Installed Building Products, Inc. — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018. Financial amounts below are in millions of dollars unless noted. IBP installs insulation and complementary building products across residential new construction, repair and remodel, and commercial markets; it operates more than 125 locations and reports one segment.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $349.0 | $295.2 | $983.3 | $833.1 |
| Gross profit | $97.3 | $85.6 | $273.0 | $242.7 |
| Gross margin | 27.9% | 29.0% | 27.8% | 29.1% |
| Operating income | $26.3 | $22.2 | $66.5 | $57.7 |
| Net income | $15.6 | $12.0 | $38.3 | $30.3 |
| Diluted EPS | $0.50 | $0.38 | $1.21 | $0.96 |
- Q3 revenue rose 18.2%; management attributed growth to acquisitions, existing-branch growth, higher selling prices, and continued housing-market recovery. Same-branch revenue grew 12.2% in Q3 and 11.6% year to date.
- Q3 gross profit increased 13.7%, slower than revenue growth; gross margin fell 1.1 percentage points. Year-to-date gross margin fell 1.3 points.
- Operating income increased 18.4% in Q3 and 15.2% year to date. Net income increased 29.6% and 26.1%, respectively. Lower effective tax rates supported net income growth.
- Operating cash flow was $68.8 million for the first nine months, versus $53.3 million a year earlier. Receivables used $36.0 million of cash, compared with $24.6 million in the prior-year period.
- At September 30, cash and cash equivalents were $139.1 million and short-term investments were $15.4 million. Total debt was $456.2 million, including current maturities; capital lease obligations totaled $8.8 million. The company reported $275.9 million of liquidity, but actual ABL availability was below the stated $150 million commitment because of borrowing-base limits and outstanding letters of credit/collateral.
Material changes and notable items
- Material inflation—following an industry supply disruption—raised costs faster than selling prices, pressuring gross margin. Management said price increases were progressing but could take several quarters to catch up with material costs. Labor-related costs and branch start-up costs also weighed on margins; improved labor utilization partly offset the pressures.
- Interest expense rose 19.5% in Q3 and 31.0% year to date, primarily due to higher borrowing balances used to support acquisitions. June amendments increased the term-loan facility by $100 million to $397.8 million and extended its maturity to 2025; ABL commitments rose to $150 million and maturity was extended to 2023.
- IBP completed eight business combinations and one minor acquisition during the first nine months, spending $34.7 million net of acquired cash. Acquisitions contributed to higher goodwill and intangible assets.
- The company repurchased 793,411 shares for $42.8 million year to date. A further $100 million repurchase authorization was approved October 31, effective November 5, 2018.
- ASC 606 adoption changed revenue timing for certain contracts. Prior periods were not restated. The company also corrected immaterial misstatements in its adoption adjustment; reported nine-month net income was $0.6 million lower than it would have been without adoption, while Q3 net income was $0.2 million higher.
Outlook, risks and contingencies
- No specific numerical earnings or revenue guidance was provided. Management expects to benefit from housing-market growth and cited a consensus forecast for housing starts to rise from about 1.2 million in 2017 to 1.3 million in 2019. It also expects continued pricing actions, while cautioning that materials inflation may take several quarters to address.
- Key exposures include housing demand, interest rates, construction activity, material availability and pricing, and the ability to pass cost increases to customers. Management noted housing-affordability pressure in certain markets. The filing states interim results are not necessarily indicative of future quarters.
- Variable-rate debt exposed to market risk was $198.3 million after hedging; a one-percentage-point interest-rate change would affect annual interest expense by approximately $2.0 million. Swaps hedge $200 million of term-loan cash flows.
- A supplier agreement commits IBP to purchase insulation materials for $25.8 million in 2019, $20.8 million in 2020, and $14.6 million in 2021. Management said pending litigation was not expected to materially affect financial position, results, or cash flows. A California legal settlement resulted in $0.8 million of expense.
- IBP said it was in compliance with debt covenants and believed cash, operating cash flow, and available borrowing capacity would support operations and obligations for at least 12 months. It acquired substantially all assets of Advanced Fiber Technology on October 31; purchase accounting details were not yet available.
Most important facts for investors to verify
- Whether selling-price increases catch up with material inflation, and whether gross margins stabilize.
- Organic growth and housing/commercial demand trends, separately from acquisition-driven growth.
- Cash conversion and receivables collection, given the increase in cash tied up in accounts receivable.
- Debt levels, interest costs, covenant headroom, and actual ABL borrowing-base availability.
- Acquisition performance, integration and purchase-price obligations, and the cash impact of the expanded share-repurchase authorization.
- Final effects of ASC 606 and the Tax Act, along with the financial terms and integration impact of the October acquisition.