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EX-32.2 - EX-32.2 - BEACON ROOFING SUPPLY INCbecn-ex322_6.htm
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EX-31.2 - EX-31.2 - BEACON ROOFING SUPPLY INCbecn-ex312_8.htm
EX-31.1 - EX-31.1 - BEACON ROOFING SUPPLY INCbecn-ex311_11.htm
EX-23.1 - EX-23.1 - BEACON ROOFING SUPPLY INCbecn-ex231_10.htm
EX-21 - EX-21 - BEACON ROOFING SUPPLY INCbecn-ex21_9.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

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

For the Fiscal Year Ended September 30, 2018

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

 

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

 

Securities registered pursuant to section 12(b) of the Act:

 

Title of each class

 

Name of each exchange on which registered

 

 

 

Common Stock, $0.01 par value

 

NASDAQ Global Select Market

 

Securities registered pursuant to section 12(g) of the Act: None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.      Yes   No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes   No

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    No   

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes   No  

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.   

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. (Check one):

 

 

Large accelerated filer

Accelerated filer

Emerging growth company

 

 

Non-accelerated filer

Smaller reporting 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

The aggregate market value of the voting common equity held by non-affiliates of the registrant, computed by reference to the closing price at which the common stock was sold as of the end of the second quarter ended March 31, 2018, was $3.60 billion.

The number of shares of common stock outstanding as of October 31, 2018 was 68,156,582.

DOCUMENTS INCORPORATED BY REFERENCE

The information required by Part III (Items 10, 11, 12, 13 and 14) will be incorporated by reference from the Registrant’s definitive proxy statement, which will be filed pursuant to Regulation 14A with the United States Securities and Exchange Commission (“SEC”) within 120 days after the end of the fiscal year to which this report relates.  


BEACON ROOFING SUPPLY, INC.

Index to Annual Report on Form 10-K

Year Ended September 30, 2018

 

 

 

 

Page

PART I

 

4

 

 

 

Item 1.

Business

4

Item 1A.

Risk Factors

13

Item 1B.

Unresolved Staff Comments

19

Item 2.

Properties

19

Item 3.

Legal Proceedings

21

Item 4.

Mine Safety Disclosures

21

 

 

 

PART II

 

22

 

 

 

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

22

Item 6.

Selected Financial Data

24

Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

27

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

45

Item 8.

Financial Statements and Supplementary Data

46

Item 9.

Changes In and Disagreements with Accountants on Accounting and Financial Disclosure

50

Item 9A.

Controls and Procedures

50

Item 9B.

Other Information

54

 

 

 

PART III

 

55

 

 

 

PART IV

 

55

 

 

 

Item 15.

Exhibits and Financial Statement Schedules

55

Item 16.      

10-K Summary

58

 

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FORWARD-LOOKING STATEMENTS

The matters discussed in this Form 10-K that are forward-looking statements are based on current management expectations that involve substantial risks and uncertainties, which could cause actual results to differ materially from the results expressed in, or implied by, these forward-looking statements. These statements can be identified by the fact that they do not relate strictly to historical or current facts. They use words such as “aim,” “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “project,” “should,” “will be,” “will continue,” “will likely result,” “would” and other words and terms of similar meaning in conjunction with a discussion of future operating or financial performance. You should read statements that contain these words carefully, because they discuss our future expectations, contain projections of our future results of operations or of our financial position or state other “forward-looking” information.

We believe that it is important to communicate our future expectations to our investors. However, there are events in the future that we are not able to accurately predict or control. The factors listed under Item 1A, Risk Factors, as well as any cautionary language in this Form 10-K, provide examples of risks, uncertainties and events that may cause our actual results to differ materially from the expectations we describe in our forward-looking statements. Although we believe that our expectations are based on reasonable assumptions, actual results may differ materially from those in the forward looking statements as a result of various factors, including, but not limited to, those described under Item 1A, Risk Factors and elsewhere in this Form 10-K.

Forward-looking statements speak only as of the date of this Form 10-K. Except as required under federal securities laws and the rules and regulations of the SEC, we do not have any intention, and do not undertake, to update any forward-looking statements to reflect events or circumstances arising after the date of this Form 10-K, whether as a result of new information, future events or otherwise. As a result of these risks and uncertainties, readers are cautioned not to place undue reliance on the forward-looking statements included in this Form 10-K or that may be made elsewhere from time to time by or on behalf of us. All forward-looking statements attributable to us are expressly qualified by these cautionary statements.

 

 

 

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PART I

ITEM 1.    BUSINESS

Unless the context suggests otherwise, the terms “Beacon,” the “Company,” “we,” “our” or “us” are referring to Beacon Roofing Supply, Inc.

Overview

Beacon is 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, insulation, waterproofing systems, wallboard, acoustical ceiling tiles, and other specialty exterior and interior building products. 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, home builders, retailers, and building materials suppliers.

As of September 30, 2018, we operated 549 branches throughout all 50 states in the U.S. and 6 provinces in Canada. We stock one of the most extensive assortments of high quality branded products in the industry, with over 90,000 SKUs available across our branch network, enabling us to deliver products to serve over 100,000 customers on a timely basis.

On January 2, 2018, we finalized the acquisition of Allied Building Products Corp. (“Allied”), a New Jersey Corporation, for approximately $2.625 billion, subject to working capital and other adjustments. As of September 30, 2018, the adjusted purchase price for Allied was $2.88 billion, and purchase accounting entries had not yet been finalized. Headquartered in East Rutherford, New Jersey, Allied was one of the country’s largest exterior and interior building products distributors, distributing products across 208 locations in 31 states in the U.S. with a strong presence in New York, New Jersey, Florida, California, Hawaii and the upper Midwest at the time of the acquisition. We believe the acquisition of Allied was a strategically and financially compelling transaction that expanded our geographic footprint, enhanced our scale and market presence, diversified our product offerings, and positioned us to provide new growth opportunities that will increase our long-term profitability.

For the fiscal year ended September 30, 2018 (“fiscal year 2018” or “2018”), residential roofing products comprised 43.6% of our sales, non-residential roofing products accounted for 25.5% of our sales, and complementary products provided the remaining 30.9% of our sales. Approximately 97% of our net sales were to customers located in the United States.

We provide our customers with a comprehensive array of value-added benefits. These services and tools are focused on supporting the entire business lifecycle, with a particular focus on enhancing our customers’ ability to meet and exceed the needs of their clientele (see “Our Products and Services” for a full listing). We believe the additional services we provide distinguish us from our competition and promote high levels of customer retention, as the vast majority of orders require at least some of these services. Our ability to provide value-add services efficiently and reliably can save our customers time and money while also enabling us to achieve attractive gross profit margins on our product sales. We have earned a reputation for providing a high level of product availability and high-quality customer service thanks to our experienced employees who provide timely, accurate and safe delivery of our products.

Our customer base includes a diverse population of residential and non-residential building contractors from the markets in which we operate. These local, regional, and national contractors work on new construction projects as well as the repair or remodeling of residential and commercial properties, particularly in the areas of roofing/re-roofing. We utilize a branch-based operating model that allows branches to maintain local customer relationships and benefit from our centralized infrastructure. This operating model allows us to benefit from the resources and scale efficiencies of being a national distributor while still providing customers with specialized products and personalized local services tailored to their specific geographic region.

Since our initial public offering (“IPO”) in 2004, we have achieved growth through a combination of completing 46 strategic and complementary acquisitions, opening 82 new branch locations and broadening the scope of our product offerings. In fiscal year 2018 alone, we acquired 215 branches and opened 3 new branches. We have grown from net sales of $652.9 million in fiscal year 2004 to net sales of $6.42 billion in fiscal year 2018, representing

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a compound annual growth rate (“CAGR”) of 17.7%. Over the same period, income from operations has increased from $34.7 million to $204.6 million, representing a CAGR of 13.5%. Our organic growth, which includes growth from existing and newly opened branches (“greenfields”) but excludes growth from acquired branches, has averaged a CAGR of 4.8% per annum since 2004. Acquired branches are excluded from organic growth measures until they have been under our ownership for at least four full fiscal quarters at the start of the reporting period. We believe that our proven business model can continue to deliver industry-leading growth and operating profit margins.

Our Industry

Market Size

Based on management’s estimates, we believe the roofing distribution market in the United States and Canada represents approximately $26 billion in revenue with roughly 60% of the market in residential roofing and 40% in commercial. We also participate in other exterior and interior building products categories, including siding, wallboard, acoustical ceiling tile, waterproofing, windows and insulation. Collectively, we believe these other building products have a larger addressable market opportunity than our primary roofing distribution business.

Demand Drivers

We believe the majority of roofing demand is driven by re-roofing activity (estimated at 80-90%), with the remaining balance being tied to new construction. Re-roofing projects are considered to be necessary maintenance and repair expenditures, and are therefore less likely to be postponed during periods of recession or slower economic growth. As a result, demand for roofing products historically has been less volatile than overall demand for construction products.

Our complementary building products demand shows exposure to both the residential and commercial sectors. These products possess greater exposure to new residential/commercial construction than within roofing, but they also have less seasonality, and lower exposure to weather conditions and severe storm volatility.

Regional variations in economic activity influence the level of demand for roofing products across the United States. Of particular importance are regional differences in the level of new home construction and renovation. Demographic trends, including population growth and migration, contribute to the regional variations through their influence on regional housing starts and existing home sales.

