becn-10q_20180331.htm

 

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 March 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 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 April 30, 2018, 68,086,674 shares of common stock, par value $0.01 per share, of the registrant were outstanding.

2


BEACON ROOFING SUPPLY, INC.

FORM 10-Q

For the Quarter Ended March 31, 2018

 

TABLE OF CONTENTS

 

Part I.

 

 

 

Financial Information (unaudited)

 

 

 

 

Item 1.

 

Condensed Consolidated Financial Statements

 

 

 

 

 

 

Consolidated Balance Sheets

 

4

 

 

 

 

Consolidated Statements of Operations

 

5

 

 

 

 

Consolidated Statements of Comprehensive Income

 

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

 

31

 

 

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

47

 

 

Item 4.

 

Controls and Procedures

 

47

 

 

 

 

 

 

 

Part II.

 

 

 

Other Information

 

48

 

 

Item 6.

 

Exhibits

 

48

 

 

 

 

 

 

 

Signatures

 

50

 

3


BEACON ROOFING SUPPLY, INC.

Consolidated Balance Sheets

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

 

 

March 31,

 

 

September 30,

 

 

March 31,

 

 

2018

 

 

2017

 

 

2017

 

Assets

 

 

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

$

16,000

 

 

$

138,250

 

 

$

10,012

 

Accounts receivable, less allowance of $16,493, $11,829 and $17,140

   as of March 31, 2018, September 30, 2017 and March 31,

   2017, respectively

 

832,823

 

 

 

704,527

 

 

 

506,386

 

Inventories, net

 

1,005,577

 

 

 

551,924

 

 

 

580,889

 

Prepaid expenses and other current assets

 

240,315

 

 

 

209,138

 

 

 

217,389

 

Total current assets

 

2,094,715

 

 

 

1,603,839

 

 

 

1,314,676

 

Property and equipment, net

 

294,222

 

 

 

156,129

 

 

 

156,380

 

Goodwill

 

2,381,620

 

 

 

1,251,986

 

 

 

1,228,059

 

Intangibles, net

 

1,410,302

 

 

 

429,069

 

 

 

439,507

 

Other assets, net

 

1,511

 

 

 

8,534

 

 

 

1,511

 

Total Assets

$

6,182,370

 

 

$

3,449,557

 

 

$

3,140,133

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities and Stockholders' Equity

 

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

 

 

 

Accounts payable

$

593,559

 

 

$

503,697

 

 

$

486,328

 

Accrued expenses

 

348,050

 

 

 

261,297

 

 

 

131,264

 

Current portions of long-term debt

 

19,597

 

 

 

14,141

 

 

 

14,014

 

Total current liabilities

 

961,206

 

 

 

779,135

 

 

 

631,606

 

Borrowings under revolving lines of credit, net

 

424,528

 

 

 

3,205

 

 

 

269,124

 

Long-term debt, net

 

2,493,889

 

 

 

721,268

 

 

 

722,101

 

Deferred income taxes, net

 

91,101

 

 

 

138,383

 

 

 

137,495

 

Long-term obligations under equipment financing and other, net

 

18,313

 

 

 

23,213

 

 

 

28,267

 

Other long-term liabilities

 

10,617

 

 

 

2,547

 

 

 

2,372

 

Total liabilities

 

3,999,654

 

 

 

1,667,751

 

 

 

1,790,965

 

 

 

 

 

 

 

 

 

 

 

 

 

Commitments and contingencies (Note 9)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

$

399,195

 

 

$

-

 

 

$

-

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders' equity:

 

 

 

 

 

 

 

 

 

 

 

Common stock (voting); $0.01 par value; 100,000,000 shares authorized;

   68,043,284 issued and outstanding as of March 31, 2018; 67,700,858

   issued and outstanding as of September 30, 2017; 60,255,320 issued

   and outstanding at March 31, 2017

 

680

 

 

 

677

 

 

 

602

 

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

   none issued or outstanding

 

-

 

 

 

-

 

 

 

-

 

Additional paid-in capital

 

1,056,248

 

 

 

1,047,506

 

