☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 2023
OR
☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from _________ to __________
Commission File Number 000-50924
BEACON ROOFING SUPPLY, INC.
(Exact name of registrant as specified in its charter)
Delaware
36-4173371
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
505 Huntmar Park Drive, Suite 300, Herndon, VA20170
(Address of principal executive offices) (Zip code)
(571) 323-3939
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol
Name of each exchange on which registered
Common Stock, $0.01 par value
BECN
NASDAQ Global Select Market
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 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 every Interactive Data File required to be submitted 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 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
☐
Emerging growth company
☐
Non-accelerated filer
☐
Smaller reporting company
☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of April 30, 2023, 63,748,358 shares of common stock, par value $0.01 per share, of the registrant were outstanding.
(Unaudited; in millions, except per share amounts)
March 31,
December 31,
March 31,
2023
2022
2022
Assets
Current assets:
Cash and cash equivalents
$
74.2
$
67.7
$
52.4
Accounts receivable, less allowance of $17.6, $17.2 and $15.5 as of March 31, 2023, December 31, 2022 and March 31, 2022, respectively
1,003.7
1,009.1
1,008.5
Inventories, net
1,292.8
1,322.9
1,462.1
Prepaid expenses and other current assets
345.7
417.8
388.4
Total current assets
2,716.4
2,817.5
2,911.4
Property and equipment, net
350.8
337.0
281.9
Goodwill
1,921.1
1,916.3
1,776.7
Intangibles, net
437.2
447.7
399.6
Operating lease right-of-use assets, net
460.0
467.6
419.7
Deferred income taxes, net
9.5
9.9
58.5
Other assets, net
8.1
7.5
1.1
Total assets
$
5,903.1
$
6,003.5
$
5,848.9
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable
$
879.9
$
821.0
$
1,052.2
Accrued expenses
306.4
448.0
410.8
Current portion of operating lease liabilities
95.8
94.5
89.6
Current portion of finance lease liabilities
18.0
16.1
9.6
Current portion of long-term debt/obligations
10.0
10.0
10.0
Total current liabilities
1,310.1
1,389.6
1,572.2
Borrowings under revolving lines of credit, net
234.8
254.9
145.6
Long-term debt, net
1,604.8
1,606.4
1,611.2
Deferred income taxes, net
0.3
0.2
0.9
Operating lease liabilities
374.6
382.1
333.3
Finance lease liabilities
72.7
67.0
40.7
Total liabilities
3,597.3
3,700.2
3,703.9
Commitments and contingencies (Note 13)
Convertible Preferred Stock (voting); $0.01 par value; aggregate liquidation preference $400.0; 0.4 shares authorized, issued and outstanding as of March 31, 2023, December 31, 2022 and March 31, 2022 (Note 5)
399.2
399.2
399.2
Stockholders’ equity:
Common stock (voting); $0.01 par value; 100.0 shares authorized; 64.0, 64.2 and 68.7 shares issued and outstanding as of March 31, 2023, December 31, 2022 and March 31, 2022, respectively
0.6
0.6
0.7
Undesignated preferred stock; 5.0 shares authorized, none issued or outstanding
—
—
—
Additional paid-in capital
1,197.2
1,187.2
1,135.9
Retained earnings
724.5
728.8
619.3
Accumulated other comprehensive income (loss)
(15.7)
(12.5)
(10.1)
Total stockholders’ equity
1,906.6
1,904.1
1,745.8
Total liabilities and stockholders’ equity
$
5,903.1
$
6,003.5
$
5,848.9
See accompanying Notes to Condensed Consolidated Financial Statements
3
BEACON ROOFING SUPPLY, INC.
Condensed Consolidated Statements of Operations
(Unaudited; in millions, except per share amounts)
Three Months Ended March 31,
2023
2022
Net sales
$
1,732.3
$
1,686.9
Cost of products sold
1,290.4
1,247.4
Gross profit
441.9
439.5
Operating expense:
Selling, general and administrative
338.3
309.3
Depreciation
20.7
17.5
Amortization
22.3
21.4
Total operating expense
381.3
348.2
Income (loss) from operations
60.6
91.3
Interest expense, financing costs and other, net
27.8
16.6
Income (loss) before provision for income taxes
32.8
74.7
Provision for (benefit from) income taxes
8.0
18.9
Net income (loss)
$
24.8
$
55.8
Reconciliation of net income (loss) to net income (loss) attributable to common stockholders:
Net income (loss)
$
24.8
$
55.8
Dividends on Preferred Stock
(6.0)
(6.0)
Undistributed income allocated to participating securities
(2.5)
(6.1)
Net income (loss) attributable to common stockholders
$
16.3
$
43.7
Weighted-average common stock outstanding:
Basic
64.3
70.1
Diluted
65.6
71.3
Net income (loss) per share:
Basic
$
0.25
$
0.62
Diluted
$
0.25
$
0.61
See accompanying Notes to Condensed Consolidated Financial Statements
4
BEACON ROOFING SUPPLY, INC.
Condensed Consolidated Statements of Comprehensive Income
(Unaudited; in millions)
Three Months Ended March 31,
2023
2022
Net income (loss)
$
24.8
$
55.8
Other comprehensive income (loss):
Foreign currency translation adjustment
(0.2)
1.5
Unrealized gain (loss) due to change in fair value of derivative financial instruments, net of tax
(2.8)
7.8
Derivative financial instruments reclassified to earnings, net of tax
(0.2)
—
Total other comprehensive income (loss)
(3.2)
9.3
Comprehensive income (loss)
$
21.6
$
65.1
See accompanying Notes to Condensed Consolidated Financial Statements
5
BEACON ROOFING SUPPLY, INC.
Condensed Consolidated Statements of Stockholders’ Equity
(Unaudited; in millions)
Common Stock
Retained
Shares
Amount
APIC1
Earnings
AOCI2
Total
Three Months Ended March 31, 2023
Balance as of December 31, 2022
64.2
$
0.6
$
1,187.2
$
728.8
$
(12.5)
$
1,904.1
Repurchase and retirement of common stock, net3
(0.4)
—
—
(23.1)
—
(23.1)
Issuance of common stock, net of shares withheld for taxes
0.2
—
4.0
—
—
4.0
Stock-based compensation
—
—
6.0
—
—
6.0
Other comprehensive income (loss)
—
—
—
—
(3.2)
(3.2)
Net income (loss)
—
—
—
24.8
—
24.8
Dividends on Preferred Stock
—
—
—
(6.0)
—
(6.0)
Balance as of March 31, 2023
64.0
$
0.6
$
1,197.2
$
724.5
$
(15.7)
$
1,906.6
Three Months Ended March 31, 2022
Balance as of December 31, 2021
70.4
$
0.7
$
1,148.6
$
682.5
$
(19.4)
$
1,812.4
Repurchase and retirement of common stock, net3
(1.9)
—
—
(113.0)
—
(113.0)
Equity forward contract
—
—
(25.0)
—
—
(25.0)
Issuance of common stock, net of shares withheld for taxes
0.2
—
7.2
—
—
7.2
Stock-based compensation
—
—
5.1
—
—
5.1
Other comprehensive income (loss)
—
—
—
—
9.3
9.3
Net income (loss)
—
—
—
55.8
—
55.8
Dividends on Preferred Stock
—
—
—
(6.0)
—
(6.0)
Balance as of March 31, 2022
68.7
$
0.7
$
1,135.9
$
619.3
$
(10.1)
$
1,745.8
1.Additional Paid-in Capital (“APIC”).
2.Accumulated Other Comprehensive Income (Loss) (“AOCI”).
3.See Note 7 for additional information.
See accompanying Notes to Condensed Consolidated Financial Statements
6
BEACON ROOFING SUPPLY, INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited; in millions)
Three Months Ended March 31,
2023
2022
Operating Activities
Net income (loss)
$
24.8
$
55.8
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization
43.0
38.9
Stock-based compensation
6.0
5.1
Certain interest expense and other financing costs
1.1
1.3
Gain on sale of fixed assets and other
(4.2)
(1.2)
Deferred income taxes
1.1
1.4
Changes in operating assets and liabilities:
Accounts receivable
8.6
(153.0)
Inventories
40.0
(299.9)
Prepaid expenses and other current assets
68.7
(19.6)
Accounts payable and accrued expenses
(88.8)
202.1
Other assets and liabilities
0.9
7.1
Net cash provided by (used in) operating activities
101.2
(162.0)
Investing Activities
Purchases of property and equipment
(22.2)
(22.8)
Acquisition of business, net
(27.4)
(0.4)
Proceeds from sale of assets
5.1
1.2
Net cash provided by (used in) investing activities
(44.5)
(22.0)
Financing Activities
Borrowings under revolving lines of credit
442.0
296.0
Payments under revolving lines of credit
(462.5)
(143.5)
Payments under term loan
(2.5)
(2.5)
Payments under equipment financing facilities and finance leases
(4.3)
(2.2)
Repurchase and retirement of common stock, net
(20.9)
(113.0)
Advance payment for equity forward contract
—
(25.0)
Payment of dividends on Preferred Stock
(6.0)
(6.0)
Proceeds from issuance of common stock related to equity awards
4.8
7.3
Payment of taxes related to net share settlement of equity awards
(0.8)
(0.1)
Net cash provided by (used in) financing activities
(50.2)
11.0
Effect of exchange rate changes on cash and cash equivalents
—
(0.4)
Net increase (decrease) in cash and cash equivalents
6.5
(173.4)
Cash and cash equivalents, beginning of period
67.7
225.8
Cash and cash equivalents, end of period
$
74.2
$
52.4
Supplemental Cash Flow Information
Cash paid during the period for:
Interest
$
20.8
$
8.2
Income taxes, net of refunds
$
5.9
$
2.4
Supplemental Disclosure of Non-Cash Activities
Amounts accrued for repurchases of common stock
$
2.2
$
—
See accompanying Notes to Condensed Consolidated Financial Statements
7
BEACON ROOFING SUPPLY, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited; in millions, except per share amounts or otherwise indicated)
1. Company Overview
Beacon Roofing Supply, Inc. (“Beacon” or the “Company”) was incorporated in the state of Delaware on August 22, 1997 and is the largest publicly traded distributor of roofing materials and complementary building products, such as siding and waterproofing, in North America.
