4,263     (1,879

Depreciation and amortization

     36,149        16,188        11,718        3,030        2,959   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

EBITDA

   $ (79,733   $ (45,435   $ (6,862   $ (8,836   $ (1,952

Impairment of assets held for sale(a)

     2,944        580        361                 

Restructuring, severance, other expense related to store closures and business optimization(b)

     19,731        8,110        5,228        287        233   

Bargain purchase gain(c)

     (11,223                            

Discontinued operations, net of tax benefit(d)

     4,214        202        (49     113        (157

Management fees(e)

     2,597        2,406        1,379        405        406   

Non-cash compensation expense

     288        384        1,305        328        146   

Acquisition costs(f)

     4,086        1,017        284        46        103   

Reduction of tax indemnification asset(g)

     3,056        1,937        347                 

Other items(h)

     (3,947                            
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

   $ (57,987   $ (30,799   $ 1,993      $ (7,657   $ (1,221
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

  (a) See note (3) above.

 

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  (b) See notes (2) and (4) above. Also includes (i) $7.7 million, $3.9 million, $1.8 million, $0.2 million and $0.1 million for the years ended December 31, 2010, 2011 and 2012, and the three months ended March 31, 2012 and 2013, respectively, related to closed locations, consisting of pre-tax losses incurred during closure and post-closure expenses, (ii) a $1.4 million loss on the sale of land and buildings in the year ended December 31, 2010, and (iii) $1.9 million, $0.9 million and $0 of business optimization expenses, primarily consulting fees related to cost saving initiatives, for the years ended December 31, 2010, 2011 and 2012, respectively.
  (c) See note (5) above.
  (d) See note (7) above.
  (e) Represents the expense for management services provided by Gores and its affiliates and by Wolseley through November 2011, other than $0.5 million that is included in income (loss) from discontinued operations the year ended December 31, 2010.
  (f) Represents (i) $2.1 million and $2.0 million in the year ended December 31, 2010 related to the acquisition of NHC and Bison, respectively, (ii) $0.8 million and $0.2 million in the year ended December 31, 2011 related to an abandoned acquisition and the acquisition of Bison, respectively, and (iii) $0.2 million and $0.1 million in the year ended December 31, 2012 related to the acquisitions of TBSG and Chesapeake, respectively, and (iv) $0.1 million in the three months ended March 31, 2013 related to the acquisition of TBSG.
  (g) See note (6) above.
  (h) Represents (i) $0.7 million of expenses related to the Company’s prepackaged reorganization and (ii) $4.6 million received as proceeds from the settlement of a legal proceeding.
  (i) See note (10) below.

 

(10) Our consolidated financial statements and related footnotes as of December 31, 2012 and March 31, 2013, for the year ended December 31, 2012 and for the three months ended March 31, 2012 and 2013 have been restated. See note (2) to our audited and unaudited financial statements included elsewhere in this prospectus.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read this discussion and analysis in conjunction with our historical consolidated financial statements and the notes thereto included elsewhere in this prospectus. This discussion and analysis covers periods prior to this offering and related transactions. As a result, the discussion and analysis of historical periods does not reflect the impact that this offering, such conversion and other related transactions will have on us. Our historical results may not be indicative of our future performance. This discussion and analysis contains forward-looking statements and involves numerous risks and uncertainties, including, but not limited to, those discussed in “Risk Factors.” Our actual results may differ materially from those contained in any forward-looking statements. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” has been revised for the effects of the restatement of our consolidated financial statements. See note (2) to our audited and unaudited financial statements included elsewhere in this prospectus.

Overview

We are a large, diversified LBM distributor and solutions provider that sells to new construction and repair and remodel contractors. We carry a broad line of products and have operations throughout the United States. Our primary products are lumber & lumber sheet goods and structural components, including engineered wood, trusses and wall panels, millwork, doors, flooring, windows & other exterior products. Additionally, we provide solution-based services to our customers, including design, product specification and installation management services. We serve a broad customer base, including large-scale production homebuilders, custom homebuilders and repair and remodeling contractors, and we believe we are among the top three LBM suppliers for residential construction in 80% of the geographic markets in which we operate, based on net sales. We offer over 39,000 products sourced through our strategic network of suppliers, which together with our various solution-based services represent approximately 50% of the construction cost of a typical new home. By enabling our customers to source a significant portion of their materials and services from one supplier, we have positioned ourselves as the supply partner of choice for many of our customers.

We have operations in 13 states that accounted for approximately 48% of 2012 U.S. single-family housing permits according to the U.S. Census Bureau. We operate in 20 metropolitan areas in these 13 states that we believe have an attractive potential for economic growth based on population trends, increasing business activity and above-average employment growth.

Restatement of previously issued consolidated financial statements

We have restated our previously issued consolidated financial statements and related footnotes as of December 31, 2012 and March 31, 2013, for the year ended December 31, 2012 and for the three months ended March 31, 2012 and 2013. For additional information regarding this restatement, see note (2) to our audited and unaudited financial statements included elsewhere in this prospectus.

We have restated our consolidated financial statements to account for a beneficial conversion feature for our Convertible Class C Preferred stock and related dividends for the year ended December 31, 2012 and the three months ended March 31, 2012. These dividends increased our loss attributable to common stockholders by $5.0 million and our basic and diluted loss per share by approximately $0.38 per share for the year ended December 31, 2012 and $0.39 per share for the three months ended March 31, 2012.

In addition, we have restated our consolidated financial statements to record additional compensation expense related to the modification of the exercise price of our outstanding stock options, the issuance of new options and the purchase of shares by management. Accordingly, in the

 

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restated consolidated statements of operations for the year ended December 31, 2012, and the three months ended March 31, 2012 and 2013, we increased stock based compensation expense by $0.5 million, $0.2 million and $0.02 million, respectively, we increased the related income tax benefit by $0.2 million, $0.06 million and $0, respectively, and increased the basic and diluted loss per share by approximately $0.03, $0.01 and $0, respectively. In the restated consolidated balance sheets as of December 31, 2012 and March 31, 2013, we increased additional paid-in capital by $0.5 million and $0.5 million and retained deficit by $0.3 million and $0.3 million, respectively, and we decreased income tax payable by $0.2 million, and $0.2 million, respectively.

All data included in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for the year ended December 31, 2012 and for the three months ended March 31, 2012 and 2013 is derived from our restated consolidated financial statements for those periods.

