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-Q on 7-Feb-2014All Recent SEC Filings

Show all filings for BEACON ROOFING SUPPLY INC

Form 10-Q for BEACON ROOFING SUPPLY INC


7-Feb-2014

Quarterly Report


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 2013 Annual Report on Form 10-K. Unless otherwise specifically indicated, all references to "2014" refer to the three months (first quarter) ended December 31, 2013 of our fiscal year ending September 30, 2014, and all references to "2013" refer to the three months (first quarter) ended December 31, 2012 of our fiscal year ended September 30, 2013. Certain tabular information may not foot due to rounding and certain reclassifications are made to prior year sales by product line to conform to the current year presentation.

Overview

We are one of the largest distributors of residential and non-residential roofing materials in the United States and Canada. We also distribute 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 materials suppliers.

We currently distribute up to 11,000 SKUs through 240 branches in the United States and Canada. We had 2,946 employees as of December 31, 2013.

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 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. Although 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 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. Our November 2012 acquisition of McClure-Johnston is an example of an acquisition that complements our existing markets. McClure-Johnston is a distributor of residential and commercial roofing products and related accessories, headquartered in the Pittsburgh area, and has 14 branches, including eight in Pennsylvania, three in West Virginia, one in Western Maryland and two in Georgia. Our December 2012 acquisition of Ford Wholesale Co., a distributor of residential and commercial roofing and related accessories with three locations in Northern California, is an example of an entry into a new geographic market with no branch overlap with our existing operations.

Results of Operations

The following table presents, 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.

                                           Three Months Ended December 31,
                                            2013                     2012

       Net sales                                 100.0 %                  100.0 %
       Cost of products sold                      77.0                     75.3
       Gross profit                               23.0                     24.7
       Operating expenses                         18.1                     18.4
       Income from operations                      4.9                      6.3
       Interest expense, financing
       costs and other                           (0.5)                    (0.4)
       Income before income taxes                  4.4                      5.9
       Income tax expense                        (1.7)                    (2.4)
       Net income                                  2.7 %                    3.5 %

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 December 31, 2013, we had a total of 240 branches in operation. Our existing market calculations includes 221 branches and excludes 19 branches because they were acquired after the start of last year's first quarter. Acquired markets for 2014 include McClure-Johnston, Ford Wholesale and Construction Materials Supply (See Note 5 to the Condensed 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).

Three Months Ended December 31, 2013 ("2014") Compared to the Three Months Ended December 31, 2012 ("2013")

Existing and Acquired Markets

                           Existing Markets            Acquired Markets               Consolidated
                             December 31,                 December 31,                December 31,
                          2013          2012           2013          2012          2013          2012
Net Sales               $ 520,395     $ 503,595     $   31,733     $  10,115     $ 552,129     $ 513,710

Gross Profit              119,659       124,271          7,245         2,484       126,905       126,754
Gross Margin                 23.0 %        24.7 %         22.8 %        24.6 %        23.0 %        24.7 %

Operating Expenses         92,310        91,178          7,506         3,324        99,818        94,505
Operating Expenses as
a % of Net Sales             17.7 %        18.1 %         23.7 %        32.9 %        18.1 %        18.4 %

Operating Income
(Loss)                  $  27,349     $  33,093     $    (261)     $   (840)     $  27,087     $  32,249
Operating Margin              5.3 %         6.6 %         -0.8 %        -8.3 %         4.9 %         6.3 %

Net Sales

Consolidated net sales increased $38.4 million, or 7.5%, to $552.1 million in 2014 from $513.7 million in 2013. Existing market sales increased $16.8 million or 3.3% (the first quarter of 2014 and 2013 both had the same number of business days), while acquired market sales increased $21.6 million to $31.7 million. There were 62 business days in both 2014 and 2013. We believe our 2014 existing market sales were influenced primarily by the following factors:

higher residential roofing activity; and

higher direct sales activity related primarily to commercial roofing;

partially offset by:

lower residential and commercial roofing average selling prices.

We believe some of the comparisons to last year above were also influenced by the earlier onset of wetter weather and colder temperatures in most of our markets compared to last year. Despite challenges posed by the inclement weather during the quarter, we expanded our presence with the opening of four new branches in 2014. Comparatively, we opened one new branch, acquired 19 branches and closed one in last year's first quarter. We are seeing success with our new branch opening process and believe we will exceed our initial targets and may open as many as 25 additional branches in fiscal 2014.

In 2014, 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 overall selling prices declined slightly in 2014 compared to 2013, with prices of complementary products generally flat. Residential and commercial roofing product prices were down nearly 1%, while complementary product prices were down less than 0.4%. The lower gross margins in 2014 below are an indicator that the deflation in our net product costs was less than the impact from the decrease in our average selling prices. Existing market net sales by geographical region increased (decreased) as follows:
Northeast (1.6%); Mid-Atlantic (2.6%); Southeast 20.9%; Southwest (1.4%); Midwest 12.2%; West 14.6%; and Canada (8.2%). These variations were primarily caused by short-term factors such as local market conditions, weather conditions and storm activity.

