Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

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

For the Quarterly Period Ended June 30, 2017

OR

 

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

For the Transition Period from                      to                     

Commission File Number 000-50924

 

 

 

LOGO

BEACON ROOFING SUPPLY, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   36-4173371
(State or other jurisdiction of
Incorporation or Organization)
  (I.R.S. Employer
Identification No.)

505 Huntmar Park Drive, Suite 300, Herndon, VA 20170

(Address of Principal Executive Offices) (Zip Code)

(571) 323-3939

(Registrant’s telephone number, including area code)

 

 

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).     Yes   ☒     No   ☐

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

 

Large accelerated filer      Accelerated filer       ☐
Non-accelerated filer   ☐ (do not check if a smaller reporting company)    Smaller reporting company       ☐
Emerging growth company        

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.   ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes  ☐    No  ☒

As of August 1, 2017, 60,371,579 shares of common stock, par value $0.01 per share, of the registrant were outstanding.

 

 

 


Table of Contents

BEACON ROOFING SUPPLY, INC.

FORM 10-Q

For the Quarter Ended June 30, 2017

TABLE OF CONTENTS

 

Part I.      Financial Information (unaudited)   
  Item 1.    Condensed Consolidated Financial Statements   
    

Consolidated Balance Sheets

     3  
    

Consolidated Statements of Operations

     4  
    

Consolidated Statements of Comprehensive Income

     5  
    

Consolidated Statements of Cash Flows

     6  
    

Notes to Condensed Consolidated Financial Statements

     7  
  Item 2.    Management’s Discussion and Analysis of Financial Condition And Results of Operations      26  
  Item 3.    Quantitative and Qualitative Disclosures About Market Risk      40  
  Item 4.    Controls and Procedures      40  
Part II.      Other Information   
  Item 6.    Exhibits      41  
Signatures      42  

 

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BEACON ROOFING SUPPLY, INC.

Consolidated Balance Sheets

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

 

     June 30,
2017
    September 30,
2016
    June 30,
2016
 

Assets

      

Current assets:

      

Cash and cash equivalents

   $ 33,055     $ 31,386     $ 36,536  

Accounts receivable, less allowance of $13,253, $14,812 and $12,022 as of June 30, 2017, September 30, 2016 and June 30, 2016, respectively

     670,977       626,965       640,101  

Inventories, net

     641,425       480,736       620,908  

Prepaid expenses and other current assets

     221,477       163,103       205,073  
  

 

 

   

 

 

   

 

 

 

Total current assets

     1,566,934       1,302,190       1,502,618  

Property and equipment, net

     156,951       148,569       153,389  

Goodwill

     1,256,014       1,197,565       1,200,206  

Intangibles, net

     442,962       464,024       477,250  

Other assets, net

     1,511       1,511       1,430  
  

 

 

   

 

 

   

 

 

 

Total Assets

   $ 3,424,372     $ 3,113,859     $ 3,334,893  
  

 

 

   

 

 

   

 

 

 

Liabilities and Stockholders’ Equity

      

Current liabilities:

      

Accounts payable

   $ 387,579     $ 360,915     $ 563,332  

Accrued expenses

     280,315       161,113       205,412  

Current portions of long-term debt

     13,762       14,811       12,605  
  

 

 

   

 

 

   

 

 

 

Total current liabilities

     681,656       536,839       781,349  

Borrowings under revolving lines of credit, net

     449,615       359,661       416,207  

Long-term debt, net

     721,685       722,929       721,630  

Deferred income taxes, net

     142,116       135,482       106,337  

Long-term obligations under equipment financing and other, net

     28,412       35,121       39,720  
  

 

 

   

 

 

   

 

 

 

Total liabilities

     2,023,484       1,790,032       2,065,243  
  

 

 

   

 

 

   

 

 

 

Commitments and contingencies

      

Stockholders’ equity:

      

Common stock (voting); $.01 par value; 100,000,000 shares authorized; 60,361,035 issued and outstanding as of June 30, 2017; 59,890,885 issued and outstanding as of September 30, 2016; 59,707,996 issued and outstanding at June 30, 2016

     603       598       597  

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

     —         —         —    

Additional paid-in capital

     714,608       694,564       686,943  

Retained earnings

     703,055       647,322       599,930  

Accumulated other comprehensive loss

     (17,378     (18,657     (17,820
  

 

 

   

 

 

   

 

 

 

Total stockholders’ equity

     1,400,888       1,323,827       1,269,650  
  

 

 

   

 

 

   

 

 

 

Total Liabilities and Stockholders’ Equity

   $ 3,424,372     $ 3,113,859     $ 3,334,893  
  

 

 

   

 

 

   

 

 

 

See accompanying Notes to Condensed Consolidated Financial Statements

 

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BEACON ROOFING SUPPLY, INC.

Consolidated Statements of Operations

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

 

     Three Months Ended
June 30,
     Nine Months Ended
June 30,
 
     2017      2016      2017      2016  

Net sales

   $ 1,213,894      $ 1,152,726      $ 3,086,802      $ 2,952,743  

Cost of products sold

     916,140        870,651        2,333,504        2,241,716  
  

 

 

    

 

 

    

 

 

    

 

 

 

Gross profit

     297,754        282,075        753,298        711,027  

Operating expense

     212,883        203,696        624,526        601,921  
  

 

 

    

 

 

    

 

 

    

 

 

 

Income from operations

     84,871        78,379        128,772        109,106  

Interest expense, financing costs, and other

     13,397        12,226        39,239        41,508  
  

 

 

    

 

 

    

 

 

    

 

 

 

Income before provision for income taxes

     71,474        66,153        89,533        67,598  

Provision for income taxes

     26,815        25,027        33,800        25,073  
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income

   $ 44,659      $ 41,126      $ 55,733      $ 42,525  
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted-average common stock outstanding:

           

Basic

     60,311,923        59,615,121        60,131,546        59,293,500  

Diluted

     61,350,843        60,619,809        61,163,591        60,276,695  

Net income per share:

           

Basic

   $ 0.74      $ 0.69      $ 0.93      $ 0.72  

Diluted

   $ 0.73      $ 0.68      $ 0.91      $ 0.71  

See accompanying Notes to Condensed Consolidated Financial Statements

 

 

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BEACON ROOFING SUPPLY, INC.

Consolidated Statements of Comprehensive Income

(Unaudited; In thousands)

 

     Three Months Ended
June 30,
     Nine Months Ended
June 30,
 
     2017      2016      2017      2016  

Net income

   $ 44,659      $ 41,126      $ 55,733      $ 42,525  

Other comprehensive income:

           

Foreign currency translation adjustment

     1,730        365        891        2,122  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total other comprehensive income

     1,730        365        891        2,122  
  

 

 

    

 

 

    

 

 

    

 

 

 

Comprehensive income

   $ 46,389      $ 41,491      $ 56,624      $ 44,647  
  

 

 

    

 

 

    

 

 

    

 

 

 

See accompanying Notes to Condensed Consolidated Financial Statements

 

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BEACON ROOFING SUPPLY, INC.

Consolidated Statements of Cash Flows

(Unaudited; In thousands)

 

     Nine Months Ended
June 30,
 
     2017     2016  

Operating Activities

    

Net income

   $ 55,733     $ 42,525  

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

    

Depreciation and amortization

     86,238       73,027  

Stock-based compensation

     11,227       14,070  

Certain interest expense and other financing costs

     3,989       5,113  

Gain on sale of fixed assets

     (726     (838

Deferred income taxes

     6,625       1,460  

Other, net

     —         (359

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

    

Accounts receivable

     (28,309     (43,060

Inventories

     (141,942     (96,363

Prepaid expenses and other assets

     (55,973     (56,764

Accounts payable and accrued expenses

     137,290       135,548  
  

 

 

   

 

 

 

Net cash provided by operating activities

     74,152       74,359  
  

 

 

   

 

 

 

Investing Activities

    

Purchases of property and equipment

     (31,882     (21,553

Acquisition of businesses, net

     (128,533     (1,018,658

Proceeds from the sale of assets

     1,839       969  
  

 

 

   

 

 

 

Net cash used in investing activities

     (158,576     (1,039,242
  

 

 

   

 

 

 

Financing Activities

    

Borrowings under revolving lines of credit

     1,721,927       1,409,128  

Repayments under revolving lines of credit

     (1,633,570     (1,006,076

Borrowings under term loan

     —         450,000  

Repayments under term loan

     (3,375     (189,000

Borrowings under Senior Notes

     —         300,000  

Borrowings under equipment financing facilities and other

     2,111       —    

Repayments under equipment financing facilities and other

     (9,870     (3,847

Payment of deferred financing costs

     —         (27,813

Proceeds from issuance of common stock

     9,994       20,213  

Taxes paid related to net share settlement of equity awards

     (1,172     —    

Excess tax benefit from stock-based compensation

     —         4,024  
  

 

 

   

 

 

 

Net cash provided by financing activities

     86,045       956,629  
  

 

 

   

 

 

 

Effect of exchange rate changes on cash and cash equivalents

     48       (871

Net increase (decrease) in cash and cash equivalents

     1,669       (9,125

Cash and cash equivalents, beginning of period

     31,386       45,661  
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 33,055     $ 36,536  
  

 

 

   

 

 

 

Supplemental cash flow information

    

Cash paid during the period for:

    

Interest

   $ 49,656     $ 40,812  

Income taxes, net of tax refunds

     37,814       867  

During the nine month period ended June 30, 2016, the Company issued Common Stock with a value of $302 million and replacement awards with a value of $5 million in connection with the acquisition of Roofing Supply Group, LLC, which are accounted for as a non-cash investing activity.

See accompanying Notes to Condensed Consolidated Financial Statements

 

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BEACON ROOFING SUPPLY, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited; In thousands, except share and per share data 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. The Company operates its business under regional and local trade names and as of June 30, 2017 the Company serviced customers in 48 states within the United States and 6 provinces in Canada. The Company’s current material subsidiaries are Beacon Sales Acquisition, Inc., Beacon Canada, Inc. and Beacon Roofing Supply Canada Company.

2. Summary of Significant Accounting Policies

Basis of Presentation

Beacon Roofing Supply, Inc. (the “Company”) prepared the condensed consolidated financial statements in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and the requirements of the Securities and Exchange Commission (“SEC”). As permitted under those rules, certain footnotes or other financial information have been condensed or omitted. The balance sheet as of June 30, 2016 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 nine-month periods ended June 30, 2017 are not necessarily indicative of the results to be expected for the twelve months ending September 30, 2017 (“fiscal year 2017” or “2017”).

The three-month periods ended June 30, 2017 and 2016 each had 64 business days and the nine-month periods ended June 30, 2017 and June 30, 2016 had 189 and 190 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 2016 (“2016”) Annual Report on Form 10-K for the year ended September 30, 2016.

Use of Estimates

The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in these consolidated financial statements and accompanying notes. Significant items subject to such estimates include inventories, purchase price allocations, recoverability of goodwill and intangibles, and income taxes. Actual amounts could differ from those estimates.

Recent Accounting Pronouncements—Adopted

In April 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2015-03, “Simplifying the Presentation of Debt Issuance Costs” to simplify the presentation of debt issuance costs. This guidance requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of the associated debt liability, consistent with the required presentation for debt discounts. This new standard is effective for financial statements issued for annual and interim reporting periods beginning after December 15, 2015 and early adoption is permitted. The Company elected to early adopt this new guidance effective October 1, 2015 and applied the new guidance retrospectively to all prior periods presented in the financial statements. The adoption of this standard changed the Company’s previous practice of presenting debt issuance costs as an asset and resulted in the reduction of total assets and total liabilities in an amount equal to the balance of unamortized debt issuance costs at each balance sheet date presented. Debt issuance costs that are now presented as a direct reduction from the carrying amount of the associated debt liability amounted to $21.7 million as of June 30, 2017, $25.2 million as of September 30, 2016, and $28.1 million as of June 30, 2016.

 

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In September 2015, the FASB issued ASU 2015-16, “Simplifying the Accounting for Measurement-Period Adjustments.” This guidance eliminates the requirement to restate prior period financial statements for measurement period adjustments related to business combinations. It requires that the cumulative impact of a measurement period adjustment, including the impact on prior periods, be recognized in the reporting period in which the adjustment is identified. In addition, the portion of the adjustment recorded in the current period that would have been recognized in prior periods had the adjustment been identified at that time must be presented, by line item, either on the face of the income statement or in the accompanying notes. This new standard is effective for annual and interim reporting periods beginning after December 15, 2015 and early adoption is permitted. The Company elected to early adopt this new guidance effective January 1, 2016 and the impact on the financial statements and related disclosures through the quarter ended June 30, 2017 was immaterial.

