Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. Company Overview
Beacon Roofing Supply, Inc. (“Beacon” or the “Company”) was incorporated in the state of Delaware on August 22, 1997 and is the largest publicly traded distributor of roofing materials and complementary building products in the United States and Canada.
On January 15, 2020, the Company announced the rebranding of its exterior product branches with the trade name “Beacon Building Products” (the “Rebranding”). The new name, and a related logo, will be adopted at over 450 Beacon one-step exterior products branches. The Company’s interior, insulation, weatherproofing and two-step branches will continue to operate under current brand names.
As of March 31, 2020, the Company operated 528 branches throughout all 50 states in the U.S. and 6 provinces in Canada. The Company’s material subsidiaries are Beacon Sales Acquisition, Inc. and Beacon Roofing Supply Canada Company.
2. Summary of Significant Accounting Policies
Basis of Presentation
The Company prepared the condensed consolidated financial statements in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and the requirements of the Securities and Exchange Commission (“SEC”). As permitted under those rules, certain footnotes or other financial information have been condensed or omitted. Certain prior period amounts have been reclassified to conform to current period presentation. The balance sheet as of March 31, 2019 has been presented for a better understanding of the impact of seasonal fluctuations on the Company’s financial condition.
In management’s opinion, the financial statements include all normal and recurring adjustments that are considered necessary for the fair presentation of the Company’s financial position and operating results. The results for the three and six months ended March 31, 2020 are not necessarily indicative of the results to be expected for the twelve months ending September 30, 2020 (“fiscal year 2020” or “2020”).
The three-month periods ended March 31, 2020 and 2019 had 64 and 63 business days, respectively. The six-month periods ended March 31, 2020 and 2019 had 126 and 125 business days, respectively.
These interim Condensed Consolidated Financial Statements should be read in conjunction with the audited Consolidated Financial Statements and Notes thereto contained in the Company’s fiscal year 2019 (“2019”) Annual Report on Form 10-K for the year ended September 30, 2019.
Use of Estimates
The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in these consolidated financial statements and accompanying notes. Significant items subject to such estimates include accounts receivable, inventories, purchase price allocations, goodwill and intangibles, and income taxes. Assumptions made in the development of these estimates contemplate the impact of the novel coronavirus (“COVID‑19”) on the economy and our anticipated results; however, actual amounts could differ from these estimates.
Recent Accounting Pronouncements—Adopted
In February 2016, the FASB issued ASU 2016-02, “Leases.” This guidance replaces most existing accounting for leases and requires enhanced disclosures. The guidance requires the Company to record a right-of-use asset and a lease liability for most of the Company’s leases, including those previously treated as operating leases. The Company adopted the standard using the modified retrospective transition method as of October 1, 2019 and will not apply the standard to comparative prior periods presented. The Company used the package of transition practical expedients outlined in the transition guidance. The most significant effects of the new standard were the recognition of $483.5 million of operating lease assets and $476.0 million of operating lease liabilities on October 1, 2019. As part of the adoption, the Company carried forward the assessment from the previous lease standard of whether Beacon’s contracts contain (or are) leases, the classification of leases, and remaining lease terms. The accounting for finance leases remains unchanged. The adoption of the new standard did not have a material impact on the Company’s consolidated results of operations or cash flows. See Note 8 for further discussion.
In February 2018, the FASB issued ASU 2018-02, “Income Statement – Reporting Comprehensive Income.” This guidance is intended to address the accounting treatment for the tax effects on items within accumulated other comprehensive income as a result
8
of the adoption of the Tax Cuts and Jobs Act of 2017. This new standard became effective for the Company on October 1, 2019. The adoption of this new guidance did not have a material impact on the Company’s financial statements and related disclosures.
Recent Accounting Pronouncements—Not Yet Adopted
In June 2016, the FASB issued ASU 2016-13, “Financial Instruments—Credit Losses: Measurement of Credit Losses on Financial Instruments.” This guidance is intended to introduce a revised approach to the recognition and measurement of credit losses, emphasizing an updated model based on expected losses rather than incurred losses. This new standard is effective for annual reporting periods, and interim reporting periods contained therein, beginning after December 15, 2019, and early adoption is permitted. The Company is currently evaluating the impact that this guidance may have on its financial statements and related disclosures.
In January 2017, the FASB issued ASU 2017-04, “Simplifying the Accounting for Goodwill Impairment.” This guidance is intended to introduce a simplified approach to measurement of goodwill impairment, eliminating the need for a hypothetical purchase price allocation and instead measuring impairment by the amount a reporting unit’s carrying value exceeds its fair value. This new standard is effective for annual reporting periods, and interim reporting periods contained therein, beginning after December 15, 2019, and early adoption is permitted. The Company does not expect the adoption of this new guidance to have a material impact on its financial statements and related disclosures.
In December 2019, the FASB issued ASU 2019-12, “Income Taxes – Simplifying the Accounting for Income Taxes.” This guidance is intended to simplify the accounting for income taxes by removing certain exceptions, clarifying existing guidance and improving consistent application of the guidance. This new standard is effective for annual reporting periods, and interim reporting periods contained therein, beginning after December 15, 2020, and early adoption is permitted. The Company is currently evaluating the impact that this guidance may have on its financial statements and related disclosures.
In March 2020, the FASB issued ASU 2020-04, “Reference Rate Reform (Topic 848), Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” The guidance provides optional practical expedients to ease the potential burden in accounting for contract modifications and hedge accounting related to reference rate reform. The standard is effective as of March 12, 2020 through December 31, 2022. However, the standard is not applicable to contract modifications made and hedging relationships entered into or evaluated after December 31, 2022. The Company expects to elect optional expedients and exceptions provided by the guidance, as needed, related to the 2023 ABL and 2025 Term Loan debt instruments, both of which include interest rates based on a LIBOR rate (with a floor) plus a fixed spread. The Company will evaluate and disclose the impact of this guidance in the period of election, as well as the nature and reason for doing so.
