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 172 branches in the United States and Canada. In fiscal year 2009, approximately 94% of our net sales were in the United States. We stock one of the most extensive assortments of high-quality branded products in the industry, enabling us to deliver products to our customers on a timely basis.

Execution of the operating plan at each of our branches drives our financial results. Revenues are impacted by the relative strength of the residential and non-residential roofing markets we serve. We allow each of our branches to develop its own marketing plan and mix of products based upon its local market. We differentiate ourselves from the competition by providing customer services, including job site delivery, tapered insulation layouts and design and metal fabrication, and by providing credit. We consider customer relations and our employees' knowledge of roofing and exterior building materials to be 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 May 2007 acquisition of Wholesale Roofing Supply ("WRS"), a single location distributor of residential and commercial roofing products located in Knoxville, Tennessee, which we integrated into our Best Distributing region in the Carolinas, is an example of such an acquisition.

General

We sell all materials necessary to install, replace and repair residential and non-residential roofs, including:

º •
º shingles; º •
º single-ply roofing; º •
º metal roofing and accessories; º •
º modified bitumen; º •
º built up roofing; º •
º insulation; º •
º slate and tile; º •
º fasteners, coatings and cements; and º •
º other roofing accessories.

We also sell complementary building products such as:

º •
º vinyl siding; º •
º doors, windows and millwork; º •
º wood and fiber cement siding; º •
º residential insulation; and º •
º waterproofing systems.

The following is a summary of our net sales by product group for the last three full fiscal years. Percentages may not total due to rounding.

                                                        Year Ended
                               September 30,           September 30,           September 30,
                                   2009                    2008                    2007
                               Net                     Net                     Net
                              Sales        Mix        Sales        Mix        Sales        Mix
Residential roofing
products                   $   897,410      51.8 % $   758,491      42.5 % $   691,693      42.0 %
Non-residential roofing
products                       599,568      34.6 %     723,742      40.6 %     605,857      36.8 %
Complementary building
products                       236,989      13.7 %     302,262      16.9 %     348,235      21.2 %

                           $ 1,733,967     100.0 % $ 1,784,495     100.0 % $ 1,645,785     100.0 %

We have over 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 2009 and 2008, we experienced increases to 0.4% and 0.6% of net sales, respectively, which is 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.

In September 2007, we amended our by-laws to change our year-end date to September 30 of each fiscal year. Prior to that amendment, we used a 52/53 week fiscal year ending on the last Saturday of September. Our fiscal years ended September 30, 2009 ("2009"), September 30, 2008 ("2008"), and September 30, 2007 ("2007") all contained 52 weeks.

Since 1997, we have made seventeen strategic and complementary acquisitions and opened 36 new branches. We opened eight branches in 2007, one in 2008 and three in 2009. 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 five fiscal years since our IPO was 4.5%.

Results of operations

The following discussion compares our results of operations for 2009, 2008 and 2007.

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.

                                                      Year ended
                                   September 30,     September 30,     September 30,
                                       2009              2008              2007
   Net sales                                100.0 %           100.0 %           100.0 %
   Cost of products sold                     76.3              76.5              77.3

       Gross profit                          23.7              23.5              22.7
   Operating expenses                        17.4              18.2              18.5

   Income from operations                     6.3               5.3               4.2
   Interest expense                          (1.3 )            (1.5 )            (1.7 )

   Income before income taxes                 5.0               3.9               2.6
   Income taxes                              (2.0 )            (1.6 )            (1.0 )

   Net income                                 3.0 %             2.3 %             1.5 %

2009 compared to 2008

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:

º •
º significant decline in non-residential roofing activity; º •
º continued weakness in new residential roofing activity in most markets; º •
º continued weak complementary product sales in most markets; and º •
º six fewer branches for most of the year;

partially offset by the positive impact of:

º •
º higher average year-over-year prices, especially in residential roofing products; and º •
º increased re-roofing activity in the areas affected by Hurricane Ike, primarily in our Southwest region.

We estimate inflation increased this year's sales by 7-9% over last year, 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.

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 and we currently expect our future overall gross margin to range from 23-24%, depending upon 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 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 )%

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:

º •
º 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; º •
º 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; º •
º reductions of $2.9 million in various general & administrative expenses, mainly from decreases in workmen's compensation and auto insurance costs; º •
º a reduction of $2.9 million in the provision for bad debts primarily due to collections of aged receivables; and º •
º 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:

º •
º 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.

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 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. We expect our future effective income tax rate to fluctuate around 39.5%, depending primarily upon the results of our operations in Canada and in the various states in which we operate.

2008 compared to 2007

The following table shows a summary of our results of operations for 2008 and 2007, broken down by existing markets and acquired markets.

For the Fiscal Years Ended

                       Existing Markets          Acquired Markets            Consolidated
(in thousands)        2008          2007         2008        2007         2008          2007
Net sales          $ 1,508,564   $ 1,489,297   $ 275,931   $ 156,488   $ 1,784,495   $ 1,645,785
Gross profit           373,929       349,343      46,079      24,574       420,008       373,917
Gross margin              24.8 %        23.5 %      16.7 %      15.7 %        23.5 %        22.7 %
Operating
expenses               283,521       282,727      41,777      21,382       325,298       304,109
Operating
expenses as a %
of net sales              18.8 %        19.0 %      15.1 %      13.7 %        18.2 %        18.5 %
Operating income   $    90,408   $    66,616   $   4,302   $   3,192   $    94,710   $    69,808
Operating margin           6.0 %         4.5 %       1.6 %       2.0 %         5.3 %         4.2 %

