The following is a discussion and analysis of our financial condition and results of operations as of and for the periods presented below. The following discussion and analysis should be read in conjunction with the "Condensed Consolidated Financial Statements" and notes thereto included elsewhere in this Quarterly Report on Form 10-Q. This section and other parts of this Quarterly Report on Form 10-Q contain forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially from the results expressed or implied by the forward-looking statement. We have made these statements in reliance on the safe harbor created by the Private Securities Litigation Reform Act of 1995 (set forth in Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act). In some cases, forward-looking statements can be identified by words such as "anticipates," "believes," "could," "estimates," "expects," "intends," "may," "plans," "potential," "predicts," "projects," "should," "will," "would" or the negative or similar expressions. All of our forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those that we are expecting, including: •the recent outbreak of the novel coronavirus COVID-19, which was declared a pandemic by theWorld Health Organization onMarch 11, 2020 , or the COVID-19 Pandemic; •the length and severity of the recent COVID-19 Pandemic and its impact on the global economy, our business, operations and financial results; •the impact of cost-saving initiatives on our financial and liquidity position; •federal, state and local government initiatives to mitigate the impact of the COVID-19 Pandemic, including additional restrictions on business activities, "shelter-in-place" orders, guidelines and other restrictions; •our ability to qualify as an essential business or service under state, county or local orders and guidelines; •the timing, amount and availability of economic stimulus or other initiatives by federal, state or provincial governments; •our ability to effectively manage any downturns in the new commercial construction market, the commercial repair and remodel market and the new residential construction market; •our ability to effectively manage any changes in economic, political and social conditions; •fluctuating demand for the products and services we offer; •our ability to effectively compete in a highly competitive industry; •our ability to realize the anticipated financial and strategic goals of future acquisitions or investments, including the identification of acquisition targets and the integration and performance of acquired stores and businesses, including integration of financial systems; •our ability to achieve the intended benefits of our recent acquisitions, including the realization of synergies; •a diversion of management's attention from ongoing business concerns to matters related to acquisitions we may make in the future or the integration of previous acquisitions; •our ability to maintain our existing contractual and business relationships; •the change in any exclusive rights or relationships we have with suppliers that provide us access to leading brands; •a material disruption at our suppliers' facilities due to weather, environmental incidents, transportation disruption, natural disasters or public health emergencies such as the COVID-19 Pandemic and other operational problems; •the effect of any social unrest upon our branches or our customers' businesses; •the effects of any changes in environmental, health and safety laws and regulations on our operations and liquidity; •our ability to attract and retain key management personnel and other talent required for our business; •our exposure to legal claims and proceedings related to our business; •our ability to manage the impact of debt and equity financing transactions; •our ability to generate a sufficient amount of cash to service our indebtedness and fund our operations; •our ability to operate our business under agreements governing our indebtedness containing financial covenants and other restrictions; •the effects of and ability to continue incurring a substantial amount of indebtedness under our asset-based lending credit facility and our term loan facility; •the volatility of the trading price of our common stock; •our relationship, and actual and potential conflicts of interest, with our majority shareholder; and •additional factors discussed under the sections entitled "Risk Factors," and "Management's Discussion and Analysis of Financial Condition and Results of Operations" as well as in the other reports we file with theSecurities and Exchange Commission , orSEC . 24 -------------------------------------------------------------------------------- The forward-looking statements contained in this Quarterly Report on Form 10-Q are based on historical performance and management's current plans, estimates and expectations in light of information currently available to us and are subject to uncertainty and changes in circumstances. There can be no assurance that future developments affecting us will be those that we have anticipated. Actual results may differ materially from these expectations due to changes in global, regional or local political, economic, business, competitive, market, regulatory, public health and other factors, many of which are beyond our control, as well as the other factors described in Item 1A. Risk Factors in this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K for the year endedDecember 31, 2019 , filed with theSEC onFebruary 25, 2020 , or the 2019 10-K, as updated by our subsequent filings with theSEC . Additional factors or events that could cause our actual results to differ may also emerge from time to time, and it is not possible for us to predict all of them. Comparisons of results for current and any prior periods are not intended to express any future trends or indications of future performance, unless expressed as such, and should only be viewed as historical data. Should one or more of these risks or uncertainties materialize, or should any of our assumptions prove to be incorrect, our actual results may vary in material respects from what we may have expressed or implied by these forward-looking statements. You should not place undue reliance on any of our forward-looking statements. Any forward-looking statement made by us in this Quarterly Report on Form 10-Q speaks only as of the date hereof. We undertake no obligation to publicly update any forward-looking statement, whether as a result of new information, future developments or otherwise, except as may be required by applicable securities laws. We qualify all of our forward-looking statements by these disclaimers.
