Business context and reporting period
Installed Building Products, Inc. (IBP) filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2016. IBP installs insulation and complementary building products through more than 100 U.S. locations; residential new construction and repair/remodel generated 89% of Q3 revenue, and commercial construction 11%.
Financial performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $225.4m | $181.6m | $629.0m | $471.2m |
| Gross profit | $67.3m | $53.4m | $184.1m | $133.8m |
| Operating income | $19.8m | $15.5m | $47.0m | $29.9m |
| Net income | $11.5m | $9.5m | $27.4m | $17.2m |
| Diluted EPS | $0.37 | $0.30 | $0.87 | $0.55 |
| Gross margin | 29.8% | 29.4% | 29.3% | 28.4% |
Revenue increased 24.1% in Q3 and 33.5% year to date. Management attributed Q3 growth to $21.7m from acquisitions, $13.3m primarily from organic job-volume growth, and $8.8m from a range of mix, pricing and building-code factors. For nine months, those components were $74.7m, $48.0m and $35.1m, respectively. Gross margin improvement reflected pricing and mix, fuel utilization and cost leverage. Nine-month operating cash flow was $54.6m versus $29.1m; investing cash outflow was $55.1m, including $36.4m for acquisitions and $19.2m for property and equipment. Cash at September 30 was $19.1m.
Financial position and material changes
At September 30, total assets were $441.8m and stockholders’ equity was $142.5m. Long-term debt was $133.0m, with $15.1m of current debt maturities; capital lease obligations totaled $16.5m. The company reported no borrowings on its $100m revolving line and approximately $18m of letters of credit issued under it. The facility also includes term and delayed-draw term loans; term loans bore interest at 2.31% (one-month LIBOR plus margin) at quarter-end. Debt increased from year-end as IBP funded acquisitions and growth.
Current assets were $184.5m and current liabilities $120.1m. Accounts receivable rose to $125.1m from $103.2m at year-end, and inventories to $34.1m from $29.3m. Operating cash flow included a $17.9m use of cash from receivables growth. Nine-month capital expenditures, including noncash purchases, were $21.3m.
Outlook, risks and unusual items
IBP gave no specific financial guidance. Management said cash from operations, cash on hand and available borrowing capacity should fund operations, debt service, capital expenditures, working capital and acquisitions for at least 12 months. It expects results to remain sensitive to housing demand, interest rates, mortgage availability and broader economic conditions. The filing notes that interim results are not necessarily indicative of future periods.
IBP completed six acquisitions in the first nine months of 2016. After quarter-end, it acquired East Coast Insulators II for approximately $16.5m and Mike’s Garage Door for approximately $0.6m. It also agreed to acquire Alpha for approximately $92.1m, including $9.2m in IBP shares, with the remainder primarily cash, plus seller obligations and potential earnout consideration. The company expected closing in Q1 2017, subject to conditions, and planned to use its credit facilities. Alpha would expand commercial construction exposure; risks cited include closing uncertainty, integration, acquired-company control deficiencies, higher debt and potential margin or cash-flow effects.
Other disclosed matters include $10.2m of general-liability reserves and $11.5m of workers’ compensation reserves, with related insurance receivables described in the filing. Management did not expect pending litigation to materially affect financial position, results or cash flows. No material changes to market-risk exposure or risk factors were reported beyond risks relating to Alpha. Disclosure controls were deemed effective at September 30, 2016.
Most important facts for investors to verify
- Whether organic job-volume growth and gross-margin improvement persist, and how much future growth depends on acquisitions, pricing and product mix.
- Receivables collection, working-capital needs and the conversion of reported earnings into operating cash flow.
- Debt levels, interest costs, covenant compliance and borrowing capacity after acquisition spending; the credit agreement imposes progressively tighter leverage limits.
- Whether Alpha closes as expected, its final purchase price and funding, and whether integration delivers anticipated benefits without material control, margin or cash-flow issues.
- Changes in housing demand, commercial-project exposure, insurance claims and the estimates underlying acquisition goodwill and intangible assets.