The Company operates its business primarily under the trade name “Beacon Building Products” and services customers in all 50 states throughout the U.S. and six provinces in Canada. The Company’s material subsidiaries are Beacon Sales Acquisition, Inc., Beacon Roofing Supply Canada Company, and SCE Waterproofing Holdings, Inc.
2. Summary of Significant Accounting Policies
Basis of Presentation
The Company prepared the condensed consolidated financial statements in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and the requirements of the Securities and Exchange Commission (“SEC”). As permitted under those rules, certain footnotes or other financial information have been condensed or omitted. Certain prior period amounts have been reclassified to conform to current period presentation.
The balance sheet as of March 31, 2022 has been presented for a better understanding of the impact of seasonal fluctuations on the Company’s financial condition. The three-month periods ended March 31, 2023 and 2022 had 64 and 63 business days, respectively.
In management’s opinion, the condensed consolidated 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 months ended March 31, 2023 are not necessarily indicative of the results to be expected for the twelve months ending December 31, 2023.
These unaudited condensed consolidated financial statements should be read in conjunction with the audited Consolidated Financial Statements and Notes thereto contained in the Company’s most recent Annual Report on Form 10-K for the fiscal year ended December 31, 2022.
Recent Accounting Pronouncements— Adopted
In October 2021, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) 2021-08, “Business Combinations – Accounting for Contract Assets and Contract Liabilities from Contracts with Customers.” The guidance is intended to improve the accounting for acquired revenue contracts with customers in a business combination by addressing diversity in practice. The guidance requires an acquirer to recognize and measure contract assets and liabilities acquired in a business combination in accordance with Topic 606 as if it had originated the contracts, as opposed to at fair value on the acquisition date. The standard became effective for the Company on January 1, 2023 and was applied prospectively to acquisitions occurring after the adoption date. The adoption of this new guidance did not have a material impact on the Company’s financial statements and related disclosures.
In March 2020, the FASB issued ASU 2020-04, “Reference Rate Reform (Topic 848), Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” The guidance provides optional practical expedients to ease the potential burden in accounting for contract modifications and hedge accounting related to reference rate reform. The provisions apply only to those transactions that reference LIBOR or another reference rate expected to be discontinued due to reference rate reform. Specifically, entities can elect to not apply certain modification accounting requirements to contracts affected by reference rate reform if certain criteria are met. Also, entities can elect various optional expedients that would allow it to continue to apply hedge accounting for hedging relationships affected by reference rate reform if certain criteria are met. Adoption of the provisions of ASU 2020-04 are optional and expedients may be elected over time. Further, in December 2022, the FASB issued ASU 2022-06, “Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848,” extending the sunset date under Topic 848 from December 31, 2022 to December 31, 2024 to align the temporary accounting relief guidance with the expected LIBOR cessation date of June 30, 2023. During the three months ended March 31, 2023, the Company adopted the optional relief guidance provided under ASU 2020-04 after entering into a new interest rate swap agreement with a reference rate indexed to SOFR, thereby creating a temporary mismatch in the referenced interest rate index of our interest rate swap and the hedged variable rate interest payments pursuant to the Company’s Term Loan. See Note 17 for further details of the transaction. The optional expedient did not have a material impact on the Company’s financial statements and related disclosures. The Company may take advantage of other optional relief guidance offered under ASU 2020-04 in the future and will evaluate and disclose the impact of this guidance in the period of election, as well as the nature and reason for doing so.
8
Recent Accounting Pronouncements—Not Yet Adopted
There were no recent accounting pronouncements not yet adopted through March 31, 2023 that are applicable to the Company except as discussed in ASU 2020-04 above.
3. Acquisitions
The following table presents the Company’s acquisitions between January 1, 2022 and March 31, 2023. The Company acquired 100% of the interests in each case. The Company has not provided pro forma results of operations for the transactions below, as the transactions individually and in the aggregate for the respective year are not material to the Company. The results of operations for these transactions are included in the Company’s condensed consolidated statements of operations from the date of the acquisition (dollars in millions):
Date Acquired
Company Name
Region
Branches
Goodwill Recognized1
Intangible Assets Acquired1
March 31, 2023
Al's Roofing Supply, Inc.
California
4
$
3.0
$
7.1
March 31, 2023
Prince Building Systems, LLC
Wisconsin
1
$
1.0
$
2.7
January 4, 2023
First Coastal Exteriors, LLC
Alabama and Mississippi
2
$
0.8
$
1.9
December 30, 2022
Whitney Building Products
Massachusetts
1
$
1.7
$
2.8
November 1, 2022
Coastal Construction Products
Florida, Illinois, Alabama, Georgia, Arkansas, Tennessee, North Carolina
18
$
131.3
$
102.8
June 1, 2022
Complete Supply, Inc.
Illinois
1
$
8.6
$
4.6
April 29, 2022
Wichita Falls Builders Wholesale, Inc.
Texas
1
$
0.4
$
0.5
January 1, 2022
Crabtree Siding and Supply
Tennessee
1
$
0.1
$
0.1
1.For Al’s Roofing Supply, Inc., Prince Building Systems, LLC, First Coastal Exteriors, LLC, Whitney Building Products and Coastal Construction Products, the measurement period is still open and amounts are based on provisional estimates of the fair value of assets acquired and liabilities assumed as of March 31, 2023.
Prior to the acquisitions, the acquired companies listed above produced aggregate annual sales of approximately $344 million. The total transaction costs incurred by the Company for these acquisitions were $1.6 million for the three months ended March 31, 2023. Of the $146.9 million of goodwill recognized for these acquisitions, $72.4 million is deductible for tax purposes.
4. Net Sales
The following table presents the Company’s net sales by line of business and geography (in millions):
U.S.
Canada
Total
Three Months Ended March 31, 2023
Residential roofing products
$
843.6
$
6.2
$
849.8
Non-residential roofing products
425.8
23.8
449.6
Complementary building products
431.6
1.3
432.9
Total net sales
$
1,701.0
$
31.3
$
1,732.3
Three Months Ended March 31, 2022
Residential roofing products
$
835.8
$
10.6
$
846.4
Non-residential roofing products
457.4
30.3
487.7
Complementary building products
350.9
1.9
352.8
Total net sales
$
1,644.1
$
42.8
$
1,686.9
5. Net Income (Loss) Per Share
Basic net income (loss) per share is calculated by dividing net income (loss) attributable to common stockholders by the weighted-average number of common shares outstanding during the period, without consideration for common share equivalents or the conversion of Preferred Stock (as defined below). Common share equivalents consist of the incremental common shares issuable upon the exercise of stock options and vesting of restricted stock unit awards. Diluted net income (loss) per common share is calculated by
9
dividing net income (loss) attributable to common stockholders by the fully diluted weighted-average number of common shares outstanding during the period.
In connection with the acquisition of Allied Building Products Corp. on January 2, 2018, the Company completed the sale of 400,000 shares of Series A Cumulative Convertible Participating Preferred Stock, par value $0.01 per share (the “Preferred Stock”), with an aggregate liquidation preference of $400.0 million, at a purchase price of $1,000 per share, to CD&R Boulder Holdings, L.P. The Preferred Stock is convertible perpetual participating preferred stock of the Company, and conversion of the Preferred Stock into $0.01 par value shares of the Company’s common stock will be at a conversion price of $41.26 per share (or 9,694,619 shares of common stock). The Preferred Stock accumulates dividends at a rate of 6.0% per annum (payable quarterly in cash or in-kind, subject to certain conditions). The Preferred Stock is not mandatorily redeemable; therefore, it is classified as mezzanine equity in the Company’s condensed consolidated balance sheets. Holders of Preferred Stock participate in dividends on an as-converted basis when declared on common shares. As a result, Preferred Stock is classified as a participating security and thereby requires the allocation of income that would have otherwise been available to common stockholders when calculating net income (loss) per share.
Diluted net income (loss) per share is calculated by utilizing the most dilutive result of the if-converted and two-class methods. In both methods, net income (loss) attributable to common stockholders and the weighted-average common shares outstanding are adjusted to account for the impact of the assumed issuance of potential common shares that are dilutive, subject to dilution sequencing rules.
The following table presents the components and calculations of basic and diluted net income (loss) per share (in millions, except per share amounts; certain amounts may not recalculate due to rounding):
Three Months Ended March 31,
2023
2022
Numerator:
Net income (loss)
$
24.8
$
55.8
Dividends on Preferred Stock
(6.0)
(6.0)
Undistributed income allocated to participating securities
(2.5)
(6.1)
Net income (loss) attributable to common stockholders – Basic and Diluted
$
16.3
$
43.7
Denominator:
Weighted-average common shares outstanding – Basic
64.3
70.1
Effect of common share equivalents
1.3
1.2
Weighted-average common shares outstanding – Diluted
65.6
71.3
Net income (loss) per share:
Net income (loss) per share – Basic
$
0.25
$
0.62
Net income (loss) per share – Diluted
$
0.25
$
0.61
The following table includes the number of shares that may be dilutive common shares in the future. These shares were not included in the computation of diluted net income (loss) per share because the effect was either anti-dilutive or the requisite performance conditions were not met (in millions):
Three Months Ended March 31,
2023
2022
Stock options
0.2
0.1
Restricted stock units
0.1
—
Preferred Stock
9.7
9.7
Equity forward contract
—
0.4
6. Stock-based Compensation
On December 23, 2019, the Board of Directors of the Company (the “Board”) approved the Beacon Roofing Supply, Inc. Second Amended and Restated 2014 Stock Plan (the “2014 Plan”). On February 11, 2020, the stockholders of the Company approved an additional 4,850,000 shares to be reserved for issuance under the 2014 Plan. The 2014 Plan, which was originally approved by the
10
stockholders on February 12, 2014, provides for discretionary awards of stock options, stock awards, restricted stock units, and stock appreciation rights to selected employees and non-employee directors. The 2014 Plan mandates that all shares underlying lapsed, forfeited, expired, terminated, cancelled and withheld awards, including those from the predecessor plan, be returned to the 2014 Plan and made available for issuance. As of March 31, 2023, there were 2,960,266 shares of common stock available for issuance pursuant to the 2014 Plan. The 2014 Plan is the only plan maintained by the Company pursuant to which equity awards are granted.
