BEACON ROOFING SUPPLY INC - 10-Q Quarterly Report

BEACON ROOFING SUPPLY, INC.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets

	December 31, 2004				December 31, 2003				September 25, 2004
	(Unaudited)				(Unaudited)				(Note)
	(Dollars in thousands, except per share data)
Assets
Current assets:
Cash		$	4,900			$	6,195			$	—
Accounts receivable, less allowance of $3,511 at December 2004, $2,995 at
December 2003 and $2,958 at September 2004 for doubtful accounts		93,194				72,382				93,824
Inventories		82,750				60,604				68,573
Prepaid expenses and other assets		22,140				14,102				14,974
Deferred income taxes		3,228				2,317				3,223
Total current assets		206,212				155,600				180,594
Property and equipment, net		27,367				23,847				25,101
Goodwill, net		104,375				93,991				94,162
Other assets		13,196				2,805				1,641
Total assets		$	351,150			$	276,243			$	301,498
Liabilities and stockholders’ equity
Current liabilities:
Cash overdraft		$	—			$	—			$	3,694
Borrowings under revolving lines of credit		52,178				60,286				44,592
Accounts payable		73,723				50,068				74,043
Accrued expenses		36,359				23,777				21,524
Warrant derivative liability		—				4,557				34,335
Current portions of long-term debt and capital lease obligations		6,158				7,950				6,152
Total current liabilities		168,418				146,638				184,340
Senior notes payable and other obligations, net of current portion		21,825				68				22,660
Junior subordinated notes payable		—				35,914				17,071
Subordinated notes payable to related parties		—				27,689				29,442
Deferred income taxes		8,819				8,829				8,764
Long-term obligations under capital leases, net of current portions		895				1,105				976
Warrant derivative liabilities		—				10,291				—
Commitments and contingencies
Stockholders’ equity:
Class A Common Stock (voting); $.01 par value; 45,500,000 shares authorized; 18,020,443 shares issued in December of 2003 and none issued in December and September of 2004		—				180				—
Class B Common Stock (nonvoting); $.01 par value; 45,500,000 shares authorized; none issued or outstanding Common Stock (voting); $.01 par value; 100,000,000 shares authorized; 26,591,988 issued in December and September of 2004		266				—				266
Undesignated Preferred Stock; 5,000,000 shares authorized, none issued or outstanding
Additional paid-in capital		140,067				26,033				140,067
Deferred compensation		(517		)		—				(690		)
Treasury stock (232,861 shares of Class A Common in December of 2003 and 232,861 shares of Common Stock in December and September of 2004)		(515		)		(515		)		(515		)
Retained earnings (deficit)		7,876				17,633				(867		)
Common Stock subscription receivable		—				—				(102,765		)
Accumulated other comprehensive income		4,016				2,378				2,749
Total stockholders’ equity		151,193				45,709				38,245
Total liabilities and stockholders’ equity		$	351,150			$	276,243			$	301,498

Note: The balance sheet at September 25, 2004 has been derived
from the audited financial statements as of that date.

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

BEACON ROOFING SUPPLY, INC.
Consolidated Statements of Income

	Three Months Ended
	December 31,		December 31,
	2004		2003
	Unaudited
	(Dollars in thousands, except per share data)
Net sales	$	199,190	$	168,586
Cost of products sold	148,844		125,783
Gross profit	50,346		42,803
Operating expenses:
Selling, general and administrative expenses	32,840		28,422
Stock-based compensation	173		—
	33,013		28,422
Income from operations	17,333		14,381
Other expense:
Interest expense	866		2,799
Interest expense related party	26		742
Change in value of warrant derivatives	—		2,920
Loss on early retirement of debt	915		—
	1,807		6,461
Income before income taxes	15,526		7,920
Income taxes	6,783		4,774
Net income	$	8,743	$	3,146
Net income per share:
Basic	$	0.33	$	0.18
Diluted	$	0.32	$	0.17
Weighted average shares used in computing net income per share:
Basic	26,359,127		17,787,583
Diluted	27,303,725		18,184,984

