BEACON ROOFING SUPPLY, INC.
Notes to Consolidated Financial Statements
(In millions, except per share amounts or otherwise indicated)
1. Company Overview
Beacon Roofing Supply, Inc. (the “Company”) was incorporated in the state of Delaware on August 22, 1997 and is the largest publicly traded distributor of residential and non-residential roofing materials and complementary building products in the United States and Canada.
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, were adopted at over 450 Beacon one-step exterior products branches. The Company’s interior, insulation, weatherproofing and two-step branches continue to operate under legacy brand names.
The Company operates its business under regional and local trade names and services customers in all 50 states throughout 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 consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All inter-company transactions have been eliminated. Certain prior period amounts have been reclassified to conform to current period presentation.
Use of Estimates
The preparation of consolidated financial statements in conformity with United States generally accepted accounting principles (“GAAP”) requires management to make estimates and assumptions that affect the amounts reported in these consolidated financial statements and accompanying notes. Significant items subject to such estimates include inventories, purchase price allocations, recoverability of goodwill and intangibles, and income taxes. Assumptions made in the development of these estimates contemplate the impact of the novel coronavirus (“COVID‑19”) on the economy and the Company’s anticipated results; however, actual amounts could differ materially from these estimates.
Fiscal Year
The fiscal years presented are the years ended September 30, 2020 (“2020”), September 30, 2019 (“2019”), and September 30, 2018 (“2018”). Each of the Company’s first three quarters ends on the last day of the calendar month.
Segment Information
Operating segments are defined as components of a business that can earn revenue and incur expenses for which discrete financial information is evaluated on a regular basis by the chief operating decision maker (“CODM”) in order to decide how to allocate resources and assess performance. The Company’s CODM, the Chief Executive Officer, reviews consolidated results of operations to make decisions, therefore the Company views its operations and manages its business as one operating segment.
Cash and Cash Equivalents
The Company considers all highly liquid investments with maturities of three months or less when purchased to be cash equivalents. Cash and cash equivalents also include unsettled credit card transactions. Cash equivalents are comprised of money market funds which invest primarily in commercial paper or bonds with a rating of A-1 or better, and bank certificates of deposit.
Accounts Receivable
Accounts receivable are derived from unpaid invoiced amounts and are recorded at their net realizable value. The allowance for doubtful accounts is calculated based on actual historical write-offs and current economic factors and represents the Company’s best estimate of its credit exposure. Each month the Company reviews its receivables on a customer-by-customer basis and any balances that are deemed uncollectible are written off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. The Company’s accounts receivable are primarily from customers in the building industry located in the United States and Canada, and no single customer represented at least 10% of the Company’s revenue during the year ended September 30, 2020 or accounts receivable as of September 30, 2020.
F-8
Concentrations of Risk
Financial instruments that potentially subject the Company to significant concentration of credit risk consist primarily of cash, cash equivalents and accounts receivable. The Company maintains the majority of its cash and cash equivalents with one financial institution, which management believes to be financially sound and with minimal credit risk. The Company’s deposits typically exceed amounts guaranteed by the Federal Deposit Insurance Corporation.
Inventories
Inventories, consisting substantially of finished goods, are valued at the lower of cost or market (net realizable value). Cost is determined using the moving weighted-average cost method.
The Company’s arrangements with vendors typically provide for rebates after it makes a special purchase and/or monthly, quarterly and/or annual rebates of a specified amount of consideration payable when a number of measures have been achieved. Annual rebates are generally related to a specified cumulative level of purchases on a calendar-year basis. The Company accounts for such rebates as a reduction of the inventory value until the product is sold, at which time such rebates reduce cost of sales in the consolidated statements of operations. Throughout the year, the Company estimates the amount of the periodic rebates based upon the expected level of purchases. The Company continually revises these estimates to reflect actual rebates earned based on actual purchase levels. Amounts due from vendors under these arrangements are included in “prepaid expenses and other current assets” in the accompanying consolidated balance sheets.
Property and Equipment
Property and equipment acquired in connection with acquisitions are recorded at fair value as of the date of the acquisition and depreciated utilizing the straight-line method over the estimated remaining lives. All other additions are recorded at cost, and depreciation is computed using the straight-line method. The Company reviews the estimated useful lives of its fixed assets on an ongoing basis and the following table summarizes the estimates currently used:
Asset Class
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Estimated Useful Life
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Buildings and improvements
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40 years
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Equipment
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3 to 7 years
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Furniture and fixtures
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7 years
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Leasehold improvements
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Shorter of the estimated useful life or the term of the lease, considering renewal options expected to be exercised.
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Business Combinations
The Company records acquisitions resulting in the consolidation of a business using the acquisition method of accounting. Under this method, the acquiring Company records the assets acquired, including intangible assets that can be identified and named, and liabilities assumed based on their estimated fair values at the date of acquisition. The Company uses an income approach to determine the fair value of acquired intangible assets, specifically the multi-period excess earnings method for customer relationships and the relief from royalty method for trade names. Various Level 3 fair value assumptions are used in the determination of these estimated fair values, including items such as sales growth rates, cost synergies, customer attrition rates, discount rates, and other prospective financial information. The purchase price in excess of the fair value of the assets acquired and liabilities assumed is recorded as goodwill. Estimates associated with the accounting for acquisitions may change as additional information becomes available regarding the assets acquired and liabilities assumed. Transaction costs associated with acquisitions are expensed as incurred.
Goodwill and Intangibles
On an annual basis and at interim periods when circumstances require, the Company tests the recoverability of its goodwill and indefinite-lived intangible assets. Examples of such indicators include a significant change in the business climate, unexpected competition, loss of key personnel or a decline in the Company’s market capitalization below the Company’s net book value.
The Company performs impairment assessments at the reporting unit level, which is defined as an operating segment or one level below an operating segment, also known as a component. The Company currently has four components which it evaluates for aggregation by examining the distribution methods, sales mix, and operating results of each component to determine if these characteristics will be sustained over a long-term basis. For purposes of this evaluation, the Company expects its components to exhibit similar economic characteristics 3-5 years after events such as an acquisition within the Company’s core roofing business or management/business restructuring. Components that exhibit similar economic characteristics are subsequently aggregated into a single reporting unit. Based on the Company’s most recent impairment assessment performed as of August 31, 2020, it was determined that all of the Company’s components exhibited similar economic characteristics, and therefore should be aggregated into a single reporting unit (collectively, the “Reporting Unit”).
F-9
To test for the recoverability of goodwill and indefinite-lived intangible assets, the Company first performs a qualitative assessment based on economic, industry and company-specific factors for all or selected reporting units to determine whether the existence of events and circumstances indicates that it is more likely than not that the goodwill or indefinite-lived intangible asset is impaired. Based on the results of the qualitative assessment, two additional steps in the impairment assessment may be required. The first step would require a comparison of each reporting unit’s fair value to the respective carrying value. If the carrying value exceeds the fair value, a second step is performed to measure the amount of impairment loss on a relative fair value basis, if any.
