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EX-32.1 - EXHIBIT 32.1 - BEACON ROOFING SUPPLY INCv465667_ex32-1.htm
EX-31.2 - EXHIBIT 31.2 - BEACON ROOFING SUPPLY INCv465667_ex31-2.htm
EX-31.1 - EXHIBIT 31.1 - BEACON ROOFING SUPPLY INCv465667_ex31-1.htm
EX-10.5 - EXHIBIT 10.5 - BEACON ROOFING SUPPLY INCv465667_ex10-5.htm
EX-10.4 - EXHIBIT 10.4 - BEACON ROOFING SUPPLY INCv465667_ex10-4.htm
EX-10.3 - EXHIBIT 10.3 - BEACON ROOFING SUPPLY INCv465667_ex10-3.htm
EX-10.2 - EXHIBIT 10.2 - BEACON ROOFING SUPPLY INCv465667_ex10-2.htm
EX-10.1 - EXHIBIT 10.1 - BEACON ROOFING SUPPLY INCv465667_ex10-1.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934

 

For the Quarterly Period Ended March 31, 2017

 

OR

 

¨TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the Transition Period from                    to                    

 

Commission File Number 000-50924

 

http:||content.edgar-online.com|edgar_conv_img|2017|02|06|0001144204-17-006196_PG1IMG1_10Q.JPG

 

BEACON ROOFING SUPPLY, INC.

(Exact name of registrant as specified in its charter)

 

Delaware   36-4173371
(State or other jurisdiction of
Incorporation or Organization)
  (I.R.S. Employer
Identification No.)

 

505 Huntmar Park Drive, Suite 300, Herndon, VA 20170

(Address of Principal Executive Offices) (Zip Code)

 

(571) 323-3939

(Registrant's telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x     No  ¨

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act:

 

Large accelerated filer   x   Accelerated filer  ¨
Non-accelerated filer ¨  (do not check if a smaller reporting company)       Smaller reporting company  ¨

Emerging growth company  ¨

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ¨

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

 

As of May 1, 2017, 60,283,487 shares of common stock, par value $0.01 per share, of the registrant were outstanding.  

 

1 

 

 

BEACON ROOFING SUPPLY, INC.

FORM 10-Q

For the Quarter Ended March 31, 2017

 

TABLE OF CONTENTS

 

Part I.   Financial Information (unaudited)  
  Item 1. Condensed Consolidated Financial Statements  
    Consolidated Balance Sheets 3
    Consolidated Statements of Operations 4
    Consolidated Statements of Comprehensive Income 5
    Consolidated Statements of Cash Flows 6
    Notes to Condensed Consolidated Financial Statements 7
       
  Item 2. Management’s Discussion and Analysis of Financial Condition And Results of Operations 27
  Item 3. Quantitative and Qualitative Disclosures About Market Risk 41
  Item 4. Controls and Procedures 41
       
Part II.     Other Information  
  Item 6.   Exhibits 42
       
Signatures     43

 

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BEACON ROOFING SUPPLY, INC.

Consolidated Balance Sheets 

(Unaudited; In thousands, except share and per share amounts)

 

   March 31,   September 30,   March 31, 
   2017   2016   2016 
Assets               
Current assets:               
Cash and cash equivalents  $10,012   $31,386   $14,841 
Accounts receivable, less allowance of $17,140, $14,812 and $9,396 as of March 31, 2017, September 30, 2016 and March 31, 2016, respectively   506,386    626,965    490,850 
Inventories, net   580,889    480,736    513,750 
Prepaid expenses and other current assets   217,389    163,103    164,625 
Total current assets   1,314,676    1,302,190    1,184,066 
                
Property and equipment, net   156,380    148,569    147,994 
Goodwill   1,228,059    1,197,565    1,160,775 
Intangibles, net   439,507    464,024    472,582 
Other assets, net   1,511    1,511    1,430 
Total Assets  $3,140,133   $3,113,859   $2,966,847 
                
Liabilities and Stockholders' Equity               
Current liabilities:               
Accounts payable  $486,328   $360,915   $417,994 
Accrued expenses   131,264    161,113    152,692 
Current portions of long-term debt   14,014    14,811    12,159 
Total current liabilities   631,606    536,839    582,845 
                
Borrowings under revolving lines of credit, net   269,124    359,661    295,690 
Long-term debt, net   722,101    722,929    722,542 
Deferred income taxes, net   137,495    135,482    102,878 
Long-term obligations under equipment financing and other, net   30,639    35,121    42,907 
Total liabilities   1,790,965    1,790,032    1,746,862 
                
Commitments and contingencies               
                
Stockholders' equity:               
Common stock (voting); $.01 par value; 100,000,000 shares authorized; 60,255,320 issued and outstanding as of March 31, 2017; 59,890,885 issued and outstanding as of September 30, 2016; 59,521,648 issued and outstanding at March 31, 2016   602    598    595 
Undesignated preferred stock; 5,000,000 shares authorized, none issued or outstanding   -    -    - 
Additional paid-in capital   709,278    694,564    678,748 
Retained earnings   658,396    647,322    558,804 
Accumulated other comprehensive loss   (19,108)   (18,657)   (18,162)
Total stockholders' equity   1,349,168    1,323,827    1,219,985 
Total Liabilities and Stockholders' Equity  $3,140,133   $3,113,859   $2,966,847 

 

 

See accompanying Notes to Condensed Consolidated Financial Statements

 

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BEACON ROOFING SUPPLY, INC.

Consolidated Statements of Operations

(Unaudited; In thousands, except share and per share amounts)

 

   Three Months Ended
March 31,
   Six Months Ended
March 31,
 
   2017   2016   2017   2016 
Net sales  $870,724   $823,537   $1,872,908   $1,800,017 
Cost of products sold   666,247    627,773    1,417,364    1,371,065 
Gross profit   204,477    195,764    455,544    428,952 
Operating expense   207,533    191,881    411,643    398,225 
Income (loss) from operations   (3,056)   3,883    43,901    30,727 
Interest expense, financing costs, and other   12,268    13,026    25,842    29,282 
Income (loss) before provision for income taxes   (15,324)   (9,143)   18,059    1,445 
Provision for (benefit from) income taxes   (5,968)   (3,424)   6,985    46 
Net income (loss)  $(9,356)  $(5,719)  $11,074   $1,399 
                     
Weighted-average common stock outstanding:                    
Basic   60,141,580    59,295,990    60,041,332    59,133,569 
Diluted   60,141,580    59,295,990    61,069,938    60,077,852 
                     
Net income (loss) per share:                    
Basic  $(0.16)  $(0.10)  $0.18   $0.02 
Diluted  $(0.16)  $(0.10)  $0.18   $0.02 

 

 

See accompanying Notes to Condensed Consolidated Financial Statements

 

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BEACON ROOFING SUPPLY, INC.

Consolidated Statements of Comprehensive Income

(Unaudited; In thousands)

 

   Three Months Ended 
March 31,
   Six Months Ended
March 31,
 
   2017   2016   2017   2016 
Net income (loss)  $(9,356)  $(5,719)  $11,074   $1,399 
Other comprehensive income (loss):                    
Foreign currency translation adjustment   813    4,226    (839)   1,757 
Total other comprehensive income (loss)   813    4,226    (839)   1,757 
Comprehensive income (loss)  $(8,543)  $(1,493)  $10,235   $3,156 

 

 

See accompanying Notes to Condensed Consolidated Financial Statements

 

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BEACON ROOFING SUPPLY, INC.

Consolidated Statements of Cash Flows

(Unaudited; In thousands)

 

   Six Months Ended
March 31,
 
   2017   2016 
     
Operating Activities          
Net income  $11,074   $1,399 
Adjustments to reconcile net income to net cash provided by operating activities:          
Depreciation and amortization   56,955    47,644 
Stock-based compensation   7,574    10,696 
Certain interest expense and other financing costs   2,703    4,053 
Gain on sale of fixed assets   (420)   (411)
Deferred income taxes   2,020    1,741 
Other, net   131    (280)
Changes in operating assets and liabilities, net of the effects of businesses acquired:          
Accounts receivable   123,590    95,150 
Inventories   (92,072)   (2,519)
Prepaid expenses and other assets   (53,062)   (15,815)
Accounts payable and accrued expenses   91,950    (61,006)
Net cash provided by operating activities   150,443    80,652 
           
Investing Activities          
Purchases of property and equipment   (24,231)   (11,059)
Acquisition of businesses, net   (58,359)   (941,156)
Proceeds from the sale of assets   1,285    377 
Net cash used in investing activities   (81,305)   (951,838)
           
Financing Activities          
Borrowings under revolving lines of credit   857,099    1,017,128 
Repayments under revolving lines of credit   (948,470)   (724,855)
Borrowings under term loan   -    450,000 
Repayments under term loan   (1,125)   (187,875)
Borrowings under Senior Notes   -    300,000 
Borrowings under equipment financing facilities and other   1,579    - 
Repayments under equipment financing facilities and other   (6,857)   (2,633)
Payment of deferred financing costs   -    (27,813)
Proceeds from issuance of common stock   7,840    15,391 
Taxes paid related to net share settlement of equity awards   (697)   - 
Excess tax benefit from stock-based compensation   -    1,630 
Net cash provided by (used in) financing activities   (90,631)   840,973 
           
Effect of exchange rate changes on cash and cash equivalents   119    (607)
           
Net decrease in cash and cash equivalents   (21,374)   (30,820)
Cash and cash equivalents, beginning of period   31,386    45,661 
Cash and cash equivalents, end of period  $10,012   $14,841 
           
Supplemental cash flow information          
Cash paid during the period for:          
Interest  $29,592   $22,210 
Income taxes, net of tax refunds   36,151    13,728 

 

 

During the six month period ended March 31, 2016, the Company issued Common Stock with a value of $302 million and replacement awards with a value of $5 million in connection with the acquisition of Roofing Supply Group, LLC, which are accounted for as a non-cash investing activity.

 

 

See accompanying Notes to Condensed Consolidated Financial Statements

 

6 

 

 

BEACON ROOFING SUPPLY, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited; In thousands, except share and per share data or otherwise indicated)

 

1. Company Overview

 

Beacon Roofing Supply, Inc. (the “Company”) was incorporated in the state of Delaware on August 22, 1997 and is the largest publicly traded distributor of residential and non-residential roofing materials and complementary building products in the United States and Canada. The Company operates its business under regional and local trade names and as of March 31, 2017 the Company serviced customers in 47 states within the United States and 6 provinces in Canada. The Company’s current material subsidiaries are Beacon Sales Acquisition, Inc., Beacon Canada, Inc. and Beacon Roofing Supply Canada Company.

