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MarketScreener Homepage  >  Equities  >  Nasdaq  >  Beacon Roofing Supply, Inc.    BECN

BEACON ROOFING SUPPLY, INC.

(BECN)
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BEACON ROOFING SUPPLY : MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (form 10-K)

11/20/2020 | 03:26pm EST
The following discussion and analysis should be read in conjunction with our
consolidated financial statements and related notes and other financial
information appearing elsewhere in this Annual Report on Form 10-K. All
references to "2020," "2019" and "2018"are referring to the twelve-month period
ended September 30 for each of those respective fiscal years. This section of
this Annual Report on Form 10-K generally discusses 2020 and 2019 items and
year-to-year comparisons between 2020 and 2019. Discussions of 2018 items and
year-to-year comparisons between 2019 and 2018 that are not included in this
Form 10-K can be found in Part II, Item 7, "Management's Discussion and Analysis
of Financial Condition and Results of Operations" in our Annual Report on
Form 10-K for the year ended September 30, 2019. The following discussion may
contain forward-looking statements that reflect our plans and expectation. Our
actual results could differ materially from those anticipated by these
forward-looking statements due to the factors discussed elsewhere in this Annual
Report on Form 10-K, particularly in the "Risk Factors" section. 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


Beacon is the largest publicly traded distributor of roofing materials and
complementary building products in the United States and Canada. We are among
the oldest and most established distributors in the industry, providing
high-quality exterior and interior products to the building industry. Our
customers rely on us for local access to the building products and services they
need to operate their businesses and serve their clients.

On January 15, 2020, we announced the rebranding of our exterior product
branches with the trade name "Beacon Building Products" (the "Rebranding"). The
new name, and a related logo, were adopted at over 450 Beacon one-step exterior
products branches. Our interior, insulation, weatherproofing and two-step
branches continue to operate under legacy brand names.

As of September 30, 2020, we operated 524 branches throughout all 50 states in
the U.S. and 6 provinces in Canada. We offer one of the most extensive
assortments of high-quality branded products in the industry, with approximately
160,000 SKUs available across our branch network.

We serve over 100,000 customers by promptly providing the products they require,
allowing our customers to deliver on the project specifications and timelines
that are critical to their success. Our customer base is composed mainly of a
diverse population of building contractors from the markets in which we operate.
These local, regional, and national contractors work on new construction
projects as well as the repair or remodeling of residential and non-residential
properties. We also distribute products to home builders, building owners, and
retailers.

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 local and 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+, a roofing
estimating tool for our residential customers. These platforms help our
customers save time, work more efficiently and grow their businesses. We believe
customer relations and our employees' extensive industry knowledge are vital to
promote customer loyalty and maintain customer satisfaction. We invest
significant resources in professional development, management skills, product
knowledge, and operational proficiency. These capabilities were developed on a
foundation of continuous improvement, thereby driving our service excellence,
productivity and efficiency.

Our recent history has been strongly influenced by significant
acquisition-driven growth, highlighted by the acquisitions of Allied Building
Products Corp. ("Allied") for $2.88 billion in 2018 (the "Allied Acquisition")
and Roofing Supply Group, LLC ("RSG") for $1.17 billion in 2016 (the "RSG
Acquisition"). These strategic acquisitions expanded our geographic footprint,
enhanced our market presence, diversified our product offerings, and positioned
us to provide new growth opportunities that will increase our long-term
profitability. The scale we have achieved from our expansion efforts will serve
as a competitive advantage, also allowing us to use our assets more efficiently
and control our expenses to drive operating leverage.

While we will continue to pursue strategic acquisitions to grow our business,
our primary focus is now on improving our operations and continuing to identify
additional opportunities for organic growth. We have demonstrated a track record
for success in this pursuit, having opened 96 new branch locations since 2004.
In 2020, we opened seven new branch locations across Connecticut, Georgia,
Louisiana, New Hampshire, Ohio, Oregon and Virginia. In 2019, we opened nine new
branch locations across Alabama, California, Florida, Nevada, North Carolina,
Pennsylvania and Texas.