Factors affecting our operating results

Our operating results and financial performance are influenced by a variety of factors, including conditions in the housing market and economic conditions generally, changes in the cost of the products we sell (particularly commodity products), pricing policies of our competitors, production schedules of our customers and seasonality. Some of the more important factors are briefly discussed below.

Conditions in the housing and construction market

The building products supply and services industry is highly dependent on new home construction and repair and remodeling activity, which in turn are dependent upon a number of factors, including interest rates, consumer confidence, employment rates, foreclosure rates, housing inventory levels, housing demand, the availability of land, the availability of construction financing and the health of the economy and mortgage markets. The homebuilding industry underwent a significant downturn that began in mid-2006 and began to stabilize in late 2011. The downturn in the homebuilding industry resulted in a substantial reduction in demand for our products and services, which in turn had a significant adverse effect on our business and operating results during fiscal years 2007 through 2012 and led to our filing for bankruptcy in 2009. As of June 2013, McGraw-Hill Construction forecasts that U.S. single-family housing starts will increase to 1.1 million by 2015. There is significant uncertainty regarding the timing and extent of any recovery in construction and repair and remodel activity and resulting product demand levels. The positive impact of a recovery on our business may also be dampened to the extent the average selling price or size of new single family homes decreases, which could cause homebuilders to decrease spending. We believe that, over the long-term, there is considerable growth potential in the U.S. housing sector.

We view single-family housing starts as a leading indicator of future business, but an additional driver of our results in any period is the number of housing units under construction (“HUC”). HUC has increased in the last year as a result of the increase in housing starts, although the HUC at the end of 2012 was roughly comparable to 2010 levels and growth in this metric has lagged the growth in housing starts during the early stages of the recent housing recovery.

Due to the low levels of housing starts and HUC relative to historical averages, continued competition for homebuilder business and growth in share of production homebuilders (see “—Consolidation of large homebuilders”), we have and may continue to experience pressure on our gross margins. Many industry forecasters expect to see continued improvement in housing demand over the next few years. We believe there are several trends that indicate U.S. housing demand will likely recover in the long term and that the recent downturn in the housing industry is likely a trough in the cyclical nature of the residential construction industry. We believe that these trends are supported by

 

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positive economic and demographic indicators that are beginning to take hold in many of the markets in which we operate. These indicators, which are typically indicative of housing market strength, include:

 

  Ÿ  

declining unemployment rates;

 

  Ÿ  

rising home values and improving household finances;

 

  Ÿ  

rebounding household formations;

 

  Ÿ  

improving sentiment towards ownership of residential real estate;

 

  Ÿ  

declining levels of new and existing for-sale home inventory; and

 

  Ÿ  

a favorable consumer interest rate environment supporting affordability and home ownership.

Overall economic conditions in the markets where we operate

Economic changes both nationally and locally in our markets impact our financial performance. Unfavorable changes in demographics, credit markets, consumer confidence, health care costs, housing affordability, housing inventory levels, a weakening of the national economy or of any regional or local economy in which we operate, and other factors beyond our control could adversely affect consumer spending, result in decreased demand for homes, and adversely affect our business. We believe continued employment growth, prospective home buyers’ access to financing, and improved consumer confidence will be necessary to increase household formation rates. Improved household formation rates in turn will increase demand for housing and stimulate new construction.

In addition, beginning in 2007, the mortgage markets experienced substantial disruption due to increased defaults, primarily as a result of credit quality deterioration. The disruption resulted in a stricter regulatory environment and reduced availability of mortgages for potential home buyers due to a tight credit market and stricter standards to qualify for mortgages. Mortgage financing and commercial credit for smaller homebuilders as well as for the development of new residential lots continue to be constrained. As the housing industry is dependent upon the economy and employment levels as well as potential home buyers’ access to mortgage financing and homebuilders’ access to commercial credit, it is likely that the housing industry will not fully recover until conditions in the economy and the credit markets improve and unemployment rates decline.

Commodity nature of our products

Many of the building products we distribute, including lumber, OSB, plywood and particleboard, are commodities that are widely available from other manufacturers or distributors with prices and volumes determined frequently based on participants’ perceptions of short-term supply and demand factors. A shortage of capacity or excess capacity in the industry can result in significant increases or declines in market prices for those products, often within a short period of time. Prices of commodity products can also change as a result of national and international economic conditions, labor and freight costs, competition, market speculation, government regulation, and trade policies, as well as from periodic delays in the delivery of lumber and other products. Short-term changes in the cost of these materials, some of which are subject to significant fluctuations, are sometimes passed on to our customers, but our pricing quotation periods and pricing pressure from our competitors may limit our ability to pass on such price changes. For example, from time to time we enter into extended pricing commitments, which could compress our gross margins in periods of inflation.

 

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The following table provides changes in the average composite framing lumber prices (per thousand board feet) and average composite structural panel prices (per thousand square feet). This composite calculation is based on index prices for OSB and plywood as reflected by Random Lengths for the periods noted below.

 

    Year ended December 31,     Three months
ended March 31,
 
    2010
versus
2009
    2010
average
price
    2011
versus
2010
    2011
average
price
    2012
versus
2011
    2012
average
price
    2013
versus
2012
    2013
average
price
 

Increase (decrease) in framing lumber prices

    28   $ 284        (4 )%    $ 272        18   $ 322        28   $ 413   

Increase (decrease) in structural panel prices

    25   $ 324        (10 )%    $ 292        32   $ 384        30   $ 501   

Periods of increasing prices provide the opportunity for higher sales and increased gross profit, while periods of declining prices may result in declines in sales and profitability. In particular, low market prices for wood products over a sustained period can adversely affect our financial condition, operating results and cash flows, as can excessive spikes in market prices. The increase in lumber and panel prices during the year ended December 31, 2012, compared with the same period in 2011, was one component of our improved net sales and gross profit for the year ended December 31, 2012, which increased $182.4 million and $45.8 million, respectively. For further discussion of the impact of commodity prices on historical periods, see “—Operating Results.”

