BEACON ROOFING SUPPLY INC - Quarter Report: 2019 December (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the Quarterly Period Ended December 31, 2019

☐	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, VA 20170

(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 and Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically 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	☐
Non-accelerated filer	☐	Smaller reporting company	☐
Emerging growth company	☐

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

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

As of January 31, 2020, 68,805,794 shares of common stock, par value $0.01 per share, of the registrant were outstanding.

BEACON ROOFING SUPPLY, INC.

FORM 10-Q

For the Quarter Ended December 31, 2019

TABLE OF CONTENTS

PART I.	Financial Information (unaudited)
	Item 1.	Condensed Consolidated Financial Statements
		Consolidated Balance Sheets	3
		Consolidated Statements of Operations	4
		Consolidated Statements of Comprehensive Income	5
		Consolidated Statements of Stockholders’ Equity	6
		Consolidated Statements of Cash Flows	7
		Notes to Condensed Consolidated Financial Statements	8
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	20
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	30
	Item 4.	Controls and Procedures	30
PART II.	Other Information
	Item 6.	Exhibits	31
Signatures			32

PART I.Financial Information (Unaudited)

Item 1.

Condensed Consolidated Financial Statements

BEACON ROOFING SUPPLY, INC.

Consolidated Balance Sheets

(In thousands, except share and per share amounts)

	December 31,			September 30,			December 31,
	2019			2019			2018
	(unaudited)						(unaudited)
Assets
Current assets:
Cash and cash equivalents	$	43,749		$	72,287		$	18,423
Accounts receivable, less allowance of $15,200, $13,095 and $21,353 as of December 31, 2019, September 30, 2019 and December 31, 2018, respectively		861,087			1,108,134			881,749
Inventories, net		1,037,827			1,018,183			1,025,310
Prepaid expenses and other current assets		311,112			315,643			375,598
Total current assets		2,253,775			2,514,247			2,301,080
Property and equipment, net		253,019			260,376			273,742
Goodwill		2,491,166			2,490,590			2,489,730
Intangibles, net		1,077,478			1,125,540			1,282,242
Operating lease assets		463,081			-			-
Other assets, net		10			2,059			1,243
Total assets	$	6,538,529		$	6,392,812		$	6,348,037

Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable	$	594,613		$	822,931		$	551,940
Accrued expenses		411,169			599,155			375,672
Current operating lease liabilities		98,994			-			-
Current portions of long-term debt/obligations		13,877			18,689			20,315
Total current liabilities		1,118,653			1,440,775			947,927
Borrowings under revolving lines of credit, net		215,642			80,961			503,216
Long-term debt, net		2,495,135			2,494,623			2,497,123
Deferred income taxes, net		107,085			103,913			110,179
Non-current operating lease liabilities		358,504			-			-
Long-term obligations under equipment financing, net		1,607			4,609			10,689
Other long-term liabilities		2,018			6,383			5,532
Total liabilities		4,298,644			4,131,264			4,074,666

Commitments and contingencies (Note 9)

Convertible Preferred Stock; $0.01 par value; aggregate liquidation preference $400,000; 400,000 shares authorized, issued and outstanding as of December 31, 2019, September 30, 2019 and December 31, 2018¹		399,195			399,195			399,195

Stockholders' equity:
Common stock (voting); $0.01 par value; 100,000,000 shares authorized; 68,760,731, 68,574,176 and 68,432,707 shares issued and outstanding as of December 31, 2019, September 30, 2019 and December 31, 2018, respectively		687			685			684
Undesignated preferred stock; 5,000,000 shares authorized, none issued or outstanding		-			-			-
Additional paid-in capital		1,086,970			1,083,042			1,067,711
Retained earnings		769,812			799,222			826,941
Accumulated other comprehensive income (loss)		(16,779	)		(20,596	)		(21,160	)
Total stockholders' equity		1,840,690			1,862,353			1,874,176
Total liabilities and stockholders' equity	$	6,538,529		$	6,392,812		$	6,348,037

________________________________________

In connection with the acquisition of Allied Building Products Corp. (“Allied”) on January 2, 2018 (the “Allied Acquisition”), 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 in cash or in-kind, subject to certain conditions). The Preferred Stock is not mandatorily redeemable; therefore, it is classified as mezzanine equity on the Company’s consolidated balance sheets.

See accompanying Notes to Condensed Consolidated Financial Statements

BEACON ROOFING SUPPLY, INC.

Consolidated Statements of Operations

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

	Three Months Ended December 31,
	2019			2018
Net sales	$	1,675,112		$	1,721,676
Cost of products sold		1,264,414			1,286,107
Gross profit		410,698			435,569
Operating expense:
Selling, general and administrative		326,919			327,693
Depreciation		19,072			17,601
Amortization		44,778			52,021
Total operating expense		390,769			397,315
Income (loss) from operations		19,929			38,254
Interest expense, financing costs, and other		38,293			38,361
Loss on debt extinguishment		14,678			-
Income (loss) before provision for income taxes		(33,042	)		(107	)
Provision for (benefit from) income taxes		(9,632	)		786
Net income (loss)	$	(23,410	)	$	(893	)
Dividends on Preferred Stock¹		6,000			6,000
Net income (loss) attributable to common shareholders	$	(29,410	)	$	(6,893	)

Weighted-average common stock outstanding:
Basic		68,667,943			68,248,020
Diluted²		68,667,943			68,248,020

Net income (loss) per share³:
Basic	$	(0.43	)	$	(0.10	)
Diluted	$	(0.43	)	$	(0.10	)

________________________________________

¹	Three months ended December 31, 2019 and 2018 amounts are composed of $5.0 million in undeclared cumulative Preferred Stock dividends, as well as an additional $1.0 million of Preferred Stock dividends that had been declared and paid as of period end.

²	Amounts do not include 9,694,619 shares issuable upon conversion of the Company’s participating Preferred Stock because such conversion would be anti-dilutive (see Note 4 for further discussion).

³	See Note 4 for detailed calculations and further discussion.

See accompanying Notes to Condensed Consolidated Financial Statements

BEACON ROOFING SUPPLY, INC.

Consolidated Statements of Comprehensive Income

(Unaudited; In thousands)

	Three Months Ended December 31,
	2019			2018
Net income (loss)	$	(23,410	)	$	(893	)
Other comprehensive income (loss):
Foreign currency translation adjustment		1,288			(3,910	)
Unrealized gain (loss) due to change in fair value of derivatives, net of tax		2,529			-
Total other comprehensive income (loss)		3,817			(3,910	)
Comprehensive income (loss)	$	(19,593	)	$	(4,803	)

See accompanying Notes to Condensed Consolidated Financial Statements

BEACON ROOFING SUPPLY, INC.

Consolidated Statements of Stockholders’ Equity

(Unaudited; In thousands, except share amounts)

											Accumulated
					Additional						Other			Total
	Common Stock				Paid-in			Retained			Comprehensive			Stockholders'
	Shares		Amount		Capital			Earnings			Income (Loss)			Equity
Three Months Ended December 31, 2018
Balance as of September 30, 2018		68,135,790	$	681	$	1,067,040		$	833,834		$	(17,250	)	$	1,884,305
Issuance of common stock, net of shares withheld for taxes		296,917		3		(2,786	)		-			-			(2,783	)
Stock-based compensation		-		-		3,457			-			-			3,457
Other comprehensive income (loss)		-		-		-			-			(3,910	)		(3,910	)
Net income (loss)		-		-		-			(893	)		-			(893	)
Dividends on Preferred Stock¹		-		-		-			(6,000	)		-			(6,000	)
Balance as of December 31, 2018		68,432,707	$	684	$	1,067,711		$	826,941		$	(21,160	)	$	1,874,176

Three Months Ended December 31, 2019
Balance as of September 30, 2019		68,574,176	$	685	$	1,083,042		$	799,222		$	(20,596	)	$	1,862,353
Issuance of common stock, net of shares withheld for taxes		186,555		2		(1,228	)		-			-			(1,226	)
Stock-based compensation		-		-		5,156			-			-			5,156
Other comprehensive income (loss)		-		-		-			-			3,817			3,817
Net income (loss)		-		-		-			(23,410	)		-			(23,410	)
Dividends on Preferred Stock¹		-		-		-			(6,000	)		-			(6,000	)
Balance as of December 31, 2019		68,760,731	$	687	$	1,086,970		$	769,812		$	(16,779	)	$	1,840,690

¹	Amount represents dividends that have been declared and paid during the respective periods presented.

See accompanying Notes to Condensed Consolidated Financial Statements

BEACON ROOFING SUPPLY, INC.