     Net Sales

    Consolidated net sales increased $138.7 million, or 8.4%, to
$1,784.5 million in 2008 from $1,645.8 million in 2007. Sales from acquired
markets increased $119.4 million, while existing markets saw internal growth of
$19.3 million, or 1.3%. There was one additional business day in 2008 as
compared to 2007, which we believe increased annual existing market sales by
approximately 0.4%. During 2008, we opened one new branch and closed four
branches. The product group sales for our existing markets were as follows:

For the Fiscal Years Ended

Existing Markets

                                        2008                   2007                Change
(dollars in millions)           Net Sales      Mix     Net Sales      Mix
Residential roofing products     $   736.1      48.8 %  $   684.5      46.0 % $  51.6       7.5 %
Non-residential roofing
products                             479.4      31.8 %      463.1      31.1 %    16.3       3.5 %
Complementary building
products                             293.1      19.4 %      341.7      22.9 %   (48.6 )   (14.2 )%

                                 $ 1,508.6     100.0 %  $ 1,489.3     100.0 % $  19.3       1.3 %

Our existing market sales were affected by the following factors:

º •
º a rapid rise in prices beginning in February 2008, especially in residential roofing products; º •
º strong re-roofing activity in storm-affected regions; º •
º continued strength in non-residential roofing activity in most markets; and º •
º one additional business day in 2008 as compared to 2007.

partially offset by the negative impact of:

º •
º continued weakness in new residential roofing activity in most markets; and º •
º lower complementary product sales in most markets, especially where we have had historically higher levels of new residential construction.

     Gross Profit

                                        2008      2007         Change
                                              (dollars in millions)
                  Gross profit         $ 420.0   $ 373.9   $ 46.1     12.3 %
                    Existing markets     373.9     349.3     24.6      7.0 %
                  Gross margin            23.5 %    22.7 %       0.8%
                    Existing markets      24.8 %    23.5 %       1.3%

In 2008, existing markets' gross profit increased $24.6 million or 7.0% as compared to 2007, while our acquired markets' gross profit increased $21.5 million. Our overall gross margin increased to 23.5% from 22.7%, while our existing markets' gross margin increased to 24.8% in 2008 from 23.5% in 2007. These increases were mostly in our residential roofing products and resulted principally from the pass-through of increases in shingle prices as we were notified of a series of price increases from our vendors, which we were experiencing beginning in February 2008. However, our cost of goods sold did not increase at the same time or rate due to favorable buying programs and the lower cost inventory on hand before the price increases. Our existing markets' gross margin in non-residential roofing and complementary products, excluding vendor incentives, which represents our invoiced gross margin, was relatively consistent with 2007. The effect of the price increases was partially offset in our overall gross margins by an increase in the sales mix of traditionally lower gross margin non-residential roofing products, while gross margin in our existing markets benefited from an increase of residential roofing products in our existing market product sales mix, which have higher gross margins than our other products.

     Operating Expenses

                                                 2008      2007         Change
                                                      (dollars in millions)
         Operating expenses                     $ 325.3   $ 304.1   $ 21.2     7.0 %
              Existing markets                    283.5     282.7      0.8     0.3 %

Our existing markets' operating expenses increased by only $0.8 million or 0.3% to $283.5 million in 2008 from $282.7 million in 2007, while our acquired markets' operating expenses increased $20.4 million. The following factors were the leading causes of the change in our existing market operating expenses:

º •
º an increase in bad debts of $4.4 million, as we experienced higher write-offs and increased our reserves due to the economic and credit climate; and º •
º an increase of $2.5 million in selling and warehouse expenses due primarily to higher transportation expenses resulting from significantly higher petroleum costs and from higher sales related costs, including credit card fees;

mostly offset by:

º •
º a decrease of $2.9 million from both expense reduction initiatives and the benefit from leveraging certain expenses over existing and acquired markets; º •
º reduced depreciation and amortization of $2.0 million due to lower amortization of intangible assets and somewhat from substantially lower capital expenditures in 2008; and º •
º payroll and related costs decreased by $1.2 million primarily from a lower headcount and favorable medical insurance claims, partially offset by higher incentive-based pay and profit sharing.

Existing markets' operating expenses as a percentage of net sales decreased to 18.8% in 2008 from 19.0% in 2007 as we were able to control our variable costs and leverage our fixed costs. Overall operating expenses decreased to 18.2% of net sales from 18.5% due to the same factors and also from blending in the lower operating expense level of North Coast. In 2008, we expensed a total of $8.5 million for the amortization of intangible assets recorded under purchase accounting in our existing markets compared to $10.3 million in 2007, while acquired markets expensed $6.5 million and $3.9 million for 2008 and 2007, respectively.

Interest expense decreased $1.5 million to $25.9 million in 2008 from $27.4 million in 2007, primarily from lower levels of debt. Average interest rates during 2008 also decreased somewhat from the prior year, which affected interest expense on our variable-rate debt. Interest expense would have been $2.8 million lower in 2008 and $0.4 million higher in 2007 without the impact of our derivatives.

Income tax expense increased to $28.5 million in 2008 from $17.1 million in 2007. Our 2008 effective income tax rate was 41.4%, compared to our 2007 effective income tax rate of 40.3%. The rate increase was primarily due to 2007 adjustments of previously accrued income taxes related to previously filed tax returns that benefited the 2007 income tax rate.

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 re-roofing, especially in our northeastern U.S. and Canada regions. 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 seasonality. When we need to borrow, our borrowings generally peak during the third quarter as 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 usually 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 period of the year to incentivize sales. Also, during the second quarter, we generally experience our lowest availability under our senior secured credit facilities, which are based on accounts receivable.

Certain quarterly financial data

The following table sets forth certain unaudited quarterly data for the . . .