UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 2019
OR
☐
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 000-50924
BEACON ROOFING SUPPLY, INC.
(Exact name of registrant as specified in its charter)
Delaware
36-4173371
(State or other jurisdiction of
Incorporation or Organization)
(I.R.S. Employer
Identification No.)
505 Huntmar Park Drive, Suite 300, Herndon, VA 20170
(Address of Principal Executive Offices) (Zip Code)
(571) 323-3939
(Registrant’s telephone number, including area code)
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 and Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act:
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol
Name of each exchange on which registered
Common Stock, $0.01 par value
BECN
NASDAQ Global Select Market
As of April 30, 2019, 68,476,962 shares of common stock, par value $0.01 per share, of the registrant were outstanding.
For the Quarter Ended March 31, 2019
TABLE OF CONTENTS
PART I.
Financial Information (unaudited)
Item 1.
Condensed Consolidated Financial Statements
Consolidated Balance Sheets
3
Consolidated Statements of Operations
4
Consolidated Statements of Comprehensive Income
5
Consolidated Statements of Stockholders’ Equity
6
Consolidated Statements of Cash Flows
7
Notes to Condensed Consolidated Financial Statements
8
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
28
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
43
Item 4.
Controls and Procedures
PART II.
Other Information
Item 6.
Exhibits
44
Signatures
45
2
PART I.Financial Information (Unaudited)
(Unaudited; In thousands, except share and per share amounts)
March 31,
September 30,
2019
2018
Assets
Current assets:
Cash and cash equivalents
$
645
129,927
16,000
Accounts receivable, less allowance of $23,058, $17,584 and $16,493 as of March 31, 2019, September 30, 2018 and March 31, 2018, respectively
869,760
1,090,533
832,823
Inventories, net
1,031,183
936,047
1,005,577
Prepaid expenses and other current assets
332,100
244,360
240,315
Total current assets
2,233,688
2,400,867
2,094,715
Property and equipment, net
271,022
280,407
294,222
Goodwill
2,490,326
2,491,779
2,381,620
Intangibles, net
1,229,949
1,334,366
1,410,302
Other assets, net
1,243
1,511
Total assets
6,226,228
6,508,662
6,182,370
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable
510,434
880,872
593,559
Accrued expenses
453,889
611,539
348,050
Current portions of long-term debt/obligations
19,988
19,661
19,597
Total current liabilities
984,311
1,512,072
961,206
Borrowings under revolving lines of credit, net
416,614
92,442
424,528
Long-term debt, net
2,494,673
2,494,725
2,493,889
Deferred income taxes, net
110,064
106,994
91,101
Long-term obligations under equipment financing and other, net
8,527
13,639
18,313
Other long-term liabilities
5,702
5,290
10,617
Total liabilities
4,019,891
4,225,162
3,999,654
Commitments and contingencies (Note 9)
Convertible preferred stock; $0.01 par value; aggregate liquidation preference $400,000; 400,000 shares authorized, issued and outstanding as of March 31, 2019, September 30, 2018 and March 31, 2018
399,195
Stockholders' equity:
Common stock (voting); $0.01 par value; 100,000,000 shares authorized; 68,475,871, 68,135,790 and 68,043,284 shares issued and outstanding as of March 31, 2019, September 30, 2018 and March 31, 2018, respectively
684
681
680
Undesignated preferred stock; 5,000,000 shares authorized, none issued or outstanding
-
Additional paid-in capital
1,073,243
1,067,040
1,056,248
Retained earnings
752,855
833,834
743,127
Accumulated other comprehensive income (loss)
(19,640
)
(17,250
(16,534
Total stockholders' equity
1,807,142
1,884,305
1,783,521
Total liabilities and stockholders' equity
See accompanying Notes to Condensed Consolidated Financial Statements
Three Months Ended March 31,
Six Months Ended March 31,
Net sales
1,429,037
1,425,625
3,150,713
2,547,604
Cost of products sold
1,094,049
1,087,248
2,380,156
1,939,474
Gross profit
334,988
338,377
770,557
608,130
Operating expense:
Selling, general and administrative
320,408
341,587
648,101
535,340
Depreciation
17,447
17,120
35,048
25,829
Amortization
51,763
37,068
103,784
55,263
Total operating expense
389,618
395,775
786,933
616,432
Income (loss) from operations
(54,630
(57,398
(16,376
(8,302
Interest expense, financing costs, and other
40,452
39,570
78,813
62,138
Income (loss) before provision for income taxes
(95,082
(96,968
(95,189
(70,440
Provision for (benefit from) income taxes1
(26,996
(30,313
(26,210
(71,381
Net income (loss)
(68,086
(66,655
(68,979
941
Dividends on preferred shares2
6,000
12,000
Net income (loss) attributable to common shareholders
(74,086
(72,655
(80,979
(5,059
Weighted-average common stock outstanding:
Basic
68,451,920
68,019,300
68,348,850
67,922,276
Diluted
Net income (loss) per share3:
(1.08
(1.07
(1.18
(0.07
________________________________________
1
Three and six months ended March 31, 2018 amounts include a non-recurring net tax benefit of $1.5 million and $48.0 million, respectively, resulting from recording the provisional impact of the enactment of the 2017 Tax Cuts and Jobs Act (“TCJA”).
Amounts for the three months ended March 31, 2019 and the three and six months ended March 31, 2018 are composed of $5.0 million in undeclared cumulative Preferred Stock dividends, as well as an additional $1.0 million of Preferred Stock dividends that had been declared and paid as of period end. Six months ended March 31, 2019 amount is composed of $5.0 million in undeclared cumulative Preferred Stock dividends, as well as an additional $7.0 million of Preferred Stock dividends that had been declared and paid as of period end. See Note 3 for further discussion.
See Note 5 for detailed calculations and further discussion.
6.0
(Unaudited; In thousands)
Other comprehensive income (loss):
Foreign currency translation adjustment
1,520
(2,028
(2,390
(1,971
Total other comprehensive income (loss)
Comprehensive income (loss)
(66,566
(68,683
(71,369
(1,030
(Unaudited; In thousands, except share amounts)
Accumulated
Additional
Other
Total
Common Stock
Paid-in
Retained
Comprehensive
Stockholders'
Shares
Amount
Capital
Earnings
Income (Loss)
Equity
Three Months Ended March 31, 2018
Balance as of December 31, 2017
67,972,383
679
1,050,389
815,782
(14,506
1,852,344
Issuance of common stock, net of shares withheld for taxes
70,901
1,528
1,529
Issuance costs related to secondary offering of common stock
(45
Stock-based compensation
4,376
Other comprehensive income (loss)
Dividends on preferred shares1
(6,000
Balance as of March 31, 2018
68,043,284
Three Months Ended March 31, 2019
Balance as of December 31, 2018
68,432,707
1,067,711
826,941
(21,160
1,874,176
43,164
725
4,807
Balance as of March 31, 2019
68,475,871
Six Months Ended March 31, 2018
Balance as of September 30, 2017
67,700,858
677
1,047,506
748,186
(14,563
1,781,806
342,426
1,381
1,384
(474
7,835
Six Months Ended March 31, 2019
Balance as of September 30, 2018
68,135,790
340,081
(2,061
(2,058
8,264
(12,000
1 Amount represents dividends that have been declared and paid during the respective periods presented.
Operating Activities
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization
138,832
81,092
Certain interest expense and other financing costs
6,051
3,987
Beneficial lease amortization
1,145
Loss on debt extinguishment
1,725
Gain on sale of fixed assets
(1,172
(319
Deferred income taxes
3,086
(47,260
Changes in operating assets and liabilities, net of the effects of businesses acquired in the period:
Accounts receivable
219,740
186,170
Inventories
(96,052
(131,789
Prepaid expenses and other assets
(85,320
67,425
Accounts payable and accrued expenses
(368,154
(130,695
Other liabilities
415
854
Net cash provided by (used in) operating activities
(242,144
39,966
Investing Activities
Purchases of property and equipment
(26,320
(24,833
Acquisition of businesses, net
(163,973
(2,726,561
Proceeds from the sale of assets
1,428
413
Net cash provided by (used in) investing activities
(188,865
(2,750,981
Financing Activities
Borrowings under revolving lines of credit
1,880,684
1,530,667
Repayments under revolving lines of credit
(1,557,615
(1,097,463
Borrowings under term loan
970,000
Repayments under term loan
(4,850
(441,000
Borrowings under senior notes
1,300,000
Payment of debt issuance costs
(67,723
Repayments under equipment financing facilities and other
(2,642
(5,643
Proceeds from issuance of convertible preferred stock
400,000
Payment of stock issuance costs
(1,279
Payment of dividends on preferred stock
(978
Proceeds from issuance of common stock related to equity awards
1,559
5,317
Taxes paid related to net share settlement of equity awards
(3,617
(3,933
Net cash provided by (used in) financing activities
301,519
2,587,965
Effect of exchange rate changes on cash and cash equivalents
208
800
Net increase (decrease) in cash and cash equivalents
(129,282
(122,250
Cash and cash equivalents, beginning of period
138,250
Cash and cash equivalents, end of period
Supplemental Cash Flow Information
Cash paid during the period for:
Interest
77,336
28,659
Income taxes paid (received), net of refunds
(11,073
33,037
Supplemental Disclosure of Non-cash Financing Activity
Preferred stock dividends, accrued and unpaid
5,022
(Unaudited)
1. Company Overview
Beacon Roofing Supply, Inc. (the “Company”) was incorporated in the state of Delaware on August 22, 1997 and is the largest publicly traded distributor of residential and non-residential roofing materials and complementary building products in the United States and Canada.
On January 2, 2018, the Company completed the acquisition of all the outstanding capital stock of Allied Building Products Corp. (“Allied”), a New Jersey corporation, for $2.625 billion, subject to certain working capital and other adjustments. Allied engages in the distribution of roofing materials, drywall, ceiling tile, and related accessories in the United States and was a wholly-owned subsidiary of Oldcastle Distribution, Inc. (see Note 3 for further discussion).
The Company operates its business under regional and local trade names and, as of March 31, 2019, the Company serviced customers in all 50 states within the United States and 6 provinces in Canada. The Company’s material subsidiaries are Beacon Sales Acquisition, Inc. and Beacon Roofing Supply Canada Company.
2. Summary of Significant Accounting Policies
Basis of Presentation
The Company prepared the condensed consolidated financial statements in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and the requirements of the Securities and Exchange Commission (“SEC”). As permitted under those rules, certain footnotes or other financial information have been condensed or omitted. Certain prior period amounts have been reclassified to conform to current period presentation. The balance sheet as of March 31, 2018 has been presented for a better understanding of the impact of seasonal fluctuations on the Company’s financial condition.
In management’s opinion, the financial statements include all normal and recurring adjustments that are considered necessary for the fair presentation of the Company’s financial position and operating results. The results for the three and six months ended March 31, 2019 are not necessarily indicative of the results to be expected for the twelve months ending September 30, 2019 (“fiscal year 2019” or “2019”).
The three-month periods ended March 31, 2019 and 2018 had 63 and 64 business days, respectively, and the six-month periods ended March 31, 2019 and 2018 each had 125 business days.
These interim Condensed Consolidated Financial Statements should be read in conjunction with the audited Consolidated Financial Statements and Notes thereto contained in the Company’s fiscal year 2018 (“2018”) Annual Report on Form 10-K for the year ended September 30, 2018.