Consolidated Statements of Cash Flows

(Unaudited; In thousands)

	Three Months Ended December 31,
	2019			2018
Operating Activities
Net income (loss)	$	(23,410	)	$	(893	)
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		63,850			69,622
Stock-based compensation		5,156			3,457
Certain interest expense and other financing costs		2,849			3,024
Beneficial lease amortization		-			572
Loss on debt extinguishment		14,678			-
Gain on sale of fixed assets		(330	)		(265	)
Deferred income taxes		2,357			3,201
Changes in operating assets and liabilities, net of the effects of businesses acquired in the period:
Accounts receivable		247,685			207,119
Inventories		(19,147	)		(90,712	)
Prepaid expenses and other current assets		(3,362	)		(131,638	)
Accounts payable and accrued expenses		(417,507	)		(400,616	)
Other assets and liabilities		1,874			246
Net cash provided by (used in) operating activities		(125,307	)		(336,883	)

Investing Activities
Purchases of property and equipment		(12,194	)		(11,688	)
Acquisition of businesses, net		-			(163,973	)
Proceeds from the sale of assets		396			401
Net cash provided by (used in) investing activities		(11,798	)		(175,260	)

Financing Activities
Borrowings under revolving lines of credit		750,711			1,298,654
Payments under revolving lines of credit		(616,767	)		(888,225	)
Payments under term loan		(2,425	)		-
Borrowings under senior notes		300,000			-
Payment under senior notes		(309,564	)		-
Payment of debt issuance costs		(3,582	)		-
Payments under equipment financing facilities and finance leases		(2,282	)		(1,465	)
Payment of dividends on Preferred Stock		(6,000	)		(6,000	)
Proceeds from issuance of common stock related to equity awards		875			834
Payment of taxes related to net share settlement of equity awards		(2,101	)		(3,617	)
Net cash provided by (used in) financing activities		108,865			400,181

Effect of exchange rate changes on cash and cash equivalents		(298	)		458

Net increase (decrease) in cash and cash equivalents		(28,538	)		(111,504	)
Cash and cash equivalents, beginning of period		72,287			129,927
Cash and cash equivalents, end of period	$	43,749		$	18,423

Supplemental Cash Flow Information
Cash paid during the period for:
Interest	$	57,420		$	57,732
Income taxes paid (received), net of refunds		125			1,239

See accompanying Notes to Condensed Consolidated Financial Statements

BEACON ROOFING SUPPLY, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

1. Company Overview

Beacon Roofing Supply, Inc. (“Beacon” or the “Company”) was incorporated in the state of Delaware on August 22, 1997 and is the largest publicly traded distributor of roofing materials and complementary building products in the United States and Canada.

As of December 31, 2019, the Company operated 530 branches throughout all 50 states throughout the U.S. and 6 provinces in Canada. The Company’s material subsidiaries are Beacon Sales Acquisition, Inc. and Beacon Roofing Supply Canada Company.

2. Summary of Significant Accounting Policies

Basis of Presentation

The 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 December 31, 2018 has been presented for a better understanding of the impact of seasonal fluctuations on the Company’s financial condition.

In management’s opinion, the financial statements include all normal and recurring adjustments that are considered necessary for the fair presentation of the Company’s financial position and operating results. The results for the three months ended December 31, 2019 are not necessarily indicative of the results to be expected for the twelve months ending September 30, 2020 (“fiscal year 2020” or “2020”).

The three-month periods ended December 31, 2019 and 2018 each had 62 business days.

These interim Condensed Consolidated Financial Statements should be read in conjunction with the audited Consolidated Financial Statements and Notes thereto contained in the Company’s fiscal year 2019 (“2019”) Annual Report on Form 10-K for the year ended September 30, 2019.

Use of Estimates

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

Recent Accounting Pronouncements—Adopted

In February 2016, the FASB issued ASU 2016-02, “Leases.” This guidance replaces most existing accounting for leases and requires enhanced disclosures. The guidance requires the Company to record a right-of-use asset and a lease liability for most of the Company’s leases, including those previously treated as operating leases. The Company adopted the standard using the modified retrospective transition method as of October 1, 2019 and will not apply the standard to comparative prior periods presented. The Company used the package of transition practical expedients outlined in the transition guidance. The most significant effects of the new standard were the recognition of $483.5 million of operating lease assets and $476.0 million of operating lease liabilities on October 1, 2019. As part of the adoption, the Company carried forward the assessment from the previous lease standard of whether Beacon’s contracts contain (or are) leases, the classification of leases, and remaining lease terms. The accounting for finance leases remains unchanged. The adoption of the new standard did not have a material impact on the Company’s consolidated results of operations or cash flows. See Note 8 for further discussion.

In February 2018, the FASB issued ASU 2018-02, “Income Statement – Reporting Comprehensive Income.” This guidance is intended to address the accounting treatment for the tax effects on items within accumulated other comprehensive income as a result of the adoption of the Tax Cuts and Jobs Act of 2017. This new standard became effective for the Company on October 1, 2019. The adoption of this new guidance did not have a material impact on the Company’s financial statements and related disclosures.

Recent Accounting Pronouncements—Not Yet Adopted

In June 2016, the FASB issued ASU 2016-13, “Financial Instruments—Credit Losses: Measurement of Credit Losses on Financial Instruments.” This guidance is intended to introduce a revised approach to the recognition and measurement of credit losses,

emphasizing an updated model based on expected losses rather than incurred losses. This new standard is effective for annual reporting periods, and interim reporting periods contained therein, beginning after December 15, 2019, and early adoption is permitted. The Company is currently evaluating the impact that this guidance may have on its financial statements and related disclosures.

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

In December 2019, the FASB issued ASU 2019-12, “Income Taxes – Simplifying the Accounting for Income Taxes.” This guidance is intended to simplify the accounting for income taxes by removing certain exceptions, clarifying existing guidance and improving consistent application of the guidance. This new standard is effective for annual reporting periods, and interim reporting periods contained therein, beginning after December 15, 2020, and early adoption is permitted. The Company is currently evaluating the impact that this guidance may have on its financial statements and related disclosures.

3. Net Sales

The following table presents the Company’s net sales by product line and geography for each period presented (in thousands):

	U.S.		Canada		Total
Three Months Ended December 31, 2018
Residential roofing products	$	720,511	$	11,679	$	732,190
Non-residential roofing products		390,268		29,641		419,909
Complementary building products		568,116		1,461		569,577
Total net sales	$	1,678,895	$	42,781	$	1,721,676

Three Months Ended December 31, 2019
Residential roofing products	$	691,307	$	10,929	$	702,236
Non-residential roofing products		388,482		32,371		420,853
Complementary building products		549,779		2,244		552,023
Total net sales	$	1,629,568	$	45,544	$	1,675,112

4. Net Income (Loss) Per Share

Basic net income (loss) per share is calculated by dividing net income (loss) attributable to common shareholders by the weighted-average number of common shares outstanding during the period, without consideration for common share equivalents or the conversion of Preferred Stock. Common share equivalents consist of the incremental common shares issuable upon the exercise of stock options and vesting of restricted stock unit awards. Diluted net income (loss) per common share is calculated by dividing net income (loss) attributable to common shareholders by the fully diluted weighted-average number of common shares outstanding during the period.

Holders of Preferred Stock participate in dividends on an as-converted basis when declared on common shares. As a result, Preferred Stock is classified as a participating security and thereby requires the allocation of income that would have otherwise been available to common shareholders when calculating net income (loss) per share.

Diluted net income (loss) per share is calculated by utilizing the most dilutive result of the if-converted and two-class methods. In both methods, net income (loss) attributable to common shareholders and the weighted-average common shares outstanding are adjusted to account for the impact of the assumed issuance of potential common shares that are dilutive, subject to dilution sequencing rules.

The following table presents the components and calculations of basic and diluted net income (loss) per share for each period presented (in thousands, except share and per share amounts):

	Three Months Ended December 31,
	2019			2018
Net income (loss)	$	(23,410	)	$	(893	)
Dividends on Preferred Stock		6,000			6,000
Net income (loss) attributable to common shareholders	$	(29,410	)	$	(6,893	)
Undistributed income allocated to participating securities		-			-
Net income (loss) attributable to common shareholders - basic and diluted	$	(29,410	)	$	(6,893	)

Weighted-average common shares outstanding - basic		68,667,943			68,248,020
Effect of common share equivalents		-			-
Weighted-average common shares outstanding - diluted		68,667,943			68,248,020

Net income (loss) per share - basic	$	(0.43	)	$	(0.10	)
Net income (loss) per share - diluted	$	(0.43	)	$	(0.10	)

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

	Three Months Ended December 31,
	2019		2018
Stock options		1,911,501		1,554,518
Restricted stock units		400,914		318,229
Preferred Stock		9,694,619		9,694,619

5. Stock-based Compensation

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

In December 2019, the Company’s Board of Directors adopted the Company’s Second Amended and Restated 2014 Plan, with a share increase of an additional 4,850,000 shares to be effective upon its approval by the shareholders at the Company’s Annual Meeting of Shareholders scheduled to be held on February 11, 2020. As of December 31, 2019, there were 680,568 shares of common stock available for issuance.

