Installed Building Products, Inc. — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019. Unaudited results; amounts below are in U.S. dollars. IBP installs insulation and complementary building products for residential and commercial construction, operating through more than 175 locations across the continental United States. It reports one operating and reportable segment.
Financial performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $371.8m | $332.6m | $713.9m | $634.3m |
| Gross profit | $107.3m | $95.6m | $196.7m | $175.6m |
| Gross margin | 28.8% | 28.8% | 27.6% | 27.7% |
| Operating income | $30.8m | $27.3m | $48.8m | $40.1m |
| Net income | $18.9m | $16.3m | $27.8m | $22.7m |
| Diluted EPS | $0.63 | $0.52 | $0.93 | $0.72 |
- Quarterly revenue rose 11.8%, gross profit 12.1%, operating income 12.8%, and net income 16.0% year over year. For the first half, revenue increased 12.6%, operating income 21.7%, and net income 22.2%.
- Q2 selling and administrative expenses were $17.9m and $52.5m, respectively. Administrative expense rose 16.7%, faster than quarterly revenue, partly reflecting wage, benefit, facility and acquisition-related costs. Net interest expense was $5.6m for the quarter and $11.3m for the half year; first-half expense was up 16.4% year over year, partly due to borrowing for acquisitions.
- First-half operating cash flow was $52.4m, compared with $33.1m. Capital spending was $17.8m; cash paid for acquisitions was $21.3m. Cash and cash equivalents were $95.7m at June 30, versus $90.4m at year-end 2018, and short-term investments were $9.9m.
- Carrying value of long-term debt, including current maturities, was $457.2m; finance lease obligations were $7.7m. The ABL revolver had no borrowings. Reported total liquidity was $222.8m, including cash, investments and available revolver capacity net of specified letters of credit and cash collateral. The company reported compliance with applicable credit covenants.
Business drivers and changes versus prior period
- Management attributed growth to acquisitions, existing-branch organic growth, selling-price increases and growth across end markets and products. Same-branch revenue increased 7.8% in Q2 and 7.6% for the first half; price and mix accounted for approximately 5.7% and 4.9%, respectively.
- Q2 revenue grew approximately 10% in residential new construction and repair and remodel, and approximately 22% in commercial. Commercial organic growth was 22.4% for Q2 and 13.7% for the first half. Residential new construction remained the largest end market, at 76% of Q2 revenue.
- Gross margin was unchanged at 28.8% in Q2; management said selling-price increases offset material-cost increases. First-half gross margin was 27.6%, slightly below 27.7% a year earlier.
- IBP completed two significant acquisitions and two smaller tuck-ins in the first half, paying $21.3m cash and recording $3.2m of seller obligations. Goodwill increased to $183.4m from $173.0m at year-end, primarily from acquisitions.
Outlook, risks and notable items
- No specific numerical earnings or revenue guidance was provided. Management expressed confidence in long-term housing demand, citing aging housing stock, population and household formation growth, and housing starts below historical averages. It expects operating results to benefit from housing-market growth.
- Material-cost inflation continued; the company said it might take until the end of 2019 to fully address the prevailing material-price environment. The industry had experienced supply disruption following a manufacturer facility failure in 2017. The ability and timing of passing costs through to customers remain important risks.
- Management cited tight construction-labor availability and expected continued spending to hire, train and retain installers, although retention, turnover and labor efficiency improved in the first half. Workers’ compensation expense rose to $7.8m from $5.3m in the first half.
- The business is exposed to housing-market and economic conditions, material prices, labor costs, customer collections and acquisition execution. Management said operating cash flow, cash and available borrowing capacity should fund operations and obligations for at least 12 months. It also noted that cash flows are seasonally stronger in the third and fourth quarters.
- At June 30, approximately $193.9m of variable-rate debt remained exposed to rate movements after hedging. A one-percentage-point rate increase or decrease would change annual interest expense by approximately $1.9m. Cash-flow hedge losses reduced comprehensive income; accumulated other comprehensive loss was $6.7m.
- Adoption of lease accounting (ASC 842) in January 2019 added operating lease right-of-use assets and liabilities to the balance sheet; this was an accounting presentation change and did not affect cash flows. Operating lease obligations were $46.0m at June 30.
- The company reported no material change in risk factors, no material defaults, and no pending litigation expected by management to materially adversely affect its financial position, results or cash flows. It also disclosed supplier purchase commitments, including $16.4m for insulation materials in 2019.
Key facts investors should verify
- Whether selling-price gains continue to offset material inflation and preserve gross margins.
- How much reported growth reflects same-branch activity versus acquisitions, and whether acquired businesses meet expected performance.
- Cash conversion, receivables and retainage collection, and the sustainability of improved operating cash flow.
- Debt, interest-rate exposure, liquidity availability under borrowing-base and collateral limitations, and compliance with credit covenants.
- Trends in installer availability, compensation and insurance-related costs, including workers’ compensation reserves.
- The impact of housing and commercial construction conditions on demand; the filing cautions that interim results are not necessarily indicative of future quarters.