In November 2015, the FASB issued ASU 2015-17, “Balance Sheet Classification of Deferred Taxes.” This guidance requires entities to present deferred tax assets and deferred tax liabilities as noncurrent in a classified balance sheet. This new standard is effective for annual and interim reporting periods beginning after December 15, 2016 and early adoption is permitted. Entities are permitted to apply this guidance either prospectively or retrospectively. The Company adopted the guidance as of March 31, 2016 and applied it retrospectively to all prior periods. As a result, the Company reclassified its current deferred tax balances of $31.9 million to non-current deferred taxes as of September 30, 2015.

Recent Accounting Pronouncements—Not Yet Adopted

In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers.” This guidance requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers, and will replace most existing revenue recognition guidance when it becomes effective. This new standard is effective for public business entities for annual and interim reporting periods beginning after December 15, 2017, and early adoption is permitted for annual reporting periods beginning after December 15, 2006. The standard permits the use of either the full retrospective or modified retrospective adoption methods. The Company is continuing to perform a detailed evaluation, using a five-step model specified in the guidance, to assess the impacts of the new standard and expects to apply the guidance using the modified retrospective method. Based on the Company’s knowledge of its revenue transactions, the Company does not expect the adoption of this new guidance to have a material impact on its financial statements, but does expect that it will result in additional revenue recognition disclosures.

In August 2014, the FASB issued ASU No. 2014-15, “Presentation of Financial Statements—Going Concern: Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern.” The guidance updates management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and provide related footnote disclosures. For each reporting period, management is required to evaluate whether there are conditions or events that raise substantial doubt about a company’s ability to continue as a going concern within one year from when the financial statements are issued. This new standard is effective for the annual reporting period ending after December 15, 2016 as well as all annual and interim reporting periods thereafter, 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 July 2015, the FASB issued ASU 2015-11, “Inventory: Simplifying the Measurement of Inventory.” This guidance applies to inventory valued at first-in, first-out (FIFO) or average cost and requires inventory to be measured at the lower of cost and net realizable value, rather than at the lower of cost or market. This new standard is effective on a prospective basis for annual and interim reporting periods beginning after December 15, 2016. The Company does not expect the adoption of this new guidance to have a material impact on its financial statements and related disclosures.

In February 2016, the FASB issued ASU 2016-02, “Leases.” This guidance will replace most existing accounting for lease guidance when it becomes effective. This new standard is effective using the modified retrospective approach for annual and interim reporting periods beginning after December 15, 2018 and early adoption is permitted. The guidance will require the Company to record a right of use asset and a lease liability for most of the Company’s leases, including those currently treated as operating leases. The Company is in the process of evaluating the impact of the standard and has decided that it will use the practical expedients outlined in the transition guidance. The scope of the overall impact on the Company’s financial statements and related disclosures is still being quantified.

 

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In March 2016, the FASB issued ASU 2016-09, “Compensation—Stock Compensation: Improvements to Employee Share-Based Payment Accounting.” This guidance is intended to simplify several aspects of the accounting for share-based payment transactions, including the accounting for income taxes, forfeitures and statutory tax withholding requirements, as well as classification in the statement of cash flows. The provisions of this standard are effective for reporting periods beginning after December 15, 2016 and early adoption is permitted in any interim or annual period, but the Company is not early adopting this guidance. The Company does not expect the adoption of this new guidance to have a material impact on its financial statements and related disclosures.

In June 2016, the FASB issued ASU 2016-13, “Financial Instruments – Credit Losses: Measurement of Credit Losses on Financial Instruments.” This guidance is intended to introduce a revised approach to the recognition and measurement of credit losses, emphasizing an updated model based on expected losses rather than incurred losses. This new standard is effective for annual and interim reporting periods beginning after December 15, 2019 and early adoption is permitted. The Company is currently evaluating the impact that this guidance may have on its financial statements and related disclosures.

In January 2017, the FASB issued ASU 2017-01, “Business Combinations: Clarifying the Definition of a Business” This guidance is intended to assist entities when evaluating when a set of transferred assets and activities constitutes a business. This new standard is effective for annual and interim reporting periods beginning after December 15, 2017 and early adoption is permitted. The Company does not expect the adoption of this new guidance to have a material impact on its financial statements and related disclosures.

In January 2017, the FASB issued ASU 2017-04, “Simplifying the Accounting for Goodwill Impairment.” This guidance is intended to introduce a simplified approach to measurement of goodwill impairment, eliminating the need for a hypothetical purchase price allocation and instead measuring impairment by the amount a reporting unit’s carrying value exceeds its fair value. This new standard is effective for annual and interim reporting periods beginning after December 15, 2019 and early adoption is permitted. The Company does not expect the adoption of this new guidance to have a material impact on its financial statements and related disclosures.

In May 2017, the FASB issued ASU 2017-09, “Scope of Modification Accounting.” This guidance is intended to provide clarity and reduce both diversity in practice and cost and complexity when applying the guidance in Compensation – Stock Compensation, to a change to the terms or conditions of a share-based payment award. This new standard is effective for annual and interim reporting periods beginning after December 15, 2017 and early adoption is permitted. The Company does not expect the adoption of this new guidance to have a material impact on its financial statements and related disclosures.

3. Acquisitions

Roofing Supply Group

On October 1, 2015, the Company acquired 100% of the equity of Roofing Supply Group, LLC (“RSG”), a leading roofing products distributor owned by investment firm Clayton, Dubilier & Rice (“CD&R”). RSG’s results of operations have been included with Company’s consolidated results beginning October 1, 2015. RSG distributed roofing supplies and related materials from 85 locations across 25 states as of October 1, 2015.

Total consideration paid for RSG was approximately $1.17 billion, out of which $288.2 million was in cash, $306.8 million of Company’s common stock and option replacement awards, and $574.4 million in refinancing of RSG’s debt. The RSG long-term debt was repaid simultaneously with the proceeds of a new ABL Revolver, Term Loan and Senior Notes (see Note 8).

In connection with the RSG acquisition, the Company was required to issue equity awards to certain RSG employees in replacement of RSG equity awards that were cancelled at closing. The replacement awards consisted of options to purchase 661,349 shares of the Company’s common stock. The terms and fair value of these awards approximated the cancelled RSG awards on the issuance date. The fair value of the replacement awards associated with services rendered through the date of the RSG acquisition was recognized as a component of the total acquisition consideration, and the remaining fair value of the replaced awards associated with post RSG acquisition services will be recognized as an expense on a straight-line basis over the remaining service period.

 

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The RSG 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 and the assembled workforce of RSG. These come from the synergies that are obtained in operating the branches as part of a larger network, and from an experienced employee base skilled at managing a distribution business. As of September 30, 2016, the Company had finalized the acquisition accounting entries for the RSG acquisition, detailed as follows (in thousands):

 

Cash

   $ 16,451  

Accounts receivable

     177,251  

Inventory

     179,651  

Other current assets

     50,000  

Property, plant, and equipment

     55,159  

Other intangible assets

     382,600  

Goodwill

     617,477  

Current liabilities

     (252,190

Non-current liabilities

     (56,949
  

 

 

 

Total purchase price

   $ 1,169,450  
  

 

 

 

RSG’s future growth attributable to new customers, geographic market presence and assembled workforce are additional assets that are not separable and which contributed to recorded goodwill, of which $86.1 million was tax deductible as of the October 1, 2015 RSG acquisition date. All of the Company’s goodwill plus the indefinite-lived trade name are tested for impairment annually, and all acquired goodwill and intangible assets are subject to review for impairment should future indicators of impairment develop. The fair value of acquired RSG accounts receivables was $177.3 million, with the gross contractual amount being $185.9 million.

Additional Acquisitions – Fiscal Year 2017

During the nine months ended June 30, 2017, the Company acquired 23 branches from the following five acquisitions:

 

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

 

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

 

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

 

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

 

    On May 1, 2017, the Company purchased certain assets of Lowry’s Inc., a distributor of waterproofing and concrete restoration materials with 11 branches operating in California, Arizona, Utah and Hawaii and annual sales of approximately $76 million.

The Company recorded the acquired assets and liabilities related to these transactions at their estimated fair values as of the respective acquisition dates, with resulting goodwill of $58.2 million (all of which is deductible for tax purposes) and $40.0 million in intangible assets associated with these other acquisitions as of June 30, 2017.

Additional Acquisitions – Fiscal Year 2016

During fiscal year 2016, the Company acquired 42 branches from the following seven additional acquisitions:

 

    On December 1, 2015, the Company purchased certain assets of RCI Roofing Supply, a distributor of residential and commercial roofing and related products with 5 branches operating in Nebraska, Iowa and Colorado and annual sales of approximately $23 million. The Company has finalized the acquisition accounting entries for this acquisition.

 

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

 

    On December 29, 2015, the Company purchased certain assets of Statewide Wholesale, a distributor of residential and commercial roofing and related products with 1 branch located in Denver, Colorado and annual sales of approximately $15 million. The Company has finalized the acquisition accounting entries for this acquisition.

 

    On April 1, 2016, the Company purchased certain assets of Atlantic Building Products, a distributor of decking, windows, siding, and related products with 2 branches operating in eastern Pennsylvania and annual sales of approximately $5 million. The Company has finalized the acquisition accounting entries for this acquisition.

 

    On April 1, 2016, the Company purchased certain assets of Lyf-Tym Building Products, a distributor of siding, windows, gutters, vinyl railings, and related products with 6 branches operating in North Carolina and Virginia and annual sales of approximately $20 million. The Company has finalized the acquisition accounting entries for this acquisition.

 

    On May 2, 2016, the Company purchased certain assets of Fox Brothers Company, a distributor of roofing, siding, windows, doors, and related products with 4 branches operating in Michigan and annual sales of approximately $35 million. The Company has finalized the acquisition accounting entries for this acquisition.

 

    On June 1, 2016, the Company acquired 100% of the equity interests of Woodfeathers, Inc., a distributor of primarily residential roofing and related products with 4 branches operating in Oregon and Washington and annual sales of approximately $30 million. The Company has finalized the acquisition accounting entries for this acquisition.

The Company recorded the acquired assets and liabilities related to these transactions at their estimated fair values as of the respective acquisition dates, with resulting goodwill of $84.8 million ($59.8 million of which is deductible for tax purposes) and $60.8 million in intangible assets associated with these other acquisitions.

Acquisitions – Additional Information

For those acquisitions where the acquisition accounting entries have yet to be finalized, the Company’s allocation of the purchase price is subject to change on receipt of additional information, including, but not limited to, the finalization of asset valuations (intangible and fixed) and income tax accounting.

4. Net Income per Share

Basic net income per common share is computed by dividing net income by the weighted-average number of common shares outstanding during the period. Diluted net income per common share is computed by dividing net income by the weighted-average number of common shares and dilutive common share equivalents then outstanding using the treasury stock method. Common share equivalents consist of the incremental common shares issuable upon the exercise of stock options and vesting of restricted stock awards.

The following table presents the basic and diluted weighted-average shares outstanding for each period presented:

 

     Three Months Ended
June 30,
     Nine Months Ended
June 30,
 
     2017      2016      2017      2016  

Weighted-average common shares outstanding, basic

     60,311,923        59,615,121        60,131,546        59,293,500  

Effect of dilutive securities:

           

Stock options

     627,243        696,059        631,086        714,125  

Restricted stock units

     411,677        308,629        400,959        269,070  
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted-average common shares outstanding, diluted

     61,350,843        60,619,809        61,163,591        60,276,695  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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

 

     Three Months Ended
June 30,
     Nine Months Ended
June 30,
 
     2017      2016      2017      2016  

Stock options

     247,102        338,769        359,757        561,348  

Restricted stock units

     —          4,066        82,520        60,293  

5. Stockholders’ Equity

The following table presents the activity included in stockholders’ equity during the nine months ended June 30, 2017 (in thousands, except share amounts):

 

                Additional
Paid-in
Capital
          Accumulated
Other
Comprehensive
Loss
    Total
Stockholders’
Equity
 
    Common Stock       Retained
Earnings
     
    Shares     Amount          

Balance at September 30, 2016

    59,890,885     $ 598     $ 694,564     $ 647,322     $ (18,657   $ 1,323,827  

Issuance of common stock, net of shares withheld for taxes

    470,150       5       8,817       —         —         8,822  

Stock-based compensation

    —         —         11,227       —         —         11,227  

Other comprehensive income

    —         —         —         —         1,279       1,279  

Net income

    —         —         —         55,733       —         55,733  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at June 30, 2017

    60,361,035     $ 603     $ 714,608     $ 703,055     $ (17,378   $ 1,400,888  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Common and Preferred Stock

The Company is authorized to issue 100 million shares of common stock and 5 million shares of preferred stock. As of June 30, 2017, September 30, 2016, and June 30, 2016 there were 60,361,035, 59,890,885 and 59,707,996 shares of common stock issued and outstanding, respectively, and no preferred stock outstanding as of any period end.