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

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

Stock Options

Non-qualified stock options granted to employees generally expire 10 years after the grant date and are subject to continued employment and vest evenly in three annual installments over the three-year period following the grant date.

The fair value of the stock options granted during the three months ended December 31, 2019 were estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions:

Risk-free interest rate	1.74	%
Expected volatility	33.18	%
Expected life (in years)	5.25
Dividend yield	-

The following table summarizes all stock option activity for the three months ended December 31, 2019 (in thousands, except share, per share, and time period amounts):

	Options Outstanding			Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term (Years)		Aggregate Intrinsic Value¹
Balance as of September 30, 2019		2,339,489		$	32.61		6.1	$	12,034
Granted		407,736			33.47
Exercised		(48,122	)		18.18
Canceled/Forfeited		(10,906	)		37.79
Expired		(2,534	)		14.45
Balance as of December 31, 2019		2,685,663		$	32.99		6.5	$	9,099
Vested and expected to vest after December 31, 2019		2,616,347		$	33.01		6.5	$	8,979
Exercisable as of December 31, 2019		1,759,950		$	33.14		5.1	$	7,278

________________________________________________________________

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 December 31, 2019 and 2018, the Company recorded stock-based compensation expense related to stock options of $1.1 million and $1.0 million, respectively. As of December 31, 2019, there was $8.1 million of unrecognized 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 for the periods presented (in thousands, except per share amounts):

	Three Months Ended December 31,
	2019		2018
Weighted-average fair value of stock options granted	$	10.70	$	8.75
Total grant date fair value of stock options vested		3,902		3,680
Total intrinsic value of stock options exercised		665		712

Restricted Stock Units

Restricted stock unit (“RSU”) awards granted to employees are subject to continued employment and generally vest on the third anniversary of the grant date. The Company also grants certain RSU awards to management that contain one or more additional vesting conditions tied directly to a defined performance metric for the Company. The actual number of RSUs that will vest can range from 0% to 200% of the original grant amount, depending upon the terms of the award and actual Company performance above or below the established performance metric targets. The Company estimates performance in relation to the defined targets when determining the projected number of RSUs that are expected to vest and calculating the related stock-based compensation expense.

RSUs granted to non-employee directors are subject to continued service and vest on the first anniversary of the grant date (except under certain conditions). Generally, the common shares underlying the RSUs are not eligible for distribution until the non-employee director’s service on the Board has terminated, and for non-employee director RSU grants made prior to fiscal year 2014, the share distribution date is six months after the director’s termination of service on the board. Beginning in fiscal year 2016, the Company enacted a policy that allows any non-employee directors who have Beacon equity holdings (defined as common stock and outstanding vested equity awards) with a total fair value that is greater than or equal to five times the annual Board cash retainer to elect to have their RSU grant settle simultaneously with vesting. Eligibility is determined annually based on the value of the non‑employee directors’ Beacon equity holdings as of December 1. Elections must be made by December 31 and apply only to the succeeding RSU grant following the election.

The following table summarizes all restricted stock unit activity for the three months ended December 31, 2019:

	RSUs Outstanding			Weighted-Average Grant Date Fair Value
Balance as of September 30, 2019		1,123,358		$	37.48
Granted		378,320			33.47
Released		(199,960	)		40.24
Canceled/Forfeited		(2,906	)		29.15
Balance as of December 31, 2019		1,298,812		$	35.75
Vested and expected to vest after December 31, 2019		1,077,493		$	36.98

During the three months ended December 31, 2019 and 2018, the Company recorded stock-based compensation expense related to restricted stock units of $4.1 million and $2.4 million, respectively. As of December 31, 2019, there was $22.3 million of unrecognized compensation cost related to unvested restricted stock units, which is expected to be recognized over a weighted-average period of 2.2 years.

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

	Three Months Ended December 31,
	2019		2018
Weighted-average fair value of RSUs granted	$	33.47	$	27.28
Total grant date fair value of RSUs vested		8,082		14,840
Total intrinsic value of RSUs released		6,826		11,160

6. Goodwill and Intangible Assets

Goodwill

The following table sets forth the change in the carrying amount of goodwill during the three months ended December 31, 2019 and 2018, respectively (in thousands):

Balance as of September 30, 2018	$	2,491,779
Acquisitions¹		(513	)
Translation and other adjustments		(1,536	)
Balance as of December 31, 2018	$	2,489,730


Balance as of September 30, 2019	$	2,490,590
Translation and other adjustments		576
Balance as of December 31, 2019	$	2,491,166

_____________________________

Reflects purchase accounting adjustments related to fiscal year 2018 acquisition of Atlas Supply, Inc.

The changes in the carrying amount of goodwill for the three months ended December 31, 2019 and 2018 were driven primarily by purchase accounting and foreign currency translation adjustments.

Intangible Assets

The following table summarizes intangible assets by category (in thousands, except time period amounts):

	December 31, 2019			September 30, 2019			December 31, 2018			Weighted-Average Remaining Life¹ (Years)
Amortizable intangible assets:
Non-compete agreements	$	2,824		$	2,824		$	2,824			2.4
Customer relationships		1,531,120			1,530,970			1,530,748			17.4
Trademarks		10,500			10,500			10,500			6.7
Beneficial lease arrangements		-			8,060			8,060			-
Total amortizable intangible assets		1,544,444			1,552,354			1,552,132
Accumulated amortization		(660,016	)		(619,864	)		(462,940	)
Total amortizable intangible assets, net	$	884,428		$	932,490		$	1,089,192
Indefinite lived trademarks		193,050			193,050			193,050
Total intangibles, net	$	1,077,478		$	1,125,540		$	1,282,242

_________________________________________________________

¹	As of December 31, 2019.

For the three months ended December 31, 2019 and 2018, the Company recorded $44.8 million and $52.0 million of amortization expense relating to the above-listed intangible assets, respectively. The intangible asset lives range from 5 to 20 years and have a weighted-average remaining life of 17.3 years as of December 31, 2019.

The following table summarizes the estimated future amortization expense for intangible assets (in thousands):

Year Ending September 30,¹
2020 (Jan - Sept)	$	133,109
2021		148,318
2022		120,666
2023		97,522
2024		78,873
Thereafter		305,940
Total future amortization expense	$	884,428

___________________________

Amounts included in the table are as of December 31, 2019 and do not reflect the incremental amortization of indefinite-lived intangible assets that is expected to occur in connection with the rebranding efforts that were announced in January 2020 (see Note 14 for further discussion).

7. Financing Arrangements

The following table summarizes all financing arrangements from the respective periods presented (in thousands):

	December 31, 2019			September 30, 2019			December 31, 2018
Revolving Lines of Credit
2023 ABL:
U.S. Revolver¹	$	209,482		$	80,961		$	496,619
Canada Revolver²		6,160			-			6,597
Current portion		-			-			-
Borrowings under revolving lines of credit, net	$	215,642		$	80,961		$	503,216

Long-term Debt, net
Term Loans:
2025 Term Loan³	$	925,486		$	926,535		$	932,102
Current portion		(9,700	)		(9,700	)		(9,700	)
Long-term borrowings under term loan		915,786			916,835			922,402
Senior Notes:
2023 Senior Notes⁴		-			294,886			293,926
2025 Senior Notes⁵		1,283,605			1,282,902			1,280,795
2026 Senior Notes⁶		295,744			-			-
Current portion		-			-			-
Long-term borrowings under senior notes		1,579,349			1,577,788			1,574,721
Long-term debt, net	$	2,495,135		$	2,494,623		$	2,497,123

Equipment Financing Facilities, net
Equipment financing facilities⁷	$	5,784		$	6,885		$	10,148
Capital lease obligations⁸		-			6,713			11,156
Current portion		(4,177	)		(8,989	)		(10,615	)
Long-term obligations under equipment financing, net	$	1,607		$	4,609		$	10,689

____________________________________________________________

¹	Effective rate on borrowings of 3.25%, 5.41% and 4.37% as of December 31, 2019, September 30, 2019 and December 31, 2018, respectively.

²	Effective rate on borrowings of 4.20% and 4.45% as of December 31, 2019 and December 31, 2018, respectively.

³	Interest rate of 3.95%, 4.36% and 4.77% as of December 31, 2019, September 30, 2019 and December 31, 2018, respectively.

⁴	Interest rate of 6.38% for all periods presented.

⁵	Interest rate of 4.88% for all periods presented.

⁶	Interest rate of 4.50% as of December 31, 2019.

⁷	Fixed interest rates ranging from 2.33% to 2.89% for all periods presented.

⁸

As of October 1, 2019, in connection with the adoption of ASU 2016-02, capital lease obligations that were formerly included in equipment financing facilities are included either in accrued expenses or other long-term liabilities on the consolidated balance sheets. See Notes 2 and 8 for further information.

