Form 10-Q BEACON ROOFING SUPPLY For: Dec 31

February 8, 2019 12:49 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, 2018

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 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 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

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, 2019, 68,438,361 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, 2018

 

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 Stockholders’ Equity

 

6

 

 

 

 

Consolidated Statements of Cash Flows

 

7

 

 

 

 

Notes to Condensed Consolidated Financial Statements

 

8

 

 

 

 

 

 

 

 

 

Item 2.

 

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

 

27

 

 

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

38

 

 

Item 4.

 

Controls and Procedures

 

38

 

 

 

 

 

 

 

PART II.

 

Other Information

 

 

 

 

Item 6.

 

Exhibits

 

39

 

 

 

 

 

 

 

Signatures

 

40

 

2


PART I.Financial Information (Unaudited)

Item 1.

Condensed Consolidated Financial Statements

BEACON ROOFING SUPPLY, INC.

Consolidated Balance Sheets

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

 

 

December 31,

 

 

September 30,

 

 

December 31,

 

 

2018

 

 

2018

 

 

2017

 

Assets

 

 

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

$

18,423

 

 

$

129,927

 

 

$

63,827

 

Restricted cash

 

-

 

 

 

-

 

 

 

1,300,000

 

Accounts receivable, less allowance of $21,353, $17,584 and $13,470 as of December 31, 2018, September 30, 2018 and December 31, 2017, respectively

 

881,749

 

 

 

1,090,533

 

 

 

552,703

 

Inventories, net

 

1,025,310

 

 

 

936,047

 

 

 

603,793

 

Prepaid expenses and other current assets

 

375,598

 

 

 

244,360

 

 

 

218,718

 

Total current assets

 

2,301,080

 

 

 

2,400,867

 

 

 

2,739,041

 

Property and equipment, net

 

273,742

 

 

 

280,407

 

 

 

154,687

 

Goodwill

 

2,489,730

 

 

 

2,491,779

 

 

 

1,251,825

 

Intangibles, net

 

1,282,242

 

 

 

1,334,366

 

 

 

410,857

 

Other assets, net

 

1,243

 

 

 

1,243

 

 

 

8,868

 

Total assets

$

6,348,037

 

 

$

6,508,662

 

 

$

4,565,278

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities and Stockholders' Equity

 

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

 

 

 

Accounts payable

$

551,940

 

 

$

880,872

 

 

$

315,442

 

Accrued expenses

 

375,672

 

 

 

611,539

 

 

 

266,049

 

Current portions of long-term debt/obligations

 

20,315

 

 

 

19,661

 

 

 

14,239

 

Total current liabilities

 

947,927

 

 

 

1,512,072

 

 

 

595,730

 

Borrowings under revolving lines of credit, net

 

503,216

 

 

 

92,442

 

 

 

-

 

Long-term debt, net

 

2,497,123

 

 

 

2,494,725

 

 

 

2,000,059

 

Deferred income taxes, net

 

110,179

 

 

 

106,994

 

 

 

93,451

 

Long-term obligations under equipment financing and other, net

 

10,689

 

 

 

13,639

 

 

 

20,951

 

Other long-term liabilities

 

5,532

 

 

 

5,290

 

 

 

2,743

 

Total liabilities

$

4,074,666

 

 

$

4,225,162

 

 

$

2,712,934

 

 

 

 

 

 

 

 

 

 

 

 

 

Commitments and contingencies (Note 9)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Convertible preferred stock; $0.01 par value; aggregate liquidation preference $400,000; 400,000 shares authorized, issued and outstanding as of December 31, 2018 and September 30, 2018; none authorized, issued or outstanding as of December 31, 2017

$

399,195

 

 

$

399,195

 

 

$

-

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders' equity:

 

 

 

 

 

 

 

 

 

 

 

Common stock (voting); $0.01 par value; 100,000,000 shares authorized; 68,432,707, 68,135,790, and 67,972,383 shares issued and outstanding as of December 31, 2018, September 30, 2018 and December 31, 2017, respectively

$

684

 

 

$

681

 

 

$

679

 

Undesignated preferred stock; 5,000,000 shares authorized, none issued or outstanding

