BEACON ROOFING SUPPLY, INC. The following discussion and analysis should be read in conjunction with our Consolidated Financial Statements and the notes thereto and 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 nine months endedJune 30, 2020 being discussed and references to "2019" refer to the three or nine months endedJune 30, 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 ofJune 30, 2020 , we operated 524 branches throughout all 50 states in theU.S. and 6 provinces inCanada . We offer one of the most extensive assortments of high-quality branded and private label 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 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+, 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 five new branches in fiscal year 2020 to date, including
locations in
year 2019, we opened a total of nine new branch locations across
California ,Florida ,Nevada ,North Carolina ,Pennsylvania andTexas . 21
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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 have implemented a number of measures 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 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 nine months endedJune 30, 2020 decreased 6.9% and 3.4%, respectively, compared to the prior year. Our average daily sales for the month ofJuly 2020 were down approximately 1.4% compared to the prior year period. 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 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 June 30,
2020 2019
Net sales $ 1,792,505 $ 1,924,534
Cost of products sold 1,360,373 1,451,998
Gross profit 432,132 472,536
Operating expense:
Selling, general and administrative 295,426 328,827
Depreciation 16,986 17,731
Amortization 44,825 51,724
Total operating expense 357,237 398,282
Income (loss) from operations 74,895 74,254
Interest expense, financing costs, and other 35,059 38,089
Loss on debt extinguishment - - Income (loss) before provision for income taxes 39,836
36,165
Provision for (benefit from) income taxes 46,561 5,178 Net income (loss) $ (6,725 )$ 30,987 Dividends on Preferred Stock 6,000 6,000
Net income (loss) attributable to common shareholders
$ 24,987 22
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Three Months Ended June 30,
2020 2019
Net sales 100.0 % 100.0 %
Cost of products sold 75.9 % 75.4 %
Gross profit 24.1 % 24.6 %
Operating expense:
Selling, general and administrative 16.5 % 17.1 %
Depreciation 0.9 % 0.9 %
Amortization 2.5 % 2.7 %
Total operating expense 19.9 % 20.7 %
Income (loss) from operations 4.2 % 3.9 %
Interest expense, financing costs, and other 2.0 % 2.0 %
Loss on debt extinguishment 0.0 % 0.0 %
Income (loss) before provision for income taxes 2.2 % 1.9 %
Provision for (benefit from) income taxes 2.6 % 0.3 %
Net income (loss) (0.4 %) 1.6 %
Dividends on Preferred Stock 0.3 % 0.3 %
Net income (loss) attributable to common shareholders (0.7 %) 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).
As of June 30, 2020 , we had a total of 524 branches in operation. All 524
branches were acquired prior to the start of the third 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 decreased 6.9% to $1.79 billion in 2020, from $1.92 billion in 2019.
The comparative decrease in net sales was influenced by softer demand early in
the quarter resulting from government restrictions in reaction to the COVID-19
pandemic, partially offset by stable sales in states/provinces with fewer
restrictions.
Net sales by geographic region increased (decreased) from 2019 to 2020 as
follows: Northeast (17.5%); Mid-Atlantic (2.3%); Southeast 6.4%; Southwest
(10.6%); Midwest (0.9%); West (12.7%); 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):
Three Months Ended June 30,
2020 2019 Change
Net Sales % Net Sales % $ %
Residential roofing
products $ 837,039 46.7 % $ 848,259 44.1 % $ (11,220 ) (1.3 %)
Non-residential roofing
products 426,961 23.8 % 472,105 24.5 % (45,144 ) (9.6 %)
Complementary building
products 528,505 29.5 % 604,170 31.4 % (75,665 ) (12.5 %)
Total net sales $ 1,792,505 100.0 % $ 1,924,534 100.0 % $ (132,029 ) (6.9 %)
23
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Gross Profit
The following table summarizes gross profit and gross margin for the periods presented (in thousands):
Three Months Ended June 30, Change1
2020 2019 $ %
Gross profit $ 432,132 $ 472,536 $ (40,404 ) (8.6 %)
Gross margin 24.1 % 24.6 % 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 margin was 24.1% in 2020, down 0.5% from 24.6% in 2019. The comparative decrease in gross margin resulted from an unfavorable move in combined product price/cost of less than 1%, partially offset by a favorable product mix shift.
