BEACON ROOFING SUPPLY, INC. The following discussion and analysis should be read in conjunction with Management's Discussion and Analysis included in our 2019 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 "2020" refer to the three or six months endedMarch 31, 2020 being discussed and references to "2019" refer to the three or six months endedMarch 31, 2019 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 roofing materials and complementary building products inthe United States andCanada . We are among the oldest and most established distributors in the industry. The complementary building products we distribute include siding, windows, insulation, waterproofing systems, wallboard, acoustical ceilings, and other specialty exterior and interior building products. 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, home builders, retailers, and other building materials suppliers.
On
As ofMarch 31, 2020 , we operated 528 branches throughout all 50 states in theU.S. and 6 provinces inCanada . We offer one of the most extensive assortments of high-quality branded products in the industry with approximately 140,000 SKUs available across our branch network, enabling us to deliver products to serve over 110,000 customers on a timely basis. Effective execution of both our 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 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 operating model and branch level autonomy differentiate us from the competition. We provide our customers with industry-leading digital solutions, including Beacon PRO+, our innovative e-commerce portal, and Beacon 3D+, an in-home visualizer and dynamic modeling tool for our residential customers. These platforms help our customers save time, work more efficiently and grow their business. Additional value-added services we offer include, but are 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 that drives service excellence, productivity and efficiency. 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. We pursue organic growth opportunities that allow us to penetrate deeper into target markets and establish a greater presence. The most recent successful execution of our growth strategy is summarized by the following:
• On
interior building products distributors, for
Acquisition"). This significant acquisition 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.
• We opened three new branches in fiscal year 2020 to date, including
locations in
a total of nine new branch locations across
Nevada ,North Carolina ,Pennsylvania andTexas . 21
--------------------------------------------------------------------------------
Recent Developments
COVID-19 Pandemic
The COVID-19 pandemic has resulted, and is likely to continue to result, in significant economic disruption, and it is likely to adversely affect our business. As of the date of this filing, significant uncertainty exists concerning the magnitude of the impact and duration of the COVID-19 pandemic.
In this unprecedented time, we continue to emphasize the health and safety of our employees, customers and the communities in which we operate. Amid the current COVID-19 backdrop, our employees are practicing social distancing and are handwashing and cleaning in accordance with CDC standards. We have been designated an essential business in all the local markets that we serve, and we have yet to experience a significant amount of forced temporary branch closures due to COVID-19 business disruptions. We continue to deliver building products to both the residential and commercial construction markets. We continue to serve customers in every way possible, and our online platform has stood out as an increasingly valuable tool in this current remote operating environment. Our average daily sales levels for the three and six months endedMarch 31, 2020 increased 0.5% and decreased 1.3%, respectively, compared to the prior year. Our average daily sales for the month ofApril 2020 were down approximately 20% compared to the prior year period; however, there were indications of relative stability in our sales volumes toward the second half of the month. In response to the potential business disruptions, we have implemented a series of operational and financial actions to combat the effects of the COVID19 induced slowdown. We immediately responded to changes in localized demand through aggressive cost-cutting actions, including a reduction in seasonal and temporary hiring, cuts in overtime hours and reduced hourly schedules. We have also implemented furloughs in both operating and non-operating functions, reduced salaries, significantly restricted capital expenditures, improved working capital metrics by reducing inventory, and heightened our organizational focus on managing all expenses. We have taken meaningful actions to improve our financial flexibility and ensure the strength of our balance sheet, and we are prepared to take additional steps to appropriately manage the business through this uncertain period. We are also monitoring input costs to ensure we are well-positioned to take advantage of any opportunities that present themselves over the next several quarters.
