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Management's Discussion of Results of Operations (Excerpts)

For purposes of readability, Zenith attempts to strip out all tables in excerpts from the Management Discussion. That information is contained elsewhere in our articles. The idea of this summary is simply to review how well we believe Management does its reporting. Also, this highlights what Management believes is important.

In our Decision Matrix at the end of each article, a company with 0 to 2 gets a "-1", and 3 to 5 gets a "+1."

On a scale of 0 to 5, 5 being best, Zenith rates this company's Management's Discussion as a 5.


COMPANY OVERVIEW

We are a leading supplier and manufacturer of building materials, manufactured 
components and construction services to professional contractors, 
sub-contractors and consumers. The Company operates approximately 400 locations 
in 40 states across the United States. Given the span and depth of our 
geographical reach, our locations are organized into nine geographical regions 
(Regions 1 through 9), which are also our operating segments, and these are 
further aggregated into four reportable segments: Northeast, Southeast, South 
and West. All of our segments have similar customers, products and services, 
and distribution methods. Our financial statements contain additional 
information regarding segment performance which is discussed in Note 13 to the 
condensed consolidated financial statements included in Item 1 of this 
quarterly report on Form 10-Q.

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

We group our building products into six product categories:

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

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

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

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

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

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

Our operating results are dependent on the following trends, events and 
uncertainties, some of which are beyond our control:

Homebuilding Industry. Our business is driven primarily by the residential new 
construction market and the residential repair and remodel market, which are in 
turn dependent upon a number of factors, including demographic trends, interest 
rates, consumer confidence, employment rates, housing affordability, household 
formation, land development costs, the availability of skilled construction 
labor, and the health of the economy and mortgage markets. According to the 
U.S. Census Bureau, the seasonally adjusted annualized rates for U.S. total 
housing starts and U.S. single-family housing starts were 1.3 million and 0.9 
million, respectively, as of September 30, 2019. However, both total and 
single-family housing starts remain below the normalized historical annual 
averages (from 1959 through 2018) of 1.5 million and 1.1 million, respectively. 
Due to the lower levels in housing starts versus historical norms, increased 
competition for homebuilder business and cyclical fluctuations in commodity 
prices, we may experience pressure on our gross margins. In addition to these 
factors, there has been a trend of consolidation within the building products 
supply industry. However, our industry remains highly fragmented and 
competitive and we will continue to face significant competition from local and 
regional suppliers. We still believe there are several meaningful trends that 
indicate U.S. housing demand will continue to trend towards recovering to the 
historical average. These trends include relatively low interest rates, the 
aging of housing stock, and normal population growth due to immigration and 
birthrate exceeding death rate. While the rate of market growth has recently 
eased, industry forecasters, including the National Association of Homebuilders 
(“NAHB”), expect to see continued increases in housing demand over the next 
year.

Targeting Large Production Homebuilders. In recent years, the homebuilding 
industry has undergone consolidation, and the larger homebuilders have 
increased their market share. We expect that trend to continue as larger 
homebuilders have better liquidity and land positions relative to the smaller, 
less capitalized homebuilders. Our focus is on maintaining relationships and 
market share with these customers while balancing the competitive pressures we 
are facing in servicing large homebuilders with certain profitability 
expectations. Additionally, we have been successful in expanding our custom 
homebuilder base while maintaining acceptable credit standards.

Repair and remodel end market. Although the repair and remodel end market is 
influenced by housing starts to a lesser degree than the homebuilding market, 
the repair and remodel end market is still dependent upon some of the same 
factors as the homebuilding market, including demographic trends, interest 
rates, consumer confidence, employment rates and the health of the economy and 
home financing markets. We expect that our ability to remain competitive in 
this space will depend on our continued ability to provide a high level of 
customer service coupled with a broad product offering.

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

Economic Conditions. Economic changes both nationally and locally in our 
markets impact our financial performance. The building products supply industry 
is highly dependent upon new home construction and subject to cyclical market 
changes. Our operations are subject to fluctuations arising from changes in 
supply and demand, national and local economic conditions, labor costs and 
availability, competition, government regulation, trade policies and other 
factors that affect the homebuilding industry such as demographic trends, 
interest rates, housing starts, the high cost of land development, employment 
levels, consumer confidence, and the availability of credit to homebuilders, 
contractors, and homeowners.

