Search the web
Welcome, Guest
[Sign Out, My Account]
EDGAR_Online

Quotes & Info
Enter Symbol(s):
e.g. YHOO, ^DJI
Symbol Lookup | Financial Search
BECN > SEC Filings for BECN > Form 10-K on 27-Nov-2013All Recent SEC Filings

Show all filings for BEACON ROOFING SUPPLY INC

Form 10-K for BEACON ROOFING SUPPLY INC


27-Nov-2013

Annual Report


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with our consolidated financial statements and related notes and other financial information appearing elsewhere in this Form 10-K. In addition to historical information, the following discussion and other parts of this Form 10-K contain forward-looking information that involves risks and uncertainties. Our actual results could differ materially from those anticipated by this forward-looking information due to the factors discussed under "Risk factors," "Forward-looking statements" and elsewhere in this Form 10-K. Certain tabular information will not foot due to rounding.

Overview

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

Depending on the market, each of our branches carries from about 2,000 to 11,000 SKUs, totaling to more than 200,000 SKUs throughout our network of 236 branches across the United States and Canada. In fiscal year 2013, approximately 92% of our net sales were in the United States. We stock one of the most extensive assortments of high-quality branded products in the industry, enabling us to deliver products to our customers on a timely basis.

Execution of the operating plan at each of our branches drives our financial results. Revenues are impacted by the relative strength of the residential and non-residential roofing markets we serve. We strive for an appropriate mix of residential, non-residential and complementary product sales in all of our regions but allow each of our branches to influence its own marketing plan and mix of products based upon its local market. We differentiate ourselves from the competition by providing many customer services such as 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 also continually pay close attention to controlling operating costs.

Our growth strategy includes both internal growth (opening 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 do not service or that complement our existing operations in an area. The following transactions highlight our recent success delivering on our growth strategy:

We have continued to focus on organic greenfield growth with the opening of 10 new branches in 2013, four new branches in 2012 and three new branches in 2011. These 17 new branch locations in the past three years have allowed us to strategically penetrate deeper into many of our existing markets and enter into new markets. Additionally in October 2013, we continued to accelerate our greenfield activity by opening two new branches bringing our branch count as of November 1, 2013 to 238.

In December 2012, we acquired Ford Wholesale Co., a distributor of residential and commercial roofing and related accessories with three locations in Northern California. This acquisition provided entry into a new geographic market with no branch overlap with our existing operations.

In November 2012, we acquired McClure-Johnston a distributor of residential and commercial roofing products and related accessories, which was headquartered in the Pittsburgh area and had 14 branches at the time of acquisition, including eight in Pennsylvania, three in West Virginia, one in Western Maryland and two in Georgia. This acquisition complemented an existing market in which we previously had operations, allowing us to capture more of the localized market share.

In July 2012, we acquired Structural Materials Co. ("Structural"), a distributor of residential and commercial roofing products and related accessories headquartered in Santa Ana, CA. Structural has six locations in Los Angeles and Orange Counties and in the surrounding areas, which we integrated into our existing Pacific Supply region in Southern California.

In May 2011, we acquired Enercon Products Inc. ("Enercon"), a roofing distributor with six locations in Western Canada. Headquartered within its branch in Edmonton, Enercon also has branches in Calgary, Regina and Saskatoon and two branches in Vancouver. This acquisition provided entry into a new geographic market with no branch overlap with our existing operations.

General

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

Shingles;

Single-ply roofing;

Metal roofing and accessories;

Modified bitumen;

Built up roofing;

Insulation;

Slate and tile;

Fasteners, coatings and cements; and

Other roofing accessories.

We also sell complementary building products such as:

Vinyl siding;

Doors, windows and millwork;

Wood and fiber cement siding;

Residential insulation; and

Waterproofing systems.

The following is a summary of our net sales by product group (in thousands) for the last three full fiscal years ("2013", "2012" and "2011"). Percentages may not total due to rounding.