9
3. Net Sales
The following table presents the Company’s net sales by product line and geography for each period presented (in thousands):
|
U.S.
|
|
|
Canada
|
|
|
Total
|
|
Three Months Ended March 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
Residential roofing products
|
$
|
594,525
|
|
|
$
|
4,392
|
|
|
$
|
598,917
|
|
Non-residential roofing products
|
|
296,156
|
|
|
|
17,470
|
|
|
|
313,626
|
|
Complementary building products
|
|
515,721
|
|
|
|
773
|
|
|
|
516,494
|
|
Total net sales
|
$
|
1,406,402
|
|
|
$
|
22,635
|
|
|
$
|
1,429,037
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2020
|
|
|
|
|
|
|
|
|
|
|
|
Residential roofing products
|
$
|
586,621
|
|
|
$
|
4,592
|
|
|
$
|
591,213
|
|
Non-residential roofing products
|
|
335,026
|
|
|
|
17,975
|
|
|
|
353,001
|
|
Complementary building products
|
|
513,237
|
|
|
|
1,035
|
|
|
|
514,272
|
|
Total net sales
|
$
|
1,434,884
|
|
|
$
|
23,602
|
|
|
$
|
1,458,486
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended March 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
Residential roofing products
|
$
|
1,308,021
|
|
|
$
|
15,759
|
|
|
$
|
1,323,780
|
|
Non-residential roofing products
|
|
682,833
|
|
|
|
47,106
|
|
|
|
729,939
|
|
Complementary building products
|
|
1,094,443
|
|
|
|
2,551
|
|
|
|
1,096,994
|
|
Total net sales
|
$
|
3,085,297
|
|
|
$
|
65,416
|
|
|
$
|
3,150,713
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended March 31, 2020
|
|
|
|
|
|
|
|
|
|
|
|
Residential roofing products
|
$
|
1,277,970
|
|
|
$
|
15,503
|
|
|
$
|
1,293,473
|
|
Non-residential roofing products
|
|
723,534
|
|
|
|
50,362
|
|
|
|
773,896
|
|
Complementary building products
|
|
1,062,947
|
|
|
|
3,282
|
|
|
|
1,066,229
|
|
Total net sales
|
$
|
3,064,451
|
|
|
$
|
69,147
|
|
|
$
|
3,133,598
|
|
4. Net Income (Loss) Per Share
Basic net income (loss) per share is calculated by dividing net income (loss) attributable to common shareholders by the weighted-average number of common shares outstanding during the period, without consideration for common share equivalents or the conversion of Preferred Stock. Common share equivalents consist of the incremental common shares issuable upon the exercise of stock options and vesting of restricted stock unit awards. Diluted net income (loss) per common share is calculated by dividing net income (loss) attributable to common shareholders by the fully diluted weighted-average number of common shares outstanding during the period.
Holders of Preferred Stock participate in dividends on an as-converted basis when declared on common shares. As a result, Preferred Stock is classified as a participating security and thereby requires the allocation of income that would have otherwise been available to common shareholders when calculating net income (loss) per share.
Diluted net income (loss) per share is calculated by utilizing the most dilutive result of the if-converted and two-class methods. In both methods, net income (loss) attributable to common shareholders and the weighted-average common shares outstanding are adjusted to account for the impact of the assumed issuance of potential common shares that are dilutive, subject to dilution sequencing rules.
10
The following table presents the components and calculations of basic and diluted net income (loss) per share for each period presented (in thousands, except share and per share amounts):
|
Three Months Ended March 31,
|
|
|
Six Months Ended March 31,
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Net income (loss)
|
$
|
(122,640
|
)
|
|
$
|
(68,086
|
)
|
|
$
|
(146,050
|
)
|
|
$
|
(68,979
|
)
|
Dividends on Preferred Stock
|
|
6,000
|
|
|
|
6,000
|
|
|
|
12,000
|
|
|
|
12,000
|
|
Net income (loss) attributable to common shareholders
|
$
|
(128,640
|
)
|
|
$
|
(74,086
|
)
|
|
$
|
(158,050
|
)
|
|
$
|
(80,979
|
)
|
Undistributed income allocated to participating securities
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Net income (loss) attributable to common shareholders - basic and diluted
|
$
|
(128,640
|
)
|
|
$
|
(74,086
|
)
|
|
$
|
(158,050
|
)
|
|
$
|
(80,979
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding - basic
|
|
68,820,155
|
|
|
|
68,451,920
|
|
|
|
68,743,633
|
|
|
|
68,348,850
|
|
Effect of common share equivalents
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Weighted-average common shares outstanding - diluted
|
|
68,820,155
|
|
|
|
68,451,920
|
|
|
|
68,743,633
|
|
|
|
68,348,850
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share - basic
|
$
|
(1.87
|
)
|
|
$
|
(1.08
|
)
|
|
$
|
(2.30
|
)
|
|
$
|
(1.18
|
)
|
Net income (loss) per share - diluted
|
$
|
(1.87
|
)
|
|
$
|
(1.08
|
)
|
|
$
|
(2.30
|
)
|
|
$
|
(1.18
|
)
|
The following table includes the number of shares that may be dilutive common shares in the future. These shares were not included in the computation of diluted net income (loss) per share because the effect was either anti-dilutive or the requisite performance conditions were not met:
|
Three Months Ended March 31,
|
|
|
Six Months Ended March 31,
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Stock options
|
|
2,088,820
|
|
|
|
1,534,920
|
|
|
|
2,000,161
|
|
|
|
1,544,719
|
|
Restricted stock units
|
|
431,381
|
|
|
|
75,599
|
|
|
|
416,148
|
|
|
|
196,914
|
|
Preferred Stock
|
|
9,694,619
|
|
|
|
9,694,619
|
|
|
|
9,694,619
|
|
|
|
9,694,619
|
|
5. Stock-based Compensation
On December 23, 2019, the Board of Directors of the Company approved the Beacon Roofing Supply, Inc. Second Amended and Restated 2014 Stock Plan (the “2014 Plan”). On February 11, 2020, the shareholders of the Company approved an additional 4,850,000 shares under the 2014 Plan. The 2014 Plan, which was originally approved by the shareholders on February 12, 2014, provides for discretionary awards of stock options, stock awards, restricted stock units, and stock appreciation rights to selected employees and non-employee directors. The 2014 Plan mandates that all forfeited, expired, and withheld shares, including those from the predecessor plan, be returned to the 2014 Plan and made available for issuance. As of March 31, 2020, there were 5,530,536 shares of common stock available for issuance under the 2014 Plan. The 2014 Plan is the only plan maintained by the Company pursuant to which equity awards are granted.
