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Beacon Roofing Supply, Inc. (BECN - Analyst Report) reported fourth-quarter 2012 adjusted earnings per share (EPS) of 60 cents, in line with the Zacks Consensus Estimate and 7% higher than the year-ago quarter. Higher sales on the back of accretive acquisitions and gross margin expansion contributed to the growth, partially offset by higher operating expenses. Including special items, EPS in the quarter stood at 58 cents, down 13% year over year from 67 cents.

Operational Update
 
Total revenue increased 4% year over year to $598 million, falling short of the Zacks Consensus Estimate of $600 million. Organic sales declined 5.6% in the quarter. In existing markets, complementary product sales increased 1.2% while both residential and non-residential roofing product sales decreased 3.3% and 10.5%, respectively. The year-ago quarter included the benefit from substantial roofing activities due to the hail storms in spring 2011. 
 
Cost of goods sold increased 1.3% to $448 million in the quarter. Gross profit rose 13% to $150 million. Gross margin contracted 190 basis points to 25% from the year-ago quarter. Operating income in the reported quarter inched up 1% to $48 million with operating margin dipping 20 basis points to 8.1%.
 
Fiscal 2012 Performance
 
Beacon Roofing’s adjusted EPS in fiscal 2012 jumped 44% year over year to $1.67, helped by increased sales and gross margins, somewhat offset by higher operating expenses and a higher income tax provision. EPS was in line with the Zacks Consensus Estimate. Including special items, EPS stood at $1.58 compared with $1.27 in the prior year.
 
Total revenue increased 12% year over year to $2.04 million, in line with the Zacks Consensus Estimate. Revenues benefited from increased re-roofing and remodeling activities in the first half, including the impact from improved weather conditions and stronger business in several markets that experienced storms last year and by higher average selling prices.
 
Financial Position
 
Cash and cash equivalents declined to $40.2 million as of September 30, 2012 from $143 million as of September 30, 2012, mainly due to payback of debt this year and acquisitions. Total debt amounted to $277.8 million as of September 30, 2012, compared with $327.1 million as of September 30, 2012. Debt-to-capitalization ratio improved to 30% as of September 30, 2012 from 38% as of September 30, 2012.
 
Cash flow from operating activities improved to $85 million during the year compared with $79 million in the prior year due to higher net income and from higher non-cash charges this year, partially offset by the impact from less favorable changes in working capital. 
 
Our Take
 
Beacon Roofing’s growth strategy includes both internal growth through opening branches, growing sales with existing customers, adding new customers and introducing new products as well as through acquisitions. Since 1997 through 2011, the company has made 25 strategic and complementary acquisitions.
 
The company has recently acquired Structural Materials Company in Southern California, Contractors Roofing & Supply Co. in St. Louis and Pennsylvania-based McClure-Johnston Company. Its main acquisition strategy is to target market leaders in geographic areas that it does not have a presence. Beacon Roofing also acquires companies to supplement branch openings within existing markets. 
 
Furthermore, over 70% of expenditures in the roofing market are for re-roofing projects, with the balance being for new construction. Re-roofing projects are generally considered maintenance and repair expenditures and are less likely to be postponed during periods of recession or slow economic growth. As a result, demand for roofing products is less volatile than overall demand for construction products. Demand for re-roofing is also on the rise providing ample scope for Beacon to expand in this market.
 
U.S. residential construction is finally stabilizing and is on the road to a much-awaited recovery, which bodes well for the Beacon Roofing. Furthermore, the company will stand to benefit from the rebuilding and repair activities following the devastating Hurricane Sandy. 
 
Beacon is one of the three largest roofing material distributors in the United States and Canada, with more than 90% of sales coming from the U.S. Beacon competes with privately-held American Builders & Contractors Supply Co Inc., Guardian Building Products Distribution Inc. and Stock Building Supply Inc. Beacon Roofing currently maintains a Zacks #3 Rank (Hold) over the short term.

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