UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
|
x
|
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
|
|
For
the Fiscal Year Ended September 30, 2010
|
|
|
¨
|
TRANSITION
REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
|
For
the Transition Period
from to
|
|
Commission
File Number 000-50924
BEACON
ROOFING SUPPLY, INC.
(Exact
name of registrant as specified in its charter)
|
Delaware
(State
or other jurisdiction of
incorporation
or organization)
|
36-4173371
(I.R.S.
Employer
Identification
No.)
|
Address
of principal executive offices: One Lakeland Park Drive, Peabody, MA
01960
Registrant's
telephone number, including area code: (978) 535-7668
Securities
registered pursuant to section 12(b) of the Act:
Title
of each class
Common
Stock, $.01 par value
Name of
each exchange on which registered:
The
NASDAQ Global Select Market
Securities
registered pursuant to section 12(g) of the Act:
None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes x No ¨
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the
Act. Yes ¨ No x
Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past
90 days. Yes x No ¨
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). ¨ YES ¨ NO
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. x
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company. See
definition of “large accelerated filer," “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check
one):
|
Large
accelerated filer x
|
Accelerated
filer ¨
|
|
Non-accelerated
filer ¨ (do
not check if a smaller reporting company)
|
Smaller
reporting company ¨
|
Indicate
by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes ¨ No x
The
aggregate market value of the voting stock (common stock) held by non-affiliates
of the registrant as of the end of the second quarter ended March 31, 2010
was $852,470,917.
The
number of shares of common stock outstanding as of November 1, 2010 was
45,676,520.
DOCUMENTS
INCORPORATED BY REFERENCE
The
information required by Part III (Items 10, 11, 12, 13 and 14) will be
incorporated by reference from the Registrant's definitive proxy statement (to
be filed pursuant to Regulation 14A).
Table
of Contents
BEACON
ROOFING SUPPLY, INC.
Index
to Annual Report
on
Form 10-K
Year
Ended September 30, 2010
|
PART
I
|
4
|
|
|
Item
1.
|
Business
|
4
|
|
Item
1A.
|
Risk
Factors
|
12
|
|
Item
1B.
|
Unresolved
Staff Comments
|
13
|
|
Item
2.
|
Properties
|
14
|
|
Item
3.
|
Legal
Proceedings
|
15
|
|
PART
II
|
16
|
|
|
Item
5.
|
Market
for Registrant's Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
|
16
|
|
Item
6.
|
Selected
Financial Data
|
18
|
|
Item
7.
|
Management's
Discussion and Analysis of Financial Condition and Results of
Operations
|
19
|
|
Item
7A.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
33
|
|
Item
8.
|
Financial
Statements and Supplementary Data
|
35
|
|
Item
9.
|
Changes
In and Disagreements with Accountants on Accounting and Financial
Disclosure
|
57
|
|
Item
9A.
|
Controls
and Procedures
|
57
|
|
Item
9B.
|
Other
Information
|
59
|
|
PART
III
|
60
|
|
|
PART
IV
|
60
|
|
|
Item
15.
|
Exhibits
and Financial Statement Schedules
|
60
|
2 of
63
Forward-looking
statements
The matters discussed in this
Form 10-K that are forward-looking statements are based on current
management expectations that involve substantial risks and uncertainties, which
could cause actual results to differ materially from the results expressed in,
or implied by, these forward-looking statements. These statements can be
identified by the fact that they do not relate strictly to historical or current
facts. They use words such as "aim," "anticipate," "believe," "could,"
"estimate," "expect," "intend," "may," "plan," "project," "should," "will be,"
"will continue," "will likely result," "would" and other words and terms of
similar meaning in conjunction with a discussion of future operating or
financial performance. You should read statements that contain these words
carefully, because they discuss our future expectations, contain projections of
our future results of operations or of our financial position or state other
"forward-looking" information.
We believe that it is important to
communicate our future expectations to our investors. However, there are events
in the future that we are not able to accurately predict or control. The factors
listed under Item 1A, Risk Factors, as well as any cautionary language in this
Form 10-K, provide examples of risks, uncertainties and events that may
cause our actual results to differ materially from the expectations we describe
in our forward-looking statements. Although we believe that our expectations are
based on reasonable assumptions, actual results may differ materially from those
in the forward looking statements as a result of various factors, including, but
not limited to, those described under Item 1A, Risk Factors and elsewhere in
this Form 10-K.
Forward-looking statements speak only
as of the date of this Form 10-K. Except as required under federal
securities laws and the rules and regulations of the SEC, we do not have any
intention, and do not undertake, to update any forward-looking statements to
reflect events or circumstances arising after the date of this Form 10-K,
whether as a result of new information, future events or otherwise. As a result
of these risks and uncertainties, readers are cautioned not to place undue
reliance on the forward-looking statements included in this Form 10-K or
that may be made elsewhere from time to time by or on behalf of us. All
forward-looking statements attributable to us are expressly qualified by these
cautionary statements.
3 of
63
PART
I
ITEM
1. BUSINESS
Overview
We are one of the largest distributors
of residential and non-residential roofing materials in the United States and
Canada. We also distribute other complementary building materials, including
siding, windows, specialty lumber products and waterproofing systems for
residential and nonresidential building exteriors. We currently operate 179
branches in 37 states and 3 Canadian provinces, carrying up to 10,000 SKUs and
serving approximately 40,000 customers. We are a leading distributor of roofing
materials in key metropolitan markets in the Northeast, Mid-Atlantic, Midwest,
Central Plains, South and Southwest regions of the United States and in Eastern
Canada.
For the fiscal year ended September 30,
2010, residential roofing products comprised 46% of our sales, non-residential
roofing products accounted for 39% of our sales, and siding, waterproofing
systems, windows, specialty lumber and other exterior building products provided
the remaining 15% of our sales.
We also provide our customers a
comprehensive array of value-added services, including:
|
|
•
|
advice
and assistance to contractors throughout the construction process,
including product identification, specification and technical
support;
|
|
|
•
|
job
site delivery, rooftop loading and logistical
services;
|
|
|
•
|
tapered
insulation design and layout
services;
|
|
|
•
|
metal
fabrication and related metal roofing design and layout
services;
|
|
|
•
|
trade
credit; and
|
|
|
•
|
marketing
support, including project leads for
contractors.
|
We believe the additional services we
provide strengthen our relationships with our customers and distinguish us from
our competition. The vast majority of orders require at least some of these
services. Our ability to provide these services efficiently and reliably can
save contractors time and money. We also believe that our value-added services
enable us to achieve attractive gross profit margins on our product sales. We
have earned a reputation for a high level of product availability, excellent
employees, professionalism and high-quality service, including timely, accurate
and safe delivery of products.
Our diverse customer base represents a
significant portion of the residential and non-residential roofing contractors
in most of our markets. Reflecting the overall market for roofing products, we
sell the majority of our products to roofing contractors that are involved on a
local basis in the replacement, or re-roofing, component of the roofing
industry. We utilize a branch-based operating model in which branches maintain
local customer relationships but benefit from centralized functions such as
information technology, accounting, financial reporting, credit, purchasing,
legal and tax services. This allows us to provide customers with specialized
products and personalized local services tailored to a geographic region, while
benefiting from the resources and scale efficiencies of a national
distributor.
We have achieved our growth through a
combination of sixteen strategic and complementary acquisitions between fiscal
years 2000 and 2010, opening new branch locations, acquiring branches and
broadening our product offering. We have grown from $224.0 million in sales
in fiscal year 2000 to $1.610 billion in sales in fiscal year 2010, which
represents a compound annual growth rate of 21.8%. Our internal
growth, which includes growth from existing and newly opened branches but
excludes growth from acquired branches, averaged 2.5% per annum over the same
period. Acquired branches are excluded from internal growth measures until they
have been under our ownership for at least four full fiscal quarters
at the start of the reporting
period. During this eleven-year period, we opened thirty-five new branch
locations (of which we have only closed two), while our same store sales
decreased an average of 0.9% per annum. Same store sales are defined as the
aggregate sales from branches open for the entire comparable annual periods
within the eleven-year period. Income from operations has increased from
$10.4 million in fiscal year 2000 to $73.5 million in fiscal year
2010, which represents a compound annual growth rate of 21.6%. We believe that
our proven business model can deliver industry-leading growth and operating
profit margins.
In fiscal year 2010, our
sales and income from operations declined 7.2% and 32.7%, respectively, over
fiscal year 2009. Both of these fiscal years contained 253 business days. We
acquired nine new branches and closed two branches during fiscal year
2010.
Our
annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on
Form 8-K, and amendments to those reports filed or furnished pursuant to Section
13(a) or 15(d) of the Securities Exchange Act of 1934 are available free of
charge on our website at www.beaconroofingsupply.com
as soon as reasonably practical after we electronically file such reports with,
or furnish them to, the Securities and Exchange Commission.
4 of
63
History
Our predecessor, Beacon Sales
Company, Inc., was founded in Charlestown, Massachusetts (a part of Boston)
in 1928. In 1984, when our former Chairman Andrew Logie acquired Beacon Sales
Company with other investors, Beacon operated three distribution facilities and
generated approximately $16 million in annual revenue. In August 1997,
Code, Hennessy & Simmons III, L.P., a Chicago-based private equity
fund, and certain members of management, purchased Beacon Sales Company to use
it as a platform to acquire leading regional roofing materials distributors
throughout the United States and Canada. At the time of the purchase by Code
Hennessy and management, Beacon Sales Company operated seven branches in New
England and generated approximately $72 million of revenue annually,
primarily from the sale of non-residential roofing products. Since 1997, we have
made twenty-two strategic and complementary acquisitions. Also since 1997, we
have opened a total of thirty-six new branches (of which we have only closed
two). We have also expanded our product offerings to offer more residential
roofing products and complementary exterior building materials and related
services. Our strategic acquisitions, branch expansions, and product line
extensions have increased the diversity of both our customer base and local
market focus and generated cost savings through increased purchasing power and
reduced overhead expenses as a percentage of net sales. We completed an initial
public offering ("IPO") and became a public company in September 2004, and
completed a follow-on stock offering in December 2005.
We were incorporated in Delaware in
1997. Our principal executive offices are located at One Lakeland Park Drive,
Peabody, MA 01960 and our telephone number is (978) 535-7668. Our Internet
website address is www.beaconroofingsupply.com.
U.S.
Industry Overview
The U.S. roofing market, based upon an
early 2010 industry report and based upon manufacturer sales to distributors and
others, was estimated to be approximately $15.0 billion in 2009 and is
projected to grow 3.6% annually through 2014 to $17.9 billion. We believe
this rate of growth is within the range of the stable long-term growth rates in
the industry over the past 40 years.
The U.S. roofing market can be
separated into two categories: the residential roofing market and the
non-residential roofing market. The residential roofing market accounted for
approximately 58% of the total U.S. market by unit volume (39% of total dollar
demand) in 2009. Through 2014, residential roofing construction in dollars is
expected to grow slightly faster than non-residential roofing construction as
residential construction is projected to rebound from current low
levels.
Traditionally, over 70% of expenditures
in the roofing market are for re-roofing projects, with the balance being for
new construction. Due to the current slow down in both residential and
non-residential new construction, it is estimated that re-roofing represented
over 85% of the expenditures for roofing in 2009. Re-roofing projects
are generally considered maintenance and repair expenditures and are less likely
than new construction projects to be postponed during periods of recession or
slow economic growth. As a
result, demand for roofing products is less volatile than overall demand for
construction products.
Regional variations in economic
activity influence the level of demand for roofing products across the United
States. Of particular importance are regional differences in the level of new
home construction and renovation, because the residential market for roofing
products accounts for approximately 58% of unit demand. Demographic trends,
including population growth and migration, contribute to regional variations in
residential demand for roofing products through their influence on regional
housing starts and existing home sales.
Roofing
distributors
Wholesale distribution is the dominant
distribution channel for both residential and nonresidential roofing products.
Wholesale roofing product distributors serve the important role of facilitating
the purchasing relationships between roofing materials manufacturers and
thousands of contractors. Wholesale distributors also maintain localized
inventories, extend trade credit, give product advice and provide delivery and
logistics services.
Despite some recent consolidation, the
roofing materials distribution industry remains highly fragmented. The industry
is characterized by a large number of small and local regional participants. As
a result of their small size, many of these distributors lack the corporate,
operating and IT infrastructure required to compete effectively.
Residential
roofing market
Within the residential roofing market,
the re-roofing market is more than twice the size of the new roofing market,
accounting for approximately 90% of the residential roofing unit demand in 2009,
compared to a historic rate of about 67%. Over the next five years, new roofing
unit demand is expected to increase from 10% of total demand in 2009 to
approximately 26% in 2014, indicating a 25% growth rate, while re-roofing demand
is expected to remain flat.
Driving the demand for re-roofing is an
aging U.S. housing stock. Over 60% of the U.S. housing stock was built prior to
1980, with the median age of U.S. homes being over 35 years. Asphalt
shingles dominate the residential roofing market, with an approximate 85% share,
and historically have had an expected useful life of 15 to 20 years A
number of factors also generate re-roofing demand, including one-time weather
damage (such as Hurricane Ike which increased demand in 2008), improvement
expenditures and homeowners looking to upgrade their homes. Sales of existing
homes can affect re-roofing demand, as some renovation decisions are made by
sellers preparing their houses for sale and others are made by new owners within
the first year or two of occupancy.
5 of
63
Within the new construction
portion of the residential roofing market, housing starts together with larger
average roof sizes have supported prior growth in new residential roofing
demand. Although new housing starts are up slightly in 2010, they declined
during 2006 through 2009, and the pace may continue at the lower levels or
decline further again in the near future.
Non-residential
roofing market
Demand for roofing products used
on non-residential buildings in dollars is forecast to continue to grow at
historical rates, but slightly slower than the expected future growth of roofing
products used in residential construction. In recent years up until 2009, new
non-residential roofing was the fastest-growing portion of the U.S. roofing
market. However, more challenging economic conditions, including tighter credit
markets, caused a decline in 2009 in new commercial projects and, to a lesser
extent, re-roofing projects, and will likely continue to influence expenditures
for non-residential roofing in the near term.
In 2009, re-roofing projects
represented approximately 81% of the total non-residential demand. Re-roofing
activity tends to be less cyclical than new construction and depends in part
upon the types of materials on existing roofs, their expected lifespan and
intervening factors such as wind or water damage.
The non-residential roofing market
includes an office and commercial market, an industrial market and an
institutional market. Office and commercial roofing projects is the single
largest component of the non-residential roofing market at 53%. Industrial
roofing projects represent 25% of non-residential roofing product sales, while
institutional projects and other make up the remaining 22% of non-residential
roofing demand.
Complementary
building products
Demand for complementary building
products such as siding, windows and doors for both the residential and
non-residential markets has decreased along with the new residential
construction market and the downturn in the economy. Unlike the roofing
industry, demand for these products is more discretionary and influenced much
greater by the new construction market.
These complementary products also
significantly contribute to the overall building products market. The U.S.
siding market was approximately $7.8 billion in 2009, while the U.S. window
and door industry was approximately $34.9 billion in 2007, the most recent
information available to us. Both of these markets have been negatively impacted
by the decline in new housing starts in recent years but siding is expected to
grow at higher rates than roofing, while windows and doors is expected to grow
at a rate slightly below that of the roofing industry over the next several
years.
Our
Strengths
We believe the sales and earnings
growth we have achieved over time has been and will continue to be driven by our
primary competitive strengths, which include the following:
|
|
•
|
National
scope combined with regional expertise. We
believe we are the second largest roofing materials distributor in the
United States and Canada. We utilize a branch-based operating model in
which branches maintain local customer relationships but benefit from
centralized functions such as information technology, accounting,
financial reporting, credit, purchasing, legal and tax services. This
allows us to provide customers with specialized products and personalized
local services tailored to a geographic region, while benefiting from the
resources and scale efficiencies of a national
distributor.
|
|
|
•
|
Diversified
business model that reduces impact of economic
downturns. We believe that our business is
meaningfully protected in an economic downturn because of our high
concentration in re-roofing, the relative non-discretionary nature of
re-roofing, the mix of our sales between residential and non-residential
products, our geographic and customer diversity, and the financial and
operational ability we have to expand our business and obtain market
share.
|
|
|
•
|
Superior
customer service. We believe that our high
level of customer service and support differentiates us from our
competitors. We employ experienced salespeople who provide advice and
assistance in properly identifying products for various applications. We
also provide services such as safe and timely job site delivery,
logistical support and marketing assistance. We believe that the services
provided by our employees improve our customers' efficiency and
profitability which, in turn, strengthens our customer
relationships.
|
6 of
63
|
|
•
|
Strong
platform for growth and acquisition. Over
the period from 1997 through 2010, we have increased revenue at rates well
in excess of the growth in the overall roofing materials distribution
industry. We have expanded our business through strategic acquisitions,
new branch openings, branch acquisitions and the diversification of our
product offering. We have successfully acquired companies and, for most of
them, improved their financial and operating performance after
acquisition.
|
|
|
•
|
Sophisticated
IT platform. All of our locations, except
for one fabrication facility, operate on the same management information
systems. We have made a significant investment in our information systems,
which we believe are among the most advanced in the roofing distribution
industry. These systems provide us with a consistent platform across all
of our operations that help us achieve additional cost reductions, greater
operating efficiencies, improved purchasing, pricing and inventory
management and a higher level of customer service. Our systems have
substantial capacity to handle our future growth without requiring
significant additional investment.
|
|
|
•
|
Industry-leading
management team. We believe that our key
personnel, including branch managers, are among the most experienced in
the roofing industry. Our executive officers, regional vice presidents and
branch managers have an average of over 11 years of roofing industry
experience.
|
|
|
•
|
Extensive
product offering and strong supplier
relationships. We have a product offering
of up to 10,000 SKUs, representing an extensive assortment of high-quality
branded products. We believe that our extensive product offering has been
a significant factor in attracting and retaining many of our customers.
Because of our significant scale, product expertise and reputation in the
markets that we serve, we have established strong ties to the major
roofing materials manufacturers and are able to achieve substantial volume
discounts.
|
Growth
Strategies
Our objective is to become the
preferred supplier of roofing and other exterior building product materials in
the U.S. and Canadian markets while continuing to increase our revenue base and
maximize our profitability. We plan to attain these goals by executing the
following strategies:
|
|
•
|
Expand
geographically through new branch openings.
Significant opportunities exist to expand our geographic focus by opening
additional branches in existing or contiguous regions. Since 1997, we and
our acquired companies have successfully entered numerous markets through
greenfield expansion. Our strategy with respect to greenfield
opportunities is to typically open branches: (1) within our existing
markets; (2) where existing customers have expanded into new markets;
or (3) in areas that have limited or no acquisition candidates and
are a good fit with our business model. At times, we have acquired small
distributors with one to three branches to fill in existing
regions.
|
|
|
•
|
Pursue
acquisitions of regional market-leading roofing materials
distributors. Acquisitions are an important
component of our growth strategy. We believe that there are significant
opportunities to grow our business through disciplined, strategic
acquisitions. With only a few large, well-capitalized competitors in the
industry, we believe we can continue to build on our distribution platform
by successfully acquiring additional roofing materials distributors.
Between 1998 and 2010, we successfully integrated seventeen strategic and
complementary acquisitions.
|
|
|
•
|
Expand
product and service offerings. We believe that continuing to
increase the breadth of our product line and customer services are
effective methods of increasing sales to current customers and attracting
new customers. We work closely with customers and suppliers to identify
new building products and services, including windows, siding,
waterproofing systems, insulation and metal fabrication. In addition, we
believe we can expand our business by introducing products that we currently only offer in
certain of our markets into some of our other markets. We also believe we
can expand particular product sales that are stronger in certain of our
markets into our markets where those products have not sold as well (e.g.,
expanding nonresidential roofing sales in markets that sell mostly
residential roofing).
|
Products
and Services
Products
The ability to provide a broad range of
products is essential in roofing materials distribution. We carry one of the
most extensive arrays of high-quality branded products in the industry, enabling
us to deliver products to our customers on a timely basis. We are able to
fulfill approximately 97% of our warehouse orders through our in-stock inventory
as a result of the breadth and depth of our inventory at our branches. Our
product portfolio includes residential and non-residential roofing products as
well as complementary building products such as siding, windows and specialty
lumber products. Our product lines are designed primarily to meet the
requirements of both residential and non-residential roofing
contractors.
7 of
63
|
Product Porfolio
|
||||||
|
Residential roofing
products
|
Non-residential roofing
products
|
Complementary building products
|
||||
|
Siding
|
Windows/Doors
|
|||||
|
Asphalt
shingles
|
Single-ply
roofing
|
Vinyl
siding
|
Vinyl
windows
|
|||
|
Synthetic
slate and tile
|
Asphalt
|
Red,
white and yellow
|
Aluminum
windows
|
|||
|
Clay
tile
|
Metal
|
cedar
siding
|
Wood
windows
|
|||
|
Concrete
tile
|
Modified
bitumen
|
Fiber
cement siding
|
Turn-key
windows
|
|||
|
Slate
|
Built-up
roofing
|
Soffits
|
Wood
doors
|
|||
|
Nail
base insulation
|
Cements
and coatings
|
House
wraps
|
Patio
doors
|
|||
|
Metal
roofing
|
Insulation—flat
stock
|
Vapor
barriers
|
||||
|
Felt
|
and
tapered
|
Stone
veneer
|
||||
|
Wood
shingles and
|
Commercial
fasteners
|
|||||
|
shakes
|
Metal
edges and
|
Other
|
Specialty
Lumber
|
|||
|
Nails
and fasteners
|
flashings
|
Waterproofing
systems
|
Redwood
|
|||
|
Metal
edgings and
|
Skylights,
smoke vents
|
Building
insulation
|
Red
cedar decking
|
|||
|
flashings
|
and
roof hatches
|
Air
barrier systems
|
Mahogany
decking
|
|||
|
Prefabricated
flashings
|
Sheet
metal, including
|
Gypsum
|
Pressure
treated lumber
|
|||
|
Ridges
and soffit vents
|
copper,
aluminum
|
Moldings
|
Fire
treated plywood
|
|||
|
Gutters
and
|
and
steel
|
Patio
covers
|
Synthetic
decking
|
|||
|
downspouts
|
Other
accessories
|
PVC
trim boards
|
||||
|
Other
accessories
|
Millwork
|
|||||
|
Custom
millwork
|
||||||
The products that we distribute are
supplied by the industry's leading manufacturers of high-quality roofing
materials and related products, such as Alcoa, BPCO, Carlisle, CertainTeed, Dow,
Firestone, GAF/Elk Materials, James Hardie, Johns Manville, Owens Corning,
Simonton, Tamko, and Revere Copper.