                                                   Year Ended September 30,
                              2013                           2012                           2011
                    Net Sales         Mix          Net Sales         Mix          Net Sales         Mix
(dollars in
thousands)
Residential
roofing products   $ 1,100,508           49.1 %   $ 1,023,547           50.1 %   $   849,970           46.8 %
Non-residential
roofing products       822,726           36.7 %       757,906           37.1 %       718,145           39.5 %
Complementary
building
products               317,489           14.2 %       262,205           12.8 %       249,308           13.7 %

                   $ 2,240,723          100.0 %   $ 2,043,658          100.0 %   $ 1,817,423          100.0 %

We have over 47,000 customers, none of which individually represent more than 2% of our total net sales. Many of our customers are small to mid-size contractors with relatively limited capital resources. We maintain strict credit review and approval policies, which has helped to keep losses from uncollectible customer receivables within our expectations. Bad debt expense in 2013 was less than 0.1% due primarily to continued improvement in the economy and credit environment. Bad debt expense in 2012 was in line with our normal historical levels at approximately 0.2% of net sales, while bad debts in 2011 were slightly higher than normal levels at 0.4% of net sales but still within our tolerance in consideration of the recovering economy.

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.

We opened 10 new branches in 2013, four new branches in 2012 and three in 2011. While we slowed the pace of new branch openings following the economic downturn that began in 2007, we began increasing our greenfield activity in 2013 which we expect to continue through 2014 as part of our continued growth strategy. 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 (organic) growth unless it results from an acquisition. When we refer to growth in existing markets or internal growth, 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 fiscal reporting period. When we refer to regions, we are referring to our geographic regions. At September 30, 2013, we had a total of 236 branches in operation. Our existing market calculations for 2013 include 196 branches and exclude 40 branches because they were acquired after the start of last year. Acquired markets for 2013 include Cassady Pierce, Structural Materials, CRS, McClure-Johnston, Ford Wholesale, Construction Materials Supply, The Roofing Connection and Fowler & Peth (See Note 4 to the Consolidated Financial Statements).

When we refer to our net product costs, we are referring to our invoice cost less the impact of short-term buying programs (also referred to as "special buys" given the manner in which they are offered).

Results of operations

The following discussion compares our results of operations for 2013, 2012 and 2011.

The following table presents information derived from our consolidated statements of operations expressed as a percentage of net sales for each of the respective the periods indicated. Percentages may not total due to rounding.

                                                       Year ended September 30,
                                                     2013         2012        2011

     Net sales                                         100.0 %     100.0 %     100.0
     Cost of products sold                              76.3        75.5        76.9

     Gross profit                                       23.7        24.5        23.1

     Operating expenses                                 17.9        17.5        17.4

     Income from operations                              5.8         7.0         5.7
     Interest expense, financing costs and other        (0.4 )      (0.8 )      (0.7 )

     Income before income taxes                          5.4         6.2         5.0
     Income taxes                                       (2.2 )      (2.5 )      (1.7 )

     Net income                                          3.2 %       3.7 %       3.3 %

2013 compared to 2012

The following table shows a summary of our results of operations for 2013 and 2012, broken down by existing markets and acquired markets.

                             Existing Markets              Acquired Markets                Consolidated
(dollars in
thousands)                 2013            2012           2013          2012           2013            2012

Net sales               $ 1,975,612     $ 1,952,942     $ 265,111     $  90,716     $ 2,240,723     $ 2,043,658

Gross profit                462,198         477,263        69,199        24,141         531,397         501,404
Gross margin                   23.4 %          24.4 %        26.1 %        26.6 %          23.7 %          24.5 %

Operating expenses          333,144         332,065        68,532        25,667         401,676         357,732
Operating expenses as
a % of net sales               16.9 %          17.0 %        25.9 %        28.3 %          17.9 %          17.5 %

Operating income
(loss)                  $   129,054     $   145,198     $     667     $  (1,526 )   $   129,721     $   143,672
Operating margin                6.5 %           7.4 %         0.3 %        -1.7 %           5.8 %           7.0 %

The operating expenses in acquired markets above for 2013 and 2012 include $7.9 and $2.1 million of amortization of intangible assets recorded under purchase accounting, respectively.

Net Sales

Consolidated net sales increased $197.1 million, or 9.6%, to $2.24 billion in 2013 from $2.04 billion in 2012. Existing market sales increased $22.7 million or 1.2% (0.4% based on the same number of business days). Acquired market sales increased $174.4 million due to a full year's sales impact from the 2012 acquisitions and the partial year impact from our 2013 acquisitions. We attribute the existing market sales increase primarily to the following factors:

better weather conditions in the fourth quarter of this year allowed for an increase in roofing activities, especially residential roofing; and

strong growth in complementary building product sales.