For all equity awards granted prior to October 1, 2014, in the event of a change in control of the Company, all awards are immediately vested. Beginning in fiscal 2015, equity awards contained a “double trigger” change in control mechanism. Unless an award is continued or assumed by a public company in an equitable manner, an award shall become fully vested immediately prior to a change in control (at 100% of the grant target in the case of a performance-based restricted stock unit award). If an award is so continued or assumed, vesting will continue in accordance with the terms of the award, unless there is a qualifying termination within one-year following the change in control, in which event the award shall immediately become fully vested (at 100% of the grant target in the case of a performance-based restricted stock unit award).
Stock Options
Non-qualified stock options granted to employees generally expire 10 years after the grant date and are subject to continued employment and vest evenly in three annual installments over the three-year period following the grant date.
11
The fair value of the stock options granted during the six months ended March 31, 2020 were estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions:
Risk-free interest rate
|
|
1.74
|
%
|
Expected volatility
|
|
33.18
|
%
|
Expected life (in years)
|
|
5.25
|
|
Dividend yield
|
|
-
|
|
The following table summarizes all stock option activity for the six months ended March 31, 2020 (in thousands, except share, per share, and time period amounts):
|
Options
Outstanding
|
|
|
Weighted-
Average
Exercise
Price
|
|
|
Weighted-
Average
Remaining
Contractual
Term (Years)
|
|
|
Aggregate
Intrinsic
Value1
|
|
Balance as of September 30, 2019
|
|
2,339,489
|
|
|
$
|
32.61
|
|
|
|
6.1
|
|
|
$
|
12,034
|
|
Granted
|
|
407,736
|
|
|
|
33.47
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
(76,329
|
)
|
|
|
18.95
|
|
|
|
|
|
|
|
|
|
Canceled/Forfeited
|
|
(20,728
|
)
|
|
|
36.26
|
|
|
|
|
|
|
|
|
|
Expired
|
|
(2,534
|
)
|
|
|
14.45
|
|
|
|
|
|
|
|
|
|
Balance as of March 31, 2020
|
|
2,647,634
|
|
|
$
|
33.12
|
|
|
|
6.3
|
|
|
$
|
342
|
|
Vested and expected to vest after March 31, 2020
|
|
2,589,890
|
|
|
$
|
33.14
|
|
|
|
6.2
|
|
|
$
|
342
|
|
Exercisable as of March 31, 2020
|
|
1,733,712
|
|
|
$
|
33.35
|
|
|
|
4.9
|
|
|
$
|
334
|
|
______________________________________________________
1
|
Aggregate intrinsic value represents the difference between the closing fair value of the underlying common stock and the exercise price of outstanding, in-the-money options on the date of measurement.
|
During the three months ended March 31, 2020 and 2019, the Company recorded stock-based compensation expense related to stock options of $1.1 million and $1.1 million, respectively. During the six months ended March 31, 2020 and 2019, the Company recorded stock-based compensation expense related to stock options of $2.2 million and $2.1 million, respectively. As of March 31, 2020, there was $7.0 million of unrecognized compensation cost related to unvested stock options, which is expected to be recognized over a weighted-average period of 2.0 years.
The following table summarizes additional information on stock options for the periods presented (in thousands, except per share amounts):
|
Six Months Ended March 31,
|
|
|
2020
|
|
|
2019
|
|
Weighted-average fair value of stock options granted
|
$
|
10.70
|
|
|
$
|
8.77
|
|
Total grant date fair value of stock options vested
|
|
3,937
|
|
|
|
3,735
|
|
Total intrinsic value of stock options exercised
|
|
1,094
|
|
|
|
1,360
|
|
Restricted Stock Units
Restricted stock unit (“RSU”) awards granted to employees are subject to continued employment and generally vest on the third anniversary of the grant date. The Company also grants certain RSU awards to management that contain one or more additional vesting conditions tied directly to a defined performance metric for the Company. The actual number of RSUs that will vest can range from 0% to 200% of the original grant amount, depending upon the terms of the award and actual Company performance above or below the established performance metric targets. The Company estimates performance in relation to the defined targets when determining the projected number of RSUs that are expected to vest and calculating the related stock-based compensation expense.
RSUs granted to non-employee directors are subject to continued service and vest on the first anniversary of the grant date (except under certain conditions). Generally, the common shares underlying the RSUs are not eligible for distribution until the non-employee director’s service on the Board has terminated, and for non-employee director RSU grants made prior to fiscal year 2014, the share distribution date is six months after the director’s termination of service on the board. Beginning in fiscal year 2016, the Company enacted a policy that allows any non-employee directors who have Beacon equity holdings (defined as common stock and outstanding vested equity awards) with a total fair value that is greater than or equal to five times the annual Board cash retainer to elect to have their RSU grant settle simultaneously with vesting. Eligibility is determined annually based on the value of the non‑employee directors’ Beacon equity holdings as of December 1. Elections must be made by December 31 and apply only to the succeeding RSU grant following the election.