In the residential market, asphalt
shingles comprise the largest share of the products we sell. We believe that we
have also developed a specialty niche in the residential roofing market by
distributing products such as high-end shingles, copper gutters and metal
roofing products, as well as specialty lumber products for residential
applications, including redwood, white and red cedar shingles, and red cedar
siding. Additionally, we distribute gutters, downspouts, tools, nails, vinyl
siding, windows, decking and related exterior shelter products to meet the needs
of our residential roofing customers.
In the non-residential market,
single-ply roofing systems comprise the largest share of our products. Our
single-ply roofing systems consist primarily of Ethylene Propylene Diene Monomer
(synthetic rubber), or EPDM, and Thermoplastic Olefin, or TPO, roofing materials
and related components. In addition to the broad range of single-ply roofing
components, we sell the insulation that is required as part of most
non-residential roofing applications. Our insulation products include tapered
insulation, which has been a high-growth product line. Our remaining
non-residential products include metal roofing and flashings, fasteners,
fabrics, coatings, roof drains, modified bitumen, built-up roofing and
asphalt.
Services
We emphasize service to our customers.
We employ a knowledgeable staff of salespeople. Our sales personnel possess
in-depth technical knowledge of roofing materials and applications and are
capable of providing advice and assistance to contractors throughout the
construction process. In particular, we support our customers with the following
value-added services:
|
•
|
advice
and assistance throughout the construction process, including product
identification, specification and technical
support;
|
|
•
|
job
site delivery, rooftop loading and logistical
services;
|
|
•
|
tapered
insulation design and layout
services;
|
|
•
|
metal
fabrication and related metal roofing design and layout
services;
|
|
•
|
trade
credit; and
|
|
•
|
marketing
support, including project leads for
contractors.
|
8 of
63
Customers
Our diverse customer base consists of
approximately 40,000 contractors, home builders, building owners, and other
resellers primarily in the Southeast, Northeast, Central Plains, Midwest,
Southwest and Mid-Atlantic regions of the United States, as well as in Eastern
Canada. Our typical customer varies by end market, with relatively small
contractors in the residential market and small to large-sized contractors in
the non-residential market. To a lesser extent, our customer base includes
general contractors, retailers and building materials suppliers.
As evidenced by the fact that a
significant number of our customers have relied on us or our predecessors as
their vendor of choice for decades, we believe that we have strong customer
relationships that our competitors cannot easily displace or replicate. No
single customer accounts for more than 1.50% of our revenues.
Sales
and Marketing
Sales
strategy
Our sales strategy is to provide a
comprehensive array of high-quality products and superior value-added services
to residential and non-residential roofing contractors reliably, accurately and
on time. We fulfill approximately 97% of our warehouse orders through our
in-stock inventory as a result of the breadth and depth of our inventory at our
local branches. We believe that our focus on providing superior value-added
services and our ability to fulfill orders accurately and rapidly enables us to
attract and retain customers.
Sales
organization
We have attracted and retained an
experienced sales force of about 900 people who are responsible for generating
revenue at the local branch level. The expertise of our salespeople helps us to
increase sales to existing customers and add new customers.
Each of our branches is headed by a
branch manager, who also functions as the branch's sales manager. In addition,
each branch employs one to four outside salespeople and one to five inside
salespeople who report to their branch manager. Branches that focus primarily on
the residential market typically staff a larger number of outside
salespeople.
The primary responsibilities of our
outside salespeople are to prospect for new customers and increase sales to
existing customers. One of the ways our outside salespeople accomplish these
objectives is by reviewing information from our proprietary LogicTrack software
system, which extracts job and bid information from construction reports and
other industry news services. The system extracts information on
construction projects in our local markets from those industry services. Once a
construction project is identified, our design and estimating team creates job
quotes, which, along with pertinent bid and job information, are readily
available to our salespeople through LogicTrack. Our outside
salespeople then contact potential customers in an effort to solicit their
interest in participating with us in the project. Throughout this
process, LogicTrack maintains a record of quoting activity, due dates, and other
data to allow tracking of the projects and efficient
follow-up. By seeking a contractor to "partner" with on a bid,
we increase the likelihood that the contractor will purchase their roofing
materials and related products from us in the event that the contractor is
selected for the project.
To complement our outside sales force,
we have built a strong and technically proficient inside sales staff. Our inside
sales force is responsible for fielding incoming orders, providing pricing
quotations and responding to customer inquiries. Our inside sales force provides
vital product expertise to our customers.
In addition to our outside and inside
sales forces, we represent certain manufacturers for particular manufacturers'
products. Currently, we have developed relationships with Carlisle, Johns
Manville, Owens Corning and Firestone on this basis. We currently employ 31
representatives who act as liaisons (on behalf of property owners, architects,
specifiers and consultants) between these roofing materials manufacturers and
professional contractors.
Marketing
In order to capitalize on the local
customer relationships that we have established and benefit from the brands
developed by our regions, we have maintained the trade names of most of the
businesses that we have acquired. These trade names, such as Alabama Roofing
Supply, Beacon Roofing Supply Canada Company, Beacon Sales Company, Best
Distributing Company, Coastal Metal Service, Dealer's Choice, GLACO, Groupe
Bedard, Entrepot de la Toiture, JGA Beacon, Lafayette Wood Works, North Coast
Commercial Roofing Systems, Mississippi Roofing Supply, Pacific Supply Company,
Quality Roofing Supply Company, Roof Depot, RSM Supply, Roofing and Sheet Metal
Supply, Shelter Distribution, Southern Roof Center, The Roof Center, West End
Roofing Siding and Windows, West End Lumber Company, Independent Building
Materials, Phoenix Sales, Louisiana Roofing Supply, Posi-Slope, Posi-Pentes, Lookout Supply
Company and
Wholesale Roofing Supply—are well-known in the local markets in which the
respective branches compete and are associated with the provision of
high-quality products and customer service.
9 of
63
As a supplement to the efforts of our
sales force, each of our branches communicates with residential and
non-residential contractors in their local markets through newsletters, direct
mail and the Internet. In order to build and strengthen relationships with
customers and vendors, we sponsor and promote our own regional trade shows,
which feature general business and roofing seminars for our customers and
product demonstrations by our vendors. In addition, we attend numerous industry
trade shows throughout the regions in which we compete, and we are an active
member of the National Roofing Contractors Association, as well as regional
contractors' associations.
Purchasing
and Suppliers
Our status as a leader in our core
geographic markets, as well as our reputation in the industry, has allowed us to
forge strong relationships with numerous manufacturers of roofing materials and
related products, including Alcoa, BPCO, Carlisle, CertainTeed, Dow, Firestone,
GAF/Elk Materials, James Hardie, Johns Manville, Owens Corning, Simonton, Tamko
and Revere Copper.
We are viewed by our suppliers as a key
distributor due to our industry expertise, significant market share in our core
geographic markets and the substantial volume of products that we distribute. We
have significant relationships with more than 125 suppliers and maintain
multiple supplier relationships for each product line.
We manage the procurement of products
through our national headquarters and regional offices, allowing us to take
advantage of both our scale and local market conditions. We believe this enables
us to purchase products more economically than most of our competitors. Product
is shipped directly by the manufacturers to our branches or
customers.
Operations
Facilities
Our network of 179 branches serves
metropolitan areas in 37 states and 3 Canadian provinces. This network has
enabled us to effectively and efficiently serve a broad customer base and to
achieve a leading market position in each of our core geographic
markets.
Operations
Our branch-based model provides each
location with a significant amount of autonomy to operate within the parameters
of our overall business model. Operations at each branch are tailored to meet
the local needs of their customers. Depending on market needs, branches carry
from about 1,000 to 10,000 SKUs.
Branch managers are responsible for
sales, pricing and staffing activities, and have full operational control of
customer service and deliveries. We provide our branch managers with significant
incentives that allow them to share in the profitability of their respective
branches as well as the company as a whole. Personnel at our corporate
operations assist the branches with purchasing, procurement, credit services,
information systems support, contract management, accounting and legal services,
benefits administration and sales and use tax services.
Distribution/fulfillment
process
Our distribution/fulfillment process is
initiated upon receiving a request for a contract job order or direct product
order from a contractor. Under a contract job order, a contractor typically
requests roofing or other construction materials and technical support services.
The contractor discusses the project's requirements with a salesperson and the
salesperson provides a price quotation for the package of products and services.
Subsequently, the salesperson processes the order and we deliver the products to
the customer's job site.
Fleet
Our distribution infrastructure
supports over 400,000 deliveries annually. To accomplish this, we maintain a
dedicated owned fleet of 594 straight trucks, 235 tractors and 388 trailers.
Nearly all of our delivery vehicles are equipped with specialized equipment,
including 674 truck-mounted forklifts, cranes, hydraulic booms and conveyors,
which are necessary to deliver products to rooftop job sites in an efficient and
safe manner.
Our branches focus on providing
materials to customers who are located within a two-hour radius of their
respective facilities. We typically make deliveries five days per
week.
Management
information systems
We have fully integrated management
information systems. Our systems are consistently implemented across our
branches and acquired businesses are promptly moved to our system following
acquisition. Our systems support every major internal operational function,
except payroll, providing complete integration of purchasing, receiving, order
processing, shipping, inventory management, sales analysis and accounting. The
same databases are shared within the systems, allowing our branches to easily
acquire products from other branches or schedule deliveries by other branches,
greatly enhancing our customer service. Our systems also include a sophisticated
pricing matrix which allows us to refine pricing by region, branch, type of
customer, customer, or even a specific customer project. In addition, our
systems allow us to monitor all branch and regional performance centrally. We
have centralized many functions to leverage our size, including accounts
payable, insurance, employee benefits, vendor relations, and
banking.
10 of
63
All of our branches are connected to
our IBM AS400 computer network by secure Internet connections or private data
lines. We maintain a second IBM AS400 as a disaster recovery system, and
information is backed up to this system throughout each business day. We have
the capability of electronically switching our domestic operations to the
disaster recovery system.
We have created a financial reporting
package that allows us to send branches information they can use to compare
branch by branch financial performance, which we believe is essential to
operating each branch efficiently and more profitably. We have also developed a
benchmarking report which enables us to compare all of our branches' performance
in 12 critical areas.
We can place purchase orders
electronically with some of our major vendors. The vendors then transmit their
invoices electronically to us. Our system automatically matches these invoices
with the related purchase orders and schedules payment. We have the capability
to handle customer processing electronically, although most customers prefer
ordering through our sales force.
Government
Regulations
We are subject to regulation by various
federal, state, provincial and local agencies. These agencies include the
Environmental Protection Agency, Department of Transportation, Interstate
Commerce Commission, Occupational Safety and Health Administration and
Department of Labor and Equal Employment Opportunity Commission. We believe we
are in compliance in all material respects with existing applicable statutes and
regulations affecting environmental issues and our employment, workplace health
and workplace safety practices.
Competition
Although we are one of the two largest
roofing materials distributors in the United States and Canada, the U.S. roofing
supply industry is highly competitive. The vast majority of our competition
comes from local and regional roofing supply distributors, and, to a much lesser
extent, other building supply distributors and "big box" retailers. Among
distributors, we compete against a small number of large distributors and many
small, local, privately-owned distributors. The principal competitive factors in
our business include, but are not limited to, the availability of materials and
supplies; technical product knowledge and expertise; advisory or other service
capabilities; pricing of products; and availability of credit. We generally
compete on the basis of the quality of our services, product quality, and, to a
lesser extent, price. We compete not only for customers within the roofing
supply industry but also for personnel.
Employees
As of September 30, 2010, we had 2,231
employees, consisting of 655 in sales and marketing, 266 in branch management,
including supervisors, 1,001 warehouse workers, helpers and drivers, and 309
general and administrative personnel. We believe that our employee relations are
good. Twenty-seven employees are currently represented by labor
unions.
Order
Backlog
Order backlog is not a material aspect
of our business and no material portion of our business is subject to government
contracts.
Seasonality
In general, sales and net income are
highest during our first, third and fourth fiscal quarters, which represent the
peak months of construction, especially in our branches in the northeastern U.S.
and in Canada. Our sales are substantially lower during the second quarter, when
we usually incur net losses. These quarterly fluctuations have diminished as we
have diversified further into the southern regions of the United
States.
Geographic
Data
For geographic data about our business,
please see Note 15 to our Consolidated Financial Statements included
elsewhere in this Form 10-K.
11 of
63
ITEM
1A. RISK FACTORS
You should carefully consider the risks
and uncertainties described below and other information included in this
Form 10-K in evaluating us and our business. If any of the events described
below occur, our business and financial results could be adversely affected in a
material way. This could cause the trading price of our common stock to decline,
perhaps significantly.
We
may not be able to effectively integrate newly acquired businesses into our
operations or achieve expected profitability from our acquisitions.
Our growth strategy includes acquiring
other distributors of roofing materials and complementary products. Acquisitions
involve numerous risks, including:
|
|
•
|
unforeseen
difficulties in integrating operations, technologies, services, accounting
and personnel;
|
|
|
•
|
diversion
of financial and management resources from existing
operations;
|
|
|
•
|
unforeseen
difficulties related to entering geographic regions where we do not have
prior experience;
|
|
|
•
|
potential
loss of key employees;
|
|
|
•
|
unforeseen
liabilities associated with businesses acquired;
and
|
|
|
•
|
inability to generate sufficient
revenue to offset acquisition or investment
costs.
|
As a result, if we fail to evaluate and
execute acquisitions properly, we might not achieve the anticipated benefits of
these acquisitions, and we may incur costs in excess of what we anticipate.
These risks may be greater in the case of larger acquisitions.
We
may not be able to successfully identify acquisition candidates, which would
slow our growth rate.
We continually seek additional
acquisition candidates in selected markets and from time to time engage in
exploratory discussions with potential candidates. If we are not successful in
finding attractive acquisition candidates that we can acquire on satisfactory
terms, or if we cannot complete acquisitions that we identify, it is unlikely
that we will sustain the historical growth rates of our business.
An
inability to obtain the products that we distribute could result in lost
revenues and reduced margins and damage relationships with
customers.
We distribute roofing and other
exterior building materials that are manufactured by a number of major
suppliers. Although we believe that our relationships with our suppliers are
strong and that we would have access to similar products from competing
suppliers should products be unavailable from current sources, any disruption in
our sources of supply, particularly of the most commonly sold items, could
result in a loss of revenues and reduced margins and damage relationships with
customers. Supply shortages may occur as a result of unanticipated demand or
production or delivery difficulties. When shortages occur, roofing material
suppliers often allocate products among distributors.
Loss
of key personnel or our inability to attract and retain new qualified personnel
could hurt our ability to operate and grow successfully.
Our future success is highly dependent
upon the services of Robert Buck, Chief Executive Officer and Chairman of the
Board, Paul Isabella, President and Chief Operating Officer, and David Grace,
Chief Financial Officer. Our success will continue to depend to a significant
extent on our executive officers and key management personnel, including our
regional vice presidents. We do not have key man life insurance covering any of
our executive officers. We may not be able to retain our executive officers and
key personnel or attract additional qualified management. The loss of any of our
executive officers or other key management personnel, or our inability to
recruit and retain qualified personnel, could hurt our ability to operate and
make it difficult to execute our acquisition and internal growth
strategies.
A
change in vendor rebates could adversely affect our income and gross
margins.
The terms on which we purchase product
from many of our vendors entitle us to receive a rebate based on the volume of
our purchases. These rebates effectively reduce our costs for products. If
market conditions change, vendors may adversely change the terms of some or all
of these programs. Although these changes would not affect the net recorded
costs of product already purchased, it may lower our gross margins on products
we sell or income we realize in future periods.
Cyclicality
in our business could result in lower revenues and reduced
profitability.
We sell a portion of our products for
new residential and non-residential construction. The strength of these markets
depends on new housing starts and business investment, which are a function of
many factors beyond our control, including credit availability, interest rates,
employment levels, and consumer confidence. Downturns in the regions and markets
we serve could result in lower revenues and, since many of our expenses are
fixed, lower profitability. Although new housing starts are up slightly thus far
in 2010, they declined during 2006 through 2009 and the pace may continue at the
lower levels or decline again further. Commercial construction activity declined
in 2009 and 2010 and could continue to decline. Tougher economic conditions,
including tighter availability of commercial credit, contributed to the recent
decline in new commercial projects and, to a lesser extent, a decline in
re-roofing projects, and may continue to have a negative effect on current and
future levels of construction, especially new non-residential
construction.
12 of
63
Seasonality
in the construction and re-roofing industry generally results in second quarter
losses.
Our second quarter is typically
adversely affected by winter construction cycles and weather patterns in colder
climates as the level of activity in the new construction and re-roofing markets
decreases. Because many of our expenses remain relatively fixed throughout the
year, we generally record a loss during our second quarter. We expect that these
seasonal variations will continue in the future.
If
we encounter difficulties with our management information systems, we could
experience problems with inventory, collections, customer service, cost control
and business plan execution.
We believe our management information
systems are a competitive advantage in maintaining our leadership position in
the roofing distribution industry. If we experience problems with our management
information systems, we could experience, among other things, product shortages
and/or an increase in accounts receivable. Any failure by us to properly
maintain our management information systems could adversely impact our ability
to attract and serve customers and could cause us to incur higher operating
costs and experience delays in the execution of our business plan.
An
impairment of goodwill and/or other intangible assets could reduce net
income.
Acquisitions frequently result in the
recording of goodwill and other intangible assets. At September 30, 2010,
goodwill represented approximately 35% of our total assets. Goodwill is not
amortized for financial reporting purposes and is subject to impairment testing
at least annually using a fair-value based approach. The
identification and measurement of goodwill impairment involves the estimation of
the fair value of our reporting units. Our accounting for impairment contains
uncertainty because management must use judgment in determining appropriate
assumptions to be used in the measurement of fair value. We determine the fair
values of our reporting units by using both a market and discounted cash flow
approach.
We evaluate the recoverability of
goodwill for impairment in between our annual tests when events or changes in
circumstances indicate that the carrying amount of goodwill may not be
recoverable. Any impairment of goodwill will reduce net income in the period in
which the impairment is recognized.
We
might need to raise additional capital, which may not be available, thus
limiting our growth prospects.
We may require additional equity or
further debt financing in order to consummate an acquisition or for additional
working capital for expansion or if we suffer losses. In the event additional
equity or debt financing is unavailable to us, we may be unable to expand or
make acquisitions and our stock price may decline as a result of the perception
that we have more limited growth prospects.
Disruptions
in the capital and credit markets may impact the availability of credit and
business conditions.
If the financial institutions that have
extended credit commitments to us are adversely affected by the conditions of
the capital and credit markets, they may become unable to fund borrowings under
those credit commitments, which could have an adverse impact on our financial
condition and our ability to borrow funds, if needed, for working capital,
acquisitions, capital expenditures and other corporate purposes.
Market disruptions could cause broader
economic downturns, which may lead to lower demand for our products and
increased incidence of customers’ inability to pay their accounts. Additional
customer bankruptcies or similar events caused by such broader downturns may
result in higher levels of bad debt expense than we have historically
experienced. Also, our suppliers may potentially be impacted, causing potential
disruptions or delays of product availability. These events would adversely
impact our results of operations, cash flows and financial
position.
ITEM
1B. UNRESOLVED STAFF COMMENTS
None.
13 of
63
ITEM
2. PROPERTIES
We lease 186 facilities, including our
headquarters and other support facilities, throughout the United States and
Eastern Canada. These leased facilities range in size from approximately 750
square feet to 137,000 square feet. In addition, we own thirteen sales/warehouse
facilities located in Manchester, New Hampshire; Reading, Pennsylvania;
Montreal, Quebec (2); Sainte-Foy, Quebec; Delson, Quebec; Salisbury, Maryland;
Hartford, Connecticut; Cranston, Rhode Island; Lancaster, Pennsylvania;
Jacksonville, Florida; Easton, Maryland; and Manassas, Virginia. These owned
facilities range in size from 11,500 square feet to 68,000 square feet. All of
the owned facilities are mortgaged to our senior lenders. We believe that our
properties are in good operating condition and adequately serve our current
business operations.
As of November 1, 2010, our 179
branches, a few with multiple leased facilities or combined facilities, and 8
other facilities were located in the following states and
provinces:
|
Number of
|
||||||
|
State
|
Branches
|
Other
|
||||
|
Alabama
|
4
|
|||||
|
Arkansas
|
4
|
|||||
|
California
|
4
|
|||||
|
Colorado
|
1
|
|||||
|
Connecticut
|
2
|
1
|
||||
|
Delaware
|
2
|
|||||
|
Florida
|
7
|
|||||
|
Georgia
|
6
|
|||||
|
Illinois
|
7
|
|||||
|
Indiana
|
6
|
|||||
|
Iowa
|
1
|
|||||
|
Kansas
|
4
|
1
|
||||
|
Kentucky
|
4
|
|||||
|
Louisiana
|
4
|
1
|
||||
|
Maine
|
1
|
|||||
|
Maryland
|
13
|
1
|
||||
|
Massachusetts
|
9
|
|||||
|
Michigan
|
3
|
|||||
|
Minnesota
|
2
|
|||||
|
Mississippi
|
2
|
|||||
|
Missouri
|
5
|
|||||
|
Nebraska
|
3
|
|||||
|
New
Hampshire
|
1
|
|||||
|
New
Jersey
|
1
|
|||||
|
New
Mexico
|
1
|
|||||
|
New
York
|
1
|
|||||
|
North
Carolina
|
10
|
|||||
|
Ohio
|
4
|
|||||
|
Oklahoma
|
3
|
|||||
|
Pennsylvania
|
13
|
|||||
|
Rhode
Island
|
1
|
|||||
|
South
Carolina
|
4
|
|||||
|
Tennessee
|
5
|
|||||
|
Texas
|
19
|
|||||
|
Vermont
|
1
|
|||||
|
Virginia
|
8
|
2
|
||||
|
West
Virginia
|
2
|
|||||
|
Subtotal—U.S.
|
168
|
6
|
||||
|
Canadian
Provinces
|
||||||
|
Manitoba
|
1
|
|||||
|
Ontario
|
4
|
1
|
||||
|
Quebec
|
6
|
|||||
|
Subtotal—Canada
|
11
|
1
|
||||
|
Total
|
179
|
7
|
14 of
63
ITEM
3. LEGAL PROCEEDINGS
From time to time, we are involved in
lawsuits that are brought against us in the normal course of business. We are
not currently a party to any legal proceedings that would be expected, either
individually or in the aggregate, to have a material adverse effect on our
business or financial condition.
