Installed Building Products, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018. The company installs insulation and complementary building products for residential and commercial construction across more than 125 locations. Comparisons are with Q1 2017 unless stated otherwise; prior-period revenue was not restated for the adoption of ASC 606.
Financial performance and position
| Metric | Q1 2018 | Q1 2017 / comparison |
|---|---|---|
| Net revenue | $301.7 million | $255.7 million; up 18.0% |
| Gross profit and margin | $80.0 million; 26.5% | $72.2 million; 28.2% |
| Operating income and margin | $12.8 million; 4.2% | $12.5 million; 4.9% |
| Net income and diluted EPS | $6.4 million; $0.20 | $6.4 million; $0.20 |
| Operating cash flow | $6.1 million | $15.7 million |
| Capital expenditures | $10.2 million | $7.8 million |
| Interest expense | $4.0 million | $2.2 million; up 86.2% |
- Revenue growth reflected acquisitions, organic branch growth and higher selling prices. Same-branch revenue rose 11.3%; management attributed approximately 7.3 percentage points to more completed jobs and 3.6 points to pricing and customer/product mix. Commercial construction organic growth was 13.5%.
- Gross margin contracted 1.7 percentage points. Management cited higher material and labor costs, including industry-wide material cost increases; it attributed 0.6 points to material and 0.5 points to labor.
- At March 31, cash and cash equivalents were $19.9 million and short-term investments were $28.8 million. Reported total liquidity was $120.2 million, including the $100 million ABL facility, net of letters of credit and cash collateral. No ABL borrowings were outstanding.
- Long-term debt, including current maturities, was $348.1 million; capital lease obligations totaled $10.8 million. The filing says the company was in compliance with applicable debt covenants.
- Cash fell from $62.5 million at year-end 2017 to $19.9 million. Cash used in investing was $21.3 million, including $11.5 million for acquisitions and $10.2 million for property and equipment; cash used in financing was $27.4 million, including $24.6 million of share repurchases.
Material changes and notable items
- ASC 606 was adopted January 1, 2018 using the modified retrospective method. It increased opening retained earnings by $2.9 million, net of tax; management said adoption increased Q1 net income by $0.3 million. The comparative period remains under the prior standard.
- The Tax Act lowered the U.S. federal corporate tax rate to 21%. The Q1 effective tax rate was 26.0%, versus 37.3%; management attributed approximately $1.0 million of the $1.5 million reduction in tax expense to the Act. Tax accounting remained provisional, with analysis to be completed within the measurement period ending December 22, 2018.
- The company acquired two businesses for total purchase consideration of $14.6 million, including Custom Door & Gate. It also acquired H2H Blinds for approximately $4.6 million on April 9, after quarter-end.
- A $50 million repurchase program began March 2, 2018. The company repurchased approximately 413,000 shares for $24.6 million in Q1 at an average price of about $59.70 per share.
Outlook, management commentary and risks
- No formal financial guidance was provided. Management cited an April 2018 Blue Chip Economic Indicators consensus forecast for U.S. housing starts to rise from approximately 1.2 million in 2017 to 1.3 million in 2018, and expected growth to benefit revenue, gross profit and operating income.
- Despite inclement weather in some markets, management reported strong housing markets and growth across products and end markets. It said selling-price increases were slower than material-cost inflation, but pricing momentum improved in March; it expected prices to continue improving in Q2 and margins to move toward historical trends. Higher material costs were expected through the remainder of 2018.
- Key sensitivities include housing demand, interest rates, construction activity and the company’s ability to pass material-cost increases to customers. A late-2017 manufacturer facility failure disrupted insulation supply and contributed to 2018 material-price increases.
- Management said operating cash flows are seasonally stronger in Q3 and Q4 and believed cash, operating cash flow and borrowing capacity would fund operations and obligations for at least 12 months. It also noted that the new lease standard, to be adopted in 2019, was expected to significantly affect the balance sheet.
- The company reported no material changes to its risk factors or market-risk exposure. It did not believe pending litigation would materially adversely affect financial position, results or cash flows. Forward-looking statements remain subject to risks described in its 2017 Form 10-K.
Important facts for investors to verify
- Whether selling-price increases keep pace with material and labor inflation, and whether gross margins recover as management anticipated.
- Whether housing starts, completed jobs and commercial construction support the company’s growth expectations.
- Acquisition integration, returns and any final purchase-price allocation adjustments, including for the post-quarter H2H Blinds acquisition.
- Debt service, interest-rate exposure, covenant compliance and actual availability under the ABL after letters of credit and collateral requirements.
- Cash conversion and working-capital needs, particularly as contract assets rose to $18.1 million from $6.2 million at year-end.
- Final Tax Act accounting and the balance-sheet effects of adopting the new lease standard.