Installed Building Products, Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; comparison is with the three months ended March 31, 2016. The company installs insulation and other building products for residential and commercial construction and repair markets, operating in more than 100 locations. Amounts below are in U.S. dollars; financial statement figures are stated in millions unless noted.
Financial performance and position
| Metric | Q1 2017 | Q1 2016 / prior date |
|---|---|---|
| Net revenue | $255.7 million | $191.7 million |
| Gross profit; gross margin | $72.2 million; 28.2% | $54.6 million; 28.5% |
| Operating income | $12.5 million | $10.6 million |
| Net income; diluted EPS | $6.4 million; $0.20 | $5.8 million; $0.19 |
| Operating cash flow | $15.7 million | $19.8 million |
| Cash; current assets | $24.6 million; $246.1 million | $14.5 million; $192.4 million at Dec. 31, 2016 |
| Total debt, excluding capital leases | $264.2 million | $151.4 million at Dec. 31, 2016 |
Revenue increased 33.4%. Management attributed approximately $47.3 million of the increase to acquisitions, $9.0 million primarily to organic completed-job volume, and the balance to pricing, mix, and insulation volumes related to building-code requirements. Cost of sales rose 33.8%; gross margin declined 0.3 percentage points. Selling and administrative expenses and amortization also increased. The effective tax rate was 37.3%, compared with 34.8%.
At March 31, total current liabilities were $154.8 million and working capital was approximately $91.3 million. The company had no borrowings under its existing $100 million revolving line, with $17.9 million of letters of credit outstanding. Capital lease obligations totaled approximately $14.2 million. Management said cash, operating cash flow, and available borrowing capacity should support operations and obligations for at least 12 months.
Material changes and transactions
- On January 5, the company acquired Alpha, expanding commercial insulation, waterproofing, fire-stopping, and fireproofing operations. Alpha contributed $28.2 million of revenue and $0.9 million of net income after acquisition during the quarter.
- Cash paid for acquisitions, net of acquired cash, was $106.9 million, versus $8.8 million in Q1 2016. The Alpha purchase included approximately $103.8 million cash consideration, 282,577 shares valued at $10.9 million, and seller obligations.
- Investing cash outflow was $115.0 million, largely reflecting acquisitions and $7.8 million of property and equipment purchases. Financing cash inflow was $109.4 million, principally from credit-facility borrowings. Cash increased by $10.1 million during the quarter.
- On April 13, after quarter-end, the company entered into a new $300 million seven-year term loan and an asset-based revolving facility of up to approximately $100 million, and used proceeds to repay the prior credit agreement. The new facilities carry collateral, covenant, and mandatory-prepayment provisions.
Outlook, risks, and notable items
No quantified revenue or earnings guidance is provided in the filing. Management described the business as positioned to grow with the housing recovery and through acquisitions, and reported estimated backlog of $86.8 million at March 31, primarily reflecting Alpha contracts. Management cautioned that results depend on housing demand and affordability, economic conditions, interest rates, and mortgage availability; it may adjust strategy based on demand and market performance.
Key execution and financial considerations include acquisition integration and funding, variable-rate borrowing costs, contract cost-to-complete estimates under percentage-of-completion accounting, collection risk, and workers’ compensation and general-liability claims. Residential revenue represented 82% of the quarter’s total, down from 89% a year earlier, with commercial revenue rising to 18%, primarily following acquisitions. The company reported no material change in risk factors or market-risk exposure and no pending litigation expected by management to materially affect financial position, results, or cash flows. The interim results are not necessarily indicative of future quarters.
Investor verification priorities
- Separate Alpha’s contribution from organic growth and monitor post-acquisition performance, integration, and the final purchase-price allocation.
- Review gross-margin trends, bad-debt expense, receivables and retainage, and the assumptions behind contract estimates and backlog conversion.
- Track debt levels, interest expense, facility availability, covenant compliance, and the terms and effects of the April 13 refinancing.
- Assess cash conversion: operating cash flow fell year over year despite higher net income, while acquisition spending and borrowings increased substantially.
- Monitor housing-market conditions, commercial mix, insurance reserves and claims, and future adoption effects of accounting standards; the filing says some impacts remain under evaluation.