Revenue

Adoption of Topic 606

On January 1, 2018, the Company adopted Topic 606 using the modified retrospective method applied to those contracts that were not completed as of January 1, 2018. Results for reporting periods beginning after January 1, 2018 are presented under Topic 606, while prior period amounts are not adjusted and continue to be reported in accordance with the Company’s historic accounting policy under Topic 605, Revenue Recognition.

The impact of adopting Topic 606 was not material to the Company’s results of operations for the three months ended March 31, 2018 and as such, comparability between periods is not materially affected.

Beginning January 1, 2018, the Company has presented contract assets and contract liabilities on its unaudited condensed consolidated balance sheets, determined on a contract-by-contract basis. Contract assets contain rights to payment that are conditional on something other than the passage of time, such as retainage, which were historically presented within accounts receivable, net of allowances, as well as the balances that were historically presented within costs in excess of billings on uncompleted contracts on the Company’s consolidated balance sheets. Contract liabilities contain advances from customers, which were historically presented within accrued expenses and other liabilities, as well as the balances that were historically presented within billings in excess of costs on uncompleted contracts on the Company’s consolidated balance sheets. Refer to further discussion of the Company’s contract assets and contract liabilities below.

Additionally, beginning January 1, 2018, the Company has presented a return asset, which represents inventory the Company expects to receive from customers related to estimated sales returns, within prepaid expenses and other current assets on the Company’s unaudited condensed consolidated balance sheets. This balance was previously presented within inventories, net on the Company’s consolidated balance sheets. Conversely, the Company has recorded a refund liability for estimated returns of inventory within accrued expenses and other liabilities on the Company’s unaudited condensed consolidated balance sheets. These balances were previously presented as an allowance within accounts receivable, net of allowances on the Company’s consolidated balance sheets.

The following table reflects the cumulative impact of adoption of Topic 606. As the cumulative impact of adopting Topic 606 on the Company’s historical results of operations was less than $0.1 million, the Company did not record an adjustment to opening retained earnings as of January 1, 2018.



(in thousands)	December 31, 2017		Adoption of Topic 606			January 1, 2018
Accounts receivable, net of allowances	$	322,892	$	(8,884	)	$	314,008
Inventories, net	309,060		(3,128		)	305,932
Contract assets	—		38,557			38,557
Costs in excess of billings on uncompleted contracts	28,738		(28,738		)	—
Prepaid expenses and other current assets	57,949		3,128			61,077
Total assets	1,473,350		935			1,474,285

Accrued expenses and other liabilities	96,262		(6,967		)	89,295
Contract liabilities	—		26,330			26,330
Billings in excess of costs on uncompleted contracts	18,428		(18,428		)	—
Total liabilities	726,451		935			727,386

Total liabilities and stockholders' equity	$	1,473,350	$	935		$	1,474,285

The following table reflects the impact of adoption of Topic 606 on the Company’s financial position as of March 31, 2018.



(in thousands)	Balances without Adoption of Topic 606		Adjustments			As Reported
Accounts receivable, net of allowances	$	361,631	$	(7,882	)	$	353,749
Inventories, net	342,735		(3,968		)	338,767
Contract assets	—		36,613			36,613
Costs in excess of billings on uncompleted contracts	26,912		(26,912		)	—
Prepaid expenses and other current assets	51,087		3,968			55,055
Total assets	1,541,689		1,819			1,543,508

Accrued expenses and other liabilities	89,700		(6,648		)	83,052
Contract liabilities	—		29,089			29,089
Billings in excess of costs on uncompleted contracts	20,622		(20,622		)	—
Total liabilities	778,114		1,819			779,933

Total liabilities and stockholders' equity	$	1,541,689	$	1,819		$	1,543,508

Nature of goods and services

A performance obligation is a promise in a contract to transfer a distinct good or service to the customer, and is the unit of account in Topic 606. The Company’s building products contracts typically contain a promise to supply multiple distinct products and thus, they generally contain multiple performance obligations under Topic 606. Depending on the nature of the promises within the Company’s construction services contracts and whether they are distinct under Topic 606, there may be a single performance obligation or multiple performance obligations. For contracts with multiple performance obligations, the contract’s transaction price is allocated to each distinct performance obligation based on the standalone selling price of each distinct good or service, which is generally determined based on the prices charged to customers.

The Company recognizes revenue for its building products contracts when control of the promised goods (the performance obligations) is transferred to the Company’s customers. This generally occurs at a point in time when the products are delivered and the customer obtains physical possession, legal title and the risks and rewards of ownership. However, for certain product offerings, products are customized to customer specifications and the customer benefits from the Company’s performance over time as deliveries are made. As such, the Company has determined that an output method based on units delivered best depicts the transfer of control to the customer.

The Company generally recognizes revenue for its construction services contracts over time using cost based input methods. Periodic estimates of progress towards completion are made based on either a comparison of labor costs incurred to date with total estimated contract labor costs or total costs incurred to date with total estimated contract costs. Incurred costs represent work performed, which correspond and best depict transfer of control to the customer.

