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| BECN > SEC Filings for BECN > Form 10-K on 2-Dec-2008 | All Recent SEC Filings |
2-Dec-2008
Annual Report
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 175 branches in the United States and Canada. In fiscal year 2008, approximately 94% of our net sales were in the United States. We stock one of the most extensive assortments of high-quality branded products in the industry, enabling us to deliver products to our customers on a timely basis.
Execution of the operating plan at each of our branches drives our financial results. Revenues are impacted by the relative strength of the residential and non-residential roofing markets we serve. We allow each of our branches to develop its own marketing plan and mix of products based upon its local market. We differentiate ourselves from the competition by providing customer services, including job site delivery, tapered insulation layouts and design and metal fabrication, and by providing credit. We consider customer relations and our employees' knowledge of roofing and exterior building materials to be 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.
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:
Year Ended
September 30, September 30, September 30,
2008 2007 2006
Net Net Net
Sales Mix Sales Mix Sales Mix
Residential roofing $ 756,321 42.4 % $ 691,693 42.0 % $ 731,704 48.8 %
products
Non-residential 725,900 40.7 % 605,857 36.8 % 448,042 29.9 %
roofing products
Complementary building 302,274 16.9 % 348,235 21.2 % 320,891 21.4 %
products
$ 1,784,495 100.0 % $ 1,645,785 100.0 % $ 1,500,637 100.0 %
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We have over 40,000 customers, none of which represents more than 0.70% 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 2008, we experienced an increase to almost 0.6% of net sales, 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 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, 2008 ("2008") and September 30, 2007 ("2007") contained 52 weeks, while the fiscal year ended September 30, 2006 ("2006") contained 53 weeks.
Since 1997, we have made seventeen strategic and complementary acquisitions and opened 33 new branches. We opened six branches in 2006, eight in 2007 and one in 2008. We slowed the pace of new
branch openings in 2008, mostly as a result of the slowdown in our business experienced in 2007. 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 four fiscal years since our IPO was 6.4%.
Results of operations
The following discussion compares our results of operations for 2008, 2007 and 2006.
The following table shows, for the periods indicated, information derived from our consolidated statements of operations expressed as a percentage of net sales for the periods presented. Percentages may not foot due to rounding.
Year ended
September 30, September 30, September 24,
2008 2007 2006
Net sales 100.0 % 100.0 % 100.0 %
Cost of products sold 76.5 77.3 75.7
Gross profit 23.5 22.7 24.3
Operating expenses 18.2 18.5 17.6
Income from operations 5.3 4.2 6.7
Interest expense (1.5 ) (1.7 ) (1.3 )
Income before income taxes 3.9 2.6 5.4
Income taxes (1.6 ) (1.0 ) (2.1 )
Net income 2.3 % 1.5 % 3.3 %
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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 %
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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 %
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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.
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%
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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 market gross margin in non-residential roofing and complementary products, excluding vendor incentives, which represents our invoiced gross margin, was relatively consistent with 2007. If price increases do not continue in the future, existing market gross margins could decrease somewhat from current levels. 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. We currently expect our future overall gross margins to fluctuate from 23% to 24% depending on our product mix and competitive conditions.
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 %
Operating expenses as a % of sales 18.2 % 18.5 % (0.3)%
Existing markets 18.8 % 19.0 % (0.2)%
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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;
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.
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. We expect our future effective income tax rate to fluctuate around 41.0%, depending primarily upon the results of our operations in Canada and in the various states in which we operate.
2007 compared to 2006
The following table shows a summary of our results of operations for 2007 and 2006, broken down by existing markets and acquired markets.