Consolidation of large homebuilders

Over the past ten years, the homebuilding industry has undergone consolidation, and many larger homebuilders have increased their market share. We expect that trend to continue as larger homebuilders have better liquidity and land positions relative to the smaller, less capitalized homebuilders. Our focus is on maintaining relationships and market share with these customers while balancing the competitive pressures we face in our markets with certain profitability expectations. Our sales to production homebuilders, which include many of the country’s largest 100 homebuilders, increased 36.0% during 2012, compared to a 24.3% increase in actual U.S. single-family housing starts for the year. We expect that our ability to maintain strong relationships with the largest builders will be vital to our ability to expand into new markets as well as grow our market share. While we generate significant sales from these homebuilders, our gross margins on sales to them tend to be lower than our gross margins on sales to other market segments, which would impact our gross margins as homebuilding recovers if the market share held by the production homebuilders continues to increase.

Seasonality

Our first and fourth quarters have historically been, and are generally expected to continue to be, adversely affected by weather patterns in some of our markets, causing reduced construction activity. In addition, quarterly results historically have reflected, and are expected to continue to reflect, fluctuations from period to period arising from the following:

 

  Ÿ  

the volatility of lumber prices;

 

  Ÿ  

the cyclical nature of the homebuilding industry;

 

  Ÿ  

general economic conditions in the markets in which we compete;

 

  Ÿ  

the pricing policies of our competitors;

 

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  Ÿ  

the production schedules of our customers; and

 

  Ÿ  

the effects of weather.

The composition and level of working capital typically change during periods of increasing sales as we carry more inventory and receivables, although this is generally offset in part by higher trade payables to our suppliers. Working capital levels typically increase in the second and third quarters of the year due to higher sales during the peak residential construction season. These increases have in the past resulted in negative operating cash flows during this peak season, which historically have been financed through available cash or excess availability on our Revolver. Collection of receivables and reduction in inventory levels following the peak building and construction season have in the past positively impacted cash flow. In the past, we have also utilized our borrowing availability under credit facilities to cover working capital needs.

Our ability to control expenses

We pay close attention to managing our working capital and operating expenses. We employ a LEAN process operating philosophy, which encourages continuous improvement in our core processes to minimize waste, improve customer service, increase expense productivity, improve working capital, and maximize profitability and cash flow. We regularly analyze our workforce productivity to achieve the optimum, cost-efficient labor mix for our facilities. Further, we pay careful attention to our logistics function and have implemented GPS-based technology to improve customer service and improve productivity of our shipping and handling costs.

Mix of products sold

We typically realize greater gross margins on more highly engineered and customized products, or ancillary products that are often purchased based on convenience and are therefore less price sensitive to our customers. For example, sales of lumber & lumber sheet goods tend to generate lower gross margins due to their commodity nature and the relatively low switching costs of sourcing those products from different suppliers. Structural components and millwork & other interior products often generate higher gross profit dollars relative to other products. Prior to the housing downturn, homebuilders were increasingly using structural components in order to realize increased efficiency and improved quality. Shortening cycle time from start to completion was a key imperative of homebuilders during periods of strong consumer demand. During the housing downturn, that trend decelerated as cycle time had less relevance. Customers who traditionally used structural components, for the most part, still do. However, the conversion of customers to this product offering has slowed. We expect this trend to reverse as the residential new construction market continues to strengthen.

Changes in sales mix among construction segments

Our operating results may vary according to the amount and type of products we sell to each of our four primary construction segments: new single-family construction, remodeling, multi-family and light commercial. We tend to realize higher gross margins on sales to the remodeling segment due to the smaller product volumes purchased by those customers, as well as the more customized nature of the projects those customers generally undertake. Gross margins within the new single-family, multi-family and light commercial construction segments can vary based on a variety of factors, including the purchase volumes of the individual customer, the mix of products sold to that customer, the size and selling price of the project being constructed, and the number of upgrades added to the project before or during its construction.

 

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Freight costs and fuel charges

A portion of our shipping and handling costs is comprised of diesel or other fuels purchased for our delivery fleet. According to the U.S. Energy Information Administration, the average retail price per gallon for No. 2 diesel fuel was $2.99, $3.85 and $3.97 during 2010, 2011 and 2012, respectively. For the year ended December 31, 2012, we incurred costs of approximately $8.9 million within selling, general and administrative expenses for diesel and other fuels. Future increases in the cost of fuel, or inbound freight costs for the products we purchase, could impact our operating results and cash flows if we are unable to pass along these cost increases to our customers through increased prices.

Certain factors affecting our financial statements

Discontinued operations and divestitures

During the years ended December 31, 2010, 2011 and 2012, we ceased operations in certain geographic markets due to declines in residential homebuilding throughout the United States and other strategic reasons. We will have no further significant continuing operations in the sold operations and exited geographic markets. The cessation of operations in these markets has been treated as discontinued operations as the markets had distinguishable cash flows and operations that have been eliminated from ongoing operations.

On April 30, 2010, we sold our Commercial Door and Hardware operations (“CDH”) to an external party for proceeds of $26.1 million. CDH consisted of twelve locations in six states and was sold in order to focus on our core residential building materials business. We recognized a loss on the sale of CDH of $0.8 million, net of transaction fees of $1.4 million.

On January 11, 2010, we sold our subsidiary, Universal Supply, LLC (“US”), to an external party for proceeds of $20.8 million. US consisted of eight roofing and siding stores in New Jersey, and was sold in order to focus on our core residential building materials business. We recognized a gain on the sale of US of $1.5 million, net of transaction fees of $1.0 million.

Restructuring expenses

During each of 2010, 2011 and 2012, in addition to discontinuing operations in certain markets as described above, we instituted several store closures and reductions in headcount in continuing markets (the “Restructurings”) in an effort to: (i) strengthen our competitive position; (ii) reduce costs and (iii) improve operating margins within existing markets that management believes have favorable long-term growth demographics.

For the year ended December 31, 2010, we recognized restructuring charges of $7.1 million from continuing operations and $0.1 million from discontinued operations. For the year ended December 31, 2011, we recognized restructuring charges of $1.3 million from continuing operations and $1.0 million from discontinued operations. For the year ended December 31, 2012, we recognized restructuring charges of $2.9 million from continuing operations and $0.1 million from discontinued operations. For the three months ended March 31, 2013, we recognized restructuring charges of $0.1 million from continuing operations. No additional costs are expected to be incurred related to the Restructurings for future periods, other than interest costs associated with remaining restructuring reserves.

