Beacon Roofing Supply, Inc.
BEACON ROOFING SUPPLY INC (Form: 10-K, Received: 11/21/2017 16:19:59)

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-K

 

 

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

For the Fiscal Year Ended September 30, 2017

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

 

(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.)

Address of principal executive offices: 505 Huntmar Park Drive, Suite 300, Herndon, VA 20170

Registrant’s telephone number, including area code: (571) 323-3939

 

 

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

 

 Common Stock, $0.01 par value

 

The NASDAQ Global Select Market

(Title of each class)

 

(Name of each exchange on which registered)

 

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

 

 

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

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

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

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

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

 

Large accelerated filer        

Accelerated filer             

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 

 

The aggregate market value of the voting stock (common stock) held by non-affiliates of the registrant, computed by reference to the closing price at which the common stock was sold as of the end of the second quarter ended March 31, 2017, was $2.96 billion.  

 

The number of shares of common stock outstanding as of October 31, 2017 was 67,734,465.  

 


 

DOCUMENTS INCORPORATED BY REFERENCE

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

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BEACON ROOFING SUPPLY, INC.

Index to Annual Report on Form 10-K

Year Ended September 30, 2017

 

 

 

 

Page

PART I

 

5

 

 

 

Item 1.

Business

5

Item 1A.

Risk Factors

15

Item 1B.

Unresolved Staff Comments

22

Item 2.

Properties

22

Item 3.

Legal Proceedings

24

Item 4.

Mine Safety Disclosures

24

 

 

 

PART II

 

25

 

 

 

Item 5.

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

25

Item 6.

Selected Financial Data

27

Item 7.

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

30

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

47

Item 8.

Financial Statements and Supplementary Data

48

Item 9.

Changes In and Disagreements with Accountants on Accounting and Financial Disclosure

50

Item 9A.

Controls and Procedures

50

Item 9B.

Other Information

53

 

 

 

PART III

 

54

 

 

 

PART IV

 

54

 

 

 

Item 15.

Exhibits and Financial Statement Schedules

54

Item 16.      

10-K Summary

57

 

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FORWARD-LOOKING STATEMENTS

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

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

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

 

 

 

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PART I

ITEM 1.      BUSINESS

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

Overview

Beacon is the largest publicly traded distributor of residential and non-residential roofing materials in the United States and Canada. We also distribute complementary building products, including siding, windows, specialty exterior building products, insulation, and waterproofing systems for residential and non-residential building exteriors. We purchase products from a large number of manufacturers and then distribute these goods to a customer base consisting of contractors, and to a lesser extent, general contractors, home builders, retailers, and building materials suppliers.

As of September 30, 2017, we operated 383 branches in 48 states throughout the United States and 6 provinces in Canada. We stock one of the most extensive assortments of high quality branded products in the industry, with over 50,000 SKUs available across our branch network, enabling us to deliver products to serve over 70,000   customers on a timely basis.

On October 1, 2015, we acquired Roofing Supply Group, LLC (“RSG”), a leading roofing products distributor headquartered in Dallas, Texas, for approximately $1.17 billion. RSG operated 85 locations across 25 states, including the key markets of California, Florida, Texas, as well as the Pacific Northwest.

On August 24, 2017 the Company entered into a definitive purchase agreement to acquire, for approximately $2.625 billion, all of the issued and outstanding shares of capital stock of Allied Building Products Corp. and an affiliated entity (together with its and their respective subsidiaries, “Allied”) on the terms and subject to the conditions set forth in the Stock Purchase Agreement (the “Allied Acquisition”). Allied is one of the country’s largest exterior and interior building products distributors and is headquartered in East Rutherford, New Jersey. Allied distributes products across 208 locations in 31 states and has a strong presence in New York, New Jersey, Florida, California, Hawaii and the upper Midwest. The Allied Acquisition is expected to close on January 2, 2018, subject to the satisfaction of customary closing conditions.

For the fiscal year ended September 30, 2017 (“fiscal year 2017” or “2017”), residential roofing products comprised 54.4% of our sales, non-residential roofing products accounted for 29.1% of our sales, and complementary products provided the remaining 16.5% of our sales. Approximately   96% of our net sales were to customers located in the United States.

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

Our customer base includes a diverse population of residential and non-residential roofing contractors from the markets in which we operate. Along with new construction projects, these local roofing contractors are typically involved in the replacement, or re-roofing, component of the roofing industry. We utilize a branch-based operating model that allows branches to maintain local customer relationships and benefit from our centralized infrastructure. This operating model allows us to benefit from the resources and scale efficiencies of being a national distributor while still providing customers with specialized products and personalized local services tailored to their specific geographic region.

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We have achieve d our growth through a combination of 43 strategic and complementary acquisitions since our initial public offering (“IPO”) in 2004, opening new branch locations and broadening our product offerings. In fiscal year 201 7 , we acquired 23 branches and opened 4 new branch es . We have grown from $652.9 million in net sales in fiscal year 2004 to $4.38 billion in net sales in fiscal year 201 7 , which represents a thirteen-year compound annual growth rate (“CAGR”) of 15.8%   . Our organic growth, which includes growth from existing and newly opened branches but excludes growth from acquired branches, averaged a CAGR of 5.1% per annum over the same period. Acquired branches are excluded from organic growth measures until they have been under our ownership for at least f our full fiscal quarters at the start of the reporting period. Since our IPO, we have opened 78 new branch locations, and during this same period existing market sales excluding greenfields increased at an average of 2.3% per annum. Existing market sales e xcluding greenfields are defined as the aggregate sales from branches open for the entire comparable annual periods. Income from operations has increased from $34.7 million in fiscal year 2004 to  $216.1 million in fiscal year 201 7 , which represents a thirteen -year CAGR of 15.1% . We believe that our proven business model can continue to deliver industry-leading growth and operating profit margins.

Our Industry

    Based on management’s estimates, we believe that the roofing distribution market in the United States and Canada represents approximately $26 billion in revenue with roughly 60-65% of the market in residential roofing and 35-40% in commercial. We also participate in several other areas of the building products market within our complementary product line, including siding, windows, insulation and waterproofing, among others.

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

Net sales from re-roofing are also expected to increase as the median age of owner occupied housing has increased from 31 years to 37 years over the last decade, according to U.S. Census data. As homes age, re-roofing demand increases, and home-owners are forced to replace or repair old, deteriorating roofs. During the past decade, re-roofing demand also has been influenced in part by existing home sales trends. Lower housing turnover during the 2007-2015 years, in particular, has resulted in many homeowners’ deferral of necessary re-roofing decisions. This combination of aging U.S. housing inventory, more favorable trends in existing home sales, and deferred re-roofing amid the housing downturn supports a favorable supply/demand dynamic in the residential repair and remodel market in the coming years.

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

In addition to our domestic operations, we also operate in 6 provinces across Canada. These international locations represented approximately 4% of our total net sales for the fiscal year ended September 30, 2017. We expect overall demand for operations in Canada to grow at rate similar to our United States operations.

Roofing Distributors

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

Despite some recent consolidation, the roofing materials distribution industry remains highly fragmented. The industry is characterized by several “national” distributors and a large number of local and regional participants. The vast majority of our competition continues to comes from these smaller, localized roofing supply distributors, and, to a much lesser extent, other building supply distributors and ‘‘big box’’ retailers.

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Residential Roofing

  Re-roofing is largely a non-discretionary decision for homeowners. However, prevailing housing market conditions and severe storm activity can influence the precise timing involved. Specifically, we believe housing turnover can impact certain homeowners’ re-roofing decisions. Increases in single-family existing home sales during fiscal 2015-2017, coupled with more active storm related roofing demand in 2016 and 2017, have boosted industry re-roofing activity during recent years. This contrasts with the period of stagnant re-roofing demand that was experienced from 2007-2014 during the housing downturn and early into its recovery.

