BEACON ROOFING SUPPLY INC - Quarter Report: 2009 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
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FOR
THE QUARTERLY PERIOD ENDED MARCH 31, 2009
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)
|
DELAWARE
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36-4173371
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|
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(State
or other jurisdiction of
incorporation
or organization)
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(I.R.S.
Employer
Identification
No.)
|
|
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One
Lakeland Park Drive,
|
||
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Peabody,
Massachusetts
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01960
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|
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(Address
of principal executive offices)
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(Zip
Code)
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978-535-7668
(Registrant's
telephone number, including area code)
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 has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted 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 and post such files). o YES o NO
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company.
(Check one):
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Large
accelerated filer o
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Accelerated
filer x
|
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Non-accelerated
filer o
(Do not check if a smaller reporting
company)
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Smaller
reporting company o
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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, 2009, there were 45,074,856 outstanding shares of the registrant's
common stock, $.01 par value per share.
BEACON ROOFING
SUPPLY, INC.
Form 10-Q
For
the Quarterly Period Ended March 31, 2009
INDEX
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Part I.
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Financial Information
|
2 | |||
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Item 1.
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Condensed Consolidated Financial Statements
(Unaudited)
|
2 | |||
|
Consolidated Balance Sheets
|
2 | ||||
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Consolidated Statements of
Operations
|
3 | ||||
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Consolidated Statements of Cash
Flows
|
4 | ||||
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Notes to Condensed Consolidated Financial
Statements
|
5 | ||||
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Item 2.
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Management's Discussion and Analysis of Financial
Condition And Results of Operations
|
10 | |||
|
Overview
|
10 | ||||
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Results of Operations
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11 | ||||
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Seasonality and Quarterly
Fluctuations
|
14 | ||||
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Liquidity and Capital
Resources
|
15 | ||||
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Cautionary Statement
|
17 | ||||
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Item 3.
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Quantitative and Qualitative Disclosures about
Market Risk
|
18 | |||
|
Interest Rate Risk
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18 | ||||
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Foreign Exchange Risk
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18 | ||||
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Item 4.
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Controls and Procedures
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18 | |||
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Part II.
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Other Information
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19 | |||
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Item 6.
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Exhibits
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19 | |||
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Signature
Page
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20 | ||||
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Index
to Exhibits
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21 | ||||
Page
1 of 21
BEACON ROOFING
SUPPLY, INC.
PART I. FINANCIAL
INFORMATION
Item 1.
Financial Statements
Consolidated Balance
Sheets
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(Unaudited)
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(Unaudited)
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(Note)
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||||||||||
|
March
31,
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March
31,
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September
30,
|
||||||||||
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2009
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2008
|
2008
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||||||||||
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(Dollars
in thousands)
|
||||||||||||
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Assets
|
||||||||||||
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Current
assets:
|
||||||||||||
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Cash
and cash equivalents
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$ | 98,106 | $ | 10,574 | $ | 26,038 | ||||||
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Accounts
receivable, less allowance of $14,216 at March 31, 2009, $10,925 at March
31, 2008, and $12,978 at September 30, 2008
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166,939 | 173,039 | 283,652 | |||||||||
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Inventories
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207,042 | 194,551 | 209,255 | |||||||||
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Prepaid
expenses and other assets
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38,195 | 26,545 | 45,799 | |||||||||
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Deferred
income taxes
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22,664 | 19,276 | 18,126 | |||||||||
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Total
current assets
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532,946 | 423,985 | 582,870 | |||||||||
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Property
and equipment, net
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51,850 | 61,384 | 56,712 | |||||||||
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Goodwill
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352,319 | 354,727 | 354,269 | |||||||||
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Other
assets, net
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67,093 | 85,886 | 73,965 | |||||||||
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Total
assets
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$ | 1,004,208 | $ | 925,982 | $ | 1,067,816 | ||||||
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Liabilities
and stockholders' equity
|
||||||||||||
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Current
liabilities:
|
||||||||||||
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Accounts
payable
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$ | 158,166 | $ | 128,386 | $ | 198,429 | ||||||
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Accrued
expenses
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63,376 | 60,262 | 89,755 | |||||||||
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Current
portion of long-term obligations
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15,066 | 12,828 | 19,926 | |||||||||
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Total
current liabilities
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236,608 | 201,476 | 308,110 | |||||||||
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Senior
notes payable, net of current portion
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330,750 | 341,250 | 332,500 | |||||||||
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Deferred
income taxes
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34,858 | 36,450 | 35,362 | |||||||||
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Long-term
obligations under equipment financing and other, net of current
portion
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22,924 | 30,801 | 25,143 | |||||||||
|
Commitments
and contingencies
|
||||||||||||
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Stockholders'
equity:
|
||||||||||||
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Common
stock (voting); $.01 par value; 100,000,000 shares authorized; 45,072,897
issued at March 31, 2009, 44,281,312 at March 31, 2008 and 44,820,550 at
September 30, 2008
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451 | 443 | 448 | |||||||||
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Undesignated
preferred stock; 5,000,000 shares authorized, none issued or
outstanding
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- | - | - | |||||||||
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Additional
paid-in capital
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222,982 | 214,188 | 219,669 | |||||||||
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Retained
earnings
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163,145 | 103,749 | 146,946 | |||||||||
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Accumulated
other comprehensive loss
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(7,510 | ) | (2,375 | ) | (362 | ) | ||||||
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Total
stockholders' equity
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379,068 | 316,005 | 366,701 | |||||||||
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Total
liabilities and stockholders' equity
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$ | 1,004,208 | $ | 925,982 | $ | 1,067,816 | ||||||
Note: The
balance sheet at September 30, 2008
has been
derived from the audited financial statements at that date.
The
accompanying Notes are an integral part of the Consolidated Financial
Statements.
Page
2 of 21
BEACON
ROOFING SUPPLY, INC.
Consolidated
Statements of Operations
|
Three Months Ended March
31,
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Six Months Ended March 31,
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|||||||||||||||
|
2009
|
2008
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2009
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2008
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|||||||||||||
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Unaudited
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||||||||||||||||
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(Dollars
in thousands, except per share data)
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||||||||||||||||
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Net
sales
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$ | 319,303 | $ | 304,251 | $ | 782,632 | $ | 702,647 | ||||||||
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Cost
of products sold
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245,025 | 235,859 | 592,356 | 542,561 | ||||||||||||
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Gross
profit
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74,278 | 68,392 | 190,276 | 160,086 | ||||||||||||
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Operating
expenses
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72,820 | 75,332 | 151,143 | 151,249 | ||||||||||||
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Income
(loss) from operations
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1,458 | (6,940 | ) | 39,133 | 8,837 | |||||||||||
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Interest
expense
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5,589 | 6,728 | 11,738 | 13,737 | ||||||||||||
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Income
(loss) before income taxes
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(4,131 | ) | (13,668 | ) | 27,395 | (4,900 | ) | |||||||||
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Income
tax expense (benefit)
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(1,688 | ) | (5,536 | ) | 11,196 | (2,009 | ) | |||||||||
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Net
income (loss)
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$ | (2,443 | ) | $ | (8,132 | ) | $ | 16,199 | $ | (2,891 | ) | |||||
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Net
income (loss) per share:
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||||||||||||||||
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Basic
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$ | (0.05 | ) | $ | (0.18 | ) | $ | 0.36 | $ | (0.07 | ) | |||||
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Diluted
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$ | (0.05 | ) | $ | (0.18 | ) | $ | 0.36 | $ | (0.07 | ) | |||||
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Weighted
average shares used in computing net income (loss) per
share:
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||||||||||||||||
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Basic
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44,941,782 | 44,280,600 | 44,881,846 | 44,276,916 | ||||||||||||
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Diluted
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44,941,782 | 44,280,600 | 45,339,821 | 44,276,916 | ||||||||||||
The
accompanying Notes are an integral part of the Consolidated Financial
Statements.