Comparison of the Three Months Ended
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):
Three Months Ended March 31,
2020 2019
Net sales $ 1,458,486 $ 1,429,037
Cost of products sold 1,116,086 1,094,049
Gross profit 342,400 334,988
Operating expense:
Selling, general and administrative 318,510 320,408
Depreciation 17,495 17,447
Amortization 187,356 51,763
Total operating expense 523,361 389,618
Income (loss) from operations (180,961 ) (54,630 )
Interest expense, financing costs, and other 23,454 40,452
Loss on debt extinguishment -
-
Income (loss) before provision for income taxes (204,415 ) (95,082 ) Provision for (benefit from) income taxes (81,775 ) (26,996 ) Net income (loss)$ (122,640 ) $ (68,086 ) Dividends on Preferred Stock 6,000
6,000
Net income (loss) attributable to common shareholders$ (128,640 ) $ (74,086 ) 22
--------------------------------------------------------------------------------
Three Months Ended March 31,
2020 2019
Net sales 100.0 % 100.0 %
Cost of products sold 76.5 % 76.6 %
Gross profit 23.5 % 23.4 %
Operating expense:
Selling, general and administrative 21.9 % 22.4 %
Depreciation 1.2 % 1.2 %
Amortization 12.8 % 3.6 %
Total operating expense 35.9 % 27.2 %
Income (loss) from operations (12.4 %) (3.8 %)
Interest expense, financing costs, and other 1.6 % 2.8 %
Loss on debt extinguishment 0.0 % 0.0 %
Income (loss) before provision for income taxes (14.0 %) (6.6 %)
Provision for (benefit from) income taxes (5.6 %) (1.8 %)
Net income (loss) (8.4 %) (4.8 %)
Dividends on Preferred Stock 0.4 % 0.4 %
Net income (loss) attributable to common shareholders (8.8 %) (5.2 %)
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 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" given the manner in which they are offered).
As of March 31, 2020 , we had a total of 528 branches in operation. All 528
branches were acquired prior to the start of the second quarter of fiscal year
2019 and therefore meet our existing market definition. As a result, operating
results for existing markets are equal to consolidated operating results for all
periods presented.
Net Sales
Net sales increased 2.1% to $1.46 billion in 2020, from $1.43 billion in 2019.
The comparative increase in net sales was influenced by our sales initiatives
around contractor conversions, national account sales, and the continued
positive impact of our industry-leading digital platform, partially offset by
decreased hurricane-related demand in the Mid-Atlantic.
Net sales by geographical region increased (decreased) from 2019 to 2020 as
follows: Northeast 1.7%; Mid-Atlantic (3.9%); Southeast (0.4%); Southwest
(2.6%); Midwest 6.8%; West 8.8%; and
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).
The following table summarizes net sales by product line for the periods
presented (in thousands):
Three Months Ended March 31,
2020 2019 Change
Net Sales % Net Sales % $ %
Residential roofing
products $ 591,213 40.5 % $ 598,917 42.0 % $ (7,704 ) (1.3 %)
Non-residential roofing
products 353,001 24.2 % 313,626 21.9 % 39,375 12.6 %
Complementary building
products 514,272 35.3 % 516,494 36.1 % (2,222 ) (0.4 %)
Total net sales $ 1,458,486 100.0 % $ 1,429,037 100.0 % $ 29,449 2.1 %
23
--------------------------------------------------------------------------------
Gross Profit
The following table summarizes gross profit and gross margin for the periods presented (in thousands):
Three Months Ended March 31, Change1
2020 2019 $ %
Gross profit $ 342,400 $ 334,988 $ 7,412 2.2 %
Gross margin 23.5 % 23.4 % N/A 0.1 %
___________________________________________________________
1 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.
Gross profit increased 2.2% to
Gross margin was 23.5% in 2020, up 0.1% from 23.4% in 2019. The comparative increase in gross margin was influenced by a net product cost decrease of approximately 1%, partially offset by a price decrease of less than 1% and a product mix shift.
Operating Expense
The following table summarizes operating expense for the periods presented (in
thousands):
Three Months Ended March 31, Change1
2020 2019 $ %
Operating expense $ 523,361 $ 389,618 $ 133,743 34.3 %
% of net sales 35.9 % 27.3 % N/A 8.6 %
_________________________________________________________________
1 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.
Operating expense increased 34.3% to$523.4 million in 2020, from$389.6 million in 2019. The comparative increase in operating expense was mainly influenced by the following factors: • a$135.6 million increase in amortization expense, which includes the gross impact of accelerated amortization of$142.6 million related to the write-off of certain trade names in connection with the Rebranding; and
• a
costs, and volume-driven payroll increases;
partially offset by:
• a
costs; and
• a
initiatives.