Product group sales for our existing markets were as follows:

For the Three Months Ended

                                     December 31, 2013          December 31, 2012
                                      Sales        Mix           Sales        Mix             Change
Residential roofing products       $   241,309       46.4 %   $   238,049       47.3 %   $  3,260      1.4 %
Non-residential roofing products       207,374       39.8 %       194,547       38.6 %     12,827      6.6
Complementary building products         71,712       13.8 %        71,000       14.1 %        712      1.0
Total existing market sales        $   520,395      100.0 %   $   503,595      100.0 %   $ 16,800      3.3 %

For 2014, our acquired markets recognized sales of $10.5, $11.3 and $9.9 million in residential roofing products, non-residential roofing products and complementary building products, respectively, compared to $2.8, $2.4, and $4.9 million in residential roofing products, non-residential roofing products and complementary building products, respectively, in 2013. The 2014 existing market sales of $520.4 million, plus the sales from acquired markets of $31.7 million, agrees to our reported total 2014 sales of $552.1 million. The 2013 existing market sales of $503.6 million, plus the sales from acquired markets of $10.1 million, agrees to our reported total 2013 sales of $513.7 million. We believe the existing market information is useful to investors because it helps explain organic growth or decline.

Gross Profit

For the Three Months Ended

                    December 31,        December 31,
                        2013                2012                   Change
Gross profit       $       126,905     $      126,754     $     151             0.1 %
Existing markets           119,659            124,271       (4,612)            -3.7 %

Gross margin                  23.0 %             24.7 %               -1.7 %
Existing markets              23.0 %             24.7 %               -1.7 %

Our existing market gross profit decreased $4.6 million or 3.7% in 2014, while our acquired market gross profit increased by $4.8 million to $7.2 million. Our overall and existing market gross margins decreased in 2014 to 23.0% from 24.7% in 2013. The lower gross margins in 2014 were due primarily to pricing pressure across all product categories, cost increases in our complementary products and, in the total sales, an increase in our mix of direct non-residential product sales, which generally have lower gross margins than our other products.

Direct sales (products shipped by our vendors directly to our customers), which typically have substantially lower gross margins (and operating expenses) compared to our warehouse sales, represented 18.4% and 15.1% of our net sales in 2014 and 2013, respectively. This increase in the percentage of direct sales was primarily attributable to the higher mix of non-residential roofing product sales, which are more commonly facilitated by direct shipment. There were no material regional impacts from changes in the direct sales mix of our geographical regions.

Operating Expenses

For the Three Months Ended

                          December 31,        December 31,
                              2013                2012                      Change
Operating expenses       $        99,818     $        94,505     $  5,313                 5.6 %
Existing markets                  92,310              91,178        1,132                 1.2 %

Operating expenses as
a % of sales                        18.1 %              18.4 %                -0.3 %
Existing markets                    17.7 %              18.1 %                -0.4 %

Operating expenses in our existing market increased by $1.1 million or 1.2% in 2014 to $92.3 million, as compared to $91.2 million in 2013, while our acquired market expenses increased by $4.2 million to $7.5 million. The following factors were the leading causes of the increased operating expenses in our existing markets:

increased payroll and employee benefit costs of $2.0 million; partially offset by:

decreased bad debt expense of $0.7 million due primarily to a lower percentage of past-due accounts; and

lower general and administrative expenses of $0.2 million.

In 2014, we expensed a total of $3.6 million for the amortization of intangible assets recorded under purchase accounting compared to $3.1 million in 2013. That increase was due to the impact of the acquisitions in 2013 that are included in our acquired markets. Our existing market operating expenses as a percentage of the related net sales in 2014 was 17.7% compared to 18.1% due to cost control initiatives and an increase in existing market sales.

Interest Expense, Financing Costs and Other

Interest expense, financing costs and other was $2.7 million in 2014 compared to $1.9 million in 2013. This year's interest expense includes $0.3 million of expense related to the amortization of deferred financing costs. Interest expense in 2013 reflected a credit of $1.3 million for the recognition of the fair value of certain interest rate derivatives (Note 7) and expense of $0.3 million resulting from the amortization of deferred financing costs.

Income Taxes

Income tax expense was $9.5 million in 2014, compared to $12.1 million in 2013. The decrease was due to a reduction in our effective tax rate to 38.8% in 2014, compared to 40.0% in 2013, due primarily to a beneficial impact from the low Canadian tax rate, a slightly lower effective state tax rate and no discrete items in 2014. We currently expect our annual tax rate to be approximately 39%.