12
The following table summarizes all restricted stock unit activity for the six months ended March 31, 2020:
|
RSUs
Outstanding
|
|
|
Weighted-Average Grant Date Fair Value
|
|
Balance as of September 30, 2019
|
|
1,123,358
|
|
|
$
|
37.48
|
|
Granted
|
|
415,670
|
|
|
|
33.59
|
|
Released
|
|
(270,264
|
)
|
|
|
45.76
|
|
Canceled/Forfeited
|
|
(12,893
|
)
|
|
|
32.20
|
|
Balance as of March 31, 2020
|
|
1,255,871
|
|
|
$
|
34.30
|
|
Vested and expected to vest after March 31, 2020
|
|
1,047,567
|
|
|
$
|
35.34
|
|
During the three months ended March 31, 2020 and 2019, the Company recorded stock-based compensation expense related to restricted stock units of $3.5 million and $3.8 million, respectively. During the six months ended March 31, 2020 and 2019, the Company recorded stock-based compensation expense related to restricted stock units of $7.6 million and $6.2 million, respectively. As of March 31, 2020, there was $20.2 million of unrecognized compensation cost related to unvested restricted stock units, which is expected to be recognized over a weighted-average period of 1.9 years.
The following table summarizes additional information on RSUs for the periods presented (in thousands, except per share amounts):
|
Six Months Ended March 31,
|
|
|
2020
|
|
|
2019
|
|
Weighted-average fair value of RSUs granted
|
$
|
33.59
|
|
|
$
|
27.77
|
|
Total grant date fair value of RSUs vested
|
|
13,362
|
|
|
|
15,920
|
|
Total intrinsic value of RSUs released
|
|
9,093
|
|
|
|
11,319
|
|
6. Goodwill and Intangible Assets
Given the adverse impact of the COVID-19 pandemic on global markets, the Company performed impairment analyses over its intangible assets and goodwill and concluded there was no impairment as of March 31, 2020.
Goodwill
The following table sets forth the change in the carrying amount of goodwill during the six months ended March 31, 2020 and 2019, respectively (in thousands):
Balance as of September 30, 2018
|
$
|
2,491,779
|
|
Acquisitions1
|
|
(513
|
)
|
Translation and other adjustments
|
|
(940
|
)
|
Balance as of March 31, 2019
|
$
|
2,490,326
|
|
|
|
|
|
|
|
|
|
Balance as of September 30, 2019
|
$
|
2,490,590
|
|
Translation and other adjustments
|
|
(1,955
|
)
|
Balance as of March 31, 2020
|
$
|
2,488,635
|
|
_____________________________
|
1
|
Reflects purchase accounting adjustments related to fiscal year 2018 acquisition of Atlas Supply, Inc.
|
|
The changes in the carrying amount of goodwill for the six months ended March 31, 2020 and 2019 were driven primarily by purchase accounting and foreign currency translation adjustments.
13
Intangible Assets
The following table summarizes intangible assets by category (in thousands, except time period amounts):
|
March 31, 2020
|
|
|
September 30, 2019
|
|
|
March 31, 2019
|
|
|
Weighted-Average Remaining Life1
(Years)
|
|
Amortizable intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-compete agreements
|
$
|
200
|
|
|
$
|
2,824
|
|
|
$
|
2,824
|
|
|
|
2.2
|
|
Customer relationships
|
|
1,486,267
|
|
|
|
1,530,970
|
|
|
|
1,530,902
|
|
|
|
16.9
|
|
Trademarks
|
|
7,600
|
|
|
|
10,500
|
|
|
|
10,500
|
|
|
|
6.6
|
|
Beneficial lease arrangements
|
|
-
|
|
|
|
8,060
|
|
|
|
8,060
|
|
|
|
-
|
|
Total amortizable intangible assets
|
|
1,494,067
|
|
|
|
1,552,354
|
|
|
|
1,552,286
|
|
|
|
|
|
Accumulated amortization
|
|
(655,417
|
)
|
|
|
(619,864
|
)
|
|
|
(515,387
|
)
|
|
|
|
|
Total amortizable intangible assets, net
|
$
|
838,650
|
|
|
$
|
932,490
|
|
|
$
|
1,036,899
|
|
|
|
|
|
Indefinite-lived trademarks
|
|
51,333
|
|
|
|
193,050
|
|
|
|
193,050
|
|
|
|
|
|
Total intangibles, net
|
$
|
889,983
|
|
|
$
|
1,125,540
|
|
|
$
|
1,229,949
|
|
|
|
|
|
_________________________________________
In the three months ended March 31, 2020, in connection with the Rebranding, the Company incurred non-cash accelerated intangible asset amortization of $142.6 million related to the write-off of certain trade names, primarily Allied (exterior products only), Roofing Supply Group and JGA. The Company used an income approach, specifically the relief from royalty method, to determine the fair value of remaining indefinite-lived trademarks. Various Level 3 fair value assumptions were used in the determination of the estimated fair value, including items such as sales growth rates, royalty rates, discount rates, and other prospective financial information.
During the three months ended March 31, 2020 and 2019, the Company recorded $187.4 million and $51.8 million of amortization expense relating to the above-listed intangible assets, respectively. During the six months ended March 31, 2020 and 2019, the Company recorded $232.1 million and $103.8 million of amortization expense relating to the above-listed intangible assets, respectively. The intangible asset lives range from 5 to 20 years and have a weighted-average remaining life of 16.9 years as of March 31, 2020.