 

 

709,278

 

Retained earnings

 

743,127

 

 

 

748,186

 

 

 

658,396

 

Accumulated other comprehensive loss

 

(16,534

)

 

 

(14,563

)

 

 

(19,108

)

Total stockholders' equity

 

1,783,521

 

 

 

1,781,806

 

 

 

1,349,168

 

Total Liabilities and Stockholders' Equity

$

6,182,370

 

 

$

3,449,557

 

 

$

3,140,133

 

 

See accompanying Notes to Condensed Consolidated Financial Statements

 

 

4


 

BEACON ROOFING SUPPLY, INC.

Consolidated Statements of Operations

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

 

 

 

Three Months Ended March 31,

 

 

Six Months Ended March 31,

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Net sales

$

1,425,625

 

 

$

870,724

 

 

$

2,547,604

 

 

$

1,872,908

 

Cost of products sold

 

1,087,248

 

 

 

666,247

 

 

 

1,939,474

 

 

 

1,417,364

 

Gross profit

 

338,377

 

 

 

204,477

 

 

 

608,130

 

 

 

455,544

 

Operating expense

 

395,775

 

 

 

207,533

 

 

 

616,432

 

 

 

411,643

 

Income (loss) from operations

 

(57,398

)

 

 

(3,056

)

 

 

(8,302

)

 

 

43,901

 

Interest expense, financing costs, and other

 

39,570

 

 

 

12,268

 

 

 

62,138

 

 

 

25,842

 

Income (loss) before provision for income taxes

 

(96,968

)

 

 

(15,324

)

 

 

(70,440

)

 

 

18,059

 

Provision for (benefit from) income taxes

 

(30,313

)

 

 

(5,968

)

 

 

(71,381

)

 

 

6,985

 

Net income (loss)

$

(66,655

)

 

$

(9,356

)

 

$

941

 

 

$

11,074

 

Dividends on preferred shares, declared

 

6,000

 

 

 

-

 

 

 

6,000

 

 

 

-

 

Net income (loss) attributable to common shareholders

$

(72,655

)

 

$

(9,356

)

 

$

(5,059

)

 

$

11,074

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average common stock outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

68,019,300

 

 

 

60,141,580

 

 

 

67,922,276

 

 

 

60,041,332

 

Diluted

 

68,019,300

 

 

 

60,141,580

 

 

 

67,922,276

 

 

 

61,069,938

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

$

(1.07

)

 

$

(0.16

)

 

$

(0.07

)

 

$

0.18

 

Diluted

$

(1.07

)

 

$

(0.16

)

 

$

(0.07

)

 

$

0.18

 

 

See accompanying Notes to Condensed Consolidated Financial Statements

 

 

5


BEACON ROOFING SUPPLY, INC.

Consolidated Statements of Comprehensive Income

(Unaudited; In thousands)

 

 

 

Three Months Ended March 31,

 

 

Six Months Ended March 31,

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Net income (loss)

$

(66,655

)

 

$

(9,356

)

 

$

941

 

 

$

11,074

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustment

 

(2,028

)

 

 

813

 

 

 

(1,971

)

 

 

(839

)

Total other comprehensive income (loss)

 

(2,028

)

 

 

813

 

 

 

(1,971

)

 

 

(839

)

Comprehensive income (loss)

$

(68,683

)

 

$

(8,543

)

 

$

(1,030

)

 

$

10,235

 

 

See accompanying Notes to Condensed Consolidated Financial Statements

6


BEACON ROOFING SUPPLY, INC.