Housing Affordability. The affordability of housing can be a key driver in 
demand for our products. Home affordability is influenced by a number of 
economic factors, such as the level of employment, consumer confidence, 
consumer income, the supply of houses, the availability of financing and 
interest rates. Changes in the inventory of available homes as well as economic 
factors relative to home prices could result in changes to the affordability of 
homes. As a result, homebuyer demand may shift towards smaller, or larger, 
homes creating fluctuations in demand for our products.

Cost of Materials. Prices of wood products, which are subject to cyclical 
market fluctuations, may adversely impact operating income when prices rapidly 
rise or fall within a relatively short period of time. We purchase certain 
materials, including lumber products, which are then sold to customers as well 
as used as direct production inputs for our manufactured and prefabricated 
products. Short-term changes in the cost of these materials, some of which are 
subject to significant fluctuations, are oftentimes passed on to our customers, 
but our pricing quotation periods may limit our ability to pass on such price 
changes. We may also be limited in our ability to pass on increases on in-bound 
freight costs on our products. Our inability to pass on material price 
increases to our customers could adversely impact our operating results.

Controlling Expenses. Another important aspect of our strategy is controlling 
costs and striving to be a low-cost building materials supplier in the markets 
we serve. We pay close attention to managing our working capital and operating 
expenses. Further, we pay careful attention to our logistics function and its 
effect on our shipping and handling costs.

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

Capital Structure: As a result of our historical growth through acquisitions, 
we have substantial indebtedness. We strive to optimize our capital structure 
to ensure that our financial needs are met in light of economic conditions, 
business activities, organic investments, opportunities for growth through 
acquisition and the overall risk characteristics of our underlying assets. In 
addition to these factors, we also evaluate our capital structure on the basis 
of our leverage ratio, our liquidity position, our debt maturity profile and 
market interest rates. As such, we may enter into various debt or equity 
transactions in order to appropriately manage and optimize our capital 
structure.



RECENT DEVELOPMENTS

During the nine months ended September 30. 2019, the Company executed several 
debt transactions, including extending the maturity of our $900.0 million 
revolving credit facility (“2023 facility”), redemption of $192.4 million in 
aggregate principal amount of our 5.625% senior secured notes due 2024 (“2024 
notes”), and repayment of $301.2 million of our senior secured term loan 
facility due 2024 (“2024 term loan”). The repayments of our 2024 notes and 2024 
term loan were funded with the proceeds from the issuance of $475.0 million in 
aggregate principal amount of our 6.75% senior secured notes due 2027 (“2027 
notes”) and cash on hand. Collectively, these transactions have extended our 
debt maturity profile and reduced the amount of long-term debt outstanding.

These transactions are described in Note 4 to the condensed consolidated 
financial statements included in Item 1 of this quarterly report on Form 10-Q. 
From time to time, based on market conditions and other factors and subject to 
compliance with applicable laws and regulations, the Company may repurchase or 
call our notes, repay debt, repurchase shares of our common stock or otherwise 
enter into transactions regarding its capital structure.

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

CURRENT OPERATING CONDITIONS AND OUTLOOK

For the third quarter of 2019, actual U.S. total housing starts were 0.3 
million, a 4.1% increase compared to the third quarter of 2018. Actual U.S. 
single-family starts were 0.2 million in the third quarter of 2019, a 3.7% 
increase compared to the same quarter a year ago. For the nine months ended 
September 30, 2019 actual U.S. total housing starts were 1.0 million, a 1.3% 
decrease compared to the nine months ended September 30, 2018. Actual U.S. 
single-family starts were 0.7 million in the first nine months of 2019, a 1.8% 
decrease compared to the same period a year ago. A composite of third party 
sources, including the NAHB, are forecasting 1.3 million U.S. total housing 
starts for the full year 2019, an increase of 0.8% from 2018, and 0.9 million 
U.S single family housing starts, a decrease of 0.1% from 2018. In addition, in 
its September 2019 semi-annual forecast, the Home Improvement Research 
Institute (“HIRI”) forecasted sales in the professional repair and remodel end 
market to increase approximately 4.5% in 2019 compared to 2018.