 

-

 

 

 

-

 

 

 

-

 

Additional paid-in capital

 

1,067,711

 

 

 

1,067,040

 

 

 

1,050,389

 

Retained earnings

 

826,941

 

 

 

833,834

 

 

 

815,782

 

Accumulated other comprehensive income (loss)

 

(21,160

)

 

 

(17,250

)

 

 

(14,506

)

Total stockholders' equity

 

1,874,176

 

 

 

1,884,305

 

 

 

1,852,344

 

Total liabilities and stockholders' equity

$

6,348,037

 

 

$

6,508,662

 

 

$

4,565,278

 

 

 

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,

 

 

2018

 

 

2017

 

Net sales

$

1,721,676

 

 

$

1,121,979

 

Cost of products sold

 

1,286,107

 

 

 

852,226

 

Gross profit

 

435,569

 

 

 

269,753

 

Operating expense:

 

 

 

 

 

 

 

Selling, general and administrative

 

327,693

 

 

 

193,753

 

Depreciation

 

17,601

 

 

 

8,709

 

Amortization

 

52,021

 

 

 

18,195

 

Total operating expense

 

397,315

 

 

 

220,657

 

Income (loss) from operations

 

38,254

 

 

 

49,096

 

Interest expense, financing costs, and other

 

38,361

 

 

 

22,568

 

Income (loss) before provision for income taxes

 

(107

)

 

 

26,528

 

Provision for (benefit from) income taxes1

 

786

 

 

 

(41,068

)

Net income (loss)

$

(893

)

 

$

67,596

 

Dividends on preferred shares2

 

6,000

 

 

 

-

 

Net income (loss) attributable to common shareholders

$

(6,893

)

 

$

67,596

 

 

 

 

 

 

 

 

 

Weighted-average common stock outstanding:

 

 

 

 

 

 

 

Basic

 

68,248,020

 

 

 

67,825,430

 

Diluted

 

68,248,020

 

 

 

69,244,678

 

 

 

 

 

 

 

 

 

Net income (loss) per share3:

 

 

 

 

 

 

 

Basic

$

(0.10

)

 

$

1.00

 

Diluted

$

(0.10

)

 

$

0.98

 

________________________________________

 

1

Three months ended December 31, 2017 amount includes a $46.5 million non-recurring net tax benefit resulting from the enactment of the 2017 Tax Cuts and Jobs Act (“TCJA”). As of December 31, 2018, the Company had completed its analysis of the impact of the TCJA in accordance with SEC Staff Accounting Bulletin No. 118. There were no adjustments to the provisional amounts during the three months ended December 31, 2018.

 

 

2

Three months ended December 31, 2018 amount is composed of $5.0 million in undeclared cumulative Preferred Stock dividends as well as an additional $1.0 million of Preferred Stock dividends that had been declared and paid as of period end. See Note 3 for further discussion.

 

 

3

See Note 5 for detailed calculations and further discussion.

 

 

See accompanying Notes to Condensed Consolidated Financial Statements

 

 6.0

4


BEACON ROOFING SUPPLY, INC.

Consolidated Statements of Comprehensive Income

(Unaudited; In thousands)

 

 

 

Three Months Ended December 31,

 

 

2018

 

 

2017

 

Net income (loss)

$

(893

)

 

$

67,596

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

Foreign currency translation adjustment

 

(3,910

)

 

 

57

 

Total other comprehensive income (loss)

 

(3,910

)

 

 

57

 

Comprehensive income (loss)

$

(4,803

)

 

$

67,653

 

 

 

See accompanying Notes to Condensed Consolidated Financial Statements

 

 


5


BEACON ROOFING SUPPLY, INC.