Based on the Company’s most recent qualitative impairment assessment performed as of August 31, 2020, the Company concluded that there were no indicators of impairment, and that therefore it was more likely than not that the fair value of the goodwill and indefinite-lived intangible assets exceeded their net carrying amount, and therefore the quantitative two-step impairment test was not required.
The Company amortizes certain identifiable intangible assets that have finite lives, currently consisting of non-compete agreements, customer relationships and trade names. Non-compete agreements are amortized on a straight-line basis over the terms of the associated contractual agreements; customer relationship assets are amortized on an accelerated basis based on the expected cash flows generated by the existing customers; and trade names are amortized on an accelerated basis over a five or ten year period. Amortizable intangible assets are tested for impairment, when deemed necessary, based on undiscounted cash flows and, if impaired, are written down to fair value based on either discounted cash flows or appraised values. In connection with certain financing arrangements, the Company has debt issuance costs that are amortized over the lives of the associated financings.
Evaluation of Long-Lived Assets
The Company evaluates the recoverability of its long-lived assets for impairment whenever events or circumstances indicate that the carrying amount of the assets may not be recoverable. Recoverability is measured by comparing the carrying amount of the asset to the future undiscounted cash flows the asset is expected to generate. If the asset is considered to be impaired, the amount of any impairment is measured as the difference between the carrying value and the fair value of the impaired asset.
Fair Value Measurement
The Company applies fair value accounting for all financial assets and liabilities that are reported at fair value in the financial statements on a recurring basis. Fair value is defined as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The accounting guidance establishes a defined three-tier hierarchy to classify and disclose the fair value of assets and liabilities on both the date of their initial measurement as well as all subsequent periods. The hierarchy prioritizes the inputs used to measure fair value by the lowest level of input that is available and significant to the fair value measurement. The three levels are described as follows:
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Level 1: Observable inputs. Quoted prices in active markets for identical assets and liabilities;
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Level 2: Observable inputs other than the quoted price. Includes quoted prices for similar instruments, quoted prices for identical or similar instruments in inactive markets and amounts derived from valuation models where all significant inputs are observable in active markets; and
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Level 3: Unobservable inputs. Includes amounts derived from valuation models where one or more significant inputs are unobservable and require the Company to develop relevant assumptions.
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The Company evaluates its financial assets and liabilities subject to fair value measurements on a recurring basis to determine the appropriate level of classification as of each reporting period.
Financial Derivatives
The Company has entered into interest rate swaps to minimize the risks and costs associated with financing activities, as well as to maintain an appropriate mix of fixed-rate and floating-rate debt. The swap agreements are contracts to exchange variable-rate for fixed-interest rate payments over the life of the agreements. The Company's derivative instruments are designated as cash flow hedges, for which the Company records the effective portions of changes in their fair value, net of tax, in other comprehensive income. The Company recognizes any ineffective portion of the hedges in the consolidated statement of operations through interest expense, financing costs and other.
Net Sales
The Company records net sales when performance obligations with the customer are satisfied. A performance obligation is a promise to transfer a distinct good to the customer and is the unit of account. The transaction price is allocated to each distinct performance obligation and recognized as net sales when, or as, the performance obligation is satisfied. All contracts have a single performance obligation as the promise to transfer the individual good is not separately identifiable from other promises and is, therefore, not distinct. Performance obligations are satisfied at a point in time and net sales are recognized when the customer accepts the delivery of a product or takes possession of a product with rights and rewards of ownership. For goods shipped by third party carriers, the Company
F-10
recognizes revenue upon shipment since the terms are generally FOB shipping point at which time control passes to the customer. The Company also arranges for certain products to be shipped directly from the manufacturer to the customer. The Company recognizes the gross revenue for these sales upon shipment as the terms are FOB shipping point at which time control passes to the customer.
The Company enters into agreements with customers to offer rebates, generally based on achievement of specified sales levels and various marketing allowances that are common industry practice. Reductions to net sales for customer programs and incentive offerings, including promotions and other volume-based incentives, are estimated using the most likely amount method and recorded in the period in which the sale occurs. Provisions for early payment discounts are accrued in the same period in which the sale occurs. The Company does not have any material payment terms as payment is received shortly after the transfer of control of the products to the customer. Commissions to internal sales teams are paid to obtain contracts. As these contracts are less than one year, these costs are expensed as incurred.
The Company includes shipping and handling costs billed to customers in net sales. Related costs are accounted for as fulfillment activities and are recognized as cost of products sold when control of the products transfers to the customer.
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 2027.
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.
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 reimbursements to landlords for items such as property insurance and common area costs. The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants.
Stock-Based Compensation
The Company applies the fair value method to recognize compensation expense for stock-based awards. Using this method, the estimated grant-date fair value of the award is recognized on a straight-line basis over the requisite service period based on the portion of the award that is expected to vest. The Company estimates forfeitures at the time of grant and revises the estimates, if necessary, in subsequent periods if actual forfeitures differ from those estimates. For awards with a performance-based vesting condition, the Company accrues stock-based compensation expense if it is probable that the performance condition will be achieved.
Stock-based compensation expense for restricted stock units is measured based on the fair value of the Company’s common stock on the grant date. The Company utilizes the Black-Scholes option pricing model to estimate the grant-date fair value of option awards. The exercise price of option awards is set to equal the estimated fair value of the common stock at the date of the grant. The following weighted-average assumptions are also used to calculate the estimated fair value of option awards:
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Expected volatility: The expected volatility of the Company’s shares is estimated using the historical stock price volatility over the most recent period commensurate with the estimated expected term of the awards.
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F-11
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Expected term: For employee stock option awards, the Company determines the weighted average expected term equal to the weighted period between the vesting period and the contract life of all outstanding options.
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Dividend yield: The Company has not paid dividends and does not anticipate paying a cash dividend in the foreseeable future and, accordingly, uses an expected dividend yield of zero.
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Risk-free interest rate: The Company bases the risk-free interest rate on the implied yield available on a U.S. Treasury note with a term equal to the estimated expected term of the awards.
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Foreign Currency Translation
The Company’s operations located outside of the United States where the local currency is the functional currency are translated into U.S. dollars using the current rate method. Results of operations are translated at the average rate of exchange for the period. Assets and liabilities are translated at the closing rates on the period end date. Gains and losses on translation of these accounts are accumulated and reported as a separate component of equity and other comprehensive income (loss). Gains and losses on foreign currency transactions are recognized in the consolidated statements of operations as a component of interest expense, financing costs, and other.
Income Taxes
The Company accounts for income taxes using the liability method, which requires it to recognize a current tax liability or asset for current taxes payable or refundable and a deferred tax liability or asset for the estimated future tax effects of temporary differences between the financial statement and tax reporting bases of assets and liabilities to the extent that they are realizable. Deferred tax expense (benefit) results from the net change in deferred tax assets and liabilities during the year.
FASB ASC Topic 740 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Based on this guidance, the Company analyzes its filing positions in all of the federal and state jurisdictions where it is required to file income tax returns, as well as all open tax years in these jurisdictions. Tax benefits from uncertain tax positions are recognized if it is more likely than not that the position is sustainable based solely on its technical merits.
