Form 10-Q BEACON ROOFING SUPPLY For: Dec 31

February 9, 2018 4:06 PM

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

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

For the Quarterly Period Ended December 31, 2017

OR

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

For the Transition Period from                      to                     

Commission File Number 000-50924

 

 

BEACON ROOFING SUPPLY, INC.

(Exact name of registrant as specified in its charter)

 

Delaware

36-4173371

(State or other jurisdiction of

Incorporation or Organization)

(I.R.S. Employer

Identification No.)

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

(Address of Principal Executive Offices) (Zip Code)

(571) 323-3939

(Registrant’s telephone number, including area code)

 

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

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

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

 

Large accelerated filer

Accelerated filer

  

Non-accelerated filer

(do not check if a smaller reporting company)

Smaller reporting company

  

Emerging growth company

 

 

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

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

As of January 31, 2018, 68,011,206 shares of common stock, par value $0.01 per share, of the registrant were outstanding.

 

 


BEACON ROOFING SUPPLY, INC.

FORM 10-Q

For the Quarter Ended December 31, 2017

 

TABLE OF CONTENTS

 

Part I.

 

 

 

Financial Information (unaudited)

 

 

 

 

Item 1.

 

Condensed Consolidated Financial Statements

 

 

 

 

 

 

Consolidated Balance Sheets

 

3

 

 

 

 

Consolidated Statements of Operations

 

4

 

 

 

 

Consolidated Statements of Comprehensive Income

 

5

 

 

 

 

Consolidated Statements of Cash Flows

 

6

 

 

 

 

Notes to Condensed Consolidated Financial Statements

 

7

 

 

 

 

 

 

 

 

 

Item 2.

 

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

 

28

 

 

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

39

 

 

Item 4.

 

Controls and Procedures

 

39

 

 

 

 

 

 

 

Part II.

 

 

 

Other Information

 

40

 

 

Item 6.

 

Exhibits

 

40

 

 

 

 

 

 

 

Signatures

 

41

 

2


BEACON ROOFING SUPPLY, INC.

Consolidated Balance Sheets

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

 

 

 

December 31,

 

 

September 30,

 

 

December 31,

 

 

2017

 

 

2017

 

 

2016

 

Assets

 

 

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

$

63,827

 

 

$

138,250

 

 

$

73,271

 

Restricted cash

 

1,300,000

 

 

 

-

 

 

 

-

 

Accounts receivable, less allowance of $13,470, $11,829 and $16,711

   as of December 31, 2017, September 30, 2017 and December 31,

   2016, respectively

 

552,703

 

 

 

704,527

 

 

 

489,898

 

Inventories, net

 

603,793

 

 

 

551,924

 

 

 

528,709

 

Prepaid expenses and other current assets

 

218,718

 

 

 

209,138

 

 

 

209,651

 

Total current assets

 

2,739,041

 

 

 

1,603,839

 

 

 

1,301,529

 

Property and equipment, net

 

154,687

 

 

 

156,129

 

 

 

147,340

 

Goodwill

 

1,251,825

 

 

 

1,251,986

 

 

 

1,197,550

 

Intangibles, net

 

410,857

 

 

 

429,069

 

 

 

444,210

 

Other assets, net

 

8,868

 

 

 

8,534

 

 

 

1,511

 

Total Assets

$

4,565,278

 

 

$

3,449,557

 

 

$

3,092,140

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities and Stockholders' Equity

 

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

 

 

 

Accounts payable

$

315,442

 

 

$

503,697

 

 

$

336,837

 

Accrued expenses

 

266,049

 

 

 

261,297

 

 

 

166,479

 

Current portions of long-term debt

 

14,239

 

 

 

14,141

 

 

 

14,610

 

Total current liabilities

 

595,730

 

 

 

779,135

 

 

 

517,926

 

Borrowings under revolving lines of credit, net

 

-

 

 

 

3,205

 

 

 

332,679

 

Long-term debt, net

 

2,000,059

 

 

 

721,268

 

 

 

722,516

 

Deferred income taxes, net and other

 

93,451

 

 

 

138,383

 

 

 

136,260

 

Long-term obligations under equipment financing and other, net

 

23,694

 

 

 

25,760

 

 

 

32,915

 

Total liabilities

 

2,712,934

 

 

 

1,667,751

 

 

 

1,742,296

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

Stockholders' equity:

 

 

 

 

 

 

 

 

 

 

 

Common stock (voting); $.01 par value; 100,000,000 shares authorized;

   67,972,383 issued and outstanding as of December 31, 2017; 67,700,858

   issued and outstanding as of September 30, 2017; 60,030,516 issued

   and outstanding at December 31, 2016

 