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

BEACON ROOFING SUPPLY, INC.
Consolidated Statements of Cash Flows

	Three Months Ended
	December 31, 2004				December 31, 2003
	Unaudited
	(In thousands)
Operating activities
Net income		$	8,743			$	3,146
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		1,810				1,651
Deferred interest		—				1,261
Stock-based compensation		173				—
Change in value of warrant derivatives		—				2,920
Loss on early retirement of debt		915				—
Changes in operating assets and liabilities, net of the effects of businesses acquired:
Accounts receivable		12,215				15,174
Inventories		(7,167		)		(5,294		)
Prepaid expenses and other assets		(3,526		)		(3,480		)
Accounts payable and accrued expenses		(408		)		(7,908		)
Net cash provided by operating activities		12,755				7,470
Investing activities
Purchases of property and equipment, net of sale proceeds		(910		)		(109		)
Acquisition of business, net of cash acquired		(30,357		)		—
Net cash used in investing activities		(31,267		)		(109		)
Financing activities
Net borrowings under revolving lines of credit		7,278				132
Repayment under senior notes payable, and other		(912		)		(1,370		)
Redemption of warrants		(34,335		)		—
Repayment of junior subordinated notes		(17,986		)		—
Repayment of subordinated notes payable to related parties		(29,442		)		—
Proceeds from IPO		102,765				—
Deferred financing costs		(238		)		—
Net cash provided by (used in) financing activities		27,130				(1,238		)
Effect of exchange rate changes on cash		(24		)		8
Net increase in cash		8,594				6,131
Cash (overdraft) at beginning of year		(3,694		)		64
Cash at end of period		$	4,900			$	6,195
Non-cash transactions
Capital lease additions		$	—			$	703

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

BEACON ROOFING SUPPLY, INC.
Notes to Consolidated Financial Statements (Unaudited)

1. Basis of Presentation

Beacon Roofing Supply, Inc. (the Company, which may be referred to as we, us or our) prepared the consolidated financial statements following accounting principles generally accepted in the United States (GAAP) for interim financial information and the requirements of the Securities and Exchange Commission (SEC). As permitted under those rules, certain footnotes or other financial information required by GAAP for complete financial statements have been condensed or omitted. The balance sheet as of December 31, 2003 has been presented for a better understanding of the impact of seasonal fluctuations on our financial condition.

In management’s opinion, the financial statements include all normal and recurring adjustments that are considered necessary for the fair presentation of our financial position and operating results. The results for the three-month period (first quarter) ended December 31, 2004 are not necessarily indicative of the results to be expected for the twelve months ending September 24, 2005 (“2005”).

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

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

You should also read the financial statements and notes included in our 2004 Annual Report on Form 10-K. The accounting policies used in preparing these financial statements are the same as those described in that Annual Report.

2. Earnings Per Share

We calculate basic earnings per share (EPS) by dividing net income by the weighted average number of common shares outstanding. Diluted EPS includes the dilutive effects of stock awards.

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

	Three Months Ended December 31,
	2004	2003
Weighted-average common shares outstanding for basic	26,359,127	17,787,583
Dilutive effect of employee stock options	944,598	397,401
Weighted-average shares assuming dilution	27,303,725	18,184,984

3. Stock-Based Compensation

We account for our employee stock options under the intrinsic value method described by Accounting Principles Bulletin No. 25, Accounting for Stock Issued to Employees (APB No. 25). Accordingly, we do not record compensation expense for options issued with an exercise price equal to the stock’s market price on the grant date. If we had accounted for our employee stock options using the fair value method described in Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based

BEACON ROOFING SUPPLY, INC.
Notes to Consolidated Financial Statements (Unaudited) (Continued)

3. Stock-Based Compensation (Continued)

Compensation (SFAS No. 123), our net income and earnings per share would have been reduced to the pro-forma amounts below (in thousands, except per share data):

	Three Months Ended December 31,
	2004			2003
Reported net income	$	8,743		$	3,146
Add: Stock-based employee compensation expense included in reported net income, net of the tax effect	104			—
Deduct: Stock-based employee compensation expense determined under the fair value method for all awards, net of the tax effect	(271		)	(101		)
Pro-forma net income	$	8,576		$	3,045
Basic earnings per share
As reported	$	0.33		$	0.18
Pro-forma	$	0.33		$	0.17
Diluted earnings per share
As reported	$	0.32		$	0.17
Pro-forma	$	0.31		$	0.17

4. Comprehensive Income

Comprehensive income for the quarters ended December 31, 2004 and December 31, 2003 was $10.0 and $3.9 million, respectively, after the addition of foreign currency translation adjustments of $1.3 and $0.8 million, respectively. Comprehensive income consists of net income and other gains and losses affecting stockholders’ equity that, under GAAP, are excluded from net income.