Partially offset by:

by heavy rains in several regions during the third quarter and fewer hail storms in 2013;

last year's very high level of re-roofing activities, including the beneficial impact from mild weather in December 2011 and strong carry over business from the significant storm activity in 2011; and

a slowdown in non-residential roofing activity in 2013, primarily in the first half of the year.

In 2013, we acquired 19 branches, opened 10 new branches, and closed two branches. In 2013, we have estimated the impact of inflation or deflation on our existing market sales and gross profit by looking at changes in our average selling prices and gross margins (discussed below). Average selling prices for residential and non-residential were flat overall (each less than +/-1% movement) in 2013 compared to 2012, while complementary product prices were up approximately 3%. Overall, blended price increases contributed an approximate $10 million of incremental sales in 2013 compared to 2012. Additionally, we also benefited from 253 business days in 2013 compared to 251 in 2012 which contributed to an approximate $15 million of year over year existing market sales growth. We estimate the impact on existing market sales related to year over year changes in unit volume (adjusted for the additional business days) was a decline of approximately $3 million.

Existing market net sales by geographical region increased (decreased) as follows: Northeast (3.7)%; Mid-Atlantic (7.8)%; Southeast 21.4%; Southwest 14.8%; Midwest (7.8%); West (2.9)%; and Canada 4.8%. These variations were primarily caused by short-term factors such as local economic conditions, weather conditions and storm activity that can influence the comparisons of a single geographical region.

The product group sales for our existing markets were as follows:

For the Fiscal Years Ended



                                                                                                         % Change Based
                                                                                                        On Average Sales
                               2013                        2012                      Change             Per Business Day
                      Net Sales        Mix        Net Sales        Mix
(dollars in
millions)
Residential roofing
products              $    977.8         49.5 %   $    965.2         49.4 %   $   12.6          1.3 %                 0.5 %
Non-residential
roofing products           735.1         37.2 %        738.0         37.8 %       (2.9 )       -0.4 %                -1.2 %
Complementary
building products          262.7         13.3 %        249.7         12.8 %       13.0          5.2 %                 4.4 %

                      $  1,975.6        100.0 %   $  1,952.9        100.0 %   $   22.7          1.2 %                 0.4 %

For 2013, our acquired markets recognized sales of $122.7, $87.7 and $54.7 million in residential roofing products, non-residential roofing products and complementary building products, respectively. The 2013 existing market sales of $1,975.6 million plus the total sales from acquired markets of $265.1 million agrees (rounded) to our reported total 2013 sales of $2,240.7 million. For 2012, our acquired markets recognized sales of $58.4, $19.9 and $12.5 million in residential roofing products, non-residential roofing products and complementary building products, respectively. The 2012 existing market sales of $1,952.9 million plus the total sales from acquired markets of $90.8 million agrees (rounded) to our reported total 2012 sales of $2,043.7 million. Prior year sales by product group are presented in a manner consistent with the current year's product classifications. We believe the existing market information is useful to investors because it helps explain organic growth or decline.

Gross Profit



                                   2013        2012                  Change
          (dollars in millions)
          Gross profit            $ 531.4     $ 501.4     $  30.0                   6.0 %
          Existing markets          462.2       477.3       (15.1 )                -3.2 %

          Gross margin               23.7 %      24.5 %                 -0.8 %
          Existing markets           23.4 %      24.4 %                 -1.0 %

Our existing market gross profit declined $15.1 million, or 3.2% in 2013, while our acquired market gross profit increased $45.1 million. Our overall and existing market gross margins decreased to 23.7% and 23.4%, in 2013, respectively, from 24.5% and 24.4% in 2012. The decline in gross margin in 2013 was primarily due to product cost increases that have not been consistently passed through to customers due to the soft demand environment.

