Installed Building Products, Inc. — FY 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. This is an annual report, not a standalone fourth-quarter filing; quarterly figures are included below. Amounts are U.S. dollars unless noted.
Business context
IBP installs insulation and complementary building products for residential, repair-and-remodel, and commercial construction customers across the continental United States. Insulation represented 67% of 2017 revenue. The company completed ten acquisitions during 2017, including Alpha, which expanded commercial insulation and related services. Commercial construction rose to 17% of revenue from 12% in 2016.
Key financial metrics
| Metric | FY 2017 | FY 2016 | Change / context |
|---|---|---|---|
| Net revenue | $1,132.9 million | $863.0 million | Up 31.3%; Alpha contributed $116.1 million of the increase |
| Gross profit / margin | $324.0 million / 28.6% | $252.4 million / 29.3% | Gross profit up 28.4%; margin down 0.7 percentage points |
| Operating income / margin | $74.3 million / 6.6% | $66.1 million / 7.7% | Operating income up 12.4% |
| Net income / diluted EPS | $41.1 million / $1.30 | $38.4 million / $1.23 | Net income up 7.0% |
| Operating cash flow | $68.8 million | $73.3 million | Down $4.5 million |
| Capital expenditures | $31.7 million | $27.0 million | Primarily vehicles and equipment |
| Cash and investments | $92.6 million | $14.5 million | Includes $30.1 million of short-term investments |
| Working capital | $195.1 million | $62.3 million | 17.2% of revenue versus 7.2% |
| Total debt, including capital leases | $359.7 million | $166.7 million | Substantial increase, primarily related to acquisition financing |
Liquidity and debt: At year-end, IBP had no ABL revolver borrowings. The approximately $100 million revolver had $17.9 million of outstanding letters of credit, leaving roughly $82.1 million of availability. Management said cash, operating cash flow, and available borrowing capacity should fund operations and obligations for at least the next 12 months. Variable-rate borrowings exposed to interest-rate risk were $199.0 million after interest-rate swaps; a 100-basis-point rate increase was estimated to add about $2.0 million to annual interest expense. The company reported compliance with applicable debt covenants.
Fourth-quarter and year-over-year changes
- Fourth-quarter 2017 revenue was $299.9 million versus $234.0 million in the prior-year quarter, up about 28.2%.
- Fourth-quarter net income was $10.8 million versus $11.1 million; diluted EPS was $0.34 versus $0.35.
- Full-year growth reflected acquisitions and organic activity. Management attributed approximately $49.6 million of the 2017 revenue increase primarily to organic job-volume growth and $34.6 million to mix, pricing, and building-code-related factors.
- Gross margin declined amid higher employee-related costs, including financial wellness and longevity stock-compensation plans. Administrative costs and amortization also increased; Alpha-related backlog amortization included $9.1 million scheduled to run through June 2018.
- Interest expense rose to $17.4 million from $6.2 million, reflecting higher debt and a $1.8 million charge related to the November term-loan modification/refinancing.
Outlook, risks, and unusual items
- Management identified 2018 priorities including capturing residential and commercial construction growth, cross-selling, disciplined acquisitions, operating leverage, and commercial expansion. It expected revenue, gross profit, and operating income to benefit from housing-market growth, but gave no specific company earnings or revenue guidance.
- The filing cited an industry consensus forecast for U.S. housing starts to increase from about 1.2 million in 2017 to 1.3 million in 2018; this is an external forecast, not company guidance.
- Management warned of tighter construction labor availability and higher hiring, training, benefits, and workers’ compensation costs. Insulation supply constraints in late 2017 contributed to industry allocations and higher 2018 material pricing, which could pressure margins if not passed through.
- Key risks include construction-market cyclicality and seasonality, severe weather, competition, supplier concentration and product-price changes, acquisition integration, labor availability, legal and insurance claims, environmental exposure, cybersecurity and IT disruptions, and variable-rate debt.
- The Tax Cuts and Jobs Act reduced the federal corporate rate to 21%. IBP recorded a $3.8 million deferred-tax remeasurement benefit, partly offset by other tax adjustments; the reported effective tax rate was 26.3% versus 35.5% in 2016. Management expected a lower tax rate to benefit future periods, subject to potential offsets.
- Goodwill and intangible assets totaled $293.5 million, about 40% of assets. No impairment was recorded in 2017. Alpha’s acquired businesses represented 18.0% of year-end assets and 10.2% of annual revenue; management excluded recently acquired subsidiaries from its internal-control assessment, while Deloitte issued an unqualified opinion on the controls it audited.
- Backlog was estimated at $80.8 million at year-end; the company cautioned that it is not a guarantee of future revenue. The company reported ordinary-course claims and lawsuits, including wage-and-hour matters, and did not expect pending matters to have a material adverse effect.
- Subsequent events included a January 2018 acquisition for approximately $2.2 million and a $50 million share-repurchase program approved effective March 2, 2018. IBP did not expect to pay dividends in the foreseeable future.
Important facts for investors to verify
- How much of reported growth and future performance is attributable to acquired businesses versus comparable-branch organic growth, and whether Alpha integration meets expectations.
- Whether labor and insulation input-cost increases can be passed through without further gross-margin pressure.
- Debt repayment capacity, covenant headroom, interest-rate exposure, and the use of the ABL facility as acquisition and working-capital needs evolve.
- The realization and impairment sensitivity of goodwill and acquired intangible assets, and the effect of acquisition amortization on earnings.
- The final effects of tax reform and adoption of new revenue-recognition and lease-accounting standards; the filing estimated an approximately $3.0 million opening retained-earnings adjustment for revenue recognition and expected lease adoption to significantly affect the balance sheet.
- Integration of acquired companies’ controls: the 2017 assessment excluded acquired subsidiaries, including Alpha, and Alpha had identified internal-control deficiencies before acquisition.