Use of Estimates
The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in these consolidated financial statements and accompanying notes. Significant items subject to such estimates include accounts receivable, inventories, purchase price allocations, goodwill and intangibles, and income taxes. Actual amounts could differ from those estimates.
Recent Accounting Pronouncements—Adopted
In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers.” This guidance requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers and replaces most previously issued revenue recognition guidance. The new standard is effective for public business entities for annual reporting periods, and interim reporting periods contained therein, beginning after December 15, 2017. The standard permits the use of either the full retrospective or modified retrospective adoption methods. The Company elected the modified retrospective method and adopted the standard as of October 1, 2018 utilizing the portfolio practical expedient. The adoption of this guidance did not impact the Company’s retained earnings and did not have a material impact on the Company’s net sales recognition practices, income from operations, or net income per share amounts. The adoption of this guidance did result in certain balance sheet reclassifications to record estimated customer returns, specifically the recognition of a current liability for the gross amount of estimated returns and a current asset for the value of the related products. These reclassifications did not have a material impact on the Company’s consolidated balance sheet as of March 31, 2019. In addition, the adoption of this guidance resulted in additional quantitative
disclosures to disaggregate net sales balances by product line and geography. See Note 4 to the Consolidated Financial Statements for further discussion.
In January 2017, the FASB issued ASU 2017-01, “Business Combinations: Clarifying the Definition of a Business.” This guidance is intended to assist entities when evaluating when a set of transferred assets and activities constitutes a business. This new standard is effective for annual reporting periods, and interim reporting periods contained therein, beginning after December 15, 2017. The Company adopted the standard as of October 1, 2018 and the standard did not have a material impact on the Company’s financial statement and related disclosures.
In May 2017, the FASB issued ASU 2017-09, “Scope of Modification Accounting.” This guidance is intended to provide clarity and reduce both diversity in practice and cost and complexity when applying the guidance in Compensation – Stock Compensation, to a change to the terms or conditions of a share-based payment award. This new standard is effective for annual reporting periods, and interim reporting periods contained therein, beginning after December 15, 2017. The Company adopted the standard as of October 1, 2018 and the standard did not have a material impact on the Company’s financial statement and related disclosures.
Recent Accounting Pronouncements—Not Yet Adopted
In February 2016, the FASB issued ASU 2016-02, “Leases.” This guidance will replace most existing accounting for lease guidance when it becomes effective. This new standard is effective using the modified retrospective approach for annual reporting periods, and interim reporting periods contained therein, beginning after December 15, 2018, and early adoption is permitted. In July 2018, the FASB amended the new lease standard which, among other changes, allows a company to elect to adopt ASU 2016-02 using a transition option whereby a cumulative effect adjustment is recorded to the opening balance of its retained earnings on the adoption date. The guidance will require the Company to record a right of use asset and a lease liability for most of the Company’s leases, including those currently treated as operating leases. The Company will adopt the standard as of October 1, 2019 and will use the practical expedients outlined in the transition guidance. The scope of the overall impact on the Company’s financial statements and related disclosures is still being quantified.
In June 2016, the FASB issued ASU 2016-13, “Financial Instruments – Credit Losses: Measurement of Credit Losses on Financial Instruments.” This guidance is intended to introduce a revised approach to the recognition and measurement of credit losses, emphasizing an updated model based on expected losses rather than incurred losses. This new standard is effective for annual reporting periods, and interim reporting periods contained therein, beginning after December 15, 2019, and early adoption is permitted. The Company is currently evaluating the impact that this guidance may have on its financial statements and related disclosures.
In January 2017, the FASB issued ASU 2017-04, “Simplifying the Accounting for Goodwill Impairment.” This guidance is intended to introduce a simplified approach to measurement of goodwill impairment, eliminating the need for a hypothetical purchase price allocation and instead measuring impairment by the amount a reporting unit’s carrying value exceeds its fair value. This new standard is effective for annual reporting periods, and interim reporting periods contained therein, beginning after December 15, 2019, and early adoption is permitted. The Company does not expect the adoption of this new guidance to have a material impact on its financial statements and related disclosures.
In February 2018, the FASB issued ASU 2018-02, “Income Statement – Reporting Comprehensive Income.” This guidance is intended to address the accounting treatment for the tax effects on items within accumulated other comprehensive income as a result of the adoption of the Tax Cuts and Jobs Act of 2017. This new standard is effective for annual reporting periods, and interim reporting periods contained therein, beginning after December 15, 2018, and early adoption is permitted. The Company does not expect the adoption of this new guidance to have a material impact on its financial statements and related disclosures.
3. Acquisitions
Allied Building Products Corp.
On January 2, 2018 (the “Closing Date”), the Company completed its acquisition of all the outstanding capital stock of Allied (the “Allied Acquisition”), pursuant to a certain stock purchase agreement dated August 24, 2017 (the “Stock Purchase Agreement”), among the Company, Oldcastle, Inc., as parent, and Oldcastle Distribution, Inc., as seller, for approximately $2.625 billion in cash, subject to a working capital and certain other adjustments as set forth in the Stock Purchase Agreement (the “Purchase Price”). As of March 31, 2019, the adjusted Purchase Price for Allied was $2.88 billion, including increases of (i) $164.0 million related to the impact of the Section 338(h)(10) election under the current U.S. tax code and (ii) $88.1 million from a recorded net working capital adjustment.
9
In connection with the Allied Acquisition, on the Closing Date the Company entered into (i) a new term loan agreement with Citibank, N.A., providing for a term loan B facility with an initial commitment of $970.0 million and (ii) an amended and restated credit agreement with Wells Fargo Bank, N.A., providing for a senior secured asset-based revolving credit facility with an initial commitment of $1.30 billion. Base borrowing rates on these facilities are at LIBOR plus 1.25% and LIBOR plus 2.25%, respectively.
In connection with the Allied Acquisition, on the Closing Date, the Company completed the sale of 400,000 shares of Series A Cumulative Convertible Participating Preferred Stock, par value $0.01 per share (the “Preferred Stock”), with an aggregate liquidation preference of $400.0 million, at a purchase price of $1,000 per share, to CD&R Boulder Holdings, L.P., pursuant to a certain investment agreement, dated as of August 24, 2017, with CD&R Boulder Holdings, L.P. and Clayton, Dubilier & Rice Fund IX, L.P. (solely for the purpose of limited provisions therein) (the “Convertible Preferred Stock Purchase”). The $400.0 million in proceeds from the Convertible Preferred Stock Purchase were used to finance, in part, the Purchase Price. The Preferred Stock is convertible perpetual participating preferred stock of the Company, and conversion of the Preferred Stock into $0.01 par value shares of the Company’s common stock will be at a conversion price of $41.26 per share. The Preferred Stock accumulates dividends at a rate of 6.0% per annum (payable in cash or in-kind, subject to certain conditions). The Preferred Stock is not mandatorily redeemable; therefore, it is classified as mezzanine equity on the Company’s consolidated balance sheets and has a balance of $399.2 million (the $400.0 million proceeds received on the Closing Date, net of $0.8 million of unamortized issuance costs) as of March 31, 2019.
Allied’s results of operations have been included with Company’s consolidated results beginning January 2, 2018. Allied distributed products in 208 locations across 31 states as of the date of the close.
The Allied Acquisition has been accounted for as a business combination in accordance with the requirements of ASC 805, “Business Combinations.” The acquisition price has been allocated among assets acquired and liabilities assumed at fair value based on information currently available, with the excess recorded as goodwill. The goodwill recognized is attributable primarily to expected synergies from the Allied assembled workforce operating the branches as part of a larger network and the value stemming from the addition of both new customers and an established new line of business (interiors). As of March 31, 2019, the Company had finalized the purchase accounting entries for the Allied Acquisition, detailed as follows (in thousands):
January 2, 2018
(as reported at
March 31, 2018)
Adjustments
(as adjusted at
March 31, 2019)
Cash
19,322
(19,153
169
315,485
22,064
337,549
Inventory
322,705
(7,920
314,785
Prepaid and other current assets
59,279
16,161
75,440
Property, plant, and equipment
139,528
(168
139,360
1,130,635
102,145
1,232,780
Intangible assets
1,037,000
Current liabilities
(271,252
11,963
(259,289
Non-current liabilities
(6,820
6,097
(723
Total purchase price
2,745,882
131,189
2,877,071
The purchase accounting entries above include the impact of the Section 338(h)(10) election under the current U.S. tax code. The Company made this election on October 15, 2018 and has reflected the $164.0 million impact of this election in the purchase price and its fiscal year 2018 tax provision accordingly. The Company determined that $1.14 billion of goodwill related to the acquisition of Allied is deductible for tax purposes as of March 31, 2019.
The Company’s goodwill and indefinite-lived trade name are tested for impairment annually, and all acquired goodwill and intangible assets are subject to review for impairment should future indicators of impairment develop. There were no material contingencies assumed as part of the Allied Acquisition.
Additional Acquisitions – Fiscal Year 2018
During fiscal year 2018, the Company acquired 7 branches from the following acquisitions:
•
On May 1, 2018, the Company acquired Tri-State Builder’s Supply, a wholesale supplier of roofing, siding, windows, doors and related building products with 1 branch located in Duluth, Minnesota and annual sales of approximately $6 million.
On July 16, 2018, the Company acquired Atlas Supply, Inc., the Pacific Northwest’s leading distributor of sealants, coatings, adhesives and related waterproofing products, with 6 branches operating in Seattle, Tacoma, Spokane, and
10
Mountlake Terrace in Washington, as well as locations in Portland, Oregon and Boise, Idaho, and annual sales of approximately $37 million.
The Company has recorded purchase accounting entries on a preliminary basis for these transactions that recognized the acquired assets and liabilities at their estimated fair values as of the respective acquisition dates. These transactions resulted in goodwill of $7.6 million ($7.2 million of which is deductible for tax purposes as of March 31, 2019) and $11.4 million in intangible assets.
For those acquisitions where the acquisition accounting entries have yet to be finalized, the Company’s allocation of the purchase price is subject to change on receipt of additional information, including, but not limited to, the finalization of asset valuations (intangible and fixed) and income tax accounting, as well as the Company’s continued review of the assumed liabilities that may result in the recognition of changes to the carrying amounts on the opening balance sheet and a related adjustment to goodwill.
4. Net Sales
The Company records net sales when performance obligations with our customer are satisfied. A performance obligation is a promise to transfer a distinct good to the customer and is the unit of account. The transaction price is allocated to each distinct performance obligation and recognized as net sales when, or as, the performance obligation is satisfied. All contracts have a single performance obligation as the promise to transfer the individual good is not separately identifiable from other promises and is, therefore, not distinct. Performance obligations are satisfied at a point in time and net sales are recognized when the customer accepts the delivery of a product or takes possession of a product with rights and rewards of ownership.
The Company enters into agreements with customers to offer rebates, generally based on achievement of specified sales levels and various marketing allowances that are common industry practice. Reductions to net sales for customer programs and incentive offerings, including promotions and other volume-based incentives, are estimated using the most likely amount method and recorded in the period in which the sale occurs. Provisions for early payment discounts are accrued in the same period in which the sale occurs. The Company does not have any material payment terms as payment is received shortly after the transfer of control of the products to the customer. Commissions to internal sales teams are paid to obtain contracts. As these contracts are less than one year, these costs are expensed as incurred.
