UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

_____________________________

Form 10-Q

xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2014

OR

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ___ to ___

Commission file number 001-36050

Stock Building Supply Holdings, Inc.

(Exact name of Registrant as specified in its charter)

Delaware	26-4687975
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
8020 Arco Corporate Drive, Suite 400 Raleigh, North Carolina	27617
(Address of principal executive offices)	(Zip Code)

(919) 431-1000

(Registrant’s telephone number, including area code)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes xNo o

Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files). Yes x No o

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.

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

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

The number of shares outstanding of the Registrant’s common stock, par value $0.01 per share, at July 28, 2014 was 26,171,056 shares.

STOCK BUILDING SUPPLY HOLDINGS, INC. AND SUBSIDIARIES

Table of Contents to Form 10-Q

	PART I - FINANCIAL INFORMATION
Item 1	Unaudited Condensed Consolidated Financial Statements
	Condensed Consolidated Balance Sheets as of June 30, 2014 and December 31, 2013	1
	Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2014 and 2013	2
	Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2014 and 2013	3
	Notes to Condensed Consolidated Financial Statements	4
Item 2	Management's Discussion and Analysis of Financial Condition and Results of Operations	12
Item 3	Quantitative and Qualitative Disclosures About Market Risk	20
Item 4	Controls and Procedures	20
	PART II - OTHER INFORMATION
Item 1	Legal Proceedings	21
Item 1A	Risk Factors	21
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	21
Item 3	Defaults Upon Senior Securities	21
Item 4	Mine Safety Disclosures	21
Item 5	Other Information	21
Item 6	Exhibits	22
	Signature	23

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PART I. FINANCIAL INFORMATION

ITEM 1    FINANCIAL STATEMENTS

STOCK BUILDING SUPPLY HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(in thousands, except share and per share amounts)	June 30, 2014			December 31, 2013
Assets
Current assets
Cash and cash equivalents	$	9,116		$	1,138
Restricted assets	460			460
Accounts receivable, net	130,999			111,285
Inventories, net	117,563			91,303
Costs in excess of billings on uncompleted contracts	9,877			7,921
Assets held for sale	300			2,363
Prepaid expenses and other current assets	10,654			9,332
Deferred income taxes	5,027			3,332
Total current assets	283,996			227,134
Property and equipment, net of accumulated depreciation	64,137			56,039
Intangible assets, net of accumulated amortization	23,662			24,789
Goodwill	7,186			7,186
Restricted assets	856			1,359
Other assets	1,987			2,033
Total assets	$	381,824		$	318,540
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable	$	91,422		$	64,984
Accrued expenses and other liabilities	30,923			30,528
Income taxes payable	4,736			2,989
Current portion of restructuring reserve	1,439			1,594
Current portion of capital lease obligation	1,431			1,240
Billings in excess of costs on uncompleted contracts	2,270			1,599
Total current liabilities	132,221			102,934
Revolving line of credit	90,834			59,072
Long-term portion of capital lease obligation	6,023			6,011
Deferred income taxes	14,186			15,496
Other long-term liabilities	7,458			7,346
Total liabilities	250,722			190,859
Commitments and contingencies (Note 9)
Stockholders' equity
Preferred stock, $0.01 par value, 50,000,000 shares authorized, no shares issued and outstanding at June 30, 2014 and December 31, 2013	—			—
Common stock, $0.01 par value, 300,000,000 shares authorized, 26,126,811 and 26,112,007 shares issued and outstanding at June 30, 2014 and December 31, 2013, respectively	261			261
Additional paid-in capital	145,652			144,570
Retained deficit	(14,811		)	(17,150		)
Total stockholders' equity	131,102			127,681
Total liabilities and stockholders' equity	$	381,824		$	318,540

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

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STOCK BUILDING SUPPLY HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

	Three Months Ended June 30,						Six Months Ended June 30,
(in thousands, except share and per share amounts)	2014			2013			2014			2013
Net sales	$	344,586		$	314,653		$	624,569		$	563,379
Cost of goods sold	262,372			243,143			477,113			438,079
Gross profit	82,214			71,510			147,456			125,300
Selling, general and administrative expenses	71,086			64,725			138,213			121,527
Depreciation expense	1,641			1,621			3,109			3,260
Amortization expense	564			562			1,127			1,109
Impairment of assets held for sale	—			—			48			—
Public offering transaction-related costs	—			686			448			686
Restructuring expense	2			39			9			99
	73,293			67,633			142,954			126,681
Income (loss) from operations	8,921			3,877			4,502			(1,381		)
Other income (expense)
Interest expense	(668		)	(1,233		)	(1,299		)	(2,258		)
Other income, net	170			206			413			396
Income (loss) from continuing operations before income taxes	8,423			2,850			3,616			(3,243		)
Income tax (expense) benefit	(2,943		)	(966		)	(1,445		)	913
Income (loss) from continuing operations	5,480			1,884			2,171			(2,330		)
Income from discontinued operations, net of income tax expense of $94, $74, $108 and $183, respectively	147			94			168			251
Net income (loss)	5,627			1,978			2,339			(2,079		)
Redeemable Class B Senior Preferred stock deemed dividend	—			(744		)	—			(1,473		)
Income (loss) attributable to common stockholders	$	5,627		$	1,234		$	2,339		$	(3,552	)
Weighted average common shares outstanding
Basic	25,722,671			13,750,400			25,703,449			13,637,462
Diluted	26,224,550			18,887,677			26,212,787			13,637,462
Basic income (loss) per share
Income (loss) from continuing operations	$	0.21		$	0.06		$	0.08		$	(0.28	)
Income from discontinued operations	0.01			0.01			0.01			0.02
Net income (loss) per share	$	0.22		$	0.07		$	0.09		$	(0.26	)
Diluted income (loss) per share
Income (loss) from continuing operations	$	0.21		$	0.06		$	0.08		$	(0.28	)
Income from discontinued operations	—			0.01			0.01			0.02
Net income (loss) per share	$	0.21		$	0.07		$	0.09		$	(0.26	)

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

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STOCK BUILDING SUPPLY HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

	Six Months Ended June 30,
(in thousands)	2014			2013
Cash flows from operating activities
Net income (loss)	$	2,339		$	(2,079	)
Adjustments to reconcile net income (loss) to net cash used in operating activities
Depreciation expense	5,319			4,920
Amortization of intangible assets	1,127			1,109
Amortization of debt issuance costs	239			323
Deferred income taxes	(3,005		)	(2,589		)
Non-cash stock compensation expense	980			264
Impairment of assets held for sale	96			—
Gain on sale of property, equipment and real estate	(684		)	(11		)
Bad debt expense	259			795
Change in assets and liabilities
Accounts receivable	(19,973		)	(31,095		)
Inventories, net	(26,260		)	(27,061		)
Accounts payable	28,609			15,448
Other assets and liabilities	(927		)	1,294
Net cash used in operating activities	(11,881		)	(38,682		)
Cash flows from investing activities
Purchases of property and equipment	(12,837		)	(1,335		)
Proceeds from sale of property, equipment and real estate	2,603			2,539
Change in restricted assets	503			1,684
Purchase of business	—			(2,373		)
Net cash (used in) provided by investing activities	(9,731		)	515
Cash flows from financing activities
Proceeds from revolving line of credit	681,675			618,455
Repayments of proceeds from revolving line of credit	(649,913		)	(572,974		)
Other financing activities	(2,172		)	(948		)
Net cash provided by financing activities	29,590			44,533
Net increase in cash and cash equivalents	7,978			6,366
Cash and cash equivalents
Beginning of period	1,138			2,691
End of period	$	9,116		$	9,057

