Installed Building Products, Inc. — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021. Unaudited results; comparisons are with the corresponding 2020 periods. IBP installs insulation and complementary building products through more than 190 locations across the continental U.S. and operates as one reportable segment.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $509.8 million | $420.5 million | $1,434.9 million | $1,211.8 million |
| Gross profit | $155.9 million | $131.6 million | $433.2 million | $375.0 million |
| Gross margin | 30.6% | 31.3% | 30.2% | 31.0% |
| Operating income | $54.4 million | $45.6 million | $139.1 million | $117.0 million |
| Net income | $34.9 million | $28.1 million | $89.4 million | $69.4 million |
| Diluted EPS | $1.18 | $0.95 | $3.02 | $2.33 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $116.5 million | $143.9 million |
- Q3 revenue increased 21.2%; management attributed growth to acquisitions, a 7.2% price/mix increase, and 4.6% same-branch volume growth. Nine-month revenue increased 18.4%.
- Q3 same-branch sales rose 11.2%. Residential new construction revenue increased 22.5%; commercial revenue increased 16.3%, though commercial same-branch sales declined 5.6%.
- Gross margin compressed year over year as cost of sales grew faster than revenue. Operating margin was approximately 10.7% for Q3 and 9.7% for the nine-month period. Net margin was approximately 6.8% and 6.2%, respectively.
- Net income benefited from a lower nine-month effective tax rate of 23.5%, versus 26.2% in 2020, including a share-based compensation windfall tax benefit. Q3 effective tax rate was 26.1%.
Cash, debt and liquidity
- Cash and cash equivalents were $191.4 million at September 30, 2021, down from $231.5 million at December 31, 2020. Current assets were $672.9 million and current liabilities $284.8 million.
- Nine-month operating cash flow was $116.5 million, compared with $143.9 million a year earlier. The filing attributes the decline primarily to higher inventory purchases, including inflation-related costs. Inventory increased to $118.1 million from $77.2 million at year-end 2020.
- Investing cash outflow was $121.6 million, including $94.5 million for acquisitions and $27.9 million for property and equipment. Financing cash outflow was $35.0 million, including $26.4 million of dividends paid. Cash declined by $40.1 million over the nine months.
- Reported debt was approximately $567.1 million, including $300 million principal amount of 5.75% senior notes due 2028, a term loan with $198.9 million carrying value due 2025, and vehicle and equipment notes. Cash less reported debt was approximately $375.6 million; this excludes lease obligations.
- The $200 million ABL revolver had no borrowings; $44.3 million of letters of credit left $155.7 million of availability. Reported total liquidity was $347.2 million. IBP said it was in compliance with debt covenants and expected liquidity to cover operations and obligations for at least 12 months.
- A $200 million interest-rate swap hedged substantially all variable cash flows on the term loan. IBP reported no variable-rate debt exposed to market risk at quarter-end. It entered two additional forward swaps on October 27, 2021, after quarter-end.
Material changes, outlook and risks
- Gross profit increased, but margin fell 0.7 percentage points in Q3 and 0.8 points for the nine months. IBP estimated that purchases through distributors and retailers at premium prices added $2.0 million to Q3 materials expense and $7.0 million to nine-month expense. Higher fuel and union costs reduced gross margin by a combined 70 basis points in Q3 and 50 basis points year to date.
- Management expected supply-chain disruptions and material-price pressure to continue into 2022. It said it would work to pass higher costs on to customers, but stated that the extent of future effects on results was uncertain. The filing gives no specific revenue or earnings guidance.
- COVID-19-related supply constraints, including lingering disruption to spray-foam materials following the February 2021 winter storms, and commercial project delays and inefficiencies remain key risks. Management also cited tight construction labor availability and potential future wage, recruiting and retention costs. Housing demand was described as supportive, while commercial same-branch sales remained weak.
- IBP completed seven acquisitions in the first nine months of 2021, with total purchase price of $115.1 million, including $96.1 million cash paid and $19.0 million of seller obligations. Acquisition contributions supported growth; acquisition-related intangible amortization and costs also increased. On November 1, 2021, IBP acquired Denison Glass and Mirror for approximately $13.7 million.
- IBP declared $0.90 per share in dividends during the first nine months of 2021, versus none in the comparable 2020 period. After quarter-end, it announced a further $0.30-per-share quarterly dividend. A $100 million stock repurchase authorization remained available, but no shares were repurchased under the program during the first nine months of 2021.
- IBP reported no material adverse effect expected from pending litigation. It had supplier purchase obligations for insulation materials, including $15.0 million for 2021 under one agreement; $10.3 million had been satisfied by September 30. The company also disclosed the OSHA COVID-19 emergency temporary standard announced November 4, 2021, noting uncertainty and possible legal challenges.
Important facts for investors to verify
- Whether IBP can sustain pricing increases and recover inflation in materials, fuel and labor without losing volume or further compressing margins.
- Whether supply constraints, including premium sourcing costs and product availability, ease as expected, and how they affect customer installations and working capital.
- Whether commercial project delays and negative commercial same-branch sales improve, and whether housing demand remains supportive.
- Acquisition integration, acquired-business performance, seller obligations and the final purchase-price allocations for recent deals.
- Cash conversion and liquidity: operating cash flow fell year over year as inventory and receivables consumed cash, despite reported cash and revolver availability.
- Debt covenant headroom, LIBOR transition terms, and the effect of the new forward interest-rate swaps and future refinancing plans.