679

 

 

 

677

 

 

 

600

 

Undesignated preferred stock; 5,000,000 shares authorized,

   none issued or outstanding

 

-

 

 

 

-

 

 

 

-

 

Additional paid-in capital

 

1,050,389

 

 

 

1,047,506

 

 

 

701,542

 

Retained earnings

 

815,782

 

 

 

748,186

 

 

 

667,752

 

Accumulated other comprehensive loss

 

(14,506

)

 

 

(14,563

)

 

 

(20,050

)

Total stockholders' equity

 

1,852,344

 

 

 

1,781,806

 

 

 

1,349,844

 

Total Liabilities and Stockholders' Equity

$

4,565,278

 

 

$

3,449,557

 

 

$

3,092,140

 

 

See accompanying Notes to Condensed Consolidated Financial Statements

 

 

 

 

3


BEACON ROOFING SUPPLY, INC.

Consolidated Statements of Operations

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

 

 

 

Three Months Ended December 31,

 

 

2017

 

 

2016

 

Net sales

$

1,121,979

 

 

$

1,002,184

 

Cost of products sold

 

852,226

 

 

 

751,117

 

Gross profit

 

269,753

 

 

 

251,067

 

Operating expense

 

220,657

 

 

 

204,110

 

Income from operations

 

49,096

 

 

 

46,957

 

Interest expense, financing costs, and other

 

22,568

 

 

 

13,574

 

Income before provision for income taxes

 

26,528

 

 

 

33,383

 

Provision for (benefit from) income taxes

 

(41,068

)

 

 

12,953

 

Net income

$

67,596

 

 

$

20,430

 

 

 

 

 

 

 

 

 

Weighted-average common stock outstanding:

 

 

 

 

 

 

 

Basic

 

67,825,430

 

 

 

59,943,264

 

Diluted

 

69,244,678

 

 

 

60,993,080

 

 

 

 

 

 

 

 

 

Net income per share:

 

 

 

 

 

 

 

Basic

$

1.00

 

 

$

0.34

 

Diluted

$

0.98

 

 

$

0.33

 

 

See accompanying Notes to Condensed Consolidated Financial Statements

 

 

4


BEACON ROOFING SUPPLY, INC.

Consolidated Statements of Comprehensive Income

(Unaudited; In thousands)

 

 

 

Three Months Ended December 31,

 

 

2017

 

 

2016

 

Net income

$

67,596

 

 

$

20,430

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

Foreign currency translation adjustment

 

57

 

 

 

(1,652

)

Total other comprehensive income (loss)

 

57

 

 

 

(1,652

)

Comprehensive income

$

67,653

 

 

$

18,778

 

 

See accompanying Notes to Condensed Consolidated Financial Statements

5


BEACON ROOFING SUPPLY, INC.

Consolidated Statements of Cash Flows

(Unaudited; In thousands)

 

 

Three Months Ended December 31,

 

 

2017

 

 

2016

 

Operating Activities

 

 

 

 

 

 

 

Net income

$

67,596

 

 

$

20,430

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

 

Depreciation and amortization

 

26,904

 

 

 

28,425

 

Stock-based compensation

 

3,459

 

 

 

3,816

 

Certain interest expense and other financing costs

 

707

 

 

 

1,418

 

Gain on sale of fixed assets

 

(319

)

 

 

(312

)

Deferred income taxes1

 

(44,923

)

 

 

788

 

Changes in operating assets and liabilities, net of the effects of businesses acquired:

 

 

 

 

 

 

 

Accounts receivable

 

151,365

 

 

 

136,895

 

Inventories

 

(52,024

)

 

 

(48,019

)

Prepaid expenses and other assets

 

(1,421

)

 

 

(46,594

)

Accounts payable and accrued expenses

 

(191,800

)

 

 

(18,724

)

Net cash provided by (used in) operating activities

 

(40,456

)

 

 

78,123

 

 

 

 

 

 

 

 

 

Investing Activities

 

 

 

 

 

 

 

Purchases of property and equipment

 

(7,416

)

 

 

(7,280

)

Acquisition of businesses, net

 

-

 

 

 

(1,850

)

Proceeds from the sale of assets

 

413

 

 

 

400

 

Net cash used in investing activities

 

(7,003

)

 

 

(8,730

)

 

 

 

 

 

 

 

 

Financing Activities

 

 

 

 

 

 

 

Borrowings under revolving lines of credit

 

17,402

 

 

 

355,057

 

Repayments under revolving lines of credit

 

(20,548

)

 

 

(382,395

)

Repayments under term loan

 

-

 

 

 

(1,125

)