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

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STOCK BUILDING SUPPLY HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1.    Organization

Stock Building Supply Holdings, Inc. and its subsidiaries (the “Company,” “we,” “us” and “our”) distributes lumber and building materials to new construction and repair and remodeling contractors. Additionally, we provide solution-based services to our customers, including component design, product specification and installation management services.

Due to the seasonal nature of our industry, sales are usually lower in the first and fourth quarters than in the second and third quarters.

2.    Basis of Presentation

The condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) that permit reduced disclosure for interim periods. The condensed consolidated balance sheet as of December 31, 2013 was derived from audited financial statements, but does not include all necessary disclosures required by accounting principles generally accepted in the United States of America (“GAAP”). The unaudited condensed consolidated financial statements include all accounts of the Company and its subsidiaries and, in the opinion of management, include all recurring adjustments and normal accruals necessary for a fair statement of the Company’s financial position, results of operations and cash flows for the dates and periods presented. These unaudited financial statements should be read in conjunction with the Company’s 2013 Annual Report on Form 10-K. 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. All material intercompany accounts and transactions have been eliminated in consolidation.

Comprehensive income (loss)

Comprehensive income (loss) is equal to the net income (loss) for all periods presented.

Reclassification

The condensed consolidated statements of operations for the three and six months ended June 30, 2013 included herein reflect $0.7 million within the line item "Public offering transaction-related costs" that had been included in "Selling, general and administrative expenses" on the condensed consolidated statements of operations for the three and six months ended June 30, 2013, included in the Company's Quarterly Report on Form 10-Q for the period ended June 30, 2013.

Recently issued accounting pronouncements

In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update 2014-09, Revenue from Contracts with Customers ("ASU 2014-09"). ASU 2014-09 provides a comprehensive revenue recognition model requiring companies to recognize revenue for the transfer of goods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services. The guidance also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts. ASU 2014-09 is effective for annual and interim periods beginning after December 15, 2016. Early application is not permitted. The guidance permits the use of either a retrospective or cumulative effect transition method. We have not yet selected a transition method and are currently evaluating the impact of the standard on our financial position and results of operations.

3.    Acquisitions

For all acquisitions, the Company allocates the purchase price to the estimated fair values of the assets acquired and liabilities assumed as of the date of the acquisition. The market approach, which indicates value based on available market pricing for comparable assets, is utilized to estimate the fair value of inventory, property and equipment. The income approach, which indicates value based on the present value of future cash flows, is primarily used to value intangible assets. The cost approach, which estimates values by determining the current cost of replacing an asset with another of equivalent utility, is used, as appropriate, for certain assets for which the market and income approaches could not be applied due to the nature of the asset.

Chesapeake Structural Systems

On April 8, 2013, Commonwealth Acquisition Holdings, LLC, a wholly-owned subsidiary of the Company, purchased certain assets and assumed certain liabilities of Chesapeake Structural Systems, Inc., Creative Wood Products, LLC and Chestruc, LLC (collectively “Chesapeake”) for an adjusted purchase price of $2.6 million. This amount included an initial holdback amount of

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$0.2 million, which was paid to the sellers during the three months ended June 30, 2014. The acquisition provides the Company with component manufacturing capability to serve customers in the Central and Northern Virginia markets. The Company incurred transaction costs of $0.2 million during the three and six months ended June 30, 2013, which are included in selling, general and administrative expenses on the consolidated statements of operations. The impact of this acquisition on our operating results was not considered material for the reporting of pro forma financial information.

The Company acquired total assets of $3.1 million and assumed liabilities of $1.4 million. The assets acquired include a customer relationship intangible asset of $1.2 million. Goodwill of $0.7 million arising from the acquisition consists of expected synergies and cost savings from excess purchase price over identifiable intangible net assets, as well as intangible assets that do not qualify for separate recognition, such as assembled workforce. All of the goodwill from this transaction is expected to be deductible for income tax purposes.

4.    Discontinued Operations

During certain prior years, the Company ceased operations in certain geographic markets. The Company will have no further significant continuing involvement in 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. To determine if cash flows have been (or will be) eliminated from ongoing operations, we evaluate a number of qualitative and quantitative factors, including, but not limited to, proximity of a closing store to any remaining open stores and the potential sales migration from the closed store to any stores remaining open.

The operating results of the discontinued operations for the three and six months endedJune 30,2014 and 2013 are as follows:

	Three Months Ended June 30,						Six Months Ended June 30,
(in thousands)	2014			2013			2014			2013
Net sales	$	—		$	—		$	—		$	—
Restructuring charges	(11		)	(9		)	(16		)	(18		)
Gain before income taxes	241			168			276			434
Income tax expense	(94		)	(74		)	(108		)	(183		)
Net income	147			94			168			251

The assets and liabilities of discontinued operations reflected on the consolidated balance sheets at June 30, 2014 and December 31, 2013 are as follows:

(in thousands)	June 30,   2014		December 31,   2013
Real estate held for sale	$	—	$	700
Prepaid expenses and other current assets	7		8
Current assets of discontinued operations	7		708
Accrued expenses and other liabilities	52		37
Current portion of restructuring reserve	206		295
Current liabilities of discontinued operations	258		332
Long-term portion of restructuring reserve	—		89
Long-term liabilities of discontinued operations	$	—	$	89

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5.    Restructuring Costs

In addition to discontinuing operations in certain markets, the Company instituted store closures and reductions in headcount in continuing markets (collectively, the “Restructurings”) in certain prior years in an effort to: (i) strengthen the Company’s competitive position; (ii) reduce costs and (iii) improve operating margins within existing markets that management believes have favorable long-term growth demographics. No additional costs, other than interest accretion, are expected to be incurred related to the Restructurings.

The following table summarizes the restructuring expenses incurred in connection with the Restructurings and the remaining reserves as of June 30, 2014:

(in thousands)	Work Force Reductions			Store Closures			Total
Restructuring reserves, December 31, 2013	$	190		$	3,412		$	3,602
Restructuring charges incurred	—			25			25
Cash payments	(88		)	(758		)	(846		)
Restructuring reserves, June 30, 2014	$	102		$	2,679		$	2,781

The remaining accrual for work force reduction of $0.1 million is expected to be fully paid by January 2015. The remaining accrual for store closures of $2.7 million is expected to be fully paid by January 2017 as the related leases expire.