All unvested employee equity awards contain a “double trigger” change in control mechanism to the extent such employee equity award is continued or assumed after a change in control. If an award is not continued or assumed by a public company in an equitable manner, such award shall become vested immediately prior to a change in control (in the case of a restricted stock unit award with performance conditions at the then-calculable payout percentage for any completed annual performance periods and at 100% for any annual performance periods not yet calculable, and in the case of a restricted stock unit award with market conditions at 100% of the award then earned but not then vested). If an award is so continued or assumed, vesting will continue in accordance with the terms of the award, unless there is a qualifying termination within one-year following the change in control, in which event the award shall immediately become vested (in the case of a restricted stock unit award with performance conditions at the then-calculable payout percentage for any completed annual performance periods and at 100% for any annual performance periods yet calculable, and in the case of a restricted stock unit award with market conditions at 100% of the award then earned but not then vested).
Stock Options
Non-qualified stock options generally expire 10 years after the grant date and, except under certain conditions, the options are subject to continued employment and vest in three annual installments over the three-year period following the grant date.
The fair values of the options granted for the periods presented were estimated on the dates of grants using the Black-Scholes option-pricing model with the following weighted-average assumptions:
Three Months Ended March 31,
2023
2022
Risk-free interest rate
4.26
%
1.92
%
Expected volatility
49.92
%
48.89
%
Expected life (in years)
5.12
5.14
Dividend yield
—
—
The following table summarizes all stock option activity for the three months ended March 31, 2023 (in millions, except per share amounts and time periods):
Options Outstanding
Weighted-Average Exercise Price
Weighted-Average Remaining Contractual Term (Years)
Aggregate Intrinsic Value1
Balance as of December 31, 2022
1.3
$
38.73
6.0
$
20.7
Granted
0.1
65.00
Exercised
(0.1)
36.94
Canceled/Forfeited
(0.0)
52.55
Balance as of March 31, 2023
1.3
$
41.03
6.2
$
24.6
Vested and expected to vest after March 31, 2023
1.3
$
40.67
6.2
$
24.6
Exercisable as of March 31, 2023
1.0
$
36.72
5.3
$
22.1
1.Aggregate intrinsic value represents the difference between the closing fair value of the underlying common stock and the exercise price of outstanding, in-the-money options on the date of measurement.
During the three months ended March 31, 2023 and 2022, the Company recorded stock-based compensation expense related to stock options of $0.9 million and $0.8 million, respectively. As of March 31, 2023, there was $7.0 million of total unrecognized
11
compensation cost related to unvested stock options, which is expected to be recognized over a weighted-average period of 2.2 years. The following table summarizes additional information on stock options (in millions, except per share amounts):
Three Months Ended March 31,
2023
2022
Weighted-average fair value per share of stock options granted
$
31.86
$
26.49
Total grant date fair value of stock options vested
$
1.8
$
0.1
Total intrinsic value of stock options exercised
$
3.3
$
4.2
Restricted Stock Units
Time-based restricted stock unit (“RSU”) awards granted to employees are subject to continued employment and generally vest on the third anniversary of the grant date. The Company also grants certain RSU awards to management that additionally may contain market or performance conditions. Market conditions are incorporated into the grant date fair value of the management awards with market conditions using a Monte Carlo valuation model. Compensation expense for management awards with market conditions is recognized over the service period and is not reversed if the market condition is not met. For awards with performance conditions, the actual number of awards that will vest can range from 0% to 200% of the original grant amount, depending upon actual Company performance below or above the established performance metric targets. At each reporting date, the Company estimates performance in relation to the defined targets when determining the projected number of management awards with performance conditions that are expected to vest and calculating the related stock-based compensation expense. Management awards with performance conditions are amortized over the service period if, and to the extent that, it is determined that achievement of the performance condition is probable. If awards with market, performance and/or service conditions are forfeited due to failure to achieve performance conditions or failure to satisfy service conditions, any previously recognized expense for such awards is reversed.
RSUs granted to non-employee directors are subject to continued service and vest on the first anniversary of the grant date (except under certain conditions). Generally, the common shares underlying the RSUs are not eligible for distribution until the non-employee director’s service on the Board has terminated, and for non-employee director RSU grants made prior to fiscal year 2014, the share distribution date is six months after the director’s termination of service on the Board. Any non-employee directors who have Beacon equity holdings (defined as common stock and outstanding vested equity awards) with a total fair value that is greater than or equal to five times the annual Board cash retainer may elect to have any future RSU grants settle simultaneously with vesting.
The following table summarizes all RSU activity for the three months ended March 31, 2023 (in millions, except grant date fair value amounts):
RSUs Outstanding
Weighted-Average Grant Date Fair Value
Balance as of December 31, 2022
1.2
$
45.60
Granted
0.4
$
65.00
Released
(0.1)
$
54.68
Canceled/Forfeited
(0.0)
$
54.67
Balance as of March 31, 2023
1.5
$
49.77
Vested and expected to vest after March 31, 20231
1.6
$
48.56
1.As of March 31, 2023, outstanding awards with performance conditions were expected to vest at greater than 100% of their original grant amount.
During the three months ended March 31, 2023 and 2022, the Company recorded stock-based compensation expense related to RSUs of $5.1 million and $4.3 million, respectively. As of March 31, 2023, there was $43.6 million of unrecognized compensation expense related to unvested RSUs (including unrecognized expense for RSUs with performance conditions at their estimated value as of March 31, 2023), which is expected to be recognized over a weighted-average period of 2.4 years.
12
The following table summarizes additional information regarding RSUs (in millions, except per share amounts):
Three Months Ended March 31,
2023
2022
Weighted-average fair value per share of RSUs granted
$
65.00
$
50.99
Total grant date fair value of RSUs vested
$
3.5
$
1.6
Total intrinsic value of RSUs released
$
3.7
$
0.8
7. Share Repurchase Program
On February 24, 2022, the Company announced a new share repurchase program (the “Repurchase Program”), pursuant to which the Company may purchase up to $500.0 million of its common stock. On February 23, 2023, the Company announced that its Board authorized and approved an increase of the Repurchase Program by approximately $387.9 million, permitting future share repurchases of $500.0 million after considering actual share repurchases as of such re-authorization date.
Share repurchases under the Repurchase Program may be made from time to time through various means, including open market purchases (including block trades), privately negotiated transactions, accelerated share repurchase transactions or through a series of forward purchase agreements, option contracts or similar agreements and contracts (including Rule 10b5-1 plans) adopted by the Company, in each case in accordance with the rules and regulations of the Securities and Exchange Commission, including, if applicable, Rule 10b-18 of the Securities Exchange Act of 1934, as amended. The timing, volume, and nature of share repurchases pursuant to the Repurchase Program are at the discretion of management and may be suspended or discontinued at any time. Shares repurchased under the Repurchase Program are retired immediately and are included in the category of authorized but unissued shares. Direct and incremental costs associated with the Repurchase Program are deferred and included as a component of the purchase price. The excess of the purchase price over the par value of the common shares is reflected in retained earnings.
The following table sets forth the Company’s share repurchases (in millions, except per share data):
Three Months Ended March 31,
2023
2022
Total number of shares repurchased
0.4
1.9
Amount repurchased1
$
23.1
$
137.9
Average price per share
$
58.21
$
59.06
1.Amount paid for the three months ended March 31, 2022 includes $25 million of ASR repurchase price that was evaluated as an unsettled equity forward contract indexed to the Company’s common stock and classified within stockholders’ equity as a reduction to additional paid in capital. The final settlement of the ASR occurred in June 2022 and resulted in the delivery of an additional 406,200 shares of the Company’s common stock.
Share repurchases for the three months ended March 31, 2023 were made on the open market through a Rule 10b5-1 repurchase plan. During the three months ended March 31, 2023, the Company incurred de minimis costs directly attributable to the Repurchase Program. Share repurchases for the three months ended March 31, 2022 were made through a combination of open market transactions as well as an ASR. During the three months ended March 31, 2022 the Company incurred costs directly attributable to the Repurchase Program of approximately $0.1 million.
As of March 31, 2023, the Company had approximately $476.9 million available for repurchases remaining under the Repurchase Program.
8. Prepaid Expenses and Other Current Assets
The following table summarizes the significant components of prepaid expenses and other current assets (in millions):
March 31,
December 31,
March 31,
2023
2022
2022
Vendor rebates
$
273.8
$
335.9
$
338.0
Other
71.9
81.9
50.4
Total prepaid expenses and other current assets
$
345.7
$
417.8
$
388.4
13
9. Goodwill and Intangible Assets
Goodwill
The following table sets forth the change in the carrying amount of goodwill during the three months ended March 31, 2023 (in millions):
Balance as of December 31, 2022
$
1,916.3
Acquisitions
4.8
Translation and other adjustments
—
Balance as of March 31, 2023
$
1,921.1
The changes in the carrying amount of goodwill for the three months ended March 31, 2023 were driven primarily by the Company’s recent acquisitions. See Note 3 for additional information.
Intangible Assets
The intangible asset lives range from 2 to 20 years. The following table summarizes intangible assets by category (in millions, except time periods):
March 31,
December 31,
March 31,
Weighted-Average Remaining
2023
2022
2022
Life1 (Years)
Amortizable intangible assets:
Customer relationships
$
1,209.9
$
1,198.1
$
1,092.4
15.8
Trademarks
4.5
4.5
1.0
1.5
Non-compete agreements
—
—
0.2
n/a
Total amortizable intangible assets
1,214.4
1,202.6
1,093.6
15.6
Accumulated amortization
(787.0)
(764.7)
(703.8)
Total amortizable intangible assets, net
427.4
437.9
389.8
Indefinite-lived trademarks
9.8
9.8
9.8
Total intangibles, net
$
437.2
$
447.7
$
399.6
1.As of March 31, 2023.
Amortization expense relating to the above-listed intangible assets for the three months ended March 31, 2023 and 2022 was $22.3 million and $21.4 million, respectively.