15 of
63
PART
II
ITEM
5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED
STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock trades on The NASDAQ
Global Select Market under the symbol "BECN". The following table lists
quarterly information on the price range of our common stock based on the high
and low reported sale prices for our common stock as reported by NASDAQ for the
periods indicated below:
|
High
|
Low
|
|||||||
|
Year
ended September 30, 2009:
|
||||||||
|
First
quarter
|
$ | 14.84 | $ | 9.72 | ||||
|
Second
quarter
|
$ | 14.99 | $ | 10.57 | ||||
|
Third
quarter
|
$ | 17.65 | $ | 13.08 | ||||
|
Fourth
quarter
|
$ | 17.15 | $ | 14.05 | ||||
|
Year
ended September 30, 2010:
|
||||||||
|
First
quarter
|
$ | 16.89 | $ | 14.31 | ||||
|
Second
quarter
|
$ | 19.31 | $ | 16.00 | ||||
|
Third
quarter
|
$ | 22.81 | $ | 18.02 | ||||
|
Fourth
quarter
|
$ | 18.50 | $ | 13.76 | ||||
There were 33 holders of record of our
common stock as of November 1, 2010.
Purchases
of Equity Securities by the Issuer and Affiliated Purchasers
No purchases of our equity securities
were made by us or any affiliated entity during the fourth quarter of the year
ended September 30, 2010.
Recent
Sales of Unregistered Securities
None.
Dividends
We have not paid cash dividends on our
common stock and do not anticipate paying dividends in the foreseeable future.
Our board of directors currently intends to retain any future earnings for
reinvestment in our business. Our revolving credit facilities currently prohibit
the payment of dividends without the prior written consent of our lender. Any
future determination to pay dividends will be at the discretion of our board of
directors and will be dependent upon our results of operations and cash flows,
our financial position and capital requirements, general business conditions,
legal, tax, regulatory and any contractual restrictions on the payment of
dividends, and any other factors our board of directors deems
relevant.
16 of
63
Performance
Graph
The following graph compares the
cumulative total shareholder return (including reinvestment of dividends) of
Beacon Roofing Supply, Inc.'s common stock based on its market prices,
beginning with the start of fiscal year 2006 and each fiscal year thereafter,
with (i) the Nasdaq Index and (ii) the S&P 1500 Building Products
Index.
The line
graph assumes that $100 was invested in our common stock, the Nasdaq Index and
the S&P 1500 Building Products Index on September 24, 2005. The closing
price of our common stock on September 30, 2010 was $14.57. The stock price
performance of Beacon Roofing Supply, Inc.'s common stock depicted in the
graph above represents past performance only and is not necessarily indicative
of future performance.
17 of
63
ITEM
6. SELECTED FINANCIAL DATA
You should read the following selected
financial information together with our financial statements and related notes
and "Management's discussion and analysis of financial condition and results of
operations" also included in this Form 10-K. We have derived the statement
of operations data for the years ended September 30, 2010, September 30, 2009
and September 30, 2008, and the balance sheet information at September 30, 2010
and September 30, 2009, from our audited financial statements included in this
Form 10-K. We have derived the statements of operations data for the years
ended September 30, 2007 and September 30, 2006, and the balance sheet
data at September 30, 2008, September 30, 2007 and September 30,
2006, from our audited financial statements not included in this
Form 10-K.
Statement
of operations data
|
(Dollars
in Thousands)
|
Fiscal
year ended September 30,
|
|||||||||||||||||||
|
2006
|
||||||||||||||||||||
|
2010
|
2009
|
2008
|
2007
|
(53
weeks)
|
||||||||||||||||
|
Net
sales
|
$ | 1,609,969 | $ | 1,733,967 | $ | 1,784,495 | $ | 1,645,785 | $ | 1,500,637 | ||||||||||
|
Cost
of products sold
|
1,249,869 | 1,322,845 | 1,364,487 | 1,271,868 | 1,136,500 | |||||||||||||||
|
Gross
profit
|
360,100 | 411,122 | 420,008 | 373,917 | 364,137 | |||||||||||||||
|
Operating
expenses
|
286,583 | 301,913 | 325,298 | 304,109 | 263,836 | |||||||||||||||
|
Income
from operations
|
73,517 | 109,209 | 94,710 | 69,808 | 100,301 | |||||||||||||||
|
Interest
expense
|
(18,210 | ) | (22,887 | ) | (25,904 | ) | (27,434 | ) | (19,461 | ) | ||||||||||
|
Income
taxes
|
(20,781 | ) | (33,904 | ) | (28,500 | ) | (17,095 | ) | (31,529 | ) | ||||||||||
|
Net
income
|
$ | 34,526 | $ | 52,418 | $ | 40,306 | $ | 25,279 | $ | 49,311 | ||||||||||
|
Net
income per share
|
||||||||||||||||||||
|
Basic
|
$ | 0.76 | $ | 1.16 | $ | 0.91 | $ | 0.57 | $ | 1.15 | ||||||||||
|
Diluted
|
$ | 0.75 | $ | 1.15 | $ | 0.90 | $ | 0.56 | $ | 1.12 | ||||||||||
|
Weighted
average shares outstanding
|
||||||||||||||||||||
|
Basic
|
45,480,922 | 45,007,313 | 44,346,293 | 44,083,915 | 42,903,279 | |||||||||||||||
|
Diluted
|
46,031,593 | 45,493,786 | 44,959,357 | 44,971,932 | 44,044,769 | |||||||||||||||
|
Other
financial and operating data:
|
||||||||||||||||||||
|
Depreciation
and amortization
|
$ | 27,773 | $ | 30,389 | $ | 34,240 | $ | 32,863 | $ | 23,792 | ||||||||||
|
Capital
expenditures (excluding acquisitions)
|
$ | 10,107 | $ | 13,656 | $ | 5,739 | $ | 23,132 | $ | 19,063 | ||||||||||
|
Number
of branches at end of period
|
179 | 172 | 175 | 178 | 155 | |||||||||||||||
Balance
sheet data
|
September
30,
|
||||||||||||||||||||
|
(In
Thousands)
|
2010
|
2009
|
2008
|
2007
|
2006
|
|||||||||||||||
|
Cash
and cash equivalents
|
$ | 117,136 | $ | 82,742 | $ | 26,038 | $ | 6,469 | $ | 1,847 | ||||||||||
|
Total
assets
|
$ | 1,042,189 | $ | 1,040,786 | $ | 1,067,816 | $ | 1,006,660 | $ | 839,890 | ||||||||||
|
Borrowings
under revolving lines of credit, current portions of long-term debt and
other obligations
|
$ | 15,734 | $ | 15,092 | $ | 19,926 | $ | 34,773 | $ | 6,657 | ||||||||||
|
Long-term
debt, net of current portions:
|
||||||||||||||||||||
|
Borrowings
under revolving lines of credit
|
$ | - | $ | - | $ | - | $ | - | $ | 229,752 | ||||||||||
|
Senior
notes payable and other obligations
|
311,771 | 322,090 | 332,500 | 343,000 | 69,282 | |||||||||||||||
|
Other
long-term obligations
|
11,910 | 16,257 | 25,143 | 31,270 | 10,610 | |||||||||||||||
| $ | 323,681 | $ | 338,347 | $ | 357,643 | $ | 374,270 | $ | 309,644 | |||||||||||
|
Stockholders'
equity
|
$ | 468,844 | $ | 423,573 | $ | 366,701 | $ | 323,850 | $ | 291,169 | ||||||||||
18 of
63
ITEM
7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read
in conjunction with our consolidated financial statements and related notes and
other financial information appearing elsewhere in this Form 10-K. In
addition to historical information, the following discussion and other parts of
this Form 10-K contain forward-looking information that involves risks and
uncertainties. Our actual results could differ materially from those anticipated
by this forward-looking information due to the factors discussed under "Risk
factors," "Forward-looking statements" and elsewhere in this Form 10-K.
Certain tabular information will 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 building materials, including siding,
windows, specialty lumber products and waterproofing systems for residential and
nonresidential 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 carry up to 10,000 SKUs through 179
branches in the United States and Canada. In fiscal year 2010, approximately 93%
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 strive for an appropriate mix of residential, non-residential and
complementary product sales in all of our regions but allow each of our branches
to influence 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
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 new 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 presently do not serve. Our April 2007 acquisition of North Coast
Commercial Roofing Systems, Inc is an example of this approach. North Coast is a
leading distributor of commercial roofing systems and related accessories, based
in Twinsburg, Ohio, which had 16 locations in Ohio, Illinois, Indiana, Kentucky,
Michigan, New York, Pennsylvania and West Virginia at the time of the
acquisition. There was minimal branch overlap with our existing operations. We
also have acquired smaller companies to supplement branch openings within an
existing region. Our April 2010 acquisition of Louisiana Roofing Supply, a
single location distributor of residential and commercial roofing products
located in Baton Rouge, Louisiana, which we integrated into our West End Roofing
Siding and Windows region in the Southwest, is an example of such an
acquisition.
General
We sell all materials necessary to
install, replace and repair residential and non-residential roofs,
including:
|
|
·
|
shingles;
|
|
|
·
|
single-ply
roofing;
|
|
|
·
|
metal
roofing and accessories;
|
|
|
·
|
modified
bitumen;
|
|
|
·
|
built
up roofing;
|
|
|
·
|
insulation;
|
|
|
·
|
slate
and tile;
|
|
|
·
|
fasteners,
coatings and cements; and
|
|
|
·
|
other
roofing accessories.
|
We also sell complementary building
products such as:
|
|
·
|
vinyl
siding;
|
|
|
·
|
doors,
windows and millwork;
|
|
|
·
|
wood
and fiber cement siding;
|
|
|
·
|
residential
insulation; and
|
|
|
·
|
waterproofing
systems.
|
19 of
63
The following is a summary of our net
sales by product group (in thousands) for the last three full fiscal years.
Percentages may not total due to rounding.
|
Year Ended
|
||||||||||||||||||||||||
|
September 30, 2010
|
September 30, 2009
|
September 30, 2008
|
||||||||||||||||||||||
|
Net Sales
|
Mix
|
Net Sales
|
Mix
|
Net Sales
|
Mix
|
|||||||||||||||||||
|
Residential
roofing products
|
$ | 745,560 | 46.3 | % | $ | 898,796 | 51.8 | % | $ | 758,491 | 42.5 | % | ||||||||||||
|
Non-residential
roofing products
|
620,977 | 38.6 | % | 598,789 | 34.5 | % | 723,742 | 40.6 | % | |||||||||||||||
|
Complementary
building products
|
243,432 | 15.1 | % | 236,382 | 13.6 | % | 302,262 | 16.9 | % | |||||||||||||||
| $ | 1,609,969 | 100.0 | % | $ | 1,733,967 | 100.0 | % | $ | 1,784,495 | 100.0 | % | |||||||||||||
We have approximately 40,000 customers,
none of which represents more than 1.50% of our net sales. Many of our customers
are small to mid-size contractors with relatively limited capital resources. We
maintain strict credit approval and review policies, which has helped to keep
losses from customer receivables within our expectations. For the seven years
prior to 2008, bad debts averaged approximately 0.3% of net sales. In 2010, bad
debts were slightly lower than normal levels at 0.2% of net sales after we
experienced increases to 0.4% and 0.6% of net sales in 2009 and 2008,
respectively, which were still within our tolerances in consideration of the
tougher economic and credit climate.
Our expenses consist primarily of the
cost of products purchased for resale, labor, fleet, occupancy, and selling and
administrative expenses. We compete for business and may respond to competitive
pressures at times by lowering prices in order to maintain our market
share.
Since 1997, we have made twenty-two
strategic and complementary acquisitions and opened 36 new branches. We did not
open any new branches in 2010. Three new branches were opened in 2009 and one in
2008. We slowed the pace of new branch openings beginning in 2008, mostly as a
result of the slowdown in our business experienced since 2007. Typically, when
we open a new branch, we transfer a certain level of existing business from an
existing branch to the new branch. This allows the new branch to commence with a
base business and also allows the existing branch to target other growth
opportunities.
In managing our business, we consider
all growth, including the opening of new branches, to be internal growth unless
it is a result of an acquisition. In our management's discussion and analysis of
financial condition and results of operations, when we refer to growth in
existing markets, 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 reporting period. Our
average annual internal sales growth over the six fiscal years since our IPO was
2.1%.
Results
of operations
The following discussion compares our
results of operations for 2010, 2009 and 2008.
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 total due to rounding.
20 of
63
|
Year ended
|
||||||||||||
|
September 30,
|
September 30,
|
September 30,
|
||||||||||
|
2010
|
2009
|
2008
|
||||||||||
|
Net
sales
|
100.0 | % | 100.0 | % | 100.0 | % | ||||||
|
Cost
of products sold
|
77.6 | 76.3 | 76.5 | |||||||||
|
Gross
profit
|
22.4 | 23.7 | 23.5 | |||||||||
|
Operating
expenses
|
17.8 | 17.4 | 18.2 | |||||||||
|
Income
from operations
|
4.6 | 6.3 | 5.3 | |||||||||
|
Interest
expense
|
(1.1 | ) | (1.3 | ) | (1.5 | ) | ||||||
|
Income
before income taxes
|
3.4 | 5.0 | 3.9 | |||||||||
|
Income
taxes
|
(1.3 | ) | (2.0 | ) | (1.6 | ) | ||||||
|
Net
income
|
2.1 | % | 3.0 | % | 2.3 | % | ||||||
2010
compared to 2009
The following table shows a summary of
our results of operations for 2010 and 2009, broken down by existing markets and
acquired markets.
|
Existing Markets
|
Acquired Markets
|
Consolidated
|
||||||||||||||||||||||
|
(in thousands)
|
2010
|
2009
|
2010
|
2009
|
2010
|
2009
|
||||||||||||||||||
|
Net
sales
|
$ | 1,583,687 | $ | 1,733,967 | $ | 26,282 | $ | - | $ | 1,609,969 | $ | 1,733,967 | ||||||||||||
|
Gross
profit
|
355,000 | 411,122 | 5,100 | - | 360,100 | 411,122 | ||||||||||||||||||
|
Gross
margin
|
22.4 | % | 23.7 | % | 19.4 | % | 22.4 | % | 23.7 | % | ||||||||||||||
|
Operating
expenses
|
280,342 | 301,913 | 6,241 | - | 286,583 | 301,913 | ||||||||||||||||||
|
Operating
expenses as a % of net sales
|
17.7 | % | 17.4 | % | 23.7 | % | 17.8 | % | 17.4 | % | ||||||||||||||
|
Operating
income
|
$ | 74,658 | $ | 109,209 | $ | (1,141 | ) | $ | - | $ | 73,517 | $ | 109,209 | |||||||||||
|
Operating
margin
|
4.7 | % | 6.3 | % | -4.3 | % | 4.6 | % | 6.3 | % | ||||||||||||||
Net
Sales
Consolidated net sales decreased
$124.0 million, or 7.2%, to $1,610.0 million in 2010 from
$1,734.0 million in 2009. Existing market sales decreased
$150.3 million or 8.7%, while acquired markets contributed
$26.3 million. We attribute the existing market sales decline primarily to
the following factors:
|
|
·
|
a
decrease in re-roofing activity in the areas affected by Hurricane Ike in
2009; and
|
|
|
·
|
continued
general weakness in residential roofing activities in certain other
regions;
|
partially
offset by:
|
|
·
|
recent
growth in non-residential roofing activity in most regions;
and
|
|
|
·
|
a
recent resurgence of growth in our complementary product
sales.
|
We
acquired nine branches in 2010 and closed two. We estimate that inflation in our
product costs had no material impact on product costs in 2010 compared to 2009;
however average selling prices were generally lower. We had 253 business days in
both 2010 and 2009. Net sales by geographical region, excluding
acquired branches, grew or (declined) as follows: Northeast 2.8%; Mid-Atlantic
7.4%; Southeast (10.4%); Southwest (32.6%); Midwest (9.2%); West (15.2%); and
Canada 10.3%. These variations were primarily caused by short-term factors such
as local economic conditions, weather conditions and storm
activity.
21 of
63
The
product group sales for our existing markets were as follows:
For
the Fiscal Years Ended
Existing
Markets
|
2010
|
2009
|
Change
|
||||||||||||||||||||||
|
(dollars in millions)
|
Net Sales
|
Mix
|
Net Sales
|
Mix
|
||||||||||||||||||||
|
Residential
roofing products
|
$ | 736.7 | 46.5 | % | $ | 898.8 | 51.8 | % | $ | (162.1 | ) | -18.0 | % | |||||||||||
|
Non-residential
roofing products
|
605.7 | 38.2 | % | 598.8 | 34.5 | % | 6.9 | 1.2 | % | |||||||||||||||
|
Complementary
building products
|
241.3 | 15.2 | % | 236.4 | 13.6 | % | 4.9 | 2.1 | % | |||||||||||||||
| $ | 1,583.7 | 100.0 | % | $ | 1,734.0 | 100.0 | % | $ | (150.3 | ) | -8.7 | % | ||||||||||||
For 2010,
our acquired markets had product group sales of $8.9, $15.3 and $2.1 million in
residential roofing products, non-residential roofing products and complementary
building products, respectively. Total 2010 existing market sales of
$1,583.7 million plus 2010 sales from acquired markets of
$26.3 million equals our reported 2010 sales of $1,610.0 million.
Prior year sales by product group are presented in a manner consistent with the
current year’s product classifications. We believe the existing market
information is useful to investors because it helps explain organic growth or
decline.
Gross
Profit
|
2010
|
2009
|
Change
|
||||||||||||||||||
|
(dollars in millions)
|
||||||||||||||||||||
|
Gross
profit
|
$ | 360.1 | $ | 411.1 | $ | (51.0 | ) | -12.4 | % | |||||||||||
|
Existing
markets
|
355.0 | 411.1 | (56.1 | ) | -13.6 | % | ||||||||||||||
|
Gross
margin
|
22.4 | % | 23.7 | % | -1.3 | % | ||||||||||||||
|
Existing
markets
|
22.4 | % | 23.7 | % | -1.3 | % | ||||||||||||||
Our
existing market gross profit decreased $56.1 million or 13.6% in 2010,
while our acquired market gross profit contributed $5.1 million. Our
overall and existing market gross margin decreased to 22.4% in 2010 from 23.7%
in 2009. The margin rate decrease in our existing markets resulted
primarily from approximately equal impacts generated by a more competitive
market and a higher sales mix of non-residential roofing products, which
typically have lower gross margins. These negative factors were partially offset
by higher 2010 vendor incentive income, primarily from short-term buying
programs. We
currently expect our fiscal year 2011 overall annual gross margin to range from
22.0% to 23.5%, dependant mostly on product mix.
Direct
sales (products shipped by our vendors directly to our customers), which
typically have substantially lower gross margins than our warehouse sales,
represented 20.3% and 19.0% of our net sales in 2010 and 2009, respectively. The
slight increase in the percentage of direct sales was primarily attributable to
the higher mix of non-residential roofing product sales. There were no material
regional impacts from changes in the direct sales mix of our geographical
regions.
Operating
Expenses
|
2010
|
2009
|
Change
|
||||||||||||||||||
|
(dollars in millions)
|
||||||||||||||||||||
|
Operating expenses
|
$ | 286.6 | $ | 301.9 | $ | (15.3 | ) | -5.1 | % | |||||||||||
|
Existing
markets
|
280.3 | 301.9 | (21.6 | ) | -7.1 | % | ||||||||||||||
|
Operating
expenses as a % of sales
|
17.8 | % | 17.4 | % | 0.4 | % | ||||||||||||||
|
Existing
markets
|
17.7 | % | 17.4 | % | 0.3 | % | ||||||||||||||
22 of
63
Our
existing market operating expenses decreased by $21.6 million or 7.1% in
2010 to $280.3 million from $301.9 million in 2009, while our acquired
markets incurred $6.3 million in operating expenses. The following factors were
the leading causes of our lower operating expenses in our existing
markets:
|
|
·
|
savings of $9.8 million in
payroll and related costs, due to a lower employee headcount, lower
incentive-based pay, and lower related benefits (including a lower
profit-sharing accrual);
|
|
|
·
|
savings
of $6.9 million in other general & administrative expenses from a
reduction in the provision for bad debts of $4.7 million, reduced claim
costs in our self-insurance programs and certain cost saving
actions;
|
|
|
·
|
reduced
depreciation and amortization expense of $3.1 million due mostly to
lower amortization of intangible
assets;
|
|
|
·
|
savings
of $1.1 million in various selling expenses, such as reduced credit card
fees due to the lower sales volume and certain cost saving actions,
partially offset by higher fuel costs;
and
|
|
|
·
|
savings
of $0.7 million in warehouse expenses mainly due to lower branch closing
costs.
|
In 2010, we expensed a total of
$9.9 million for the amortization of intangible assets recorded under
purchase accounting compared to $12.2 million in 2009. Our existing market operating expenses
as a percentage of net sales increased to 17.7% in 2010 from 17.4% in 2009 due
to the reductions outlined above offset by a larger percentage decline in net
sales.
Interest
Expense
Interest
expense decreased $4.7 million to $18.2 million in 2010 from
$22.9 million in 2009. This decrease was primarily due to lower debt and
the expiration of certain interest derivatives (see Item 7A) that carried higher
interest rates than the rates on our current derivatives and lower variable
interest rates on the unhedged components of our debt. Interest
expense would have been $8.9 and $8.3 million less in 2010 and 2009,
respectively, without the impact of our derivatives.