Consolidated Statements of Stockholders’ Equity

(In thousands, except share amounts)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

Other

 

 

Total

 

 

Common Stock

 

 

Paid-in

 

 

Retained

 

 

Comprehensive

 

 

Stockholders'

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Earnings

 

 

Income (Loss)

 

 

Equity

 

Balance as of 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 (loss)

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

57

 

 

 

57

 

Net income (loss)

 

-

 

 

 

-

 

 

 

-

 

 

 

67,596

 

 

 

-

 

 

 

67,596

 

Balance as of December 31, 2017

 

67,972,383

 

 

$

679

 

 

$

1,050,389

 

 

$

815,782

 

 

$

(14,506

)

 

$

1,852,344

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

Other

 

 

Total

 

 

Common Stock

 

 

Paid-in

 

 

Retained

 

 

Comprehensive

 

 

Stockholders'

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Earnings

 

 

Income (Loss)

 

 

Equity

 

Balance as of September 30, 2018

 

68,135,790

 

 

$

681

 

 

$

1,067,040

 

 

$

833,834

 

 

$

(17,250

)

 

$

1,884,305

 

Issuance of common stock, net of shares withheld for taxes

 

296,917

 

 

 

3

 

 

 

(2,786

)

 

 

-

 

 

 

-

 

 

 

(2,783

)

Stock-based compensation

 

-

 

 

 

-

 

 

 

3,457

 

 

 

-

 

 

 

-

 

 

 

3,457

 

Other comprehensive income (loss)

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(3,910

)

 

 

(3,910

)

Net income (loss)

 

-

 

 

 

-

 

 

 

-

 

 

 

(893

)

 

 

-

 

 

 

(893

)

Dividends on preferred shares1

 

-

 

 

 

-

 

 

 

-

 

 

 

(6,000

)

 

 

-

 

 

 

(6,000

)

Balance as of December 31, 2018

 

68,432,707

 

 

$

684

 

 

$

1,067,711

 

 

$

826,941

 

 

$

(21,160

)

 

$

1,874,176

 

 

1 Amount represents dividends that have been declared and paid during the three months ended December 31, 2018.

 

 

See accompanying Notes to Condensed Consolidated Financial Statements

6


BEACON ROOFING SUPPLY, INC.

Consolidated Statements of Cash Flows

(Unaudited; In thousands)

 

 

Three Months Ended December 31,

 

 

2018

 

 

2017

 

Operating Activities

 

 

 

 

 

 

 

Net income (loss)

$

(893

)

 

$

67,596

 

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

 

 

 

 

 

 

 

Depreciation and amortization

 

69,622

 

 

 

26,904

 

Stock-based compensation

 

3,457

 

 

 

3,459

 

Certain interest expense and other financing costs

 

3,024

 

 

 

707

 

Beneficial lease amortization

 

572

 

 

 

-

 

Gain on sale of fixed assets

 

(265

)

 

 

(319

)

Deferred income taxes

 

3,201

 

 

 

(44,923

)

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

 

 

 

 

 

 

 

Accounts receivable

 

207,119

 

 

 

151,365

 

Inventories

 

(90,712

)

 

 

(52,024

)

Prepaid expenses and other assets

 

(131,638

)

 

 

(1,421

)

Accounts payable and accrued expenses

 

(400,616

)

 

 

(191,800

)

Other liabilities

 

246

 

 

 

-

 

Net cash provided by (used in) operating activities

 

(336,883

)

 

 

(40,456

)

 

 

 

 

 

 

 

 

Investing Activities

 

 

 

 

 

 

 

Purchases of property and equipment

 

(11,688

)

 

 

(7,416

)

Acquisition of businesses, net

 

(163,973

)

 

 

-

 

Proceeds from the sale of assets

 

401

 

 

 

413

 

Net cash provided by (used in) investing activities

 

(175,260

)

 

 

(7,003

)

 

 

 

 

 

 

 

 

Financing Activities

 

 

 

 

 

 

 

Borrowings under revolving lines of credit

 

1,298,654

 

 

 

17,402

 

Repayments under revolving lines of credit

 

(888,225

)

 

 

(20,548

)

Borrowings under senior notes

 

-

 

 

 

1,300,000

 

Payment of debt issuance costs

 

-

 

 

 

(21,917

)

Repayments under equipment financing facilities and other

 

(1,465

)

 

 

(1,968

)

Payment of stock issuance costs

 

-

 

 

 

(429

)

Payment of dividends on preferred stock

 

(6,000

)

 

 

-

 

Proceeds from issuance of common stock related to equity awards

 

834

 

 

 

3,781

 