Interest Expense, Financing Costs and Other
Interest expense, financing costs and other expense was
• a$5.6 million settlement received in connection with a class action lawsuit; • a$5.3 million refund to be received as the final true-up of the$164.0
million payment resulting from the 338(h)(10) election made in connection
with the Allied Acquisition; and
• a lower weighted-average interest rate on our outstanding debt.
Income Taxes
There was an income tax benefit of$81.8 million in 2020, compared to$27.0 million in 2019. The comparative increase in income tax benefit was primarily due to tax benefits from deferred tax adjustments of$36.5 million related to the Rebranding and$33.3 million related to the impact of the recently announced CARES Act related to the COVID-19 pandemic that allows the Company to carry back net operating losses for five years and tax effects current year net losses at a 35% rate.
The effective tax rate, excluding any discrete items, was 39.8% in 2020, compared to 27.9% in 2019. We expect our fiscal year 2020 effective tax rate, excluding any discrete items, will range from approximately 38.0% to 40.0%.
24--------------------------------------------------------------------------------
Net Income (Loss)/Net Income (Loss) Per Share
Net income (loss) was$(122.6) million in 2020, compared to$(68.1) million in 2019. There were$6.0 million of dividends on preferred shares in both 2020 and 2019, making net income (loss) attributable to common shareholders of$(128.6) million and$(74.1) million , respectively. We calculate net income (loss) per share by dividing net income (loss), less dividends on preferred shares and adjustments for participating securities, by the weighted-average number of common shares outstanding during the period. Diluted net income (loss) per share is calculated by utilizing the most dilutive result after applying and comparing the two-class method and if-converted method (see Note 4 in the Notes to Condensed Consolidated Financial Statements for further discussion). The following table presents all the components utilized to calculate basic and diluted net income (loss) per share (in thousands, except share and per share amounts): Three Months Ended March 31, 2020 2019 Net income (loss)$ (122,640 ) $ (68,086 ) Dividends on Preferred Stock 6,000
6,000
Net income (loss) attributable to common shareholders (128,640 )
(74,086 )
Undistributed income allocated to participating
securities - -
Net income (loss) attributable to common shareholders - $ basic and diluted (if-converted method)
(128,640 ) $ (74,086 )
Undistributed income allocated to participating
securities - -
Re-allocation of undistributed income to Preferred Stock
- -
Net income (loss) attributable to common shareholders - $ diluted (two-class method)
(128,640 ) Weighted-average common shares outstanding - basic 68,820,155
68,451,920
Effect of common share equivalents - -
Weighted-average common shares outstanding - diluted (if-converted and two-class method)
68,820,155 68,451,920
Net income (loss) per share - basic $ (1.87 )$ (1.08 ) Net income (loss) per share - diluted (two-class (1.87 ) (1.08 ) method) Net income (loss) per share - diluted (if-converted (1.87 ) (1.08 ) method)
Comparison of the Six Months Ended
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):
Six Months Ended March 31,
2020 2019
Net sales $ 3,133,598 $ 3,150,713
Cost of products sold 2,380,500 2,380,156
Gross profit 753,098 770,557
Operating expense:
Selling, general and administrative 645,429 648,101
Depreciation 36,567 35,048
Amortization 232,134 103,784
Total operating expense 914,130 786,933
Income (loss) from operations (161,032 ) (16,376 )
Interest expense, financing costs, and other 61,747 78,813
Loss on debt extinguishment 14,678
-
Income (loss) before provision for income taxes (237,457 )
(95,189 )
Provision for (benefit from) income taxes (91,407 ) (26,210 )
Net income (loss) $ (146,050 ) $ (68,979 )
Dividends on Preferred Stock 12,000 12,000
Net income (loss) attributable to common shareholders$ (158,050 ) $ (80,979 ) 25
--------------------------------------------------------------------------------
Six Months Ended March 31,
2020 2019
Net sales 100.0 % 100.0 %
Cost of products sold 76.0 % 75.5 %
Gross profit 24.0 % 24.5 %
Operating expense:
Selling, general and administrative 20.6 % 20.6 %
Depreciation 1.2 % 1.1 %
Amortization 7.4 % 3.3 %
Total operating expense 29.2 % 25.0 %
Income (loss) from operations (5.1 %) (0.5 %)
Interest expense, financing costs, and other 2.0 % 2.5 %
Loss on debt extinguishment 0.5 % 0.0 %
Income (loss) before provision for income taxes (7.6 %) (3.0 %)
Provision for (benefit from) income taxes (2.9 %) (0.8 %)
Net income (loss) (4.7 %) (2.2 %)
Dividends on Preferred Stock 0.3 % 0.4 %
Net income (loss) attributable to common (5.0 %) (2.6 %)
shareholders
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 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" given the manner in which they are offered).