Income
Taxes
Income tax expense decreased to $20.8
million in 2010 from $33.9 million in 2009 and our effective income tax rate
decreased to 37.6% from 39.3% in 2009. The 2010
income tax expense includes benefits from the reversals of certain discrete tax
reserves and releases of valuation allowances on certain deferred tax assets
totaling $1.4 million and from a higher percentage of Canadian income in 2010
than in 2009. We currently expect our full fiscal year 2011 effective income tax
rate to be approximately 39.5%, excluding any future discrete
items.
2009 compared to
2008
Net
Sales
Consolidated net sales decreased
$50.5 million, or 2.8%, to $1,734.0 million in 2009 from
$1,784.5 million in 2008. For 2009, all of our sales were
considered to be from existing market as we did not acquire any branches in 2009
or 2008. The product group sales for 2009 and 2008 were as follows
(percentages may not total due to rounding):
|
2009
|
2008
|
Change
|
||||||||||||||||||||||
|
(dollars in millions)
|
Net Sales
|
Mix
|
Net Sales
|
Mix
|
||||||||||||||||||||
|
Residential roofing
products
|
$ | 897.4 | 51.8 | % | $ | 758.5 | 42.5 | % | $ | 138.9 | 18.3 | % | ||||||||||||
|
Non-residential
roofing products
|
599.6 | 34.6 | % | 723.7 | 40.6 | % | (124.1 | ) | -17.1 | % | ||||||||||||||
|
Complementary
building products
|
237.0 | 13.7 | % | 302.3 | 16.9 | % | (65.3 | ) | -21.6 | % | ||||||||||||||
| $ | 1,734.0 | 100.0 | % | $ | 1,784.5 | 100.0 | % | $ | (50.5 | ) | -2.8 | % | ||||||||||||
Our 2009 sales were affected primarily
by the following factors, most of which resulted from tougher economic
conditions:
|
·
|
significant
decline in non-residential roofing
activity;
|
|
·
|
continued
weakness in new residential roofing activity in most
markets;
|
|
·
|
continued
weak complementary product sales in most markets;
and
|
|
·
|
six fewer branches for most of
the year;
|
partially
offset by the positive impact of:
|
·
|
higher average year-over-year
prices, especially in residential roofing products;
and
|
|
·
|
increased re-roofing activity in
the areas affected by Hurricane Ike, primarily in our Southwest
region.
|
23 of
63
We
estimate inflation increased 2009 sales by 7-9% over 2008, indicating a drop in
volume of 10-12%, mostly in non-residential roofing and complementary product
sales. We opened three new branches late in 2009 and closed six branches during
the year. We had 253 business days in both 2009 and
2008. Net sales by geographical region grew or (declined) as follows:
Northeast (12.6%); Mid-Atlantic (9.7%); Southeast 4.3%; Southwest 38.1%; Midwest
(14.5%); West (21.6%); and Canada (10.8%). These variations were primarily
caused by short-term factors such as local economic conditions and storm
activity.
Gross
Profit
|
2009
|
2008
|
Change
|
||||||||||||||||||
|
(dollars
in millions)
|
||||||||||||||||||||
|
Gross
profit
|
$ | 411.1 | $ | 420.0 | $ | (8.9 | ) | -2.1 | % | |||||||||||
|
Gross
margin
|
23.7 | % | 23.5 | % | 0.2 | % | ||||||||||||||
In 2009, gross profit decreased
$8.9 million or 2.1% as compared to 2008, while gross margin increased to
23.7% from 23.5%. 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, partially offset
by margin rate pressures from increased competition for fewer
orders. In addition, the benefit of lower weighted-average costs of
residential roofing products in comparison to the current prices of those
products in the marketplace continued from the fourth quarter of fiscal year
2008 into the first quarter of this year. This weighted-average cost
effect ended during the second quarter of 2009.
Direct sales (products shipped by our
vendors directly to our customers), which typically have substantially lower
gross margins than our warehouse sales, represented 19.0% and 21.7% of our net
sales for 2009 and 2008, respectively. The decrease in the percentage of direct
sales was attributable to the lower mix of non-residential roofing product
sales. There were no material changes in the direct sales mix of our
geographical regions.
Operating
Expenses
|
2009
|
2008
|
Change
|
||||||||||||||||||
|
(dollars
in millions)
|
||||||||||||||||||||
|
Operating
expenses
|
$ | 301.9 | $ | 325.3 | $ | (23.4 | ) | -7.2 | % | |||||||||||
|
Operating
expenses as a % of sales
|
17.4 | % | 18.2 | % | -0.8 | % | ||||||||||||||
Our
operating expenses decreased by $23.4 million to $301.9 million in
2009 from $325.3 million in 2008. The following factors were the leading
causes of our lower operating expenses:
|
·
|
savings of $7.8 million in
payroll and related costs, primarily driven by a lower headcount, lower
incentive-based pay, and reductions in overtime, partially offset by less
favorable medical claims
experience;
|
|
·
|
savings
of $6.9 million in selling expenses, primarily from lower transportation
costs resulting from lower fuel prices and the lower sales volumes,
partially offset by an increase in credit card
fees;
|
|
·
|
reductions
of $2.9 million in various general & administrative expenses, mainly
from decreases in workmen’s compensation and auto insurance
costs;
|
|
·
|
a
reduction of $2.9 million in the provision for bad debts primarily due to
collections of aged receivables;
and
|
|
·
|
reduced
depreciation and amortization expense of $3.9 million due to lower
amortization of intangible assets and the impact of very low capital
expenditures in 2008;
|
partially
offset by:
|
|
·
|
an
increase of $0.9 million in warehouse expenses, mostly due to costs
associated with the closing of the six
branches.
|
In 2009, we expensed a total of
$12.2 million for the amortization of intangible assets recorded under
purchase accounting compared to $15.0 million in 2008. Our operating expenses as a percentage
of net sales decreased to 17.4% in 2009 from 18.2% in 2008 as we were able to
control our variable costs and reduce fixed costs.
24 of
63
Interest
Expense
Interest expense decreased
$3.0 million to $22.9 million in 2009 from $25.9 million in 2008.
This decrease was primarily due to a continued pay down of debt and lower
average interest rates, which affected the unhedged portion of our variable-rate
debt. Interest expense would have been $8.3 and $2.8 million less in
2009 and 2008, respectively, without the impact of our derivatives.
Income
Taxes
Income tax expense increased to
$33.9 million in 2009 from $28.5 million in 2008. Our 2009 effective
income tax rate was 39.3%, compared to our 2008 effective income tax rate of
41.4%. The rate decrease was primarily due to refunds for prior years’ tax
credits and favorable state income tax audit results. We also experienced a
reduction in our state income tax rate due to a higher apportionment in states
with lower income tax rates.
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 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
accounts payable terms offered by our suppliers typically have due dates in
April, May and June, while our peak accounts receivable collections typically
occur from June through November.
We generally experience a slowing of
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.
Our vendors are also affected by the
seasonality in the industry and are more likely to provide seasonal incentives
in our second quarter as a result of the lower level of roofing activity. Also
during the second quarter, we generally experience our lowest availability under
our senior secured credit facilities, which are asset-based lending
facilities.
Certain
quarterly financial data
The following table sets forth certain
unaudited quarterly data for the fiscal years 2010 and 2009 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 total due to
rounding.
|
Fiscal
year 2010
|
Fiscal
year 2009
|
|||||||||||||||||||||||||||||||
|
Qtr
1
|
Qtr
2
|
Qtr
3
|
Qtr
4
|
Qtr
1
|
Qtr
2
|
Qtr
3
|
Qtr
4
|
|||||||||||||||||||||||||
|
(dollars
in millions, except per share data)
|
||||||||||||||||||||||||||||||||
|
(unaudited)
|
||||||||||||||||||||||||||||||||
|
Net
sales
|
$ | 367.7 | $ | 285.4 | $ | 474.3 | $ | 482.6 | $ | 463.3 | $ | 319.3 | $ | 463.6 | $ | 487.7 | ||||||||||||||||
|
Gross
profit
|
88.3 | 61.1 | 104.3 | 106.4 | 116.0 | 74.3 | 107.8 | 113.0 | ||||||||||||||||||||||||
|
Income
(loss) from operations
|
18.5 | (6.0 | ) | 30.2 | 30.8 | 37.7 | 1.5 | 33.6 | 36.5 | |||||||||||||||||||||||
|
Net
income (loss)
|
$ | 7.8 | $ | (6.5 | ) | $ | 16.3 | $ | 16.9 | $ | 18.6 | $ | (2.4 | ) | $ | 17.2 | $ | 19.0 | ||||||||||||||
|
Earnings
(loss) per share - basic
|
$ | 0.17 | $ | (0.14 | ) | $ | 0.36 | $ | 0.37 | $ | 0.42 | $ | (0.05 | ) | $ | 0.38 | $ | 0.42 | ||||||||||||||
|
Earnings
(loss) per share - fully diluted
|
$ | 0.17 | $ | (0.14 | ) | $ | 0.35 | $ | 0.37 | $ | 0.41 | $ | (0.05 | ) | $ | 0.38 | $ | 0.42 | ||||||||||||||
|
Quarterly
sales as % of year's sales
|
22.8 | % | 17.7 | % | 29.5 | % | 30.0 | % | 26.7 | % | 18.4 | % | 26.7 | % | 28.1 | % | ||||||||||||||||
|
Quarterly
gross profit as % of year's gross profit
|
24.5 | % | 17.0 | % | 29.0 | % | 29.5 | % | 28.2 | % | 18.1 | % | 26.2 | % | 27.5 | % | ||||||||||||||||
|
Quarterly
income (loss) from operations as % of
|
||||||||||||||||||||||||||||||||
|
year's
income from operations
|
25.2 | % | -8.1 | % | 41.1 | % | 41.9 | % | 34.5 | % | 1.3 | % | 30.8 | % | 33.4 | % | ||||||||||||||||
Impact
of inflation
We believe that our results of
operations are not materially impacted by moderate changes in the inflation
rate. In general, we have been able to pass on price increases from our vendors
to our customers in a timely manner. Inflation and changing prices
did not have a material impact on our operations in 2010 or 2009. However,
during the fourth quarter of 2008, we experienced unusual and frequent price
increases in many our products that are derived from petroleum-based raw
materials, especially asphalt shingles in our residential roofing products. We
estimate that this unusual inflation increased our 2008 sales by approximately
2.1% and our fourth quarter 2008 sales by approximately 7% above historical
annual inflation for our industry. We further estimate that this caused a
temporary increase in our gross margin of approximately 60 basis points for the
fourth quarter. We also estimate that this inflation increased our
2008 gross profit by approximately $11.5 million, net income by $4.7 million and
fully diluted earnings per share by $0.11.
25 of
63
Liquidity
and capital resources
We had
cash and cash equivalents of $117.1 million at September 30, 2010 compared
to $82.7 million at September 30, 2009. Our net working capital was
$367.6 million at September 30, 2010 compared to $334.9 million at
September 30, 2009.
2010
compared to 2009
Our net cash provided by operating
activities was $74.5 million in 2010 compared to $87.6 million in
2009. The lower cash from operations was partially due to the drop of $17.9
million in our net income. The following mentioned changes in working
capital exclude the impact of businesses acquired. Accounts payable and accrued
expenses decreased $39.1 million in 2010, reflecting the impact from lower
purchasing levels associated with our effort to decrease inventories in the
fourth quarter. Accounts receivable increased by $6.5 million in 2010
mostly due to the higher sales mix of non-residential roofing products that
generally have longer payment terms (the number of days outstanding for accounts
receivable increased due to the same factor). Inventories, with a decline of
$41.0 million, was a favorable offset to the preceding negative influences on
cash, as we curtailed the previously high level of special buys late in 2010 due
to a more stable pricing climate from our asphalt shingle
suppliers. Inventory turns, based upon average inventory for the
fourth quarter, were flat year over year. Also, we saw a favorable
decrease of $8.7 million in prepaid expenses and other assets, including the
impact from a drop in escrows (associated with acquisitions) and lower rebates
receivable resulting from the lower purchases in the fourth
quarter.
Net cash
used in investing activities was $29.4 million in 2010 compared to
$13.7 million in 2009. This increase was mainly due to the cost of our
acquisitions, partially offset by lower capital spending for transportation and
material handling equipment. We continue to closely manage our capital
expenditures during these challenging economic times and we expect fiscal year
2011 capital expenditures to total between 0.7% to 1.0% of net sales, mostly
dependent upon our sales volume and exclusive of the impact of branch
openings.
Net cash
used by financing activities was $10.8 million in 2010 compared to
$17.6 million in 2009. These amounts primarily reflected repayments under
our credit facilities, partially offset by proceeds from the exercise of stock
options.
2009
compared to 2008
Our net
cash provided by operating activities was $87.6 million in 2009 compared to
$49.6 million in 2008. In addition to the benefit from improved operating
results, accounts receivable decreased by $56.1 million in 2009 due primarily to
the collection of the high prior year-end receivables and the lower 2009 fourth
quarter sales. In addition, inventories decreased by $14.2 million due to the
lower sales and purchasing activity. The favorable impact from those changes was
partially offset by a decrease of $67.5 million in accounts payable and accrued
expenses, due to lower fourth quarter purchasing levels, voluntary accelerated
payments to certain vendors in order to receive additional discounted terms, and
the payment of previously accrued income taxes. An increase of $2.3 million in
prepaid expenses and other assets was also an unfavorable impact on cash from
operating activities. The number of days outstanding for accounts receivable,
based upon sales for each year, decreased in 2009 from 2008 mainly from the
favorable impact of a higher mix of residential roofing products (which have
shorter payment terms), while inventory turns were up slightly in 2009 as
compared to 2008.
Net cash
used in investing activities increased by $8.0 million in 2009 to
$13.7 million from $5.7 million in 2008, due primarily to
increased capital spending for transportation and material handling equipment,
and the purchase of the land and building at one of our prior leased facilities
for approximately $2.0 million.
Net cash
used by financing activities was $17.6 million in 2009 compared to
$23.8 million in 2008. These amounts primarily reflect repayments under our
credit facilities.
Capital
Resources
Our principal source of liquidity at
September 30, 2010 was our cash and cash equivalents of $117.1 million and
our available borrowings of $159.9 million under revolving lines of credit.
Our borrowing base availability is determined primarily by trade accounts
receivable, less outstanding borrowings. Borrowings outstanding under the
revolving lines of credit in the accompanying balance sheet at September 30,
2010 and 2009 were classified as short-term debt because we paid off those
borrowings subsequent to the respective year-ends and there is no current
expectation of a minimum level of outstanding revolver borrowings during the
subsequent 12 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. Our cash equivalents are comprised of highly liquid money
market funds which invest in commercial paper or bonds with a rating of A-1 or
better.
Significant factors which could affect
future liquidity include the following:
|
|
•
|
the
adequacy of available bank lines of
credit;
|
|
|
•
|
the
ability to attract long-term capital with satisfactory
terms;
|
26 of
63
|
|
•
|
cash
flows generated from operating
activities;
|
|
|
•
|
acquisitions;
and
|
|
|
•
|
capital
expenditures.
|
Our primary capital needs are for
working capital obligations and other general corporate purposes, including
acquisitions and capital expenditures. Our primary sources of working capital
are cash from operations and cash equivalents, supplemented by bank borrowings.
In the past, we have paid for acquisitions from cash on hand or financed them
initially through increased bank borrowings, the issuance of common stock and/or
other borrowings. We then repay any such borrowings with cash flows from
operations. We have funded our past capital expenditures through increased bank
borrowings, including equipment financing, or through capital leases, and then
have reduced these 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 continually seek potential
acquisitions and from time to time hold discussions with 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 strong base for obtaining additional financing
resources at competitive 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:
|
|
•
|
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, 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 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 $159.9 million available for borrowings and less than
$0.1 million was outstanding under the US Revolver and Canadian Revolver at
September 30, 2010. There were $4.6 million of outstanding standby letters
of credit at September 30, 2010. The Term Loan requires amortization of 1% per
year, payable in quarterly installments of approximately $0.8 million, plus
any required prepayments under the Excess Cash Flow, discussed below, and with
the remainder 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:
Excess
Cash Flow
On May 15 of each fiscal year,
commencing on May 15, 2008, 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 2010, we will be required to make a $7.0 million payment by May 15,
2011. The amounts payable under this provision were classified as
short-term debt at September 30, 2010 and 2009.
Interest
Interest on borrowings under the U.S.
credit facility is payable at our election at either of the following
rates:
|
|
•
|
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.
|
|
|
•
|
the
current LIBOR Rate plus a margin of 1.00% (for US Revolver loans) or 2.00%
(for Term Loan).
|
27 of
63
Interest under the Canadian credit
facility is payable at our election at either of the following
rates:
|
|
•
|
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
|
|
|
•
|
the
BA rate as described in the Canadian facility plus
1.00%.
|
The US Revolver currently carries an
interest rate at the base rate (3.25% at September 30, 2010), while the Canada
revolver carries an interest rate of the Canadian prime rate plus 0.75% (3.00%
at September 30, 2010), and the Term Loan carries an interest rate of LIBOR plus
2% (2.53% and 2.26% for two LIBOR arrangements under the Term Loan at September
30, 2010). 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 September 30, 2010, this ratio was 2.11:1.0.
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 September 30, 2010, 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 Facilities
As of September 30, 2010, there was
$15.0 million outstanding under prior equipment financing facilities, with fixed
interest rates ranging from 4.1% to 7.4% and payments due through September
2014. Our current equipment financing facility provides for financing up to $5.5
million of purchased transportation and material handling equipment through May
1, 2011 at an interest rate approximately 2% above the 5-year term swap rate at
the time of the advances. There were no amounts outstanding under this
current facility at September 30, 2010.
Contractual
Obligations
At September 30, 2010, our contractual
obligations were as follows:
|
Fiscal
years
|
||||||||||||||||||||||||
|
2011
|
2012
|
2013
|
2014
|
2015
|
Thereafter
|
|||||||||||||||||||
|
Senior
bank debt and revolver
|
$ | 10.4 | $ | 3.4 | $ | 308.4 | $ | - | $ | - | $ | - | ||||||||||||
|
Equipment
financing
|
5.4 | 4.7 | 3.0 | 1.9 | - | - | ||||||||||||||||||
|
Operating
leases
|
23.3 | 20.2 | 14.6 | 12.0 | 7.9 | 3.5 | ||||||||||||||||||
|
Interest
(1)
|
13.8 | 13.6 | 11.0 | 0.5 | - | - | ||||||||||||||||||
|
Non-cancelable
purchase obligations (2)
|
- | - | - | - | - | - | ||||||||||||||||||
|
Total
|
$ | 52.9 | $ | 41.9 | $ | 337.0 | $ | 14.4 | $ | 7.9 | $ | 3.5 | ||||||||||||
|
|
(1)
|
Interest
payments reflect all currently scheduled amounts along with projected
amounts to be paid under the senior bank debt using a LIBOR Curve to
estimate the future interest rates and considering our current interest
rate hedges.
|
|
|
(2)
|
In
general, we purchase products under purchase obligations that are
cancelable by us without cost or expire after
30 days.
|
Capital
Expenditures
Excluding acquisitions, we incurred net
capital expenditures of $10.1, $13.7 and $5.7 million in 2010, 2009 and
2008, respectively. Typically, over 80% of our capital expenditures have
generally been made for transportation and material handling equipment. In 2010
and 2009, we incurred a higher spend rate (with capital expenditures at 0.6% and
0.8% of sales, respectively) after we substantially reduced capital expenditures
in 2008 (0.3% of sales) due to the business slowdown. We expect future annual
capital expenditures beyond 2011 to total closer to 1.0% of net sales, exclusive
of the impact of new branch openings and assuming improved economic and industry
conditions.
28 of
63
Off-Balance
Sheet Arrangements
We have no off-balance sheet
arrangements.
Critical
accounting policies
Critical accounting policies are those
that are both important to the accurate portrayal of a company's financial
condition and results and require subjective or complex judgments, often as a
result of the need to make estimates about the effect of matters that are
inherently uncertain.
In order to prepare financial
statements that conform to accounting principles generally accepted in the
United States, commonly referred to as U.S. GAAP, we make estimates and
assumptions that affect the amounts reported in our financial statements and
accompanying notes. Certain estimates are particularly sensitive due to their
significance to the financial statements and the possibility that future events
may be significantly different from our expectations.
We have identified the following
accounting policies that require us to make the most subjective or complex
judgments in order to fairly present our consolidated financial position and
results of operations.
Stock-Based
Compensation
We account for employee and
non-employee director stock-based compensation using the fair value method of
accounting. 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, which represents the requisite service period.
We estimate forfeitures in calculating the expense related to stock-based
compensation. In addition, we report the benefits of tax deductions in excess of
recognized compensation cost as both a financing cash inflow and an operating
cash outflow. The excess tax benefit classified as a financing activity would
have been classified as an operating inflow if we did not use the fair value
method.
Interest
Rate Swaps
We enter into interest rate swaps 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
are contracts to exchange variable-rate for fixed-interest rate payments over
the life of the agreements. Our current 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.
Allowance
for Doubtful Accounts
We maintain an allowance for doubtful
accounts for estimated losses due to the failure of our customers to make
required payments. We perform periodic credit evaluations of our customers and
typically do not require collateral, although we typically obtain payment and
performance bonds for any type of public work and have the ability to lien
projects under certain circumstances. Consistent with industry practices, we
require payment from most customers within 30 days, except for sales to our
commercial roofing contractors, which we typically require to pay in
60 days.
As our business is seasonal in certain
regions, our customers' businesses are also seasonal. Sales are lowest in the
winter months and our past due accounts receivable balance as a percentage of
total receivables generally increases during this time. Throughout the year, we
record estimated reserves based upon our judgment of specific customer
situations, aging of accounts and our historical write-offs of uncollectible
accounts.
Periodically, we perform a specific
analysis of all accounts past due and write off account balances when we have
exhausted reasonable collection efforts and determined that the likelihood of
collection is remote based upon the following factors:
|
|
•
|
aging
statistics and trends;
|
|
|
•
|
customer
payment history;
|
|
|
•
|
review
of the customer’s financial statements when
available;
|
|
|
•
|
independent
credit reports; and
|
|
|
•
|
discussions
with customers.
|
We charge these write-offs against our
allowance for doubtful accounts. In the past, bad debts typically averaged
approximately 0.3% of net sales. In 2010, bad debts were back to
slightly lower than normal levels at 0.2% of net sales after we experienced
increases to 0.4% and 0.6% of net sales in 2009 and 2008, respectively, which
were still within our tolerances in consideration of the tougher economic and
credit climate.