Taxes paid related to net share settlement of equity awards

 

(3,617

)

 

 

(3,925

)

Net cash provided by (used in) financing activities

 

400,181

 

 

 

1,272,396

 

 

 

 

 

 

 

 

 

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

 

458

 

 

 

640

 

 

 

 

 

 

 

 

 

Net increase (decrease) in cash, cash equivalents, and restricted cash

 

(111,504

)

 

 

1,225,577

 

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

 

129,927

 

 

 

138,250

 

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

$

18,423

 

 

$

1,363,827

 

 

 

 

 

 

 

 

 

Supplemental Cash Flow Information

 

 

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

 

 

Interest

$

57,732

 

 

$

26,781

 

Income taxes, net of tax refunds

 

1,239

 

 

 

22,130

 

 

 

 

 

 

 

 

 

See accompanying Notes to Condensed Consolidated Financial Statements

7


BEACON ROOFING SUPPLY, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

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.

On January 2, 2018, the Company completed the acquisition of all the outstanding capital stock of Allied Building Products Corp. (“Allied”), a New Jersey corporation, for $2.625 billion, subject to certain working capital and other adjustments. Allied engages in the distribution of roofing materials, drywall, ceiling tile, and related accessories in the United States and was a wholly-owned subsidiary of Oldcastle Distribution, Inc. (see Note 3 for further discussion).

The Company operates its business under regional and local trade names and, as of December 31, 2018, the Company serviced customers in all 50 states within the United States and 6 provinces in Canada. The Company’s material subsidiaries are Beacon Sales Acquisition, Inc., and Beacon Roofing Supply Canada Company.

2. Summary of Significant Accounting Policies

Basis of Presentation

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. Certain prior period amounts have been reclassified to conform to current period presentation. The balance sheet as of December 31, 2017 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 months ended December 31, 2018 are not necessarily indicative of the results to be expected for the twelve months ending September 30, 2019 (“fiscal year 2019” or “2019”).

The three-month periods ended December 31, 2018 and 2017 had 62 and 61 business days, respectively.

These interim Condensed Consolidated Financial Statements should be read in conjunction with the audited Consolidated Financial Statements and Notes thereto contained in the Company’s fiscal year 2018 (“2018”) Annual Report on Form 10-K for the year ended September 30, 2018.

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 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 replaces most previously issued revenue recognition guidance. The new standard is effective for public business entities for annual reporting periods, and interim reporting periods contained therein, 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 elected the modified retrospective method and adopted the standard as of October 1, 2018 utilizing the portfolio practical expedient. The adoption of this guidance did not impact the Company’s retained earnings and did not have a material impact on the Company’s net sales recognition practices, income from operations, or net income per share amounts. The adoption of this guidance did result in certain balance sheet reclassifications to record estimated customer returns, specifically the recognition of a current liability for the gross amount of estimated returns and a current asset for the value of the related products. These reclassifications did not have a material impact on the Company’s consolidated balance sheet as of December 31, 2018. In addition, the adoption of this guidance resulted in additional quantitative disclosures to disaggregate net sales balances by product line and geography. See Note 4 to the Consolidated Financial Statements for further discussion.

8


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 reporting periods, and interim reporting periods contained therein, beginning after December 15, 2017, and early adoption is permitted. The Company adopted the standard as of October 1, 2018 and the standard did not have a material impact on the Company’s financial statement 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 reporting periods, and interim reporting periods contained therein, beginning after December 15, 2017, and early adoption is permitted. The Company adopted the standard as of October 1, 2018 and the standard did not have a material impact on the Company’s financial statement and related disclosures.

Recent Accounting Pronouncements—Not Yet Adopted

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 reporting periods, and interim reporting periods contained therein, beginning after December 15, 2018, and early adoption is permitted. In July 2018, the FASB amended the new lease standard which, among other changes, allows a company to elect to adopt ASU 2016-02 using a transition option whereby a cumulative effect adjustment is recorded to the opening balance of its retained earnings on the adoption date. 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 reporting periods, and interim reporting periods contained therein, 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 2017-04, “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 reporting periods, and interim reporting periods contained therein, 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 February 2018, the FASB issued ASU 2018-02, “Income Statement – Reporting Comprehensive Income.” This guidance is intended to address the accounting treatment for the tax effects on items within accumulated other comprehensive income as a result of the adoption of the Tax Cuts and Jobs Act of 2017. This new standard is effective for annual reporting periods, and interim reporting periods contained therein, beginning after December 15, 2018, 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.