The Company includes shipping and handling costs billed to customers in net sales. Related costs are accounted for as fulfillment activities and are recognized as cost of products sold when control of the products transfers to the customer.
The following table presents the Company’s net sales by product line and geography for the three and six months ended March 31, 2019 (in thousands):
U.S.
Canada
Residential roofing products
594,525
4,392
598,917
1,308,021
15,759
1,323,780
Non-residential roofing products
296,156
17,470
313,626
682,833
47,106
729,939
Complementary building products
515,721
773
516,494
1,094,443
2,551
1,096,994
Total net sales
1,406,402
22,635
3,085,297
65,416
5. Net Income (Loss) Per Share
Basic net income (loss) per share is calculated by dividing net income (loss) attributable to common shareholders by the weighted-average number of common shares outstanding during the period, without consideration for common share equivalents or the conversion of Preferred Stock. Common share equivalents consist of the incremental common shares issuable upon the exercise of stock options and vesting of restricted stock unit awards. Diluted net income (loss) per common share is calculated by dividing net income (loss) attributable to common shareholders by the fully diluted weighted-average number of common shares outstanding during the period.
Holders of Preferred Stock participate in dividends on an as-converted basis when declared on common shares. As a result, Preferred Stock is classified as a participating security and thereby requires the allocation of income that would have otherwise been available to common shareholders when calculating net income (loss) per share.
Diluted net income (loss) per share is calculated by utilizing the most dilutive result of the if-converted and two-class methods. In both methods, net income (loss) attributable to common shareholders and the weighted-average common shares outstanding are adjusted to account for the impact of the assumed issuance of potential common shares that are dilutive, subject to dilution sequencing rules.
11
The following table presents the components and calculations of basic and diluted net income (loss) per share for each period presented (in thousands, except share and per share amounts):
Dividends on preferred shares
Undistributed income allocated to participating securities
Net income (loss) attributable to common shareholders - basic and diluted
Weighted-average common shares outstanding - basic
Effect of common share equivalents
Weighted-average common shares outstanding - diluted
Net income (loss) per share - basic
Net income (loss) per share - diluted
The following table includes the number of shares that may be dilutive common shares in the future. These shares were not included in the computation of diluted net income (loss) per share because the effect was either anti-dilutive or the requisite performance conditions were not met:
Stock options
1,534,920
275,209
1,544,719
281,742
Restricted stock units
75,599
90,024
196,914
45,012
Preferred Stock
9,694,619
9,586,901
4,740,776
6. Stock-based Compensation
On February 9, 2016, the shareholders of the Company approved the Amended and Restated Beacon Roofing Supply, Inc. 2014 Stock Plan (the “2014 Plan”). The 2014 Plan provides for discretionary awards of stock options, stock awards, restricted stock units, and stock appreciation rights for up to 5,000,000 shares of common stock to selected employees and non-employee directors. The 2014 Plan mandates that all forfeited, expired, and withheld shares, including those from the predecessor plans, be returned to the 2014 Plan and made available for issuance. As of March 31, 2019, there were 1,720,132 shares of common stock available for issuance.
Prior to the 2014 Plan, the Company maintained the amended and restated Beacon Roofing Supply, Inc. 2004 Stock Plan (the “2004 Plan”). Upon shareholder approval of the 2014 Plan, the Company ceased issuing equity awards from the 2004 Plan and mandated that all future equity awards will be issued from the 2014 Plan.
For all equity awards granted prior to October 1, 2014, in the event of a change in control of the Company, all awards are immediately vested. Beginning in fiscal 2015, equity awards contained a “double trigger” change in control mechanism. Unless an award is continued or assumed by a public company in an equitable manner, an award shall become fully vested immediately prior to a change in control (at 100% of the grant target in the case of a performance-based restricted stock unit award). If an award is so continued or assumed, vesting will continue in accordance with the terms of the award, unless there is a qualifying termination within one-year following the change in control, in which event the award shall immediately become fully vested (at 100% of the grant target in the case of a performance-based restricted stock unit award).
Stock Options
Non-qualified stock options granted to employees generally expire 10 years after the grant date and are subject to continued employment and vest evenly in three annual installments over the three-year period following the grant date.
12
The fair value of the stock options granted during the six months ended March 31, 2019 were estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions:
Risk-free interest rate
3.00
%
Expected volatility
29.35
Expected life (in years)
5.18
Dividend yield
The following table summarizes all stock option activity for the six months ended March 31, 2019 (in thousands, except share, per share, and time period amounts):
Options
Outstanding
Weighted-
Average
Exercise
Price
Remaining
Contractual
Term (Years)
Aggregate
Intrinsic
Value1
1,969,037
33.08
5.7
14,088
Granted
611,031
27.31
Exercised
(87,554
17.80
Canceled/Forfeited
(40,525
39.22
Expired
(950
12.25
2,451,039
32.10
6.4
11,615
Vested and expected to vest after March 31, 2019
2,402,609
32.09
6.3
11,424
Exercisable as of March 31, 2019
1,586,518
30.88
4.9
8,462
________________________________________________________________
Aggregate intrinsic value represents the difference between the closing fair value of the underlying common stock and the exercise price of outstanding, in-the-money options on the date of measurement.
During the three months ended March 31, 2019 and 2018, the Company recorded stock-based compensation expense related to stock options of $1.1 million and $0.8 million, respectively. During the six months ended March 31, 2019 and 2018, the Company recorded stock-based compensation expense related to stock options of $2.1 million and $1.9 million, respectively. As of March 31, 2019, there was $7.2 million of unrecognized compensation cost related to unvested stock options, which is expected to be recognized over a weighted-average period of 2.1 years.
The following table summarizes additional information on stock options for the periods presented (in thousands, except per share amounts):
Weighted-average fair value of stock options granted
8.77
15.86
Total grant date fair value of stock options vested
3,735
3,832
Total intrinsic value of stock options exercised
1,360
7,700
Restricted Stock Units
Restricted stock unit (“RSU”) awards granted to employees are subject to continued employment and generally vest on the third anniversary of the grant date. The Company also grants certain RSU awards to management that contain one or more additional vesting conditions tied directly to a defined performance metric for the Company. The actual number of RSUs that will vest can range from 0% to 200% of the original grant amount, depending upon the terms of the award and actual Company performance above or below the established performance metric targets. The Company estimates performance in relation to the defined targets when determining the projected number of RSUs that are expected to vest and calculating the related stock-based compensation expense.
RSUs granted to non-employee directors are subject to continued service and vest on the first anniversary of the grant date (except under certain conditions). Generally, the common shares underlying the RSUs are not eligible for distribution until the non-employee director’s service on the Board has terminated, and for non-employee director RSU grants made prior to fiscal year 2014, the share distribution date is six months after the director’s termination of service on the board. Beginning in fiscal year 2016, the Company enacted a policy that allows any non-employee directors who have Beacon equity holdings (defined as common stock and outstanding vested equity awards) with a total fair value that is greater than or equal to five times the annual Board cash retainer to elect to have any future RSU grants settle simultaneously with vesting.
13
The following table summarizes all restricted stock unit activity for the six months ended March 31, 2019:
RSUs
Weighted-Average Grant Date Fair Value
934,023
47.00
669,579
27.77
Released
(371,189
40.63
(86,445
46.88
1,145,968
37.83
1,072,948
37.62
During the three months ended March 31, 2019 and 2018, the Company recorded stock-based compensation expense related to restricted stock units of $3.8 million and $3.5 million, respectively. During the six months ended March 31, 2019 and 2018, the Company recorded stock-based compensation expense related to restricted stock units of $6.2 million and $5.9 million, respectively. As of March 31, 2019, there was $24.8 million of unrecognized compensation cost related to unvested restricted stock units, which is expected to be recognized over a weighted-average period of 2.0 years.
The following table summarizes additional information on RSUs for the periods presented (in thousands, except per share amounts):
Weighted-average fair value of RSUs granted
57.40
Total grant date fair value of RSUs vested
15,920
6,523
Total intrinsic value of RSUs released
11,319
10,924
7. Goodwill and Intangible Assets
The following table sets forth the change in the carrying amount of goodwill during the six months ended March 31, 2019 and 2018, respectively (in thousands):
1,251,986
Acquisitions
Translation and other adjustments
(1,001
Acquisitions1
(513
(940
_____________________________
Reflects purchase accounting adjustments related to fiscal year 2018 acquisition of Atlas Supply, Inc. (see Note 3 for further discussion).
The changes in the carrying amount of goodwill for the six months ended March 31, 2019 and 2018 were driven primarily by purchase accounting and foreign currency translation adjustments.
Intangible Assets
In connection with transactions finalized during fiscal year 2018, the Company recorded intangible assets of $1.05 billion ($920.8 million of customer relationships, $120.0 million of indefinite-lived trademarks, and $7.0 million of beneficial lease arrangements).
14
The following table summarizes intangible assets by category (in thousands, except time period amounts):
March 31, 2019
September 30, 2018
March 31, 2018
Weighted-Average Remaining Life1
(Years)
Amortizable intangible assets:
Non-compete agreements
2,824
2.38
Customer relationships
1,530,902
1,530,565
1,519,766
18.14
Trademarks
10,500
7.25
Beneficial lease arrangements
8,060
7,644
4.02
Total amortizable intangible assets
1,552,286
1,551,949
1,540,734
Accumulated amortization
(515,387
(410,633
(323,482
Total amortizable intangible assets, net
1,036,899
1,141,316
1,217,252
Indefinite lived trademarks
193,050
Total intangibles, net
_________________________________________________________
As of March 31, 2019.
For the three months ended March 31, 2019 and 2018, the Company recorded $51.8 million and $37.1 million of amortization expense relating to the above-listed intangible assets, respectively. For the six months ended March 31, 2019 and 2018, the Company recorded $103.8 million and $55.3 million of amortization expense relating to the above-listed intangible assets, respectively. The intangible asset lives range from 5 to 20 years and have a weighted-average remaining life of 18.0 years as of March 31, 2019.
The following table summarizes the estimated future amortization expense for intangible assets (in thousands):
Year Ending September 30,
2019 (Apr - Sept)
104,780
2020
179,549
2021
149,980
2022
121,431
2023
97,522
Thereafter
383,637
Total future amortization expense
15
8. Financing Arrangements
The following table summarizes all financing arrangements from the respective periods presented (in thousands):
Revolving Lines of Credit
2023 ABL:
U.S. Revolver, expires January 20231
414,369
89,352
Canada Revolver, expires January 20232
2,245
3,090
Current portion
Long-term Debt, net
Term Loans:
Term Loan, matures January 20253
928,631
930,726
931,909
(9,700
Long-term borrowings under term loans
918,931
921,026
922,209
Senior Notes:
Senior Notes, mature October 20234
294,246
293,607
292,967
Senior Notes, mature November 20255
1,281,496
1,280,092
1,278,713
Long-term borrowings under senior notes
1,575,742
1,573,699
1,571,680
Equipment Financing Facilities and Other
Equipment financing facilities, various maturities through September 20216
9,068
11,222
13,347
Capital lease obligations, various maturities through November 20217
9,747
12,378
14,863
(10,288
(9,961
(9,897
____________________________________________________________
Effective rate on borrowings of 4.27%, 3.36% and 3.41% as of March 31, 2019, September 30, 2018 and March 31, 2018, respectively.
