Net sales for the fourth quarter ending December 31, 2018 were $1.8 billion, a 2.1 percent increase compared to a year ago. The Company had one additional sales day in the fourth quarter of 2018 compared to the fourth quarter of 2017. Estimated sales unit volume per day grew at 3.3 percent in the quarter, partially offset by approximately 2.8 percent from the impact of commodity deflation, which resulted in sales per day growth of 0.5 percent. Estimated sales unit volume per day, excluding commodity inflation, grew approximately 4.5 percent in the single-family homebuilding end market and 1.1 percent in the repair and remodeling/other end market while the multi-family end market declined by 1.8 percent as expected. Additionally, value-added products sales per day grew by 6.8 percent, including 4.7 percent in the windows, doors, and millwork category and 9.1 percent in manufactured products.

Gross margin of $492.8 million in the fourth quarter of 2018 increased by $61.6 million, or 14.3 percent, over the prior year. Gross margin percentage was 27.1 percent, an increase of approximately 290 basis points compared to the fourth quarter of 2017 and an increase of 240 basis points over the third quarter of 2018. The margin percentage increase was attributable to the sharp decline in the cost of commodities during the quarter, relative to our short-term customer pricing commitments, combined with continued pricing discipline and growth in value-added products.

Rapid commodity inflation or deflation can cause short-term gross margin percentage fluctuations, whereas higher or lower sustained commodity prices will increase or decrease, respectively, the Company’s net sales, gross margin and Adjusted EBITDA dollars.

SG&A in the fourth quarter of 2018 was $402.3 million, or 22.2 percent of sales, compared to $366.4 million, or 20.6 percent of sales, in the fourth quarter of 2017. The increase of approximately $35.9 million was mainly due to higher variable costs, including compensation related to the improved performance. As a percentage of sales, SG&A increased by 1.6 percent as fixed cost leverage was offset by increased commissions and incentives related to the high margins achieved in the fourth quarter.

Interest expense in the fourth quarter of 2018 was $23.4 million compared to $89.5 million in the same period last year. Adjusting for the $56.3 million one-time premium paid to redeem notes in the fourth quarter of 2017, interest expense declined by $6.6 million. The year over year reduction is largely a result of a gain on debt extinguishment in the amount of $3.2 million and the opportunistic refinancing transactions the Company executed in 2017, slightly offset by rising interest rates impacting the floating rate instruments. The debt extinguishment executed in the fourth quarter of 2018 consisted of a series of open market purchases of $53.6 million in aggregate principal amount of 2024 notes. In February 2019, an additional $20.4 million in aggregate principal amount of the same notes was repurchased.

GAAP income tax expense in the fourth quarter of 2018 was $15.0 million compared to income tax expense of $18.0 million in the fourth quarter of 2017. The effective tax rate for the fourth quarter is approximately 22.4 percent.

Net income for the fourth quarter of 2018 was $52.0 million, or $0.45 per diluted share, compared to a net loss of ($42.7) million, or ($0.38) per diluted share, for the fourth quarter of 2017 due to the improved operating results in the fourth quarter of 2018 and the one-time premium paid related to the refinancing transactions in the prior year.

Adjusted net income was $53.1 million, or $0.46 per diluted share, compared to $46.6 million, or $0.40 per diluted share, in the fourth quarter of 2017. The year over year increase of $6.5 million, or 14.0 percent, was primarily driven by improved operating results and lower interest expense.

Fourth quarter Adjusted EBITDA grew $28.1 million to $125.0 million compared to $96.9 million in the period a year ago, an increase of 29.0 percent. The year over year improvement was largely driven by the increase in sales, particularly in the value-added product categories, and the Company’s expanded gross margin percentage. As a result, Adjusted EBITDA improved to 6.9 percent of sales in the fourth quarter from 5.4 percent in the same period a year ago.

Net sales for the full year 2018 were $7.7 billion, a 9.8 percent increase over the prior year comprised of an estimated sales unit volume growth of 3.2 percent and approximately 6.6 percent of commodity price inflation. Single-family and repair and remodel / other end market sales unit volume growth in 2018 was partially offset by expected declines in the multi-family end markets. Additionally, value-added products grew by 10.5 percent.