Page
3 of 21
BEACON
ROOFING SUPPLY, INC.
Consolidated
Statements of Cash Flows
|
Six Months Ended March 31,
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||||||||
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2009
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2008
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|||||||
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Unaudited
(in thousands)
|
||||||||
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Operating
activities:
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||||||||
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Net
income (loss)
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$ | 16,199 | $ | (2,891 | ) | |||
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Adjustments
to reconcile net income (loss) to net cash provided by operating
activities:
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||||||||
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Depreciation
and amortization
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15,311 | 17,488 | ||||||
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Stock-based
compensation
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2,385 | 2,590 | ||||||
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Deferred
income taxes
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(317 | ) | (1,049 | ) | ||||
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Changes
in assets and liabilities:
|
||||||||
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Accounts
receivable
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113,356 | 93,889 | ||||||
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Inventories
|
269 | (29,008 | ) | |||||
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Prepaid
expenses and other assets
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7,255 | 6,075 | ||||||
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Accounts
payable and accrued expenses
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(69,613 | ) | (57,609 | ) | ||||
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Net
cash provided by operating activities
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84,845 | 29,485 | ||||||
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Investing
activities:
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||||||||
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Purchases
of property and equipment, net of sales proceeds
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(4,761 | ) | (1,214 | ) | ||||
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Net
cash used in investing activities
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(4,761 | ) | (1,214 | ) | ||||
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Financing
activities:
|
||||||||
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Repayments
under revolving lines of credit, net
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(4,627 | ) | (21,053 | ) | ||||
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Net
repayments under senior notes payable, and other
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(4,188 | ) | (2,898 | ) | ||||
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Proceeds
from exercise of options
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845 | 15 | ||||||
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Income
tax benefit from stock-based compensation deductions in excess of the
associated compensation costs
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86 | 16 | ||||||
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Net
cash used by financing activities
|
(7,884 | ) | (23,920 | ) | ||||
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Effect
of exchange rate changes on cash
|
(132 | ) | (246 | ) | ||||
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Net
increase in cash and cash equivalents
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72,068 | 4,105 | ||||||
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Cash
and cash equivalents at beginning of year
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26,038 | 6,469 | ||||||
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Cash
and cash equivalents at end of period
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$ | 98,106 | $ | 10,574 | ||||
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Cash
paid during the year for:
|
||||||||
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Interest
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$ | 6,414 | $ | 3,212 | ||||
|
Income
taxes, net of refunds
|
32,907 | 8,924 | ||||||
The
accompanying Notes are an integral part of the Consolidated Financial
Statements
Page
4 of 21
BEACON
ROOFING SUPPLY, INC.
Notes
to Condensed Consolidated Financial Statements (Unaudited)
1.
Basis of Presentation
Beacon
Roofing Supply, Inc. (the "Company") 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, 2008 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-month period (second quarter) and the six-months period ended March 31,
2009 are not necessarily indicative of the results to be expected for the twelve
months ending September 30, 2009.
The
Company's fiscal year ends on the last day in September of each year and each
quarter ends on the last day of the respective third calendar month. The
six-month periods ended March 31, 2009 and March 31, 2008 both had 125 business
days, while the three-month periods ended March 31, 2009 and March 31, 2008 had
63 and 64 business days, respectively.
You
should also read the financial statements and notes included in the Company's
fiscal year 2008 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.
Accounting
Changes
Effective
October 1, 2008, the Company prospectively implemented the provisions of
Statement of Financial Accounting Standards ("SFAS") No. 157, Fair Value
Measurements. For the fair value measurements that are
required or permitted under other standards, SFAS 157 clarifies the fair
value objective and establishes a framework for developing fair value
estimates. In February 2008, the Financial Accounting Standards Board
(FASB) issued FASB Staff Position FAS 157-2, Effective Date of FASB Statement
No. 157, which defers the effective date for the Company to
October 1, 2009 for any nonfinancial assets and liabilities, except
those that are recognized or disclosed at fair value on a recurring basis (that
is, at least annually).
SFAS 157
provides a framework for measuring fair value and establishes a fair value
hierarchy that prioritizes the inputs used to measure fair value, giving the
highest priority to unadjusted quoted prices in active markets for identical
assets or liabilities (Level 1 inputs), the next priority to observable market
based inputs or unobservable inputs that are corroborated by market data (Level
2 inputs) and the lowest priority to unobservable inputs (Level 3
inputs).
The
Company’s assets and liabilities that are measured at fair value on a recurring
basis are its interest rate swaps and collars (Note 7). At March 31, 2009 and
2008 and at September 30, 2008, unrealized losses of $12.9, $13.3 and $7.4
million, respectively, were recorded on those financial
derivatives. These balances were included in accrued expenses in the
Consolidated Balance Sheets. The fair values of the interest rate swaps and
collars were determined through the use of pricing models, which utilize
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 swap and collar agreements. These fair values are therefore based on
Level 2 inputs.
Page
5 of 21
BEACON
ROOFING SUPPLY, INC.
Notes
to Consolidated Financial Statements (Unaudited) (Continued)
1.
Basis of Presentation (Continued)
Beginning
October 1, 2008, SFAS 159, The Fair Value Option for Financial
Assets and Financial Liabilities—Including an amendment of FASB Statement
No. 115, also became effective for the Company. SFAS 159
permits companies to measure many financial instruments and certain other items
at fair value at specified election dates. There was no impact from SFAS 159 as
the Company chose to retain its current accounting valuation methods for those
items.
2.
Earnings Per Share
The
Company calculates basic income per share by dividing net income (loss) by the
weighted-average number of common shares outstanding. Diluted net income per
share includes the dilutive effects of outstanding stock awards.
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,
|
|||||||||||||||
|
2009
|
2008
|
2009
|
2008
|
|||||||||||||
|
Weighted-average
common shares outstanding for basic
|
44,941,782 | 44,280,600 | 44,881,846 | 44,276,916 | ||||||||||||
|
Dilutive
effect of stock options
|
- | - | 457,975 | - | ||||||||||||
|
Weighted-average
shares assuming dilution
|
44,941,782 | 44,280,600 | 45,339,821 | 44,276,916 | ||||||||||||
3.
