UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D. C. 20549

 

 

FORM 10-Q

 

 

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

 

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2005

 

OR

 

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

 

FOR THE TRANSITION PERIOD FROM              TO             .

 

COMMISSION FILE NO.: 000-50924

 

 

BEACON ROOFING SUPPLY, INC.

(Exact name of Registrant as specified in its charter)

 

 

DELAWARE		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)

 

978-535-7668

(Registrant’s telephone number, including area code)

 

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

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

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act)    YES  o    NO  ý

 

As of May 3, 2005, there were 26,456,497 outstanding shares of the registrant’s common stock, $.01 par value per share.

 

 

BEACON ROOFING SUPPLY, INC.

 

Form 10-Q

For the Quarter and Six Months Ended March 31, 2005

 

INDEX

 

Part I.	Financial Information	3
Item 1.	Financial Statements (Unaudited)	3
	Consolidated Balance Sheets	3
	Consolidated Statements of Operations	4
	Consolidated Statements of Cash Flows Notes to Consolidated Financial Statements	5
		6
Item 2.	Management’s Discussion and Analysis of Financial Condition And Results of Operations	10
	Overview	10
	Results of Operations	10
	Seasonality and Quarterly Fluctuations	14
	Liquidity and Capital Resources	15
	Cautionary Statement	17
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	17
	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

 

 

2

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BEACON ROOFING SUPPLY, INC.

PART I.  FINANCIAL INFORMATION

Item 1.  Financial Statements

Consolidated Balance Sheets

 

		March 31,			March 31,			September 25,
(Dollars in thousands, except per share data)		2005			2004			2004
		(Unaudited)			(Unaudited)			(Note)
Assets
Current assets:
Cash		$	8,522		$	1,595		$	—
Accounts receivable, less allowance for doubtful accounts of $3,647 at March 31, 2005, $3,213 at March 31, 2004, and $2,958 at September 25, 2004		91,117			68,740			93,824
Inventories		95,980			69,877			68,573
Prepaid expenses and other assets		16,499			8,508			14,974
Deferred income taxes		3,227			2,320			3,223
Total current assets		215,345			151,040			180,594
Property and equipment, net		29,392			24,146			25,101
Goodwill		104,375			93,876			94,162
Other assets		12,988			1,870			1,641
Total assets		$	362,100		$	270,932		$	301,498
Liabilities and stockholders’ equity
Current liabilities:
Cash overdraft		$	—		$	—		$	3,694
Borrowings under revolving lines of credit		67,859			52,392			44,592
Accounts payable		74,197			53,105			74,043
Accrued expenses		29,320			21,590			21,524
Warrant derivative liability		—			6,942			34,335
Current portions of long-term debt and capital lease obligations		6,161			6,125			6,152
Total current liabilities		177,537			140,154			184,340
Senior notes payable and other obligations, net of current portion		20,990			24,149			22,660
Junior subordinated notes payable		—			16,432			17,071
Subordinated notes payable to related parties		—			28,243			29,442
Deferred income taxes		9,045			8,547			8,764
Long-term obligations under capital leases, net of current portion		814			1,045			976
Warrant derivative liabilities		—			15,984			—
Commitments and contingencies
Stockholders’ equity:
Class A Common Stock (voting); $.01 par value; 45,500,000 shares authorized and 18,091,988 shares issued in March of 2004		—			181			—
Common Stock (voting); $.01 par value; 100,000,000 shares authorized; 26,632,938 issued in March of 2005 and 26,591,988 issued in September of 2004		266			—			266
Undesignated Preferred Stock; 5,000,000 shares authorized, none issued or outstanding		—			—			—
Additional paid-in capital		140,135			28,248			140,067
Deferred compensation		(344		)	(1,324		)	(690		)
Treasury Stock (232,861 shares of Class A Common in March of 2004 and 232,861 shares of Common Stock in March of 2005 and September of 2004)		(515		)	(515		)	(515		)
Retained earnings (deficit)		10,295			7,630			(867		)
Common Stock subscription receivable		—			—			(102,765		)
Accumulated other comprehensive income		3,877			2,158			2,749
Total stockholders’ equity		153,714			36,378			38,245
Total liabilities and stockholders’ equity		$	362,100		$	270,932		$	301,498

 

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

 

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

 

 

3

 

BEACON ROOFING SUPPLY, INC.