Operating Expense
The following table summarizes operating expense for the periods presented (in
thousands):
Three Months Ended June 30, Change1
2020 2019 $ %
Operating expense $ 357,237 $ 398,282 $ (41,045 ) (10.3 %)
% of net sales 19.9 % 20.7 % N/A (0.8 %)
_________________________________________________________________
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 decreased 10.3% to$357.2 million in 2020, from$398.3 million in 2019. The comparative decrease in operating expense was significantly influenced 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 effects:
• a
to reductions in both hours worked and headcount;
• a
fleet costs;
• a
to a decrease in travel; and
• a $6.9 million decrease in amortization expense;
partially offset by:
• an
bankruptcy that increased bad debt expense by approximately
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$35.1 million in 2020, compared to$38.1 million in 2019. The comparative decrease is primarily due to a lower weighted-average interest rate on our outstanding debt.
Income Taxes
There was an income tax provision of$46.6 million in 2020, compared to$5.2 million in 2019. The comparative increase in income tax expense was primarily due to a net$32.8 million tax provision stemming from the adjustment of a prior quarter deferred tax benefit related to the Company's application of the CARES Act (see Note 14 in the Notes to Condensed Consolidated Financial Statements for further discussion).
Net Income (Loss)/Net Income (Loss) Per Share
Net income (loss) was$(6.7) million in 2020, compared to$31.0 million in 2019. There were$6.0 million of dividends on preferred shares in both 2020 and 2019, making net income (loss) attributable to common shareholders of$(12.7) million and$25.0 million , 24
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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 June 30,
2020 2019
Net income (loss) $ (6,725 ) $ 30,987
Dividends on Preferred Stock 6,000 6,000
Net income (loss) attributable to common shareholders (12,725 )
24,987
Undistributed income allocated to participating securities -
(3,099 ) Net income (loss) attributable to common shareholders - $ basic and diluted (if-converted method)
(12,725 ) $ 21,888
Undistributed income allocated to participating
securities - 3,099
Re-allocation of undistributed income to Preferred Stock
- (3,068 ) Net income (loss) attributable to common shareholders - $ diluted (two-class method)
(12,725 ) Weighted-average common shares outstanding - basic 68,840,849
68,477,946
Effect of common share equivalents -
787,438
Weighted-average common shares outstanding - diluted (if-converted and two-class method)
68,840,849 69,265,384
Net income (loss) per share - basic $ (0.18 )$ 0.32 Net income (loss) per share - diluted (two-class (0.18 )
0.32
method)
Net income (loss) per share - diluted (if-converted (0.18 ) 0.32 method)
Comparison of the Nine 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):
Nine Months Ended June 30,
2020 2019
Net sales $ 4,926,103 $ 5,075,247
Cost of products sold 3,740,873 3,832,154
Gross profit 1,185,230 1,243,093
Operating expense:
Selling, general and administrative 940,855 976,928
Depreciation 53,553 52,779
Amortization 276,959 155,508
Total operating expense 1,271,367 1,185,215
Income (loss) from operations (86,137 ) 57,878
Interest expense, financing costs, and other 96,806 116,902
Loss on debt extinguishment 14,678
-
Income (loss) before provision for income taxes (197,621 )
(59,024 )
Provision for (benefit from) income taxes (44,846 ) (21,032 )
Net income (loss) $ (152,775 ) $ (37,992 )
Dividends on Preferred Stock 18,000 18,000
Net income (loss) attributable to common shareholders$ (170,775 ) $ (55,992 ) 25
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Nine Months Ended June 30,
2020 2019
Net sales 100.0 % 100.0 %
Cost of products sold 75.9 % 75.5 %
Gross profit 24.1 % 24.5 %
Operating expense:
Selling, general and administrative 19.1 % 19.3 %
Depreciation 1.1 % 1.0 %
Amortization 5.6 % 3.1 %
Total operating expense 25.8 % 23.4 %
Income (loss) from operations (1.7 %) 1.1 %
Interest expense, financing costs, and other 2.0 % 2.3 %
Loss on debt extinguishment 0.3 % 0.0 %
Income (loss) before provision for income taxes (4.0 %) (1.2 %)
Provision for (benefit from) income taxes (0.9 %) (0.5 %)
Net income (loss) (3.1 %) (0.7 %)
Dividends on Preferred Stock 0.4 % 0.4 %
Net income (loss) attributable to common (3.5 %) (1.1 %)