Stock-Based Compensation
The
Company records stock-based compensation under SFAS 123R, Share-Based Payments, using
the modified-prospective transition method. Under this method, compensation
expense includes: (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. SFAS 123R also requires
the Company to estimate forfeitures in calculating the expense related to
stock-based compensation.
Compensation
cost arising from stock options granted to employees and non-employee directors
is recognized as an expense using the straight-line method over the vesting
period. As of March 31, 2009, there was $6.6 million of total unrecognized
compensation cost related to stock options. That cost is expected to be
recognized over a weighted-average period of 2.3 years. The Company recorded
stock-based compensation expense of $1.2 million ($0.7 million net of tax)
for both the three months ended March 31, 2009 and 2008, and $2.4 million
($1.4 million net of tax) and $2.6 million ($1.6 million net of tax)
for the six months ended March 31, 2009 and 2008, respectively.
Page
6 of 21
BEACON
ROOFING SUPPLY, INC.
Notes
to Consolidated Financial Statements (Unaudited) (Continued)
3.
Stock-Based Compensation (Continued)
The fair
values of options were estimated on the dates of grants using the Black-Scholes
option-pricing model with the following weighted-average
assumptions:
|
Six Months Ended March 31,
|
||||||||
|
2009
|
2008
|
|||||||
|
Risk-free
interest rate
|
2.49 | % | 3.92 | % | ||||
|
Expected
life in years
|
7 | 6 | ||||||
|
Expected
volatility
|
48.00 | % | 45.00 | % | ||||
|
Dividend
yield
|
0.00 | % | 0.00 | % | ||||
Expected
lives of the options granted are based primarily on history, while expected
volatilities are based on historical volatilities of the Company’s stock and
stocks of comparable public companies. Estimated cumulative forfeiture rates of
0%-15% were utilized in the expense recognition of options during both of the
periods above.
The
following table summarizes stock options outstanding as of March 31, 2009, as
well as activity during the six months then ended:
|
Weighted-
|
||||||||||||||||
|
Weighted-
|
Average
|
|||||||||||||||
|
Average
|
Remaining
|
Aggregate
|
||||||||||||||
|
Number
of
|
Exercise
|
Contractual
|
Intrinsic
|
|||||||||||||
|
Shares
|
Price
|
Life
|
Value
|
|||||||||||||
|
(in
Millions)
|
||||||||||||||||
|
Outstanding
at September 30, 2008
|
3,082,080 | $ | 12.90 | |||||||||||||
|
Granted
|
873,356 | 12.20 | ||||||||||||||
|
Exercised
|
(252,347 | ) | 3.34 | |||||||||||||
|
Canceled
|
(78,861 | ) | $ | 16.87 | ||||||||||||
|
Outstanding
at March 31, 2009
|
3,624,228 | $ | 13.31 | 7.4 | $ | 9.2 | ||||||||||
|
Vested
or Expected to Vest at March 31, 2009
|
3,519,682 | $ | 13.33 | 7.4 | $ | 9.0 | ||||||||||
|
Exercisable
at March 31, 2009
|
2,130,718 | $ | 13.68 | 6.3 | $ | 6.5 | ||||||||||
As of
March 31, 2009, there were remaining options to purchase 1,700,229 shares of
common stock available for grants under the Company's 2004 Stock Plan. The
weighted-average grant date fair values of stock options granted during the six
months ended March 31, 2009 and March 31, 2008 were $6.35 and $4.54,
respectively. The intrinsic value of stock options exercised during the six
months ended March 31, 2009 and March 31, 2008 was $2.2 and $0.1 million,
respectively. At March 31, 2009, the Company had $13.4 million
of excess tax benefits available for potential deferred tax write-offs related
to option accounting.
Page
7 of 21
EACON
ROOFING SUPPLY, INC.
Notes
to Consolidated Financial Statements (Unaudited) (Continued)
4.
Comprehensive Income (loss)
Comprehensive
income (loss) consists of net income and other gains and losses affecting
stockholders' equity that, under GAAP, are excluded from net income. For the
Company, these consisted of the following items:
|
Unaudited
|
Three
Months Ended March 31,
|
Six
Months Ended March 31,
|
||||||||||||||
|
(Dollars
in thousands, except per share data)
|
2009
|
2008
|
2009
|
2008
|
||||||||||||
|
Net
income (loss)
|
$ | (2,443 | ) | $ | (8,132 | ) | $ | 16,199 | $ | (2,891 | ) | |||||
|
Foreign
currency translation adjustment, net of tax effect of $402 and $513 for
the three months and $2,091 and $473 for the six months
|
(746 | ) | (953 | ) | (3,884 | ) | (878 | ) | ||||||||
|
Unrealized
gain (loss) on financial derivatives, net of tax effect of $(104) and
$2,863 for the three months and $2,197 and $4,508 for the six
months
|
155 | (4,253 | ) | (3,264 | ) | (6,697 | ) | |||||||||
|
Comprehensive
income (loss)
|
$ | (3,034 | ) | $ | (13,338 | ) | $ | 9,051 | $ | (10,466 | ) | |||||
5.
Debt
The
Company currently has the following credit facilities:
|
|
•
|
a senior secured credit facility
in the U.S.;
|
|
|
•
|
a Canadian senior secured credit
facility; and
|
|
|
•
|
an
equipment financing facility.
|
Senior
Secured Credit Facilities
On
November 2, 2006, the Company entered into an amended and restated
seven-year $500 million U.S. senior secured credit facility and a
C$15 million senior secured Canadian credit facility with GE Antares
Capital ("GE Antares") and a syndicate of other lenders (combined, the "Credit
Facility"). The Credit Facility consists of a U.S. revolving credit facility of
$150 million, which includes a sub-facility of $20 million for letters
of credit, and an initial $350 million term loan (the "Term Loan"). The
Credit Facility also includes a C$15 million senior secured revolving
credit facility provided by GE Canada Finance Holding Company. As of March 31,
2009, there were $0.1 million of revolver borrowings and $341.3 million of Term
Loans outstanding and the Company was in compliance with the covenants under the
Credit Facility. Substantially all of the Company's assets, including the
capital stock and assets of wholly-owned subsidiaries, secure obligations under
the Credit Facility. Included in short-term debt is a $7 million payment paid in
April 2009 for fiscal year 2008’s Excess Cash Flow (as defined in the Credit
Facility).
Equipment
Financing Facility
The
Company has an equipment financing facility which allows for the financing of up
to $5.5 million of purchased transportation and material handling equipment
through February 15, 2010 at an interest rate approximately 3% above the 5- or
6-year term swap rate at the time of the advances. There were no amounts
outstanding under this facility at March 31, 2009; however, there were $22.1
million of equipment financing loans outstanding under prior equipment financing
facilities at March 31, 2009, with fixed interest rates ranging from 5.5% to
7.4%.
6.
Foreign Sales
Foreign
(Canadian) sales totaled $33.7 and $38.2 million in the six months ended
March 31, 2009 and March 31, 2008, respectively.
Page
8 of 21
BEACON
ROOFING SUPPLY, INC.
Notes
to Consolidated Financial Statements (Unaudited) (Continued)
7.