In addition to our domestic operations, we also operate in 6 provinces across Canada. These international locations represented approximately 3% of our total net sales for the fiscal year ended September 30, 2018. We expect overall demand for operations in Canada to grow at rate similar to our United States operations. For further geographic information, see Note 13 in the Notes to the Consolidated Financial Statements.

Distribution Channels

Wholesale distribution is the primary distribution channel for both residential and commercial roofing products. Wholesale roofing product distributors serve the important role of facilitating the purchasing relationships between roofing materials manufacturers and thousands of contractors. Wholesale distributors can maintain localized inventories, extend trade credit, give product advice and provide delivery and logistics services.

Given significant consolidation the past decade, Beacon and two other distributors now represent over 50% of the industry. The industry is characterized by these “national” distributors, a large number of local and regional roofing supply participants, as well as home improvement retailers and lumberyards. Our competition primarily involves the local, regional and national specialty roofing distributors.

Our complementary products are distributed from traditional exteriors locations or branches designed to address a specific product and customer subset (i.e. interiors). The competitive landscape within interiors shares similar fragmentation characteristics to roofing, as four large participants, including Beacon, hold more than a 50% combined position in the market. The other product categories are typically more fragmented and have more meaningful involvement from manufacturer direct sales, home improvement and specialty retailers and lumber yards.  

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Our Strengths

We believe the sales and earnings growth we have achieved over time has been, and will continue to be, driven by our primary competitive strengths, which include the following:

 

Leading distribution platform with a national scope.  We are the largest publicly traded distributor of residential and non-residential roofing materials in the United States and Canada. We also distribute a broad and growing range of complementary building products. We maintain leading positions in key metropolitan markets across all the regions that we serve and utilize a branch-based operating model whereby branches cultivate and maintain local customer relationships while benefiting from the scale efficiencies of centralized corporate functions.

 

Strategic geographic presence and regional specialization. Our geographic footprint is designed to provide advantages in the regional markets we serve. We provide our customers with specialized products and personalized local services tailored to their specific geographic region with the resources and scale efficiencies of a national distributor.

 

Diversified and stable business model. Our business has been protected in times of economic downturn because of the non-discretionary nature of the demand for our products as well as the diversity of both our product offerings and our customer base. For the fiscal year ended September 30, 2018, no single customer accounted for more than 1% of our net sales. We have a long history of organic sales growth and healthy gross margins through a variety of economic cycles. Since our 2004 IPO, our total and existing market net sales have increased by a CAGR of 17.7% and 4.8%, respectively, and our total and existing market gross margins have averaged approximately 24.0% and 23.9%, respectively.

 

Strong cash flow generation. We have increased net sales in twelve of the fourteen fiscal years since our IPO, including increases in each of the last eight consecutively. Our track record of growth, combined with limited capital expenditure requirements, has resulted in strong free cash flow generation that has allowed us to manage our debt leverage effectively.

 

Superior customer service and product delivery to our loyal and growing customer base. A significant number of our customers have relied on us as their vendor of choice for decades, and we believe that these strong customer relationships cannot be easily replicated. We believe that the services provided by our employees improve our customers’ efficiency and profitability, which, in turn, strengthens our customer relationships. We consider customer relations and our employees’ knowledge of roofing and building materials as being vital to our ability to increase customer loyalty and maintain customer satisfaction. We invest significant resources in professional development, management skills, product knowledge and operational proficiency. The in-depth knowledge of both the materials we sell and their respective applications allows our sales team to provide guidance to our customers throughout the project lifecycle.

 

Industry-leading management team with a successful track record of growth and integration.  We believe that our key employees, including executive officers, regional presidents, and branch managers , are among the most experienced members of the roofing and building materials industry and have a track record of achieving growth and delivering profitability. Since our 2004 IPO, the Beacon management team has successfully completed and integrated 46 acquisitions and opened 82 new greenfield locations. We generally have improved the financial and operating performance of our acquired businesses and helped them to grow their operations following integration onto our platform.

 

 

Well-designed technological infrastructure that continues to evolve.  We have made a significant investment in our information systems and technological resources. Nearly our entire branch network operates on the same management information systems, providing us with a consistent platform to deliver excellent customer service and achieve operating efficiencies in purchasing, pricing and inventory management. Our unified platform has promoted the seamless integration of all our acquired businesses, and allows us to pursue additional growth opportunities without concerns of significant additional investment.

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Our Growth Strategy

Our objective is to be the preferred supplier of roofing and other complementary building product materials across markets in the United States and Canada while continuing to increase net sales, maximize profitability and maintain a strong balance sheet. We plan to attain these goals by executing the following initiatives:

 

Selectively pursue opportunities for organic growth and strategic acquisitions. We believe that there will be meaningful opportunities to further expand or intensify our geographic focus in contiguous or existing regions. Our disciplined approach to opening new branches focuses on locations that are: (1) within existing markets; (2) where existing customers have expanded into new markets; or (3) in areas that have limited or no acquisition candidates and are a good fit with our business model and culture. We believe we can continue to expand and improve our distribution platform by strategically acquiring additional building product distributors in locations that are new or complement our existing operations in an area.

 

Expand product offerings and increase cross-selling activities. Due to the unique characteristics of each geographic region, our local customers typically require market-specific product offerings. We believe we have one of the most extensive offerings of high-quality branded products in the industry, with over 90,000 SKUs available across our branch network, and we feel that there are opportunities for our branches to expand their current product rosters. This will create additional opportunities for our branches to cross-sell more products throughout our existing network. In particular, we seek to expand non-residential roofing sales into markets where we currently sell mostly residential roofing. In addition, we work closely with customers and suppliers to identify new products and services, and continue to expand our product offering to include complementary building materials such as windows, siding, doors, waterproofing systems, insulation and metal fabrication.

 

Continue to provide exceptional customer service and expertise. We provide a comprehensive array of high-quality products and offer value-added services. In fiscal year 2018, we were able to support our customers by fulfilling approximately 93.8% of warehouse orders through our in-stock inventory as a result of the breadth and depth of the inventory maintained at our local branches. We believe that our focus on providing both value-added services and accurate and rapid order fulfillment enables us to attract and retain customers.

Our Products and Services

Products

The ability to provide a broad range of products is essential to success in roofing materials distribution. We carry one of the most extensive arrays of high-quality branded products in the industry, enabling us to deliver a wide variety of products to our customers on a timely basis. We are able to fulfill the vast majority of our warehouse orders with inventory on hand because of the breadth and depth of the inventories at our branches.

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Our product portfolio includes residential and non-residential roofing products as well as complementary building products, including:

 

Product Portfolio

Residential

 

Non-Residential

 

Complementary

Roofing Products

 

Roofing Products

 

Building Products

Asphalt shingles

 

Single-ply roofing

 

Vinyl siding

Synthetic slate and tile

 

Asphalt

 

Fiber cement siding

Clay tile

 

Metal

 

Drywall

Concrete tile

 

Modified bitumen

 

Insulation

Slate

 

Build-up roofing

 

Acoustic tile

Nail base insulation

 

Cements and coatings

 

Stone veneer

Metal roofing

 

Insulation (flat stock/tapered)

 

Windows

Felts

 

Commercial fasteners

 

Doors

Synthetic underlayment

 

Metal edges and flashings

 

Skylights

Wood shingles and shakes

 

Smoke/roof hatches

 

Waterproofing

Nails and fasteners

 

Sheet metal (copper/aluminum/steel)

 

Gutters and downspouts

Metal edgings and flashings

 

Roofing tools

 

Decking and railing

Prefabricated flashings

 

PVC membrane

 

Air barrier

Ridge and soffit vents

 

TPO membrane

 

Concrete restoration systems 

Solar systems 

 

EPDM membrane

 

 

 

Our product lines are designed to meet the requirements of our customers, comprised mainly of contractors that are engaged in new construction or renovation projects. The products that we distribute are supplied by the industry’s leading manufacturers of high-quality roofing materials, siding, insulation, drywall, acoustic tiles, waterproofing, windows, doors, decking and related products (See “Purchasing and Suppliers”).

 

In the residential market, asphalt shingles comprise the largest share of the products we sell. We also distribute products such as shingles, roofing tile, gutters and various other roofing products.

 

In the non-residential market, single-ply roofing systems and the associated insulation products comprise the largest share of our product offering. Our single-ply roofing systems consist primarily of Ethylene Propylene Diene Monomer (synthetic rubber) or “EPDM” and Thermoplastic Olefin or “TPO”, along with other roofing materials and related components. In addition to the broad range of single-ply roofing components, we sell asphaltic membranes and the insulation required in most non-residential roofing applications, such as tapered insulation.

 

In the area of complementary building products, siding, drywall, waterproofing and acoustic tiles comprise the largest share of the products we sell out of our portfolio. Additionally, we distribute windows, decking and related exterior shelter products to meet the expansive needs of our customers.