5. Acquisition

On December 15, 2004, we purchased 100% of the outstanding stock of JGA Corp. (“JGA”), a distributor of roofing and other building products with eight branches in Georgia and Florida. This purchase was funded through our revolving line of credit. JGA had net sales of $74 million (unaudited) for the year ended December 31, 2003. We have included the results of operations for JGA from the date of acquisition and applied preliminary purchase accounting as of the date of acquisition, which resulted in recorded preliminary amounts of goodwill of $9.6 million, trademarks of $9.8 million and customer relationships of $1.5 million subject to a final settlement. If JGA’s results had been included for the entire quarter ended December 31, 2004, our results would not have been materially different.

6. Stock Options

We granted options to purchase 344,000 shares of Common Stock in the first quarter of 2005 under our 2004 Stock Plan; 324,000 of the options were at $17.80 per share and 20,000 of the options were at $17.34 per share, the closing prices on the dates of the grants. There were remaining options available for grant to purchase 1,836,000 shares of Common Stock under the 2004 Stock Plan as of December 31, 2004.

BEACON ROOFING SUPPLY, INC.
Notes to Consolidated Financial Statements (Unaudited) (Continued)

7. Debt

Effective September 28, 2004, the Company amended its senior secured credit facilities (revolving lines of credit and term loans). The amendment extends the maturity date of the facilities to September 30, 2009, including extending the installment schedule of the term loans so that the final payment is due on September 30, 2009, increases the revolving lines of credit from $113.0 million to $118.5 million, includes an option of increasing the revolving lines of credit by an additional $40.0 million, and expands the criteria for acquisitions which do not require lender consent. The amendment also changes the cash receipts lockbox arrangement to give the Company sole control over the funds in the Company’s lockbox accounts, unless excess availability is less than $10 million or an event of default occurs, in which case the senior secured lenders have the right to take control over such funds and to apply such funds to repayment of the senior debt. Prior to the effectiveness of the amendment, the senior lenders had sole control over the funds in the Company’s lockbox accounts. The new lockbox arrangement has not yet been established.

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

Junior Subordinated Notes Payable

The Company had 18% junior subordinated notes payable to certain mezzanine financing providers prior to September 28, 2004, at which time the Company repaid the notes in full in conjunction with the settlement of its IPO. These notes were subordinate to the senior notes payable and borrowings under the revolving lines of credit, however the senior lenders permitted the early repayment of the subordinated debt.

Subordinated Notes Payable to Related Parties

Subordinated notes payable to related parties consisted of 12% subordinated notes payable to stockholders and former owner and 8% subordinated promissory notes payable to former owners. These notes were subordinate to the senior notes payable and revolver borrowings, however the senior lenders permitted the early repayment of these notes upon receipt of the IPO proceeds.

8. Warrant Derivative Liabilities

Prior to redemption on September 28, 2004, the Company had warrants outstanding that included a “put” feature, which allowed the holder to require a fair market value cash settlement at a fixed date. The Company accounted for the warrant derivatives in accordance with EITF 00-19 Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock. The warrant derivatives were included as a liability and valued at fair market value until the warrants were redeemed. We incurred a charge of $2.9 million for the change in the value of warrant derivatives in the first quarter of 2004.