 

2. Summary of Significant Accounting Policies

 

Basis of Presentation

 

Beacon Roofing Supply, Inc. (the “Company”) prepared the condensed consolidated financial statements in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and the requirements of the Securities and Exchange Commission (“SEC”). As permitted under those rules, certain footnotes or other financial information have been condensed or omitted. The balance sheet as of March 31, 2016 has been presented for a better understanding of the impact of seasonal fluctuations on the Company's financial condition.

 

In management's opinion, the financial statements include all normal and recurring adjustments that are considered necessary for the fair presentation of the Company's financial position and operating results. The results for the three and six-month periods ended March 31, 2017 are not necessarily indicative of the results to be expected for the twelve months ending September 30, 2017 (“fiscal year 2017” or “2017”).

 

The three-month periods ended March 31, 2017 and 2016 each had 64 business days and the six-month periods ended March 31, 2017 and March 31, 2016 had 125 and 126 business days, respectively.

 

These interim Condensed Consolidated Financial Statements should be read in conjunction with the audited Consolidated Financial Statements and Notes thereto contained in the Company’s fiscal year 2016 (“2016”) Annual Report on Form 10-K for the year ended September 30, 2016.

 

Use of Estimates

 

The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in these consolidated financial statements and accompanying notes. Significant items subject to such estimates include inventories, purchase price allocations, recoverability of goodwill and intangibles, and income taxes. Actual amounts could differ from those estimates.

 

Recent Accounting Pronouncements - Adopted

 

In April 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2015-03, “Simplifying the Presentation of Debt Issuance Costs” to simplify the presentation of debt issuance costs. This guidance requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of the associated debt liability, consistent with the required presentation for debt discounts. This new standard is effective for financial statements issued for annual and interim reporting periods beginning after December 15, 2015 and early adoption is permitted. The Company elected to early adopt this new guidance effective October 1, 2015 and applied the new guidance retrospectively to all prior periods presented in the financial statements. The adoption of this standard changed the Company’s previous practice of presenting debt issuance costs as an asset and resulted in the reduction of total assets and total liabilities in an amount equal to the balance of unamortized debt issuance costs at each balance sheet date presented. Debt issuance costs that are now presented as a direct reduction from the carrying amount of the associated debt liability amounted to $22.9 million as of March 31, 2017, $25.2 million as of September 30, 2016, and $28.7 million as of March 31, 2016.

 

In September 2015, the FASB issued ASU 2015-16, “Simplifying the Accounting for Measurement-Period Adjustments.” This guidance eliminates the requirement to restate prior period financial statements for measurement period adjustments related to business combinations. It requires that the cumulative impact of a measurement period adjustment, including the impact on prior periods, be recognized in the reporting period in which the adjustment is identified. In addition, the portion of the adjustment recorded in the current period that would have been recognized in prior periods had the adjustment been identified at that time must be presented, by line item, either on the face of the income statement or in the accompanying notes. This new standard is effective for annual and interim reporting periods beginning after December 15, 2015 and early adoption is permitted. The Company elected to early adopt this new guidance effective January 1, 2016 and the impact on the financial statements and related disclosures through the quarter ended March 31, 2017 was immaterial.

 

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In November 2015, the FASB issued ASU 2015-17, "Balance Sheet Classification of Deferred Taxes." This guidance requires entities to present deferred tax assets and deferred tax liabilities as noncurrent in a classified balance sheet. This new standard is effective for annual and interim reporting periods beginning after December 15, 2016 and early adoption is permitted. Entities are permitted to apply this guidance either prospectively or retrospectively. The Company adopted the guidance as of March 31, 2016 and applied it retrospectively to all prior periods. As a result, the Company reclassified its current deferred tax balances of $31.9 million to non-current deferred taxes as of September 30, 2015.

 

Recent Accounting Pronouncements - Not Yet Adopted

 

In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers.” This guidance requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers, and will replace most existing revenue recognition guidance when it becomes effective. This new standard is effective for public business entities for fiscal years beginning on or after January 1, 2018, and early adoption is permitted for annual periods beginning after December 31, 2016. The standard permits the use of either the full retrospective or modified retrospective adoption methods. The Company is continuing to perform a detailed evaluation, using a five-step model specified in the guidance, to assess the impacts of the new standard and expects to apply the guidance using the modified retrospective method. Based on the Company’s knowledge of its revenue transactions, the Company does not expect the adoption of this new guidance to have a material impact on its financial statements, but does expect that it will result in additional disclosures regarding revenue recognition policies. 

 

In August 2014, the FASB issued ASU No. 2014-15, “Presentation of Financial Statements—Going Concern: Disclosure of Uncertainties about an Entity's Ability to Continue as a Going Concern.” The guidance updates management's responsibility to evaluate whether there is substantial doubt about an entity's ability to continue as a going concern and provide related footnote disclosures. For each reporting period, management is required to evaluate whether there are conditions or events that raise substantial doubt about a company's ability to continue as a going concern within one year from when the financial statements are issued. This new standard is effective for the annual reporting period ending after December 15, 2016 as well as all annual and interim reporting periods thereafter, and early adoption is permitted. The Company does not expect the adoption of this new guidance to have a material impact on its financial statements and related disclosures.

 

In July 2015, the FASB issued ASU 2015-11, “Inventory: Simplifying the Measurement of Inventory.” This guidance applies to inventory valued at first-in, first-out (FIFO) or average cost and requires inventory to be measured at the lower of cost and net realizable value, rather than at the lower of cost or market. This new standard is effective on a prospective basis for annual and interim reporting periods beginning after December 15, 2016. The Company does not expect the adoption of this new guidance to have a material impact on its financial statements and related disclosures.

 

In February 2016, the FASB issued ASU 2016-02, “Leases.” This guidance will replace most existing accounting for lease guidance when it becomes effective. This new standard is effective using the modified retrospective approach for annual and interim and reporting periods beginning after December 15, 2018 and early adoption is permitted. The guidance will require the Company to record a right of use asset and a lease liability for most of the Company’s leases, including those currently treated as operating leases. The Company is in the process of evaluating the impact of the standard and has decided that it will use the practical expedients outlined in the transition guidance. The scope of the overall impact on the Company’s financial statements and related disclosures is still being quantified. 

 

In March 2016, the FASB issued ASU 2016-09, “Compensation - Stock Compensation: Improvements to Employee Share-Based Payment Accounting.” This guidance is intended to simplify several aspects of the accounting for share-based payment transactions, including the accounting for income taxes, forfeitures and statutory tax withholding requirements, as well as classification in the statement of cash flows. The provisions of this standard are effective for reporting periods beginning after December 15, 2016 and early adoption is permitted in any interim or annual period, but the Company is not early adopting this guidance. The adoption of this guidance will likely have a positive impact on the Company’s income tax provision, net income and operating cash flows in periods in which employees elect to exercise their vested stock options or when restrictions on share-based awards lapse (based on our comparison of our deferred tax assets for share-based compensation to the current intrinsic value of the underlying awards).

 

In June 2016, the FASB issued ASU 2016-13, “Financial Instruments – Credit Losses: Measurement of Credit Losses on Financial Instruments.” This guidance is intended to introduce a revised approach to the recognition and measurement of credit losses, emphasizing an updated model based on expected losses rather than incurred losses. This new standard is effective for annual and interim reporting periods beginning after December 15, 2019 and early adoption is permitted. The Company is currently evaluating the impact that this guidance may have on its financial statements and related disclosures.

 

In January 2017, the FASB issued ASU 2017-01, “Business Combinations: Clarifying the Definition of a Business” This guidance is intended to assist entities when evaluating when a set of transferred assets and activities constitutes a business. This new standard is effective for annual and interim reporting periods beginning after December 15, 2017 and early adoption is permitted. Based on the Company’s current business model, it does not expect the adoption of this new guidance to have a material impact on its financial statements and related disclosures.

 

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In January 2017, the FASB issued ASU 2017-04, “Simplifying the Accounting for Goodwill Impairment.” This guidance is intended to introduce a simplified approach to measurement of goodwill impairment, eliminating the need for a hypothetical purchase price allocation and instead measuring impairment by the amount a reporting unit’s carrying value exceeds its fair value. This new standard is effective for annual and interim reporting periods beginning after December 15, 2019 and early adoption is permitted. Based on the Company’s current business model, it does not expect the adoption of this new guidance to have a material impact on its financial statements and related disclosures.

 

3. Acquisitions

 

Roofing Supply Group

 

On October 1, 2015, the Company acquired 100% of the equity of Roofing Supply Group, LLC ("RSG”), a leading roofing products distributor owned by investment firm Clayton, Dubilier & Rice ("CD&R"). RSG’s results of operations have been included with Company’s consolidated results beginning October 1, 2015. RSG distributed roofing supplies and related materials from 85 locations across 25 states as of October 1, 2015.

 

Total consideration paid for RSG was approximately $1.17 billion, out of which $288.2 million was in cash, $306.8 million of Company’s common stock and option replacement awards, and $574.4 million in refinancing of RSG’s debt. The RSG long-term debt was repaid simultaneously with the proceeds of a new ABL Revolver, Term Loan and Senior Notes (see Note 8).

 

In connection with the RSG acquisition, the Company was required to issue equity awards to certain RSG employees in replacement of RSG equity awards that were cancelled at closing. The replacement awards consisted of options to purchase 661,349 shares of the Company’s common stock. The terms and fair value of these awards approximated the cancelled RSG awards on the issuance date. The fair value of the replacement awards associated with services rendered through the date of the RSG acquisition was recognized as a component of the total acquisition consideration, and the remaining fair value of the replaced awards associated with post RSG acquisition services will be recognized as an expense on a straight-line basis over the remaining service period.

 

The RSG acquisition has been accounted for as a business combination in accordance with the requirements of ASC 805 Business Combinations. The acquisition price has been allocated among assets acquired and liabilities assumed at fair value based on information currently available, with the excess recorded as goodwill. The goodwill recognized is attributable primarily to expected synergies and the assembled workforce of RSG. These come from the synergies that are obtained in operating the branches as part of a larger network, and from an experienced employee base skilled at managing a distribution business. As of September 30, 2016, the Company had finalized the acquisition accounting entries for the RSG acquisition, detailed as follows (in thousands):

 

Cash  $16,451 
Accounts receivable   177,251 
Inventory   179,651 
Other current assets   50,000 
Property, plant, and equipment   55,159 
Other intangible assets   382,600 
Goodwill   617,477 
Current liabilities   (252,190)
Non-current liabilities   (56,949)
Total purchase price  $1,169,450 

 

RSG’s future growth attributable to new customers, geographic market presence and assembled workforce are additional assets that are not separable and which contributed to recorded goodwill, of which $86.1 million was tax deductible as of the October 1, 2015 RSG acquisition date. All of the Company’s goodwill plus the indefinite-lived trade name are tested for impairment annually, and all acquired goodwill and intangible assets are subject to review for impairment should future indicators of impairment develop. The fair value of acquired RSG accounts receivables was $177.3 million, with the gross contractual amount being $185.9 million.

  

Additional Acquisitions – Fiscal Year 2017

 

During the six months ended March 31, 2017, the Company acquired 12 branches from the following four acquisitions:

 

·On December 16, 2016, the Company purchased certain assets of BJ Supply Company, a distributor of roofing and related building products with 1 branch serving Pennsylvania and New Jersey and annual sales of approximately $4 million.

 

·On January 3, 2017, the Company acquired American Building & Roofing, Inc., a distributor of mainly residential roofing and related building products with 7 branches around Washington State and annual sales of approximately $36 million.

 

9 

 

 

·On January 9, 2017, the Company acquired Eco Insulation Supply, a distributor of insulation and related accessories with 1 branch serving Connecticut, Southern New England and the New York City metropolitan area and annual sales of approximately $8 million.

 

·On March 1, 2017, the Company acquired Acme Building Materials, Inc., a distributor of residential roofing and related building products with 3 branches in Eastern Michigan and annual sales of approximately $13 million.  

 

The Company recorded the acquired assets and liabilities related to these transactions at their estimated fair values as of the respective acquisition dates, with resulting goodwill of $31.0 million (all of which is deductible for tax purposes) and $15.9 million in intangible assets associated with these other acquisitions as of March 31, 2017.

 

Additional Acquisitions – Fiscal Year 2016

 

During fiscal year 2016, the Company acquired 42 branches from the following seven additional acquisitions:

 

  · On December 1, 2015, the Company purchased certain assets of RCI Roofing Supply, a distributor of residential and commercial roofing and related products with 5 branches operating in Nebraska, Iowa and Colorado and annual sales of approximately $23 million. The Company has finalized the acquisition accounting entries for this acquisition.

 

  · On December 18, 2015, the Company acquired 100% of the equity interests of Roofing and Insulation Supply, a distributor primarily of residential and commercial insulation along with roofing and related products with 20 branches spanning 13 states operating across New England, the Mid-Atlantic, the Southeast, the Upper Midwest, Texas and Colorado and annual sales of approximately $70 million. The Company has finalized the acquisition accounting entries for this acquisition.

 

  · On December 29, 2015, the Company purchased certain assets of Statewide Wholesale, a distributor of residential and commercial roofing and related products with 1 branch located in Denver, Colorado and annual sales of approximately $15 million. The Company has finalized the acquisition accounting entries for this acquisition.

 

  · On April 1, 2016, the Company purchased certain assets of Atlantic Building Products, a distributor of decking, windows, siding, and related products with 2 branches operating in eastern Pennsylvania and annual sales of approximately $5 million.

 

  · On April 1, 2016, the Company purchased certain assets of Lyf-Tym Building Products, a distributor of siding, windows, gutters, vinyl railings, and related products with 6 branches operating in North Carolina and Virginia and annual sales of approximately $20 million.

 

  · On May 2, 2016, the Company purchased certain assets of Fox Brothers Company, a distributor of roofing, siding, windows, doors, and related products with 4 branches operating in Michigan and annual sales of approximately $35 million.

 

  · On June 1, 2016, the Company acquired 100% of the equity interests of Woodfeathers, Inc., a distributor of primarily residential roofing and related products with 4 branches operating in Oregon and Washington and annual sales of approximately $30 million.

 

The Company recorded the acquired assets and liabilities related to these transactions at their estimated fair values as of the respective acquisition dates, with resulting goodwill of $84.8 million ($59.8 million of which is deductible for tax purposes) and $60.8 million in intangible assets associated with these other acquisitions.

 

Acquisitions – Additional Information

 

For those acquisitions where the acquisition accounting entries have yet to be finalized, the Company’s allocation of the purchase price is subject to change on receipt of additional information, including, but not limited to, the finalization of asset valuations (intangible and fixed) and income tax accounting.

 

4. Net Income (Loss) per Share

 

Basic net income per common share is computed by dividing net income by the weighted-average number of common shares outstanding during the period. Diluted net income per common share is computed by dividing net income by the weighted-average number of common shares and dilutive common share equivalents then outstanding using the treasury stock method. Common share equivalents consist of the incremental common shares issuable upon the exercise of stock options and vesting of restricted stock awards.

 

10 

 

 

The following table presents the basic and diluted weighted-average shares outstanding for each period presented:

 

   Three Months Ended 
March 31,
   Six Months Ended 
March 31,
 
   2017   2016   2017   2016 
                 
Weighted-average common shares outstanding, basic   60,141,580    59,295,990    60,041,332    59,133,569 
Effect of dilutive securities:                    
Stock options   -    -    633,007    696,112 
Restricted stock units   -    -    395,599    248,171 
Weighted-average common shares outstanding, diluted   60,141,580    59,295,990    61,069,938    60,077,852 

 

The following table includes the number of shares that may be dilutive common shares in the future. These shares were not included in the computation of diluted net income per share because the effect was either anti-dilutive or the requisite performance conditions were not met. 

 

   Three Months Ended 
March 31,
   Six Months Ended 
March 31,
 
   2017   2016   2017   2016 
Stock options   270,428    665,281    416,085    667,251 
Restricted stock units   -    88,407    123,780    88,407 

  

 

5. Stockholders’ Equity

 

The following table presents the activity included in stockholders’ equity during the six months ended March 31, 2017 (in thousands, except share amounts):

 

                   Accumulated     
           Additional       Other   Total 
   Common Stock   Paid-in   Retained   Comprehensive   Stockholders' 
   Shares   Amount   Capital   Earnings   Loss   Equity 
Balance at September 30, 2016   59,890,885   $598   $694,564   $647,322   $(18,657)  $1,323,827 
Issuance of common stock, net of shares withheld for taxes   364,435    4    7,140    -    -    7,144 
Stock-based compensation   -    -    7,574    -    -    7,574 
Other comprehensive income (loss)   -    -    -    -    (451)   (451)
Net income   -    -    -    11,074    -    11,074 
Balance at March 31, 2017   60,255,320   $602   $709,278   $658,396   $(19,108)  $1,349,168 

 

Common and Preferred Stock

 

The Company is authorized to issue 100 million shares of common stock and 5 million shares of preferred stock. As of March 31, 2017, September 30, 2016, and March 31, 2016 there were 60,255,320, 59,890,885 and 59,521,648 shares of common stock issued and outstanding, respectively, and no preferred stock outstanding as of any period end.

 

Accumulated Other Comprehensive Loss 

 

Other comprehensive income (loss) is comprised of certain gains and losses that are excluded from net income under GAAP and instead recorded as a separate element of stockholders’ equity. The Company’s other comprehensive income (loss) consists of foreign currency translation adjustments as well as unrealized gains or losses on the Company’s derivative contracts.

 

11 

 

 

The following table summarizes the components of and changes in accumulated other comprehensive loss (in thousands):

 

           Accumulated 
   Foreign   Derivative   Other 
   Currency   Financial   Comprehensive 
   Translation   Instruments   Loss 
Balance as of September 30, 2016  $(18,269)  $(388)  $(18,657)
Other comprehensive loss before reclassifications   (839)   -    (839)
Reclassifications out of other comprehensive loss   -    388    388 
Balance as of March 31, 2017  $(19,108)  $-   $(19,108)

 

6. Stock-based Compensation

 

On February 9, 2016, the shareholders of the Company approved the Amended and Restated Beacon Roofing Supply, Inc. 2014 Stock Plan (the “2014 Plan”). The 2014 Plan provides for discretionary awards of stock options, stock awards, restricted stock units, and stock appreciation rights (“SARs”) for up to 5,000,000 shares of common stock to selected employees and non-employee directors. The 2014 Plan mandates that all forfeited, expired, and withheld shares, including those from the predecessor plans, be returned to the 2014 Plan and made available for issuance. As of March 31, 2017, there were 4,051,683 shares of common stock available for issuance.

 

Prior to the 2014 Plan, the Company maintained the amended and restated Beacon Roofing Supply, Inc. 2004 Stock Plan (the “2004 Plan”). Upon shareholder approval of the 2014 Plan, the Company ceased issuing equity awards from the 2004 Plan and mandated that all future equity awards will be issued from the 2014 Plan.

 

For all equity awards granted prior to October 1, 2014, in the event of a change in control of the Company, all awards are immediately vested. Beginning in fiscal 2015, equity awards contain a “double trigger” change in control mechanism. Unless an award is continued or assumed by a public company in an equitable manner, an award shall become fully vested immediately prior to a change in control (at 100% in the case of a performance-based restricted stock award). If an award is so continued or assumed, vesting will continue in accordance with the terms of the award, unless there is a qualifying termination within one-year following the change in control, in which event the award shall become fully vested immediately (at 100% in the case of a performance-based restricted stock award).

 

Stock Options

 

Non-qualified stock options generally expire 10 years after the grant date and, except under certain conditions, the options are subject to continued employment and vest in one-third increments over a three-year period following the grant dates.

 

The fair values of the options granted during the six months ended March 31, 2017 were estimated on the dates of grants using the Black-Scholes option-pricing model with the following weighted-average assumptions:

 

     
Risk-free interest rate   1.97%
Expected volatility   28.83%
Expected life (in years)   5.30 
Dividend yield    

 

12 

 

 

The following table summarizes all stock option activity for the period presented (in thousands, except share, per share, and time period amounts):

 

   Options
Outstanding
   Weighted-
Average
Exercise Price
   Weighted-Average
Remaining
Contractual Term
(Years)
   Aggregate
Intrinsic
Value1
 
                 
Balance as of September 30, 2016   2,312,789   $25.55    6.3   $38,225 
Granted   245,818    47.40           
Exercised   (316,827)   21.20           
Canceled   (22,271)   24.19           
Balance as of March 31, 2017   2,219,509   $28.60    6.5   $45,630 
Vested and expected to vest after March 31, 2017   2,167,911   $28.51    6.5   $44,759 
Exercisable as of March 31, 2017   1,487,885   $25.40    5.4   $35,350 

 

 

1Aggregate intrinsic value as represents the difference between the closing fair value of the underlying common stock and the exercise price of outstanding, in-the-money options on the date of measurement

 

During the three months ended March 31, 2017 and 2016, the Company recorded stock-based compensation expense related to stock options of $1.3 million and $1.6 million, respectively. During the six months ended March 31, 2017 and 2016, the Company recorded stock-based compensation expense related to stock options of $2.6 million and $7.7 million, respectively. As of March 31, 2017, there was $7.0 million of total unrecognized compensation cost related to unvested stock options, which is expected to be recognized over a weighted-average period of 2.1 years.

 

The following table summarizes additional information on stock options for the period presented (in thousands, except per share amounts):

 

  

Six Months Ended

March 31,

 
   2017   2016 
         
Weighted-average fair value of stock options granted  $14.21   $12.89 
Total fair value of stock options vested   4,998    11,020 
Total intrinsic value of stock options exercised   7,906    14,415 

 

Restricted Stock Units

 

Restricted stock unit (“RSU”) awards granted to employees are subject to continued employment and generally vest after three years. The Company also grants certain RSU awards to management that contain an additional vesting condition tied directly to a defined performance metric for the Company. The actual number of RSUs that will vest can range from 0% to 150% of the grant, depending upon actual Company performance below or above the target level. The Company estimates performance in relation to the established target when determining the projected number of RSUs that will vest and calculating the compensation cost related to these awards.

 

RSUs granted to non-employee directors are subject to continued service and vest after one year (except under certain conditions). Generally, the common shares underlying the RSUs are not eligible for distribution until the director’s service on the Board has terminated. For non-employee director RSU grants made prior to fiscal year 2014, the share distribution date is six months after the director’s termination of service on the board. RSU grants made in fiscal year 2014 and thereafter have no such holding period requirement. Additionally, beginning in fiscal year 2016 non-employee directors holding common stock and outstanding vested unexercised/unsettled equity awards with a fair value that is greater than or equal to five times the annual cash retainer may elect to have future grants settle simultaneously with vesting.

 

13 

 

 

The following table summarizes all restricted stock unit activity for the period presented: 

 

   RSUs
Outstanding
   Weighted-Average
Grant Date Fair Value
 
Balance at September 30, 2016   705,434   $34.55 
Granted   267,042    47.28 
Released   (65,651)   36.33 
Forfeited   (7,463)   44.53 
Balance at March 31, 2017   899,362   $38.27 
Vested and expected to vest after March 31,2017   832,557   $38.27 

 

 During the three months ended March 31, 2017 and 2016, the Company recorded stock-based compensation expense related to restricted stock units of $2.5 million and $1.9 million, respectively. During the six months ended March 31, 2017 and 2016, the Company recorded stock-based compensation expense related to restricted stock units of $5.0 million and $3.0 million, respectively. As of March 31, 2017, there was $17.5 million of total unrecognized compensation cost related to unvested restricted stock units, which is expected to be recognized over a weighted-average period of 2.1 years.

 

The following table summarizes additional information on RSUs for the period presented (in thousands):

 

   Six Months Ended 
March 31,
 
   2017   2016 
         
Total fair value of RSUs released  $2,385   $369 
Total intrinsic value of RSUs released   3,071    403 

   

7. Goodwill and Intangible Assets

 

Goodwill

 

The following table sets forth the change in the carrying amount of goodwill for the Company during the six months ended March 31, 2017 and 2016, respectively (in thousands):

 

Balance at September 30, 2015  $496,415 
Acquisition of RSG   617,634 
Other acquisitions   47,608 
Translation and other adjustments   (882)
Balance at March 31, 2016  $1,160,775 
      
Balance at September 30, 2016  $1,197,565 
Acquisitions   31,005 
Translation and other adjustments   (511)
Balance at March 31, 2017  $1,228,059 

  

The change in the carrying amount of goodwill for the six months ended March 31, 2017 and 2016 is primarily attributable to the Company’s acquisitions finalized during the respective periods presented (see Note 3).

 

Intangible Assets

 

In connection with transactions finalized during the six months ended March 31, 2017 and fiscal year 2016, the Company recorded intangible assets of $15.9 million (mostly customer relationships) and $442.6 million ($375.0 million of customer relationships, $4.3 million of amortizable trademarks, and $63.3 million of indefinite-lived trademarks), respectively. Intangible assets consisted of the following (in thousands, except time period amounts):

 

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   March 31, 
2017
   September 30,
2016
   March 31,
2016
   Weighted-
Average
Remaining
Life1
(Years)
 
Amortizable intangible assets:                    
Non-compete agreements  $2,824   $3,324   $2,824    3.61 
Customer relationships   582,028    566,964    541,161    17.91 
Trademarks   6,670    5,400    4,600    6.60 
Beneficial lease arrangements   960    960    610    10.40 
Total amortizable intangible assets   592,482    576,648    549,195      
Less:  Accumulated amortization   (226,025)   (185,674)   (149,663)     
Total amortizable intangible assets, net  $366,457   $390,974   $399,532      
Indefinite lived trademarks   73,050    73,050    73,050      
Total intangibles, net  $439,507   $464,024   $472,582      

 

 

1As of March 31, 2017

 

For the three month periods ended March 31, 2017 and 2016, we recorded $20.3 million and $17.1 million of amortization expense relating to the above-listed intangible assets, respectively. For the six month periods ended March 31, 2017 and 2016, we recorded $40.4 million and $32.3 million of amortization expense relating to the above-listed intangible assets, respectively. The intangible asset lives range from 1 to 20 years and have a weighted-average remaining life of 17.7 years as of March 31, 2017.

 

The following table presents the estimated annual amortization expense for these intangible assets (in thousands):

 

Year Ending September 30,    
2017 (Apr - Sept)  $40,750 
2018   67,713 
2019   55,112 
2020   44,527 
2021   35,378 
Thereafter   122,977 
   $366,457 

 

8. Financing Arrangements

 

In connection with the RSG Acquisition on October 1, 2015, the Company entered into various financing arrangements totaling $1.45 billion. A “Senior Secured Credit Facility” was entered into that is comprised of an asset-based revolving line of credit (“ABL”) of $700.0 million ($350.0 million of which was drawn at closing) and a new $450.0 million term loan (“Term Loan”). The Company also raised an additional $300.0 million through the issuance of senior notes (the “Senior Notes”).

 

The proceeds from the Senior Secured Credit Facility and Senior Notes were used to provide working capital and funds for other general corporate purposes, to refinance or otherwise extinguish all third-party indebtedness for borrowed money under Company’s and RSG’s existing senior secured credit facilities and RSG’s unsecured senior notes due 2020, to finance the acquisition, and to pay fees and expenses associated with the RSG acquisition. The Company incurred financing costs totaling approximately $31.3 million.

 

15 

 

 

The following table summarizes all financing arrangements the Company has entered into (in thousands):

 

   March 31,   September 30,   March 31, 
   2017   2016   2016 
Senior Secured Credit Facility               
Revolving Lines of Credit:               
U.S. Revolver, expires October 1, 2020 1  $269,124   $355,087   $295,690 
Canadian Revolver, expires October 1, 20202   -    4,574    - 
Term Loan, matures October 1, 20223   434,912    436,380    436,632 
Total borrowings under Senior Secured Credit Facility   704,036    796,041    732,322 
Less: current portion   (4,500)   (4,500)   (4,500)
Total long-term borrowings under Senior Secured Credit Facility  $699,536   $791,541   $727,822 
                
Senior Notes               
Senior Notes, matures October 20234   291,689    291,049    290,410 
Less: current portion   -    -    - 
Total long-term borrowings under Senior Notes  $291,689   $291,049   $290,410 
                
Equipment Financing Facilities and Other               
Equipment financing facilities, various maturities through September 20215  $17,949   $20,419   $22,855 
Capital lease obligations, various maturities through November 20216   22,204    25,013    25,130 
Total obligations under equipment financing facilities and other   40,153    45,432    47,985 
Less: current portion   (9,514)   (10,311)   (7,659)
Total long-term obligations under equipment financing facilities and other  $30,639   $35,121   $40,326 

 

 

1- Effective rates on borrowings are 2.97% as of March 31, 2017; 2.90% as of September 30, 2016; and 2.58% as of March 31, 2016
2- Effective rates on borrowings are 3.20% as of March 31, 2017, September 30, 2016 and March 31, 2016
3- Interest rate of 3.50% as of March 31, 2017; 3.50% as of September 30, 2016; 4.00% as of March 31, 2016
4- Interest rate of 6.38% as of March 31, 2017, September 30, 2016 and March 31, 2016
5- Fixed interest rates ranging from 2.33% to 3.25% as of March 31, 2017 and September 30, 2016; 2.33% to 4.49% as of March 31, 2016
6- Fixed interest rates ranging from 2.72% to 10.39% as of March 31, 2017, September 30, 2016, and March 31, 2016

  

Asset-based Line of Credit (“ABL”)

 

On October 1, 2015, the Company entered into a $700 million ABL with Wells Fargo Bank, N.A. and a syndicate of other lenders. This ABL consists of revolving loans in both the United States (“U.S. Revolver”) in the amount of $670.0 million and Canada (“Canada Revolver”) in the amount of $30.0 million.

 

The ABL has a maturity date of October 1, 2020. The U.S. Revolver has various tranches of borrowings, bearing interest at rates ranging from 2.39% to 4.50%. The effective rate of these borrowings is 2.97% and is paid monthly. As of March 31, 2017, the outstanding balance on the U.S. Revolver and Canada Revolvers, net of debt issuance fees, was $269.1 million. The U.S. Revolver also has outstanding standby letters of credit in the amount of $10.4 million as of March 31, 2017. Current unused commitment fees on the revolving credit facilities are 0.25% per annum.

 

There is one financial covenant under the ABL, which is a Consolidated Fixed Charge Ratio. The Consolidated Fixed Charge Ratio is calculated by dividing consolidated earnings before interest, taxes, depreciation and amortization (EBITDA) by Consolidated Fixed Charges (as defined in the agreement). Per the covenant, the Company’s Consolidated Fixed Charge Ratio must be a minimum of 1.00 at the end of each fiscal quarter, calculated on a trailing four quarter basis. The covenant is only applicable when the borrowing availability is less than 10% of the maximum loan cap or $60.0 million. The ABL is guaranteed jointly and severally and fully and unconditionally by the Company’s active United States subsidiary.

 

Term Loan

 

On October 1, 2015, the Company entered into a $450.0 million Term Loan with Citibank N.A., and a syndicate of other lenders. The Term Loan requires quarterly principal payments in the amount of $1.1 million, with the remaining outstanding principal to be paid on its maturity date of October 1, 2022. The interest rate paid is based on a LIBOR rate (with a floor) plus a fixed spread. The Company has 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.

 

16 

 

 

On September 16, 2016, the Company refinanced its Term Loan, lowering the LIBOR floor by 25 basis points and lowering the spread by 25 basis points. As a result of the refinancing, the Company wrote off $1.6 million of debt issuance costs in interest expense. As of March 31, 2017, the outstanding balance on the Term Loan, net of debt issuance fees, was $434.9 million. The Term Loan is guaranteed jointly and severally and fully and unconditionally by the Company’s active United States subsidiary. 

 

Senior Notes

 

On October 1, 2015, the Company raised $300.0 million by issuing senior notes due 2023 (the “Senior Notes”). The Senior Notes have a coupon rate of 6.38% per annum and are payable semi-annually in arrears beginning April 1, 2016. There are early payment provisions in the Senior Note indenture in which the Company would be subject to “make whole” provisions. Management anticipates repaying the notes at the maturity date of October 1, 2023. As of March 31, 2017 the outstanding balance on the Senior Notes, net of debt issuance fees, was $291.7 million. The Senior Notes are guaranteed jointly and severally and fully and unconditionally by the Company’s active United States subsidiary.

 

Other Information

 

The Senior Secured Credit Facility and the previous credit facility it replaced had certain lenders who participated in both arrangements, therefore management accounted for a portion of this transaction as a debt modification and a portion as a debt extinguishment. In accordance with the accounting for debt modification, the Company expensed $2.2 million of direct issuance costs incurred and will amortize the previously capitalized issuance costs over the term of the Senior Secured Credit Facility. The remainder of the settlement of the Company’s previous financing arrangements was accounted for as debt extinguishment, for which the Company recognized a loss of $0.8 million in the first quarter of fiscal year 2016.

 

Equipment Financing Facilities and Other

 

As of March 31, 2017, the Company had a $17.9 million outstanding under equipment financing facilities, with fixed interest rates ranging from 2.33% to 3.25% and payments due through September 2021.

 

As of March 31, 2017 the Company had $22.2 million of capital lease obligations outstanding. These leases have interest rates ranging from 2.72% to 10.39% with payments due through November 2021.

 

9. Commitments and Contingencies

 

Operating Leases

 

The Company mostly operates in leased facilities, which are accounted for as operating leases. The leases typically provide for a base rent plus real estate taxes. Certain of the leases provide for escalating rents over the lives of the leases and rent expense is recognized over the terms of those leases on a straight-line basis. 

 

For the three months ended March 31, 2017 and 2016, rent expense was $14.7 million and $14.6 million, respectively. For the six months ended March 31, 2017 and 2016, rent expense was $28.9 million and $30.6 million, respectively. Sublet income was immaterial for each of these periods.

 

Contingencies

 

The Company is subject to loss contingencies pursuant to various federal, state and local environmental laws and regulations; however, the Company is not aware of any reasonably possible losses that would have a material impact on its results of operations, financial position, or liquidity. Potential loss contingencies include possible obligations to remove or mitigate the effects on the environment of the placement, storage, disposal or release of certain chemical or other substances by the Company or by other parties. In connection with its acquisitions, the Company’s practice is to request indemnification for any and all known material liabilities of significance as of the respective dates of acquisition. Historically, environmental liabilities have not had a material impact on the Company's results of operations, financial position or liquidity.

 

The Company is subject to litigation from time to time in the ordinary course of business; however the Company does not expect the results, if any, to have a material adverse impact on its results of operations, financial position or liquidity.

 

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10. Geographic Data

 

The following tables summarize certain geographic information for the periods presented (in thousands):

 

   Three Months Ended March 31,   Six Months Ended March 31, 
   2017   2016   2017   2016 
Net sales                    
U.S.  $849,226   $803,675   $1,809,461   $1,735,018 
Canada   21,498    19,862    63,447    64,999 
Total net sales  $870,724   $823,537   $1,872,908   $1,800,017 
                     
   March 31,   September 30,   March 31,         
   2017   2016   2016         
Long-lived assets                       
U.S.  $511,507   $527,680   $536,512         
Canada   12,841    13,374    12,444         
Total long-lived assets  $524,348   $541,054   $548,956         

 

11. Fair Value Measurement

 

As of March 31, 2017, the carrying amount of cash and cash equivalents, accounts receivable, prepaid and other current assets, accounts payable and accrued expenses approximated fair value because of the short-term nature of these instruments. The Company measures its cash equivalents at amortized cost, which approximates fair value based upon quoted market prices (Level 1). Based upon recent trading prices (Level 2 — market approach) as of March 31, 2017, the fair value of the Company’s $300.0 million Senior Notes was $321.0 million. As of March 31, 2017, the fair value of the Company’s Senior Secured Credit Facility approximated the amount outstanding. The Company estimates the fair value of its Senior Secured Credit Facility by discounting the future cash flows of each instrument using estimated market rates of debt instruments with similar maturities and credit profiles (Level 3).

 

12. Supplemental Guarantor Information 

 

All of the Senior Notes issued on October 1, 2015 are guaranteed jointly and severally by all of the United States subsidiaries of the Company (collectively, the “Guarantors”), and not by the Canadian subsidiaries of the Company. Such guarantees are full and unconditional. Supplemental condensed consolidating financial information of the Company, including such information for the Guarantors, is presented below. The information is presented in accordance with the requirements of Rule 3-10 under the SEC’s Regulation S-X. The financial information may not necessarily be indicative of results of operations, cash flows or financial position had the non-guarantor subsidiaries operated as independent entities. Investments in subsidiaries are presented using the equity method of accounting. The principal elimination entries eliminate investments in subsidiaries and intercompany balances and transactions. Separate financial statements of the Guarantors are not provided as the consolidating financial information contained herein provides a more meaningful disclosure to allow investors to determine the nature of the assets held by, and the operations of, the combined groups. 

 

18 

 

  

BEACON ROOFING SUPPLY, INC.

Condensed Consolidating Balance Sheets

(Unaudited; In thousands)

 

   March 31, 2017 
   Parent   Guarantor
Subsidiaries
   Non-Guarantor
Subsidiaries
   Eliminations
and Other
   Consolidated 
Assets                         
Current assets:                         
Cash and cash equivalents  $-   $24,181   $1,946   $(16,115)  $10,012 
Accounts receivable, net   -    490,724    15,437    225    506,386 
Inventories, net   -    556,463    24,426    -    580,889 
Prepaid expenses and other current assets   28,952    184,764    3,673    -    217,389 
Total current assets   28,952    1,256,132    45,482    (15,890)   1,314,676 
                          
Intercompany receivable, net   -    961,450    -    (961,450)   - 
Investments in consolidated subsidiaries   2,959,542    -    -    (2,959,542)   - 
Deferred income taxes, net   57,419    -    -    (57,419)   - 
Property and equipment, net   5,614    140,918    9,848    -    156,380 
Goodwill   -    1,198,805    29,254    -    1,228,059 
Intangibles, net   -    436,513    2,994    -    439,507 
Other assets, net   1,242    269    -    -    1,511 
                          
Total Assets  $3,052,769   $3,994,087   $87,578   $(3,994,301)  $3,140,133 
                          
Liabilities and Stockholders' Equity                         
Current liabilities:                         
Accounts payable  $27,209   $468,144   $6,865   $(15,890)  $486,328 
Accrued expenses   26,226    103,045    1,993    -    131,264 
Current portions of long-term debt   4,500    9,514    -    -    14,014 
Total current liabilities   57,935    580,703    8,858    (15,890)   631,606 
                          
Intercompany payable, net   923,565    -    37,885    (961,450)   - 
Borrowings under revolving lines of credit, net   -    269,124    -    -    269,124 
Long-term debt, net   722,101    -    -    -    722,101 
Deferred income taxes, net   -    194,556    358    (57,419)   137,495 
Long-term obligations under equipment financing and other, net   -    30,593    46    -    30,639 
Total liabilities   1,703,601    1,074,976    47,147    (1,034,759)   1,790,965 
                          
Total stockholders' equity   1,349,168    2,919,111    40,431    (2,959,542)   1,349,168 
                          
Total Liabilities and Stockholders' Equity  $3,052,769   $3,994,087   $87,578   $(3,994,301)  $3,140,133 

  

19 

 

 

BEACON ROOFING SUPPLY, INC.

Condensed Consolidating Balance Sheets

(Unaudited; In thousands)

 

   September 30, 2016 
   Parent   Guarantor
Subsidiaries
   Non-Guarantor
Subsidiaries
   Eliminations
and Other
   Consolidated 
Assets    
Current assets:                         
Cash and cash equivalents  $-   $37,447   $2,876   $(8,937)  $31,386 
Accounts receivable, net   -    593,395    34,710    (1,140)   626,965 
Inventories, net   -    460,516    20,220    -    480,736 
Prepaid expenses and other current assets   3,527    153,681    5,895    -    163,103 
Total current assets   3,527    1,245,039    63,701    (10,077)   1,302,190 
                          
Intercompany receivable, net   -    878,931    -    (878,931)   - 
Investments in consolidated subsidiaries   2,891,677    -    -    (2,891,677)   - 
Deferred income taxes, net   59,567    -    -    (59,567)   - 
Property and equipment, net   4,626    133,897    10,046    -    148,569 
Goodwill   -    1,167,905    29,660    -    1,197,565 
Intangibles, net   -    460,696    3,328    -    464,024 
Other assets, net   1,242    269    -    -    1,511 
                          
Total Assets  $2,960,639   $3,886,737   $106,735   $(3,840,252)  $3,113,859 
                          
Liabilities and Stockholders' Equity                         
Current liabilities:                         
Accounts payable  $26,630   $329,895   $14,467   $(10,077)  $360,915 
Accrued expenses   42,594    114,016    4,503    -    161,113 
Current portions of long-term obligations   4,500    10,311    -    -    14,811 
Total current liabilities   73,724    454,222    18,970    (10,077)   536,839 
                          
Intercompany payable, net   840,159    -    38,772    (878,931)   - 
Borrowings under revolving lines of credit, net   -    355,087    4,574    -    359,661 
Long-term debt, net   722,929    -    -    -    722,929 
Deferred income taxes, net   -    194,556    493    (59,567)   135,482 
Long-term obligations under equipment financing and other, net   -    35,074    47    -    35,121 
Total liabilities   1,636,812    1,038,939    62,856    (948,575)   1,790,032 
                          
Total stockholders' equity   1,323,827    2,847,798    43,879    (2,891,677)   1,323,827 
                          
Total Liabilities and Stockholders' Equity  $2,960,639   $3,886,737   $106,735   $(3,840,252)  $3,113,859 

  

20 

 

 

BEACON ROOFING SUPPLY, INC.

Condensed Consolidating Balance Sheets

(Unaudited; In thousands)

 

   March 31, 2016 
   Parent   Guarantor
Subsidiaries
   Non-Guarantor
Subsidiaries
   Eliminations
and Other
   Consolidated 
Assets    
Current assets:                         
Cash and cash equivalents  $-   $28,831   $4,689   $(18,679)  $14,841 
Accounts receivable, net   -    476,860    15,130    (1,140)   490,850 
Inventories, net   -    483,582    30,168    -    513,750 
Prepaid expenses and other current assets   16,474    145,102    3,049    -    164,625 
Total current assets   16,474    1,134,375    53,036    (19,819)   1,184,066 
                          
Intercompany receivable, net        802,015    -    (802,015)   - 
Investments in consolidated subsidiaries   2,716,780    -    -    (2,716,780)   - 
Deferred income taxes, net   17,403    -    -    (17,403)   - 
Property and equipment, net   3,740    135,511    8,743    -    147,994 
Goodwill   -    1,130,818    29,957    -    1,160,775 
Intangibles, net   -    468,881    3,701    -    472,582 
Other assets, net   1,233    197    -    -    1,430 
                          
Total Assets  $2,755,630   $3,671,797   $95,437   $(3,556,017)  $2,966,847 
                          
Liabilities and Stockholders' Equity                         
Current liabilities:                         
Accounts payable  $34,045   $392,032   $11,736   $(19,819)  $417,994 
Accrued expenses   10,390    137,378    4,924    -    152,692 
Current portions of long-term obligations   4,500    7,659    -    -    12,159 
Total current liabilities   48,935    537,069    16,660    (19,819)   582,845 
                          
Intercompany payable, net   764,168    -    37,847    (802,015)   - 
Borrowings under revolving lines of credit   -    295,690    -    -    295,690 
Long-term debt, net   722,542    -    -    -    722,542 
Deferred income taxes, net   -    119,855    426    (17,403)   102,878 
Long-term obligations under equipment financing and other, net   -    42,860    47    -    42,907 
Total liabilities   1,535,645    995,474    54,980    (839,237)   1,746,862 
                          
Total stockholders' equity   1,219,985    2,676,323    40,457    (2,716,780)   1,219,985 
                          
Total Liabilities and Stockholders' Equity  $2,755,630   $3,671,797   $95,437   $(3,556,017)  $2,966,847 

  

21 

 

 

BEACON ROOFING SUPPLY, INC.

Condensed Consolidating Statements of Operations

(Unaudited; In thousands, except share and per share amounts)

 

   Three Months Ended March 31, 2017 
       Guarantor   Non-Guarantor   Eliminations     
   Parent   Subsidiaries   Subsidiaries   and Other   Consolidated 
Net sales  $-   $849,226   $21,498   $-   $870,724 
Cost of products sold   -    649,595    16,652    -    666,247 
Gross profit   -    199,631    4,846    -    204,477 
Operating expense   7,010    193,448    7,075    -    207,533 
Intercompany charges (income)   (12,555)   11,993    562    -    - 
Income (loss) from operations   5,545    (5,810)   (2,791)   -    (3,056)
Interest expense, financing costs, and other   3,983    8,003    282    -    12,268 
Intercompany interest expense (income)   (5,089)   5,089    -    -    - 
Income (loss) before provision for income taxes   6,651    (18,902)   (3,073)   -    (15,324)
Provision for (benefit from) income taxes   2,444    (7,568)   (844)   -    (5,968)
Income (loss) before equity in net income of subsidiaries   4,207    (11,334)   (2,229)   -    (9,356)
Equity in net loss of subsidiaries   (13,563)   -    -    13,563    - 
Net loss  $(9,356)  $(11,334)  $(2,229)  $13,563   $(9,356)
                          
Weighted-average common stock outstanding:                         
Basic                       60,141,580 
Diluted                       60,141,580 
                          
Net income (loss) per share:                         
Basic                      $(0.16)
Diluted                      $(0.16)
                          
   Three Months Ended March 31, 2016 
       Guarantor   Non-Guarantor   Eliminations     
   Parent   Subsidiaries   Subsidiaries   and Other   Consolidated 
Net sales  $-   $803,781   $19,862   $(106)  $823,537 
Cost of products sold   -    612,646    15,233    (106)   627,773 
Gross profit   -    191,135    4,629    -    195,764 
Operating expenses   27,987    157,398    6,496    -    191,881 
Intercompany charges (income)   (17,593)   16,270    1,323    -    - 
Income (loss) from operations   (10,394)   17,467    (3,190)   -    3,883 
Interest expense, financing costs, and other   4,763    8,267    (4)   -    13,026 
Intercompany interest expense (income)   (4,795)   4,412    383    -    - 
Income (loss) before provision for income taxes   (10,362)   4,788    (3,569)   -    (9,143)
Provision for (benefit from) income taxes   (11,141)   8,663    (946)   -    (3,424)
Income (loss) before equity in net income of subsidiaries   779    (3,875)   (2,623)   -    (5,719)
Equity in net loss of subsidiaries   (6,498)   -    -    6,498    - 
Net loss  $(5,719)  $(3,875)  $(2,623)  $6,498   $(5,719)
                          
Weighted-average common stock outstanding:                         
Basic                       59,295,990 
Diluted                       59,295,990 
                          
Net income (loss) per share:                         
Basic                      $(0.10)
Diluted                      $(0.10)

  

22 

 

 

 BEACON ROOFING SUPPLY, INC.

Condensed Consolidating Statements of Operations

(Unaudited; In thousands, except share and per share amounts)

 

   Six Months Ended March 31, 2017 
       Guarantor   Non-Guarantor   Eliminations     
   Parent   Subsidiaries   Subsidiaries   and Other   Consolidated 
Net sales  $-   $1,809,461   $63,447   $-   $1,872,908 
Cost of products sold   -    1,368,129    49,235    -    1,417,364 
Gross profit   -    441,332    14,212    -    455,544 
Operating expense   15,656    380,521    15,466    -    411,643 
Intercompany charges (income)   (24,508)   23,392    1,116    -    - 
Income from operations   8,852    37,419    (2,370)   -    43,901 
Interest expense, financing costs, and other   19,337    5,458    1,047    -    25,842 
Intercompany interest expense (income)   (10,682)   10,682    -    -    - 
Income (loss) before provision for income taxes   197    21,279    (3,417)   -    18,059 
Provision for (benefit from) income taxes   (410)   8,334    (939)   -    6,985 
Income (loss) before equity in net income of subsidiaries   607    12,945    (2,478)   -    11,074 
Equity in net income of subsidiaries   10,467    -    -    (10,467)   - 
Net income (loss)  $11,074   $12,945   $(2,478)  $(10,467)  $11,074 
                          
Weighted-average common stock outstanding:                         
Basic                       60,041,332 
Diluted                       61,069,938 
                          
Net income per share:                         
Basic                      $0.18 
Diluted                      $0.18 
                          
   Six Months Ended March 31, 2016 
       Guarantor   Non-Guarantor   Eliminations     
   Parent   Subsidiaries   Subsidiaries   and Other   Consolidated 
Net sales  $-   $1,735,265   $64,999   $(247)  $1,800,017 
Cost of products sold   -    1,321,029    50,283    (247)   1,371,065 
Gross profit   -    414,236    14,716    -    428,952 
Operating expenses   59,159    324,412    14,654    -    398,225 
Intercompany charges (income)   (25,440)   23,456    1,984    -    - 
Income (loss) from operations   (33,719)   66,368    (1,922)   -    30,727 
Interest expense, financing costs, and other   14,637    14,505    140    -    29,282 
Intercompany interest expense (income)   (8,721)   7,949    772    -    - 
Income (loss) before provision for income taxes   (39,635)   43,914    (2,834)   -    1,445 
Provision for (benefit from) income taxes   (20,873)   21,670    (751)   -    46 
Income (loss) before equity in net income of subsidiaries   (18,762)   22,244    (2,083)   -    1,399 
Equity in net income of subsidiaries   20,161    -    -    (20,161)   - 
Net income (loss)  $1,399   $22,244   $(2,083)  $(20,161)  $1,399 
                          
Weighted-average common stock outstanding:                         
Basic                       59,133,569 
Diluted                       60,077,852 
                          
Net income per share:                         
Basic                      $0.02 
Diluted                      $0.02 

 

23 

 

 

BEACON ROOFING SUPPLY, INC.

Condensed Consolidating Statements of Comprehensive Income

(Unaudited; In thousands) 

 

   Three Months Ended March 31, 2017 
       Guarantor   Non-Guarantor   Eliminations     
   Parent   Subsidiaries   Subsidiaries   and Other   Consolidated 
Net loss  $(9,356)  $(11,334)  $(2,229)  $13,563   $(9,356)
Other comprehensive income:                         
Foreign currency translation adjustment   813    -    813    (813)   813 
Total other comprehensive income   813    -    813    (813)   813 
Comprehensive loss  $(8,543)  $(11,334)  $(1,416)  $12,750   $(8,543)

  

   Three Months Ended March 31, 2016 
       Guarantor   Non-Guarantor   Eliminations     
   Parent   Subsidiaries   Subsidiaries   and Other   Consolidated 
Net loss  $(5,719)  $(3,875)  $(2,623)  $6,498   $(5,719)
Other comprehensive income:                         
Foreign currency translation adjustment   4,226    -    4,226    (4,226)   4,226 
Total other comprehensive income    4,226    -    4,226    (4,226)   4,226 
Comprehensive income (loss)  $(1,493)  $(3,875)  $1,603   $2,272   $(1,493)

 

   Six Months Ended March 31, 2017 
       Guarantor   Non-Guarantor   Eliminations     
   Parent   Subsidiaries   Subsidiaries   and Other   Consolidated 
Net income (loss)  $11,074   $12,945   $(2,478)  $(10,467)  $11,074 
Other comprehensive income:                         
Foreign currency translation adjustment   (839)   -    (839)   839    (839)
Total other comprehensive loss    (839)   -    (839)   839    (839)
Comprehensive income (loss)  $10,235   $12,945   $(3,317)  $(9,628)  $10,235 

 

   Six Months Ended March 31, 2016 
       Guarantor   Non-Guarantor   Eliminations     
   Parent   Subsidiaries   Subsidiaries   and Other   Consolidated 
Net income (loss)  $1,399   $22,244   $(2,083)  $(20,161)  $1,399 
Other comprehensive income:                         
Foreign currency translation adjustment   1,757    -    1,757    (1,757)   1,757 
Total other comprehensive income   1,757    -    1,757    (1,757)   1,757 
Comprehensive income (loss)  $3,156   $22,244   $(326)  $(21,918)  $3,156 

  

24 

 

 

BEACON ROOFING SUPPLY, INC.