Accumulated Other Comprehensive Loss

Other comprehensive income (loss) is comprised of certain gains and losses that are excluded from net income under GAAP and instead recorded as a separate element of stockholders’ equity. The Company’s other comprehensive income (loss) consists of foreign currency translation adjustments as well as unrealized gains or losses on the Company’s derivative contracts.

The following table summarizes the components of and changes in accumulated other comprehensive loss (in thousands):

 

     Foreign
Currency
Translation
     Derivative
Financial
Instruments
     Accumulated
Other
Comprehensive
Loss
 

Balance as of September 30, 2016

   $ (18,269    $ (388    $ (18,657

Other comprehensive income before reclassifications

     891        —          891  

Reclassifications out of other comprehensive loss

     —          388        388  
  

 

 

    

 

 

    

 

 

 

Balance as of June 30, 2017

   $ (17,378    $ —        $ (17,378
  

 

 

    

 

 

    

 

 

 

6. Stock-based Compensation

On February 9, 2016, the shareholders of the Company approved the Amended and Restated Beacon Roofing Supply, Inc. 2014 Stock Plan (the “2014 Plan”). The 2014 Plan provides for discretionary awards of stock options, stock awards, restricted stock units, and stock appreciation rights (“SARs”) for up to 5,000,000 shares of common stock to selected employees and non-employee directors. The 2014 Plan mandates that all forfeited, expired, and withheld shares, including those from the predecessor plans, be returned to the 2014 Plan and made available for issuance. As of June 30, 2017, there were 4,087,948 shares of common stock available for issuance.

 

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Prior to the 2014 Plan, the Company maintained the amended and restated Beacon Roofing Supply, Inc. 2004 Stock Plan (the “2004 Plan”). Upon shareholder approval of the 2014 Plan, the Company ceased issuing equity awards from the 2004 Plan and mandated that all future equity awards will be issued from the 2014 Plan.

For all equity awards granted prior to October 1, 2014, in the event of a change in control of the Company, all awards are immediately vested. Beginning in fiscal 2015, equity awards contain a “double trigger” change in control mechanism. Unless an award is continued or assumed by a public company in an equitable manner, an award shall become fully vested immediately prior to a change in control (at 100% in the case of a performance-based restricted stock award). If an award is so continued or assumed, vesting will continue in accordance with the terms of the award, unless there is a qualifying termination within one-year following the change in control, in which event the award shall become fully vested immediately (at 100% in the case of a performance-based restricted stock award).

Stock Options

Non-qualified stock options generally expire 10 years after the grant date and, except under certain conditions, the options are subject to continued employment and vest in one-third increments over a three-year period following the grant dates.

The fair values of the options granted during the nine months ended June 30, 2017 were estimated on the dates of grants using the Black-Scholes option-pricing model with the following weighted-average assumptions:

 

Risk-free interest rate

     1.97

Expected volatility

     28.83

Expected life (in years)

     5.30  

Dividend yield

     —    

The following table summarizes all stock option activity for the period presented (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, 2016

     2,312,789      $ 25.55      6.3    $ 38,225  

Granted

     245,818        47.40        

Exercised

     (387,645      21.93        

Canceled

     (29,743      26.81        
  

 

 

          

Balance as of June 30, 2017

     2,141,219      $ 28.69      6.3    $ 43,480  
  

 

 

          

Vested and expected to vest after June 30, 2017

     2,095,729      $ 28.57      6.2    $ 42,826  

Exercisable as of June 30, 2017

     1,467,224      $ 24.99      5.2    $ 35,227  

 

1  Aggregate intrinsic value as represents the difference between the closing fair value of the underlying common stock and the exercise price of outstanding, in-the-money options on the date of measurement

During the three months ended June 30, 2017 and 2016, the Company recorded stock-based compensation expense related to stock options of $1.1 million and $1.9 million, respectively. During the nine months ended June 30, 2017 and 2016, the Company recorded stock-based compensation expense related to stock options of $3.7 million and $9.6 million, respectively. As of June 30, 2017, there was $5.6 million of total unrecognized compensation cost related to unvested stock options, which is expected to be recognized over a weighted-average period of 1.9 years.

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

 

     Nine Months Ended
June 30,
 
     2017      2016  

Weighted-average fair value of stock options granted

   $ 14.21      $ 12.89  

Total fair value of stock options vested

     5,529        11,943  

Total intrinsic value of stock options exercised

     9,617        18,388  

 

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Restricted Stock Units

Restricted stock unit (“RSU”) awards granted to employees are subject to continued employment and generally vest after three years. The Company also grants certain RSU awards to management that contain an additional vesting condition tied directly to a defined performance metric for the Company. The actual number of RSUs that will vest can range from 0% to 150% of the grant, depending upon actual Company performance below or above the target level. The Company estimates performance in relation to the established target when determining the projected number of RSUs that will vest and calculating the compensation cost related to these awards.

RSUs granted to non-employee directors are subject to continued service and vest after one year (except under certain conditions). Generally, the common shares underlying the RSUs are not eligible for distribution until the director’s service on the Board has terminated. 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. RSU grants made in fiscal year 2014 and thereafter have no such holding period requirement. Additionally, beginning in fiscal year 2016 non-employee directors holding common stock and outstanding vested unexercised/unsettled equity awards with a fair value that is greater than or equal to five times the annual cash retainer may elect to have future grants settle simultaneously with vesting.

The following table summarizes all restricted stock unit activity for the period presented:

 

     RSUs
Outstanding
     Weighted-Average
Grant Date Fair
Value
 

Balance at September 30, 2016

     705,434      $ 34.55  

Granted

     273,065        47.31  

Released

     (117,689      34.19  

Forfeited

     (77,576      31.15  
  

 

 

    

Balance at June 30, 2017

     783,234      $ 38.78  
  

 

 

    

Vested and expected to vest after June 30, 2017

     796,109      $ 38.77  

During the three months ended June 30, 2017 and 2016, the Company recorded stock-based compensation expense related to restricted stock units of $2.6 million and $1.5 million, respectively. During the nine months ended June 30, 2017 and 2016, the Company recorded stock-based compensation expense related to restricted stock units of $7.7 million and $4.5 million, respectively. As of June 30, 2017, there was $15.4 million of total unrecognized compensation cost related to unvested restricted stock units, which is expected to be recognized over a weighted-average period of 2.0 years.

The following table summarizes additional information on RSUs for the period presented (in thousands):

 

     Nine Months Ended
June 30,
 
     2017      2016  

Total fair value of RSUs released

   $ 4,552      $ 743  

Total intrinsic value of RSUs released

     5,620        403  

7. Goodwill and Intangible Assets

Goodwill

The following table sets forth the change in the carrying amount of goodwill for the Company during the nine months ended June 30, 2017 and 2016, respectively (in thousands):

 

Balance at September 30, 2015

   $ 496,415  

Acquisition of RSG

     618,630  

Other acquisitions

     85,881  

Translation and other adjustments

     (720
  

 

 

 

Balance at June 30, 2016

   $ 1,200,206  
  

 

 

 

Balance at September 30, 2016

   $ 1,197,565  

Acquisitions

     58,234  

Translation and other adjustments

     215  
  

 

 

 

Balance at June 30, 2017

   $ 1,256,014  
  

 

 

 

 

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The change in the carrying amount of goodwill for the nine months ended June 30, 2017 and 2016 is primarily attributable to the Company’s acquisitions finalized during the respective periods presented (see Note 3).

Intangible Assets

In connection with transactions finalized during the nine months ended June 30, 2017 and fiscal year 2016, the Company recorded intangible assets of $40.0 million ($38.3 of customer relationships and $1.7 million of amortizable trademarks) and $442.6 million ($375.0 million of customer relationships, $4.3 million of amortizable trademarks, and $63.3 million of indefinite-lived trademarks), respectively. Intangible assets consisted of the following (in thousands, except time period amounts):

 

     June 30,
2017
     September 30,
2016
     June 30,
2016
     Weighted-
Average
Remaining
Life1
(Years)
 

Amortizable intangible assets:

           

Non-compete agreements

   $ 2,824      $ 3,324      $ 2,824        3.53  

Customer relationships

     605,326        566,964        562,888        17.80  

Trademarks

     7,650        5,400        5,000        7.53  

Beneficial lease arrangements

     960        960        610        10.25  
  

 

 

    

 

 

    

 

 

    

Total amortizable intangible assets

     616,760        576,648        571,322     

Less: Accumulated amortization

     (246,848      (185,674      (167,122   
  

 

 

    

 

 

    

 

 

    

Total amortizable intangible assets, net

   $ 369,912      $ 390,974      $ 404,200     
  

 

 

    

 

 

    

 

 

    

Indefinite lived trademarks

     73,050        73,050        73,050     
  

 

 

    

 

 

    

 

 

    

Total intangibles, net

   $ 442,962      $ 464,024      $ 477,250     
  

 

 

    

 

 

    

 

 

    

 

1  As of June 30, 2017

For the three month periods ended June 30, 2017 and 2016, we recorded $20.7 million and $17.4 million of amortization expense relating to the above-listed intangible assets, respectively. For the nine month periods ended June 30, 2017 and 2016, we recorded $61.1 million and $49.7 million of amortization expense relating to the above-listed intangible assets, respectively. The intangible asset lives range from 1 to 20 years and have a weighted-average remaining life of 17.6 years as of June 30, 2017.

The following table presents the estimated annual amortization expense for these intangible assets (in thousands):

 

Year Ending September 30,

      

2017 (Jul - Sept)

   $ 23,235  

2018

     71,731  

2019

     58,516  

2020

     47,313  

2021

     37,662  

Thereafter

     131,455  
  

 

 

 
   $ 369,912  
  

 

 

 

 

8. Financing Arrangements

In connection with the RSG Acquisition on October 1, 2015, the Company entered into various financing arrangements totaling $1.45 billion. A “Senior Secured Credit Facility” was entered into that is comprised of an asset-based revolving line of credit (“ABL”) of $700.0 million ($350.0 million of which was drawn at closing) and a new $450.0 million term loan (“Term Loan”). The Company also raised an additional $300.0 million through the issuance of senior notes (the “Senior Notes”).

The proceeds from the Senior Secured Credit Facility and Senior Notes were used to provide working capital and funds for other general corporate purposes, to refinance or otherwise extinguish all third-party indebtedness for borrowed money under Company’s and RSG’s existing senior secured credit facilities and RSG’s unsecured senior notes due 2020, to finance the acquisition, and to pay fees and expenses associated with the RSG acquisition. The Company incurred financing costs totaling approximately $31.3 million.

 

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The following table summarizes all financing arrangements the Company has entered into (in thousands):

 

     June 30,      September 30,      June 30,  
     2017      2016      2016  

Senior Secured Credit Facility

        

Revolving Lines of Credit:

        

U.S. Revolver, expires October 1, 2020 1

   $ 437,285      $ 355,087      $ 406,917  

Canadian Revolver, expires October 1, 20202

     12,330        4,574        9,290  

Term Loan, matures October 1, 20223

     434,177        436,380        435,507  
  

 

 

    

 

 

    

 

 

 

Total borrowings under Senior Secured Credit Facility

     883,792        796,041        851,714  

Less: current portion

     (4,500      (4,500      (4,500
  

 

 

    

 

 

    

 

 

 

Total long-term borrowings under Senior Secured Credit Facility

   $ 879,292      $ 791,541      $ 847,214  
  

 

 

    

 

 

    

 

 

 

Senior Notes

        

Senior Notes, matures October 20234

     292,008        291,049        290,623  

Less: current portion

     —          —          —    
  

 

 

    

 

 

    

 

 

 

Total long-term borrowings under Senior Notes

   $ 292,008      $ 291,049      $ 290,623  
  

 

 

    

 

 

    

 

 

 

Equipment Financing Facilities and Other

        

Equipment financing facilities, various maturities through September 20215

   $ 16,701      $ 20,419      $ 21,641  

Capital lease obligations, various maturities through November 20216

     20,973        25,013        26,184  
  

 

 

    

 

 

    

 

 

 

Total obligations under equipment financing facilities and other

     37,674        45,432        47,825  

Less: current portion

     (9,262      (10,311      (8,105
  

 

 

    

 

 

    

 

 

 

Total long-term obligations under equipment financing facilities and other

   $ 28,412      $ 35,121      $ 39,720  
  

 

 

    

 

 

    

 

 

 

 

1  - Effective rates on borrowings are 3.28% as of June 30, 2017; 2.90% as of September 30, 2016; and 2.77% as of June 30, 2016
2  - Effective rates on borrowings are 3.20% as of June 30, 2017, September 30, 2016 and June 30, 2016
3  - Interest rate of 3.50% as of June 30, 2017; 3.50% as of September 30, 2016; 4.00% as of June 30, 2016
4  - Interest rate of 6.38% as of June 30, 2017, September 30, 2016 and June 30, 2016
5  - Fixed interest rates ranging from 2.33% to 3.25% as of June 30, 2017 and September 30, 2016; 2.33% to 4.49% as of June 30, 2016
6  - Fixed interest rates ranging from 2.72% to 10.39% as of June 30, 2017, September 30, 2016, and June 30, 2016

Asset-based Line of Credit (“ABL”)

On October 1, 2015, the Company entered into a $700 million ABL with Wells Fargo Bank, N.A. and a syndicate of other lenders. This ABL consists of revolving loans in both the United States (“U.S. Revolver”) in the amount of $670.0 million and Canada (“Canada Revolver”) in the amount of $30.0 million.

