The following is a discussion and analysis of our financial condition and results of operations as of and for the periods presented below. The following discussion and analysis should be read in conjunction with the "Condensed Consolidated Financial Statements" and notes thereto included elsewhere in this Quarterly Report on Form 10-Q. This section and other parts of this Quarterly Report on Form 10-Q contain forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially from the results expressed or implied by the forward-looking statement. We have made these statements in reliance on the safe harbor created by the Private Securities Litigation Reform Act of 1995 (set forth in Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act). In some cases, forward-looking statements can be identified by words such as "anticipates," "believes," "could," "estimates," "expects," "intends," "may," "plans," "potential," "predicts," "projects," "should," "will," "would" or the negative or similar expressions. All of our forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those that we are expecting, including: •the recent outbreak of the novel coronavirus COVID-19, which was declared a pandemic by theWorld Health Organization onMarch 11, 2020 , or the COVID-19 Pandemic; •the length and severity of the recent COVID-19 Pandemic and its impact on the global economy, our business, operations and financial results; •the impact of cost-saving initiatives on our financial and liquidity position; •federal, state and local government initiatives to mitigate the impact of the COVID-19 Pandemic, including additional restrictions on business activities, "shelter-in-place" orders and other restrictions; •our ability to qualify as an essential business or service under state, county or local orders; •the timing, amount and availability of economic stimulus or other initiatives by federal, state or provincial governments; •our ability to effectively manage any downturns in the new commercial construction market, the commercial repair and remodel market and the new residential construction market; •our ability to effectively manage any changes in economic, political and social conditions; •fluctuating demand for the products and services we offer; •our ability to effectively compete in a highly competitive industry; •our ability to realize the anticipated financial and strategic goals of future acquisitions or investments, including the identification of acquisition targets and the integration and performance of acquired stores and businesses, including integration of financial systems; •our ability to achieve the intended benefits of our recent acquisitions, including the realization of synergies; •a diversion of management's attention from ongoing business concerns to matters related to acquisitions we may make in the future or the integration of previous acquisitions; •our ability to maintain our existing contractual and business relationships; •the change in any exclusive rights or relationships we have with suppliers that provide us access to leading brands; •a material disruption at our suppliers' facilities due to weather, environmental incidents, transportation disruption, natural disasters or public health emergencies such as the COVID-19 Pandemic and other operational problems; •the effects of any changes in environmental, health and safety laws and regulations on our operations and liquidity; •our ability to attract and retain key management personnel and other talent required for our business; •our exposure to legal claims and proceedings related to our business; •our ability to manage the impact of debt and equity financing transactions; •our ability to generate a sufficient amount of cash to service our indebtedness and fund our operations; •our ability to operate our business under agreements governing our indebtedness containing financial covenants and other restrictions; •the effects of and ability to continue incurring a substantial amount of indebtedness under our asset-based lending credit facility and our term loan facility; •the volatility of the trading price of our common stock; •our relationship, and actual and potential conflicts of interest, with our majority shareholder; and •additional factors discussed under the sections entitled "Risk Factors," and "Management's Discussion and Analysis of Financial Condition and Results of Operations" as well as in the other reports we file with theSecurities and Exchange Commission , orSEC . The forward-looking statements contained in this Quarterly Report on Form 10-Q are based on historical performance and management's current plans, estimates and expectations in light of information currently available to us and are subject to uncertainty and changes in circumstances. There can be no assurance that future developments affecting us will be those that we have anticipated. Actual results may differ materially from these expectations due to changes in global, regional or 23 -------------------------------------------------------------------------------- local political, economic, business, competitive, market, regulatory, public health and other factors, many of which are beyond our control, as well as the other factors described in Item 1A. Risk Factors in this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K for the year endedDecember 31, 2019 , filed with theSEC onFebruary 25, 2020 , or the 2019 10-K, as updated by our subsequent filings with theSEC . Additional factors or events that could cause our actual results to differ may also emerge from time to time, and it is not possible for us to predict all of them. Comparisons of results for current and any prior periods are not intended to express any future trends or indications of future performance, unless expressed as such, and should only be viewed as historical data. Should one or more of these risks or uncertainties materialize, or should any of our assumptions prove to be incorrect, our actual results may vary in material respects from what we may have expressed or implied by these forward-looking statements. You should not place undue reliance on any of our forward-looking statements. Any forward-looking statement made by us in this Quarterly Report on Form 10-Q speaks only as of the date hereof. We undertake no obligation to publicly update any forward-looking statement, whether as a result of new information, future developments or otherwise, except as may be required by applicable securities laws. We qualify all of our forward-looking statements by these disclaimers.
Overview
We are one of the largest specialty building products distributors of wallboard and suspended ceiling systems inthe United States andCanada . Since 2013, we have completed more than 35 acquisitions and have over 175 branches and 30,000 SKUs. We have a national operating model supported by local market expertise and an entrepreneurial, customer-centric culture. Our strong national brand and acquisition expertise have established us as the distributor of choice for leading suppliers, and we have over 25,000 customers across construction-related end markets. We believe we are able to maintain our local market excellence due to our longstanding customer relationships, dependable service and market-specific product offerings that cater to local market trends and preferences.