Direct sales (products shipped by our vendors directly to our customers), which typically have substantially lower gross margins than our warehouse sales, represented 17.5% and 17.7% of our net sales in 2013 and 2012, respectively. This decrease was primarily attributable to the lower mix of non-residential roofing product sales, which are more commonly facilitated by direct shipment. There were no material divisional impacts from changes in the direct sales mix of our geographical regions.

Operating Expenses



                                          2013        2012                  Change
    (dollars in millions)
    Operating expenses                   $ 401.7     $ 357.7     $ 44.0                  12.3 %
    Existing markets                       333.1       332.1        1.0                   0.3 %

    Operating expenses as a % of sales      17.9 %      17.5 %                 0.4 %
    Existing markets                        16.9 %      17.0 %                -0.1 %

Operating expenses in our existing markets were relatively flat year over year increasing $1.0 million, or 0.3% in 2013, to $333.1 million, compared to $332.1 million in 2012, while our acquired markets expenses increased by $43.0 million to $68.5 million. The following factors were the leading causes of the higher operating expenses in our existing markets:

increased payroll and related costs of $7.1 million primarily due to higher salaries and wages, overtime pay and payroll taxes;

increased warehouse and selling expenses of $3.6 million from higher fuel and transportation costs, rent and real estate taxes, and credit card fees; and

increased depreciation of $0.5 million from the impact of increased capital expenditures and acquisition activity in recent years.

Partially offset by

lower employee benefit costs of $3.6 million due primarily to lower bonus, profit-sharing accruals and stock compensation expense;

decreased amortization expense of $1.6 million from lower amortization of intangibles; and

decreased bad debt expense of $4.5 million due primarily to a lower percentage of past-due accounts and very low historical write-offs.

In 2013 and 2012, we expensed a total of $14.0 million and $9.4 million, respectively, for the amortization of intangible assets recorded under purchase accounting, including the impact from acquired markets. Our existing markets operating expenses as a percentage of the related net sales were 16.9% and 17.0% in 2013 and 2012, respectively.

Interest Expense, Financing Costs and Other

Interest expense, financing costs and other were $8.2 million in 2013 compared to $17.2 million in 2012 due primarily to lower debt balances in 2013 and a marginally lower effective interest rate. The 2012 expense includes a charge of $2.6 million for the recognition of the fair value of certain interest rate derivatives and $1.2 million resulting from the refinancing of our debt. These negative factors on interest expense, financing costs and other in 2012 were partially offset by the benefit from lower outstanding total debt. Excluding the impact of our interest rate derivatives, interest expense, financing costs and other would have been $1.3 and $7.5 million lower in 2013 and 2012, respectively.

Income Taxes

Income tax expense was $48.9 million in 2013, an effective tax rate of 40.2%, compared to $50.9 million in 2012, which was an effective tax rate of 40.3%. We expect our future annual income tax rate to average approximately 39.5% to 40.5%, excluding any discrete items.

2012 compared to 2011

The following table shows a summary of our results of operations for 2012 and 2011, broken down by existing markets and acquired markets.

                        Existing Markets               Acquired Markets                 Consolidated
(dollars in
thousands)            2012            2011            2012           2011           2012            2011

Net sales          $ 1,905,441     $ 1,792,391     $  138,217     $   25,032     $ 2,043,658     $ 1,817,423

Gross profit           464,149         413,227         37,255          6,398         501,404         419,625
Gross margin              24.4 %          23.1 %         27.0 %         25.6 %          24.5 %          23.1 %

Operating
expenses               321,057         311,347         36,675          4,536         357,732         315,883
Operating
expenses as a %
of net sales              16.8 %          17.4 %         26.5 %         18.1 %          17.5 %          17.4 %

Operating income
(loss)             $   143,092     $   101,880     $      580     $    1,862     $   143,672     $   103,742
Operating margin           7.5 %           5.7 %          0.4 %          7.4 %           7.0 %           5.7 %

Net Sales

Consolidated net sales increased $226.2 million, or 12.5%, to $2,043.7 million in 2012 from $1,817.4 million in 2011. Existing markets sales increased $113.0 million or 6.3% (7.6% based on the same number of business days). Acquired markets sales increased $113.2 million due to a full year's sales impact from the 2011 acquisitions and the partial year impact from our 2012 acquisitions. We attribute the existing markets sales increase primarily to the following factors:

better weather conditions in the first half of 2012 allowed for an increase in roofing activities, especially residential roofing;

strong growth in the first half of 2012 in the markets affected by 2011 storms;

strong growth in non-residential roofing activity in most of our regions through the second quarter of 2012; and

industry-wide price increases in our roofing product groups since the second quarter of 2011.

