UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2020
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Transition Period From To
Commission File Number: 001-36307
(Exact name of registrant as specified in its charter)
| |
| |
| (State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) | |
| |
| |
| (Address of principal executive offices) |
(Zip Code) |
(614 ) 221-3399
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class |
Trading Symbol(s) |
Name of each exchange on which registered | ||
| |
|
|
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes
☒
No
☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation Yes
S-T
(Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☒
No
☐
Indicate by a check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated
filer, smaller reporting company, or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2
of the Exchange Act.| |
☒ |
Accelerated filer |
☐ | |||
| Non-accelerated filer |
☐ |
Smaller reporting company |
| |||
| Emerging growth company |
|
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b–2 of the Exchange Act). Yes ☒
☐
No On April
29
, 2020, the registrant had shares of common stock, par value $0.01 per share, outstanding.
TABLE OF CONTENTS
| 1 |
||||
| 1 |
||||
| 25 |
||||
| 37 |
||||
| 38 |
||||
| 38 |
||||
| 38 |
||||
| 38 |
||||
| 40 |
||||
| 40 |
||||
| 40 |
||||
| 40 |
||||
| 41 |
||||
| 42 |
i
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements
INSTALLED BUILDING PRODUCTS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(in thousands, except share and per share amounts)
March 31, |
December 31, |
|||||||
2020 |
2019 |
|||||||
ASSETS |
||||||||
Current assets |
||||||||
Cash and cash equivalents |
$ | $ | ||||||
Investments |
||||||||
Accounts receivable (less allowance for credit losses of $ |
||||||||
Inventories |
||||||||
Other current assets |
||||||||
Total current assets |
||||||||
Property and equipment, net |
||||||||
Operating lease right-of-use assets |
||||||||
Goodwill |
||||||||
Intangibles, net |
||||||||
Other non-current assets |
||||||||
Total assets |
$ | $ | ||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY |
||||||||
Current liabilities |
||||||||
Current maturities of long-term debt |
$ | $ | ||||||
Current maturities of operating lease obligations |
||||||||
Current maturities of finance lease obligations |
||||||||
Accounts payable |
||||||||
Accrued compensation |
||||||||
Other current liabilities |
||||||||
Total current liabilities |
||||||||
Long-term debt |
||||||||
Operating lease obligations |
||||||||
Finance lease obligations |
||||||||
Deferred income taxes |
||||||||
Other long-term liabilities |
||||||||
Total liabilities |
||||||||
Commitments and contingencies (Note 15) |
||||||||
Stockholders’ equity |
||||||||
Preferred Stock; $ |
||||||||
Common stock; $ |
||||||||
Additional paid in capital |
||||||||
Retained earnings |
||||||||
Treasury stock; at cost: |
( |
) | ( |
) | ||||
Accumulated other comprehensive loss |
( |
) | ( |
) | ||||
Total stockholders’ equity |
||||||||
Total liabilities and stockholders’ equity |
$ | $ | ||||||
See accompanying notes to consolidated financial statements
1
INSTALLED BUILDING PRODUCTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (UNAUDITED)
(in thousands, except share and per share amounts)
| Three months ended March 31, |
||||||||
| 2020 |
2019 |
|||||||
| Net revenue |
$ | |
$ | |
||||
| Cost of sales |
|
|
||||||
| Gross profit |
|
|
||||||
| Operating expenses |
||||||||
| Selling |
|
|
||||||
| Administrative |
|
|
||||||
| Amortization |
|
|
||||||
| Operating income |
|
|
||||||
| Other expense |
||||||||
| Interest expense, net |
|
|
||||||
| Other |
|
|
||||||
