Installed Building Products, Inc. — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014. Unaudited; financial statement amounts below are in millions of dollars unless noted. IBP installs insulation and other building products across more than 100 U.S. locations; 88.1% of quarterly revenue came from residential construction.
Financial performance and liquidity
| Metric | Q1 2014 | Q1 2013 |
|---|---|---|
| Revenue | $105.9 | $92.0 |
| Gross profit / margin | $26.4 / 24.9% | $22.3 / 24.2% |
| Operating income / margin | $0.9 / 0.8% | $0.3 / 0.3% |
| Continuing-operations net income (loss) | $0.4 | $(0.2) |
| Net income (loss) | $0.4 | $(0.5) |
| Net loss attributable to common shareholders | $(19.5) | $(2.0) |
| Operating cash flow | $5.0 | $(8.6) |
- Revenue grew 15.2%. Management attributed about $1.9 million of the increase to acquisitions, $10.1 million predominantly to more completed residential new-construction jobs, and the balance to mix and pricing factors.
- Gross margin improved about 0.7 percentage points. Operating expenses increased faster than revenue overall, particularly administrative costs, which rose 18.9% to $18.4 million.
- The $19.5 million common-shareholder loss primarily reflects $19.9 million of preferred-stock accretion recorded before the IPO; it is not the same as the quarter’s $0.4 million consolidated net income.
- Cash was $5.2 million, plus $1.7 million of restricted cash. The revolving facility had $18.6 million outstanding and $21.1 million of additional availability; total facility limit was $50 million. Long-term debt, including current maturities, was $19.4 million. Capital-lease obligations totaled $24.4 million.
- Current assets were $91.3 million versus current liabilities of $67.4 million. Operating cash flow improved by $13.6 million year over year, while investing activities used $2.6 million, including $2.0 million for the U.S. Insulation acquisition.
Material changes and significant events
- IBP completed its February 2014 IPO, selling 8,567,500 shares at $11 each and receiving $87.6 million net of underwriting discounts and commissions. It used $75.7 million to redeem preferred stock and $11.9 million to repay its revolving facility. Shares outstanding rose to 30,601,401 at March 31.
- Revolver borrowings fell from $27.3 million at year-end to $18.6 million at quarter-end. Shareholders’ equity moved from a $71.4 million deficit to $69.0 million positive, principally reflecting IPO-related equity transactions.
- IBP acquired U.S. Insulation on March 24 for $2.3 million, including a $0.3 million seller obligation. Its contribution to reported quarterly results was not significant. Goodwill increased $1.2 million. The 2013 comparison includes the Ace acquisition.
- Discontinued-operations loss declined to $0.03 million from $0.29 million.
Outlook, risks and contingencies
- No specific revenue or earnings guidance was provided. Management said operating cash flow, cash on hand and available revolver capacity should fund operations, debt service, capital expenditures and working capital for at least the next 12 months.
- Management cited housing recovery and continued acquisitions as growth opportunities, while warning that weaker economic conditions, reduced housing demand or affordability, higher interest rates and tighter mortgage lending could impair results. Other identified risks include reliance on new-home construction and key customers, raw-material cost and availability, and competitive pressures.
- The company was in compliance with its credit-facility covenants at March 31. Borrowings are secured by company assets; a fixed-charge coverage test applies if availability falls below a specified threshold.
- Two wage-and-hour lawsuits were settled for approximately $1.4 million and approved by the court by April 2014. About $1.0 million was accrued at March 31. Management did not expect other pending matters to have a material adverse effect.
- A supply contract extending through August 2017 has minimum quantities without a quantifiable stated rate. Another contract was formally suspended pending further negotiations, expected in Q4 2014; reported contractual purchase-obligation estimates include assumptions for that suspended contract.
- CEO and CFO concluded disclosure controls were not effective at March 31 because previously reported material weaknesses remained under remediation. Management said remediation was not complete; controls must be implemented, tested and found effective over a sufficient period.
Investor verification points
- Reconcile the IPO proceeds, preferred-stock redemption and revolving-debt repayments, including the effect of preferred-stock accretion on reported loss per share.
- Track residential job volumes, pricing and mix, and whether gross-margin improvement continues as operating and administrative costs rise.
- Monitor cash conversion, working-capital needs, borrowing-base availability, capital-lease commitments and covenant headroom.
- Review the status and financial implications of the suspended supply contract and the unquantifiable long-term minimum-purchase commitment.
- Confirm progress in remediating internal-control material weaknesses and monitor insurance reserves and the resolved wage-and-hour litigation.