Within the new construction portion of the residential roofing market, growth historically has been driven by housing starts, and in particular, by single-family home construction. According to the U.S. Census Bureau, single-family starts peaked at 1.7 million homes in 2005 and troughed at 0.4 million homes in 2011. Housing starts have recovered steadily since 2011 and have reached 0.8 million in 2016. The Mortgage Bankers Association (MBA) economic forecast projects single-family starts will finish 2017 with a 7% gain compared to 2016 and see 8%-9% increases in both 2018 and 2019.

   Non-residential Roofing

    As with residential re-roofing, non-residential re-roofing activity tends to be less cyclical than new construction and depends, in part, upon the types of materials on existing roofs, their expected lifespan and intervening factors such as wind or water damage. In contrast to residential roofing, we do not believe economic driven re-roofing project deferrals have been as common for the non-residential product line. The non-residential roofing market primarily consists of office, retail, industrial and institutional buildings.

According to the 2018 Dodge Construction Outlook, U.S. construction starts will increase 3% in 2018 following expected gains of 4% in 2017 and 5% in 2016. Commercial buildings are expected to see a 2% increase, while institutional buildings should see a 3% increase in construction during 2018.

Complementary Building Products

Demand for complementary building products such as siding, windows and doors, and insulation for both the residential and non-residential markets has been at historically low levels in recent years, consistent with the downturns in the new construction markets and in the overall economy. Unlike the roofing industry, demand for these products is more discretionary and significantly influenced by new construction markets and the pace of overall residential remodeling activity.

According to the Joint Center for Housing Studies at Harvard University, its Leading Indicator of Remodeling Activity (LIRA) is calling for accelerating growth rates in U.S. remodeling activity throughout calendar year 2018 with anticipated growth rate of 7.7% by the third quarter. As mentioned above, the outlook for new home construction is also projected to see solid growth in the coming years.

Our Strengths

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

 

Leading roofing distribution platform with a national scope combined with regional expertise.   We are the largest publicly traded distributor of residential and non-residential roofing materials in the United States, and we maintain leading positions in key metropolitan markets across the United States and Canada. Our geographic footprint is designed to provide advantages in the regional markets we serve. We utilize a branch-based operating model whereby branches cultivate and maintain local customer relationships while benefiting from centralized functions such as information technology, marketing, accounting, financial reporting, credit, purchasing, human resources, legal and tax services. We provide our customers with specialized products and personalized local services tailored to their specific geographic region, with the resources and scale efficiencies of a national distributor.

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Diversified business model in a stable enviro nment.  Our business historically has been protected in times of economic downturn because of the non-discretionary nature of most re-roofing demand, the mix of our sales between residential and non-residential products, our geographic and customer diversi ty, and the financial and operational ability to expand our business and obtain market share. We have a long history of organic sales growth and healthy gross margins through a variety of economic cycles. Over the last thirteen fiscal years, our total and existing market net sales have increased by a CAGR of 15.8% and 5.1%, respectively , (including growth through acquisitions) and our gross margins in existing markets (i.e., excluding acquisitions) have averaged approximately 24% .

 

Well-positioned in attractive roofing demand markets. We believe that our national distribution platform is strategically positioned to continue benefitting from the North American market recovery, and we expect that improving economic conditions and continued recovery in residential and non-residential construction activity will drive the demand for additional roofing materials and complementary building products.

 

Superior customer service to our well established, long-term customer base . Our diverse customer base consists of contractors, home builders, building owners, and other resellers. A significant number of our customers have relied on us as their vendor of choice for decades, and we believe that these strong customer relationships cannot be easily replicated. For the fiscal year ended September 30, 2017, no single customer accounted for more than 2% of our net sales.

We believe that the services provided by our employees improve our customers’ efficiency and profitability, which, in turn, strengthens our customer relationships. We consider customer relations and our employees’ knowledge of roofing and exterior building materials as being vital to our ability to increase customer loyalty and maintain customer satisfaction. We invest significant resources in professional development, management skills, product knowledge and operational proficiency. The in-depth knowledge of the materials we sell and their applications allows our sales personnel to provide technical advice and value-added service to our customers throughout the construction process.

We provide a number of value-added services to our customers. In particular, we support our customers with: advice and assistance on product identification, specification and technical support; timely job site delivery, rooftop loading and logistical services; tapered insulation design and related layout services; metal fabrication and related metal roofing design and layout services; trade credit; and marketing support, including project leads for contractors.

 

Strong platform for growth and acquisition. From the time of our IPO in 2004, we increased net sales at rates well above the overall growth in the roofing materials distribution industry. We have expanded our business through strategic acquisitions, new branch openings, and the diversification of our product offering. We generally have improved the financial and operating performance of our acquired companies and helped them to grow their businesses following acquisition.

 

Strong cash flow generation driven by a stable business model. We have increased net sales in eight of the last ten fiscal years, including increases in each of the last seven consecutively. Our track record of growth, combined with limited capital expenditure requirements, has resulted in strong free cash flow across all economic cycles. We have a strong history of managing our debt leverage effectively and we have successfully reduced leverage subsequent to the RSG transaction.

 

Centralized IT platform.  We have made a significant investment in our information systems, including the ongoing development of a platform for online sales. All of our locations, except for one fabrication facility, operate on the same management information systems, providing us with a consistent platform to deliver excellent customer service and achieve operating efficiencies in purchasing, pricing and inventory management. Our systems have substantial capacity to handle our future growth plans without requiring significant additional investment.

 

Industry-leading management team with a track record of integration.  We believe that our key employees, including branch managers, regional vice presidents and executive officers, are among the

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most experienced members of the roofing industry and have a track record of achieving stro ng revenue growth and delivering profitability. Since Beacon became a publicly traded company in 2004, the Beacon management team has successfully completed and integrated 43 acquisitions and opened 78 new greenfield locations.

Our Growth Strategies

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

 

Expand product offering and increase cross-selling activities. Due to the unique characteristics of each geographic region, our local customers typically require market specific product offerings. We believe we have one of the most extensive offerings of high-quality branded products in the industry, with over 50,000 SKUs available across our branch network, however there remain opportunities for branches to expand their current product rosters. This will create additional opportunities for our branches to cross-sell more products throughout our existing network. In particular, we seek to expand non-residential roofing sales into markets where we currently sell mostly residential roofing. In addition, we work closely with customers and suppliers to identify new products and services, and continue to expand our product offering to include complementary building materials such as windows, siding, doors, waterproofing systems, insulation and metal fabrication.

 

Continue to provide exceptional customer service and roofing expertise. We provide a comprehensive array of high-quality products and offer value-added services. In fiscal year 2017, we were able to support our customers by fulfilling approximately 97% of warehouse orders through our in-stock inventory as a result of the breadth and depth of the inventory maintained at our local branches. We believe that our focus on providing both value-added services and accurate and rapid order fulfillment enables us to attract and retain customers.

 

Selectively pursue opportunities for organic growth and strategic acquisitions. Acquisitions and greenfield expansion is an important component of our growth strategy. We believe that there will be meaningful opportunities to further expand or intensify our geographic focus in contiguous or existing regions. We intend to continue to pursue our growth strategy while focusing on maintaining a strong balance sheet.

Since 2004, Beacon has opened 78 new branches through greenfield expansion. Beacon has a disciplined approach to new branch openings and its typical strategy is to open branches: (1) within its existing markets; (2) where existing customers have expanded into new markets; or (3) in areas that have limited or no acquisition candidates and are a good fit with its business model and culture.