As of
Net sales decreased 0.5% to$3.13 billion in 2020, from$3.15 billion in 2019. The comparative decrease in net sales was influenced by decreased hurricane-related demand in the Mid-Atlantic and Southeast, partially offset by the continued positive impact of our industry-leading digital platform.
Net sales by geographical region increased (decreased) from 2019 to 2020 as
follows: Northeast (2.3%); Mid-Atlantic (9.2%); Southeast (2.4%); Southwest
(0.3%); Midwest 2.0%; West 5.7%; and
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).
The following table summarizes net sales by product line for the periods
presented (in thousands):
Six Months Ended March 31,
2020 2019 Change
Net Sales % Net Sales % $ %
Residential roofing
products $ 1,293,473 41.3 % $ 1,323,780 42.0 % $ (30,307 ) (2.3 %)
Non-residential roofing
products 773,896 24.7 % 729,939 23.2 % 43,957 6.0 %
Complementary building
products 1,066,229 34.0 % 1,096,994 34.8 % (30,765 ) (2.8 %)
Total net sales $ 3,133,598 100.0 % $ 3,150,713 100.0 % $ (17,115 ) (0.5 %)
26
--------------------------------------------------------------------------------
Gross Profit
The following table summarizes gross profit and gross margin for the periods presented (in thousands):
Six Months Ended March 31, Change1
2020 2019 $ %
Gross profit $ 753,098 $ 770,557 $ (17,459 ) (2.3 %)
Gross margin 24.0 % 24.5 % N/A (0.5 %)
________________________________
1 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.
Gross profit decreased 2.3% to
Gross margin was 24.0% in 2020, down 0.5% from 24.5% in 2019. The comparative
decrease in gross margin was influenced by a price decrease of less than 1% and
a product mix shift, partially offset by a net product cost decrease of less
than 1%.
Operating Expense
The following table summarizes operating expense for the periods presented (in
thousands):
Six Months Ended March 31, Change1
2020 2019 $ %
Operating expense $ 914,130 $ 786,933 $ 127,197 16.2 %
% of net sales 29.2 % 25.0 % N/A 4.2 %
________________________________
1 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.
Operating expense increased 16.2% to $914.1 million in 2020, from $786.9 million
in 2019. The comparative increase in operating expense was mainly influenced by
the following factors:
• a $128.3 million increase in amortization expense, which includes the
gross impact of accelerated amortization of $142.6 million related to the
write-off of certain trade names in connection with the Rebranding;
partially offset by:
• a net
due to higher incursion of acquisition-related costs in the prior period.
Interest Expense, Financing Costs and Other
Interest expense, financing costs and other expense was
• a$5.6 million settlement received in connection with a class action lawsuit; • a$5.3 million refund to be received as the final true-up of the$164.0
million payment resulting from the 338(h)(10) election made in connection
with the Allied Acquisition; and
• a lower weighted-average interest rate on our outstanding debt.
Income Taxes
There was an income tax benefit of$91.4 million in 2020, compared to$26.2 million in 2019. The comparative increase in income tax benefit was primarily due to tax benefits from deferred tax adjustments of$36.5 million related to the Rebranding and$33.3 million related to the impact of the recently announced CARES Act related to the COVID-19 pandemic that allows the Company to carry back net operating losses for five years and tax effects current year net losses at a 35% rate.
The effective tax rate, excluding any discrete items, was 39.8% in 2020, compared to 27.9% in 2019. We expect our fiscal year 2020 effective tax rate, excluding any discrete items, will range from approximately 38.0% to 40.0%.