Partially offset by:

less roofing activity in the back half of 2012 in the markets affected by 2011 hail storms; and

a slowdown in non-residential roofing activity during the back half of 2012.

In 2012, we acquired twenty-two branches, opened four new branches, and closed two branches. In 2012, we have estimated the impact of inflation or deflation on our sales and gross profit by looking at changes in our average selling prices and gross margins (discussed below). Average selling prices were up overall 3-4% in 2012 compared to 2011, with price increases of non-residential products at 8-9%. Residential roofing product prices were up slightly at 1%, while complementary product prices were up 3-4%. The higher gross margins in 2012 are an indicator that the inflation in our net product costs was less than the impact from the increase in our average selling prices. Existing markets net sales by geographical region increased (decreased) as follows: Northeast 6.3%; Mid-Atlantic 10.9%; Southeast 13.9%; Southwest 10.3%; Midwest (3.0%); West 2.8%; and Canada 3.1%. These variations were primarily caused by short-term factors such as local economic conditions, weather conditions and storm activity that influence the comparisons of a single geographical region. We had 251 business days in 2012 compared to 254 in 2011.

The product group sales for our existing markets were as follows:

For the Fiscal Years Ended



                                                                                                                     % Change Based
                                                                                                                    On Average Sales
                                   2012                           2011                         Change               Per Business Day
                         Net Sales         Mix          Net Sales         Mix
(dollars in millions)
Residential roofing
products                $     923.5           48.5 %   $     826.2           46.1 %   $     97.3           11.8 %                13.1 %
Non-residential
roofing products              734.0           38.5 %         717.4           40.0 %         16.6            2.3 %                 3.5 %
Complementary
building products             247.9           13.0 %         248.8           13.9 %         (0.9 )         -0.4 %                 0.8 %

                        $   1,905.4          100.0 %   $   1,792.4          100.0 %   $    113.0            6.3 %                 7.6 %

For 2012, our acquired markets recognized sales of $100.1, $23.9 and $14.2 million in residential roofing products, non-residential roofing products and complementary building products, respectively. The 2012 existing markets sales of $1,905.4 million plus the total sales from acquired markets of $138.2 million agrees (rounded) to our reported total 2012 sales of $2,043.7 million. For 2011, our acquired markets recognized sales of $23.8, $0.7 and $0.5 million in residential roofing products, non-residential roofing products and complementary building products, respectively. The 2011 existing markets sales of $1,792.4 million plus the sales from acquired markets of $25.0 million agrees to our reported total 2011 sales of $1,817.4 million. Prior year sales by product group are presented in a manner consistent with the current year's product classifications. We believe the existing markets information is useful to investors because it helps explain organic growth or decline.

Gross Profit



                                    2012        2011                 Change
           (dollars in millions)
           Gross profit            $ 501.4     $ 419.6     $ 81.8                 19.5 %
            Existing markets         464.1       413.2       50.9                 12.3 %

           Gross margin               24.5 %      23.1 %                1.4 %
            Existing markets          24.4 %      23.1 %                1.3 %

Our existing markets gross profit increased $50.9 million or 12.3% in 2012, while our acquired markets gross profit increased $30.9 million. Our overall and existing markets gross margins increased to 24.5% and 24.4% in 2012, respectively, from 23.1% in 2011. The higher gross margins in 2012 were due primarily to improved gross margins in residential roofing product sales and an increase in our mix of those residential product sales, which generally have higher gross margins than our other products.

Direct sales (products shipped by our vendors directly to our customers), which . . .

  Add BECN to Portfolio     Set Alert         Email to a Friend  
Get SEC Filings for Another Symbol: Symbol Lookup
Quotes & Info for BECN - All Recent SEC Filings
Copyright © 2014 Yahoo! Inc. All rights reserved. Privacy Policy - Terms of Service
SEC Filing data and information provided by EDGAR Online, Inc. (1-800-416-6651). All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.