Consolidated Statements of Operations

 

Unaudited		Three Months Ended March 31,								Six Months Ended March 31,
(Dollars in thousands, except per share data)		2005				2004				2005				2004
Net sales		$	172,116			$	124,081			$	371,306			$		292,667
Cost of products sold		130,746				91,520				279,590				217,303
Gross profit		41,370				32,561				91,716				75,364
Operating expenses:
Selling, general and administrative expenses		35,722				28,635				68,561				57,057
Stock-based compensation		172				642				346				642
		35,894				29,277				68,907				57,699
Income from operations		5,476				3,284				22,809				17,665
Other expense:
Interest expense		1,185				2,682				2,051				5,482
Interest expense-related party		—				741				26				1,483
Change in value of warrant derivatives		—				8,081				—				11,000
Loss on early retirement of debt		—				3,285				915				3,285
		1,185				14,789				2,992				21,250
Income (loss) before income taxes		4,291				(11,505			)	19,817				(3,585			)
Income taxes		1,873				(1,502			)	8,656				3,272
Net income (loss)		$		2,418		$		(10,003	)	$	11,161			$	(6,857		)
Net income (loss) per share:
Basic		$		0.09		$		(0.56	)	$		0.42		$	(0.39		)
Diluted		$		0.09		$		(0.56	)	$		0.41		$	(0.39		)
Weighted average shares used in computing net income (loss) per share:
Basic		26,384,001				17,838,459				26,371,317				17,805,460
Diluted		27,344,123				17,838,459				27,323,528				17,805,460

 

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

 

 

4

 

BEACON ROOFING SUPPLY, INC.

Consolidated Statements of Cash Flows

 

 

		Six Months Ended March 31,
Unaudited (In thousands)		2005				2004
Operating activities:
Net income (loss)		$	11,161			$	(6,857	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization		3,940				3,427
Deferred interest		—				2,545
Stock-based compensation		345				642
Change in value of warrant derivatives		—				11,000
Loss on early retirement of debt		915				3,285
Deferred income taxes		232				(201		)
Changes in assets and liabilities, net of the effects of business acquired:
Accounts receivable		14,195				18,696
Inventories		(20,441			)	(14,618		)
Prepaid expenses and other assets		1,826				1,239
Accounts payable and accrued expenses		(6,738			)	(6,842		)
Net cash provided by operating activities		5,435				12,316
Investing activities:
Purchases of property and equipment, net of sale proceeds		(4,791			)	(1,228		)
Acquisition of business, net of cash acquired		(30,334			)	—
Net cash used in investing activities		(35,125			)	(1,228		)
Financing activities:
Net borrowings under revolving lines of credit		22,994				49,786
Borrowings (repayments) under senior notes payable, and other		(1,791			)	29,846
Redemption of warrants		(34,335			)	—
Early retirement of debt		—				(66,556		)
Repayment of junior subordinated notes		(17,986			)	(21,500		)
Repayment of subordinated notes payable to related parties		(29,442			)	—
Proceeds from sale of Common Stock		102,833				250
Deferred financing costs		(342			)	(1,400		)
Net cash provided by (used in) financing activities		41,931				(9,574		)
Effect of exchange rate changes on cash		(25			)	17
Net increase in cash		12,216				1,531
Cash (overdraft) at beginning of year		(3,694			)	64
Cash at end of period		$		8,522		$	1,595
Non-cash transactions:
Capital lease additions		$		—		$	703

 

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

 

 

5

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BEACON ROOFING SUPPLY, INC.

Notes to Consolidated Financial Statements (Unaudited)

 

1. Basis of Presentation

 

Beacon Roofing Supply, Inc. (the Company, which may be referred to as we, us or our) prepared the consolidated financial statements following accounting principles generally accepted in the United States (GAAP) for interim financial information and the requirements of the Securities and Exchange Commission (SEC). As permitted under those rules, certain footnotes or other financial information required by GAAP for complete financial statements have been condensed or omitted. The balance sheet as of March 31, 2004 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- and six-month periods ended March 31, 2005 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 (Loss) Per Share

 

We calculate basic income (loss) per share by dividing the net income (loss) by the weighted average number of common shares outstanding. Diluted net income per share 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 March 31,				Six Months Ended March 31,
		2005		2004		2005		2004
Weighted-average common shares outstanding used for basic net income (loss) per share		26,384,001		17,838,459		26,371,317		17,805,460
Dilutive effect of employee stock options		960,122		—		952,211		—
Weighted-average shares assuming dilution		27,344,123		17,838,459		27,323,528		17,805,460

 

 

6

 

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 Compensation (SFAS No. 123), our net income (loss) and net income (loss) per share would have been (pro forma) as follows:

 

