Installed Building Products, Inc. — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020. IBP installs insulation and complementary building products across residential new construction, repair and remodel, and commercial markets through more than 180 locations. All figures below are in U.S. dollars; financial statement amounts are in millions unless otherwise noted.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $420.5 | $396.4 | $1,211.8 | $1,110.4 |
| Gross profit / margin | $131.6 / 31.3% | $118.1 / 29.8% | $375.0 / 31.0% | $314.8 / 28.3% |
| Operating income / margin | $45.6 / 10.8% | $37.4 / 9.4% | $117.0 / 9.7% | $86.3 / 7.8% |
| Net income / margin | $28.1 / 6.7% | $21.2 / 5.4% | $69.4 / 5.7% | $49.0 / 4.4% |
| Diluted EPS | $0.95 | $0.71 | $2.33 | $1.64 |
| Operating cash flow | Not presented quarterly | $143.9 | $106.5 |
Third-quarter revenue rose 6.1% year over year, while gross profit increased 11.5%. For the first nine months, revenue grew 9.1% and gross profit 19.1%. Management attributed growth to acquisitions, selling-price increases, higher multifamily volume, and complementary-product sales. Gross margin improvement reflected lower fuel costs, higher selling prices against relatively stable material costs, and improved labor utilization. Selling, administrative, and amortization expenses increased, including from acquisitions and higher compensation, benefits, facilities, and insurance costs.
Liquidity, debt, and capital allocation
- At September 30, cash and cash equivalents were $267.5 million and short-term investments were $1.2 million. IBP reported total liquidity of $430.0 million, including its $200 million asset-based revolver; $38.7 million of letters of credit were outstanding. Management noted that collateral limitations reduce reported liquidity.
- Total debt carrying value was $568.4 million, including $300 million of 5.75% senior notes due 2028, a term loan, and vehicle and equipment notes. Long-term debt, excluding current maturities, was $544.3 million. No revolver borrowings were outstanding; availability was $161.3 million including letters of credit.
- Operating cash flow was $143.9 million, compared with $106.5 million in the prior-year period. The increase primarily reflected higher earnings and CARES Act payroll-tax deferrals, partly offset by a $17.8 million cash payment to settle prior interest-rate swaps. Capital expenditures were $25.5 million, versus $37.3 million.
- IBP spent $38.8 million on acquisitions and repurchased approximately 443,000 shares for $15.8 million during the nine months. Repurchases were suspended during Q2 and Q3; management said the program would resume November 9, 2020.
Changes, outlook, and risks
- Same-branch sales growth was 1.7% in Q3, versus 9.3% a year earlier; same-branch single-family sales declined 3.1%, although total single-family sales grew 1.8%. Same-branch volume growth was 2.2% and price/mix growth was 0.2%. The nine-month same-branch sales growth rate was 5.1%.
- IBP estimated temporary COVID-related branch interruptions reduced nine-month revenue by approximately $12.0–$14.5 million. Management expected pandemic-related effects to weigh on revenue, net income, and operating cash flow in Q4 2020 and into 2021, but said the full-year impact could not be reliably estimated. It cited the normal lag between housing starts and completions, project delays and social-distancing inefficiencies in commercial work, and uncertainty over future restrictions and construction demand.
- Management said housing starts rose 11.4% year over year in Q3 and expected residential backlog to provide near-term support, while warning that earlier housing-start declines and other disruption could affect Q4 and 2021. Commercial backlog remained strong but had declined slightly from June 30; project delays and longer-term changes in demand for offices, schools, airports, and arenas were risks. No company-specific numerical earnings or revenue guidance was provided.
- IBP reported no material COVID-related collection or supply disruption to date and had rehired substantially all of about 600 employees previously furloughed or laid off. It nevertheless noted potential risks from renewed shutdowns, customer credit deterioration, labor availability, and insulation-supply constraints if housing demand remains high.
- In August, IBP paid $17.8 million to terminate existing swaps and entered a forward swap with a $200 million notional amount, a 0.51% fixed rate, and an April 2030 maturity, beginning July 2021. The terminated-swap loss will be amortized to interest expense; about $3.4 million was expected to be reclassified to interest expense over the next 12 months. A one-percentage-point rate change on exposed variable-rate debt would change annual interest expense by approximately $2.0 million.
- Five acquisitions were completed in the first nine months, with $38.8 million in cash paid and $7.0 million in seller obligations. Two additional acquisitions closed in October 2020 for approximately $18.1 million and $9.0 million, respectively. Management reported no goodwill or other asset impairment at September 30. Litigation was described as not expected to materially affect the company, though outcomes are inherently uncertain.
- Other items: adoption of the expected-credit-loss standard reduced opening retained earnings by $1.2 million net of tax; the allowance for credit losses rose to $9.4 million from $6.9 million at year-end 2019. A supplier agreement required $22.6 million of purchases in 2020 and $15.0 million in 2021; $9.1 million of the 2020 obligation had been met by September 30.
Investor verification priorities
- Check subsequent results against management’s expected COVID-related pressure in Q4 2020 and 2021, especially housing completions, branch activity, and commercial project starts.
- Assess whether pricing, material costs, labor utilization, and acquisition contributions sustain the Q3 and year-to-date margin gains.
- Monitor cash conversion and liquidity, including the effect of payroll-tax deferrals, collateral restrictions, customer collections, and acquisition spending.
- Review debt-service costs, covenant headroom, LIBOR transition terms, and the interest-rate swap’s future coverage and cash-flow implications.
- Track integration and returns from 2020 and October acquisitions, and confirm the effect of resuming share repurchases on capital available for operations and acquisitions.