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 branches in the northern and mid-western U.S. and in Canada. We have historically incurred low net income levels or net losses during the second quarter when our sales are substantially lower.

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

We generally experience a slowing of our accounts receivable collections during our second quarter, mainly due to the inability of some of our customers to conduct their businesses effectively in inclement weather in certain of our divisions. We continue to attempt to collect those receivables, which require payment under our standard terms. We do not provide material concessions to our customers during this quarter of the year.

Our vendors are also affected by the seasonality in the industry and are more likely to provide seasonal incentives in our second quarter as a result of the lower level of roofing activity. We generally experience our peak working capital needs during the third quarter after we build our inventories following the winter season but before we begin collecting on most of our spring receivables.

Certain Quarterly Financial Data

The following table sets forth certain unaudited quarterly data for fiscal year
2014 (ending September 30, 2014) and fiscal year 2013 which, in the opinion of
management, reflect all adjustments (consisting of normal recurring adjustments)
considered necessary for a fair presentation of this data. Results of any one or
more quarters are not necessarily indicative of results for an entire fiscal
year or of continuing trends. Totals may not total due to rounding.

                                      Fiscal 2014                            Fiscal 2013
                                         Qtr 1            Qtr 1            Qtr 2         Qtr 3        Qtr 4
                                            (unaudited; dollars in millions, except per share data)
Net sales                          $           552.1    $    513.7       $    416.3     $  627.2     $  683.5
Gross profit                                   126.9         126.8             99.7        147.3        157.6
Income from operations                          27.1          32.3              1.9         48.0         47.5
Net income                         $            15.0    $     18.2       $    (0.2)     $   27.2     $   27.4

Earnings per share - basic         $            0.31    $     0.38       $        -     $   0.56     $   0.56
Earnings per share - fully
diluted                            $            0.30    $     0.37       $        -     $   0.55     $   0.55

Quarterly sales as % of full
year's sales                                                  22.9 %           18.6 %       28.0 %       30.5 %
Quarterly gross profit as % of
full year's gross
  profit                                                      23.9 %           18.8 %       27.7 %       29.7 %
Quarterly income from operations
as % of full
  year's income from operations                               24.9 %            1.5 %       37.0 %       36.7 %

Earnings in the first quarter of fiscal 2014 included no one-time or non-recurring activities.

Earnings in the first quarter of fiscal 2013 included a benefit of $1.3 million ($0.8 million net of tax), or $0.02 per diluted share, for the recognition of the fair value of the ineffective portion of certain interest rate derivatives in interest expense, financing costs and other and a charge of $0.9 million ($0.5 million net of tax), or $0.01 per diluted shares, for termination benefits associated with the retirement of our former CFO.

Earnings in the second quarter of fiscal 2013 included a benefit of $1.2 million ($0.8 million net of tax), or $0.02 per diluted share, for the recognition of the fair value of the ineffective portion of certain interest rate derivatives in interest expense, financing costs and other.

Earnings in the third quarter of fiscal 2013 included a charge of $0.1 million ($0.1 million net of tax), or $0.00 per diluted share, associated with the termination benefits of certain employees.

Earnings in the fourth quarter of fiscal 2013 included a charge of $0.3 million ($0.2 million net of tax), or $0.00 per diluted share, associated with the termination benefits of certain employees.

Liquidity and Capital Resources

We had cash and cash equivalents of $56.4 million at December 31, 2013 compared to $47.0 million at September 30, 2013. Our net working capital was $417.7 million at December 31, 2013 compared to $391.3 million at September 30, 2013.

2014 Compared to 2013

Our net cash provided by operating activities was $54.2 million in 2014 compared to $47.3 million provided in 2013. This increase in cash from operations was primarily due to a larger benefit from working capital changes in 2014 compared to 2013. The 2014 changes in working capital consisted of the positive impacts from a decrease in accounts receivable of $85.0 million and a $36.9 million increase in accounts payable and accrued expenses, partially offset by the negative impacts from an increase in inventories of $58.0 million and a $35.5 million increase in prepaid expenses and other assets. Our accounts receivable days sales outstanding (calculated based on the ending accounts receivable balance and the most recent quarter's sales) decreased slightly compared to last year, mainly due to a favorable impact on the calculation from the very strong first quarter sales and focused collections during the quarter. Inventory turns slowed slightly compared to 2013 as a result of higher on-hand inventory levels. We increased our purchases in December 2013 from several of our major suppliers to take advantage of incentive programs that are based on calendar year purchases. The increase in prepaid expenses and other assets was primarily due to higher amounts due from vendors for the related incentive programs, which resulted from the higher level of purchases during the quarter, including an increased level of special buys. In connection with these purchases during the first quarter of 2014, we also realized increases in our accounts payable and accrued expenses at December 31, 2013.

