BEACON ROOFING SUPPLY INC MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (form 10-K)
The following discussion and analysis should be read in conjunction with our consolidated financial statements and related notes and other financial information appearing elsewhere in this Annual Report on Form 10-K. All references to "2022" are referring to the twelve-month period endedDecember 31, 2022 , while references to "Fiscal 2021" are referring to the twelve-month period endedSeptember 30, 2021 and references to "Calendar 2021" are referring to the twelve-month period endedDecember 31, 2021 . This section of this Annual Report on Form 10-K generally discusses 2022, Fiscal 2021, and Calendar 2021 items and year-to-year comparisons between such periods. Discussions of items from the twelve-month period endedSeptember 30, 2020 ("Fiscal 2020") and year-to-year comparisons between Fiscal 2021 and Fiscal 2020 that are not included in this Form 10-K can be found in Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the year endedSeptember 30, 2021 . Discussions of year-to-year comparisons between the three-month periods endedDecember 31, 2021 and 2020 that are not included in this Form 10-K can be found in Part I, Item 2, "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Transition Report on Form 10-Q for the period endedDecember 31, 2021 , which is incorporated by reference. The following discussion may contain forward-looking statements that reflect our plans and expectation. Our actual results could differ materially from those anticipated by these forward-looking statements due to the factors discussed elsewhere in this Annual Report on Form 10-K, particularly in the "Risk Factors" section. We do not undertake, and specifically disclaim, any obligation to update any forward-looking statements to reflect the occurrence of events or circumstances after the date of such statements except as required by law.
Overview
We are the largest publicly traded distributor of roofing materials and complementary building products, such as siding and waterproofing, inNorth America . We have served the building industry for over 90 years and as ofDecember 31, 2022 , we operated 480 branches throughout all 50 states in theU.S. and six provinces inCanada . 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 ofAllied Building Products Corp. for$2.88 billion in 2018 andRoofing 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 control our expenses to drive operating leverage. OnFebruary 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. We have pursued and finalized numerous acquisitions in key markets to complement the expansion of our geographic footprint, including 22 total branches from our acquisitions in 2022 (for additional information, see Note 3 in the Notes to Consolidated Financial Statements): •onDecember 30, 2022 , we acquiredWhitney Building Products, LLC , a distributor of commercial and multifamily waterproofing and restoration products, with one branch located inMassachusetts and annual sales of approximately$19 million prior to the acquisition;
•on
largest independent distributors of specialty waterproofing products in the
approximately
21 --------------------------------------------------------------------------------
•on
of residential roofing and exterior building supplies to contractors and
homebuilders, with one branch located in
approximately
•onApril 29, 2022 , we acquiredWichita Falls Builders Wholesale, Inc. , a distributor of complementary residential exterior building materials, including windows, doors and siding to contractors, homebuilders and retail customers, with one branch located inTexas and annual sales of approximately$4 million prior to the acquisition; and
•on
distributor of residential exterior building materials, including a broad
offering of complementary products, to contractors and homebuilder customers,
with one branch located in
million
In addition, onJanuary 4, 2023 , we announced the acquisition ofFirst Coastal Exteriors, LLC , a distributor of complementary residential and commercial building products including siding, gutter products, and windows, with two branches in the Southeast and annual sales of approximately$10 million prior to the acquisition. As part of Ambition 2025, we will continue to pursue additional strategic acquisitions to grow our business. We also remain heavily focused on improving our operations and continuing to identify additional opportunities for organic growth. Our recent highlights in these pursuits are demonstrated by the following results for 2022:
•2022 organic daily sales growth of 23.7{7e5ff73c23cd1cd7ac587f9048f78b3ced175b09520fe5fee10055eb3132dce7} compared to Fiscal 2021, driven
primarily by successful price execution;
•16 new branch locations opened in 2022; and
•significant improvements in the results of our branches falling in the bottom
quintile of our operating performance metrics.
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. In order to pursue these strategic growth initiatives and focus on our core exterior products business, we completed two divestitures in 2021. OnDecember 1, 2021 , we completed the divestiture of our solar products business ("Solar Products"). The results of operations from Solar Products were not material to us and are included in continuing operations for the periods presented. OnFebruary 10, 2021 , we completed the sale of our interior products and insulation businesses ("Interior Products") toFoundation Building Materials Holding Company LLC for the final adjusted purchase price of$842.7 million . We have reflected Interior Products as discontinued operations for the three months endedDecember 31, 2021 and years endedSeptember 30, 2021 and 2020. Unless otherwise noted, amounts and disclosures in our discussion below relate to our continuing operations. For additional information, see Note 4 in the Notes to Consolidated Financial Statements.
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 2022. 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 have 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 ofUkraine . 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. 22
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Results of Operations
The following tables set forth consolidated statement of operations data and
such data as a percentage of total net sales for the periods presented (in
millions):
Year Ended
December 31, September 30,
2022 2021
Net sales $ 8,429.7 $ 6,642.0
Cost of products sold 6,194.2 4,884.3
Gross profit 2,235.5 1,757.7
Operating expense:
Selling, general and administrative 1,372.9 1,138.7
Depreciation 75.1 58.9
Amortization 84.1 103.3
Total operating expense 1,532.1 1,300.9
Income (loss) from operations 703.4 456.8
Interest expense, financing costs and other 83.7 98.1
Loss on debt extinguishment - 60.2
Income (loss) from continuing operations before income taxes 619.7 298.5