Services

We emphasize superior value-added services to our customers. We employ a knowledgeable sales force that possesses an in-depth understanding of the various roofing and complementary building products we provide. Our sales force is capable of providing guidance to our customers throughout the lifecycles of their various projects. Specifically, we support our customers with the following value-added services:

 

advice and assistance on product identification, specification and technical support, and training services;

 

a large, service ready fleet with a broad footprint supporting timely job site delivery, rooftop loading and logistical services;

 

tapered insulation engineered with enhanced computer-aided design and related layout services;

 

metal fabrication and related metal roofing design and layout services;

 

access to Beacon Pro+, our e-commerce platform that provides customers with 24/7 online access;

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access to Beacon 3D+, our residential estimating tool that helps our customers attract and retain more business;

 

exclusive relationships with vendors that help promote delivery tracking and lead generation;

 

trade credit and online bill pay; and

 

marketing support, including project leads for contractors.

Our Customers

We serve over 100,000 customers, comprised of contractors, home builders, building owners, and other resellers across the continental United States and Canada. Our customer base varies by size, ranging from relatively small contractors to large-sized contractors and builders that operate on a national scale. A significant number of our customers have relied on us as their vendor of choice for decades. We believe that we have strong customer relationships that our competitors cannot easily displace or replicate. For the fiscal year ended September 30, 2018, no single customer accounted for more than 1% of our net sales.

Our Culture and Employees

We believe that our values based culture is a key differentiator, which is critical to our success. We pride ourselves on attracting and retaining highly dedicated and customer-focused employees at all levels of the organization. We maintain a safety-first environment and strong relations with our employees.

As of September 30, 2018, we had 8,356 employees consisting of 2,034 in sales and marketing, 872 branch and assistant branch managers, 4,075 drivers, delivery helpers and warehouse workers, 1,311 general and administrative employees and 64 executives. We have 450 employees that are represented by labor unions and there are no material outstanding labor disputes.

Sales and Marketing

Sales Strategy

Our sales strategy is to provide a comprehensive array of high-quality products and superior customer service to our customers, both accurately and on time.  We believe that our proficiency in order fulfillment and robust catalog of value-added services, particularly the Beacon Pro+ e-commerce platform, enable us to attract and retain customers and differentiate ourselves from the competition.

Sales Organization

We have an experienced sales force that is responsible for generating sales at the local branch level. We also have a core group of high-level sales associates who focus on national account customers, as well as sales personnel that have specialized knowledge in topics like solar and insulation. The expertise of our salespeople helps us to increase sales to existing customers and add new customers.

Each of our branches is led by a branch manager, who also functions as the branch’s sales manager. There is also a sales director at each location that is responsible for overseeing and coaching the sales team. The typical branch sales team is composed of one to four outside salespeople and one to five inside salespeople. Branches that focus primarily on the residential market generally staff a larger number of outside salespeople.

The primary objectives of our outside salespeople are to increase sales to existing customers and prospect for new customers. These activities are supported by utilizing our CRM (Customer Relationship Management) system throughout our selling organization. Each outside sales representative has a strategic group of existing customers that they actively manage to ensure that Beacon is meeting and exceeding their respective needs. They also spend time seeking new customers in order to grow and expand their portfolio.

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To complement our outside sales force, we have built an experienced and technically proficient inside sales staff with vital product expertise to address inquiries from our customers. Our inside sales force is on the front line of customer engagement and is also responsible for fielding incoming orders and providing price quotes.

In addition to our outside and inside sales forces, we employ representatives who act as liaisons for certain roofing materials manufacturers to assist with the promotion of specific products to professional contractors, architects and building owners.

Marketing

Our marketing efforts are designed to ensure that our customers understand the benefits they receive from their local branch being part of a broader network of locations. As a supplement to the efforts of our sales force, each of our branches communicates with customers in their local markets through email, newsletters, direct mail, social media and the key industry websites. In order to build and strengthen relationships with customers and vendors, we offer exclusive promotions and sponsor our own regional trade shows, which feature general business and roofing seminars for our customers and product demonstrations by our vendors. In addition, we attend numerous industry trade shows throughout the regions in which we compete, and we are an active member of the National Roofing Contractors Association, National Women in Roofing, as well as certain regional contractors’ associations.

In fiscal year 2017, we introduced Beacon Pro+, our innovative e-commerce portal that enables customers to order online from our catalog of over 90,000 products and have 24/7 access to view real time pricing, review the status of orders, request and approve quotes, and pay their bills online.

In fiscal year 2018, we introduced Beacon 3D+, a leading edge service offering to our residential customers that transforms smartphone photos of any home to a fully measured, customizable 3D model. Beacon 3D+ both saves our customers time with measuring and pricing estimates and helps homeowners easily visualize what the finished project will look like.

Purchasing and Suppliers

Our status as a leader in our core geographic markets, as well as our reputation in the industry, has allowed us to forge strong relationships with numerous manufacturers of roofing materials and complementary building products, including Atlas Roofing, Berger Building Products, Building Products of Canada, Carlisle Syntec, CertainTeed Roofing, CertainTeed Siding, Firestone Building Products, GAF, IKO Manufacturing, James Hardie Building Products, Johns Manville Roofing, Malarkey, Owens Corning Roofing, Ply Gem, Soprema, and TAMKO Building Products.

We are positioned as a key distributor with our suppliers due to our industry expertise, market share, track record of growth and financial strength, and the substantial volume of products that we distribute.

We manage the procurement of products through our national headquarters and regional offices, allowing us to take advantage of both our scale and local market conditions. We believe this enables us to purchase products more economically than most of our competitors. Product is shipped directly by the manufacturers to our branches or customers.

Operations and Infrastructure

Operations

Our branch-based model provides each location with a significant amount of autonomy to operate within the parameters of our overall business model. Operations at each branch are tailored to meet local customer needs. Branch managers are responsible for sales, pricing and staffing activities, and have full operational control of customer service and deliveries. We provide our branch managers with significant incentives that allow them to share in the profitability of their respective branches and the company as a whole. Employees at our regional and corporate operations assist the branches with, among other things, procurement, credit and safety services, fleet management, information systems support, contract management, accounting, treasury and legal services, human resources, benefits administration and sales and use tax services.

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Our distribution fulfillment process is initiated upon receiving a request for a contract job order or direct product order from a customer. Under a contract job order, the customer typically requests roofing or other construction materials and technical support services. The customer discusses the project’s requirements with a salesperson and the salesperson provides a price quote for the package of products and services. Subsequently, the salesperson processes the order and we deliver the products to the customer’s job site. In fiscal year 2018, we were able to support our customers by fulfilling approximately 93.8% of warehouse orders through our in-stock inventory as a result of the breadth and depth of the inventory maintained at our local branches.

Facilities

As of September 30, 2018, our network of 549 branches was serving key metropolitan areas in all 50 states throughout the U.S. and 6 Canadian provinces. This network has enabled us to effectively and efficiently serve a broad customer base and to achieve a leading market position in each of our geographic markets.

Fleet

For the year ended September 30, 2018, our distribution infrastructure supported 2 million deliveries. To service our customer base, we maintained a dedicated owned fleet of 2,307 straight trucks, 809 tractors and 1,349 trailers as of September 30, 2018. Nearly all of our delivery vehicles are equipped with specialized equipment, including 1,383 truck-mounted forklifts, cranes, hydraulic booms and conveyors, which are necessary to deliver products to rooftop job sites in an efficient and safe manner and in accordance with our customers’ requirements.

Our branches typically focus on providing materials to customers who are located within a two-hour radius of their respective facilities. Our branches generally make deliveries each business day.

Management Information Systems

We have fully integrated management information systems across our locations. Acquired businesses are moved to our IT platform as soon as feasible following acquisition. Our systems support every major internal operational function, providing complete integration of purchasing, receiving, order processing, shipping, inventory management, sales analysis and accounting. The same databases are shared within the systems, allowing our branches to easily acquire products from other branches or schedule deliveries by other branches, greatly enhancing our customer service. Our systems also include a pricing matrix which allows us to refine pricing by region, branch, customer and customer type, or even a specific customer project. In addition, our systems allow us to centrally monitor all branch and regional performance as often as daily. We have centralized many functions to leverage our growing size, including accounts payable, insurance, payroll, employee benefits, vendor relations, and banking.

All of our branches are connected to a common computer network via secure Internet connections or private data lines. We maintain redundant systems with transactional data getting replicated throughout each business day. We have the capability of electronically switching our operations to the disaster recovery system.

We place purchase orders electronically with some of our major vendors. The vendors then transmit their invoices electronically to us. Our system matches these invoices with the related purchase orders and then schedules the associated payment. We retain many financial, credit and other documents for purposes of internal approvals, online viewing and auditing.

Government Regulations

We are subject to regulation by various federal, state, provincial and local agencies. These agencies include the Environmental Protection Agency, Department of Transportation, Occupational Safety and Health Administration and Department of Labor and Equal Employment Opportunity Commission. We believe we are in compliance in all material respects with existing applicable statutes and regulations affecting environmental issues and our employment, workplace health and workplace safety practices.

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In 2012, the United States Supreme Court upheld the majority of the provisions in the Patient Protection and Affordable Care Act (the “Act”). The Act places requirements on employers to provide a minimum level of benefits to employees and assesses penalties on employers if the benefits do not meet the required minimum level or if the cost of coverage to employees exceeds affordability thresholds specified in the Act. The minimum benefits and affordability requirements took effect in 2014. The Act also imposes an excise tax beginning in 2018 on plans whose average cost exceeds specified amounts. We have analyzed the effects on us from the provisions of the Act and we do not currently anticipate a significant financial impact.

