Installed Building Products, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. Amounts below are USD unless noted. The filing was signed May 8, 2020.
Business context
IBP installs insulation and complementary building products for residential new construction, repair and remodel, and commercial construction customers. It operated through more than 180 locations and reported one operating segment. Residential new construction represented 75% of Q1 revenue; commercial represented 19%.
Financial performance and liquidity
| Metric | Q1 2020 | Q1 2019 / comparison |
|---|---|---|
| Revenue | $397.3 million | $342.1 million; up 16.1% |
| Gross profit / margin | $116.3 million / 29.3% | $89.4 million / 26.1% |
| Operating income | $29.0 million | $18.0 million |
| Net income | $16.0 million | $8.8 million |
| Diluted EPS | $0.53 | $0.30 |
| Operating cash flow | $35.9 million | $15.9 million |
- Revenue growth reflected acquisitions, organic growth and higher selling prices. Same-branch sales increased 12.1%; same-branch volume declined 0.2%, while price/mix increased 12.1%.
- Gross margin improved as higher selling prices were achieved against relatively stable material costs, alongside improved labor utilization.
- At March 31, cash and cash equivalents were $187.2 million and short-term investments were $26.5 million. Reported total liquidity was $375.0 million, including $161.3 million of remaining ABL Revolver availability after letters of credit. No revolver borrowings were outstanding.
- Total debt carrying value was approximately $569.8 million, including $24.2 million of current maturities; long-term debt was $545.6 million. Operating and finance lease liabilities totaled $52.5 million. The company reported compliance with applicable debt covenants.
- Capital expenditures were $9.9 million; acquisition cash payments were $8.5 million; share repurchases used $15.8 million. The repurchase program was subsequently suspended in response to COVID-19.
Material changes versus the prior-year quarter
- Revenue rose 16.1%, gross profit 30.0%, and net income increased from $8.8 million to $16.0 million. Gross margin expanded 3.2 percentage points.
- Interest expense increased 29.6% to $7.4 million, primarily reflecting higher debt levels following 2019 financing transactions.
- Administrative expense increased 24.3%, including higher wages, benefits, facility costs and health insurance expense. The allowance for credit losses was $9.0 million at quarter-end, versus $6.9 million at year-end 2019; the company also recorded a $1.2 million after-tax opening retained-earnings adjustment on adopting the expected-credit-loss standard.
- Cash and investments totaled $213.7 million, compared with $215.9 million at December 31, 2019. Operating cash flow was higher year over year.
Outlook, risks and unusual items
- Management said COVID-19 had not materially affected Q1, but estimated it reduced Q1 revenue by $2.0–$2.5 million. About 90% of branches were in markets where construction was considered essential. New York activity was substantially halted; other temporary restrictions affected additional markets. The company had furloughed or laid off 563 employees and rehired nearly 280 by the filing date.
- Management could not estimate the full-year or Q2 financial impact. It expected COVID-19 to reduce revenue and net income during the remainder of 2020, with a more pronounced effect in Q3 and Q4 because of the lag between housing starts and completions. Industry experts cited in the filing anticipated housing starts declining about 30% for 2020; this was an industry estimate, not company guidance.
- April 2020 revenue was approximately 2% above April 2019 despite closures of branches representing about 10% of revenue. Management cited housing-construction backlog and a strong commercial backlog as near-term support, but warned of risks from lower housing demand, branch restrictions, commercial project delays and customer credit deterioration.
- Management expected liquidity to support operations and debt service for at least 12 months and did not anticipate difficulty meeting obligations. Cash-preservation steps included suspending repurchases, delaying acquisition closings, suspending executive pay increases and eliminating nonessential travel. The CARES Act was expected to defer approximately $15–$20 million of employer Social Security tax payments, rather than reduce the related expense.
- Two acquisitions were completed in Q1 for total purchase consideration of $11.1 million, including seller obligations. Goodwill and intangible assets were not considered impaired at March 31; management said it would continue monitoring impairment indicators.
- Interest-rate swaps hedged substantially all variable cash flows on the term loan. The filing estimated $3.2 million of accumulated hedge losses would be reclassified as additional interest expense over the next 12 months. A supplier agreement requires purchases of $22.6 million in 2020 and $15.0 million in 2021; $1.8 million of the 2020 obligation had been met by quarter-end.
- Management did not expect pending litigation to materially affect financial position, results or cash flows. Forward-looking statements remain subject to substantial COVID-19, housing-market, construction, labor, material-cost and financing risks.
Important facts for investors to verify
- Subsequent quarterly disclosures on revenue, margins, cash generation and the timing and severity of COVID-19 effects, particularly in Q3 and Q4.
- Housing starts, construction restrictions, branch reopening and rehiring progress, and the commercial backlog’s conversion into revenue.
- Receivable collections, allowance for credit losses and customer payment capacity as economic conditions change.
- Actual available borrowing capacity under the asset-based revolver, collateral limitations, covenant compliance and debt service requirements.
- Acquisition integration and purchase accounting, expected supplier-purchase commitments, and any change in impairment assessments or hedge-related interest expense.