Provision for (benefit from) income taxes 161.3 77.3
Net income (loss) from continuing operations 458.4 221.2
Net income (loss) from discontinued operations - (266.7)
Net income (loss) 458.4 (45.5)
Dividends on Preferred Stock 24.0 24.0
Net income (loss) attributable to common stockholders $ 434.4 $ (69.5)
Year Ended
December 31, September 30,
2022 2021
Net sales 100.0 {7e5ff73c23cd1cd7ac587f9048f78b3ced175b09520fe5fee10055eb3132dce7} 100.0 {7e5ff73c23cd1cd7ac587f9048f78b3ced175b09520fe5fee10055eb3132dce7}
Cost of products sold 73.5 {7e5ff73c23cd1cd7ac587f9048f78b3ced175b09520fe5fee10055eb3132dce7} 73.5 {7e5ff73c23cd1cd7ac587f9048f78b3ced175b09520fe5fee10055eb3132dce7}
Gross profit 26.5 {7e5ff73c23cd1cd7ac587f9048f78b3ced175b09520fe5fee10055eb3132dce7} 26.5 {7e5ff73c23cd1cd7ac587f9048f78b3ced175b09520fe5fee10055eb3132dce7}
Operating expense:
Selling, general and administrative 16.3 {7e5ff73c23cd1cd7ac587f9048f78b3ced175b09520fe5fee10055eb3132dce7} 17.1 {7e5ff73c23cd1cd7ac587f9048f78b3ced175b09520fe5fee10055eb3132dce7}
Depreciation 0.9 {7e5ff73c23cd1cd7ac587f9048f78b3ced175b09520fe5fee10055eb3132dce7} 0.9 {7e5ff73c23cd1cd7ac587f9048f78b3ced175b09520fe5fee10055eb3132dce7}
Amortization 1.0 {7e5ff73c23cd1cd7ac587f9048f78b3ced175b09520fe5fee10055eb3132dce7} 1.6 {7e5ff73c23cd1cd7ac587f9048f78b3ced175b09520fe5fee10055eb3132dce7}
Total operating expense 18.2 {7e5ff73c23cd1cd7ac587f9048f78b3ced175b09520fe5fee10055eb3132dce7} 19.6 {7e5ff73c23cd1cd7ac587f9048f78b3ced175b09520fe5fee10055eb3132dce7}
Income (loss) from operations 8.3 {7e5ff73c23cd1cd7ac587f9048f78b3ced175b09520fe5fee10055eb3132dce7} 6.9 {7e5ff73c23cd1cd7ac587f9048f78b3ced175b09520fe5fee10055eb3132dce7}
Interest expense, financing costs and other 1.0 {7e5ff73c23cd1cd7ac587f9048f78b3ced175b09520fe5fee10055eb3132dce7} 1.5 {7e5ff73c23cd1cd7ac587f9048f78b3ced175b09520fe5fee10055eb3132dce7}
Loss on debt extinguishment - {7e5ff73c23cd1cd7ac587f9048f78b3ced175b09520fe5fee10055eb3132dce7} 0.9 {7e5ff73c23cd1cd7ac587f9048f78b3ced175b09520fe5fee10055eb3132dce7}
Income (loss) from continuing operations before income taxes 7.3 {7e5ff73c23cd1cd7ac587f9048f78b3ced175b09520fe5fee10055eb3132dce7} 4.5 {7e5ff73c23cd1cd7ac587f9048f78b3ced175b09520fe5fee10055eb3132dce7}
Provision for (benefit from) income taxes 1.9 {7e5ff73c23cd1cd7ac587f9048f78b3ced175b09520fe5fee10055eb3132dce7} 1.2 {7e5ff73c23cd1cd7ac587f9048f78b3ced175b09520fe5fee10055eb3132dce7}
Net income (loss) from continuing operations 5.4 {7e5ff73c23cd1cd7ac587f9048f78b3ced175b09520fe5fee10055eb3132dce7} 3.3 {7e5ff73c23cd1cd7ac587f9048f78b3ced175b09520fe5fee10055eb3132dce7}
Net income (loss) from discontinued operations - {7e5ff73c23cd1cd7ac587f9048f78b3ced175b09520fe5fee10055eb3132dce7} (4.0) {7e5ff73c23cd1cd7ac587f9048f78b3ced175b09520fe5fee10055eb3132dce7}
Net income (loss) 5.4 {7e5ff73c23cd1cd7ac587f9048f78b3ced175b09520fe5fee10055eb3132dce7} (0.7) {7e5ff73c23cd1cd7ac587f9048f78b3ced175b09520fe5fee10055eb3132dce7}
Dividends on Preferred Stock 0.2 {7e5ff73c23cd1cd7ac587f9048f78b3ced175b09520fe5fee10055eb3132dce7} 0.3 {7e5ff73c23cd1cd7ac587f9048f78b3ced175b09520fe5fee10055eb3132dce7}
Net income (loss) attributable to common stockholders 5.2 {7e5ff73c23cd1cd7ac587f9048f78b3ced175b09520fe5fee10055eb3132dce7} (1.0) {7e5ff73c23cd1cd7ac587f9048f78b3ced175b09520fe5fee10055eb3132dce7}
23
-------------------------------------------------------------------------------- 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 programs.
As of
Comparison of the Years Ended
(“Fiscal 2021”)
Net Sales Net sales increased 26.9{7e5ff73c23cd1cd7ac587f9048f78b3ced175b09520fe5fee10055eb3132dce7} to$8.43 billion in 2022, from$6.64 billion in Fiscal 2021, despite one fewer selling day. Net sales increased across all three lines of business, substantially driven by a weighted-average selling price increase of approximately 23-24{7e5ff73c23cd1cd7ac587f9048f78b3ced175b09520fe5fee10055eb3132dce7} as well as an estimated volume increase of approximately 2-3{7e5ff73c23cd1cd7ac587f9048f78b3ced175b09520fe5fee10055eb3132dce7}. Additionally, net sales in 2022 includes the results of acquired branches, while net sales in Fiscal 2021 includes the results of divested branches that were included in continuing operations. Excluding the impact of acquired and divested branches, the increase in net sales would have been approximately 1{7e5ff73c23cd1cd7ac587f9048f78b3ced175b09520fe5fee10055eb3132dce7} lower. 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 organicU.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): Year Ended December 31, September 30, 2022 2021 Year-over-Year Change Net Sales {7e5ff73c23cd1cd7ac587f9048f78b3ced175b09520fe5fee10055eb3132dce7} Net Sales {7e5ff73c23cd1cd7ac587f9048f78b3ced175b09520fe5fee10055eb3132dce7} $ {7e5ff73c23cd1cd7ac587f9048f78b3ced175b09520fe5fee10055eb3132dce7} Residential roofing products$ 4,217.9 50.0 {7e5ff73c23cd1cd7ac587f9048f78b3ced175b09520fe5fee10055eb3132dce7}$ 3,516.2 53.0 {7e5ff73c23cd1cd7ac587f9048f78b3ced175b09520fe5fee10055eb3132dce7} $ 701.7 20.0 {7e5ff73c23cd1cd7ac587f9048f78b3ced175b09520fe5fee10055eb3132dce7} Non-residential roofing products 2,464.3 29.2 {7e5ff73c23cd1cd7ac587f9048f78b3ced175b09520fe5fee10055eb3132dce7} 1,688.8 25.4 {7e5ff73c23cd1cd7ac587f9048f78b3ced175b09520fe5fee10055eb3132dce7} 775.5 45.9 {7e5ff73c23cd1cd7ac587f9048f78b3ced175b09520fe5fee10055eb3132dce7} Complementary building products 1,747.5 20.8 {7e5ff73c23cd1cd7ac587f9048f78b3ced175b09520fe5fee10055eb3132dce7} 1,437.0 21.6 {7e5ff73c23cd1cd7ac587f9048f78b3ced175b09520fe5fee10055eb3132dce7} 310.5 21.6 {7e5ff73c23cd1cd7ac587f9048f78b3ced175b09520fe5fee10055eb3132dce7} Total net sales$ 8,429.7 100.0 {7e5ff73c23cd1cd7ac587f9048f78b3ced175b09520fe5fee10055eb3132dce7}$ 6,642.0 100.0 {7e5ff73c23cd1cd7ac587f9048f78b3ced175b09520fe5fee10055eb3132dce7}$ 1,787.7 26.9 {7e5ff73c23cd1cd7ac587f9048f78b3ced175b09520fe5fee10055eb3132dce7} Gross Profit
The following table summarizes gross profit and gross margin for the periods
presented (in millions):
Year Ended Change1
December 31, September 30,
2022 2021 $ {7e5ff73c23cd1cd7ac587f9048f78b3ced175b09520fe5fee10055eb3132dce7}
Gross profit $ 2,235.5 $ 1,757.7 $ 477.8 27.2 {7e5ff73c23cd1cd7ac587f9048f78b3ced175b09520fe5fee10055eb3132dce7}
Gross margin 26.5 {7e5ff73c23cd1cd7ac587f9048f78b3ced175b09520fe5fee10055eb3132dce7} 26.5 {7e5ff73c23cd1cd7ac587f9048f78b3ced175b09520fe5fee10055eb3132dce7} N/A - {7e5ff73c23cd1cd7ac587f9048f78b3ced175b09520fe5fee10055eb3132dce7}
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 26.5{7e5ff73c23cd1cd7ac587f9048f78b3ced175b09520fe5fee10055eb3132dce7} in both 2022 and Fiscal 2021. The consistent gross margin
resulted from a weighted-average selling price increase of approximately 23-24{7e5ff73c23cd1cd7ac587f9048f78b3ced175b09520fe5fee10055eb3132dce7},
offset by a weighted-average product cost increase of approximately 23-24{7e5ff73c23cd1cd7ac587f9048f78b3ced175b09520fe5fee10055eb3132dce7}.