The following table summarizes the estimated future amortization expense for intangible assets (in millions):
Year Ending December 31,
2023 (Apr - Dec)
$
61.1
2024
69.3
2025
56.8
2026
48.2
2027
39.2
Thereafter
152.8
Total future amortization expense
$
427.4
14
10. Accrued Expenses
The following table summarizes the significant components of accrued expenses (in millions):
March 31,
December 31,
March 31,
2023
2022
2022
Inventory
$
108.8
$
106.9
$
198.0
Customer rebates
35.8
112.8
31.0
Payroll and employee benefit costs
47.6
118.6
65.3
Selling, general and administrative
101.7
96.0
72.8
Income taxes
1.3
7.8
31.9
Interest and other
11.2
5.9
11.8
Total accrued expenses
$
306.4
$
448.0
$
410.8
11. Financing Arrangements
The following table summarizes all outstanding debt (presented net of unamortized debt issuance costs) and other financing arrangements (in millions):
March 31,
December 31,
March 31,
2023
2022
2022
Revolving Lines of Credit
2026 ABL:
2026 U.S. Revolver1
$
234.8
$
254.9
$
145.6
2026 Canada Revolver
—
—
—
Borrowings under revolving lines of credit, net
$
234.8
$
254.9
$
145.6
Long-term Debt, net
Term Loan:
2028 Term Loan2
$
970.2
$
972.2
$
977.9
Current portion
(10.0)
(10.0)
(10.0)
Long-term borrowings under term loan
960.2
962.2
967.9
Senior Notes:
2026 Senior Notes3
297.6
297.4
296.9
2029 Senior Notes4
347.0
346.8
346.4
Long-term borrowings under senior notes
644.6
644.2
643.3
Long-term debt, net
$
1,604.8
$
1,606.4
$
1,611.2
1.Effective rate on borrowings of 5.75%, 5.45%, and 2.51% as of March 31, 2023, December 31, 2022 and March 31, 2022, respectively.
2.Interest rate of 6.88%, 6.32% and 2.46% as of March 31, 2023, December 31, 2022 and March 31, 2022, respectively.
3.Interest rate of 4.50% for all periods presented.
4.Interest rate of 4.125% for all periods presented.
2021 Debt Refinancing
In May 2021, the Company entered into various financing arrangements to refinance certain debt instruments to take advantage of lower market interest rates for the Company’s fixed rate indebtedness and to extend maturities (the “2021 Debt Refinancing”). The transactions included a new $350.0 million issuance of senior notes (the “2029 Senior Notes”). In addition, the Company entered into a second amended and restated credit agreement for its $1.30 billion asset-based revolving line of credit (the “2026 ABL”), and an amended and restated term loan credit agreement for a term loan of $1.00 billion (the “2028 Term Loan”), which together are defined as the “New Senior Secured Credit Facilities.”
On May 19, 2021, the Company used the net proceeds from the 2029 Senior Notes offering, together with cash on hand and borrowings under the New Senior Secured Credit Facilities, to redeem all $1.30 billion aggregate principal amount outstanding of the
15
Company’s 4.875% Senior Notes due 2025 at a redemption price of 102.438%, to refinance all outstanding borrowings under the Company’s previous term loan, and to pay all related accrued interest, fees and expenses.
The Company capitalized debt issuance costs totaling $29.0 million related to the 2029 Senior Notes, 2026 ABL and 2028 Term Loan, which are being amortized over the terms of the financing arrangements.
2029 Senior Notes
On May 10, 2021, the Company and certain subsidiaries of the Company as guarantors completed a private offering of $350.0 million aggregate principal amount of 4.125% senior unsecured notes due 2029 at an issue price of 100.000%. The 2029 Senior Notes mature on May 15, 2029 and bear interest at a rate of 4.125% per annum, payable on May 15 and November 15 of each year, which commenced on November 15, 2021. The 2029 Senior Notes are fully and unconditionally guaranteed, on a joint and several basis, by certain of the Company’s active United States subsidiaries.
The 2029 Senior Notes and related subsidiary guarantees were offered and sold in a private transaction exempt from the registration requirements of the Securities Act of 1933, as amended (the “Securities Act”), to qualified institutional buyers in accordance with Rule 144A under the Securities Act and to non-U.S. persons outside of the United States pursuant to Regulation S under the Securities Act. The 2029 Senior Notes and related subsidiary guarantees have not been, and will not be, registered under the Securities Act or the securities laws of any state or other jurisdiction, and may not be offered or sold in the United States absent registration or an applicable exemption from the registration requirements of the Securities Act and other applicable securities laws.
As of March 31, 2023, the outstanding balance on the 2029 Senior Notes, net of $3.0 million of unamortized debt issuance costs, was $347.0 million.
2026 ABL
On May 19, 2021, the Company entered into a $1.30 billion senior secured asset-based revolving credit facility with Wells Fargo Bank, N.A. and a syndicate of other lenders. The 2026 ABL provides for revolving loan commitments in both the United States in an amount up to $1.25 billion (“2026 U.S. Revolver”) and Canada in an amount up to $50.0 million (“2026 Canada Revolver”) (as such amounts may be reallocated pursuant to the terms of the 2026 ABL). The 2026 ABL has a maturity date of May 19, 2026. The 2026 ABL has various borrowing tranches with an interest rate based, at the Company’s option, on a base rate, plus an applicable margin, or a reserve adjusted LIBOR rate, plus an applicable margin. The applicable margin for borrowings is based on the Company’s quarterly average excess availability as determined by reference to a borrowing base and ranges from 0.25% to 0.75% per annum in the case of base rate borrowings and 1.25% to 1.75% per annum in the case of LIBOR borrowings. The 2026 ABL also includes procedures for the succession from LIBOR to SOFR. The unused commitment fees on the 2026 ABL are 0.20% per annum.
The 2026 ABL contains a springing financial covenant that requires a minimum 1.00 : 1.00 Fixed Charge Coverage Ratio (consolidated EBITDA less capital expenditures to fixed charges, each as defined in the 2026 ABL credit agreement) as of the end of each fiscal quarter (in each case, calculated on a trailing four fiscal quarter basis). The covenant would become operative if the Company failed to maintain a specified minimum amount of availability to borrow under the 2026 ABL, which was not applicable to the Company as of March 31, 2023.
In addition, the New Senior Secured Credit Facilities and the 2029 Senior Notes are subject to negative covenants that, among other things and subject to certain exceptions, limit the Company’s ability and the ability of its restricted subsidiaries to: (i) incur indebtedness (including guarantee obligations); (ii) incur liens; (iii) engage in mergers or other fundamental changes; (iv) dispose of certain property or assets; (v) make certain payments, dividends or other distributions; (vi) make certain acquisitions, investments, loans and advances; (vii) prepay certain indebtedness; (viii) change the nature of their business; (ix) engage in certain transactions with affiliates; (x) engage in sale-leaseback transactions; and (xi) enter into certain other restrictive agreements. The 2026 ABL is secured by a first priority lien over substantially all of the Company’s and each guarantor’s accounts and other receivables, chattel paper, deposit accounts (excluding any such account containing identifiable proceeds of Term Priority Collateral (as defined below)), inventory, and, to the extent related to the foregoing and other ABL Priority Collateral, general intangibles (excluding equity interests in any subsidiary of the Company and all intellectual property), instruments, investment property (but not equity interests in any subsidiary of the Company), commercial tort claims, letters of credit, supporting obligations and letter of credit rights, together with all books, records and documents related to, and all proceeds and products of, the foregoing, subject to certain customary exceptions (the “ABL Priority Collateral”), and a second priority lien over substantially all of the Company’s and each guarantor’s other assets, including all of the equity interests of any subsidiary held by the Company or any guarantor, subject to certain customary exceptions (the “Term Priority Collateral”). Beacon Sales Acquisition, Inc., a Delaware corporation and subsidiary of the Company, is a U.S. Borrower under the 2026 ABL and Beacon Roofing Supply Canada Company, an unlimited liability company organized under the laws of Nova Scotia and subsidiary of the Company, is a Canadian borrower under the 2026 ABL. The 2026 ABL is fully and unconditionally guaranteed, on a joint and several basis, by the Company’s active U.S. subsidiaries.
16
As of March 31, 2023, the outstanding balance on the 2026 ABL, net of $5.2 million of unamortized debt issuance costs, was $234.8 million. The Company also had outstanding standby letters of credit related to the 2026 U.S. Revolver in the amount of $15.7 million as of March 31, 2023.
2028 Term Loan
On May 19, 2021, the Company entered into a $1.00 billion senior secured term loan B facility with Citibank, N.A. and a syndicate of other lenders. The 2028 Term Loan requires quarterly principal payments in the amount of $2.5 million, with the remaining outstanding principal to be paid on its May 19, 2028 maturity date. The interest rate is based, at the Company’s option, on a base rate, plus an applicable margin, or a reserve adjusted LIBOR rate, plus an applicable margin. The applicable margin for the 2028 Term Loan ranges, depending on the Company’s consolidated total leverage ratio (consolidated total indebtedness to consolidated EBITDA, each as defined in the 2028 Term Loan credit agreement), from 1.25% to 1.50% per annum in the case of base rate borrowings and 2.25% to 2.50% per annum in the case of LIBOR borrowings. The 2028 Term Loan also includes procedures for the succession from LIBOR to SOFR.
The 2028 Term Loan is secured by a shared first-priority lien on the Term Priority Collateral and a shared second-priority lien on the ABL Priority Collateral. Certain excluded assets will not be included in the Term Priority Collateral and the ABL Priority Collateral. The 2028 Term Loan is fully and unconditionally guaranteed, on a joint and several basis, by certain of the Company’s active U.S. subsidiaries.
On March 16, 2023, the Company novated and amended its interest rate swap agreement related to the 2028 Term Loan. For additional information, see Note 17.
As of March 31, 2023, the outstanding balance on the 2028 Term Loan, net of $12.3 million of unamortized debt issuance costs, was $970.2 million.
Other Financing Arrangements
2026 Senior Notes
On October 9, 2019, the Company, and certain subsidiaries of the Company as guarantors, completed a private offering of $300.0 million aggregate principal amount of 4.50% Senior Secured Notes due 2026 (the “2026 Senior Notes”) at an issue price of 100.000%. The 2026 Senior Notes mature on November 15, 2026 and bear interest at a rate of 4.50% per annum, payable on May 15 and November 15 of each year, commencing on May 15, 2020. The 2026 Senior Notes and related subsidiary guarantees are secured by a shared first-priority lien on the Term Priority Collateral and a shared second-priority lien on the ABL Priority Collateral. Certain excluded assets will not be included in the Term Priority Collateral and the ABL Priority Collateral. The 2026 Senior Notes are fully and unconditionally guaranteed, on a joint and several basis, by certain of the Company’s active U.S. subsidiaries.