Effective rate on borrowings of 4.45% and 3.95% as of March 31, 2019 and September 30, 2018, respectively.
Interest rate of 4.75%, 4.53% and 3.94% as of March 31, 2019, September 30, 2018 and March 31, 2018, respectively.
Interest rate of 6.38% for all periods presented.
Interest rate of 4.88% for all periods presented.
Fixed interest rates ranging from 2.33% to 3.25% for all periods presented.
Fixed interest rates ranging from 2.72% to 10.39% for all periods presented.
Financing - Allied Acquisition
In connection with the Allied Acquisition, the Company entered into various financing arrangements totaling $3.57 billion, including an asset-based revolving line of credit of $1.30 billion (“2023 ABL”), $525.0 million of which was drawn at closing, and a $970.0 million term loan (“2025 Term Loan”). The Company also raised an additional $1.30 billion through the issuance of senior notes (the “2025 Senior Notes”).
The proceeds from these financing arrangements were used to finance the Allied Acquisition, to refinance or otherwise extinguish all third-party indebtedness, to pay fees and expenses associated with the acquisition, and to provide working capital and funds for other general corporate purposes. The Company capitalized new debt issuance costs totaling approximately $65.3 million related to the 2023 ABL, the 2025 Term Loan and the 2025 Senior Notes.
Since the financing arrangements entered into in connection with the Allied Acquisition had certain lenders who also participated in previous financing arrangements entered into by the Company, portions of the transactions were accounted for as either a debt modification or a debt extinguishment. In accordance with the accounting for debt modification, the Company expensed $2.0 million of debt issuance costs related to the Allied financing arrangements and recognized a loss on debt extinguishment of $1.7 million. The remainder of the debt issuance costs will be amortized over the term of the Allied financing arrangements.
16
2023 ABL
On January 2, 2018, the Company entered into a $1.30 billion asset-based revolving line of credit with Wells Fargo Bank, N.A. and a syndicate of other lenders. The 2023 ABL consists of revolving loans in both the United States (“2023 U.S. Revolver”) in the amount of $1.20 billion and Canada (“2023 Canada Revolver”) in the amount of $100.0 million. The 2023 ABL has a maturity date of January 2, 2023. The 2023 ABL has various borrowing tranches with an interest rate based on a LIBOR rate (with a floor) plus a fixed spread. The current unused commitment fees on the 2023 ABL are 0.25% per annum.
There is one financial covenant under the 2023 ABL, which is a Consolidated Fixed Charge Ratio. The Consolidated Fixed Charge Ratio is calculated by dividing consolidated earnings before interest, taxes, depreciation and amortization (EBITDA) by Consolidated Fixed Charges (both as defined in the agreement). Per the covenant, the Company’s Consolidated Fixed Charge Ratio must be a minimum of 1.00 at the end of each fiscal quarter, calculated on a trailing four quarter basis. The Company was in compliance with this covenant as of March 31, 2019.
The 2023 ABL is secured by a first priority lien over substantially all of the Company’s and each guarantor’s accounts, chattel paper, deposit accounts, books, records and inventory (as well as intangibles related thereto), subject to certain customary exceptions (the “ABL Priority Collateral”), and a second priority lien over substantially all of the Company’s and each guarantor’s other assets, including all of the equity interests of any subsidiary held by the Company or any guarantor, subject to certain customary exceptions (the “Term Priority Collateral”). The 2023 ABL is guaranteed jointly, severally, fully and unconditionally by the Company’s active United States subsidiaries.
As of March 31, 2019, the total balance outstanding on the 2023 ABL, net of $9.4 million of unamortized debt issuance costs, was $416.6 million. The Company also has outstanding standby letters of credit related to the 2023 U.S. Revolver in the amount of $13.4 million as of March 31, 2019.
2025 Term Loan
On January 2, 2018, the Company entered into a $970.0 million Term Loan with Citibank N.A., and a syndicate of other lenders. The 2025 Term Loan requires quarterly principal payments in the amount of $2.4 million, with the remaining outstanding principal to be paid on its January 2, 2025 maturity date. The interest rate is based on a LIBOR rate (with a floor) plus a fixed spread. The Company has the option of selecting a LIBOR period that determines the rate at which interest can accrue on the Term Loan as well as the period in which interest payments are made.
The 2025 Term Loan is secured by a first priority lien on the Term Priority Collateral and a second priority lien on the ABL Priority Collateral. Certain excluded assets will not be included in the Term Priority Collateral and the ABL Priority Collateral. The Term Loan is guaranteed jointly, severally, fully and unconditionally by the Company’s active United States subsidiaries.
As of March 31, 2019, the outstanding balance on the 2025 Term Loan, net of $31.7 million of unamortized debt issuance costs, was $928.6 million.
2025 Senior Notes
On October 25, 2017, Beacon Escrow Corporation, a wholly owned subsidiary of the Company (the “Escrow Issuer”), completed a private offering of $1.30 billion aggregate principal amount of 4.875% Senior Notes due 2025 at an issue price of 100%. The 2025 Senior Notes bear interest at a rate of 4.875% per annum, payable semi-annually in arrears, beginning May 1, 2018. The Company anticipates repaying the 2025 Senior Notes at the maturity date of November 1, 2025. Per the terms of the Escrow Agreement, the net proceeds from the 2025 Senior Notes remained in escrow until they were used to fund a portion of the purchase price of the Allied Acquisition payable at closing on January 2, 2018.
Upon closing of the Allied Acquisition on January 2, 2018, (i) the Escrow Issuer merged with and into the Company, and the Company assumed all obligations under the 2025 Senior Notes; and (ii) all existing domestic subsidiaries of the Company (including the entities acquired in the Allied Acquisition) became guarantors of the 2025 Senior Notes.
As of March 31, 2019, the outstanding balance on the 2025 Senior Notes, net of $18.5 million of unamortized debt issuance costs, was $1.28 billion.
Financing - RSG Acquisition
In connection with the Roofing Supply Group (“RSG”) acquisition in fiscal year 2016, the Company entered into various financing arrangements totaling $1.45 billion, including an asset-based revolving line of credit (“2020 ABL”) of $700.0 million ($350.0 million of which was drawn at closing) and a $450.0 million term loan (“2022 Term Loan”). The Company also raised an additional $300.0 million through the issuance of senior notes (the “2023 Senior Notes”).
17
The proceeds from these financing arrangements were used to provide working capital and funds for other general corporate purposes, to refinance or otherwise extinguish all third-party indebtedness, to finance the acquisition, and to pay fees and expenses associated with the RSG acquisition. The Company incurred debt issuance costs totaling approximately $31.3 million related to the 2020 ABL, 2022 Term Loan and 2023 Senior Notes.
2020 ABL
On October 1, 2015, the Company entered into a $700.0 million asset-based revolving line of credit with Wells Fargo Bank, N.A. and a syndicate of other lenders. The 2020 ABL had an original maturity date of October 1, 2020 and consisted of revolving loans in both the United States, in the amount of $670.0 million, and Canada, in the amount of $30.0 million. The 2020 ABL had various borrowing tranches with an interest rate based on a LIBOR rate (with a floor) plus a fixed spread. The full balance of the 2020 ABL was paid on January 2, 2018 in conjunction with the Allied Acquisition.
2022 Term Loan
On October 1, 2015, the Company entered into a $450.0 million Term Loan with Citibank N.A., and a syndicate of other lenders. The 2022 Term Loan required quarterly principal payments in the amount of $1.1 million, with the remaining outstanding principal to be paid on its original maturity date of October 1, 2022. The interest rate was based on a LIBOR rate (with a floor) plus a fixed spread. The Company had the option of selecting a LIBOR period that determined the rate at which interest would accrue, as well as the period in which interest payments are made. The full balance of the 2022 Term Loan was paid on January 2, 2018 in conjunction with the Allied Acquisition, including the write-off of $0.7 million in debt issuance costs.
2023 Senior Notes
On October 1, 2015, the Company raised $300.0 million by issuing senior notes due 2023. The 2023 Senior Notes have a coupon rate of 6.38% per annum and are payable semi-annually in arrears, beginning April 1, 2016. There are early payment provisions in the indenture in which the Company would be subject to “make whole” provisions. The Company anticipates repaying the notes at the maturity date of October 1, 2023.
The 2023 Senior Notes are guaranteed jointly, severally, fully and unconditionally by the Company’s active United States subsidiaries.
As of March 31, 2019, the outstanding balance on the 2023 Senior Notes, net of $5.8 million of unamortized debt issuance costs, was $294.2 million.
As of March 31, 2019, the Company had $9.1 million outstanding under equipment financing facilities, with fixed interest rates ranging from 2.33% to 3.25% and payments due through September 2021.
As of March 31, 2019, the Company had $9.7 million of capital lease obligations outstanding. These leases have interest rates ranging from 2.72% to 10.39% with payments due through November 2021.
9. Commitments and Contingencies
Operating Leases
The Company mostly operates in leased facilities, which are accounted for as operating leases. The leases typically provide for a base rent plus real estate taxes. Certain of the leases provide for escalating rents over the lives of the leases and rent expense is recognized over the terms of those leases on a straight-line basis.
At March 31, 2019, the minimum rental commitments under all non-cancelable operating leases with initial or remaining terms of more than one year were as follows (in thousands):
57,736
110,728
99,764
81,465
64,583
153,028
Total minimum lease payments
567,304
18
For the three months ended March 31, 2019 and 2018, rent expense was $27.9 million and $28.5 million, respectively. For the six months ended March 31, 2019 and 2018, rent expense was $55.4 million and $43.7 million, respectively. Sublet income was immaterial for each of these periods.
Contingencies
The Company is subject to loss contingencies pursuant to various federal, state and local environmental laws and regulations; however, the Company is not aware of any reasonably possible losses that would have a material impact on its results of operations, financial position, or liquidity. Potential loss contingencies include possible obligations to remove or mitigate the effects on the environment of the placement, storage, disposal or release of certain chemical or other substances by the Company or by other parties. In connection with its acquisitions, the Company’s practice is to request indemnification for any and all known material liabilities of significance as of the respective dates of acquisition. Historically, environmental liabilities have not had a material impact on the Company’s results of operations, financial position or liquidity.
The Company is subject to litigation from time to time in the ordinary course of business; however, the Company does not expect the results, if any, to have a material adverse impact on its results of operations, financial position or liquidity.
10. Geographic Data
The following table summarizes certain geographic information for the periods presented (in thousands):
Long-lived assets:
1,297,327
1,409,742
1,499,860
11,837
13,224
13,125
Total long-lived assets
1,309,164
1,422,966
1,512,985
11. Accumulated Other Comprehensive Income (Loss)
Other comprehensive income (loss) is composed of certain gains and losses that are excluded from net income under GAAP and instead recorded as a separate element of stockholders’ equity. For the three and six months ended March 31, 2019, the change in accumulated other comprehensive income (loss) was $1.5 million and $(2.4) million, respectively, and composed solely of foreign currency translation effects. There were no reclassifications out of accumulated other comprehensive income (loss) for the three and six months ended March 31, 2019.
12. Fair Value Measurement
As of March 31, 2019, the carrying amount of cash and cash equivalents, accounts receivable, prepaid and other current assets, accounts payable and accrued expenses approximated fair value because of the short-term nature of these instruments. The Company measures its cash equivalents at amortized cost, which approximates fair value based upon quoted market prices (Level 1).