Unaudited		Three Months Ended March 31,								Six Months Ended March 31,
(Dollars in thousands, except per share data)		2005				2004				2005				2004
Net income (loss), as reported		$	2,418			$		(10,003	)	$	11,161			$	(6,857		)
Add: stock-based compensation, net of tax		103				158				207				158
Less: stock-based compensation expense determined under the fair value method, net of tax		(294			)	(264			)	(664			)	(365			)
Pro forma net income (loss)		$	2,227			$	(10,109		)	$		10,704		$		(7,064	)
Basic earnings (loss) per share:
As reported		$		0.09		$	(0.56		)	$		0.42		$		(0.39	)
Pro forma		$		0.08		$	(0.57		)	$		0.41		$		(0.40	)
Diluted earnings (loss) per share:
As reported		$		0.09		$	(0.56		)	$		0.41		$		(0.39	)
Pro forma		$		0.08		$	(0.57		)	$		0.39		$		(0.40	)

 

 

4. Comprehensive Income (Loss)

 

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

 

Unaudited		Three Months Ended March 31,							Six Months Ended March 31,
(Dollars in thousands)		2005			2004				2005			2004
Net income (loss)		$	2,418		$		(10,003	)	$	11,161		$	(6,857	)
Foreign currency translation adjustment		(139		)	(220			)	1,128			578
Comprehensive income (loss)		$	2,279		$	(10,223		)	$	12,289		$	(6,279	)

 

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 goodwill of $9.6 million as follows (in 000’s):

 

 

Net assets		$	9,335
Noncompete		170
Customer relationships		1,500
Trademarks		9,750
Goodwill		9,579
Purchase Price		$	30,334

 

 

7

 

6. Stock Options

 

During the first six months of 2005, we granted options to purchase 409,000 shares of Common Stock under our 2004 Stock Plan at closing prices ranging from $17.34 to $21.27 per share on the dates of the grants. As of March 31, 2005, there were remaining options to purchase 1,771,000 shares of Common Stock available for grant under the 2004 Stock Plan.

 

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. 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.

 

Borrowings are 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 charges of $8.1 and $11.0 million for changes in the value of warrant derivatives in the second quarter and six months ended March 31, 2004, respectively.

 

9. Foreign Sales

 

Foreign (Canadian) sales totaled $11.7 and $35.0 million in the three and six months ended March 31, 2005, respectively, and $9.0 and $26.5 million in the three and six months ended March 31, 2004, respectively.

 

 

8

 

10. 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 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 Company’s fiscal year ending September 30, 2006. The Company is in the process of evaluating the impact of this new pronouncement on its financial statements.

 

 

9

 

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” and “YTD 2005” refer to the three months (second quarter) and six months (year-to-date) ended March 31, 2005, respectively, and all references to “2004” and “YTD 2004” refer to the three months (second quarter) and six months (year-to-date) ended March 31, 2004, respectively.

 

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 79 branches in the United States and Canada, including two branches acquired in late April 2005. As of March 31, 2005, we had 1,316 employees, including our sales and marketing team of 362 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 March 31,				Six Months Ended March 31,
		2005		2004		2005		2004
Net sales		100.0	%	100.0	%	100.0	%	100.0	%
Cost of products sold		76.0		73.8		75.3		74.2
Gross profit		24.0		26.2		24.7		25.8
Operating expenses:
Selling, general and administrative expenses		20.7		23.1		18.5		19.6
Stock-based compensation		0.1		0.5		0.1		0.2
		20.8		23.6		18.6		19.8
Income from operations		3.2		2.6		6.1		6.0
Interest expense		(0.7	)	(2.8	)	(0.6	)	(2.3	)
Change in value of warrant derivatives		—		(6.5	)	—		(3.8	)
Loss on early retirement of debt		—		(2.6	)	(0.2	)	(1.1	)
Income (loss) before income taxes		2.5		(9.3	)	5.3		(1.2	)
Income taxes		(1.1	)	1.2		(2.3	)	(1.1	)
Net income (loss)		1.4	%	(8.1	)%	3.0	%	(2.3	)%

 

 

10

 

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. At March 31, 2005, 69 branches were included in our existing market calculations and 8 branches were excluded because they were acquired during the current fiscal year.

 

Three Months Ended March 31, 2005 (“2005”) Compared to the Three Months Ended March 31, 2004 (“2004”)

 

Existing and Acquired Markets

 

		Existing Markets							Acquired Market						Consolidated
For the Three Months Ended		March 31,							March 31,						March 31,
(in thousands)		2005			2004				2005			2004			2005				2004
Net sales		$	145,178		$		124,081		$	26,938		$	—		$	172,116			$		124,081
Gross Profit		36,931			32,561				4,439			—			41,370				32,561
Gross Margin		25.4		%	26.2			%	16.5		%				24.0			%	26.2			%
Operating Expenses		32,354			29,277				3,540			—			35,894				29,277
Operating Expenses as a % of net sales		22.3		%	23.6			%	13.1		%				20.9			%	23.6			%
Operating Income		$	4,577		$	3,284			$	899		$	—		$		5,476		$	3,284