The restructuring reserve at June 30, 2014 consists of a current portion of $1.4 million and a long-term portion of $1.4 million. The long-term portion is included in other long-term liabilities on the consolidated balance sheets.

6.    Accounts Receivable

Accounts receivable consist of the following at June 30, 2014 and December 31, 2013:

(in thousands)	June 30,   2014			December 31,   2013
Trade receivables	$	135,774		$	115,876
Allowance for doubtful accounts	(2,433		)	(2,707		)
Allowance for sales returns and discounts	(2,342		)	(1,884		)
	$	130,999		$	111,285

7.    Secured Credit Agreement

On June 30, 2009, the Company entered into a Secured Credit Agreement (the “Credit Agreement”) with Wells Fargo Capital Finance ("WFCF"), which includes a revolving line of credit (the “Revolver”). The Revolver was amended during 2013 and 2014 for changes in financial covenants, maximum availability, maturity date and interest rate. The following is a summary of the significant terms of the Revolver as of June 30, 2014:

Maturity	December 31, 2017
Interest/Usage Rate	Company’s option of Base Rate(a) plus a Base Rate Margin (ranges from 0.50%–1.00% based on Revolver availability) or London Inter Bank Offered Rate ("LIBOR") plus a LIBOR Rate Margin (ranges from 1.50%–2.00% based on Revolver availability)
Maximum Availability	Lesser of $200 million or the borrowing base(b)
Periodic Principal Payments	None

(a) Base Rate is the higher of (i) the Federal Funds Rate plus 0.5% or (ii) the prime rate.

(b) The Revolver’s borrowing base is calculated as the sum of (i) 85% of the Company’s eligible accounts receivable plus (ii) the lesser of 90% of the eligible credit card receivables and $5 million plus (iii) the lesser of $150 million, 65% of the eligible inventory or 85% of the net liquidation value of eligible inventory as defined in the Credit Agreement plus (iv) the lesser of $30 million, 85% of the net liquidation value of eligible fixed assets or the net book value of fixed assets, all as defined in the Credit Agreement, minus (v) reserves from time to time set by the administrative agent. The Company’s borrowing base can also be increased pursuant to certain terms outlined in the Credit Agreement.

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The Credit Agreement provides that the Company can use the Revolver availability to issue letters of credit. The fees on any outstanding letters of credit issued under the Revolver include a participation fee equal to the LIBOR Rate Margin. The fee on the unused portion of the Revolver is 0.25%. The Revolver includes a financial covenant that requires the Company to maintain a minimum Fixed Charge Coverage Ratio of 1.00:1.00 as defined by the Credit Agreement. The Fixed Charge Coverage Ratio requirement is only applicable if the sum of (i) availability under the Revolver and (ii) qualified cash ("Adjusted Liquidity") is less than $20 million, and remains in effect until the date on which Adjusted Liquidity has been greater than or equal to $20 million for a period of 30 consecutive days. The Company used cash for operating activities for the six months ended June 30, 2014. While there can be no assurances, based upon the Company’s forecast, the Company does not expect the financial covenants to become applicable during the year ending December 31, 2014.

The Company had outstanding borrowings of $90.8 million and $59.1 million with net availability of $90.2 million and $71.0 million as of June 30, 2014 and December 31, 2013, respectively. The interest rate on outstanding LIBOR Rate borrowings of $81.0 million was 1.7% and the interest rate on outstanding Base Rate borrowings of $9.8 million was 3.8% as of June 30, 2014. The interest rate on outstanding LIBOR Rate borrowings of $52.0 million was 1.9% and the interest rate on outstanding Base Rate borrowings of $7.1 million was 4.0% as of December 31, 2013. The Company had $9.2 million and $8.9 million in letters of credit outstanding under the Credit Agreement as of June 30, 2014 and December 31, 2013, respectively. The Revolver is collateralized by substantially all assets of the Company. The carrying value of the Revolver at June 30, 2014 and December 31, 2013 approximates fair value as the Revolver contains a variable interest rate. As such, the fair value of the Revolver was classified as a Level 2 measurement in accordance with ASC 820.

8.    Income Taxes

The Company evaluates its deferred tax assets quarterly to determine if valuation allowances are required. In assessing the realizability of deferred tax assets, the Company considers both positive and negative evidence in determining whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The Company recognized valuation allowances of $1.9 million against its deferred tax assets related to certain tax jurisdictions as of June 30, 2014 and December 31, 2013.

During the three and six months endedJune 30, 2014 and 2013, the Company did not recognize material changes to its valuation allowances against deferred tax assets related to continuing operations. To the extent the Company generates sufficient taxable income in the future to utilize the tax benefits of the net deferred tax assets on which a valuation allowance is recorded, the effective tax rate may decrease as the valuation allowance is reversed. The Company is not permitted to carry back any of its existing tax net operating losses; therefore, to the extent the Company generates future tax net operating losses, the Company may be required to increase the valuation allowance on net deferred tax assets and income tax benefit would be adversely affected.

For the three and six months endedJune 30, 2014, the Company’s effective income tax rate including discontinued operations and other discrete items was 35.1% and 39.9%, respectively, which varied from the federal statutory rate of 35% primarily due to the unfavorable impact of certain non-deductible secondary offering transaction-related costs and a reduction in the annual effective tax rate from a permanent domestic manufacturing deduction under Internal Revenue Code Section 199 (the "Manufacturing Deduction"). For the three and six months endedJune 30, 2013, the Company’s effective income tax rate including discontinued operations and other discrete items was 34.5% and 26.0%, respectively, which varied from the federal statutory rate of 35% primarily due to the unfavorable impact of certain non-deductible initial public offering transaction-related costs and the reduction in the annual effective tax rate from the Manufacturing Deduction. 

The effective income tax rate on continuing operations for the three months ended June 30, 2014 was 34.9% compared to an effective income tax rate on continuing operations of 33.9% for the three months ended June 30, 2013. The effective income tax rate on continuing operations for the six months endedJune 30, 2014 was 40.0% compared to an effective income tax rate on continuing operations of 28.2% for the six months endedJune 30, 2013. The increase in the tax rates for the comparative three-month and six-month periods is primarily due to a change in the Manufacturing Deduction tax benefits and the non-deductibility of certain public offering transaction-related costs.

The Company has no material uncertain tax positions as of June 30, 2014 and December 31, 2013.