The 2026 Senior Notes and related subsidiary guarantees were offered and sold in a private transaction exempt from the registration requirements of the Securities Act, to qualified institutional buyers in accordance with Rule 144A under the Securities Act and to non-U.S. persons outside of the United States pursuant to Regulation S under the Securities Act. The 2026 Senior Notes and related subsidiary guarantees have not been, and will not be, registered under the Securities Act or the securities laws of any state or other jurisdiction, and may not be offered or sold in the United States absent registration or an applicable exemption from the registration requirements of the Securities Act and other applicable securities laws.
On October 28, 2019, the Company used the net proceeds from the offering, together with cash on hand and available borrowings under the Company’s previous asset-based revolving credit facility, to redeem all $300.0 million aggregate principal amount outstanding of the Company’s 6.375% Senior Notes due 2023.
The Company capitalized debt issuance costs of $4.7 million related to the 2026 Senior Notes, which are being amortized over the term of the financing arrangements.
As of March 31, 2023, the outstanding balance on the 2026 Senior Notes, net of $2.4 million of unamortized debt issuance costs, was $297.6 million.
17
12. Leases
The following table summarizes components of lease costs recognized in the condensed consolidated statements of operations (in millions):
Three Months Ended March 31,
2023
2022
Operating lease costs
$
30.0
$
27.5
Finance lease costs:
Amortization of right-of-use assets
4.6
2.7
Interest on lease obligations
1.1
0.4
Variable lease costs
2.9
2.2
Total lease costs
$
38.6
$
32.8
The following table presents supplemental cash flow information related to the Company’s leases (in millions):
Three Months Ended March 31,
2023
2022
Cash paid for amounts included in measurement of lease obligations:
Operating cash flows from operating leases
$
28.6
$
25.8
Operating cash flows from finance leases
$
1.1
$
0.4
Financing cash flows from finance leases
$
4.3
$
2.3
Right-of-use assets obtained in exchange for new finance lease liabilities
$
11.8
$
20.1
Right-of-use assets obtained in exchange for new operating lease liabilities
$
6.8
$
11.6
As of March 31, 2023, the Company’s operating leases had a weighted-average remaining lease term of 6.1 years and a weighted-average discount rate of 4.61%, and the Company’s finance leases had a weighted-average remaining lease term of 4.8 years and a weighted-average discount rate of 5.28%.
The following table summarizes future lease payments as of March 31, 2023 (in millions):
Year Ending December 31,
Operating Leases
Finance Leases
2023 (Apr - Dec)
$
86.9
$
16.7
2024
105.3
22.1
2025
86.3
21.9
2026
73.2
20.3
2027
57.2
15.3
Thereafter
133.1
6.5
Total future lease payments
542.0
102.8
Imputed interest
(71.6)
(12.1)
Total lease liabilities
$
470.4
$
90.7
13. Commitments and Contingencies
The Company is subject to loss contingencies pursuant to various federal, state and local environmental laws and regulations; however, the Company is not aware of any reasonably possible losses that would have a material impact on its results of operations, financial position, or liquidity. Potential environmental 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. 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 and governmental investigations from time to time in the ordinary course of business; however, the Company does not expect the results, if any, to have a material adverse impact on its results of operations, financial position or liquidity. The Company accrues a liability for legal claims when payments associated with the claims become probable and the costs
18
can be reasonably estimated. The Company also considers whether an insurance recovery receivable is applicable and appropriate based on the specific legal claim. The actual costs of resolving legal claims and governmental investigations may be substantially higher or lower than the amounts accrued for those activities.
In December 2018, a Company vehicle was involved in an accident that resulted in a fatality. The estate of the decedent and two bystanders filed a lawsuit in October 2019 in the Fourth Judicial District Court for Utah County, Provo Division, against the driver and the Company. Trial was held in late August 2022; the jury determined that the truck driver was not liable for the accident. The plaintiffs filed post-trial motions seeking a mistrial and new trial. In April 2023, the trial court ruled on the plaintiffs’ motions, reversing the jury’s verdict and ordering that the second phase of the trial proceed. Because the second phase of the trial has not yet occurred, there is not a probable loss with respect to this matter, and the Company has not accrued any amounts within its financial statements as of March 31, 2023, and any potential loss in regard to this matter is not reasonably estimable.
In August 2022 an employee of the Company was involved in a fatal worksite accident. The accident was investigated by California’s Division of Occupational Safety and Health and non-material fines were assessed and have been paid. The Company anticipates that any statutory benefits to be paid as a result of the accident to the decedent’s estate will be through workers’ compensation insurance, subject to the Company’s self-insured retention. There is not a probable or reasonably estimable loss beyond statutory workers’ compensation amounts with respect to this accident.
14. Accumulated Other Comprehensive Income (Loss)
Other comprehensive income (loss) is composed of certain gains and losses that are excluded from net income under GAAP and instead recorded as a separate element of stockholders’ equity. The following table summarizes the components of, and changes in, AOCI (in millions):
Foreign Currency Translation
Derivative Financial Instruments
AOCI
Balance as of December 31, 2022
$
(22.2)
$
9.7
$
(12.5)
Other comprehensive income before reclassifications
(0.2)
(2.8)
(3.0)
Reclassifications out of other comprehensive loss
—
(0.2)
(0.2)
Balance as of March 31, 2023
$
(22.4)
$
6.7
$
(15.7)
Gains (losses) on derivative instruments are reclassified in the condensed consolidated statements of operations in interest expense, financing costs and other, net in the period in which the hedged transaction affects earnings.
15. Geographic Data
The following table summarizes certain geographic information (in millions):
March 31,
December 31,
March 31,
2023
2022
2022
Long-lived assets:
U.S.
$
774.7
$
770.6
$
662.9
Canada
11.6
11.8
9.9
Total long-lived assets
$
786.3
$
782.4
$
672.8
16. Fair Value Measurement
As of March 31, 2023, the carrying amount of cash and cash equivalents, accounts receivable, prepaid and other current assets, accounts payable and accrued expenses approximated fair value because of the short-term nature of these instruments. The Company measures its cash equivalents at amortized cost, which approximates fair value based upon quoted market prices (Level 1).
As of March 31, 2023, based upon recent trading prices (Level 2), the fair value of the Company’s $300.0 million 2026 Senior Notes was $299.3 million, and the fair value of the $350.0 million 2029 Senior Notes was $324.6 million.
As of March 31, 2023, the fair value of the Company’s term loan and revolving lines of credit approximated the amount outstanding. The Company estimates the fair value of its term loan and revolving lines of credit by discounting the future cash flows of each instrument using estimated market rates of debt instruments with similar maturities and credit profiles (Level 3).
19
17. Financial Derivatives
The Company uses interest rate derivative instruments to manage the risk related to fluctuating cash flows from interest rate changes by converting a portion of its variable-rate borrowings into fixed-rate borrowings.
On September 11, 2019, the Company entered into two interest rate swap agreements to manage the interest rate risk associated with the variable rate on the Company’s previous term loan. Each swap agreement has a notional amount of $250.0 million. As part of the 2021 Debt Refinancing, Beacon refinanced its previous term loan, resulting in the issuance of the 2028 Term Loan; the two interest rate swaps were designed and executed such that they continue to hedge against a total notional amount of $500.0 million related to the refinanced 2028 Term Loan. One agreement (the “5-year swap”) was scheduled to expire on August 30, 2024 and swaps the thirty-day LIBOR with a fixed-rate of 1.49%. The second agreement (the “3-year swap”) expired on August 30, 2022 and swapped the thirty-day LIBOR with a fixed-rate of 1.50%. At the inception of the swap agreements, the Company determined that both swaps qualified for cash flow hedge accounting under ASC 815. Therefore, changes in the fair value of the swaps, net of taxes, were recognized in other comprehensive income each period, then reclassified into the condensed consolidated statements of operations as a component of interest expense, financing costs and other, net in the period in which the hedged transaction affects earnings.
On March 16, 2023, the Company novated its 5-year swap agreement to another counterparty and, in connection with such novation, amended the interest rate swap agreement. The amendment changed the index rate from LIBOR to SOFR, increased the total notional amount of the interest rate swap to $500.0 million, and extended the termination date to March 31, 2027 (the “2027 interest rate swap”). Specifically, the fixed rate of 1.49% indexed to LIBOR was modified to 3.00% indexed to SOFR. The Company used a strategy commonly referred to as “blend and extend” which allows the asset position of the novated 5-year swap agreement of approximately $9.9 million to be effectively blended into the new 2027 interest rate swap agreement. As a result of this transaction, on March 16, 2023 the 5-year swap agreement was de-designated and the unrealized gain of $9.9 million included within accumulated other comprehensive income was frozen and will be ratably reclassified as a reduction to interest expense, financing costs and other, net over the original term of the 5-year swap, or through August 30, 2024 as the hedged transactions affect earnings. Additionally, the 2027 interest rate swap had a fair value of $9.9 million at inception and will be ratably recorded to accumulated other comprehensive income and reclassified to interest expense, financing costs and other, net over the term of the 2027 interest rate swap, or through March 31, 2027 as the hedged transactions affect earnings. At the inception of the 2027 interest rate swap, the Company determined that the swap qualified for cash flow hedge accounting under ASC 815. Therefore, changes in the fair value of the swap, net of taxes, will be recognized in other comprehensive income each period, then reclassified into the condensed consolidated statements of operations as a component of interest expense, financing costs and other, net in the period in which the hedged transaction affects earnings. The 2027 interest rate swap is the only swap agreement outstanding as of March 31, 2023.
The effectiveness of the outstanding 2027 interest rate swap will be assessed qualitatively by the Company during the life of the hedge by (i) comparing the current terms of the hedge with the related hedged debt to assure they continue to coincide and (ii) through an evaluation of the ability of the counterparty to the hedge to honor its obligations under the hedge. The Company performed a qualitative analysis as of March 31, 2023 and concluded that the outstanding 2027 interest rate swap continues to meet the requirements under ASC 815 to qualify for cash flow hedge accounting. As of March 31, 2023, the fair value of the 2027 interest rate swap, net of tax, was $6.9 million in favor of the Company.