Our net sales for the third quarter of 2019 decreased 6.5% from the same period 
last year. Commodity price deflation decreased our sales in the third quarter 
of 2019 by an estimated 17.4%. In the third quarter of 2019, we had one 
additional selling day compared to the third quarter of 2018, which increased 
sales by 1.5%. Excluding the impact of commodity price deflation and the 
additional selling day, we achieved 9.4% sales growth in the single-family, 
multi-family and repair and remodel/other end markets, primarily as a result of 
sales volume growth in our manufactured products and windows, doors & millwork 
categories. Our gross margin percentage increased by 2.6% during the third 
quarter of 2019 compared to the third quarter of 2018. This increase in gross 
margin percentage is primarily attributable to an improved product mix, the 
decline in the cost of commodities relative to our customer pricing commitments 
and continued pricing discipline. In addition, sales growth in our value-add 
higher margin product categories, primarily our manufactured products and 
windows, doors & millwork categories, contributed to increased gross profit 
dollars and percentage compared to the third quarter of 2018. Our selling, 
general and administrative expenses, as a percentage of net sales, were 20.8% 
in the third quarter of 2019, a 1.9% increase from 18.9% in the third quarter 
of 2018. This increase was largely due to the effects of commodity price 
deflation on our net sales and an increase in variable compensation related to 
increased sales volume and gross margin in the third quarter of 2019 compared 
to the third quarter of 2018.

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

SEASONALITY AND OTHER FACTORS

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

•


The volatility of lumber prices;

•


The cyclical nature of the homebuilding industry;

•


General economic conditions in the markets in which we compete;

•


The pricing policies of our competitors;

•


The production schedules of our customers; and

•


The effects of weather.

The composition and level of working capital typically change during periods of 
increasing sales as we carry more inventory and receivables. Working capital 
levels typically increase in the first and second quarters of the year due to 
higher sales during the peak residential construction season. These increases 
may result in negative operating cash flows during this peak season, which 
historically have been financed through available cash and borrowing 
availability under credit facilities. Generally, collection of receivables and 
reduction in inventory levels following the peak building and construction 
season positively impact cash flow.

RESULTS OF OPERATIONS


Three Months Ended September 30, 2019 Compared with the Three Months Ended 
September 30, 2018

Net Sales. Net sales for the three months ended September 30, 2019 were 
$1,981.0 million, a 6.5% decrease from net sales of $2,118.5 million for the 
three months ended September 30, 2018. Commodity price deflation decreased our 
sales in the third quarter of 2019 by an estimated 17.4%. In the third quarter 
of 2019, we had one additional selling day compared to the third quarter of 
2018 which increased sales by 1.5%. Excluding the impact of commodity price 
deflation and the additional selling day, we achieved 9.4% sales growth in the 
single-family, multi-family and repair and remodel/other end markets primarily 
as a result of sales volume growth in our manufactured products and windows, 
doors & millwork categories.


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

Gross Margin. Gross margin increased $18.4 million to $541.1 million. Our gross 
margin percentage increased to 27.3% in the third quarter of 2019 from 24.7% in 
the third quarter of 2018, a 2.6% increase. Our gross margin percentage 
increase was primarily attributable to an improved product mix, the decline in 
the cost of commodities relative to our customer pricing commitments and 
continued pricing discipline. In addition, sales growth in our value-add higher 
margin product categories, primarily our manufactured products and windows, 
doors & millwork categories, contributed to increased gross profit dollars and 
percentage compared to the third quarter of 2018.

Selling, General and Administrative Expenses. In the third quarter of 2019, 
selling, general and administrative expenses increased $10.5 million, or 2.6%, 
and as a percentage of sales increased to 20.8% from 18.9% in the third quarter 
of 2018. This increase was primarily due to increases in variable compensation 
related to increased sales volume and gross margin. The increase as a 
percentage of net sales was also attributable to the effect of commodity price 
deflation on our net sales.