24
--------------------------------------------------------------------------------
Operating Expense
The following table summarizes operating expense for the periods presented (in
millions):
Year Ended Change1
December 31, September 30,
2022 2021 $ {7e5ff73c23cd1cd7ac587f9048f78b3ced175b09520fe5fee10055eb3132dce7}
Selling, general and administrative
$ 234.2 20.6 {7e5ff73c23cd1cd7ac587f9048f78b3ced175b09520fe5fee10055eb3132dce7} Depreciation 75.1 58.9 16.2 27.5 {7e5ff73c23cd1cd7ac587f9048f78b3ced175b09520fe5fee10055eb3132dce7} Amortization 84.1 103.3 (19.2) (18.6) {7e5ff73c23cd1cd7ac587f9048f78b3ced175b09520fe5fee10055eb3132dce7} Total operating expense$ 1,532.1 $ 1,300.9 $ 231.2 17.8 {7e5ff73c23cd1cd7ac587f9048f78b3ced175b09520fe5fee10055eb3132dce7} {7e5ff73c23cd1cd7ac587f9048f78b3ced175b09520fe5fee10055eb3132dce7} of net sales 18.2 {7e5ff73c23cd1cd7ac587f9048f78b3ced175b09520fe5fee10055eb3132dce7} 19.6 {7e5ff73c23cd1cd7ac587f9048f78b3ced175b09520fe5fee10055eb3132dce7} N/A (1.4) {7e5ff73c23cd1cd7ac587f9048f78b3ced175b09520fe5fee10055eb3132dce7}
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 17.8{7e5ff73c23cd1cd7ac587f9048f78b3ced175b09520fe5fee10055eb3132dce7} to
in Fiscal 2021. The comparative increase in operating expense was mainly
influenced by the following factors:
•a$116.2 million increase in payroll and employee benefit costs and stock-based compensation, primarily due to increased headcount to drive and support growth for new and acquired branches, as well as wage inflation and higher incentive compensation, including special RSU grants made in connection with the Company's Ambition 2025 strategic plan;
•a
fleet costs, as well as net sales growth resulting in higher commissions; and
•a
to higher insurance expenses and an increase in travel and entertainment
expenses.
Operating expense in 2022 includes the results of acquired branches, while operating expense in Fiscal 2021 includes the results of divested branches that were included in continuing operations, the combined results of which drove a net increase of$35.5 million from Fiscal 2021 to 2022.
Operating expense as a percent of sales was comparatively lower in 2022, driven
primarily by the positive impact from net sales growth.
Interest Expense, Financing Costs and Other
Interest expense, financing costs and other expense was$83.7 million in 2022, compared to$98.1 million in Fiscal 2021. The comparative decrease is primarily due to lower average debt balances during the respective periods, partially offset by a higher weighted-average interest rate on our outstanding debt.
Loss on Debt Extinguishment
Loss on debt extinguishment was$60.2 million in Fiscal 2021 and includes the write-off of debt issuance costs and payment of redemption premiums stemming from our 2021 Debt Refinancing (as defined below).
Income Taxes
Provision for (benefit from) income taxes was$161.3 million in 2022, compared to$77.3 million in Fiscal 2021. The comparative increase in income tax expense was primarily due to an increase in pre-tax book income in 2022. The effective tax rate was 26.0{7e5ff73c23cd1cd7ac587f9048f78b3ced175b09520fe5fee10055eb3132dce7} in 2022, compared to 25.9{7e5ff73c23cd1cd7ac587f9048f78b3ced175b09520fe5fee10055eb3132dce7} in Fiscal 2021.
Net Income (Loss)/Net Income (Loss) Per Share
Net income (loss) from continuing operations was$458.4 million in 2022, compared to$221.2 million in Fiscal 2021. There was no net income (loss) from discontinued operations in 2022, compared to$(266.7) million in Fiscal 2021 (see Note 4 in the Notes to Consolidated Financial Statements for further discussion). Net income (loss) was$458.4 million in 2022, compared to$(45.5) million in Fiscal 2021. There were$24.0 million of dividends on Preferred Stock in both 2022 and Fiscal 2021, making net income (loss) attributable to common stockholders$434.4 million and$(69.5) million , respectively. 25 -------------------------------------------------------------------------------- We calculate net income (loss) per share by dividing net income (loss), less dividends on Preferred Stock and adjustments for participating securities, by the weighted-average number of common shares outstanding during the period. Diluted net income (loss) per share is calculated by utilizing the most dilutive result after applying and comparing the two-class method and if-converted method (see Note 6 in the Notes to 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):
Year Ended
December 31 , September 30,
2022 2021
Numerator:
Net income (loss) from continuing operations$ 458.4 $ 221.2 Dividends on Preferred Stock (24.0) (24.0)
Undistributed income from continuing operations allocated to participating
securities
(54.8) -
Net income (loss) from continuing operations attributable to common
stockholders – Basic
379.6 197.2 Add back: dividends on Preferred Stock1 - 24.0
Net income (loss) from continuing operations attributable to common
stockholders – Diluted (if-converted and two-class method)
379.6 221.2 Net income (loss) from discontinued operations - (266.7)
Undistributed income from discontinued operations allocated to
participating securities
- -
Net income (loss) from discontinued operations attributable to common
stockholders – Basic and Diluted (if-converted and two-class method)
- (266.7)
Net income (loss) attributable to common stockholders – Basic (if-converted
and two-class method)
Net income (loss) attributable to common stockholders – Diluted
(if-converted and two-class method)
Denominator:
Weighted-average common shares outstanding - Basic 67.1 69.7 Effect of common share equivalents 1.3 1.1 Effect of convertible Preferred Stock1 - 9.7 Weighted-average common shares outstanding - Diluted 68.4 80.5 Net income (loss) per share: Basic - Continuing operations$ 5.66 $ 2.83 Basic - Discontinued operations - (3.83) Basic net income (loss) per share
Diluted - Continuing operations$ 5.55 $ 2.75 Diluted - Discontinued operations - (3.32)
Diluted net income (loss) per share (if-converted and two-class method)
1.The hypothetical conversion of the Preferred Stock became dilutive for the year endedSeptember 30, 2021 , primarily stemming from the significant income from continuing operations and offsetting loss from discontinued operations in 2021, and their combined effect on the Company's calculation of diluted net income (loss) per share. 26 --------------------------------------------------------------------------------