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 2.9% to$4.93 billion in 2020, from$5.08 billion in 2019. The comparative decrease in net sales was primarily influenced by softer demand resulting from government restrictions in reaction to the COVID-19 pandemic and 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 geographic region increased (decreased) from 2019 to 2020 as
follows: Northeast (8.0%); Mid-Atlantic (6.7%); Southeast 0.7%; Southwest
(4.3%); Midwest 0.8%; West (1.1%); 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):
Nine Months Ended June 30,
2020 2019 Change
Net Sales % Net Sales % $ %
Residential roofing
products $ 2,130,825 43.2 % $ 2,168,755 42.7 % $ (37,930 ) (1.7 %)
Non-residential roofing
products 1,200,665 24.4 % 1,200,546 23.7 % 119 0.0 %
Complementary building
products 1,594,613 32.4 % 1,705,946 33.6 % (111,333 ) (6.5 %)
Total net sales $ 4,926,103 100.0 % $ 5,075,247 100.0 % $ (149,144 ) (2.9 %)
26
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Gross Profit
The following table summarizes gross profit and gross margin for the periods presented (in thousands):
Nine Months Ended June 30, Change1
2020 2019 $ %
Gross profit $ 1,185,230 $ 1,243,093 $ (57,863 ) (4.7 %)
Gross margin 24.1 % 24.5 % N/A (0.4 %)
________________________________
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 24.1% in 2020, down 0.4% 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):
Nine Months Ended June 30, Change1
2020 2019 $ %
Operating expense $ 1,271,367 $ 1,185,215 $ 86,152 7.3 %
% of net sales 25.8 % 23.4 % N/A 2.4 %
________________________________
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 7.3% to
• a $121.5 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.
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 effects:
• an
due to reductions in both hours worked and headcount; and
• a
fleet costs.
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
• a$5.6 million settlement received in connection with a class action lawsuit; • a$5.3 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; and
• a lower weighted-average interest rate on our outstanding debt.
Income Taxes
There was an income tax benefit of$44.8 million in 2020, compared to$21.0 million in 2019. The comparative increase in income tax benefit was primarily due to tax benefits from deferred tax adjustments of$36.5 million related to the Rebranding. 27
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The effective tax rate, excluding any discrete items, was (18.3%) in 2020, compared to 36.5% in 2019. We expect our fiscal year 2020 effective tax rate, excluding any discrete items, will range from approximately (18.0%) to (20.0%).
Net Income (Loss)/Net Income (Loss) Per Share
Net income (loss) was$(152.8) million in 2020, compared to$(38.0) million in 2019. There were$18.0 million of dividends on preferred shares in both 2020 and 2019, making net income (loss) attributable to common shareholders$(170.8) million and$(56.0) million , respectively. We calculate net income (loss) per share by dividing net income (loss), less dividends on preferred shares and adjustments for participating securities, by the weighted-average number of common shares outstanding during the period. Diluted net income (loss) per share is calculated by utilizing the most dilutive result after applying and comparing the two-class method and if-converted method (see Note 4 in the Notes to Condensed Consolidated Financial Statements for further discussion). The following table presents all the components utilized to calculate basic and diluted net income (loss) per share (in thousands, except share and per share amounts): Nine Months Ended June 30, 2020 2019 Net income (loss)$ (152,775 ) $ (37,992 ) Dividends on Preferred Stock 18,000
18,000
Net income (loss) attributable to common shareholders (170,775 )
(55,992 )
Undistributed income allocated to participating
securities - -
Net income (loss) attributable to common shareholders - basic and diluted (if-converted method)
$ (170,775 ) $ (55,992 ) 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)
$ (170,775 )
Weighted-average common shares outstanding, basic 68,775,920
68,391,882
Effect of common share equivalents -
-
Weighted-average common shares outstanding - diluted (if-converted and two-class method)
68,775,920 68,391,882
Net income (loss) per share - basic$ (2.48 ) $ (0.82 ) Net income (loss) per share - diluted (two-class method) (2.48 ) (0.82 ) Net income (loss) per share - diluted (if-converted method) (2.48 ) (0.82 )
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.
28
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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.