Since 2004, Beacon has completed 43 acquisitions. We believe that the roofing distribution sector remains fragmented and that there are significant opportunities to further grow our business through disciplined, strategic acquisitions. With only a few large, well-capitalized competitors in the industry, we believe we can continue to build on our distribution platform by successfully acquiring additional roofing materials distributors. Our main acquisition strategy is to target market leaders in geographic areas that we do not service or that complement our existing operations in an area.

 

Enhance margins and free cash flow generation through continued execution of our growth strategy. We believe that as recent greenfield locations continue to ramp up, and if expected synergies and cost savings from acquisitions are realized, our margins will continue to improve. We also believe that we have an operating model that requires minimal capital, which, when combined with stable re-roofing demand, will position us for strong free cash flow generation. We intend to continue to use cash flows to support deleveraging and our continued platform growth. We have, and will continue to, invest heavily in our branch expansion. Although management estimates that our branch expansion strategy over the past several years has resulted in above average upfront operating costs and capital expenditures, we believe these new branches will increase their contribution to our profitability and cash flow as they mature.

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Our Products and Services

Products

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

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

 

Product Portfolio

Residential

 

Non-Residential

 

Complementary

Roofing Products

 

Roofing Products

 

Building Products

Asphalt shingles

 

Single-ply roofing

 

Vinyl siding

Synthetic slate and tile

 

Asphalt

 

Fiber cement siding

Clay tile

 

Metal

 

Stone veneer

Concrete tile

 

Modified bitumen

 

Windows

Slate

 

Build-up roofing

 

Doors

Nail base insulation

 

Cements and coatings

 

Skylights

Metal roofing

 

Insulation – flat stock & tapered

 

Waterproofing

Felts

 

Commercial fasteners

 

Building insulation

Synthetic underlayment

 

Metal edges and flashings

 

Gutters and downspouts

Wood shingles and shakes

 

Smoke/roof hatches

 

Decking and railing

Nails and fasteners

 

Sheet metal (copper/aluminum/steel)

 

Air barrier

Metal edgings and flashings

 

Roofing tools

 

Concrete restoration systems 

Prefabricated flashings

 

PVC membrane

 

Sealants 

Ridge and soffit vents

 

TPO membrane

 

 

 

 

EPDM membrane

 

 

 

Our product lines are designed to meet the requirements of residential and non-residential roofing contractors as well as siding & insulation contractors. The products that we distribute are supplied by the industry’s leading manufacturers of high-quality roofing materials, siding materials, insulation, windows, doors, decking and related products (See “Purchasing and Suppliers”).

 

In the residential market, asphalt shingles comprise the largest share of the products we sell. We distribute products such as high-end shingles, gutters and metal roofing products, and tile roofing. Additionally, we distribute downspouts, tools, nails, vinyl and fiber cement siding, windows, decking and related exterior shelter products to meet the expansive needs of our customers.

 

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

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Of all the complementary building products in our portfolio, vinyl and cement siding comprise the largest share of the products we sell.  

Services

We emphasize superior value-added services to our customers. We employ a knowledgeable sales force that possesses in-depth knowledge of roofing materials and applications and is capable of providing technical advice and assistance to contractors and other customers throughout the re-roofing and construction process. In particular, we support our customers with the following value-added services:

 

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

 

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

 

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

 

metal fabrication and related metal roofing design and layout services;

 

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

 

trade credit and online bill pay; and

 

marketing support, including project leads for contractors.

Our Customers

We serve over 70,000 customers, comprised of contractors, home builders, building owners, and other resellers across the continental United States and Canada. Our typical customer base varies by end market, with relatively small contractors in the residential market and small to large-sized contractors in the non-residential market. To a lesser extent, our customer base in a market can include general contractors, retailers and building materials suppliers. A significant number of our customers have relied on us or our predecessors as their vendor of choice for decades, therefore we believe that we have strong customer relationships that our competitors cannot easily displace or replicate. No single customer accounts for more than 2% of our net sales.

Our Culture and Employees

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

As of September 30, 2017 we had 5,406 employees consisting of 1,334 in sales and marketing, 682 branch and assistant branch managers, 2,666 drivers, delivery helpers and warehouse workers, 680 general and administrative employees and 44 executives. We have 33 employees that are represented by labor unions and there are no outstanding labor disputes.

Sales and Marketing

Sales strategy

Our sales strategy is to provide a comprehensive array of high-quality products and superior value-added services to residential and non-residential roofing contractors reliably, accurately and on time. In fiscal year 2017, we were able to support our customers by fulfilling approximately 97% of warehouse orders at the time of invoice. This is a result of the breadth and depth of the inventory maintained at our local branches.   We believe that our focus on providing superior value-added services and accurate and rapid order fulfillment enables us to attract and retain customers.

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Sales organization

We have attracted and retained an experienced sales force that consisted of approximately 1,181 employees as of September 30, 2017 who are responsible for generating sales at the local branch level. The expertise of our salespeople helps us to increase sales to existing customers and add new customers.

Each of our branches is led by a branch manager, who also functions as the branch’s sales manager. In addition, each branch generally employs one to four outside salespeople and one to five inside salespeople who report to their branch manager. Branches that focus primarily on the residential market typically staff a larger number of outside salespeople.

The primary objectives of our outside salespeople are to increase sales to existing customers and prospect for new customers. These activities are supported by utilizing our CRM (Customer Relationship Management) system throughout our selling organization. We continue to use our proprietary LogicTrack software system to extract information on construction projects in our local markets. Once a construction project is identified, members of our design and estimating team create job quotes, which, along with pertinent bid and job information, are readily available to our salespeople through LogicTrack. Our outside salespeople then contact potential customers in an effort to solicit their interest in participating with us in the identified project. Throughout this process, LogicTrack maintains a record of quoting activity, due dates, and other data to allow tracking of the projects and efficient follow-up. By seeking a contractor to “partner with” on a bid, we increase the likelihood that such contractor will purchase their roofing materials and related products from us in the event that the contractor is selected for the project.

To complement our outside sales force, we have built an experienced and technically proficient inside sales staff that provides vital product expertise to our customers. Our inside sales force is responsible for fielding incoming orders, providing pricing quotations and responding to customer inquiries.

In addition to our outside and inside sales forces, we employ representatives who act as liaisons for certain roofing materials manufacturers to assist with the promotion of specific products to professional contractors, architects and building owners. These relationships include exclusive geographic territories and we currently have a developed relationship with Carlisle on this basis.

Marketing

In order to capitalize on established customer relationships and locally developed brands, we have maintained the trade names of most of the businesses that we have acquired. These trade names—such as Acme Building Materials, Alabama Roofing Supply, American Building & Roofing, Atlantic Building Products, Applicators Sales, Beacon Roofing Supply Canada Company, Beacon Sales, Best Distributing, BJ Supply, Cassady Pierce, Coastal Metal Service, Dealers Choice, Eco Insulation Supply, Enercon Products, Entrepot de la Toiture, Ford Wholesale, Fox Brothers Company, Groupe Bédard, Intermountain Supply, JGA, JGA Beacon, Lowry’s, Lyf-Tym Building Products, Lafayette Wood Works, McClure Johnston, Mississippi Roofing Supply, North Coast Roofing Systems, Pacific Supply, Posi-Pentes, Posi-Slope, ProCoat Systems, Quality Roofing Supply, RCI Roofing Supply, RIS Insulation Supply, RIS Roofing Supply, RIS Roofing and Insulation Supply, Roof Depot, Roofing Supply Group, Southern Roof Center, Statewide Wholesale, Structural Materials, The Roof Center, West End Roofing, Siding & Windows, Wholesale Roofing Supply, and Woodfeathers — are well-known in the local markets in which the respective branches compete and are associated with high-quality products and customer service.