Change in Fiscal Year End
OnAugust 11, 2021 , our Board of Directors approved a change in our fiscal year end fromSeptember 30 to December 31 . The Company's 2022 fiscal year began onJanuary 1, 2022 and ended onDecember 31, 2022 . We have presented unaudited pro-forma statements of operations and cash flows for the year endedDecember 31, 2021 ("Calendar 2021") and have provided comparisons to 2022. We have also presented the unaudited balance sheet as ofDecember 31, 2021 with a comparison toDecember 31, 2022 . The pro-forma statements of operations and cash flows were derived as follows (in millions): Plus: Three Less: Three Months Ended Months Ended Fiscal 2021 December 31, 20211 December 31, 20202 Calendar 2021 (Unaudited) (Unaudited) Net sales$ 6,642.0 $ 1,754.9 $ 1,576.5$ 6,820.4 Cost of products sold 4,884.3 1,293.3 1,176.8 5,000.8 Gross profit 1,757.7 461.6 399.7 1,819.6 Operating expense: Selling, general and administrative 1,138.7 294.2 265.2 1,167.7 Depreciation 58.9 16.5 13.9 61.5 Amortization 103.3 22.2 25.5 100.0 Loss on sale of business - 22.3 - 22.3 Total operating expense 1,300.9 355.2 304.6 1,351.5 Income (loss) from operations 456.8 106.4 95.1 468.1 Interest expense, financing costs and other 98.1 17.4 30.0 85.5 Loss on debt extinguishment 60.2 - - 60.2 Income (loss) from continuing operations before income taxes 298.5 89.0 65.1 322.4 Provision for (benefit from) income taxes 77.3 20.9 17.7 80.5 Net income (loss) from continuing operations 221.2 68.1 47.4 241.9 Net income (loss) from discontinued operations (266.7) (0.1) (267.9) 1.1 Net income (loss) (45.5) 68.0 (220.5) 243.0 Dividends on Preferred Stock 24.0 6.0 6.0 24.0 Net income (loss) attributable to common stockholders$ (69.5) $ 62.0 $ (226.5)$ 219.0
1.As set forth in our Transition Report on Form 10-Q for the period ended
2.As set forth in our Quarterly Report on Form 10-Q for the period ended
27
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Plus: Three Less: Three
Months Ended Months Ended
December 31, December 31,
Fiscal 2021 20211 20202 Calendar 2021
(Unaudited) (Unaudited)
Operating Activities
Net income (loss) $ (45.5) $ 68.0 $ (220.5) $ 243.0
Adjustments to reconcile net income (loss)
to net cash provided by (used in) operating
activities:
Depreciation and amortization 175.2 38.7 52.3 161.6
Stock-based compensation 22.6 2.8 4.9 20.5
Certain interest expense and other financing
costs 8.7 1.3 2.9 7.1
Loss on debt extinguishment 60.2 - - 60.2
Gain on sale of fixed assets and other (3.8) (1.6) (0.6) (4.8)
Deferred income taxes (139.2) 1.6 (85.9) (51.7)
Loss on sale of business 360.6 22.3 - 382.9
Loss on classification as held for sale - - 355.4 (355.4)
Changes in operating assets and liabilities:
Accounts receivable (81.3) 137.6 149.6 (93.3)
Inventories (225.0) (89.1) (89.3) (224.8)
Prepaid expenses and other current assets 9.6 (26.2) 18.0 (34.6)
Accounts payable and accrued expenses (56.0) (102.6) (227.5) 68.9
Other assets and liabilities (8.1) (3.2) 1.6 (12.9)
Net cash provided by (used in) operating
activities 78.0 49.6 (39.1) 166.7
Investing Activities
Purchases of property and equipment (66.5) (23.3) (18.0) (71.8)
Acquisition of business, net - (89.0) - (89.0)
Proceeds from sale of business 836.0 35.8 - 871.8
Proceeds from sale of assets 4.4 1.7 0.7 5.4
Net cash provided by (used in) investing
activities 773.9 (74.8) (17.3) 716.4
Financing Activities
Borrowings under revolving lines of credit 252.3 - 2.3 250.0
Payments under revolving lines of credit (509.3) - (102.3) (407.0)
Borrowings under term loan 1,000.0 - - 1,000.0
Payments under term loan (948.3) (2.5) (2.4) (948.4)
Borrowings under senior notes 350.0 - - 350.0
Payment under senior notes (1,300.0) - - (1,300.0)
Payment of debt issuance costs (20.3) - - (20.3)
Payment of call premium (31.7) - - (31.7)
Payments under equipment financing
facilities and finance leases (6.5) (1.4) (1.7) (6.2)
Payment of dividends on Preferred Stock (24.0) (6.0) (6.0) (24.0)
Proceeds from issuance of common stock
related to equity awards 26.3 5.2 7.1 24.4
Payment of taxes related to net share
settlement of equity awards (4.5) (4.4) (2.8) (6.1)
Net cash provided by (used in) financing
activities (1,216.0) (9.1) (105.8) (1,119.3)
Effect of exchange rate changes on cash and
cash equivalents (0.5) 0.1 (1.0) 0.6
Net increase (decrease) in cash and cash
equivalents (364.6) (34.2) (163.2) (235.6)
Cash and cash equivalents, beginning of
period 624.6 260.0 624.6 260.0
Cash and cash equivalents, end of period
1.As set forth in our Transition Report on Form 10-Q for the period ended
2.As set forth in our Quarterly Report on Form 10-Q for the period ended
28 --------------------------------------------------------------------------------
Consolidated Balance Sheets
(in millions)
December 31, December 31,
2022 2021
(Unaudited)
Assets
Current assets:
Cash and cash equivalents $ 67.7 $ 225.8
Accounts receivable, net 1,009.1 855.2
Inventories, net 1,322.9 1,161.7
Prepaid expenses and other current assets 417.8 367.2
Total current assets 2,817.5 2,609.9
Property and equipment, net 337.0 256.3
Goodwill 1,916.3 1,777.4
Intangibles, net 447.7 421.0
Operating lease assets 467.6 413.9
Deferred income taxes, net 9.9 61.9
Other assets, net 7.5 8.9
Total assets $ 6,003.5 $ 5,549.3
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 821.0 $ 794.2
Accrued expenses 448.0 472.1
Current operating lease liabilities 94.5 89.0
Current finance lease liabilities 16.1 6.4
Current portion of long-term debt/obligations 10.0 10.0
Total current liabilities 1,389.6 1,371.7
Borrowings under revolving lines of credit, net 254.9 -
Long-term debt, net 1,606.4 1,612.9
Deferred income taxes, net 0.2 0.8
Non-current operating lease liabilities 382.1 326.3
Non-current finance lease liabilities 67.0 26.0
Total liabilities 3,700.2 3,337.7
Convertible Preferred Stock 399.2 399.2
Stockholders' equity:
Common stock 0.6 0.7
Undesignated preferred stock - -
Additional paid-in capital 1,187.2 1,148.6
Retained earnings 728.8 682.5
Accumulated other comprehensive income (loss) (12.5) (19.4)
Total stockholders' equity 1,904.1 1,812.4
Total liabilities and stockholders' equity $ 6,003.5 $ 5,549.3
29
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Consolidated Statements of Operations
(in millions)
Year Ended December 31,
2022 2021
(Unaudited)
