Installed Building Products, Inc. — Q2 2014 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2014. Amounts below are in millions unless stated otherwise. The company installs insulation and complementary building products, primarily for residential construction, through more than 100 locations in 46 states. Residential construction represented 89.2% of Q2 revenue.
Financial performance
| Metric | Q2 2014 | Q2 2013 | H1 2014 | H1 2013 |
|---|---|---|---|---|
| Net revenue | $126.3 | $104.7 | $232.3 | $196.6 |
| Gross profit / margin | $34.8 / 27.5% | $26.3 / 25.1% | $61.2 / 26.4% | $48.5 / 24.7% |
| Operating income / margin | $4.6 / 3.6% | $2.5 / 2.4% | $5.5 / 2.3% | $2.8 / 1.4% |
| Net income from continuing operations | $2.3 | $1.4 | $2.7 | $1.2 |
| Net income (loss) attributable to common shareholders | $2.3 | ($0.3) | ($17.2) | ($2.3) |
| Basic and diluted EPS attributable to common shareholders | $0.07 | ($0.02) | ($0.61) | ($0.11) |
Q2 revenue increased 20.7%; H1 revenue increased 18.1%. Management attributed most of the organic increase to more completed residential new-construction jobs, with acquisitions and customer/product mix and pricing also contributing. Q2 net income attributable to common shareholders improved to $2.3 million. H1 common-shareholder loss principally reflects $19.9 million of preferred-stock accretion before the preferred shares were redeemed in February; it does not represent an operating loss.
Administrative expense rose to $22.0 million in Q2, up 30.3%, including $1.6 million of public-company costs and $0.8 million of secondary-offering costs. Higher wages and benefits and growth-related costs also increased operating expenses. Depreciation rose with investment in vehicles and equipment; management said improved branch-cost leverage partly offset cost increases.
Cash flow, liquidity and capital structure
- H1 operating cash flow was $7.6 million, versus $7.6 million used in H1 2013. Investing used $3.1 million, including $2.0 million for the U.S. Insulation acquisition; cash capital expenditures were $1.5 million.
- Cash at June 30 was $5.1 million, with $1.6 million of restricted cash. The company reported $35.8 million of additional availability under its then-existing revolving credit facility. Current assets were $99.3 million and current liabilities $70.2 million.
- At June 30, debt was $7.4 million, including $7.0 million drawn on the $50 million revolving facility; capital-lease obligations were $26.6 million. The facility was secured by company assets, and $7.2 million of letters of credit supported insurance programs.
- The February IPO generated $87.6 million net of underwriting discounts and commissions; $75.7 million was used to redeem preferred stock and $11.9 million to reduce revolving borrowings. In June, the company received $14.4 million from shares sold under the underwriters’ option; it received no proceeds from selling shareholders’ shares.
- On July 8, after quarter-end, the company replaced the prior facility with a five-year $100 million secured facility: a funded $25 million term loan and a $75 million revolver. The agreement includes a minimum 1.10:1 fixed-charge coverage ratio and a maximum leverage ratio that steps down from 3.50:1 to 2.75:1 by March 2016.
Outlook, risks and unusual items
- No numerical earnings or revenue guidance was provided. Management said cash, operating cash flow and borrowing capacity should support operations, debt service, capital expenditures and working capital for at least 12 months.
- Management cited the housing recovery and acquisition strategy as growth opportunities, while warning that weaker economic conditions, lower housing demand or affordability, higher interest rates and tighter mortgage lending could hurt results. The business is substantially dependent on residential construction; the filing also identifies key-customer reliance and raw-material cost and availability as risks.
- On August 11, the company acquired Marv’s Insulation for $1.5 million; purchase accounting was incomplete when the filing was issued. U.S. Insulation, acquired in March, contributed $2.9 million of revenue and $0.2 million of net income after acquisition.
- Two wage-and-hour lawsuits were settled for approximately $1.4 million and approved by April 2014; no related accrual remained at June 30. Management said other pending matters were not expected to have a material adverse effect.
- The contractual-obligations table estimates $36.3 million of purchase obligations, including a suspended supply contract; the filing says this estimate assumes the company remains obligated for the suspended contract. Management expected purchases to exceed minimum quantities for the contracts.
- Disclosure controls and procedures were deemed ineffective at June 30 because previously identified control weaknesses had not yet been remediated. Remediation efforts were underway.
Important facts for investors to verify
- Whether residential construction activity, completed-job growth and customer demand continued to support revenue and margins after Q2.
- Availability, borrowing, pricing and covenant headroom under the July 2014 credit agreement, including the effect of the $25 million term loan and future amortization.
- The status and enforceability of the suspended supply contract and the assumptions underlying the estimated purchase obligations.
- Progress in remediating internal-control weaknesses, and whether management later concluded disclosure controls were effective.
- Acquisition performance and integration, and the final purchase accounting for Marv’s Insulation.