Gross margin increased for the full year 2018 by $195.5 million to $1,922.9 million. Gross margin percentage increased to 24.9 percent from 24.6 percent in 2017, a 30 basis point increase. The pressure experienced on gross margin percentage during the first half of 2018, due to rising commodity costs relative to our customer pricing commitments, was more than offset by the sharp decline in commodity costs during the second half of the year.

Rapid commodity inflation or deflation can cause short-term gross margin percentage fluctuations, whereas higher or lower sustained commodity prices will over time increase or decrease, respectively, the Company’s sales, gross margin and Adjusted EBITDA dollars.

Interest expense was $108.2 million in 2018, a decrease of $85.0 million from 2017. This decrease, which is largely attributable to the capital management strategy executed in both 2018 and 2017, was partially offset by increased interest expense due to increased market interest rates on our floating rate debt instruments. Interest expense for the year ended December 31, 2018 included a $3.2 million gain on debt extinguishment. Excluding the one-time charges of $58.7 million related to the debt transactions executed in 2017, interest expense decreased by $26.3 million.

Net income for the full year 2018 was $205.2 million, or $1.76 per diluted share, compared to $38.8 million, or $0.34 per diluted share, in 2017, an increase of $1.42 per diluted share driven by improved operating results for the full year 2018 and the one-time costs related to the refinancing transactions in the prior year.

Adjusted net income for the full year 2018 was $221.2 million, or $1.90 per diluted share, compared to $147.2 million, or $1.27 per diluted share, for the full year 2017, an increase of $0.63 per diluted share. The year over year increase of $74.0 million, or 50.3 percent, was primarily driven by the Company’s sales growth, improved margin and lower interest expense.

Adjusted EBITDA for the full year 2018 grew $82.6 million to $501.6 million, or 6.5 percent of sales, compared to $419.0 million, or 6.0 percent of sales, for the prior year. The year over year improvement was attributable to cost leverage and the growth in higher margin value-added products partially offset by an increase in variable costs including sales commissions and incentives related to the profitable growth in 2018.

Net debt as of December 31, 2018 declined by $179 million to $1,567 million as compared to the prior year end. The Company decreased its leverage ratio versus December 31, 2017 by 1.1x, to 3.1x net debt / Adjusted EBITDA, achieving a goal announced in 2015 to manage the balance sheet leverage ratio between 2.5x and 3.5x.

Due to the substantial conversion of working capital during the fourth quarter, net cash generated in operations and investing was $186.2 million for the full year 2018, achieving the guidance to generate $170 – 190 million for the full year 2018. Cash used in investing activities was $96.6 million in 2018 mainly related to facility improvements to expand the Company’s manufacturing capacity and purchase of rolling stock in support of the Company’s sales growth.

Liquidity as of December 31, 2018 was $595.4 million, consisted of net borrowing availability under the revolving credit facility and cash on hand.

In February of 2019, the Company’s Board of Directors authorized the repurchase of up to $20 million in common stock. We may repurchase shares primarily to offset dilution associated with the Company’s stock incentive plans and other compensation programs. The repurchase plan may also be used for other transactions or for other corporate purposes, if deemed necessary. The program may be suspended or terminated at any time.

Sales

Cost of sales

Gross margin

Selling, general and administrative expenses

Income from operations

Interest expense, net

Income (loss) before income taxes

Income tax expense

Net income (loss)

Comprehensive income (loss)

Basic

Diluted

Basic

Diluted

Sales

Cost of sales

Gross margin

Selling, general and administrative expenses

Income from operations

Interest expense, net

Income before income taxes

Income tax expense (benefit)

Net income

Comprehensive income

Basic

Diluted

Basic

Diluted

Current assets:

Cash and cash equivalents

Accounts receivable, less allowances of $13,054 and $11,771 at December 31, 2018 and 2017, respectively

Other receivables

Inventories, net

Other current assets

Total current assets

Property, plant and equipment, net

Goodwill

Intangible assets, net

Deferred income taxes

Other assets, net

Total assets

Current liabilities:

Accounts payable

Accrued liabilities

Current maturities of long-term debt and lease obligations

Total current liabilities

Long-term debt and lease obligations, net of current maturities, debt discount, and debt issuance costs