9.    Commitments and Contingencies

From time to time, various claims, legal proceedings and litigation are asserted or commenced against the Company principally arising from alleged product liability, warranty, casualty, construction defect, contract, tort, employment and other disputes. In determining loss contingencies, management considers the likelihood of loss as well as the ability to reasonably estimate the amount of such loss or liability. An estimated loss is recorded when it is considered probable that such a liability has been incurred and when the amount of loss can be reasonably estimated. It is not certain that the Company will prevail in these matters. However,

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the Company does not believe that the ultimate outcome of any pending matters will have a material adverse effect on its consolidated financial position, results of operations or cash flows.

10.    Stock Based Compensation

The following table highlights the expense related to stock based compensation for the three and six months endedJune 30, 2014 and 2013:

	Three Months Ended June 30,				Six Months Ended June 30,
(in thousands)	2014		2013		2014		2013
Nonvested stock	$	187	$	54	$	388	$	136
Stock options	268		64		535		128
Restricted stock units	40		—		57		—
Stock based compensation	$	495	$	118	$	980	$	264

The following is a summary of nonvested stock, restricted stock unit and stock option activity for the six months endedJune 30, 2014:

	Nonvested Stock				Restricted Stock Units			Stock Options
	Number of Shares Outstanding		Weighted Average Grant Date Fair Value		Number of Units Outstanding	Weighted Average Grant Date Fair Value		Number of Options Outstanding		Weighted Average Exercise Price
December 31, 2013	427,993		$	15.72	10,000	$	13.96	714,484		$	9.98
Granted	—		—		11,124	18.39		9,000		18.22
Vested/exercised	(29,218	)	2.60		—	—		(14,804	)	0.97
Forfeited	—		—		—	—		(26,250	)	14.00
June 30, 2014	398,775		$	16.68	21,124	$	16.29	682,430		$	10.14

11.    Segments

ASC 280, Segment Reporting, defines operating segments as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance.

The Company's operating segments consist of the East and West divisions along with Coleman Floor, which offers professional flooring installation services. Due to the similar economic characteristics, nature of products, distribution methods and customers, the Company has aggregated our East and West operating segments into one reportable segment, "Geographic divisions."

In addition to our reportable segment, the Company's consolidated results include "Coleman Floor" and "Other reconciling items." Other reconciling items is comprised of our corporate activities.

The following tables present Net Sales, Adjusted EBITDA and certain other measures for the reportable segment and total continuing operations for the three and six months endedJune 30, 2014 and 2013.

	Three Months Ended June 30, 2014									June 30,   2014
(in thousands)	Net Sales		Gross Profit		Depreciation & Amortization		Adjusted EBITDA			Total Assets
Geographic divisions	$	331,390	$	80,002	$	3,144	$	21,382		$	346,486
Coleman Floor	13,196		2,212		29		(182		)	10,519
Other reconciling items	—		—		237		(8,260		)	24,819
	$	344,586	$	82,214	$	3,410				$	381,824

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	Three Months Ended June 30, 2013
(in thousands)	Net Sales		Gross Profit		Depreciation & Amortization		Adjusted EBITDA
Geographic divisions	$	302,666	$	69,085	$	2,925	$	14,788
Coleman Floor	11,987		2,425		33		397
Other reconciling items	—		—		109		(6,159		)
	$	314,653	$	71,510	$	3,067

	Six Months Ended June 30, 2014
(in thousands)	Net Sales		Gross Profit		Depreciation & Amortization		Adjusted EBITDA
Geographic divisions	$	599,843	$	143,120	$	5,963	$	30,188
Coleman Floor	24,726		4,336		53		(597		)
Other reconciling items	—		—		430		(16,541		)
	$	624,569	$	147,456	$	6,446

	Six Months Ended June 30, 2013
(in thousands)	Net Sales		Gross Profit		Depreciation & Amortization		Adjusted EBITDA
Geographic divisions	$	541,183	$	120,618	$	5,548	$	19,372
Coleman Floor	22,196		4,682		65		824
Other reconciling items	—		—		413		(12,391		)
	$	563,379	$	125,300	$	6,026

Reconciliation to consolidated financial statements:

	Three Months Ended June 30,						Six Months Ended June 30,
(in thousands)	2014			2013			2014			2013
Net income (loss), as reported	$	5,627		$	1,978		$	2,339		$	(2,079	)
Interest expense	668			1,233			1,299			2,258
Income tax expense (benefit)	2,943			966			1,445			(913		)
Depreciation and amortization	3,410			3,067			6,446			6,026
Impairment of assets held for sale	—			—			48			—
Public offering transaction-related costs	—			686			448			686
Restructuring expense	2			39			9			99
Discontinued operations, net of taxes	(147		)	(94		)	(168		)	(251		)
Management fees	12			560			89			966
Non-cash compensation expense	495			118			980			264
Acquisition costs	—			154			—			257
Severance and other items related to store closures	(70		)	319			115			492
Adjusted EBITDA of Coleman Floor	182			(397		)	597			(824		)
Adjusted EBITDA of other reconciling items	8,260			6,159			16,541			12,391
Adjusted EBITDA of geographic divisions reportable segment	$	21,382		$	14,788		$	30,188		$	19,372

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12.    Income (Loss) Per Common Share

Basic net income (loss) per share (“EPS”) is calculated by dividing net income (loss) attributable to common stockholders by the weighted average shares outstanding during the period. Diluted EPS is calculated by adjusting weighted average shares outstanding for the dilutive effect of potential common shares, determined using the treasury-stock method. For purposes of the diluted EPS calculation, stock options, nonvested stock and restricted stock unit awards are considered to be potential common shares. During periods of net income, participating securities are allocated a proportional share of net income determined by dividing total weighted average participating securities by the sum of total weighted average common shares and participating securities (“the two-class method”). During periods of net loss, no effect is given to participating securities since they do not share in the losses of the Company.

The basic and diluted EPS calculations for the three and six months endedJune 30, 2014 and 2013 are presented below:

Basic EPS

	Three Months Ended June 30,					Six Months Ended June 30,
(in thousands, except share and per share amounts)	2014		2013			2014		2013
Income (loss) from continuing operations	$	5,480	$	1,884		$	2,171	$	(2,330	)
Redeemable Class B Senior Preferred stock deemed dividend	—		(744		)	—		(1,473		)
Income from continuing operations allocated to participating securities	—		(279		)	—		—
Income (loss) attributable to common stockholders, from continuing operations	5,480		861			2,171		(3,803		)
Income from discontinued operations, net of tax	147		94			168		251
Income from discontinued operations allocated to participating securities	—		(23		)	—		—
Income attributable to common stockholders from discontinued operations	147		71			168		251
Income (loss) attributable to common stockholders	$	5,627	$	932		$	2,339	$	(3,552	)
Weighted average outstanding shares of common stock	25,722,671		13,750,400			25,703,449		13,637,462
Basic EPS
Income (loss) from continuing operations	$	0.21	$	0.06		$	0.08	$	(0.28	)
Income from discontinued operations	0.01		0.01			0.01		0.02
Net income (loss) per share	$	0.22	$	0.07		$	0.09	$	(0.26	)

