BEACON ROOFING SUPPLY INC Management’s Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

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BEACON ROOFING SUPPLY INC Management’s Discussion and Analysis of Financial Condition and Results
of Operations (form 10-Q)


The following discussion and analysis should be read in conjunction with our
Consolidated Financial Statements and the notes thereto and Management’s
Discussion and Analysis included in our 2021 Annual Report on Form 10-K, our
Condensed Consolidated Financial Statements and the notes thereto included in
our Transition Report on Form 10-Q for the period from October 1, 2021 to
December 31, 2021 and our Condensed Consolidated Financial Statements and the
notes thereto included elsewhere in this document. Unless otherwise indicated,
references to “2022” refer to the three or six months ended June 30, 2022 being
discussed and references to “2021” refer to the three or six months ended
June 30, 2021 being discussed.

Cautionary Statement Regarding Forward-Looking Information

Our disclosure and analysis in this report contains forward-looking information
within the meaning of the Private Securities Litigation Reform Act of 1995, as
amended, that involves risks and uncertainties. Our forward-looking statements
express our current expectations or forecasts of possible future results or
events, including projections of future performance, statements of management’s
plans and objectives, future contracts, and forecasts of trends and other
matters. You can identify these statements by the fact that they do not relate
strictly to historic or current facts and often use words such as “anticipate,”
“estimate,” “expect,” “believe,” “will likely result,” “outlook,” “project” and
other words and expressions of similar meaning. No assurance can be given that
the results in any forward-looking statements will be achieved and actual
results could be affected by one or more factors, which could cause them to
differ materially. We do not undertake, and specifically disclaim, any
obligation to update any forward-looking statements to reflect the occurrence of
events or circumstances after the date of such statements except as required by
law.

Certain factors that may affect our business and could cause actual results to
differ materially from those expressed in any forward-looking statements include
those set forth under the heading “Risk Factors” in our Annual Report on Form
10-K for the fiscal year ended September 30, 2021. We may not succeed in
addressing these and other risks. Consequently, all forward-looking statements
in this report are qualified by the factors, risks and uncertainties contained
therein and readers are cautioned not to place undue reliance on forward-looking
statements.

Overview

We are the largest publicly traded distributor of roofing materials and
complementary building products in North America. We have served the building
industry for over 90 years and as of June 30, 2022, we operated 450 branches
throughout all 50 states in the U.S. and 6 provinces in Canada. We offer one of
the most extensive ranges of high-quality professional grade exterior products
comprising over 100,000 SKUs, and we serve over 80,000 residential and
non-residential customers who trust us to help them save time, work more
efficiently and enhance their businesses.

We are strategically focused on the two core markets of residential and
non-residential roofing. As a distributor, our national scale, networked model
and specialized capabilities are competitive advantages, providing strong value
for both customers and suppliers. We intend to grow faster than the market by
enhancing our customers’ experience, activating a complete go-to-market
strategy, and expanding our footprint while also driving margin-enhancing
initiatives.

Our differentiated service model is designed to solve customer needs. The scale
of our business provides branch coverage, technology enablement and investment
in our team that is the foundation of customer excellence. In addition, service
is further enhanced by our On Time and Complete network (Beacon OTC®),
market-based sales teams, and national call center. We also provide the most
complete digital commerce platform in roofing distribution, creating value for
customers who are able to operate their businesses more effectively and
efficiently.

Our history has been strongly influenced by significant acquisition-driven
growth, highlighted by the acquisitions of Allied Building Products Corp. for
$2.88 billion in 2018 and Roofing Supply Group, LLC for $1.17 billion in 2016.
These strategic acquisitions expanded our geographic footprint, enhanced our
market presence, and diversified our product offerings. The scale we have
achieved from our expansion efforts serves as a competitive advantage, allowing
us to use our assets more efficiently, and control our expenses to drive
operating leverage.

On February 24, 2022, we announced our Ambition 2025 Value Creation Framework
(“Ambition 2025”) to drive growth, enhance customer service and expand our
footprint in key markets, which included new Ambition 2025 financial targets and
the Repurchase Program (as defined and further detailed below) as well as
strategic deployment of capital on acquisitions. We have pursued and finalized
numerous smaller acquisitions in key markets to complement the expansion of our
geographic footprint, including 13 total branches from these recent acquisitions
(for additional information, see Note 3 in the Notes to Condensed Consolidated
Financial Statements):

•On June 1, 2022, we acquired Complete Supply, Inc., an independent distributor
of residential roofing and exterior building supplies to contractors and
homebuilders, with 1 branch located in Illinois and annual sales of
approximately $10 million prior to the acquisition;

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•On April 29, 2022, we acquired Wichita Falls Builders Wholesale, Inc., a
distributor of complementary residential exterior building materials, including
windows, doors and siding to contractors, homebuilders and retail customers,
with 1 branch located in Texas and annual sales of approximately $4 million
prior to the acquisition;

•On January 1, 2022, we acquired Crabtree Siding and Supply, a wholesale
distributor of residential exterior building materials, including a broad
offering of complementary products, to contractors and homebuilder customers,
with 1 branch located in Tennessee and annual sales of approximately $1 million
prior to the acquisition; and

•On November 1, 2021, we acquired Midway Sales & Distributing, Inc., a leading
Midwest distributor of residential and commercial exterior building and roofing
supplies, with 10 branches across Kansas, Missouri and Nebraska and annual sales
of approximately $130 million prior to the acquisition.

