Installed Building Products, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; comparisons are with the three months ended March 31, 2018 unless stated otherwise. IBP installs insulation and complementary building products for residential and commercial construction across the continental United States. It operates in one reportable segment.
Financial performance
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Net revenue | $342.1 million | $301.7 million | +13.4% |
| Gross profit | $89.4 million | $80.0 million | +11.8% |
| Gross margin | 26.1% | 26.5% | -0.4 percentage points |
| Operating income | $18.0 million | $12.8 million | +40.6% |
| Net income | $8.8 million | $6.4 million | +38.2% |
| Diluted EPS | $0.30 | $0.20 | +50.0% |
| Net cash provided by operating activities | $15.9 million | $6.1 million | +$9.8 million |
Revenue growth reflected acquisitions, existing-branch growth and higher selling prices. Same-branch revenue increased 7.4%; approximately 3.4% came from more completed jobs, with the balance attributed to pricing and customer/product mix. Commercial organic growth was 6.6%. Selling and administrative expenses rose in dollars, but each declined as a share of revenue. Net interest expense increased 40.5% to $5.7 million, primarily due to acquisition-related borrowing. The effective tax rate was 27.5%, versus 26.0%.
Balance sheet, debt and liquidity
- At March 31, 2019, cash and cash equivalents were $88.1 million and short-term investments were $10.0 million. Total current assets were $408.3 million against current liabilities of $182.4 million.
- Long-term debt, including current maturities, totaled $454.4 million; this included a $390.1 million term loan, net of issuance costs, and $60.8 million of vehicle and equipment notes. No ABL Revolver borrowings were outstanding.
- Reported total liquidity was $219.3 million, comprising cash, short-term investments and $150.0 million of ABL commitments, less specified outstanding letters of credit and cash collateral. Availability may be limited by borrowing-base and collateral provisions.
- Operating cash flow was $15.9 million. Cash purchases of property and equipment were $8.7 million; the resulting $7.2 million difference is operating cash flow less those purchases, not a company-defined free-cash-flow measure. Cash ended the quarter at $88.1 million.
- Adoption of lease accounting on January 1, 2019 added $45.3 million of operating-lease right-of-use assets and $44.9 million of operating-lease obligations at quarter-end. This accounting change affects balance-sheet comparability with 2018.
Material changes and operating developments
- Cost of sales grew 14.0%, faster than revenue, and gross margin declined to 26.1%. Management attributed margin pressure principally to materials-price inflation and customer work delays in late 2018, which shifted installations into Q1 before recent selling-price increases fully took effect.
- Management said pricing had improved in recent months but was still catching up with material costs, and expected the current material-price environment could take until year-end 2019 to address fully.
- IBP completed the acquisition of 1st State Insulation on March 18, 2019 for a stated total purchase price of $6.5 million, including $1.4 million of seller obligations. Acquisitions contributed to revenue growth; the filing does not quantify their total contribution to reported growth.
- Net income increased while comprehensive income fell to $6.1 million from $7.6 million, mainly because the after-tax cash-flow-hedge mark was a $2.7 million loss in Q1 2019 versus a $1.2 million gain in Q1 2018.
Outlook, risks and contingencies
The filing provides no specific numerical earnings or revenue guidance. Management cited potential long-term housing-market support from an aging housing stock, population and household formation growth, and housing starts below historical averages. It also expressed confidence that operating cash flow, cash and available borrowing capacity would fund operations, debt service, capital expenditures and working capital for at least the next 12 months. Results remain exposed to housing demand, interest rates, material costs and the timing of customer price increases, labor availability and acquisition execution. Management noted tight construction labor markets and expected to spend more on hiring, training and retention in 2019.
- Interest-rate exposure: approximately $195.0 million of variable-rate debt remained exposed after hedges; a hypothetical one-percentage-point rate increase would raise annual interest expense by about $2.0 million.
- Supplier purchase commitments included $16.4 million for 2019, $21.4 million for 2020 and $15.0 million for 2021 under an insulation-material agreement. A separate chemical-supplier agreement required $0.6 million of purchases in 2019.
- Outstanding performance bonds, insurance letters of credit/cash collateral and permit/license bonds totaled $88.4 million. These are not all equivalent to funded debt.
- IBP reported routine claims and litigation, principally contractual and employment matters, and did not expect pending matters to have a material adverse effect. It was in compliance with applicable credit covenants. No material risk-factor changes from the 2018 Form 10-K were reported.
Important facts for investors to verify
- Whether customer price increases catch up with materials inflation, and whether gross margin stabilizes or recovers.
- How much reported revenue growth came from acquisitions versus organic activity, including sustained same-branch and commercial growth.
- Debt, interest expense, hedge coverage and actual ABL borrowing availability, including collateral and borrowing-base limits.
- Cash conversion and seasonal working-capital movements, given the timing of receivables, retainage and construction activity.
- Acquisition integration and purchase-accounting updates, as well as the scale and timing of supplier commitments and insurance-related obligations.