Borrowings under Senior Notes2

 

1,300,000

 

 

 

-

 

Payment of debt issuance costs

 

(21,917

)

 

 

-

 

Repayments under equipment financing facilities and other

 

(1,968

)

 

 

(2,405

)

Payment of issuance costs from secondary offering of common stock

 

(429

)

 

 

-

 

Proceeds from issuance of common stock related to equity awards

 

3,781

 

 

 

3,460

 

Taxes paid related to net share settlement of equity awards

 

(3,925

)

 

 

(297

)

Net cash provided by (used in) financing activities

 

1,272,396

 

 

 

(27,705

)

 

 

 

 

 

 

 

 

Effect of exchange rate changes on cash, cash equivalents, and restricted cash

 

640

 

 

 

197

 

 

 

 

 

 

 

 

 

Net increase in cash, cash equivalents, and restricted cash

 

1,225,577

 

 

 

41,885

 

Cash, cash equivalents, and restricted cash, beginning of period

 

138,250

 

 

 

31,386

 

Cash, cash equivalents, and restricted cash, end of period

$

1,363,827

 

 

$

73,271

 

 

 

 

 

 

 

 

 

Supplemental cash flow information

 

 

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

 

 

Interest

$

26,781

 

 

$

19,335

 

Income taxes, net of tax refunds

 

22,130

 

 

 

13,906

 

_____________

  1 Includes impact of provisional amounts recognized relating to estimated impact of Tax Cuts and Jobs Act of 2017 – see Note 12.

  2 Gross funds from issuance of 2025 Senior Notes to finance the Company’s Allied Acquisition, presented as restricted cash on the Company’s consolidated balance sheet – see Note 8.

See accompanying Notes to Condensed Consolidated Financial Statements

6


BEACON ROOFING SUPPLY, INC.

Notes to Condensed Consolidated Financial Statements

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

1. Company Overview

Beacon Roofing Supply, Inc. (the “Company”) was incorporated in the state of Delaware on August 22, 1997 and is the largest publicly traded distributor of residential and non-residential roofing materials and complementary building products in the United States and Canada. The Company operates its business under regional and local trade names and, as of December 31, 2017, the Company serviced customers in 48 states within the United States and 6 provinces in Canada. The Company’s material subsidiaries are Beacon Sales Acquisition, Inc., Beacon Canada, Inc. and Beacon Roofing Supply Canada Company.

2. Summary of Significant Accounting Policies

Basis of Presentation

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

In management’s opinion, the financial statements include all normal and recurring adjustments that are considered necessary for the fair presentation of the Company’s financial position and operating results. The results for the three-month periods ended December 31, 2017 are not necessarily indicative of the results to be expected for the twelve months ending September 30, 2018 (“fiscal year 2018” or “2018”).

The three-month periods ended December 31, 2017 and 2016 each had 61 business days.

These interim Condensed Consolidated Financial Statements should be read in conjunction with the audited Consolidated Financial Statements and Notes thereto contained in the Company’s fiscal year 2017 (“2017”) Annual Report on Form 10-K for the year ended September 30, 2017.

Use of Estimates

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

Recent Accounting Pronouncements—Adopted

        In July 2015, the FASB issued ASU 2015-11, “Inventory: Simplifying the Measurement of Inventory.” This guidance applies to inventory valued at first-in, first-out (FIFO) or average cost and requires inventory to be measured at the lower of cost and net realizable value, rather than at the lower of cost or market. This new standard is effective on a prospective basis for annual and interim reporting periods beginning after December 15, 2016. The Company adopted this guidance effective October 1, 2017 and the standard did not have a no material impact on the Company’s financial statements and related disclosures.

In March 2016, the FASB issued ASU 2016-09, “Compensation—Stock Compensation: Improvements to Employee Share-Based Payment Accounting.” This guidance is intended to simplify several aspects of the accounting for share-based payment transactions, including the accounting for income taxes, forfeitures and statutory tax withholding requirements, as well as classification in the statement of cash flows. The provisions of this standard are effective for reporting periods beginning after December 15, 2016 and early adoption is permitted in any interim or annual period. The Company adopted this guidance effective October 1, 2017. As a result, the Company now records excess tax benefits (or deficiencies) as income tax benefits (or expenses) in our consolidated statements of operations rather than as additional paid-in-capital in its consolidated balance sheets. ASU 2016-09 allowed for this guidance to be applied prospectively or retrospectively.  The Company elected to apply this guidance prospectively, and recognized $2.4 million of excess tax benefits in our consolidated statement of operations for the three months ended December 31, 2017 related to equity award transactions executed in the period. To align with the prospective treatment in our consolidated statements of operations, the Company now classifies excess tax benefits (or deficiencies) along with accrued income taxes in operating activities within our consolidated statements of cash flows. The Company elected to retain its historical approach to

7


accounting for forfeitures and statutory tax withholding requirements, therefore these specific aspects of the new guidance had no impact on its financial statements and related disclosures.