As part of Ambition 2025, we will continue to pursue strategic acquisitions to
grow our business, while we also remain heavily focused on improving our
operations and continuing to identify additional opportunities for organic
growth. Our recent highlights in these pursuits are demonstrated by the
following results for the first half of 2022:

•2022 organic daily sales growth of 24.2% compared to 2021, driven primarily by
successful price execution;

•two new branch locations in 2022; and

•significant improvements in labor efficiency and fleet utilization metrics as
compared to pre-pandemic levels, driven by strategic cost actions.

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

In order to pursue these strategic growth initiatives and focus on our core
exterior products business, we completed two divestitures in 2021. On December
1, 2021, we completed the divestiture of our solar products business (“Solar
Products”). The results of operations from Solar Products were not material to
us and are included in continuing operations for the periods presented. On
February 10, 2021, we completed the sale of our interior products and insulation
businesses (“Interior Products”) to Foundation Building Materials Holding
Company LLC for the final adjusted purchase price of $842.7 million. We have
reflected Interior Products as discontinued operations for the three and six
months ended June 30, 2021. Unless otherwise noted, amounts and disclosures in
our discussion below relate to our continuing operations. For additional
information, see Note 4 in the Notes to Condensed Consolidated Financial
Statements.

COVID-19 Pandemic and Supply Chain Dynamics

We continue to monitor the ongoing impact of the COVID-19 pandemic, including
the effects of recent notable variants of the virus. The health and safety of
our employees, customers, and the communities in which we operate remains our
top priority. Additional safety measures have been implemented in response to
the COVID-19 pandemic. We had an essential business designation status
throughout the pandemic in all the local markets that we serve. To date, our
business experienced the largest adverse impact from COVID-19 in the third
quarter of fiscal year 2020, mainly in areas with significant government
construction restrictions that have since been eliminated. We have the financial
strength and operational flexibility to respond to future COVID-19 pandemic
restrictions, and have taken proactive steps to make a number of the cost
management initiatives undertaken in response to the COVID-19 pandemic
permanent.

The exterior products industry experienced constrained supply chain dynamics in
2021, which has continued in 2022. As a result, we experienced significant cost
increases and, at times, a limited ability to purchase enough product to meet
consumer demand. We have continued to see an increase in our backlog metrics.
Open orders, a measure of our backlog, ended the quarter higher than the prior
quarter-end. These trends, caused in large part from global disruptions related
to the COVID-19 pandemic and the subsequent rapid economic recovery, may persist
in the near-term. In addition to inflationary pressures caused by product
shortages, we are also experiencing product cost inflation caused by increased
input costs, including rising oil prices, which increases may have been impacted
by the Russian invasion of Ukraine. We took proactive measures to actively
increase our inventory, price effectively and deliver high-value solutions to
our customers’ critical building material needs. As a leading distributor of
essential building materials, we will continue to react quickly to market and
supply chain developments and ensure high-quality service for our customers.

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Comparison of the Three Months Ended June 30, 2022 and 2021

The following tables set forth condensed consolidated statements of operations
data and such data as a percentage of total net sales for the periods presented
(in millions):

Three Months Ended June 30,
2022 2021
Net sales $ 2,358.2 $ 1,872.1
Cost of products sold 1,708.0 1,354.7
Gross profit 650.2 517.4
Operating expense:
Selling, general and administrative 355.4 296.3
Depreciation 18.9 15.1
Amortization 21.5 25.2

Total operating expense 395.8 336.6
Income (loss) from operations 254.4 180.8
Interest expense, financing costs, and other 18.9 23.2
Loss on debt extinguishment – 50.7
Income (loss) from continuing operations before income taxes 235.5 106.9
Provision for (benefit from) income taxes 61.0 27.1
Net income (loss) from continuing operations 174.5 79.8
Net income (loss) from discontinued operations – (3.3)
Net income (loss) 174.5 76.5
Dividends on Preferred Stock 6.0 6.0
Net income (loss) attributable to common stockholders $

168.5 $ 70.5

Three Months Ended June 30,
2022 2021
Net sales 100.0 % 100.0 %
Cost of products sold 72.4 % 72.4 %
Gross profit 27.6 % 27.6 %
Operating expense:
Selling, general and administrative 15.1 % 15.8 %
Depreciation 0.8 % 0.9 %
Amortization 0.9 % 1.3 %

Total operating expense 16.8 % 18.0 %
Income (loss) from operations 10.8 % 9.6 %
Interest expense, financing costs, and other 0.8 % 1.2 %
Loss on debt extinguishment – % 2.7 %
Income (loss) from continuing operations before income taxes 10.0 % 5.7 %
Provision for (benefit from) income taxes 2.6 % 1.4 %
Net income (loss) from continuing operations 7.4 % 4.3 %
Net income (loss) from discontinued operations – % (0.2) %
Net income (loss) 7.4 % 4.1 %
Dividends on Preferred Stock 0.3 % 0.3 %
Net income (loss) attributable to common stockholders 7.1 % 3.8 %

When we refer to regions, we are referring to our geographic regions. When we
refer to our net product costs, we are referring to our invoice cost less the
impact of short-term buying programs.

As of June 30, 2022, we had a total of 450 branches in operation.