29 of
63
Inventory
Valuation
Product inventories represent one of
our largest assets and are recorded at net realizable value. Our goal is to
manage our inventory so that we minimize out of stock positions. To do this, we
maintain an adequate inventory of SKUs at each branch based on sales history. At
the same time, we continuously strive to better manage our slower moving classes
of inventory. We monitor our inventory levels by branch and record provisions
for excess inventories based on slower moving inventory. We define potential
excess inventory as the amount of inventory on hand in excess of the historical
usage, excluding items purchased in the last three months. We then apply our
judgment as to forecasted demand and other factors, including liquidation value,
to determine the required adjustments to net realizable value. In addition, at
the end of each year, we evaluate our inventory at each branch and write off and
dispose of obsolete products. Our inventories are generally not susceptible to
technological obsolescence.
During the year, we perform periodic
cycle counts and write off excess or damaged inventory as needed. At year-end,
we take a physical inventory and record any necessary additional
write-offs.
Vendor
Rebates
Our typical rebate arrangements with
our vendors provide for us to receive a rebate of a specified amount, payable to
us when we achieve any of a number of measures generally related to the volume
of purchases from our vendors. We account for these rebates as a reduction of
the prices of the related vendors' products, which reduces the inventory cost
until the period in which we sell the product, at which time these rebates
reduce cost of sales in our income statement. Throughout the year, we estimate
the amount of rebates receivable based upon the expected level of purchases. We
continually revise these estimates to reflect actual rebates earned based on
actual purchase levels. Historically, our actual rebates have been within our
expectations used for our estimates. If we fail to achieve a measure which is
required to obtain a vendor rebate, we will have to record a charge in the
period that we determine the criteria or measure for the vendor rebate will not
be met to the extent the vendor rebate was estimated and included as a reduction
to cost of sales.
If market conditions were to change,
vendors may change the terms of some or all of these programs. Although these
changes would not affect the amounts which we have recorded related to products
already purchased, it may impact our gross margin on products we sell or
revenues earned in future periods.
Revenue
Recognition
We recognize revenue when the following
four basic criteria are met:
|
|
•
|
persuasive
evidence of an arrangement exists;
|
|
|
•
|
delivery
has occurred or services have been
rendered;
|
|
|
•
|
the
price to the buyer is fixed or determinable;
and
|
|
|
•
|
collectability
is reasonably assured.
|
We generally recognize revenue at the
point of sale or upon delivery to the customer's site. For goods shipped by
third party carriers, we recognize revenue upon shipment since the terms are FOB
shipping point. Approximately 80% of our revenues are for products delivered by
us or picked up by our customers at our facilities, which provides for timely
and accurate revenue recognition.
We also ship certain products directly
from the manufacturer to the customer. Revenues are recognized upon
notifications of deliveries from our vendors. Delays in receiving delivery
notifications could impact our financial results, although it has not been
material to our consolidated results of operations in the past.
We also provide certain job site
delivery services, which include crane rentals and rooftop deliveries of certain
products, for which the associated revenues are recognized upon completion of
the services. These revenues represent less than 1% of our net
sales.
All revenues recognized are net of
sales taxes collected, allowances for discounts and estimated returns, which are
provided for at the time of pick up or delivery. In the past, customer returns
have not been material to our consolidated results of operations. All sales
taxes collected are subsequently remitted to the appropriate government
authorities.
Income
Taxes
We account for income taxes using the
liability method, which requires us to recognize a current tax liability or
asset for current taxes payable or refundable and a deferred tax liability or
asset for the estimated future tax effects of temporary differences between the
financial statement and tax reporting bases of assets and liabilities to the
extent that they are realizable. Deferred tax expense (benefit) results from the
net change in deferred tax assets and liabilities during the
year.
30 of
63
We have operations in 37 U.S. states
and three provinces in Canada and we are subject to potential tax audits in each
of these jurisdictions and federally in both the United States and Canada. These
audits may involve complex issues, which may require an extended period of time
to resolve. Accruals for uncertain tax positions require us to make estimates
and judgments with respect to the ultimate outcome of potential tax audits.
Actual results could differ from these estimates.
FASB ASC Topic 740, Income Taxes)
prescribes a recognition threshold and measurement attribute for the financial
statement recognition and measurement of a tax position taken or expected to be
taken in a tax return. Based on this guidance, we analyze our filing
positions in all of the federal and state jurisdictions where we are required to
file income tax returns, as well as all open tax years in these
jurisdictions. Tax benefits from uncertain tax positions are
recognized if it is more likely than not that the position is sustainable based
solely on its technical merits.
Goodwill
Goodwill represents the excess paid to
acquire businesses over the estimated fair value of tangible and identifiable
intangible assets acquired, less liabilities assumed. At September 30, 2010, our
goodwill balance was $365.1 million, representing approximately 35% of our
total assets.
We test goodwill for impairment in the
fourth quarter of each fiscal year or at any other time when impairment
indicators exist. Examples of such indicators include a significant change in
the business climate, unexpected competition, loss of key personnel or a decline
in our market capitalization below our net book value. In performing the
impairment test, we utilize a two-step approach. The first step requires a
comparison of each reporting unit’s fair value to the respective carrying value.
If the carrying value exceeds the fair value, a second step is performed to
measure the amount of impairment loss, if any.
We assess
goodwill for impairment at the reporting unit level, which is defined as an
operating segment or one level below an operating segment, referred to as a
component (defined as a business for which discrete financial information is
available and regularly reviewed by component managers), which in our case is
our regions. We aggregate components within a reporting unit that have similar
economic characteristics. We evaluate the distribution methods, sales
mix, and operating results of each of our regions to determine if these
characteristics have or will be sustained over a long-term basis. For purposes
of this evaluation, we would expect our regions to exhibit similar economic
characteristics 3-5 years after events such as an acquisition within our core
roofing business or management/business restructuring. This evaluation also
considers major storm activity or local economic challenges that may impact the
short term operations of the region. Based on our evaluation at
September 30, 2010, two of our regions did not exhibit similar economic
characteristics and therefore were individually evaluated for goodwill
impairment as separate reporting units. The remaining components were
aggregated into a third reporting unit (the “Aggregated Reporting Unit”) and
tested in total for goodwill impairment.
The fair
value of each reporting unit is estimated via reference to values generated by
market and income approaches. We believe the market approach generally provides
a meaningful indicator of fair value as it reflects the current value at which
shares of comparable companies are actively traded in a free and open
market. We believe the DCF provides a meaningful indicator of fair
value as it appropriately measures the value of the income producing assets and
reflects the income potential that would establish the amount paid by a
potential buyer.
The
market approach considers prices at which comparable companies are trading in an
active marketplace as well as control premiums in buy/sell transactions for
comparable companies. Key assumptions used in the market approach and
applied to each reporting unit included:
|
|
§
|
The
use of comparable publicly traded companies, which we considered to be
distributors of industrial construction
products.
|
|
|
§
|
The
application of adjustments for a control premium, which were consistent
with premiums obtained in recent comparable
acquisitions.
|
The
income approach utilizes a discounted cash flow method (“DCF”) that estimates
after-tax cash flows on a debt-free basis, discounted to present value using a
risk-adjusted discount rate. The key assumptions used in each
reporting unit’s respective DCF approach included:
|
|
§
|
The
reporting unit’s five-year projections of financial results, which were
based on our strategic forecasts. Sales growth rates represent estimates
based on current and forecasted sales mix and market conditions. The
profit margins were projected by each reporting unit based on historical
margins, projected sales mix, current expense structure and anticipated
changes in expenses.
|
|
|
§
|
The
projected terminal value, which represents the total present value of
projected cash flows beyond the last period in the DCF. This value
reflected our estimate for stable, perpetual growth of each reporting
unit.
|
|
|
§
|
The
discount rate, which was set by using a weighted average cost of capital
method that considered market and industry
data.
|
Management
utilizes its company and industry experience to address these assumptions with
best estimates. There were no significant changes in the methods used
to determine the above estimates as compared to the prior year.
31 of
63
To
corroborate our calculations, we reconciled the Company’s total market
capitalization value to the sum of the fair values of the three reporting units.
Our market capitalization reflects an implied control premium consistent with
premiums indicated with the recent industry average.
Based on
our calculations, the fair values for the Aggregated Reporting Unit and one of
the two remaining reporting units significantly exceeded the respective carrying
values.
For the
remaining reporting unit, which had $70.8 million of goodwill, we calculated a
fair value that exceeded its carrying value by 6%. In addition to the estimates
resulting from the key assumptions discussed above, the projected cash flows
assume this reporting unit is able to take advantage of certain market
opportunities by expanding residential sales and increasing small to mid-sized
commercial projects. We believe our ability to achieve these
opportunities is consistent with our historical success in growing multiple
lines of business for previous acquisitions. The projected cash flows
also assume a recovery of the commercial markets, which we believe is reasonable
based on current industry projections.
While
management does not believe the following assumption changes are reasonably
likely to occur, for sensitivity purposes, we have considered the impact on the
remaining reporting unit’s valuation of increasing the discount rate and
decreasing the perpetual growth rate by 100 basis points each and reducing the
forecasted cash flows and market multiples by 10% each. These
analyses noted that except for the decrease in the perpetual growth rate, any
one of the above assumption changes would reduce the reporting unit’s fair value
to an amount that would be below its carrying value. As a result, if actual
operating results and/or the underlying assumptions used in the analyses differ
from expected, a future impairment charge may be necessary.
In the
event that the future operating results of any of our reporting units do not
meet our current expectations, we will consider taking other actions as
necessary to maximize profitability based upon conditions at the
time. Accordingly, the above sensitivity analysis, while a useful
tool, should not be used as a sole predictor of potential
impairment. A thorough analysis of all the facts and circumstances
existing at the time of such an evaluation would need to be performed to
determine if recording an impairment loss was appropriate.
Based on
the results of the first step of the impairment test for all reporting units,
the second step was not required and no impairment was recognized. If
circumstances change or events occur to indicate that the fair value of any of
our reporting units (under the guidelines discussed above) has fallen below its
carrying value, we will compare the estimated fair value of such reporting
unit’s goodwill to its carrying value. If the book value of the goodwill exceeds
the implied fair value of the goodwill, we will recognize the difference as an
impairment loss in the determination of operating income.
Adoption
of Recent Accounting Pronouncements
In December 2007, the Financial
Accounting Standards Board (FASB) issued guidance that significantly changes the
accounting for and reporting of business combination transactions and
non-controlling (minority) interests in consolidated financial statements. This
guidance was effective for us in fiscal year 2010. The adoption of this guidance
resulted in the expensing of certain costs incurred this year but did not have a
significant impact on our financial statements. However, this could have a
material impact on the accounting for our future acquisitions, depending on the
circumstances and the terms of the acquisitions.
In April
2009, the FASB issued disclosure guidance about fair value of financial
instruments in interim financial statements. This was effective for us at the
beginning of the third quarter of fiscal year 2009 but had no impact on our
financial statements.
In May
2009, the FASB issued guidance on subsequent events that establishes general
standards of accounting for and disclosure of events that occur after the
balance sheet date. We have evaluated all subsequent events under this
guidance.
In
June 2009, the FASB implemented the FASB Accounting Standards Codification
(“ASC”). Effective for interim and annual financial periods ended after
September 15, 2009, the ASC has become the source of authoritative
generally accepted accounting principles in the United States and supersedes all
existing non-SEC accounting and reporting standards. All other non-grandfathered
non-SEC accounting literature not included in the ASC has become
non-authoritative. This new guidance affected the way in which we referenced and
reported accounting and reporting standards, beginning with our fiscal year 2009
Annual Report.
Other
Recent Accounting Pronouncements
In October 2009, the FASB issued
guidance that amends the criteria for allocating a contract's consideration to
individual services or products in multiple deliverable arrangements. This
guidance is effective prospectively for revenue arrangements entered into or
materially modified in fiscal years beginning on or after June 15, 2010. We
will adopt this guidance beginning on October 1, 2010 but we do not expect
an impact on our financial statements.
32 of
63
In June 2009, the FASB issued guidance
that changes the way entities account for securitizations and special purpose
entities. This new guidance is effective for annual reporting periods beginning
after November 15, 2009. We will adopt this guidance beginning on
October 1, 2010 but do not expect an impact on our financial
statements.
ITEM
7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
We are exposed to certain market risks
as part of our on-going business operations. Our primary exposure includes
changes in interest rates and foreign exchange rates.
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 (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. 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 September 30, 2010, we had
$322.1 million of term loans and less than $0.1 million of revolving
credit outstanding under our Credit Facility. Our weighted-average effective
interest rate on that debt, after considering the effect of the interest rate
swaps, was 3.91% at September 30, 2010. A hypothetical 10% increase in interest
rates in effect at September 30, 2010, would have increased annual interest
expense on the borrowings outstanding at that date by approximately
$0.3 million.
We enter into interest rate swaps 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 aggregate fair
value of these swaps represented a loss of $11.1 million at September 30,
2010. A hypothetical increase (or decrease) of 10% in interest rates from the
level in effect at September 30, 2010, would result in an aggregate unrealized
gain or (loss) in value of the swaps of approximately $0.3 million or
($0.3) million, respectively.
Financial
Derivatives
We use 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 us 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 our derivative financial instruments is used to measure
interest to be paid or received and does not represent our exposure due to
credit risk. Our current derivative instruments are with counterparties rated
highly by nationally recognized credit rating agencies.
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. As of September 30,
2010, the following interest rate derivative instruments were outstanding:
a) a $100 million interest rate swap with interest payments at a fixed
rate of 2.72%; b) a $50 million interest rate swap with interest payments
at a fixed rate of 3.12%; and c) a $50 million interest rate swap with
interest payments at a fixed rate of 3.11%. These interest rate swaps expire in
April 2013.
These derivative instruments are
designated as cash flow hedges, for which we record the effective portions of
changes in their fair value, net of taxes, in other comprehensive income. The
effectiveness of the hedges is periodically assessed by us during the lives of
the hedges by 1) comparing the current terms of the hedges with the related
hedged debt to assure they continue to coincide and 2) through an evaluation of
the counterparties’ ability 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.
We record any differences paid or
received on its interest rate hedges as adjustments to interest
expense. Since inception, we have not recognized any gains or losses
on these hedges. The table below presents the combined fair values of the
interest rate derivative instruments on the indicated balance
sheets:
33 of
63
|
Unrealized Losses
|
||||||||||||
|
September 30,
|
September 30,
|
September 30,
|
||||||||||
|
Location on Balance Sheet
|
2010
|
2009
|
2008
|
|||||||||
|
(Dollars in thousands)
|
||||||||||||
|
Accrued
expenses
|
$ | 11,084 | $ | 12,348 | $ | 7,396 | ||||||
The fair values of the interest rate
hedges 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 hedge agreements. These values reflect a Level 2 measurement under the
applicable fair value hierarchy.
Foreign
Currency Exchange Rate Risk
We have exposure to foreign currency
exchange rate fluctuations for revenues generated by our operations outside the
United States, which can adversely impact our net income and cash flows.
Approximately 7% of our revenues in 2010 were derived from sales to customers in
Canada. This business is primarily conducted in the local currency. This exposes
us to risks associated with changes in foreign currency that can adversely
affect revenues, net income and cash flows. We do not enter into financial
instruments to manage this foreign currency exchange risk.
34 of
63
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA
Beacon
Roofing Supply, Inc.
Index to consolidated financial
statements
|
Page
|
|
|
Report
of Independent Registered Public Accounting Firm
|
36
|
|
Consolidated
Balance Sheets as of September 30, 2010 and 2009
|
37
|
|
Consolidated
Statements of Operations for the Years Ended September 30, 2010, 2009 and
2008
|
38
|
|
Consolidated
Statements of Stockholders' Equity and Comprehensive Income for the Years
Ended September 30, 2010, 2010 and 2009
|
39
|
|
Consolidated
Statements of Cash Flows for the Years Ended September 30, 2010, 2009 and
2008
|
40
|
|
Notes
to Consolidated Financial Statements
|
41
|
35 of
63
Report
of Independent Registered Public Accounting Firm
The Board
of Directors and Shareholders of
Beacon
Roofing Supply, Inc.
We have audited the accompanying
consolidated balance sheets of Beacon Roofing Supply, Inc. (the Company) as
of September 30, 2010 and 2009 and the related consolidated statements of
operations, stockholders' equity and comprehensive income, and cash flows for
each of the three years in the period ended September 30, 2010. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance
with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial
statements referred to above present fairly, in all material respects, the
consolidated financial position of Beacon Roofing Supply, Inc. at September
30, 2010 and 2009, and the consolidated results of its operations and its cash
flows for each of the three years in the period ended September 30, 2010, in
conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance
with the standards of the Public Company Accounting Oversight Board (United
States), Beacon Roofing Supply, Inc.'s internal control over financial
reporting as of September 30, 2010, based on criteria established in Internal
Control-Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission and our report dated November 29, 2010 expressed an
unqualified opinion thereon.
As discussed in Note 1 to the
accompanying financial statements, as of October 1, 2009, the Company adopted
Accounting Standards Codification 805, Business
Combinations.
|
/s/
Ernst & Young LLP
|
|
|
Boston,
Massachusetts
|
|
|
November
29, 2010
|
36 of
63
Beacon
Roofing Supply, Inc.
Consolidated
Balance Sheets
|
September 30,
|
September 30,
|
|||||||
|
(Dollars
in thousands, except per share data)
|
2010
|
2009
|
||||||
|
Assets
|
||||||||
|
Current
assets:
|
||||||||
|
Cash
and cash equivalents
|
$ | 117,136 | $ | 82,742 | ||||
|
Accounts
receivable, less allowances of $11,817 in 2010 and $13,442 in
2009
|
241,341 | 227,379 | ||||||
|
Inventories
|
158,774 | 195,011 | ||||||
|
Prepaid
expenses and other current assets
|
43,115 | 52,714 | ||||||
|
Deferred
income taxes
|
17,178 | 19,323 | ||||||
|
Total
current assets
|
577,544 | 577,169 | ||||||
|
Property
and equipment, net
|
47,751 | 52,965 | ||||||
|
Goodwill
|
365,061 | 354,193 | ||||||
|
Other
assets, net
|
51,833 | 56,459 | ||||||
|
Total
assets
|
$ | 1,042,189 | $ | 1,040,786 | ||||
|
Liabilities
and stockholders' equity
|
||||||||
|
Current
liabilities:
|
||||||||
|
Accounts
payable
|
$ | 144,064 | $ | 151,683 | ||||
|
Accrued
expenses
|
50,132 | 75,536 | ||||||
|
Current
portions of long-term obligations
|
15,734 | 15,092 | ||||||
|
Total
current liabilities
|
209,930 | 242,311 | ||||||
|
Senior
notes payable, net of current portion
|
311,771 | 322,090 | ||||||
|
Deferred
income taxes
|
39,734 | 36,555 | ||||||
|
Long-term
obligations under equipment financing and other, net of current
portion
|
11,910 | 16,257 | ||||||
|
Commitments
and contingencies (Notes 9 and 14)
|
||||||||
|
Stockholders'
equity:
|
||||||||
|
Common
stock (voting); $.01 par value; 100,000,000 shares authorized; 45,663,858
issued in 2010 and 45,244,837 issued in 2009
|
457 | 452 | ||||||
|
Undesignated
Preferred Stock; 5,000,000 shares authorized, none issued or
outstanding
|
- | - | ||||||
|
Additional
paid-in capital
|
236,136 | 226,793 | ||||||
|
Retained
earnings
|
233,890 | 199,364 | ||||||
|
Accumulated
other comprehensive loss
|
(1,639 | ) | (3,036 | ) | ||||
|
Total
stockholders' equity
|
468,844 | 423,573 | ||||||
|
Total
liabilities and stockholders' equity
|
$ | 1,042,189 | $ | 1,040,786 | ||||
See
accompanying notes.
37 of
63
Beacon
Roofing Supply, Inc.
Consolidated Statements of
Operations
|
Year Ended
|
||||||||||||
|
September 30,
|
September 30,
|
September 30,
|
||||||||||
|
2010
|
2009
|
2008
|
||||||||||
|
(Dollars
in thousands, except per share data)
|
||||||||||||
|
Net
sales
|
$ | 1,609,969 | $ | 1,733,967 | $ | 1,784,495 | ||||||
|
Cost
of products sold
|
1,249,869 | 1,322,845 | 1,364,487 | |||||||||
|
Gross
profit
|
360,100 | 411,122 | 420,008 | |||||||||
|
Operating
expenses
|
286,583 | 301,913 | 325,298 | |||||||||
|
Income
from operations
|
73,517 | 109,209 | 94,710 | |||||||||
|
Interest
expense
|
18,210 | 22,887 | 25,904 | |||||||||
|
Income
before provision for income taxes
|
55,307 | 86,322 | 68,806 | |||||||||
|
Provision
for income taxes
|
20,781 | 33,904 | 28,500 | |||||||||
|
Net
income
|
$ | 34,526 | $ | 52,418 | $ | 40,306 | ||||||
|
Net
income per share:
|
||||||||||||
|
Basic
|
$ | 0.76 | $ | 1.16 | $ | 0.91 | ||||||
|
Diluted
|
$ | 0.75 | $ | 1.15 | $ | 0.90 | ||||||
|
Weighted
average shares used in computing net income per share:
|
||||||||||||
|
Basic
|
45,480,922 | 45,007,313 | 44,346,293 | |||||||||
|
Diluted
|
46,031,593 | 45,493,786 | 44,959,357 | |||||||||
See
accompanying notes.
38 of
63
Beacon
Roofing Supply, Inc.