                                       24

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General

We sell all materials necessary to install, replace and repair residential and non-residential roofs, including:

  • Shingles, standard and specialty;


  • Single-ply roofing;


  • Metal roofing and accessories;


  • Modified bitumen;


  • Built-up roofing;


  • Insulation;


  • Slate and tile roofing;


  • Fasteners, coatings and cements; and


  • Other roofing accessories.

We also sell complementary building products such as:

  • Vinyl, wood and fiber cement siding;


  • Doors, windows and millwork;


  • Decking and railing;


  • Building insulation;


  • Weatherproofing systems;


  • Wallboard;


  • Steel stud framing; and


  • Acoustical ceilings.


We serve over 100,000 customers, none of which individually represents more than
1% of our total net sales. Many of our customers are small to mid-size
contractors with relatively limited capital resources. We maintain strict credit
review and approval policies, which has helped to keep losses from uncollectible
customer receivables within our expectations. Our expenses consist primarily of
the cost of products purchased for resale, labor, fleet, occupancy, and selling
and administrative expenses.

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, we implemented a number of protocols to facilitate a
safer environment at each of our locations, including more rigorous cleaning and
sanitizing routines; limits on customer traffic in stores to maintain physical
and social distancing protocols; other physical and social distancing efforts
such as markings on floors, signage and plexiglass shields; and instituting
curbside pickup. 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
non-residential 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 months and year ended September 30, 2020 decreased 0.6% and 2.7%, respectively, compared to the prior year.


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 also
implemented furloughs in both operating and non-operating functions, temporarily
reduced salaries, improved working capital metrics by reducing inventory, and
heightened our organizational focus on managing all expenses. Additionally, we
significantly restricted capital expenditures, primarily by deferring
expenditures related to our fleet vehicles. We took meaningful actions to
improve our

                                       25

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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.

Results of Operations


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
millions):

                                                   Year Ended September 30,
                                            2020              2019             2018
Net sales                               $    6,943.9$    7,105.2$    6,418.3
Cost of products sold                        5,244.7           5,368.6          4,825.0
Gross profit                                 1,699.2           1,736.6          1,593.3
Operating expense:
Selling, general and administrative          1,273.0           1,311.0          1,187.2
Depreciation                                    70.1              70.7             60.3
Amortization                                   321.0             207.1            141.2
Total operating expense                      1,664.1           1,588.8          1,388.7
Income (loss) from operations                   35.1             147.8            204.6
Interest expense, financing costs, and
other                                          128.1             158.6      

136.5

Loss on debt extinguishment                     14.7                 -      

-

Income (loss) before provision for
income taxes                                  (107.7 )           (10.8 )    

68.1

Provision for (benefit from) income
taxes                                          (26.8 )            (0.2 )          (30.5 )
Net income (loss)                              (80.9 )           (10.6 )    

98.6

Dividends on Preferred Stock                    24.0              24.0      

18.0

Net income (loss) attributable to
common shareholders                     $     (104.9 )$      (34.6 )$       80.6




                                                          Year Ended September 30,
                                                       2020         2019         2018
Net sales                                               100.0 %      100.0 %      100.0 %
Cost of products sold                                    75.5 %       75.6 %       75.2 %
Gross profit                                             24.5 %       24.4 %       24.8 %
Operating expense:
Selling, general and administrative                      18.3 %       18.4 %       18.5 %
Depreciation                                              1.0 %        1.0 %        0.9 %
Amortization                                              4.7 %        2.9 %        2.2 %
Total operating expense                                  24.0 %       22.3 %       21.6 %
Income (loss) from operations                             0.5 %        2.1 %        3.2 %
Interest expense, financing costs, and other              1.9 %        2.2 %        2.1 %
Loss on debt extinguishment                               0.2 %        0.0 %        0.0 %
Income (loss) before provision for income taxes          (1.6 %)      (0.1 %)       1.1 %
Provision for (benefit from) income taxes                (0.4 %)       0.0 %       (0.4 %)
Net income (loss)                                        (1.2 %)      (0.1 %)       1.5 %
Dividends on Preferred Stock                              0.3 %        0.4 

% 0.2 % Net income (loss) attributable to common shareholders (1.5 %) (0.5 %) 1.3 %





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).

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As of September 30, 2020, we had a total of 524 branches in operation. All 524
branches were acquired prior to the start 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.