3. Acquisitions

Allied Building Products Corp.

On January 2, 2018 (the “Closing Date”), the Company completed its acquisition of all the outstanding capital stock of Allied (the “Allied Acquisition”), pursuant to a certain stock purchase agreement dated August 24, 2017 (the “Stock Purchase Agreement”), among the Company, Oldcastle, Inc., as parent, and Oldcastle Distribution, Inc., as seller, for approximately $2.625 billion in cash, subject to a working capital and certain other adjustments as set forth in the Stock Purchase Agreement (the “Purchase Price”). As of December 31, 2018, the adjusted Purchase Price for Allied was $2.88 billion, including increases of (i) $164.0 million related to the impact of the Section 338(h)(10) election under the current U.S. tax code and (ii) $88.1 million from a recorded net working capital adjustment.

In connection with the Allied Acquisition, on the Closing Date the Company entered into (i) a new term loan agreement with Citibank, N.A., providing for a term loan B facility with an initial commitment of $970.0 million and (ii) an amended and restated credit agreement with Wells Fargo Bank, N.A., providing for a senior secured asset-based revolving credit facility with an initial commitment of $1.30 billion. Base borrowing rates on these facilities are at LIBOR plus 1.25% and LIBOR plus 2.25%, respectively.

9


In connection with the Allied Acquisition, on the Closing Date, the Company completed the sale of 400,000 shares of Series A Cumulative Convertible Participating Preferred Stock, par value $0.01 per share (the “Preferred Stock”), with an aggregate liquidation preference of $400.0 million, at a purchase price of $1,000 per share, to CD&R Boulder Holdings, L.P., pursuant to a certain investment agreement, dated as of August 24, 2017, with CD&R Boulder Holdings, L.P. and Clayton, Dubilier & Rice Fund IX, L.P. (solely for the purpose of limited provisions therein) (the “Convertible Preferred Stock Purchase”). The $400.0 million in proceeds from the Convertible Preferred Stock Purchase were used to finance, in part, the Purchase Price. The Preferred Stock is convertible perpetual participating preferred stock of the Company, and conversion of the Preferred Stock into $0.01 par value shares of the Company’s common stock will be at a conversion price of $41.26 per share. The Preferred Stock accumulates dividends at a rate of 6.0% per annum (payable in cash or in-kind, subject to certain conditions). The Preferred Stock is not mandatorily redeemable; therefore, it is classified as mezzanine equity on the Company’s consolidated balance sheets and has a balance of $399.2 million (the $400.0 million proceeds received on the Closing Date, net of $0.8 million of unamortized issuance costs) as of December 31, 2018.

Allied’s results of operations have been included with Company’s consolidated results beginning January 2, 2018. Allied distributed products in 208 locations across 31 states as of the date of the close.

The Allied Acquisition has been accounted for as a business combination in accordance with the requirements of ASC 805, “Business Combinations.” The acquisition price has been allocated among assets acquired and liabilities assumed at fair value based on information currently available, with the excess recorded as goodwill. The goodwill recognized is attributable primarily to expected synergies from the Allied assembled workforce operating the branches as part of a larger network and the value stemming from the addition of both new customers and an established new line of business (interiors). As of December 31, 2018, the Company had finalized the purchase accounting entries for the Allied Acquisition, detailed as follows (in thousands):

 

 

January 2, 2018

 

 

 

 

 

 

January 2, 2018

 

 

(as reported at

March 31, 2018)

 

 

Adjustments

 

 

(as adjusted at

December 31, 2018)

 

Cash

$

19,322

 

 

$

(19,153

)

 

$

169

 

Accounts receivable

 

315,485

 

 

 

22,064

 

 

 

337,549

 

Inventory

 

322,705

 

 

 

(7,920

)

 

 

314,785

 

Prepaid and other current assets

 

59,279

 