Consolidated
Statements of Stockholders' Equity and Comprehensive Income
|
Common Stock
|
Accumulated
|
|||||||||||||||||||||||
|
Additional
|
Other
|
Total
|
||||||||||||||||||||||
|
Number
|
Paid-in
|
Retained
|
Comprehensive
|
Stockholders'
|
||||||||||||||||||||
|
(Dollars in thousands, except share data)
|
of Shares
|
Amount
|
Capital
|
Earnings
|
Income (Loss)
|
Equity
|
||||||||||||||||||
|
Balances
at September 30, 2007
|
44,273,312 | $ | 443 | $ | 211,567 | $ | 106,640 | $ | 5,200 | $ | 323,850 | |||||||||||||
|
Issuance
of common stock for option excercises
|
547,238 | 5 | 3,241 | 3,246 | ||||||||||||||||||||
|
Stock-based
compensation
|
4,861 | 4,861 | ||||||||||||||||||||||
|
Net
income
|
40,306 | 40,306 | ||||||||||||||||||||||
|
Foreign
currency translation adjustment
|
(3,401 | ) | ||||||||||||||||||||||
|
Tax
effect
|
1,011 | |||||||||||||||||||||||
|
Foreign
currency translation adjustment, net
|
(2,390 | ) | (2,390 | ) | ||||||||||||||||||||
|
Unrealized
loss on financial derivatives
|
(5,306 | ) | ||||||||||||||||||||||
|
Tax
effect
|
2,134 | |||||||||||||||||||||||
|
Unrealized
loss on financial derivatives, net
|
(3,172 | ) | (3,172 | ) | ||||||||||||||||||||
|
Comprehensive
income
|
34,744 | |||||||||||||||||||||||
|
Balances
at September 30, 2008
|
44,820,550 | 448 | 219,669 | 146,946 | (362 | ) | 366,701 | |||||||||||||||||
|
Issuance
of common stock for option excercises
|
424,287 | 4 | 2,344 | 2,348 | ||||||||||||||||||||
|
Stock-based
compensation
|
4,780 | 4,780 | ||||||||||||||||||||||
|
Net
income
|
52,418 | 52,418 | ||||||||||||||||||||||
|
Foreign
currency translation adjustment
|
163 | |||||||||||||||||||||||
|
Tax
effect
|
123 | |||||||||||||||||||||||
|
Foreign
currency translation adjustment, net
|
286 | 286 | ||||||||||||||||||||||
|
Unrealized
loss on financial derivatives
|
(4,952 | ) | ||||||||||||||||||||||
|
Tax
effect
|
1,992 | |||||||||||||||||||||||
|
Unrealized
loss on financial derivatives, net
|
(2,960 | ) | (2,960 | ) | ||||||||||||||||||||
|
Comprehensive
income
|
49,744 | |||||||||||||||||||||||
|
Balances
at September 30, 2009
|
45,244,837 | 452 | 226,793 | 199,364 | (3,036 | ) | 423,573 | |||||||||||||||||
|
Issuance
of common stock for option excercises
|
419,021 | 5 | 4,342 | 4,347 | ||||||||||||||||||||
|
Stock-based
compensation
|
5,001 | 5,001 | ||||||||||||||||||||||
|
Net
income
|
34,526 | 34,526 | ||||||||||||||||||||||
|
Foreign
currency translation adjustment
|
1,731 | |||||||||||||||||||||||
|
Tax
effect
|
(911 | ) | ||||||||||||||||||||||
|
Foreign
currency translation adjustment, net
|
820 | 820 | ||||||||||||||||||||||
|
Unrealized
loss on financial derivatives
|
1,264 | |||||||||||||||||||||||
|
Tax
effect
|
(687 | ) | ||||||||||||||||||||||
|
Unrealized
loss on financial derivatives, net
|
577 | 577 | ||||||||||||||||||||||
|
Comprehensive
income
|
35,923 | |||||||||||||||||||||||
|
Balances
at September 30, 2010
|
45,663,858 | $ | 457 | $ | 236,136 | $ | 233,890 | $ | (1,639 | ) | $ | 468,844 | ||||||||||||
See
accompanying notes.
39 of
63
Beacon Roofing
Supply, Inc.
Consolidated
Statements of Cash Flows
|
Year Ended
|
||||||||||||
|
(In thousands)
|
September 30,
|
September 30,
|
September 30,
|
|||||||||
|
2010
|
2009
|
2008
|
||||||||||
|
Operating
activities
|
||||||||||||
|
Net
income
|
$ | 34,526 | $ | 52,418 | $ | 40,306 | ||||||
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
||||||||||||
|
Depreciation
and amortization
|
27,773 | 30,389 | 34,240 | |||||||||
|
Stock-based
compensation
|
5,001 | 4,780 | 4,861 | |||||||||
|
Deferred
income taxes
|
3,060 | (599 | ) | (2,838 | ) | |||||||
|
Changes
in assets and liabilities, net of the effects of businesses
acquired:
|
||||||||||||
|
Accounts
receivable
|
(6,486 | ) | 56,143 | (17,434 | ) | |||||||
|
Inventories
|
40,952 | 14,168 | (44,050 | ) | ||||||||
|
Prepaid
expenses and other assets
|
8,723 | (2,256 | ) | (9,645 | ) | |||||||
|
Accounts
payable and accrued expenses
|
(39,051 | ) | (67,467 | ) | 44,127 | |||||||
|
Net
cash provided by operating activities
|
74,498 | 87,576 | 49,567 | |||||||||
|
Investing
activities
|
||||||||||||
|
Purchases
of property and equipment, net of sale proceeds
|
(10,107 | ) | (13,656 | ) | (5,739 | ) | ||||||
|
Acquisition
of businesses
|
(19,328 | ) | - | - | ||||||||
|
Net
cash used in investing activities
|
(29,435 | ) | (13,656 | ) | (5,739 | ) | ||||||
|
Financing
activities
|
||||||||||||
|
Repayments
under revolving lines of credit
|
67 | (4,955 | ) | (20,899 | ) | |||||||
|
Borrowings
(repayments) under senior notes payable, and other
|
(15,193 | ) | (14,969 | ) | (6,131 | ) | ||||||
|
Proceeds
from exercise of options
|
3,561 | 1,717 | 1,302 | |||||||||
|
Income
tax benefit from stock-based compensation deductions in excess of the
associated compensation cost
|
786 | 631 | 1,944 | |||||||||
|
Net
cash used by financing activities
|
(10,779 | ) | (17,576 | ) | (23,784 | ) | ||||||
|
Effect
of exchange rate changes on cash
|
110 | 360 | (475 | ) | ||||||||
|
Net
increase in cash and cash equivalents
|
34,394 | 56,704 | 19,569 | |||||||||
|
Cash
and cash equivalents at beginning of year
|
82,742 | 26,038 | 6,469 | |||||||||
|
Cash
and cash equivalents at end of year
|
$ | 117,136 | $ | 82,742 | $ | 26,038 | ||||||
|
Cash
paid during the year for:
|
||||||||||||
|
Interest
|
$ | 20,560 | $ | 22,929 | $ | 26,924 | ||||||
|
Income
taxes, net of refunds
|
$ | 16,907 | $ | 49,805 | $ | 11,695 | ||||||
See
accompanying notes
40 of
63
Beacon Roofing
Supply, Inc.
Notes
to Consolidated Financial Statements
Year
Ended September 30, 2010
(dollars
in thousands, except per share data or as otherwise indicated)
1.
The Company
Business
Beacon
Roofing Supply, Inc. (the "Company"), which was formed on August 22,
1997, distributes roofing materials and other complementary building materials
to customers in 37 states and three provinces in Canada and is incorporated in
Delaware. The Company operates its United States business under regional trade
names associated with former subsidiary corporate names. The Company’s current
subsidiaries are Beacon Sales Acquisition, Inc., Beacon Canada, Inc. and
Beacon Roofing Supply Canada Company, along with two other Canadian entities
acquired in 2010: Posi-Slope Enterprises, Inc. and Posi-Pentes, Inc. Prior to
fiscal year 2010, the Company operated its U.S. business through its
wholly-owned subsidiaries: Beacon Sales Acquisition, Inc., Quality Roofing
Supply Company, Inc., Best Distributing Co., The Roof Center, Inc.,
West End Lumber Company, Inc., JGA Beacon, Inc, Shelter
Distribution, Inc., Beacon Pacific, Inc. and North Coast Commercial
Roofing Systems, Inc. On October 1, 2009, the Company merged all of its
U.S. subsidiaries into Beacon Sales Acquisition, Inc.
Estimates
The
preparation of consolidated financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, and disclosures of contingent assets and liabilities, at the date
of the consolidated financial statements. Actual amounts could differ from those
estimates.
Adoption
of Recent Accounting Pronouncements
In
December 2007, the Financial Accounting Standards Board (FASB) issued guidance
that significantly changes the accounting for and reporting of business
combination transactions and non-controlling (minority) interests in
consolidated financial statements. This guidance was effective for the Company
in fiscal year 2010. The adoption of this guidance resulted in the expensing of
certain costs incurred this year but did not have a significant impact on the
financial statements. However, this could have a material impact on the
accounting for the Company’s future acquisitions, depending on the circumstances
and the terms of the acquisitions.
In April
2009, the FASB issued disclosure guidance about fair value of financial
instruments in interim financial statements. This was effective for the Company
beginning in the third quarter of fiscal year 2009 but had no impact on the
financial statements.
In May
2009, the FASB issued guidance on subsequent events that establishes general
standards of accounting for and disclosure of events that occur after the
balance sheet date. The Company has evaluated all subsequent events under this
guidance.
In
June 2009, the FASB implemented the FASB Accounting Standards Codification
(“ASC”). Effective for interim and annual financial periods ended after
September 15, 2009, the ASC has become the source of authoritative
generally accepted accounting principles in the United States and supersedes all
existing non-SEC accounting and reporting standards. All other non-grandfathered
non-SEC accounting literature not included in the ASC has become
non-authoritative. This new guidance affected the way in which the Company
references and reports accounting and reporting standards, beginning with its
fiscal year 2009 Annual Report.
Effective
October 1, 2008, the Company followed guidance from the FASB that clarified the
fair value objective and established a framework for developing fair value
estimates. This new guidance also established a fair value hierarchy that
prioritized 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. Please refer to Note 17 for the related
disclosures.
Also
beginning October 1, 2008, FASB guidance permits companies to measure many
financial instruments and certain other items at fair value at specified
election dates. There was no impact on the financial statements from this change
as the Company chose to retain its current accounting valuation methods for
those items.
In March
2008, the FASB issued guidance that required 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, and (c) how derivative instruments
and related hedged items affect an entity’s financial position, financial
performance and cash flows. This guidance was effective for the Company in the
quarter ended March 31, 2009. Please refer to Note 17 for the related
disclosures.
41 of
63
2.
Summary of Significant Accounting Policies
Consolidation
The
consolidated financial statements include the accounts of the Company and its
wholly-owned subsidiaries. All inter-company transactions have been eliminated.
Certain reclassifications have been made to the prior year information to
conform to the current year presentation.
Fiscal
Year
The fiscal years ended September 30,
2010 ("2010"), September 30, 2009 (“2009”), and September 30, 2008 ("2008")
were all comprised of 52 weeks. Each of the Company's first three quarters ends
on the last day of the calendar month.
Industry
Segment Information
Based on qualitative and quantitative
criteria, the Company has determined that it operates within one reportable
segment, which is the wholesale distribution of building materials. Please
refer to the “Goodwill” summary below for discussion of the Company’s reporting
units and the related impairment review.
Cash
and Cash Equivalents
The Company considers all highly liquid
investments with maturities of three months or less when purchased to be cash
equivalents. Cash and cash equivalents also include unsettled credit card
transactions. Cash equivalents are comprised of money market funds
which invest primarily in commercial paper or bonds with a rating of A-1 or
better.
Inventories
and Rebates
Inventories, consisting substantially
of finished goods, are valued at the lower of cost or market (net realizable
value). Cost is determined using the moving weighted-average cost
method.
The Company's arrangements with vendors
typically provide for monthly, quarterly and/or annual rebates of a specified
amount of consideration payable when a number of measures have been achieved,
generally related to a specified cumulative level of calendar-year purchases.
The Company accounts for such rebates as a reduction of the prices of the
vendor's inventory until the product is sold, at which time such rebates reduce
cost of sales in the consolidated statements of operations. Throughout the year,
the Company estimates the amount of the rebates based upon the expected level of
purchases. The Company continually revises these estimates to reflect actual
rebates earned based on actual purchase levels. Amounts due from vendors under
these arrangements as of September 30, 2010 and September 30, 2009 totaled $34.5
and $38.9 million, respectively, and are included in "Prepaid expenses and
other current assets" in the accompanying consolidated balance
sheets.
Property
and Equipment
Property and equipment acquired in
connection with acquisitions are recorded at fair value as of the date of the
acquisition and depreciated utilizing the straight-line method over the
remaining lives. All other additions are recorded at cost, and depreciation is
computed using the straight-line method over the following estimated useful
lives:
|
Asset
|
Estimated Useful Life
|
|
|
Buildings
and improvements
|
10
to 40 years
|
|
|
Equipment
|
3
to 10 years
|
|
|
Furniture
and fixtures
|
5
to 10 years
|
|
|
Leasehold
improvements
|
Shorter
of the estimated useful life or the term of the lease, considering renewal
options expected to be
exercised.
|
42 of
63
Revenue
Recognition
The
Company recognizes revenue when the following four basic criteria are
met:
•
persuasive evidence of an arrangement exists;
•
delivery has occurred or services have been
rendered;
•
the price to the buyer is fixed or determinable;
and
•
collectability is reasonably assured.
Based on
these criteria, the Company generally recognizes revenue at the point of sale or
upon delivery to the customer site. For goods shipped by third party carriers,
the Company recognizes revenue upon shipment since the terms are generally FOB
shipping point. The Company also arranges for certain products to be shipped
directly from the manufacturer to the customer. The Company recognizes the gross
revenue for these sales upon notifications of deliveries from the
vendors.
The
Company also provides certain job site delivery services, which include crane
rentals and rooftop deliveries of certain products, for which the associated
revenues are recognized upon completion of the services. These revenues
represent less than 1% of the Company's sales.
All
revenues recognized are net of sales taxes collected, allowances for discounts
and estimated returns, which are provided for at the time of pick up or
delivery. Sales taxes collected are subsequently remitted to the appropriate
government authorities.
Shipping
and Handling Costs
The
Company classifies shipping and handling costs, consisting of driver wages and
vehicle expenses, as operating expenses in the accompanying consolidated
statements of operations. Shipping and handling costs were approximately $67,528
in 2010, $68,470 in 2009, and $81,537 in 2008.
Financial
Derivatives
The
Company enters into interest rate swaps 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 are contracts to exchange
variable-rate for fixed-interest rate payments over the life of the agreements.
The Company's current derivative instruments are designated as cash flow hedges,
for which the Company records the effective portions of changes in their fair
value, net of tax, in other comprehensive income. The Company recognizes any
ineffective portion of the hedges in earnings, of which there has been none to
date.
Concentrations
of Risk
Financial
instruments, which potentially subject the Company to concentration of credit
risk, consist principally of accounts receivable. The Company's accounts
receivable are primarily from customers in the building industry located in the
United States and Canada. Concentration of credit risk with respect to accounts
receivable is limited due to the large number of customers comprising the
Company's customer base. The Company performs credit evaluations of its
customers; however, the Company's policy is not to require collateral. At
September 30, 2010 and 2009, the Company had no significant concentrations of
credit risk.
The
Company purchases a major portion of its products from a small number of
vendors. Approximately two-thirds of the Company's total cost of inventory
purchases were from 10 vendors in 2010, 7 vendors in 2009, and 9 vendors in
2008. In addition, more than 10% of the total cost of purchases were made from
each of three vendors in 2010, 2009 and 2008.
Impairment
of Long-Lived Assets
Impairment
losses are required to be recorded on long-lived assets when indicators of
impairment are present and the undiscounted cash flows estimated to be generated
by those assets are less than the assets' carrying value. If such assets are
considered to be impaired, the impairment to be recognized is the total by which
the carrying value exceeds the fair value of the assets.
Amortizable
and Other Intangible Assets
The
Company amortizes identifiable intangible assets consisting of non-compete
agreements, customer relationships and deferred financing costs because these
assets have finite lives. Non-compete agreements are generally amortized over
the terms of the associated contractual agreements; customer relationship assets
are amortized on an accelerated basis based on the expected cash flows generated
by the existing customers; and deferred financing costs are amortized over the
lives of the associated financings. Trademarks are not amortized because they
have indefinite lives. The Company evaluates its trademarks for impairment on an
annual basis based on the fair value of the underlying assets.
43 of
63
Goodwill
Goodwill
represents the excess paid to acquire businesses over the estimated fair value
of tangible and identifiable intangible assets acquired, less liabilities
assumed. The Company tests goodwill for impairment in the fourth quarter of each
fiscal year or at any other time when impairment indicators exist. Examples of
such indicators include a significant change in the business climate, unexpected
competition, loss of key personnel or a decline in the Company’s market
capitalization below net book value. In performing the impairment test, the
Company utilizes a two-step approach. The first step requires a comparison of
each reporting unit’s fair value to the respective carrying value. If the
carrying value exceeds the fair value, a second step is performed to measure the
amount of impairment loss, if any.
The
Company assesses goodwill for impairment at the reporting unit level, which is
defined as an operating segment or one level below an operating segment,
referred to as a component (defined as a business for which discrete financial
information is available and regularly reviewed by component managers), which in
the Company’s case is its regions. The Company aggregates components within a
reporting unit that have similar economic characteristics. The Company
evaluates the distribution methods, sales mix, and operating results of each of
its regions to determine if these characteristics have or will be sustained over
a long-term basis. For purposes of this evaluation, the Company would expect the
regions to exhibit similar economic characteristics 3-5 years after events such
as an acquisition within its core roofing business or management/business
restructuring. This evaluation also considers major storm activity or local
economic challenges that may impact the short term operations of the
region. Based on the Company’s evaluation at September 30, 2010, two of
its regions did not exhibit similar economic characteristics and therefore were
individually evaluated for goodwill impairment as separate reporting
units. The remaining components were aggregated into a third reporting
unit (the “Aggregated Reporting Unit”) and tested in total for goodwill
impairment.
The fair
value of each reporting unit is estimated via reference to values generated by
market and income approaches. The Company believes the market approach generally
provides a meaningful indicator of fair value as it reflects the current value
at which shares of comparable companies are actively traded in a free and open
market. The Company believes the income approach provides a meaningful
indicator of fair value as it appropriately measures the value of the income
producing assets and reflects the income potential that would establish the
amount paid by a potential buyer.
The
market approach considers prices at which comparable companies are trading in an
active marketplace as well as control premiums in buy/sell transactions for
comparable companies. Key assumptions used in the market approach and
applied to each reporting unit included:
|
|
§
|
The
use of comparable publicly traded companies, which the Company considered
to be distributors of industrial construction
products.
|
|
|
§
|
The
application of adjustments for a control premium, which were consistent
with premiums obtained in recent comparable
acquisitions.
|
The
income approach utilizes a discounted cash flow method (“DCF”) that estimates
after-tax cash flows on a debt-free basis, discounted to present value using a
risk-adjusted discount rate. The key assumptions used in each reporting
unit’s respective DCF approach included:
|
|
§
|
The
reporting unit’s five-year projections of financial results, which were
based on the Company's strategic forecasts. Sales growth rates represent
estimates based on current and forecasted sales mix and market conditions.
The profit margins were projected by each reporting unit based on
historical margins, projected sales mix, current expense structure and
anticipated changes in expenses.
|
|
|
§
|
The
projected terminal value, which represents the total present value of
projected cash flows beyond the last period in the DCF. This value
reflected an estimate for stable, perpetual growth of each reporting
unit.
|
|
|
§
|
The
discount rate, which was set by using a weighted average cost of capital
method that considered market and industry
data.
|
Management
utilizes Company and industry experience to address these assumptions with best
estimates. There were no significant changes in the methods used to
determine the above estimates as compared to the prior year.
Based on
the results of the first step of the impairment test for all reporting units,
the second step was not required and no impairment was recognized. If
circumstances change or events occur to indicate that the fair value of any of
the reporting units (under the guidelines discussed above) has fallen below its
carrying value, the Company will compare the estimated fair value of such
reporting unit’s goodwill to its carrying value. If the book value of the
goodwill exceeds the implied fair value of the goodwill, the Company will
recognize the difference as an impairment loss in the determination of operating
income.
Stock-Based
Compensation
The
Company accounts for employee and non-employee director stock-based compensation
using the fair value method of accounting. The Company estimates forfeitures in
calculating the expense related to stock-based compensation. In addition, the
Company reports the benefits of tax deductions in excess of recognized
compensation cost as both a financing cash inflow and an operating cash
outflow.
44 of
63
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,
which represents the requisite service period. As of September 30, 2010, there
was $5.7 million of total unrecognized compensation cost related to stock
options. That cost is expected to be recognized over a weighted-average period of 1.9 years.
The Company recorded stock-based compensation expense of $5.0 million
($3.0 million net of tax) or $0.07 per basic share and per diluted share in
2010, $4.8 million ($2.9 million net of tax) or $0.06 per basic share
and per diluted share in 2009, and $4.9 million ($2.9 million net of
tax) or $0.06 per basic share and per diluted share in 2008.
The fair
values of the options were estimated on the dates of the grants using the
Black-Scholes option-pricing model with the following weighted-average
assumptions:
|
Year Ended
|
||||||||||||
|
September 30,
|
September 30,
|
September 30,
|
||||||||||
|
2010
|
2009
|
2008
|
||||||||||
|
Dividend
yield
|
- | - | - | |||||||||
|
Expected
life in years
|
7 | 7 | 6 | |||||||||
|
Risk-free
interest rate
|
2.45 | % | 2.49 | % | 3.91 | % | ||||||
|
Expected
volatility
|
48.00 | % | 48.00 | % | 45.00 | % | ||||||
|
Weighted
average fair value of options granted
|
$ | 7.60 | $ | 6.35 | $ | 4.55 | ||||||
Expected
lives of the options granted are based primarily on historical option activity,
while expected volatilities are based on the historical volatilities of the
Company's stock and stocks of comparable public companies. Stock-based
compensation is recorded net of estimated forfeitures, which are based on
historical activity. Estimated cumulative forfeiture rates utilized during the
above periods did not exceed 15%. The risk-free interest rates are based on the
market yields on U.S. Treasury securities at a 5-year constant maturity, quoted
on an investment basis, on the dates of the grants. The Company has not paid any
cash dividends and does not anticipate paying dividends in the foreseeable
future.