The following table summarizes the estimated future amortization expense for intangible assets (in thousands):
Year Ending September 30,
|
|
|
|
2020 (Apr - Sept)
|
$
|
88,344
|
|
2021
|
|
147,987
|
|
2022
|
|
120,540
|
|
2023
|
|
97,416
|
|
2024
|
|
78,771
|
|
Thereafter
|
|
305,592
|
|
Total future amortization expense
|
$
|
838,650
|
|
14
7. Financing Arrangements
The following table summarizes all financing arrangements from the respective periods presented (in thousands):
|
March 31, 2020
|
|
|
September 30, 2019
|
|
|
March 31, 2019
|
|
Revolving Lines of Credit
|
|
|
|
|
|
|
|
|
|
|
|
2023 ABL:
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Revolver1
|
$
|
1,001,609
|
|
|
$
|
80,961
|
|
|
$
|
414,369
|
|
Canada Revolver2
|
|
-
|
|
|
|
-
|
|
|
|
2,245
|
|
Current portion
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Borrowings under revolving lines of credit, net
|
$
|
1,001,609
|
|
|
$
|
80,961
|
|
|
$
|
416,614
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term Debt, net
|
|
|
|
|
|
|
|
|
|
|
|
Term Loans:
|
|
|
|
|
|
|
|
|
|
|
|
2025 Term Loan3
|
$
|
924,438
|
|
|
$
|
926,535
|
|
|
$
|
928,631
|
|
Current portion
|
|
(9,700
|
)
|
|
|
(9,700
|
)
|
|
|
(9,700
|
)
|
Long-term borrowings under term loan
|
|
914,738
|
|
|
|
916,835
|
|
|
|
918,931
|
|
Senior Notes:
|
|
|
|
|
|
|
|
|
|
|
|
2023 Senior Notes4
|
|
-
|
|
|
|
294,886
|
|
|
|
294,246
|
|
2025 Senior Notes5
|
|
1,284,308
|
|
|
|
1,282,902
|
|
|
|
1,281,496
|
|
2026 Senior Notes6
|
|
295,775
|
|
|
|
-
|
|
|
|
-
|
|
Current portion
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Long-term borrowings under senior notes
|
|
1,580,083
|
|
|
|
1,577,788
|
|
|
|
1,575,742
|
|
Long-term debt, net
|
$
|
2,494,821
|
|
|
$
|
2,494,623
|
|
|
$
|
2,494,673
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equipment Financing Facilities, net
|
|
|
|
|
|
|
|
|
|
|
|
Equipment financing facilities7
|
$
|
4,675
|
|
|
$
|
6,885
|
|
|
$
|
9,068
|
|
Capital lease obligations8
|
|
-
|
|
|
|
6,713
|
|
|
|
9,747
|
|
Current portion
|
|
(3,712
|
)
|
|
|
(8,989
|
)
|
|
|
(10,288
|
)
|
Long-term obligations under equipment financing, net
|
$
|
963
|
|
|
$
|
4,609
|
|
|
$
|
8,527
|
|
____________________________________________________________
1
|
Effective rate on borrowings of 2.33%, 5.41% and 4.27% as of March 31, 2020, September 30, 2019 and March 31, 2019, respectively.
|
2
|
Effective rate on borrowings of 4.45% as of March 31, 2019.
|
3
|
Interest rate of 3.85%, 4.36% and 4.75% as of March 31, 2020, September 30, 2019 and March 31, 2019, respectively.
|
4
|
Interest rate of 6.38% for all periods presented.
|
5
|
Interest rate of 4.88% for all periods presented.
|
6
|
Interest rate of 4.50% as of March 31, 2020.
|
7
|
Fixed interest rates ranging from 2.33% to 2.89% as of March 31, 2020 and September 30, 2019. Fixed interest rates ranging from 2.33% to 3.25% as of March 31, 2019.
|
8
|
As of October 1, 2019, in connection with the adoption of ASU 2016-02, capital lease obligations that were formerly included in equipment financing facilities are included either in accrued expenses or other long-term liabilities on the consolidated balance sheets. See Notes 2 and 8 for further information.
|
Debt Refinancing
2026 Senior Notes
On October 9, 2019, the Company, and certain subsidiaries of the Company as guarantors, executed a private offering of $300.0 million aggregate principal amount of 4.50% Senior Notes due 2026 (the “2026 Senior Notes”) at an issue price of 100%. The 2026 Senior Notes mature on November 15, 2026 and bear interest at a rate of 4.50% per annum, payable on May 15 and November 15 of each year, commencing on May 15, 2020.
The 2026 Senior Notes and related subsidiary guarantees were offered and sold in a private transaction exempt from the registration requirements of the Securities Act of 1933, as amended (the “Securities Act”), to qualified institutional buyers in accordance with Rule 144A under the Securities Act and to non-U.S. persons outside of the United States pursuant to Regulation S under the Securities Act. The 2026 Senior Notes and related subsidiary guarantees have not been, and will not be, registered under the Securities Act or the securities laws of any state or other jurisdiction, and may not be offered or sold in the United States absent registration or an applicable exemption from the registration requirements of the Securities Act and other applicable securities laws.
15
On October 28, 2019, the Company used the net proceeds from the offering, together with cash on hand and available borrowings under the 2023 ABL (as defined below), to redeem all $300.0 million aggregate principal amount outstanding of the 2023 Senior Notes (as defined below) at a redemption price of 103.188% and to pay all related accrued interest, fees and expenses.
The intent of the transaction was to take advantage of lower market interest rates by refinancing the existing 2023 Senior Notes with the 2026 Senior Notes. The Company has accounted for the refinance as a debt extinguishment of the 2023 Senior Notes and an issuance of the 2026 Senior Notes. As a result, the Company recorded a loss on debt extinguishment of $14.7 million in the three months ended December 31, 2019. The Company has capitalized debt issuance costs of $4.5 million related to the 2026 Senior Notes, which are being amortized over the term of the financing arrangements.
As of March 31, 2020, the outstanding balance on the 2026 Senior Notes, net of $4.2 million of unamortized debt issuance costs, was $295.8 million.
Financing - Allied Acquisition
In connection with the Allied Acquisition, the Company entered into various financing arrangements totaling $3.57 billion, including an asset-based revolving line of credit of $1.30 billion (“2023 ABL”), $525.0 million of which was drawn at closing, and a $970.0 million term loan (“2025 Term Loan”). The Company also raised an additional $1.30 billion through the issuance of senior notes (the “2025 Senior Notes”).
The proceeds from these financing arrangements were used to finance the Allied Acquisition, to refinance or otherwise extinguish all third-party indebtedness, to pay fees and expenses associated with the acquisition, and to provide working capital and funds for other general corporate purposes. The Company capitalized new debt issuance costs totaling approximately $65.3 million related to the 2023 ABL, the 2025 Term Loan and the 2025 Senior Notes, which are being amortized over the term of the financing arrangements.