Acquisitions

During 2010 and 2012, we acquired three businesses: Bison and NHC in 2010, and TBSG in 2012. As a result of these acquisitions, our revenues for the year ended December 31, 2011 increased

 

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by approximately $43.2 million compared to the year ended December 31, 2010. TBSG was acquired on December 21, 2012 and did not have a material impact on our 2012 operating results. Our revenues for the three months ended March 31, 2013 increased by approximately $4.5 million compared to the three months ended March 31, 2012 as a result of the TBSG acquisition.

Operating results

The following tables set forth our operating results in dollars and as a percentage of net sales for the periods indicated.

 

(dollars in thousands)   2010     2011     2012     Three months
ended
March 31, 2012
    Three months
ended
March 31, 2013
 
                            (as restated)     (as restated)     (as restated)  

Net sales

  $ 751,706        100.0   $ 759,982        100.0   $ 942,398        100.0   $ 187,939        100.0   $ 248,726        100.0

Cost of goods sold

    587,692        78.2        591,017        77.8        727,670        77.2        144,508        76.9        194,936        78.4   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    164,014        21.8        168,965        22.2        214,728        22.8        43,431        23.1        53,790        21.6   

Operating expenses:

                   

Selling, general and administrative expenses

    246,338        32.8        213,036        28.0        221,192        23.5        52,834        28.1        56,802        22.8   

Depreciation expense

    29,337        3.9        11,844        1.5        7,759        0.8        2,067        1.1        1,639        0.7   

Amortization expense

    1,140        0.2        1,457        0.2        1,470        0.2        365        0.2        547        0.2   

Impairment of assets held for sale

    2,944        0.4        580        0.1        361        0.0                               

Restructuring expense

    7,089        0.9        1,349        0.2        2,853        0.3        44        0.0        60        0.0   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

    (122,834     (16.4     (59,301     (7.8     (18,907     (2.0     (11,879     (6.3     (5,258     (2.1

Other income (expenses):

                   

Bargain purchase gain

    11,223        1.5                                                           

Interest expense, net

    (1,575     (0.2     (2,842     (0.4     (4,037     (0.4     (963     (0.5     (1,025     (0.4

Other income (expense), net

    (57     (0.0     (2,120     (0.3     278        0.0        126        0.1        190        0.1   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from continuing operations before income taxes

    (113,243     (15.1     (64,263     (8.5     (22,666     (2.4     (12,716     (6.7     (6,093     (2.4

Income tax benefit

    47,463        6.3        22,332        2.9        8,084        0.9        4,263        2.2        1,879        0.7   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from continuing operations

    (65,780     (8.8     (41,931     (5.5     (14,582     (1.5     (8,453     (4.5     (4,214     (1.7

Income (loss) from discontinued operations, net of tax benefit (provision) of $4,038, $(658), $(52), $79 and $(109), respectively

    (4,214     (0.6     (202     (0.0     49        0.0        (113     (0.1     157        0.1   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

  $ (69,994     (9.3 )%    $ (42,133     (5.5 )%    $ (14,533     (1.5 )%    $ (8,566     (4.6 )%    $ (4,057     (1.6 )% 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Three months ended March 31, 2013 compared to three months ended March 31, 2012

Net sales

For the three months ended March 31, 2013, net sales increased $60.8 million, or 32.3%, to $248.7 million from $187.9 million during the three months ended March 31, 2012, driven primarily by increases in housing starts in the markets we serve, as well as inflation in commodity products. According to the U.S. Census Bureau, single-family housing starts, which were the primary driver for approximately 78% of our sales for the three months ended March 31, 2013, increased 29.0% for the quarter, compared with the three months ended March 31, 2012. We estimate our sales volume increased approximately 21.1%, including approximately $4.5 million in net sales from 2012 acquisitions, while commodity price inflation resulted in an additional 11.2% increase in sales for the three months ended March 31, 2013 compared to the three months ended March 31, 2012. Increases in net sales from our locations in Texas, Georgia and North Carolina represented approximately 70% of the total increase in net sales for the three months ended March 31, 2013 compared to the three months ended March 31, 2012.

 

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The following table shows sales classified by major product category.

 

     Three months ended
March 31, 2012
    Three months ended
March 31, 2013
       
(dollars in thousands)    Sales      % of Sales     Sales      % of Sales     % Change  

Structural components

   $ 21,578         11.5   $ 30,565         12.3     41.6

Millwork and other interior products

     37,135         19.8        47,415         19.1        27.7   

Lumber & lumber sheet goods

     61,160         32.5        93,688         37.7        53.2   

Windows and other exterior products

     43,134         22.9        48,840         19.6        13.2   

Other building products & services

     24,932         13.3        28,218         11.3        13.2   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total sales

   $ 187,939         100.0   $ 248,726         100.0     32.3
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Increased sales volume was achieved across all product categories. Average selling prices for lumber and lumber sheet goods were approximately 33.7% higher for the three months ended March 31, 2013 compared to the three months ended March 31, 2012. This commodity price inflation has resulted in sales growth for lumber & lumber sheet goods exceeding that of our other product categories. Windows and other exterior products, and other building products & services include subcategories, such as roofing, siding and hardware, which are driven more by the repair and remodeling market and therefore experienced slower growth in sales volumes than other product categories.

Cost of goods sold

For the three months ended March 31, 2013, cost of goods sold increased $50.4 million, or 34.9%, to $194.9 million from $144.5 million during the three months ended March 31, 2012. We estimate our cost of sales increased approximately 22.5% as a result of increased sales volumes, while commodity cost inflation resulted in an additional 12.4% increase in cost of goods sold.

Gross profit

For the three months ended March 31, 2013, gross profit increased $10.4 million, or 23.9%, to $53.8 million from $43.4 million for the three months ended March 31, 2012, driven primarily by increased sales volumes. Our gross profit as a percentage of net sales (“gross margin”) decreased to 21.6% for the three months ended March 31, 2013 from 23.1% for the three months ended March 31, 2012, primarily as a result of the increased percentage of net sales attributable to lumber & lumber sheet goods.

Operating expenses

For the three months ended March 31, 2013, selling, general and administrative expenses increased $4.0 million, or 7.5%, to $56.8 million from $52.8 million for the three months ended March 31, 2012. This was driven primarily by variable costs to serve higher sales volumes, such as sales commissions, shipping and handling costs and other variable compensation, which increased by $3.3 million in the aggregate for the three months ended March 31, 2013 as compared to the three months ended March 31, 2012.