Comprehensive
Loss
Accumulated
other comprehensive loss consisted of the following:
|
September
30,
|
September
30,
|
|||||||
|
2010
|
2009
|
|||||||
|
Foreign
currency translation adjustment
|
$ | 8,413 | $ | 6,683 | ||||
|
Tax
effect
|
(3,249 | ) | (2,338 | ) | ||||
|
Foreign
currency translation adjustment, net
|
5,164 | 4,345 | ||||||
|
Unrealized
loss on financial derivatives
|
(11,084 | ) | (12,348 | ) | ||||
|
Tax
effect
|
4,281 | 4,967 | ||||||
|
Unrealized
loss on financial derivatives, net
|
(6,803 | ) | (7,381 | ) | ||||
|
Accumulated
other comprehensive loss
|
$ | (1,639 | ) | $ | (3,036 | ) | ||
Net
Income per Share
Basic net
income per common share is computed by dividing net income by the weighted
average number of common shares outstanding. Diluted net income per common share
is computed by dividing net income by the weighted average number of common
shares and dilutive common share equivalents then outstanding using the treasury
stock method. Common equivalent shares consist of the incremental common shares
issuable upon the exercise of stock options.
The
following table reflects the calculation of weighted average shares outstanding
for each period presented:
45 of
63
|
Year Ended
|
||||||||||||
|
September 30,
|
September 30,
|
September 30,
|
||||||||||
|
2010
|
2009
|
2008
|
||||||||||
|
Weighted-average
common shares outstanding for basic
|
45,480,922 | 45,007,313 | 44,346,293 | |||||||||
|
Dilutive
effect of stock options
|
550,671 | 486,473 | 613,064 | |||||||||
|
Weighted-average
shares assuming dilution
|
46,031,593 | 45,493,786 | 44,959,357 | |||||||||
Fair
Value of Financial Instruments
Financial instruments consist mainly of
cash and cash equivalents, accounts receivable, accounts payable, borrowings
under the Company's revolving lines of credit and long-term debt. Except for the
long-term debt, these instruments are short-term in nature, and there is
currently no known trading market for the Company’s debt. Therefore, at
September 30, 2010 and 2009, the Company believes the carrying amounts of its
financial instruments approximated their fair values. Please refer to Note 17
for disclosures of the Company’s financial derivatives that are recorded at fair
value.
Income
Taxes
The Company accounts for income taxes
using the liability method, which requires it to recognize a current tax
liability or asset for current taxes payable or refundable and a deferred tax
liability or asset for the estimated future tax effects of temporary differences
between the financial statement and tax reporting bases of assets and
liabilities to the extent that they are realizable. Deferred tax expense
(benefit) results from the net change in deferred tax assets and liabilities
during the year.
FASB ASC Topic 740 prescribes a
recognition threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected to be taken in a
tax return. Based on this guidance, the Company analyzes its filing
positions in all of the federal and state jurisdictions where it is required to
file income tax returns, as well as all open tax years in these jurisdictions.
Tax benefits from uncertain tax positions are recognized if it is more likely
than not that the position is sustainable based solely on its technical
merits.
Foreign
Currency Translation
The assets and liabilities of the
Company's foreign subsidiary, Beacon Roofing Supply Canada Company ("BRSCC"),
are translated into U.S. dollars at current exchange rates as of the balance
sheet date, and revenues and expenses are translated at average monthly exchange
rates. Net unrealized translation gains or losses are recorded directly to a
separate component of stockholders' equity, net of the related deferred taxes.
Realized gains and losses from foreign currency transactions were not material
for any of the periods presented. The Company has inter-company debt from BRSCC,
which has been considered as long-term for financial reporting purposes since
repayment is not planned
or anticipated in the foreseeable future. Accordingly, the balance is marked to
market each period with a corresponding entry recorded as a separate component
of stockholders' equity.
Recent
Accounting Pronouncements
In
October 2009, the FASB issued guidance that amends the criteria for allocating a
contract's consideration to individual services or products in multiple
deliverable arrangements. This guidance is effective prospectively for revenue
arrangements entered into or materially modified in fiscal years beginning on or
after June 15, 2010. The Company will adopt this guidance beginning on
October 1, 2010 and does not expect an impact on the financial
statements.
In June 2009, the FASB issued guidance
that changes the way entities account for securitizations and special purpose
entities. This new guidance is effective for annual reporting periods beginning
after November 15, 2009. The Company believes this change will not have an
impact on its financial statements.
3.
Goodwill, Intangibles and Other Assets
Goodwill was $365,061 and $354,193 at
September 30, 2010 and 2009, respectively, of which $233,204 can be
amortized for income tax purposes. The Company's goodwill increased by $10,868
in 2010, due to goodwill associated with acquisitions of $10,365 and an increase
from foreign currency translation of $503, after a decrease of $76 in 2009 from
foreign currency translation.
46 of
63
Intangibles and other assets, included
in other long-term assets, consisted of the following:
|
September 30,
|
September 30,
|
|||||||
|
2010
|
2009
|
|||||||
|
Amortizable
intangible assets
|
||||||||
|
Non-compete
agreememts
|
$ | 5,553 | $ | 5,150 | ||||
|
Customer
relationships
|
92,076 | 88,746 | ||||||
|
Beneficial
lease arrangements
|
610 | 610 | ||||||
|
Deferred
financing costs and other
|
7,407 | 7,334 | ||||||
| 105,646 | 101,840 | |||||||
|
Less:
accumulated amortization
|
65,827 | 55,131 | ||||||
| 39,819 | 46,709 | |||||||
|
Unamortizable
trademarks
|
9,750 | 9,750 | ||||||
|
Other
assets
|
2,264 | - | ||||||
|
Total
other assets
|
$ | 51,833 | $ | 56,459 | ||||
Amortization expense related to
intangible assets amounted to approximately $10,696, $12,995, and $15,859 in
2010, 2009, and 2008, respectively. The intangible lives range from one to
fifteen years and the weighted average remaining life was 10.5 years at
September 30, 2010. Estimated future annual amortization for the above
intangible assets as of September 30, 2010 is as follows:
|
Future
|
||||
|
Amortization
|
||||
|
Year ending September
|
||||
|
2011
|
$ | 9,180 | ||
|
2012
|
7,384 | |||
|
2013
|
5,862 | |||
|
2014
|
4,068 | |||
|
2015
|
3,280 | |||
|
Thereafter
|
10,045 | |||
|
Total
future amortization
|
$ | 39,819 | ||
4.
Acquisitions
The Company acquired nine branches from
five acquisitions made during 2010 at a total cost of $19.3 million, with
resulting goodwill of $10.4 million. As of September 30, 2010, the purchase
price allocations for all of these acquisitions were preliminary. On July 16,
2010, the Company purchased the stock of Posi-Slope Enterprises, Inc. and its
sister company Posi-Pentes, Inc. (together “Posi-Slope”), which specialize in
the design and fabrication of tapered roof insulation systems. Posi-Slope has
two locations, in the Provinces of Ontario and Quebec, and services customers
throughout Canada. In April 2010, the Company purchased certain assets of
Phoenix Sales, Inc. ("Phoenix"), a distributor of commercial roofing systems and
related accessories with four branches located in Tampa, Orlando, Pompano and
Ft. Myers, Florida.
Also in April 2010, the Company purchased certain assets of Louisiana
Roofing Supply ("LRS"), a distributor of mostly residential roofing systems and
related accessories with one location in Baton Rouge, Louisiana. In February
2010, the Company purchased certain assets of Independent Building Materials,
LLC (“IBM”), a distributor of primarily residential roofing products with one
branch in Orlando, Florida. In December 2009, the Company purchased certain
assets of Lookout Supply Company (“Lookout”), a distributor of roofing products
and related accessories with one branch in Chattanooga,
Tennessee.
47 of
63
5.
Prepaid Expenses and Other Current Assets
The significant components of prepaid
expenses and other current assets were as follows:
|
September 30,
|
September 30,
|
|||||||
|
2010
|
2009
|
|||||||
|
Vendor
rebates
|
$ | 34,538 | $ | 38,857 | ||||
|
Refundable
income taxes
|
3,846 | 3,545 | ||||||
|
Other
|
4,731 | 10,312 | ||||||
| $ | 43,115 | $ | 52,714 | |||||
6.
Property and Equipment, net
Property and equipment, net, consisted
of the following:
|
September 30,
|
September 30,
|
|||||||
|
2010
|
2009
|
|||||||
|
Land
|
$ | 3,056 | $ | 3,190 | ||||
|
Buildings
and leasehold improvements
|
19,987 | 18,725 | ||||||
|
Equipment
|
107,548 | 100,731 | ||||||
|
Furniture
and fixtures
|
10,936 | 10,478 | ||||||
| 141,527 | 133,124 | |||||||
|
Less:
accumulated depreciation and amortization
|
93,776 | 80,159 | ||||||
| $ | 47,751 | $ | 52,965 | |||||
Depreciation and amortization of
property and equipment totaled $17,077, $17,389 and $18,381 in 2010, 2009 and
2008, respectively.
7.
Accrued Expenses
The significant components of accrued
expenses were as follows:
|
September 30,
|
September 30,
|
|||||||
|
2010
|
2009
|
|||||||
|
Uninvoiced
inventory receipts
|
$ | 7,739 | $ | 19,970 | ||||
|
Employee-related
accruals
|
13,498 | 18,736 | ||||||
|
Unrealized
loss on financial derivatives
|
11,084 | 12,348 | ||||||
|
Other
|
17,811 | 24,482 | ||||||
| $ | 50,132 | $ | 75,536 | |||||
8.
Financing Arrangements
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 provides for a cash receipts lock-box
arrangement that gives the Company 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 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 $159.9 million available for borrowings and less than
$0.1 million outstanding under the US Revolver and Canadian Revolver at
September 30, 2010. There were $4.6 million of outstanding standby letters
of credit at September 30, 2010.
48 of
63
The Term Loan requires amortization of
1% per year, payable in quarterly installments of approximately
$0.8 million, plus any required prepayments under the Excess Cash Flow 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:
Excess
Cash Flow
On May 15 of each fiscal year, the
Company 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 its results for 2010, the Company will
be required to make a $7.0 million payment by May 15, 2011. The amounts payable
of $7.0 million under this provision at September 30, 2010 and 2009 were
classified as short-term debt.
Interest
Interest on borrowings under the U.S.
credit facility is payable at the Company’s election at either of the following
rates:
|
|
•
|
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.
|
|
•
|
the
current LIBOR Rate plus a margin of 1.00% (for US Revolver loans) or 2.00%
(for Term Loan).
|
Interest under the Canadian credit
facility is payable at the Company’s election at either of the following
rates:
|
|
•
|
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
|
|
•
|
the
BA rate as described in the Canadian facility plus
1.00%.
|
The US Revolver currently carries an
interest rate at the base rate (3.25% at September 30, 2010), while the Canada
revolver carries an interest rate of the Canadian prime rate plus 0.75% (3.00%
at September 30, 2010), and the Term Loan carries an interest rate of LIBOR plus
2% (2.53% and 2.26% for two LIBOR arrangements under the Term Loan at September
30, 2010). 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,
the Company’s Consolidated Leverage Ratio, as defined, must not be greater than
4.00:1.0. At September 30, 2010, this ratio was 2.11:1.0.
Capital
Expenditures
The Company cannot incur aggregate
Capital Expenditures, as defined, in excess of three percent (3.00%) of
consolidated gross revenue for any fiscal year.
As of September 30, 2010, the Company
was in compliance with these covenants. Substantially all of the Company’s
assets, including the capital stock and assets of wholly-owned subsidiaries,
secure obligations under the Credit Facility.
49 of
63
Senior
Notes Payable
Senior notes payable under the Term
Loan consisted of the following:
|
September 30,
|
September 30,
|
|||||||
|
2010
|
2009
|
|||||||
|
Senior notes payable to
commercial lenders, due in equal quarterly payments
of principal of $0.8 million with the remainder due in 2013, plus required
prepayment amounts and interest at the base rate, as
defined, plus 0.75% or LIBOR plus 2.0% (2.53% and
2.26% at September 30, 2010) through September
2013
|
$ | 322,126 | $ | 332,518 | ||||
|
Less
current portion
|
10,355 | 10,428 | ||||||
| $ | 311,771 | $ | 322,090 | |||||
Equipment
Financing Facilities
As of
September 30, 2010, there was $15.0 million outstanding under prior equipment
financing facilities, with fixed interest rates ranging from 4.1% to 7.4% and
payments due through September 2014. The Company’s current equipment financing
facility provides for financing up to $5.5 million of purchased transportation
and material handling equipment through May 1, 2011 at an interest rate
approximately 2% above the 5-year term swap rate at the time of the advances.
There were no amounts outstanding under this current facility at September 30,
2010.
Other
Information
Annual
principal payments for all outstanding borrowings for each of the next five
years and thereafter as of September 30, 2010 were as follows:
|
Senior
Secured
|
Equipment
|
Revolving
Lines
of
|
||||||||||||||
|
Fiscal year
|
Credit
Facility
|
Financing
|
Credit
|
Total
|
||||||||||||
|
2011
|
$ | 10,355 | $ | 5,301 | $ | 78 | $ | 15,734 | ||||||||
|
2012
|
3,355 | 4,707 | - | 8,062 | ||||||||||||
|
2013
|
308,416 | 3,040 | - | 311,456 | ||||||||||||
|
2014
|
- | 1,907 | - | 1,907 | ||||||||||||
|
2015
|
- | - | - | - | ||||||||||||
|
Thereafter
|
- | - | - | - | ||||||||||||
|
Subtotal
|
322,126 | 14,955 | 78 | 337,159 | ||||||||||||
|
Less
current portion
|
10,355 | 5,301 | 78 | 15,734 | ||||||||||||
|
Total
long-term debt
|
$ | 311,771 | $ | 9,654 | $ | - | $ | 321,425 | ||||||||
9.
Leases
The Company mostly operates in leased
facilities, which are accounted for as operating leases. The leases typically
provide for a base rent plus real estate taxes. Certain of the leases provide
for escalating rents over the lives of the leases and rent expense is recognized
over the terms of those leases on a straight-line basis. The Company leases two
buildings from a limited liability entity that is partly owned by one of the
Company’s directors (Note 13).
At
September 30, 2010, the minimal rental commitments under all non-cancelable
operating leases with initial or remaining terms of more than one year were as
follows:
50 of
63
|
Operating
|
||||
|
Leases
|
||||
|
Year ending September
|
||||
|
2011
|
23,341 | |||
|
2012
|
20,211 | |||
|
2013
|
14,629 | |||
|
2014
|
11,957 | |||
|
2015
|
7,863 | |||
|
Thereafter
|
3,452 | |||
|
Total
minimum lease payments
|
$ | 81,453 | ||
Rent expense was $25,227 in 2010,
$25,761 in 2009 and $24,823 in 2008. Sublet income was immaterial for these
years.
10.
Stock Options
Stock
Option Plans
The Company is currently making
stock-based awards under its 2004 Stock Plan, which was adopted on
September 21, 2004. The 2004 Stock Plan allows for the granting of up to
5.05 million shares of Common Stock in the form of stock options or stock
awards to key employees and members of the Board of Directors. The key terms of
the grants are determined by the Company's Board of Directors.
The 1998 Stock Plan allowed for the
granting of options to purchase up to 3.1 million shares of Common Stock.
Options were generally allowed to be exercised beginning 18 months after
the date of grant and will
terminate ten years from the grant date. No further awards will be made under
the 1998 Stock Plan.
In the event of a change in control of
the Company, all outstanding options are immediately vested.
Information
regarding the Company's stock options is summarized below (not in
thousands):
|
Weighted-
|
||||||||||||||||
|
Weighted-
|
Average
|
|||||||||||||||
|
Average
|
Remaining
|
Aggregate
|
||||||||||||||
|
Number
of
|
Exercise
|
Contractual
|
Intrinsic
|
|||||||||||||
|
Shares
|
Price
|
Life
|
Value
|
|||||||||||||
|
(in Millions)
|
||||||||||||||||
|
Outstanding
at September 30, 2007
|
3,045,120 | $ | 12.15 | |||||||||||||
|
Granted
|
759,023 | 9.34 | ||||||||||||||
|
Exercised
|
(547,238 | ) | 2.38 | |||||||||||||
|
Canceled
|
(174,825 | ) | 17.26 | |||||||||||||
|
Outstanding
at September 30, 2008
|
3,082,080 | 12.90 | ||||||||||||||
|
Granted
|
873,356 | 12.20 | ||||||||||||||
|
Exercised
|
(424,287 | ) | 4.05 | |||||||||||||
|
Canceled
|
(113,395 | ) | 16.56 | |||||||||||||
|
Outstanding
at September 30, 2009
|
3,417,754 | $ | 13.70 | |||||||||||||
|
Granted
|
862,114 | 14.64 | ||||||||||||||
|
Exercised
|
(419,021 | ) | 8.50 | |||||||||||||
|
Canceled
|
(87,115 | ) | 17.47 | |||||||||||||
|
Outstanding
at September 30, 2010
|
3,773,732 | $ | 14.41 | 6.9 | $ | 7.6 | ||||||||||
|
Vested
or Expected to Vest at September 30, 2010
|
3,679,952 | $ | 14.42 | 6.8 | $ | 7.5 | ||||||||||
|
Exercisable
at September 30, 2010
|
2,234,663 | $ | 15.24 | 5.8 | $ | 5.4 | ||||||||||
The aggregate intrinsic values above
include only in-the-money options. There were options available for grants to
purchase 959,764 shares of Common Stock under the 2004 Stock Plan at September
30, 2010. The weighted-average grant date fair values of stock options
granted during 2010, 2009 and 2008 were $7.60, $6.35 and $4.55, respectively.
The intrinsic values of stock options exercised during 2010 and 2009 were
$4.3 million and $4.2 million, respectively. At September 30, 2010,
the Company had $15.1 million of excess tax benefits available for
potential deferred tax write-offs related to option accounting.
The
Company granted 678,686 additional options and 85,483 restricted shares under
the 2004 Stock Plan to management in November 2010. The restricted shares
represent shares that will vest if the Company attains targeted performance
criteria at the end of a three-year period. The actual number of shares that
will vest can range from 0% to 125% of this number depending upon actual Company
performance below or above the target level.
51 of
63
Details
regarding options to purchase common stock outstanding as of September 30, 2010
were as follows:
|
Weighted
|
||||||||||||||||
|
Range of
|
||||||||||||||||
|
Average
|
||||||||||||||||
|
Options
|
Exercise
|
Contractual
|
Options
|
|||||||||||||
|
Outstanding
|
Prices
|
Life in Years
|
Exercisable
|
|||||||||||||
| 144,603 | $ | 0.85 - $2.33 | 2.1 | 144,603 | ||||||||||||
| 577,666 | $ | 8.04 - $10.60 | 7.1 | 379,520 | ||||||||||||
| 1,075,283 | $ | 11.56 - $12.93 | 7.0 | 582,874 | ||||||||||||
| 852,050 | $ | 13.64 - $14.45 | 8.7 | 68,250 | ||||||||||||
| 485,121 | $ | 16.63 - $18.64 | 5.8 | 422,907 | ||||||||||||
| 614,259 | $ | 20.45 - $24.38 | 5.9 | 611,759 | ||||||||||||
| 24,750 | $ | 26.09 - $27.17 | 5.6 | 24,750 | ||||||||||||
|
Totals
|
3,773,732 | 2,234,663 | ||||||||||||||
Special
CEO Options Grant
The Company granted stock options to
its President and Chief Executive Officer (CEO) in October 2003 under an
executive securities agreement. The grant, as amended, included options to
purchase 612,366 shares of common stock at the then fair value and was scheduled
to vest over two years. These options were not granted under the Company's 1998
Stock Plan or 2004 Stock Plan. Options to purchase 150,000, 220,000, 200,000,
and 42,366 shares under this grant were exercised in 2006, 2008, 2009, and 2010,
respectively, leaving none outstanding under the special CEO grant at September
30, 2010.
11.
Benefit Plans
The Company maintains defined
contribution plans covering all full-time employees of the Company who have
90 days of service and are at least 21 years old. An eligible employee
may elect to make a before-tax contribution of between 1% and 100% of his or her
compensation through payroll deductions, not to exceed the annual limit set by
law. The Company currently matches the first 50% of participant contributions
limited to 6% of a participant's gross compensation (maximum Company match is
3%). Additional amounts associated with profit sharing were contributed in the
three years presented and are scheduled to be contributed in 2011 for 2010 as
well. All Company contributions are subject to the discretion of management and
the board of directors. The combined expense for this plan and a similar plan
for Canadian employees was $4,172 in 2010, $6,253 in 2009 and $5,775 in
2008.
The Company also contributes to an
external pension fund for certain of its employees who belong to a local union.
Annual contributions were $91, $101 and $109 in 2010, 2009, and 2008,
respectively.
52 of
63
12.