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.
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 did 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 11 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 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.
F-12
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 will become effective for the Company on October 1, 2020. The adoption of the new standard will be done using the modified-retrospective approach, through a cumulative-effect adjustment to retained earnings as of October 1, 2020. The most significant effect of the standard is expected to be an increase to the Company’s accounts receivable reserve and a corresponding retained earnings adjustment of approximately $4.3 million on October 1, 2020.
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 will become effective for the Company on October 1, 2020. 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.
In October 2020, the FASB issued ASU 2020-06, “Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40), Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity.” The guidance is intended to simplify the accounting for convertible instruments, including reducing the number of accounting models that require separate accounting for embedded conversion features and requiring the use of the if-converted method for all convertible instruments in the diluted EPS calculation. The new standard is effective for annual reporting periods, and interim reporting periods contained therein, beginning after December 15, 2021. Early adoption is permitted for annual reporting periods, and interim reporting periods contained therein, beginning after December 15, 2020. The Company does not expect the adoption of this new guidance to have a material impact on its financial statements and related disclosures.
3. Acquisitions
Allied Building Products Corp.
On January 2, 2018 (the “Closing Date”), the Company completed its acquisition of all the outstanding capital stock of Allied (the “Allied Acquisition”), pursuant to a certain stock purchase agreement dated August 24, 2017 (the “Stock Purchase Agreement”), among the Company, Oldcastle, Inc., as parent, and Oldcastle Distribution, Inc., as seller, for approximately $2.625 billion in cash, subject to a working capital and certain other adjustments as set forth in the Stock Purchase Agreement (the “Purchase Price”). As of September 30, 2020, the adjusted Purchase Price for Allied was $2.88 billion, including increases of (i) $164.0 million related to the impact of the Section 338(h)(10) election under the current U.S. tax code and (ii) $88.1 million from a recorded net working capital adjustment.
In connection with the Allied Acquisition, on the Closing Date the Company entered into (i) a new term loan agreement with Citibank, N.A., providing for a term loan B facility with an initial commitment of $970.0 million and (ii) an amended and restated credit agreement with Wells Fargo Bank, N.A., providing for a senior secured asset-based revolving credit facility with an initial commitment of $1.30 billion. Base borrowing rates on these facilities are at LIBOR plus 1.25% and LIBOR plus 2.25%, respectively.
In connection with the Allied Acquisition, on the Closing Date, the Company completed the sale of 400,000 shares of Series A Cumulative Convertible Participating Preferred Stock, par value $0.01 per share (the “Preferred Stock”), with an aggregate liquidation preference of $400.0 million, at a purchase price of $1,000 per share, to CD&R Boulder Holdings, L.P., pursuant to an investment agreement, dated as of August 24, 2017, with CD&R Boulder Holdings, L.P. and Clayton, Dubilier & Rice Fund IX, L.P. (solely for the purpose of limited provisions therein) (the “Convertible Preferred Stock Purchase”). The $400.0 million in proceeds from the Convertible Preferred Stock Purchase were used to finance, in part, the Purchase Price. The Preferred Stock is convertible perpetual participating preferred stock of the
F-13
Company, and conversion of the Preferred Stock into $0.01 par value shares of the Company’s common stock will be at a conversion price of $41.26 per share. The Preferred Stock accumulates dividends at a rate of 6.0% per annum (payable in cash or in-kind, subject to certain conditions). The Preferred Stock is not mandatorily redeemable; therefore, it is classified as mezzanine equity on the Company’s consolidated balance sheets and has a balance of $399.2 million (the $400.0 million proceeds received on the Closing Date, net of $0.8 million of unamortized issuance costs) as of September 30, 2020.
Allied’s results of operations have been included with Company’s consolidated results beginning January 2, 2018. Allied distributed products in 208 locations across 31 states as of the date of the close.
The Allied Acquisition has been accounted for as a business combination in accordance with the requirements of ASC 805, “Business Combinations.” The acquisition price has been allocated among assets acquired and liabilities assumed at fair value based on information currently available, with the excess recorded as goodwill. The goodwill recognized is attributable primarily to expected synergies from the Allied assembled workforce operating the branches as part of a larger network and the value stemming from the addition of both new customers and an established new line of business (interiors). As of March 31, 2019, the Company had finalized the purchase accounting entries for the Allied Acquisition, detailed as follows (in millions):
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January 2, 2018
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January 2, 2018
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(as reported at
March 31, 2018)
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Adjustments
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(as adjusted at
March 31, 2019)
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Cash
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$
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19.3
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$
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(19.2
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)
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$
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0.2
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Accounts receivable
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315.5
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22.1
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337.5
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Inventory
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322.7
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(7.9
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)
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314.8
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Prepaid and other current assets
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59.3
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16.2
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75.4
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Property, plant, and equipment
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139.5
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(0.2
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)
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139.4
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Goodwill
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1,130.6
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102.1
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1,232.8
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Intangible assets
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1,037.0
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—
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1,037.0
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Current liabilities
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(271.3
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)
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12.0
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(259.3
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)
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Non-current liabilities
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(6.8
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)
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6.1
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(0.7
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)
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Total purchase price
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$
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2,745.8
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$
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131.2
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$
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2,877.1
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The purchase accounting entries above include the impact of the Section 338(h)(10) election under the current U.S. tax code. The Company made this election on October 15, 2018 and has reflected the $164.0 million impact of this election in the purchase price and its fiscal year 2018 tax provision accordingly. In the year ended September 30, 2020, the Company received a net $5.1 million refund as the final true-up of the $164.0 million payment, which was recorded in interest expense, financing costs, and other in the consolidated statements of operations. The Company determined that $1.01 billion of goodwill related to the acquisition of Allied remains deductible for tax purposes as of September 30, 2020.
All of the Company’s goodwill and indefinite-lived trade name are tested for impairment annually, and all acquired goodwill and intangible assets are subject to review for impairment should future indicators of impairment develop. There were no material contingencies assumed as part of the Allied Acquisition.
Additional Acquisitions – Fiscal Year 2018
During fiscal year 2018, the Company acquired 7 branches from the following two acquisitions:
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On May 1, 2018, the Company acquired Tri-State Builder’s Supply, a wholesale supplier of roofing, siding, windows, doors and related building products with 1 branch located in Duluth, Minnesota and annual sales of approximately $6 million. The Company has finalized the acquisition accounting entries for this transaction.
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On July 16, 2018, the Company acquired Atlas Supply, Inc., the Pacific Northwest’s leading distributor of sealants, coatings, adhesives and related weatherproofing products, with 6 branches operating in Seattle, Tacoma, Spokane, and Mountlake Terrace in Washington, as well as locations in Portland, Oregon and Boise, Idaho, and annual sales of approximately $37 million. The Company has finalized the acquisition accounting entries for this transaction.
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The Company has recorded purchase accounting entries for these transactions that recognized the acquired assets and liabilities at their estimated fair values as of the respective acquisition dates. These transactions resulted in goodwill of $7.6 million ($6.5 million of which remains deductible for tax purposes as of September 30, 2020) and $11.4 million in intangible assets.