As a supplement to the efforts of our sales force, each of our branches communicates with residential and non-residential contractors in their local markets through newsletters, direct mail, social media and the Internet. In order to build and strengthen relationships with customers and vendors, we offer exclusive promotions and sponsor our own regional trade shows, which feature general business and roofing seminars for our customers and product demonstrations by our vendors. In addition, we attend numerous industry trade shows throughout the regions in which we compete, and we are an active member of the National Roofing Contractors Association, as well as certain regional contractors’ associations.

In fiscal year 2017, we introduced Beacon Pro+, our innovative e-commerce portal that enables customers to order online from our catalog of over 50,000 products and have 24/7 access to view real time pricing, review the status of orders, request and approve quotes, and pay their bills online.

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Purchasing and Suppliers

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

We are viewed by our suppliers as a key distributor due to our industry expertise, past growth and profitability, significant market share, financial strength, and the substantial volume of products that we distribute.

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

Operations and Infrastructure

Operations

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

Our distribution fulfillment process is initiated upon receiving a request for a contract job order or direct product order from a contractor. Under a contract job order, a contractor typically requests roofing or other construction materials and technical support services. The contractor discusses the project’s requirements with a salesperson and the salesperson provides a price quotation for the package of products and services. Subsequently, the salesperson processes the order and we deliver the products to the customer’s job site. In fiscal year 2017, we were able to support our customers by fulfilling approximately 97% of warehouse orders through our in-stock inventory as a result of the breadth and depth of the inventory maintained at our local branches.

Facilities

As of September 30, 2017, our network of 383 branches was serving metropolitan areas in 48 states and 6 Canadian provinces. This network has enabled us to effectively and efficiently serve a broad customer base and to achieve a leading market position in each of our core geographic markets.

Fleet

For the year ended September 30, 2017, our distribution infrastructure supported over one million deliveries. To service our customer base, we maintained a dedicated owned fleet of 590 straight trucks, 566 tractors and 978 trailers as of September 30, 2017. Nearly all of our delivery vehicles are equipped with specialized equipment, including 1,779 truck-mounted forklifts, cranes, hydraulic booms and conveyors, which are necessary to deliver products to rooftop job sites in an efficient and safe manner and in accordance with our customers’ requirements.

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

Management Information Systems

We have fully integrated management information systems across our locations. Acquired businesses are moved to our IT platform as soon as feasible following acquisition. Our systems support every major internal

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operatio nal function, except payroll, providing complete integration of purchasing, receiving, order processing, shipping, inventory management, sales analysis and accounting. The same databases are shared within the systems, allowing our branches to easily acquir e products from other branches or schedule deliveries by other branches, greatly enhancing our customer service. Our systems also include a pricing matrix which allows us to refine pricing by region, branch, customer and customer type, or even a specific c ustomer project. In addition, our systems allow us to centrally monitor all branch and regional performance as often as daily. We have centralized many functions to leverage our growing size, including accounts payable, insurance, payroll, employee benefit s, vendor relations, and banking.

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

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

Government Regulations

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

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

Competition

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

Order Backlog

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

Seasonality

In general, sales and net income are highest during our first, third and fourth fiscal quarters, which represent the peak months of construction and re-roofing, especially in our branches in the northern and mid-western regions of the United States and in Canada. Our sales are substantially lower during the second quarter, when we usually incur net losses. These quarterly fluctuations have diminished as we have diversified further into the southern and western regions of the United States.

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

History and Additional Information

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

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

ITEM 1A.    RISK FACTORS

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

Risks Related to Our Business

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

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

 

unforeseen difficulties in integrating operations, technologies, services, accounting and employees, including difficulties in operating and integrating Allied’s interior products business line, a business line which we have not previously operated;

 

diversion of financial and management resources from existing operations;

 

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

 

potential loss of key employees;

 

unforeseen liabilities associated with businesses acquired; and

 

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

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

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

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

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

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

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

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

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

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

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

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

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

A portion of the products we sell are for residential and non-residential construction. The strength of these markets depends on new housing starts and business investment, which are a function of many factors beyond our control, including credit and capital availability, interest rates, foreclosure rates, housing inventory levels and occupancy, employment levels, consumer confidence and the health of the United States economy and mortgage

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mark ets. Economic downturns in the regions and markets we serve could result in lower revenues and, since many of our expenses are fixed, lower profitabilit y . The challenging economic conditions in recent years, including tighter credit markets, have adversely affected demand for new residential and non-residential projects and, to a lesser extent, re-roofing projects, and may continue to negatively affect expenditures for roofing in the near term. Unfavorable changes in demographics, credit markets, consumer c onfidence, housing affordability, or housing inventory levels and occupancy, or a weakening of the United States economy or of any regional or local economy in which we operate could adversely affect consumer spending, result in decreased demand for our pr oducts, and adversely affect our business. In addition, instability in the economy and financial markets, including as a result of terrorism or civil or political unrest, may result in a decrease in housing starts, which would adversely affect our business .

Seasonality in the construction and re-roofing industry generally results in second quarter losses.

Our second quarter is typically affected adversely by winter construction cycles and cold weather patterns as the levels of activity in the new construction and re-roofing markets decrease. Because many of our expenses remain relatively fixed throughout the year, we generally record a loss during our second quarter. We expect that these seasonal variations will continue in the near future.

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

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

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

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

Acquisitions frequently result in the recording of goodwill and other intangible assets. At September 30, 2017, goodwill represented approximately 36 % of our total assets. We expect to record significant additional goodwill and other intangible assets upon consummation of the Allied Acquisition. Goodwill is not amortized for financial reporting purposes and is subject to impairment testing a t least annually using a fair-value based approach. The identification and measurement of goodwill impairment involves the estimation of the fair value of our reporting units. Our accounting for impairment contains uncertainty because management must use judgment in determining appropriate assumptions to be used in the measurement of fair value. We determine the fair values of our reporting units by using a qualitative approach.

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

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

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

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

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

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

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

As of September 30, 2017, we had $300.0 million in aggregate principal amount of our 6.375% senior notes due 2023, $441.0 million outstanding under our existing seven-year senior secured term loan “B” facility, $3.2 million drawn under our existing senior secured asset-based revolving credit facility (the “ABL Facility” and, together with the term loan B facility, our “Existing Senior Secured Credit Facilities”), and $35.4 million of total other indebtedness. In connection with the Allied Acquisition, on October 25, 2017 we issued $1.3 billion in aggregate principal amount of our 4.875% senior notes due 2025 (our “outstanding senior notes”), and we also expect to borrow up to an aggregate principal amount of $970.0 million under a seven-year senior secured term loan “B” facility (the “New Term Loan”) and enter into an amended and restated senior secured asset-based revolving credit facility with commitments of up to $1.3 billion (the “New ABL Facility” and, collectively with the New Term Loan, the “New Senior Secured Credit Facilities”). Our substantial debt could have important consequences to us, including:

 

increasing our vulnerability to general economic and industry conditions;

 

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

 

exposing us to the risk of increased interest rates, and corresponding increased interest expense, because future borrowings under our Existing Senior Secured Credit Facilities or New Senior Secured Credit Facilities would be at variable rates of interest;

 

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

 

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

 

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

 

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

In addition, the debt agreements that currently govern our Existing Senior Secured Credit Facilities and the indentures governing our outstanding senior notes impose significant operating and financial restrictions on us, including limitations on our ability to, among other things, pay dividends and make other distributions on, or redeem or repurchase, capital stock; make certain investments; incur certain liens; enter into transactions with affiliates; merge or consolidate; enter into agreements that restrict the ability of our subsidiaries to make dividends or other payments to

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Beacon Roofing Supply, Inc.; and transfer or sell assets. We expect that the debt agreements and other debt instruments that will govern the New S enior Secured Credit Facilities will have similar restrictions. In addition, the terms of our preferred stock contain restrictions on our ability to pay dividends on our common stock, and the holders of such shares would participate in any declared common stock dividends, reducing the cash available to holders of common stock. As a result of these restrictions, we will be limited as to how we conduct our business and we may be unable to raise additional debt or equity financing to compete effectively or to capitalize on available business opportunities.