Consolidated Statements of Cash Flows

(Unaudited; In thousands)

 

Six Months Ended March 31,

 

 

2018

 

 

2017

 

Operating Activities

 

 

 

 

 

 

 

Net income (loss)

$

941

 

 

$

11,074

 

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

 

 

 

 

 

 

 

Depreciation and amortization

 

81,092

 

 

 

56,955

 

Stock-based compensation

 

7,835

 

 

 

7,574

 

Certain interest expense and other financing costs

 

3,987

 

 

 

2,703

 

Loss on debt extinguishment

 

1,725

 

 

 

-

 

Gain on sale of fixed assets

 

(319

)

 

 

(420

)

Deferred income taxes1

 

(47,260

)

 

 

2,020

 

Other, net

 

-

 

 

 

131

 

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

 

 

 

 

 

 

 

Accounts receivable

 

186,170

 

 

 

123,590

 

Inventories

 

(131,789

)

 

 

(92,072

)

Prepaid expenses and other assets

 

67,425

 

 

 

(53,062

)

Accounts payable and accrued expenses

 

(130,695

)

 

 

91,950

 

Other liabilities

 

854

 

 

 

87

 

Net cash provided by (used in) operating activities

 

39,966

 

 

 

150,530

 

 

 

 

 

 

 

 

 

Investing Activities

 

 

 

 

 

 

 

Purchases of property and equipment

 

(24,833

)

 

 

(24,231

)

Acquisition of businesses, net

 

(2,726,561

)

 

 

(58,359

)

Proceeds from the sale of assets

 

413

 

 

 

1,285

 

Net cash provided by (used in) investing activities

 

(2,750,981

)

 

 

(81,305

)

 

 

 

 

 

 

 

 

Financing Activities

 

 

 

 

 

 

 

Borrowings under revolving lines of credit

 

1,530,667

 

 

 

857,099

 

Repayments under revolving lines of credit

 

(1,097,463

)

 

 

(948,470

)

Borrowings under term loan

 

970,000

 

 

 

-

 

Repayments under term loan

 

(441,000

)

 

 

(1,125

)

Borrowings under senior notes

 

1,300,000

 

 

 

-

 

Payment of debt issuance costs

 

(67,723

)

 

 

-

 

Repayments under equipment financing facilities and other

 

(5,643

)

 

 

(5,365

)

Proceeds from issuance of convertible preferred stock

 

400,000

 

 

 

-

 

Payment of stock issuance costs

 

(1,279

)

 

 

-

 

Payment of dividends on preferred stock

 

(978

)

 

 

-

 

Proceeds from issuance of common stock related to equity awards

 

5,317

 

 

 

7,840

 

Taxes paid related to net share settlement of equity awards

 

(3,933

)

 

 

(697

)

Net cash provided by (used in) financing activities

 

2,587,965

 

 

 

(90,718

)

 

 

 

 

 

 

 

 

Effect of exchange rate changes on cash and cash equivalents

 

800

 

 

 

119

 

 

 

 

 

 

 

 

 

Net increase (decrease) in cash and cash equivalents

 

(122,250

)

 

 

(21,374

)

Cash and cash equivalents, beginning of period

 

138,250

 

 

 

31,386

 

Cash and cash equivalents, end of period

$

16,000

 

 

$

10,012

 

 

 

 

 

 

 

 

 

Supplemental cash flow information

 

 

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

 

 

Interest

$

28,659

 

 

$

29,592

 

Income taxes, net of tax refunds

 

33,037

 

 

 

36,151

 

 

 

 

 

 

 

 

 

Supplemental disclosure of non-cash financing activity

 

 

 

 

 

 

 

Preferred stock dividends, accrued and unpaid

 

5,022

 

 

 

-

 

_____________________

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

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 finalized its acquisition of Allied Building Products Corp., a New Jersey corporation, and an affiliated entity (together “Allied”) for $2.625 billion, subject to certain working capital and other adjustments (see Note 3). 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.

The Company operates its business under regional and local trade names and, as of March 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., Allied Building Products, LLC 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. Certain prior period amounts have been reclassified to conform to current period presentation. The balance sheet as of March 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 and six months ended March 31, 2018 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 March 31, 2018 and 2017 each had 64 business days and the six-month periods ended March 31, 2018 and 2017 each had 125 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 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 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 $0.4 million and $2.9 million of excess tax benefits in our consolidated statement of operations related to equity award transactions executed in the period for the three and six months ended March 31, 2018. 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

8


taxes in operating activities within our consolidated statements of cash flows. The Company elected to retain its historical approach to 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 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 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. The 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 on our legacy and newly acquired businesses, 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.

