Installed Building Products, Inc. — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019. IBP installs insulation and complementary building products across residential new construction, repair and remodel, and commercial markets. It reported one operating and reportable segment, with more than 175 locations.
Financial performance
| Metric | Q3 2019 | Q3 2018 | First 9 months 2019 | First 9 months 2018 |
|---|---|---|---|---|
| Revenue | $396.4 million | $349.0 million | $1,110.4 million | $983.3 million |
| Gross profit | $118.1 million | $97.3 million | $314.8 million | $273.0 million |
| Gross margin | 29.8% | 27.9% | 28.3% | 27.8% |
| Operating income | $37.4 million | $26.3 million | $86.3 million | $66.5 million |
| Net income | $21.2 million | $15.6 million | $49.0 million | $38.3 million |
| Diluted EPS | $0.71 | $0.50 | $1.64 | $1.21 |
| Net cash from operations | Not presented separately | Not presented separately | $106.5 million | $68.8 million |
Revenue increased 13.6% in Q3 and 12.9% in the first nine months. Management attributed growth to acquisitions, organic growth, higher selling prices, and improved housing activity. Same-branch revenue grew 9.3% in Q3 and 8.2% year to date; commercial organic growth was 29.1% and 22.4%, respectively. Q3 gross margin improved primarily due to selling-price increases that helped offset higher material costs.
Cash, debt, and liquidity
- At September 30, cash and cash equivalents were $235.0 million, short-term investments were $5.0 million, and current assets were $578.5 million.
- Reported debt was $565.2 million, including $300.0 million principal of 5.75% senior notes due 2028, a term loan, and vehicle and equipment notes. Cash less reported debt was approximately $330.3 million; this calculation excludes lease obligations.
- Operating and finance lease liabilities totaled $49.0 million. Operating lease right-of-use assets were $42.6 million; the company adopted the new lease accounting standard on January 1, 2019.
- No borrowings were outstanding on the new $200 million asset-based revolver. Reported total liquidity was $405.4 million, including full revolver capacity; the filing says collateral limitations would reduce that amount by $51.9 million. It also identifies $10.0 million held in a trust as additional insurance collateral.
- Operating cash flow was $106.5 million; investing cash outflow was $58.0 million and financing cash inflow was $96.0 million for the nine months. Capital expenditures were $37.3 million and acquisition cash payments were $24.7 million.
Material changes and unusual items
- In September, IBP issued $300 million of 5.75% senior notes and used part of the proceeds to repay term-loan debt and fund transaction costs. It also replaced its $150 million revolver with a $200 million ABL facility. The company reported compliance with applicable debt covenants at quarter end.
- Q3 interest expense rose 60.1% to $8.5 million; the increase included a $2.8 million write-off of previously capitalized loan costs related to the debt transactions.
- Other comprehensive loss from cash-flow hedges was $8.0 million for the first nine months, versus $2.5 million of income a year earlier. The filing estimates $1.5 million will be reclassified as increased interest expense over the next 12 months.
- IBP completed four business combinations and four insignificant tuck-in acquisitions in the first nine months, with $24.7 million cash paid and $4.3 million of seller obligations. The company made no stock repurchases during the period.
Outlook, risks, and contingencies
Management said it expects cash from operations, cash on hand, and borrowing capacity to support operations and obligations for at least the next 12 months. It described long-term housing demand drivers positively, but provided no specific numerical earnings or revenue guidance in the filing. Management expects material-cost inflation to continue into 2020 and said it will continue working to pass cost increases through to customers. It also noted tight construction labor availability, although retention, turnover, and labor efficiency improved during the first nine months.
Results remain exposed to housing-market and broader economic conditions, material prices and the timing of customer price increases, labor availability and costs, and acquisition execution. Revenue recognition uses estimated contract costs under a cost-to-cost percentage-of-completion method, so revisions to estimated costs can affect reported revenue and profit. IBP reported ordinary-course claims and litigation, but does not believe pending matters will materially affect its financial position, results, or cash flows. It disclosed supplier purchase commitments of $16.4 million for 2019, $21.4 million for 2020, and $15.0 million for 2021 under one materials agreement.
Investor verification points
- Confirm whether pricing increases continue to offset material-cost inflation and whether gross-margin gains persist.
- Track organic and same-branch growth separately from acquisition-driven revenue, especially in residential and commercial markets.
- Review debt-service costs, revolver availability after collateral restrictions, and compliance with note and credit-facility covenants.
- Monitor operating cash conversion, receivables and contract assets, and acquisition spending and integration results.
- Assess labor costs and availability, insurance and workers’ compensation reserves, and the potential effects of contract-estimate revisions.