F-14
4. Net Sales
The following table presents the Company’s net sales by product line and geography for the years ended September 30, 2020 and 2019 (in millions):
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U.S.
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Canada
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Total
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Year Ended September 30, 2020
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Residential roofing products
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$
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3,043.2
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$
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56.4
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$
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3,099.6
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Non-residential roofing products
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1,534.5
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112.1
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1,646.6
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Complementary building products
|
|
2,188.7
|
|
|
|
9.0
|
|
|
|
2,197.7
|
|
Total net sales
|
$
|
6,766.4
|
|
|
$
|
177.5
|
|
|
$
|
6,943.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30, 2019
|
|
|
|
|
|
|
|
|
|
|
|
Residential roofing products
|
$
|
3,023.2
|
|
|
$
|
56.4
|
|
|
$
|
3,079.6
|
|
Non-residential roofing products
|
|
1,582.8
|
|
|
|
122.4
|
|
|
|
1,705.2
|
|
Complementary building products
|
|
2,312.5
|
|
|
|
7.9
|
|
|
|
2,320.4
|
|
Total net sales
|
$
|
6,918.5
|
|
|
$
|
186.7
|
|
|
$
|
7,105.2
|
|
5. Net Income (Loss) Per Share
The following table presents the components and calculations of basic and diluted net income (loss) per share for each period presented (in millions, except per share amounts):
|
Year Ended September 30,
|
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
Net income (loss)
|
$
|
(80.9
|
)
|
|
$
|
(10.6
|
)
|
|
$
|
98.6
|
|
Dividends on Preferred Stock
|
|
24.0
|
|
|
|
24.0
|
|
|
|
18.0
|
|
Net income (loss) attributable to common shareholders
|
$
|
(104.9
|
)
|
|
$
|
(34.6
|
)
|
|
$
|
80.6
|
|
Undistributed income allocated to participating securities
|
|
—
|
|
|
|
—
|
|
|
|
(7.7
|
)
|
Net income (loss) attributable to common shareholders - basic and diluted
|
$
|
(104.9
|
)
|
|
$
|
(34.6
|
)
|
|
$
|
72.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding - basic
|
|
68.8
|
|
|
|
68.4
|
|
|
|
68.0
|
|
Effect of common share equivalents
|
|
—
|
|
|
|
—
|
|
|
|
1.2
|
|
Weighted-average common shares outstanding - diluted
|
|
68.8
|
|
|
|
68.4
|
|
|
|
69.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share - basic
|
$
|
(1.52
|
)
|
|
$
|
(0.51
|
)
|
|
$
|
1.07
|
|
Net income (loss) per share - diluted
|
$
|
(1.52
|
)
|
|
$
|
(0.51
|
)
|
|
$
|
1.05
|
|
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 (in millions):
|
Year Ended September 30,
|
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
Stock options
|
|
2.0
|
|
|
|
1.3
|
|
|
|
0.4
|
|
Restricted stock units
|
|
0.3
|
|
|
|
0.1
|
|
|
|
0.2
|
|
Preferred Stock
|
|
9.7
|
|
|
|
9.7
|
|
|
|
7.2
|
|
6. 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 September 30, 2020, there were 5.7 million shares of common stock available for issuance. The 2014 Plan is the only plan maintained by the Company pursuant to which equity awards are granted.
F-15
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 generally expire 10 years after the grant date and, except under certain conditions, the options are subject to continued employment and vest in three annual installments over the three-year period following the grant dates.
The fair values of the options granted for the year ended September 30, 2020 were estimated on the dates of grants using the Black-Scholes option-pricing model with the following weighted-average assumptions:
|
|
Year Ended September 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
Risk-free interest rate
|
|
|
1.61
|
%
|
|
|
2.86
|
%
|
|
|
2.10
|
%
|
Expected volatility
|
|
|
34.26
|
%
|
|
|
29.68
|
%
|
|
|
26.43
|
%
|
Expected life (in years)
|
|
|
5.26
|
|
|
|
5.22
|
|
|
|
5.46
|
|
Dividend yield
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
The following table summarizes all stock option activity for the periods presented (in millions, except 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
|
|
2.3
|
|
|
$
|
32.61
|
|
|
|
6.1
|
|
|
$
|
12.0
|
|
Granted
|
|
0.5
|
|
|
|
31.95
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
(0.2
|
)
|
|
|
19.51
|
|
|
|
|
|
|
|
|
|
Canceled/Forfeited
|
|
(0.1
|
)
|
|
|
37.30
|
|
|
|
|
|
|
|
|
|
Expired
|
|
—
|
|
|
|
31.68
|
|
|
|
|
|
|
|
|
|
Balance as of September 30, 2020
|
|
2.5
|
|
|
$
|
33.09
|
|
|
|
5.9
|
|
|
$
|
6.9
|
|
Vested and expected to vest after September 30, 2020
|
|
2.4
|
|
|
$
|
33.13
|
|
|
|
5.9
|
|
|
$
|
6.8
|
|
Exercisable as of September 30, 2020
|
|
1.6
|
|
|
$
|
33.69
|
|
|
|
4.5
|
|
|
$
|
5.1
|
|
____________________________________________________________________
1 Aggregate intrinsic value as represents the difference between the closing fair value of the underlying common stock and the exercise price of outstanding, in-the-money options on the date of measurement.
During the years ended September 30, 2020, 2019, and 2018, the Company recorded stock-based compensation expense related to stock options of $4.4 million, $4.1 million, and $3.9 million, respectively. As of September 30, 2020, there was $4.9 million of total unrecognized compensation cost related to unvested stock options, which is expected to be recognized over a weighted-average period of 1.8 years.
The following table summarizes additional information on stock options for the periods presented (in millions, except per share amounts):
|
Year Ended September 30,
|
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
Weighted-average fair value of stock options granted
|
$
|
10.35
|
|
|
$
|
8.91
|
|
|
$
|
15.86
|
|
Total grant date fair value of stock options vested
|
$
|
4.3
|
|
|
$
|
3.9
|
|
|
$
|
4.2
|
|
Total intrinsic value of stock options exercised
|
$
|
2.1
|
|
|
$
|
2.8
|
|
|
$
|
9.6
|
|
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%
F-16
to 200% of the original grant amount, depending upon actual Company performance below or above the established performance metric targets. The Company estimates performance in relation to the defined targets when determining the projected number of RSUs that are expected to vest and calculating the related stock-based compensation expense.
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 any future RSU grants settle simultaneously with vesting.