The ABL has a maturity date of October 1, 2020. The U.S. Revolver has various tranches of borrowings, bearing interest at rates ranging from 2.59% to 4.75%. The effective rate of these borrowings is 3.28% and is paid monthly. As of June 30, 2017, the outstanding balance on the U.S. Revolver and Canada Revolvers, net of debt issuance fees, was $449.6 million. The U.S. Revolver also has outstanding standby letters of credit in the amount of $10.9 million as of June 30, 2017. Current unused commitment fees on the revolving credit facilities are 0.25% per annum.

There is one financial covenant under the ABL, which is a Consolidated Fixed Charge Ratio. The Consolidated Fixed Charge Ratio is calculated by dividing consolidated earnings before interest, taxes, depreciation and amortization (EBITDA) by Consolidated Fixed Charges (as defined in the agreement). Per the covenant, the Company’s Consolidated Fixed Charge Ratio must be a minimum of 1.00 at the end of each fiscal quarter, calculated on a trailing four quarter basis. The covenant is only applicable when the borrowing availability is less than 10% of the maximum loan cap or $60.0 million. The ABL is guaranteed jointly and severally and fully and unconditionally by the Company’s active United States subsidiary.

 

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Term Loan

On October 1, 2015, the Company entered into a $450.0 million Term Loan with Citibank N.A., and a syndicate of other lenders. The Term Loan requires quarterly principal payments in the amount of $1.1 million, with the remaining outstanding principal to be paid on its maturity date of October 1, 2022. The interest rate paid 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.

On September 16, 2016, the Company refinanced its Term Loan, lowering the LIBOR floor by 25 basis points and lowering the spread by 25 basis points. As a result of the refinancing, the Company wrote off $1.6 million of debt issuance costs in interest expense. As of June 30, 2017, the outstanding balance on the Term Loan, net of debt issuance fees, was $434.2 million. The Term Loan is guaranteed jointly and severally and fully and unconditionally by the Company’s active United States subsidiary.

Senior Notes

On October 1, 2015, the Company raised $300.0 million by issuing senior notes due 2023 (the “Senior Notes”). The Senior Notes have a coupon rate of 6.38% per annum and are payable semi-annually in arrears beginning April 1, 2016. There are early payment provisions in the Senior Note indenture in which the Company would be subject to “make whole” provisions. Management anticipates repaying the notes at the maturity date of October 1, 2023. As of June 30, 2017 the outstanding balance on the Senior Notes, net of debt issuance fees, was $292.0 million. The Senior Notes are guaranteed jointly and severally and fully and unconditionally by the Company’s active United States subsidiary.

Other Information

The Senior Secured Credit Facility and the previous credit facility it replaced had certain lenders who participated in both arrangements, therefore management accounted for a portion of this transaction as a debt modification and a portion as a debt extinguishment. In accordance with the accounting for debt modification, the Company expensed $2.2 million of direct issuance costs incurred and will amortize the previously capitalized issuance costs over the term of the Senior Secured Credit Facility. The remainder of the settlement of the Company’s previous financing arrangements was accounted for as debt extinguishment, for which the Company recognized a loss of $0.8 million in the first quarter of fiscal year 2016.

Equipment Financing Facilities and Other

As of June 30, 2017, the Company had a $16.7 million outstanding under equipment financing facilities, with fixed interest rates ranging from 2.33% to 3.25% and payments due through September 2021.

As of June 30, 2017 the Company had $21.0 million of capital lease obligations outstanding. These leases have interest rates ranging from 2.72% to 10.39% with payments due through November 2021.

 

9. Commitments and Contingencies

Operating 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. 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.

For the three months ended June 30, 2017 and 2016, rent expense was $15.8 million and $14.5 million, respectively. For the nine months ended June 30, 2017 and 2016, rent expense was $44.7 million and $45.1 million, respectively. Sublet income was immaterial for each of these periods.

 

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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.

 

10. Geographic Data

The following tables summarize certain geographic information for the periods presented (in thousands):

 

     Three Months Ended June 30,      Nine Months Ended June 30,  
     2017      2016      2017      2016  

Net sales

           

U.S.

   $ 1,167,647      $ 1,097,555      $ 2,977,108      $ 2,832,573  

Canada

     46,247        55,171        109,694        120,170  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total net sales

   $ 1,213,894      $ 1,152,726      $ 3,086,802      $ 2,952,743  
  

 

 

    

 

 

    

 

 

    

 

 

 
            June 30,      September 30,      June 30,  
            2017      2016      2016  

Long-lived assets

           

U.S.

      $ 515,170      $ 527,680      $ 545,070  

Canada

        13,204        13,374        13,949  
     

 

 

    

 

 

    

 

 

 

Total long-lived assets

      $ 528,374      $ 541,054      $ 559,019  
     

 

 

    

 

 

    

 

 

 

 

11. Fair Value Measurement

As of June 30, 2017, 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). Based upon recent trading prices (Level 2 — market approach) as of June 30, 2017, the fair value of the Company’s $300.0 million Senior Notes was $323.6 million. As of June 30, 2017, the fair value of the Company’s Senior Secured Credit Facility 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).

 

12. Supplemental Guarantor Information

All of the Senior Notes issued on October 1, 2015 are guaranteed jointly and severally by all of the United States subsidiaries of the Company (collectively, the “Guarantors”), and not by the Canadian subsidiaries of the Company. Such guarantees are full and unconditional. Supplemental condensed consolidating financial information of the Company, including such information for the Guarantors, is presented below. The information is presented in accordance with the requirements of Rule 3-10 under the SEC’s Regulation S-X. The financial information may not necessarily be indicative of results of operations, cash flows or financial position had the non-guarantor subsidiaries operated as independent entities. Investments in subsidiaries are presented using the equity method of accounting. The principal elimination entries eliminate investments in subsidiaries and intercompany balances and transactions. Separate financial statements of the Guarantors are not provided as the consolidating financial information contained herein provides a more meaningful disclosure to allow investors to determine the nature of the assets held by, and the operations of, the combined groups.

 

18


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BEACON ROOFING SUPPLY, INC.

Condensed Consolidating Balance Sheets

(Unaudited; In thousands)

 

     June 30, 2017  
     Parent      Guarantor
Subsidiaries
     Non-
Guarantor
Subsidiaries
     Eliminations
and Other
    Consolidated  

Assets

  

Current assets:

             

Cash and cash equivalents

   $ —        $ 34,583      $ 7,314      $ (8,842   $ 33,055  

Accounts receivable, net

     1,327        640,796        29,994        (1,140     670,977  

Inventories, net

     —          608,367        33,058        —         641,425  

Prepaid expenses and other current assets

     30,158        185,633        5,686        —         221,477  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total current assets

     31,485        1,469,379        76,052        (9,982     1,566,934  

Intercompany receivable, net

     —          1,037,846        —          (1,037,846     —    

Investments in consolidated subsidiaries

     3,070,328        —          —          (3,070,328     —    

Deferred income taxes, net

     58,230        —          —          (58,230     —    

Property and equipment, net

     6,541        140,126        10,284        —         156,951  

Goodwill

     —          1,226,034        29,980        —         1,256,014  

Intangibles, net

     —          440,042        2,920        —         442,962  

Other assets, net

     1,242        269        —          —         1,511  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total Assets

   $ 3,167,826      $ 4,313,696      $ 119,236      $ (4,176,386   $ 3,424,372  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Liabilities and Stockholders’ Equity

             

Current liabilities:

             

Accounts payable

   $ 23,839      $ 354,696      $ 19,026      $ (9,982   $ 387,579  

Accrued expenses

     18,174        257,387        4,754        —         280,315  

Current portions of long-term debt

     4,500        9,262        —          —         13,762  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total current liabilities

     46,513        621,345        23,780        (9,982     681,656  

Intercompany payable, net

     998,740        —          39,106        (1,037,846     —    

Borrowings under revolving lines of credit, net

     —          437,285        12,330        —         449,615  

Long-term debt, net

     721,685        —          —          —         721,685  

Deferred income taxes, net

     —          199,746        600        (58,230     142,116  

Long-term obligations under equipment financing and other, net

     —          28,365        47        —         28,412  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total liabilities

     1,766,938        1,286,741        75,863        (1,106,058     2,023,484  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 
             
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total stockholders’ equity

     1,400,888        3,026,955        43,373        (3,070,328     1,400,888  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 
             
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total Liabilities and Stockholders’ Equity

   $ 3,167,826      $ 4,313,696      $ 119,236      $ (4,176,386   $ 3,424,372  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

19


Table of Contents

BEACON ROOFING SUPPLY, INC.

Condensed Consolidating Balance Sheets

(Unaudited; In thousands)

 

     September 30, 2016  
     Parent      Guarantor
Subsidiaries
     Non-Guarantor
Subsidiaries
     Eliminations
and Other
    Consolidated  

Assets

  

Current assets:

             

Cash and cash equivalents

   $ —        $ 37,447      $ 2,876      $ (8,937   $ 31,386  

Accounts receivable, net

     —          593,395        34,710        (1,140     626,965  

Inventories, net

     —          460,516        20,220        —         480,736  

Prepaid expenses and other current assets

     3,527        153,681        5,895        —         163,103  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total current assets

     3,527        1,245,039        63,701        (10,077     1,302,190  

Intercompany receivable, net

     —          878,931        —          (878,931     —    

Investments in consolidated subsidiaries

     2,891,677        —          —          (2,891,677     —    

Deferred income taxes, net

     59,567        —          —          (59,567     —    

Property and equipment, net

     4,626        133,897        10,046        —         148,569  

Goodwill

     —          1,167,905        29,660        —         1,197,565  

Intangibles, net

     —          460,696        3,328        —         464,024  

Other assets, net

     1,242        269        —          —         1,511  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total Assets

   $ 2,960,639      $ 3,886,737      $ 106,735      $ (3,840,252   $ 3,113,859  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Liabilities and Stockholders’ Equity

             

Current liabilities:

             

Accounts payable

   $ 26,630      $ 329,895      $ 14,467      $ (10,077   $ 360,915  

Accrued expenses

     42,594        114,016        4,503        —         161,113  

Current portions of long-term obligations

     4,500        10,311        —          —         14,811  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total current liabilities

     73,724        454,222        18,970        (10,077     536,839  

Intercompany payable, net

     840,159        —          38,772        (878,931     —    

Borrowings under revolving lines of credit, net

     —          355,087        4,574        —         359,661  

Long-term debt, net

     722,929        —          —          —         722,929  

Deferred income taxes, net

     —          194,556        493        (59,567     135,482  

Long-term obligations under equipment financing and other, net

     —          35,074        47        —         35,121  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total liabilities

     1,636,812        1,038,939        62,856        (948,575     1,790,032  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total stockholders’ equity

     1,323,827        2,847,798        43,879        (2,891,677     1,323,827  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total Liabilities and Stockholders’ Equity

   $ 2,960,639      $ 3,886,737      $ 106,735      $ (3,840,252   $ 3,113,859  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

20


Table of Contents

BEACON ROOFING SUPPLY, INC.