2023 ABL
On January 2, 2018, the Company entered into a $1.30 billion asset-based revolving line of credit with Wells Fargo Bank, N.A. and a syndicate of other lenders. The 2023 ABL consists of revolving loans in both the United States (“2023 U.S. Revolver”) in the amount of $1.20 billion and Canada (“2023 Canada Revolver”) in the amount of $100.0 million. The 2023 ABL has a maturity date of January 2, 2023. The 2023 ABL has various borrowing tranches with an interest rate based on a LIBOR rate (with a floor) plus a fixed spread. The current unused commitment fees on the 2023 ABL are 0.25% per annum.
There is one financial covenant under the 2023 ABL, which is the Fixed Charge Coverage Ratio (the “FCCR”). The FCCR is calculated by dividing Consolidated EBITDA, less Capital Expenditures, by Consolidated Fixed Charges (all terms as defined in the agreement). Per the covenant, the Company’s FCCR must be a minimum of 1.00 at the end of each fiscal quarter, calculated on a trailing four quarter basis (or under certain circumstances, at the end of each fiscal month, calculated on a trailing twelve-month basis.) Compliance is only required at such times as borrowing availability (subject to certain adjustments) is less than the greater of (i) 10% of the lesser of the borrowing base or the aggregate commitments or (ii) $90.0 million, and for a period of thirty days thereafter. The Company was in compliance with this covenant as of March 31, 2020.
The 2023 ABL is secured by a first priority lien over substantially all of the Company’s and each guarantor’s accounts, chattel paper, deposit accounts, books, records and inventory (as well as intangibles related thereto), subject to certain customary exceptions (the “ABL Priority Collateral”), and a second priority lien over substantially all of the Company’s and each guarantor’s other assets, including all of the equity interests of any subsidiary held by the Company or any guarantor, subject to certain customary exceptions (the “Term Priority Collateral”). The 2023 ABL is guaranteed jointly, severally, fully and unconditionally by the Company’s active United States subsidiaries.
In March 2020, the Company elected to draw down approximately $725 million from its revolving credit facility. This was a proactive measure to increase the Company's cash position and preserve financial flexibility in light of current uncertainty in global markets resulting from the COVID-19 pandemic. As of March 31, 2020, the total balance outstanding on the 2023 ABL, net of $6.9 million of unamortized debt issuance costs, was $1.00 billion. The Company also has outstanding standby letters of credit related to the 2023 U.S. Revolver in the amount of $13.0 million as of March 31, 2020.
2025 Term Loan
On January 2, 2018, the Company entered into a $970.0 million Term Loan with Citibank N.A., and a syndicate of other lenders. The 2025 Term Loan requires quarterly principal payments in the amount of $2.4 million, with the remaining outstanding principal to be paid on its January 2, 2025 maturity date. The interest rate is based on a LIBOR rate (with a floor) plus a fixed spread. The Company has the option of selecting a LIBOR period that determines the rate at which interest can accrue on the Term Loan as well as the period in which interest payments are made.
16
The 2025 Term Loan is secured by a first priority lien on the Term Priority Collateral and a second priority lien on the ABL Priority Collateral. Certain excluded assets will not be included in the Term Priority Collateral and the ABL Priority Collateral. The Term Loan is guaranteed jointly, severally, fully and unconditionally by the Company’s active United States subsidiaries.
As of March 31, 2020, the outstanding balance on the 2025 Term Loan, net of $26.2 million of unamortized debt issuance costs, was $924.4 million.
2025 Senior Notes
On October 25, 2017, Beacon Escrow Corporation, a wholly owned subsidiary of the Company (the “Escrow Issuer”), completed a private offering of $1.30 billion aggregate principal amount of 4.875% Senior Notes due 2025 at an issue price of 100%. The 2025 Senior Notes bear interest at a rate of 4.875% per annum, payable semi-annually in arrears, beginning May 1, 2018. The Company anticipates repaying the 2025 Senior Notes at the maturity date of November 1, 2025. Per the terms of the Escrow Agreement, the net proceeds from the 2025 Senior Notes remained in escrow until they were used to fund a portion of the purchase price of the Allied Acquisition payable at closing on January 2, 2018.
Upon closing of the Allied Acquisition on January 2, 2018, (i) the Escrow Issuer merged with and into the Company, and the Company assumed all obligations under the 2025 Senior Notes; and (ii) all existing domestic subsidiaries of the Company (including the entities acquired in the Allied Acquisition) became guarantors of the 2025 Senior Notes.
As of March 31, 2020, the outstanding balance on the 2025 Senior Notes, net of $15.7 million of unamortized debt issuance costs, was $1.28 billion.
Financing - RSG Acquisition
2023 Senior Notes
On October 1, 2015, in connection with the acquisition of Roofing Supply Group, the Company raised $300.0 million by issuing 6.38% Senior Notes due 2023 (the “2023 Senior Notes”). The 2023 Senior Notes had a coupon rate of 6.38% per annum and were payable semi-annually in arrears, beginning April 1, 2016. There were early payment provisions in the indenture under which the Company would be subject to redemption premiums. On October 28, 2019, the Company redeemed all $300.0 million aggregate principal amount outstanding of the 2023 Senior Notes at a redemption price of 103.188% plus accrued interest and, as a result, wrote off $5.1 million of unamortized debt issuance costs.
Equipment Financing Facilities
As of March 31, 2020, the Company had $4.7 million outstanding under equipment financing facilities, with fixed interest rates ranging from 2.33% to 2.89% and payments due through September 2021.
8. Leases
The Company mostly operates in leased facilities, which are accounted for as operating leases. The leases typically provide for a base rent plus real estate taxes and insurance. Certain of the leases provide for escalating rents over the lives of the leases, and rent expense is recognized over the terms of those leases on a straight-line basis. The real estate leases expire between 2020 and 2038.
In addition, the Company leases equipment such as trucks and forklifts. Equipment leases are primarily accounted for as operating leases; however, the Company also accounts for some equipment leases as finance leases. The equipment leases expire between 2020 and 2026.
The Company determines if an arrangement is a lease at inception. Operating lease assets and liabilities are included on the consolidated balance sheets. Finance lease assets are included in property and equipment, net. The current portion of the finance lease liabilities is included in accrued expenses, and the noncurrent portion is included in other long-term liabilities.