For the three months ended March 31, 2013, depreciation expense decreased $0.4 million, or 20.7%, to $1.6 million from $2.1 million during the three months ended March 31, 2012, driven primarily by a reduction in the size of our distribution fleet and the full depreciation of certain fixed assets.

For the three months ended March 31, 2013, amortization expense increased to $0.5 million from $0.4 million for the three months ended March 31, 2012, due primarily to amortization of intangible assets acquired in the TBSG acquisition.

 

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For the three months ended March 31, 2013, restructuring expense was $0.1 million compared to $0.0 million for the three months ended March 31, 2012. The expense related primarily to interest accretion on our restructuring reserves.

Other income (expenses)

Interest expense. For the three months ended March 31, 2013, interest expense of $1.0 million was unchanged from $1.0 million for the three months ended March 31, 2012, which was a result of higher average borrowings offset by lower interest rates.

Other income, net. For the three months ended March 31, 2013, other income, net was $0.2 million compared to $0.1 million for the three months ended March 31, 2012, which was a result of increased miscellaneous income.

Income tax benefit from continuing operations

For the three months ended March 31, 2013, income tax benefit from continuing operations decreased $2.4 million, or 55.8%, to $1.9 million from $4.3 million for the three months ended March 31, 2012, driven primarily by a reduction in our loss from continuing operations before income taxes. Our effective tax rate for the three months ended March 31, 2013 was 30.8% compared to 33.5% for the three months ended March 31, 2012. The decrease in the effective tax rate is primarily due to the domestic manufacturing deduction tax benefit which was not available in the prior year due to the Company’s tax operating loss position.

2012 compared to 2011

Net sales

For the year ended December 31, 2012, net sales increased $182.4 million, or 24.0%, to $942.4 million from $760.0 million during the year ended December 31, 2011, driven primarily by increases in housing starts in the markets we serve, as well as inflation in commodity products. According to the U.S. Census Bureau, single-family housing starts, which were the primary driver for approximately 75% of our 2012 net sales, increased 24.3% for the year, compared with 2011. We estimate our sales volume increased approximately 19.5%, while commodity price inflation resulted in an additional 4.5% increase in net sales during 2012 compared to 2011. Increases in net sales from our locations in Texas, Utah, Georgia and North Carolina represented approximately 75% of the total increase in net sales for 2012 compared to 2011.

The following table shows net sales classified by major product category.

 

     2011     2012        
(dollars in thousands)    Sales      % of Sales     Sales      % of Sales     % Change  

Structural components

   $ 87,542         11.5   $ 106,745         11.3     21.9

Millwork & other interior products

     143,128         18.8        178,449         18.9        24.7   

Lumber & lumber sheet goods

     247,299         32.6        333,952         35.5        35.0   

Windows & other exterior products

     178,361         23.5        202,532         21.5        13.6   

Other building products & services

     103,652         13.6        120,720         12.8        16.5   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total net sales

   $ 759,982         100.0   $ 942,398         100.0     24.0
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Increased sales volume was achieved across all product categories. Average selling prices for lumber & lumber sheet goods were approximately 13.9% higher in 2012, compared to 2011. During 2012, prices rose to a level not seen on a consistent basis since 2005 and 2006. This commodity price inflation has resulted in net sales growth for lumber & lumber sheet goods exceeding that of our other

 

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product categories. Windows & other exterior products, and other building products & services include subcategories, such as roofing, siding and hardware, which are driven more by the repair and remodeling market and therefore experienced slower growth in net sales volumes than other product categories.

Cost of goods sold

For the year ended December 31, 2012, cost of goods sold increased $136.7 million, or 23.1%, to $727.7 million from $591.0 million during the year ended December 31, 2011. We estimate that our cost of sales increased approximately 18.6% as a result of increased sales volumes, while commodity cost inflation resulted in an additional 4.9% increase in cost of goods sold.

Gross profit

For the year ended December 31, 2012, gross profit increased $45.8 million, or 27.1%, to $214.7 million from $169.0 million during the year ended December 31, 2011, driven primarily by increased sales volumes. Our gross margin increased to 22.8% in 2012 from 22.2% in 2011, primarily as a result of spreading fixed costs over a larger sales base and operational improvements.

Operating expenses

For the year ended December 31, 2012, selling, general and administrative expenses increased $8.2 million, or 3.8%, to $221.2 million from $213.0 million during the year ended December 31, 2011. This was driven primarily by variable costs to serve higher sales volumes, such as sales commissions, shipping and handling costs and other variable compensation, which increased by $7.3 million in the aggregate in 2012 as compared to the prior year.

For the year ended December 31, 2012, depreciation expense decreased $4.1 million, or 34.5%, to $7.8 million from $11.8 million during the year ended December 31, 2011, driven primarily by a reduction in the size of our distribution fleet and the full depreciation of certain fixed assets.

For the year ended December 31, 2012, amortization expense of $1.5 million was unchanged from $1.5 million during the year ended December 31, 2011, and represented the amortization of intangible assets arising from the acquisitions of certain businesses in prior years.

For the year ended December 31, 2012, impairment of assets held for sale of $0.4 million decreased from $0.6 million during the year ended December 31, 2011, driven primarily by a reduction in the number of assets identified as excess or underutilized and offered for sale.

For the year ended December 31, 2012, restructuring expense of $2.9 million increased from $1.3 million during the year ended December 31, 2011. This increase resulted primarily from management’s determination that subleasing closed properties could no longer be reasonably assumed, which resulted in a revised estimate of our restructuring reserves.

Other income (expenses)

Interest expense.    For the year ended December 31, 2012, interest expense increased $1.2 million, or 42.0%, to $4.0 million from $2.8 million during the year ended December 31, 2011, driven primarily by increased average daily borrowings under our revolving line of credit. The increase in average daily borrowings was primarily the result of cash used by operations of $7.0 million and $12.2 million in 2011 and 2012, respectively, the redemption of Class A preferred shares and Class A common shares for $25.0 million in 2011, and the redemption of Class B preferred shares and

 

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payment of dividends totaling $23.0 million in 2012. These uses, partially offset by cash provided from other activities, increased the balance on the Revolver by $20.9 million in 2011 and $38.4 million in 2012.

Other income (expense), net.    For the year ended December 31, 2012, other income, net was $0.3 million, compared to other expense, net of $2.1 million during the year ended December 31, 2011. This change was driven primarily by a reduction in expense associated with the write-off of a tax indemnification asset.