 

 

16,161

 

 

 

75,440

 

Property, plant, and equipment

 

139,528

 

 

 

(168

)

 

 

139,360

 

Goodwill

 

1,130,635

 

 

 

102,145

 

 

 

1,232,780

 

Intangible assets

 

1,037,000

 

 

 

-

 

 

 

1,037,000

 

Current liabilities

 

(271,252

)

 

 

11,963

 

 

 

(259,289

)

Non-current liabilities

 

(6,820

)

 

 

6,097

 

 

 

(723

)

     Total purchase price

$

2,745,882

 

 

$

131,189

 

 

$

2,877,071

 

 

The purchase accounting entries above include the impact of the Section 338(h)(10) election under the current U.S. tax code. The Company made this election on October 15, 2018 and has reflected the $164.0 million impact of this election in the purchase price and its fiscal year 2018 tax provision accordingly. The Company determined that $1.16 billion of goodwill related to the acquisition of Allied is deductible for tax purposes as of December 31, 2018.

The Company’s goodwill and indefinite-lived trade name are tested for impairment annually, and all acquired goodwill and intangible assets are subject to review for impairment should future indicators of impairment develop. There were no material contingencies assumed as part of the Allied acquisition.

The following table represents the unaudited pro forma consolidated net sales and net income (loss) for the Company for the periods indicated (in thousands):

 

Three Months Ended

 

 

December 31, 2017

 

 

(unaudited)

 

Net sales

$

1,787,628

 

Net income (loss)

 

32,257

 

The above pro forma results have been calculated by combining the historical results of the Company and Allied as if the Allied Acquisition had occurred on the first day of the fiscal year (October 1) for the period presented. The income tax provision used to calculate net income (loss) for the respective periods presented has been adjusted to reflect the effective tax rate for the annual periods as if it had been based on the resulting, combined results. The pro forma results include estimates for intangible asset amortization, depreciation, interest expense and debt issuance costs and are subject to change once final asset values have been determined. No other material pro forma adjustments were deemed necessary to conform to the Company’s accounting policies or for any other

10


situation. The pro forma information is not necessarily indicative of the results that would have been achieved had the transactions occurred on the first day of the fiscal years presented or that may be achieved in the future.

Additional Acquisitions – Fiscal Year 2018

During fiscal year 2018, the Company acquired 7 branches from the following acquisitions:

 

On May 1, 2018, the Company 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, the Company 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, Spokane, and Mountlake Terrace in Washington, as well as locations in Portland, Oregon and Boise, Idaho, and annual sales of approximately $37 million.

The Company has recorded purchase accounting entries on a preliminary basis for these transactions that recognized the acquired assets and liabilities at their estimated fair values as of the respective acquisition dates. These transactions resulted in goodwill of $7.6 million ($7.4 million of which is deductible for tax purposes as of December 31, 2018) and $11.4 million in intangible assets.

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, as well as the Company’s continued review of the assumed liabilities that may result in the recognition of changes to the carrying amounts on the opening balance sheet and a related adjustment to goodwill.

4. Net Sales

The Company records net sales when performance obligations with our customer are satisfied. A performance obligation is a promise to transfer a distinct good to the customer and is the unit of account. The transaction price is allocated to each distinct performance obligation and recognized as net sales when, or as, the performance obligation is satisfied. All contracts have a single performance obligation as the promise to transfer the individual good is not separately identifiable from other promises and is, therefore, not distinct. Performance obligations are satisfied at a point in time and net sales are recognized when the customer accepts the delivery of a product or takes possession of a product with rights and rewards of ownership.

The Company enters into agreements with customers to offer rebates, generally based on achievement of specified sales levels and various marketing allowances that are common industry practice. Reductions to net sales for customer programs and incentive offerings, including promotions and other volume-based incentives, are estimated using the most likely amount method and recorded in the period in which the sale occurs. Provisions for early payment discounts are accrued in the same period in which the sale occurs. The Company does not have any material payment terms as payment is received shortly after the transfer of control of the products to the customer. Commissions to internal sales teams are paid to obtain contracts. As these contracts are less than one year, these costs are expensed as incurred.