Overview
We are one of the largest specialty building products distributors of wallboard and suspended ceiling systems inthe United States andCanada . Since 2013, we have completed more than 35 acquisitions and have over 170 branches and 30,000 SKUs. We have a national operating model supported by local market expertise and an entrepreneurial, customer-centric culture. Our strong national brand and acquisition expertise have established us as the distributor of choice for leading suppliers, and we have over 25,000 customers across construction-related end markets. We believe we are able to maintain our local market excellence due to our longstanding customer relationships, dependable service and market-specific product offerings that cater to local market trends and preferences.
Factors and Trends Affecting Our Business and Results of Operations
See Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, in the 2019 10-K for a discussion of the general and specific factors and trends affecting our business and results of operations, which include general economic conditions, new non-residential construction, new residential construction, non-residential repair and remodel construction, volume, costs and pricing programs.
The COVID-19 Pandemic's Impact on our Business
The uncertain macroeconomic environment created by the COVID-19 Pandemic has had and will continue to have a significant, adverse impact on our business. As of the date of this filing, significant uncertainty exists concerning the magnitude of the impact and duration of the disruption, and we are unable to determine or predict the overall impact the COVID-19 Pandemic will have on our financial position, results of operations, or cash flows. The following events related to the COVID-19 Pandemic have resulted and will result in lost or delayed revenue to our company: •limitations on the ability of manufacturers to produce the products we sell; •limitations on the ability of our suppliers to meet delivery requirements and commitments; •limitations on the ability of our employees to perform their work; •limitations imposed by local, state or federal orders and guidelines affecting our ability to operate, including additional restrictions after the recent escalation in COVID-19 diagnoses; •limitations on the ability of freight carriers to deliver our products to us and our customers; •limitations on the ability of our customers to conduct their business and purchase our products and services; •delays in starting construction jobs, temporary closure of job sites or cancellation of jobs; •disruptions to our customers' supply chains or purchasing; and •limitations on the ability of our customers to pay us on a timely basis. 25 -------------------------------------------------------------------------------- Although the effects of the COVID-19 Pandemic have impacted our financial position and results of operations as noted above, we have maintained our profitability, including gross margin and adjusted EBITDA margin, during the three months endedJune 30, 2020 . In addition, we continue to evaluate and pursue our strategic initiatives. We are resuming our focus on acquisitions during the second half of the year. We also expect to begin a pilot launch of our e-commerce platform during the third quarter of 2020, which we believe will allow us to enhance our existing sales channels, increase our product offerings and improve purchasing and logistics. In spite of the challenging market conditions resulting from the COVID-19 Pandemic, we continue to seek opportunities for organic growth and to enhance our financial flexibility. We have taken proactive measures to right-size our business, and we are positioned to withstand changes to market and economic environments. Additionally, all of our branches are currently open for business throughoutthe United States andCanada . We have taken safety precautions based on recommendations from federal, state and local authorities as we continue to operate as part of an "Essential Critical Infrastructure Sector" in many states. In a select number of states where stronger restrictions are or have been in place, includingWashington, California ,Michigan ,New Jersey , and theCommonwealth of Pennsylvania , we have experienced more significant year-over-year headwinds, and thus, have not seen the seasonal improvements in our financial results as we would typically expect. Certain states, such asCalifornia , have re-implemented restrictions and guidelines due to the recent escalation of local COVID-19 cases. While these restrictions do not currently affect our ability to