Competition

Although we are one of the two largest roofing materials and complementary building product distributors in the United States and Canada, the industry remains highly competitive. The vast majority of our competition comes from local and regional roofing supply distributors, and, to a lesser extent, other building supply distributors and big box retailers. Among distributors, we compete against a small number of large distributors and many small and local privately owned distributors. The principal competitive factors in our business include, but are not limited to, the availability of materials and supplies; technical product knowledge and expertise; advisory or other service capabilities; pricing of products; and the availability of credit and capital. We generally compete on the basis of the quality of our products and services, and to a lesser extent, price.

Order Backlog

Order backlog is not a material aspect of our business and no material portion of our business is subject to government contracts.

Seasonality

In general, sales and net income are highest during our first, third and fourth fiscal quarters, which represent the peak months of construction and re-roofing, especially in our branches in the northern and midwestern regions of the United States and in Canada. Our sales are substantially lower during the second quarter, when we usually incur net losses.

We generally experience our peak working capital needs during the third quarter after we build our inventories following the winter season but before we begin collecting on most of our spring receivables. Our principal sources of liquidity are cash and borrowings under our revolving credit facility, so our borrowings tend to be highest in the third quarter of our fiscal year.

History and Additional Information

Our predecessor, Beacon Sales Company, Inc., was founded in Charlestown, Massachusetts (part of Boston) in 1928. Beacon Roofing Supply, Inc. was incorporated in Delaware in 1997. Our principal executive offices are located at 505 Huntmar Park Drive, Suite 300, Herndon, Virginia 20170 and our telephone number is (571) 323-3939. Our Internet website address is www.becn.com.

We are subject to the information and periodic reporting requirements of the Securities Exchange Act of 1934, as amended (“Exchange Act”), and, in accordance with such requirements, furnish or file periodic reports, proxy statements, and other information with the Securities and Exchange Commission (“SEC”). These periodic reports, proxy statements, and other information are available at the SEC website, www.sec.gov. We also maintain an investor relations page on our website where our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and other required SEC filings may be accessed free of charge as soon as reasonably practicable after such material is electronically filed with, or furnished to, the SEC.

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ITEM 1A.    RISK FACTORS

You should carefully consider the risks and uncertainties described below and other information included in this Form 10-K in evaluating us and our business. If any of the events described below occur, our business and financial results could be adversely affected in a material way. This could cause the trading price of our common stock to decline, perhaps significantly.

Risks Related to Our Business

We may not be able to effectively integrate newly acquired businesses into our operations or achieve expected cost savings or profitability from our acquisitions.

Our growth strategy includes acquiring other distributors of roofing materials and complementary products. Acquisitions involve numerous risks, including:

 

unforeseen difficulties in integrating operations, technologies, services, accounting and employees, including difficulties in operating and integrating Allied’s interior products business line, a business line which we have operated for a limited period of time;

 

diversion of financial and management resources from existing operations;

 

unforeseen difficulties related to entering geographic regions where we do not have prior experience;

 

potential loss of key employees;

 

unforeseen liabilities associated with businesses acquired; and

 

inability to generate sufficient revenue or realize sufficient cost savings to offset acquisition or investment costs.

As a result, if we fail to evaluate and execute acquisitions properly, we might not achieve the anticipated benefits of such acquisitions and we may incur costs in excess of what we anticipate. These risks would likely be greater in the case of larger acquisitions, including the Allied Acquisition.  See “—Risks Related to the Allied Acquisition” below.

We may not be able to successfully complete acquisitions on acceptable terms, which would slow our growth rate.

The acquisition of other distributors of roofing materials and complementary products is an important part of our growth strategy. We continually seek additional acquisition candidates in selected markets and from time to time engage in exploratory discussions with potential candidates. We are unable to predict whether or when we will be able to identify any suitable additional acquisition candidates, or the likelihood that any potential acquisition will be completed. If we cannot complete acquisitions that we identify on acceptable terms, it is unlikely that we will sustain the historical growth rates of our business.

An inability to obtain the products that we distribute could result in lost revenues and reduced margins and damage relationships with customers.

We distribute roofing and other exterior building materials that are manufactured by a number of major suppliers. Disruptions in our sources of supply may occur as a result of unanticipated demand or production or delivery difficulties. When shortages occur, roofing material suppliers often allocate products among distributors. Although we believe that our relationships with our suppliers are strong and that we would have access to similar products from competing suppliers should products be unavailable from current sources, any supply shortage, particularly of the most commonly sold items, could result in a loss of revenues and reduced margins and damage relationships with customers.

13


Loss of key talent or our inability to attract and retain new qualified talent could hurt our ability to operate and grow successfully.

Our success will continue to depend to a significant extent on our executive officers and key management personnel, including our divisional executive vice presidents and regional vice presidents. We do not have key man life insurance covering any of our executive officers. We may not be able to retain our executive officers and key personnel or attract additional qualified management. The loss of any of our executive officers or other key management employees, or our inability to recruit and retain qualified employees, could hurt our ability to operate and make it difficult to execute our acquisition and internal growth strategies. Further, the Allied Acquisition may negatively impact our ability to retain key personnel.

A change in vendor pricing and demand could adversely affect our income and gross margins.

Many of the products that we distribute are subject to price changes based upon manufacturers’ raw material costs and other manufacturer pricing decisions. For example, as a distributor of residential roofing supplies, our business is sensitive to asphalt prices, which are highly volatile and often linked to oil prices, as oil is a significant input in asphalt production. Shingle prices have been volatile in recent years, partly due to volatility in asphalt prices. Historically, we have generally been able to pass increases in the prices of shingles on to our customers. Although we often are able to pass on manufacturers’ price increases, our ability to pass on increases in costs and our ability to do so in a timely fashion depends on market conditions. The inability to pass along cost increases or a delay in doing so could result in lower operating margins. In addition, higher prices could impact demand for these products, resulting in lower sales volumes.

A change in vendor rebates could adversely affect our income and gross margins.

The terms on which we purchase products from many of our vendors entitle us to receive a rebate based on the volume of our purchases. These rebates effectively reduce our costs for products. If market conditions change, vendors may adversely change the terms of some or all of these programs. Although these changes would not affect the net recorded costs of product already purchased, it may lower our gross margins on products we sell and therefore the income we realize on such sales in future periods.

Cyclicality in our business and general economic conditions could result in lower revenues and reduced profitability.

A portion of the products we sell are for residential and non-residential construction. The strength of these markets depends on new housing starts and business investment, which are a function of many factors beyond our control, including credit and capital availability, interest rates, foreclosure rates, housing inventory levels and occupancy, changes in the tax laws, employment levels, consumer confidence and the health of the United States economy and mortgage markets. Economic downturns in the regions and markets we serve could result in lower revenues and, since many of our expenses are fixed, lower profitability. The challenging economic conditions in recent years, including tighter credit markets, have adversely affected demand for new residential and non-residential projects and, to a lesser extent, re-roofing projects, and may continue to negatively affect expenditures for roofing in the near term. Unfavorable changes in demographics, credit markets, consumer confidence, housing affordability, or housing inventory levels and occupancy, or a weakening of the United States economy or of any regional or local economy in which we operate could adversely affect consumer spending, result in decreased demand for our products, and adversely affect our business. In addition, instability in the economy and financial markets, including as a result of terrorism or civil or political unrest, may result in a decrease in housing starts, which would adversely affect our business.

Seasonality and weather-related conditions may have a significant impact on our financial results from period to period

The demand for our outdoor building materials is heavily correlated to both seasonal changes and unpredictable weather patterns. Seasonal demand fluctuations are expected, such as in our second quarter, when winter construction cycles and cold weather patterns have an adverse impact on new construction and re-roofing activity. The timing of weather patterns (unseasonable temperatures) and severe weather events (hurricanes and storms) may impact our financial results within a given period either positively or negatively, making it difficult to accurately forecast our results of operations. We expect that these seasonal and weather-related variations will continue in the near future.

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If we encounter difficulties with our management information systems, we could experience problems with inventory, collections, customer service, cost control and business plan execution.

We believe our management information systems are a competitive advantage in maintaining our leadership position in the roofing distribution industry. However, if we experience problems with our management information systems, we could experience, among other things, product shortages and/or an increase in accounts receivable aging. Any failure by us to properly maintain and protect our management information systems could adversely impact our ability to attract and serve customers and could cause us to incur higher operating costs and experience delays in the execution of our business plan.

Since we rely heavily on information technology both in serving our customers and in our enterprise infrastructure in order to achieve our objectives, we may be vulnerable to damage or intrusion from a variety of deliberate cyber-attacks carried out by insiders or third parties, including computer viruses, worms or other malicious software programs that may access our systems. Despite the precautions we take to mitigate the risks of such events, an attack on our enterprise information technology system could result in theft or disclosure of our proprietary or confidential information or a breach of confidential customer or employee information. Such events could have an adverse impact on revenue, harm our reputation, and cause us to incur significant legal liability and costs to address and remediate such events and related security concerns.

An impairment of goodwill and/or other intangible assets could reduce net income.

Acquisitions frequently result in the recording of goodwill and other intangible assets. We recorded significant additional goodwill and other intangible assets upon consummation of the Allied Acquisition. At September 30, 2018, goodwill represented approximately 38.3% of our total assets. Goodwill is not amortized for financial reporting purposes and is subject to impairment testing at least annually using a fair-value based approach. The identification and measurement of goodwill impairment involves the estimation of the fair value of our reporting units. Our accounting for impairment contains uncertainty because management must use judgment in determining appropriate assumptions to be used in the measurement of fair value. We determine the fair values of our reporting units by using a qualitative approach.