Debt Refinancing

2026 Senior Notes

On October 9, 2019, the Company, and certain subsidiaries of the Company as guarantors, executed a private offering of $300.0 million aggregate principal amount of 4.50% Senior Notes due 2026 (the “2026 Senior Notes”) at an issue price of 100%. The 2026 Senior Notes mature on November 15, 2026 and bear interest at a rate of 4.50% per annum, payable on May 15 and November 15 of each year, commencing on May 15, 2020.

The 2026 Senior Notes and related subsidiary guarantees were offered and sold in a private transaction exempt from the registration requirements of the Securities Act of 1933, as amended (the “Securities Act”), to qualified institutional buyers in accordance with Rule 144A under the Securities Act and to non-U.S. persons outside of the United States pursuant to Regulation S under the Securities Act. The 2026 Senior Notes and related subsidiary guarantees have not been, and will not be, registered under the Securities Act or the securities laws of any state or other jurisdiction, and may not be offered or sold in the United States absent registration or an applicable exemption from the registration requirements of the Securities Act and other applicable securities laws.

On October 28, 2019, the Company used the net proceeds from the offering, together with cash on hand and available borrowings under the 2023 ABL (as defined below), to redeem all $300.0 million aggregate principal amount outstanding of the 2023 Senior Notes (as defined below) at a redemption price of 103.188% and to pay all related accrued interest, fees and expenses.

The intent of the transaction was to take advantage of lower market interest rates by refinancing the existing 2023 Senior Notes with the 2026 Senior Notes. The Company has accounted for the refinance as a debt extinguishment of the 2023 Senior Notes and an issuance of the 2026 Senior Notes. As a result, the Company recorded a loss on debt extinguishment of $14.7 million in the three months ended December 31, 2019. The Company capitalized new debt issuance costs of $4.4 million related to the 2026 Senior Notes, which are being amortized over the term of the financing arrangements.

As of December 31, 2019, the outstanding balance on the 2026 Senior Notes, net of $4.3 million of unamortized debt issuance costs, was $295.7 million.

Financing - Allied Acquisition

In connection with the Allied Acquisition, the Company entered into various financing arrangements totaling $3.57 billion, including an asset-based revolving line of credit of $1.30 billion (“2023 ABL”), $525.0 million of which was drawn at closing, and a $970.0 million term loan (“2025 Term Loan”). The Company also raised an additional $1.30 billion through the issuance of senior notes (the “2025 Senior Notes”).

The proceeds from these financing arrangements were used to finance the Allied Acquisition, to refinance or otherwise extinguish all third-party indebtedness, to pay fees and expenses associated with the acquisition, and to provide working capital and funds for other general corporate purposes. The Company capitalized new debt issuance costs totaling approximately $65.3 million related to the 2023 ABL, the 2025 Term Loan and the 2025 Senior Notes, which are being amortized over the term of the financing arrangements.

2023 ABL

On January 2, 2018, the Company entered into a $1.30 billion asset-based revolving line of credit with Wells Fargo Bank, N.A. and a syndicate of other lenders. The 2023 ABL consists of revolving loans in both the United States (“2023 U.S. Revolver”) in the amount of $1.20 billion and Canada (“2023 Canada Revolver”) in the amount of $100.0 million. The 2023 ABL has a maturity date of January 2, 2023. The 2023 ABL has various borrowing tranches with an interest rate based on a LIBOR rate (with a floor) plus a fixed spread. The current unused commitment fees on the 2023 ABL are 0.25% per annum.

There is one financial covenant under the 2023 ABL, which is the Fixed Charge Coverage Ratio. The Fixed Charge Coverage Ratio is calculated by dividing Consolidated EBITDA, less Capital Expenditures, by Consolidated Fixed Charges (all terms as defined in the agreement). Per the covenant, the Company’s Fixed Charge Coverage Ratio must be a minimum of 1.00 at the end of each fiscal quarter, calculated on a trailing four quarter basis. The Company was in compliance with this covenant as of December 31, 2019.

The 2023 ABL is secured by a first priority lien over substantially all of the Company’s and each guarantor’s accounts, chattel paper, deposit accounts, books, records and inventory (as well as intangibles related thereto), subject to certain customary exceptions (the “ABL Priority Collateral”), and a second priority lien over substantially all of the Company’s and each guarantor’s other assets, including all of the equity interests of any subsidiary held by the Company or any guarantor, subject to certain customary exceptions (the “Term Priority Collateral”). The 2023 ABL is guaranteed jointly, severally, fully and unconditionally by the Company’s active United States subsidiaries.

As of December 31, 2019, the total balance outstanding on the 2023 ABL, net of $7.5 million of unamortized debt issuance costs, was $215.6 million. The Company also has outstanding standby letters of credit related to the 2023 U.S. Revolver in the amount of $13.0 million as of December 31, 2019.

2025 Term Loan

On January 2, 2018, the Company entered into a $970.0 million Term Loan with Citibank N.A., and a syndicate of other lenders. The 2025 Term Loan requires quarterly principal payments in the amount of $2.4 million, with the remaining outstanding principal to be paid on its January 2, 2025 maturity date. The interest rate is based on a LIBOR rate (with a floor) plus a fixed spread. The Company has the option of selecting a LIBOR period that determines the rate at which interest can accrue on the Term Loan as well as the period in which interest payments are made.

The 2025 Term Loan is secured by a first priority lien on the Term Priority Collateral and a second priority lien on the ABL Priority Collateral. Certain excluded assets will not be included in the Term Priority Collateral and the ABL Priority Collateral. The Term Loan is guaranteed jointly, severally, fully and unconditionally by the Company’s active United States subsidiaries.

As of December 31, 2019, the outstanding balance on the 2025 Term Loan, net of $27.5 million of unamortized debt issuance costs, was $925.5 million.

2025 Senior Notes

On October 25, 2017, Beacon Escrow Corporation, a wholly owned subsidiary of the Company (the “Escrow Issuer”), completed a private offering of $1.30 billion aggregate principal amount of 4.875% Senior Notes due 2025 at an issue price of 100%. The 2025 Senior Notes bear interest at a rate of 4.875% per annum, payable semi-annually in arrears, beginning May 1, 2018. The Company anticipates repaying the 2025 Senior Notes at the maturity date of November 1, 2025. Per the terms of the Escrow Agreement, the net proceeds from the 2025 Senior Notes remained in escrow until they were used to fund a portion of the purchase price of the Allied Acquisition payable at closing on January 2, 2018.

Upon closing of the Allied Acquisition on January 2, 2018, (i) the Escrow Issuer merged with and into the Company, and the Company assumed all obligations under the 2025 Senior Notes; and (ii) all existing domestic subsidiaries of the Company (including the entities acquired in the Allied Acquisition) became guarantors of the 2025 Senior Notes.

As of December 31, 2019, the outstanding balance on the 2025 Senior Notes, net of $16.4 million of unamortized debt issuance costs, was $1.28 billion.

Financing - RSG Acquisition

2023 Senior Notes

On October 1, 2015, in connection with the acquisition of Roofing Supply Group, the Company raised $300.0 million by issuing 6.38% Senior Notes due 2023 (the “2023 Senior Notes”). The 2023 Senior Notes had a coupon rate of 6.38% per annum and were payable semi-annually in arrears, beginning April 1, 2016. There were early payment provisions in the indenture in which the Company would be subject to redemption premiums. On October 28, 2019, the Company redeemed all $300.0 million aggregate principal amount outstanding of the 2023 Senior Notes at a redemption price of 103.188% plus accrued interest and, as a result, wrote off $5.1 million of unamortized debt issuance costs.

Equipment Financing Facilities

As of December 31, 2019, the Company had $5.8 million outstanding under equipment financing facilities, with fixed interest rates ranging from 2.33% to 2.89% and payments due through September 2021.

8. Leases

The Company mostly operates in leased facilities, which are accounted for as operating leases. The leases typically provide for a base rent plus real estate taxes and insurance. Certain of the leases provide for escalating rents over the lives of the leases, and rent expense is recognized over the terms of those leases on a straight-line basis. The real estate leases expire between 2020 and 2038.

In addition, the Company leases equipment such as trucks and forklifts. Equipment leases are primarily accounted for as operating leases; however, the Company also accounts for some equipment leases as finance leases. The equipment leases expire between 2020 and 2026.

The Company determines if an arrangement is a lease at inception. Operating lease assets and liabilities are included on the consolidated balance sheet as of December 31, 2019. Finance lease assets are included in property and equipment, net. The current portion of the finance lease liabilities is included in accrued expenses, and the noncurrent portion is included in other long-term liabilities.

Operating lease assets and liabilities are recognized at the present value of the future lease payments at the lease commencement date. The interest rate used to determine the present value of the future lease payments is the Company’s incremental borrowing rate, because the interest rates implicit in most of the leases are not readily determinable. The incremental borrowing rate is estimated to approximate the interest rate on a collateralized basis with similar terms and payments.