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 (see Note 12). This new standard is effective for annual and interim reporting

9


periods 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, 2017 (the “Closing Date”), the Company completed its previously announced acquisition (the “Allied Acquisition”) of all the outstanding capital stock of Allied Building Products Corp. and an affiliated entity (together, “Allied”), pursuant to that 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 March 31, 2018, the Company estimated a working capital adjustment of $120.9 million.  

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 will be at LIBOR plus 1.25% and LIBOR plus 2.25%, respectively.

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 that 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 accrues 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 on the Company’s consolidated balance sheets as mezzanine equity and recognized at $399.2 million (the $400.0 million proceeds received on the Closing Date, net of $0.8 million of issuance costs).    

 

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). The Company has recorded purchase accounting entries on a preliminary basis for the Allied Acquisition, detailed as follows (in thousands):

 

Cash

$

19,322

 

Accounts receivable

 

315,485

 

Inventory

 

322,705

 

Prepaid and other current assets

 

59,279

 

Property, plant, and equipment

 

139,528

 

Goodwill

 

1,130,635

 

Intangible assets

 

1,037,000

 

Current liabilities

 

(271,252

)

Non-current liabilities

 

(6,820

)

  Total purchase price

$

2,745,882

 

 

The purchase accounting entries above assume the Company will make a Section 338(h)(10) election under the current U.S. tax code. As of March 31, 2018 the Company had not made this election, but expects to do so in in the fourth quarter of fiscal year 2018. Upon making the Section 338(h)(10) election, the Company will then determine the amount of Allied goodwill that will become tax deductible. All of the Company’s goodwill plus the indefinite-lived trade name are tested for impairment annually, and all acquired goodwill and intangible assets are subject to review for impairment should future indicators of impairment develop. There were no material contingencies assumed as part of the Allied acquisition.

10


 

Net sales from the Allied Acquisition included in the Company’s statements of operations for the three and six months ended March 31, 2018 were $534.1 million. Net income (loss) from the Allied Acquisition included in the Company’s statements of operations for the three and six months ended March 31, 2018 was a loss of $13.0 million.    

 

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

 

Six Months Ended

March 31, 2018

 

 

Six Months Ended

March 31, 2017

 

 

(unaudited)

 

Net sales

$

3,213,253

 

 

$

3,029,811

 

Net income (loss)

 

(37,153

)

 

 

(33,094

)

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 each of the periods 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 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 2017

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. The Company has finalized the acquisition accounting entries for this transaction.

 

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. The Company has finalized the acquisition accounting entries for this transaction.

 

On March 1, 2017, the Company acquired Acme Building Materials, Inc., a distributor of residential roofing and related building products with 3 branches in Eastern Michigan and annual sales of approximately $13 million. The Company has finalized the acquisition accounting entries for this transaction.

 

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 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 Allied opening balance sheet and a related adjustment to goodwill.

11


4. Net Income (Loss) Per Share

Basic net income (loss) per share is calculated by dividing net income (loss), less dividends on preferred shares, by the weighted-average number of common shares outstanding during the period. Diluted net income (loss) per common share is calculated by utilizing the most dilutive result from the following two methods:

 

Two-class method: This method assumes no conversion of the Preferred Stock. It is calculated by dividing net income (loss), less dividends on preferred shares, by the weighted-average number of common shares outstanding when including the dilutive effect common share equivalents then outstanding using the treasury stock method.

 

If-converted method: This method assumes full conversion of the Preferred Stock as of the first day of the period. It is calculated by dividing net income (loss) by the weighted-average number of common shares outstanding when including the dilutive effect of the Preferred Stock and the common share equivalents then outstanding using the treasury stock method.

In both of the aforementioned methods, common share equivalents consist of the incremental common shares issuable upon the exercise of stock options and vesting of restricted stock unit awards.