9. Recent Accounting Pronouncements

In December 2004, the FASB issued Statement No. 123(R), Share-Based Payment (SFAS No. 123(R)). SFAS No. 123(R) replaces SFAS No. 123, supersedes APB No. 25 and amends FASB Statement No. 95, Statement of Cash Flows. Generally, the approach in SFAS No. 123(R) is similar to the approach described

BEACON ROOFING SUPPLY, INC.
Notes to Consolidated Financial Statements (Unaudited) (Continued)

9. Recent Accounting Pronouncements (Continued)

in SFAS No. 123. However SFAS No. 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values (i.e., pro forma disclosure is no longer an alternative to financial statement recognition). The provisions of SFAS No. 123(R) must be applied at the beginning of the first interim or annual period beginning after June 15, 2005. The Company is in the process of evaluating the impact of this new pronouncement on its financial statements.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion in conjunction with Management’s Discussion and Analysis included in our 2004 Annual Report on Form 10-K. Unless otherwise specifically indicated, all references to “2005” or the “2005 period” refer to the three months (first quarter) ended December 31, 2004, and all references to “2004” or the “2004 period” refer to the three months (first quarter) ended December 31, 2003.

Overview

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

We distribute up to 7,500 SKUs through 75 branches in the United States and Canada. As of December 31, 2004, we had 1,319 employees, including our sales and marketing team of 365 employees. In fiscal year 2004, approximately 90% of our net sales were in the United States. We stock one of the most extensive assortments of high quality branded products in the industry, enabling us to deliver products to our customers on a timely basis.

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

Our acquisition strategy is to target market leaders in geographic areas that we presently do not service. Our December 2004 acquisition of JGA Corp. (“JGA”) reflects this approach. JGA is a leading Southeast distributor of roofing and other building materials with eight branches in Georgia and Florida, a growing area targeted by us for expansion.

Results of Operations

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

	Three Months Ended
	December 31,			December 31,
	2004			2003
Net sales		100.0	%		100.0	%
Cost of products sold		74.7			74.6
Gross profit		25.3			25.4
Operating expenses:
Selling, general and administrative expenses		16.5			16.9
Stock-based compensation		0.1			—
		16.6			16.9
Income from operations		8.7			8.5
Interest expense		(0.4	)		(2.1	)
Change in value of warrant derivatives		—			(1.7	)
Loss on early retirement of debt		(0.5	)		—
Income before income taxes		7.8			4.7
Income taxes		(3.4	)		(2.8	)
Net income		4.4	%		1.9	%

Existing and Acquired Markets

In managing our business, we consider all growth, including branch expansion, to be internal growth unless it results from an acquisition. When we refer to growth in existing markets in our discussion and analysis of financial condition and results of operations, we include growth from existing and newly-opened branches but exclude growth from acquired branches until they have been under our ownership for at least one full fiscal year. During the three months ended December 31, 2004, our internal sales growth was 15.8%. At December 31, 2004, 67 branches were included in our existing market calculations and 8 branches were excluded because they were acquired during the current fiscal year.

	Existing Markets								Acquired Market							Consolidated
	Three Months Ended								Three Months Ended							Three Months Ended
	December 31,				December 31,				December 31,				December 31,			December 31,				December 31,
	2004				2003				2004				2003			2004				2003
										(in thousands)
Net sales		$	195,257			$	168,586			$	3,933			$	—		$	199,190			$	168,586
Gross Profit		49,772				42,803				574				—			50,346				42,803
Gross Margin		25.5		%		25.4		%		14.6		%					25.3		%		25.4		%
Operating Expenses		32,374				28,422				639				—			33,013				28,422
Operating Expenses as a % of net sales		16.6		%		16.9		%		16.2		%					16.6		%		16.9		%
Operating Income		17,398				14,381				(65		)		—			17,333				14,381
Operating Margin		8.9		%		8.5		%		-1.7		%					8.7		%		8.5		%

Net Sales

Net sales increased $30.6 million, or 18.2%, to $199.2 million in 2005 from $168.6 in 2004. Existing markets saw internal growth of $26.7 million or 15.8%, while our JGA acquisition contributed the

remaining increase. We did not open any branches during fiscal year 2004. Foreign (Canadian) sales totaled $23.2 million in 2005 compared to $17.5 million in 2004. JGA had product group sales of $2.0, $0.8, $1.1 million in residential roofing products, non-residential roofing products, and complementary building products, respectively, while the product group sales for our existing markets were as follows:

	Three Months Ended
	December 31,			December 31,
	2004			2003			Growth
		(dollars in millions)
Residential roofing products		$	78.7		$	74.1	$	4.6	6.2	%
Non-residential roofing products		71.2			56.5		14.7		26.0
Complementary building products		45.4			38.0		7.4		19.5
		$	195.3		$	168.6	$	26.7	15.8	%

Our existing market growth increased due primarily to the following factors:

· Continued strong new housing markets along the U.S. East Coast.

