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STOCK BUILDING SUPPLY HOLDINGS, INC. - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

July 29, 2014

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, 2014 increased 9.5% 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. 12 -------------------------------------------------------------------------------- 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 average 2014 average 2014 versus 2013 price 2014 versus 2013 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. 13 --------------------------------------------------------------------------------



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. 14 --------------------------------------------------------------------------------



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

Three Months Ended Three Months Ended June 30, 2014 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. 15 -------------------------------------------------------------------------------- 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 Six Months Ended June 30, 2014 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. 16

-------------------------------------------------------------------------------- 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: June 30, December 31, (in thousands) 2014 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.

17 -------------------------------------------------------------------------------- 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 ended June 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. 18 -------------------------------------------------------------------------------- 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. 19



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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.


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