Installed Building Products, Inc. — Q3 2014 Form 10-Q
Reporting period: Three and nine months ended September 30, 2014. Unless stated otherwise, dollar amounts are in millions; the filing reports financial statements in thousands. IBP installs insulation and other building products across more than 100 U.S. locations, serving residential and commercial construction markets.
Financial performance
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Revenue | $140.5 | $116.0 | $372.8 | $312.6 |
| Gross profit | $39.6 | $29.9 | $100.8 | $78.5 |
| Operating income | $10.8 | $5.8 | $16.3 | $8.5 |
| Continuing-operations net income | $6.2 | $3.1 | $8.9 | $4.3 |
| Net income (loss) attributable to common shareholders | $6.2 | $1.4 | $(11.0) | $(0.9) |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $14.7 | $2.6 |
Revenue increased 21.1% in Q3 and 19.2% for the nine-month period. Gross margin, calculated from reported figures, rose to 28.2% from 25.8% in Q3 and to 27.1% from 25.1% year to date. Operating margin increased to 7.7% from 5.0% in Q3 and to 4.4% from 2.7% year to date. Q3 diluted EPS was $0.19 versus $0.06; nine-month loss per share was $0.37 versus $0.04, reflecting preferred-stock accretion of $19.9 in 2014 versus $4.6 in 2013, rather than a decline in reported net income.
For the nine months, operating cash flow was $14.7; investing cash outflow was $5.4, including $3.3 for acquisitions; and financing cash inflow was $11.3. Cash rose to $24.7 from $4.1 at year-end 2013. At September 30, current assets were $128.1 and current liabilities were $77.2.
Changes, capital and liquidity
- Q3 revenue growth included approximately $18.3 from more completed residential new-construction jobs and $4.0 from acquisitions. Year-to-date growth included $40.3 from increased residential jobs and $8.9 from acquisitions.
- At September 30, IBP had $25.0 outstanding on its term loan and no revolver borrowings. The new senior secured facility, entered into in July, provides a $25.0 term loan and up to $75.0 revolving capacity, maturing July 2019. The term loan bears variable-rate interest and requires quarterly amortization beginning December 2014.
- Capital lease obligations totaled $28.3 on the balance sheet ($9.5 current and $18.8 long term). The contractual-obligations table lists $33.4 of total capital lease payments, including estimated interest.
- The February IPO generated $87.6 net proceeds; $75.7 was used to redeem preferred stock and $11.9 to reduce the prior revolver. The June secondary offering generated $14.4 for the company from underwriters’ overallotment shares; proceeds from selling-stockholder shares went to those holders. Common shares outstanding increased to 31.8 million from 16.2 million at year-end.
Outlook, risks and unusual items
- Management said cash, operating cash flows and available borrowing capacity should support operations, debt service, capital expenditures and working capital for at least the next 12 months. It cited the housing recovery and acquisition strategy as growth opportunities but provided no quantified guidance.
- Management identified exposure to housing demand and affordability, interest rates and mortgage lending, key customers, raw-material cost and availability, competition, and the ability to improve underperforming businesses.
- Financial covenants require a minimum fixed-charge coverage ratio of 1.10:1 and a maximum leverage ratio that steps down from 3.50:1 to 2.75:1 beginning March 2016. The facility is secured by substantially all eligible company and guarantor assets. Outstanding letters of credit were $9.8; restricted cash supporting insurance programs was $1.6.
- Contractual obligations included $35.6 of purchase obligations, based partly on estimates for a supply contract formally suspended pending negotiations, and $16.8 of operating lease payments. Management expected purchases to exceed minimum quantities under supply contracts.
- Two wage-and-hour lawsuits were settled and court-approved in 2014 for approximately $1.4; related expenses were paid. Management said other pending claims were not expected to have a material adverse effect.
- Q3 other expense included a $0.2 write-off of old loan costs. Year-to-date results also included a $19.9 preferred-stock accretion charge and a tax benefit associated with cancellation of a preferred-stock put option.
- Disclosure controls were reported ineffective as of September 30, 2014. Management was working to remediate previously disclosed material weaknesses and said remediation was not complete.
- Subsequent events: IBP acquired substantially all assets of Installed Building Solutions on November 10 for approximately $10.0, subject to working-capital adjustment. A vehicle and equipment financing agreement was entered into October 27; no balance was outstanding at quarter-end.
Important facts for investors to verify
- Whether revenue and margin growth are sustained, and how much is attributable to housing-market volume, acquisitions, pricing and product mix.
- Compliance with the new credit facility’s leverage and fixed-charge covenants, variable interest costs, and available revolver capacity after letters of credit.
- The status and financial implications of the suspended supply contract and the $35.6 of estimated purchase obligations.
- Progress in remediating material weaknesses and the effectiveness of disclosure controls in subsequent filings.
- Integration, financing and acquired-business performance following the approximately $10.0 post-quarter acquisition.