Expansion-related rises in operating costs and interest expenses limited Beacon Roofing Supply to a still-robust 10.6% jump in net income for its fiscal third quarter ended June 30, as sales shot up 59.4% to $1.93 billion, the company reported today.
Most of the increase stems from Beacon’s takeover of Allied Building Products at the start of this year. Exclude acquisition-related costs and the non-recurring effects of tax reform and adjusted net income shot up 57.5%, Beacon said.
Excluding acquisitions, sales rose 2.0%. “Not only did we achieve positive price-cost realization in each of our three product lines, but we also significantly outperformed our prior public guidance, which we believe underscores the value our service levels bring to the market,” president and CEO Paul Isabella said in a news release.
Later, according to the transcript of Beacon’s call with analysts, Isabella said the No. 3 company on the ProSales 100 “had a very good quarter on many fronts. We entered the quarter with very specific priorities: improve price-cost, gross margins, expense control and continue our progress on the integration of Allied. And I’m pleased to say we exceeded internal expectation on all of these.”
Gross margin rose 100 basis points from the previous year’s 3rd quarter to reach 25.5%, while gross profit shot up 65.9% to $493.9 million. But while adding Allied’s numbers to Beacon’s boosted its sales, so too did its costs. Selling, general, and administrative (SG&A) fees went up 76% of $323.2 million. SG&A as a percentage of revenues climbed to 16.7% from 15.1% in the April-to-June 2018 quarter.
Meanwhile, depreciation jumped 84.2% to $15.8 million and amortization swelled roughly 1.5 times its previous size to reach $50.1 million. As a result, total operating expenses amounted to $389.1 million, or 20.1% of revenues, compared with 17.5% a year earlier.
“The integration of Allied is tracking better than expected for 2018, and we remain committed to realizing our long-term synergy goals,” Isabella said in the press release. He told analysts later that, “Despite modest top-line quarterly growth, existing market SG&A as a percentage of sales was approximately the same as the year-ago period, again excellent core cost control efforts throughout the organization. Given the softer volumes than anticipated, we implemented targeted cost reduction activities during Q3 that’s beyond our Allied synergies. This should also help us as we go forward into Q4.”
Below the operating income line, interest expense climbed 178% to $37.3 million. And $6 million held back for an as-yet undeclared dividend payout to holders of preferred shares caused net income attributable to shareholders to shrink 0.6% to $43.4 million.
The company’s balance sheet lists goodwill as making up $2.32 billion of the company’s $6.59 billion in assets. On the liabilities side, long-term debt totals $2.49 billion.
Beacon ranks 3rd on the ProSales 100. It recorded $4.32 billion in U.S. sales last year, 100% of it to pros. Isabella told analysts that the company plans to open 10 to 15 greenfield locations annually over the next few years, even as the company works to pay down its debt.