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Net Sales

Net sales increased 26.0% to $2.36 billion in 2022, up from $1.87 billion in
2021. Net sales increased across all three lines of business, substantially
driven by a weighted-average selling price increase of approximately 24-25% as
well as an estimated volume increase of approximately 0-1%. Additionally, net
sales in 2022 includes the results of acquired branches, while net sales in 2021
includes the results of divested branches that were included in continuing
operations. Excluding the impact of acquired and divested branches, the increase
in net sales would have been approximately 1% lower.

Net sales by geographic region, including the impact of acquired and divested
branches, increased from 2021 to 2022 as follows: Northeast 20.8%; Mid-Atlantic
21.4%; Southeast 24.0%; Southwest 29.7%; Midwest 42.6%; West 10.4%; and Canada
13.6%.

We estimate the impact of inflation or deflation on our sales and gross profit
by looking at changes in our average selling prices and gross margins (discussed
below). To calculate approximate weighted average selling price and product cost
changes, we review organic U.S. warehouse sales of the same items sold
regionally period over period and normalize the data for non-representative
outliers. To determine estimated volumes, we subtract the change in weighted
average selling price, calculated as described above, from the total changes in
net sales, excluding acquisitions and dispositions. As a result, and especially
in high inflationary periods, the weighted average selling price and estimated
volume changes may not be directly comparable to changes reported in prior
periods.

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

Three Months Ended June 30,
2022 2021 Year-over-Year Change
Net Sales Mix % Net Sales Mix % $ %
Residential roofing products $ 1,196.1 50.7 % $ 981.6 52.4 % $ 214.5 21.9 %
Non-residential roofing products 682.6 29.0 % 486.7 26.0 % 195.9 40.3 %
Complementary building products 479.5 20.3 % 403.8 21.6 % 75.7 18.7 %
Total net sales $ 2,358.2 100.0 % $ 1,872.1 100.0 % $ 486.1 26.0 %

Gross Profit

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

Three Months Ended June 30, Change1
2022 2021 $ %
Gross profit $ 650.2 $ 517.4 $ 132.8 25.7 %

Gross margin 27.6 % 27.6 % N/A 0.0 %

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.

Gross margin was 27.6% in both 2022 and 2021. The consistent gross margin
resulted from a weighted-average selling price increase (calculated as described
above) of approximately 24-25%, offset by a weighted-average product cost
increase of approximately 23-24% and a higher non-residential product mix.

Operating Expense

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

Three Months Ended June 30, Change1
2022 2021 $ %
Selling, general and administrative $ 355.4 $ 296.3 $ 59.1 19.9 %
Depreciation 18.9 15.1 3.8 25.2 %
Amortization 21.5 25.2 (3.7) (14.7) %
Operating expense $ 395.8 $ 336.6 $ 59.2 17.6 %

% of net sales 16.8 % 18.0 % N/A (1.2) %

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

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Operating expense increased 17.6% to $395.8 million in 2022, from $336.6 million
in 2021. The comparative increase in operating expense was mainly influenced by
the following factors:

•a $28.6 million increase in payroll and employee benefit costs, primarily due
to increased headcount to drive and support future growth, as well as wage
inflation and higher incentive compensation;

•a $11.4 million increase in selling costs, primarily due to net sales growth
resulting in higher commissions, as well as an increase in fleet costs; and

•a $8.7 million increase in general and administrative expenses, primarily due
to higher professional fees and an increase in travel and entertainment
expenses.

Operating expense in 2022 includes the results of acquired branches, while
operating expense in 2021 includes the results of divested branches that were
included in continuing operations, the combined results of which drove a net
increase of $7.2 million from 2021 to 2022.

Operating expense as a percent of sales was lower in 2022, driven by the
positive impact from net sales growth as well as productivity gains.

Interest Expense, Financing Costs and Other

Interest expense, financing costs and other expense was $18.9 million in 2022,
compared to $23.2 million in 2021. The comparative decrease is primarily due to
a lower weighted-average interest rate on our outstanding debt.

Loss on Debt Extinguishment

Loss on debt extinguishment was $50.7 million in 2021 and includes the write-off
of debt issuance costs and payment of redemption premiums stemming from our 2021
Debt Refinancing.

Income Taxes

Income tax provision (benefit) was $61.0 million in 2022, compared to $27.1
million in 2021. The comparative increase in income tax provision was primarily
due to higher pre-tax income from continuing operations. The effective tax rate,
excluding any discrete items, was 26.1% in 2022, compared to 25.9% in 2021. We
expect our 2022 effective tax rate, excluding any discrete items, will range
from approximately 25.5% to 26.5%.

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

Net income (loss) from continuing operations was $174.5 million in 2022,
compared to $79.8 million in 2021. Net income (loss) from discontinued
operations was $(3.3) million in 2021 (see Note 4 in the Notes to Condensed
Consolidated Financial Statements for further discussion). Consolidated net
income (loss) was $174.5 million in 2022, compared to $76.5 million in 2021.
There were $6.0 million of dividends on preferred shares for both 2022 and 2021,
making consolidated net income (loss) attributable to common stockholders $168.5
million and $70.5 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 6 in the Notes to Condensed Consolidated Financial Statements for
further discussion).