 

Net Sales

 

Consolidated net sales increased $48.0 million, or 38.7%, to $172.1 million in 2005 from $124.1 million in 2004. Existing markets saw internal growth of $21.1 million or 17.0%, while JGA contributed the remaining increase of $26.9 million. We opened two branches in 2005 and one branch during 2004. JGA had product group sales of $15.0, $5.0, $6.9 million in residential roofing products, non-residential roofing products, and complementary building products, respectively, while the product group sales for our existing markets were as follows:

 

		For the Three Months Ended
		March 31,			March 31,
(dollars in millions)		2005			2004				Growth
Residential roofing products		$	56.0		$		52.2		$	3.8			7.3	%
Non-residential roofing products		52.1			37.3				14.8				39.7
Complementary building products		37.1			34.6				2.5				7.2
		$	145.2		$	124.1			$		21.1		17.0	%

 

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

 

•                   continued strong residential roofing demand , although growth over last year’s historically high levels has slowed,

•                   continued penetration into complementary building products markets,

•                   a robust non-residential market, including the impact of large price increases,

•                   continued home re-modeling demand, and

•                   overall price increases of approximately 5% to 8%.

 

 

Gross Profit

 

		For the Three Months Ended
		March 31,			March 31,
(dollars in millions)		2005			2004			Change
Gross profit		$	41.4		$	32.6		$	8.8		27.1	%
Gross margin		24.0		%	26.2		%			-2.2%

 

 

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Existing markets’ gross profit growth of 13.4% contributed $4.4 million to the total gross profit increase while JGA also accounted for $4.4 million of the increase.  Existing markets’ gross margin was 25.4% in 2005 compared to 26.2% in 2004. This decline was due mainly to the large increase in non-residential roofing products as a percentage of our total net sales, which in general have lower gross margins than our other product groups. Due to its product mix, JGA has lower gross margins than our existing markets and this has also  lowered our overall gross margin. We expect our future quarterly gross margins to fluctuate from 24% to 26% depending primarily on our product mix.

 

Operating Expenses

 

		For the Three Months Ended
		March 31,			March 31,
(dollars in millions)		2005			2004			Change
Operating expenses		$	35.9		$	29.3		$	6.6		22.5	%
Operating expenses as a % of sales		20.9		%	23.6		%			-2.7%

 

Selling, general and administrative (SG&A) expenses increased $7.1 million or 24.7% to $35.7 million in 2005 from $28.6 million in 2004. JGA contributed $3.5 million of this increase, while existing markets saw SG&A expenses increase $3.6 million or 12.3%. The existing markets’ SG&A expense increase was due primarily to increased payroll and related costs of $2.4 million or 13.9%. Much of the increase in payroll costs was driven by our increased sales volume. We have also hired additional personnel for public-company reporting and trainee hiring for future expansion. Existing markets’ transportation costs increased $0.2 million or 12.3%, including higher fuel costs that accounted 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 $0.8 million in professional fees as we incurred additional public-company costs and embarked on our Sarbanes-Oxley Section 404 compliance project. Existing markets’ warehouse expenses, excluding depreciation, increased by $0.6 million or 17.4%, which reflects the opening of three new branches since 2004.

 

SG&A expenses as a percentage of net sales decreased to 20.7% in 2005 from 23.1% in 2004, primarily due to leveraging our fixed costs over our increased net sales and JGA’s lower SG&A expenses as a percentage of 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 as compared to $0.6 million in 2004. This compensation relates to the issuance of options and stock to certain employees below fair market value prior to our IPO.

 

Interest Expense

 

Interest expense decreased $2.2 million to $1.2 million in 2005 from $3.4 million in 2004. Although we acquired JGA through borrowings under our revolving line of credit and interest rates have increased slightly, our debt level remains substantially lower than in 2004, resulting in a significant reduction in interest expense.

 

Change in Value of Warrant Derivatives

 

This prior-year charge of $8.1 million was associated with warrant derivatives that existed prior to their settlement in connection with our IPO and was due to the effect of the increase in the fair market value of our common stock during 2004.

 

Loss on Early Retirement of Debt

 

In March 2004, we refinanced our credit facilities and used a portion of the proceeds to pay off a portion of our junior subordinated notes. In connection with the associated early retirement of debt, we recorded a $3.3 million loss in 2004.

 

Income Taxes

 

Income tax expense was $1.9 million in 2005 compared to a $1.5 million benefit in 2004. Our 2005 effective income tax rate was 43.6%. Our 2004 effective income tax rate was 43.9% prior to the impact of the non-deductible warrant derivatives charge of $8.1 million.

 

 

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