The following table summarizes all restricted stock unit activity for the periods presented (in millions, except per share amounts):
|
RSUs
Outstanding
|
|
|
Weighted-Average Grant Date Fair Value
|
|
Balance as of September 30, 2019
|
|
1.1
|
|
|
$
|
37.48
|
|
Granted
|
|
0.5
|
|
|
|
31.81
|
|
Released
|
|
(0.3
|
)
|
|
|
44.87
|
|
Canceled/Forfeited
|
|
(0.1
|
)
|
|
|
33.69
|
|
Balance as of September 30, 2020
|
|
1.2
|
|
|
$
|
33.55
|
|
Vested and expected to vest after September 30, 2020
|
|
1.0
|
|
|
$
|
34.68
|
|
During the years ended September 30, 2020, 2019, and 2018, the Company recorded stock-based compensation expense related to RSUs of $12.8 million, $12.3 million, and $12.6 million, respectively. As of September 30, 2020, there was $12.9 million of total unrecognized compensation cost related to unvested restricted stock units, which is expected to be recognized over a weighted-average period of 1.7 years.
The following table summarizes additional information on RSUs for the period presented (in millions, except per share amounts):
|
Year Ended September 30,
|
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
Weighted-average fair value of RSUs granted
|
$
|
31.81
|
|
|
$
|
28.02
|
|
|
$
|
57.40
|
|
Total grant date fair value of RSUs vested
|
$
|
14.4
|
|
|
$
|
16.1
|
|
|
$
|
6.7
|
|
Total intrinsic value of RSUs released
|
$
|
9.8
|
|
|
$
|
11.5
|
|
|
$
|
11.0
|
|
7. Prepaid Expenses and Other Current Assets
The following table summarizes the significant components of prepaid expenses and other current assets (in millions):
|
September 30,
|
|
|
2020
|
|
|
2019
|
|
Vendor rebates
|
$
|
326.4
|
|
|
$
|
262.8
|
|
Other
|
|
51.9
|
|
|
|
52.8
|
|
Total prepaid expenses and other current assets
|
$
|
378.3
|
|
|
$
|
315.6
|
|
8. Property and Equipment
The following table provides a detailed breakout of property and equipment, by type (in millions):
|
September 30,
|
|
|
2020
|
|
|
2019
|
|
Land and buildings
|
$
|
87.3
|
|
|
$
|
83.4
|
|
Equipment
|
|
453.1
|
|
|
|
448.1
|
|
Furniture and fixtures
|
|
42.5
|
|
|
|
40.0
|
|
Finance lease assets
|
|
11.6
|
|
|
|
—
|
|
Total property and equipment
|
|
594.5
|
|
|
|
571.5
|
|
Accumulated depreciation
|
|
(350.8
|
)
|
|
|
(311.1
|
)
|
Total property and equipment, net
|
$
|
243.7
|
|
|
$
|
260.4
|
|
F-17
Depreciation expense for the years ended September 30, 2020, 2019, and 2018 was $70.1 million, $70.7 million, and $60.3 million, respectively.
9. Goodwill and Intangible Assets
The Company considered the adverse impact of the COVID-19 pandemic on its operations as part of its annual impairment analyses of intangible assets and goodwill and concluded there was no impairment to record in fiscal year 2020.
Goodwill
The following table sets forth the change in the carrying amount of goodwill during the years ended September 30, 2020 and 2019, respectively (in millions):
Balance as of September 30, 2018
|
$
|
2,491.8
|
|
Acquisitions1
|
|
(0.5
|
)
|
Translation and other adjustments
|
|
(0.7
|
)
|
Balance as of September 30, 2019
|
$
|
2,490.6
|
|
|
|
|
|
|
|
|
|
Balance as of September 30, 2019
|
$
|
2,490.6
|
|
Translation and other adjustments
|
|
(0.2
|
)
|
Balance as of September 30, 2020
|
$
|
2,490.4
|
|
___________________________________________
|
1
|
Reflects purchase accounting adjustments related to fiscal year 2018 acquisition of Atlas Supply, Inc. (see Note 3 for further discussion).
|
|
The changes in the carrying amount of goodwill for the years ended September 30, 2020 and 2019 were driven primarily by purchase accounting and foreign currency translation adjustments.
Intangible Assets
In connection with transactions finalized for the year ended September 30, 2018, the Company recorded intangible assets of $1.05 billion ($920.8 million of customer relationships, $7.0 million of beneficial lease arrangements, and $120.0 million of indefinite-lived trademarks).
The following table summarizes intangible assets by category (in millions, except time period amounts):
|
September 30,
|
|
|
Weighted-
Average
Remaining
Life1
|
|
|
2020
|
|
|
2019
|
|
|
(Years)
|
|
Amortizable intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
Non-compete agreements
|
$
|
0.2
|
|
|
$
|
2.8
|
|
|
|
1.7
|
|
Customer relationships
|
|
1,481.1
|
|
|
|
1,530.9
|
|
|
|
16.4
|
|
Trademarks
|
|
7.2
|
|
|
|
10.5
|
|
|
|
6.1
|
|
Beneficial lease arrangements
|
|
—
|
|
|
|
8.1
|
|
|
|
—
|
|
Total amortizable intangible assets
|
|
1,488.5
|
|
|
|
1,552.3
|
|
|
|
|
|
Accumulated amortization
|
|
(738.6
|
)
|
|
|
(619.9
|
)
|
|
|
|
|
Total amortizable intangible assets, net
|
$
|
749.9
|
|
|
$
|
932.4
|
|
|
|
|
|
Indefinite-lived trademarks
|
|
51.3
|
|
|
|
193.1
|
|
|
|
|
|
Total intangibles, net
|
$
|
801.2
|
|
|
$
|
1,125.5
|
|
|
|
|
|
___________________________________________
|
1
|
As of September 30, 2020.
|
In the second quarter of fiscal year 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.
F-18
For the years ended September 30, 2020, 2019, and 2018, the Company recorded $321.0 million, $207.1 million, and $141.2 million, respectively, of amortization expense relating to the above-listed intangible assets. The intangible asset lives range from 5 to 20 years and the weighted-average remaining life was 16.4 years as of September 30, 2020.
The following table summarizes the estimated future amortization expense for intangible assets (in millions):
Year Ending September 30,
|
|
|
|
2021
|
$
|
147.9
|
|
2022
|
|
120.4
|
|
2023
|
|
97.3
|
|
2024
|
|
78.7
|
|
2025
|
|
63.6
|
|
Thereafter
|
|
242.0
|
|
Total future amortization expense
|
$
|
749.9
|
|
10. Financing Arrangements
The following table summarizes all financing arrangements from the respective periods presented (in millions):
|
September 30,
|
|
|
2020
|
|
|
2019
|
|
Revolving Lines of Credit
|
|
|
|
|
|
|
|
2023 ABL:
|
|
|
|
|
|
|
|
U.S. Revolver1
|
$
|
251.1
|
|
|
$
|
81.0
|
|
Current portion
|
|
—
|
|
|
|
—
|
|
Borrowings under revolving lines of credit, net
|
$
|
251.1
|
|
|
$
|
81.0
|
|
|
|
|
|
|
|
|
|
Long-term Debt, net
|
|
|
|
|
|
|
|
Term Loans:
|
|
|
|
|
|
|
|
2025 Term Loan2
|
$
|
922.3
|
|
|
$
|
926.5
|
|
Current portion
|
|
(9.7
|
)
|
|
|
(9.7
|
)
|
Long-term borrowings under term loan
|
|
912.6
|
|
|
|
916.8
|
|
Senior Notes:
|
|
|
|
|
|
|
|
2023 Senior Notes3
|
|
—
|
|
|
|
294.9
|
|
2025 Senior Notes4
|
|
1,285.7
|
|
|
|
1,282.9
|
|
2026 Senior Notes5
|
|
295.9
|
|
|
|
—
|
|
Current portion
|
|
—
|
|
|
|
—
|
|
Long-term borrowings under senior notes
|
|
1,581.6
|
|
|
|
1,577.8
|
|
Long-term debt, net
|
$
|
2,494.2
|
|
|
$
|
2,494.6
|
|
|
|
|
|
|
|
|
|
Equipment Financing Facilities, net
|
|
|
|
|
|
|
|
Equipment financing facilities6
|
$
|
2.6
|
|
|
$
|
6.9
|
|
Capital lease obligations7
|
|
—
|
|
|
|
6.7
|
|
Current portion
|
|
(2.6
|
)
|
|
|
(9.0
|
)
|
Long-term obligations under equipment financing, net
|
$
|
—
|
|
|
$
|
4.6
|
|
___________________________________________________
1
|
Effective rate on borrowings of 1.89% and 5.41% as of September 30, 2020 and 2019, respectively.