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The following table presents all the components utilized to calculate basic and
diluted net income (loss) per share (in millions, except per share amounts;
certain amounts may not recalculate due to rounding):

Three Months Ended June 30,

2022 2021

Numerator:

Net income (loss) from continuing operations $ 174.5 $ 79.8
Dividends on Preferred Stock (6.0) (6.0)

Undistributed income from continuing operations allocated to participating
securities

(20.9) (9.0)

Net income (loss) from continuing operations attributable to common
stockholders – Basic and Diluted (if-converted and two-class method)

147.6 64.8

Net income (loss) from discontinued operations – (3.3)

Undistributed income from discontinued operations allocated to
participating securities

– 0.4

Net income (loss) from discontinued operations attributable to common
stockholders – Basic and Diluted (if-converted and two-class method)

– (2.9)

Net income (loss) attributable to common stockholders – Basic and Diluted
(if-converted and two-class method)

$ 147.6 $ 61.9

Denominator:

Weighted-average common shares outstanding – Basic 68.1 69.9
Effect of common share equivalents 1.4 1.4

Weighted-average common shares outstanding – Diluted 69.5 71.3

Net income (loss) per share:
Basic – Continuing operations $ 2.17 $ 0.93
Basic – Discontinued operations – (0.04)
Basic net income (loss) per share $ 2.17 $ 0.89

Diluted – Continuing operations $ 2.12 $ 0.91
Diluted – Discontinued operations – (0.04)
Diluted net income (loss) per share (if-converted and two-class method) $ 2.12 $ 0.87

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Comparison of the Six Months Ended June 30, 2022 and 2021

The following tables set forth condensed consolidated statements of operations
data and such data as a percentage of total net sales for the periods presented
(in millions):

Six Months Ended June 30,
2022 2021
Net sales $ 4,045.1 $ 3,190.1
Cost of products sold 2,955.4 2,339.9
Gross profit 1,089.7 850.2
Operating expense:
Selling, general and administrative 664.7 564.1
Depreciation 36.4 29.7
Amortization 42.9 52.8

Total operating expense 744.0 646.6
Income (loss) from operations 345.7 203.6
Interest expense, financing costs, and other 35.5 51.8
Loss on debt extinguishment – 60.2
Income (loss) from continuing operations before income taxes 310.2 91.6
Provision for (benefit from) income taxes 79.9 22.3
Net income (loss) from continuing operations 230.3 69.3
Net income (loss) from discontinued operations – 0.9
Net income (loss) 230.3 70.2
Dividends on Preferred Stock 12.0 12.0
Net income (loss) attributable to common stockholders $ 218.3 $ 58.2

Six Months Ended June 30,
2022 2021
Net sales 100.0 % 100.0 %
Cost of products sold 73.1 % 73.3 %
Gross profit 26.9 % 26.7 %
Operating expense:
Selling, general and administrative 16.4 % 17.7 %
Depreciation 0.9 % 0.9 %
Amortization 1.1 % 1.7 %

Total operating expense 18.4 % 20.3 %
Income (loss) from operations 8.5 % 6.4 %
Interest expense, financing costs, and other 0.8 % 1.6 %
Loss on debt extinguishment – % 1.9 %
Income (loss) from continuing operations before income taxes 7.7 % 2.9 %
Provision for (benefit from) income taxes 2.0 % 0.7 %
Net income (loss) from continuing operations 5.7 % 2.2 %
Net income (loss) from discontinued operations – % – %
Net income (loss) 5.7 % 2.2 %
Dividends on Preferred Stock 0.3 % 0.4 %
Net income (loss) attributable to common stockholders 5.4 % 1.8 %

When we refer to regions, we are referring to our geographic regions. When we
refer to our net product costs, we are referring to our invoice cost less the
impact of short-term buying programs.

As of June 30, 2022, we had a total of 450 branches in operation.

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Net Sales

Net sales increased 26.8% to $4.05 billion in 2022, up from $3.19 billion in
2021. Net sales increased across all three lines of business, substantially
driven by a weighted-average selling price increase of approximately 23-24% as
well as an estimated volume increase of approximately 2-3%. Additionally, net
sales in 2022 includes the results of acquired branches, while net sales in 2021
includes the results of divested branches that were included in continuing
operations. Excluding the impact of acquired and divested branches, the increase
in net sales would have been approximately 1% lower.

Net sales by geographic region, including the impact of acquired and divested
branches, increased from 2021 to 2022 as follows: Northeast 23.3%; Mid-Atlantic
22.0%; Southeast 20.6%; Southwest 31.5%; Midwest 45.1%; West 12.4%; and Canada
17.2%.

We estimate the impact of inflation or deflation on our sales and gross profit
by looking at changes in our average selling prices and gross margins (discussed
below). To calculate approximate weighted average selling price and product cost
changes, we review organic U.S. warehouse sales of the same items sold
regionally period over period and normalize the data for non-representative
outliers. To determine estimated volumes, we subtract the change in weighted
average selling price, calculated as described above, from the total changes in
net sales, excluding acquisitions and dispositions. As a result, and especially
in high inflationary periods, the weighted average selling price and estimated
volume changes may not be directly comparable to changes reported in prior
periods.