Operating lease assets and liabilities are recognized at the present value of the future lease payments at the lease commencement date. The interest rate used to determine the present value of the future lease payments is the Company’s incremental borrowing rate, because the interest rates implicit in most of the leases are not readily determinable. The incremental borrowing rate is estimated to approximate the interest rate on a collateralized basis with similar terms and payments.
Operating lease assets include any prepaid lease payments and lease incentives. The Company’s lease terms include periods under options to extend or terminate the lease when it is reasonably certain that those options will be exercised. The Company generally uses the base, non-cancelable lease term when determining the lease assets and liabilities. Operating lease expense is recognized on a straight-line basis over the lease term.
17
The Company’s lease agreements generally contain lease and non-lease components. Non-lease components primarily include payments for maintenance and utilities. The Company has elected to combine fixed payments for non-lease components with lease payments and account for them together as a single lease component, which increases the lease assets and liabilities.
Payments under the Company’s lease agreements are primarily fixed. However, certain lease agreements contain variable payments, which are expensed as incurred and are not included in the operating lease assets and liabilities. These amounts include payments affected by the Consumer Price Index and payments for maintenance and utilities. The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants.
The following table summarizes components of operating lease costs recognized within selling, general and administrative expenses (in thousands):
|
|
Three Months Ended March 31, 2020
|
|
|
Six Months Ended March 31, 2020
|
|
Operating lease costs
|
|
$
|
30,967
|
|
|
$
|
62,428
|
|
Variable lease costs
|
|
|
2,954
|
|
|
|
5,611
|
|
Total operating lease costs
|
|
$
|
33,921
|
|
|
$
|
68,039
|
|
The following table presents supplemental cash flow information related to operating leases (in thousands):
|
|
Six Months Ended March 31, 2020
|
|
Operating cash flows for operating lease liabilities
|
|
$
|
59,046
|
|
As of March 31, 2020, the Company’s operating leases had a weighted-average remaining lease term of 5.7 years and a weighted-average discount rate of 3.99%. Future lease payments under operating leases as of March 31, 2020 were as follows (in thousands):
Year Ending September 30,
|
|
|
|
|
2020 (Apr - Sept)
|
|
$
|
57,919
|
|
2021
|
|
|
108,453
|
|
2022
|
|
|
92,762
|
|
2023
|
|
|
75,755
|
|
2024
|
|
|
58,649
|
|
Thereafter
|
|
|
106,081
|
|
Total future lease payments
|
|
|
499,619
|
|
Imputed interest
|
|
|
(51,777
|
)
|
Total operating lease liabilities
|
|
$
|
447,842
|
|
9. Commitments and Contingencies
The Company is subject to loss contingencies pursuant to various federal, state and local environmental laws and regulations; however, the Company is not aware of any reasonably possible losses that would have a material impact on its results of operations, financial position, or liquidity. Potential loss contingencies include possible obligations to remove or mitigate the effects on the environment of the placement, storage, disposal or release of certain chemical or other substances by the Company or by other parties. In connection with its acquisitions, the Company’s practice is to request indemnification for any and all known material liabilities of significance as of the respective dates of acquisition. Historically, environmental liabilities have not had a material impact on the Company’s results of operations, financial position or liquidity.
The Company is subject to litigation from time to time in the ordinary course of business; however, the Company does not expect the results, if any, to have a material adverse impact on its results of operations, financial position or liquidity.
The Company participates in multi-employer defined benefit plans for which it is not the sponsor. As of March 31, 2020, some of the Company’s multi-employer defined benefit plans were reported to have underfunded liabilities. Withdrawal from participation in one of these plans requires the Company to make a lump-sum contribution to the plan. The Company’s withdrawal liability depends on the extent of the plan’s funding of vested benefits, among other factors. The Company has withdrawn from the Central States Pension Fund and Local 408 Pension fund. As a result, the Company has recorded contingent liabilities for the estimated pension plan exit costs. The Company does not believe that the finalized lump-sum contributions to exit these plans will have a material impact on its results of operations.
18
10. Accumulated Other Comprehensive Income (Loss)
Other comprehensive income (loss) is composed of certain gains and losses that are excluded from net income under GAAP and instead recorded as a separate element of stockholders’ equity.
The following table summarizes the components of and changes in accumulated other comprehensive loss (in thousands):
|
Foreign
|
|
|
Derivative
|
|
|
Accumulated
Other
|
|
|
Currency
Translation
|
|
|
Financial
Instruments
|
|
|
Comprehensive
Loss
|
|
Balance as of September 30, 2019
|
$
|
(18,984
|
)
|
|
$
|
(1,612
|
)
|
|
$
|
(20,596
|
)
|
Other comprehensive income before reclassifications
|
|
(5,168
|
)
|
|
|
(13,357
|
)
|
|
|
(18,525
|
)
|
Reclassifications out of other comprehensive loss
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Balance as of March 31, 2020
|
$
|
(24,152
|
)
|
|
$
|
(14,969
|
)
|
|
$
|
(39,121
|
)
|
Gains (losses) on derivative instruments are recognized in the consolidated statements of operations in interest expense, financing costs, and other.
11. Geographic Data
The following table summarizes certain geographic information for the periods presented (in thousands):
|
March 31, 2020
|
|
|
September 30, 2019
|
|
|
March 31, 2019
|
|
Long-lived assets:
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
|
$
|
1,075,534
|
|
|
$
|
1,182,552
|
|
|
$
|
1,297,327
|
|
Canada
|
|
10,498
|
|
|
|
12,373
|
|
|
|
11,837
|
|
Total long-lived assets
|
$
|
1,086,032
|
|
|
$
|
1,194,925
|
|
|
$
|
1,309,164
|
|
12. Fair Value Measurement
As of March 31, 2020, the carrying amount of cash and cash equivalents, accounts receivable, prepaid and other current assets, accounts payable and accrued expenses approximated fair value because of the short-term nature of these instruments. The Company measures its cash equivalents at amortized cost, which approximates fair value based upon quoted market prices (Level 1).