27--------------------------------------------------------------------------------
Net Income (Loss)/Net Income (Loss) Per Share
Net income (loss) was$(146.1) million in 2020, compared to$(69.0) million in 2019. There were$12.0 million of dividends on preferred shares in both 2020 and 2019, making net income (loss) attributable to common shareholders$(158.1) million and$(81.0) million , respectively. We calculate net income (loss) per share by dividing net income (loss), less dividends on preferred shares and adjustments for participating securities, by the weighted-average number of common shares outstanding during the period. Diluted net income (loss) per share is calculated by utilizing the most dilutive result after applying and comparing the two-class method and if-converted method (see Note 4 in the Notes to Condensed Consolidated Financial Statements for further discussion). The following table presents all the components utilized to calculate basic and diluted net income (loss) per share (in thousands, except share and per share amounts): Six Months Ended March 31, 2020 2019 Net income (loss)$ (146,050 ) $ (68,979 ) Dividends on Preferred Stock 12,000
12,000
Net income (loss) attributable to common shareholders (158,050 )
(80,979 )
Undistributed income allocated to participating
securities - -
Net income (loss) attributable to common shareholders - basic and diluted (if-converted method)
$ (158,050 ) $ (80,979 ) Undistributed income allocated to participating securities -
-
Re-allocation of undistributed income to Preferred Stock
- -
Net income (loss) attributable to common shareholders - diluted (two-class method)
$ (158,050 )
Weighted-average common shares outstanding, basic 68,743,633
68,348,850
Effect of common share equivalents -
-
Weighted-average common shares outstanding - diluted (if-converted and two-class method)
68,743,633 68,348,850
Net income (loss) per share - basic$ (2.30 ) $ (1.18 ) Net income (loss) per share - diluted (two-class method) (2.30 ) (1.18 ) Net income (loss) per share - diluted (if-converted method) (2.30 ) (1.18 )
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
• Adjusted Net Income (Loss)
• Adjusted EBITDA
We define Adjusted Net Income (Loss) as net income excluding the impact of
acquisition costs, business restructuring costs, the effects of tax reform, and
the direct financial impact of the COVID-19 pandemic. We define Adjusted EBITDA
as net income excluding the impact of interest expense (net of interest income),
income taxes, depreciation and amortization, stock-based compensation,
acquisition costs, business restructuring costs, and the direct financial impact
of the COVID 19 pandemic.
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 expect to compute our
non-GAAP financial measures consistently using the same methods each period.
We believe these non-GAAP measures are useful measures because they permit
investors to better understand changes over comparative periods by providing
financial results that are unaffected by certain items that are not indicative
of ongoing operating performance.
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. These non-GAAP
measures should not be considered in isolation or as a substitute for other
financial performance measures presented in accordance with GAAP. These non-GAAP
financial measures may have material limitations including, but not limited to,
the exclusion of certain costs without a corresponding reduction of net income
for the income generated by the assets to which the excluded costs are related.
In addition, these non-GAAP financial measures may differ from similarly titled
measures presented by other companies.
28--------------------------------------------------------------------------------
Adjusted Net Income (Loss)
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) for each of the periods indicated (in thousands):
Three Months Ended March 31 ,
Six Months Ended
2020 2019 2020 2019
Net income (loss) $ (122,640 ) $ (68,086 ) $ (146,050 ) $ (68,979 )
Adjustments:
Acquisition costs1 43,875 61,479 94,509 125,440
Business restructuring costs2 144,461 - 164,991 -
COVID-19 impact3 (33,322 ) - (33,322 ) -
Effects of tax reform - (462 ) - (462 )
Total adjustments 155,014 61,017 226,178 124,978
Tax impact of total adjustments4 (44,854 ) (17,815 ) (64,282 ) (34,383 )
Total adjustments, net of tax 110,160 43,202 161,896 90,595
Adjusted Net Income (Loss) $ (12,480 ) $ (24,884 ) $ 15,846 $ 21,616 _______________________________
1 The following table presents a breakout of the components of acquisition costs
for each of the periods indicated:
Three Months Ended March 31, Six Months Ended March 31,
2020 2019 2020 2019
Amortization of intangible assets
$ 89,485 $ 103,784 Costs classified as selling, general, and administrativea 2,447 6,687 6,299 15,605 Non-operating (income) expensesb (3,279 ) 3,028 (1,275 ) 6,051 Total acquisition costs$ 43,875 $ 61,479 $ 94,509 $ 125,440
__________________________________
a. Mainly composed of professional fees, branch integration expenses,
travel expenses, employee severance and retention costs, and other
personnel expenses.
b. Amounts include the amortization of debt issuance costs. For the three
and six months ended March 31, 2020 , amounts are offset by a $5.3
million refund to be received as the final true-up of the $164.0
million payment resulting from the 338(h)(10) election made in
connection with the Allied Acquisition.