· Continued penetration into our complementary building products markets.

· A robust non-residential market, including the impact from price increases.

· Continued existing home re-modeling growth.

· The 2005 period included 66 business days compared to 64 in the 2004 period.

· Estimated impact of 4% to 6% due to price increases.

Gross Profit

	Three Months Ended December 31,
		2004			2003			Change
	(dollars in millions)
Gross profit		$	50.3		$	42.8		$7.5			17.6	%
Gross margin		25.3		%	25.4		%		-0.1	%

Existing markets’ gross profit growth of 16.3% contributed $7.0 million to the total gross profit increase, while JGA accounted for the remaining increase. Although we have been able to capitalize somewhat on recent price increases, the gross profit growth was due primarily to the growth in net sales discussed above. Existing markets’ gross margin was 25.5% in 2005 compared to 25.4% in 2004. As with many of our past acquisitions, JGA, due to its product mix, has lower gross margins, which when combined with our existing operations will lower overall gross margins. We currently estimate that JGA will lower our overall gross margin rate by 50 to 70 basis points for the entire 2005 fiscal year.

Operating Expenses

	Three Months Ended December 31,
	2004			2003			Change
	(dollars in millions)
Operating expenses	$	33.0		$	28.4		$	4.6			16.2	%
Operating expenses as a % of sales	16.6		%	16.9		%			-0.3	%

Selling, general and administrative (SG&A) expenses increased $4.4 million, or 15.5%, to $32.8 million in 2005 from $28.4 million in 2004. JGA contributed $0.6 million to this increase. The remaining SG&A expense increase of $3.8 million, or 13.4%, was due primarily to increased payroll costs of $3.1 million, an 18% increase. We believe much of the increase in payroll costs was driven by our increased sales volume. Additionally, we have hired increased personnel for public company reporting and future expansion. Transportation costs increased $0.5 million, or 24.6%, including higher fuel costs that account for approximately one-third of the increase while the remaining increase was due to the increased sales volume. We expect high fuel costs to continue for the foreseeable future. This increase may adversely affect our future results of operations, although historically we have passed most of these increases on to our customers. We also experienced an increase of $0.3 million in professional fees as we incurred additional public company costs and embarked on our Sarbanes-Oxley Section 404 compliance project and a decrease of $0.5 million in bad debt expense due to better economic conditions.

SG&A expenses, as a percentage of net sales, decreased to 16.6% in 2005 from 16.9% in 2004, primarily due to leveraging our fixed costs over our increased net sales. We expect to incur additional administrative costs as a public company over the remainder of 2005, including additional costs associated with compliance with the Sarbanes-Oxley Act.

We incurred $0.2 million in stock-based compensation in 2005 related to the pre-IPO issuance of options to certain employees below fair market value.

Interest Expense

Interest expense decreased $2.6 million to $0.9 million in 2005 from $3.5 million in 2004. Although interest rates have increased slightly, our lower debt level after the IPO has resulted in substantially less interest expense.

Change in Value of Warrant Derivatives

This prior-year charge of $2.9 million was associated with warrant derivatives that existed prior to the settlement of our IPO and was due to the effect of the increase in the fair market value of our common stock during the 2004 period.

Loss on Early Retirement of Debt

On September 28, 2004, we used a portion of the proceeds from our IPO to pay off the remaining junior subordinated notes. In connection with the associated early retirement of debt, we recorded a $0.9 million loss in the first quarter of 2005.

Income Taxes

Income taxes increased to $6.8 million in 2005 from $4.8 million in 2004. Our 2005 effective income tax rate decreased from 60% to 44% due to the prior-year impact on our pre-tax loss of the non-deductible warrant derivatives charge.