We evaluate the recoverability of goodwill for impairment in between our annual tests when events or changes in circumstances, including a sustained decline in our market capitalization, indicate that the carrying amount of goodwill may not be recoverable. Any impairment of goodwill will reduce net income in the period in which the impairment is recognized.

We might need to raise additional capital, which may not be available, thus limiting our growth prospects.

In the future we may require equity or additional debt financing in order to consummate an acquisition, for additional working capital for expansion, or if we suffer more than seasonally expected losses. In the event such additional financing is unavailable to us on commercially attractive terms or at all, we may be unable to expand or make acquisitions or pursue other growth opportunities.

Major disruptions in the capital and credit markets may impact both the availability of credit and business conditions.

If the financial institutions that have extended credit commitments to us are adversely affected by major disruptions in the capital and credit markets, they may become unable to fund borrowings under those credit commitments. This could have an adverse impact on our financial condition since we need to borrow funds at times for working capital, acquisitions, capital expenditures and other corporate purposes.

Major disruptions in the capital and credit markets could also lead to broader economic downturns, which could result in lower demand for our products and increased incidence of customers’ inability to pay their accounts. The majority of our net sales volume is facilitated through the extension of trade credit to our customers. Additional customer bankruptcies or similar events caused by such broader downturns may result in a higher level of bad debt expense than we have historically experienced. Also, our suppliers may be impacted, causing potential disruptions or delays of product availability. These events would adversely impact our results of operations, cash flows and financial position.

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Our level and terms of indebtedness could adversely affect our ability to raise additional capital to fund our operations, take advantage of new business opportunities, and prevent us from meeting our obligations under our debt instruments.

As of September 30, 2018, we had $1.3 billion in aggregate principal amount of our 4.875% senior notes due in 2025 outstanding, $300.0 million in aggregate principal amount of our 6.375% senior notes due in 2023 outstanding, $930.3 million outstanding under our senior secured term loan due in 2025, $92.4 million drawn under our asset-based revolving line of credit with a 2023 maturity date, and $23.6 million of total other indebtedness. Our substantial debt could have important consequences to us, including:

 

increasing our vulnerability to general economic and industry conditions;

 

requiring a substantial portion of our cash flow used in operations to be dedicated to the payment of principal and interest on our indebtedness, therefore reducing our liquidity and our ability to use our cash flow to fund our operations, capital expenditures and future business opportunities;

 

exposing us to the risk of increased interest rates, and corresponding increased interest expense, because borrowings under our asset-based revolving line of credit and term loan are at variable rates of interest;

 

reducing funds available for working capital, capital expenditures, acquisitions and other general corporate purposes, due to the costs and expenses associated with such debt;

 

making it more difficult to satisfy our obligations under the terms of our indebtedness;

 

limiting our ability to obtain additional financing for working capital, capital expenditures, debt service requirements, acquisitions, and general corporate or other purposes; and

 

limiting our ability to adjust to changing marketplace conditions and placing us at a competitive disadvantage compared to our competitors who may have less debt.

In addition, the debt agreements that currently govern our asset-based revolving line of credit and term loan and the indentures governing our outstanding senior notes impose significant operating and financial restrictions on us, including limitations on our ability to, among other things, pay dividends and make other distributions on, or redeem or repurchase, capital stock; make certain investments; incur certain liens; enter into transactions with affiliates; merge or consolidate; enter into agreements that restrict the ability of our subsidiaries to make dividends or other payments to Beacon Roofing Supply, Inc.; and transfer or sell assets. In addition, the terms of our preferred stock contain restrictions on our ability to pay dividends on our common stock, and the holders of such shares would participate in any declared common stock dividends, reducing the cash available to holders of common stock. As a result of these restrictions, we will be limited as to how we conduct our business and we may be unable to raise additional debt or equity financing to compete effectively or to capitalize on available business opportunities.

If our cash flows and capital resources are insufficient to fund our debt service obligations, we may be forced to reduce or delay capital expenditures, sell assets, seek additional capital, or restructure or refinance our indebtedness. These alternative measures may not be successful and may not permit us to meet our scheduled debt service obligations, which could cause us to default on our debt obligations and impair our liquidity. In the event of a default under any of our indebtedness, the holders of the defaulted debt could elect to declare all the funds borrowed to be due and payable, together with accrued and unpaid interest, which in turn could result in cross-defaults under our other indebtedness. The lenders under our asset-based revolving line of credit could also elect to terminate their commitments thereunder and cease making further loans, and the lenders under the asset-based revolving line of credit and term loan could institute foreclosure proceedings against their collateral, which could potentially force us into bankruptcy or liquidation.

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Despite our current level of indebtedness, we may be able to incur substantially more debt and enter into other transactions which could further exacerbate the risks to our financial condition described above.

We may be able to incur significant additional indebtedness in the future. Although the debt agreements that currently govern our asset-based revolving line of credit, term loan, outstanding senior notes and other debt instruments contain restrictions on the incurrence of additional indebtedness and entering into certain types of other transactions, these restrictions are subject to a number of qualifications and exceptions. Additional indebtedness incurred in compliance with these restrictions could be substantial. These restrictions also do not prevent us from incurring obligations, such as trade payables, that do not constitute indebtedness as defined under our debt instruments. To the extent we incur additional indebtedness or other obligations, the risks described in the immediately preceding risk factor and others described herein may increase.

Risks Related to our Preferred Stock

The holders of Preferred Stock issued in connection with the Allied Acquisition have rights, preferences and privileges that are not held by, and are preferential to, the rights of, our common shareholders. We may be required, under certain circumstances, to repurchase the preferred stock for cash, and such obligations could adversely affect our liquidity and financial condition.

 

On January 2, 2018 we issued 400,000 shares of Series A Cumulative Convertible Participating Preferred Stock, par value $0.01 per share (the “Preferred Stock”) to CD&R Boulder Holdings, L.P. (the “CD&R Stockholder”), an entity affiliated with the investment firm Clayton, Dubilier & Rice LLC, pursuant to an Investment Agreement dated August 24, 2017 (the “Investment Agreement”). The proceeds of the issuance were used to partially finance the Allied Acquisition.  The Preferred Stock is convertible perpetual participating preferred stock of Beacon, with an initial conversion price of $41.26 per share, and accrues dividends at a rate of 6.0% per annum (payable in cash or in-kind, subject to specified limitations). The Preferred Stock may be converted at any time at the option of the holder into 9,694,619 shares of our common stock, which would represent approximately 12.5% of our outstanding shares of common stock as of September 30, 2018 (giving effect to the conversion). In addition, under the terms of the Preferred Stock, we may, at our option, force the conversion of all (but not less than all) of the outstanding shares of Preferred Stock to common stock if at any time the market price of our common stock exceeds 200% of the then-effective conversion price per share for at least 75 days out of any trailing 90-trading day period. Any conversion of the Preferred Stock may significantly dilute our common shareholders and adversely affect both our net income per share and the market price of our common stock.

If we issue additional shares of Preferred Stock as “in-kind” dividend payments that, together with the 400,000 shares of Preferred Stock issued to the CD&R Stockholder, represent in excess of 12,071,937 shares of our common stock on an as-converted basis, and in certain other circumstances as provided in the Preferred Stock certificate of designations, a “Triggering Event” would occur. Upon the occurrence of a “Triggering Event,” the dividend rate will increase to 9.0% per annum for so long as the Triggering Event remains in effect, which will further dilute our common shareholders if we issue additional shares of Preferred Stock to satisfy our dividend payment obligations.  Moreover, if we declare or pay a cash dividend on our common stock, we will be required to declare and pay a dividend on the outstanding Preferred Stock on a pro rata basis with the common shares determined on an as-converted basis at the time the dividend is declared. The maximum number of shares of common stock into which the Preferred Stock may be converted (taking into account any shares of Preferred Stock issued as in-kind dividend payments) will be limited to 12,071,937 shares of our common stock, which represents 19.99% of the total number of shares of common stock issued and outstanding immediately prior to the execution of the Investment Agreement, unless and until we were to obtain shareholder approval of such issuance under the Nasdaq listing rules. The terms of the Investment Agreement and Preferred Stock do not require us to obtain shareholder approval in these circumstances.  

Holders of the Preferred Stock generally are entitled to vote with the holders of the shares of common stock on an as converted basis on all matters submitted for a vote of holders of shares of common stock, voting together with the holders of shares of common stock as one class (subject to the limitation that any one Preferred Stock holder, together with its affiliates, cannot vote any shares in excess of 19.99% of the aggregate voting power of the common stock outstanding immediately prior to the execution of the Investment Agreement). The prior written consent of the holders of a majority of the Preferred Stock is required to, among other things, (i) amend or modify our charter, by-laws or the certificate of designations governing the Preferred Stock that would adversely affect the Preferred Stock or (ii) amend our debt agreements to, among other things, adversely affect our ability to pay dividends on the Preferred Stock, subject to certain exceptions.