As of March 31, 2019, based upon recent trading prices (Level 2), the fair value of the Company’s $300.0 million Senior Notes due in 2023 was $312.0 million and the fair value of the $1.30 billion Senior Notes due 2025 was $1.24 billion.
As of March 31, 2019, the fair value of the Company’s term loan and revolving asset-based line of credit approximated the amount outstanding. The Company estimates the fair value of its Senior Secured Credit Facility by discounting the future cash flows of each instrument using estimated market rates of debt instruments with similar maturities and credit profiles (Level 3).
13. Supplemental Guarantor Information
The 2023 Senior Notes and 2025 Senior Notes are guaranteed jointly and severally by all the United States subsidiaries of the Company (collectively, the “Guarantors”), and not by the Canadian subsidiaries of the Company. Such guarantees are full and unconditional. Supplemental condensed consolidating financial information of the Company, including such information for the Guarantors, is presented below. The information is presented in accordance with the requirements of Rule 3-10 under the SEC’s Regulation S-X. The financial information may not necessarily be indicative of results of operations, cash flows or financial position had the non-guarantor subsidiaries operated as independent entities. Investments in subsidiaries are presented using the equity method of accounting. The principal elimination entries eliminate investments in subsidiaries and intercompany balances and transactions. Separate financial statements of the Guarantors are not provided as the consolidating financial information contained herein provides a more meaningful disclosure to allow investors to determine the nature of the assets held by, and the operations of, the combined groups.
19
Condensed Consolidating Balance Sheets
Parent
Guarantor
Subsidiaries
Non-
Eliminations
and Other
Consolidated
312
333
Accounts receivable, net
850,149
20,751
(1,140
1,001,561
29,622
37,086
287,869
7,145
2,139,891
57,851
Intercompany receivable, net
1,610,041
(1,610,041
Investments in consolidated subsidiaries
6,240,394
(6,240,394
21,170
(21,170
20,210
240,948
9,864
2,461,212
29,114
1,227,975
1,974
6,320,103
7,680,067
98,803
(7,872,745
7,758
494,376
9,440
28,685
418,963
6,241
9,700
10,288
46,143
923,627
15,681
Intercompany payable, net
1,572,950
37,091
130,932
302
5,621
81
4,113,766
1,483,076
55,400
(1,632,351
Convertible preferred stock
6,196,991
43,403
20
136,499
1,959
(8,531
1,051,410
40,262
(1,139
907,605
28,442
23,711
214,011
6,638
2,309,525
77,301
(9,670
1,361,615
(1,361,615
6,109,325
(6,109,325
22,475
(22,475
18,929
250,517
10,961
2,461,725
30,054
1,332,104
2,262
6,175,683
7,715,486
120,578
(7,503,085
24,154
843,907
22,482
(9,671
41,448
564,331
5,760
9,961
75,302
1,418,199
28,242
1,322,156
39,459
128,846
622
(22,474
5,207
83
3,892,183
1,655,243
71,496
(1,393,760
6,060,243
49,082
21
18,746
8,196
(10,942
816,058
17,905
978,852
26,725
35,646
199,947
4,722
2,013,603
57,548
(12,082
1,284,455
(1,284,455
5,949,437
(5,949,437
19,902
(19,902
10,761
272,866
10,595
2,351,447
30,173
1,407,772
2,530
268
6,016,989
7,330,411
100,846
(7,265,876
21,042
572,222
12,377
61,788
281,265
4,997
9,897
92,530
863,384
17,374
1,247,040
37,415
110,614
389
814
9,729
74
3,834,273
1,426,568
55,252
(1,316,439
5,903,843
45,594
22
Condensed Consolidating Statements of Operations
Non-Guarantor Subsidiaries
Eliminations and Other
1,075,918
18,131
330,484
4,504
4,420
308,830
7,158
736
16,242
469
51,653
110
5,156
376,725
7,737
Intercompany charges (income)
(6,857
6,857
1,701
(53,098
(3,233
27,929
12,475
48
Intercompany interest expense (income)
(1,209
827
382
(25,019
(66,400
(3,663
Provision for (benefit from) income taxes
(7,685
(18,276
(1,035
Income (loss) before equity in net income of subsidiaries
(17,334
(48,124
(2,628
Equity in net income of subsidiaries
(50,752
50,752
1,404,617
21,008
1,070,605
16,643
334,012
4,365
2,672
331,072
7,843
443
16,238
439
36,935
133
3,115
384,245
8,415
(1,477
1,477
(1,638
(51,710
(4,050
47,220
3,807
(11,457
(5,181
4,804
377
(43,677
(60,321
7,030
(10,469
(18,575
(1,269
(33,208
(41,746
8,299
(33,447
33,447
23
2,328,213
51,943
757,084
13,473
14,195
618,378
15,528
1,500
32,614
934
103,564
220
15,695
754,556
16,682
(13,544
13,544
(2,151
(11,016
(3,209
62,242
15,960
611
(10,889
10,125
764
(53,504
(37,101
(4,584
(15,039
(9,876
(1,295
(38,465
(27,225
(3,289
(30,514
30,514
2,480,879
66,725
1,887,041
52,433
593,838
14,292
2,539
515,953
16,848
899
24,048
882
54,999
264
3,438
595,000
17,994
(584
584
(2,854
(1,746
(3,702
57,296
4,632
210
(49,261
(16,503
(4,676
(4,948
(65,247
(1,186
(44,313
48,744
(3,490
45,254
(45,254
24
Condensed Consolidating Statements of Comprehensive Income
(1,520
(1,108
49,232
2,028
6,271
35,475
2,390
(5,679
32,904
1,971
(5,461
(43,283
25
Condensed Consolidating Statements of Cash Flows
(62,741
(186,932
1,389
6,140
(2,781
(23,370
(169
1,418
Intercompany activity
84,430
(84,430
81,649
(185,925
(159
1,867,135
13,549
(1,543,371
(14,244
(84,452
(2,323
86,775
(18,908
236,670
(3,018
162
46
(136,187
(1,626
8,531
26
(47,488
77,948
9,289
217
(5,050
(18,524
(1,259
398
606,865
(606,865
(2,124,746
(18,126
(1,244
1,514,102
16,565
(1,077,744
(19,719
(55,893
(11,830
(609,760
923
608,837
2,172,234
(190,875
(2,231
(131,053
6,614
2,189
149,799
1,582
(13,131
27
The following discussion and analysis should be read in conjunction with Management’s Discussion and Analysis included in our 2018 Annual Report on Form 10-K and our Condensed Consolidated Financial Statements and the notes thereto included elsewhere in this document. Unless otherwise indicated, references to “2019” refer to the three and six months ended March 31, 2019 being discussed and references to “2018” refer to the three and six months ended March 31, 2018 being discussed. We do not undertake, and specifically disclaim, any obligation to update any forward-looking statements to reflect the occurrence of events or circumstances after the date of such statements except as required by law.
Overview
We are the largest publicly traded distributor of residential and non-residential roofing materials in the United States and Canada. We also distribute complementary building products, including siding, windows, specialty exterior building products, insulation, waterproofing systems, wallboard and acoustical ceiling tiles. We are among the oldest and most established distributors in the industry. We purchase products from a large number of manufacturers and then distribute these goods to a customer base consisting of contractors and, to a lesser extent, general contractors, retailers, and building materials suppliers.
As of March 31, 2019, we operated 539 branches in 50 states throughout the United States and 6 provinces in Canada. We stock one of the most extensive assortments of high-quality branded products in the industry with approximately 90,000 SKUs available across our branch network, enabling us to deliver products to serve over 100,000 customers on a timely basis.
On January 2, 2018, we completed the acquisition of all the outstanding capital stock of Allied Building Products Corp. (“Allied”), a New Jersey Corporation (the “Allied Acquisition”), for approximately $2.625 billion, subject to working capital and other adjustments (the “Purchase Price”). As of March 31, 2019, the adjusted Purchase Price for Allied was $2.88 billion and purchase accounting entries were finalized. Headquartered in East Rutherford, New Jersey, Allied was one of the country’s largest exterior and interior building products distributors, distributing products across 208 locations in 31 states in the U.S. with a strong presence in New York, New Jersey, Florida, California, Hawaii and the upper Midwest at the time of the acquisition. We believe the acquisition of Allied was a strategically and financially compelling transaction that expanded our geographic footprint, enhanced our scale and market presence, diversified our product offerings, and positioned us to provide new growth opportunities that will increase our long-term profitability.
Effective execution of both the sales and operating plans enables us to grow beyond the relative strength of the markets we serve. Our business model is a bottom-up approach, where each of our branches uses its regional knowledge and experience to assist with the development of a marketing plan and stocking a product mix that is best suited for its respective market. Local alignment with overall strategic goals provides the foundation for significant ownership of results at the branch level.
Our distinctive operational model combined with significant branch level autonomy differentiates us from the competition. We provide our customers with value-added services, including, but not limited to, job site delivery, custom designed tapered roofing systems, metal fabrication, and trade credit. We consider customer relations and our employees’ knowledge of roofing and building materials to be vital to our ability to increase customer loyalty and maintain customer satisfaction. Our customers’ business success can be enhanced when they are supported by our efficient and effective distribution network. We invest significant resources in professional development, management skills, product knowledge and operational proficiency. We pride ourselves on providing these capabilities developed on a foundation of continuous improvement driving service excellence, productivity and efficiencies.
We seek opportunities to expand our business operations through both acquisitions and organic growth (opening branches, growing sales with existing customers, adding new customers and introducing new products). Our main acquisition strategy is to target market leaders that do business in geographic areas that we currently do not service or that complement our existing regional operations. In addition to our acquisition of Allied, our recent success in delivering on our growth strategy is highlighted by the following:
On May 1, 2018, we acquired Tri-State Builder’s Supply, a wholesale supplier of roofing, siding, windows, doors and related building products with 1 branch located in Duluth, Minnesota and annual sales of approximately $6 million.
On July 16, 2018, we acquired Atlas Supply, Inc., the Pacific Northwest’s leading distributor of sealants, coatings, adhesives and related waterproofing products, with 6 branches operating in Seattle, Tacoma, Spokane, and Mountlake Terrace in Washington, as well as locations in Portland, Oregon and Boise, Idaho, and annual sales of approximately $37 million.
In addition, we have opened five new branches in fiscal year 2019, including locations in Plano, Texas; Panama City, Florida; Odessa, Florida; Fresno, California; and Reno, Nevada. New branch locations allow us to penetrate deeper into our existing markets and establish a greater presence.
Results of Operations
Comparison of the Three Months Ended March 31, 2019 and 2018
The following tables set forth consolidated statement of operations data and such data as a percentage of total net sales for the periods presented (in thousands):
100.0
76.6
76.3
23.4
23.7
22.4
24.0
1.2
3.6
2.6
27.2
27.8
(3.8
%)
(4.1
2.8
(6.6
(6.9
(1.8
(2.2
(4.8
(4.7
0.4
(5.2
(5.1
In managing our business, we consider all growth, including the opening of new branches, to be organic growth unless it results from an acquisition. When we refer to growth in existing markets or organic growth, we include growth from existing and newly opened branches but exclude growth from acquired branches until they have been under our ownership for at least four full fiscal quarters at the start of the fiscal reporting period. We believe the existing market information is useful to investors because it helps explain organic growth or decline. When combined, our existing market information and acquired market information equal our consolidated company totals. When we refer to regions, we are referring to our geographic regions. When we refer to our net product costs, we are referring to our invoice cost less the impact of short-term buying programs (also referred to as “special buys”).