Condensed Consolidating Balance Sheets

(Unaudited; In thousands)

 

     June 30, 2016  
     Parent      Guarantor
Subsidiaries
     Non-Guarantor
Subsidiaries
     Eliminations
and Other
    Consolidated  

Assets

  

Current assets:

             

Cash and cash equivalents

   $ —        $ 39,168      $ 3,461      $ (6,093   $ 36,536  

Accounts receivable, net

     —          608,880        32,361        (1,140     640,101  

Inventories, net

     —          589,976        30,932        —         620,908  

Prepaid expenses and other current assets

     11,697        196,123        5,562        (8,309     205,073  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total current assets

     11,697        1,434,147        72,316        (15,542     1,502,618  

Intercompany receivable, net

        950,364        —          (950,364     —    

Investments in consolidated subsidiaries

     2,838,385        —          —          (2,838,385     —    

Deferred income taxes, net

     67,484        —          —          (67,484     —    

Property and equipment, net

     4,266        138,725        10,398        —         153,389  

Goodwill

     —          1,170,087        30,119        —         1,200,206  

Intangibles, net

     —          473,699        3,551        —         477,250  

Other assets, net

     1,233        197        —          —         1,430  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total Assets

   $ 2,923,065      $ 4,167,219      $ 116,384      $ (3,871,775   $ 3,334,893  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Liabilities and Stockholders’ Equity

             

Current liabilities:

             

Accounts payable

   $ 15,964      $ 544,311      $ 10,290      $ (7,233   $ 563,332  

Accrued expenses

     —          200,014        13,707        (8,309     205,412  

Current portions of long-term obligations

     4,500        8,105        —          —         12,605  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total current liabilities

     20,464        752,430        23,997        (15,542     781,349  

Intercompany payable, net

     911,321        —          39,043        (950,364     —    

Borrowings under revolving lines of credit

     —          406,916        9,291        —         416,207  

Long-term debt, net

     721,630        —          —          —         721,630  

Deferred income taxes, net

     —          173,344        477        (67,484     106,337  

Long-term obligations under equipment financing and other, net

     —          39,672        48        —         39,720  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total liabilities

     1,653,415        1,372,362        72,856        (1,033,390     2,065,243  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total stockholders’ equity

     1,269,650        2,794,857        43,528        (2,838,385     1,269,650  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total Liabilities and Stockholders’ Equity

   $ 2,923,065      $ 4,167,219      $ 116,384      $ (3,871,775   $ 3,334,893  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

21


Table of Contents

BEACON ROOFING SUPPLY, INC.

Condensed Consolidating Statements of Operations

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

 

     Three Months Ended June 30, 2017  
     Parent     Guarantor
Subsidiaries
     Non-Guarantor
Subsidiaries
     Eliminations
and Other
    Consolidated  

Net sales

   $ —       $ 1,167,647      $ 46,247      $ —       $ 1,213,894  

Cost of products sold

     —         880,325        35,815        —         916,140  
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Gross profit

     —         287,322        10,432        —         297,754  

Operating expense

     407       204,478        7,998        —         212,883  

Intercompany charges (income)

     (12,549     11,987        562        —         —    
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Income from operations

     12,142       70,857        1,872        —         84,871  

Interest expense, financing costs, and other

     9,610       3,586        201        —         13,397  

Intercompany interest expense (income)

     (6,724     6,724        —          —         —    
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Income before provision for income taxes

     9,256       60,547        1,671        —         71,474  

Provision for income taxes

     3,473       22,883        459        —         26,815  
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Income before equity in net income of subsidiaries

     5,783       37,664        1,212        —         44,659  

Equity in net income of subsidiaries

     38,876       —          —          (38,876     —    
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Net income

   $ 44,659     $ 37,664      $ 1,212      $ (38,876   $ 44,659  
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Weighted-average common stock outstanding:

            

Basic

               60,311,923  

Diluted

               61,350,843  

Net income per share:

            

Basic

             $ 0.74  

Diluted

             $ 0.73  

 

     Three Months Ended June 30, 2016  
     Parent     Guarantor
Subsidiaries
     Non-Guarantor
Subsidiaries
    Eliminations
and Other
    Consolidated  

Net sales

   $     $ 1,097,554      $ 55,172     $ —       $ 1,152,726  

Cost of products sold

           828,448        42,203       —         870,651  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Gross profit

           269,106        12,969       —         282,075  

Operating expenses

     5,933       189,343        8,420       —         203,696  

Intercompany charges (income)

     (10,598     9,938        660       —         —    
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Income from operations

     4,665       69,825        3,889       —         78,379  

Interest income, financing costs, and other

     9,926       2,511        (211     —         12,226  

Intercompany interest expense (income)

     (6,325     5,909        416       —         —    
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Income before provision for income taxes

     1,064       61,405        3,684       —         66,153  

Provision for income taxes

     3,667       20,384        976       —         25,027  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Income (loss) before equity in net income of subsidiaries

     (2,603     41,021        2,708       —         41,126  

Equity in net income of subsidiaries

     43,729       —          —         (43,729     —    
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Net income

   $ 41,126     $ 41,021      $ 2,708     $ (43,729   $ 41,126  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Weighted-average common stock outstanding:

           

Basic

              59,615,121  

Diluted

              60,619,809  

Net income per share:

           

Basic

            $ 0.69  

Diluted

            $ 0.68  

 

22


Table of Contents

BEACON ROOFING SUPPLY, INC.

Condensed Consolidating Statements of Operations

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

 

     Nine Months Ended June 30, 2017  
     Parent     Guarantor
Subsidiaries
     Non-Guarantor
Subsidiaries
    Eliminations
and Other
    Consolidated  

Net sales

   $ —       $ 2,977,108      $ 109,694     $ —       $ 3,086,802  

Cost of products sold

     —         2,248,454        85,050       —         2,333,504  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Gross profit

     —         728,654        24,644       —         753,298  

Operating expense

     16,063       584,999        23,464       —         624,526  

Intercompany charges (income)

     (37,057     35,379        1,678       —         —    
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Income (loss) from operations

     20,994       108,276        (498     —         128,772  

Interest expense, financing costs, and other

     28,947       9,044        1,248       —         39,239  

Intercompany interest expense (income)

     (17,406     17,406        —         —         —    
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Income (loss) before provision for income taxes

     9,453       81,826        (1,746     —         89,533  

Provision for (benefit from) income taxes

     3,063       31,217        (480     —         33,800  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Income (loss) before equity in net income of subsidiaries

     6,390       50,609        (1,266     —         55,733  

Equity in net income of subsidiaries

     49,343       —          —         (49,343     —    
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ 55,733     $ 50,609      $ (1,266   $ (49,343   $ 55,733  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Weighted-average common stock outstanding:

           

Basic

              60,131,546  

Diluted

              61,163,591  

Net income per share:

           

Basic

            $ 0.93  

Diluted

            $ 0.91  

 

     Nine Months Ended June 30, 2016  
     Parent     Guarantor
Subsidiaries
     Non-Guarantor
Subsidiaries
    Eliminations
and Other
    Consolidated  

Net sales

   $ —       $ 2,832,819      $ 120,171     $ (247   $ 2,952,743  

Cost of products sold

     —         2,149,477        92,486       (247     2,241,716  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Gross profit

     —         683,342        27,685       —         711,027  

Operating expenses

     65,092       513,755        23,074       —         601,921  

Intercompany charges (income)

     (36,038     33,394        2,644       —         —    
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Income (loss) from operations

     (29,054     136,193        1,967       —         109,106  

Interest expense, financing costs, and other

     24,563       17,016        (71     —         41,508  

Intercompany interest expense (income)

     (15,046     13,858        1,188       —         —    
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Income (loss) before provision for income taxes

     (38,571     105,319        850       —         67,598  

Provision for (benefit from) income taxes

     (17,206     42,054        225       —         25,073  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Income (loss) before equity in net income of subsidiaries

     (21,365     63,265        625       —         42,525  

Equity in net income of subsidiaries

     63,890       —          —         (63,890     —    
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Net income

   $ 42,525     $ 63,265      $ 625     $ (63,890   $ 42,525  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Weighted-average common stock outstanding:

           

Basic

              59,293,500  

Diluted

              60,276,695  

Net income per share:

           

Basic

            $ 0.72  

Diluted

            $ 0.71  

 

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Table of Contents

BEACON ROOFING SUPPLY, INC.

Condensed Consolidating Statements of Comprehensive Income

(Unaudited; In thousands)

 

     Three Months Ended June 30, 2017  
     Parent      Guarantor
Subsidiaries
     Non-Guarantor
Subsidiaries
     Eliminations
and Other
    Consolidated  

Net income

   $ 44,659      $ 37,664      $ 1,212      $ (38,876   $ 44,659  

Other comprehensive income:

             

Foreign currency translation adjustment

     1,730        —          1,730        (1,730     1,730  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total other comprehensive income

     1,730        —          1,730        (1,730     1,730  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Comprehensive income

   $ 46,389      $ 37,664      $ 2,942      $ (40,606   $ 46,389  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

     Three Months Ended June 30, 2016  
     Parent      Guarantor
Subsidiaries
     Non-Guarantor
Subsidiaries
     Eliminations
and Other
    Consolidated  

Net income

   $ 41,126      $ 41,021      $ 2,708      $ (43,729   $ 41,126  

Other comprehensive income:

             

Foreign currency translation adjustment

     365        —          365        (365     365  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total other comprehensive income

     365        —          365        (365     365  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Comprehensive income

   $ 41,491      $ 41,021      $ 3,073      $ (44,094   $ 41,491  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

     Nine Months Ended June 30, 2017  
     Parent      Guarantor
Subsidiaries
     Non-Guarantor
Subsidiaries
    Eliminations
and Other
    Consolidated  

Net income (loss)

   $ 55,733      $ 50,609      $ (1,266   $ (49,343   $ 55,733  

Other comprehensive income:

            

Foreign currency translation adjustment

     891        —          891       (891     891  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total other comprehensive income

     891        —          891       (891     891  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Comprehensive income (loss)

   $ 56,624      $ 50,609      $ (375   $ (50,234   $ 56,624  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

 

     Nine Months Ended June 30, 2016  
     Parent      Guarantor
Subsidiaries
     Non-Guarantor
Subsidiaries
     Eliminations
and Other
    Consolidated  

Net income

   $ 42,525      $ 63,265      $ 625      $ (63,890   $ 42,525  

Other comprehensive income:

             

Foreign currency translation adjustment

     2,122        —          2,122        (2,122     2,122  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total other comprehensive income

     2,122        —          2,122        (2,122     2,122  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Comprehensive income

   $ 44,647      $ 63,265      $ 2,747      $ (66,012   $ 44,647  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

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Table of Contents

BEACON ROOFING SUPPLY, INC.

Condensed Consolidating Statements of Cash Flows

(Unaudited; In thousands)

 

    Nine Months Ended June 30, 2017  
    Parent     Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations
and Other
    Consolidated  

Net cash provided by (used in) operating activities

  $ (33,267   $ 108,628     $ (2,064   $ 855     $ 74,152  

Investing Activities

         

Purchases of property and equipment

    (2,972     (27,522     (1,388     —         (31,882

Acquisition of businesses

    (128,533     —         —         —         (128,533

Proceeds from the sale of assets

    —         1,828       11       —         1,839  

Intercompany activity

    159,325       —         —         (159,325     —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) investing activities

    27,820       (25,694     (1,377     (159,325     (158,576
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Financing Activities

         

Borrowings under revolving lines of credit

    —         1,705,434       16,493       —         1,721,927  

Repayments under revolving lines of credit

    —         (1,624,574     (8,996     —         (1,633,570

Repayments under term loan

    (3,375     —         —         —         (3,375

Borrowings under equipment financing facilities and other

    —         2,111       —         —         2,111  

Repayments under equipment financing facilities and other

    —         (9,870     —         —         (9,870

Proceeds from issuance of common stock

    9,994       —         —         —         9,994  

Taxes paid related to net share settelement of equity awards

    (1,172     —         —         —         (1,172

Intercompany activity

    —         (158,899     334       158,565       —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) financing activities

    5,447       (85,798     7,831       158,565       86,045  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Effect of exchange rate changes on cash and cash equivalents

    —         —         48       —         48  

Net increase (decrease) in cash and cash equivalents

    —         (2,864     4,438       95       1,669  

Cash and cash equivalents, beginning of period

    —         37,447       2,876       (8,937     31,386  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents, end of period

  $ —       $ 34,583     $ 7,314     $ (8,842   $ 33,055  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

    Nine Months Ended June 30, 2016  
    Parent     Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations
and Other
    Consolidated  

Net cash provided by (used in) operating activities

  $ (106,764   $ 173,900     $ 9,109     $ (1,886   $ 74,359  

Investing Activities

         