Net cash used in investing activities was $5.1 million in 2014 compared to $67.3 million used in 2013. During the first quarter of 2013, we spent $64.5 million on acquisitions. Capital expenditures were $5.4 million in 2014 compared to $3.1 million in 2013. We currently expect fiscal year 2014 capital expenditures to total between 1.0% to 1.5% of net sales, mostly dependent upon our sales volume and the impact of branch openings related to our Greenfield development activities.

Net cash used in financing activities was $39.9 million in 2014 compared to net cash provided of $14.0 million in 2013. In 2014, there were $47.4 million of repayments under the revolving lines of credit as well as $2.8 million of scheduled quarterly repayment under the Term Loan. Additionally, we also financed $6.2 million worth of equipment purchases under our equipment financing facility during the quarter. In 2013, there were $3.8 million of loan repayments and we borrowed $6.1 million under our revolving lines of credit. We also had $4.0 million and $9.9 million of proceeds from exercises of stock options in the first quarter of 2014 and 2013, respectively.

Capital Resources

Our principal source of liquidity at December 31, 2013 was our cash and cash equivalents of $56.4 million and our available borrowings of $332.1 million under our revolving lines of credit, which took into account all of the debt covenants under the Credit Facility (see below), including the maximum consolidated total leverage ratio and minimum consolidated interest coverage ratio. Borrowings outstanding under the revolving lines of credit in the accompanying balance sheets were classified as short-term debt since there were no current expectations of a minimum level of outstanding revolver borrowings in the following twelve months.

Liquidity is defined as the current amount of readily available cash and the ability to generate adequate amounts of cash to meet the current needs for cash. We assess our liquidity in terms of our cash and cash equivalents on hand and the ability to generate cash to fund our operating activities, taking into consideration the seasonal nature of our business.

Significant factors which could affect future liquidity include the following:

the adequacy of available bank lines of credit;

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

cash flows generated from operating activities;

acquisitions; and

capital expenditures.

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

We believe we have adequate current liquidity and availability of capital to fund our present operations, meet our commitments on our existing debt and fund anticipated growth, including expansion in existing and targeted market areas. We seek potential acquisitions from time to time and hold discussions with certain acquisition candidates. If suitable acquisition opportunities or working capital needs arise that would require additional financing, we believe that our financial position and earnings history provide a sufficient base for obtaining additional financing resources at reasonable rates and terms, as we have in the past. We may also issue additional shares of common stock to raise funds, which we last did in December 2005, or we may issue preferred stock.

Indebtedness

We currently have the following credit facilities:

a senior secured credit facility in the United States

a Canadian senior secured credit facility; and

an equipment financing facility.

Senior Secured Credit Facility

On April 5, 2012, we entered into a five-year senior secured credit facility that includes a $550 million U.S. credit facility and a CAN$15 million ($14.1 million) Canadian credit facility with Wells Fargo Bank, National Association, and a syndicate of other lenders (combined, the "Senior Secured Credit Facility"). The $550 million U.S. credit facility consists of a revolving credit facility of $325 million (the "U.S. Revolver"), which includes a sub-facility of $20 million for letters of credit, and a $225 million term loan (the "Term Loan"). The Term Loan has required amortization of 5% per year that is payable in quarterly installments, with the balance due on June 30, 2017. We may increase the Credit Facility by up to $200 million under certain conditions. At December 31, 2013, there was $205.3 million outstanding under the Term Loan and no outstanding borrowings under the U.S. Revolver or the Canadian Credit Facility. There were $7.0 million of outstanding standby letters of credit at December 31, 2013.

Interest

Borrowings under the Credit Facility carry interest at a margin above the LIBOR Rate. The margin is 1.75% per annum and can range from 1.50% to 2.50% per annum depending upon our Consolidated Total Leverage Ratio, as defined in the Credit Facility. The Credit Facility also provides for a U.S. base rate, defined in the agreement as the higher of the Prime Rate, or the Federal Funds Rate plus 0.50%, plus a margin above that rate. In addition, the Canadian credit facility may also be borrowed under a base rate, defined in the agreement as the higher of the Canadian Prime Rate, or the annual rate of interest equal to the sum of the CDOR rate plus 1.0%, plus a margin above that rate. The margin for both base rates is 0.75% per annum and can range from .50% to 1.50% per annum depending upon our Consolidated Total Leverage Ratio, as defined in the Credit Facility. Initial unused commitment fees on the revolving credit facilities are 0.375% per annum. The unused commitment fees can range from 0.35% to 0.50% per annum, again depending upon our Consolidated Total Leverage Ratio.

Our outstanding borrowings under the Term Loan carried an interest rate of LIBOR plus 1.75% (1.92% at December 31, 2013).

Financial covenants under the Credit Facility are as follows:

. . .

  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.