Financial Derivatives
The
Company uses derivative financial instruments for hedging and non-trading
purposes to manage its exposure to changes in interest rates. Use of derivative
financial instruments in hedging programs subjects the Company to certain risks,
such as market and credit risks. Market risk represents the possibility that the
value of the derivative instrument will change. In a hedging relationship, the
change in the value of the derivative is offset to a great extent by the change
in the value of the underlying hedged item. Credit risk related to derivatives
represents the possibility that the counterparty will not fulfill the terms of
the contract. The notional, or contractual, amount of the Company's derivative
financial instruments is used to measure interest to be paid or received and
does not represent the Company's exposure due to credit risk. The Company's
current derivative instruments are with counterparties rated highly by
nationally recognized credit rating agencies.
The
Company is using interest rate derivative instruments to manage the risk of
interest rate changes by converting a portion of its variable-rate borrowings
into fixed-rate borrowings. There were interest rate derivative instruments
outstanding in a total notional amount of $300 million at March 31, 2009,
which consisted of: a) interest rate swaps totaling $200 million,
expiring in April 2010, with a fixed rate of 4.97%; b) a $50 million
interest rate collar expiring in April 2010 with a floor rate of 3.99% and a cap
rate of 5.75%; and c) a $50 million interest rate collar expiring in
April 2010 with a floor rate of 3.75% and a cap rate of 6.00%. The combined fair
market value of the agreements resulted in a recorded liability of approximately
$12.9 million at March 31, 2009, which was determined based on current
interest rates and expected future trends.
These
derivative instruments are designated as cash flow hedges, for which the Company
records the effective portions of changes in their fair value, net of taxes, in
other comprehensive income (Note 4). The accumulated losses on the hedges,
net of taxes, included in other comprehensive income at March 31, 2009 and
September 30, 2008 were $7.7 and $4.4 million, respectively. The effectiveness
of the hedges is periodically assessed by the Company during the lives of the
hedges by comparing the current terms of the hedges with the related hedged debt
to assure they continue to coincide and through an evaluation of the
counterparties to the hedges to honor their obligations under the hedges. Any
ineffective portion of the hedges is recognized in earnings, of which there has
been none to date and none is anticipated.
8.
Recent Accounting Pronouncements
In March
2008, the FASB issued SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities—an Amendment of FASB Statement
No. 133, which requires enhanced disclosures about an entity’s
derivative and hedging activities. In addition to disclosing the fair values of
derivative instruments and their gains and losses in a tabular format, entities
are required to provide enhanced disclosures about (a) how and why an
entity uses derivative instruments, (b) how derivative instruments and
related hedged items are accounted for under SFAS 133 and its related
interpretations, and (c) how derivative instruments and related hedged
items affect an entity’s financial position, financial performance and cash
flows. SFAS 161 was effective for the Company in the quarter ended March 31,
2009 and the related disclosures have been included in this Form
10-Q.
In
December 2007, the FASB issued SFAS No. 141(R), Business Combinations, and
SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements, an amendment of ARB No. 51. These
new standards will significantly change the accounting for and reporting of
business combination transactions and noncontrolling (minority) interests in
consolidated financial statements. SFAS 141R and SFAS 160 are required
to be adopted simultaneously and will be effective for the Company in the fiscal
year beginning October 1, 2009. Earlier adoption is prohibited. The Company
believes the adoption of SFAS 141R could have a significant impact on the
accounting for its future acquisitions depending on the circumstances and the
terms of the acquisitions. The adoption of SFAS 160 is not expected to have
a material impact on the financial statements.
Page
9 of 21
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 2008 Annual Report on Form 10-K. Unless otherwise
specifically indicated, all references to “2009” and “YTD 2009” refer to the
three months (second quarter) and six months (year-to-date) ended March 31,
2009, respectively, of our fiscal year ending September 30, 2009, and all
references to “2008” and “YTD 2008” refer to the three months (second quarter)
and six months (year-to-date) ended March 31, 2008, respectively, of our fiscal
year ended September 30, 2008. Certain tabular information may not foot due
to rounding.
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 materials
suppliers.
We
distribute up to 10,000 SKUs through 169 branches in the United States and
Canada. We had 2,272 employees as of March 31, 2009, including our sales and
marketing team of 936 employees.
In fiscal
year 2008, approximately 94% 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. Although 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, adding new customers and introducing new products) and
acquisition growth. Our main acquisition strategy is to target market leaders in
geographic areas that we do not service. Our April 2007 acquisition of North
Coast Commercial Roofing Systems, Inc. ("North Coast") is one example of
this approach. North Coast is a distributor of commercial roofing systems and
related accessories that operated 16 branches in eight states in the Midwest and
Northeast. North Coast had minimal branch overlap with our existing operations
at the time of the acquisition. In addition, we also acquire smaller companies
to supplement branch openings within existing markets. Our August 2006
acquisition of Roof Depot, Inc. ("Roof Depot"), which operated two branches
and was integrated into our Midwest region, is one example of such an
acquisition.
Page
10 of 21
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. Percentages may not foot due to rounding.
|
Three
Months Ended March 31,
|
Six
Months Ended March 31,
|
|||||||||||||||
|
2009
|
2008
|
2009
|
2008
|
|||||||||||||
|
Net
sales
|
100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||
|
Cost
of products sold
|
76.7 | 77.5 | 75.7 | 77.2 | ||||||||||||
|
Gross
profit
|
23.3 | 22.5 | 24.3 | 22.8 | ||||||||||||
|
Operating
expenses
|
22.8 | 24.8 | 19.3 | 21.5 | ||||||||||||
|
Income
(loss) from operations
|
0.5 | (2.3 | ) | 5.0 | 1.3 | |||||||||||
|
Interest
expense
|
(1.8 | ) | (2.2 | ) | (1.5 | ) | (2.0 | ) | ||||||||
|
Income
(loss) before income taxes
|
(1.3 | ) | (4.5 | ) | 3.5 | (0.7 | ) | |||||||||
|
Income
tax benefit (expense)
|
0.5 | 1.8 | (1.4 | ) | 0.3 | |||||||||||
|
Net
income (loss)
|
(0.8 | )% | (2.7 | )% | 2.1 | % | (0.4 | )% | ||||||||
In
managing our business, we consider all growth, including the opening of new
branches, to be internal (organic) growth unless it results from an acquisition.
When we have referred to growth in existing markets or internal growth in our
prior filings, we included growth from existing and newly opened branches but
excluded 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, 2009, we had a total of 169 branches in operation, all of
which are considered existing-market branches.