| Income before income taxes |
|
|
||||||
| Income tax provision |
|
|
||||||
| Net income |
$ | |
$ | |
||||
| Other comprehensive loss, net of tax: |
||||||||
| Unrealized loss on cash flow hedge, net of tax benefit of $ |
( |
) | ( |
) | ||||
| Comprehensive income |
$ | |
$ | |
||||
| Basic net income per share |
$ | |
$ | |
||||
| Diluted net income per share |
$ | |
$ | |
||||
| Weighted average shares outstanding: |
||||||||
| Basic |
|
|
||||||
| Diluted |
|
|
||||||
See accompanying notes to consolidated financial statements
2
INSTALLED BUILDING PRODUCTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (UNAUDITED)
(in thousands, except share amounts)
| Common Stock |
Additional Paid In |
Retained |
Treasury Stock |
Accumulated Other Comprehensive |
Stockholders’ |
|||||||||||||||||||||||||||
| Shares |
Amount |
Capital |
Earnings |
Shares |
Amount |
Loss |
Equity |
|||||||||||||||||||||||||
| BALANCE - January 1, 2019 |
|
$ | |
$ | |
$ | |
( |
) | $ | ( |
) | $ | ( |
) | $ | |
|||||||||||||||
| Net income |
|
|
||||||||||||||||||||||||||||||
| Issuance of common stock awards to employees |
|
|
( |
) | — |
|||||||||||||||||||||||||||
| Surrender of common stock awards |
( |
) | ( |
) | ( |
) | ||||||||||||||||||||||||||
| Share-based compensation expense |
|
|
||||||||||||||||||||||||||||||
| Other comprehensive loss, net of tax |
( |
) | ( |
) | ||||||||||||||||||||||||||||
| BALANCE - March 31, 2019 |
|
$ | |
$ | |
$ | |
( |
) | $ | ( |
) | $ | ( |
) | $ | |
|||||||||||||||
| Common Stock |
Additional Paid In |
Retained |
Treasury Stock |
Accumulated Other Comprehensive |
Stockholders’ |
|||||||||||||||||||||||||||
| Shares |
Amount |
Capital |
Earnings |
Shares |
Amount |
Loss |
Equity |
|||||||||||||||||||||||||
| BALANCE - January 1, 2020 |
|
$ | |
$ | |
$ | |
( |
) | $ | ( |
) | $ | ( |
) | $ | |
|||||||||||||||
| Net income |
|
|
||||||||||||||||||||||||||||||
| Cumulative effect of accounting changes, net of tax |
( |
) | ( |
) | ||||||||||||||||||||||||||||
| Issuance of common stock awards to employees |
|
|
( |
) | — |
|||||||||||||||||||||||||||
| Surrender of common stock awards |
( |
) | — |
— |
||||||||||||||||||||||||||||
| Share-based compensation expense |
|
|
||||||||||||||||||||||||||||||
| Share-based compensation issued to directors |
|
|
|
|||||||||||||||||||||||||||||
| Common stock repurchase |
( |
) | ( |
) | ( |
) | ||||||||||||||||||||||||||
| Other comprehensive loss, net of tax |
( |
) | ( |
) | ||||||||||||||||||||||||||||
| BALANCE - March 31, 2020 |
|
$ | |
$ | |
$ | |
( |
) | $ | ( |
) | $ | ( |
) | $ | |
|||||||||||||||
See accompanying notes to consolidated financial statements
3
INSTALLED BUILDING PRODUCTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)
| Three months ended March 31, |
||||||||
| 2020 |
2019 |
|||||||
| Cash flows from operating activities |
||||||||
| Net income |
$ | |
$ | |
||||
| Adjustments to reconcile net income to net cash provided by operating activities |
||||||||
| Depreciation and amortization of property and equipment |
|
|
||||||
| Amortization of operating lease right-of-use assets |
|
|
||||||
| Amortization of intangibles |
|
|
||||||
| Amortization of deferred financing costs and debt discount |
|
|
||||||
| Provision for credit losses |
|
|
||||||
| Gain on sale of property and equipment |
( |
) | ( |
) | ||||
| Noncash stock compensation |
|
|
||||||
| Changes in assets and liabilities, excluding effects of acquisitions |
||||||||
| Accounts receivable |
( |
) | ( |
) | ||||
| Inventories |
|
|
||||||
| Other assets |
|
( |
) | |||||
| Accounts payable |
( |
) | ( |
) | ||||
| Income taxes receivable/payable |
|
|
||||||
| Other liabilities |
( |
) | ( |
) | ||||