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Diluted EPS

	Three Months Ended June 30,					Six Months Ended June 30,
(in thousands, except share and per share amounts)	2014		2013			2014		2013
Income (loss) from continuing operations	$	5,480	$	1,884		$	2,171	$	(2,330	)
Redeemable Class B Senior Preferred stock deemed dividend	—		(744		)	—		(1,473		)
Income (loss) attributable to common stockholders, from continuing operations	5,480		1,140			2,171		(3,803		)
Income from discontinued operations, net of tax	147		94			168		251
Income (loss) attributable to common stockholders	$	5,627	$	1,234		$	2,339	$	(3,552	)
Weighted average outstanding shares of common stock	25,722,671		13,750,400			25,703,449		13,637,462
Effect of dilutive securities:
Redeemable Class C Convertible Preferred stock (as converted basis)	—		4,454,889			—		—
Nonvested stock	351,741		565,241			361,322		—
Stock options	145,290		117,147			143,791		—
Restricted stock units	4,848		—			4,225		—
Weighted average shares and dilutive shares	26,224,550		18,887,677			26,212,787		13,637,462
Diluted EPS
Income (loss) from continuing operations	$	0.21	$	0.06		$	0.08	$	(0.28	)
Income from discontinued operations	—		0.01			0.01		0.02
Net income (loss) per share	$	0.21	$	0.07		$	0.09	$	(0.26	)

The following table provides the securities that could potentially dilute basic earnings per share in the future, but were not included in the computation of diluted earnings per share because to do so would have been anti-dilutive:

	Three Months Ended June 30,		Six Months Ended June 30,
	2014	2013	2014	2013
Stock options	127,773	—	127,773	575,463
Nonvested stock	—	—	—	226,607
Redeemable Class C Convertible Preferred Stock (as converted basis)	—	—	—	4,454,889

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ITEM 2    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 Quarterly Report on Form 10-Q and with our audited financial statements included in our 2013 Annual Report on Form 10-K. This discussion and analysis covers periods prior to our initial public offering ("IPO") and related transactions. As a result, the discussion and analysis of historical periods does not reflect the impact that the offering, our conversion to a corporation 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 that involve risks, uncertainties and assumptions. Our actual results may differ from those anticipated in these forward-looking statements as a result of many factors. Our risk factors are set forth in “Part II, Item 1A. Risk Factors.”

Business and Executive Overview

We are a large, diversified lumber and building materials distributor and solutions provider that sells to new construction and repair and remodeling contractors. We carry a broad line of products and have operations throughout the United States. Our primary products are lumber & lumber sheet goods, millwork, doors, flooring, windows, structural components such as engineered wood products, trusses and wall panels and 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. We offer a broad range of products sourced through a 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 14 states, which states accounted for approximately 58% of 2013 U.S. single-family housing permits according to the U.S. Census Bureau. In these 14 states, we operate in 21 metropolitan areas that we believe have an attractive potential for economic growth based on population trends and above-average employment growth.

Our net sales for the three months ended June 30, 2014increased9.5% compared to the prior year period. We estimate sales increased 13.3% due to volume and decreased 3.8% due to commodity price deflation. Our gross profit as a percentage of net sales ("gross margin") was 23.9% for the three months ended June 30, 2014 compared to 22.7% for the prior year period. We recorded income from operations of $8.9 million during the three months ended June 30, 2014, compared to $3.9 million during the three months ended June 30, 2013. For further discussion, see “-Operating Results.”

Factors Affecting Our Operating Results

Our operating results and financial performance are influenced by a variety of factors, including, among others, 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. According to the U.S. Census Bureau, single-family housing starts increased approximately 3.5% for the three months ended June 30, 2014 as compared to the same period in the prior year, while single-family houses under construction as of June 30, 2014 increased 8.6% as compared to June 30, 2013.

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. We believe improved household formation rates in turn should increase demand for housing and stimulate new construction.

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Commodity nature of our products

Many of the building products we distribute, including lumber, oriented strand board ("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.

The following table reflects changes in average composite framing lumber prices (per thousand board feet) and average composite structural panel prices (per thousand square feet). These prices represent transactions between manufacturers and their customers as reported by Random Lengths. The average composite structural panel prices are based on index prices for OSB and plywood.

	Three Months Ended June 30,			Six Months Ended June 30,
	2014 versus 2013		2014 average price	2014 versus 2013		2014 average price
Change in framing lumber prices	(2	%)	$372	(4	%)	$382
Change in structural panel prices	(18	%)	$372	(23	%)	$368

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. 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. 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. This could impact our gross margins as homebuilding recovers if the market share held by the production homebuilders continues to increase.

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 margins relative to other products. Homebuilders often use structural components in order to realize increased efficiency and improved quality. We believe shortening cycle time from start to completion is a key goal of homebuilders during periods of strong consumer demand or limited availability of framing labor. As the residential new construction market continues to strengthen, we expect the use of structural components by homebuilders to increase.

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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Operating Results

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

	Three Months Ended June 30,										Six Months Ended June 30,
(in thousands)	2014					2013					2014					2013
Net sales	$	344,586		100.0	%	$	314,653		100.0	%	$	624,569		100.0	%	$	563,379		100.0	%
Cost of goods sold	262,372			76.1	%	243,143			77.3	%	477,113			76.4	%	438,079			77.8	%
Gross profit	82,214			23.9	%	71,510			22.7	%	147,456			23.6	%	125,300			22.2	%
Operating expenses:
Selling, general and administrative expenses	71,086			20.6	%	64,725			20.6	%	138,213			22.1	%	121,527			21.6	%
Depreciation expense	1,641			0.5	%	1,621			0.5	%	3,109			0.5	%	3,260			0.6	%
Amortization expense	564			0.2	%	562			0.2	%	1,127			0.2	%	1,109			0.2	%
Impairment of assets held for sale	—			0.0	%	—			0.0	%	48			0.0	%	—			0.0	%
Public offering transaction-related costs	—			0.0	%	686			0.2	%	448			0.1	%	686			0.1	%
Restructuring expense	2			0.0	%	39			0.0	%	9			0.0	%	99			0.0	%
Income (loss) from operations	8,921			2.6	%	3,877			1.2	%	4,502			0.7	%	(1,381		)	(0.3	)%
Other income (expense)
Interest expense	(668		)	(0.2	)%	(1,233		)	(0.4	)%	(1,299		)	(0.2	)%	(2,258		)	(0.4	)%
Other income, net	170			0.0	%	206			0.1	%	413			0.1	%	396			0.1	%
Income (loss) from continuing operations before income taxes	8,423			2.4	%	2,850			0.9	%	3,616			0.6	%	(3,243		)	(0.6	)%
Income tax (expense) benefit	(2,943		)	(0.8	)%	(966		)	(0.3	)%	(1,445		)	(0.2	)%	913			0.2	%
Income (loss) from continuing operations	5,480			1.6	%	1,884			0.6	%	2,171			0.4	%	(2,330		)	(0.4	)%
Income from discontinued operations, net of income tax expense of $94, $74, $108 and $183, respectively	147			0.0	%	94			0.0	%	168			0.0	%	251			0.0	%
Net income (loss)	$	5,627		1.6	%	$	1,978		0.6	%	$	2,339		0.4	%	$	(2,079	)	(0.4	)%