As of March 31, 2019, we had a total of 539 branches in operation. Our existing market calculations include the operating results of the 532 branches that meet our definition (7 branches were excluded because they were acquired after the start of the second quarter of fiscal year 2018).
29
The following table summarizes our results of operations by market type (existing and acquired) for the periods presented (in thousands):
Existing Markets
Acquired Markets
1,418,988
1,425,107
10,049
518
332,187
338,226
2,801
151
Gross margin
27.9
29.2
Selling, general, and administrative
317,698
341,349
2,710
238
17,368
17,073
79
47
51,210
37,056
553
Operating expense1
386,276
395,478
3,342
297
Operating expense as a % of net sales
33.3
57.3
27.3
Operating income (loss)
(54,089
(57,252
(541
(146
Operating margin
(4.0
(5.4
(28.2
___________________________________________
Existing market operating expense for 2019 and 2018 includes $6.7 million ($4.7 million, net of taxes) and $28.3 million ($20.0 million, net of taxes), respectively, of non-recurring acquisition costs.
Net Sales
Consolidated net sales increased 0.2% to $1.43 billion in 2019, a level similar to 2018. Existing market net sales decreased 0.4% to $1.42 billion in 2019, from $1.43 billion in 2018. The year-over-year decrease in existing market net sales was mainly influenced by the following factors:
the impact of harsh winter weather in 2019 on the Midwest and West markets;
partially offset by:
higher pricing across all major product lines; and
stronger demand in the Mid-Atlantic market due to the impact of Hurricane Florence.
Existing market net sales by geographical region increased (decreased) from 2018 to 2019 as follows: Northeast 13.4%; Mid-Atlantic 18.8%; Southeast (3.0%); Southwest (2.7%); Midwest (10.5%); West (10.9%); and Canada 7.7%.
We estimate the impact of inflation or deflation on our sales and gross profit by looking at changes in our average selling prices and gross margins (discussed below).
Product line net sales for our existing markets were as follows (in thousands):
Change
598,795
42.2
581,834
40.9
16,961
2.9
313,591
22.1
332,651
23.3
(19,060
(5.7
506,602
35.7
510,622
35.8
(4,020
(0.8
Total existing market sales
(6,119
(0.4
Acquired market net sales were $10.0 million in 2019. We recognized acquired market product line net sales of $0.1 million in residential roofing products, $9.9 million in complementary building products and immaterial sales in non-residential roofing products.
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Gross Profit
Gross profit and gross margin for our consolidated and existing markets were as follows (in thousands):
Change1
Gross profit - consolidated
(3,389
(1.0
Gross profit - existing markets
(6,039
Gross margin - consolidated
N/A
(0.3
Gross margin - existing markets
___________________________________________________________
Percentage changes for dollar amounts represent the ratable increase or decrease from period-to-period. Percentage changes for percentages represent the net period-to-period change in basis points.
Consolidated gross profit decreased 1.0% to $335.0 million in 2019, from $338.4 million in 2018. Existing market gross profit decreased 1.8% to $332.2 million in 2019, from $338.2 million in 2018.
Consolidated gross margin was 23.4% in 2019, down 0.3% from 23.7% in 2018. Existing market gross margin was 23.4% in 2019, down 0.3% from 23.7% in 2018. The year-over-year decrease in existing market gross margin was mainly influenced by a product cost increase of approximately 5-6% and an unfavorable mix shift, partially offset by a price increase of approximately 5-6% across all products.
Consolidated gross margin and existing market gross margin were the same due to most branches being classified as existing market branches for the period. Consolidated direct sales (products shipped by our vendors directly to our customers), which typically have substantially lower gross margins (and operating expense) compared to our warehouse sales, represented 14.3% and 13.9% of our net sales in 2019 and 2018, respectively.
Operating Expense
Operating expense for consolidated and existing markets was as follows (in thousands):
Operating expense - consolidated
(6,157
(1.6
Operating expense - existing markets
(9,202
(2.3
% of net sales - consolidated
(0.5
% of net sales - existing markets
(0.6
_________________________________________________________________
Consolidated operating expense decreased 1.6% to $389.6 million in 2019, from $395.8 million in 2018. Existing market operating expense decreased 2.3% to $386.3 million in 2019, from $395.5 million in 2018. The year-over-year decrease in existing market operating expense was mainly influenced by the following factors:
a net decrease in general and administrative expense of $22.7 million, mainly due to higher incursion of one-time costs related to the Allied Acquisition in the prior period;
an increase in amortization expense of $14.1 million, mainly due to the scheduled accelerated run-rate of intangible asset amortization related to the Allied Acquisition; and
an increase in selling expense of $3.5 million, mainly due to higher vehicle costs.
During 2019 and 2018, we recorded amortization expense related to the intangible assets recorded under purchase accounting within our existing markets of $51.2 million and $37.1 million, respectively. Our existing market operating expense as a percentage of the related net sales in 2019 was 27.2%, compared to 27.8% in 2018.
31
Interest Expense, Financing Costs and Other
Interest expense, financing costs and other expense was $40.5 million in 2019, remaining relatively flat compared to $39.6 million in 2018.
Income Taxes
There was an income tax benefit of $27.0 million in 2019, compared to $30.3 million in 2018. The decrease in income tax benefit was mainly driven by the impact of the Tax Cuts and Jobs Act of 2017. In 2018, the Company remeasured its deferred tax assets and liabilities based on the revised corporate tax rate, resulting in a $1.5 million non-recurring net tax benefit for the period. The effective tax rate, excluding any discrete items, was 27.9% in 2019, compared to 29.4% in 2018. We expect our fiscal year 2019 effective tax rate, excluding any discrete items, will range from approximately 27.0% to 28.0%.
Net Income (Loss)/Net Income (Loss) Per Share
Net income (loss) was $(68.1) million in 2019, compared to $(66.7) million in 2018. There were $6.0 million of dividends on preferred shares in 2019 and 2018, making net income (loss) attributable to common shareholders of $(74.1) million in 2019, compared to $(72.7) million in 2018. We calculate net income (loss) per share by dividing net income (loss), less dividends on preferred shares and adjustments for participating securities, by the weighted-average number of common shares outstanding during the period. Diluted net income (loss) per share is calculated by utilizing the most dilutive result after applying and comparing the two-class method and if-converted method (see Note 5 in the Notes to Condensed Consolidated Financial Statements for further discussion).
The following table presents all the components utilized to calculate basic and diluted net income (loss) per share (in thousands, except share and per share amounts):
Net income (loss) attributable to common shareholders - basic and diluted (if-converted method)
Re-allocation of undistributed income to preferred shares
Net income (loss) attributable to common shareholders - diluted (two-class method)
Weighted-average common shares outstanding - diluted (if-converted and two-class method)
Net income (loss) per share - diluted (two-class method)
Net income (loss) per share - diluted (if-converted method)
32
Comparison of the Six Months Ended March 31, 2019 and 2018
75.5
76.1
24.5
23.9
20.6
21.0
1.1
1.0
3.3
2.2
25.0
24.2
2.5
2.4
(3.0
(2.7
0.0
0.2
(2.6
(0.2
As of March 31, 2019, we had a total of 539 branches in operation. Our existing market calculations include the operating results of the 327 branches that meet our definition (212 branches were excluded because they were acquired after the start of fiscal year 2018).
33
1,841,405
1,826,412
1,309,308
721,192
424,188
427,452
346,369
180,678
23.0
26.5
25.1
368,194
375,808
279,907
159,532
16,556
15,520
18,492
10,309
25,337
30,774
78,447
24,489
410,087
422,102
376,846
194,330
22.3
23.1
28.8
26.9
14,100
5,349
(30,476
(13,651
0.8
0.3
(1.9
1 Existing market operating expense for 2019 and 2018 includes $15.6 million ($11.4 million, net of taxes) and $33.9 million ($23.9 million, net of taxes), respectively, of non-recurring acquisition costs.
Consolidated net sales increased 23.7% to $3.15 billion in 2019, from $2.55 billion in 2018. Existing market net sales increased 0.8% to $1.84 billion in 2019, from $1.83 billion in 2018. The year-over-year increase in existing market net sales was mainly influenced by the following factors:
double-digit net sales growth in the Northeast and Mid-Atlantic markets;
stronger demand in the Mid-Atlantic market due to the impact of Hurricane Florence; and
higher pricing across all major product lines;
decreased storm activity in the Southwest, Midwest, and West markets; and
the impact of harsh winter weather in 2019 on the Midwest and West markets.
Existing market net sales by geographical region increased (decreased) from 2018 to 2019 as follows: Northeast 15.3%; Mid-Atlantic 22.1%; Southeast 0.6%; Southwest (8.0%); Midwest (7.3%); West (20.1%); and Canada (2.0%).
971,124
52.7
945,947
51.8
25,177
2.7
524,728
28.5
531,956
29.1
(7,228
(1.4
345,553
18.8
348,509
19.1
(2,956
14,993
34
Acquired market net sales were $1.31 billion in 2019. We recognized acquired market product line net sales of $352.7 million in residential roofing products, $205.2 million in non-residential roofing products and $751.4 million in complementary building products.
162,427
26.7
(3,264
0.6
Consolidated gross profit increased 26.7% to $770.6 million in 2019, from $608.1 million in 2018. Existing market gross profit decreased 0.8% to $424.2 million in 2019, from $427.5 million in 2018.
Consolidated gross margin was 24.5% in 2019, up 0.6% from 23.9% in 2018. Existing market gross margin was 23.0% in 2019, down 0.4% from 23.4% in 2018. The year-over-year decrease in existing market gross margin was mainly influenced by a product cost increase of approximately 7% across all products, partially offset by a price increase across all products of approximately 7% and an unfavorable mix shift.
Consolidated gross margin was slightly higher than existing market gross margin due to the positive impact of recent acquisitions. Consolidated direct sales (products shipped by our vendors directly to our customers), which typically have substantially lower gross margins (and operating expense) compared to our warehouse sales, represented 12.6% and 13.7% of our net sales in 2019 and 2018, respectively.
170,501
27.7
(12,015
(2.8
Consolidated operating expense increased 27.7% to $786.9 million in 2019, from $616.4 million in 2018. Existing market operating expense decreased 2.8% to $410.1 million in 2019, from $422.1 million in 2018. The year-over-year decrease in existing market operating expense was mainly influenced by the following factors:
a net decrease in general and administrative expense of $13.4 million, mainly due to higher incursion of acquisition-related costs in the prior period;
an increase in warehouse operating expense of $2.3 million, mainly due to higher equipment costs in the current period.
During 2019 and 2018, we recorded amortization expense related to the intangible assets recorded under purchase accounting within our existing markets of $25.3 million and $30.8 million, respectively. Our existing market operating expense as a percentage of the related net sales in 2019 was 22.3%, compared to 23.1% in 2018.
35
Interest expense, financing costs and other expense was $78.8 million in 2019, compared to $62.1 million in 2018. The increase was mainly driven by the additional interest costs related to a higher average outstanding debt balance over the comparative periods as a direct result of the Allied Acquisition.