In November 2016, the FASB issued ASU 2016-18, “Restricted Cash.” This guidance standardizes the presentation of changes to restricted cash on the statement of cash flows by requiring that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amount generally described as restricted cash or restricted cash equivalents. The provisions of this standard are effective for reporting periods beginning after December 15, 2017. Early adoption is permitted in any interim or annual period, and the guidance is required to be applied retrospectively. The Company adopted this guidance effective October 1, 2017. As a result, the Company included restricted cash within its consolidated statements of cash flows for the three months ended December 31, 2017 and 2016, and also included the required disclosures within the related footnotes.  

Recent Accounting Pronouncements—Not Yet Adopted

In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers.” This guidance requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers, and will replace most existing revenue recognition guidance when it becomes effective. This new standard is effective for public business entities for annual and interim reporting periods beginning after December 15, 2017, and early adoption is permitted for annual reporting periods beginning after December 15, 2016. The standard permits the use of either the full retrospective or modified retrospective adoption methods. The Company is continuing to perform a detailed evaluation, using a five-step model specified in the guidance, to assess the impacts of the new standard and expects to apply the guidance using the modified retrospective method. Based on the Company’s knowledge of its revenue transactions, the Company does not expect the adoption of this new guidance to have a material impact on its financial statements, but does expect that it will result in additional revenue recognition disclosures.

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

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

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

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

In May 2017, the FASB issued ASU 2017-09, “Scope of Modification Accounting.” This guidance is intended to provide clarity and reduce both diversity in practice and cost and complexity when applying the guidance in Compensation – Stock Compensation, to a change to the terms or conditions of a share-based payment award. This new standard is effective for annual and interim reporting periods beginning after December 15, 2017 and early adoption is permitted. The Company does not expect the adoption of this new guidance to have a material impact on its financial statements and related disclosures.

8


3. Acquisitions

During fiscal year 2017, the Company acquired 23 branches from the following five acquisitions:

 

On December 16, 2016, the Company purchased certain assets of BJ Supply Company, a distributor of roofing and related building products with 1 branch serving Pennsylvania and New Jersey and annual sales of approximately $4 million. The Company has finalized the acquisition accounting entries for this transaction.

 

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

 

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

 

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

 

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

The Company recorded the acquired assets and liabilities related to these transactions at their estimated fair values as of the respective acquisition dates, with resulting goodwill of $53.0 million (all of which is deductible for tax purposes) and $47.4 million in intangible assets associated with these other acquisitions.

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

4. Net Income per Share

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

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

 

 

Three Months Ended December 31,

 

 

2017

 

 

2016

 

Weighted-average common shares outstanding, basic

 

67,825,430

 

 

 

59,943,264

 

Effect of dilutive securities:

 

 

 

 

 

 

 

Stock options

 

914,724

 

 

 

649,644

 

Restricted stock units

 

504,524

 

 

 

400,172

 

Weighted-average common shares outstanding, diluted

 

69,244,678

 

 

 

60,993,080

 

 

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

 

 

Three Months Ended December 31,

 

 

2017

 

 

2016

 

Stock options

 

288,275

 

 

 

561,741

 

Restricted stock units

 

-

 

 

 

247,559

 

 

9


5. Stockholders’ Equity

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

Common Stock

 

 

Additional

Paid-in

 

 

Retained

 

 

Other

Comprehensive

 

 

Total

Stockholders'

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Earnings

 

 

Loss

 

 

Equity

 

Balance at September 30, 2017

 

67,700,858

 

 

$

677

 

 

$

1,047,506

 

 

$

748,186

 

 

$

(14,563

)

 

$

1,781,806

 

Issuance of common stock, net of shares withheld for taxes

 

271,525

 

 

 

2

 

 

 

(147

)

 

 

-

 

 

 

-

 

 

 

(145

)

Issuance costs related to secondary offering of common stock

 

 

 

 

 

 

 

 

 

(429

)

 

 

 

 

 

 

 

 

 

 

(429

)

Stock-based compensation

 

-

 

 

 

-

 

 

 

3,459

 

 

 

-

 

 

 

-

 

 

 

3,459

 

Other comprehensive income

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

57

 

 

 

57

 

Net income

 

-

 

 

 

-

 

 

 

-

 

 

 

67,596

 

 

 

-

 

 

 

67,596

 

Balance at December 31, 2017

 

67,972,383

 

 

$

679

 

 

$

1,050,389

 

 

$

815,782

 

 

$

(14,506

)

 

$

1,852,344

 

 

Common and Preferred Stock

The Company is authorized to issue 100 million shares of common stock and 5 million shares of preferred stock. As of December 31, 2017, September 30, 2017, and December 31, 2016 there were 67,972,383, 67,700,858 and 60,030,516 shares of common stock issued and outstanding, respectively, and no preferred stock outstanding as of any period end.