Three months ended June 30, 2014 compared to three months ended June 30, 2013

Net sales

For the three months ended June 30, 2014, net sales increased$29.9 million, or 9.5%, to $344.6 million from $314.7 million during the three months ended June 30, 2013. The increase in net sales was primarily driven by increased volume of approximately 13.3%, while the impact of commodity price deflation decreased net sales by approximately 3.8%. We estimate approximately 74% of our net sales for the three months ended June 30, 2014 were to customers engaged in new single-family construction.  According to the U.S. Census Bureau, single-family housing starts increased approximately 3.5% for the three months ended June 30, 2014 as compared to the same period in the prior year, while single-family houses under construction as of June 30, 2014 increased 8.6% as compared to June 30, 2013. Increases in net sales from Texas, North Carolina and California represented approximately 75% of the total net sales increase for the three months ended June 30, 2014 as compared to the prior year period.

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

	Three Months Ended   June 30, 2014				Three Months Ended   June 30, 2013
(in thousands)	Net Sales		% of Sales		Net Sales		% of Sales		% Change
Structural components	$	45,667	13.3	%	$	40,467	12.9	%	12.8	%
Millwork & other interior products	61,113		17.7	%	55,583		17.7	%	9.9	%
Lumber & lumber sheet goods	123,743		35.9	%	121,909		38.7	%	1.5	%
Windows & other exterior products	70,758		20.5	%	61,759		19.6	%	14.6	%
Other building products & services	43,305		12.6	%	34,935		11.1	%	24.0	%
Total net sales	$	344,586	100.0	%	$	314,653	100.0	%	9.5	%

Increased sales volume was achieved across all product categories. Average selling prices for lumber & lumber sheet goods were approximately 9.7% lower during the three months ended June 30, 2014 compared to the three months ended June 30, 2013.

Cost of goods sold

For the three months ended June 30, 2014, cost of goods sold increased$19.3 million, or 7.9%, to $262.4 million from $243.1 million during the three months ended June 30, 2013. We estimate our cost of goods sold increased approximately 12.1% as a result of increased sales volumes, while commodity cost deflation resulted in a 4.2% decrease in cost of goods sold.

Gross profit

For the three months ended June 30, 2014, gross profit increased$10.7 million, or 15.0%, to $82.2 million from $71.5 million for the three months ended June 30, 2013, driven primarily by increased sales volumes. Our gross margin was 23.9% for the three months ended June 30, 2014 and 22.7% for the three months ended June 30, 2013. This increase was primarily driven by improved gross margins on sales of structural components and lumber & lumber sheet goods, as well as a higher percentage of total net sales being derived from non-commodity product offerings.

Operating expenses

For the three months ended June 30, 2014, selling, general and administrative expenses increased$6.4 million, or 9.8%, to $71.1 million, or 20.6% of net sales, from $64.7 million, or 20.6% of net sales, for the three months ended June 30, 2013. Variable costs to serve higher sales volumes, such as sales commissions, shipping and handling costs and other variable compensation, increased by $3.3 million in the aggregate. Other salary, wage, benefit and employer taxation costs increased $2.8 million, primarily as a result of headcount additions to serve higher sales volume and generate future growth opportunities and a $0.4 million increase in stock compensation expense.

For the three months ended June 30, 2013, the Company incurred $0.7 million of non-capitalizable costs associated with our IPO.

Other income (expenses)

Interest expense. For the three months ended June 30, 2014, interest expense was $0.7 million compared to $1.2 million for the three months ended June 30, 2013. This decrease relates primarily to a decrease in Revolver borrowings and lower average borrowing rates in 2014.

Income tax from continuing operations

For the three months ended June 30, 2014, income tax expense from continuing operations was $2.9 million compared to $1.0 million for the three months ended June 30, 2013. This increase is due to to an increase in income from continuing operations before income taxes. The effective tax rate from continuing operations for the three months ended June 30, 2014 was 34.9% compared to 33.9% for the three months ended June 30, 2013.

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Six months ended June 30, 2014 compared to six months ended June 30, 2013

Net sales

For the six months ended June 30, 2014, net sales increased$61.2 million, or 10.9%, to $624.6 million from $563.4 million during the six months ended June 30, 2013. The increase in net sales was primarily driven by increased volume of approximately 13.2%, while the impact of commodity price deflation decreased net sales by approximately 2.7%. We estimate approximately 74% of our net sales for the six months ended June 30, 2014 were to customers engaged in new single-family construction.  According to the U.S. Census Bureau, single-family housing starts increased approximately 1.2% for the six months ended June 30, 2014 as compared to the same period in the prior year, while single-family houses under construction as of June 30, 2014 increased 8.6% as compared to June 30, 2013. Increases in net sales from Texas, California, Utah and North Carolina represented approximately 83% of the total net sales increase for the six months ended June 30, 2014 as compared to the prior year period.

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

	Six Months Ended   June 30, 2014				Six Months Ended   June 30, 2013
(in thousands)	Net Sales		% of Sales		Net Sales		% of Sales		% Change
Structural components	$	83,683	13.4	%	$	71,032	12.6	%	17.8	%
Millwork & other interior products	113,707		18.2	%	102,998		18.3	%	10.4	%
Lumber & lumber sheet goods	220,163		35.3	%	215,597		38.3	%	2.1	%
Windows & other exterior products	128,295		20.5	%	110,599		19.6	%	16.0	%
Other building products & services	78,721		12.6	%	63,153		11.2	%	24.7	%
Total net sales	$	624,569	100.0	%	$	563,379	100.0	%	10.9	%

Increased sales volume was achieved across all product categories. Average selling prices for lumber & lumber sheet goods were approximately 7.0% lower during the six months ended June 30, 2014 compared to the six months ended June 30, 2013.

Cost of goods sold

For the six months ended June 30, 2014, cost of goods sold increased$39.0 million, or 8.9%, to $477.1 million from $438.1 million during the six months ended June 30, 2013. We estimate our cost of goods sold increased approximately 12.2% as a result of increased sales volumes, while commodity cost deflation resulted in a 3.3% decrease in cost of goods sold.

Gross profit

For the six months ended June 30, 2014, gross profit increased$22.2 million, or 17.7%, to $147.5 million from $125.3 million for the three months ended June 30, 2013, driven primarily by increased sales volumes. Our gross margin was 23.6% for the six months ended June 30, 2014 and 22.2% for the six months ended June 30, 2013. This increase was primarily driven by improved gross margins on sales of structural components and lumber & lumber sheet goods, as well as a higher percentage of total net sales being derived from non-commodity product offerings.