The Company includes shipping and handling costs billed to customers in net sales. Related costs are accounted for as fulfillment activities and are recognized as cost of products sold when control of the products transfers to the customer.

The following table presents the Company’s net sales by product line and geography for the three months ended December 31, 2018 (in thousands):

 

Three Months Ended December 31, 2018

 

 

U.S.

 

 

Canada

 

 

Total

 

Residential roofing products

$

720,511

 

 

$

11,679

 

 

$

732,190

 

Non-residential roofing products

 

390,268

 

 

 

29,641

 

 

 

419,909

 

Complementary building products

 

568,116

 

 

 

1,461

 

 

 

569,577

 

Total net sales

$

1,678,895

 

 

$

42,781

 

 

$

1,721,676

 

 

5. Net Income (Loss) Per Share

Basic net income (loss) per share is calculated by dividing net income (loss) attributable to common shareholders by the weighted-average number of common shares outstanding during the period, without consideration for common share equivalents or

11


the conversion of Preferred Stock. Common share equivalents consist of the incremental common shares issuable upon the exercise of stock options and vesting of restricted stock unit awards. Diluted net income (loss) per common share is calculated by dividing net income (loss) attributable to common shareholders by the fully diluted weighted-average number of common shares outstanding during the period.

Holders of Preferred Stock participate in dividends on an as-converted basis when declared on common shares. As a result, Preferred Stock is classified as a participating security and thereby requires the allocation of income that would have otherwise been available to common shareholders when calculating net income (loss) per share.

Diluted net income (loss) per share is calculated by utilizing the most dilutive result of the if-converted and two-class methods. In both methods, net income (loss) attributable to common shareholders and the weighted-average common shares outstanding are adjusted to account for the impact of the assumed issuance of potential common shares that are dilutive, subject to dilution sequencing rules.

The following table presents the components and calculations of basic and diluted net income (loss) per share for each period presented (in thousands, except share and per share amounts):

 

 

Three Months Ended December 31,

 

 

2018

 

 

2017

 

Net income (loss)

$

(893

)

 

$

67,596

 

Dividends on preferred shares

 

(6,000

)

 

 

-

 

Net income (loss) attributable to common shareholders

$

(6,893

)

 

$

67,596

 

Undistributed income allocated to participating securities

 

-

 

 

 

-

 

Net income (loss) attributable to common shareholders - basic and diluted

$

(6,893

)

 

$

67,596

 

 

 

 

 

 

 

 

 

Weighted-average common shares outstanding - basic

 

68,248,020

 

 

 

67,825,430

 

Effect of common share equivalents

 

-

 

 

 

1,419,248

 

Weighted-average common shares outstanding - diluted

 

68,248,020

 

 

 

69,244,678

 

 

 

 

 

 

 

 

 

Net income (loss) per share - basic

$

(0.10

)

 

$

1.00

 

Net income (loss) per share - diluted

$

(0.10

)

 

$

0.98

 

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 (loss) per share because the effect was either anti-dilutive or the requisite performance conditions were not met:

 

Three Months Ended December 31,

 

 

2018

 

 

2017

 

Stock options

 

1,554,518

 

 

 

288,275

 

Restricted stock units

 

318,229

 

 

 

-

 

Preferred Stock

 

9,694,619

 

 

 

-

 

 

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 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, 2018, there were 1,772,191 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% of the grant target in the case of a performance-based restricted stock unit 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

12


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

Stock Options

Non-qualified stock options granted to employees generally expire 10 years after the grant date and are subject to continued employment and vest evenly in three annual installments over the three-year period following the grant date.