Interest Expense, Net. Interest expense was $27.8 million in the third quarter 
of 2019, a decrease of $1.3 million from the third quarter of 2018. This 
decrease in interest expense is primarily due to lower outstanding debt 
balances during the third quarter of 2019 compared to the third quarter of 
2018. However, this decrease was partially offset by $3.1 million in one-time 
charges related to the debt financing transactions executed in the third 
quarter of 2019 as well as the effect of higher interest rates.

Income Tax Expense. We recorded income tax expense of $23.7 million and $19.4 
million in the third quarters of 2019 and 2018, respectively. Our effective tax 
rate was 23.3% and 20.9% in the third quarters of 2019 and 2018, respectively.


Nine Months Ended September 30, 2019 Compared with the Nine Months Ended 
September 30, 2018

Net Sales. Net sales for the nine months ended September 30, 2019 were $5,516.9 
million, a 6.6% decrease over net sales of $5,908.8 million for the nine months 
ended September 30, 2018. Commodity price deflation decreased our sales in the 
first nine months of 2019 by an estimated 12.9%. Excluding the impact of 
commodity price deflation, we achieved 6.3% sales growth in the single-family, 
multi-family and repair and remodel/other end markets, primarily as a result of 
sales volume growth in our manufactured products and windows, doors & millwork 
categories.


Nine Months Ended September 30,

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

Gross Margin. Gross margin increased $70.1 million to $1,500.3 million. Our 
gross margin percentage increased to 27.2% in the first nine months of 2019 
from 24.2% in the first nine months of 2018, a 3.0% increase. Our gross margin 
percentage increase was primarily attributable to an improved product mix, the 
decline in the cost of commodities relative to our customer pricing commitments 
and continued pricing discipline. In addition, sales growth in our value-add 
higher margin product categories, primarily our manufactured products and 
windows, doors & millwork categories, contributed to increased gross profit 
dollars and percentage compared to the nine months ended September 30, 2018.

Selling, General and Administrative Expenses. For the nine months ended 
September 30, 2019, selling, general and administrative expenses increased 
$31.4 million, or 2.7%, and as a percentage of sales increased to 21.4% from 
19.5% in the first nine months of 2018. This increase was primarily due to 
increases in variable compensation related to increased sales volume and gross 
margin, as well as an increase in insurance costs. The increase as a percentage 
of net sales was also attributable to the effect of commodity price deflation 
on our net sales.

Interest Expense, Net. Interest expense was $82.1 million for the nine months 
ended September 30, 2019, a decrease of $2.7 million compared to the nine 
months ended September 30, 2018. This decrease in interest expense is primarily 
due to lower outstanding debt balances during the nine months ended September 
30, 2019 compared to the nine months ended September 30, 2018. However, this 
decrease was partially offset by $6.8 million in one-time charges related to 
the debt financing transactions executed in the first nine months of 2019 as 
well as the effect of higher interest rates.

Income Tax Expense. We recorded income tax expense of $54.7 million and $40.5 
million for the nine months ended September 30, 2019 and 2018, respectively. 
Our effective tax rate was 23.2% and 20.9% in the first nine months of 2019 and 
2018, respectively.


Results by Reportable Segment

The following tables show net sales and income before income taxes by 
reportable segment excluding the “All Other” caption as shown in Note 13 to the 
condensed consolidated financial statements included in Item 1 of this 
quarterly report on Form 10-Q (dollars in thousands):

Three months ended September 30,

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

According to the U.S. Census Bureau, actual single-family housing starts in the 
third quarter of 2019 decreased 2.2%, 0.3% and 1.0% in the Northeast, Midwest 
and West regions, respectively, compared to the third quarter of 2018. However, 
single-family housing starts increased 8.1% in the South region over the same 
period. For the third quarter of 2019, our net sales declined in our Southeast, 
South and West reportable segments due to the impact of commodity price 
deflation. Net sales increased slightly in our Northeast reportable segment 
largely due to an increase in sales volume in our manufactured products and 
windows, doors & millwork categories, offsetting the impact of commodity price 
deflation. We achieved increased profitability in our Northeast, Southeast and 
West reportable segments largely due to an improved product mix, the decline in 
the cost of commodities relative to our customer pricing commitments and 
continued pricing discipline. However, profitability declined in our South 
reportable segment largely due to the impact of commodity price deflation 
offsetting the improvement in gross margin percentage.