Income tax benefit from continuing operations

For the year ended December 31, 2012, income tax benefit from continuing operations decreased $14.2 million, or 63.7%, to $8.1 million from $22.3 million during the year ended December 31, 2011, driven primarily by a reduction in our loss from continuing operations before income taxes. Our effective tax rate for 2012 was 35.7% compared to 34.8% for 2011.

2011 compared to 2010

Net sales

For the year ended December 31, 2011, net sales increased $8.3 million, or 1.1%, to $760.0 million from $751.7 million during the year ended December 31, 2010. According to the U.S. Census Bureau, single-family housing starts, which were the primary driver for approximately 71% of our 2011 net sales, decreased 8.6% for the year, compared with 2010. We estimate our sales volume increased approximately 3.0%, including approximately $43.2 million in net sales from 2010 acquisitions, while commodity price deflation resulted in a 1.9% decrease in net sales during 2011 compared to 2010.

The following table shows net sales classified by major product category.

 

     2010     2011        
(dollars in thousands)    Sales      % of sales     Sales      % of sales     % change  

Structural components

   $ 89,885         12.0   $ 87,542         11.5     (2.6 )% 

Millwork & other interior products

     137,315         18.3        143,128         18.8        4.2   

Lumber & lumber sheet goods

     237,003         31.5        247,299         32.6        4.3   

Windows & other exterior products

     184,007         24.4        178,361         23.5        (3.1

Other building products & services

     103,496         13.8        103,652         13.6        0.2   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total net sales

   $ 751,706         100.0   $ 759,982         100.0     1.1
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Sales volumes for millwork & other interior products, lumber & lumber sheet goods and other building products & services increased primarily as a result of incremental net sales from 2010 acquisitions. Sales for structural components and windows & other exterior products declined primarily as a result of the decline in single-family housing starts from 2010 to 2011.

Cost of goods sold

For the year ended December 31, 2011, cost of goods sold increased $3.3 million, or 0.6%, to $591.0 million from $587.7 million during the year ended December 31, 2010, driven primarily by increased sales volumes.

Gross profit

For the year ended December 31, 2011, gross profit increased $5.0 million, or 3.0%, to $169.0 million from $164.0 million during the year ended December 31, 2010, driven primarily by increased sales volumes and a reduction in depreciation expense within our cost of goods sold. Our gross margin

 

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increased to 22.2% in 2011 from 21.8% in 2010, primarily due to a decrease in depreciation expense within cost of goods sold of $2.9 million, resulting from the full depreciation of certain fixed assets and a reduction in the number of manufacturing operations during 2010.

Operating expenses

For the year ended December 31, 2011, selling, general and administrative expenses decreased $33.3 million, or 13.5%, to $213.0 million from $246.3 million during the year ended December 31, 2010, driven primarily by the benefits from restructuring and other cost reduction initiatives undertaken in 2010 and 2011.

For the year ended December 31, 2011, depreciation expense decreased $17.5 million, or 59.6%, to $11.8 million from $29.3 million during the year ended December 31, 2010, driven primarily by the full depreciation of certain fixed assets and to a lesser extent, the reduction in the size of our distribution fleet.

For the year ended December 31, 2011, amortization expense increased $0.3 million, or 27.8%, to $1.5 million from $1.1 million during the year ended December 31, 2010, driven primarily by the full year impact of the amortization of intangible assets arising from the acquisitions of NHC and Bison in 2010.

For the year ended December 31, 2011, impairment of assets held for sale of $0.6 million decreased from $2.9 million during the year ended December 31, 2010, driven primarily by a reduction in the number of new assets identified as excess or underutilized and offered for sale.

For the year ended December 31, 2011, restructuring expense of $1.3 million decreased from $7.1 million during the year ended December 31, 2010. This decrease resulted primarily from a reduction in the number of store closures and workforce reductions that give rise to restructuring expense.

Other income (expenses)

Interest expense.    For the year ended December 31, 2011, interest expense increased $1.3 million, or 80.4%, to $2.8 million from $1.6 million during the year ended December 31, 2010, driven primarily by increased average daily borrowings under our revolving line of credit. The increase in average daily borrowings was primarily the result of cash used by operations of $58.0 million and $7.0 million in 2010 and 2011, respectively, the redemption of Class B preferred shares and payment of dividends totaling $32.3 million in 2010, and the redemption of Class A preferred shares and Class A common shares for $25.0 million in 2011. These uses, partially offset by cash provided by other activities, reduced cash and cash equivalents by $70.3 million in 2010, and increased the balance on the Revolver by $13.0 million in 2010 and $20.9 million in 2011.

Other income (expense), net.    For the year ended December 31, 2011, other expense, net increased $2.0 million, to $2.1 million from $0.1 million during the year ended December 31, 2010. This was driven primarily by a decrease in other income associated with legal settlement proceeds received in 2010, and partially offset by a decrease in other expense associated with the write-off of a tax indemnification asset.

Income tax benefit from continuing operations

For the year ended December 31, 2011, income tax benefit decreased $25.1 million, or 52.9%, to $22.3 million from $47.5 million during the year ended December 31, 2010, driven primarily by a

 

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reduction in our losses from continuing operations before income taxes. Our effective tax rate for 2011 was 34.8% compared to 41.9% for 2010. The decrease in our effective tax rate was primarily due to an increase in our valuation allowance and certain nondeductible (permanent) items in 2011 as compared to 2010.

Liquidity and capital resources

Our primary capital requirements are to fund working capital needs and operating expenses, meet required interest and principal payments, and fund capital expenditures. Since 2010, our capital resources have primarily consisted of cash and cash equivalents and borrowings under our Revolver.

The homebuilding industry, and therefore our business, experienced a significant downturn that started in 2006. However, activity improved as 2012 saw the first meaningful increase in housing starts since the downturn began. We are expecting increased stability and continued improvement in the housing industry in 2013. Beyond 2013, it is difficult for us to predict what will happen as our industry is dependent on a number of factors, including national economic conditions, employment levels, the availability of credit for homebuilders and potential home buyers, the level of foreclosures, existing home inventory, and interest rates. Due to the effects of the significant housing industry downturn, our operations incurred operating losses and used cash for operations for the years ended December 31, 2010, 2011 and 2012 and the three months ended March 31, 2012 and 2013. We are not expecting our cash flows from operations to be positive in 2013 due primarily to increased working capital requirements related to increasing revenues.