Accumulated Other Comprehensive Loss

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

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

 

 

 

Foreign

Currency

Translation

 

 

Accumulated

Other

Comprehensive

Loss

 

Balance as of September 30, 2017

 

$

(14,563

)

 

$

(14,563

)

Other comprehensive income before reclassifications

 

 

57

 

 

 

57

 

Reclassifications out of other comprehensive loss

 

 

-

 

 

 

-

 

Balance as of December 31, 2017

 

$

(14,506

)

 

$

(14,506

)

 

6. Stock-based Compensation

On February 9, 2016, the shareholders of the Company approved the Amended and Restated Beacon Roofing Supply, Inc. 2014 Stock Plan (the “2014 Plan”). The 2014 Plan provides for discretionary awards of stock options, stock awards, restricted stock units, and stock appreciation rights (“SARs”) for up to 5,000,000 shares of common stock to selected employees and non-employee directors. The 2014 Plan mandates that all forfeited, expired, and withheld shares, including those from the predecessor plans, be returned to the 2014 Plan and made available for issuance. As of December 31, 2017, there were 3,638,039 shares of common stock available for issuance.

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

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

10


change in control, in which event the award shall become fully vested immediately (at 100% in the case of a performance-based restricted stock award).

Stock Options

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

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

 

Risk-free interest rate

 

2.10

%

Expected volatility

 

26.43

%

Expected life (in years)

 

5.46

 

Dividend yield

-

 

The following table summarizes all stock option activity for the three months ended December 31, 2017 (in thousands, except share, per share, and time period amounts):

 

 

Options

Outstanding

 

 

Weighted-

Average

Exercise

Price

 

 

Weighted-

Average

Remaining

Contractual

Term (Years)

 

 

Aggregate

Intrinsic

Value1

 

Balance as of September 30, 2017

 

2,084,228

 

 

$

28.84

 

 

 

6.1

 

 

$

46,714

 

Granted

 

276,370

 

 

 

55.17

 

 

 

 

 

 

 

 

 

Exercised

 

(154,588

)

 

 

24.46

 

 

 

 

 

 

 

 

 

Canceled/Forfeited

 

(7,711

)

 

 

38.05

 

 

 

 

 

 

 

 

 

Expired

 

(2,274

)

 

 

14.56

 

 

 

 

 

 

 

 

 

Balance as of December 31, 2017

 

2,196,025

 

 

$

32.44

 

 

 

6.4

 

 

$

68,776

 

Vested and expected to vest after December 31, 2017

 

2,168,798

 

 

$

32.25

 

 

 

6.4

 

 

$

68,339

 

Exercisable as of December 31, 2017

 

1,582,337

 

 

$

27.40

 

 

 

5.4

 

 

$

57,537

 

 

 

1 

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

During the three months ended December 31, 2017 and 2016, the Company recorded stock-based compensation expense related to stock options of $1.1 million and $1.3 million, respectively. As of December 31, 2017, there was $8.0 million of unrecognized compensation cost related to unvested stock options, which is expected to be recognized over a weighted-average period of 2.3 years.

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

 

 

Three Months Ended December 31,

 

 

2017

 

 

2016

 

Weighted-average fair value of stock options granted

$

15.86

 

 

$

14.21

 

Total fair value of stock options vested

 

3,773

 

 

 

4,887

 

Total intrinsic value of stock options exercised

 

5,448

 

 

 

2,750

 

Restricted Stock Units

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

11


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

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

 

 

RSUs

Outstanding

 

 

Weighted-

Average

Grant Date

Fair Value

 

Balance at September 30, 2017

 

770,973

 

 

$

38.95

 

Granted

 

160,510

 

 

 

55.17

 

Performance awards1

 

41,440

 

 

 

39.56

 

Released

 

(184,771

)

 

 

31.31

 

Canceled/Forfeited

 

(7,206

)

 

 

40.65

 

Balance at December 31, 2017

 

780,946

 

 

$

44.11

 

Vested and expected to vest after December 31, 2017

 

748,271

 

 

$

43.92

 

 

 

1 

Additional restricted stock units outstanding as a result of the satisfaction of a performance vesting condition prior to the ascribed time-based vesting condition (release date).