The Company reclassified a gain of $0.2 million out of accumulated other comprehensive income and to interest expense, financing costs and other, net during the three months ended March 31, 2023. Approximately $12.4 million of net gains included in accumulated other comprehensive income (loss) at March 31, 2023 is expected to be reclassified into earnings within the next 12 months as interest payments are made on the Company’s Term Loan and amortization of the frozen AOCI on the 5-year swap and inception date fair value of the 2027 interest rate swap occurs. The Company records any differences paid or received on its interest rate hedges to interest expense, financing costs and other, net within the condensed consolidated statements of operations.
The fair value of the interest rate swap is determined through the use of a pricing model, which utilizes verifiable inputs such as market interest rates that are observable at commonly quoted intervals (generally referred to as the “forward curve”) for the full terms of the hedge agreements. These values reflect a Level 2 measurement under the applicable fair value hierarchy. The following table summarizes the combined fair values, net of tax, of the interest rate derivative instrument (in millions):
Net Assets (Liabilities) as of
March 31,
December 31,
March 31,
Instrument
Fair Value Hierarchy
2023
2022
2022
Designated interest rate swaps1
Level 2
$
6.9
$
9.7
$
3.7
1.Assets are included in the condensed consolidated balance sheets in prepaid expenses and other current assets, while liabilities are included in accrued expenses.
20
The following table summarizes the amounts of gain (loss) on the change in fair value of the designated interest rate derivative instruments recognized in other comprehensive income (in millions):
Three Months Ended March 31,
Instrument
2023
2022
Designated interest rate swaps
$
(2.8)
$
7.8
21
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 our Consolidated Financial Statements and the notes thereto and Management’s Discussion and Analysis included in our 2022 Annual Report on Form 10-K and our Condensed Consolidated Financial Statements and the notes thereto included elsewhere in this report. Unless otherwise indicated, references to “2023” refer to the three months ended March 31, 2023 being discussed and references to “2022” refer to the three months ended March 31, 2022 being discussed.
Cautionary Statement Regarding Forward-Looking Information
Our disclosure and analysis in this report contains forward-looking information within the meaning of the Private Securities Litigation Reform Act of 1995, as amended, 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. 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.
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 December 31, 2022. We may not succeed in addressing these and other risks. Consequently, all forward-looking statements in this report are qualified by the factors, risks and uncertainties contained therein and readers are cautioned not to place undue reliance on forward-looking statements.
Overview
We are the largest publicly traded distributor of roofing materials and complementary building products, such as siding and waterproofing, in North America. We have served the building industry for over 90 years and as of March 31, 2023, we operated 490 branches throughout all 50 states in the U.S. and six provinces in Canada. We offer one of the most extensive ranges of high-quality professional grade exterior products comprising over 130,000 SKUs, and we serve nearly 100,000 residential and non-residential customers who trust us to help them save time, work more efficiently and enhance their businesses.
We are strategically focused on two core markets, residential and non-residential roofing, as well as complementary building products like siding and waterproofing that are often utilized by the roofing and other specialty contractors we serve. As a distributor, our national scale, networked model, and specialized capabilities are competitive advantages, providing strong value for both customers and suppliers. We intend to grow faster than the market by enhancing our customers’ experience, activating a complete go-to-market strategy, and expanding our footprint organically and through acquisitions while also driving margin-enhancing initiatives.
Our differentiated service model is designed to solve customer needs. The scale of our business provides branch coverage, technology enablement, and investment in our team that is the foundation of customer service excellence. In addition, service is further enhanced by our On Time and Complete network (Beacon OTC®), market-based sales teams, and national call center. We also provide the most complete digital commerce platform in roofing distribution, creating value for customers who are able to operate their businesses more effectively and efficiently.
Our history has been strongly influenced by significant acquisition-driven growth, highlighted by the acquisitions of Allied Building Products Corp. for $2.88 billion in 2018 and Roofing Supply Group, LLC for $1.17 billion in 2016. These strategic acquisitions expanded our geographic footprint, enhanced our market presence, and diversified our product offerings. The scale we have achieved from our expansion serves as a competitive advantage, allowing us to use our assets more efficiently, and manage our expenses to drive operating leverage.
We have since pursued and finalized numerous acquisitions in key markets to complement the expansion of our geographic footprint, including 29 total branches from eight acquisitions since January 1, 2022 (for additional information, see Note 3 in the Notes to Condensed Consolidated Financial Statements).
On February 24, 2022, we announced our Ambition 2025 Value Creation Framework (“Ambition 2025”) to drive growth, enhance customer service, and expand our footprint in key markets, which included new Ambition 2025 financial targets and the Repurchase Program (as defined and further detailed below), as well as strategic deployment of capital on acquisitions.
The Ambition 2025 strategies are central to achieving sales growth, improving operational performance, and increasing profitability. Most importantly, our customers benefit from these initiatives as they are designed to make us more efficient and easier to do business
22
with, differentiating our service from competitors. Our recent highlights in these pursuits are demonstrated by the following accomplishments in the first quarter:
•seven branches acquired;
•three new branch locations opened;
•digital sales 11.3% higher than the prior year period; and
•continued improvements in the results of our branches falling in the bottom quintile of our operating performance metrics.
COVID-19 Pandemic and Supply Chain Dynamics
We continue to monitor the ongoing impact of the COVID-19 pandemic, including the effects of recent notable variants of the virus. The health and safety of our employees, customers, and the communities in which we operate remain our top priority. Additional safety measures have been implemented in response to the COVID-19 pandemic. We had an essential business designation status throughout the pandemic in all the local markets that we serve. To date, our business experienced the largest adverse impact from COVID-19 in the third quarter of fiscal year 2020, mainly in areas with significant government construction restrictions that have since been eliminated. We have the financial strength and operational flexibility to respond to future COVID-19 pandemic restrictions, and have taken proactive steps to make a number of the cost management initiatives undertaken in response to the COVID-19 pandemic permanent.
The exterior products industry experienced constrained supply chain dynamics in 2021, which has continued in fiscal year 2022 and 2023. As a result, we experienced significant cost increases and, at times, a limited ability to purchase enough product to meet customer demand. We have continued to experience elevated backlog metrics, though they eased throughout the second half of 2022. Open orders, a measure of our backlog, ended the quarter lower than the prior quarter-end, though it remains higher than pre-pandemic levels. These trends, caused in large part from global disruptions related to the COVID-19 pandemic and the subsequent rapid economic recovery, may persist in the near-term. In addition to inflationary pressures caused by product shortages, we are also experiencing product cost inflation caused by increased input costs, including rising oil prices, which increases may have been impacted by the global economic and geopolitical environment, including the Russian invasion of Ukraine. We took proactive measures to ensure adequate inventory, price effectively, and deliver high-value solutions to our customers’ critical building material needs. As a leading distributor of essential building materials, we will continue to react quickly to market and supply chain developments and ensure high-quality service for our customers.
Comparison of the Three Months Ended March 31, 2023 and 2022
The following tables set forth condensed consolidated statements of operations data and such data as a percentage of total net sales for the periods presented (in millions):
Three Months Ended March 31,
2023
2022
Net sales
$
1,732.3
$
1,686.9
Cost of products sold
1,290.4
1,247.4
Gross profit
441.9
439.5
Operating expense:
Selling, general and administrative
338.3
309.3
Depreciation
20.7
17.5
Amortization
22.3
21.4
Total operating expense
381.3
348.2
Income (loss) from operations
60.6
91.3
Interest expense, financing costs and other, net
27.8
16.6
Income (loss) before provision for income taxes
32.8
74.7
Provision for (benefit from) income taxes
8.0
18.9
Net income (loss)
24.8
55.8
23
Three Months Ended March 31,
2023
2022
Net sales
100.0
%
100.0
%
Cost of products sold
74.5
%
73.9
%
Gross profit
25.5
%
26.1
%
Operating expense:
Selling, general and administrative
19.5
%
18.4
%
Depreciation
1.2
%
1.0
%
Amortization
1.3
%
1.3
%
Total operating expense
22.0
%
20.7
%
Income (loss) from operations
3.5
%
5.4
%
Interest expense, financing costs and other, net
1.6
%
1.0
%
Income (loss) before provision for income taxes
1.9
%
4.4
%
Provision for (benefit from) income taxes
0.5
%
1.1
%
Net income (loss)
1.4
%
3.3
%
When we refer to regions, we are referring to our geographic regions. When we refer to our net product costs, we are referring to our invoice cost less the impact of short-term buying and rebate programs.
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 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. As of March 31, 2023, we had a total of 490 branches in operation, 28 of which were acquired after the start of the first quarter of 2022.
Net Sales
Net sales increased 2.7% to $1.73 billion in 2023, up from $1.69 billion in 2022. The increase was primarily driven by higher prices and net sales from acquired branches, which contributed $75.8 million compared to the prior year period (primarily from the Coastal Construction Products acquisition, which is reported in the complementary building products line of business in the table below), as well as from newly opened branches, which contributed $19.4 million. Net sales were negatively impacted by an estimated organic volume decrease of approximately 11-12%, largely offset by a weighted-average selling price increase of approximately 9-10%. The decrease in organic volumes was driven primarily by weakness in new residential construction demand and the destocking of inventories by commercial customers.
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). To calculate approximate weighted average selling price and product cost changes, we review organic U.S. warehouse sales of the same items sold regionally period over period and normalize the data for non-representative outliers. To determine estimated volumes, we subtract the change in weighted average selling price, calculated as described above, from the total changes in net sales, excluding acquisitions and dispositions. As a result, and especially in high inflationary periods, the weighted average selling price and estimated volume changes may not be directly comparable to changes reported in prior periods.