|
2
|
Interest rate of 2.41% and 4.36% as of September 30, 2020 and 2019, respectively.
|
3
|
Interest rate of 6.38% as of September 30, 2019.
|
4
|
Interest rate of 4.88% for all periods presented.
|
5
|
Interest rate of 4.50% as of September 30, 2020.
|
6
|
Fixed interest rates ranging from 2.33% to 2.89% for all periods presented.
|
7
|
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 11 for further discussion).
|
F-19
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.
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 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 $4.8 million related to the 2026 Senior Notes, which are being amortized over the term of the financing arrangements.
As of September 30, 2020, the outstanding balance on the 2026 Senior Notes, net of $4.1 million of unamortized debt issuance costs, was $295.9 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, as amended to date, provides for revolving loans in both the United States (“2023 U.S. Revolver”) in an amount up to $1.25 billion and Canada (“2023 Canada Revolver”) in an amount up to $50.0 million, in each case subject to a borrowing base. The 2023 ABL has a maturity date of January 2, 2023. The 2023 ABL has various borrowing tranches with an interest rate based, at the Company’s option, on a base rate, plus an applicable margin, or a reserve adjusted LIBOR rate, plus an applicable margin. The applicable margin ranges from 0.25% to 0.75% per annum with respect to base rate borrowings and from 1.25% to 1.75% per annum with respect to LIBOR borrowings. The current unused commitment fees on the 2023 ABL are 0.25% per annum. On July 28, 2020, the Company amended the 2023 ABL to provide for, among other things, a mechanism for replacing LIBOR with the secured overnight financing rate published by the Federal Reserve Bank of New York or other alternate benchmark rate selected by the administrative agent and the Company.
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 September 30, 2020.
F-20
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 lines of credit. 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. During the second half of fiscal 2020, the Company used a portion of its operating cash flows to fully repay these additional borrowings. As of September 30, 2020, the total balance outstanding on the 2023 ABL, net of $5.9 million of unamortized debt issuance costs, was $251.1 million. 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 September 30, 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, at the Company’s option, on a base rate, plus an applicable margin, or a reserve adjusted LIBOR rate, plus an applicable margin. The applicable margin is 1.25% per annum with respect to base rate borrowings and 2.25% per annum with respect to LIBOR borrowings. 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.
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 September 30, 2020, the outstanding balance on the 2025 Term Loan, net of $23.4 million of unamortized debt issuance costs, was $922.3 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 September 30, 2020, the outstanding balance on the 2025 Senior Notes, net of $14.3 million of unamortized debt issuance costs, was $1.29 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.
F-21
Other Information
The following table presents annual principal payments for all outstanding financing arrangements for each of the next five years and thereafter (in millions):
Year Ending September 30,
|
|
2023 ABL
|
|
|
2025
Term
Loan
|
|
|
Senior
Notes1
|
|
|
Equipment
Financing
Facilities
|
|
|
Total
|
|
2021
|
|
$
|
—
|
|
|
$
|
9.7
|
|
|
$
|
—
|
|
|
$
|
2.6
|
|
|
$
|
12.3
|
|
2022
|
|
|
—
|
|
|
|
9.7
|
|
|
|
—
|
|
|
|
—
|
|
|
|
9.7
|
|
2023
|
|
|
257.0
|
|
|
|
9.7
|
|
|
|
—
|
|
|
|
—
|
|
|
|
266.7
|
|
2024
|
|
|
—
|
|
|
|
9.7
|
|
|
|
—
|
|
|
|
—
|
|
|
|
9.7
|
|
2025
|
|
|
—
|
|
|
|
906.9
|
|
|
|
—
|
|
|
|
—
|
|
|
|
906.9
|
|
Thereafter
|
|
|
—
|
|
|
|
—
|
|
|
|
1,600.0
|
|
|
|
—
|
|
|
|
1,600.0
|
|
Total debt
|
|
|
257.0
|
|
|
|
945.7
|
|
|
|
1,600.0
|
|
|
|
2.6
|
|
|
|
2,805.3
|
|
Unamortized debt issuance costs
|
|
|
(5.9
|
)
|
|
|
(23.4
|
)
|
|
|
(18.4
|
)
|
|
|
—
|
|
|
|
(47.7
|
)
|
Total long-term debt
|
|
$
|
251.1
|
|
|
$
|
922.3
|
|
|
$
|
1,581.6
|
|
|
$
|
2.6
|
|
|
$
|
2,757.6
|
|
___________________________________________________
1
|
Represent principal amounts for 2025 Senior Notes and 2026 Senior Notes.
|
Under the terms of the 2023 ABL, the 2025 Term Loan, the 2025 Senior Notes and the 2026 Senior Notes, the Company is limited in making certain restricted payments, including dividends on its common stock. Based on the provisions in the respective debt agreements and given the Company’s intention to not pay common stock dividends in the foreseeable future, the Company does not believe that the restrictions are significant.
11. Leases
The following table summarizes components of operating lease costs recognized within selling, general and administrative expenses (in millions):
|
|
Year Ended September 30, 2020
|
|
Operating lease costs
|
|
$
|
124.5
|
|
Variable lease costs
|
|
|
10.4
|
|
Total operating lease costs
|
|
$
|
134.9
|
|
The following table presents supplemental cash flow information related to operating leases (in millions):
|
|
Year Ended September 30, 2020
|
|
Operating cash flows for operating lease liabilities
|
|
$
|
118.7
|
|
As of September 30, 2020, the Company’s operating leases had a weighted-average remaining lease term of 5.6 years and a weighted-average discount rate of 3.87%. The following table summarizes future lease payments under operating leases as of September 30, 2020 (in millions):
Year Ending September 30,
|
|
|
|
|
2021
|
|
$
|
115.1
|
|
2022
|
|
|
101.4
|
|
2023
|
|
|
84.3
|
|
2024
|
|
|
67.4
|
|
2025
|
|
|
40.8
|
|
Thereafter
|
|
|
81.8
|
|
Total future lease payments
|
|
|
490.8
|
|
Imputed interest
|
|
|
(49.9
|
)
|
Total operating lease liabilities
|
|
$
|
440.9
|
|
F-22
12. 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.