During the three months ended December 31, 2017 and 2016, the Company recorded stock-based compensation expense related to restricted stock units of $2.4 million and $2.5 million, respectively. As of December 31, 2017, there was $18.2 million of unrecognized compensation cost related to unvested restricted stock units, which is expected to be recognized over a weighted-average period of 2.1 years.

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

 

 

Three Months Ended December 31,

 

 

2017

 

 

2016

 

Weighted-average fair value of RSUs granted

$

55.17

 

 

$

47.40

 

Total fair value of RSUs vested

 

5,786

 

 

 

1,002

 

Total intrinsic value of RSUs released

 

10,683

 

 

 

1,096

 

 

7. Goodwill and Intangible Assets

Goodwill

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

 

Balance at September 30, 2016

$

1,197,565

 

Acquisitions

 

774

 

Translation and other adjustments

 

(789

)

Balance at December 31, 2016

$

1,197,550

 

 

 

 

 

Balance at September 30, 2017

$

1,251,986

 

Acquisitions

 

-

 

Translation and other adjustments

 

(161

)

Balance at December 31, 2017

$

1,251,825

 

 

The change in the carrying amount of goodwill for the three months ended December 31, 2017 was driven by foreign currency translation adjustments.

12


Intangible Assets

In connection with transactions finalized during fiscal year 2017, the Company recorded intangible assets of $47.4 million ($42.7 million of customer relationships, $4.6 million of amortizable trademarks, and $0.1 million of beneficial lease arrangements). Intangible assets consisted of the following (in thousands, except time period amounts):

 

 

December 31,

2017

 

 

September 30,

2017

 

 

December 31,

2016

 

 

Weighted-

Average

Remaining

Life1

(Years)

 

Amortizable intangible assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-compete agreements

$

2,824

 

 

$

2,824

 

 

$

2,824

 

 

 

3.10

 

Customer relationships

 

609,984

 

 

 

610,026

 

 

 

567,157

 

 

 

17.36

 

Trademarks

 

10,500

 

 

 

10,500

 

 

 

5,900

 

 

 

8.17

 

Beneficial lease arrangements

 

1,060

 

 

 

1,060

 

 

 

960

 

 

 

8.65

 

Total amortizable intangible assets

 

624,368

 

 

 

624,410

 

 

 

576,841

 

 

 

 

 

Less:  Accumulated amortization

 

(286,561

)

 

 

(268,391

)

 

 

(205,681

)

 

 

 

 

Total amortizable intangible assets, net

$

337,807

 

 

$

356,019

 

 

$

371,160

 

 

 

 

 

Indefinite lived trademarks

 

73,050

 

 

 

73,050

 

 

 

73,050

 

 

 

 

 

Total intangibles, net

$

410,857

 

 

$

429,069

 

 

$

444,210

 

 

 

 

 

 

 

1 

As of December 31, 2017

For the three month periods ended December 31, 2017 and 2016, we recorded $18.2 million and $20.1 million of amortization expense relating to the above-listed intangible assets, respectively. The intangible asset lives range from 5 to 20 years and have a weighted-average remaining life of 17.1 years as of December 31, 2017.

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

 

Year Ending September 30,

 

 

 

2018 (Jan - Sept)

$

53,374

 

2019

 

58,774

 

2020

 

47,754

 

2021

 

38,234

 

2022

 

30,289

 

Thereafter

 

109,382

 

 

$

337,807

 

 

13


8. Financing Arrangements

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

 

 

December 31,

 

 

September 30,

 

 

December 31,

 

 

2017

 

 

2017

 

 

2016

 

Senior Secured Credit Facility

 

 

 

 

 

 

 

 

 

 

 

Revolving Lines of Credit:

 

 

 

 

 

 

 

 

 

 

 

U.S. Revolver, expires October 1, 2020 1

$

-

 

 

$

-

 

 

$

330,445

 

Canadian Revolver, expires October 1, 20202

 

-

 

 

 

3,205

 

 

 

2,234

 

Term Loan, matures October 1, 20223

 

433,828

 

 

 

433,440

 

 

 

435,647

 

Total borrowings under Senior Secured Credit Facility

 

433,828

 

 

 

436,645

 

 

 

768,326

 

Less: current portion

 

(4,500

)

 

 

(4,500

)

 

 

(4,500

)

Total long-term borrowings under Senior Secured Credit Facility

$

429,328

 

 

$

432,145

 

 

$

763,826

 

 

 

 

 

 

 

 

 

 

 

 

 

Senior Notes

 

 

 

 

 

 