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

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

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

Risks Related to the Allied Acquisition

The Allied Acquisition is subject to closing conditions. Failure to complete the Allied Acquisition could have material and adverse effects on Beacon.

On August 24, 2017, Beacon entered into the Stock Purchase Agreement in connection with the Allied Acquisition. Although we currently expect the Allied Acquisition to close on January 2, 2018, subject to customary closing conditions, there can be no assurance that the Allied Acquisition will be completed in accordance with the anticipating timing or at all. In addition, if the Allied Acquisition has not been completed by February 28, 2018, either Allied or the Company may terminate the Stock Purchase Agreement unless the failure of the Allied Acquisition to be completed has resulted from the failure of the party seeking to terminate the Stock Purchase Agreement to perform its obligations thereunder.

If the Allied Acquisition is not completed on a timely basis, or at all, Beacon’s ongoing business may be adversely affected. Additionally, in the event the Allied Acquisition is not completed, Beacon will be subject to a number of risks without realizing any of the benefits of having completed the Allied Acquisition, including the following:

 

the Company will be required to pay its costs relating to the Allied Acquisition, such as legal, accounting, financing and financial advisory fees, whether or not the Allied Acquisition is completed, and could be required to pay Allied a termination fee of $85 million in cash if the Stock Purchase Agreement is terminated under specified circumstances;

 

time and resources committed by the Company’s management to matters relating to the Allied Acquisition could otherwise have been devoted to pursuing other beneficial opportunities; and

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the market price of the Company’s securities could decline to the extent that the current market price reflects a market assumption that the Allied Acquisition will be completed, or to the extent that the Allied Acquisition is fundamental to the Company’s business strategy.

 

The issuance of preferred shares in the Convertible Preferred Stock Purchase, which will rank senior to our shares of common stock, and the issuance of additional preferred shares as “in-kind” dividend payments will reduce the relative voting power of our common stockholders, will dilute the ownership of such stockholders, and may adversely affect the market price of our common stock. The preferred stock to be issued in the Convertible Preferred Stock Purchase will have rights, preferences and privileges that are not held by, and are preferential to the rights of, our common stockholders. We may be required under certain circumstances to repurchase the preferred stock for cash; such obligations could adversely affect our liquidity and financial condition.

 

On August 24, 2017, in connection with the execution of the Stock Purchase Agreement, Beacon entered into an investment agreement (the “Investment Agreement”) with CD&R Boulder Holdings, L.P. (the “CD&R Stockholder”) and Clayton, Dubilier & Rice Fund IX, L.P. (solely for the purpose of limited provisions therein) for the purchase of shares of Series A Cumulative Convertible Participating Preferred Stock, par value $0.01 per share (the “preferred stock”) in order to partially finance the Allied Acquisition.  The preferred stock will be convertible perpetual participating preferred stock of Beacon, with an initial conversion price of $41.26 per share, and accrue dividends at a rate of 6.0% per annum (payable in cash or in-kind, subject to specified limitations).  The preferred stock may be converted to shares of our common stock at any time following issuance thereof at the option of the holder, and any such conversion will dilute the ownership interest of our common stockholders.  Pursuant to the Investment Agreement, upon closing of the Allied Acquisition, the CD&R Stockholder will purchase 400,000 shares of our preferred stock with an aggregate liquidation preference of $400 million, at a purchase price of $1,000 per share (such purchase, the “Convertible Preferred Stock Purchase”).  Such shares of preferred stock may be converted at any time at the option of the holder into 9,694,619 shares of our common stock representing approximately 14.3% of our outstanding shares of common stock (as of September 30, 2017 and assuming no adjustment to the initial conversion price of $41.26 per share).  In addition, under the terms of the preferred stock, we may, at our option, force the conversion of all (but not less than all) of the outstanding shares of preferred stock to common stock if any time the market price of our common stock exceeds 200% of the then-effective conversion price per share for at least 75 days out of any trailing 90-trading day period.  Any such conversion would significantly dilute our common stockholders and may adversely affect our earnings per share and the market price of our common stock.

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

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

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

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

Following the completion of the Allied Acquisition and an 18-month lock-up period, the CD&R Stockholder may sell shares of our common stock issued upon conversion of preferred stock in the public market, which may cause the market price of our common stock to decrease and therefore make it more difficult to raise equity financing or issue equity as consideration in an acquisition.

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

Following the consummation of the Allied Acquisition, the CD&R Stockholder will hold a significant equity interest in us and may exercise significant influence over us, including through its ability to designate up to two directors to our board of directors, and its interests as a preferred equity holder may diverge from or even conflict with your interests.

 

After giving effect to the Allied Acquisition, the CD&R Stockholder will beneficially own preferred stock convertible into approximately 14.3% of our outstanding common stock (as of September 30, 2017 and assuming no adjustment to the initial conversion price of $41.26 per share) and will become our largest stockholder.  As a result, the CD&R Stockholder may have the indirect ability to influence our policy and operations.  In addition, in connection with the Allied Acquisition, we have entered into the Investment Agreement with the CD&R Stockholder, pursuant to which the CD&R Stockholder will be initially entitled to appoint up to two directors to our board of directors.  Notwithstanding that all directors will be subject to fiduciary duties to us and to applicable law, the interests of the directors designated by the CD&R Stockholder may differ from the interests of our security holders as a whole or of our other directors.  With such representation on our board of directors, the CD&R Stockholder will have influence over the appointment of management and any action requiring the vote of our board of directors, including significant corporate action such as mergers and sales of substantially all of our assets.  The directors controlled by the CD&R Stockholder will also be able to make decisions affecting our capital structure, including decisions to issue additional capital stock and incur additional debt.  Additionally, for so long as the CD&R Stockholder owns preferred stock, certain matters will require the approval of the CD&R Stockholder, including (1) amendments or modifications to the Company’s charter, by-laws or the certificate of designations governing the

21


 

preferred stock that would adversely affect the preferred stock, (2) authorization, creation, increase in the authorized amount of, or issuance of any class or series of senior or parity equity securities or any security convertible into, shares of senio r or parity equity securities, (3) any increase or decrease in the authorized number of preferred shares or the issuance of additional shares of preferred stock, (4) amendments to the Company’s debt agreements that would, among other things, adversely affe ct the Company’s ability to pay dividends on the preferred stock, subject to certain exceptions, and (5) the liquidation, dissolution or filing of a voluntary petition for bankruptcy or receivership.  The interests of the CD&R Stockholder as stockholder ma y not in all cases be aligned with your interests and may even conflict with your interests.  The CD&R Stockholder and its affiliates are in the business of making or advising on investments in companies, including businesses that may directly or indirectl y compete with certain portions of our business.  In addition, the CD&R Stockholder may have an interest in pursuing acquisitions, divestitures, financings or other transactions that, in their judgment, could enhance their equity investments, even though s uch a transaction might involve risks to you.  Furthermore, the CD&R Stockholder may in the future own businesses that directly or indirectly compete with us.  The CD&R Stockholder may also pursue acquisition opportunities that may be complementary to our business, and as a result, those acquisition opportunities may not be available to us.

  ITEM 1B.     UNRESOLVED STAFF COMMENTS

None.