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The conversion price of the Preferred Stock is subject to customary anti-dilution adjustments, including in the event of any stock split, stock dividend, recapitalization or similar event.  Adjustments to the conversion price could dilute the ownership interest of our common shareholders.  In addition, holders of Preferred Stock have the right to receive a liquidation preference entitling them to be paid out of our assets available for distribution to shareholders, before any payment may be made to holders of shares of common stock, an amount equal to the greater of (a) 100% of the liquidation preference thereof plus all accrued and unpaid dividends or (b) the amount that such holder would have been entitled to receive upon our liquidation, dissolution and winding up if all outstanding shares of Preferred Stock had been converted into common stock immediately prior to such liquidation, dissolution or winding up, without regard to any of the limitations on conversion or convertibility.

Furthermore, the holders of the Preferred Stock will have certain redemption rights, including upon certain change of control events involving us, which, if exercised, could require us to repurchase all of the outstanding Preferred Stock for cash at the original purchase price of the Preferred Stock plus all accrued and unpaid dividends thereon. Our obligations to pay regular dividends to the holders of the Preferred Stock or any required repurchase of the outstanding Preferred Stock could impact our liquidity and reduce the amount of cash available for working capital, capital expenditures, growth opportunities, acquisitions, and other general corporate purposes. Our obligations to the holders of Preferred Stock could also limit our ability to obtain additional financing or increase our borrowing costs, which could have an adverse effect on our financial condition. The preferential rights could also result in divergent interests between the holders of the Preferred Stock and our common shareholders.

Following the expiration of an 18-month lock-up period on July 2, 2019, the CD&R Stockholder may sell shares of our common stock in the public market, which may cause the market price of our common stock to decrease, and therefore make it more difficult to raise equity financing or issue equity as consideration in an acquisition.

Our registration rights agreement with the CD&R Stockholder requires us to register all shares held by the CD&R Stockholder and its permitted transferees (including shares of our common stock issued upon conversion of Preferred Stock) under the Securities Act promptly following the expiration of an 18-month lock-up period on July 2, 2019. The registration rights for the CD&R Stockholder will allow it to sell its shares without compliance with the volume and manner of sale limitations under Rule 144 promulgated under the Securities Act and will facilitate the resale of such securities into the public market. The market value of our common stock could decline as a result of sales by the CD&R Stockholder from time to time. In particular, the sale of a substantial number of our shares by the CD&R Stockholder within a short period of time, or the perception that such sale might occur, could cause our stock price to decrease, make it more difficult for us to raise funds through future offerings of Beacon common stock or acquire other businesses using Beacon common stock as consideration.

The CD&R Stockholder holds a significant equity interest in our business and may exercise significant influence over us, including through its ability to designate up to two directors to our board of directors, and its interests as a preferred equity holder may diverge from, or even conflict with, the interests of our common shareholders.

 

The CD&R Stockholder beneficially owns Preferred Stock convertible into 9,694,619 shares of common stock, or approximately 12.5% of our outstanding common stock as of September 30, 2018. In addition, the CD&R Stockholder owns 314,400 shares of common stock purchased in the open market with cash dividends paid on the Preferred Stock. The terms of the Investment Agreement permit the C&R Stockholder to acquire additional shares of common stock in the open market with future cash dividends paid on the Preferred Stock or as otherwise consented to by our board of directors. As a result, the CD&R Stockholder may have the indirect ability to significantly influence our policies and operations. In addition, under the Investment Agreement, the CD&R Stockholder is entitled to appoint up to two directors to our board of directors (Nathan K. Sleeper and Philip W. Knisely currently serve as the CD&R Stockholder designees). Notwithstanding that all directors will be subject to fiduciary duties to us and to applicable law, the interests of the directors designated by the CD&R Stockholder may differ from the interests of our other directors or common shareholders as a whole. With such representation on our board of directors, the CD&R Stockholder has influence over the appointment of management and any action requiring the vote of our board of directors, including significant corporate action such as mergers and sales of substantially all of our assets. The directors controlled by the CD&R Stockholder will also be able to influence decisions affecting our capital structure, including decisions to issue additional capital stock and incur additional debt. Additionally, for so long as the CD&R Stockholder owns Preferred Stock, the following matters will require the approval of the CD&R Stockholder: (1) amendments or modifications to our charter, by-laws or the certificate of designations governing the Preferred

18


Stock that would adversely affect the Preferred Stock, (2) authorization, creation, increase in the authorized amount of, or issuance of any class or series of senior or parity equity securities or any security convertible into, shares of senior or parity equity securities (but not junior securities), (3) any increase or decrease in the authorized number of shares of Preferred Stock or the issuance of additional shares of Preferred Stock, (4) amendments to our debt agreements that would, among other things, adversely affect our ability to pay dividends on the Preferred Stock, subject to certain exceptions, and (5) the liquidation, dissolution or filing of a voluntary petition for bankruptcy or receivership. The CD&R Stockholder and its affiliates are in the business of making or advising on investments in companies, including businesses that may directly or indirectly compete with certain portions of our business. In addition, the CD&R Stockholder may have an interest in pursuing acquisitions, divestitures, financings or other transactions that, in their judgment, could enhance their equity investments and have a negative impact to our common shareholders. Furthermore, the CD&R Stockholder may, in the future, own businesses that directly or indirectly compete with us. The CD&R Stockholder may also pursue acquisition opportunities that may be complementary to our business, and as a result, those acquisition opportunities may not be available to us.

 

ITEM 1B.    UNRESOLVED STAFF COMMENTS

None.

 

ITEM 2.    PROPERTIES

As of October 31, 2018, we leased 526 branch facilities and 15 non-branch facilities throughout the United States and Canada. These leased facilities range in size from approximately 2,000 to 348,000 square feet. In addition, as of October 31, 2018 we owned 22 branch facilities. These owned facilities range in size from 11,505 square feet to 68,000 square feet. We believe that our properties are in good operating condition and adequately serve our current business operations.

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The following table summarizes the locations of our branches and facilities as of October 31, 2018:

 

 

 

 

 

Non-Branch

Location

 

Branches

 

Facilities

U.S. State

 

 

 

 

Alabama

 

7

 

 

Alaska

 

1

 

 

Arizona

 

5

 

 

Arkansas

 

4

 

 

California

 

50

 

 

Colorado

 

20

 

 

Connecticut

 

7

 

1

Delaware

 

3

 

 

Florida

 

36

 

1

Georgia

 

15

 

1

Hawaii

 

11

 

 

Idaho

 

2

 

 

Illinois

 

15

 

 

Indiana

 

8

 

 

Iowa

 

3

 

 

Kansas

 

4

 

 

Kentucky

 

5

 

 

Louisiana

 

9

 

 

Maine

 

4

 

 

Maryland

 

22

 

1

Massachusetts

 

15

 

 

Michigan

 

13

 

 

Minnesota

 

8

 

 

Mississippi

 

2

 

 

Missouri

 

10

 

 

Montana

 

1

 

 

Nebraska

 

7

 

 

Nevada

 

3

 

 

New Hampshire

 

2

 

 

New Jersey

 

21

 

2

New Mexico

 

1

 

 

New York

 

19

 

 

North Carolina

 

24

 

2

North Dakota

 

4

 

1

Ohio

 

12

 

1

Oklahoma

 

2

 

 

Oregon

 

7

 

 

Pennsylvania

 

33

 

 

Rhode Island

 

2

 

 

South Carolina

 

8

 

 

South Dakota

 

3

 

 

Tennessee

 

9

 

 

Texas

 

38

 

2

Utah

 

6

 

 

Vermont

 

1

 

 

Virginia

 

16

 

1

Washington

 

18

 

1

West Virginia

 

4

 

 

20


Wisconsin

 

4

 

 

Wyoming

 

2

 

 

Total—  United States

 

526

 

14

 

 

 

 

 

Canadian Province

 

 

 

 

Alberta

 

3

 

 

British Columbia

 

4

 

 

Nova Scotia

 

1

 

 

Ontario

 

6

 

1

Quebec

 

6

 

 

Saskatchewan

 

2

 

 

Total— Canada

 

22

 

1

 

 

 

 

 

Total - All

 

548

 

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ITEM 3.    LEGAL PROCEEDINGS

From time to time, we are involved in lawsuits that are brought against us in the normal course of business. We are not currently a party to any legal proceedings that would be expected, either individually or in the aggregate, to have a material adverse effect on our business or financial condition.

 

ITEM 4.    MINE SAFETY DISCLOSURES

Not applicable.

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PART II

ITEM 5.    MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Our common stock trades on the Nasdaq Global Select Market (the “Nasdaq”) under the symbol “BECN”. As of October 31, 2018, there were 89 registered holders of record of our common stock.

We have not paid cash dividends on our common stock and do not anticipate paying dividends in the foreseeable future. Our board of directors currently intends to retain any future earnings for reinvestment in our growing business. Any future determination to pay dividends will also be at the discretion of our board of directors and will be dependent upon our results of operations and cash flows, our financial position and capital requirements, general business conditions, legal, tax, regulatory and any contractual restrictions on the payment of dividends, and any other factors our board of directors deems relevant.

Stock Performance Graph

This stock performance graph shall not be deemed “soliciting material” or to be “filed” with the SEC for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or otherwise subject to the liabilities under that Section, and shall not be deemed to be incorporated by reference into any filing of Beacon Roofing Supply, Inc. under the Securities Act of 1933, as amended, or the Exchange Act. The performance of Beacon Roofing Supply, Inc.’s common stock depicted in the stock performance graph represents historical results only, and is not necessarily indicative of future performance.