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

Six Months Ended June 30,
2022 2021 Year-over-Year Change
Net Sales % Net Sales % $ %
Residential roofing products $ 2,042.6 50.5 % $ 1,676.7 52.6 % $ 365.9 21.8 %
Non-residential roofing products 1,170.3 28.9 % 816.5 25.6 % 353.8 43.3 %
Complementary building products 832.2 20.6 % 696.9 21.8 % 135.3 19.4 %
Total net sales $ 4,045.1 100.0 % $ 3,190.1 100.0 % $ 855.0 26.8 %

Gross Profit

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

Six Months Ended June 30, Change1
2022 2021 $ %
Gross profit $ 1,089.7 $ 850.2 $ 239.5 28.2 %

Gross margin 26.9 % 26.7 % N/A 0.2 %

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

Gross margin was 26.9% in 2022, up 0.2 percentage points from 26.7% in 2021. The
comparative increase in gross margin resulted from a weighted-average selling
price increase (calculated as described above) of approximately 23-24%, largely
offset by a weighted-average product cost increase of approximately 23-24% and a
higher non-residential product mix.

Operating Expense

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

Six Months Ended June 30, Change1
2022 2021 $ %
Selling, general, and administrative $ 664.7 $ 564.1 $ 100.6 17.8 %
Depreciation 36.4 29.7 6.7 22.6 %
Amortization 42.9 52.8 (9.9) (18.8) %
Total operating expense $ 744.0 $ 646.6 $ 97.4 15.1 %

% of net sales 18.4 % 20.3 % N/A (1.9) %

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.

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Operating expense increased 15.1% to $744.0 million in 2022, from $646.6 million
in 2021. The comparative increase in operating expense was mainly influenced by
the following factors:

•a $45.2 million increase in payroll and employee benefit costs, primarily due
to increased headcount to drive and support future growth, as well as wage
inflation and higher incentive compensation;

•a $21.7 million increase in selling costs, primarily due to net sales growth
resulting in higher commissions, as well as an increase in fleet costs; and

•a $19.1 million increase in general and administrative expenses, primarily due
to an increase in travel and entertainment expenses as well as insurance
expenses.

Operating expense in 2022 includes the results of acquired branches, while
operating expense in 2021 includes the results of divested branches that were
included in continuing operations, the combined results of which drove a net
increase of $12.8 million from 2021 to 2022.

Operating expense as a percent of sales was lower in 2022, driven by the
positive impact from net sales growth as well as productivity gains.

Interest Expense, Financing Costs and Other

Interest expense, financing costs and other expense was $35.5 million in 2022,
compared to $51.8 million in 2021. The comparative decrease is primarily due to
decreased average debt balances during the respective periods and a lower
weighted-average interest rate on our outstanding debt.

Loss on Debt Extinguishment

Loss on debt extinguishment was $60.2 million in 2021 and includes the write-off
of debt issuance costs and payment of redemption premiums stemming from our 2021
Debt Refinancing.

Income Taxes

Income tax provision (benefit) was $79.9 million in 2022, compared to $22.3
million in 2021. The comparative increase in income tax provision was primarily
due to higher pre-tax income from continuing operations. The effective tax rate,
excluding any discrete items, was 26.0% in 2022, compared to 25.9% in 2021. We
expect our 2022 effective tax rate, excluding any discrete items, will range
from approximately 25.5% to 26.5%.

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

Net income (loss) from continuing operations was $230.3 million in 2022,
compared to $69.3 million in 2021. Net income (loss) from discontinued
operations was $0.9 million in 2021 (see Note 4 in the Notes to Condensed
Consolidated Financial Statements for further discussion). Consolidated net
income (loss) was $230.3 million in 2022, compared to $70.2 million in 2021.
There were $12.0 million of dividends on preferred shares for both 2022 and
2021, making consolidated net income (loss) attributable to common stockholders
$218.3 million and $58.2 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 6 in the Notes to Condensed Consolidated Financial Statements for
further discussion).

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The following table presents all the components utilized to calculate basic and
diluted net income (loss) per share (in millions, except per share amounts;
certain amounts may not recalculate due to rounding):

Six Months Ended June 30,
2022 2021
Numerator:
Net income (loss) from continuing operations $ 230.3 $ 69.3
Dividends on Preferred Stock

(12.0) (12.0)
Undistributed income from continuing operations allocated to participating
securities

(26.8) (6.9)

Net income (loss) from continuing operations attributable to common
stockholders – Basic and Diluted (if-converted and two-class method)

191.5 50.4

Net income (loss) from discontinued operations – 0.9

Undistributed income from discontinued operations allocated to
participating securities

– (0.2)

Net income (loss) from discontinued operations attributable to common
stockholders – Basic and Diluted (if-converted and two-class method)

– 0.7

Net income (loss) attributable to common stockholders – Basic and Diluted
(if-converted and two-class method)

$ 191.5 $ 51.1

Denominator:

Weighted-average common shares outstanding – Basic 69.1 69.8
Effect of common share equivalents 1.3 1.2

Weighted-average common shares outstanding – Diluted 70.4 71.0

Net income (loss) per share:
Basic – Continuing operations $ 2.77 $ 0.72
Basic – Discontinued operations – 0.01
Basic net income (loss) per share

$ 2.77 $ 0.73

Diluted – Continuing operations $ 2.72 $ 0.71
Diluted – Discontinued operations – 0.01

Diluted net income (loss) per share (if-converted and two-class method) $ 2.72 $ 0.72

Non-GAAP Financial Measures

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

•Adjusted Operating Expense. We define Adjusted Operating Expense as operating
expense, excluding the impact of the adjusting items (as described below).

•Adjusted Net Income (Loss). We define Adjusted Net Income (Loss) as net income
(loss) from continuing operations, excluding the impact of the adjusting items
(as described below).

•Adjusted EBITDA. We define Adjusted EBITDA as net income (loss) from continuing
operations, excluding the impact of interest expense (net of interest income),
income taxes, depreciation and amortization, stock-based compensation, and the
adjusting items (as described below).