13. Accumulated Other Comprehensive Income (Loss)
Other comprehensive income (loss) is comprised of certain gains and losses that are excluded from net income under GAAP and instead recorded as a separate element of stockholders’ equity.
The following table summarizes the components of and changes in accumulated other comprehensive loss (in millions):
|
Foreign
|
|
|
Derivative
|
|
|
|
|
|
|
Currency
Translation
|
|
|
Financial
Instruments
|
|
|
AOCI
|
|
Balance as of September 30, 2017
|
$
|
(14.6
|
)
|
|
$
|
—
|
|
|
$
|
(14.6
|
)
|
Other comprehensive loss before reclassifications
|
|
(2.7
|
)
|
|
|
—
|
|
|
|
(2.7
|
)
|
Reclassifications out of other comprehensive loss
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Balance as of September 30, 2018
|
$
|
(17.3
|
)
|
|
$
|
—
|
|
|
$
|
(17.3
|
)
|
Other comprehensive income before reclassifications
|
|
(1.7
|
)
|
|
|
(1.6
|
)
|
|
|
(3.3
|
)
|
Reclassifications out of other comprehensive loss
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Balance as of September 30, 2019
|
$
|
(19.0
|
)
|
|
$
|
(1.6
|
)
|
|
$
|
(20.6
|
)
|
Other comprehensive income before reclassifications
|
|
(0.7
|
)
|
|
|
(13.4
|
)
|
|
|
(14.1
|
)
|
Reclassifications out of other comprehensive loss
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Balance as of September 30, 2020
|
$
|
(19.7
|
)
|
|
$
|
(15.0
|
)
|
|
$
|
(34.7
|
)
|
Gains (losses) on derivative instruments are recognized in the consolidated statements of operations in interest expense, financing costs, and other.
14. Income Taxes
The Company recorded a provision for (benefit from) income taxes of $(26.8) million, $(0.2) million and $(30.5) million for the years ended September 30, 2020, 2019 and 2018, respectively.
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 at the enacted federal tax rate of 35% for net operating losses (“NOLs”) arising in tax years beginning after December 31, 2017 and before January 1, 2021. However, due to strong results from operations through year end, the Company realized taxable income for the year ended September 30, 2020 and did not generate any benefit associated with the carryback of losses permitted under the CARES Act.
Other provisions in the CARES Act impacting 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. The Company carried back losses from 2018 to 2016 during the year to generate an immaterial tax benefit. The increase in Section 163(j) interest limitation percentage allowed the Company to deduct all interest expense from 2020 and utilize the Section 163(j) deferred tax asset carryover generated in 2019. The remaining provisions did not have a material impact on the Company’s tax provision (benefit).
On December 22, 2017, the U.S. federal government officially signed into law the Tax Cut and Jobs Act of 2017 (“TCJA”). ASC 740, Accounting for Income Taxes, required companies to recognize the effect of tax law changes in the period of enactment even though the effective date for most provisions was for tax years beginning after December 31, 2017, or in the case of certain other provisions, January 1, 2018. The Company has fully implemented the federal TCJA provisions into its ASC 740 analysis. State conformity to the
F-23
TCJA law changes have been communicated by the state and local jurisdictions; therefore, the Company has made adjustments related to the potential impact in its financial statements.
The following table summarizes the components of the income tax provision (benefit) (in millions):
|
Year Ended September 30,
|
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
Federal1
|
$
|
(1.1
|
)
|
|
$
|
—
|
|
|
$
|
(4.4
|
)
|
Foreign
|
|
1.4
|
|
|
|
0.6
|
|
|
|
0.5
|
|
State
|
|
0.6
|
|
|
|
1.6
|
|
|
|
3.5
|
|
Total current taxes
|
|
0.9
|
|
|
|
2.2
|
|
|
|
(0.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
(21.3
|
)
|
|
|
(1.5
|
)
|
|
|
(35.2
|
)
|
Foreign
|
|
0.2
|
|
|
|
—
|
|
|
|
(0.2
|
)
|
State
|
|
(6.6
|
)
|
|
|
(0.9
|
)
|
|
|
5.3
|
|
Total deferred taxes
|
|
(27.7
|
)
|
|
|
(2.4
|
)
|
|
|
(30.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for (benefit from) income taxes
|
$
|
(26.8
|
)
|
|
$
|
(0.2
|
)
|
|
$
|
(30.5
|
)
|
_____________________________
|
1
|
2018 tax benefit due to changes in the treatment of acquired fixed assets stemming from the Tax Cut and Jobs Act of 2017
|
The following table is a reconciliation of the statutory federal income tax rate to the Company’s effective income tax rate for the periods presented:
|
Year Ended September 30,
|
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
U.S. federal income taxes at statutory rate
|
|
21.0
|
%
|
|
|
21.0
|
%
|
|
|
24.5
|
%
|
State income taxes, net of federal benefit
|
|
4.1
|
%
|
|
|
(3.3
|
%)
|
|
|
5.2
|
%
|
Share-based payments
|
|
(0.6
|
%)
|
|
|
(4.7
|
%)
|
|
|
(3.9
|
%)
|
Deferred tax asset/liability remeasurement1
|
|
0.6
|
%
|
|
|
0.0
|
%
|
|
|
(73.5
|
%)
|
Repatriation transition tax1
|
|
0.0
|
%
|
|
|
4.3
|
%
|
|
|
1.8
|
%
|
Non-deductible meals and entertainment
|
|
(0.9
|
%)
|
|
|
(13.9
|
%)
|
|
|
2.2
|
%
|
Other
|
|
0.7
|
%
|
|
|
(1.8
|
%)
|
|
|
(1.2
|
%)
|
Effective tax rate
|
|
24.9
|
%
|
|
|
1.6
|
%
|
|
|
(44.9
|
%)
|
_____________________________
|
1
|
2020 includes the impact of carryback of NOLs to 2016 tax year and realization of 35% statutory rate. 2018 includes Impact of Tax Cut and Jobs Act of 2017.