As of March 31, 2020, based upon recent trading prices (Level 2), the fair value of the Company’s $300.0 million Senior Notes due in 2026 was $279.1 million and the fair value of the $1.30 billion Senior Notes due 2025 was $1.17 billion.
As of March 31, 2020, the fair value of the Company’s term loan and revolving asset-based line of credit approximated the amount outstanding. The Company estimates the fair value of its Senior Secured Credit Facility by discounting the future cash flows of each instrument using estimated market rates of debt instruments with similar maturities and credit profiles (Level 3).
13. Financial Derivatives
The Company uses interest rate derivative instruments to manage the risk related to fluctuating cash flows from interest rate changes by converting a portion of its variable-rate borrowings into fixed-rate borrowings.
On September 11, 2019, the Company entered into two interest rate swap agreements to manage the interest rate risk associated with the variable rate on the 2025 Term Loan (see Note 7 for more information). Each swap agreement has a notional amount of $250 million. One agreement (the “5-year swap”) will expire on August 30, 2024 and swaps the thirty-day LIBOR with a fixed-rate of 1.49%. The second agreement (the “3-year swap”) will expire on August 30, 2022 and swaps the thirty-day LIBOR with a fixed-rate of 1.50%. At the inception of the swap agreements, the Company determined that both swaps qualified for cash flow hedge accounting under ASC 815. Therefore, changes in the fair value of the effective portions of the swaps, net of taxes, will be recognized in other comprehensive income each period, then reclassified into the consolidated statements of operations as a component of interest expense, financing costs, and other in the period in which the hedged transaction affects earnings. Any ineffective portions of the hedges are immediately recognized in earnings as a component of interest expense, financing costs and other.
The effectiveness of the swaps will be assessed qualitatively by the Company during the lives of the hedges by a) comparing the current terms of the hedges with the related hedged debt to assure they continue to coincide and b) through an evaluation of the ability of the counterparty to the hedges to honor their obligations under the hedges. The Company performed a qualitative analysis as
19
of March 31, 2020 and concluded that the swap agreements continue to meet the requirements under ASC 815 to qualify for cash flow hedge accounting. As of March 31, 2020, the fair value of the 3‑year and 5‑year swaps, net of tax, were $5.6 million and $9.4 million, respectively, both in favor of the counterparty. These amounts are included in accrued expenses in the accompanying consolidated balance sheets.
The Company records any differences paid or received on its interest rate hedges to interest expense, financing costs and other. The following table summarizes the combined fair values, net of tax, of the interest rate derivative instruments (in thousands):
|
|
|
|
Assets/(Liabilities) as of:
|
|
Instrument
|
|
Fair Value Hierarchy
|
|
March 31, 2020
|
|
|
September 30, 2019
|
|
|
March 31, 2019
|
|
Designated interest rate swaps1
|
|
Level 2
|
|
$
|
(14,969
|
)
|
|
$
|
(1,612
|
)
|
|
$
|
-
|
|
_______________________
|
1
|
Assets are included on the consolidated balance sheets in prepaid expenses and other current assets, while liabilities are included in accrued expenses.
|
|
The fair value of the interest rate swaps is determined through the use of a pricing model, which utilizes verifiable inputs such as market interest rates that are observable at commonly quoted intervals (generally referred to as the “LIBOR Curve”) for the full terms of the hedge agreements. These values reflect a Level 2 measurement under the applicable fair value hierarchy.
The following table summarizes the amounts of gain (loss) on the interest rate derivative instruments recognized in other comprehensive income (in thousands):
|
|
Three Months Ended March 31,
|
|
|
Six Months Ended March 31,
|
|
Instrument
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Designated interest rate swaps
|
|
$
|
(15,886
|
)
|
|
$
|
-
|
|
|
$
|
(13,357
|
)
|
|
$
|
-
|
|
14. Income Taxes
On March 27, 2020, the U.S. federal government officially signed into law the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). ASC 740, “Accounting for Income Taxes,” requires companies to recognize the effect of tax law changes in the period of enactment. The CARES Act allows companies a five-year carryback for Net Operating Losses (“NOLs”) arising in tax years beginning after December 31, 2017 and before January 1, 2021. The Company is projecting to generate a taxable loss for the year ending September 30, 2020, which the Company will be able carryback to the year ending September 30, 2015 with an enacted federal tax rate of 35%. This resulted in the recognition of a $33.3 million income tax benefit for the three months ended March 31, 2020, which is composed of the following items:
|
•
|
The Company remeasured its deferred tax assets and liabilities that existed at the beginning of the year that, upon reversal, will be taxed in a fiscal year that permits a carryback claim and will be taxed at the 35% federal enacted rate. As a result, the Company recognized a $17.4 million decrease of its deferred tax liabilities related to this remeasurement, which also resulted in an income tax benefit for the same amount.
|
|
•
|
In determining the annual effective tax rate (“ETR”) for the year ending September 30, 2020, the Company recognized a benefit of $15.9 million associated with the application of the tax rate differential between the enacted federal rate of 21% and 35% on the year-to-date pre-tax net loss.
|
Other provisions in the CARES Act that will impact the Company include the ability to carry back losses due to the technical correction for fiscal year filers with an NOL in the 2017-2018 straddle year, the technical correction regarding qualified improvement property, the increase in Section 163(j) interest limitation percentage, and the allowance of remaining AMT credits to be fully refundable in 2019.
In addition to the CARES Act, the Company also recognized the impact of the Rebranding during the three months ended March 31, 2020 with non-cash accelerated intangible asset amortization of $142.6 million related to the write-off of certain trade names. The Company determined that the Rebranding was an unusual or infrequent occurring item; therefore, the tax effect is recognized in the interim period the transaction arose. As a result, the Company recognized a $36.5 million decrease of its deferred tax liabilities, which also resulted in the recognition of an income tax benefit for the same amount in its consolidated statement of operations for the three months ended March 31, 2020.
20