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 March 31,

 

 

Six Months Ended March 31,

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Net income (loss)

$

(66,655

)

 

$

(9,356

)

 

$

941

 

 

$

11,074

 

Less: Dividends on preferred shares, declared

 

6,000

 

 

 

-

 

 

 

6,000

 

 

 

-

 

Net income (loss) attributable to common shareholders

$

(72,655

)

 

$

(9,356

)

 

$

(5,059

)

 

$

11,074

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average common shares outstanding, basic

 

68,019,300

 

 

 

60,141,580

 

 

 

67,922,276

 

 

 

60,041,332

 

Effect of common share equivalents

 

-

 

 

 

-

 

 

 

-

 

 

 

1,028,606

 

Effect of Preferred Stock conversion

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Weighted-average common shares outstanding, diluted

 

68,019,300

 

 

 

60,141,580

 

 

 

67,922,276

 

 

 

61,069,938

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) per share - basic

$

(1.07

)

 

$

(0.16

)

 

$

(0.07

)

 

$

0.18

 

Net income (loss) per share - diluted

$

(1.07

)

 

$

(0.16

)

 

$

(0.07

)

 

$

0.18

 

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

 

 

Three Months Ended March 31,

 

 

Six Months Ended March 31,

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Stock options

 

275,209

 

 

 

270,428

 

 

 

281,742

 

 

 

416,085

 

Restricted stock units

 

90,024

 

 

 

-

 

 

 

45,012

 

 

 

123,780

 

 

12


5. Stockholders’ Equity

The following table presents the activity included in stockholders’ equity during the six months ended March 31, 2018 (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

 

342,426

 

 

 

3

 

 

 

1,381

 

 

 

-

 

 

 

-

 

 

 

1,384

 

Issuance costs related to secondary offering of common stock

 

-

 

 

 

-

 

 

 

(474

)

 

 

-

 

 

 

-

 

 

 

(474

)

Stock-based compensation

 

-

 

 

 

-

 

 

 

7,835

 

 

 

-

 

 

 

-

 

 

 

7,835

 

Other comprehensive income (loss)

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(1,971

)

 

 

(1,971

)

Net income (loss)

 

-

 

 

 

-

 

 

 

-

 

 

 

941

 

 

 

-

 

 

 

941

 

Dividends on preferred shares, declared

 

-

 

 

 

-

 

 

 

-

 

 

 

(6,000

)

 

 

-

 

 

 

(6,000

)

Balance at March 31, 2018

 

68,043,284

 

 

$

680

 

 

$

1,056,248

 

 

$

743,127

 

 

$

(16,534

)

 

$

1,783,521

 

 

Common Stock

The Company is authorized to issue 100 million shares of common stock. As of March 31, 2018, September 30, 2017, and March 31, 2017 there were 68,043,284, 67,700,858 and 60,255,320 shares of common stock issued and outstanding, respectively.

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

 

 

(1,971

)

 

 

(1,971

)

Reclassifications out of other comprehensive loss

 

 

-

 

 

 

-

 

Balance as of March 31, 2018

 

$

(16,534

)

 

$

(16,534

)

 

6. Stock-based Compensation

On February 9, 2016, the shareholders of the Company approved the Amended and Restated Beacon Roofing Supply, Inc. 2014 Stock Plan (the “2014 Plan”). The 2014 Plan provides for discretionary awards of stock options, stock awards, restricted stock units, and stock appreciation rights (“SARs”) for up to 5,000,000 shares of common stock to selected employees and non-employee directors. The 2014 Plan mandates that all forfeited, expired, and withheld shares, including those from the predecessor plans, be returned to the 2014 Plan and made available for issuance. As of March 31, 2018, there were 3,723,984 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

13


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 six months ended March 31, 2018 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 six months ended March 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, 2017

 

2,084,228

 

 

$

28.84

 

 

 

6.1

 

 

$

46,714

 

Granted

 

276,370

 

 

 

55.17

 

 

 

 

 

 

 

 

 

Exercised

 

(217,397

)

 

 

24.46

 

 

 

 

 

 

 

 

 

Canceled/Forfeited

 

(47,842

)

 

 

41.82

 

 

 

 

 

 

 

 

 

Expired

 

(1,991

)

 

 

15.28

 

 

 

 

 