ITEM 2.    PROPERTIES

As of October 31, 2017, we leased 382 facilities including our headquarters and other support facilities, throughout the United States and Canada. These leased facilities range in size from approximately 2,000 to 137,000 square feet. In addition, we own 13 sales/warehouse facilities located in Manchester, New Hampshire; Reading, Pennsylvania; Montreal, Quebec (2); Sainte-Foy, Quebec; Delson, Quebec; Trois Rivieres, Quebec; Salisbury, Maryland; Hartford, Connecticut; Cranston, Rhode Island; Lancaster, Pennsylvania; Easton, Maryland; and Manassas, Virginia. These owned facilities range in size from 11,500 square feet to 68,000 square feet. All of the owned properties are mortgaged to our senior lenders. We believe that our properties are in good operating condition and adequately serve our current business operations.

22


 

As of October 31, 201 7 , we operated 383 branches, a few with multiple leased facilities or combined facilities, as well as 12 other facilities. The following table summarizes the locations of these branches and facilities:

 

 

 

 

 

Non-Branch

Location

 

Branches

 

Facilities

 

 

 

 

 

U.S. State

 

 

 

 

Alabama

 

6

 

 

Arizona

 

4

 

 

Arkansas

 

4

 

 

California

 

31

 

 

Colorado

 

14

 

 

Connecticut

 

4

 

1

Delaware

 

3

 

 

Florida

 

18

 

 

Georgia

 

12

 

1

Hawaii

 

2

 

 

Idaho

 

1

 

 

Illinois

 

8

 

 

Indiana

 

6

 

 

Iowa

 

2

 

 

Kansas

 

4

 

 

Kentucky

 

6

 

 

Louisiana

 

9

 

 

Maine

 

4

 

 

Maryland

 

15

 

2

Massachusetts

 

13

 

 

Michigan

 

9

 

 

Minnesota

 

3

 

 

Mississippi

 

3

 

 

Missouri

 

10

 

 

Montana

 

1

 

 

Nebraska

 

7

 

 

Nevada

 

1

 

 

New Hampshire

 

2

 

 

New Jersey

 

2

 

 

New Mexico

 

1

 

 

New York

 

2

 

 

North Carolina

 

22

 

2

Ohio

 

8

 

1

Oklahoma

 

3

 

 

Oregon

 

3

 

 

Pennsylvania

 

28

 

 

Rhode Island

 

1

 

 

South Carolina

 

8

 

 

South Dakota

 

2

 

 

Tennessee

 

9

 

 

Texas

 

34

 

2

Utah

 

5

 

 

Vermont

 

1

 

 

Virginia

 

12

 

2

Washington

 

11

 

 

West Virginia

 

4

 

 

23


 

 

 

 

 

Non-Branch

Location

 

Branches

 

Facilities

Wisconsin

 

1

 

 

Wyoming

 

2

 

 

Total—  United States

 

361

 

11

 

 

 

 

 

Canadian Province

 

 

 

 

Alberta

 

3

 

 

British Columbia

 

4

 

 

Nova Scotia

 

1

 

 

Ontario

 

6

 

1

Quebec

 

6

 

 

Saskatchewan

 

2

 

 

Total— Canada

 

22

 

1

 

 

 

 

 

Total - All

 

383

 

12

 

 

 

ITEM 3.    LEGAL PROCEEDINGS

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

ITEM 4.    MINE SAFETY DISCLOSURES

Not applicable.

24


 

PART II

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

Our common stock trades on the NASDAQ Global Select Market (the “NASDAQ”) under the symbol “BECN”. The following table lists quarterly information on the price range of our common stock based on the high and low reported sale prices for our common stock as reported by NASDAQ for the periods indicated below:

 

 

High

 

 

Low

 

Year Ended September 30, 2016:

 

 

 

 

 

 

 

First Quarter

$

44.01

 

 

$

32.02

 

Second Quarter

$

43.25

 

 

$

32.24

 

Third Quarter

$

45.72

 

 

$

40.42

 

Fourth Quarter

$

48.96

 

 

$

39.50

 

 

 

 

 

 

 

 

 

Year Ended September 30, 2017:

 

 

 

 

 

 

 

First Quarter

$

49.32

 

 

$

40.68

 

Second Quarter

$

50.61

 

 

$

43.51

 

Third Quarter

$

52.12

 

 

$

47.02

 

Fourth Quarter

$

51.96

 

 

$

39.57

 

 

There were 94 registered holders of record of our common stock as of October 31, 2017.

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

No purchases of our equity securities were made by us or any affiliated entity during the fourth quarter of the fiscal year ended September 30, 2017.

Recent Sales of Unregistered Securities

None.

Dividends

We have not paid cash dividends on our common stock and do not anticipate paying dividends in the foreseeable future. Our board of directors currently intends to retain any future earnings for reinvestment in our growing business. Our revolving credit facilities currently prohibit the payment of dividends without the prior written consent of our lenders. Any future determination to pay dividends will also be at the discretion of our board of directors and will be dependent upon our results of operations and cash flows, our financial position and capital requirements, general business conditions, legal, tax, regulatory and any contractual restrictions on the payment of dividends, and any other factors our board of directors deems relevant.

Stock Performance Graph

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

 

The following graph compares the cumulative total shareholder return on Beacon Roofing Supply, Inc.’s common stock (based on market prices) for the last five fiscal years with the cumulative total return on (i) the Nasdaq Index, (ii) the S&P 1500 Trading Companies & Distributors Index and (iii) the S&P 1500 Building Products Index,

25


 

assuming a hypothetical $100 investm ent in each on September 30, 2012 and the re-investment of all dividends. The closing price of our common stock on September 30, 2017 was $51.25   .

 

Historically, we have utilized the S&P 1500 Buildings Products Index in our comparison of cumulative total return. We believe the S&P 1500 Trading Companies & Distributors Index includes a more representative sample of peer companies to Beacon and provides a better benchmark of industry performance for the following reasons:

 

 

The S&P 1500 Building Products Index includes many manufacturing companies that have different financial and operating characteristics and are not directly comparable to our business.

 

 

The S&P 1500 Trading Companies & Distributors Index is comprised of companies that bear more similarities to our business, regardless of the types of products distributed.

 

We expect to utilize the S&P 1500 Trading Companies & Distributors Index in future filings, but for this year we have included the results of both indexes in the stock performance graph below.  

 

 

 

 

26


 

ITEM 6.    SELECTE D FINANCIAL DATA

You should read the following selected financial information together with our financial statements and related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” also included in this Form 10-K. We have derived the statement of operations data for the years ended September 30, 2017, September 30, 2016 and September 30, 2015, and the balance sheet data as of September 30, 2017 and September 30, 2016, from our audited financial statements included in this Form 10-K. We have derived the statements of operations data for the years ended September 30, 2014 and September 30, 2013, and the balance sheet data as of September 30, 2015, September 30, 2014 and September 30, 2013, from our audited financial statements not included in this Form 10-K.