Operating expenses

For the six months ended June 30, 2014, selling, general and administrative expenses increased$16.7 million, or 13.7%, to $138.2 million, or 22.1% of net sales, from $121.5 million, or 21.6% of net sales, for the six months ended June 30, 2013. Variable costs to serve higher sales volumes, such as sales commissions, shipping and handling costs and other variable compensation, increased by $6.7 million in the aggregate. Other salary, wage, benefit and employer taxation costs increased $7.4 million, primarily as a result of headcount additions to serve higher sales volume and generate future growth opportunities and a $0.7 million increase in stock compensation expense. We estimate that general and administrative expenses associated with our transition to a public company for the six months ended June 30, 2014 were approximately $1.0 million.

For the six months ended June 30, 2014, the Company incurred $0.4 million of public offering transaction-related costs in connection with a secondary offering in which shares were sold by certain stockholders. The Company did not receive any proceeds from the offering. For the six months ended June 30, 2013, the Company incurred $0.7 million of non-capitalizable costs associated with our IPO.

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Other income (expenses)

Interest expense. For the six months ended June 30, 2014, interest expense was $1.3 million compared to $2.3 million for the six months ended June 30, 2013. This decrease relates primarily to a decrease in Revolver borrowings and lower average borrowing rates in 2014.

Income tax from continuing operations

For the six months ended June 30, 2014, income tax expense from continuing operations was $1.4 million compared to an income tax benefit of $0.9 million for the six months ended June 30, 2013. The Company recognized pre-tax income for the six months ended June 30, 2014 and a pre-tax loss for the six months ended June 30, 2013. The effective tax rate from continuing operations for the six months ended June 30, 2014 was 40.0% compared to 28.2% for the six months ended June 30, 2013. The increase in the tax rate is primarily due to a change in the Manufacturing Deduction tax benefits and the non-deductibility of certain public offering transaction-related costs.

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. During 2013 and the first six months of 2014, our capital resources have primarily consisted of cash and cash equivalents, borrowings under our Revolver and proceeds from our initial public offering.

Our liquidity at June 30, 2014 was $99.3 million, which includes $9.1 million in cash and cash equivalents and $90.2 million of unused borrowing capacity under our Revolver.

We believe that our cash flows from operations, combined with our current cash levels, 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

Adjusted working capital* and net current assets

Adjusted working capital was $142.2 million and $122.6 million as of June 30, 2014 and December 31, 2013, respectively, and net current assets (current assets less current liabilities) were $151.8 million and $124.2 million as of June 30, 2014 and December 31, 2013, respectively, as summarized in the following table:

(in thousands)	June 30, 2014			December 31, 2013
Accounts receivable, net	$	130,999		$	111,285
Inventories, net	117,563			91,303
Other current assets	25,858			22,948
Income taxes payable	(4,736		)	(2,989		)
Accounts payable, accrued expenses and other current liabilities	(127,485		)	(99,945		)
Total adjusted working capital*	142,199			122,602
Cash and cash equivalents	9,116			1,138
Restricted assets	460			460
Total net current assets	$	151,775		$	124,200

*Adjusted working capital is a non-GAAP financial measure that management uses to assess the Company’s financial position and liquidity. Management believes adjusted working capital provides investors with an additional view of the Company’s liquidity and ability to repay current obligations. We calculate adjusted working capital as current assets, as determined under GAAP, excluding cash and cash equivalents and restricted assets, minus current liabilities, as determined under GAAP, excluding the Revolver. The presentation of this additional information is not meant to be considered superior to, in isolation of or as a substitute for results prepared in accordance with GAAP or as an indication of our performance. Our calculation of adjusted working capital is not necessarily comparable to similarly titled measures reported by other companies.

Accounts receivable, net, increased$19.7 million from December 31, 2013 to June 30, 2014 primarily due to seasonal increases in sales and days sales outstanding (measured against net sales in the current fiscal quarter of each period) increased from 33 days at December 31, 2013 to 34 days at June 30, 2014.

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Inventories, net, increased$26.3 million from December 31, 2013 to June 30, 2014 and inventory days on hand (measured against cost of goods sold in the current fiscal quarter of each period) increased from 36 days at December 31, 2013 to 40 days at June 30, 2014 primarily due to seasonal increases in inventory during the second quarter of 2014.

Income taxes payable increased$1.7 million from December 31, 2013 to June 30, 2014. Approximately $4.4 million of this increase related to year-to-date pre-tax earnings, which was offset by income tax payments, net of refunds, of $2.7 million. These payments related primarily to the settlement of an audit of prior taxable years with the Internal Revenue Service.

Accounts payable, accrued expenses and other liabilities increased$27.5 million from December 31, 2013 to June 30, 2014 primarily due to an increase in the volume of inventory purchases.

Cash flows from operating activities

Net cash used in operating activities was $11.9 million and $38.7 million for the six months ended June 30, 2014 and 2013, respectively, as summarized in the following table:

	Six Months Ended June 30,
(in thousands)	2014			2013
Net income (loss)	$	2,339		$	(2,079	)
Non-cash expenses	7,336			7,400
Change in deferred income taxes	(3,005		)	(2,589		)
Change in working capital and other	(18,551		)	(41,414		)
Net cash used in operating activities	$	(11,881	)	$	(38,682	)

Net cash used in operating activities declined by $26.8 million for the six months ended June 30, 2014 as compared to the six months ended June 30, 2013 primarily due to the following:

• Net income increased by $4.4 million as discussed in “-Operating Results,” above.

• Cash used in operating activities related to working capital and other declined by $22.9 million. The increase in accounts receivable during the six months ended June 30, 2014 was $11.1 million lower than the prior year period due primarily to a smaller increase in net sales during the six months ended June 30, 2014 compared to six months ended June 30, 2013. The increase in accounts payable during the six months ended June 30, 2014 was $13.2 million higher than the prior year period due primarily to purchases of commodity inventory in excess of immediate needs in the fourth quarter of 2012, which reduced the seasonal increase in accounts payable for the six months ended June 30, 2013.

Cash flows from investing activities

Net cash (used in) provided by investing activities was $(9.7) million and $0.5 million for the six months endedJune 30, 2014 and 2013, respectively, as summarized in the following table:

	Six Months Ended June 30,
(in thousands)	2014			2013
Purchases of property and equipment	$	(12,837	)	$	(1,335	)
Proceeds from sale of property, equipment and real estate	2,603			2,539
Change in restricted assets	503			1,684
Purchase of business	—			(2,373		)
Net cash (used in) provided by investing activities	$	(9,731	)	$	515

Cash used for the purchase of property and equipment for the six months ended June 30, 2014 and 2013 resulted primarily from the purchase of vehicles and equipment to support increased sales volume and replace aged assets.