Contract revenues and contract costs to be recognized are dependent on the accuracy of estimates, including quantities of materials, labor productivity and other cost estimates. Historically, the Company has made reasonable estimates of the extent of progress towards completion and contract completion costs. Due to uncertainties inherent in the estimation process, it is possible that actual completion costs may vary from estimates. Revenue recognized for performance obligations satisfied over time for the three months ended March 31, 2018 represented approximately 27% of total revenues for the period.

Estimated losses on uncompleted contracts and changes in contract estimates reflect the Company's best estimate of probable losses of unbilled receivables, and are recognized in the period such revisions are known and can be reasonably estimated. These estimates are recognized in cost of sales. Estimated losses on uncompleted contracts and changes in contract estimates are established by assessing estimated costs to complete, change orders and claims for uncompleted contracts. Assumptions for estimated costs to complete include material prices, labor costs, labor productivity and contract claims. Such estimates are inherently uncertain and it is possible that actual completion costs may vary from these estimates.

All sales recognized are net of allowances for discounts and estimated returns, based on historical experience. Taxes assessed by governmental authorities that are directly imposed on the Company’s revenue-producing transactions are excluded from sales. The Company accounts for shipping and handling costs associated with its contracts as a fulfillment cost and expenses these as incurred within selling, general and administrative expenses on the unaudited condensed consolidated statements of operations.

Disaggregation of revenue

The following tables present the Company’s net sales disaggregated by major product category and customer type. As noted above, prior period amounts have not been adjusted under the modified retrospective method and continue to be reported in accordance with the Company’s historic accounting policy under Topic 605.

The following table shows net sales classified by major product category for the three months ended March 31, 2018 and 2017:



	Three Months Ended March 31,
(in thousands)	2018		2017
Structural components	$	135,829	$	109,891
Lumber & lumber sheet goods	288,086		244,436
Millwork, doors & windows	229,518		210,751
Other building products & services	180,769		192,622
Total net sales	$	834,202	$	757,700

The following table reflects the Company’s estimate of net sales by each customer type for the three months ended March 31, 2018 and 2017:



	Three Months Ended March 31,
(in thousands)	2018		2017
Single-family homebuilders	$	637,308	$	559,589
Remodeling contractors	95,451		82,075
Multi-family, commercial & other contractors	101,443		116,036
Total net sales	$	834,202	$	757,700

Contract balances

The timing of revenue recognition, invoicing and cash collection affects receivables, contract assets and contract liabilities on the Company’s unaudited condensed consolidated balance sheets. For building products contracts that contain performance obligations satisfied at a point in time, the Company recognizes revenue upon satisfaction of the performance obligation and then bills the customer, resulting in a receivable. For building products contracts that contain performance obligations satisfied over time, the Company recognizes revenue as the performance obligation is satisfied, but prior to billing, resulting in an unbilled receivable, as the Company has an unconditional right to payment.

For the Company’s construction services contracts, amounts are generally billed as work progresses in accordance with agreed-upon contractual terms. Revenue is also recognized over time as the performance obligations are satisfied, which can result in contract assets and liabilities, on a contract-by-contract basis, due to timing differences between billing and revenue recognition. Contract assets include unbilled amounts when the revenue recognized exceeds the amount billed to the customer. Conversely, contract liabilities include amounts that have been billed to the customer in excess of the revenue recognized.

At times, the Company will have a right to payment from previous performance that is conditional on something other than passage of time, such as retainage, which creates a contract asset. Conversely, the Company may receive advances from customers prior to the Company’s performance, which creates a contract liability.

Contract assets are reclassified to a receivable when the right to consideration becomes unconditional. The Company’s terms generally provide for payment within 30 days of being invoiced. On occasion, when necessary to compete in certain circumstances, the Company will offer extended payment terms, which do not exceed one year.

The following table reflects the Company’s contract balances as of March 31, 2018 and January 1, 2018, the date that the Company adopted Topic 606:



(in thousands)	March 31, 2018		January 1, 2018		Change
Receivables, including unbilled receivables presented in prepaid expenses and other current assets	$	360,696	$	321,418	$	39,278
Contract assets	36,613		38,557		(1,944		)
Contract liabilities	$	29,089	$	26,330	$	2,759

During the three months ended March 31, 2018, the Company’s contract assets decreased by $1.9 million and the Company’s contract liabilities increased by $2.8 million. The change in contract assets and liabilities was primarily due to the timing of revenue recognition, as the balances were not materially impacted by any other factors. For the three months ended March 31, 2018, the Company recognized revenue of $21.6 million that was included in contract liabilities as of January 1, 2018. Revenue recognized related to performance obligations that were satisfied or partially satisfied in previous periods was not material for the three months ended March 31, 2018.

Practical Expedients

As permitted by Topic 606, the Company has elected to expense any incremental costs of obtaining a contract as incurred as the amortization period would have been one year or less. Additionally, as permitted by Topic 606, the Company has elected not to adjust the promised amount of consideration for a significant financing component as the Company expects that the period of time between the Company’s satisfaction of the performance obligation and the customer’s payment would have been one year or less. Finally, as permitted by Topic 606, the Company has elected not to disclose the value of unsatisfied performance obligations, as the Company’s contracts generally have an original expected length of one year or less.