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 June 30 ,
Nine Months Ended
2020 2019 2020 2019
Net income (loss) $ (6,725 ) $ 30,987 $ (152,775 ) $ (37,992 )
Adjustments:
Acquisition costs1 48,416 60,482 142,925 185,922
Business restructuring costs2 2,846 1,664 167,836 1,664
COVID-19 impact3 36,216 - 2,894 -
Effects of tax reform - - - (462 )
Total adjustments 87,478 62,146 313,655 187,124
Tax impact of total adjustments4 (11,271 ) (20,563 ) (75,550 ) (54,946 )
Total adjustments, net of tax 76,207 41,583 238,105 132,178
Adjusted Net Income (Loss)
_______________________________
1 The following table presents a breakout of the components of acquisition costs
for each of the periods indicated:
Three Months Ended June 30, Nine Months Ended June 30,
2020 2019 2020 2019
Amortization of intangible assets
$ 134,310 $ 155,508 Costs classified as selling, general, and administrativea 1,588 5,733 7,887 21,337 Non-operating (income) expensesb 2,003 3,025 728 9,077 Total acquisition costs$ 48,416 $ 60,482 $ 142,925 $ 185,922
__________________________________
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 nine
months ended June 30, 2020 , amounts are offset by a $5.3 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.
2 The following table presents a breakout of the components of business
restructuring costs for each of the periods indicated:
Three Months Ended June 30 ,
Nine Months Ended
2020 2019 2020 2019
Amortization in connection with
the Rebranding $ - $ - $ 142,649 $ -
Costs classified as selling,
general, and administrativea 1,069 1,664 1,890 1,664
Non-operating (income) expensesb 1,777 - 23,297 -
Total business restructuring costs
__________________________________
a. Mainly composed of costs stemming from headcount rationalization
efforts and certain Rebranding costs.
b. Amounts include accrued estimated costs related to employee benefitplan withdrawals and amortization of debt issuance costs. Nine months
ended
of
3 Three and nine months ended
(benefit) of
revaluation of deferred tax assets and liabilities made in conjunction with the
Company's application of the CARES Act (see Note 14 in the Notes to Condensed
Consolidated Financial Statements for further discussion). Three and nine
months ended
other costs directly related to the Company's response to the COVID-19
pandemic, which are classified as selling, general and administrative.
4 Represents tax impact on adjustments that are not included in the Company's
income tax provision (benefit) for the period presented. 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
and 2019 were calculated using a blended effective tax rate of 12.9% and 33.1%,
respectively. The tax impact of adjustments for the nine months ended
2020 and 2019 were calculated using an effective tax rate of 24.1% and 29.4%,
respectively.
29
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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 June 30, Nine Months Ended June 30,
2020 2019 2020 2019
Net income (loss) $ (6,725 ) $ 30,987 $ (152,775 ) $ (37,992 )
Interest expense, net 35,360 40,169 105,781 121,800
Income taxes1 46,561 5,178 (44,846 ) (21,032 )
Depreciation and amortization2 61,811 69,455 330,512 208,287
Stock-based compensation 3,532 4,637 13,349 12,901
Acquisition costs3 1,588 5,733 2,605 21,337
Business restructuring costs4 1,962 1,664 22,589 1,664
COVID-19 impact5 3,426 - 3,449 -
Adjusted EBITDA $ 147,515 $ 157,823 $ 280,664 $ 306,965
Net sales $ 1,792,505 $ 1,924,534 $ 4,926,103 $ 5,075,247
Net margin6 (0.4 %) 1.6 % (3.1 %) (0.7 %)
Adjusted EBITDA margin6 8.2 % 8.2 % 5.7 % 6.0 %
____________________________________________________________
1 Three and nine months ended
(benefit) of
revaluation of deferred tax assets and liabilities made in conjunction with the
Company's application of the CARES Act. Nine months ended
also includes an income tax provision (benefit) of
from a decrease of deferred tax liabilities in connection with the Rebranding
(see Note 14 in the Notes to Condensed Consolidated Financial Statements for
further discussion).
2 Nine months ended
accelerated intangible asset amortization of
write-off of certain trade names in connection with the Rebranding.
3 Includes selling, general, and administrative costs related to acquisitions
such as professional fees, branch integration expenses, travel expenses,
employee severance and retention costs, and other personnel expenses. For the
nine months ended
received as the final true-up of the
338(h)(10) election 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 Amounts include accrued estimated costs related to employee benefit plan
withdrawals, costs stemming from headcount rationalization efforts, and certain
Rebranding costs. Nine months ended
on debt extinguishment of
refinancing. 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.
6 We define net margin as net income (loss) divided by net sales and Adjusted
EBITDA margin as Adjusted EBITDA divided by net sales.
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 regions of theU.S. andCanada . 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. 30
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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.