Purchases of property and equipment

    (2,338     (16,791     (2,424     —         (21,553

Acquisition of businesses

    (1,018,658     —         —         —         (1,018,658

Proceeds from the sale of assets

    —         969       —         —         969  

Intercompany activity

    561,413       —         —         (561,413     —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

    (459,583     (15,822     (2,424     (561,413     (1,039,242
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Financing Activities

         

Borrowings under revolving lines of credit

    —         1,409,128       —         —         1,409,128  

Repayments under revolving lines of credit

    —         (994,627     (11,449     —         (1,006,076

Borrowings under term loan

    450,000       —         —         —         450,000  

Repayments under term loan

    (189,000     —         —         —         (189,000

Borrowings under Senior Notes

    300,000       —         —         —         300,000  

Repayments under equipment financing facilities and other

    —         (3,847     —         —         (3,847

Payment of deferred financing costs

    (18,890     (8,923     —         —         (27,813

Proceeds from issuance of common stock

    20,213       —         —         —         20,213  

Excess tax benefit from stock-based compensation

    4,024       —         —         —         4,024  

Intercompany activity

    —         (563,457     2,045       561,412       —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) financing activities

    566,347       (161,726     (9,404     561,412       956,629  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Effect of exchange rate changes on cash and cash equivalents

    —         —         (871     —         (871

Net decrease in cash and cash equivalents

    —         (3,648     (3,590     (1,887     (9,125

Cash and cash equivalents, beginning of period

    —         42,816       7,051       (4,206     45,661  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents, end of period

  $ —       $ 39,168     $ 3,461     $ (6,093   $ 36,536  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis should be read in conjunction with Management’s Discussion and Analysis included in our 2016 Annual Report on Form 10-K and our condensed consolidated financial statements and the notes thereto included elsewhere in this document. Unless otherwise indicated, references to “2017” refer to the three and nine month periods ended June 30, 2017 being discussed and references to “2016” refer to the three and nine month periods ended June 30, 2016 being discussed. We do not undertake, and specifically disclaim, any obligation to update any forward-looking statements to reflect the occurrence of events or circumstances after the date of such statements except as required by law.

Overview

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

As of June 30, 2017, we operated 384 branches in 48 states throughout the United States and 6 provinces in Canada. We stock one of the most extensive assortments of high quality branded products in the industry, with over 46,000 SKUs available across our branch network, enabling us to deliver products to serve nearly 67,000 customers on a timely basis. For 2016, approximately 96% of our net sales came from customers located in the United States.

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

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

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

Acquisition Growth—2017:

 

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

 

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

 

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

 

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

 

    On May 1, 2017, the Company purchased certain assets of Lowry’s Inc., a distributor of waterproofing and concrete restoration materials with 11 branches operating in California, Arizona, Utah and Hawaii and annual sales of $76 million.

 

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Table of Contents

Acquisition Growth—2016:

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

27


Table of Contents

Results of Operations

Comparison of the Three Months Ended June 30, 2017 and 2016

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

 

     Three Months Ended June 30,  
     2017     2016  
     (In thousands)  

Net sales

   $ 1,213,894     $ 1,152,726  

Cost of products sold

     916,140       870,651  
  

 

 

   

 

 

 

Gross profit

     297,754       282,075  

Operating expense

     212,883       203,696  
  

 

 

   

 

 

 

Income from operations

     84,871       78,379  

Interest expense, financing costs, and other

     13,397       12,226  
  

 

 

   

 

 

 

Income before provision for income taxes

     71,474       66,153  

Provision for income taxes

     26,815       25,027  
  

 

 

   

 

 

 

Net income

     44,659       41,126  
  

 

 

   

 

 

 
     Three Months Ended June 30,  
     2017     2016  
     % of Net Sales  

Net sales

     100.0     100.0

Cost of products sold

     75.5     75.5
  

 

 

   

 

 

 

Gross profit

     24.5     24.5

Operating expense

     17.5     17.7
  

 

 

   

 

 

 

Income from operations

     7.0     6.8

Interest expense, financing costs, and other

     1.1     1.1
  

 

 

   

 

 

 

Income before provision for income taxes

     5.9     5.7

Provision for income taxes

     2.2     2.2
  

 

 

   

 

 

 

Net income

     3.7     3.5
  

 

 

   

 

 

 

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

As of June 30, 2017, we had a total of 384 branches in operation. Our existing market calculations include 353 branches and exclude 31 branches because they were acquired after the start of the third quarter of fiscal year 2016. When we refer to our net product costs, we are referring to our invoice cost less the impact of short-term buying programs (also referred to as “special buys” given the manner in which they are offered).

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

 

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Table of Contents
                                                                             
     Existing Markets      Acquired Markets      Consolidated  
     Three Months Ended June 30,  
     2017      2016      2017      2016      2017      2016  
     (Dollars in thousands)  

Net sales

     $     1,163,963        $     1,139,140        $     49,931        $     13,586        $     1,213,894        $     1,152,726  

Gross profit

     $ 283,089        $ 278,551        $ 14,665        $ 3,524        $ 297,754        $ 282,075  

Gross margin

     24.3%        24.5%        29.4%        25.9%        24.5%        24.5%  

Operating expense (1)

     $ 200,931        $ 201,032        $ 11,952        $ 2,664        $ 212,883        $ 203,696  

Operating expense as a % of net sales

     17.3%        17.6%        23.9%        19.6%        17.5%        17.7%  

Operating income

     $ 82,159        $ 77,519        $ 2,712        $ 860        $ 84,871        $ 78,379  

Operating margin

     7.1%        6.8%        5.4%        6.3%        7.0%        6.8%  

 

1  During 2017 and 2016, we recorded amortization expense related to intangible assets recorded under purchase accounting of $20.7 million ($2.7 million from acquired markets) and $17.4 million ($0.4 from acquired markets), respectively. In addition, existing market operating expense for 2017 and 2016 included non-recurring charges of $9.9 million ($6.1 million, net of taxes) and $7.9 million ($5.1 million, net of taxes), respectively, for the recognition of certain costs related to acquisitions completed in fiscal years 2016 and 2017.

Net Sales

Consolidated net sales increased $61.2 million, or 5.3%, to $1.21 billion in 2017 from $1.15 billion in 2016. Existing market sales increased $24.8 million, or 2.2%, over the same comparative period. We believe the increase in our 2017 existing market sales was influenced primarily by the following factors:

 

  increased demand in our residential and complementary product groups;

 

  higher core residential re-roofing demand; and

 

  increased storm demand in the Midwest region;

partially offset by:

 

  lower commercial product sales; and

 

  weather-induced demand decreases in the Mid-Atlantic, Northeast and Southwest regions.

Net sales within our acquired markets were $49.9 million in 2017, an increase from 2016 due to the sales impact from recent acquisitions.

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

Existing markets net sales by geographical region increased (decreased) from 2016 to 2017 as follows: Northeast 1.4%; Mid-Atlantic 1.8%; Southeast 2.8%; Southwest (7.9)%; Midwest 14.5%; West 8.0%; and Canada (16.2)%. These variations were primarily caused by short-term factors such as local market conditions, weather conditions and storm activity.

Product group sales for our existing markets were as follows:

 

                                                                                                                                         
     Three Months Ended June 30,                
     2017      2016      Change  
     Net Sales      %      Net Sales      %      $      %  
     (Dollars in thousands)  

Residential roofing products

     $ 651,648          56.0%          $ 617,873          54.2%          $ 33,775           5.5%    

Non-residential roofing products

     340,245          29.2%          359,440          31.6%              (19,195)          -5.3%    

Complementary building products

     172,070          14.8%          161,827          14.2%          10,243           6.3%    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

Total existing market sales

     $     1,163,963          100.0%          $     1,139,140          100.0%          $ 24,823           2.2%    
  

 

 

       

 

 

       

 

 

    

 

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Table of Contents

For 2017, our acquired markets recognized sales of $17.8 million, $4.5 million and $27.6 million in residential roofing products, non-residential roofing products and complementary building products, respectively. The combination of our 2017 existing market sales of $1.16 billion plus the sales from acquired markets of $49.9 million equals our total 2017 sales of $1.21 billion. We believe the existing market information is useful to investors because it helps explain organic growth or decline.

Gross Profit

Gross profit and gross margin for our consolidated and existing markets were as follows:

 

                                                                           
     Three Months Ended
June 30,
     Change1  
     2017      2016      $      %  
     (Dollars in thousands)  

Gross profit—consolidated

   $ 297,754        $ 282,075        $ 15,679          5.6%    

Gross profit—existing markets

     283,089          278,551          4,538          1.6%    

Gross margin—consolidated

     24.5%          24.5%          N/A          0.0%    

Gross margin—existing markets

     24.3%          24.5%          N/A          -0.2%    

 

1  Percentage changes for dollar amounts represent the ratable increase or decrease from period-to-period. Percentage changes for percentages represent the net period-to-period change in basis points.

Our existing market gross profit increased $4.5 million, or 1.6%, to $283.1 million in 2017, and gross profit within our acquired markets was $14.7 million for the same period. Our overall gross margins stayed the same at 24.5%. Gross margins within our existing markets for 2017 decreased to 24.3%.

Direct sales (products shipped by our vendors directly to our customers), which typically have substantially lower gross margins (and operating expense) compared to our warehouse sales, represented 14.9% and 16.3% of our net sales in 2017 and 2016, respectively. We believe variations in direct sales activity to be primarily caused by short-term factors such as local market conditions, weather conditions and storm activity. None of these variations were driven by material regional impacts from changes in the direct sales mix of our geographical regions.

Operating Expense

Operating expense for consolidated and existing markets was as follows:

 

                                                                           
     Three Months Ended
June 30,
     Change1  
     2017      2016      $      %  
     (Dollars in thousands)  

Operating expense—consolidated

   $ 212,883        $ 203,696        $ 9,187           4.5%    

Operating expense—existing markets

     200,931          201,032          (101)          -0.1%    

Operating expense as a % of net sales—consolidated

     17.5%          17.7%          N/A          -0.2%    

Operating expense as a % of net sales—existing markets

     17.3%          17.6%          N/A          -0.3%    

 

1  Percentage changes for dollar amounts represent the ratable increase or decrease from period-to-period. Percentage changes for percentages represent the net period-to-period change in basis points.

Operating expense in our existing markets decreased by $0.1 million, or 0.1% in 2017, to $200.9 million, as compared to $201.0 million in 2016, while operating expense within our acquired markets was $12.0 million in 2017. The following factors were the leading causes of the decrease in operating expense in our existing markets:

 

  a decrease in bad debt expense of $4.0 million due to improved collections results;

partially offset by:

 

  an increase in amortization expense of $1.3 million due to the incremental amortization of intangibles related to the RSG acquisition;

 

  an increase in selling and warehouse expenses of $2.3 million due to higher sales volume and the impact of recent acquisitions; and

 

  a decrease of $0.3 million in losses recognized on the disposal of certain assets.

 

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During 2017 and 2016, we recorded amortization expense related to the intangible assets recorded under purchase accounting within our existing markets of $18.0 million and $17.1 million, respectively. Our existing markets operating expense as a percentage of the related net sales in 2017 was 17.3%, compared to 17.6% in 2016.

Interest Expense, Financing Costs and Other

Interest expense, financing costs and other expense was $13.4 million in 2017, as compared to $12.2 million in 2016. The primary driver of the slight increase is a higher outstanding debt balance over the comparative periods.

Income Taxes

Provision for income tax was $26.8 million in 2017, as compared to $25.0 million in 2016. The increase was primarily due to the $5.3 million difference in pre-tax net income for the comparative periods. The effective tax rate before discrete items was relatively flat for the comparative periods. We expect our fiscal year 2017 effective annual income tax rate to average approximately 39%, excluding any discrete items.