Operating lease assets include any prepaid lease payments and lease incentives. The Company’s lease terms include periods under options to extend or terminate the lease when it is reasonably certain that those options will be exercised. The Company generally uses the base, non-cancelable lease term when determining the lease assets and liabilities. Operating lease expense is recognized on a straight-line basis over the lease term.

The Company’s lease agreements generally contain lease and non-lease components. Non-lease components primarily include payments for maintenance and utilities. The Company has elected to combine fixed payments for non-lease components with lease payments and account for them together as a single lease component, which increases the lease assets and liabilities.

Payments under the Company’s lease agreements are primarily fixed. However, certain lease agreements contain variable payments, which are expensed as incurred and are not included in the operating lease assets and liabilities. These amounts include payments affected by the Consumer Price Index and payments for maintenance and utilities. The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants.

The following table summarizes components of operating lease costs recognized within selling, general and administrative expenses (in thousands):

	Three Months Ended December 31, 2019
Operating lease costs	$	31,461
Variable lease costs		2,657
Total operating lease costs	$	34,118

The following table presents supplemental cash flow information related to operating leases (in thousands):

		Three Months Ended December 31, 2019
Operating cash flows for operating lease liabilities		$	29,500

As of December 31, 2019, the Company’s operating leases had a weighted-average remaining lease term of 5.8 years and a weighted-average discount rate of 3.98%. Future lease payments under operating leases as of December 31, 2019 were as follows (in thousands):

Year Ending September 30,
2020 (Jan - Sept)	$	85,742
2021		105,322
2022		89,230
2023		71,987
2024		54,834
Thereafter		95,205
Total future lease payments		502,320
Imputed interest		(44,822	)
Total operating lease liabilities	$	457,498

9. Commitments and Contingencies

The Company is subject to loss contingencies pursuant to various federal, state and local environmental laws and regulations; however, the Company is not aware of any reasonably possible losses that would have a material impact on its results of operations, financial position, or liquidity. Potential loss contingencies include possible obligations to remove or mitigate the effects on the environment of the placement, storage, disposal or release of certain chemical or other substances by the Company or by other parties. In connection with its acquisitions, the Company’s practice is to request indemnification for any and all known material liabilities of significance as of the respective dates of acquisition. Historically, environmental liabilities have not had a material impact on the Company’s results of operations, financial position or liquidity.

The Company is subject to litigation from time to time in the ordinary course of business; however, the Company does not expect the results, if any, to have a material adverse impact on its results of operations, financial position or liquidity.

The Company participates in multi-employer defined benefit plans for which it is not the sponsor. As of December 31, 2019, some of the Company’s multi-employer defined benefit plans were reported to have underfunded liabilities. Withdrawal from participation in one of these plans requires the Company to make a lump-sum contribution to the plan. The Company’s withdrawal liability depends on the extent of the plan’s funding of vested benefits, among other factors. The Company has withdrawn from the Central States Pension Fund and Local 408 Pension fund. As a result, the Company has recorded contingent liabilities for the estimated pension plan exit costs. The Company does not believe that the finalized lump-sum contributions to exit these plans will have a material impact on its results of operations.

10. Accumulated Other Comprehensive Income (Loss)

Other comprehensive income (loss) is composed of certain gains and losses that are excluded from net income under GAAP and instead recorded as a separate element of stockholders’ equity.

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

	Foreign			Derivative			Accumulated Other
	Currency Translation			Financial Instruments			Comprehensive Loss
Balance as of September 30, 2019	$	(18,984	)	$	(1,612	)	$	(20,596	)
Other comprehensive income before reclassifications		1,288			2,529			3,817
Reclassifications out of other comprehensive loss		-			-			-
Balance as of December 31, 2019	$	(17,696	)	$	917		$	(16,779	)

Gains (losses) on derivative instruments are recognized in the consolidated statements of operations in interest expense, financing costs, and other.

11. Geographic Data

The following table summarizes certain geographic information for the periods presented (in thousands):

	December 31, 2019		September 30, 2019		December 31, 2018
Long-lived assets:
U.S.	$	1,125,415	$	1,182,552	$	1,352,081
Canada		12,042		12,373		12,096
Total long-lived assets	$	1,137,457	$	1,194,925	$	1,364,177

12. Fair Value Measurement

As of December 31, 2019, 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 December 31, 2019, based upon recent trading prices (Level 2), the fair value of the Company’s $300.0 million Senior Notes due in 2026 was $309.8 million and the fair value of the $1.30 billion Senior Notes due 2025 was $1.31 billion.

As of December 31, 2019, the fair value of the Company’s term loan and revolving asset-based line of credit approximated the amount outstanding. The Company estimates the fair value of its Senior Secured Credit Facility by discounting the future cash flows of each instrument using estimated market rates of debt instruments with similar maturities and credit profiles (Level 3).

13. Financial Derivatives

The Company uses interest rate derivative instruments to manage the risk related to fluctuating cash flows from interest rate changes by converting a portion of its variable-rate borrowings into fixed-rate borrowings.

On September 11, 2019, the Company entered into two interest rate swap agreements to manage the interest rate risk associated with the variable rate on the 2025 Term Loan (see Note 7 for more information). Each swap agreement has a notional amount of $250 million. One agreement (the “5-year swap”) will expire on August 30, 2024 and swaps the thirty-day LIBOR with a fixed-rate of 1.49%. The second agreement (the “3-year swap”) will expire on August 30, 2022 and swaps the thirty-day LIBOR with a fixed-rate of 1.50%. At the inception of the swap agreements, the Company determined that both swaps qualified for cash flow hedge accounting under ASC 815. Therefore, changes in the fair value of the effective portions of the swaps, net of taxes, will be recognized in other comprehensive income each period, then reclassified into the consolidated statements of operations as a component of interest expense, financing costs, and other in the period in which the hedged transaction affects earnings. Any ineffective portions of the hedges are immediately recognized in earnings as a component of interest expense, financing costs and other.

The effectiveness of the swaps will be assessed qualitatively by the Company during the lives of the hedges by a) comparing the current terms of the hedges with the related hedged debt to assure they continue to coincide and b) through an evaluation of the ability of the counterparty to the hedges to honor their obligations under the hedges. The Company performed a qualitative analysis as

of December 31, 2019 and concluded that the swap agreements continue to meet the requirements under ASC 815 to qualify for cash flow hedge accounting. As of December 31, 2019, the fair value of the 3‑year and 5‑year swaps, net of tax, were $0.2 million and $0.8 million, respectively, both in favor of the Company. These amounts are included in accrued expenses in the accompanying consolidated balance sheets.

The Company records any differences paid or received on its interest rate hedges to interest expense, financing costs and other. The following table summarizes the combined fair values, net of tax, of the interest rate derivative instruments (in thousands):

		Assets/(Liabilities) as of:
Instrument	Fair Value Hierarchy	December 31, 2019		September 30, 2019			December 31, 2018
Designated interest rate swaps¹	Level 2	$	917	$	(1,612	)	$	-

_______________________

Assets are included on the consolidated balance sheets in prepaid expenses and other current assets, while liabilities are included in accrued expenses.

The fair value of the interest rate swaps is determined through the use of a pricing model, which utilizes verifiable inputs such as market interest rates that are observable at commonly quoted intervals (generally referred to as the “LIBOR Curve”) for the full terms of the hedge agreements. These values reflect a Level 2 measurement under the applicable fair value hierarchy.

The following table summarizes the amounts of gain (loss) on the interest rate derivative instruments recognized in other comprehensive income (in thousands):

	Three Months Ended December 31,
Instrument	2019		2018
Designated interest rate swaps	$	2,529	$	-

14. Subsequent Events

On January 14, 2020, the Company determined to rebrand its exterior product branches with the tradename “Beacon Building Products” (the “Rebranding”). The new name, and a related logo, will be adopted at over 450 Beacon one-step exterior products branches. The Company’s interior, insulation, weatherproofing and two-step branches will continue to operate under current brand names.

In connection with the Rebranding, the Company has determined that it will incur non-cash accelerated intangible asset amortization of approximately $135.0 million to $140.0 million related to the write-off of certain tradenames, primarily Allied (exterior products only), Roofing Supply Group and JGA. The accelerated amortization will be recognized in the three months ending March 31, 2020. The physical rebranding of branch locations and equipment is expected to result in cash expenditures of approximately $5.0 million.

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis should be read in conjunction with Management’s Discussion and Analysis included in our 2019 Annual Report on Form 10-K and our Condensed Consolidated Financial Statements and the notes thereto included elsewhere in this document. Unless otherwise indicated, references to “2020” refer to the three months ended December 31, 2019 being discussed and references to “2019” refer to the three months ended December 31, 2018 being discussed. We do not undertake, and specifically disclaim, any obligation to update any forward-looking statements to reflect the occurrence of events or circumstances after the date of such statements except as required by law.

