Installed Building Products, Inc. — Q3 2015 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2015. Financial amounts below are in millions of dollars unless stated otherwise. IBP installs insulation and other building products across residential and commercial markets; residential construction and repair/remodel accounted for 89% of revenue, commercial construction 11%.
Financial performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Revenue | $181.6 | $140.5 | $471.2 | $372.8 |
| Gross profit | $53.4 | $39.6 | $133.8 | $100.8 |
| Operating income | $15.5 | $10.8 | $29.9 | $16.3 |
| Net income | $9.5 | $6.2 | $17.2 | $8.9 |
| Diluted earnings per share | $0.30 | $0.19 | $0.55 | $(0.37) |
| Cash from operating activities | — | $29.1 | $14.7 |
- Q3 revenue rose 29.3%; nine-month revenue rose 26.4%. Management attributed $29.4 million of Q3 and $59.3 million of nine-month revenue growth to acquisitions, and $4.3 million and $19.0 million, respectively, primarily to organic job-volume growth.
- Gross margin expanded to 29.4% from 28.2% in Q3 and to 28.4% from 27.1% for the nine-month period, which management attributed primarily to higher-revenue leverage and cost efficiencies. Operating margins were approximately 8.5% and 6.3%, respectively, versus 7.7% and 4.4% a year earlier.
- Interest expense was $1.0 million for Q3 and $2.7 million for the nine months. The nine-month 2014 common-stockholder loss included $19.9 million of preferred-stock accretion; this makes the year-over-year EPS comparison less representative of underlying operating performance.
Cash, debt and liquidity
- Cash was $5.3 million at September 30, 2015, down from $10.8 million at year-end 2014. Current assets were $139.0 million and current liabilities $100.7 million; reported long-term debt was $95.5 million, with $6.4 million of current maturities. Capital lease obligations totaled $22.3 million.
- Operating cash flow of $29.1 million was more than offset by $91.0 million of investing outflows, principally $71.0 million for acquisitions, net of cash acquired, and $20.0 million of property and equipment purchases. Financing activities provided $56.4 million.
- The amended credit facility provides $100 million of revolving capacity, a $50 million term loan, a $50 million delayed-draw term loan and a $25 million uncommitted accordion. At quarter-end, the revolving line was undrawn; term-loan balances were $48.8 million and $35.0 million, respectively. Facility maturity is April 2020. IBP reported compliance with its financial covenants.
- Management said cash from operations, cash on hand and available borrowing capacity should be adequate for operations and expected needs for at least the next 12 months.
Material developments, outlook and risks
- IBP completed five acquisitions during the first nine months of 2015, with aggregate purchase consideration of $84.3 million, including $71.96 million cash paid and $12.36 million in seller obligations. Acquisition-related goodwill and intangibles increased materially; preliminary purchase-price allocations remain subject to adjustment.
- Management described continued acquisition-led expansion and the housing recovery as growth opportunities, but gave no quantified revenue or earnings guidance. It cautioned that weaker economic conditions, lower housing demand or affordability, higher interest rates and tighter mortgage lending could adversely affect results.
- At September 30, outstanding letters of credit were $9.8 million, performance bonds $2.0 million and permit/license bonds $3.8 million. Contractual obligations included $68.7 million of estimated purchase obligations; supply-contract commitments are quantity-based and not specifically rate-quantifiable in the notes.
- IBP reported ordinary-course claims and litigation, but management did not expect pending matters to have a material adverse effect. It also disclosed related-party sales, purchases, rent and a March 2015 repurchase of 315,000 shares from a related party for approximately $6.1 million.
- An October 16, 2015 credit-agreement amendment changed the definition of “Change in Control,” including removal of language described as a “dead hand proxy put.” Management reported no material change in risk factors or market-risk exposure and said disclosure controls were effective.
Important facts for investors to verify
- How much reported growth is sustainable organic growth versus acquired revenue, and how the 2015 acquisitions perform after integration.
- Acquisition funding, preliminary purchase-price adjustments, rising debt and lease obligations, available liquidity, and ongoing compliance with credit covenants.
- Cash conversion and working-capital needs, especially the increase in receivables, alongside substantial acquisition and vehicle/equipment spending.
- Potential effects of housing demand, interest rates, mortgage availability, purchase commitments, and self-insured claims on margins and cash flows.
- Related-party transactions and the reported insurance, legal and other contingencies.