Comparison of the Years Ended September 30, 2020 and 2019

Net Sales


Net sales decreased 2.3% to $6.94 billion in 2020, from $7.11 billion in 2019.
The comparative decrease in net sales was primarily influenced by softer demand
from the impact of the COVID-19 pandemic, partially offset by increased volume
in the Southeast and the continued positive impact of our industry-leading
digital platform.

Net sales by geographic region increased (decreased) from 2019 to 2020 as follows: Northeast (7.5%); Mid-Atlantic (4.4%); Southeast 4.7%; Southwest (2.2%); Midwest (0.2%); West (3.5%); and Canada (4.9%).


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 millions):

                                       Year Ended September 30,
                                    2020                        2019                     Change
                          Net Sales          %         Net Sales         %            $            %
Residential roofing
products                  $  3,099.6          44.6 %   $  3,079.6        43.3 %   $    20.0         0.6 %
Non-residential roofing
products                     1,646.6          23.7 %      1,705.2        24.0 %       (58.6 )      (3.4 %)
Complementary building
products                     2,197.7          31.7 %      2,320.4        32.7 %      (122.7 )      (5.3 %)
Total net sales           $  6,943.9         100.0 %   $  7,105.2       100.0 %   $  (161.3 )      (2.3 %)




Gross Profit

The following table summarizes gross profit and gross margin for the periods presented (in millions):


               Year Ended September 30,             Change1
                 2020              2019           $          %
Gross profit $     1,699.2$ 1,736.6$ (37.4 )     (2.2 %)
Gross margin          24.5 %          24.4 %       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 margin was 24.5% in 2020, up 0.1% from 24.4% in 2019. The comparative increase in gross margin was primarily influenced by a slight product mix shift. Prices and product costs were flat over the comparative periods.

Operating Expense


The following table summarizes operating expense for the periods presented (in
millions):

                                       Year Ended September 30,             Change1
                                         2020              2019           $          %
Selling, general, and administrative $     1,273.0$ 1,311.0$ (38.0 )     (2.9 %)
Depreciation                                  70.1            70.7        (0.6 )     (0.8 %)
Amortization                                 321.0           207.1       113.9       55.0 %
Total operating expense              $     1,664.1$ 1,588.8$  75.3        4.7 %
% of net sales                                24.0 %          22.3 %       N/A        1.7 %

__________________________________

     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 4.7% to $1.66 billion in 2020, from $1.59 billion in 2019. The comparative increase in operating expense was mainly influenced by:

• a net $113.9 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.



                                       27

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The increase was partially offset by our aggressive cost-cutting actions in response to the COVID-19 pandemic, as well as our renewed focus on improving our cost structure and identifying opportunities for efficiencies across our business. These initiatives combined to produce the following primary effects:

• a $24.5 million decrease in selling expense, mainly due to a decrease in

fleet costs; and

• a $15.8 million decrease in payroll and employee benefit costs, mainly

due to reductions in both hours worked and headcount.

While certain of our cost actions were temporary in nature, we remain focused on improving our expense structure to produce permanent efficiency gains and increase our operating leverage as demand improves.

Interest Expense, Financing Costs and Other

Interest expense, financing costs and other expense was $128.1 million in 2020, compared to $158.6 million in 2019. The decrease is primarily due to:

• a lower weighted-average interest rate on our outstanding debt;

• a $5.6 million settlement received in connection with a class action

lawsuit; and

• a net $5.1 million refund 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.

Income Taxes


There was an income tax benefit of $26.8 million in 2020, compared to $0.2
million in 2019. The comparative increase in income tax benefit was primarily
due to the pretax loss in 2020 driven by the accelerated amortization of
$142.6 million related to the write-off of certain trade names in connection
with the Rebranding. The effective tax rate was 24.9% in 2020, compared to 1.6%
in 2019.