Overview

We are the largest publicly traded distributor of roofing materials and complementary building products in the United States and Canada. We are among the oldest and most established distributors in the industry. The complementary building products we distribute include siding, windows, insulation, waterproofing systems, wallboard, acoustical ceilings, and other specialty exterior and interior building products. We purchase products from a large number of manufacturers and then distribute these goods to a customer base consisting of contractors and, to a lesser extent, home builders, retailers, and other building materials suppliers.

As of December 31, 2019, we operated 530 branches throughout all 50 states in the U.S. and 6 provinces in Canada. We offer one of the most extensive assortments of high-quality branded products in the industry with approximately 140,000 SKUs available across our branch network, enabling us to deliver products to serve over 110,000 customers on a timely basis.

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

We provide our customers with industry-leading digital solutions, including Beacon PRO+, our innovative e-commerce portal, and Beacon 3D+, an in-home visualizer and dynamic modeling tool for our residential customers. These platforms help our customers save time, work more efficiently and grow their business. Additional value-added services we offer include, but are not limited to, job site delivery, custom designed tapered roofing systems, metal fabrication and trade credit. We consider customer relations and our employees’ knowledge of roofing and building materials to be vital to our ability to increase customer loyalty and maintain customer satisfaction. Our customers’ business success can be enhanced when they are supported by our efficient and effective distribution network. We invest significant resources in professional development, management skills, product knowledge, and operational proficiency. We pride ourselves on providing these capabilities developed on a foundation of continuous improvement that drives service excellence, productivity and efficiency.

We seek opportunities to expand our business operations through both acquisitions and organic growth (opening branches, growing sales with existing customers, adding new customers and introducing new products). Our main acquisition strategy is to target market leaders that do business in geographic areas that we currently do not service or that complement our existing regional operations. We pursue organic growth opportunities that allow us to penetrate deeper into target markets and establish a greater presence. The most recent successful execution of our growth strategy is summarized by the following:

•

On January 2, 2018, we completed the acquisition of Allied Building Products Corp. (“Allied”), one of the country’s largest exterior and interior building products distributors, for $2.88 billion (the “Allied Acquisition”). This significant acquisition expanded our geographic footprint, enhanced our scale and market presence, diversified our product offerings, and positioned us to provide new growth opportunities that will increase our long-term profitability.

•

We opened two new branches in fiscal year 2020, including locations in Georgia and Virginia. In 2019, we opened a total of nine new branch locations across Alabama, California, Florida, Nevada, North Carolina, Pennsylvania and Texas.

Comparison of the Three Months Ended December 31, 2019 and 2018

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 thousands):

	Three Months Ended December 31,
	2019			2018
Net sales	$	1,675,112		$	1,721,676
Cost of products sold		1,264,414			1,286,107
Gross profit		410,698			435,569
Operating expense:
Selling, general and administrative¹		326,919			327,693
Depreciation		19,072			17,601
Amortization		44,778			52,021
Total operating expense		390,769			397,315
Income (loss) from operations		19,929			38,254
Interest expense, financing costs, and other		38,293			38,361
Loss on debt extinguishment		14,678			-
Income (loss) before provision for income taxes		(33,042	)		(107	)
Provision for (benefit from) income taxes		(9,632	)		786
Net income (loss)	$	(23,410	)	$	(893	)
Dividends on Preferred Stock		6,000			6,000
Net income (loss) attributable to common shareholders	$	(29,410	)	$	(6,893	)

_________________________

Includes acquisition and business restructuring costs of $3.9 million ($2.8 million, net of taxes) and $8.9 million ($6.6 million, net of taxes), for the three months ended December 31, 2019 and 2018, respectively.

	Three Months Ended December 31,
	2019			2018
Net sales		100.0	%		100.0	%
Cost of products sold		75.5	%		74.7	%
Gross profit		24.5	%		25.3	%
Operating expense:
Selling, general and administrative		19.5	%		19.1	%
Depreciation		1.1	%		1.0	%
Amortization		2.7	%		3.1	%
Total operating expense		23.3	%		23.2	%
Income (loss) from operations		1.2	%		2.1	%
Interest expense, financing costs, and other		2.3	%		2.2	%
Loss on debt extinguishment		0.9	%		0.0	%
Income (loss) before provision for income taxes		(2.0	%)		(0.1	%)
Provision for (benefit from) income taxes		(0.6	%)		0.0	%
Net income (loss)		(1.4	%)		(0.1	%)
Dividends on Preferred Stock		0.4	%		0.3	%
Net income (loss) attributable to common shareholders		(1.8	%)		(0.4	%)

In managing our business, we consider all growth, including the opening of new branches, to be organic growth unless it results from an acquisition. When we refer to growth in existing markets or organic growth, we include growth from existing and newly opened branches but exclude growth from acquired branches until they have been under our ownership for at least four full fiscal quarters at the start of the fiscal reporting period. We believe the existing market information is useful to investors because it helps explain organic growth or decline. 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 (also referred to as “special buys” given the manner in which they are offered).

As of December 31, 2019, we had a total of 530 branches in operation. All 530 branches were acquired prior to the start of fiscal year 2019 and therefore meet our existing market definition. As a result, operating results for existing markets are equal to consolidated operating results for all periods presented.

Net Sales

Net sales decreased 2.7% to $1.68 billion in 2020, from $1.72 billion in 2019. The comparative decrease in net sales was mainly influenced by decreased hurricane-related demand in the Mid-Atlantic and Southeast. Combined net sales from those regions unaffected by hurricane-related activity were flat over the comparative periods.

Net sales by geographical region increased (decreased) from 2019 to 2020 as follows: Northeast (5.3%); Mid-Atlantic (13.6%); Southeast (4.7%); Southwest 2.0%; Midwest (1.2%); West 3.0%; and Canada 6.5%.

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).

The following table summarizes net sales by product line for the periods presented (in thousands):

	Three Months Ended December 31,
	2019					2018					Change
	Net Sales		%			Net Sales		%			$			%
Residential roofing products	$	702,236		41.9	%	$	732,190		42.5	%	$	(29,954	)		(4.1	%)
Non-residential roofing products		420,853		25.1	%		419,909		24.4	%		944			0.2	%
Complementary building products		552,023		33.0	%		569,577		33.1	%		(17,554	)		(3.1	%)
Total net sales	$	1,675,112		100.0	%	$	1,721,676		100.0	%	$	(46,564	)		(2.7	%)

Gross Profit

The following table summarizes gross profit and gross margin for the periods presented (in thousands):

	Three Months Ended December 31,						Change¹
	2019			2018			$			%
Gross profit	$	410,698		$	435,569		$	(24,871	)		(5.7	%)
Gross margin		24.5	%		25.3	%	N/A				(0.8	%)

________________________________

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 profit decreased 5.7% to $410.7 million in 2020, from $435.6 million in 2019.

Gross margin was 24.5% in 2020, down 0.8% from 25.3% in 2019. The comparative decrease in gross margin was influenced by an overall product cost increase of less than 1%, accompanied by comparatively flat pricing.

Operating Expense

The following table summarizes operating expense for the periods presented (in thousands):

	Three Months Ended December 31,						Change¹
	2019			2018			$			%
Operating expense	$	390,769		$	397,315		$	(6,546	)		(1.6	%)
% of net sales		23.3	%		23.2	%	N/A				0.1	%

________________________________

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 decreased 1.6% to $390.8 million in 2020, from $397.3 million in 2019. The comparative decrease in operating expense was mainly influenced by the following factors:

•

a $7.2 million decrease in amortization expense, due to the scheduled declining run-rate of intangible asset amortization related to acquisitions;

partially offset by:

•

a net increase of $1.8 million in payroll and employee benefit costs, which includes the combined impact of a $6.9 million increase from merit increases and higher insurance costs and a $5.1 million decrease from recently implemented labor cost efficiency initiatives.

Interest Expense, Financing Costs and Other

Interest expense, financing costs and other expense remained flat at $38.3 million in 2020, compared to $38.4 million in 2019.

Income Taxes

There was an income tax benefit of $9.6 million in 2020, compared to income tax expense of $0.8 million in 2019. The comparative increase in income tax benefit was primarily due to a $32.9 million increase in pre-tax net loss. The effective tax rate, excluding any discrete items, was 28.5% in 2020, compared to 26.9% in 2019. We expect our fiscal year 2020 effective tax rate, excluding any discrete items, will range from approximately 28.0% to 29.0%.

Net Income (Loss)/Net Income (Loss) Per Share

Net income (loss) was $(23.4) million in 2020, compared to $(0.9) million in 2019. There were $6.0 million of dividends on preferred shares in both 2020 and 2019, making net income (loss) attributable to common shareholders $(29.4) million and $(6.9) million, respectively. 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) per share is calculated by utilizing the most dilutive result after applying and comparing the two-class method and if-converted method (see Note 4 in the Notes to Condensed Consolidated Financial Statements for further discussion).