Comparison of the Nine Months Ended June 30, 2017 and 2016

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

 

                                             
     Nine Months Ended June 30,  
     2017      2016  
     (In thousands)  

Net sales

   $  3,086,802        $ 2,952,743    

Cost of products sold

     2,333,504          2,241,716    
  

 

 

    

 

 

 

Gross profit

     753,298          711,027    

Operating expense

     624,526          601,921    
  

 

 

    

 

 

 

Income from operations

     128,772          109,106    

Interest expense, financing costs, and other

     39,239          41,508    
  

 

 

    

 

 

 

Income before provision for income taxes

     89,533          67,598    

Provision for income taxes

     33,800          25,073    
  

 

 

    

 

 

 

Net income

     55,733          42,525    
  

 

 

    

 

 

 
     Nine Months Ended June 30,  
     2017      2016  
     % of Net Sales  

Net sales

     100.0%        100.0%  

Cost of products sold

     75.6%        75.9%  
  

 

 

    

 

 

 

Gross profit

     24.4%        24.1%  

Operating expense

     20.2%        20.4%  
  

 

 

    

 

 

 

Income from operations

     4.2%        3.7%  

Interest expense, financing costs, and other

     1.3%        1.4%  
  

 

 

    

 

 

 

Income before provision for income taxes

     2.9%        2.3%  

Provision for income taxes

     1.1%        0.8%  
  

 

 

    

 

 

 

Net income

     1.8%        1.5%  
  

 

 

    

 

 

 

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

As of June 30, 2017, we had a total of 384 branches in operation. Our existing market calculations include 322 branches and exclude 62 branches because they were acquired after the start of fiscal year 2016. When we refer to our net product costs, we are referring to our invoice cost less the impact of short-term buying programs (also referred to as “special buys” given the manner in which they are offered).

 

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

 

                                                     
     Existing Markets      Acquired Markets      Consolidated  
     Nine Months Ended June 30,  
     2017      2016      2017      2016      2017      2016  
     (Dollars in thousands)  

Net sales

     $     2,899,742        $     2,878,003        $     187,060        $     74,740        $     3,086,802        $     2,952,743  

Gross profit

     $ 699,798        $ 691,732        $ 53,500        $ 19,295        $ 753,298        $ 711,027  

Gross margin

     24.1%        24.0%        28.6%        25.8%        24.4%        24.1%  

Operating expense (1)

     $ 575,167        $ 582,261        $ 49,359        $ 19,660        $ 624,526        $ 601,921  

Operating expense as a % of net sales

     19.8%        20.2%        26.4%        26.3%        20.2%        20.4%  

Operating income (loss)

     $ 124,631        $ 109,471        $ 4,141        $ (365)        $ 128,772        $ 109,106  

Operating margin

     4.3%        3.8%        2.2%        -0.5%        4.2%        3.7%  

 

1  During 2017 and 2016, we recorded amortization expense related to intangible assets recorded under purchase accounting of $61.1 million ($8.9 million from acquired markets) and $49.7 million ($3.0 million from acquired markets), respectively. In addition, existing market operating expense for 2017 and 2016 included non-recurring charges of $28.5 million ($17.5 million, net of taxes) and $44.7 million ($27.1 million, net of taxes), respectively, for the recognition of certain costs related to acquisitions completed in fiscal years 2016 and 2017.

Net Sales

Consolidated net sales increased $134.1 million, or 4.5%, to $3.09 billion in 2017 from $2.95 billion in 2016. Existing market sales increased $21.7 million, or 0.8%, over the same comparative period. We believe the slight increase in our 2017 existing market sales were influenced primarily by the following factors:

 

    increased demand in our residential and complementary product groups;

partially offset by:

 

    lower average selling prices; and

 

    lower commercial product demand.

Net sales within our acquired markets were $187.1 million in 2017, an increase from 2016 due to the sales impact from recent acquisitions.

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

Existing markets net sales by geographical region increased (decreased) from 2016 to 2017 as follows: Northeast (5.6)%; Mid-Atlantic 3.5%; Southeast 4.2%; Southwest 2.0%; Midwest 8.1%; West (12.9)%; and Canada (8.7)%. These variations were primarily caused by short-term factors such as local market conditions, weather conditions and storm activity.

Product group sales for our existing markets were as follows:

 

                                                                                                     
     Nine Months Ended June 30,                
     2017      2016      Change  
     Net Sales      %      Net Sales      %      $      %  
     (Dollars in thousands)  

Residential roofing products

     $     1,621,546          55.9%          $     1,533,170          53.2%          $ 88,376           5.8%    

Non-residential roofing products

     889,264          30.7%          971,938          33.8%              (82,674)          -8.5%    

Complementary building products

     388,932          13.4%          372,895          13.0%          16,037           4.3%    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

Total existing market sales

     $ 2,899,742          100.0%          $ 2,878,003          100.0%          $ 21,739           0.8%    
  

 

 

       

 

 

       

 

 

    

 

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For 2017, our acquired markets recognized sales of $60.9 million, $11.4 million and $114.8 million in residential roofing products, non-residential roofing products and complementary building products, respectively. The combination of our 2017 existing market sales of $2.90 billion plus the sales from acquired markets of $187.1 million equals our total 2017 sales of $3.09 billion. We believe the existing market information is useful to investors because it helps explain organic growth or decline.

Gross Profit

Gross profit and gross margin for our consolidated and existing markets were as follows:

 

     Nine Months Ended
June 30,
     Change1  
     2017      2016      $      %  
     (Dollars in thousands)  

Gross profit—consolidated

    $     753,298         $     711,027         $     42,271          5.9%    

Gross profit—existing markets

     699,798          691,732          8,066          1.2%    

Gross margin—consolidated

     24.4%          24.1%          N/A          0.3%    

Gross margin—existing markets

     24.1%          24.0%          N/A          0.1%    

 

1  Percentage changes for dollar amounts represent the ratable increase or decrease from period-to-period. Percentage changes for percentages represent the net period-to-period change in basis points.

Our existing market gross profit increased $8.1 million, or 1.2%, to $699.8 million in 2017, and gross profit within our acquired markets was $53.5 million for the same period. Our overall gross margins improved to 24.4% in 2017, mainly due to a favorable shift in sales mix to residential products. Gross margins within our existing markets for 2017 increased to 24.1%.

Direct sales (products shipped by our vendors directly to our customers), which typically have substantially lower gross margins (and operating expense) compared to our warehouse sales, represented 15.5% and 16.4% of our net sales in 2017 and 2016, respectively. We believe variations in direct sales activity to be primarily caused by short-term factors such as local market conditions, weather conditions and storm activity. None of these variations were driven by material regional impacts from changes in the direct sales mix of our geographical regions.

Operating Expense

Operating expense for consolidated and existing markets was as follows:

 

     Nine Months Ended
June 30,
     Change1  
     2017      2016      $      %  
     (Dollars in thousands)  

Operating expense—consolidated

    $     624,526         $     601,921           $    22,605           3.8%    

Operating expense—existing markets

     575,167          582,261          (7,094)          -1.2%    

Operating expense as a % of net sales —consolidated

     20.2%          20.4%          N/A          -0.2%    

Operating expense as a % of net sales —existing markets

     19.8%          20.2%          N/A          -0.4%    

 

1  Percentage changes for dollar amounts represent the ratable increase or decrease from period-to-period. Percentage changes for percentages represent the net period-to-period change in basis points.

Operating expense in our existing markets decreased by $7.1 million, or 1.2% in 2017, to $575.2 million, as compared to $582.3 million in 2016, while operating expense within our acquired markets was $49.4 million in 2017. The following factors were the leading causes of the decrease in operating expense in our existing markets:

 

    a decrease in payroll, employee benefits costs, and stock compensation expense of $9.0 million due to additional compensation costs recognized in 2016 as a result of the RSG transaction;

 

    a decrease in general and administrative of $5.6 million due to the continued realization of cost synergies and consolidation of certain branches related to recent acquisitions; and

 

    a decrease in bad debt expense of $3.0 million due to improved collections results;

 

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partially offset by:

 

    an increase in depreciation and amortization expense of $6.3 million due to the incremental amortization of intangibles related to the RSG transaction; and

 

    an increase in selling expense of $4.4 million due to higher sales volume and related employee costs.

During 2017 and 2016, we recorded amortization expense related to the intangible assets recorded under purchase accounting within our existing markets of $52.3 million and $46.7 million, respectively. Our existing markets operating expense as a percentage of the related net sales in 2017 was 19.8%, compared to 20.2% in 2016.

Interest Expense, Financing Costs and Other

Interest expense, financing costs and other expense was $39.2 million in 2017, as compared to $41.5 million in 2016. The primary driver of the decrease is a lower interest rate from the September 2016 refinancing of our Term Loan and the gradual decrease in outstanding debt as a result of recent principal payments.

Income Taxes

Provision for income taxes was $33.8 million in 2017, as compared to $25.1 million in 2016. The increase was primarily due to a $21.9 million increase in pre-tax net income for the comparative periods. The effective tax rate before discrete items was relatively flat for the comparative periods. We expect our fiscal year 2017 effective annual income tax rate to average approximately 39%, excluding any discrete items.

Non-GAAP Financial Measures

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

 

    Adjusted Net Income (Loss)/Adjusted EPS

 

    Adjusted EBITDA

We define Adjusted Net Income (Loss) as net income that excludes certain non-recurring costs and the incremental amortization of intangibles related to acquisitions completed in fiscal years 2016 and 2017. Adjusted net income per share (“Adjusted EPS”) is calculated by dividing the Adjusted Net Income (Loss) for the period by the weighted-average diluted shares outstanding for the period.

We define Adjusted EBITDA as net income plus interest expense (net of interest income), income taxes, depreciation and amortization, adjustments to contingent consideration, stock-based compensation and certain non-recurring costs from acquisitions completed in fiscal years 2016 and 2017. EBITDA is a measure commonly used in the distribution industry.

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

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

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

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

 

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Adjusted Net Income (Loss)/Adjusted EPS

 

     Three Months Ended June 30,      Nine Months Ended June 30,  
     2017      2016      2017      2016  
     Amount      Per Share      Amount      Per Share      Amount      Per Share      Amount      Per Share  

Net income

   $ 44,659      $ 0.73      $ 41,126      $ 0.68      $ 55,733      $ 0.91      $ 42,525      $ 0.71  

Company adjustments, net of income taxes:

                       

Acquisition costs1

     6,761        0.11        5,444        0.09        20,075        0.33        30,405        0.50  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Adjusted Net Income (Loss)

   $       51,420      $       0.84      $       46,570      $       0.77      $       75,808      $       1.24      $       72,930      $       1.21  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

1  Acquisition costs reflect certain non-recurring charges and the incremental amortization of intangibles related to acquisitions completed in fiscal years 2016 and 2017, net of $4.2 million and $2.9 million in tax for the three months ended June 30, 2017 and 2016, respectively and $12.6 million and $19.8 million in tax for the nine months ended June 30, 2017 and 2016, respectively.

Adjusted EBITDA

 

     Three Months Ended June 30,      Nine Months Ended June 30,  
     2017      2016      2017      2016  

Net income

   $ 44,659       $ 41,126       $ 55,733       $ 42,525   

Acquisition costs1

     1,971         2,157         4,715         23,310   

Interest expense, net

     13,614         12,508         40,098         41,836   

Income taxes

     26,815         25,027         33,800         25,073   

Depreciation and amortization

     29,283         25,375         86,238         73,019   

Stock-based compensation

     3,653         3,374         11,227         14,070   
  

 

 

    

 

 

    

 

 

    

 

 

 

Adjusted EBITDA

   $         119,995       $         109,567       $         231,811       $         219,833   
  

 

 

    

 

 

    

 

 

    

 

 

 

Adjusted EBITDA as a % of net sales

     9.9%        9.5%        7.5%        7.4%  

 

1  Acquisition costs reflect certain non-recurring charges related to acquisitions completed in fiscal years 2016 and 2017 (excluding the impact of tax) that are not embedded in other balances of the table. Certain portions of the total acquisition costs incurred are included in interest expense, income taxes, depreciation and amortization, and stock-based compensation.

Seasonality and Quarterly Fluctuations

In general, sales and net income are highest during our first, third and fourth fiscal quarters, which represent the peak months of construction and re-roofing, especially in our branches in the northern and mid-western U.S. and in Canada. We have historically incurred low net income levels or net losses during the second quarter when our sales are substantially lower.

We generally experience an increase in inventory, accounts receivable and accounts payable during the third and fourth quarters of the year as a result of the seasonality of our business. Our peak cash usage generally occurs during the third quarter, primarily because accounts payable terms offered by our suppliers typically have due dates in April, May and June, while our peak accounts receivable collections typically occur from June through November.

We generally experience a slowing of our accounts receivable collections during our second quarter, mainly due to the inability of some of our customers to conduct their businesses effectively in inclement weather in certain divisions. We continue to attempt to collect those receivables, which require payment under our standard terms. We do not provide material concessions to our customers during this quarter of the year.

We generally experience our peak working capital needs during the third quarter after we build our inventories following the winter season but before we begin collecting on most of our spring receivables.

Certain Quarterly Financial Data

The following table sets forth certain unaudited quarterly data for fiscal year 2017 (ending September 30, 2017) and fiscal year 2016 which, in the opinion of management, reflect all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation of this data. Results of any one or more quarters are not necessarily indicative of results for an entire fiscal year or of continuing trends.