Other long-term liabilities

Total liabilities

Commitments and contingencies

Stockholders’ equity:

Preferred stock, $0.01 par value, 10,000 shares authorized; zero shares issued and outstanding at December 31, 2018 and 2017

Common stock, $0.01 par value, 200,000 shares authorized; 115,078 and 113,572 shares issued and outstanding at December 31, 2018 and 2017, respectively

Additional paid-in capital

Retained earnings (accumulated deficit)

Total stockholders’ equity

Total liabilities and stockholders’ equity

Cash flows from operating activities:

Net income

Adjustments to reconcile net income to net cash provided by operating activities:

Depreciation and amortization

Amortization and write-off of debt issuance costs and debt discount

(Gain) loss on extinguishment of debt

Payment of original issue discount

Deferred income taxes

Stock compensation expense

Net (gain) loss on sales of assets and asset impairments

Changes in assets and liabilities

Receivables

Inventories

Other current assets

Other assets and liabilities

Accounts payable

Accrued liabilities

Net cash provided by operating activities

Cash flows from investing activities:

Purchases of property, plant and equipment

Proceeds from sale of property, plant and equipment

Cash used for acquisitions, net

Net cash used in investing activities

Cash flows from financing activities:

Borrowings under revolving credit facility

Payments under revolving credit facility

Proceeds from issuance of notes

Repayments of long-term debt and other loans

Proceeds from long-term debt and other loans

Payments of debt extinguishment costs

Payments of loan costs

Exercise of stock options

Repurchase of common stock

Net cash used in financing activities

Net (decrease) increase in cash and cash equivalents

Cash and cash equivalents at beginning of period

Cash and cash equivalents at end of period

Reconciliation to Adjusted EBITDA:

GAAP Net Income

Integration related expenses

Debt issuance and refinancing cost ⁽¹⁾

Revaluation of NOL ⁽²⁾

Adjusted Net Income

Diluted adjusted net income per share:

Reconciling items:

Depreciation and amortization expense

Interest expense, net

Income tax (benefit) expense

Stock compensation expense

(Gain)/loss on sale and asset impairments

Other management-identified adjustments ⁽³⁾

Adjusted EBITDA

Adjusted EBITDA Margin

Gain or loss associated with refinancing long term debt.

In 2017, the company revalued its NOL tax asset given the tax reform that allows for a lower federal corporate tax rate.

Primarily relates to severance and one time cost.

Net sales

Gross margin

Gross margin %

Adjusted SG&A/Other (excluding depreciation and amortization) as a % of sales ⁽¹⁾

Adjusted EBITDA

Adjusted EBITDA margin %

Depreciation and amortization

Interest expense, net of debt issuance cost and refinancing

Income tax expense

Other adjustments

Adjusted Net Income

Basic adjusted net income per share:

Diluted adjusted net income per share:

Basic

Diluted

The company provided detailed explanations of these non-GAAP financial measures in its Form 8-K filed with the SEC on February 28, 2019.

Adjusted SG&A and other as a percentage of sales is defined as GAAP SG&A less depreciation and amortization, stock comp, acquisition, integration and other expenses. GAAP SG&A in Q4-18 of $402.3M less $25.2M depreciation and amortization, less $4.3M of integration expenses, less $4.5M of stock comp and $0.6M loss from sales, impairments, and other. GAAP SG&A in FY18 of $1,554.0M less $97.9M depreciation and amortization, less $19.2M of integration expenses, less $14.4M of stock comp and $1.1M loss from sales, impairments, and other.

Lumber & Lumber Sheet Goods

Manufactured Products

Windows, Doors & Millwork

Gypsum, Roofing & Insulation

Siding, Metal & Concrete Products

Other

Total adjusted net sales

Three months ended

December 31,

2024 Secured Notes @ 5.625% Fixed

2024 Term Loan @ 5.2% (Floating LIBOR)

Revolving Credit Facility @ 3.9% (Floating LIBOR)

Amortization of deferred loan costs and debt discount

Other finance obligations and capital leases

Gain on debt extinguishment

Other

Cash

Total