Certain Quarterly Financial Data
The following table sets forth certain unaudited quarterly data for the first
three 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 3 Qtr 2 Qtr 1 Qtr 4 Qtr 3 Qtr 2 Qtr 1
Net sales $ 1,792,505 $ 1,458,486 $ 1,675,112
n/m n/m 28.6 % 27.1 % 20.1 % 24.2 %
Gross profit 432,132 342,400 410,698 493,462 472,536 334,988 435,569 % of fiscal year's gross profit
n/m n/m n/m 28.4 % 27.2 % 19.3 % 25.1 %
Income (loss) from operations 74,895 (180,961 ) 19,929
89,874 74,254 (54,630 ) 38,254 % of fiscal year's income (loss) from operations
n/m n/m n/m 60.8 % 50.3 % (37.0 %) 25.9 %
Net income (loss)$ (6,725 ) $ (122,640 ) $ (23,410 )
6,000 6,000 6,000 6,000 6,000 6,000
Net income (loss)
attributable to common
shareholders $ (12,725 ) $ (128,640 ) $ (29,410 ) Net income (loss) per share - basic$ (0.18 ) $ (1.87 ) $ (0.43 )
$ (0.18 ) $ (1.87 ) $ (0.43 )
__________________________________________________
n/m = not meaningful.
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 ofJune 30, 2020 were our cash and cash equivalents of$1.02 billion and our available borrowings of approximately$329.0 million under our asset-based revolving lines of credit. During the three months endedMarch 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 three months endedJune 30, 2020 , we used a portion of our operating cash flows to repay approximately$153.5 million of the balance of our revolving lines of credit.
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.
31
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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
thousands):
Nine Months Ended June 30,
2020 2019
Net cash provided by (used in) operating
activities $ 250,449 $ (194,897 )
Net cash provided by (used in) investing
activities (23,716 ) (202,110 )
Net cash provided by (used in) financing
activities 719,555 294,778
Effect of exchange rate changes on cash and cash equivalents (199 ) 31 Net increase (decrease) in cash and cash equivalents$ 946,089 $ (102,198 ) Operating Activities Net cash provided by operating activities was$250.4 million in 2020, compared to cash used in operating activities of$194.9 million in 2019. Cash from operations increased$445.3 million due to an incremental cash inflow of$473.1 million stemming from changes to our net working capital, mainly driven by decreases in accounts receivable, inventory, and prepaid expenses and other current assets. The increase in cash from operations was partially offset by a decrease in net income after adjustments for non-cash items of$27.8 million .
Investing Activities
Net cash used in investing activities was$23.7 million in 2020, compared to$202.1 million in 2019. The$178.4 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$719.6 million in 2020, compared to$294.8 million in 2019. The financing cash flow increase of$424.8 million was primarily due to a$436.3 million increase in net borrowings under our revolving lines of credit over the comparative periods, partially offset by a$13.5 million net 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. 32
-------------------------------------------------------------------------------- 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 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 endedDecember 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
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 ofJune 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 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 ofJune 30, 2020 , the total balance outstanding on the 2023 ABL, net of$6.3 million of unamortized debt issuance costs, was$848.7 million . We also have outstanding standby letters of credit related to the 2023 U.S. Revolver in the amount of$13.0 million as ofJune 30, 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. 33
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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 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 ofJune 30, 2020 , we had$3.6 million outstanding under equipment financing facilities, with fixed interest rates ranging from 2.33% to 2.89% and payments due throughSeptember 2021 . 34
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Cautionary Statement for Purposes of the "Safe Harbor" Provisions of the Private Securities Litigation Reform Act of 1995
Our disclosure and analysis in this report contains forward-looking information that involves risks and uncertainties. Our forward-looking statements express our current expectations or forecasts of possible future results or events, including projections of future performance, statements of management's plans and objectives, future contracts, and forecasts of trends and other matters. You can identify these statements by the fact that they do not relate strictly to historic or current facts and often use words such as "anticipate," "estimate," "expect," "believe," "will likely result," "outlook," "project" and other words and expressions of similar meaning. No assurance can be given that the results in any forward-looking statements will be achieved and actual results could be affected by one or more factors, which could cause them to differ materially. For these statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act. Certain factors that may affect our business and could cause actual results to differ materially from those expressed in any forward-looking statements include those set forth under the heading "Risk Factors" contained herein, as well as those in our Annual Report on Form 10-K for the fiscal year endedSeptember 30, 2019 .
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