 

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     2017      2016  
     Qtr 1      Qtr 2      Qtr 3      Qtr 1      Qtr 2      Qtr 3      Qtr 4  
     (Dollars in thousands)  

Net sales

    $     1,002,184       $     870,724       $     1,213,894       $     976,480       $     823,537       $     1,152,726       $     1,174,366  

% of year’s sales

     32.5%        28.2%        39.3%        23.7%        20.0%        27.9%        28.4%  

Gross profit

    $ 251,067       $ 204,477       $ 297,754       $ 233,188       $ 195,764       $ 282,075       $ 302,042  

% of year’s gross profit

     33.3%        27.1%        39.5%        23.0%        19.3%        27.8%        29.9%  

Income (loss) from operations

    $ 46,957       $ (3,056)       $ 84,871       $ 26,844       $ 3,883       $ 78,379       $ 95,878  

% of year’s income from operations

     36.5%        -2.4%        65.9%        13.1%        1.9%        38.2%        46.8%  

Net income (loss)

    $ 20,430       $ (9,356)       $ 44,659       $ 7,118       $ (5,719)       $ 41,126       $ 47,392  

Net income (loss) per share—basic

    $ 0.34       $ (0.16)       $ 0.74       $ 0.12       $ (0.10)       $ 0.69       $ 0.79  

Net income (loss) per share—diluted

    $ 0.33       $ (0.16)       $ 0.73       $ 0.12       $ (0.10)       $ 0.68       $ 0.78  

Liquidity

Liquidity is defined as the current amount of readily available cash and the ability to generate adequate amounts of cash to meet the current needs for cash. We assess our liquidity in terms of our cash and cash equivalents on hand and the ability to generate cash to fund our operating activities, taking into consideration the seasonal nature of our business.

Our principal sources of liquidity as of June 30, 2017 were our cash and cash equivalents of $33.1 million and our available borrowings of $229.1 million under our asset based lending revolving credit facility.

Significant factors which could affect future liquidity include the following:

 

    the adequacy of available bank lines of credit;

 

    the ability to attract long-term capital with satisfactory terms;

 

    cash flows generated from operating activities;

 

    acquisitions; and

 

    capital expenditures.

Our primary capital needs are for working capital obligations and other general corporate purposes, including acquisitions and capital expenditures. Our primary sources of working capital are cash from operations and cash equivalents supplemented by bank borrowings. In the past, we have financed larger acquisitions initially through increased bank borrowings and the issuance of common stock. We then repay any such borrowings with cash flows from operations. We have funded most of our capital expenditures with cash on hand or through increased bank borrowings, including equipment financing, and then have reduced those obligations with cash flows from operations.

We believe we have adequate current liquidity and availability of capital to fund our present operations, meet our commitments on our existing debt and fund anticipated growth, including expansion in existing and targeted market areas. We seek potential acquisitions from time to time and hold discussions with certain acquisition candidates. If suitable acquisition opportunities or working capital needs arise that require additional financing, we believe that our financial position and earnings history provide a sufficient base for obtaining additional financing resources at reasonable rates and terms. We may also choose to issue additional shares of common stock or preferred stock in order to raise funds.

 

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The following table summarizes our cash flows for the periods indicated (in thousands):

 

     Nine Months Ended
June 30,
 
     2017      2016  

Net cash provided by operating activities

     $           74,152        $           74,359  

Net cash used in investing activities

     (158,576      (1,039,242

Net cash provided by financing activities

     86,045        956,629  

Effect of exchange rate changes on cash and equivalents

     48        (871
  

 

 

    

 

 

 

Net increase (decrease) in cash and cash equivalents

     $ 1,669        $ (9,125
  

 

 

    

 

 

 

Operating Activities

Our net cash provided by operating activities was $74.2 million in 2017, compared to $74.4 million provided by operating activities in 2016. Cash from operations decreased $0.2 million due to an increase in net income after adjustments for non-cash items of $28.1 million and a increase in working capital that provided an incremental cash usage of $28.3 million.

Investing Activities

Net cash used in investing activities was $158.6 million in 2017, compared to $1.04 billion in 2016. During 2017, we spent $128.5 million on acquisitions compared to $1.02 billion in 2016. This decrease was partially offset by a $10.3 million increase in capital expenditures, which were $31.9 million in 2017 as compared to $21.6 million in 2016.

Financing Activities

Net cash provided by financing activities was $86.0 million in 2017, compared to $956.6 million in 2016. The net decrease of $870.6 million was primarily due to the new financing agreements that we entered into as a result of the RSG acquisition in 2016, offset by repayments and payment of deferred financing costs. In addition, proceeds from the issuance of common stock decreased by $10.2 million to $10.0 million in 2017, as compared to $20.2 million in 2016. This decrease is due to the additional stock option exercise activity that occurred in 2016 in relation to the RSG acquisition.

Capital Resources

We currently have access to the following financing arrangements:

 

    an asset-based revolving line of credit in the United States;

 

    an asset-based revolving line of credit in Canada;

 

    a term loan; and

 

    senior notes

In connection with the RSG acquisition on October 1, 2015, we entered into various financing arrangements totaling $1.45 billion. These arrangements allowed us to refinance our existing debt and substantially pay off all the RSG debt at closing. Prior to the RSG acquisition, we had a credit facility with a syndicate of commercial banks that included a revolver and a long term note. As of the date of the RSG acquisition, approximately $185.6 million was outstanding on the long-term note payable and approximately $11.2 million was outstanding under the revolver.

We entered into a “Senior Secured Credit Facility”, comprised of an asset-based revolving line of credit (“ABL”) of $700.0 million ($350.0 million of which was drawn at closing) and a new $450.0 million term loan (“Term Loan”). We also raised an additional $300.0 million through the issuance of senior notes (the “Senior Notes”).

Asset-based Line of Credit (“ABL”)

On October 1, 2015, we entered into a $700.0 million ABL with Wells Fargo Bank, N.A. and a syndicate of other lenders. This ABL consists of revolving loans in both the United States (“U.S. Revolver”) in the amount of $670.0 million and Canada (“Canada Revolver”) in the amount of $30.0 million. The ABL has a maturity date of October 1, 2020.

 

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The U.S. Revolver has various tranches of borrowings, bearing interest at rates ranging from 2.59% to 4.75%. The effective rate of these borrowings is 3.28% and is paid monthly. As of June 30, 2017, the outstanding balance on the U.S. Revolver and Canada Revolvers, net of debt issuance fees, was $449.6 million. The U.S. Revolver also has outstanding standby letters of credit in the amount of $10.9 million as of June 30, 2017. Current unused commitment fees on the revolving credit facilities are 0.25% per annum.

There is one financial covenant under the ABL, which is a Consolidated Fixed Charge Ratio. The Consolidated Fixed Charge Ratio is calculated by dividing consolidated earnings before interest, taxes, depreciation and amortization (EBITDA) by Consolidated Fixed Charges (as defined in the agreement). Per the covenant, the Consolidated Fixed Charge Ratio must be a minimum of 1.00 at the end of each fiscal quarter, calculated on a trailing four quarter basis. The covenant is only applicable when the borrowing availability is less than 10% of the maximum loan cap or $60.0 million.

The ABL is guaranteed jointly and severally and fully and unconditionally by our active United States subsidiary.

Term Loan

On October 1, 2015, we entered into a $450.0 million Term Loan with Citibank N.A., and a syndicate of other lenders. The Term Loan requires quarterly principal payments in the amount of $1.1 million, with the remaining outstanding principal to be paid on its maturity date of October 1, 2022. The interest rate paid is based on a LIBOR rate (with a floor) plus a fixed spread. We have 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.

On September 16, 2016, we refinanced our Term Loan and lowered the LIBOR floor by 25 basis points and lowered the spread by 25 basis points. As a result of the refinancing we wrote off $1.6 million of debt issuance costs in interest expense. As of June 30, 2017 the outstanding balance on the Term Loan, net of debt issuance fees, was $434.2 million.

The Term Loan is guaranteed jointly and severally and fully and unconditionally by our active United States subsidiary.

Senior Notes

We also raised $300.0 million in Senior Notes, which mature on October 1, 2023. These notes bear interest at the rate of 6.38% per year, payable semi-annually in arrears on April 1 and October 1 of each year, beginning April 1, 2016. There are early payment provisions in the Senior Note indenture in which we would be subject to “make whole” provisions. Management anticipates repaying the notes at the maturity date of October 1, 2023. As of June 30, 2017 the outstanding balance on the Senior Notes, net of debt issuance fees, was $292.0 million.

The Senior Notes are guaranteed jointly and severally and fully and unconditionally by our active United States subsidiary.

Equipment Financing Facilities and Other

As of June 30, 2017, we had $16.7 million outstanding under equipment financing facilities, with fixed interest rates ranging from 2.33% to 3.25% and payments due through September 2021.

As of June 30, 2017, we had $21.0 million of capital lease obligations outstanding. These leases have interest rates ranging from 2.72% to 10.39% with payments due through November 2021.

 

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Cautionary Statement for Purposes of the “Safe Harbor” Provisions of the Private Securities Litigation Reform Act of 1995

Our disclosure and analysis in this report contains forward-looking information that involves risks and uncertainties. Our forward-looking statements express our current expectations or forecasts of possible future results or events, including projections of future performance, statements of management’s plans and objectives, future contracts, and forecasts of trends and other matters. You can identify these statements by the fact that they do not relate strictly to historic or current facts and often use words such as “anticipate,” “estimate,” “expect,” “believe,” “will likely result,” “outlook,” “project” and other words and expressions of similar meaning. No assurance can be given that the results in any forward-looking statements will be achieved and actual results could be affected by one or more factors, which could cause them to differ materially. For these statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act.

Certain factors that may affect our business and could cause actual results to differ materially from those expressed in any forward-looking statements include those set forth under the heading “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended September 30, 2016.

 

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Item 3. Quantitative and Qualitative Disclosures about Market Risk

The Company’s market risk disclosures set forth in Part II, Item 7A, “Quantitative and Qualitative Disclosures About Market Risk” of its 2016 Annual Report on Form 10-K have not changed materially during the nine month period ended June 30, 2017.

 

Item 4. Controls and Procedures

As of June 30, 2017, management, including the CEO and CFO, performed an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934 (the “Act”)). Based on that evaluation, management, including the CEO and CFO, concluded that as of June 30, 2017, our disclosure controls and procedures were effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Act is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms, and to ensure that information required to be disclosed by us in the reports that we file or submit under the Act is accumulated and communicated to our management, including our CEO and CFO, as appropriate to allow timely decisions regarding required disclosure. We maintain a system of internal control over financial reporting that is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States. Based on the most recent evaluation, we have concluded that no significant change in our internal control over financial reporting occurred during the last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

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Part II. OTHER INFORMATION

 

Item 6. Exhibits

 

         

Incorporated by Reference

 

Exhibit

Number

  

Description

  

Form

  

File No.

   Exhibit      Filing Date  
31.1*    Certification of Chief Executive Officer Pursuant to Rule 13a-14(a)            
31.2*    Certification of Chief Financial Officer Pursuant to Rule 13a-14(a)            
32.1*    Certification pursuant to 18 U.S.C. Section 1350            
 101*    101.INS XBRL Instance            
  

101.SCH XBRL Taxonomy Extension Schema

           
  

101.CAL XBRL Taxonomy Extension Calculation

           
  

101.LAB XBRL Taxonomy Extension Labels

           
  

101.PRE XBRL Taxonomy Extension Presentation

           
  

101.DEF XBRL Taxonomy Extension Definition

           

 

+ Management contract or compensatory plan/arrangement
* Filed herewith

Pursuant to Rule 405 of Regulation S-T, the following interactive data files formatted in Extensible Business Reporting Language (XBRL) are attached as Exhibit 101 to this Quarterly Report on Form 10-Q: (i) the Consolidated Balance Sheets as of June 30, 2017; September 30, 2016; and June 30, 2016, (ii) the Consolidated Statements of Operations for the three and nine months ended June 30, 2017 and June 30, 2016, (iii) the Consolidated Statements of Comprehensive Income for the three and nine months ended June 30, 2017 and June 30, 2016, (iv) the Consolidated Statements of Cash Flows for the nine months ended June 30, 2017 and June 30, 2016, and (v) the Notes to Condensed Consolidated Financial Statements.

 

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SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

  BEACON ROOFING SUPPLY, INC.
Date: August 3, 2017   BY:  

/s/ JOSEPH M. NOWICKI

    Joseph M. Nowicki
    Executive Vice President & Chief Financial Officer

 

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