2 The following table presents a breakout of the components of business
restructuring costs for each of the periods indicated:
Three Months Ended March 31, Six Months Ended March 31,
2020 2019 2020 2019
Amortization in connection with
the Rebranding $ 142,649 $ - $ 142,649 $ -
Costs classified as selling,
general, and administrativea 816 - 821 -
Non-operating (income) expensesb 996 - 21,521 -
Total business restructuring costs
164,991 $ -
__________________________________
a. Mainly composed of costs stemming from headcount rationalization
efforts and certain Rebranding costs.
b. Amounts include accrued estimated costs related to employee benefit
plan withdrawals and amortization of debt issuance costs. For the six
months ended March 31, 2020 , amount also includes a loss on debt
extinguishment of $14.7 million in connection with the October 2019
debt refinancing.
3 Mainly composed of a
application of the CARES Act (see Note 14 in the Notes to Condensed
Consolidated Financial Statements), partially offset by severance and other
costs directly related to the Company's response to the COVID-19 pandemic.
4 The effective tax rate applied to these adjustments is calculated by using
forecasted adjusted pre-tax income while factoring in estimated discrete tax
adjustments for the fiscal year. The tax impact of adjustments for the three
months ended
tax rate of 28.9% and 29.2%, respectively. The tax impact of adjustments for
the six months ended
tax rate of 28.4% and 27.5%, respectively.
29
--------------------------------------------------------------------------------
Adjusted EBITDA
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):
Three Months Ended March 31 ,
Six Months Ended
2020 2019 2020 2019
Net income (loss)
35,625 41,815 70,421 81,631
Income taxes1 (81,775 ) (26,996 ) (91,407 ) (26,210 )
Depreciation and
amortization2 204,851 69,210 268,701 138,832
Stock-based compensation 4,661 4,807 9,817 8,264
Acquisition costs3 (2,835 ) 6,687 1,017 15,605
Business restructuring
costs4 943 - 20,627 -
COVID-19 impact5 23 - 23 -
Adjusted EBITDA $ 38,853 $ 27,437 $ 133,149 $ 149,143
Adjusted EBITDA as a % of
net sales 2.7 % 1.9 % 4.2 % 4.7 %
____________________________________________________________
1 Three and six months ended
deferred tax adjustments of
million related to the impact of the recently announced CARES Act related to
the COVID-19 pandemic that allows the Company to carry back net operating
losses for five years and tax effects current year net losses at a 35% rate.
2 Three and six months ended
non-cash accelerated intangible asset amortization of
the write-off of certain trade names in connection with the Rebranding.
3 Includes selling, general, and administrative costs related to acquisitions
(excluding the impact of tax). For the three and six months ended
2020, amounts are offset by a
true-up of the
made in connection with the Allied Acquisition. Other items the Company
classifies as acquisition costs are embedded within the other balances reported
in the table.
4 Six months ended
extinguishment of
accrued estimated costs related to employee benefit plan withdrawals, costs
stemming from headcount rationalization efforts, and certain Rebranding costs.
Other items the Company classifies as business restructuring costs are embedded
within the other balances reported in the table.
5 Mainly composed of severance and other costs directly related to the Company's
response to the COVID-19 pandemic. Other items the Company classifies as part
of the COVID-19 impact are embedded within the other balances reported in 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-westernU.S. and inCanada . 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.
The impact of the COVID-19 pandemic may cause fluctuations in our financial results and working capital that are not aligned with the seasonality we generally experience.