Three Months Ended March 31, 2009
("2009") Compared to the Three Months Ended March 31, 2008
("2008")
Net
Sales
Consolidated
net sales increased $15.0 million, or 4.9%, to $319.3 million in 2009
from $304.3 million in 2008. We attribute the sales increase primarily to
the following factors:
|
|
·
|
higher year-over-year prices,
especially in residential roofing products;
and
|
|
|
·
|
strong
re-roofing activity in the areas affected by Hurricane
Ike;
|
partially
offset by the negative impact of:
|
|
·
|
weakness
in non-residential roofing activity, partially due to adverse winter
conditions in our markets that have the largest concentration of
commercial business;
|
|
|
·
|
continued
weakness in new residential roofing activity in most
markets;
|
|
|
·
|
continued
weak complementary product sales in most markets;
and
|
|
|
·
|
eight fewer branches and one less
business day than in 2008.
|
We closed
two branches in this year’s second quarter and one branch during last year’s
second quarter. We estimate inflation increased this year’s sales by
13-15% of over last year’s second quarter, indicating a drop in volume of
8-10%. In addition, we had 63 business days in 2009 compared to 64 in
2008, which we believe decreased our sales by approximately 1.7%. Our
product group sales were as follows:
For
the Three Months Ended
|
March
31, 2009
|
March
31, 2008
|
|||||||||||||||||||||||
|
Sales
|
Mix
|
Sales
|
Mix
|
Change
|
||||||||||||||||||||
|
(dollars
in thousands)
|
||||||||||||||||||||||||
|
Residential
roofing products
|
$ | 172,155 | 53.9 | % | $ | 125,493 | 41.2 | % | $ | 46,662 | 37.2 | % | ||||||||||||
|
Non-residential
roofing products
|
101,302 | 31.7 | % | 115,905 | 38.1 | % | (14,603 | ) | -12.6 | |||||||||||||||
|
Complementary
building products
|
45,846 | 14.4 | % | 62,853 | 20.7 | % | (17,007 | ) | -27.1 | |||||||||||||||
| $ | 319,303 | 100.0 | % | $ | 304,251 | 100.0 | % | $ | 15,052 | 4.9 | % | |||||||||||||
Page
11 of 21
Gross
Profit
For
the Three Months Ended
|
|
March
31,
|
March
31,
|
||||||||||||||||||
|
2009
|
2008
|
Change
|
||||||||||||||||||
|
(dollars
in millions)
|
||||||||||||||||||||
|
Gross
profit
|
$ | 74.3 | $ | 68.4 | $ | 5.9 | 8.6 | % | ||||||||||||
|
|
||||||||||||||||||||
|
Gross
margin
|
23.3 | % | 22.5 | % | 0.8 | % | ||||||||||||||
Our
gross profit increased $5.9 million or 8.6% in 2009, while our gross margin
increased to 23.3% in 2009 from 22.5% in 2008. The margin rate
increase was largely the result of a product mix shift to more residential
roofing products, which have substantially higher gross margins than the more
competitive non-residential market. Gross margins in residential
roofing, excluding vendor incentives, which represent our invoiced gross margin,
decreased in 2009 compared to 2008, while invoiced gross margins in
non-residential roofing increased and complementary margins were virtually flat
to last year.
Operating
Expenses
For
the Three Months Ended
|
March 31,
|
March 31,
|
|||||||||||||||||||
|
2009
|
2008
|
Change
|
||||||||||||||||||
|
(dollars in millions)
|
||||||||||||||||||||
|
Operating
expenses
|
$ | 72.8 | $ | 75.3 | $ | (2.5 | ) | -3.3 | % | |||||||||||
|
Operating
expenses as a % of sales
|
22.8 | % | 24.8 | % |
-2.0%
|
|||||||||||||||
Our
operating expenses decreased by $2.5 million or 3.3% to $72.8 million
in 2009 from $75.3 million in 2008. The following factors were the leading
causes of our lower operating expenses:
|
|
·
|
savings of $1.3 million in
selling expenses, primarily from lower fuel
costs;
|
|
|
·
|
savings
of $1.1 million in general & administrative expenses, primarily from
lower insurances costs; and
|
|
|
·
|
reduced
depreciation and amortization expense of $1.0 million due to lower
amortization of intangible assets and the impact of very low capital
expenditures in fiscal year 2008;
|
partially
offset by:
|
|
·
|
an increase of $0.4 million in
payroll and related costs, primarily from higher incentive-based pay
accruals, partially offset by the benefit from a lower headcount;
and
|
|
|
·
|
an increase of $0.5 million
in warehouse expenses, mostly due to costs associated with the closing of
the two branches.
|
In
2009, we expensed a total of $3.0 million for the amortization of
intangible assets recorded under purchase accounting compared to
$3.7 million in 2008. Our operating expenses as a percentage
of net sales decreased to 22.8% in 2009 from 24.8% in 2008 as we were able to
control our variable costs related to the increased sales and better leverage
our fixed costs.
Page
12 of 21
Interest
Expense
Interest
expense decreased $1.1 million to $5.6 million in 2009 from
$6.7 million in 2008. This decrease was primarily due to a paydown of debt
and lower average interest rates, which affected the unhedged portion of our
variable-rate debt. Interest expense would have been $2.3 and $0.1
million less in 2009 and 2008, respectively, without the impact of our
derivatives.
Income
Taxes
An
income tax benefit of $1.7 million was recorded in 2009, an effective tax
rate of 40.9%, compared to $5.5 million in 2008, an effective tax rate of
40.5%. The slight increase in the effective rate reflects changes in allocations
of taxable income and losses among the states in which we are
located.
Six Months Ended March 31, 2009 ("YTD
2009") Compared to the Six Months Ended March 31, 2008 ("YTD
2008")
Net
Sales
Consolidated
net sales increased $80.0 million, or 11.4%, to $782.6 million in YTD
2009 from $702.6 million in YTD 2008. We attribute the sales increase
primarily to the same factors mentioned above for the second quarter, including
approximately the same estimated inflation impact. We closed six branches in YTD 2009,
while we opened one branch and closed two branches in YTD 2008. We
had 125 business days in both YTD 2009 and YTD 2008. Our product
group sales were as follows:
For
the Six Months Ended
|
March 31, 2009
|
March 31, 2008
|
|||||||||||||||||||||||
|
Sales
|
Mix
|
Sales
|
Mix
|
Change
|
||||||||||||||||||||
|
(dollars in thousands)
|
||||||||||||||||||||||||
|
Residential
roofing products
|
$ | 406,637 | 52.0 | % | $ | 273,546 | 38.9 | % | $ | 133,091 | 48.7 | % | ||||||||||||
|
Non-residential
roofing products
|
266,015 | 34.0 | % | 288,649 | 41.1 | % | (22,634 | ) | -7.8 | |||||||||||||||
|
Complementary
building products
|
109,980 | 14.1 | % | 140,452 | 20.0 | % | (30,472 | ) | -21.7 | |||||||||||||||
| $ | 782,632 | 100.0 | % | $ | 702,647 | 100.0 | % | $ | 79,985 | 11.4 | % | |||||||||||||
Gross
Profit
For
the Six Months Ended
|
March 31,
|
March 31,
|
||||||||||||||||
|
2009
|
2008
|
Change
|
|||||||||||||||
|
(dollars in millions)
|
|||||||||||||||||
|
Gross
Profit
|
$ | 190.3 | $ | 160.1 | $ | 30.2 | 18.9 | % | |||||||||
|
Gross
Margin
|
24.3 | % | 22.8 | % |
1.5
|
% | |||||||||||
Our
gross profit increased $30.2 million or 18.9% in YTD 2009, while our gross
margin also increased to 24.3% in YTD 2009 from 22.8% in YTD
2008. The margin rate increase was largely the result of a product
mix shift to more residential roofing products, which have substantially higher
gross margins than the more competitive non-residential market. In
addition, the benefit of lower weighted-average costs of residential roofing
products in comparison to current prices of those products in the marketplace
continued from the fourth quarter of fiscal YTD 2009 into the first quarter of
this year. This weighted-average residential cost effect ended during
the beginning of the second quarter of 2009, and we currently expect our future
overall gross margin to range from 23-24.5%, dependant upon product
mix.