Consolidated Statement of Operations Data:

 

 

Year Ended September 30,

 

 

2017

 

 

2016

 

 

2015

 

 

2014

 

 

2013

 

 

(In thousands, except share and per share amounts)

 

Net sales

$

4,376,670

 

 

$

4,127,109

 

 

$

2,515,169

 

 

$

2,326,905

 

 

$

2,240,723

 

Cost of products sold

 

3,300,731

 

 

 

3,114,040

 

 

 

1,919,804

 

 

 

1,799,065

 

 

 

1,709,326

 

Gross profit

 

1,075,939

 

 

 

1,013,069

 

 

 

595,365

 

 

 

527,840

 

 

 

531,397

 

Operating expense

 

859,843

 

 

 

808,085

 

 

 

478,284

 

 

 

428,977

 

 

 

401,676

 

Income from operations

 

216,096

 

 

 

204,984

 

 

 

117,081

 

 

 

98,863

 

 

 

129,721

 

Interest expense, financing costs, and other

 

52,751

 

 

 

58,452

 

 

 

11,037

 

 

 

10,095

 

 

 

8,247

 

Income before provision for income taxes

 

163,345

 

 

 

146,532

 

 

 

106,044

 

 

 

88,768

 

 

 

121,474

 

Provision for income taxes

 

62,481

 

 

 

56,615

 

 

 

43,767

 

 

 

34,922

 

 

 

48,867

 

Net income

$

100,864

 

 

$

89,917

 

 

$

62,277

 

 

$

53,846

 

 

$

72,607

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average common stock outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

60,315,648

 

 

 

59,424,372

 

 

 

49,578,130

 

 

 

49,227,466

 

 

 

48,472,240

 

Diluted

 

61,344,263

 

 

 

60,418,067

 

 

 

50,173,478

 

 

 

49,947,699

 

 

 

49,385,335

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

$

1.67

 

 

$

1.51

 

 

$

1.26

 

 

$

1.09

 

 

$

1.50

 

Diluted

$

1.64

 

 

$

1.49

 

 

$

1.24

 

 

$

1.08

 

 

$

1.47

 

 

Balance Sheet Data:

 

 

September 30,

 

 

2017

 

 

2016

 

 

2015

 

 

2014

 

 

2013

 

 

(In thousands)

 

Cash and cash equivalents

$

138,250

 

 

$

31,386

 

 

$

45,661

 

 

$

54,472

 

 

$

47,027

 

Total assets

 

3,449,557

 

 

 

3,113,859

 

 

 

1,539,428

 

 

 

1,433,896

 

 

 

1,338,696

 

Total long-term indebtedness 1

 

750,233

 

 

 

1,117,711

 

 

 

192,567

 

 

 

216,460

 

 

 

209,601

 

Total stockholders’ equity

 

1,781,806

 

 

 

1,323,827

 

 

 

883,116

 

 

 

817,101

 

 

 

754,356

 

 

1 Net of debt issuance costs, except for $5.3 million of debt issuance costs related to the Company’s revolving lines of credit that are classified as other assets in the consolidated balance sheet as of September 30, 2017

 

Non-GAAP Financial Measures

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

 

Adjusted Net Income (Loss)/Adjusted EPS

27


 

 

Adjusted EBITDA

We define Adjusted Net Income (Loss) as net income that excludes non-recurring costs related to acquisitions and certain incremental amortization of intangibles related to the RSG acquisition. Adjusted net income per share (“Adjusted EPS”) is calculated by dividing the Adjusted Net Income (Loss) for the period by the weighted-average diluted shares outstanding for the period.

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

We use these supplemental measures to evaluate performance period over period and to analyze the underlying trends in our business and to establish operational goals and forecasts that are used in allocating resources. We expect to compute Adjusted EBITDA using the same consistent method from quarter to quarter and year to year.

We believe these measures are useful because they allow investors to better understand year-over-year changes in underlying operating performance. We believe that these non-GAAP measures provide investors and analysts with a measure of operating results unaffected by differences in capital structures and capital investment cycles among otherwise comparable companies. Further, we believe these measures are useful to investors because they improve comparability of results of operations since they eliminate the impact of purchase accounting adjustments that can render operating results non-comparable between periods.

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

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

Adjusted Net Income (Loss)/Adjusted EPS

 

 

Year Ended September 30,

 

 

2017

 

 

2016

 

 

2015

 

 

Amount

 

 

Per

Share

 

 

Amount

 

 

Per

Share

 

 

Amount

 

 

Per

Share

 

Net income

$

100,864

 

 

$

1.64

 

 

$

89,917

 

 

$

1.49

 

 

$

62,277

 

 

$

1.24

 

Company adjustments, net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Acquisition costs 1

 

32,700

 

 

 

0.54

 

 

 

36,608

 

 

 

0.61

 

 

 

6,978

 

 

 

0.14

 

Adjusted Net Income (Loss)

$

133,564

 

 

$

2.18

 

 

$

126,525

 

 

$

2.10

 

 

$

69,255

 

 

$

1.38

 

 

1 Acquisition costs reflect non-recurring charges related to acquisitions and certain incremental amortization of intangibles related to the RSG acquisition, net of $20.5 million, $22.9 million, and $0.3 million in tax for 2017, 2016 and 2015, respectively.

28


 

Adjusted EBITDA

 

 

Year Ended September 30,

 

 

 

2017

 

 

2016

 

 

2015

 

 

Net income

$

100,864

 

 

$

89,917

 

 

$

62,277

 

 

Acquisition costs 1

 

15,745

 

 

 

24,749

 

 

 

6,978

 

 

Interest expense, net

 

53,802

 

 

 

58,145

 

 

 

10,561

 

 

Income taxes

 

62,481

 

 

 

56,615

 

 

 

44,046

 

 

Depreciation and amortization

 

116,467

 

 

 

100,191

 

 

 

34,862

 

 

Stock-based compensation

 

15,074

 

 

 

17,749

 

 

 

9,936

 

 

Adjusted EBITDA

$

364,433

 

 

$

347,366

 

 

$

168,660

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Adjusted EBITDA as a % of net sales

 

8.3

%

 

 

8.4

%

 

 

6.7

%

 

 

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

29


 

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

The following discussion and analysis should be read in conjunction with our consolidated financial statements and related notes and other financial information appearing elsewhere in this Annual Report on Form 10-K. All references to “2017,” “2016” and “2015”are referring to the twelve month period ended September 30 for each of those respective fiscal years. The following discussion may contain forward-looking statements that reflect our plans and expectation. Our actual results could differ materially from those anticipated by these forward-looking statements due to the factors discussed elsewhere in this Annual Report on Form 10-K, particularly in the “Risk Factors” section. We do not undertake, and specifically disclaim, any obligation to update any forward-looking statements to reflect the occurrence of events or circumstances after the date of such statements except as required by law.

Overview

We are the largest publicly traded distributor of residential and non-residential roofing materials in the United States and Canada. We also distribute complementary building products, including siding, windows, specialty exterior building products, insulation, and waterproofing systems for residential and non-residential building exteriors. We are among the oldest and most established distributors in the industry. We purchase products from a large number of manufacturers and then distribute these goods to a customer base consisting of contractors and, to a lesser extent, general contractors, retailers, and building materials suppliers.

As of September 30, 2017 we operated in 383 locations throughout 48 states, as well as 6 provinces in Canada. We stock one of the most extensive assortments of high quality branded products in the industry with over 50,000 SKUs available across our branch network, enabling us to deliver a wide range of products to our customers on a timely basis. For 2017, approximately 96% of our net sales came from customers located in the United States.

Effective execution of both the sales and operating plans enables us to grow beyond the relative strength of the residential and non-residential roofing markets we serve. Our business model is a bottom-up approach, where each of our branches uses their regional knowledge and experience to assist with the development of a marketing plan and stocking a product mix that is best suited for its respective market. Local alignment with overall strategic goals provides the foundation for significant ownership of results at the branch level.

Our distinctive operational model combined with significant branch level autonomy differentiates us from the competition. We provide our customers with value-added services, including, but not limited to, job site delivery, custom designed tapered roofing systems, metal fabrication, and trade credit. We consider customer relations and our employees' knowledge of roofing and exterior building materials to be vital to our ability to increase customer loyalty and maintain customer satisfaction. Our customers’ business success can be enhanced when they are supported by our efficient and effective distribution network. We invest significant resources in professional development, management skills, product knowledge and operational proficiency. We pride ourselves on providing these capabilities developed on a foundation of continuous improvement driving service excellence, productivity and efficiencies.

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

Acquisition Growth - 2017:

 

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

30


 

 

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

 

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

 

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

 

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 $76 million.