The following graph compares the cumulative total shareholder return on Beacon Roofing Supply, Inc.’s common stock (based on market prices) for the last five fiscal years with the cumulative total return on (i) the Nasdaq Index and (ii) the S&P 1500 Trading Companies & Distributors Index, assuming a hypothetical $100 investment in each on September 30, 2013 and the re-investment of all dividends. The closing price of our common stock on September 30, 2018, was $36.19.

 

 

22


 

 

 

Base

 

INDEXED RETURNS

 

 

 

Period

 

Years Ended September 30,

 

Company / Index

 

9/30/13

 

 

2014

 

 

 

2015

 

 

 

2016

 

 

 

2017

 

 

 

2018

 

Beacon Roofing Supply, Inc.

 

100

 

 

69.11

 

 

 

88.12

 

 

 

114.10

 

 

 

139.00

 

 

 

98.16

 

Nasdaq Index

 

100

 

 

120.61

 

 

 

125.43

 

 

 

146.03

 

 

 

180.62

 

 

 

226.08

 

S&P 1500 Trading Companies & Distributors Index

 

100

 

 

107.95

 

 

 

83.92

 

 

 

98.72

 

 

 

112.22

 

 

 

154.62

 

 


23


ITEM 6.    SELECTED FINANCIAL DATA

You should read the following selected financial information together with our financial statements and related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” also included in this Form 10-K. We have derived the statement of operations data for the years ended September 30, 2018, September 30, 2017, and September 30, 2016, and the balance sheet data as of September 30, 2018, and September 30, 2017, from our audited financial statements included in this Form 10-K. We have derived the statements of operations data for the years ended September 30, 2015 and September 30, 2014, and the balance sheet data as of September 30, 2016, September 30, 2015 and September 30, 2014, from our audited financial statements not included in this Form 10-K.

Consolidated Statement of Operations Data:

 

 

Year Ended September 30,

 

 

2018

 

 

2017

 

 

2016

 

 

2015

 

 

2014

 

Net sales

$

6,418,311

 

 

$

4,376,670

 

 

$

4,127,109

 

 

$

2,515,169

 

 

$

2,326,905

 

Cost of products sold

 

4,824,990

 

 

 

3,300,731

 

 

 

3,114,040

 

 

 

1,919,804

 

 

 

1,799,065

 

Gross profit

 

1,593,321

 

 

 

1,075,939

 

 

 

1,013,069

 

 

 

595,365

 

 

 

527,840

 

Operating expense

 

1,388,695

 

 

 

859,843

 

 

 

808,085

 

 

 

478,284

 

 

 

428,977

 

Income (loss) from operations

 

204,626

 

 

 

216,096

 

 

 

204,984

 

 

 

117,081

 

 

 

98,863

 

Interest expense, financing costs, and other

 

136,544

 

 

 

52,751

 

 

 

58,452

 

 

 

11,037

 

 

 

10,095

 

Income (loss) before provision for income taxes

 

68,082

 

 

 

163,345

 

 

 

146,532

 

 

 

106,044

 

 

 

88,768

 

Provision for (benefit from) income taxes

 

(30,544

)

 

 

62,481

 

 

 

56,615

 

 

 

43,767

 

 

 

34,922

 

Net income (loss)

$

98,626

 

 

$

100,864

 

 

$

89,917

 

 

$

62,277

 

 

$

53,846

 

Dividends on preferred shares

 

18,000

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Net income (loss) attributable to common shareholders

$

80,626

 

 

$

100,864

 

 

$

89,917

 

 

$

62,277

 

 

$

53,846

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average common stock outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

68,012,879

 

 

 

60,315,648

 

 

 

59,424,372

 

 

 

49,578,130

 

 

 

49,227,466

 

Diluted

 

69,191,039

 

 

 

61,344,263

 

 

 

60,418,067

 

 

 

50,173,478

 

 

 

49,947,699

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

$

1.07

 

 

$

1.67

 

 

$

1.51

 

 

$

1.26

 

 

$

1.09

 

Diluted

$

1.05

 

 

$

1.64

 

 

$

1.49

 

 

$

1.24

 

 

$

1.08

 

 

Balance Sheet Data:

 

 

September 30,

 

 

2018

 

 

2017

 

 

2016

 

 

2015

 

 

2014

 

Cash and cash equivalents

$

129,927

 

 

$

138,250

 

 

$

31,386

 

 

$

45,661

 

 

$

54,472

 

Total assets

 

6,508,662

 

 

 

3,449,557

 

 

 

3,113,859

 

 

 

1,539,428

 

 

 

1,433,896

 

Total long-term indebtedness1

 

2,606,096

 

 

 

750,233

 

 

 

1,117,711

 

 

 

192,567

 

 

 

216,460

 

Total stockholders’ equity

 

1,884,305

 

 

 

1,781,806

 

 

 

1,323,827

 

 

 

883,116

 

 

 

817,101

 

 

 

1

Net of debt issuance costs

 

24


Non-GAAP Financial Measures

To provide investors with additional information regarding our financial results, we prepare certain financial measures that are not calculated in accordance with generally accepted accounting principles in the United States (“GAAP”), specifically:

 

Adjusted Net Income (Loss)/Adjusted EPS

 

Adjusted EBITDA

We define Adjusted Net Income (Loss) as net income that excludes non-recurring acquisition costs, the amortization of intangibles, business restructuring costs, and the non-recurring effects of tax reform. Adjusted net income per share (“Adjusted EPS”) is calculated by dividing the Adjusted Net Income (Loss) for the period by the weighted-average diluted shares outstanding for the period after assuming the full conversion of the participating Preferred Stock.

We define Adjusted EBITDA as net income plus interest expense (net of interest income), income taxes, depreciation and amortization, stock-based compensation, non-recurring acquisition costs, and business restructuring costs. EBITDA is a measure commonly used in the distribution industry.

We use these supplemental measures to evaluate performance period over period and to analyze the underlying trends in our business and to establish operational goals and forecasts that are used in allocating resources. We expect to compute our non-GAAP financial measures consistently using the same methods each period.

We believe these non-GAAP measures are useful because they allow investors to better understand year-over-year changes in underlying operating performance. We believe that these non-GAAP measures provide investors and analysts with a measure of operating results unaffected by differences in capital structures and capital investment cycles among otherwise comparable companies. Further, we believe these measures are useful to investors because they improve comparability of results of operations since they eliminate the impact of purchase accounting adjustments that can render operating results non-comparable between periods. However, our calculations of these non-GAAP measures may not align with similarly titled measures reported by other companies.  

Although we believe that these non-GAAP financial measures are useful in evaluating our business, this information should be considered as supplemental in nature and is not meant as a substitute for the related financial information prepared in accordance with GAAP. You should not consider any of these measures as a substitute alongside other financial performance measures presented in accordance with GAAP.

The following tables present a reconciliation of net income, the most directly comparable financial measure as measured in accordance with GAAP, to Adjusted Net Income (Loss)/Adjusted EPS and Adjusted EBITDA for each of the periods indicated (in thousands, except per share amounts):

Adjusted Net Income (Loss)/Adjusted EPS

 

 

Year Ended September 30,

 

 

2018

 

 

2017

 

 

2016

 

 

Amount

 

 

Per

Share1

 

 

Amount

 

 

Per

Share2

 

 

Amount

 

 

Per

Share3

 

Net income (loss)

$

98,626

 

 

$

1.29

 

 

$

100,864

 

 

$

1.64

 

 

$

89,917

 

 

$

1.49

 

Acquisition costs4

 

156,859

 

 

 

2.05

 

 

 

63,627

 

 

 

1.04

 

 

 

65,143

 

 

 

1.08

 

Effects of tax reform5

 

(48,805

)

 

 

(0.64

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Adjusted Net Income (Loss)

$

206,680

 

 

$

2.70

 

 

$

164,491

 

 

$

2.68

 

 

$

155,060

 

 

$

2.57

 

 

1

Per share amounts are calculated using the diluted weighted-average common stock outstanding totals for each respective period after assuming the full conversion of the participating Preferred Stock. The weighted-average share count utilized in the 2018 calculation of Adjusted EPS is 76,415,522. This amount is the 69,191,039 diluted weighted-average shares outstanding plus the assumed conversion of 7,224,483 weighted-average shares of participating Preferred Stock, which were excluded from the GAAP net income (loss) per share calculation for the period due to their anti-dilutive nature.

2

The weighted-average share count utilized in the 2017 calculation of Adjusted EPS is 61,344,263.

25


3

The weighted-average share count utilized in the 2016 calculation of Adjusted EPS is 60,418,067.

4

Acquisition costs for 2018 include 79.3 million of non-recurring charges related to acquisitions and 141.2 million of amortization expense related to intangibles, both net of 63.6 million in tax in total. Acquisition costs for 2017 include 21.2 million of non-recurring charges related to acquisitions and 82.5 million of amortization expense related to intangibles, both net of 40.0 million in tax in total. Acquisition costs for 2016 include 36.7 million of non-recurring charges related to acquisitions and 68.3 million of amortization expense related to intangibles, both net of 39.8 million in tax in total.

5

Impact of the Tax Cuts and Jobs Act of 2017 – see Note 12 in the Notes to the Consolidated Financial Statements for further discussion.