Net Income (Loss)/Net Income (Loss) Per Share


Net income (loss) was $(80.9) million in 2020, compared to $(10.6) million in
2019. There were $24.0 million of dividends on preferred shares in both 2020 and
2019, making net income (loss) attributable to common shareholders $(104.9)
million and $(34.6) 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 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 millions, except per share amounts):

                                                              Year Ended September 30,
                                                               2020               2019
Net income (loss)                                          $       (80.9 )$     (10.6 )
Dividends on Preferred Stock                                        24.0    

24.0

Net income (loss) attributable to common shareholders $ (104.9 )

    $     (34.6 )
Undistributed income allocated to participating securities             -                 -

Net income (loss) attributable to common shareholders - basic and diluted (if-converted method)

                    $      (104.9 )$     (34.6 )
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)

                                 $      (104.9 )

$ (34.6 )


Weighted-average common shares outstanding, basic                   68.8    

68.4

Effect of common share equivalents                                     -                 -

Weighted-average common shares outstanding - diluted (if-converted and two-class method)

                                 68.8    

68.4


Net income (loss) per share - basic                        $       (1.52 )$     (0.51 )
Net income (loss) per share - diluted (two-class method)   $       (1.52 )$     (0.51 )
Net income (loss) per share - diluted (if-converted
method)                                                    $       (1.52 )$     (0.51 )




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Seasonality


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 regions of
the U.S. and Canada. We continue to attempt to collect those receivables, which
require payment under our standard terms, and typically do not provide material
concessions to our customers.

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.

Quarterly Financial Data


The following table sets forth certain unaudited quarterly data for 2020 and
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 millions, except
per share amounts):

                                                     2020                                                     2019
                               Qtr 4         Qtr 3         Qtr 2          Qtr 1         Qtr 4         Qtr 3         Qtr 2          Qtr 1
Net sales                    $ 2,017.8$ 1,792.5$ 1,458.5      $

1,675.1 $ 2,029.9$ 1,924.6$ 1,429.0$ 1,721.7 % of fiscal year's net sales 29.1 % 25.8 % 21.0 %

 24.1 %        28.6 %        27.1 %        20.1 %         24.2 %

Gross profit                     514.0         432.1         342.4          410.7         493.5         472.5         335.0          435.6
% of fiscal year's gross
profit                            30.2 %        25.4 %        20.2 %         24.2 %        28.4 %        27.2 %        19.3 %         25.1 %

Income (loss) from
operations                       121.2          75.0        (181.0 )         19.9          89.9          74.2         (54.6 )         38.3
% of fiscal year's income
(loss) from operations           345.3 %       213.7 %      (515.7 %)        56.7 %        60.8 %        50.3 %       (37.0 %)        25.9 %

Net income (loss)            $    71.9$    (6.8 )$  (122.6 )    $  

(23.4 ) $ 27.4$ 31.0$ (68.1 )$ (0.9 ) Dividends on Preferred Stock 6.0

           6.0           6.0            6.0           6.0           6.0           6.0            6.0
Net income (loss)
attributable to common
shareholders                 $    65.9$   (12.8 )$  (128.6 )$   (29.4 )$    21.4$    25.0$   (74.1 )$    (6.9 )

Net income (loss) per share
- basic                      $    0.84$   (0.18 )$   (1.87 )$   (0.43 )$    0.27$    0.32$   (1.08 )$   (0.10 )
Net income (loss) per share
- diluted                    $    0.83$   (0.18 )$   (1.87 )$   (0.43 )$    0.27$    0.32$   (1.08 )$   (0.10 )


Impact of Inflation

We believe that our results of operations are not materially impacted by modest
changes in inflation. In general, we have historically been successful in
passing on price increases from our vendors to our customers in a timely manner.
There was no significant inflationary pressure in 2020. There was increased
product inflation from our suppliers in 2019 and 2018, and we were able to
mostly offset higher products costs with increased selling prices.

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 the seasonal nature of our business.

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Our principal sources of liquidity as of September 30, 2020 were our cash and
cash equivalents of $624.6 million and our available borrowings of $955.0
million under our asset-based revolving lines of credit. During the three months
ended March 31, 2020, we elected to borrow an additional $725.0 million under
our revolving lines of credit 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. During the
second half of fiscal 2020, we used a portion of our operating cash flows to
fully repay these additional borrowings.

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;


  • working capital management;


  • 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.