According to the U.S. Census Bureau, actual single-family housing starts in the 
first nine months of 2019 decreased 9.3%, 5.4% and 8.6% in the Northeast, 
Midwest and West regions, respectively, compared to the first nine months of 
2018. However, single-family housing starts increased 3.4% in the South region 
over the same period. For the nine months ended September 30, 2019, our net 
sales declined in all of our reportable segments primarily due to the impact of 
commodity price deflation. We achieved increased profitability in our 
Northeast, Southeast and South reportable segments largely due to an improved 
product mix, the decline in the cost of commodities relative to our customer 
pricing commitments and continued pricing discipline. However, profitability 
declined in our West reportable segment largely due the impact of commodity 
price deflation offsetting the improvement in gross margin percentage.

LIQUIDITY AND CAPITAL RESOURCES

Our primary capital requirements are to fund working capital needs and 
operating expenses, meet required interest and principal payments, and to fund 
capital expenditures and potential future acquisitions. Our capital resources 
at September 30, 2019 consist of cash on hand and borrowing availability under 
our 2023 facility.

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

As of September 30, 2019, we had no outstanding borrowings under our 2023 
facility and our net excess borrowing availability was $813.5 million after 
being reduced by outstanding letters of credit of approximately $82.2 million. 
Excess availability must equal or exceed a minimum specified amount, currently 
$89.6 million, or we are required to meet a fixed charge coverage ratio of 1:00 
to 1:00. We were not in violation of any covenants or restrictions imposed by 
any of our debt agreements at September 30, 2019.

Liquidity

Our liquidity at September 30, 2019 was $856.8 million, which consists of net 
borrowing availability under the 2023 facility and cash on hand.

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

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

Consolidated Cash Flows

Cash provided by operating activities was $360.3 million for the nine months 
ended September 30, 2019 compared to cash provided by operating activities of 
$9.5 million for the nine months ended September 30, 2018. The $350.7 million 
increase in cash provided by operations was largely the result of a working 
capital decrease of $54.2 million in the first nine months of 2019 compared to 
a working capital increase of $266.5 million for the first nine months of 2018. 
This change in working capital was primarily due to the timing and impact of 
changes in commodity prices on the value of cash received from customers, 
inventory purchases and cash paid to vendors in the first nine months of 2018 
compared to the first nine months of 2019.

Cash used in investing activities was $106.4 million and $76.8 million for the 
nine months ended September 30, 2019 and 2018, respectively. This increase in 
cash used in investing activities was primarily due to our acquisition of Sun 
State in the third quarter of 2019. Our capital expenditures in the first nine 
months of 2019 were consistent with the first nine months of 2018.

Cash used in financing activities was $220.7 million for the nine months ended 
September 30, 2019 compared to cash provided by financing activities of $44.2 
million for the nine months ended September 30, 2018. Cash used in financing 
activities for the first nine months of 2019 was primarily due to $502.1 
million in long-term debt repayments, largely consisting of $301.2 million in 
repayments of the 2024 term loan and $191.5 million in cash repayments of our 
2024 notes. In addition, we had $179.0 million in net repayments on our 2023 
facility in the first nine months of 2019. These payments were offset by $478.4 
million in proceeds received from the issuance of 2027 notes. In connection 
with our debt transactions executed in the first nine months of 2019 we paid 
$10.9 million in debt issuance and extinguishment costs. Further, in the first 
nine months of 2019 we paid $7.9 million to repurchase and retire 460,000 
shares of our common stock pursuant to a repurchase program authorized by our 
board of directors. Cash provided by financing activities for the first nine 
months of 2018 were primarily due to $54.0 million in net borrowings on the 
2023 facility.