Cash provided by the sale of property, equipment and real estate for the six months ended June 30, 2014 and 2013 resulted primarily from the sale of real estate during those periods.

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Cash provided by restricted assets during the six months ended June 30, 2014 and 2013 resulted primarily from the release of escrow funds and excess deposits used to pre-fund expected losses for self-insured casualty and health claims incurred by the Company.

The Company acquired Chesapeake during the six months ended June 30, 2013.

Cash flows from financing activities

Net cash provided by financing activities was $29.6 million and $44.5 million for the six months ended June 30, 2014 and 2013, respectively, as summarized in the following table:

	Six Months Ended June 30,
(in thousands)	2014			2013
Proceeds from Revolver, net of repayments	$	31,762		$	45,481
Payments on capital leases	(736		)	(788		)
Other financing activities, net	(1,436		)	(160		)
Net cash provided by financing activities	$	29,590		$	44,533

Proceeds from the Revolver were primarily used to fund cash used in operating activities and purchases of property and equipment for the six months ended June 30, 2014 and 2013.

Other financing activities, net, for the six months ended June 30, 2014 consists primarily of secured borrowings, debt issuance costs and payment of a holdback amount related to the Chesapeake acquisition.

Capital expenditures

Capital expenditures vary depending on prevailing business factors, including current and anticipated market conditions. Historically, capital expenditures have for the most part remained at relatively low levels in comparison to the operating cash flows generated during the corresponding periods. We expect our 2014 capital expenditures to be approximately $30 to $40 million (including the incurrence of capital lease obligations) primarily related to rolling stock and equipment, including lease buyouts, and facility and technology investments to support our operations.

Revolving credit facility

On June 30, 2009, we entered into the Credit Agreement with WFCF, which includes the Revolver. The Credit Agreement has subsequently been amended eleven times. We were in compliance with all debt covenants for the quarter ended June 30, 2014. We are subject to a financial covenant requiring a minimum Fixed Charge Coverage Ratio of 1.00:1.00 if Adjusted Liquidity is less than $20 million. While there can be no assurances, based upon our forecast, we do not expect the financial covenant to become applicable during the year ended December 31, 2014.

We had outstanding borrowings of $90.8 million with net availability of $90.2 million as of June 30, 2014. The interest rate on outstanding LIBOR Rate borrowings of $81.0 million was 1.7% and the interest rate on outstanding Base Rate borrowings of $9.8 million was 3.8% as of June 30, 2014. We had $9.2 million in letters of credit outstanding under the Credit Agreement as of June 30, 2014. The Revolver is collateralized by substantially all of our assets.

Contractual Obligations and Commercial Commitments

Outstanding borrowings under the Revolver increased to $90.8 million at June 30, 2014 from $59.1 million at December 31, 2013.

The Company has entered into contracts to purchase fleet and certain equipment, which are non-cancellable, enforceable and legally binding on us. As of June 30, 2014, these purchase obligations totaled $13.6 million. The Company expects to pay for these assets over the six-month period ending December 31, 2014.

Off-Balance Sheet Arrangements

At June 30, 2014 and December 31, 2013, other than operating leases and letters of credit issued under the Credit Agreement, we had no material off-balance sheet arrangements with unconsolidated entities.

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Recently Issued Accounting Pronouncements

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers. ASU 2014-09 provides a comprehensive revenue recognition model requiring companies to recognize revenue for the transfer of goods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services. The guidance also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts. ASU 2014-09 is effective for annual and interim periods beginning after December 15, 2016. Early application is not permitted. The guidance permits the use of either a retrospective or cumulative effect transition method. We have not yet selected a transition method and are currently evaluating the impact of the standard on our financial position and results of operations.

Critical Accounting Policies

There have been no significant material changes to the critical accounting policies as disclosed in the Company’s 2013 Annual Report on Form 10-K.

ITEM 3     QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There have been no significant material changes to the market risks as disclosed in the Company’s 2013 Annual Report on Form 10-K.

ITEM 4    CONTROLS AND PROCEDURES

Disclosure controls and procedures

Our senior management is responsible for establishing and maintaining disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), which are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer’s management, including its principal executive officer or officers and principal financial officer or officers, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure.

We have evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report, with the participation of our Chief Executive Officer and Chief Financial Officer, as well as other key members of our management. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of June 30, 2014.

Changes in internal control over financial reporting

There was no change in our internal control over financial reporting during the three months ended June 30, 2014 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION

ITEM 1    LEGAL PROCEEDINGS

We are currently involved in various claims, legal proceedings and lawsuits incidental to the conduct of our business in the ordinary course. We are a defendant in various pending lawsuits, legal proceedings and claims arising from assertions of alleged product liability, warranty, casualty, construction defect, contract, tort, employment and other claims. We carry insurance in such amounts in excess of our self-insurance as we believe to be reasonable under the circumstances although insurance may or may not cover any or all of our liabilities in respect of claims and lawsuits. We do not believe that the ultimate resolution of these matters will have a material adverse effect on our consolidated financial position, cash flows or operating results.

ITEM 1A    RISK FACTORS

There have been no material changes in our risk factors from those disclosed in "Part I, Item 1A Risk Factors" in our 2013 Annual Report on Form 10-K. The risks described in our 2013 Annual Report on Form 10-K, in addition to the other information set forth in this report,are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

ITEM 2    UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

ITEM 3    DEFAULTS UPON SENIOR SECURITIES

Not applicable.

ITEM 4    MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5    OTHER INFORMATION

None.

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ITEM 6    EXHIBITS

EXHIBIT INDEX

Exhibit No.	Description
10.1	Separation Agreement, dated as of April 4, 2014, between Stock Building Supply Holdings, Inc. and James F. Drexinger (incorporated by reference to Exhibit 10.2 to the Stock Building Supply Holdings, Inc. Form 10-Q filed with the Commission on April 29, 2014 in Commission File No. 001-36050)
31.1	Certification by Jeffrey G. Rea, President and Chief Executive Officer, pursuant to Exchange Act Rule 13a-14, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification by James F. Major, Jr., Executive Vice President, Chief Financial Officer and Treasurer, pursuant to Exchange Act Rule 13a-14, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1	Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2	Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS*	XBRL Instance Document
101.SCH*	XBRL Taxonomy Extension Schema Document
101.CAL*	XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF*	XBRL Taxonomy Extension Definition Linkbase Document
101.LAB*	XBRL Taxonomy Extension Label Linkbase Document
101.PRE*	XBRL Taxonomy Extension Presentation Linkbase Document

_________________

* XBRL (Extensible Business Reporting Language) information is furnished and not filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.

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SIGNATURE

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	STOCK BUILDING SUPPLY HOLDINGS, INC.
Date: July 29, 2014	By:	/s/ James F. Major, Jr.
		Executive Vice President, Chief Financial Officer and Treasurer
		(Principal financial and accounting officer and duly authorized officer)

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