There was an income tax benefit of $26.2 million in 2019, compared to $71.4 million in 2018. The decrease in income tax benefit was mainly driven by the impact of the Tax Cuts and Jobs Act of 2017. In 2018, the Company remeasured its deferred tax assets and liabilities based on the revised corporate tax rate, resulting in a $48.0 million non-recurring net tax benefit for the period. The effective tax rate, excluding any discrete items, was 27.9% in 2019, compared to 29.4% in 2018. We expect our fiscal year 2019 effective tax rate, excluding any discrete items, will range from approximately 27.0% to 28.0%.
Net income (loss) was $(69.0) million in 2019, compared to $0.9 million in 2018. There were $12.0 million of dividends on preferred shares in 2019, compared to $6.0 million in 2018, making net income (loss) attributable to common shareholders of $(81.0) million in 2019, compared to $(5.1) million in 2018. We calculate net income (loss) per share by dividing net income (loss), less dividends on preferred shares and adjustments for participating securities, by the weighted-average number of common shares outstanding during the period. Diluted net income (loss) per share is calculated by utilizing the most dilutive result after applying and comparing the two-class method and if-converted method (see Note 5 in the Notes to Condensed Consolidated Financial Statements for further discussion).
The following table presents the all the components utilized to calculate basic and diluted net income (loss) per share (in thousands, except share and per share amounts):
Weighted-average common shares outstanding, basic
Non-GAAP Financial Measures
To provide investors with additional information regarding our financial results, we prepare certain financial measures that are not calculated in accordance with generally accepted accounting principles in the United States (“GAAP”), specifically:
Adjusted Net Income (Loss)/Adjusted EPS
Adjusted EBITDA
We define Adjusted Net Income (Loss) as net income that excludes non-recurring acquisition costs, the amortization of intangibles, business restructuring costs, and the non-recurring effects of tax reform. Adjusted Net Income (Loss) per share or "Adjusted EPS" is calculated by dividing the Adjusted Net Income (Loss) for the period by the weighted-average diluted shares outstanding for the period.
36
We define Adjusted EBITDA as net income plus interest expense (net of interest income), income taxes, depreciation and amortization, stock-based compensation, non-recurring acquisition costs, and business restructuring costs. EBITDA is a measure commonly used in the distribution industry, and we present Adjusted EBITDA to enhance your understanding of our operating performance.
We use these supplemental non-GAAP measures to evaluate financial performance, analyze the underlying trends in our business and establish operational goals and forecasts that are used when allocating resources.
We believe these non-GAAP measures are useful measures because they allow investors to better understand changes in underlying operating performance over comparative periods by providing investors with financial results that are unaffected by cyclical variances that can be driven by items such as investment activity or purchase accounting adjustments.
While we believe that these non-GAAP measures are useful to investors when evaluating our business, they are not prepared and presented in accordance with GAAP, and therefore should be considered supplemental in nature. You should not consider these non-GAAP measures in isolation or as a substitute for other financial performance measures presented in accordance with GAAP. In addition, these non-GAAP measures may have material limitations and may differ from similarly titled measures presented by other companies.
The following table presents a reconciliation of net income, the most directly comparable financial measure as measured in accordance with GAAP, to Adjusted Net Income (Loss)/Adjusted EPS for each of the periods indicated (in thousands, except per share amounts):
Per
Share1
Share2
(0.99
(0.98
(1.01
0.01
0.09
0.18
0.08
Adjustments:
Acquisition costs3
43,664
0.64
50,604
0.74
91,057
1.33
76,237
1.12
Effects of tax reform4
(462
(0.01
(1,491
(0.02
(47,983
(0.71
Adjusted Net Income (Loss)
(30,884
(0.45
(23,542
(0.35
9,616
0.14
23,195
0.34
___________________________________________________
The weighted-average share count utilized in the calculation of Adjusted EPS for the three months ended March 31, 2019 is 68,451,920. The weighted-average share count utilized in the calculation of Adjusted EPS for the three months ended March 31, 2018 is 68,019,300.
The weighted-average share count utilized in the calculation of Adjusted EPS for the six months ended March 31, 2019 is 68,348,850. The weighted-average share count utilized in the calculation of Adjusted EPS for the six months ended March 31, 2018 is 67,922,276.
Three months ended March 31, 2019 amount is composed of $9.7 million of non-recurring acquisition costs ($6.9 million, net of tax) and $51.8 million of amortization expense related to intangibles ($36.8 million, net of tax). Three months ended March 31, 2018 amount is composed of $34.6 million of non-recurring acquisition costs ($24.4 million, net of tax) and $37.1 million of amortization expense related to intangibles ($26.2 million, net of tax). Six months ended March 31, 2019 amount is composed of $21.7 million of non-recurring acquisition costs ($15.7 million, net of tax) and $103.8 million of amortization expense related to intangibles ($75.3 million, net of tax). Six months ended March 31, 2018 amount is composed of $52.5 million of non-recurring acquisition costs ($37.1 million, net of tax) and $55.3 million of amortization expense related to intangibles ($39.1 million, net of tax).
Impact of the Tax Cuts and Jobs Act of 2017.
37
The following table presents a reconciliation of net income, the most directly comparable financial measure as measured in accordance with GAAP, to Adjusted EBITDA for each of the periods indicated (in thousands):
Acquisition costs1
6,687
28,301
15,605
33,870
Interest expense, net
41,815
41,763
81,631
65,279
Income taxes
69,210
54,188
27,437
31,660
149,143
117,636
Adjusted EBITDA as a % of net sales
1.9
4.7
4.6
Represents non-recurring acquisition costs (excluding the impact of tax) that are included in operating expense and not embedded in other balances of the table.
Seasonality and Quarterly Fluctuations
In general, sales and net income are highest during our first, third and fourth fiscal quarters, which represent the peak months of construction and re-roofing, especially in our branches in the northern and mid-western U.S. and in Canada. We have historically incurred low net income levels or net losses during the second quarter when our sales are substantially lower.
We generally experience an increase in inventory, accounts receivable and accounts payable during the third and fourth quarters of the year as a result of the seasonality of our business. Our peak cash usage generally occurs during the third quarter, primarily because accounts payable terms offered by our suppliers typically have due dates in April, May and June, while our peak accounts receivable collections typically occur from June through November.
We generally experience a slowing of our accounts receivable collections during our second quarter, mainly due to the inability of some of our customers to conduct their businesses effectively in inclement weather in certain divisions. We continue to attempt to collect those receivables, which require payment under our standard terms. We do not provide material concessions to our customers during this quarter of the year.
We generally experience our peak working capital needs during the third quarter after we build our inventories following the winter season but before we begin collecting on most of our spring receivables.
38
Certain Quarterly Financial Data
The following table sets forth certain unaudited quarterly data for the first two quarters of 2019 and fiscal year 2018, which, in the opinion of management, reflect all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation of this data. Results of any one or more quarters are not necessarily indicative of results for an entire fiscal year or of continuing trends (in thousands, except per share amounts):
Qtr 2
Qtr 1
Qtr 4
Qtr 3
Qtr 11
1,721,676
1,935,756
1,934,951
1,121,979
% of fiscal year’s net sales
45.4
54.6
30.2
30.1
22.2
17.5
435,569
491,297
493,894
269,753
% of fiscal year’s gross profit
43.5
56.5
30.8
31.0
21.2
16.9
38,254
108,115
104,813
49,096
% of fiscal year’s income (loss) from operations
(333.6
233.6
52.8
51.2
(28.1
(893
48,310
49,375
67,596
(6,893
42,310
43,375
(0.10
0.54
0.56
1.00
0.55
0.98
_____________________________________________________________________
Results from the first quarter of fiscal year 2018 do not include the impact of the Allied Acquisition (see Note 3 in the Notes to Condensed Consolidated Financial Statements for further discussion).
Liquidity
Liquidity is defined as the current amount of readily available cash and the ability to generate adequate amounts of cash to meet the current needs for cash. We assess our liquidity in terms of our cash and cash equivalents on hand and the ability to generate cash to fund our operating activities, taking into consideration available borrowings and the seasonal nature of our business.
Our principal sources of liquidity as of March 31, 2019 were our cash and cash equivalents of $0.6 million and our available borrowings of $781.7 million under our asset-based lending revolving credit facility.
Significant factors which could affect future liquidity include the following:
the adequacy of available bank lines of credit;
the ability to attract long-term capital with satisfactory terms;
cash flows generated from operating activities;
acquisitions; and
capital expenditures.
Our primary capital needs are for working capital obligations and other general corporate purposes, including acquisitions and capital expenditures. Our primary sources of working capital are cash from operations and bank borrowings. We have financed large acquisitions through increased bank borrowings and the issuance of long-term debt and common or preferred stock. We then repay any such borrowings with cash flows from operations. We have funded most of our capital expenditures with cash on hand, increased bank borrowings, or equipment financing, and then reduced those obligations with cash flows from operations.
We believe we currently have adequate liquidity and availability of capital to fund our present operations, meet our commitments on our existing debt and fund anticipated growth, including expansion in existing and targeted market areas. We seek potential acquisitions from time to time and hold discussions with certain acquisition candidates. If suitable acquisition opportunities or working capital needs arise that require additional financing, we believe that our financial position and earnings history provide a
39
sufficient base for obtaining additional financing resources at reasonable rates and terms. We may also choose to issue additional shares of common stock or preferred stock in order to raise funds.
The following table summarizes our cash flows for the periods indicated (in thousands):
Net cash used in operating activities was $242.1 million in 2019, compared to $40.0 million in 2018. Cash from operations decreased $282.1 million due to an incremental cash outflow of $321.3 million stemming from changes to our net working capital, mainly driven by decreases in accounts payable and accrued expenses. This decrease was partially offset by an increase in net income after adjustments for non-cash items of $39.2 million.
Net cash used in investing activities was $188.9 million in 2019, compared to $2.75 billion in 2018. The $2.56 billion of additional investing cash spend was primarily due to the impact of the Allied Acquisition in 2018, partially offset by the $164.0 million payment resulting from the 338(h)(10) election made in October 2018 (see Note 3 in the Notes to Condensed Consolidated Financial Statements).
Net cash provided by financing activities was $301.5 million in 2019, compared to $2.59 billion in 2018. The financing cash flow decrease of $2.29 billion was primarily due to the combined $2.27 billion impact of the 2025 Senior Notes and 2025 Term Loan that we entered into in 2018 in connection with the Allied Acquisition (see Note 8 in the Notes to Condensed Consolidated Financial Statements for further discussion).
Capital Resources
As of March 31, 2019, we had access to the following financing arrangements:
an asset-based revolving line of credit in the United States;
an asset-based revolving line of credit in Canada;
a term loan; and
two separate senior notes instruments
In connection with the Allied Acquisition, we entered into various financing arrangements totaling $3.57 billion, including an asset-based revolving line of credit of $1.30 billion (“2023 ABL”), $525.0 million of which was drawn at closing, and a $970.0 million term loan (“2025 Term Loan”). We also raised an additional $1.30 billion through the issuance of senior notes (the “2025 Senior Notes”).
The proceeds from these financing arrangements were used to finance the Allied Acquisition, to refinance or otherwise extinguish all third-party indebtedness, to pay fees and expenses associated with the acquisition, and to provide working capital and funds for other general corporate purposes. We capitalized new debt issuance costs totaling approximately $65.3 million related to the 2023 ABL, the 2025 Term Loan and the 2025 Senior Notes.