Net sales $ 8,429.7 $ 6,820.4
Cost of products sold 6,194.2 5,000.8
Gross profit 2,235.5 1,819.6
Operating expense:
Selling, general and administrative 1,372.9 1,167.7
Depreciation 75.1 61.5
Amortization 84.1 100.0
Loss on sale of business - 22.3
Total operating expense 1,532.1 1,351.5
Income (loss) from operations 703.4 468.1
Interest expense, financing costs and other 83.7 85.5
Loss on debt extinguishment - 60.2
Income (loss) from continuing operations before income taxes 619.7 322.4
Provision for (benefit from) income taxes 161.3 80.5
Net income (loss) from continuing operations 458.4 241.9
Net income (loss) from discontinued operations - 1.1
Net income (loss) 458.4 243.0
Dividends on Preferred Stock 24.0 24.0
Net income (loss) attributable to common stockholders $ 434.4 $ 219.0
30
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Consolidated Statements of Cash Flows
(in millions)
Year Ended December 31,
2022 2021
(Unaudited)
Operating Activities
Net income (loss) $ 458.4 $ 243.0
Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities:
Depreciation and amortization 159.2 161.6
Stock-based compensation 27.6 20.5
Certain interest expense and other financing costs 5.2 7.1
Loss on debt extinguishment - 60.2
Gain on sale of fixed assets and other (4.1) (4.8)
Deferred income taxes 30.1 (51.7)
Loss on sale of business - 27.5
Changes in operating assets and liabilities:
Accounts receivable (111.4) (93.3)
Inventories (117.7) (224.8)
Prepaid expenses and other current assets (36.3) (34.6)
Accounts payable and accrued expenses (15.2) 68.9
Other assets and liabilities 5.3 (12.9)
Net cash provided by (used in) operating activities 401.1 166.7
Investing Activities
Purchases of property and equipment (90.1) (71.8)
Acquisition of business, net (309.2) (89.0)
Proceeds from sale of business - 871.8
Proceeds from sale of assets 5.2 5.4
Investment in available for sale securities (1.5) -
Net cash provided by (used in) investing activities (395.6) 716.4
Financing Activities
Borrowings under revolving lines of credit 2,781.3 250.0
Payments under revolving lines of credit (2,520.6) (407.0)
Borrowings under term loan - 1,000.0
Payments under term loan (10.0) (948.4)
Borrowings under senior notes - 350.0
Payment under senior notes - (1,300.0)
Payment of debt issuance costs - (20.3)
Payment of call premium - (31.7)
Payments under equipment financing facilities and finance leases (12.1)
(6.2) Repurchase and retirement of common stock, net (388.1) - Payment of dividends on Preferred Stock (24.0) (24.0) Proceeds from issuance of common stock related to equity awards 16.7 24.4
Payment of taxes related to net share settlement of equity awards (5.7)
(6.1) Net cash provided by (used in) financing activities (162.5) (1,119.3) Effect of exchange rate changes on cash and cash equivalents (1.1) 0.6 Net increase (decrease) in cash and cash equivalents (158.1) (235.6) Cash and cash equivalents, beginning of period 225.8 461.4 Cash and cash equivalents, end of period$ 67.7 $ 225.8 31
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Comparison of 2022 and the Year Ended
Years Ended December 31, Change
2022 2021 $ {7e5ff73c23cd1cd7ac587f9048f78b3ced175b09520fe5fee10055eb3132dce7}
(Unaudited)
Net sales $ 8,429.7 $ 6,820.4 $ 1,609.3 23.6 {7e5ff73c23cd1cd7ac587f9048f78b3ced175b09520fe5fee10055eb3132dce7}
Gross profit $ 2,235.5 $ 1,819.6 $ 415.9 22.9 {7e5ff73c23cd1cd7ac587f9048f78b3ced175b09520fe5fee10055eb3132dce7}
Gross margin 26.5 {7e5ff73c23cd1cd7ac587f9048f78b3ced175b09520fe5fee10055eb3132dce7} 26.7 {7e5ff73c23cd1cd7ac587f9048f78b3ced175b09520fe5fee10055eb3132dce7} N/A (0.2) {7e5ff73c23cd1cd7ac587f9048f78b3ced175b09520fe5fee10055eb3132dce7}
Total operating expense $ 1,532.1 $ 1,351.5 $ 180.6 13.4 {7e5ff73c23cd1cd7ac587f9048f78b3ced175b09520fe5fee10055eb3132dce7}
Income (loss) from operations $ 703.4 $ 468.1 $ 235.3 50.3 {7e5ff73c23cd1cd7ac587f9048f78b3ced175b09520fe5fee10055eb3132dce7}
Net income (loss) from continuing
operations $ 458.4 $ 241.9 $ 216.5 89.5 {7e5ff73c23cd1cd7ac587f9048f78b3ced175b09520fe5fee10055eb3132dce7}
Net sales increased 23.6{7e5ff73c23cd1cd7ac587f9048f78b3ced175b09520fe5fee10055eb3132dce7} compared to Calendar 2021 to $8.43 billion . 2022 net
sales increased across all three lines of business versus the prior year period,
driven largely by the successful implementation of price increases and higher
demand for our products. Weighted-average selling price increased approximately
20-21{7e5ff73c23cd1cd7ac587f9048f78b3ced175b09520fe5fee10055eb3132dce7} and estimated volumes increased approximately 1-2{7e5ff73c23cd1cd7ac587f9048f78b3ced175b09520fe5fee10055eb3132dce7}.
Residential roofing product sales increased 17.5{7e5ff73c23cd1cd7ac587f9048f78b3ced175b09520fe5fee10055eb3132dce7}, non-residential roofing
product sales increased 41.6{7e5ff73c23cd1cd7ac587f9048f78b3ced175b09520fe5fee10055eb3132dce7}, and complementary product sales increased 17.3{7e5ff73c23cd1cd7ac587f9048f78b3ced175b09520fe5fee10055eb3132dce7}
compared to the prior year.
Gross margin decreased to 26.5{7e5ff73c23cd1cd7ac587f9048f78b3ced175b09520fe5fee10055eb3132dce7}, from 26.7{7e5ff73c23cd1cd7ac587f9048f78b3ced175b09520fe5fee10055eb3132dce7} in the prior year as price-cost
improvement was more than offset by a higher non-residential product sales mix.
The increase in operating expense in 2022 was primarily due to increases in
payroll and benefit costs, selling costs and general and administrative
expenses, combined with the effect of acquired branches.
Net income (loss) from continuing operations was$458.4 million , compared to$241.9 million in the prior year. Calendar 2021 results include a loss on debt extinguishment of$60.2 million . The improvement compared to the prior year period was largely driven by higher net sales.
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
(“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) from continuing operations, excluding the impact of the adjusting items
(as described below).
•Adjusted EBITDA. We define Adjusted EBITDA as net income (loss) from continuing
operations, 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.
32
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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 costs related to historical 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 consideration or holdback liabilities; and amortization of debt issuance costs.
