Installed Building Products, Inc. — FY2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. This annual filing includes fourth-quarter results but is not a standalone quarterly report. Dollar amounts are in U.S. dollars.
Business context
IBP installs insulation and complementary building products for residential and commercial construction customers. It operated more than 100 locations and derived 77% of FY2016 revenue from insulation. Residential new construction and repair/remodel represented 88% of revenue; commercial construction represented 12%. The company completed multiple acquisitions during 2016 and acquired Alpha on January 5, 2017, after the reporting date.
Key financial metrics
| Metric | FY2016 | FY2015 |
|---|---|---|
| Revenue | $863.0 million | $662.7 million |
| Gross profit / margin | $252.4 million / 29.3% | $188.3 million / 28.4% |
| Operating income / margin | $66.1 million / 7.7% | $45.0 million / 6.8% |
| Net income | $38.4 million | $26.5 million |
| Diluted earnings per share | $1.23 | $0.85 |
| Cash from operating activities | $73.3 million | $34.5 million |
| Cash from investing activities | $(79.6) million | $(111.4) million |
| Cash from financing activities | $14.0 million | $72.9 million |
At year-end, cash was $14.5 million, working capital was $62.3 million, total assets were $462.1 million and total stockholders’ equity was $154.0 million. Total debt, including capital lease obligations and vehicle financing, was $166.7 million. The company reported no revolving-line borrowings at year-end and was in compliance with its debt covenants.
FY2016 fourth-quarter revenue was $234.0 million, gross profit was $68.4 million and net income was $11.1 million. The filing does not provide a clear standalone Q4 margin comparison.
Changes versus prior year
- Revenue rose 30.2%. Management attributed approximately $96.9 million of the increase to acquisitions, $58.6 million primarily to organic job-volume growth, and the remainder to a mix of customer/product mix, pricing and insulation-volume factors.
- Gross margin improved from 28.4% to 29.3%, primarily reflecting favorable mix, market pricing and insulation-volume factors, as well as material savings and improved fuel costs and utilization.
- Operating expenses remained about 21.6% of revenue. Administrative costs rose with growth and acquisitions; amortization expense increased to $11.3 million from $6.3 million.
- Interest expense increased to $6.2 million from $3.7 million, primarily due to higher debt levels supporting growth and acquisitions.
- Operating cash flow more than doubled, while investing outflows included $53.3 million for acquisitions and $27.0 million for property and equipment. Capital expenditures, including non-cash purchases, were $27.8 million.
Outlook, risks and unusual items
- Management said it expected to improve profitability and results in 2017 and planned to pursue organic growth, cross-selling, acquisitions and operating leverage. It cautioned that positive trends might not continue. These statements are outlook, not quantified company guidance.
- The filing cited a third-party Blue Chip forecast of housing starts rising from about 1.2 million in 2016 to 1.3 million in 2017 and 1.4 million in 2018; this is not IBP guidance. Management also cited an industry forecast for 6% growth in commercial construction starts in 2017.
- Alpha’s acquisition consideration included approximately $81.9 million cash, $12.2 million in IBP shares and $1.9 million of seller obligations, subject to customary adjustments. IBP estimated potential additional earnout payments of $20–$25 million. The transaction was funded with a draw on the existing credit facility. Purchase accounting was incomplete when the filing was issued.
- IBP identified Alpha integration, increased commercial-market exposure, acquisition financing costs, and Alpha’s previously identified internal-control material weaknesses and significant deficiencies as risks. Certain 2016-acquired subsidiaries were excluded from management’s and the auditor’s 2016 internal-control assessments; both reported effective controls for the assessed scope.
- Other principal risks include construction-market cyclicality and seasonality, severe weather, competition, supplier concentration (three largest suppliers were 41% of material purchases), labor and product-cost pressures, claims and insurance reserves, environmental exposure, and variable-rate debt. A one-percentage-point rate increase was estimated to raise annual interest expense by about $1.1 million.
- The company reported no goodwill impairment in 2016. Goodwill and other intangible assets totaled $193.4 million, about 42% of year-end assets. No material adverse outcome was expected from pending ordinary-course litigation, but outcomes remain uncertain.
- IBP paid no dividends and said it did not expect to pay them in the foreseeable future. The financial statements and internal-control audit reports were unqualified.
Important facts for investors to verify
- Whether Alpha meets expectations, integrates successfully, and contributes cash flow sufficient to support its acquisition financing and any earnout.
- Organic growth and margin trends apart from acquisitions, including the company’s ability to pass through material, fuel and labor cost increases.
- Debt levels, borrowing availability, covenant headroom and interest-rate exposure after the Alpha transaction.
- Realization of receivables and inventory growth, and the development of bad-debt and insurance claims reserves.
- Progress in remediating Alpha’s disclosed internal-control issues and the impact of its commercial construction exposure.
- Whether housing and commercial construction forecasts, seasonal patterns and supplier availability support management’s 2017 outlook.