The following table presents the all the components utilized to calculate basic and diluted net income (loss) per share (in thousands, except share and per share amounts):

	Three Months Ended December 31,
	2019			2018
Net income (loss)	$	(23,410	)	$	(893	)
Dividends on Preferred Stock		6,000			6,000
Net income (loss) attributable to common shareholders		(29,410	)		(6,893	)
Undistributed income allocated to participating securities		-			-
Net income (loss) attributable to common shareholders - basic and diluted (if-converted method)	$	(29,410	)	$	(6,893	)
Undistributed income allocated to participating securities		-			-
Re-allocation of undistributed income to Preferred Stock		-			-
Net income (loss) attributable to common shareholders - diluted (two-class method)	$	(29,410	)	$	(6,893	)

Weighted-average common shares outstanding, basic		68,667,943			68,248,020
Effect of common share equivalents		-			-
Weighted-average common shares outstanding - diluted (if-converted and two-class method)		68,667,943			68,248,020

Net income (loss) per share - basic	$	(0.43	)	$	(0.10	)
Net income (loss) per share - diluted (two-class method)		(0.43	)		(0.10	)
Net income (loss) per share - diluted (if-converted method)		(0.43	)		(0.10	)

Non-GAAP Financial Measures

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

•

Adjusted Net Income (Loss)

•

Adjusted EBITDA

We define Adjusted Net Income (Loss) as net income that excludes acquisition costs, business restructuring costs, and the effects of tax reform. We define Adjusted EBITDA as net income plus interest expense (net of interest income), income taxes, depreciation and amortization, stock-based compensation, acquisition costs, and business restructuring costs.

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 allow investors to better understand changes in underlying operating performance over comparative periods by providing investors with financial results that are unaffected by cyclical variances that can be driven by items such as investment activity or purchase accounting adjustments.

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. You should not consider these non-GAAP measures 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 that the excluded costs are related to. In addition, these non-GAAP financial measures may differ from similarly titled measures presented by other companies.

Adjusted Net Income (Loss)

The following table presents a reconciliation of net income, the most directly comparable financial measure as measured in accordance with GAAP, to Adjusted Net Income (Loss) for each of the periods indicated (in thousands):

	Three Months Ended December 31,
	2019			2018
Net income (loss)	$	(23,410	)	$	(893	)
Adjustments:
Acquisition costs¹		51,479			63,962
Business restructuring costs²		19,683			-
Total adjustments		71,162			63,962
Tax impact of total adjustments³		(19,424	)		(16,569	)
Total adjustments, net of tax		51,738			47,393
Adjusted Net Income (Loss)	$	28,328		$	46,500

_______________________________

¹	The following table presents a breakout of the components of acquisition costs for each of the periods indicated:

	Three Months Ended December 31,
	2019		2018
Amortization of intangible assets	$	44,778	$	52,021
Costs classified as selling, general, and administrative^a		3,852		8,917
Amortization of debt issuance costs		2,849		3,024
Total acquisition costs	$	51,479	$	63,962

__________________________________

^a.

Selling, general, and administrative costs related to acquisitions are mainly composed of professional fees, branch integration expenses, travel expenses, employee severance and retention costs, and other personnel expenses.

Business restructuring costs are mainly composed of a loss on debt extinguishment of $14.7 million in connection with debt refinancing. Also included are accrued estimated costs related to employee benefit plan withdrawals, costs stemming from headcount rationalization efforts, and re-branding costs.

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 three months ended December 31, 2019 and 2018 were calculated using an effective tax rate of 27.3% and 25.9%, respectively.

Adjusted EBITDA

The following table presents a reconciliation of net income, the most directly comparable financial measure as measured in accordance with GAAP, to Adjusted EBITDA for each of the periods indicated (in thousands):

	Three Months Ended December 31,
	2019			2018
Net income (loss)	$	(23,410	)	$	(893	)
Interest expense, net		34,796			39,816
Income taxes		(9,632	)		786
Depreciation and amortization		63,850			69,622
Stock-based compensation		5,156			3,457
Acquisition costs¹		3,852			8,917
Business restructuring costs²		19,683			-
Adjusted EBITDA	$	94,295		$	121,705

Adjusted EBITDA as a % of net sales		5.6%			7.1%

____________________________________________________________

Represents selling, general, and administrative costs related to acquisitions (excluding the impact of tax) only. The other items the Company classifies as acquisition costs are embedded within the other balances reported in the table.

Seasonality and Quarterly Fluctuations

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

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

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

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

Certain Quarterly Financial Data

The following table sets forth certain unaudited quarterly data for the first quarter of 2020 and fiscal year 2019, which, in the opinion of management, reflect all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation of this data. Results of any one or more quarters are not necessarily indicative of results for an entire fiscal year or of continuing trends (in thousands, except per share amounts):

	2020			2019
	Qtr 1			Qtr 4			Qtr 3			Qtr 2			Qtr 1
Net sales	$	1,675,112		$	2,029,913		$	1,924,534		$	1,429,037		$	1,721,676
% of fiscal year’s net sales		100.0	%		28.6	%		27.1	%		20.1	%		24.2	%

Gross profit		410,698			493,462			472,536			334,988			435,569
% of fiscal year’s gross profit		100.0	%		28.4	%		27.2	%		19.3	%		25.1	%

Income (loss) from operations		19,929			89,874			74,254			(54,630	)		38,254
% of fiscal year’s income (loss) from operations		100.0	%		60.8	%		50.3	%		(37.0	%)		25.9	%

Net income (loss)	$	(23,410	)	$	27,380		$	30,987		$	(68,086	)	$	(893	)
Dividends on Preferred Stock		6,000			6,000			6,000			6,000			6,000
Net income (loss) attributable to common shareholders	$	(29,410	)	$	21,380		$	24,987		$	(74,086	)	$	(6,893	)

Net income (loss) per share - basic	$	(0.43	)	$	0.27		$	0.32		$	(1.08	)	$	(0.10	)
Net income (loss) per share - diluted	$	(0.43	)	$	0.27		$	0.32		$	(1.08	)	$	(0.10	)

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 December 31, 2019 were our cash and cash equivalents of $43.7 million and our available borrowings of $943.9 million under our asset-based lending revolving credit facility.

Significant factors which could affect future liquidity include the following:

•

the adequacy of available bank lines of credit;

•

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

•

cash flows generated from operating activities;

•

acquisitions; and

•

capital expenditures.

Our primary capital needs are for working capital obligations and other general corporate purposes, including acquisitions and capital expenditures. Our primary sources of working capital are cash from operations and bank borrowings. We have financed large 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. 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 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 seek potential acquisitions from time to time and hold discussions with certain acquisition candidates. If suitable acquisition opportunities or working capital needs arise that require additional financing, we believe that our financial position and earnings history provide a sufficient base for obtaining additional financing resources at reasonable rates and terms. We may also choose to issue additional shares of common stock or preferred stock in order to raise funds.

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

	Three Months Ended December 31,
	2019			2018
Net cash provided by (used in) operating activities	$	(125,307	)	$	(336,883	)
Net cash provided by (used in) investing activities		(11,798	)		(175,260	)
Net cash provided by (used in) financing activities		108,865			400,181
Effect of exchange rate changes on cash and cash equivalents		(298	)		458
Net increase (decrease) in cash and cash equivalents	$	(28,538	)	$	(111,504	)

Operating Activities

Net cash used in operating activities was $125.3 million in 2020, compared to $336.9 million in 2019. Cash from operations increased $211.6 million due to an incremental cash inflow of $225.1 million stemming from changes to our net working capital, mainly driven by decreases in prepaid expenses and other assets. This increase was partially offset by a decrease in net income after adjustments for the loss on debt extinguishment and other non-cash items of $13.6 million.

Investing Activities

Net cash used in investing activities was $11.8 million in 2020, compared to $175.3 million in 2019. The $163.5 million decrease in investing cash spend was primarily due to the $164.0 million payment resulting from the 338(h)(10) election made in 2019 in connection with the Allied Acquisition.

Financing Activities

Net cash provided by financing activities was $108.9 million in 2020, compared to $400.2 million in 2019. The financing cash flow decrease of $291.3 million was primarily due to a $276.5 million decrease in net borrowings under our revolving lines of credit over the comparative periods.

Capital Resources

As of December 31, 2019, we had access to the following financing arrangements:

•

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

•

an asset-based revolving line of credit in Canada;

•

a term loan; and

•

two separate senior notes instruments

Debt Refinancing

2026 Senior Notes

On October 9, 2019, we and certain of our subsidiaries as guarantors executed a private offering of $300.0 million aggregate principal amount of 4.50% Senior Notes due 2026 (the “2026 Senior Notes”) at an issue price of 100%. The 2026 Senior Notes mature on November 15, 2026 and bear interest at a rate of 4.50% per annum, payable on May 15 and November 15 of each year, commencing on May 15, 2020.