•Restructuring costs. Represent costs stemming from headcount rationalization
efforts; branch re-organization; certain rebranding costs; impact of the
Interior Products and Solar Products divestitures; accrued estimated costs
related to employee benefit plan withdrawals; amortization of debt issuance
costs; costs related to changing our fiscal year end; debt refinancing and
extinguishment costs; and abandoned lease costs.
•COVID-19 impacts. Represent costs directly related to the COVID-19 pandemic; and income tax provision (benefit) stemming from the revaluation of deferred tax assets and liabilities made in conjunction with our application of the CARES Act.
The following table presents the impact and respective location of the adjusting
items in our consolidated statements of operations for each of the periods
indicated (in millions):
Operating Expense Non-Operating Expense
Amorti- Loss on Sale Interest Other (Income) Income
SG&A1 zation of Business Expense Expense Taxes2 Total
Year Ended December 31, 2022
Acquisition costs $ 6.3 $ 84.1 $ - $ 4.0 $ - $ - $ 94.4
Restructuring costs 8.9 - - 1.2 - - 10.1
COVID-19 impacts 2.0 - - - - - 2.0
Total adjusting items $ 17.2 $ 84.1 $ - $ 5.2 $ - $ - $ 106.5
Year Ended December 31, 2021
Acquisition costs $ 2.6 $ 97.8 $ - $ 5.1 $ - $ - $ 105.5
Restructuring costs3 10.4 2.2 22.3 2.1 60.3 - 97.3
COVID-19 impacts 2.3 - - - - - 2.3
Total adjusting items $ 15.3 $ 100.0 $ 22.3 $ 7.2 $ 60.3 $ - $ 205.1
Year Ended September 30, 2021
Acquisition costs $ 3.3 $ 101.1 $ - $ 6.1 $ - $ - $ 110.5
Restructuring costs3 9.4 2.2 - 2.7 60.3 - 74.6
COVID-19 impacts 1.6 - - - - - 1.6
Total adjusting items $ 14.3 $ 103.3 $ - $ 8.8 $ 60.3 $ - $ 186.7
Year Ended September 30, 2020
Acquisition costs4 $ 9.6 $ 119.3 $ - $ 8.0 $ (5.1) $ - $ 131.8
Restructuring costs5 2.3 142.6 - 3.6 21.5 - 170.0
COVID-19 impacts6 4.2 - - - - (0.7) 3.5
Total adjusting items $ 16.1 $ 261.9 $ - $ 11.6 $ 16.4 $ (0.7) $ 305.3
1.Selling, general and administrative expense (“SG&A”).
2.For tax impact of adjusting items, see Adjusted Net Income (Loss) table below.
3.Other (income) expense includes a loss on debt extinguishment of
in connection with the write-off of debt issuance costs and payment of
redemption premiums stemming from our refinancing transactions.
4.Other (income) expense includes a net
final true-up of the
election made in connection with the Allied Acquisition.
5.Amortization includes the impact of non-cash accelerated intangible asset amortization of$142.6 million related to the write-off of certain trade names in connection with our rebranding efforts. Other (income) expense includes a loss on debt extinguishment of$14.7 million in connection with theOctober 2019 debt refinancing.
6.Income taxes consist of a tax benefit of
revaluation of deferred tax assets and liabilities made in conjunction with our
application of the CARES Act.
33
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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):
Year Ended December 31, Year Ended September 30,
2022 2021 2021 2020
Operating expense $ 1,532.1 $ 1,351.5 $ 1,300.9 $ 1,385.5
Acquisition costs (90.4) (100.4) (104.4) (128.9)
Restructuring costs (8.9) (34.9) (11.6) (144.9)
COVID-19 impacts (2.0) (2.3) (1.6) (4.2)
Adjusted Operating Expense $ 1,430.8 $ 1,213.9 $ 1,183.3 $ 1,107.5
Net sales $ 8,429.7 $ 6,820.4 $ 6,642.0 $ 5,916.7
Operating expense as {7e5ff73c23cd1cd7ac587f9048f78b3ced175b09520fe5fee10055eb3132dce7} of net sales 18.2 {7e5ff73c23cd1cd7ac587f9048f78b3ced175b09520fe5fee10055eb3132dce7} 19.8 {7e5ff73c23cd1cd7ac587f9048f78b3ced175b09520fe5fee10055eb3132dce7} 19.6 {7e5ff73c23cd1cd7ac587f9048f78b3ced175b09520fe5fee10055eb3132dce7} 23.4 {7e5ff73c23cd1cd7ac587f9048f78b3ced175b09520fe5fee10055eb3132dce7}
Adjusted Operating Expense as {7e5ff73c23cd1cd7ac587f9048f78b3ced175b09520fe5fee10055eb3132dce7} of net 17.0 {7e5ff73c23cd1cd7ac587f9048f78b3ced175b09520fe5fee10055eb3132dce7} 17.8 {7e5ff73c23cd1cd7ac587f9048f78b3ced175b09520fe5fee10055eb3132dce7} 17.8 {7e5ff73c23cd1cd7ac587f9048f78b3ced175b09520fe5fee10055eb3132dce7} 18.7 {7e5ff73c23cd1cd7ac587f9048f78b3ced175b09520fe5fee10055eb3132dce7}
sales
Adjusted Net Income (Loss)
The following table presents a reconciliation of net income (loss) from
continuing operations, 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):
Year Ended December 31, Year Ended September 30,
2022 2021 2021 2020
Net income (loss) from continuing
operations $ 458.4 $ 241.9 $ 221.2 $ (81.3)
Adjusting items:
Acquisition costs 94.4 105.5 110.5 131.8
Restructuring costs 10.1 97.3 74.6 170.0
COVID-19 impacts 2.0 2.3 1.6 3.5
Total adjusting items 106.5 205.1 186.7 305.3
Less: tax impact of adjusting items1 (27.0) (52.6) (47.8) (78.2)
Total adjustments, net of tax 79.5 152.5 138.9 227.1
Adjusted Net Income (Loss) $ 537.9 $ 394.4 $ 360.1 $ 145.8
Net sales $ 8,429.7 $ 6,820.4 $ 6,642.0 $ 5,916.7
Net income (loss) as {7e5ff73c23cd1cd7ac587f9048f78b3ced175b09520fe5fee10055eb3132dce7} of sales 5.4 {7e5ff73c23cd1cd7ac587f9048f78b3ced175b09520fe5fee10055eb3132dce7} 3.5 {7e5ff73c23cd1cd7ac587f9048f78b3ced175b09520fe5fee10055eb3132dce7} 3.3 {7e5ff73c23cd1cd7ac587f9048f78b3ced175b09520fe5fee10055eb3132dce7} (1.4) {7e5ff73c23cd1cd7ac587f9048f78b3ced175b09520fe5fee10055eb3132dce7}
Adjusted Net Income (Loss) as {7e5ff73c23cd1cd7ac587f9048f78b3ced175b09520fe5fee10055eb3132dce7} of sales 6.4 {7e5ff73c23cd1cd7ac587f9048f78b3ced175b09520fe5fee10055eb3132dce7} 5.8 {7e5ff73c23cd1cd7ac587f9048f78b3ced175b09520fe5fee10055eb3132dce7} 5.4 {7e5ff73c23cd1cd7ac587f9048f78b3ced175b09520fe5fee10055eb3132dce7} 2.5 {7e5ff73c23cd1cd7ac587f9048f78b3ced175b09520fe5fee10055eb3132dce7}
1.Amounts represent tax impact on adjustments that are not included in our
income tax provision (benefit) for the periods presented. The effective tax rate
applied to these adjustments is calculated by using forecasted adjusted pre-tax
income while factoring in estimated discrete tax adjustments for the fiscal
year. The tax impact of adjustments for the years ended December 31, 2022 and
2021 and September 30, 2021 and 2020 were calculated using a blended effective
tax rate of 25.4{7e5ff73c23cd1cd7ac587f9048f78b3ced175b09520fe5fee10055eb3132dce7}, 25.6{7e5ff73c23cd1cd7ac587f9048f78b3ced175b09520fe5fee10055eb3132dce7}, 25.6{7e5ff73c23cd1cd7ac587f9048f78b3ced175b09520fe5fee10055eb3132dce7} and 25.6{7e5ff73c23cd1cd7ac587f9048f78b3ced175b09520fe5fee10055eb3132dce7}, respectively.