The following table summarizes our cash flows for the periods indicated (in
millions):

                                                       Year Ended September 30,
                                                  2020           2019            2018
Net cash provided by (used in) operating
activities                                     $    479.3$     212.7$    539.4
Net cash provided by (used in) investing
activities                                          (39.0 )        (211.7 )     (2,784.4 )
Net cash provided by (used in) financing
activities                                          112.2           (58.8 ) 

2,236.0

Effect of exchange rate changes on cash and
cash equivalents                                     (0.2 )           0.2   

0.6

Net increase (decrease) in cash and cash
equivalents                                    $    552.3$     (57.6 )$     (8.4 )




Operating Activities

Net cash provided by operating activities was $479.3 million in 2020, compared
to $212.7 million in 2019. Cash from operations increased $266.6 million due to
an incremental cash inflow of $238.8 million stemming from changes to our net
working capital, mainly driven by decreases in accounts receivable and inventory
as well as an increase in accounts payable. In addition, there was an increase
in net income after adjustments for non-cash items of $27.8 million.

Investing Activities


Net cash used in investing activities was $39.0 million in 2020, compared to
$211.7 million in 2019. The $172.7 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 $112.2 million in 2020, compared
to net cash used in financing activities of $58.8 million in 2019. The financing
cash flow increase of $171.0 million was primarily due to a $181.9 million
increase in net borrowings under our revolving lines of credit over the
comparative periods, partially offset by a $13.1 million net cash outflow in the
current period related to the refinancing of our outstanding senior notes.

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Monitoring and Assessing Collectability of Accounts Receivable


We perform periodic credit evaluations of our customers and typically do not
require collateral, although we typically obtain payment and performance bonds
for any type of public work and can lien projects under certain circumstances.
Consistent with industry practices, we require payment from most customers
within 30 days, except for sales to our non-residential roofing contractors,
which we typically require to pay in 60 days.

As our business is seasonal in certain geographic regions, our customers'
businesses are also seasonal. Sales are lowest in the winter months and our past
due accounts receivable balance as a percentage of total receivables generally
increases during this time. Throughout the year, we closely monitor our
receivables and record estimated reserves based upon our judgment of specific
customer situations, aging of accounts and our historical write-offs of
uncollectible accounts.

Our divisional credit offices are staffed to manage and monitor our receivable
aging balances and our systems allow us to enforce pre-determined credit
approval levels and properly leverage new business. The credit pre-approval
process denotes the maximum credit that each level of management can approve,
with the highest credit amount requiring approval by our CEO and CFO. There are
daily communications with branch and field staff. Our divisional offices conduct
periodic reviews with their branch managers, various regional management staff
and the Chief Credit Officer. Depending on the state of the respective
division's receivables, these reviews can be weekly, bi-weekly or monthly.
Additionally, the divisions are required to submit a monthly receivable forecast
to the Chief Credit Officer. On a monthly basis, the Chief Credit Officer
reviews and discusses these forecasts, as well as a prior month recap, with our
executive management team.

Periodically, we perform a specific analysis of all accounts past due and write
off account balances when we have exhausted reasonable collection efforts and
determined that the likelihood of collection is remote based upon the following
factors:

  • aging statistics and trends;


  • customer payment history;


  • review of the customer's financial statements when available;


  • independent credit reports; and


  • discussions with customers.


We still pursue collection of amounts written off in certain circumstances and
credit the allowance for any subsequent recoveries. Over the past three fiscal
years, bad debt expense has been, on average, 0.15% of net sales. The continued
limitation of bad debt expense is primarily attributed to the continued
strengthening of our collections process and overall credit environment.

Commitments


The following table summarizes our contractual obligations as of September 30,
2020 (in millions):

                                                        Payments Due by Period
                                Total         < 1 year        1-3 Years       3-5 Years       > 5 Years
2023 ABL                      $   257.0      $        -      $     257.0      $        -      $        -
2025 Term Loan                    945.7             9.7             19.4           916.6               -
Senior Notes1                   1,600.0               -                -               -         1,600.0
Equipment financing and other       2.6             2.6                -               -               -
Operating leases                  490.8           115.1            185.7           108.2            81.8
Interest2                         512.8           102.0            196.4           191.7            22.7
Total                         $ 3,808.9$    229.4$     658.5$  1,216.5$  1,704.5

_______________________________________________

1 Represent principal amounts for 2025 Senior Notes and 2026 Senior Notes.

2 Interest payments reflect all currently scheduled and projected amounts as

calculated using future LIBOR projections.