Factors and Trends Affecting Our Business and Results of Operations
See Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, in the 2019 10-K for a discussion of the general and specific factors and trends affecting our business and results of operations, which include general economic conditions, new non-residential construction, new residential construction, non-residential repair and remodel construction, volume, costs and pricing programs.
The COVID-19 Pandemic's Impact on our Business
The uncertain macroeconomic environment created by the COVID-19 Pandemic has had and will continue to have a significant, adverse impact on our business. As of the date of this filing, significant uncertainty exists concerning the magnitude of the impact and duration of the disruption, and we are unable to determine or predict the overall impact the COVID-19 Pandemic will have on our financial position, results of operations, or cash flows. The following events related to the COVID-19 Pandemic have resulted and will result in lost or delayed revenue to our company: •limitations on the ability of manufacturers to produce the products we sell; •limitations on the ability of our suppliers to meet delivery requirements and commitments; •limitations on the ability of our employees to perform their work; •limitations imposed by local, state or federal orders affecting our ability to operate; •limitations on the ability of freight carriers to deliver our products to us and our customers; •limitations on the ability of our customers to conduct their business and purchase our products and services; •delays in starting construction jobs, temporary closure of jobsites or cancellation of jobs; •disruptions to our customers' supply chains or purchasing; and •limitations on the ability of our customers to pay us on a timely basis. We continue to operate the vast majority of our branches throughoutthe United States andCanada , taking safety precautions based on recommendations from federal, state and local authorities. We continue to operate as part of an "Essential Critical Infrastructure Sector" in many states. In a select number of states, includingWashington, California ,Michigan ,New Jersey , and theCommonwealth of Pennsylvania , stronger restrictions are or have been in place, and the Company has experienced more significant year over year headwinds and has not seen the typical seasonal improvement. 24 -------------------------------------------------------------------------------- We will continue to actively monitor the disruption caused by the COVID-19 Pandemic, and may take further actions that alter our business operations as may be required by federal, state or local authorities or that we determine are in the best interests of our employees, customers, suppliers and stockholders. We furloughed approximately 450 employees in response to the COVID-19 Pandemic, but as ofMay 8, 2020 , approximately 250 employees have returned to work. Other than the furloughs, we have not seen any material changes to our workforce due to the COVID-19 Pandemic. We may take further actions in the future as the situation develops. We entered the COVID-19 Pandemic with a strong balance sheet and have taken steps to enhance our financial flexibility. InMarch 2020 , in response to the COVID-19 Pandemic, we drew$120.0 million from our 2018 Revolving Credit Facility to provide financial flexibility and liquidity due to volatile financial market conditions. The additional steps we have taken to maintain cash flow include: •delaying or reducing capital expenditures that are not anticipated to impact near-term business; •deferring or limiting non-essential operating expenses; •reduced salaries for exempt employees led by voluntary salary reductions by certain members of our senior management team, including a 50% salary reduction for our Chief Executive Officer; •reduced independent board member compensation by 50%; •optimizing all areas of working capital; •restricted hiring, deferred wage increases and reduced other employer-related costs; •furloughed team members associated with temporary branch closures; and •temporarily suspended acquisition-related activity. We do not anticipate any issues servicing our debt and do not expect to need additional borrowings in the second quarter of 2020. As ofApril 30, 2020 , we have cash on hand of approximately$87 million and approximately$205 million of remaining borrowing capacity under our 2018 Revolving Credit Facility. We estimate the negative impact of the COVID-19 Pandemic to our base business net sales for the three months endedMarch 31, 2020 , was between$14.0 million and$18.0 million across all product lines. This historical estimate is a management estimate only based on the information available as of the date of this filing. We did not record any asset impairments, inventory charges or provision for expected credit losses related to the COVID-19 Pandemic during the first quarter of 2020, but future events may require such charges, which could have a material adverse effect on our financial condition, results of operations, cash flows or liquidity.
First Quarter Update
Financial Results
We reported net sales of$524.3 million for the three months endedMarch 31, 2020 , an increase of$9.4 million , or 1.8%, compared to the three months endedMarch 31, 2019 . Our gross margin for the three months endedMarch 31, 2020 , was 30.9% compared to 29.7% for the three months endedMarch 31, 2019 , due to improved profitability across our wallboard, metal framing, and complementary and other products lines driven by our ongoing pricing and purchasing initiatives.
2020 Acquisitions
We supplement our organic growth strategy with selective acquisitions. As noted above, we have temporarily suspended our acquisition activity in response to the COVID-19 Pandemic. SinceJanuary 2020 through the date of this filing, we have completed one acquisition, which resulted in the addition of two branches. See Note 7, Acquisitions, to the condensed consolidated financial statements. In executing our acquisition strategy and integrating acquired companies, we focus on the cost savings we can achieve through combined procurement and pricing programs and brand consolidation. The acquisition contributed$3.9 million to net sales for the three months endedMarch 31, 2020 . Effective Date of Acquisitions Acquisition Branch Locations # of Branches Acquired Insulation Distributors, Inc. February 3, 2020 Maryland 2 25
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