34
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Adjusted EBITDA
The following table presents a reconciliation of net income (loss) from
continuing operations, the most directly comparable financial measure as
measured in accordance with GAAP, to Adjusted EBITDA for each of the periods
indicated (in millions):
Year Ended December 31, Year Ended September 30,
2022 2021 2021 2020
Net income (loss) from continuing
operations $ 458.4 $ 241.9 $ 221.2 $ (81.3)
Interest expense, net 86.3 86.7 101.0 138.4
Income taxes 161.3 80.5 77.3 (27.0)
Depreciation and amortization 159.2 161.5 162.2 320.0
Stock-based compensation 27.6 17.4 18.4 16.0
Acquisition costs1 6.3 2.6 3.3 4.5
Restructuring costs1 8.9 93.0 69.7 23.8
COVID-19 impacts1 2.0 2.3 1.6 4.2
Adjusted EBITDA $ 910.0 $ 685.9 $ 654.7 $ 398.6
Net sales $ 8,429.7 $ 6,820.4 $ 6,642.0 $ 5,916.7
Net income (loss) as {7e5ff73c23cd1cd7ac587f9048f78b3ced175b09520fe5fee10055eb3132dce7} of net sales 5.4 {7e5ff73c23cd1cd7ac587f9048f78b3ced175b09520fe5fee10055eb3132dce7} 3.5 {7e5ff73c23cd1cd7ac587f9048f78b3ced175b09520fe5fee10055eb3132dce7} 3.3 {7e5ff73c23cd1cd7ac587f9048f78b3ced175b09520fe5fee10055eb3132dce7} (1.4) {7e5ff73c23cd1cd7ac587f9048f78b3ced175b09520fe5fee10055eb3132dce7}
Adjusted EBITDA as {7e5ff73c23cd1cd7ac587f9048f78b3ced175b09520fe5fee10055eb3132dce7} of net sales 10.8 {7e5ff73c23cd1cd7ac587f9048f78b3ced175b09520fe5fee10055eb3132dce7} 10.1 {7e5ff73c23cd1cd7ac587f9048f78b3ced175b09520fe5fee10055eb3132dce7} 9.9 {7e5ff73c23cd1cd7ac587f9048f78b3ced175b09520fe5fee10055eb3132dce7} 6.7 {7e5ff73c23cd1cd7ac587f9048f78b3ced175b09520fe5fee10055eb3132dce7}
1.Amounts represent adjusting items included in selling, general and
administrative expense and other income (expense); remaining adjusting item
balances are embedded within the other line item balances reported in this
table.
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 endingJune 30 ,September 30 , andDecember 31 , which encompass the peak months of construction and re-roofing. Conversely, we have historically experienced low net income levels or net losses in quarters endingMarch 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 endingMarch 31 andJune 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 endingJune 30 andSeptember 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 continuing 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.
Impact of Inflation
As a distributor, inflation has the potential to impact both the cost of
products we deliver and various inputs into the operations of our distribution
network. We have historically been successful in passing on the product-related
cost increases from our suppliers to our customers in a timely manner.
In 2022 and 2021, we were able to successfully offset significant product cost
increases with higher selling prices. We also endeavor to offset any non-product
inflation in our operations such as such as fuel, wages, and rent with annual
productivity improvements. There was no significant inflationary pressure in
2020.
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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 ofDecember 31, 2022 were our cash and cash equivalents of$67.7 million and our available borrowings of approximately$1.02 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. For a schedule of lease payments over the next five years and
thereafter, see Note 13 in the Notes to Consolidated Financial Statements. For a
schedule of principal payments for all outstanding financing arrangements over
the next five years and thereafter, see Note 12 in the Notes to Consolidated
Financial Statements.
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.
The following table summarizes our cash flows for the periods indicated (in
millions):
Year Ended
December 31, September 30,
2022 2021
Net cash provided by (used in) operating activities $ 401.1 $ 78.0
Net cash provided by (used in) investing activities (395.6) 773.9
Net cash provided by (used in) financing activities (162.5) (1,216.0)
Effect of exchange rate changes on cash and cash equivalents (1.1) (0.5)
Net increase (decrease) in cash and cash equivalents $ (158.1) $ (364.6)
Operating Activities
Net cash provided by operating activities was $401.1 million in 2022, compared
to $78.0 million in Fiscal 2021. Cash from operations increased $323.1 million
primarily due to an increase in net income after adjustments for non-cash items
of $237.6 million , as well as an incremental cash inflow of $85.5 million
stemming from changes to our net working capital, mainly driven by a favorable
change in cash outflows related to inventories. Operating cash flows used in
discontinued operations for Fiscal 2021 was $28.2 million .
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Investing Activities
Net cash used in investing activities was$395.6 million in 2022, compared to net cash provided by investing activities of$773.9 million in Fiscal 2021. The$1.17 billion decrease in investing cash flows was primarily due to proceeds from the sale of Interior Products in Fiscal 2021 as well as our business acquisitions in 2022. Investing cash flows used in discontinued operations for Fiscal 2021 was$2.5 million . Financing Activities Net cash used in financing activities was$162.5 million in 2022, compared to$1.22 billion in Fiscal 2021. The financing cash flow increase of$1.05 billion was primarily due to a$517.7 million increase in net borrowings under our revolving lines of credit and a$950.0 million decrease in net payments under our senior notes over the comparative periods, partially offset by repurchases of common stock of$388.1 million in 2022.