Income Taxes
The
income tax provision consisted of the following:
|
Fiscal year
|
||||||||||||
|
2010
|
2009
|
2008
|
||||||||||
|
Current:
|
||||||||||||
|
Federal
|
$ | 13,368 | $ | 27,280 | $ | 23,443 | ||||||
|
Foreign
|
1,615 | 1,956 | 1,980 | |||||||||
|
State
|
2,738 | 5,268 | 5,915 | |||||||||
| 17,721 | 34,504 | 31,338 | ||||||||||
|
Deferred:
|
||||||||||||
|
Federal
|
2,153 | (76 | ) | (2,445 | ) | |||||||
|
Foreign
|
(17 | ) | 29 | (26 | ) | |||||||
|
State
|
924 | (553 | ) | (367 | ) | |||||||
| 3,060 | (600 | ) | (2,838 | ) | ||||||||
| $ | 20,781 | $ | 33,904 | $ | 28,500 | |||||||
The
following table shows the principal reasons for the differences between the
effective income tax rate and the statutory federal income tax
rate:
|
Fiscal
Year
|
||||||||||||
|
2010
|
2009
|
2008
|
||||||||||
|
Federal
income taxes at statutory rate
|
35.00 | % | 35.00 | % | 35.00 | % | ||||||
|
State
income taxes, net of federal benefit
|
3.42 | 3.83 | 5.24 | |||||||||
|
Foreign
income taxes in excess of 35%
|
(0.17 | ) | 0.18 | 0.04 | ||||||||
|
Non-deductible
meals and entertainment
|
0.41 | 0.25 | 0.50 | |||||||||
|
Tax
reserves
|
(1.41 | ) | 0.56 | (0.08 | ) | |||||||
|
Other
|
0.32 | (0.54 | ) | 0.72 | ||||||||
|
Total
|
37.57 | % | 39.28 | % | 41.42 | % | ||||||
The components of the Company's
deferred taxes were as follows:
|
September
30,
|
September
30,
|
|||||||
|
2010
|
2009
|
|||||||
|
Deferred
tax liabilities:
|
||||||||
|
Excess
tax over book depreciation and amortization
|
$ | 44,469 | $ | 40,719 | ||||
|
Foreign
currency translation adjustment
|
3,250 | 2,339 | ||||||
|
Other
|
454 | 401 | ||||||
| 48,173 | 43,459 | |||||||
|
Deferred
tax assets:
|
||||||||
|
Deferred
compensation
|
8,440 | 6,903 | ||||||
|
Allowance
for doubtful accounts
|
4,357 | 5,122 | ||||||
|
Accrued
vacation & other
|
2,665 | 2,005 | ||||||
|
Unrealized
loss on financial derivatives
|
4,281 | 4,967 | ||||||
|
Inventory
valuation
|
5,874 | 7,230 | ||||||
| 25,618 | 26,227 | |||||||
|
Net
deferred income tax liabilities
|
$ | 22,556 | $ | 17,232 | ||||
53 of
63
As of
September 30, 2010, there were available tax benefits totaling $369 related to
foreign tax credit carryforwards, most of which expire in fiscal year 2020. The
Company has not recorded a valuation allowance for this amount since future
recognition is expected to occur within the next three years due to a drop in
Canadian income tax rates. As of September 30, 2009, there were available tax
benefits totaling $539 related to tax credit and NOL carryforwards. Of this
total, $317 represented an available benefit from foreign tax credit
carryforwards, most of which was scheduled to expire in fiscal year 2017, and
$222 represented an available benefit from state NOL carryforwards, most of
which was scheduled to expire in fiscal year 2027. As of September 30, 2009, the
Company recorded a valuation allowance to fully reserve for these amounts since
future recognition was uncertain at that time.
As of
September 30, 2010, the total amount of gross unrecognized tax benefits
(excluding the federal benefit received from state positions) was $432, all of
which, if recognized, would affect the Company’s effective tax rate. The
Company’s continuing practice is to recognize any interest and penalties related
to income tax matters in income tax expense in the consolidated statements of
operations. There were no significant accrued interest and penalty amounts
resulting from unrecognized tax benefits at September 30, 2010. The Company
currently anticipates its unrecognized tax benefits will decline by
approximately 80% during the next twelve months. A reconciliation of the
beginning and ending amounts of the gross unrecognized income tax benefits is as
follows:
|
2010
|
2009
|
|||||||
|
Balance,
beginning of year
|
$ | 740 | $ | - | ||||
|
Current
year uncertain tax positions
|
740 | |||||||
|
Expiration
of statutes of limitations
|
(308 | ) | ||||||
|
Balance,
end of year
|
$ | 432 | $ | 740 | ||||
In 2010,
2009, and 2008, the Company had reductions in income taxes payable of $1,559,
$1,565 and $2,873, respectively, as a result of stock option
exercises.
The Company has operations in 37 U.S.
states and three provinces in Canada and is subject to tax audits in each of
these jurisdictions and federally in both the United States and Canada. These
audits may involve complex issues, which may require an extended period of time
to resolve. The Company has provided for its estimate of taxes payable in the
accompanying financial statements. Additional taxes are reasonably possible
however the amounts cannot be estimated at this time. The Company is no longer
subject to U.S. federal tax examinations for tax years prior to 2008. For the
majority of states, the Company is also no longer subject to tax examinations
for tax years before 2007.
13.
Related-Party Transactions
The Company leases two buildings from a
limited liability entity that is partly owned by one of the Company’s directors
for an aggregate expense of approximately $0.4 million in 2010,
$0.4 million in 2009, and $0.5 million in 2008. The director’s interest in
the dollar value of these lease arrangements was approximately 32% at September
30, 2010.
14.
Contingencies
The Company is subject to loss
contingencies pursuant to various federal, state and local environmental laws
and regulations; however, the Company is not aware of any reasonably possible
losses that would have a material impact on its results of operations, financial
position, or liquidity. Potential loss contingencies include possible
obligations to remove or mitigate the effects on the environment of the
placement, storage, disposal or release of certain chemical or other substances
by the Company or by other parties. In connection with its acquisitions, the
Company has been indemnified for any and all known environmental liabilities as
of the respective dates of acquisition. Historically, environmental liabilities
have not had a material impact on the Company's results of operations, financial
position or liquidity.
The Company is subject to litigation
from time to time in the ordinary course of business; however the Company does
not expect the results, if any, to have a material adverse impact on its results
of operations, financial position or liquidity.
54 of
63
15.
Geographic and Product Data
The Company's geographic and product
information was as follows:
|
Year
Ended
|
||||||||||||||||||||||||||||||||||||
|
September 30, 2010
|
September 30, 2009
|
September 30, 2008
|
||||||||||||||||||||||||||||||||||
|
Property
|
Property
|
Property
|
||||||||||||||||||||||||||||||||||
|
Income
|
and
|
Income
|
and
|
Income
|
and
|
|||||||||||||||||||||||||||||||
|
Net
|
before
|
Equipment,
|
Net
|
before
|
Equipment,
|
Net
|
before
|
Equipment,
|
||||||||||||||||||||||||||||
|
Revenues
|
taxes
|
net
|
Revenues
|
taxes
|
net
|
Revenues
|
taxes
|
net
|
||||||||||||||||||||||||||||
|
U.S.
|
$ | 1,501,748 | $ | 50,338 | $ | 41,900 | $ | 1,637,831 | $ | 80,502 | $ | 47,108 | $ | 1,676,735 | $ | 63,103 | $ | 50,891 | ||||||||||||||||||
|
Canada
|
108,221 | 4,969 | 5,851 | 96,136 | 5,820 | 5,857 | 107,760 | 5,703 | 5,821 | |||||||||||||||||||||||||||
|
Total
|
$ | 1,609,969 | $ | 55,307 | $ | 47,751 | $ | 1,733,967 | $ | 86,322 | $ | 52,965 | $ | 1,784,495 | $ | 68,806 | $ | 56,712 | ||||||||||||||||||
Net
revenues from external customers by product group were as follows:
|
Year Ended
|
||||||||||||
|
September
30,
|
September
30,
|
September
30,
|
||||||||||
|
2010
|
2009
|
2008
|
||||||||||
|
Residential
roofing products
|
$ | 745,560 | $ | 898,796 | $ | 758,491 | ||||||
|
Non-residential
roofing products
|
620,977 | 598,789 | 723,742 | |||||||||
|
Complementary
building products
|
243,432 | 236,382 | 302,262 | |||||||||
|
Total
|
$ | 1,609,969 | $ | 1,733,967 | $ | 1,784,495 | ||||||
Prior
year revenues by product group are presented in a manner consistent with the
current year’s product classifications.
16. Allowance for
Doubtful Accounts
The
activity in the allowance for doubtful accounts consisted of the
following:
|
Balance
at
|
||||||||||||||||
|
beginning
|
Provision
|
Balance
at
|
||||||||||||||
|
Fiscal
Year
|
of year
|
Additions
|
Write-offs
|
end of year
|
||||||||||||
|
September
30, 2010
|
$ | 13,442 | $ | 4,622 | $ | (6,247 | ) | $ | 11,817 | |||||||
|
September
30, 2009
|
$ | 12,978 | $ | 7,413 | $ | (6,949 | ) | $ | 13,442 | |||||||
|
September
30, 2008
|
$ | 7,970 | $ | 10,954 | $ | (5,946 | ) | $ | 12,978 | |||||||
17.
Financial Derivatives
The
Company uses derivative financial instruments for hedging and non-trading
purposes to manage its exposure related to fluctuating cash flows from 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 large financial counterparties rated highly by nationally recognized credit
rating agencies.
The
Company is using interest rate derivative instruments to manage the risk related
to fluctuating cash flows from interest rate changes by converting a portion of
its variable-rate borrowings into fixed-rate borrowings. As of September 30,
2010, the following interest rate derivative instruments were outstanding:
a) a $100 million interest rate swap with interest payments at a fixed
rate of 2.72%; b) a $50 million interest rate swap with interest payments
at a fixed rate of 3.12%; and c) a $50 million interest rate swap with
interest payments at a fixed rate of 3.11%. These interest rate swaps expire in
April 2013.
55 of
63
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 effectiveness of the hedges is
periodically assessed by the Company during the lives of the hedges by 1)
comparing the current terms of the hedges with the related hedged debt to assure
they continue to coincide and 2) through an evaluation of the ability 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.
The
Company records any differences paid or received on its interest rate hedges as
adjustments to interest expense. Since inception, the Company has not
recognized any gains or losses on these hedges and there has been no effect on
income from hedge ineffectiveness. The table below presents the combined
fair values of the interest rate derivative instruments:
|
Unrealized Losses
|
||||||||||||
|
September 30,
|
September 30,
|
September 30,
|
||||||||||
|
Location
on Balance Sheet
|
2010
|
2009
|
2008
|
|||||||||
|
(Dollars
in thousands)
|
||||||||||||
|
Accrued
expenses
|
$ | 11,084 | $ | 12,348 | $ | 7,396 | ||||||
The fair
values of the interest rate hedges 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 hedge agreements. These values reflect a Level
2 measurement under the applicable fair value hierarchy.
56 of
63
ITEM
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM
9A. CONTROLS AND PROCEDURES
1.
Disclosure Controls and Procedures
Our management, with the participation
of our chief executive officer and chief financial officer, evaluated the
effectiveness of our disclosure controls and procedures (as defined in
Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as
of September 30, 2010. Based on this evaluation, our chief executive officer and
chief financial officer concluded that, as of September 30, 2010, our disclosure
controls and procedures were (1) designed to ensure that material
information relating to Beacon Roofing Supply, Inc., including its
consolidated subsidiaries, is made known to our chief executive officer and
chief financial officer by others within those entities, particularly during the
period in which this report was being prepared and (2) effective, in that
they provide reasonable assurance that information required to be disclosed by
us in the reports that we file or submit under the Securities Exchange Act of
1934 is recorded, processed, summarized and reported within the time periods
specified in the SEC's rules and forms.
2.
Internal Control over Financial Reporting
(a)
Management's Annual Report on Internal Control Over Financial
Reporting
Our management is responsible for
establishing and maintaining adequate internal control over financial reporting.
Internal control over financial reporting is defined in Rule 13a-15(f) or
15d-15(f) promulgated under the Securities Exchange Act of 1934 as a process
designed by, or under the supervision of, the company's principal executive and
principal financial officers, and effected by the company's board of directors,
management and other personnel, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted accounting
principles and includes those policies and procedures that:
|
|
•
|
Pertain
to the maintenance of records that in reasonable detail accurately and
fairly reflect the transactions and dispositions of the assets of the
company;
|
|
|
•
|
Provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of management and
directors of the company; and
|
|
|
•
|
Provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of the company's assets that
could have a material effect on the financial
statements.
|
Our internal control system was
designed to provide reasonable assurance to our management and Board of
Directors regarding the preparation and fair presentation of published financial
statements. All internal control systems, no matter how well designed, have
inherent limitations which may not prevent or detect misstatements. Therefore,
even those systems determined to be effective can provide only reasonable
assurance with respect to financial statement preparation and presentation.
Projections of any evaluation of effectiveness to future periods are subject to
the risk that controls may become inadequate because of changes in conditions,
or that the degree of compliance with the policies or procedures may
deteriorate.
Our management assessed the
effectiveness of our internal controls over financial reporting as of September
30, 2010. In making this assessment, we used the criteria set forth in Internal
Control-Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission (COSO). Based on our assessment, we believe that, as
of September 30, 2010, our internal control over financial reporting is
effective at the reasonable assurance level based on those
criteria.
57 of
63
Our Independent Registered Public
Accounting Firm has issued a report on the Company's internal control over
financial reporting. This report appears below.
(b)
Attestation Report of the Independent Registered Public Accounting
Firm
Report
of Independent Registered Public Accounting Firm
The Board
of Directors and Shareholders of
Beacon
Roofing Supply, Inc.
We have audited Beacon Roofing
Supply, Inc.'s internal control over financial reporting as of September
30, 2010, based on criteria established in Internal Control—Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission
(the COSO criteria). Beacon Roofing Supply, Inc.'s management is
responsible for maintaining effective internal control over financial reporting,
and for its assessment of the effectiveness of internal control over financial
reporting included in the accompanying Management's Annual Report on Internal
Control over Financial Reporting. Our responsibility is to express an opinion on
the company's internal control over financial reporting based on our
audit.
We conducted our audit in accordance
with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial
reporting was maintained in all material respects. Our audit included obtaining
an understanding of internal control over financial reporting, assessing the
risk that a material weakness exists, testing and evaluating the design and
operating effectiveness of internal control based on the assessed risk, and
performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our
opinion.
A company's internal control over
financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted
accounting principles. A company's internal control over financial reporting
includes those policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use, or disposition of the
company's assets that could have a material effect on the financial
statements.
Because of its inherent limitations,
internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future
periods are subject to the
risk that controls may become inadequate because of changes in conditions, or
that the degree of compliance with the policies or procedures may
deteriorate.
In our opinion, Beacon Roofing
Supply, Inc. maintained, in all material respects, effective internal
control over financial reporting as of September 30, 2010, based on the COSO
criteria.
We also have audited, in accordance
with the standards of the Public Company Accounting Oversight Board (United
States), the consolidated balance sheets of Beacon Roofing Supply, Inc. as
of September 30, 2010 and 2009 and the related consolidated statements of
operations, stockholders' equity and comprehensive income, and cash flows for
each of the three years in the period ended September 30, 2010 and our report
dated November 29, 2010 expressed an unqualified opinion thereon.
|
/s/ ERNST & YOUNG
LLP
|
|
|
Boston,
Massachusetts
November
29, 2010
|
(c)
Changes in Internal Control Over Financial Reporting
No change in our internal control over
financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the
Securities Exchange Act of 1934) occurred during the fiscal quarter ended
September 30, 2010 that has materially affected, or is reasonably likely to
materially affect, our internal control over financial
reporting.
58 of
63
ITEM
9B. OTHER INFORMATION
We have
no information to report pursuant to Item 9B.
59 of
63
PART
III
This part
of our Form 10-K, which includes Items 10 through 14, is omitted because we
will file definitive proxy material pursuant to Regulation 14A not more
than 120 days after the close of our year-end, which proxy material will
include the information required by Items 10 through 14 and is incorporated
herein by reference.
PART
IV
ITEM 15. EXHIBITS AND
FINANCIAL STATEMENT SCHEDULES
(a)
(1) Financial Statements
The
following financial statements of our Company and Report of the Independent
Registered Public Accounting Firm are included in Part II, Item 8 of this
Report:
|
•
|
Report
of Independent Registered Public Accounting
Firm
|
|
•
|
Consolidated
Balance Sheets as of September 30, 2010 and
2009
|
|
•
|
Consolidated
Statements of Operations for the years ended September 30, 2010, 2009 and
2008
|
|
•
|
Consolidated
Statements of Stockholders' Equity for the years ended September 30, 2010,
2009 and 2008
|
|
•
|
Consolidated
Statements of Cash Flows for the years ended September 30, 2010, 2009 and
2008
|
|
•
|
Notes
to Consolidated Financial
Statements
|
(2)
Financial Statement Schedules
Financial
statement schedules have been omitted because they are either not applicable or
the required information has been disclosed in the financial statements or notes
thereto.
(3) Exhibits
Exhibits
are set forth on the attached exhibit index.
60 of
63
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
|
BEACON
ROOFING SUPPLY, INC.
(REGISTRANT)
|
||
|
By:
|
/s/ DAVID R.
GRACE
|
|
|
David
R. Grace
|
||
|
Chief
Financial and Accounting Officer
|
||
|
Date:
November 29, 2010
|
||
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
|
SIGNATURE
|
TITLE
|
DATE
|
||
|
/s/ ROBERT R.
BUCK
|
Chairman
and Chief Executive Officer
|
November
29, 2010
|
||
|
Robert
R. Buck
|
||||
|
/s/ DAVID R.
GRACE
|
Senior
Vice President, Chief Financial Officer
|
November
29, 2010
|
||
|
David
R. Grace
|
and
Chief Accounting Officer
|
|||
|
/s/ ANDREW R.
LOGIE
|
Director
|
November
29, 2010
|
||
|
Andrew
R. Logie
|
||||
|
/s/ H. ARTHUR BELLOWS,
JR.
|
Director
|
November
29, 2010
|
||
|
H.
Arthur Bellows, Jr.
|
||||
|
/s/ JAMES J.
GAFFNEY
|
Director
|
November
29, 2010
|
||
|
James
J. Gaffney
|
||||
|
/s/ PETER M.
GOTSCH
|
Director
|
November
29, 2010
|
||
|
Peter
M. Gotsch
|
||||
|
/s/ WILSON B.
SEXTON
|
Director
|
November
29, 2010
|
||
|
Wilson
B. Sexton
|
||||
|
/s/ STUART A.
RANDLE
|
Director
|
November
29, 2010
|
||
|
Stuart
A. Randle
|
61 of
63
INDEX
TO EXHIBITS
EXHIBIT
|
EXHIBIT
NUMBER
|
||
|
3.1
|
Second
Amended and Restated Certificate of Incorporation of Beacon Roofing
Supply, Inc. (incorporated herein by reference to Exhibit 3.1 to Beacon
Roofing Supply, Inc.'s annual report on Form 10-K for the year ended
September 25, 2004)
|
|
|
3.2
|
Amended
and Restated By-Laws of Beacon Roofing Supply, Inc. (incorporated by
reference to Exhibit 3.2 to Beacon Roofing Supply, Inc.'s annual report on
Form 10-K for the year ended September 30, 2007)
|
|
|
4.1
|
Form
of Specimen Common Stock Certificate of Beacon Roofing Supply, Inc.
(incorporated herein by reference to Exhibit 4.1 to Beacon Roofing Supply,
Inc.'s Registration Statement on S-1 (Registration
No. 333-116027))
|
|
|
10.1
|
Fourth
Amended and Restated Credit Agreement, dated as of November 2, 2006,
among Beacon Sales Acquisition, Inc., as borrower, Beacon Roofing Supply,
Inc., as one of the Guarantors, the Lenders and L/C Issuers party thereto,
and General Electric Capital Corporation, as Administrative Agent and
Collateral Agent (incorporated by reference to Exhibit 10.1 of Beacon
Roofing Supply, Inc.'s current report on Form 8-K filed November 3,
2006).
|
|
|
10.2
|
Fourth
Amended and Restated Loan and Security Agreement, dated as of
November 2, 2006, among Beacon Roofing Supply Canada Company, GE
Canada Finance Holding Company and the financial institutions party
thereto (incorporated by reference to Exhibit 10.2 to Beacon Roofing
Supply, Inc's current report on Form 8-K filed November 3,
2006).
|
|
|
10.3
|
Form
of Beacon Roofing Supply, Inc. 2004 Stock Plan Stock Option Agreement for
all employees, including executive officers who are not directors
(incorporated by reference to Exhibit 10.3 to Beacon Roofing Supply,
Inc.'s annual report on Form 10-K for the year ended September 30,
2008).*
|
|
|
10.4
|
Form
of Beacon Roofing Supply, Inc. 2004 Stock Plan Stock Option Agreement for
non-employee directors (incorporated by reference to Exhibit 10.3 to
Beacon Roofing Supply, Inc.'s quarterly report on Form 10-Q for the
quarter ended March 31, 2006).*
|
|
|
10.5
|
Form
of Beacon Roofing Supply, Inc. 2004 Stock Plan Stock Option Agreement for
employee directors (incorporated by reference to Exhibit 10.5 to Beacon
Roofing Supply, Inc.'s annual report on Form 10-K for the year ended
September 30,
2008).*
|
62 of
63
|
10.6
|
Executive
Securities Agreement dated as of October 20, 2003 by and between
Beacon Roofing Supply, Inc., Robert Buck and Code, Hennessy & Simmons
III, L.P. (incorporated herein by reference to Exhibit 10.5 to Beacon
Roofing Supply, Inc.'s Registration Statement on Form S-1 (Registration
No. 333-116027))
|
|
|
10.7
|
Amendment
to Executive Securities Agreement dated as of January 28, 2004 by and
between Beacon Roofing Supply, Inc., Robert Buck and Code, Hennessy &
Simmons III, L.P. (incorporated herein by reference to Exhibit 10.6 to
Beacon Roofing Supply, Inc.'s Registration Statement on Form S-1
(Registration No. 333-116027))
|
|
|
10.8
|
1998
Stock Plan (incorporated herein by reference to Exhibit 4.1 to Beacon
Roofing Supply, Inc.'s Registration Statement on Form S-8 (Registration
No. 333-119747))*
|
|
|
10.9
|
Amended
and Restated 2004 Stock Plan (incorporated herein by reference to Exhibit
10.1 to Beacon Roofing Supply, Inc.'s current report on Form 8-K filed on
February 11, 2008)*
|
|
|
10.10
|
Description
of Management Cash Bonus Plan (incorporated herein by reference to Exhibit
10 to Beacon Roofing Supply, Inc.'s quarterly report on Form
10-Q for the quarter ended December 31, 2009)*
|
|
|
21
|
Subsidiaries
of Beacon Roofing Supply, Inc.
|
|
|
23.1
|
Consent
of Ernst & Young LLP, Independent Registered Public Accounting
Firm
|
|
|
31.1
|
CEO
certification pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
|
|
|
31.2
|
CFO
certification pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
|
|
|
32.1
|
CEO
certification pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
|
|
|
32.2
|
CFO
certification pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
|
*Compensatory
plan or arrangement.
63 of
63