Page
13 of 21
Operating
Expenses
For
the Six Months Ended
|
March 31,
|
March 31,
|
||||||||||||||||
|
2009
|
2008
|
Change
|
|||||||||||||||
|
(dollars in millions)
|
|||||||||||||||||
|
Operating
Expenses
|
$ | 151.1 | $ | 151.2 | $ | (0.1 | ) | -0.1 | % | ||||||||
|
Operating
Expenses as a % of Sales
|
19.3 | % | 21.5 | % |
-2.2
|
% | |||||||||||
Our
operating expenses decreased by $0.1 million to $151.1 million in YTD
2009 from $151.2 million in YTD 2008. The following factors were the
leading causes of our lower operating expenses:
|
|
·
|
savings of $1.1 million in
selling expenses, primarily from lower fuel costs, partially offset by an
increase in certain other selling expenses such as credit card fees
(associated with the higher
sales);
|
|
·
|
savings
of $1.2 million in general & administrative expenses, primarily from
lower insurance costs; and
|
|
|
·
|
reduced
depreciation and amortization expense of $2.2 million due to lower
amortization of intangible assets and the impact of very low capital
expenditures in fiscal year 2008;
|
mostly
offset by:
|
|
·
|
an increase of $3.1 million in
payroll and related costs primarily from higher incentive-based pay
accruals, including profit-sharing, and less favorable medical insurance
claims experience, partially offset by the benefit from a lower headcount;
and
|
|
|
·
|
an
increase of $1.3 million in warehouse expenses, mostly due to costs
associated with the closing of the six
branches;
|
In
YTD 2009, we expensed a total of $6.2 million for the amortization of
intangible assets recorded under purchase accounting compared to
$7.7 million in YTD 2008. Our operating expenses as a percentage
of net sales decreased to 19.3% in YTD 2009 from 21.5% in YTD 2008 as we were
able to control our variable costs related to the increased sales and better
leverage our fixed costs.
Interest
Expense
Interest
expense decreased $2.0 million to $11.7 million in YTD 2009 from
$13.7 million in YTD 2008. This decrease was primarily due to a pay down of
debt and lower average interest rates, which affected the unhedged portion of
our variable-rate debt. Interest expense would have been $2.8 million
less in YTD 2009 without the impact of our derivatives, while there was no
impact from the derivatives in YTD 2008.
Income
Taxes
Income
tax expense of $11.2 million was recorded in YTD 2009, an effective tax
rate of 40.9%, compared to an income tax benefit of $2.0 million in YTD
2008, an effective tax rate of 41.0%.
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 reroofing,
especially in our branches in the northeastern U.S. and in Canada. Our sales are
substantially lower during the second quarter, when we historically have
incurred low net income levels or net losses.
We
generally experience an increase in inventory, accounts receivable and accounts
payable during the first, third and fourth quarters of the year as a result of
the seasonality of our business. Our peak borrowing level generally occurs
during the third quarter, primarily because dated accounts payable offered by
our suppliers typically are payable in April, May and June, while our peak
accounts receivable collections typically occur from June through
November.
We
generally experience a slowing of collections of our accounts receivable during
our second quarter, mainly due to the inability of some of our customers to
conduct their businesses effectively in inclement weather in certain of our
regions. We continue to attempt to collect those receivables, which require
payment under our standard terms. We do not provide any concessions to our
customers during this quarter of the year, although we may take advantage of
seasonal incentives from our vendors. Also during the second quarter, we
generally experience our lowest availability under our senior secured credit
facilities, which are asset-based lending facilities.
Page
14 of 21
Certain
Quarterly Financial Data
The
following table sets forth certain unaudited quarterly data for fiscal years
2009 (ending September 30, 2009) and 2008 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. Totals may not foot due to rounding.
|
Fiscal
Year 2009
|
Fiscal
Year 2008
|
|||||||||||||||||||||||
|
Qtr
1
|
Qtr
2
|
Qtr
1
|
Qtr
2
|
Qtr
3
|
Qtr
4
|
|||||||||||||||||||
|
(dollars
in millions, except per share data)
|
||||||||||||||||||||||||
|
(unaudited)
|
||||||||||||||||||||||||
|
Net
sales
|
$ | 463.3 | $ | 319.3 | $ | 398.4 | $ | 304.3 | $ | 514.6 | $ | 567.2 | ||||||||||||
|
Gross
profit
|
116.0 | 74.3 | 91.7 | 68.4 | 120.2 | 139.7 | ||||||||||||||||||
|
Income
(loss) from operations
|
37.7 | 1.5 | 15.8 | (6.9 | ) | 36.9 | 48.9 | |||||||||||||||||
|
Net
income (loss)
|
$ | 18.6 | $ | (2.4 | ) | $ | 5.2 | $ | (8.1 | ) | $ | 18.3 | $ | 24.9 | ||||||||||
|
Earnings
(loss) per share - basic
|
$ | 0.42 | $ | (0.05 | ) | $ | 0.12 | $ | (0.18 | ) | $ | 0.41 | $ | 0.56 | ||||||||||
|
Earnings
(loss) per share - fully diluted
|
$ | 0.41 | $ | (0.05 | ) | $ | 0.12 | $ | (0.18 | ) | $ | 0.41 | $ | 0.55 | ||||||||||
|
Quarterly
sales as % of year's sales
|
22.3 | % | 17.1 | % | 28.8 | % | 31.8 | % | ||||||||||||||||
|
Quarterly
gross profit as % of year's gross profit
|
21.8 | % | 16.3 | % | 28.6 | % | 33.3 | % | ||||||||||||||||
|
Quarterly
income (loss) from operations as % of
|
||||||||||||||||||||||||
|
year's
income (loss) from operations
|
16.7 | % | -7.3 | % | 39.0 | % | 51.6 | % | ||||||||||||||||
The
calculations of the net loss per share for the second quarter of both years do
not include the effect of stock options since the impact would have been
anti-dilutive.
Liquidity
and Capital Resources
We
had cash and cash equivalents of $98.1 million at March 31, 2009 compared
to $10.6 million at March 31, 2008 and $26.0 million at
September 30, 2008. Our net working capital was $296.3 million at
March 31, 2009 compared to $222.5 million at March 31, 2008 and
$274.8 million at September 30, 2008.
