Installed Building Products, Inc. — Q3 2017 Form 10-Q
Business context and reporting period. The company installs insulation and complementary building products for residential and commercial projects across the continental U.S. It reported the three and nine months ended September 30, 2017. The business has one reportable segment. Residential work represented 84% of Q3 revenue (89% in Q3 2016); commercial work represented 16% (11%).
Key financial results
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $295.2m | $225.4m | $833.1m | $629.0m |
| Gross profit / margin | $85.6m / 29.0% | $67.3m / 29.8% | $242.7m / 29.1% | $184.1m / 29.3% |
| Operating income / margin | $22.2m / 7.5% | $19.8m / 8.8% | $57.7m / 6.9% | $47.0m / 7.5% |
| Net income | $12.0m | $11.5m | $30.3m | $27.4m |
| Diluted EPS | $0.38 | $0.37 | $0.96 | $0.87 |
Q3 revenue grew 31.0%; nine-month revenue grew 32.4%. Acquisitions contributed approximately $48.7m and $141.8m, respectively. Management attributed approximately $8.3m of Q3 growth and $35.8m of nine-month growth predominantly to organic completed-job volume. Cost of sales rose faster than revenue in both comparisons, and gross margin declined 0.8 percentage points in Q3 and 0.2 points year to date. Higher interest and amortization also weighed on earnings.
- Cash flow and investment: Nine-month operating cash flow was $53.3m, versus $54.6m a year earlier. Investing used $180.3m, including $131.0m for acquisitions, $22.9m for property and equipment, and $25.2m for investments. Financing provided $179.5m. Capital expenditures, including unpaid purchases, were $23.3m. Cash flow from operations less reported cash purchases of property and equipment was approximately $30.4m; this is a simple calculation, not a company-defined measure.
- Liquidity: At September 30, cash, cash equivalents and investments totaled approximately $92.1m, compared with $14.5m at December 31, 2016. The company had no ABL revolver borrowings and reported $82.1m of borrowing availability, net of $17.9m of letters of credit. Management said available liquidity and operating cash flow should cover operations and funding needs for at least 12 months.
- Debt: Long-term debt, including current maturities, was $343.8m at September 30, versus $151.4m at December 31, 2016; capital lease obligations totaled $13.6m. The April 2017 financing included a $300m, seven-year term loan and an asset-based revolver of up to approximately $100m. The company reported covenant compliance. It had hedged $100m of variable-rate debt with swaps fixing the rate at 1.9% plus applicable loan margins.
Material changes and management commentary
- Seven business combinations were completed during the first nine months, including Alpha, Columbia and Astro; acquisition cash paid was $131.2m, with additional seller obligations and $10.9m of stock consideration. Acquisitions increased goodwill and intangible assets and contributed to higher administrative costs, amortization and interest expense.
- Hurricanes Harvey and Irma disrupted Texas and Florida operations and reduced Q3 revenue and gross profit; the filing does not quantify the storm impact separately.
- Management cited housing demand, interest rates, mortgage availability and broader economic conditions as important drivers. It described the company as positioned to grow through the housing recovery and acquisition strategy, but provided no specific financial guidance.
- Backlog was estimated at $81.4m at September 30, 2017, reflecting the Alpha acquisition. This is expected revenue on uncompleted contracts, not a guarantee of future sales.
Risks, contingencies and unusual items
- Residential new construction is a major demand driver and is exposed to housing affordability, interest rates, lending standards and economic conditions. The filing also notes execution and integration demands from acquisitions.
- The company expected to provide approximately $10m of additional collateral for insurance programs in Q4 2017. Outstanding performance bonds totaled approximately $24.1m; permit and license bonds totaled $5.9m.
- Management said pending contractual and employment-related claims were not expected to have a material adverse effect, while acknowledging litigation uncertainty. Workers’ compensation and general liability reserves were approximately $23.4m before related insurance receivables.
- Investments were concentrated entirely in the financial sector as of September 30, although the company said its investment portfolio complied with its policy. The filing reported no material change in market-risk exposure.
- An October 30, 2017 acquisition of substantially all assets of A+ Insulation for approximately $2.4m was disclosed as a subsequent event; purchase accounting was incomplete.
Investor verification priorities
- Separate organic growth from acquisition contributions and assess the durability of acquired revenue and margins.
- Track gross-margin pressure, storm-related disruption, and the effect of installer share-based compensation and product mix.
- Review debt growth, interest expense, term-loan repayment provisions, ABL availability and covenant headroom.
- Assess operating cash conversion and working-capital needs, particularly receivables, which rose alongside growth.
- Monitor acquisition integration, backlog conversion, insurance claims and the timing of additional collateral requirements.