 

 

 

 

 

Senior Notes, matures October 20234

 

292,648

 

 

 

292,328

 

 

 

291,369

 

Senior Notes, matures November 20255

 

1,278,083

 

 

 

-

 

 

 

-

 

Less: current portion

 

-

 

 

 

-

 

 

 

-

 

Total long-term borrowings under Senior Notes

$

1,570,731

 

 

$

292,328

 

 

$

291,369

 

 

 

 

 

 

 

 

 

 

 

 

 

Equipment Financing Facilities and Other

 

 

 

 

 

 

 

 

 

 

 

Equipment financing facilities, various maturities through September 20216

$

14,400

 

 

$

15,445

 

 

$

19,188

 

Capital lease obligations, various maturities through November 20217

 

19,033

 

 

 

19,956

 

 

 

23,837

 

Total obligations under equipment financing facilities and other

 

33,433

 

 

 

35,401

 

 

 

43,025

 

Less: current portion

 

(9,739

)

 

 

(9,641

)

 

 

(10,110

)

Total long-term obligations under equipment financing facilities and other

$

23,694

 

 

$

25,760

 

 

$

32,915

 

 

 

1 

Effective rates on borrowings are 1.50% as of December 31, 2017; 2.00% as of September 30, 2017; and 3.13% as of December 31, 2016

 

2

Effective rates on borrowings are 3.70% as of December 31, 2017; 3.70% as of September 30, 2017; and 3.20% as of December 31, 2016

 

3 

Interest rate of 4.06% as of December 31, 2017; 3.50% as of September 30, 2017; 3.71% as of December 31, 2016

 

4

Interest rate of 6.38% as of December 31, 2017, September 30, 2017 and December 31, 2016

 

5 

Interest rate of 4.88% as of December 31, 2017

 

6 

Fixed interest rates ranging from 2.33% to 3.25% as of December 31, 2017, September 30, 2017, and December 31, 2016

 

7 

Fixed interest rates ranging from 2.72% to 10.39% as of December 31, 2017, September 30, 2016, and December 31, 2016

Financing - Allied Acquisition

On October 25, 2017, in connection with the financing for the Allied Acquisition (see Note 14), Beacon Escrow Corporation, a wholly owned subsidiary of the Company (the “Escrow Issuer”), completed a private offering of $1.30 billion aggregate principal amount of 4.875% Senior Notes due 2025 (the “2025 Senior Notes”) at an issue price of 100%. The 2025 Senior Notes bear interest at a rate of 4.875% per annum, payable semi-annually in arrears, beginning May 1, 2018. Management anticipates repaying the notes at the maturity date of November 1, 2025.

The net proceeds from the 2025 Senior Notes were deposited into a segregated escrow account with U.S. Bank National Association, as escrow agent (the “Escrow Agent”), subject to the satisfaction of all conditions precedent to the consummation of the Allied Acquisition and certain other conditions set forth in an escrow agreement (the “Escrow Agreement”) with the Escrow Agent.  There are conditions that must be satisfied prior to releasing these proceeds from escrow; therefore, these escrowed funds have been presented as restricted cash on the Company’s consolidated balance sheet as of December 31, 2017. The following table provides a reconciliation of cash, cash equivalents, and restricted cash from the Company’s balance sheet to the same amounts shown in the Company’s consolidated statement of cash flows for the three months ended December 31, 2017 (in thousands):

 

14


 

December 31,

 

 

2017

 

Cash and cash equivalents

$

63,827

 

Restricted cash

 

1,300,000

 

Total cash, cash equivalents, and restricted cash

$

1,363,827

 

Per the terms of the Escrow Agreement, the net proceeds from the 2025 Senior Notes remained in escrow until they were used to fund a portion of the purchase price of the Allied Acquisition payable at closing on January 2, 2018.  On the same date, (i) the Escrow Issuer merged with and into the Company, and the Company assumed all obligations under the 2025 Senior Notes; and (ii) all existing domestic subsidiaries of the Company (including the entities acquired in the Allied Acquisition) became guarantors of the 2025 Senior Notes.

As of December 31, 2017, the outstanding balance on the 2025 Senior Notes, net of debt issuance fees, was $1.28 billion.

Financing - RSG Acquisition

On October 1, 2015, in connection with the RSG Acquisition, the Company entered into various financing arrangements totaling $1.45 billion. A “Senior Secured Credit Facility” was entered into that is comprised of an asset-based revolving line of credit (“ABL”) of $700.0 million ($350.0 million of which was drawn at closing) and a new $450.0 million term loan (“Term Loan”). The Company also raised an additional $300.0 million through the issuance of senior notes (the “2023 Senior Notes”).