operate, they could affect projects where we deliver our products. During the second quarter, our branches in several states, including inMinnesota andIllinois , have also been impacted by social unrest. While we continue to operate our branches, such social unrest may negatively impact our business in the future. We continue to safeguard our employees and customers and will continue to actively monitor the disruption caused by the COVID-19 Pandemic. We may take further actions that alter our business operations as may be required by federal, state or local authorities or that we determine are in the best interests of our employees, customers, suppliers and stockholders. From March throughJune 2020 , we furloughed approximately 450 employees in response to the COVID-19 Pandemic, but as ofJuly 31, 2020 , substantially all of our employees have returned to work. Other than these furloughs, there have not been any further material changes to our workforce due to the COVID-19 Pandemic. We may take further actions in the future as the situation develops. We restored temporary salary reductions for all employees and compensation for independent board members during the second quarter of 2020. We entered the COVID-19 Pandemic with a strong balance sheet and have taken steps to enhance our financial flexibility. InMarch 2020 , in response to the COVID-19 Pandemic, we drew$120.0 million from our 2018 Revolving Credit Facility to provide financial flexibility and liquidity to respond to volatile financial market conditions. We repaid the first quarter draw under our 2018 Revolving Credit Facility inJune 2020 and decreased our net debt leverage ratio. See "-Liquidity and Capital Resources-Summary" for additional information. The additional steps we have taken to maintain cash flow include: •delaying or reducing capital expenditures that are not anticipated to impact near-term business; •deferring or limiting non-essential operating expenses; •optimizing all areas of working capital; and •restricted hiring, deferred wage increases and reduced other employer-related costs. We do not anticipate any issues in servicing our debt and do not expect to need additional borrowings in the second half of 2020 other than for ordinary course operations. The Company qualifies for and has deferred certain corporate income tax payments and employer payroll tax payments pursuant to certain provisions of the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act"). We deferredUnited States corporate income tax payments which would otherwise have been paid during the three months endedMarch 31, 2020 to the three months endedSeptember 30, 2020 . We also deferred employer payroll taxes, of which 50% are required to be deposited byDecember 2021 and the remaining 50% byDecember 2022 under the CARES Act. We did not record any asset impairments, inventory charges or provision for expected credit losses related to the COVID-19 Pandemic during the second quarter of 2020, but future events may require such charges, which could have a material adverse effect on our financial condition, results of operations, cash flows or liquidity. 26 --------------------------------------------------------------------------------
Second Quarter Update
Financial Results
We reported net sales of$486.1 million for the three months endedJune 30, 2020 , a decrease of$73.8 million , or 13.2%, compared to the three months endedJune 30, 2019 . Our gross margin for the three months endedJune 30, 2020 , was 30.0% compared to 30.6% for the three months endedJune 30, 2019 . The decrease in net sales and gross margin was primarily due to COVID-19 Pandemic related market disruptions. 2020 Acquisitions We supplement our organic growth strategy with selective acquisitions. We temporarily suspended our acquisition activity in response to the COVID-19 Pandemic but will resume focusing on acquisitions in the second half of 2020. In the first quarter, we completed one acquisition, which resulted in the addition of two branches. See Note 7, Acquisitions, to the condensed consolidated financial statements. In executing our acquisition strategy and integrating acquired companies, we focus on the cost savings we can achieve through combined procurement and pricing programs and brand consolidation. This acquisition contributed$5.0 million to net sales for the three months endedJune 30, 2020 and$8.9 million for the six months endedJune 30, 2020 . Effective Date of Acquisitions Acquisition Branch Locations # of Branches Acquired Insulation Distributors, Inc. February 3, 2020 Maryland 2
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