Condensed Consolidating Statements of Cash Flows

(Unaudited; In thousands)

 

   Six Months Ended March 31, 2017 
   Parent   Guarantor
Subsidiaries
   Non-Guarantor
Subsidiaries
   Eliminations
and Other
   Consolidated 
     
Net cash provided by (used in) operating activities  $(29,347)  $181,847   $5,121   $(7,178)  $150,443 
                          
Investing Activities                         
Purchases of property and equipment   (1,709)   (21,742)   (780)   -    (24,231)
Acquisition of businesses   (58,359)   -    -    -    (58,359)
Proceeds from the sale of assets   -    1,274    11    -    1,285 
Intercompany activity   83,397    -    -    (83,397)   - 
Net cash provided by (used in) investing activities   23,329    (20,468)   (769)   (83,397)   (81,305)
                          
Financing Activities                         
Borrowings under revolving lines of credit   -    852,583    4,516    -    857,099 
Repayments under revolving lines of credit   -    (939,438)   (9,032)   -    (948,470)
Repayments under term loan   (1,125)   -    -    -    (1,125)
Borrowings under equipment financing facilities and other   -    1,579    -    -    1,579 
Repayments under equipment financing facilities and other   -    (6,857)   -    -    (6,857)
Proceeds from issuance of common stock   7,840    -    -    -    7,840 
Taxes paid related to net share settelement of equity awards   (697)   -    -    -    (697)
Intercompany activity   -    (82,512)   (885)   83,397    -
Net cash provided by (used in) financing activities   6,018    (174,645)   (5,401)   83,397    (90,631)
                          
Effect of exchange rate changes on cash and cash equivalents   -    -    119    -    119 
                          
Net decrease in cash and cash equivalents   -    (13,266)   (930)   (7,178)   (21,374)
Cash and cash equivalents, beginning of period   -    37,447    2,876    (8,937)   31,386 
Cash and cash equivalents, end of period  $-   $24,181   $1,946   $(16,115)  $10,012 

 

   Six Months Ended March 31, 2016 
   Parent   Guarantor
Subsidiaries
   Non-Guarantor
Subsidiaries
   Eliminations
and Other
   Consolidated 
     
Net cash provided by (used in) operating activities  $(41,213)  $127,076   $9,262   $(14,473)  $80,652 
                          
Investing Activities                         
Purchases of property and equipment   (1,507)   (9,093)   (459)   -    (11,059)
Acquisition of businesses   (941,156)   -    -    -    (941,156)
Proceeds from the sale of assets   -    377    -    -    377 
Intercompany activity   423,620    -    -    (423,620)   - 
Net cash used in investing activities   (519,043)   (8,716)   (459)   (423,620)   (951,838)
                          
Financing Activities                         
Borrowings under revolving lines of credit   -    1,017,128    -    -    1,017,128 
Repayments under revolving lines of credit   -    (713,407)   (11,448)   -    (724,855)
Borrowings under term loan   450,000    -    -    -    450,000 
Repayments under term loan   (187,875)   -    -    -    (187,875)
Borrowings under Senior Notes   300,000    -    -    -    300,000 
Repayments under equipment financing facilities and other   -    (2,633)   -    -    (2,633)
Payment of deferred financing costs   (18,890)   (8,923)   -    -    (27,813)
Proceeds from issuance of common stock   15,391    -    -    -    15,391 
Excess tax benefit from stock-based compensation   1,630    -    -    -    1,630 
Intercompany activity   -    (424,510)   890    423,620    - 
Net cash provided by (used in) financing activities   560,256    (132,345)   (10,558)   423,620    840,973 
                          
Effect of exchange rate changes on cash and cash equivalents   -    -    (607)   -    (607)
                          
Net decrease in cash and cash equivalents   -    (13,985)   (2,362)   (14,473)   (30,820)
Cash and cash equivalents, beginning of period   -    42,816    7,051    (4,206)   45,661 
Cash and cash equivalents, end of period  $-   $28,831   $4,689   $(18,679)  $14,841 

 

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13. Subsequent Events

 

On May 1, 2017, the Company purchased certain assets of Lowry’s Inc., a distributor of waterproofing and concrete restoration materials with 11 branches operating in California, Arizona, Utah and Hawaii and annual sales of approximately $76 million.

 

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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

 

The following discussion and analysis should be read in conjunction with Management’s Discussion and Analysis included in our 2016 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 “2017” refer to the three and six month periods ended March 31, 2017 being discussed and references to “2016” refer to the three and six month periods ended March 31, 2016 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 residential and non-residential roofing materials in the United States and Canada. We also distribute complementary building products, including siding, windows, specialty exterior building products, insulation, and waterproofing systems for residential and non-residential building exteriors. We are among the oldest and most established distributors in the industry. 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, general contractors, retailers, and building materials suppliers.

 

As of March 31, 2017, we operated 375 branches in 47 states throughout the United States and 6 provinces in Canada. We stock one of the most extensive assortments of high quality branded products in the industry, with over 46,000 SKUs available across our branch network, enabling us to deliver products to serve nearly 67,000 customers on a timely basis. For 2016, approximately 97% of our net sales came from customers located in the United States.

 

Effective execution of both the sales and operating plans enables us to grow beyond the relative strength of the residential and non-residential roofing markets we serve. Our business model is a bottom-up approach, where each of our branches uses its regional knowledge and experience to assist with the development of a marketing plan and stocking a 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 operational model combined with significant branch level autonomy differentiates us from the competition. We provide our customers with value-added services, including, but 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 exterior 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 driving service excellence, productivity and efficiencies.

 

We seek opportunities to expand our business operations through both acquisitions and organic growth (by opening branches, growing sales with existing customers, adding new customers and introducing new products). Our main acquisition strategy is to target market leaders who do business in geographic areas that we currently do not service or that complement our existing regional operations. The following highlights our recent success in delivering on our growth strategy: 

 

·Acquisition Growth - 2017:

 

-On December 16, 2016, the Company purchased certain assets of BJ Supply Company, a distributor of roofing and related building products with 1 branch serving Pennsylvania and New Jersey and annual sales of $4 million.

 

-On January 3, 2017, the Company acquired American Building & Roofing, Inc., a distributor of mainly residential roofing and related building products with 7 branches around Washington State and annual sales of $36 million.

 

-On January 9, 2017, the Company acquired Eco Insulation Supply, a distributor of insulation and related accessories with 1 branch serving Connecticut, Southern New England and the New York City metropolitan area and annual sales of $8 million.

 

-On March 1, 2017, the Company acquired Acme Building Materials, Inc., a distributor of residential roofing and related building products with 3 branches in Eastern Michigan and annual sales of $13 million.

  

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·Acquisition Growth - 2016:

          

  - On October 1, 2015, we completed our acquisition of Roofing Supply Group ("RSG"), a leading roofing products distributor, in a cash and stock transaction valued at approximately $1.17 billion. Completion of the RSG acquisition strengthened our position as the largest publicly traded roofing materials and related products distributor in the U.S., with approximately $3.71 billion in combined pro forma net sales at the time of the acquisition. The RSG Acquisition has provided us the opportunity to create a stronger roofing distribution company built upon the foundation of two strong, growing distribution platforms with an extensive national footprint and continued growth potential. On the date of the acquisition, RSG operated 85 branches across 25 states, with 300 to 2,200 SKUs per branch. This acquisition has allowed us to expand our product offerings and increase our cross selling opportunities while maintaining our standards for exceptional customer service and roofing expertise.

 

  - We finalized seven additional strategic acquisitions in fiscal year 2016, acquiring 42 branches that significantly enhanced our geographic footprint, particularly in the Southern, Western, and Pacific Northwest regions of the United States:

 

  o

On December 1, 2015, we purchased certain assets of RCI Roofing Supply, a distributor of residential and commercial roofing and related products with 5 branches operating in Nebraska, Iowa and Colorado and annual sales of approximately $23 million.

 

  o

On December 18, 2015, we acquired 100% of the equity interests of Roofing and Insulation Supply, a distributor primarily of residential and commercial insulation along with roofing and related products with 20 branches spanning 13 states operating across New England, the Mid-Atlantic, the Southeast, the Upper Midwest, Texas and Colorado and annual sales of approximately $70 million.

 

  o

On December 29, 2015, we purchased certain assets of Statewide Wholesale, a distributor of residential and commercial roofing and related products with 1 branch located in Denver, Colorado and annual sales of approximately $15 million.

 

  o

On April 1, 2016, we purchased certain assets of Atlantic Building Products, a distributor of decking, windows, siding, and related products with 2 branches operating in eastern Pennsylvania and annual sales of approximately $5 million.

 

  o

On April 1, 2016, we purchased certain assets of Lyf-Tym Building Products, a distributor of siding, windows, gutters, vinyl railings, and related products with 6 branches operating in North Carolina and Virginia and annual sales of approximately $20 million.

 

  o

On May 2, 2016, we purchased certain assets of Fox Brothers Company, a distributor of roofing, siding, windows, doors, and related products with 4 branches operating in Michigan and annual sales of approximately $35 million.

 

  o

On June 1, 2016, we acquired 100% of the equity interests of Woodfeathers, Inc., a distributor of primarily residential roofing and related products with 4 branches operating in Oregon and Washington and annual sales of approximately $30 million. 

 

Results of Operations

 

Comparison of the Three Months Ended March 31, 2017 and 2016

 

The following tables set forth selected consolidated statement of operations data and such data as a percentage of total revenue for each of the periods indicated:

 

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   Three Months Ended March 31, 
   2017   2016 
   (In thousands) 
Net sales  $870,724   $823,537 
Cost of products sold   666,247    627,773 
Gross profit   204,477    195,764 
Operating expense   207,533    191,881 
Income (loss) from operations   (3,056)   3,883 
Interest expense, financing costs, and other   12,268    13,026 
Loss before provision for income taxes   (15,324)   (9,143)
Benefit from income taxes   (5,968)   (3,424)
Net loss   (9,356)   (5,719)

  

   Three Months Ended March 31, 
   2017   2016 
   % of Net Sales 
Net sales   100.0%   100.0%
Cost of products sold   76.5%   76.2%
Gross profit   23.5%   23.8%
Operating expense   23.8%   23.3%
Income (loss) from operations   -0.3%   0.5%
Interest expense, financing costs, and other   1.4%   1.6%
Loss before provision for income taxes   -1.7%   -1.1%
Benefit from income taxes   -0.6%   -0.4%
Net loss   -1.1%   -0.7%

  

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. When we refer to regions, we are referring to our geographic regions.