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

Asset-based Line of Credit (“ABL”)

On October 1, 2015, the Company entered into a $700 million ABL with Wells Fargo Bank, N.A. and a syndicate of other lenders. This ABL consists of revolving loans in both the United States (“U.S. Revolver”) in the amount of $670.0 million and Canada (“Canada Revolver”) in the amount of $30.0 million. The ABL has a maturity date of October 1, 2020.

The ABL has various borrowing tranches with an interest at rate of LIBOR plus a margin 125 basis points, 150 basis points or 175 basis points, based on the total outstanding balance of each tranche. The LIBOR rates can be fixed at one, three, six, or twelve month intervals and any non-fixed LIBOR amounts revert to a 4.75% base rate. As of December 31, 2017, the total balance outstanding on the ABL was immaterial, and the weighted-average interest rate was 1.50%. Unamortized debt issuance costs of $4.9 million related to the ABL are classified in “other assets, net” on the Company’s consolidated balance sheet as of December 31, 2017. The Company also has outstanding standby letters of credit related to the U.S. Revolver in the amount of $10.7 million as of December 31, 2017. The current unused commitment fees on the ABL are 0.25% per annum.

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

Term Loan

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

On September 16, 2016, the Company refinanced its Term Loan, lowering the LIBOR floor by 25 basis points and lowering the spread by 25 basis points. As a result of the refinancing, the Company wrote off $1.6 million of debt issuance costs in interest expense. As of December 31, 2017, the outstanding balance on the Term Loan, net of debt issuance fees, was $433.8 million. The Term Loan is guaranteed jointly, severally, fully and unconditionally by the Company’s active United States subsidiary.

15


2023 Senior Notes

On October 1, 2015, the Company raised $300.0 million by issuing senior notes due 2023 (the “2023 Senior Notes”). The 2023 Senior Notes have a coupon rate of 6.38% per annum and are payable semi-annually in arrears, beginning April 1, 2016. There are early payment provisions in the indenture in which the Company would be subject to “make whole” provisions. Management anticipates repaying the notes at the maturity date of October 1, 2023. As of December 31, 2017, the outstanding balance on the 2023 Senior Notes, net of debt issuance fees, was $292.6 million. The 2023 Senior Notes are guaranteed jointly, severally, fully and unconditionally by the Company’s active United States subsidiary.

Equipment Financing Facilities and Other

As of December 31, 2017, the Company had a $14.4 million outstanding under equipment financing facilities, with fixed interest rates ranging from 2.33% to 3.25% and payments due through September 2021.

As of December 31, 2017 the Company had $19.0 million of capital lease obligations outstanding. These leases have interest rates ranging from 2.72% to 10.39% with payments due through November 2021.

9. Commitments and Contingencies

Operating Leases

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

For the three months ended December 31, 2017 and 2016, rent expense was $15.2 million and $14.2 million, respectively. Sublet income was immaterial for each of these periods.

Contingencies

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

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

10. Geographic Data

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

 

 

Three Months Ended December 31,

 

 

2017

 

 

2016

 

Net sales

 

 

 

 

 

 

 

U.S.

$

1,076,262

 

 

$

960,235

 

Canada

 

45,717

 

 

 

41,949

 

Total net sales

$

1,121,979

 

 

$

1,002,184

 

 

 

December 31,

 

 

September 30,

 

 

December 31,

 

 

2017

 

 

2017

 

 

2016

 

Long-lived assets

 

 

 

 

 

 

 

 

 

 

 

U.S.

$

488,137

 

 

$

507,236

 

 

$

507,295

 

Canada

 

13,225

 

 

 

13,446

 

 

 

12,716

 

Total long-lived assets

$

501,362

 

 

$

520,682

 

 

$

520,011

 

 

16


11. Fair Value Measurement

As of December 31, 2017, the carrying amount of cash and cash equivalents, accounts receivable, prepaid and other current assets, accounts payable and accrued expenses approximated fair value because of the short-term nature of these instruments. The Company measures its cash equivalents at amortized cost, which approximates fair value based upon quoted market prices (Level 1).

As of December 31, 2017, based upon recent trading prices (Level 2 — market approach), the fair value of the Company’s $300.0 million Senior Notes due in 2023 was $320.0 million and the fair value of the $1.30 billion Senior Notes due 2025 was $1.31 billion.

As of December 31, 2017, the fair value of the Company’s Senior Secured Credit Facility approximated the amount outstanding. The Company estimates the fair value of its Senior Secured Credit Facility by discounting the future cash flows of each instrument using estimated market rates of debt instruments with similar maturities and credit profiles (Level 3).

12