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, 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 into the southern regions of the United States.

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

We generally experience a slowing of collections of our accounts receivable during our second quarter, mainly due to the inability of our customers to conduct their businesses effectively in inclement weather. We continue to attempt to collect those receivables, which require payment under our standard terms. We do not provide any concessions to our customers during this quarter of the year, although we may take advantage of seasonal concessions and incentives from our vendors. Also during the second quarter, we 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 2005 and 2004 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.

	2005		2004
	Qtr 1		Qtr 1			Qtr 2			Qtr 3			Qtr 4
	(dollars in millions, except per share data) (unaudited)
Net sales	$	199.2	$	168.6		$	124.1		$	180.0		$	180.2
Gross profit	50.3		42.8			32.6			45.4			44.9
Income from operations	17.3		14.4			3.3			13.4			3.6
Quarterly sales as % of annual sales	—		25.8		%	19.0		%	27.6		%	27.6		%
Quarterly gross profit as % of annual gross profit	—		25.8			19.7			27.4			27.1
Quarterly income from operations as % of annual income from operations	—		41.5		%	9.5		%	38.6		%	10.4		%

Liquidity and capital resources

We had cash of $4.9 million at December 31, 2004, compared to cash of $6.2 million at December 31, 2003 and a cash overdraft of $3.7 million at September 25, 2004. Our working capital was $37.8 million at December 31, 2004 compared to working capital of $9.0 million at December 31, 2003 and a working capital deficit of ($3.7) million at September 25, 2004.

2005 compared to 2004

Our net cash provided by operating activities was $12.8 million for 2005 compared to $7.5 million for 2004. Our sales growth drove our income from operations to $17.3 million in 2005 from $14.4 million in 2004. Inventory levels increased as we anticipated some price increases and temporary shortages by increasing our purchases. This growth in inventory was offset by an increase in accounts payable. Accounts

receivable did not decline as much as seasonally normal or as much as in 2004 due to the strong increase in sales.

Net cash used in investing activities in 2005 was $31.3 million compared to $0.1 million in 2004 due to the net $30.4 million acquisition of JGA. Net capital expenditures increased slightly after consideration of last year’s first-quarter capital lease additions.

Net cash provided by financing activities was $27.1 million in 2005 compared to net cash used in financing activities of $1.2 million in 2004. The cash provided by financing activities in 2005 reflects borrowings under our revolving lines of credit for the JGA acquisition and the proceeds from our IPO less the associated warrant redemption and debt payments. The net cash used in financing activities in 2004 primarily reflects the repayment of amounts due under certain notes payable.

Capital Resources

Our principal source of liquidity at December 31, 2004 was our available borrowings of $73.7 million under revolving lines of credit. Our borrowing base availability is determined primarily by trade accounts receivable and product inventory levels. Borrowings outstanding under the revolving lines of credit at December 31, 2004 have been classified as current liabilities in the accompanying balance sheets in accordance with EITF Issue 95-22, Balance Sheet Classification of Borrowings Outstanding under Revolving Credit Arrangements that include both a Subjective Acceleration Clause and a Lock-Box Arrangement.

Liquidity is defined as the ability to generate adequate amounts of cash to meet the current need for cash. We assess our liquidity in terms of our ability to generate cash to fund our operating activities, taking into consideration the seasonal nature of our business. Significant factors which could affect liquidity include the following:

· the adequacy of available bank lines of credit;

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

· cash flows generated from operating activities;

· acquisitions; and

· capital expenditures.

Our primary capital needs are for working capital obligations and other general corporate purposes, including acquisitions and capital expenditures. Our primary sources of working capital are cash from operations supplemented by bank borrowings. In the past, we have financed acquisitions initially through increased bank borrowings, the issuance of common stock and other borrowings, then repaying any such borrowings with cash flows from operations. We have funded our capital expenditures through increased bank borrowings or through capital leases and then have reduced these obligations with cash flows from operations.

We believe we have adequate 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. Additionally, we may issue additional shares of common or preferred stock to raise funds.

Indebtedness

We currently have the following credit facilities:

· a senior secured credit facility in the U.S.;

· a Canadian senior secured credit facility; and

· a capital lease facility.