 

As of March 31, 2017, we had a total of 375 branches in operation. Our existing market calculations include 344 branches and exclude 31 branches because they were acquired after the start of the second quarter of fiscal year 2016. 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).

 

The following table presents a summary of our results of operations for the periods presented, broken down by existing markets and acquired markets:

 

   Existing Markets   Acquired Markets   Consolidated 
   Three Months Ended March 31, 
   2017   2016   2017   2016   2017   2016 
           (Dollars in thousands)         
Net sales  $843,368   $823,537   $27,356   $-   $870,724   $823,537 
                               
Gross profit  $196,410   $195,764   $8,067   $-   $204,477   $195,764 
Gross margin   23.3%   23.8%   29.5%   N/A    23.5%   23.8%
                               
Operating expense (1)  $198,868   $191,881   $8,665   $-   $207,533   $191,881 
Operating expense as a % of net sales   23.6%   23.3%   31.7%   N/A    23.8%   23.3%
                               
Operating income (loss)  $(2,458)  $3,883   $(598)  $-   $(3,056)  $3,883 
Operating margin   -0.3%   0.5%   -2.2%   N/A    -0.4%   0.5%

 

 

1 During 2017 and 2016, we recorded amortization expense related to intangible assets recorded under purchase accounting of $20.3 million ($1.0 million from acquired markets) and $17.1 million (none from acquired markets), respectively. In addition, existing market operating expense for 2017 and 2016 included non-recurring charges of $9.5 million ($5.8 million, net of taxes) and $11.2 million ($6.7 million, net of taxes), respectively, for the recognition of certain costs related to major acquisitions completed in fiscal years 2016 and 2017 (none from acquired markets for both years).

 

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Net Sales

 

Consolidated net sales increased $47.2 million, or 5.7%, to $870.7 in 2017 from $823.5 million in 2016. Existing market sales increased $19.8 million, or 2.4% over the same comparative period. We believe the increase in our 2017 existing market sales was influenced primarily by the following factors:

 

·increased demand in our residential and complementary product groups; and
  
·favorable weather conditions in most regions and continued re-roof demand from 2016 storms;

 

partially offset by:

 

·lower average selling prices;

 

·lower commercial product demand; and

 

·unfavorable weather conditions in California, negatively impacting overall demand in the West region

 

Net sales within our acquired markets were $27.3 million in 2017, an increase from 2016 due to the sales impact from recent acquisitions.

 

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). Average overall selling prices in existing markets declined approximately 1% in 2017 compared to 2016, driven primarily by decreases in residential and non-residential selling prices which were both down approximately 1% year-over-year. The average selling prices of complementary products increased slightly year-over-year. During the same period, net product costs decreased less than 1% year-over-year.

 

Existing markets net sales by geographical region increased (decreased) from 2016 to 2017 as follows: Northeast (6.0)%; Mid-Atlantic 3.6%; Southeast 7.9%; Southwest 4.9%; Midwest 9.7%; West (18.8)%; and Canada 8.2%. These variations were primarily caused by short-term factors such as local market conditions, weather conditions and storm activity.

 

Product group sales for our existing markets were as follows:

 

   Three Months Ended March 31,         
   2017   2016   Change 
   Net Sales   %   Net Sales   %   $   % 
   (Dollars in thousands)         
Residential roofing products   473,126    56.1%  $432,774    52.6%  $40,352    9.3%
Non-residential roofing products   243,482    28.9%   269,270    32.7%   (25,788)   -9.6%
Complementary building products   126,760    15.0%   121,493    14.7%   5,267    4.3%
Total existing market sales   843,368    100.0%  $823,537    100.0%  $19,831    2.4%

 

For 2017, our acquired markets recognized sales of $10.8 million, $0.5 million and $16.1 million in residential roofing products, non-residential roofing products and complementary building products, respectively. The combination of our 2017 existing market sales of $843.4 million plus the sales from acquired markets of $27.3 million equals our total 2017 sales of $870.7 million. We believe the existing market information is useful to investors because it helps explain organic growth or decline.

 

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Gross Profit

 

Gross profit and gross margin for our consolidated and existing markets were as follows:

 

   Three Months Ended         
   March 31,   Change1 
   2017   2016   $   % 
   (Dollars in thousands) 
Gross profit - consolidated  $204,477   $195,764   $8,713    4.5%
Gross profit - existing markets   196,410    195,764    646    0.3%
                     
Gross margin - consolidated   23.5%   23.8%   N/A    -0.3%
Gross margin - existing markets   23.3%   23.8%   N/A    -0.5%

  

 

1Percentage changes for dollar amounts represents the ratable increase or decrease from period-to-period. Percentage changes for percentages represent the net period-to-period change in basis points

 

Our existing market gross profit increased $0.6 million, or 0.3%, to $196.4 million in 2017, and gross profit within our acquired markets was $8.1 million for the same period. Our overall gross margins decreased to 23.5% in 2017, mainly due to decrease in residential shingle pricing. Gross margins within our existing markets for 2017 decreased to 23.3%.

 

Direct sales (products shipped by our vendors directly to our customers), which typically have substantially lower gross margins (and operating expense) compared to our warehouse sales, represented 17.8% and 18.0% of our net sales in 2017 and 2016, respectively. We believe variations in direct sales activity to be primarily caused by short-term factors such as local market conditions, weather conditions and storm activity. None of these variations were driven by material regional impacts from changes in the direct sales mix of our geographical regions.

 

Operating Expense

 

Operating expense for consolidated and existing markets was as follows:

 

   Three Months Ended         
   March 31,   Change1 
   2017   2016   $   % 
   (Dollars in thousands) 
Operating expense - consolidated  $207,533   $191,881   $15,652    8.2%
Operating expense - existing markets   198,868    191,881    6,987    3.6%
                     
Operating expense as a % of net sales - consolidated   23.8%   23.3%   N/A    0.5%
Operating expense as a % of net sales - existing markets   23.6%   23.3%   N/A    0.3%

 

 

1Percentage changes for dollar amounts represents 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 in our existing markets increased by $7.0 million, or 3.6% in 2017, to $198.9 million, as compared to $191.9 million in 2016, while operating expense within our acquired markets was $9.0 million in 2017. The following factors were the leading causes of the increase in operating expense in our existing markets:

 

  · an increase in depreciation and amortization expense of $3.4 million due to the incremental amortization of intangibles related to the RSG acquisition;

 

  ·

an increase in selling expense of $1.8 million due to higher sales volume and related employee costs; and

 

  · an increase in bad debt expense of $1.3 million due to the aging of accounts determined to be uncollectible.

   

During 2017 and 2016, we recorded amortization expense related to the intangible assets recorded under purchase accounting within our existing markets of $19.3 million and $17.1 million, respectively. Our existing markets operating expense as a percentage of the related net sales in 2017 was 23.6%, compared to 23.3% in 2016.

 

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Interest Expense, Financing Costs and Other

 

Interest expense, financing costs and other expense was $12.3 million in 2017, as compared to $13.0 million in 2016. The primary driver of the slight decrease is a the lower interest rate from the September 2016 refinancing of our Term Loan and the decrease in outstanding debt as a result of recent principal payments.

   

Income Taxes

 

There was an income tax benefit of $6.0 million in 2017, as compared to $3.4 million benefit in 2016. The tax benefit increase was primarily due to the $6.2 million difference in pre-tax net loss for the comparative periods. The effective tax rate before discrete items was relatively flat for the comparative periods. We expect our fiscal year 2017 effective annual income tax rate to average approximately 39.0%, excluding any discrete items. 

 

Comparison of the Six Months Ended March 31, 2017 and 2016

 

The following tables set forth selected consolidated statement of operations data and such data as a percentage of total revenue for each of the periods indicated:

 

   Six Months Ended March 31, 
   2017   2016 
   (In thousands) 
Net sales  $1,872,908   $1,800,017 
Cost of products sold   1,417,364    1,371,065 
Gross profit   455,544    428,952 
Operating expense   411,643    398,225 
Income from operations   43,901    30,727 
Interest expense, financing costs, and other   25,842    29,282 
Income before provision for income taxes   18,059    1,445 
Provision for income taxes   6,985    46 
Net income   11,074    1,399 

 

   Six Months Ended March 31, 
   2017   2016 
   % of Net Sales 
Net sales   100.0%   100.0%
Cost of products sold   75.7%   76.2%
Gross profit   24.3%   23.8%
Operating expense   22.0%   22.1%
Income from operations   2.3%   1.7%
Interest expense, financing costs, and other   1.4%   1.6%
Income before provision for income taxes   0.9%   0.1%
Provision for income taxes   0.3%   0.0%
Net income   0.6%   0.1%

 

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. When we refer to regions, we are referring to our geographic regions.

 

As of March 31, 2017, we had a total of 375 branches in operation. Our existing market calculations include 321 branches and exclude 54 branches because they were acquired after the start of fiscal year 2016. 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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The following table presents a summary of our results of operations for the periods presented, broken down by existing markets and acquired markets:

 

   Existing Markets   Acquired Markets   Consolidated 
   Six Months Ended March 31, 
   2017   2016   2017   2016   2017   2016 
   (Dollars in thousands) 
Net sales  $1,776,621   $1,775,700   $96,287   $24,317   $1,872,908   $1,800,017 
                               
Gross profit  $427,660   $422,310   $27,884   $6,642   $455,544   $428,952 
Gross margin   24.1%   23.8%   29.0%   27.3%   24.3%   23.8%
                               
Operating expense (1)  $383,578   $390,259   $28,065   $7,966   $411,643   $398,225 
Operating expense as a % of net sales   21.6%   22.0%   29.1%   32.8%   22.0%   22.1%
                               
Operating income (loss)  $44,081   $32,051   $(180)  $(1,324)  $43,901   $30,727 
Operating margin   2.5%   1.8%   -0.2%   -5.4%   2.3%   1.7%

  

 

 1 During 2017 and 2016, we recorded amortization expense related to intangible assets recorded under purchase accounting of $40.4 million ($4.8 million from acquired markets) and $32.3 million ($1.3 million from acquired markets), respectively. In addition, existing market operating expense for 2017 and 2016 included non-recurring charges o