30--------------------------------------------------------------------------------
Certain Quarterly Financial Data
The following table sets forth certain unaudited quarterly data for the first
two quarters of 2020 and fiscal year 2019, 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):
2020 2019
Qtr 2 Qtr 1 Qtr 4 Qtr 3 Qtr 2 Qtr 1
Net sales $ 1,458,486 $ 1,675,112 $ 2,029,913 $ 1,924,534 $ 1,429,037 $ 1,721,676
% of fiscal year's net sales n/m n/m 28.6 % 27.1 % 20.1 % 24.2 %
Gross profit 342,400 410,698 493,462 472,536 334,988 435,569
% of fiscal year's gross
profit n/m n/m 28.4 % 27.2 % 19.3 % 25.1 %
Income (loss) from
operations (180,961 ) 19,929 89,874 74,254 (54,630 ) 38,254
% of fiscal year's income
(loss) from operations n/m n/m 60.8 % 50.3 % (37.0 %) 25.9 %
Net income (loss)$ (122,640 ) $ (23,410 ) $ 27,380 $ 30,987 $ (68,086 ) $ (893 ) Dividends on Preferred Stock 6,000 6,000 6,000 6,000 6,000 6,000 Net income (loss) attributable to common shareholders$ (128,640 ) $ (29,410 ) $ 21,380
Net income (loss) per share - basic$ (1.87 ) $ (0.43 ) $ 0.27 $ 0.32 $ (1.08 ) $ (0.10 ) Net income (loss) per share - diluted$ (1.87 ) $ (0.43 ) $ 0.27 $ 0.32 $ (1.08 ) $ (0.10 ) 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 ofMarch 31, 2020 were our cash and cash equivalents of$781.2 million and our available borrowings of$197.5 million under our asset-based revolving credit facility. DuringMarch 2020 , we elected to borrow an additional$725.0 million under our revolving credit facility as a proactive measure to increase our cash position and preserve financial flexibility in response to the current uncertainty in global markets resulting from the COVID-19 pandemic.
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 may explore additional or replacement financing sources in order to bolster
liquidity and strengthen our capital structure.
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 may 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 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.
31
--------------------------------------------------------------------------------
The following table summarizes our cash flows for the periods indicated (in
thousands):
Six Months Ended March 31,
2020 2019
Net cash provided by (used in) operating
activities $ (150,824 ) $ (242,144 )
Net cash provided by (used in) investing
activities (23,942 ) (188,865 )
Net cash provided by (used in) financing
activities 883,467 301,519
Effect of exchange rate changes on cash and cash equivalents 184
208
Net increase (decrease) in cash and cash equivalents$ 708,885 $ (129,282 ) Operating Activities Net cash used in operating activities was$150.8 million in 2020, compared to$242.1 million in 2019. Cash from operations increased$91.3 million due to a incremental cash inflow of$81.2 million stemming from changes to our net working capital, mainly driven by decreases in inventory and prepaid expenses and other assets. In addition, there was an increase in net income after adjustments for non-cash items of$10.2 million .
Investing Activities
Net cash used in investing activities was$23.9 million in 2020, compared to$188.9 million in 2019. The$164.9 million decrease in investing cash spend was primarily due to the$164.0 million payment resulting from the 338(h)(10) election made in 2019 in connection with the Allied Acquisition.
Financing Activities
Net cash provided by financing activities was$883.5 million in 2020, compared to$301.5 million in 2019. The financing cash flow increase of$581.9 million was primarily due to a$596.3 million increase in net borrowings under our revolving lines of credit over the comparative periods, partially offset by an additional$13.3 million cash outflow in the current period related to the refinancing of our outstanding senior notes.
