Zacks_Analysts' Blog : Beacon Fails Expectations - Analyst Blog

Beacon Roofing Supply Inc. (BECN) delivered earnings per share (EPS) of 35 cents in its second quarter ended June 30, 2010, falling short of the Zacks Consensus Estimate of 46 cents and 38 cents reported in the year-ago quarter. The results were hurt by lower sales of residential roofing products and narrower gross margins that were under pressure from weak market conditions.

 

Total revenues increased 2.3% year over year to $474.3 million, but failed to meet the Zacks Consensus Estimate of $486 million. Complementary building products, at $72.4 million, posted a growth of 19% while non-residential roofing products recorded a growth of 11%. Both these businesses drove the year-over-year increase in total revenue. Revenues from residential roofing products were a dampener, declining 12% to $217.2 million.

 

Cost & Margin Performance

 

Cost of sales increased 4% to $369.9 million in the quarter. Based on revenues, the same increased 130 basis points to 78%. Consequently, gross profit dropped 3% to $104.3 million and gross margin plunged 130 basis points to 22%.

 

Operating expenses dipped marginally by 0.2% to $74 million in the quarter and based on revenues, dropped 40 basis points to 15.6%. Operating income declined 10% to $30.2 million and operating margin contracted 80 basis points to 6.4%.

 

Financial Position

 

As of June 30, 2010, Beacon had cash and cash equivalents of $82.1 million, down from $89.9 million as of March 31, 2010. During the quarter, the company’s cash flows from operations were $902,000 compared with an outflow of $543,000 in the year-ago quarter.

 

As of June 30, 2010, the debt-to-capitalization ratio improved marginally to 43% from 44.1% as of March 31, 2010.

 

Our Take

 

Beacon Roofing Supply is one of the three largest roofing materials distributors in the United States and Canada . The company’s growth has historically been driven by acquisitions and new branch openings.

 

Prior to the reported quarter, Beacon faced lower residential and non-residential roofing sales volumes in most regions due to a significant decline in housing starts and weak commercial construction activity. Complementary product sales, which are more discretionary in nature than roofing products, continue to be negatively impacted by lower levels of new residential construction, a derivative of the slowdown in the economy.

 

However, in the reported quarter, non-residential roofing sales and complementary products sales are beginning to see a turnaround. Residential roofing products sales continue to remain sluggish. The last increase seen in sales was in the third quarter of fiscal 2009. We believe with a recovery in the U.S. economy, roofing activity will eventually improve.

 

Beacon is one of the three largest roofing materials distributors in the United States and Canada, with more than 90% of its sales coming from the U.S. Beacon sells roofing materials, asphalt shingles and single-ply roofing to both residential and non-residential markets. It also sells complementary building materials such as vinyl siding, doors, windows, insulation and waterproofing systems.