The following table summarizes net sales by line of business for the periods presented (in millions):
Three Months Ended March 31,
Year-over-Year Change
2023
2022
Net Sales
%
Net Sales
%
$
%
Residential roofing products
$
849.8
49.0
%
$
846.4
50.2
%
$
3.4
0.4
%
Non-residential roofing products
449.6
26.0
%
487.7
28.9
%
(38.1)
(7.8)
%
Complementary building products
432.9
25.0
%
352.8
20.9
%
80.1
22.7
%
Total net sales
$
1,732.3
100.0
%
$
1,686.9
100.0
%
$
45.4
2.7
%
24
Gross Profit
The following table summarizes gross profit and gross margin for the periods presented (in millions):
Three Months Ended March 31,
Change1
2023
2022
$
%
Gross profit
$
441.9
$
439.5
$
2.4
0.5
%
Gross margin
25.5
%
26.1
%
N/A
(0.6)
%
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.
Gross margin was 25.5% in 2023, down 0.6 percentage points from 26.1% in 2022. The year-over-year decrease in gross margin resulted from a weighted-average product cost increase of approximately 10-11%, partially offset by a weighted-average selling price increase (calculated as described above) of approximately 9-10% and a lower non-residential product sales mix.
Operating Expense
The following table summarizes operating expense for the periods presented (in millions):
Three Months Ended March 31,
Change1
2023
2022
$
%
Selling, general and administrative
$
338.3
$
309.3
$
29.0
9.4
%
Depreciation
20.7
17.5
3.2
18.3
%
Amortization
22.3
21.4
0.9
4.2
%
Total operating expense
$
381.3
$
348.2
$
33.1
9.5
%
% of net sales
22.0
%
20.7
%
N/A
1.3
%
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 increased 9.5% to $381.3 million in 2023, from $348.2 million in 2022. The year-over-year increase in operating expense was mainly influenced by the following factors:
•a $12.9 million increase in payroll and employee benefit costs, primarily due to increased headcount to drive and support future growth, as well as wage inflation;
•a $7.2 million increase in warehouse operating costs, primarily due to higher rent expense; and
•a $6.4 million increase in general and administrative expenses, primarily due to an increase in travel and entertainment expenses and higher professional fees.
The increase in operating expense in 2023 includes the impact of acquired and newly opened branches, which contributed $20.8 million and $5.9 million, respectively. Excluding these impacts, operating expense increased by approximately 1.8%.
Interest Expense, Financing Costs and Other
Interest expense, financing costs and other, net was $27.8 million in 2023, compared to $16.6 million in 2022. The comparative increase is primarily due to a higher weighted-average interest rate on our outstanding debt.
Income Taxes
Income tax provision (benefit) was $8.0 million in 2023, compared to $18.9 million in 2022. The comparative decrease in income tax provision was primarily due to lower pre-tax income. The effective tax rate, excluding any discrete items, was 26.3% in 2023, compared to 25.9% in 2022. We expect our 2023 effective tax rate, excluding any discrete items that may arise during the tax year, will range from approximately 26.0% to 27.0%.
Net Income (Loss)/Net Income (Loss) Per Share
We calculate net income (loss) per share by dividing net income (loss), less dividends on preferred shares and adjustments for participating securities, by the weighted-average number of common shares outstanding during the period. Diluted net income (loss)
25
per share is calculated by utilizing the most dilutive result after applying and comparing the two-class method and if-converted method (see Note 5 in the Notes to Condensed Consolidated Financial Statements for further discussion).
The following table presents all the components utilized to calculate basic and diluted net income (loss) per share (in millions, except per share amounts; certain amounts may not recalculate due to rounding):
Three Months Ended March 31,
2023
2022
Numerator:
Net income (loss)
$
24.8
$
55.8
Dividends on Preferred Stock
(6.0)
(6.0)
Undistributed income allocated to participating securities
(2.5)
(6.1)
Net income (loss) attributable to common stockholders – Basic and Diluted
$
16.3
$
43.7
Denominator:
Weighted-average common shares outstanding – Basic
64.3
70.1
Effect of common share equivalents
1.3
1.2
Weighted-average common shares outstanding – Diluted
65.6
71.3
Net income (loss) per share:
Net income (loss) per share – Basic
$
0.25
$
0.62
Net income (loss) per share – Diluted
$
0.25
$
0.61
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 Operating Expense. We define Adjusted Operating Expense as operating expense, excluding the impact of the adjusting items (as described below).
•Adjusted Net Income (Loss). We define Adjusted Net Income (Loss) as net income (loss), excluding the impact of the adjusting items (as described below).
•Adjusted EBITDA. We define Adjusted EBITDA as net income (loss), excluding the impact of interest expense (net of interest income), income taxes, depreciation and amortization, stock-based compensation, and the adjusting items (as described below).
We use these supplemental non-GAAP measures to evaluate financial performance, analyze the underlying trends in our business and establish operational goals and forecasts that are used when allocating resources. We expect to compute our non-GAAP financial measures consistently using the same methods each period.
We believe these non-GAAP measures are useful measures because they permit investors to better understand changes over comparative periods by providing financial results that are unaffected by certain items that are not indicative of ongoing operating performance.
While we believe that these non-GAAP measures are useful to investors when evaluating our business, they are not prepared and presented in accordance with GAAP, and therefore should be considered supplemental in nature. These non-GAAP measures should not be considered in isolation or as a substitute for other financial performance measures presented in accordance with GAAP. These non-GAAP financial measures may have material limitations including, but not limited to, the exclusion of certain costs without a corresponding reduction of net income for the income generated by the assets to which the excluded costs relate. In addition, these non-GAAP financial measures may differ from similarly titled measures presented by other companies.
Adjusting Items to Non-GAAP Financial Measures
The impact of the following expense (income) items is excluded from each of our non-GAAP measures (the “adjusting items”):
•Acquisition costs. Represent certain direct and incremental costs related to acquisitions, including: amortization of intangible assets; professional fees, branch integration expenses, travel expenses, employee severance and retention costs, and other personnel expenses classified as selling, general and administrative; gains/losses related to changes in fair value of contingent
26
consideration or holdback liabilities; and amortization of debt issuance costs. Acquisition costs are impacted by the timing and size of the acquisitions. We exclude acquisition costs from our non-GAAP financial measures to provide a useful comparison of our operating results to prior periods and to our peer companies because such amounts vary significantly based on the magnitude of the acquisition and do not reflect our core operations.
•Restructuring costs. Represent costs stemming from headcount rationalization efforts and certain rebranding costs; impact of divestitures; costs related to changing our fiscal year end; amortization of debt issuance costs; debt refinancing and extinguishment costs; and abandoned lease costs. We exclude restructuring costs from our non-GAAP financial measures, as such items vary significantly based on the magnitude of the restructuring activity and also do not reflect expected future operating expenses. Additionally, these costs do not necessarily provide meaningful insight into the current or past core operations of our business.
•COVID-19 impacts. Represent costs directly related to the COVID-19 pandemic. Beginning January 1, 2023, the Company determined COVID-19 impacts should no longer be considered an adjusting item. This change will be applied prospectively.
The following table presents the impact of the adjusting items on our condensed consolidated statements of operations for each of the periods indicated (in millions):
Operating Expense
Non-Operating Expense
SG&A1
Amortization
Interest Expense
Income Taxes2
Total
Three Months Ended March 31, 2023
Acquisition costs
$
1.7
$
22.3
$
1.0
$
—
$
25.0
Restructuring costs
0.5
—
0.3
—
0.8
Total adjusting items
$
2.2
$
22.3
$
1.3
$
—
$
25.8
Three Months Ended March 31, 2022
Acquisition costs
$
0.5
$
21.4
$
1.0
$
—
$
22.9
Restructuring costs
1.7
—
0.3
—
2.0
COVID-19 impacts
1.4
—
—
—
1.4
Total adjusting items
$
3.6
$
21.4
$
1.3
$
—
$
26.3
1.Selling, general and administrative expense (“SG&A”).
2.For tax impact of adjusting items, see Adjusted Net Income (Loss) table below.
Adjusted Operating Expense
The following table presents a reconciliation of operating expense, the most directly comparable financial measure as measured in accordance with GAAP, to Adjusted Operating Expense for each of the periods indicated (in millions):
Three Months Ended March 31,
2023
2022
Operating expense
$
381.3
$
348.2
Acquisition costs
(24.0)
(21.9)
Restructuring costs
(0.5)
(1.7)
COVID-19 impacts1
—
(1.4)
Adjusted Operating Expense
$
356.8
$
323.2
Net sales
$
1,732.3
$
1,686.9
Operating expense as % of net sales
22.0
%
20.7
%
Adjusted Operating Expense as % of net sales
20.6
%
19.2
%
1.Beginning January 1, 2023, the Company determined COVID-19 impacts should no longer be considered an adjusting item. This change will be applied prospectively.
27
Adjusted Net Income (Loss)
The following table presents a reconciliation of net income (loss), the most directly comparable financial measure as measured in accordance with GAAP, to Adjusted Net Income (Loss) for each of the periods indicated (in millions):
Three Months Ended March 31,
2023
2022
Net income (loss)
$
24.8
$
55.8
Adjusting items:
Acquisition costs
25.0
22.9
Restructuring costs
0.8
2.0
COVID-19 impacts1
—
1.4
Total adjusting items
25.8
26.3
Less: tax impact of adjusting items2
(6.8)
(6.5)
Total adjustments, net of tax
19.0
19.8
Adjusted Net Income (Loss)
$
43.8
$
75.6
Net sales
$
1,732.3
$
1,686.9
Net income (loss) as % of sales
1.4
%
3.3
%
Adjusted Net Income (Loss) as % of sales
2.5
%
4.5
%
1.Beginning January 1, 2023, the Company determined COVID-19 impacts should no longer be considered an adjusting item. This change will be applied prospectively.
2.Amounts represent tax impact on adjustments that are not included in our income tax provision (benefit) for the periods presented. The tax impact of adjustments for the three months ended March 31, 2023 and 2022 were calculated using a blended effective tax rate of 26.4% and 24.7%, respectively.
Adjusted EBITDA
The following table presents a reconciliation of net income (loss), the most directly comparable financial measure as measured in accordance with GAAP, to Adjusted EBITDA for each of the periods indicated (in millions):
Three Months Ended March 31,
2023
2022
Net income (loss)
$
24.8
$
55.8
Interest expense, net
29.0
17.2
Income taxes
8.0
18.9
Depreciation and amortization
43.0
38.9
Stock-based compensation
6.0
5.1
Acquisition costs1
1.7
0.5
Restructuring costs1
0.5
1.7
COVID-19 impacts2
—
1.4
Adjusted EBITDA
$
113.0
$
139.5
Net sales
$
1,732.3
$
1,686.9
Net income (loss) as % of net sales
1.4
%
3.3
%
Adjusted EBITDA as % of net sales
6.5
%
8.3
%
1.Amounts represent adjusting items included in SG&A and other income (expense); remaining adjusting item balances are embedded within the other line item balances reported in this table.