Capital Resources

As of September 30, 2020 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.


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Debt Refinancing

2026 Senior Notes


On October 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 on November 15, 2026 and bear interest at a rate of 4.50%
per annum, payable on May 15 and November 15 of each year, commencing on May 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 of the 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 in the
United States absent registration or an applicable exemption from the
registration requirements of the Securities Act and other applicable securities
laws.

On October 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 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 December 31,
2019. We have capitalized debt issuance costs of $4.7 million related to the
2026 Senior Notes, which are being amortized over the term of the financing
arrangements.

As of September 30, 2020, the outstanding balance on the 2026 Senior Notes, net of $4.1 million of unamortized debt issuance costs, was $295.9 million.

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


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, as amended to date, provides for revolving loans in both the United States
("2023 U.S. Revolver") in an amount up to $1.25 billion and Canada ("2023 Canada
Revolver") in an amount up to $50.0 million, in each case subject to a borrowing
base. The 2023 ABL has a maturity date of January 2, 2023. The 2023 ABL has
various borrowing tranches with an interest rate based, at our option, on a base
rate, plus an applicable margin, or a reserve adjusted LIBOR rate, plus an
applicable margin. The applicable margin ranges from 0.25% to 0.75% per annum
with respect to base rate borrowings and from 1.25% to 1.75% per annum with
respect to LIBOR borrowings. The current unused commitment fees on the 2023 ABL
are 0.25% per annum. On July 28, 2020, we amended the 2023 ABL to provide for,
among other things, a mechanism for replacing LIBOR with the secured overnight
financing rate published by the Federal Reserve Bank of New York or other
alternate benchmark rate selected by the administrative agent and us.

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, our 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. We were in
compliance with this covenant as of September 30, 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

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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 September 30, 2020, the total balance outstanding on the 2023 ABL, net of
$5.9 million of unamortized debt issuance costs, was $251.1 million. We also
have outstanding standby letters of credit related to the 2023 U.S. Revolver in
the amount of $13.0 million as of September 30, 2020.

2025 Term Loan


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, at our option, on a base rate, plus an applicable margin, or a reserve
adjusted LIBOR rate, plus an applicable margin. The applicable margin is 1.25%
per annum with respect to base rate borrowings and 2.25% per annum with respect
to LIBOR borrowings. 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.

As of September 30, 2020, the outstanding balance on the 2025 Term Loan, net of $23.4 million of unamortized debt issuance costs, was $922.3 million.

2025 Senior Notes


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 September 30, 2020, the outstanding balance on the 2025 Senior Notes, net of $14.3 million of unamortized debt issuance costs, was $1.29 billion.

Financing - RSG Acquisition

2023 Senior Notes


On October 1, 2015, in connection with the acquisition of Roofing Supply Group,
we 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, beginning April 1, 2016. There were early
payment provisions in the indenture under which we would be subject to
redemption premiums. On October 28, 2019, we 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 of September 30, 2020, we had $2.6 million outstanding under equipment financing facilities, with fixed interest rates ranging from 2.33% to 2.89% and payments due through September 2021.

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements.

Critical Accounting Policies

Our consolidated financial statements are prepared in accordance with GAAP. Accounting policies, methods and estimates are an integral part of the preparation of consolidated financial statements in accordance with U.S. GAAP and, in part, are based upon


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management's current judgments. Those judgments are normally based on knowledge
and experience with regard to past and current events and assumptions about
future events. Certain accounting policies, methods and estimates are
particularly sensitive because of their significance to the consolidated
financial statements and because of the possibility that future events affecting
them may differ markedly from management's current judgments. While there are a
number of accounting policies, methods and estimates affecting our consolidated
financial statements, areas that are particularly significant include:

  • Inventories


  • Business Combinations


  • Goodwill and Intangible Assets

Inventories


Inventories, consisting substantially of finished goods, are valued at the lower
of cost or market (net realizable value). Cost is determined using the moving
weighted-average cost method.