Senior secured credit facilities

The credit facilities mature on September 30, 2009 and consist of a $118.5 million United States revolving line of credit including a CDN $15 million Canadian revolving line of credit, commonly referred to as revolvers, and term loans totaling $30 million. The facilities include an option of increasing the revolving lines of credit by an additional $40 million. A recent amendment changes the cash receipts lockbox arrangement to give us sole control over the funds in our lockbox accounts, unless excess availability is less than $10 million or an event of default occurs, in which case the senior secured lenders have the right to take control over such funds and to apply such funds to repayment of the senior debt. Once the lockbox arrangement is operational, the revolver borrowings will be classified as long-term debt for amounts expected to be outstanding for greater than one year.

As of December 31, 2004, there was $52.2 million outstanding and $73.7 million available for borrowing under the revolvers, subject to changes in our borrowing base availability determined primarily by trade accounts receivable and product inventories levels. The balance outstanding under the term loans was $27.7 million at December 31, 2004.

Interest on borrowings under the U.S. facilities is payable at our election at either of the following rates:

· an index 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% to 1.75%; or

· the current LIBOR Rate plus a margin ranging from 2.00% to 3.00%.

Interest under the Canadian 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 1.25%) plus 0.75%; or

· the BA rate as described in the Canadian facility plus 2.00%.

Substantially all of our assets, including the capital stock and assets of our wholly-owned subsidiaries secure our obligations under these senior secured credit facilities. The senior secured credit facilities have numerous restrictive covenants, including required fixed charge coverage and an indebtedness to EBITDA ratio determined at the end of each quarter. As of December 31, 2004, we were in compliance with all covenants and financial ratio requirements.

Capital lease facility

Our capital lease facility allows us to finance a portion of our transportation and warehouse equipment. The facility totals $11 million, of which $1.2 million was outstanding at December 31, 2004 with fixed interest rates averaging 5.7%.

DELAWARE		36-4173371
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

One Lakeland Park Drive, Peabody, Massachusetts		01960
(Address of principal executive offices)		(Zip Code)

		Page
Part I.	Financial Information
Item 1.	Financial Statements (Unaudited)
	Consolidated Balance Sheets	3
	Consolidated Statements of Income	4
	Consolidated Statements of Cash Flows	5
	Notes to Consolidated Financial Statements	6

Item 2.	Management’s Discussion and Analysis of Financial Condition And Results of Operations
	Overview	10
	Results of Operations	11
	Seasonality and Quarterly Fluctuations	14
	Liquidity and Capital Resources	14
	Cautionary Statement	17

Item 3.	Quantitative and Qualitative Disclosures about Market Risk
	Interest Rate Risk	17
	Foreign Exchange Risk	17

Item 4.	Controls and Procedures	17

Part II.	Other Information	18

Item 6.	Exhibits	18

Signature Page		19

Index to Exhibits		20


Exhibit Number		Document Description
10.1		Second Amendment, dated October 29, 2004, to Second Amended and Restated Loan and Security Agreement dated as of March 12, 2004, among Beacon Sales Acquisition, Inc., the domestic subsidiaries of Beacon Sales Acquisition, Inc. named therein, General Electric Capital Corporation and the lenders party thereto.
31.1		Certification by Robert R. Buck pursuant to Rule 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2		Certification by David R. Grace pursuant to Rule 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1		Certification by Robert R. Buck and David R. Grace pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

	BEACON ROOFING SUPPLY, INC.
	BY:	/s/ DAVID R. GRACE
		David R. Grace, Chief Financial Officer, and duly authorized signatory on behalf of the Registrant

10.1		Second Amendment, dated October 29, 2004, to Second Amended and Restated Loan and Security Agreement dated as of March 12, 2004, among Beacon Sales Acquisition, Inc., the domestic subsidiaries of Beacon Sales Acquisition, Inc. named therein, General Electric Capital Corporation and the lenders party thereto.
31.1		Certification by Robert R. Buck pursuant to Rule 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2		Certification by David R. Grace pursuant to Rule 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1		Certification by Robert R. Buck and David R. Grace pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.