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2.Beginning January 1, 2023, the Company determined COVID-19 impacts should no longer be considered an adjusting item. This change will be applied prospectively.
Seasonality and Quarterly Fluctuations
The demand for building materials is closely correlated to both seasonal changes and unpredictable weather patterns, therefore demand fluctuations are expected.
In general, our net sales and net income are highest in quarters ending June 30, September 30 and December 31, which represent the peak months of construction and re-roofing. Conversely, we have historically experienced low net income levels or net losses in quarters ending March 31, when winter construction cycles and cold weather patterns have an adverse impact on our customers’ ability to conduct their business.
Our balance sheet fluctuates throughout the year, driven by similar seasonal trends. We generally experience an increase in inventory and peak cash usage in the quarters ending March 31 and June 30, driven primarily by increased purchasing that is necessary to meet the rise in demand for our products during the warmer months. Accounts receivable, accounts payable, and cash collections are generally at their highest during the quarters ending June 30 and September 30, when sales are typically at their peak.
At times, we experience fluctuations in our financial performance that are driven by factors outside of our control, including the impact that severe weather events and unusual weather patterns may have on the timing and magnitude of demand and material availability.
In addition, the impacts of the COVID-19 pandemic and supply chain disruptions as well as inflation have caused, and may continue to cause, fluctuations in our financial results and working capital that are not aligned with the seasonality we generally experience.
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 available borrowings and the seasonal nature of our business.
Our principal sources of liquidity as of March 31, 2023 were our cash and cash equivalents of $74.2 million and our available borrowings of approximately $1.10 billion under our asset-based revolving lines of credit.
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;
•working capital management;
•acquisitions;
•share repurchases; and
•capital expenditures.
Our primary capital needs are for working capital obligations and other general corporate purposes, including acquisitions, capital expenditures, and share repurchases. Our primary sources of working capital are cash from operations and bank borrowings. We have financed larger acquisitions through increased bank borrowings and the issuance of long-term debt and common or preferred stock. We then repay any such borrowings with cash flows from operations or subsequent financings. We have funded most of our capital expenditures with cash on hand, increased bank borrowings, or equipment financing, and then reduced those obligations with cash flows from operations. We may explore additional or replacement financing sources in order to bolster liquidity and strengthen our capital structure.
We believe we currently have adequate 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 may seek additional potential acquisitions from time to time, including as part of our Ambition 2025 initiative. If suitable acquisition opportunities or working capital needs arise that require additional financing, we believe that our financial position, credit profile 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 millions):
Three Months Ended March 31,
2023
2022
Net cash provided by (used in) operating activities
$
101.2
$
(162.0)
Net cash provided by (used in) investing activities
(44.5)
(22.0)
Net cash provided by (used in) financing activities
(50.2)
11.0
Effect of exchange rate changes on cash and cash equivalents
—
(0.4)
Net increase (decrease) in cash and cash equivalents
$
6.5
$
(173.4)
Operating Activities
Net cash provided by operating activities was $101.2 million in 2023, compared to net cash used in operating activities of $162.0 million in 2022. Cash from operations increased $263.2 million in 2023 primarily due to an incremental cash inflow of $292.7 million stemming from changes to our net working capital, mainly driven by a favorable change in cash flows related to inventories and accounts receivable compared to the prior year, partially offset by an unfavorable change in cash flows related to accounts payable and accrued expenses. The increase was partially offset by a decrease in net income after adjustments for non-cash items of $29.5 million.
Investing Activities
Net cash used in investing activities was $44.5 million in 2023, compared to $22.0 million in 2022. Cash used in investing activities increased $22.5 million in 2023 primarily due to acquisitions made by the Company during the period. See Note 3 for more information.
Financing Activities
Net cash used in financing activities was $50.2 million in 2023, compared to net cash provided by financing activities of $11.0 million in 2022. Cash from financing activities decreased $61.2 million in 2023 primarily due to an increase in net repayments under our revolving lines of credit, partially offset by a decrease in share repurchases compared to the prior year.
Share Repurchase Program
On February 24, 2022, we announced a new share repurchase program (the “Repurchase Program”), pursuant to which we may purchase up to $500.0 million of our common stock. On February 23, 2023, we announced that our Board authorized and approved an increase of the Repurchase Program by approximately $387.9 million, permitting future share repurchases of $500.0 million after considering actual share repurchases as of such re-authorization date.
Share repurchases under the Repurchase Program may be made from time to time through various means, including open market purchases (including block trades), privately negotiated transactions, accelerated share repurchase transactions or through a series of forward purchase agreements, option contracts or similar agreements and contracts (including Rule 10b5-1 plans) adopted by us, in each case in accordance with the rules and regulations of the Securities and Exchange Commission, including, if applicable, Rule 10b-18 of the Securities Exchange Act of 1934, as amended. The timing, volume, and nature of share repurchases pursuant to the Repurchase Program are at our discretion and may be suspended or discontinued at any time. Shares repurchased under the Repurchase Program are retired immediately and are included in the category of authorized but unissued shares. Direct and incremental costs associated with the Repurchase Program are deferred and included as a component of the purchase price. The excess of the purchase price over the par value of the common shares is reflected in retained earnings.
The following table sets forth our share repurchases (in millions, except per share data):
Three Months Ended March 31,
2023
2022
Total number of shares repurchased
0.4
1.9
Amount repurchased1
$
23.1
$
137.9
Average price per share
$
58.21
$
59.06
1.Amount paid for the three months ended March 31, 2022 includes $25 million of ASR repurchase price that was evaluated as an unsettled equity forward contract indexed to our common stock and classified within stockholders’ equity as a reduction to additional paid in capital. The final settlement of the ASR occurred in June 2022 and resulted in the delivery of an additional 406,200 shares of our common stock.
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Share repurchases for the three months ended March 31, 2023 were made on the open market through a Rule 10b5-1 repurchase plan. During the three months ended March 31, 2023, we incurred de minimis costs directly attributable to the Repurchase Program. Share repurchases for the three months ended March 31, 2022 were made through a combination of open market transactions as well as an ASR. During the three months ended March 31, 2022 we incurred costs directly attributable to the Repurchase Program of approximately $0.3 million.
As of March 31, 2023, we had approximately $476.9 million available for repurchases remaining under the Repurchase Program. See Note 7 in the Notes to Condensed Consolidated Financial Statements for additional information.
Capital Resources
In May 2021, we entered into a series of financing arrangements to refinance certain debt instruments to take advantage of lower market interest rates for our fixed rate indebtedness and to extend maturities (the “2021 Debt Refinancing”). As of March 31, 2023, we had access to the following financing arrangements:
•the 2026 U.S. Revolver, an asset-based revolving line of credit in the U.S., in an amount up to $1.25 billion and with an outstanding balance (net of unamortized debt issuance costs) of $234.8 million;
•the 2026 Canada Revolver, an asset-based revolving line of credit in Canada, in an amount up to $50.0 million and with no outstanding balance;
•the 2028 Term Loan with an outstanding balance (net of unamortized debt issuance costs) of $970.2 million; and
•two separate senior notes instruments, including the 2029 Senior Notes and 2026 Senior Notes, with outstanding balances (net of unamortized debt issuance costs) of $347.0 million and $297.6 million, respectively.
See Note 11 in the Notes to Condensed Consolidated Financial Statements for additional information on our current financing arrangements and the 2021 Debt Refinancing.
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Item 3. Quantitative and Qualitative Disclosures about Market Risk
Our market risk disclosures set forth in Part II, Item 7A, “Quantitative and Qualitative Disclosures About Market Risk” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2022 have not changed materially during the three months ended March 31, 2023.
Item 4. Controls and Procedures
As of March 31, 2023, 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 “Exchange Act”)). Based on that evaluation, management, including the CEO and CFO, concluded that as of March 31, 2023, 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 Exchange 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 Exchange 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 generally accepted accounting principles in the United States.
There have been no material changes to our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the three months ended March 31, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
See Note 13 in the Notes to Condensed Consolidated Financial Statements for information about pending legal proceedings.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities
The following table provides information with respect to the Company’s purchases of its common stock during the first quarter of 2023:
Period
Total Number of Shares Purchased
Average Price Paid per Share
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs1, 2
Maximum Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs1
(in millions)
January 1 - 31, 2023
—
$
—
—
$
112.1
February 1 - 28, 2023
—
—
—
$
500.0
March 1 - 31, 2023
399,300
58.21
399,300
$
476.9
Total
399,300
$
58.21
399,300
1.On February 24, 2022, the Company announced a program to repurchase up to $500.0 million of its common stock. On February 23, 2023, the Company announced that its Board authorized and approved an increase of the Repurchase Program by approximately $387.9 million, permitting future share repurchases of $500.0 million.
2.All purchases were made on the open market through a Rule 10b5-1 repurchase plan.
See Note 7 in the Notes to Condensed Consolidated Financial Statements for additional information on our Share Repurchase Program.
101.INS Inline XBRL Instance – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)
+ Management contract or compensatory plan/arrangement
* Filed herewith
** Furnished herewith
Pursuant to Rule 405 of Regulation S-T, the following interactive data files formatted in Inline Extensible Business Reporting Language (iXBRL) are attached as Exhibit 101 to this Quarterly Report on Form 10-Q:
(i)the Condensed Consolidated Balance Sheets as of March 31, 2023; December 31, 2022; and March 31, 2022,
(ii)the Condensed Consolidated Statements of Operations for the three months ended March 31, 2023 and 2022,
(iii)the Condensed Consolidated Statements of Comprehensive Income for the three months ended March 31, 2023 and 2022,
(iv)the Condensed Consolidated Statements of Stockholders’ Equity for the three months ended March 31, 2023 and 2022,
(v)the Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2023 and 2022, and
(vi)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: May 5, 2023
BY:
/s/ FRANK A. LONEGRO
Frank A. Lonegro
Executive Vice President & Chief Financial Officer