Acquisition Growth - 2016:

 

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

 

 

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

 

­

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

 

­

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

 

­

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

 

­

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

 

­

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

 

­

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

31


 

 

­

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

Organic Growth:

We have continued to promote organic greenfield growth with the opening of 4 new branches in 2017, 1 new branch in 2016, and 6 new branches in 2015. These 11 new branch locations have allowed us to penetrate deeper into many of our existing markets and establish a greater presence in new markets. In addition, RSG opened 9 new branches in 2015 and 9 new branches in 2014. Although these new greenfield locations impact our operating cost structure slightly in the near-term, we believe that our greenfields are strategically located within markets with strong dynamics and opportunity to quickly establish our presence and gain local market share.

General

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

 

Shingles, standard and specialty;

 

Single-ply roofing;

 

Metal roofing and accessories;

 

Modified bitumen;

 

Built-up roofing;

 

Insulation;

 

Slate and tile roofing;

 

Fasteners, coatings and cements; and

 

Other roofing accessories.

We also sell complementary building products such as:

 

Vinyl, wood and fiber cement siding;

 

Doors, windows and millwork;

 

Decking and railing;

 

Building insulation; and

 

Waterproofing systems.

We serve over 70,000 customers, none of which individually represents more than 2% of our total net sales. Many of our customers are small to mid-size contractors with relatively limited capital resources. We maintain strict credit review and approval policies, which has helped to keep losses from uncollectible customer receivables within our expectations.

Our expenses consist primarily of the cost of products purchased for resale, labor, fleet, occupancy, and selling and administrative expenses. We compete for business and may respond to competitive pressures at times by lowering prices in order to maintain our market share.

32


 

Results of Operations

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

 

 

Year Ended September 30,

 

 

2017

 

 

2016

 

 

2015

 

 

(In thousands)

 

Net sales

$

4,376,670

 

 

$

4,127,109

 

 

$

2,515,169

 

Cost of products sold

 

3,300,731

 

 

 

3,114,040

 

 

 

1,919,804

 

Gross profit

 

1,075,939

 

 

 

1,013,069

 

 

 

595,365

 

Operating expense

 

859,843

 

 

 

808,085

 

 

 

478,284

 

Income from operations

 

216,096

 

 

 

204,984

 

 

 

117,081

 

Interest expense, financing costs, and other

 

52,751

 

 

 

58,452

 

 

 

11,037

 

Income before provision for income taxes

 

163,345

 

 

 

146,532

 

 

 

106,044

 

Provision for income taxes

 

62,481

 

 

 

56,615

 

 

 

43,767

 

Net income

$

100,864

 

 

$

89,917

 

 

$

62,277

 

 

 

Year Ended September 30,

 

 

2017

 

 

2016

 

 

2015

 

 

% of Net sales

 

Net sales

 

100.0

%

 

 

100.0

%

 

 

100.0

%

Cost of products sold

 

75.4

%

 

 

75.5

%

 

 

76.3

%

Gross profit

 

24.6

%

 

 

24.5

%

 

 

23.7

%

Operating expense

 

19.6

%

 

 

19.6

%

 

 

19.0

%

Income from operations

 

5.0

%

 

 

4.9

%

 

 

4.7

%

Interest expense, financing costs, and other

 

1.2

%

 

 

1.4

%

 

 

0.4

%

Income before provision for income taxes

 

3.8

%

 

 

3.5

%

 

 

4.3

%

Provision for income taxes

 

1.5

%

 

 

1.3

%

 

 

1.8

%

Net income

 

2.3

%

 

 

2.2

%

 

 

2.5

%

 

In managing our business, we consider all growth, including the opening of new branches, to be organic growth unless it results from an acquisition. When we refer to growth in existing markets or organic growth, we include growth from existing and newly opened branches but exclude growth from acquired branches until they have been under our ownership for at least four full fiscal quarters at the start of the fiscal reporting period. When we refer to regions, we are referring to our geographic regions.

As of September 30, 2017, we had a total of 383 branches in operation. Our existing market calculations include 322 branches and exclude 61 branches because they were acquired after the start of fiscal year 2016. Acquired markets for 2017 include activity from branches acquired under BJ Supply Company, American Building & Roofing, Inc., Eco Insulation Supply, Acme Building Materials, Inc., and Lowry’s Inc. acquisitions (See Note 3 to the Condensed Consolidated Financial Statements). When we refer to our net product costs, we are referring to our invoice cost less the impact of short-term buying programs (also referred to as “special buys” given the manner in which they are offered).

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2017 vs. 2016

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

 

 

Existing Markets

 

 

Acquired Markets

 

 

Consolidated

 

 

Year Ended September 30,

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

 

(Dollars in thousands)

 

Net sales

$

4,063,328

 

 

$

3,960,322

 

 

$

313,342

 

 

$

166,787

 

 

$

4,376,670

 

 

$

4,127,109

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross profit

$

986,691

 

 

$

969,705

 

 

$

89,248

 

 

$

43,364

 

 

$

1,075,939

 

 

$

1,013,069

 

Gross margin

 

24.3

%

 

 

24.5

%

 

 

28.5

%

 

 

26.0

%

 

 

24.6

%

 

 

24.5

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expense 1

$

782,294

 

 

$

767,879

 

 

$

77,549

 

 

$

40,206

 

 

$

859,843

 

 

$

808,085

 

% of net sales

 

19.3

%

 

 

19.4

%

 

 

24.7

%

 

 

24.1

%

 

 

19.6

%

 

 

19.6

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income

$

204,398

 

 

$

201,826

 

 

$

11,698

 

 

$

3,158

 

 

$

216,096

 

 

$

204,984

 

Operating margin

 

5.0

%

 

 

5.1

%

 

 

3.7

%

 

 

1.9

%

 

 

5.0

%

 

 

4.9

%

 

1

During 2017 and 2016, we recorded amortization expense related to intangible assets recorded under purchase accounting of $82.5 million ($14.3   million from acquired markets) and $68.3    million ($6.5   million from acquired markets), respectively. In addition, existing market operating expense for 2017 and 2016 included non-recurring charges of $47.8   million ($29.4   million, net of taxes) and $51.9   million ($31.9   million, net of taxes), respectively, for the recognition of certain costs related to acquisitions.

Net Sales

Consolidated net sales increased     $249.6 million, or 6.0%   , to $4.38   billion in 2017 from $4.13 billion in 2016. Existing market sales increased   $103.0   million, or 2.6%   over the same comparative periods. We believe our 2017 existing market sales were influenced primarily by the following factors:

 

increased volume in our residential roofing and complementary products lines;

 

increased levels of re-roofing activity; and

 

continued strong storm activity across the Midwest and the impact of Hurricane Matthew;

partially offset by:

 

decreased volume in our non-residential product line; and

 

lower residential and non-residential roofing average selling prices.

Net sales within our acquired markets were $313.3   million in 2017, an   increase from 2016 due to the sales impact from recent acquisitions.

We estimate the impact of inflation or deflation on our sales and gross profit by looking at changes in our average selling prices and gross margins (discussed below). Average overall selling prices in existing markets declined less than 1% in 2017 compared to 2016, driven primarily by declines in residential and non-residential selling prices which were both down approximately 1% year-over-year. The average selling prices of complementary products increased more than 1% year-over-year. During the same period, net product costs for complementary products increased over 2%, while residential and non-residential net product costs decreased less than 1% year-over-year.

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Existing markets net sales by geographical region increased (decreased) from 2016 to 2017 as follows: Northeast (3.0%)   ; Mid-Atlantic 4.8%   ; Southeast 6.6%   ; Southwest (2.3%)   ; Midwest 10.8%   ; West (4.7%)   ; and Canada (0.2%)   . These variations were primarily caused by short-term factors such as local market conditions, weather conditions, storm activity an d foreign currency exchange rates.

 Product group sales for our existing markets were as follows: