BEACON ROOFING SUPPLY INC - Quarter Report: 2006 March (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D. C. 20549

 

FORM 10-Q

 

x

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

 

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2006

 

OR

 

o

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

 

FOR THE TRANSITION PERIOD FROM              TO             .

 

COMMISSION FILE NO.: 000-50924

 

BEACON ROOFING SUPPLY, INC.

(Exact name of Registrant as specified in its charter)

 

 

978-535-7668

(Registrant’s telephone number, including area code)

 

 

(former name, former address and former fiscal year, if changed since last report)

 

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

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. (Check one):

 

Large Accelerated Filer  x                Accelerated Filer  o        Non-Accelerated Filer  o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     YES  o    NO  x

 

As of May 1, 2006, there were 29,182,691 outstanding shares of the registrant’s common stock, $.01 par value per share.

 

 

BEACON ROOFING SUPPLY, INC.

 

Form 10-Q

For the Quarter Ended March 31, 2006

 

INDEX

 

					Page
Part I.		Financial Information			3
Item 1.		Financial Statements (Unaudited)			3
		Consolidated Balance Sheets			3
		Consolidated Statements of Operations			4
		Consolidated Statements of Cash Flows			5
		Notes to Consolidated Financial Statements			6
Item 2.		Management’s Discussion and Analysis of Financial Condition And Results of Operations			12
		Overview			12
		Results of Operations			12
		Seasonality and Quarterly Fluctuations			17
		Liquidity and Capital Resources			17
		Cautionary Statement			20
Item 3.		Quantitative and Qualitative Disclosures about Market Risk			20
		Interest Rate Risk			20
		Foreign Exchange Risk			20
Item 4.		Controls and Procedures			20
Part II.		Other Information			21
Item 6.		Exhibits			21
Signature Page					22
Index to Exhibits					23

 

2

 

BEACON ROOFING SUPPLY, INC.

PART I.  FINANCIAL INFORMATION

 

Item 1.  Financial Statements

 

Consolidated Balance Sheets

 

		(Unaudited)			(Unaudited)			(Note)
		March 31,			March 31,			September 24,
		2006			2005			2005
		(Dollars in thousands)
Assets
Current assets:
Cash		$	—		$	5,886		$	—
Accounts receivable, less allowance for doubtful accounts of $5,782 at March 31, 2006, $3,647 at March 31, 2005 and $4,104 at September 24, 2005		160,807			91,117			123,345
Inventories		178,494			95,980			82,423
Prepaid expenses and other assets		35,346			19,135			22,656
Deferred income taxes		10,983			3,227			4,339
Total current assets		385,630			215,345			232,763
Property and equipment, net		52,862			29,392			31,767
Goodwill, net		258,445			104,375			108,553
Other assets		61,298			12,988			13,904
Total assets		$	758,235		$	362,100		$	386,987
Liabilities and stockholders’ equity
Current liabilities:
Cash overdraft		$	1,257		$	—		$	6,107
Borrowings under revolving lines of credit		—			67,859			—
Accounts payable		135,789			74,197			70,158
Accrued expenses		48,467			29,320			29,146
Current portions of long-term debt and capital lease obligations		28,370			6,161			6,348
Total current liabilities		213,883			177,537			111,759
Borrowings under revolving lines of credit		208,605			—			63,769
Senior notes payable and other obligations, net of current portion		52,453			20,990			20,156
Deferred income taxes		20,473			9,045			10,890
Long-term obligations under capital leases & other, net of current portion		7,057			814			1,668
Commitments and contingencies
Stockholders’ equity:
Common stock (voting); $.01 par value; 100,000,000 shares authorized; 29,414,302 issued in March of 2006, 26,632,938 in March of 2005 and 26,911,573 issued in September of 2005		294			266			269
Undesignated preferred stock; 5,000,000 shares authorized, none issued or outstanding		—			—			—
Additional paid-in capital		201,368			140,135			142,173
Deferred compensation		—			(344		)	—
Treasury stock (232,861 shares in March of 2006, March of 2005 and September of 2005		(515		)	(515		)	(515		)
Retained earnings		49,735			10,295			32,050
Accumulated other comprehensive income		4,882			3,877			4,768
Total stockholders’ equity		255,764			153,714			178,745
Total liabilities and stockholders’ equity		$	758,235		$	362,100		$	386,987

 

Note: The balance sheet at September 24, 2005
has been derived from the audited financial statements at that date.

 

The accompanying Notes are an integral part of the Consolidated Financial Statements

 

3

 

BEACON ROOFING SUPPLY, INC.

Consolidated Statements of Operations

 

Unaudited

(Dollars in thousands, except per share data)

 

		Three Months Ended March 31,						Six Months Ended March 31,
		2006			2005			2006			2005
Net sales		$	322,396		$	172,116		$	662,282		$	371,306
Cost of products sold		244,637			130,746			500,815			279,590
Gross profit		77,759			41,370			161,467			91,716
Operating expenses (includes stock-based compensation  expense of $735 and $172 for the three months ended  in 2006 and 2005, respectively, and $1,333 and $346 for  the six months ended in 2006 and 2005, respectively)		65,403			35,894			123,399			68,907
Income from operations		12,356			5,476			38,068			22,809
Other expenses:
Interest expense		4,294			1,185			8,312			2,077
Loss on early retirement of debt		—			—			—			915
		4,294			1,185			8,312			2,992
Income before income taxes		8,062			4,291			29,756			19,817
Income taxes		3,286			1,873			12,071			8,656
Net income		$	4,776		$	2,418		$	17,685		$	11,161
Net income per share:
Basic		$	0.16		$	0.09		$	0.63		$	0.42
Diluted		$	0.16		$	0.09		$	0.61		$	0.41
Weighted average shares used in computing net income per share:
Basic		29,053,876			26,384,001			28,011,772			26,371,317
Diluted		29,873,185			27,344,123			28,924,347			27,323,528

 

The accompanying Notes are an integral part of the Consolidated Financial Statements.

 

 

4

 

 

BEACON ROOFING SUPPLY, INC.

Consolidated Statements of Cash Flows

 

		Six Months ended March 31,
		2006			2005
		Unaudited
		(In thousands)
Operating activities:
Net income		$	17,685		$	11,161
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		10,816			3,940
Stock-based compensation		1,333			346
Loss on early retirement of debt		—			915
Unrealized gain on interest rate collar		(286		)	—
Deferred income taxes		289			232
Changes in assets and liabilities, net of the effects of businesses acquired:
Accounts receivable		24,099			14,195
Inventories		(32,768		)	(20,441		)
Prepaid expenses and other assets		(1,130		)	(811		)
Accounts payable and accrued expenses		15,666			(6,738		)
Net cash provided by operating activities		35,704			2,799
Investing activities:
Purchases of property and equipment, net of sale proceeds		(4,160		)	(4,791		)
Acquisition of businesses, net of cash acquired		(279,588		)	(30,334		)
Net cash used in investing activities		(283,748		)	(35,125		)
Financing activities:
Net borrowings under revolving lines of credit		144,825			22,994
Net borrowings (repayments) under senior notes payable, and other		52,295			(1,791		)
Repurchase of warrants		—			(34,335		)
Repayments of junior subordinated notes		—			(17,986		)
Repayments of subordinated notes payable to related parties		—			(29,442		)
Net proceeds from sale of common stock		51,576			102,833
Proceeds from exercise of options		1,421			—
Deferred financing costs		(2,167		)	(342		)
Income tax benefit from stock-based compensation deductions in excess of recognized compensation cost		4,890			—
Net cash provided by financing activities		252,840			41,931
Effect of exchange rate changes on cash		54			(25		)
Net increase in cash		4,850			9,580
Cash overdraft at beginning of year		(6,107		)	(3,694		)
Cash (overdraft) at end of period		$	(1,257	)	$	5,886
Non-cash transactions:
Capital lease additions		$	3,518		$	—

 

The accompanying Notes are an integral part of the Consolidated Financial Statements

 

 

5

 

 

BEACON ROOFING SUPPLY, INC.

 

Notes to Consolidated Financial Statements (Unaudited)

 

1. Basis of Presentation

 

Beacon Roofing Supply, Inc. (the Company, which may be referred to as we, us or our) prepared the consolidated financial statements following accounting principles generally accepted in the United States (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 required by GAAP for complete financial statements have been condensed or omitted. The balance sheet as of March 31, 2005 has been presented for a better understanding of the impact of seasonal fluctuations on our financial condition. Certain prior-year amounts have been reclassified to conform to the current-year presentation.

 

In management’s opinion, the financial statements include all normal and recurring adjustments that are considered necessary for the fair presentation of our financial position and operating results. The results for the three-month and six-month periods ended March 31, 2006 are not necessarily indicative of the results to be expected for the twelve months ending September 30, 2006 (“2006”).

 

The Company’s fiscal year ends on the close of business on the last Saturday in September of each year. Except for the fourth quarter of 2005, each of the Company’s 2006 and 2005 quarters ends on the last day of the respective third calendar month.

 

We completed our initial public offering (“IPO”) on September 22, 2004 and received the net IPO proceeds on September 28, 2004. In connection with the associated early retirement of debt paid with the proceeds, we recorded a $0.9 million loss in the first quarter of 2005.

 

On December 16, 2005, the Company sold two million shares of common stock at $27.50 per share in a public offering. Selling stockholders also sold shares in the offering. The net proceeds to the Company from this offering, after all associated expenses, totaled approximately $51.6 million and were used for the pay down of revolver borrowings. The Company did not receive any proceeds from the sales by the selling stockholders.

 

You should also read the financial statements and notes included in our 2005 Annual Report on Form 10-K. The accounting policies used in preparing these financial statements are the same as those described in that Annual Report.

 

2. Earnings Per Share

 

We calculate basic income per share by dividing the net income by the weighted-average number of common shares outstanding. Diluted net income per share includes the dilutive effects of stock awards. As discussed in Note 1, the Company sold two million additional shares of common stock in December 2005.

 

The following table reflects the calculation of weighted-average shares outstanding for each period presented:

 

		Three Months Ended March 31,				Six Months Ended March 31,
		2006		2005		2006		2005
Weighted-average common shares outstanding for basic		29,053,876		26,384,001		28,011,772		26,371,317
Dilutive effect of employee stock options		819,309		960,122		912,575		952,211
Weighted-average common shares assuming dilution		29,873,185		27,344,123		28,924,347		27,323,528

 

 

6

 

3. Stock-Based Compensation

 

Effective September 25, 2005, the Company adopted Statement of Financial Accounting Standards (“SFAS”) 123R, Share-Based Payments, using the modified-prospective transition method.  Prior to 2006, the Company accounted for stock awards granted to employees under the recognition and measurement principles of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and Related Interpretations.  As a result, no compensation expense was previously recognized for stock options granted to employees after the Company’s IPO because all such stock options granted had exercise prices equal to the market value of the Company’s stock on the date of the grant.

 

Under the modified-prospective transition method, compensation expense recognized in the three-month and six-month periods of 2006 included: (a) compensation cost for all unvested share-based awards granted prior to September 25, 2005, based on the grant date fair value estimated in accordance with SFAS 123, Accounting For Stock-Based Compensation, and (b) compensation cost for all share-based awards granted subsequent to September 24, 2005, based on the grant date fair value estimated in accordance with SFAS 123R. Results of prior periods have not been restated. SFAS 123R also requires the Company to estimate forfeitures in calculating the expense related to stock-based compensation. The impact of estimating forfeitures upon adoption was not material.  In addition, SFAS 123R requires the Company to reflect the benefits of tax deductions in excess of recognized compensation cost to be reported as both a financing cash inflow and an operating cash outflow upon adoption. The excess tax benefit classified as a financing activity would have been classified as an operating inflow if the company had not adopted SFAS 123R.

 

Compensation cost arising from stock options granted to employees and non-employee directors is recognized as expense using the straight-line method over the vesting period. As of March 31, 2006, there was $6.3 million of total unrecognized compensation cost related to stock options.  That cost is expected to be recognized over a period of 2.9 years.   As a result of adopting SFAS 123R, the Company recorded  stock-based compensation expense of $0.7 million ($0.4 million net of tax) and $1.3 million ($0.8 million net of tax) for the three and six months ended March 31, 2006, respectively.  Included in this total stock-based compensation expense was incremental expense of $0.1 million ($0.1 million net of tax) and $0.7 million ($0.4 million net of tax) for options granted during the three and six months ended March 31, 2006, respectively.

 

The following table illustrates the effect (in thousands, except per share amounts) on net income and earnings per share for the three and six months ended March 31, 2005 as if the Company’s stock-based compensation had been determined based on the fair value at the grant dates for awards made prior to 2006, under those plans and consistent with SFAS 123R:

 

Unaudited		Three Months Ended			Six Months Ended
(Dollars in thousands, except per share data)		March 31,2005			March 31,2005
Net income, as reported		$	2,418		$	11,161
Add: stock-based compensation, net of tax		103			207
Less: stock-based compensation expense determined under fair value method, net of tax		(294		)	(664		)
Pro forma net income		$	2,227		$	10,704
Basic earnings per share:
As reported		$	0.09		$	0.42
Pro forma		$	0.08		$	0.41
Diluted earnings per share:
As reported		$	0.09		$	0.41
Pro forma		$	0.08		$	0.39

 

 

7

 

The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions used for grants issued in the first two quarters of 2006 and 2005:

 

		Six Months Ended March 31,
		2006		2005
Risk free interest rate		4.49 - 4.94	%	3.70 - 4.00	%
Expected life		5.0 years		5.0 years
Expected volatility		45.0	%	45.0	%
Expected dividend yield		0	%	0	%

 

Expected life of the options granted and expected volatilities are based on the expected life and historical volatilities of the stocks of comparable public companies and other factors.  Estimated annual forfeiture rates of 0.0 - 8.0% were utilized in valuing the options granted in the first two quarters of 2006.

 

The following table summarizes stock options outstanding as of March 31, 2006 as well as activity during the six months then ended:

 

 

At March 31, 2006, the weighted-average remaining contractual life of options outstanding and exercisable was 7.6 years and 6.7 years, respectively. As of March 31, 2006, there were remaining options to purchase 1,350,167 shares of common stock available for grant under the Company’s 2004 Stock Plan.

 

At March 31, 2006, the aggregate intrinsic value of options outstanding and options exercisable was $54.5 million and $44.9 million, respectively.  (The intrinsic value of a stock option is the amount by which the market value of the underlying stock exceeds the exercise price of the option.)  The weighted-average grant date fair value of stock options granted during the six months ended March 31, 2006 and 2005 was $13.36 and $8.05, respectively.  The intrinsic value of stock options exercised during the six months ended March 31, 2006 and 2005 was $14.5 million and $0.7 million, respectively.   At March 31, 2006, the Company had $7.4 million of excess tax benefits available for deferred tax write-offs related to option accounting.

 

4. Comprehensive Income

 

Comprehensive income consists of net income and other gains and losses affecting stockholders’ equity that, under GAAP, are excluded from net income. In our case, these consist of foreign currency translation gains or losses as follows:

 

Unaudited		Three Months Ended March 31,						Six Months Ended March 31,
(Dollars in thousands)		2006			2005			2006			2005
Net income		$	4,776		$	2,418		$	17,685		$	11,161
Foreign currency translation adjustments		(74		)	(139		)	114			1,128
Comprehensive income		$	4,702		$	2,279		$	17,799		$	12,289

 

 

8

 

5. Acquisitions

 

 C&S Roofing Materials, Inc. D/B/A Pacific Supply Company

 

On January 10, 2006, we purchased certain assets of C&S Roofing Materials, Inc. D/B/A Pacific Supply Company (“Pacific”), a distributor of roofing and other building products with four locations located in Orange and Los Angeles counties in California.  This purchase was funded through our U.S. revolving line of credit. A total of $2.0 million of cash remains in escrow for post-closing indemnification claims and is included in other long-term assets. Pacific had net sales of $53 million (unaudited) for the year ended December 31, 2005. We have included the results of operations for Pacific from the date of acquisition and applied preliminary purchase accounting as of the date of acquisition, which resulted in recorded goodwill of $26.8 million as follows (in 000’s):

 

 

 

Mississippi Roofing Supply, Inc., Sunbelt Supply LLC, & Alabama Roofing Supply LLC

 

On January 17, 2006, we purchased certain assets of Mississippi Roofing Supply, Inc., Sunbelt Supply LLC, & Alabama Roofing Supply LLC (together the “Supply Companies”), three affiliated distributors of roofing and other building products with two locations in Alabama and one in Mississippi. This purchase was funded through our U.S. revolving line of credit. A total of $3.8 million of cash remains in escrow for post-closing purchase price adjustments and indemnification claims, of which $3.0 million is included in other current assets and $0.8 million is included in other long-term assets. The Supply Companies had combined net sales of $76 million (unaudited) for the year ended December 31, 2005. We have included the results of operations for the Supply Companies from the date of acquisition.  The purchase price is to be adjusted for working capital levels and the financial performance for the year ended December 31, 2005, which has not yet been finalized.  We have applied preliminary purchase accounting as of the date of acquisition, which resulted in recorded goodwill of $47.6 million as follows (in 000’s):

 

 

SDI Holding, Inc.

 

On October 14, 2005, we purchased 100% of the outstanding stock of SDI Holding, Inc. (“Shelter”), a distributor of roofing and other building products with 51 branches in 14 states at the time of the acquisition. This purchase was funded through our U.S. revolving line of credit. A total of $2.0 million of cash remains in escrow for post-closing purchase price adjustments and indemnification claims and is included in other current assets. Based upon Shelter’s final performance for the 2005 calendar year, the sellers may also qualify for an earn-out payment of up to $10 million, which would be payable during the third quarter of the Company’s 2006 fiscal year. No settlement has yet been reached in determining the actual earn-out payment.  Shelter had net sales of $342.4 million (unaudited) for the year ended December 31, 2005. We have included the results of operations for Shelter from the date of acquisition and applied preliminary purchase accounting as of the date of acquisition, which resulted in recorded goodwill of $73.1 million as follows (in 000’s):

 

 

9

 

Supplemental Pro Forma Information - Unaudited

 

The unaudited pro forma summary information below for the six months ended March 31, 2006 and the three and six months ended March 31, 2005, give effect to the acquisition of Shelter as if the acquisition had occurred at the beginning of those periods and is after giving effect to certain adjustments, including amortization of the intangibles subject to amortization and related income taxes. The aggregate impact of the inclusion of Pacific and the Supply Companies on the pro forma net income and net income per share presented below was not material and therefore has not been presented. Had the impact from Pacific and the Supply Companies been included in the pro forma net sales below, total pro forma net sales would have been $255.5 million for the three months ended March 31, 2005, $715.8 and $552.9 million for the six months ended March 31, 2006 and 2005, respectively, and $326.1 million for the three months ended March 31, 2006 (not presented). The unaudited pro forma summary information is not necessarily indicative of the financial results that would have occurred if the Shelter acquisition had been consummated at the beginning of those periods, nor is it necessarily indicative of the financial results which may be attained in the future.

 

The pro forma summary information is based upon available information and upon certain assumptions that the Company’s management believes are reasonable. As mentioned above, the Shelter acquisition is being accounted for using the purchase method of accounting. The allocation of the purchase price is preliminary. Final amounts could differ from those reflected in the pro forma summary information and such differences could be significant.

 

 

Unaudited		Three Months Ended March 31,					Six Months Ended March 31,
(Dollars in thousands, except per share amounts)		2005					2006			2005
Net Sales			$	234,421			$	678,104		$	499,483
Net Income			$	1,073			$	17,145		$	8,825
Net Income per Share:
Basic			$	0.04			$	0.61		$	0.33
Diluted			$	0.04			$	0.59		$	0.32

 

 

JGA Corp.

 

On December 15, 2004, we purchased 100% of the outstanding stock of JGA Corp. (“JGA”), a distributor of roofing and other building products with eight branches in Georgia and Florida at the time of our acquisition. This purchase was funded through our U.S. revolving line of credit. A total of $1.2 million of cash remains in escrow for post-closing indemnification claims and is included in other current assets. JGA had net sales of $74 million (unaudited) for the year ended December 31, 2003. We have included the results of operations for JGA from the date of acquisition and applied purchase accounting as of the date of acquisition, which resulted in recorded goodwill of $9.7 million and $11.4 million of other intangible assets.

 

Other Recent Acquisitions

 

On November 23, 2005, we purchased certain assets of Easton Wholesale Company, Inc. (“Easton”), a distributor of building products located in Easton, Maryland. On September 1, 2005, we purchased certain assets of Commercial Supply, Inc. (“CSI”), a distributor of building products located in western Massachusetts. On April 26, 2005, we purchased certain assets of Insulation Systems, Inc. of Virginia (“ISI”), a distributor of roofing and other building products with two branches in Virginia.

 

 

10

 

6. Debt

 

Effective October 14, 2005, the Company and its lenders in connection with the purchase of Shelter (Note 5) amended and restated the senior secured credit facilities (revolving lines of credit and term loans). The amendment extended the maturity date of the facilities to October 14, 2010, lowered the interest rates charged, increased the revolving lines of credit and term loans to totals of $230 and $80 million, respectively, and extended the installment schedule of the term loans so that the final payment is due on October 14, 2010. In addition, the amendment expanded the criteria for acquisitions which do not require lender consent and included an option of increasing the revolving lines of credit by an additional $50 million, which was done in January 2006 (see below). The amendment also increased the amount of allowed annual capital expenditures to 1.5% of net sales.

 

In January 2006, the Company and its lenders agreed to increase the revolving lines of credit by the additional $50 million to a total of $280 million and amend the term loans to provide for additional loans totaling $10 million that were added to our existing term loans to total $90 million. The lenders also agreed to waive certain minimum availability levels related to the January 2006 acquisitions. None of the other terms of the revolving lines of credit and term loans were changed.

 

The borrowings under the amended facilities continue to be collateralized by substantially all of the Company’s assets and are subject to certain operating and financial covenants, which, among other things, restrict the payment of dividends. The senior secured credit facilities have numerous restrictive covenants, including required fixed charge coverage ratios.

 

7. Foreign Sales

 

Foreign (Canadian) sales totaled $13.4 and $38.9 million in the three and six months ended March 31, 2006, respectively, and $9.8 and $35.0 million in the three and six months ended March 31, 2005, respectively.

 

8. Financial Derivatives

 

The Company enters into interest rate derivative agreements, commonly referred to as swaps or collars, with the objective of reducing volatility in our borrowing costs.  At March 31, 2006, there were two interest rate collars outstanding that effectively convert the variable LIBOR component on a portion of our term loans to a fixed rate.  The first collar has a notional amount of $75 million, expires in November 2008, and has a floor rate of 4.33% and a cap rate of 5.85%.  The second collar has a notional amount of $75 million, expires in January 2008, and has a floor rate of 4.54% and a cap rate of 5.09%.  The combined fair market value of the agreements resulted in a recorded asset of approximately $0.3 million at March 31, 2006, which was determined based on current interest rates and expected trends.  Since these instruments do not quality as hedges, changes in the unrealized gain or loss are recorded in interest expense.  The differentials to be paid or received under the terms of the agreement are accrued as interest rates change and are recognized as an adjustment to interest expense related to the debt.

 

 

11

 

ITEM 2  Management’s Discussion And Analysis Of Financial Condition And Results of Operations

 

You should read the following discussion in conjunction with Management’s Discussion and Analysis included in our 2005 Annual Report on Form 10-K. Unless otherwise specifically indicated, all references to “2006” and “YTD 2006” refer to the three months (second quarter) and six months (year-to-date) ended March 31, 2006, respectively, of our fiscal year ending September 30, 2006, and all references to “2005” and “YTD 2005” refer to the three months (second quarter) and six months (year-to-date) ended March 31, 2005, respectively, of our fiscal year ended September 24, 2005.

 

Overview

 

We are one of the largest distributors of residential and non-residential roofing materials in the United States and Canada. We are also a distributor of other complementary building products, including siding, windows, specialty lumber products and waterproofing systems for residential and non-residential building exteriors. We purchase products from a large number of manufacturers and then distribute these goods to a customer base consisting of contractors and, to a lesser extent, general contractors, retailers and building material suppliers.

 

We currently distribute up to 8,500 SKUs through 148 branches in the United States and Canada.  We had approximately 2,360 employees as of March 31, 2006, including our sales and marketing team of approximately 640 employees. In fiscal year 2005, approximately 90% of our net sales were in the United States. We stock one of the most extensive assortments of high-quality branded products in the industry, enabling us to deliver products to our customers on a timely basis.

 

Execution of the operating plan at each of our branches drives our financial results. Revenues are impacted by the relative strength of the residential and non-residential roofing markets we serve. We allow each of our branches to develop its own marketing plan and mix of products based upon its local market. We differentiate ourselves from the competition by providing customer services, including job site delivery, tapered insulation layouts and design and metal fabrication, and by providing credit. We consider customer relations and our employees’ knowledge of roofing and exterior building materials to be very important to our ability to increase customer loyalty and maintain customer satisfaction. We invest significant resources in training our employees in sales techniques, management skills and product knowledge. While we consider these attributes important drivers of our business, we continually pay close attention to controlling operating costs.

 

Our growth strategy includes both internal growth (opening branches, growing sales with existing customers and introducing new products) and acquisition growth.  Our main acquisition strategy is to target market leaders in geographic areas that we presently do not service. Our October 2005 acquisition of SDI Holding, Inc. (“Shelter”) is one example of this approach. Shelter is a leading distributor of roofing and other building materials, currently operating 51 branches in the Southeast, Midwest and Central Plains regions of the United States, growing areas targeted by us for expansion.  In addition, we also acquire smaller companies to supplement branch openings within existing markets. Our November 2005 acquisition of Easton Wholesale Company, Inc. (“EWI”), which was integrated into our region in the Mid-Atlantic, is one example of such an acquisition.

 

Results of Operations

 

The following table shows, for the periods indicated, information derived from our consolidated statements of operations, expressed as a percentage of net sales for the periods presented.