Our liquidity at March 31, 2013 was $42.2 million, which includes $5.8 million in cash and cash equivalents and $36.4 million of unused borrowing capacity under our Revolver.

We believe that our cash flows from operations, combined with our current cash levels, the proceeds from this offering and available borrowing capacity, will be adequate to fund debt service requirements and provide cash, as required, to support our ongoing operations, capital expenditures, lease obligations and working capital for at least the next 12 months.

Historical cash flow information

Working capital

Working capital (current assets excluding cash and cash equivalents and restricted assets minus current liabilities excluding our Revolver) was $97.9 million, $68.6 million and $81.3 million as of December 31, 2010, 2011 and 2012, respectively, and $96.5 million as of March 31, 2013, as summarized in the following table.

 

     As of December 31,     March 31,
2013
 
     2010     2011     2012    
(dollars in thousands)                (as restated)     (as restated)  

Working capital:

    

Accounts receivable, net

   $ 66,283      $ 65,206      $ 90,297      $ 104,611   

Inventories, net

     64,275        49,682        73,918        95,560   

Income taxes receivable (payable)

     18,091        9,171        (2,939     (3,223

Accounts payable

     (46,181     (45,019     (74,231     (88,757

Other current assets (liabilities), net

     (4,585     (10,399     (5,740     (11,534
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 97,883      $ 68,641      $ 81,305      $ 96,657   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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Accounts receivable, net, declined $1.1 million from December 31, 2010 to December 31, 2011 and increased $25.1 million from December 31, 2011 to December 31, 2012, primarily as a result of changes in net sales. The increase in accounts receivable, net, of $14.3 million from December 31, 2012 to March 31, 2013 is primarily a result of higher net sales and seasonal increases that are typical following the winter months. Days sales outstanding at December 31, 2010, 2011 and 2012 and March 31, 2013 (measured against net sales in the current fiscal quarter of each period) were approximately 36, 33, 33 and 38 days, respectively.

Inventories, net, declined $14.6 million from December 31, 2010 to December 31, 2011 due to a reduction in the number of days of inventory on hand and an approximately 3% decline in the Random Lengths composite lumber index in the fourth quarter of 2011 compared to the fourth quarter of 2010. Inventories, net, increased $24.2 million from December 31, 2011 to December 31, 2012 due to increases in net sales and an approximately 33% and 44% increase in the Random Lengths composite lumber and structural panel indices, respectively, in the fourth quarter of 2012 compared to the fourth quarter of 2011. Inventories, net, increased $21.7 million from December 31, 2012 to March 31, 2013 due to increases in net sales and an approximately 19% and 17% increase in the Random Lengths composite lumber and structural panel indices, respectively, in the first quarter of 2013 compared to the fourth quarter of 2012. In response to rising commodity costs, during the fourth quarter of 2012 and the first quarter of 2013, we purchased additional commodity inventory in excess of immediate needs in order to maintain a lower inventory cost basis. Inventory days on hand at December 31, 2010, 2011 and 2012 and March 31, 2013 (measured against cost of goods sold in the current fiscal quarter of each period) were approximately 43, 32, 35 and 44 days, respectively.

Income taxes receivable declined $8.9 million from December 31, 2010 to December 31, 2011 due to the collection of tax refunds related to net operating loss carrybacks totaling $24.8 million in 2011 and a reduction in the taxable losses generated by us in the tax year ended March 31, 2012 as compared to the tax year ended March 31, 2011. The change from income taxes receivable of $9.2 million at December 31, 2011 to income taxes payable of $2.9 million at December 31, 2012 primarily resulted from the collection of tax refunds totaling $16.4 million in 2012 and a $2.9 million liability as of December 31, 2012 for taxes, interest and penalties related to certain IRS audits. Income taxes payable increased $0.3 million from December 31, 2012 to March 31, 2013 due to increased liabilities related to certain IRS audits. See note (15) to our audited financial statements included elsewhere in this prospectus.

Accounts payable declined $1.2 million from December 31, 2010 to December 31, 2011, increased $29.2 million from December 31, 2011 to December 31, 2012, and increased $14.5 million from December 31, 2012 to March 31, 2013, in each case, primarily as a result of changes in the volume of inventory purchases leading up to each balance sheet date.

Other current assets (liabilities), net, increased $5.8 million from December 31, 2010 to December 31, 2011 and declined $4.7 million from December 31, 2011 to December 31, 2012 primarily as a result of a $5.0 million reserve for future share issuance to Gores Holdings at December 31, 2011. On January 26, 2012, the Company issued Gores Holdings 5,000 Class C convertible preferred shares to satisfy this liability. See notes (11), (14) and (17) to our audited financial statements included elsewhere in this prospectus. Other current assets (liabilities), net, increased $5.8 million from December 31, 2012 to March 31, 2013 primarily due to an increase in accrued expenses due to seasonality.

 

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Cash flows from operating activities

Net cash used by operating activities was $58.0 million during 2010, $7.0 million during 2011, $12.2 million during 2012, and $10.9 million and $17.6 million for the three months ended March 31, 2012 and 2013, respectively, as summarized in the following table.

 

     Year ended December 31,     Three months ended
March 31,
 
     2010     2011     2012     2012     2013  
(dollars in thousands)                (as restated)     (as restated)     (as restated)  

Operating cash flows:

      

Net loss

   $ (69,994   $ (42,133   $ (14,533   $ (8,566   $ (4,057

Non-cash expenses

     47,691        21,014        16,790        4,265        3,759   

(Gain) loss on bargain purchase and sale of assets and operations

     (12,351     (2,609     169        (249     2   

Change in deferred income taxes

     (25,046     (5,926     (3,633     158        (1,874

Change in working capital and other

     1,701        22,653        (11,036     (6,508     (15,471
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ (57,999   $ (7,001   $ (12,243   $ (10,900   $ (17,641
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash used by operating activities increased by $6.7 million for the three months ended March 31, 2013 as compared to the three months ended March 31, 2012 primarily due to the following:

 

  Ÿ  

Net loss declined by $4.5 million as discussed in “Operating Results” above.

 

  Ÿ  

Non-cash expenses declined by $0.5 million due primarily to a reduction in depreciation expense of $0.3 million, which was driven by a reduction in the size of our distribution fleet and the full depreciation of certain fixed assets.