The fair value of the options granted during the three months ended December 31, 2018 were estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions:

Risk-free interest rate

 

3.00

%

Expected volatility

 

29.34

%

Expected life (in years)

 

5.18

 

Dividend yield

-

 

The following table summarizes all stock option activity for the three months ended December 31, 2018 (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, 2018

 

1,969,037

 

 

$

33.08

 

 

 

5.7

 

 

$

14,088

 

Granted

 

605,184

 

 

 

27.26

 

 

 

 

 

 

 

 

 

Exercised

 

(48,800

)

 

 

17.11

 

 

 

 

 

 

 

 

 

Canceled/Forfeited

 

(12,967

)

 

 

41.12

 

 

 

 

 

 

 

 

 

Expired

 

(950

)

 

 

12.25

 

 

 

 

 

 

 

 

 

Balance as of December 31, 2018

 

2,511,504

 

 

$

31.96

 

 

 

6.6

 

 

$

11,478

 

Vested and expected to vest after December 31, 2018

 

2,455,082

 

 

$

31.94

 

 

 

6.5

 

 

$

11,275

 

Exercisable as of December 31, 2018

 

1,645,162

 

 

$

30.75

 

 

 

5.1

 

 

$

8,511

 

________________________________________________________________

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, 2018 and 2017, the Company recorded stock-based compensation expense related to stock options of $1.0 million and $1.1 million, respectively. As of December 31, 2018, there was $8.1 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 periods presented (in thousands, except per share amounts):

 

Three Months Ended December 31,

 

 

2018

 

 

2017

 

Weighted-average fair value of stock options granted

$

8.75

 

 

$

15.86

 

Total grant date fair value of stock options vested

 

3,680

 

 

 

3,773

 

Total intrinsic value of stock options exercised

 

712

 

 

 

5,448

 

Restricted Stock Units

Restricted stock unit (“RSU”) awards granted to employees are subject to continued employment and generally vest on the third anniversary of the grant date. The Company also grants certain RSU awards to management that contain one or more additional vesting conditions tied directly to a defined performance metric for the Company. The actual number of RSUs that will vest can range from 0% to 200% of the original grant amount, depending upon the terms of the award and actual Company performance above or below the established performance metric targets. The Company estimates performance in relation to the defined targets when determining the projected number of RSUs that are expected to vest and calculating the related stock-based compensation expense.

RSUs granted to non-employee directors are subject to continued service and vest on the first anniversary of the grant date (except under certain conditions). Generally, the common shares underlying the RSUs are not eligible for distribution until the non-employee director’s service on the Board has terminated, and 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. Beginning in fiscal year 2016, the

13


Company enacted a policy that allows any non-employee directors who have Beacon equity holdings (defined as common stock and outstanding vested equity awards) with a total fair value that is greater than or equal to five times the annual Board cash retainer to elect to have any future RSU grants settle simultaneously with vesting.

The following table summarizes all restricted stock unit activity for the three months ended December 31, 2018:

 

RSUs

Outstanding

 

 

Weighted-Average Grant Date Fair Value

 

Balance as of September 30, 2018

 

934,023

 

 

$

47.00

 

Granted

 

630,745

 

 

 

27.28

 

Released

 

(366,779

)

 

 

40.46

 

Canceled/Forfeited

 

(77,455

)

 

 

47.52

 

Balance as of December 31, 2018

 

1,120,534

 

 

$

38.00

 

Vested and expected to vest after December 31, 2018

 

1,040,181

 

 

$

37.78

 

 

During the three months ended December 31, 2018 and 2017, the Company recorded stock-based compensation expense related to restricted stock units of $2.4 million and $2.4 million, respectively. As of December 31, 2018, there was $27.2 million of unrecognized compensation cost related to unvested restricted stock units, which is expected to be recognized over a weighted-average period of 2.3 years.

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

 

Three Months Ended December 31,

 

 

2018

 

 

2017

 

Weighted-average fair value of RSUs granted

$

27.28

 

 

$

55.17

 

Total grant date fair value of RSUs vested

 

14,840

 

 

 

5,786

 

Total intrinsic value of RSUs released

 

11,160

 

 

 

10,683

 

 

7. Goodwill and Intangible Assets

Goodwill

The following table sets forth the change in the carrying amount of goodwill during the three months ended December 31, 2018 and 2017, respectively (in thousands):

Balance as of September 30, 2017

$

1,251,986

 

Translation and other adjustments

 

(161

)

Balance as of December 31, 2017

$

1,251,825

 

 

 

 

 

 

 

 

 

Balance as of September 30, 2018

$

2,491,779

 

Acquisitions1

 

(513

)

Translation and other adjustments

 

(1,536

)

Balance as of December 31, 2018

$

2,489,730