 

		Three Months Ended March 31,				Six Months Ended March 31,
		2006		2005		2006		2005
Net sales		100.0	%	100.0	%	100.0	%	100.0	%
Cost of products sold		75.9		76.0		75.6		75.3
Gross profit		24.1		24.0		24.4		24.7
Operating expenses		20.3		20.8		18.6		18.6
Income from operations		3.8		3.2		5.8		6.1
Interest expense		(1.3	)	(0.7	)	(1.3	)	(0.6	)
Loss on early retirement of debt		—		—		—		(0.2	)
Income before income taxes		2.5		2.5		4.5		5.3
Income taxes		(1.0	)	(1.1	)	(1.8	)	(2.3	)
Net income		1.5	%	1.4	%	2.7	%	3.0	%

 

 

12

 

In managing our business, we consider all growth, including branch expansion, to be internal growth unless it results from an acquisition. When we refer to growth in existing markets in our discussion and analysis of financial condition and results of operations, 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. At March 31, 2006, we had a total of 147 branches in operation. For the quarter ended March 31, 2006, 85 branches (including JGA for the first time) were included in our existing market calculations and 62 branches were excluded because they were acquired during or after the quarter ended March 31, 2005. However, JGA is included in acquired markets for YTD 2006 due to their partial-prior-year operations. Acquired markets (see Note 5 to the consolidated financial statements) for YTD 2006 also include Pacific, the Supply Companies, Shelter, Easton, ISI and CSI, and for YTD 2005 represent the partial-year operations for JGA.

 

Three Months Ended March 31, 2006 (“2006”) Compared to the Three Months Ended March 31, 2005 (“2005”)

 

Existing and Acquired Markets

 

For the Three Months Ended

 

		Existing Markets						Acquired Markets						Consolidated
		March 31,						March 31,						March 31,
		2006			2005			2006			2005			2006			2005
Net Sales		$	213,637		$	172,116		$	108,759		$	—		$	322,396		$	172,116
Gross Profit		51,362			41,370			26,397			—			77,759			41,370
Gross Margin		24.0		%	24.0		%	24.3		%	—			24.1		%	24.0		%
Operating Expenses		38,622			35,894			26,781			—			65,403			35,894
Operating Expenses as a % of Net Sales		18.1		%	20.8		%	24.6		%	—			20.3		%	20.8		%
Operating Income (Loss)		$	12,740		$	5,476		$	(384	)	$	—		$	12,356		$	5,476
Operating Margin		6.0		%	3.2		%	-0.4		%	—			3.8		%	3.2		%

 

 

Net Sales

 

Consolidated net sales increased $150.3 million, or 87.3%, to $322.4 million in 2006 from $172.1 million in 2005. Existing markets saw internal growth of $41.5 million or 24.1%, while acquired markets contributed the remaining increase of $108.8 million. A portion of the acquired markets’ business benefited from the Gulf Coast rebuilding that is occurring following Hurricane Katrina. We opened two new branches in existing markets during 2006 and 2005.  For 2006, our acquired markets had combined product group sales of $59.5, $35.3 and $14.0 million in residential roofing products, non-residential roofing products and complementary building products, respectively, while the product group sales for our existing markets were as follows:

 

For the Three Months Ended

 

		March 31, 2006					March 31, 2005
		Sales			Mix		Sales			Mix		Growth
		(dollars in millions)
Residential roofing products		$	95.8		44.8	%	$	71.0		41.2	%	$	24.8		34.9	%
Non-residential roofing products		65.5			30.7		57.1			33.2		8.4			14.7
Complementary building products		52.3			24.5		44.0			25.6		8.3			18.9
		$	213.6		100.0	%	$	172.1		100.0	%	$	41.5		24.1	%

 

Note: Total 2006 existing market sales of $213.6 million plus 2006 sales from acquired markets of $108.8 million equal $322.4 million of total 2006 sales. We believe the existing market information is useful to investors because it helps explain organic growth.

 

Our second-quarter existing market growth was due primarily to the following factors:

 

•		overall estimated price increases of approximately 6%-8% compared to 2005;
•		strong residential roofing demand, helped by a mild winter on the East Coast;
•		seven new branches opened in existing markets since March 31, 2005;
•		high demand for complementary building products;
•		strong non-residential roofing demand throughout all regions; and
•		continued strong home remodeling demand.

 

 

13