|
F-24
Deferred income taxes reflect the tax consequences of temporary differences between the amounts of assets and liabilities for financial reporting purposes and such amounts as measured by tax law. These temporary differences are determined according to ASC 740 Income Taxes. The following table presents temporary differences that give rise to deferred tax assets and liabilities for the periods presented (in millions):
|
September 30,
|
|
|
2020
|
|
|
2019
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
Deferred compensation
|
$
|
10.8
|
|
|
$
|
11.1
|
|
Allowance for doubtful accounts
|
|
5.7
|
|
|
|
4.2
|
|
Accrued vacation and other
|
|
10.4
|
|
|
|
5.2
|
|
Inventory valuation
|
|
13.7
|
|
|
|
14.3
|
|
Tax loss carryforwards1
|
|
11.5
|
|
|
|
18.3
|
|
Unrealized loss on financial derivatives
|
|
4.8
|
|
|
|
0.5
|
|
Lease liability
|
|
111.6
|
|
|
|
1.6
|
|
Total deferred tax assets
|
|
168.5
|
|
|
|
55.2
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
Excess tax over book depreciation and amortization
|
|
(128.7
|
)
|
|
|
(159.1
|
)
|
Lease right-of-use asset
|
|
(113.8
|
)
|
|
|
—
|
|
Total deferred tax liabilities
|
|
(242.5
|
)
|
|
|
(159.1
|
)
|
|
|
|
|
|
|
|
|
Net deferred income tax liabilities
|
$
|
(74.0
|
)
|
|
$
|
(103.9
|
)
|
_____________________________
|
1
|
Comprised of net operating loss, foreign tax, and alternative minimum tax carryforwards
|
The Company acquired $135.3 million of federal and state net operating loss (“NOL”) carryforwards as part of its acquisition of RSG in fiscal year 2016. For the year ended September 30, 2020, the Company utilized $4.3 million of federal NOLs. As of September 30, 2020, the Company had a total federal NOL carryforward balance of $27.8 million, portions of which are set to expire at various dates through 2035.
The Company’s non-domestic subsidiary, BRSCC, is treated as a controlled foreign corporation. BRSCC’s taxable income, which reflects all of the Company’s Canadian operations, is being taxed only in Canada and would generally be taxed in the United States only upon an actual or deemed distribution. The Company expects that BRSCC’s earnings will be indefinitely reinvested for the foreseeable future; therefore, no United States deferred tax asset or liability for the differences between the book basis and the tax basis of BRSCC has been recorded as of September 30, 2020.
As of September 30, 2020, the Company’s goodwill balance on its consolidated balance sheet was $2.49 billion, of which there remains an amortizable tax basis of $1.25 billion for income tax purposes.
As of September 30, 2020, there were no uncertain tax positions which, if recognized, would affect the Company’s effective tax rate. The Company’s accounting policy is to recognize any interest and penalties related to income tax matters in income tax expense in the consolidated statements of operations.
The Company has operations in 50 U.S. states and 6 provinces in Canada. The Company is currently under audit in certain state and local jurisdictions for various years. These audits may involve complex issues, which may require an extended period of time to resolve. Additional taxes are reasonably possible; however, the amounts cannot be estimated at this time or would not be significant. The Company is no longer subject to U.S. federal income tax examinations for any fiscal years ended on or before September 30, 2016. For the majority of states, the Company is also no longer subject to tax examinations for any fiscal years ended on or before September 30, 2016. In Canada, the Company is no longer subject to tax examinations for any fiscal years ended on or before September 30, 2016. For the Canadian provinces, the Company is no longer subject to tax examinations for any fiscal years ended on or before September 30, 2016.
F-25
15. Geographic Data
The following tables summarize certain geographic information for the periods presented (in millions):
|
September 30,
|
|
|
2020
|
|
|
2019
|
|
Long-lived assets:
|
|
|
|
|
|
|
|
U.S.
|
$
|
985.8
|
|
|
$
|
1,182.5
|
|
Canada
|
|
9.9
|
|
|
|
12.4
|
|
Total long-lived assets
|
$
|
995.7
|
|
|
$
|
1,194.9
|
|
16. Allowance for Doubtful Accounts
The following table summarizes changes in the valuation of the allowance for doubtful accounts (in millions):
Year Ended September 30,
|
|
Beginning
Balance
|
|
|
Charged to
Operations
|
|
|
Write-offs
|
|
|
Ending
Balance
|
|
2020
|
|
$
|
13.1
|
|
|
$
|
19.2
|
|
|
$
|
(13.1
|
)
|
|
$
|
19.2
|
|
2019
|
|
|
17.6
|
|
|
|
9.5
|
|
|
|
(14.0
|
)
|
|
|
13.1
|
|
2018
|
|
|
11.8
|
|
|
|
11.0
|
|
|
|
(5.2
|
)
|
|
|
17.6
|
|
The increase in valuation as of September 30, 2020 is primarily due to the recording of additional allowance in response to certain customer bankruptcies.
17. Fair Value Measurement
As of September 30, 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 September 30, 2020, based upon recent trading prices (Level 2 — market approach), the fair value of the Company’s $300.0 million Senior Notes due in 2026 was $309.0 million and the fair value of the $1.30 billion Senior Notes due in 2025 was $1.28 billion.
As of September 30, 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 these financing arrangements by discounting the future cash flows of each instrument using estimated market rates of debt instruments with similar maturities and credit profiles (Level 3).
18. Employee Benefit Plans
The Company maintains defined contribution plans covering all full-time employees of the Company who have 90 days of service and are at least 21 years old. An eligible employee may elect to make a before-tax contribution of between 1% and 100% of his or her compensation through payroll deductions, not to exceed the annual limit set by law. The Company currently matches the first 50% of participant contributions limited to 6% of a participant’s gross compensation (maximum Company match is 3%). The combined total expense for this plan and a similar plan for Canadian employees was $12.1 million, $11.7 million, and $11.8 million for the years ended September 30, 2020, 2019, and 2018, respectively.
The Company sponsors an external pension fund for certain of its foreign employees who belong to a local union. Pension contributions are made to government-sponsored social security pension plans in accordance with local legal requirements. Annual contributions were $1.7 million, $1.0 million, and $0.2 million for the years ended September 30, 2020, 2019, and 2018, respectively.
The Company also participates in multi-employer defined benefit plans for which it is not the sponsor. The aggregated expense for these plans was $2.5 million, $2.6 million, and $1.8 million for the years ended September 30, 2020, 2019, and 2018, respectively. Withdrawal from participation in one of these plans requires the Company to make a lump-sum contribution to the plan, and the Company’s withdrawal liability depends on the extent of the plan’s funding of vested benefits, among other factors. During the year ended September 30, 2020, the Company withdrew from the Central States Pension Fund and Local 408 Pension Fund, both of which were reported to have underfunded liabilities. The Company reached a settlement agreement with each fund, and the lump-sum contributions made to exit the funds did not have a material impact on its results of operations.
F-26
19. 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. 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 of September 30, 2020 and concluded that the swap agreements continue to meet the requirements under ASC 815 to qualify for cash flow hedge accounting. As of September 30, 2020, the fair value of the 3-year and 5-year swaps, net of tax, were $5.0 million and $10.0 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 millions):
|
|
|
|
Assets/(Liabilities) as of
|
|
|
|
|
|
September 30,
|
|
Instrument
|
|
Fair Value Hierarchy
|
|
2020
|
|
|
2019
|
|
Designated interest rate swaps1
|
|
Level 2
|
|
$
|
(15.0
|
)
|
|
$
|
(1.6
|
)
|
_______________________
|
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 millions):
|
|
Year Ended September 30,
|
|
Instrument
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
Designated interest rate swaps
|
|
$
|
(13.4
|
)
|
|
$
|
(1.6
|
)
|
|
$
|
—
|
|
F-27