We use these supplemental non-GAAP measures to evaluate financial performance,
analyze the underlying trends in our business and establish operational goals
and forecasts that are used when allocating resources. We expect to compute our
non-GAAP financial measures consistently using the same methods each period.

We believe these non-GAAP measures are useful measures because they permit
investors to better understand changes over comparative periods by providing
financial results that are unaffected by certain items that are not indicative
of ongoing operating performance.

While we believe that these non-GAAP measures are useful to investors when
evaluating our business, they are not prepared and presented in accordance with
GAAP, and therefore should be considered supplemental in nature. These non-GAAP
measures should

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not be considered in isolation or as a substitute for other financial
performance measures presented in accordance with GAAP. These non-GAAP financial
measures may have material limitations including, but not limited to, the
exclusion of certain costs without a corresponding reduction of net income for
the income generated by the assets to which the excluded costs relate. In
addition, these non-GAAP financial measures may differ from similarly titled
measures presented by other companies.

Adjusting Items to Non-GAAP Financial Measures

The impact of the following expense (income) items is excluded from each of our
non-GAAP measures (the “adjusting items”):

•Acquisition costs. Represent certain costs related to historical acquisitions,
including: amortization of intangible assets; professional fees, branch
integration expenses, travel expenses, employee severance and retention costs,
and other personnel expenses classified as selling, general and administrative;
gains/losses related to changes in fair value of contingent consideration or
holdback liabilities; and amortization of debt issuance costs.

•Restructuring costs. Represent costs stemming from headcount rationalization
efforts and certain rebranding costs; impact of the Interior Products and Solar
Products divestitures; costs related to changing our fiscal year end;
amortization of debt issuance costs; debt refinancing and extinguishment costs;
and abandoned lease costs.

•COVID-19 impacts. Represent costs directly related to the COVID-19 pandemic.

The following table presents the impact of the adjusting items on our condensed
consolidated statements of operations for each of the periods indicated (in
millions):

Operating Expense Non-Operating Expense
Amorti- Interest Other (Income)
SG&A1 zation Expense Expense Income Taxes2 Total
Three Months Ended June 30, 2022
Acquisition costs $ 1.7 $ 21.5 $ 1.0 $ – $ – $ 24.2
Restructuring costs 2.9 – 0.3 – – 3.2
COVID-19 impacts 0.1 – – – – 0.1
Total adjusting items $ 4.7 $ 21.5 $ 1.3 $ – $ – $ 27.5
Three Months Ended June 30, 2021
Acquisition costs $ 0.8 $ 25.2 $ 1.2 $ – $ – $ 27.2
Restructuring costs3 1.7 – 0.7 50.8 – 53.2
COVID-19 impacts 0.4 – – – – 0.4
Total adjusting items $ 2.9 $ 25.2 $ 1.9 $ 50.8 $ – $ 80.8

Six Months Ended June 30, 2022
Acquisition costs $ 2.2 $ 42.9 $ 2.0 $ – $ – $ 47.1
Restructuring costs 4.6 – 0.6 – – 5.2
COVID-19 impacts 1.5 – – – – 1.5
Total adjusting items $ 8.3 $ 42.9 $ 2.6 $ – $ – $ 53.8
Six Months Ended June 30, 2021
Acquisition costs $ 1.4 $ 50.5 $ 3.1 $ – $ – $ 55.0
Restructuring costs3 4.7 2.3 1.5 60.3 – 68.8
COVID-19 impacts 0.9 – – – – 0.9
Total adjusting items $ 7.0 $ 52.8 $ 4.6 $ 60.3 $

– $ 124.7

1.Selling, general and administrative expense (“SG&A”).

2.For tax impact of adjusting items, see Adjusted Net Income (Loss) table below.

3.Other (income) expense for the three and six months ended June 30, 2021
includes a loss on debt extinguishment of $50.7 million and $60.2 million,
respectively, in connection with the write-off of debt issuance costs and
payment of redemption premiums stemming from our refinancing transactions.

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Adjusted Operating Expense

The following table presents a reconciliation of operating expense, the most
directly comparable financial measure as measured in accordance with GAAP, to
Adjusted Operating Expense for each of the periods indicated (in millions):

Three Months Ended June 30, Six Months Ended June 30,
2022 2021 2022 2021
Operating expense $ 395.8 $ 336.6 $ 744.0 $ 646.6
Acquisition costs (23.2) (26.0) (45.1) (51.9)
Restructuring costs (2.9) (1.7) (4.6) (7.0)
COVID-19 impacts (0.1) (0.4) (1.5) (0.9)
Adjusted Operating Expense $ 369.6 $ 308.5 $ 692.8 $ 586.8

Net sales $ 2,358.2 $ 1,872.1 $ 4,045.1 $ 3,190.1
Operating expense as % of net sales 16.8 % 18.0 % 18.4 % 20.3 %
Adjusted Operating Expense as % of net 15.7 % 16.5 % 17.1 % 18.4 %

sales

Adjusted Net Income (Loss)