Quantitative and Qualitative Disclosures About Market Risk

We may experience changes in interest expense if changes in our debt occur. 
Changes in market interest rates could also affect our interest expense. Our 
2024 notes and 2027 notes bear interest at a fixed rate, therefore, our 
interest expense related to these notes would not be affected by an increase in 
market interest rates. Borrowings under the 2023 facility and the 2024 term 
loan bear interest at either a base rate or eurodollar rate, plus, in each 
case, an applicable margin. A 1.0% increase in interest rates on the 2023 
facility would result in no additional interest expense annually as we had no 
outstanding borrowings as of September 30, 2019. The 2023 facility also 
assesses variable commitment and outstanding letter of credit fees based on 
quarterly average loan utilization. A 1.0% increase in interest rates on the 
2024 term loan would result in approximately $1.6 million in additional 
interest expense annually as of September 30, 2019.

We purchase certain materials, including lumber products, which are then sold 
to customers as well as used as direct production inputs for our manufactured 
products that we deliver. Short-term changes in the cost of these materials and 
the related in-bound freight costs, some of which are subject to significant 
fluctuations, are sometimes, but not always, passed on to our customers. Delays 
in our ability to pass on material price increases to our customers can 
adversely impact our operating results.


Legal Proceedings

The Company has a number of known and threatened construction defect legal 
claims. While these claims are generally covered under the Company’s existing 
insurance programs to the extent any loss exceeds the deductible, there is a 
reasonable possibility of loss that is not able to be estimated at this time 
because (i) many of the proceedings are in the discovery stage, (ii) the 
outcome of future litigation is uncertain, and/or (iii) the complex nature of 
the claims. Although the Company cannot estimate a reasonable range of loss 
based on currently available information, the resolution of these matters could 
have a material adverse effect on the Company's financial position, results of 
operations or cash flows.

In addition, we are involved in various other claims and lawsuits incidental to 
the conduct of our business in the ordinary course. We carry insurance coverage 
in such amounts in excess of our self-insured retention as we believe to be 
reasonable under the circumstances and that may or may not cover any or all of 
our liabilities in respect of such claims and lawsuits. Although the ultimate 
disposition of these other proceedings cannot be predicted with certainty, 
management believes the outcome of any such claims that are pending or 
threatened, either individually or on a combined basis, will not have a 
material adverse effect on our consolidated financial position, cash flows or 
results of operations. However, there can be no assurances that future adverse 
judgments and costs would not be material to our results of operations or 
liquidity for a particular period.

Although our business and facilities are subject to federal, state and local 
environmental regulation, environmental regulation does not have a material 
impact on our operations. We believe that our facilities are in material 
compliance with such laws and regulations. As owners and lessees of real 
property, we can be held liable for the investigation or remediation of 
contamination on such properties, in some circumstances without regard to 
whether we knew of or were responsible for such contamination. Our current 
expenditures with respect to environmental investigation and remediation at our 
facilities are minimal, although no assurance can be provided that more 
significant remediation may not be required in the future as a result of spills 
or releases of petroleum products or hazardous substances or the discovery of 
unknown environmental conditions.



Item 1A. Risk Factors

In addition to the other information set forth in this report, you should 
carefully consider the factors discussed in Part 1, “Item 1A. Risk Factors” in 
our annual report on Form 10-K for the year ended December 31, 2018, which 
could materially affect our business, financial condition or future results. 
The risks described in our annual report on Form 10-K 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.

Other than as described below, there were no material changes to the risk 
factors reported in Part 1, “Item 1A. Risk Factors” in our annual report on 
Form 10-K for the year ended December 31, 2018.

The interest rates on our 2023 facility and 2024 term loan may be impacted by 
the phase out of the London Interbank Offered Rate (“LIBOR”)

Interest rates on borrowings under our 2023 facility and 2024 term loan may be 
based on LIBOR. In July 2017, the United Kingdom Financial Conduct Authority 
announced the desire to phase out the use of LIBOR by the end of 2021. At this 
time, there is no definitive information regarding the future utilization of 
LIBOR or of any particular replacement rate. The phase out of LIBOR may have an 
adverse impact on the cost of our borrowings under our 2023 facility and 2024 
term loan.


Company Stock Repurchases

The shares repurchased and retired in the third quarter of 2019 were 
repurchased pursuant to a program authorized by our board of directors in 
February 2019. Under this program we are authorized to repurchase up to $20.0 
million of our common stock.