Installed Building Products, Inc. — Q2 2017 Form 10-Q
Reporting period: Three and six months ended June 30, 2017. IBP installs insulation and complementary building products for residential and commercial projects across more than 100 U.S. locations. The company reports one operating and reportable segment.
Financial performance
| Metric | Q2 2017 | Q2 2016 | First half 2017 | First half 2016 |
|---|---|---|---|---|
| Revenue | $282.2 million | $211.9 million | $537.9 million | $403.6 million |
| Gross profit / margin | $84.9 million / 30.1% | $62.2 million / 29.4% | $157.1 million / 29.2% | $116.8 million / 28.9% |
| Operating income | $23.0 million | $16.6 million | $35.4 million | $27.2 million |
| Net income | $12.0 million | $10.0 million | $18.3 million | $15.8 million |
| Diluted earnings per share | $0.38 | $0.32 | $0.58 | $0.50 |
| Operating cash flow | Not stated separately | Not stated separately | $28.4 million | $36.2 million |
- Revenue increased 33.2% in Q2 and 33.3% in the first half. Acquisitions contributed approximately $45.8 million and $93.1 million, respectively; management attributed approximately $18.5 million and $27.5 million to predominantly organic completed-job volume growth.
- Cost of sales declined as a share of revenue: to 69.9% in Q2 from 70.6%, and to 70.8% for the first half from 71.1%. Gross margin consequently improved modestly.
- Operating income grew, but higher interest and amortization costs weighed on bottom-line margin. Interest expense was $4.9 million in Q2 and $7.0 million for the first half, versus $1.5 million and $3.1 million in the comparable periods.
- First-half operating cash flow fell despite higher net income, principally reflecting a $17.4 million increase in accounts receivable, alongside other working-capital movements.
Balance sheet, debt and liquidity
- At June 30, cash and cash equivalents were $66.7 million and current investments were $25.3 million; together, management reported $92.0 million in cash, cash equivalents and marketable securities.
- Total debt was $340.5 million, including $13.5 million of current maturities; long-term debt was $327.0 million. Capital lease obligations totaled $13.9 million.
- Current assets were $328.0 million and current liabilities were $143.8 million. Accounts receivable was $176.8 million, compared with $128.5 million at year-end 2016.
- The April 2017 refinancing established a seven-year $300 million term loan and an asset-based revolver of up to approximately $100 million. No revolver borrowings were outstanding; availability was $82.1 million after $17.9 million of letters of credit. IBP reported compliance with applicable covenants.
- IBP entered interest-rate swaps covering $100 million of variable-rate debt, fixing the swap rate at 1.9% through the hedge period. The swaps had a $0.1 million net liability fair value at quarter-end.
Material changes and unusual items
- IBP completed four business combinations during the first half, including the January acquisition of Alpha. Acquisition-related cash payments, net of cash acquired, were $116.9 million; the company also issued $10.9 million of stock and recorded $3.0 million of seller obligations. Acquisitions drove much of the increase in goodwill and intangibles.
- Alpha expanded commercial activity: commercial revenue represented 17% of revenue in 2017, versus 12% in 2016; residential represented 83%, versus 88%. Estimated backlog at June 30 was $78.6 million, following Alpha’s acquisition.
- Acquisition-related amortization increased, and administrative expense rose with acquired operations, growth-support costs, and share-based compensation. The company reported $1.3 million of acquisition-related costs for the first half.
- A July 31 acquisition of Energy Savers, LLC for approximately $1.1 million, subject to a working-capital adjustment, was disclosed as a subsequent event.
Outlook, risks and contingencies
- Management said cash flows from operations, cash on hand and available borrowing capacity should support operations, debt service, capital expenditures and working capital for at least the next 12 months. No numerical revenue or earnings guidance was provided.
- Management cited the housing recovery, national scale and continued acquisition strategy as growth opportunities, while noting that results depend on housing demand, affordability, interest rates, mortgage availability and broader economic conditions. Acquisition integration and execution also remain relevant to the growth strategy.
- First-half capital expenditures were $14.6 million, primarily for vehicles and equipment. Future obligations include $430.1 million of scheduled long-term debt payments, including principal and interest, and $15.2 million of capital lease payments, as presented in the contractual-obligations table.
- IBP had $25.7 million of performance bonds and $5.5 million of permit and license bonds outstanding. It reported claims and litigation, principally contractual and employment matters, but did not expect pending matters to have a material adverse effect. Insurance reserves include general liability and workers’ compensation exposures.
- Management identified no material change in risk factors or market-risk exposure from its prior annual filing. Disclosure controls were assessed as effective; no material change in internal control over financial reporting was reported.
- IBP intended to adopt the new revenue-recognition standard using the modified retrospective approach and was continuing to assess its effects. The filing did not provide a clear quantified estimate of the adoption impact.
Important facts for investors to verify
- How much of revenue and earnings growth is organic versus acquired, and whether Alpha’s commercial backlog converts profitably into revenue.
- Whether rising receivables and weaker operating cash flow reflect normal growth-related timing or a sustained deterioration in collections and cash conversion.
- Debt-service capacity, interest-rate exposure, revolver availability and compliance with credit-agreement covenants as acquisition spending continues.
- The effect of acquisition-related amortization, integration costs, goodwill and purchase-price adjustments on future earnings and returns.
- Whether construction activity, contract cost estimates, insurance claims and bond requirements develop in line with management’s expectations.