 

 

 

 

Balance as of March 31, 2018

 

2,093,368

 

 

$

32.48

 

 

 

6.2

 

 

$

43,646

 

Vested and expected to vest after March 31, 2018

 

2,071,674

 

 

$

32.32

 

 

 

6.1

 

 

$

43,510

 

Exercisable as of March 31, 2018

 

1,512,437

 

 

$

27.48

 

 

 

5.2

 

 

$

38,704

 

________________________________

 

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 March 31, 2018 and 2017, the Company recorded stock-based compensation expense related to stock options of $0.8 million and $1.3 million, respectively. During the six months ended March 31, 2018 and 2017, the Company recorded stock-based compensation expense related to stock options of $1.9 million and $2.6 million, respectively. As of March 31, 2018, there was $6.7 million of unrecognized compensation cost related to unvested stock options, which is expected to be recognized over a weighted-average period of 2.1 years.

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

 

 

Six Months Ended March 31,

 

 

2018

 

 

2017

 

Weighted-average fair value of stock options granted

$

15.86

 

 

$

14.21

 

Total fair value of stock options vested

 

3,832

 

 

 

4,977

 

Total intrinsic value of stock options exercised

 

7,700

 

 

 

7,906

 

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 actual Company performance below or above 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.

14


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 Company enacted a policy that allows any non-employee directors who hold common stock and have 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 six months ended March 31, 2018:

 

 

RSUs

Outstanding

 

 

Weighted-

Average

Grant Date

Fair Value

 

Balance at September 30, 2017

 

770,973

 

 

$

38.95

 

Granted

 

370,190

 

 

 

57.40

 

Performance awards1

 

41,440

 

 

 

39.56

 

Released

 

(189,154

)

 

 

31.63

 

Canceled/Forfeited

 

(35,974

)

 

 

47.65

 

Balance at March 31, 2018

 

957,475

 

 

$

47.23

 

Vested and expected to vest after March 31, 2018

 

936,924

 

 

$

47.10

 

_________________________________

 

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 March 31, 2018 and 2017, the Company recorded stock-based compensation expense related to restricted stock units of $3.5 million and $2.5 million, respectively. During the six months ended March 31, 2018 and 2017, the Company recorded stock-based compensation expense related to restricted stock units of $5.9 million and $5.0 million, respectively. As of March 31, 2018, there was $26.2 million of unrecognized compensation cost related to unvested restricted stock units, which is expected to be recognized over a weighted-average period of 2.0 years.

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

 

 

Six Months Ended March 31,

 

 

2018

 

 

2017

 

Weighted-average fair value of RSUs granted

$

57.40

 

 

$

47.27

 

Total fair value of RSUs vested

 

6,523

 

 

 

2,736

 

Total intrinsic value of RSUs released

 

10,924

 

 

 

3,074

 

 

7. Goodwill and Intangible Assets

Goodwill

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

 

Balance at September 30, 2016

$

1,197,565

 

Acquisitions

 

31,005

 

Translation and other adjustments

 

(511

)

Balance at March 31, 2017

$

1,228,059

 

 

 

 

 

Balance at September 30, 2017

$

1,251,986

 

Acquisitions

 

1,130,635

 

Translation and other adjustments

 

(1,001

)

Balance at March 31, 2018

$

2,381,620

 

 

15


The change in the carrying amount of goodwill for the six months ended March 31, 2018 and 2017 is primarily attributable to the Company’s acquisitions finalized during the respective periods presented (see Note 3).

Intangible Assets

In connection with transactions finalized during the six months ended March 31, 2018 and fiscal year 2017, the Company recorded intangible assets of $1.04 billion ($910.0 million of customer relationships, $6.6 million of beneficial lease arrangements, and $120.0 million of indefinite-lived trademarks). 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).

The following table summarizes intangible assets by category (in thousands, except time period amounts):

 

 

March 31,

2018

 

 

September 30,

2017

 

 

March 31,

2017

 

 

Weighted-

Average

Remaining

Life1

(Years)

 

Amortizable intangible assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-compete agreements

$

2,824