 

  Ÿ  

Gain on sale of assets declined from $0.2 million for the three months ended March 31, 2012, which resulted from disposals of excess equipment and vehicles, to $0.0 million for the three months ended March 31, 2013.

 

  Ÿ  

Change in deferred income taxes declined by $2.0 million due to a reduction in the timing differences between our losses before income taxes under GAAP and our taxable income. The reduction in timing differences primarily resulted from the decrease in depreciation expense for the three months ended March 31, 2013 compared to the three months ended March 31, 2012.

 

  Ÿ  

Changes in working capital and other declined by $9.0 million due primarily to the increase in working capital discussed above.

Net cash used by operating activities increased by $5.2 million in 2012 as compared to 2011 primarily due to the following:

 

  Ÿ  

Net loss declined by $27.6 million as discussed in “Operating Results” above.

 

  Ÿ  

Non-cash expenses declined by $4.2 million due primarily to a reduction in depreciation expense of $5.0 million primarily resulting from the full depreciation of certain fixed assets.

 

  Ÿ  

Loss on sales of assets of $0.2 million in 2012 declined from a gain of $2.6 million in 2011 as a result of fewer disposals of excess equipment and vehicles.

 

  Ÿ  

Change in deferred income taxes declined by $2.3 million due to a reduction in the timing differences between our losses before income taxes under GAAP and our taxable income. The reduction in timing differences primarily resulted from the decrease in depreciation expense from 2011 to 2012.

 

  Ÿ  

Changes in working capital and other decreased by $33.7 million due primarily to the increase in working capital during 2012 discussed above.

 

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Net cash used by operating activities declined by $51.0 million in 2011 as compared to 2010 primarily due to the following:

 

  Ÿ  

Net loss declined by $27.9 million as discussed in “Operating results” above.

 

  Ÿ  

Non-cash expenses declined by $26.7 million due to a reduction in depreciation expense of $23.6 million resulting from the full depreciation of certain fixed assets and a reduction in the impairment of assets held for sale of $3.0 million, which occurred primarily in 2010 due to declines in the value of certain real estate held for sale and the discontinuation of certain operations.

 

  Ÿ  

Gain on bargain purchase of $11.2 million and gain on sale of operations of $3.1 million occurred in 2010 resulting from the purchase of NHC and the sale of certain operations. See notes (4) and (5) to our audited financial statements included elsewhere in this prospectus. Gain on the sale of assets of $2.6 million in 2011 primarily resulted from the sale of excess equipment and delivery vehicles.

 

  Ÿ  

Change in deferred income taxes declined by $19.1 million due to a reduction in the timing differences between our losses before income taxes under GAAP and our taxable income. The reduction in timing differences primarily resulted from the decrease in depreciation expense as well as the sale of certain operations in 2010.

 

  Ÿ  

Changes in working capital and other increased by $21.0 million due primarily to the decrease in working capital during 2011 discussed above.

Cash flows from investing activities

Net cash provided by (used in) investing activities was $8.1 million during 2010, $7.3 million during 2011, ($4.9) million during 2012, and $1.2 million and $1.5 million for the three months ended March 31, 2012 and 2013, respectively, as summarized in the following table.

 

     Year ended December 31,     Three months ended
March 31,
 
     2010     2011     2012     2012     2013  
                 (as restated)     (as restated)     (as restated)  
(dollars in thousands)              

Investing cash flows:

      

Purchases of property and equipment

   $ (2,506   $ (1,339   $ (2,741   $ (705   $ (374

Purchases of businesses

     (49,848            (6,582              

Proceeds from real estate, property and equipment

     23,513        6,106        1,393        483        7   

Proceeds from sale of operations

     46,831                               

Change in restricted assets

     (9,897     2,555        3,069        1,387        1,833   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 8,093      $ 7,322      $ (4,861   $ 1,165      $ 1,466   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash used for the purchase of property and equipment in 2010, 2011 and 2012 and the three months ended March 31, 2013 and 2012 primarily resulted from the replacement of certain aged vehicles and equipment in order to minimize maintenance costs and asset down time.

Cash used for the purchase of businesses resulted from the acquisitions of Bison and NHC in 2010 and TBSG in 2012, and also included an advance of $0.9 million to the sellers of TBSG against future earnout payments. See note (4) of our audited financial statements included elsewhere in this prospectus.

 

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Cash provided by the sale of real estate, property and equipment declined by $17.4 million from 2010 to 2011 and declined by $4.7 million from 2011 to 2012. The proceeds generated in 2010 primarily resulted from the sale of excess or underutilized assets arising from our restructuring and business optimization activities. In 2011 and 2012, as restructuring activities declined and sales volumes increased, fewer excess or underutilized assets were identified for disposal.

Cash provided by the sale of operations resulted from the disposal of CDH and US. See note (5) of our audited financial statements included elsewhere in this prospectus.

Cash used by restricted assets in 2010 resulted primarily from cash deposits to pre-fund expected losses for self-insured casualty and health claims, deposits for surety bonds, and proceeds from the sale of operations which were held in escrow. Cash provided by restricted assets in 2011 and 2012 and the three months ended March 31, 2013 and 2012 resulted from the use of those deposits to pay claims and the release of excess deposits and escrow funds to the Company. See note (3) of our audited financial statements included elsewhere in this prospectus.

Cash flows from financing activities

Net cash provided by (used in) financing activities was ($20.4) million during 2010, $0.1 million during 2011, $14.8 million during 2012, and $10.0 million and $19.2 million for the three months ended March 31, 2012 and 2013, respectively, as summarized in the following table.

 

     Year ended December 31,     Three months
ended
March 31,
 
     2010     2011     2012     2012     2013  
                 (as restated)     (as restated)     (as restated)  
(dollars in thousands)              

Financing cash flows:

      

Proceeds from Revolver, net of repayments

   $ 13,000      $ 20,850      $ 38,368      $ 10,118      $ 20,266   

Redemption of Class A junior preferred and Class A common stock

            (25,000                     

Dividends paid and redemption of Class B senior preferred stock

     (32,300            (23,000              

Cash received for Class C convertible preferred stock

            5,000                        

Payments on capital leases and other

     (1,115     (712     (530     (79     (1,027
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ (20,415   $ 138      $ 14,838      $ 10,039      $ 19,239