Adjusted EBITDA

 

 

Year Ended September 30,

 

 

 

2018

 

 

2017

 

 

2016

 

 

Net income (loss)

$

98,626

 

 

$

100,864

 

 

$

89,917

 

 

Acquisition costs1

 

54,441

 

 

 

15,745

 

 

 

24,749

 

 

Interest expense, net

 

143,074

 

 

 

53,802

 

 

 

58,145

 

 

Income taxes

 

(30,544

)

 

 

62,481

 

 

 

56,615

 

 

Depreciation and amortization

 

201,503

 

 

 

116,467

 

 

 

100,191

 

 

Stock-based compensation

 

16,473

 

 

 

15,074

 

 

 

17,749

 

 

Adjusted EBITDA

$

483,573

 

 

$

364,433

 

 

$

347,366

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Adjusted EBITDA as a % of net sales

 

7.5

%

 

 

8.3

%

 

 

8.4

%

 

 

 

1

Acquisition costs reflect non-recurring charges related to acquisitions (excluding the impact of tax) that are not embedded in other balances of the table. Certain portions of the total acquisition costs incurred are included in interest expense, income taxes, depreciation and amortization, and stock-based compensation.

26


ITEM 7.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis should be read in conjunction with our consolidated financial statements and related notes and other financial information appearing elsewhere in this Annual Report on Form 10-K. All references to “2018,” “2017” and “2016”are referring to the twelve month period ended September 30 for each of those respective fiscal years. The following discussion may contain forward-looking statements that reflect our plans and expectation. Our actual results could differ materially from those anticipated by these forward-looking statements due to the factors discussed elsewhere in this Annual Report on Form 10-K, particularly in the “Risk Factors” section. We do not undertake, and specifically disclaim, any obligation to update any forward-looking statements to reflect the occurrence of events or circumstances after the date of such statements except as required by law.

Overview

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, wallboard and acoustical ceiling tiles. 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 September 30, 2018, we operated 549 branches throughout all 50 states in the U.S. and 6 provinces in Canada. We stock one of the most extensive assortments of high quality branded products in the industry with approximately 90,000 SKUs available across our branch network, enabling us to deliver products to serve over 100,000 customers on a timely basis.

On January 2, 2018, we finalized the acquisition of Allied Building Products Corp. (“Allied”), a New Jersey Corporation, for approximately $2.625 billion, subject to working capital and other adjustments. As of September 30, 2018, the adjusted purchase price for Allied was $2.88 billion, and purchase accounting entries had not yet been finalized. Headquartered in East Rutherford, New Jersey, Allied was one of the country’s largest exterior and interior building products distributors, distributing products across 208 locations in 31 states in the U.S. with a strong presence in New York, New Jersey, Florida, California, Hawaii and the upper Midwest at the time of the acquisition. We believe the acquisition of Allied was a strategically and financially compelling transaction that expanded our geographic footprint, enhanced our scale and market presence, diversified our product offerings, and positioned us to provide new growth opportunities that will increase our long-term profitability.

Effective execution of both the sales and operating plans enables us to grow beyond the relative strength of the markets we serve. Our business model is a bottom-up approach, where each of our branches uses its regional knowledge and experience to assist with the development of a marketing plan and 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 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.

27


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

 

On December 16, 2016, we 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, we 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.

 

On January 9, 2017, we 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, we 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.

 

On May 1, 2017, we 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.

 

On May 1, 2018, we acquired Tri-State Builder’s Supply, a wholesale supplier of roofing, siding, windows, doors and related building products with 1 branch located in Duluth, Minnesota and annual sales of approximately $6 million.

 

On July 16, 2018, we acquired Atlas Supply, Inc., the Pacific Northwest’s leading distributor of sealants, coatings, adhesives and related waterproofing products, with 6 branches operating in Seattle, Tacoma, and Mountlake Terrace in Washington, as well as locations in Portland, Oregon and Boise, Idaho, and annual sales of approximately $37 million.

In addition, we opened three new branches in 2018, four new branches in 2017, and one new branch in 2016. These eight new branch locations allow us to penetrate deeper into our existing markets and establish a greater presence.

General

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

 

Shingles, standard and specialty;

 

Single-ply roofing;

 

Metal roofing and accessories;

 

Modified bitumen;

 

Built-up roofing;

 

Insulation;

 

Slate and tile roofing;

 

Fasteners, coatings and cements; and

 

Other roofing accessories.

28


We also sell complementary building products such as:

 

Vinyl, wood and fiber cement siding;

 

Doors, windows and millwork;

 

Decking and railing;

 

Building insulation;

 

Waterproofing systems;

 

Wallboard; and

 

Acoustical ceiling tiles.

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

Results of Operations

The following tables set forth consolidated statement of operations data and such data as a percentage of total net sales for the periods presented (in thousands):

 

 

Year Ended September 30,

 

 

2018

 

 

2017

 

 

2016

 

Net sales

$

6,418,311

 

 

$

4,376,670

 

 

$

4,127,109

 

Cost of products sold

 

4,824,990

 

 

 

3,300,731

 

 

 

3,114,040

 

Gross profit

 

1,593,321

 

 

 

1,075,939

 

 

 

1,013,069

 

Operating expense:

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative

 

1,187,192

 

 

 

743,376

 

 

 

707,893

 

Depreciation

 

60,318

 

 

 

34,002

 

 

 

31,876

 

Amortization

 

141,185

 

 

 

82,465

 

 

 

68,316

 

Total operating expense

 

1,388,695

 

 

 

859,843

 

 

 

808,085

 

Income (loss) from operations

 

204,626

 

 

 

216,096

 

 

 

204,984

 

Interest expense, financing costs, and other

 

136,544

 

 

 

52,751

 

 

 

58,452

 

Income (loss) before provision for income taxes

 

68,082

 

 

 

163,345

 

 

 

146,532

 

Provision for (benefit from) income taxes

 

(30,544

)

 

 

62,481

 

 

 

56,615

 

Net income (loss)

 

98,626

 

 

 

100,864

 

 

 

89,917

 

Dividends on preferred shares

 

18,000

 

 

 

-

 

 

 

-

 

Net income (loss) attributable to common shareholders

 

80,626

 

 

 

100,864

 

 

 

89,917

 

29


 

 

Year Ended September 30,

 

 

2018

 

 

2017

 

 

2016

 

Net sales

 

100.0

%

 

 

100.0

%

 

 

100.0

%

Cost of products sold

 

75.2

%

 

 

75.4

%

 

 

75.5

%

Gross profit

 

24.8

%

 

 

24.6

%

 

 

24.5

%

Operating expense:

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative

 

18.5

%

 

 

16.9

%

 

 

17.1

%

Depreciation

 

0.9

%

 

 

0.8

%

 

 

0.8

%

Amortization

 

2.2

%

 

 

1.9

%

 

 

1.7

%

Total operating expense

 

21.6

%

 

 

19.6

%

 

 

19.6

%

Income (loss) from operations

 

3.2

%

 

 

5.0

%

 

 

4.9

%

Interest expense, financing costs, and other

 

2.1

%

 

 

1.2

%

 

 

1.4

%

Income (loss) before provision for income taxes

 

1.1

%

 

 

3.8

%

 

 

3.5

%

Provision for (benefit from) income taxes

 

(0.4

%)

 

 

1.5

%

 

 

1.3

%

Net income (loss)

 

1.5

%

 

 

2.3

%

 

 

2.2

%

Dividends on preferred shares

 

0.2

%

 

 

0.0

%

 

 

0.0

%

Net income (loss) attributable to common shareholders

 

1.3

%

 

 

2.3

%

 

 

2.2

%

 

In managing our business, we consider all growth, including the opening of new branches, to be organic growth unless it results from an acquisition. When we refer to growth in existing markets or organic growth, we include growth from existing and newly opened branches but exclude growth from acquired branches until they have been under our ownership for at least four full fiscal quarters at the start of the fiscal reporting period. We believe the existing market information is useful to investors because it helps explain organic growth or decline. When we refer to regions, we are referring to our geographic regions. When we refer to our net product costs, we are referring to our invoice cost less the impact of short-term buying programs (also referred to as “special buys” given the manner in which they are offered).

As of September 30, 2018, we had a total of 549 branches in operation. Our existing market calculations include 315 branches and exclude 234 branches that were acquired after the start of fiscal year 2017.

2018 vs. 2017

The following table summarizes our results of operations by market type (existing and acquired) for the periods presented (in thousands):

 

 

Existing Markets

 

 

Acquired Markets

 

 

Consolidated

 

 

Year Ended September 30,

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Net sales

$

3,900,455

 

 

$

3,880,952

 

 

$

2,517,856

 

 

$

495,718

 

 

$

6,418,311

 

 

$

4,376,670

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross profit

$

933,798

 

 

$

945,494

 

 

$

659,523

 

 

$

130,445

 

 

$

1,593,321

 

 

$

1,075,939

 

Gross margin

 

23.9

%

 

 

24.4

%

 

 

26.2

%

 

 

26.3

%

 

 

24.8

%

 

 

24.6

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling, general, and administrative

$

710,112

 

 

$

659,970

 

 

$

477,080

 

 

$

83,406

 

 

$

1,187,192

 

 

$

743,376

 

Depreciation

 

30,823

 

 

 

29,993

 

 

 

29,495

 

 

 

4,009

 

 

 

60,318

 

 

 

34,002

 

Amortization

 

54,540

 

 

 

66,250

 

 

 

86,645