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

Three Months Ended June 30, Six Months Ended June 30,
2022 2021 2022 2021
Net income (loss) from continuing
operations $ 174.5 $ 79.8 $ 230.3 $ 69.3
Adjusting items:
Acquisition costs 24.2 27.2 47.1 55.0
Restructuring costs 3.2 53.2 5.2 68.8
COVID-19 impacts 0.1 0.4 1.5 0.9
Total adjusting items 27.5 80.8 53.8 124.7
Less: tax impact of adjusting items1 (7.4) (20.7) (13.9) (32.0)
Total adjustments, net of tax 20.1 60.1 39.9 92.7
Adjusted Net Income (Loss) $ 194.6 $ 139.9 $ 270.2 $ 162.0

Net sales $ 2,358.2 $ 1,872.1 $ 4,045.1 $ 3,190.1
Net income (loss) as % of sales 7.4 % 4.3 % 5.7 % 2.2 %
Adjusted Net Income (Loss) as % of sales 8.3 % 7.5 % 6.7 % 5.1 %

1.Amounts represent tax impact on adjustments that are not included in our
income tax provision (benefit) for the periods presented. The tax impact of
adjustments for the three months ended June 30, 2022 and 2021 were calculated
using a blended effective tax rate of 26.9% and 25.6%, respectively. The tax
impact of adjustments for the six months ended June 30, 2022 and 2021 were
calculated using a blended effective tax rate of 25.8% and 25.7%, respectively.

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Adjusted EBITDA

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

Three Months Ended June 30, Six Months Ended June 30,
2022 2021 2022 2021
Net income (loss) from continuing
operations $ 174.5 $ 79.8 $ 230.3 $ 69.3
Interest expense, net 19.1 23.2 36.3 52.8
Income taxes 61.0 27.1 79.9 22.3
Depreciation and amortization 40.4 40.3 79.3 82.5
Stock-based compensation 8.0 5.4 13.1 9.6
Acquisition costs1 1.7 0.8 2.2 1.4
Restructuring costs1 2.9 52.5 4.6 65.0
COVID-19 impacts 0.1 0.4 1.5 0.9
Adjusted EBITDA $ 307.7 $ 229.5 $ 447.2 $ 303.8

Net sales $ 2,358.2 $ 1,872.1 $ 4,045.1 $ 3,190.1
Net income (loss) as % of net sales 7.4 % 4.3 % 5.7 % 2.2 %
Adjusted EBITDA as % of net sales 13.0 % 12.3 % 11.1 % 9.5 %

1.Amounts represent adjusting items included in SG&A and other income (expense);
remaining adjusting item balances are embedded within the other line item
balances reported in this table.

Seasonality and Quarterly Fluctuations

The demand for building materials is closely correlated to both seasonal changes
and unpredictable weather patterns, therefore demand fluctuations are expected.

In general, our net sales and net income are highest in quarters ending June 30,
September 30 and December 31, which represent the peak months of construction
and re-roofing. Conversely, we have historically experienced low net income
levels or net losses in quarters ending March 31, when winter construction
cycles and cold weather patterns have an adverse impact on our customers’
ability to conduct their business.

Our balance sheet fluctuates throughout the year, driven by similar seasonal
trends. We generally experience an increase in inventory and peak cash usage in
the quarters ending March 31 and June 30, driven primarily by increased
purchasing that is necessary to meet the rise in demand for our products during
the warmer months. Accounts receivable, accounts payable, and cash collections
are generally at their highest during the quarters ending June 30 and September
30, when sales are typically at their peak.

At times, we experience fluctuations in our financial performance that are
driven by factors outside of our control, including the impact that severe
weather events and unusual weather patterns may have on the timing and magnitude
of demand and material availability.

In addition, the impacts of the COVID-19 pandemic and resulting supply chain
disruptions as well as inflation have caused, and may continue to cause,
fluctuations in our financial results and working capital that are not aligned
with the seasonality we generally experience.

Liquidity

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

Our principal sources of liquidity as of June 30, 2022 were our cash and cash
equivalents of $54.6 million and our available borrowings of approximately
$809.0 million under our asset-based revolving lines of credit.

Significant factors which could affect future liquidity include the following:

•the adequacy of available bank lines of credit;

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

•cash flows generated from operating activities;

•working capital management;

•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 or subsequent financings. We have
funded most of our capital expenditures with cash on hand, increased bank
borrowings, or equipment financing, and then reduced those obligations with cash
flows from operations. We may explore additional or replacement financing
sources in order to bolster liquidity and strengthen our capital structure.

We believe we currently have adequate liquidity and availability of capital to
fund our present operations, meet our commitments on our existing debt and fund
anticipated growth, including expansion in existing and targeted market areas.
We may seek 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, credit profile and earnings history provide a sufficient
base for obtaining additional financing resources at reasonable rates and terms.
We may also choose to issue additional shares of common stock or preferred stock
in order to raise funds.

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

Six Months Ended June 30,
2022 2021
Net cash provided by (used in) operating activities $ (187.0) $ 18.7
Net cash provided by (used in) investing activities (53.5) 810.4
Net cash provided by (used in) financing activities 69.6 (1,101.6)
Effect of exchange rate changes on cash and cash equivalents (0.3) –
Net increase (decrease) in cash and cash equivalents $ (171.2) $ (272.5)

Operating Activities

Net cash used in operating activities, including both continuing and
discontinued operations, was $187.0 million in 2022, compared to cash provided
by operating activities of $18.7 million in 2021. Cash from operations decreased
$205.7 million primarily due to an incremental cash outflow of $372.0 million
stemming from changes to our net working capital, mainly driven by an
unfavorable change in cash outflows related to accounts receivable and
inventories compared to the prior year, partially offset by a favorable change
in cash inflows related to accounts payable and accrued expenses. The
unfavorable change related to accounts receivable is largely driven by increased
sales, while the unfavorable change related to inventories and favorable change
related to accounts payable and accrued expenses are primarily due to product
cost inflation as well as a build-up of product inventories during our peak
selling season. The decrease was partially offset by an increase in net income
after adjustments for non-cash items of $166.3 million. Operating cash flows
used in discontinued operations for the six months ended June 30, 2021 were
$21.8 million.