Monitoring and Assessing Collectability of Accounts Receivable
We perform periodic credit evaluations of our customers and typically do not require collateral, although we typically obtain payment and performance bonds for any type of public work and can lien projects under certain circumstances. Consistent with industry practices, we require payment from most customers within 30 days, except for sales to our non-residential roofing contractors, which we typically require to pay in 60 days. As our business is seasonal in certain geographic regions, our customers' businesses are also seasonal. Sales are lowest in the winter months and our past due accounts receivable balance as a percentage of total receivables generally increases during this time. Throughout the year, we closely monitor our receivables and record estimated reserves based upon our judgment of specific customer situations, aging of accounts, our historical write-offs of uncollectible accounts, and expected future circumstances that may impact collectability. Our divisional credit teams are staffed to manage and monitor our receivable aging balances and our systems allow us to enforce predetermined credit approval levels and properly leverage new business. The credit preapproval process denotes the maximum credit that each level of management can approve, with the highest credit amount requiring approval by our CEO and CFO. There are daily communications with branch and field staff. Our divisional teams conduct periodic reviews with their branch managers, various regional management staff and the Chief Credit Officer. Depending on the state of the respective division's receivables, these reviews can be weekly, biweekly or monthly. Additionally, the divisions are required to submit a monthly receivable forecast to the Chief Credit Officer. On a monthly basis, the Chief Credit Officer reviews and discusses these forecasts, as well as a prior month recap, with members of our executive management team. Periodically, we perform a specific analysis of all accounts past due and write off account balances when we have exhausted reasonable collection efforts and determined that the likelihood of collection is remote based upon the following factors:
•aging statistics and trends;
•customer payment history;
•review of the customer’s financial statements when available;
•independent credit reports; and
•discussions with customers.
We still pursue collection of amounts written off in certain circumstances and
credit the allowance for any subsequent recoveries. Over the past three fiscal
years, bad debt expense has been, on average, 0.17{7e5ff73c23cd1cd7ac587f9048f78b3ced175b09520fe5fee10055eb3132dce7} of net sales. The continued
limitation of bad debt expense is primarily attributed to the continued
strengthening of our collections process and overall credit environment.
Capital Resources
InMay 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 ofDecember 31, 2022 , we had access to the following financing arrangements:
•the 2026 U.S. Revolver, an asset-based revolving line of credit in
States
•the 2026 Canada Revolver, an asset-based revolving line of credit in
an amount up to
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•the 2028 Term Loan with an outstanding balance of
•two separate senior notes instruments, the 2029 Senior Notes and 2026 Senior
Notes, with outstanding balances of
respectively.
See Note 12 in the Notes to Consolidated Financial Statements for additional
information on our current financing arrangements and the 2021 Debt Refinancing.
Critical Accounting Estimates
Our consolidated financial statements are prepared in accordance with GAAP. Accounting policies, methods, and estimates are an integral part of the preparation of consolidated financial statements in accordance withU.S. GAAP and, in part, are based upon management's current judgments. Those judgments are normally based on knowledge and experience with regard to past and current events and assumptions about future events. Certain accounting policies, methods, and estimates are particularly sensitive because of their significance to the consolidated financial statements and because of the possibility that future events affecting them may differ markedly from management's current judgments. While there are a number of accounting policies, methods, and estimates affecting our consolidated financial statements, areas that are particularly significant include:
•Inventories (including vendor rebates)
•Business combinations
•Goodwill and intangible assets
Inventories (Including Vendor Rebates)
Inventories, consisting substantially of finished goods, are valued at the lower of cost or market (net realizable value). Cost is determined using the moving weighted-average cost method. Our arrangements with vendors typically provide for rebates after we make a special purchase and/or monthly, quarterly, and/or annual rebates of a specified amount of consideration payable when a number of measures have been achieved. Annual rebates are generally related to a specified cumulative level of purchases on a calendar-year basis. We account for such rebates as a reduction of the inventory value until the product is sold, at which time such rebates reduce cost of products sold in the consolidated statements of operations. Throughout the year, we estimate the amount of the periodic rebates based upon the expected level of purchases. We continually revise these estimates to reflect actual rebates earned based on actual purchase levels. Amounts due from vendors under these arrangements are included in "Prepaid expenses and other current assets" in the accompanying consolidated balance sheets.
Business Combinations
We record acquisitions resulting in the consolidation of a business using the acquisition method of accounting. Under this method, we record the assets acquired, including intangible assets that can be identified, and liabilities assumed based on their estimated fair values at the date of acquisition. We use an income approach to determine the fair value of acquired intangible assets, specifically the multi-period excess earnings method for customer relationships and the relief from royalty method for trade names. Various Level 3 fair value assumptions are used in the determination of these estimated fair values, including items such as sales growth rates, cost synergies, customer attrition rates, discount rates, and other prospective financial information. The purchase price in excess of the fair value of the assets acquired and liabilities assumed is recorded as goodwill. Estimates associated with the accounting for acquisitions may change as additional information becomes available regarding the assets acquired and liabilities assumed. We believe these estimates are based on reasonable assumptions, however they are inherently uncertain and unpredictable, therefore actual results may differ. Transaction costs associated with acquisitions are expensed as incurred and are included as a component of selling, general and administrative expense within the consolidated statements of operations.
On an annual basis and at interim periods when circumstances require, we test
the recoverability of our goodwill and indefinite-lived intangible assets and
review for indicators of impairment. Examples of such indicators include a
significant change in the business climate, unexpected competition, loss of key
personnel, or a decline in our market capitalization below net book value.
We perform impairment assessments at the reporting unit level, which is defined
as an operating segment or one level below an operating segment, also known as a
component. The Company evaluates its components for aggregation by examining the
distribution methods, sales mix, and operating results of each component to
determine if these characteristics will be sustained over a long-term basis. For
purposes of this evaluation, we expect components to exhibit similar economic
characteristics 3-5 years after events such as an acquisition within our core
roofing business or management/business restructuring. Components that exhibit
similar economic
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characteristics are subsequently aggregated into a single reporting unit. Based on our most recent impairment assessment performed as ofAugust 31, 2022 , it was determined that all components exhibited similar economic characteristics, and therefore should be aggregated into a single reporting unit (collectively, the "Reporting Unit"). To test for the recoverability of goodwill and indefinite-lived intangible assets, we first perform a qualitative assessment based on economic, industry, and company-specific factors for all or selected reporting units to determine whether the existence of events and circumstances indicates that it is more likely than not that the goodwill or indefinite-lived intangible asset is impaired. Based on the results of the qualitative assessment, two additional steps in the impairment assessment may be required. The first step would require a comparison of each reporting unit's fair value to the respective carrying value. If the carrying value exceeds the fair value, a second step is performed to measure the amount of impairment loss on a relative fair value basis, if any. Based on our most recent impairment assessment performed as ofAugust 31, 2022 , we concluded that it was more likely than not that the fair value of the goodwill and indefinite-lived intangible assets exceeded their net carrying amount, therefore the quantitative two-step impairment test was not required. Our total market capitalization exceeded carrying value by approximately 117{7e5ff73c23cd1cd7ac587f9048f78b3ced175b09520fe5fee10055eb3132dce7} as ofAugust 31, 2022 . We did not identify any macroeconomic, industry conditions, or cost-related factors that would indicate it is more likely than not that the fair value of the reporting unit was less than its carrying value. We amortize certain identifiable intangible assets that have finite lives, currently consisting of customer relationships and trade names. Customer relationship assets are amortized on an accelerated basis based on the expected cash flows generated by the existing customers; and trade names are amortized on an accelerated basis over the term we expect to use the trade name. Amortizable intangible assets are tested for impairment, when deemed necessary, based on undiscounted cash flows and, if impaired, are written down to fair value based on either discounted cash flows or appraised values.
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