For the Fiscal Years Ended
Existing Markets Acquired Markets Consolidated
2007 2006 2007 2006 2007 2006
(in thousands)
Net sales $ 970,457 $ 1,019,858 $ 675,328 $ 480,779 $ 1,645,785 $ 1,500,637
Gross profit 227,274 247,137 146,643 117,000 373,917 364,137
Gross margin 23.4 % 24.2 % 21.7 % 24.3 % 22.7 % 24.3 %
Operating
expenses 157,946 162,204 146,163 101,632 304,109 263,836
Operating
expenses as a %
of net sales 16.3 % 15.9 % 21.6 % 21.1 % 18.5 % 17.6 %
Operating income $ 69,328 $ 84,933 $ 480 $ 15,368 $ 69,808 $ 100,301
Operating margin 7.1 % 8.3 % 0.1 % 3.2 % 4.2 % 6.7 %
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Consolidated net sales increased $145.1 million, or 9.7%, to $1,645.8 million in 2007 from $1,500.6 million in 2006. Sales from acquired markets increased $194.5 million, while existing markets
For the Fiscal Years Ended
Existing Markets % Change Based
On Average Sales
2007 2006 Change Per Business Day
Net Sales Mix Net Sales Mix
(dollars in millions)
Residential
roofing products $ 399.3 41.1 % $ 435.1 42.7 % $ (35.8 ) (8.2 )% (6.8 )%
Non-residential
roofing products 365.7 37.7 % 356.1 34.9 % 9.6 2.7 % 4.3 %
Complementary
building products 205.5 21.2 % 228.7 22.4 % (23.2 ) (10.1 )% (8.7 )%
$ 970.5 100.0 % $ 1,019.9 100.0 % $ (49.4 ) (4.8 )% (3.3 )%
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Our existing market sales were affected by the following factors:
º •
º a substantial decline in new residential construction, especially in
the mid-Atlantic states;
º •
º a significant slowdown in re-roofing and reconstruction activities in
certain areas of Texas, the Gulf Coast and Southeastern United States
affected by Hurricanes Katrina and Rita;
º •
º four fewer business days; and
º •
º harsher winter conditions this year in the Northeast, Canada, and
Midwest;
partially offset by the positive impact of:
º •
º continued growth in non-residential roofing; and
º •
º six new branches opened in existing markets since September 30, 2006.
Gross Profit
2007 2006 Change
(dollars in millions)
Gross profit $ 373.9 $ 364.1 $ 9.8 2.7 %
Existing markets 227.3 247.1 (19.8 ) (8.0 )%
Gross margin 22.7 % 24.3 % (1.6)%
Existing markets 23.4 % 24.2 % (0.8)%
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In 2007 our existing markets' gross profit declined 8.0% or $19.8 million compared to 2006, despite the six new branches, while acquired markets' gross profit increased $29.6 million. Existing markets' gross margin decreased to 23.4% in 2007 from 24.2% in 2006. The existing market decrease was caused by an increase in competitive conditions and generally lower construction activity. We experienced the highest margin compression in the markets that experienced the benefit of additional hurricane activity in 2006 and in our regions with higher sales mix of new residential roofing products. Our overall gross
margin has also decreased due primarily to those factors and the increase in product mix of traditionally lower gross margin non-residential roofing products.
Operating Expenses
2007 2006 Change
(dollars in millions)
Operating expenses $ 304.1 $ 263.8 $ 40.3 15.3 %
Existing markets 157.9 162.2 (4.3 ) (2.6 )%
Operating expenses as a % of sales 18.5 % 17.6 % 0.9%
Existing markets 16.3 % 15.9 % 0.4%
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Our existing markets' operating expenses decreased by 2.6% or $4.3 million in 2007 while acquired markets' operating expenses increased $44.5 million. The acquired markets' 2007 and 2006 operating expenses included $13.6 and $8.3 million, respectively, for the amortization of intangible assets recorded under purchase accounting. The existing markets' operating expense decline was due primarily to reductions in payroll and related costs ($2.9 million), other general and administrative expenses ($1.0 million) and selling costs ($0.4 million), which include transportation costs. These reductions resulted from cost-saving measures, improved insurance claims experience and from our lower sales volume and were partially offset by increased warehouse expense ($1.3 million), principally from our six new branches opened in existing markets since September 30, 2006, and higher depreciation and amortization ($1.4 million) resulting primarily from the depreciation of new transportation equipment. In addition, existing markets' general and administrative expenses benefited by $2.7 million from leveraging certain expenses over a larger base of branches, including our acquired markets. Total operating costs in 2007 include approximately $3.6 million incurred at the new branches, excluding allocated costs. Stock option expense increased $1.8 million in 2007 from 2006 due to the impact of our 2007 grants.
Existing markets' operating expenses as a percentage of net sales increased to 16.3% from 15.9%, primarily due to the lower sales and the relatively fixed structure of our current operating expenses. Overall operating expenses increased to 18.5% of net sales in 2007 from 17.6% in 2006, due to the lower sales, higher operating cost percentages at Shelter and Pacific, and the impact from the additional amortization expense mentioned above, offset somewhat by a lower operating cost percentage at North Coast.
Interest expense increased $8.0 million to $27.4 million in 2007 from $19.5 million in 2006. We refinanced our credit facilities in November 2006 and incurred additional borrowings to finance our acquisitions, both of which increased our debt level since September 30, 2006. Average interest rates during 2007 also increased from the prior year, which affected interest expense on our variable rate-debt.
Income tax expense decreased to $17.1 million in 2007 from $31.5 million in 2006. Our 2007 effective income tax rate was 40.3%, compared to our 2006 effective income tax rate of 39.0%. The rate increase was primarily due to the 2006 reversal of $1.1 million of previously accrued income taxes related to previously filed tax returns.
Seasonality and quarterly fluctuations
. . .
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