Investing Activities

Net cash used in investing activities was $53.5 million in 2022, compared to
cash provided by investing activities of $810.4 million in 2021. Cash provided
by investing activities in 2021 primarily reflects proceeds from the sale of
Interior Products, whereas cash used in investing activities in 2022 reflects
cash used for purchases of property and equipment as well as acquired
businesses. There were no investing cash flows from discontinued operations.

Financing Activities

Net cash provided by financing activities was $69.6 million in 2022, compared to
cash used in financing activities of $1.10 billion in 2021. Cash used in
financing activities in 2021 was primarily due to $1.05 billion in net
repayments of borrowings, mostly in connection with the 2021 Debt Refinancing
(as defined below). Cash provided by financing activities in 2022 reflects
$467.8 million in net borrowings, partially offset by $338.1 million in cash
used to repurchase our common stock and a $50.0 million advance payment for
shares of our common stock, both under the Repurchase Program (as defined
below).

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Share Repurchase Program

On February 24, 2022, we announced a new share repurchase program (the
“Repurchase Program”), pursuant to which we may purchase up to $500.0 million of
our common stock. Shares repurchased under the Repurchase Program are retired
immediately and are included in the category of authorized but unissued shares.
As of June 30, 2022, we had approximately $112.1 million remaining under the
Repurchase Program. The pace of our repurchase activity will depend on factors
such as our working capital needs, our cash requirements for acquisitions, our
debt repayment obligations, our stock price, and economic and market conditions.

On March 10, 2022, we entered into a Variable Tenor ASR Master Agreement (the
“ASR Master Agreement”) and Supplemental Confirmation (collectively, the “March
2022 ASR Agreement”) with Citibank, N.A. (“Citi”) to repurchase $125.0 million
of our common stock. Under the terms of the March 2022 ASR Agreement, we paid
$125.0 million to Citi and received an initial share delivery of 1,689,189
shares of our common stock, representing 80% of the then expected share
repurchases under the March 2022 ASR Agreement, based on the closing price of
our common stock of $59.20 on March 11, 2022. On June 13, 2022, we completed the
March 2022 ASR Agreement and received an additional 406,200 shares of our common
stock. In total, 2,095,389 shares of our common stock were delivered under the
March 2022 ASR Agreement at an average price of $59.65 per share, which
represents the daily volume-weighted average price of our common stock during
the term of the March 2022 ASR Agreement, less a discount and adjustments
pursuant to the terms of the March 2022 ASR Agreement.

On June 13, 2022, we entered into an additional Supplemental Confirmation
(together with the ASR Master Agreement, the “June 2022 ASR Agreement”) with
Citi to repurchase an additional $250.0 million of our common stock. Under the
terms of the June 2022 ASR Agreement, we paid $250.0 million to Citi and
received an initial share delivery of 3,480,077 shares of our common stock,
representing 80% of the total expected share repurchases under the June 2022 ASR
Agreement, based on the closing price of our common stock of $57.47 on June 13,
2022. The final number of shares to be repurchased pursuant to the ASR Agreement
will be determined upon settlement. As of June 30, 2022, the remaining
$50.0 million of the $250.0 million purchase price was evaluated as an unsettled
equity forward contract indexed to our common stock and classified within
stockholders’ equity as a reduction to additional paid-in capital until the
equity forward contract settles, when it will be reflected as a reduction in
retained earnings. The final settlement of the June 2022 ASR Agreement is
expected to be completed in the fourth quarter of 2022.

During the six months ended June 30, 2022, we also repurchased on the open
market 221,658 shares of our common stock at an average price of $57.98 per
share for an aggregate purchase price of $12.9 million.

See Note 8 in the Notes to Condensed Consolidated Financial Statements for
additional information.

Capital Resources

In May 2021, we entered into a series of financing arrangements to refinance
certain debt instruments to take advantage of lower market interest rates (the
“2021 Debt Refinancing”). Upon completion of the 2021 Debt Refinancing, the
weighted-average interest rate on our outstanding debt was 3.43% as of June 30,
2022, down from 4.21% as of March 31, 2021 (prior to the 2021 Debt Refinancing).

As of June 30, 2022, we had access to the following financing arrangements:

•the 2026 U.S. Revolver, an asset-based revolving line of credit in the United
States, in an amount up to $1.25 billion and with an outstanding balance of
$455.1 million;

•the 2026 Canada Revolver, an asset-based revolving line of credit in Canada, in
an amount up to $50.0 million and with an outstanding balance of $6.2 million;

•the 2028 Term Loan with an outstanding balance of $975.9 million; and

•two separate senior notes instruments, including the 2029 Senior Notes and 2026
Senior Notes, with outstanding balances of $346.6 million and $297.1 million,
respectively.

See Note 10 in the Notes to Condensed Consolidated Financial Statements for
additional information on our current financing arrangements and the 2021 Debt
Refinancing.

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