YTD
2009 Compared to YTD 2008
Our
net cash provided by operating activities was $84.8 million in YTD 2009
compared to $29.5 million in YTD 2008. In addition to the benefit from
improved operating results, accounts receivable and prepaid expenses and other
assets decreased in YTD 2009 by $113.4 and $7.3 million, respectively, primarily
due to normal seasonal declines. The favorable impact from these changes were
partially offset by a decrease of $69.6 million in accounts payable and accrued
expenses, due principally to a normal seasonal decline and the payment of
previously accrued income taxes. The number of days outstanding for
accounts receivable, based upon year-to-date sales for each period, decreased in
YTD 2009 from YTD 2008 mainly from the impact of the stronger sales, while
inventory turns increased slightly in YTD 2009 as compared to YTD
2008.
Net
cash used in investing activities increased by $3.6 million in YTD 2009 to
$4.8 million from $1.2 million in YTD 2008, due to increased capital
spending. We are closely managing our capital expenditures during these
challenging economic times and we expect full fiscal year 2009 capital
expenditures to total 0.5% to 0.7% of net sales.
Net
cash used by financing activities was $7.9 million in YTD 2009 compared to
$23.9 million in YTD 2008. These quarterly amounts primarily reflected
repayments under our revolving lines of credit and term loan. As discussed
further below, there was a $7 million accelerated payment due under the term
loan at March 31, 2009 that was paid in April 2009.
Capital
Resources
Our
principal source of liquidity at March 31, 2009 was our cash and cash
equivalents of $98.1 million and our available borrowings of $130.7 million
under revolving lines of credit, subject to compliance with the maximum
consolidated leverage ratio below. Our borrowing base availability is determined
primarily by trade accounts receivable, less outstanding borrowings and letters
of credit. Borrowings outstanding under the revolving lines of credit in the
accompanying balance sheets have been classified as short-term debt since there
were no current expectations of a minimum level of outstanding revolver
borrowings in the following twelve months.
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 the
seasonal nature of our business.
Significant
factors which could affect future liquidity include the following:
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·
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the
adequacy of available bank lines of
credit;
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15 of 21
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·
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the ability to attract long-term
capital with satisfactory
terms;
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·
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cash flows generated from
operating activities;
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·
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acquisitions;
and
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·
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capital
expenditures.
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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 cash equivalents
supplemented by bank borrowings. In the past, we have financed acquisitions
initially through increased bank borrowings, the issuance of common stock and
other borrowings. We then repay any such borrowings with cash flows from
operations. We have funded most of our past capital expenditures with cash on
hand or through increased bank borrowings, including equipment financing, and
then have reduced those obligations with cash flows from
operations.
We
believe we have adequate current 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 would 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, as we have in the
past. We may also issue additional shares of common stock to raise funds, which
we did in December 2005, or we may issue preferred stock.
Indebtedness
We
currently have the following credit facilities:
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•
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a senior secured credit facility
in the U.S.;
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•
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a Canadian senior secured credit
facility; and
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•
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an
equipment financing facility.
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Senior
Secured Credit Facilities
On
November 2, 2006, we entered into an amended and restated seven-year
$500 million U.S. senior secured credit facility and a C$15 million
senior secured Canadian credit facility with GE Antares Capital ("GE Antares")
and a syndicate of other lenders (combined, the "Credit Facility"). The Credit
Facility refinanced the prior $370 million credit facilities that also were
provided through GE Antares. The Credit Facility provides us with lower interest
rates and available funds for future acquisitions and ongoing working capital
requirements. In addition, the Credit Facility increased the allowable total
equipment financing and/or capital lease financing to $35 million. The
Credit Facility provides for a cash receipts lock-box arrangement that gives us
sole control over the funds in lock-box accounts, unless excess availability is
less than $10 million or an event of default occurs, in which case the
senior secured lenders would have the right to take control over such funds and
to apply such funds to repayment of the senior debt.
The
Credit Facility consists of a U.S. revolving credit facility of
$150 million (the "US Revolver"), which includes a sub-facility of
$20 million for letters of credit, and provided an initial
$350 million term loan (the "Term Loan"). The Credit Facility also includes
a C$15 million senior secured revolving credit facility provided by GE
Canada Finance Holding Company (the "Canada Revolver"). There was a combined
$130.7 million available for revolver borrowings at March 31, 2009, subject
to compliance with the maximum consolidated leverage ratio below, with
$0.1 million outstanding under the US Revolver that carried an interest
rate of 3.25%. Borrowings outstanding under the revolving lines of
credit in the accompanying balance sheets were classified as short-term debt
since there were no current expectations of a minimum level of outstanding
revolver borrowings in the following twelve months. There were $5.1, $4.5 and
$4.3 million of outstanding standby letters of credit at March 31, 2009, March
31, 2008 and September 30, 2008, respectively. The Term Loan requires
amortization of 1% per year, payable in quarterly installments of approximately
$0.9 million, and the remainder is due in 2013. The Credit Facility may
also be expanded by up to an additional $200 million under certain
conditions. There are mandatory prepayments under the Credit Facility under
certain conditions, including the following cash flow condition:
Page
16 of 21
Excess
Cash Flow
By
May 15 of each fiscal year, we must pay an amount equal to 50% of the
Excess Cash Flow (as defined in the Credit Facility) for the prior fiscal year,
not to exceed $7.0 million with respect to any fiscal year. Based on our
results for fiscal year 2008, a payment of $7.0 million was paid in April
2009.
Interest
Interest
on borrowings under the U.S. credit facility is payable at our election at
either of the following rates:
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·
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the base rate (that is the higher
of (a) the base rate for corporate loans quoted in The Wall Street Journal
or (b) the Federal Reserve overnight rate plus 1/2 of 1%) plus a margin of
0.75% for the Term Loan.
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·
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the current LIBOR Rate plus a
margin of 1.00% (for U.S. Revolver loans) or 2.00% (for Term
Loan).
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Interest
under the Canadian credit facility is payable at our election at either of the
following rates:
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·
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an index rate (that is the higher
of (1) the Canadian prime rate as quoted in The Globe and Mail and
(2) the 30-day BA Rate plus 0.75%),
or
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·
|
the BA rate as described in the
Canadian facility plus
1.00%.
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The
US Revolver currently carries interest rates of the base rate plus 0.75% (3.25%
at March 31, 2009)), while the Canada revolver carries an interest rate of the
Canadian prime rate plus 0.75%, and the Term Loan carries an interest rate of
LIBOR plus 2% (3.44% and 2.52% for two LIBOR arrangements under the Term Loan at
March 31, 2009). Unused fees on the revolving credit facilities are 0.25% per
annum. Availability under the revolving credit facilities is limited to 85% of
eligible accounts receivable, increasing to 90% from January through April of
each year.
Financial
covenants, which apply only to the Term Loan, are limited to a leverage ratio
and a yearly capital expenditure limitation as follows:
Maximum
Consolidated Leverage Ratio
On
the last day of each fiscal quarter, our Consolidated Leverage Ratio, as
defined, must not be greater than 4.00:1.0. At March 31, 2009, this ratio was
1.67:1.
Capital
Expenditures
We
cannot incur aggregate Capital Expenditures, as defined, in excess of three
percent (3.00%) of consolidated gross revenue for any fiscal year.