Since the financing arrangements entered into in connection with the Allied Acquisition had certain lenders who also participated in our previous financing arrangements, portions of the transactions were accounted for as either a debt modification or a debt extinguishment. In accordance with the accounting for debt modification, we expensed $2.0 million of debt issuance costs related to the Allied financing arrangements and recognized a loss on debt extinguishment of $1.7 million. The remainder of the debt issuance costs will be amortized over the term of the Allied financing arrangements.
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On January 2, 2018, we entered into a $1.30 billion asset-based revolving line of credit with Wells Fargo Bank, N.A. and a syndicate of other lenders. The 2023 ABL consists of revolving loans in both the United States (“2023 U.S. Revolver”) in the amount of $1.20 billion and Canada (“2023 Canada Revolver”) in the amount of $100.0 million. The 2023 ABL has a maturity date of January 2, 2023. The 2023 ABL has various borrowing tranches with an interest rate based on a LIBOR rate (with a floor) plus a fixed spread. The current unused commitment fees on the 2023 ABL are 0.25% per annum.
There is one financial covenant under the 2023 ABL, which is a Consolidated Fixed Charge Ratio. The Consolidated Fixed Charge Ratio is calculated by dividing consolidated earnings before interest, taxes, depreciation and amortization (EBITDA) by Consolidated Fixed Charges (both as defined in the agreement). Per the covenant, our Consolidated Fixed Charge Ratio must be a minimum of 1.00 at the end of each fiscal quarter, calculated on a trailing four quarter basis. The Company was in compliance with this covenant as of March 31, 2019.
The 2023 ABL is secured by a first priority lien over substantially all of our and each guarantor’s accounts, chattel paper, deposit accounts, books, records and inventory (as well as intangibles related thereto), subject to certain customary exceptions (the “ABL Priority Collateral”), and a second priority lien over substantially all of our and each guarantor’s other assets, including all of the equity interests of any subsidiary held by us or any guarantor, subject to certain customary exceptions (the “Term Priority Collateral”). The 2023 ABL is guaranteed jointly, severally, fully and unconditionally by our active United States subsidiaries.
As of March 31, 2019, the total balance outstanding on the 2023 ABL, net of $9.4 million of unamortized debt issuance costs, was $416.6 million. We also have outstanding standby letters of credit related to the 2023 U.S. Revolver in the amount of $13.4 million as of March 31, 2019.
On January 2, 2018, we entered into a $970.0 million Term Loan with Citibank N.A., and a syndicate of other lenders. The 2025 Term Loan requires quarterly principal payments in the amount of $2.4 million, with the remaining outstanding principal to be paid on its January 2, 2025 maturity date. The interest rate is based on a LIBOR rate (with a floor) plus a fixed spread. We have the option of selecting a LIBOR period that determines the rate at which interest can accrue on the Term Loan as well as the period in which interest payments are made.
The 2025 Term Loan is secured by a first priority lien on the Term Priority Collateral and a second priority lien on the ABL Priority Collateral. Certain excluded assets will not be included in the Term Priority Collateral and the ABL Priority Collateral. The Term Loan is guaranteed jointly, severally, fully and unconditionally by our active United States subsidiaries.
On October 25, 2017, Beacon Escrow Corporation, our wholly-owned subsidiary (the “Escrow Issuer”), completed a private offering of $1.30 billion aggregate principal amount of 4.875% Senior Notes due 2025 at an issue price of 100%. The 2025 Senior Notes bear interest at a rate of 4.875% per annum, payable semi-annually in arrears, beginning May 1, 2018. We anticipate repaying the 2025 Senior Notes at the maturity date of November 1, 2025. Per the terms of the Escrow Agreement, the net proceeds from the 2025 Senior Notes remained in escrow until they were used to fund a portion of the purchase price of the Allied Acquisition payable at closing on January 2, 2018.
Upon closing of the Allied Acquisition on January 2, 2018, (i) the Escrow Issuer merged with and into us, and we assumed all obligations under the 2025 Senior Notes; and (ii) all our existing domestic subsidiaries (including the entities acquired in the Allied Acquisition) became guarantors of the 2025 Senior Notes.
As of March 31, 2019, the outstanding balance on the 2025 Senior Notes, net of $18.5 million of debt issuance costs, was $1.28 billion.
In connection with the Roofing Supply Group (“RSG”) acquisition in fiscal year 2016, we entered into various financing arrangements totaling $1.45 billion, including an asset-based revolving line of credit (“2020 ABL”) of $700.0 million ($350.0 million of which was drawn at closing) and a $450.0 million term loan (“2022 Term Loan”). We also raised an additional $300.0 million through the issuance of senior notes (the “2023 Senior Notes”).
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The proceeds from these financing arrangements were used to provide working capital and funds for other general corporate purposes, to refinance or otherwise extinguish all third-party indebtedness, to finance the acquisition, and to pay fees and expenses associated with the RSG acquisition. We incurred debt issuance costs totaling approximately $31.3 million related to the 2020 ABL, 2022 Term Loan, and 2023 Senior Notes.
On October 1, 2015, we entered into a $700.0 million asset-based revolving line of credit with Wells Fargo Bank, N.A. and a syndicate of other lenders. The 2020 ABL had an original maturity date of October 1, 2020 and consisted of revolving loans in both the United States, in the amount of $670.0 million, and Canada, in the amount of $30.0 million. The 2020 ABL had various borrowing tranches with an interest rate based on a LIBOR rate (with a floor) plus a fixed spread. The full balance of the 2020 ABL was paid on January 2, 2018 in conjunction with the Allied Acquisition.
On October 1, 2015, we entered into a $450.0 million Term Loan with Citibank N.A., and a syndicate of other lenders. The 2022 Term Loan required quarterly principal payments in the amount of $1.1 million, with the remaining outstanding principal to be paid on its original maturity date of October 1, 2022. The interest rate was based on a LIBOR rate (with a floor) plus a fixed spread. We had the option of selecting a LIBOR period that determined the rate at which interest would accrue, as well as the period in which interest payments are made. The full balance of the 2022 Term Loan was paid on January 2, 2018 in conjunction with the Allied Acquisition, including the write-off of $0.7 million in debt issuance costs.
On October 1, 2015, we raised $300.0 million by issuing senior notes due 2023. The 2023 Senior Notes have a coupon rate of 6.38% per annum and are payable semi-annually in arrears, beginning April 1, 2016. There are early payment provisions in the indenture in which we would be subject to “make whole” provisions. We anticipate repaying the notes at the maturity date of October 1, 2023.
The 2023 Senior Notes are guaranteed jointly, severally, fully and unconditionally by our active United States subsidiaries.
As of March 31, 2019, we had $9.1 million outstanding under equipment financing facilities, with fixed interest rates ranging from 2.33% to 3.25% and payments due through September 2021.
As of March 31, 2019, we had $9.7 million of capital lease obligations outstanding. These leases have interest rates ranging from 2.72% to 10.39% with payments due through November 2021.
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Cautionary Statement for Purposes of the “Safe Harbor” Provisions of the Private Securities Litigation Reform Act of 1995
Our disclosure and analysis in this report contains forward-looking information that involves risks and uncertainties. Our forward-looking statements express our current expectations or forecasts of possible future results or events, including projections of future performance, statements of management’s plans and objectives, future contracts, and forecasts of trends and other matters. You can identify these statements by the fact that they do not relate strictly to historic or current facts and often use words such as “anticipate,” “estimate,” “expect,” “believe,” “will likely result,” “outlook,” “project” and other words and expressions of similar meaning. No assurance can be given that the results in any forward-looking statements will be achieved and actual results could be affected by one or more factors, which could cause them to differ materially. For these statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act.
Certain factors that may affect our business and could cause actual results to differ materially from those expressed in any forward-looking statements include those set forth under the heading “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended September 30, 2018.
Quantitative and Qualitative Disclosures about Market Risk
Our market risk disclosures set forth in Part II, Item 7A, “Quantitative and Qualitative Disclosures About Market Risk” of its 2018 Annual Report on Form 10-K have not changed materially during the three-month period ended March 31, 2019.
As of March 31, 2019, management, including the CEO and CFO, performed an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934 (the “Act”)). Based on that evaluation, management, including the CEO and CFO, concluded that as of March 31, 2019, our disclosure controls and procedures were effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Act is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms, and to ensure that information required to be disclosed by us in the reports that we file or submit under the Act is accumulated and communicated to our management, including our CEO and CFO, as appropriate to allow timely decisions regarding required disclosure. We maintain a system of internal control over financial reporting that is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles in the United States.
On January 2, 2018, we completed our acquisition of Allied Building Products Corp. ("Allied"). As permitted under existing SEC staff guidance, management elected to exclude Allied from our internal controls assessment for fiscal year 2018. However, for fiscal year 2019, the acquired Allied business is within the scope of management’s assessment of internal controls. Although management has not fully integrated all of the acquired Allied branches, the internal controls at the Allied branches were part of management’s assessment of internal controls for effectiveness as of March 31, 2019. The full integration of the remaining Allied branches may lead to changes in future periods, but we do not expect these changes to materially affect our internal controls over financial reporting.
Including the Allied Acquisition, there has been no change to our internal control over financial reporting during the last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II.OTHER INFORMATION
Incorporated by Reference
Exhibit
Number
Description
Form
File No.
Filing Date
10.1*
Letter Agreement, dated February 13, 2019, by and among Beacon Roofing Supply, Inc., CD&R Boulder Holdings, L.P. and Clayton, Dubilier & Rice Fund IX, L.P. (solely for the purposes described therein)
10.2+*
Employment and Post-Employment Exclusive Consulting Agreement, dated as of February 25, 2019, between Beacon Roofing Supply, Inc. and Paul Isabella
31.1*
Certification of Chief Executive Officer Pursuant to Rule 13a-14(a)
31.2*
Certification of Chief Financial Officer Pursuant to Rule 13a-14(a)
32.1*
Certification pursuant to 18 U.S.C. Section 1350
101*
101.INS XBRL Instance
101.SCH XBRL Taxonomy Extension Schema
101.CAL XBRL Taxonomy Extension Calculation
101.LAB XBRL Taxonomy Extension Labels
101.PRE XBRL Taxonomy Extension Presentation
101.DEF XBRL Taxonomy Extension Definition
________________________________________________
+
Management contract or compensatory plan/arrangement
*
Filed herewith
Pursuant to Rule 405 of Regulation S-T, the following interactive data files formatted in Extensible Business Reporting Language (XBRL) are attached as Exhibit 101 to this Quarterly Report on Form 10-Q: (i) the Consolidated Balance Sheets as of March 31, 2019; September 30, 2018; and March 31, 2018, (ii) the Consolidated Statements of Operations for the three and six months ended March 31, 2019 and 2018, (iii) the Consolidated Statements of Comprehensive Income for the three and six months ended March 31, 2019 and 2018, (iv) the Consolidated Statements of Stockholders’ Equity for the three and six months ended March 31, 2019 and 2018, (v) the Consolidated Statements of Cash Flows for the six months ended March 31, 2019 and 2018, and (vi) the Notes to Condensed Consolidated Financial Statements.
SIGNATURE
Pursuant to the requirements 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.
Date: May 8, 2019
BY:
/s/ JOSEPH M. NOWICKI
Joseph M. Nowicki
Executive Vice President & Chief Financial Officer