Installed Building Products, Inc. — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018. Amounts are in millions of dollars except per-share data. The company installs insulation and complementary building products across residential new construction, repair and remodel, and commercial markets.
Financial performance
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $332.6 | $282.2 | $634.3 | $537.9 |
| Gross profit / margin | $95.6 / 28.8% | $84.9 / 30.1% | $175.6 / 27.7% | $157.1 / 29.2% |
| Operating income | $27.3 | $23.0 | $40.1 | $35.4 |
| Net income | $16.3 | $12.0 | $22.7 | $18.3 |
| Diluted EPS | $0.52 | $0.38 | $0.72 | $0.58 |
| Interest expense, net | $5.7 | $4.9 | $9.7 | $7.0 |
- Q2 revenue rose 17.9%; management attributed growth to acquisitions, organic growth, higher selling prices and product/end-market diversity. Same-branch revenue increased 11.3% in both the quarter and first half.
- Gross margin contracted 1.3 percentage points in Q2 and 1.5 points year to date. Management cited material inflation, installer-related costs and training wages; lower workers’ compensation costs partly offset the pressure.
- Operating expenses increased in dollars, but administrative expenses declined as a percentage of revenue, helped by lower bonus and insurance costs. Interest expense rose with higher debt balances.
Cash flow, debt and liquidity
- First-half operating cash flow was $33.1 million, versus $28.4 million a year earlier. Investing used $28.4 million, including $18.6 million for acquisitions and $18.5 million for property and equipment. Financing provided $72.5 million, including $100 million of term-loan proceeds and $24.6 million of share repurchases.
- At June 30, cash and cash equivalents were $139.7 million and short-term investments were $20.3 million. Total debt was $453.4 million, including $20.1 million of current maturities; capital lease obligations totaled $9.9 million.
- The June amendments increased the term-loan facility to $397.8 million and extended its maturity to April 2025. The ABL commitment increased from $100 million to $150 million and matures in June 2023. There were no ABL borrowings outstanding. Reported total liquidity was $281.5 million, but actual ABL availability was below the stated commitment because it is limited by borrowing-base availability; letters of credit and cash collateral were $28.5 million.
- The company reported compliance with debt covenants. Variable-rate debt exposure was $198.3 million after hedging; a 1 percentage-point rate move was estimated to change annual interest expense by about $2.0 million.
Outlook, risks and notable items
- No formal quantified company revenue or earnings guidance is stated. Management cited a July 2018 consensus projection of approximately 1.3 million U.S. housing starts in 2018, versus approximately 1.2 million in 2017, and expected housing growth to benefit results.
- Management expected selling prices to continue improving in Q3, with margins moving toward historical trends, while also expecting higher material costs through the rest of 2018. It noted price increases had lagged material-cost increases, despite improving pricing momentum.
- Key sensitivities include housing demand and broader economic conditions, material availability and inflation, the ability to pass cost increases to customers, labor costs, interest rates, and execution and integration of acquisitions. Revenue recognition uses cost-to-cost estimates for most contracts, making estimated costs to complete a significant judgment.
- Adoption of ASC 606 on January 1, 2018 increased opening retained earnings by $2.9 million, net of tax; prior periods were not restated. Contract assets rose to $18.1 million from $6.2 million at year-end, primarily reflecting the accounting change. Remaining performance obligations were $83.8 million, expected to be recognized substantially over 18 months.
- The company completed five business combinations and one insignificant tuck-in during the first half. It authorized a $50 million buyback and repurchased approximately 413,000 shares for $24.6 million. A new supplier agreement obligates purchases of $61.2 million of insulation materials over 2019–2021.
- Management did not expect pending litigation to have a material adverse effect. No material risk-factor changes were reported. Disclosure controls were assessed as effective at June 30, 2018.
Investor verification points
- Track whether selling-price gains catch up with material inflation and support margin recovery.
- Confirm cash conversion, working-capital trends and actual borrowing-base availability under the ABL.
- Monitor debt, interest expense and the effectiveness and scope of interest-rate hedges.
- Assess acquisition integration, purchase-price adjustments and the return on acquisition and capital spending.
- Review the final Tax Act accounting and the impact of adopting lease accounting in 2019.