Installed Building Products, Inc. — FY2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. This is an annual report, not a standalone fourth-quarter filing. IBP installs insulation and complementary building products across residential and commercial markets, operating more than 175 branches in the continental United States.
Financial performance
| Metric | FY2018 | FY2017 | Change |
|---|---|---|---|
| Revenue | $1,336.4 million | $1,132.9 million | +18.0% |
| Gross profit / margin | $371.6 million / 27.8% | $324.0 million / 28.6% | +14.7%; margin down 0.8 points |
| Operating income | $93.2 million | $74.3 million | +25.5% |
| Net income | $54.7 million | $41.1 million | +33.1% |
| Diluted earnings per share | $1.75 | $1.30 | +$0.45 |
| Cash from operating activities | $96.6 million | $68.8 million | +$27.9 million |
Fourth-quarter revenue was $353.1 million, gross profit $98.6 million, net income $16.5 million, and diluted EPS $0.53. These compare with $299.9 million, $81.3 million, $10.8 million, and $0.34, respectively, in Q4 2017.
Revenue growth reflected acquisitions, organic growth and higher selling prices. Same-branch revenue increased 11.5%; acquisitions contributed $73.5 million to the year-over-year revenue increase. Gross margin contracted as insulation material costs rose faster than customer pricing, alongside branch start-up and employee-program costs. Operating income improved despite higher selling, administrative and interest expenses.
Cash, debt and liquidity
- Year-end cash and cash equivalents were $90.4 million, with $10.1 million of short-term investments; working capital was $229.9 million.
- Total debt, including capital lease obligations, was approximately $463.5 million, up from $359.7 million. The term loan balance was $395.8 million before unamortized issuance costs; no ABL Revolver borrowings were outstanding.
- Reported liquidity was $221.6 million, including the $150 million ABL Revolver commitment less $28.9 million of outstanding letters of credit. Revolver availability may be subject to borrowing-base and cash-collateral limitations.
- Investing activities used $74.1 million, including $57.7 million for acquisitions and $35.2 million for property and equipment, partly offset by investment maturities. Financing activities provided $5.4 million; IBP repurchased 2.1 million shares for $89.4 million.
- Interest expense, net, was $20.5 million. After swaps, $196 million of borrowings remained exposed to variable rates; management estimated a 100-basis-point rate increase would add about $2.0 million in annual interest expense.
Material changes and business developments
- IBP completed ten acquisitions in 2018. Acquisitions expanded product and geographic reach; the company also acquired cellulose manufacturer Advanced Fiber Technology.
- In June, IBP increased its term-loan facility by $100 million to $397.8 million and extended maturity to 2025; it raised ABL commitments from $100 million to $150 million and extended maturity to 2023.
- IBP entered into interest-rate swaps intended to hedge $200 million of term-loan cash flows. It also entered into insulation-supply agreements with purchase obligations through 2021.
- Residential new construction and repair/remodel represented 84% of revenue; commercial construction represented 16%. Insulation was 66% of revenue. The top ten customers contributed approximately 14%; no single customer exceeded 4%.
Outlook, risks and unusual items
- Management said it expected to improve profitability and results in 2019, citing continued housing and commercial-market opportunities, cross-selling, operating leverage and acquisitions. It expected pricing momentum to continue, but said higher material costs might not be fully addressed until the end of 2019. No quantified earnings or revenue guidance was provided, and management cautioned that recent positive trends might not continue.
- Key exposures include housing and construction cycles, seasonality and weather, material-price inflation and supply concentration, tight labor availability and rising labor costs, competitive limits on passing through price increases, acquisition integration, and legal, safety, environmental and cybersecurity risks.
- Goodwill and other intangible assets totaled $322.8 million, approximately 39% of assets; no impairment was recorded. Backlog was $88.0 million versus $80.8 million a year earlier, but contracts can be canceled or changed and backlog is not guaranteed revenue.
- IBP adopted ASC 606 in 2018 using the modified retrospective method. Prior-year figures were not restated; reported 2018 revenue was $0.8 million lower than it would have been without adoption. The change added $2.1 million to opening retained earnings.
- The company reported an unqualified audit opinion and effective internal control over financial reporting; certain 2018-acquired subsidiaries were excluded from management’s internal-control assessment. A CEO-associated entity sold 150,000 shares back to IBP in a privately negotiated repurchase at a disclosed 3% discount to the prior market price.
Important facts for investors to verify
- Whether customer pricing catches up with material-cost inflation, and the resulting gross-margin trajectory.
- Organic growth and acquisition contributions, including integration performance and returns on acquisition spending.
- Debt reduction, covenant headroom, borrowing-base limits and sensitivity to interest rates.
- Cash conversion amid rising receivables and inventory, and the timing and collectability of retainage.
- Backlog conversion and cancellations, supplier concentration and the terms or fulfillment of supply commitments.
- Potential exposure from contingent liabilities, insurance reserves, related-party transactions and the newly acquired manufacturing business.