As
of March 31, 2009, we were in compliance with these covenants. Substantially all
of our assets, including the capital stock and assets of wholly-owned
subsidiaries secure obligations under the Credit Facility.
Equipment
Financing Facility
We
have an equipment financing facility which allows for the financing of up to
$5.5 million of purchased transportation and material handling equipment through
February 15, 2010 at an interest rate approximately 3% above the 5- or 6-year
term swap rate at the time of the advances. There were no amounts
outstanding under this facility at March 31, 2009; however, there were $22.1
million of equipment financing loans outstanding under prior equipment financing
facilities at March 31, 2009, with fixed interest rates ranging from 5.5% to
7.4%.
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.
Page
17 of 21
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 Form 10-K for the fiscal
year ended September 30, 2008.
Item 3. Quantitative
and Qualitative Disclosures about Market Risk
Interest
Rate Risk
Our
interest rate risk relates primarily to the variable-rate borrowings under our
Credit Facility. The following discussion of our interest rate swaps and collars
(see "Financial Derivatives" below) is based on a 10% change in interest rates.
These changes are hypothetical scenarios used to calibrate potential risk and do
not represent our view of future market changes. The interest rate collars have
had no impact yet on our interest expense. As the hypothetical figures discussed
below indicate, changes in fair value based on the assumed change in rates
generally cannot be extrapolated because the relationship of the change in
assumption to the change in fair value may not be linear. The effect of a
variation in a particular assumption is calculated without changing any other
assumption. In reality, changes in one factor may result in changes in another,
which may magnify or counteract the sensitivities.
At
March 31, 2009, we had $341.3 million of term loans outstanding under our
Credit Facility, $0.1 million of borrowings under revolving lines of
credit, and $22.1 million of equipment financing outstanding. Our
weighted-average effective interest rate on that debt, after considering the
effect of the interest rate swaps, was 6.12% at March 31, 2009 (6.59% at March
31, 2008). A hypothetical 10% increase in interest rates in effect at March 31,
2009, would have increased annual interest expense on the borrowings outstanding
at that date by only $0.1 million, since most of the interest cost on our
current bank debt is fixed by the financial derivatives.
We
enter into interest rate swaps and collars to minimize the risks and costs
associated with financing activities, as well as to maintain an appropriate mix
of fixed-and floating-rate debt. The swap agreements discussed below are
contracts to exchange variable-rate for fixed-interest rate payments over the
life of the agreements. The collar agreements, also discussed below, provide for
fixed-rate caps and floors. The aggregate fair value of these swaps and collars
represented an unrealized loss of $12.9 million at March 31, 2009. A
hypothetical increase (or decrease) of 10% in interest rates from the level in
effect at March 31, 2009, would result in an aggregate unrealized gain or (loss)
in value of the swaps and collars of approximately $0.4 million or
($0.4) million, respectively.
Financial
Derivatives
As
discussed above, we use interest rate derivative instruments to manage the risk
of interest rate changes by converting a portion of our variable-rate borrowings
into fixed-rate borrowings. We had interest rate derivative instruments
outstanding in a total notional amount of $300 million at March 31, 2009,
which consisted of: a) interest rate swaps totaling $200 million,
expiring in April 2010, with a fixed rate of 4.97%; b) a $50 million
interest rate collar expiring in April 2010 with a floor rate of 3.99% and a cap
rate of 5.75%; and c) a $50 million interest rate collar expiring in
April 2010 with a floor rate of 3.75% and a cap rate of 6.00%. We entered into
these instruments during the second quarter of 2007. The derivative instruments
are designated as cash flow hedges, for which we record the effective portions
of changes in their fair value, net of tax, in other comprehensive income. We
recognize any ineffective portion of our hedges in earnings, of which there has
been none to date.
Foreign
Exchange Risk
There
have been no material changes from what we reported in our Form 10-K for
the year ended September 30, 2008.
Item 4. Controls
and Procedures
The
term "disclosure controls and procedures" is defined in Rules 13a-15(e) and
15d-15(e) of the Securities Exchange Act of 1934 (the "Act"). The rules refer to
the controls and other procedures designed to ensure that information required
to be disclosed in reports that we file or submit under the Act is recorded,
processed, summarized and reported within the time periods specified. As of
March 31, 2009, management, including the CEO and CFO, performed an evaluation
of the effectiveness of the design and operation of our disclosure controls and
procedures. Based on that evaluation, management, including the CEO and CFO,
concluded that as of March 31, 2009, our disclosure controls and procedures were
effective at ensuring that material information related to us or our
consolidated subsidiaries is made known to them and is disclosed on a timely
basis in our reports filed under the Act. 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 accounting
principles generally accepted in the United States. Based on the most recent
evaluation, we have concluded that no significant change in our internal control
over financial reporting occurred during the last fiscal quarter that has
materially affected, or is reasonably likely to materially affect, our internal
control over financial reporting.
Page
18 of 21
Part II.
Other Information
Items 1-3
and 5 are not applicable and have been omitted.
Item
4. Submission of Matters to a Vote of Security Holders
Our
Annual Meeting of Shareholders was held on February 5, 2009 to elect a board of
seven directors. Each director nominee was elected.
The
numbers of votes for each director nominee were as follows:
|
DIRECTOR NOMINEE
|
VOTES FOR
|
VOTES WITHHELD
|
||||||
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Robert
R. Buck
|
39,447,518 | 1,161,359 | ||||||
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Andrew
R. Logie
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40,078,659 | 530,218 | ||||||
|
H.
Arthur Bellows, Jr.
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37,134,431 | 3,474,446 | ||||||
|
James
J. Gaffney
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40,213,934 | 394,943 | ||||||
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Peter
M. Gotsch
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37,656,529 | 2,952,348 | ||||||
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Stuart
A. Randle
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40,217,382 | 391,495 | ||||||
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Wilson
B. Sexton
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39,617,068 | 991,809 | ||||||
Item 6. Exhibits
(a) Exhibits required by
Item 601 of Regulation S-K
|
Exhibit
Number
|
Document Description
|
|
|
31.1
|
Certification
by Robert R. Buck pursuant to Rule 13a-14(a) and 15d-14(a), as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
|
|
|
31.2
|
Certification
by David R. Grace pursuant to Rule 13a-14(a) and 15d-14(a), as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
|
|
|
32.1
|
Certification
by Robert R. Buck and David R. Grace pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of
2002.
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Page
19 of 21
Signature Page
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 on May 8, 2009.
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BEACON
ROOFING SUPPLY, INC.
|
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BY:
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/s/ DAVID R. GRACE
|
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David R. Grace, Senior Vice President & Chief Financial Officer, and duly
authorized signatory on behalf of the Registrant
|
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Page
20 of 21
Index to Exhibits
|
Exhibit
Number
|
Document Description
|
|
|
31.1
|
Certification
by Robert R. Buck pursuant to Rule 13a-14(a) and 15d-14(a), as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
|
|
|
31.2
|
Certification
by David R. Grace pursuant to Rule 13a-14(a) and 15d-14(a), as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
|
|
|
32.1
|
Certification
by Robert R. Buck and David R. Grace pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of
2002.
|
Page
21 of 21