Our arrangements with vendors typically provide for rebates after we make a
special purchase and/or monthly, quarterly and/or annual rebates of a specified
amount of consideration payable when a number of measures have been achieved.
Annual rebates are generally related to a specified cumulative level of
purchases on a calendar-year basis. We account for such rebates as a reduction
of the inventory value until the product is sold, at which time such rebates
reduce cost of sales in the consolidated statements of operations. Throughout
the year, we estimate the amount of the periodic rebates based upon the expected
level of purchases. We continually revise these estimates to reflect actual
rebates earned based on actual purchase levels. Amounts due from vendors under
these arrangements are included in "Prepaid expenses and other current assets"
in the accompanying consolidated balance sheets.

Business Combinations


We record acquisitions resulting in the consolidation of a business using the
acquisition method of accounting. Under this method, we record the assets
acquired, including intangible assets that can be identified and named, and
liabilities assumed based on their estimated fair values at the date of
acquisition. We use an income approach to determine the fair value of acquired
intangible assets, specifically the multi-period excess earnings method for
customer relationships and the relief from royalty method for trade names.
Various Level 3 fair value assumptions are used in the determination of these
estimated fair values, including items such as sales growth rates, cost
synergies, customer attrition rates, discount rates, and other prospective
financial information. The purchase price in excess of the fair value of the
assets acquired and liabilities assumed is recorded as goodwill. We believe
these estimates are based on reasonable assumptions, however they are inherently
uncertain and unpredictable, therefore actual results may differ. Estimates
associated with the accounting for acquisitions may change as additional
information becomes available regarding the assets acquired and liabilities
assumed. Transaction costs associated with acquisitions are expensed as
incurred.

Goodwill and Indefinite-Lived Intangibles

On an annual basis and at interim periods when circumstances require, we test the recoverability of our goodwill and indefinite-lived intangible assets. Examples of such indicators include a significant change in the business climate, unexpected competition, loss of key personnel or a decline in our market capitalization below net book value.


We perform impairment assessments at the reporting unit level, which is defined
as an operating segment or one level below an operating segment, also known as a
component. We currently have four components which we evaluate for aggregation
by examining the distribution methods, sales mix, and operating results of each
component to determine if these characteristics will be sustained over a
long-term basis. For purposes of this evaluation, we expect components to
exhibit similar economic characteristics 3-5 years after events such as an
acquisition within our core roofing business or management/business
restructuring. Components that exhibit similar economic characteristics are
subsequently aggregated into a single reporting unit. Based on our most recent
impairment assessment performed as of August 31, 2020, it was determined that
all components exhibited similar economic characteristics, and therefore should
be aggregated into a single reporting unit (collectively the "Reporting Unit").

To test for the recoverability of goodwill and indefinite-lived intangible
assets, we first perform a qualitative assessment based on economic, industry
and company-specific factors for all or selected reporting units to determine
whether the existence of events and circumstances indicates that it is more
likely than not that the goodwill or indefinite-lived intangible asset is
impaired. Based on the results of the qualitative assessment, two additional
steps in the impairment assessment may be required. The first step would require
a comparison of each reporting unit's fair value to the respective carrying
value. If the carrying value exceeds the fair value, a second step is performed
to measure the amount of impairment loss on a relative fair value basis, if any.

Based on our most recent impairment assessment performed as of August 31, 2020,
we concluded that it was more likely than not that the fair value of the
goodwill and indefinite-lived intangible assets exceeded their net carrying
amount, therefore the quantitative two-step impairment test was not required.
Our total market capitalization exceeded carrying value by approximately 50.5%
as of

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August 31, 2020. We did not identify any macroeconomic, industry conditions or
cost-related factors that would indicate it is more likely than not that the
fair value of the reporting unit was less than its carrying value.

We amortize certain identifiable intangible assets that have finite lives,
currently consisting of non-compete agreements, customer relationships and trade
names. Non-compete agreements are amortized on a straight-line basis over the
terms of the associated contractual agreements; customer relationship assets are
amortized on an accelerated basis based on the expected cash flows generated by
the existing customers; and trade names are amortized on an accelerated basis
over a five- or ten-year period. Amortizable intangible assets are tested for
impairment, when deemed necessary, based on undiscounted cash flows and, if
impaired, are written down to fair value based on either discounted cash flows
or appraised values. In connection with certain financing arrangements, we have
debt issuance costs that are amortized over the lives of the associated
financings.

© Edgar Online, source Glimpses

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