Capital Resources
As of
• an asset-based revolving line of credit inthe United States ; • an asset-based revolving line of credit inCanada ; • a term loan; and • two separate senior notes instruments Debt Refinancing 2026 Senior Notes OnOctober 9, 2019 , we and certain of our subsidiaries as guarantors executed a private offering of$300.0 million aggregate principal amount of 4.50% Senior Notes due 2026 (the "2026 Senior Notes") at an issue price of 100%. The 2026 Senior Notes mature onNovember 15, 2026 and bear interest at a rate of 4.50% per annum, payable onMay 15 andNovember 15 of each year, commencing onMay 15, 2020 . The 2026 Senior Notes and related subsidiary guarantees were offered and sold in a private transaction exempt from the registration requirements of the Securities Act of 1933, as amended (the "Securities Act"), to qualified institutional buyers in accordance with Rule 144A under the Securities Act and to non-U.S. persons outside ofthe United States pursuant to Regulation S under the Securities Act. The 2026 Senior Notes and related subsidiary guarantees have not been, and will not be, registered under the Securities Act or the securities laws of any state or other jurisdiction, and may not be offered or sold inthe United States absent registration or an applicable exemption from the registration requirements of the Securities Act and other applicable securities laws. OnOctober 28, 2019 , we used the net proceeds from the offering, together with cash on hand and available borrowings under the 2023 ABL (as defined below), to redeem all$300.0 million aggregate principal amount outstanding of the 2023 Senior Notes (as defined below) at a redemption price of 103.188% and to pay all related accrued interest, fees and expenses. The intent of the transaction was to take advantage of lower market interest rates by refinancing the existing 2023 Senior Notes with the 2026 Senior Notes. We have accounted for the refinance as a debt extinguishment of the 2023 Senior Notes and an issuance of the 2026 Senior Notes. As a result, we recorded a loss on debt extinguishment of$14.7 million in the three months ended 32
--------------------------------------------------------------------------------
As of
Financing - Allied Acquisition
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, which are being amortized over the term of the financing arrangements.
2023 ABL
OnJanuary 2, 2018 , we entered into a$1.30 billion asset-based revolving line of credit withWells Fargo Bank, N.A . and a syndicate of other lenders. The 2023 ABL consists of revolving loans in boththe United States ("2023U.S. Revolver") in the amount of$1.20 billion andCanada ("2023 Canada Revolver") in the amount of$100.0 million . The 2023 ABL has a maturity date ofJanuary 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 the Fixed Charge Coverage Ratio (the "FCCR"). The FCCR is calculated by dividing Consolidated EBITDA, less Capital Expenditures, by Consolidated Fixed Charges (all terms as defined in the agreement). Per the covenant, the Company's FCCR must be a minimum of 1.00 at the end of each fiscal quarter, calculated on a trailing four quarter basis (or under certain circumstances, at the end of each fiscal month, calculated on a trailing twelve-month basis.) Compliance is only required at such times as borrowing availability (subject to certain adjustments) is less than the greater of (i) 10% of the lesser of the borrowing base or the aggregate commitments or (ii)$90.0 million , and for a period of thirty days thereafter. The Company was in compliance with this covenant as ofMarch 31, 2020 . 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 activeUnited States subsidiaries. As ofMarch 31, 2020 , the total balance outstanding on the 2023 ABL, net of$6.9 million of unamortized debt issuance costs, was$1.00 billion . We also have outstanding standby letters of credit related to the 2023 U.S. Revolver in the amount of$13.0 million as ofMarch 31, 2020 .
2025 Term Loan
OnJanuary 2, 2018 , we entered into a$970.0 million Term Loan withCitibank 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 itsJanuary 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 activeUnited States subsidiaries.
As of
2025 Senior Notes
OnOctober 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 33
-------------------------------------------------------------------------------- Notes bear interest at a rate of 4.875% per annum, payable semi-annually in arrears, beginningMay 1, 2018 . We anticipate repaying the 2025 Senior Notes at the maturity date ofNovember 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 onJanuary 2, 2018 . Upon closing of the Allied Acquisition onJanuary 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
Financing - RSG Acquisition
2023 Senior Notes
OnOctober 1, 2015 , in connection with the acquisition ofRoofing Supply Group , the Company raised$300.0 million by issuing 6.38% Senior Notes due 2023 (the "2023 Senior Notes"). The 2023 Senior Notes had a coupon rate of 6.38% per annum and were payable semi-annually in arrears, beginningApril 1, 2016 . There were early payment provisions in the indenture under which the Company would be subject to redemption premiums. OnOctober 28, 2019 , the Company redeemed all$300.0 million aggregate principal amount outstanding of the 2023 Senior Notes at a redemption price of 103.188% plus accrued interest and, as a result, wrote off$5.1 million of unamortized debt issuance costs.
Equipment Financing Facilities
As ofMarch 31, 2020 , we had$4.7 million outstanding under equipment financing facilities, with fixed interest rates ranging from 2.33% to 2.89% and payments due throughSeptember 2021 . 34
--------------------------------------------------------------------------------
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" contained herein, as well as those in our Annual Report on Form 10-K for the fiscal year endedSeptember 30, 2019 .
© Edgar Online, source