On October 28, 2019, we used the net proceeds from the offering, together with cash on hand and available borrowings under the 2023 ABL (as defined below), to redeem all $300.0 million aggregate principal amount outstanding of the 2023 Senior Notes (as defined below) at a redemption price of 103.188% and to pay all related accrued interest, fees and expenses.

The intent of the transaction was to take advantage of lower market interest rates by refinancing the existing 2023 Senior Notes with the 2026 Senior Notes. We have accounted for the refinance as a debt extinguishment of the 2023 Senior Notes and an issuance of the 2026 Senior Notes. As a result, we recorded a loss on debt extinguishment of $14.7 million in the three months ended

December 31, 2019. We capitalized new debt issuance costs of $4.4 million related to the 2026 Senior Notes, which are being amortized over the term of the financing arrangements.

As of December 31, 2019, the outstanding balance on the 2026 Senior Notes, net of $4.3 million of unamortized debt issuance costs, was $295.7 million.

Financing - Allied Acquisition

In connection with the Allied Acquisition, we entered into various financing arrangements totaling $3.57 billion, including an asset-based revolving line of credit of $1.30 billion (“2023 ABL”), $525.0 million of which was drawn at closing, and a $970.0 million term loan (“2025 Term Loan”). We also raised an additional $1.30 billion through the issuance of senior notes (the “2025 Senior Notes”).

The proceeds from these financing arrangements were used to finance the Allied Acquisition, to refinance or otherwise extinguish all third-party indebtedness, to pay fees and expenses associated with the acquisition, and to provide working capital and funds for other general corporate purposes. We capitalized new debt issuance costs totaling approximately $65.3 million related to the 2023 ABL, the 2025 Term Loan and the 2025 Senior Notes, which are being amortized over the term of the financing arrangements.

2023 ABL

On January 2, 2018, we entered into a $1.30 billion asset-based revolving line of credit with Wells Fargo Bank, N.A. and a syndicate of other lenders. The 2023 ABL consists of revolving loans in both the United States (“2023 U.S. Revolver”) in the amount of $1.20 billion and Canada (“2023 Canada Revolver”) in the amount of $100.0 million. The 2023 ABL has a maturity date of January 2, 2023. The 2023 ABL has various borrowing tranches with an interest rate based on a LIBOR rate (with a floor) plus a fixed spread. The current unused commitment fees on the 2023 ABL are 0.25% per annum.

There is one financial covenant under the 2023 ABL, which is the Fixed Charge Coverage Ratio. The Fixed Charge Coverage Ratio is calculated by dividing Consolidated EBITDA, less Capital Expenditures, by Consolidated Fixed Charges (all terms as defined in the agreement). Per the covenant, our Consolidated Fixed Charge Ratio must be a minimum of 1.00 at the end of each fiscal quarter, calculated on a trailing four quarter basis. The Company was in compliance with this covenant as of December 31, 2019.

The 2023 ABL is secured by a first priority lien over substantially all of our and each guarantor’s accounts, chattel paper, deposit accounts, books, records and inventory (as well as intangibles related thereto), subject to certain customary exceptions (the “ABL Priority Collateral”), and a second priority lien over substantially all of our and each guarantor’s other assets, including all of the equity interests of any subsidiary held by us or any guarantor, subject to certain customary exceptions (the “Term Priority Collateral”). The 2023 ABL is guaranteed jointly, severally, fully and unconditionally by our active United States subsidiaries.

As of December 31, 2019, the total balance outstanding on the 2023 ABL, net of $7.5 million of unamortized debt issuance costs, was $215.6 million. We also have outstanding standby letters of credit related to the 2023 U.S. Revolver in the amount of $13.0 million as of December 31, 2019.

2025 Term Loan

On January 2, 2018, we entered into a $970.0 million Term Loan with Citibank N.A., and a syndicate of other lenders. The 2025 Term Loan requires quarterly principal payments in the amount of $2.4 million, with the remaining outstanding principal to be paid on its January 2, 2025 maturity date. The interest rate is based on a LIBOR rate (with a floor) plus a fixed spread. We have the option of selecting a LIBOR period that determines the rate at which interest can accrue on the Term Loan as well as the period in which interest payments are made.

As of December 31, 2019, the outstanding balance on the 2025 Term Loan, net of $27.5 million of unamortized debt issuance costs, was $925.5 million.

2025 Senior Notes

On October 25, 2017, Beacon Escrow Corporation, our wholly owned subsidiary (the “Escrow Issuer”), completed a private offering of $1.30 billion aggregate principal amount of 4.875% Senior Notes due 2025 at an issue price of 100%. The 2025 Senior Notes bear interest at a rate of 4.875% per annum, payable semi-annually in arrears, beginning May 1, 2018. We anticipate repaying the 2025 Senior Notes at the maturity date of November 1, 2025. Per the terms of the Escrow Agreement, the net proceeds from the

2025 Senior Notes remained in escrow until they were used to fund a portion of the purchase price of the Allied Acquisition payable at closing on January 2, 2018.

Upon closing of the Allied Acquisition on January 2, 2018, (i) the Escrow Issuer merged with and into us, and we assumed all obligations under the 2025 Senior Notes; and (ii) all our existing domestic subsidiaries (including the entities acquired in the Allied Acquisition) became guarantors of the 2025 Senior Notes.

As of December 31, 2019, the outstanding balance on the 2025 Senior Notes, net of $16.4 million of unamortized debt issuance costs, was $1.28 billion.

Financing - RSG Acquisition

2023 Senior Notes

Equipment Financing Facilities

As of December 31, 2019, we had $5.8 million outstanding under equipment financing facilities, with fixed interest rates ranging from 2.33% to 2.89% and payments due through September 2021.

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

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

Certain factors that may affect our business and could cause actual results to differ materially from those expressed in any forward-looking statements include those set forth under the heading “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended September 30, 2019.

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 its 2019 Annual Report on Form 10-K have not changed materially during the three-month period ended December 31, 2019.

Item 4.

Controls and Procedures

As of December 31, 2019, management, including the CEO and CFO, performed an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934 (the “Act”)). Based on that evaluation, management, including the CEO and CFO, concluded that as of December 31, 2019, our disclosure controls and procedures were effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Act is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms, and to ensure that information required to be disclosed by us in the reports that we file or submit under the Act is accumulated and communicated to our management, including our CEO and CFO, as appropriate to allow timely decisions regarding required disclosure. We maintain a system of internal control over financial reporting that is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles in the United States.

There has been no change to our internal control over financial reporting during the last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II.OTHER INFORMATION

Item 6.

Exhibits

			Incorporated by Reference
Exhibit Number		Description	Form		Exhibit	Filing Date

4.1	Indenture, dated as of October 9, 2019, by and among Beacon Roofing Supply, Inc., the subsidiary guarantors party thereto, and U.S. Bank National Association, as trustee and collateral agent.			8-K	4.1	October 9, 2019

4.2	Form of 4.500% Senior Secured Notes due 2026 (included as Exhibit A to the Indenture incorporated by reference as Exhibit 4.1).			8-K	4.1	October 9, 2019

10.1*+	Separation Agreement, dated as of November 24, 2019, between Beacon Roofing Supply, Inc. and Joseph Nowicki.

10.2*+	Description of Executive Annual Incentive Plan.

31.1*	Certification of Chief Executive Officer Pursuant to Rule 13a-14(a)

31.2*	Certification of Chief Financial Officer Pursuant to Rule 13a-14(a)

32.1*	Certification pursuant to 18 U.S.C. Section 1350

101*		101.INS 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.
		101.SCH Inline XBRL Taxonomy Extension Schema
		101.CAL Inline XBRL Taxonomy Extension Calculation
		101.PRE Inline XBRL Taxonomy Extension Presentation
		101.LAB Inline XBRL Taxonomy Extension Labels
		101.DEF Inline XBRL Taxonomy Extension Definition

104*	Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

________________________________________________

+	Management contract or compensatory plan/arrangement

*	Filed 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 Consolidated Balance Sheets as of December 31, 2019; September 30, 2019; and December 31, 2018, (ii) the Consolidated Statements of Operations for the three months ended December 31, 2019 and 2018, (iii) the Consolidated Statements of Comprehensive Income for the three months ended December 31, 2019 and 2018, (iv) the Consolidated Statements of Stockholders’ Equity for the three months ended December 31, 2019 and 2018, (v) the Consolidated Statements of Cash Flows for the three months ended December 31, 2019 and 2018, and (vi) the Notes to Condensed Consolidated Financial Statements.

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: February 4, 2020	BY:	/s/ JOSEPH M. NOWICKI
		Joseph M. Nowicki
		Executive Vice President & Chief Financial Officer