| Net cash provided by operating activities |
|
|
||||||
| Cash flows from investing activities |
||||||||
| Purchases of investments |
( |
) | ( |
) | ||||
| Maturities of short term investments |
|
|
||||||
| Purchases of property and equipment |
( |
) | ( |
) | ||||
| Acquisitions of businesses |
( |
) | ( |
) | ||||
| Proceeds from sale of property and equipment |
|
|
||||||
| Other |
( |
) | ( |
) | ||||
| Net cash used in investing activities |
( |
) | ( |
) | ||||
| Cash flows from financing activities |
||||||||
| Payments on term loan |
— |
( |
) | |||||
| Proceeds from vehicle and equipment notes payable |
|
|
||||||
| Debt issuance costs |
( |
) | — |
|||||
| Principal payments on long-term debt |
( |
) | ( |
) | ||||
| Principal payments on finance lease obligations |
( |
) | ( |
) | ||||
| Acquisition-related obligations |
( |
) | ( |
) | ||||
| Repurchase of common stock |
( |
) | — |
|||||
| Surrender of common stock awards by employees |
— |
( |
) | |||||
| Net cash used in financing activities |
( |
) | ( |
) | ||||
| Net change in cash and cash equivalents |
|
( |
) | |||||
| Cash and cash equivalents at beginning of period |
|
|
||||||
| Cash and cash equivalents at end of period |
$ | |
$ | |
||||
| Supplemental disclosures of cash flow information |
||||||||
| Net cash paid during the period for: |
||||||||
| Interest |
$ | |
$ | |
||||
| Income taxes, net of refunds |
|
|
||||||
| Supplemental disclosure of noncash activities |
||||||||
| Right-of-use assets obtained in exchange for operating lease obligations |
|
|
||||||
| Property and equipment obtained in exchange for finance lease obligations |
|
|
||||||
| Seller obligations in connection with acquisition of businesses |
|
|
||||||
| Unpaid purchases of property and equipment included in accounts payable |
|
|
||||||
See accompanying notes to consolidated financial statements
4
INSTALLED BUILDING PRODUCTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1 - ORGANIZATION
Installed Building Products (“IBP”), a Delaware corporation formed on October 28, 2011, and its wholly-owned subsidiaries (collectively referred to as the “Company,” and “we,” “us” and “our”) primarily install insulation, waterproofing, fire-stopping, fireproofing, garage doors, rain gutters, window blinds, shower doors, closet shelving and mirrors and other products for residential and commercial builders located in the continental United States. The Company operates in over 180 locations and its corporate office is located in Columbus, Ohio.
We have one operating segment and a single reportable segment. Substantially all of our sales are derived from the service-based installation of various products in the residential new construction, repair and remodel and commercial construction end markets from our national network of branch locations.
Each of our branches has the capacity to serve all of our end markets. See Note 3, Revenue Recognition, for information on our revenues by product and end market.
The COVID-19 outbreak has caused significant volatility, uncertainty and economic disruption. Public health organizations and international, federal, state and local governments have implemented measures to combat the spread of COVID-19, including restrictions on movement such as quarantines, “stay-at-home” orders and social distancing ordinances and restricting or prohibiting outright some or all forms of commercial and business activity. We do not believe the various orders and restrictions or COVID-19 itself materially impacted our business in the first quarter of 2020. The U.S. housing market was robust in the latter months of 2019 and experienced a strong start in 2020. However, the extent to which COVID-19 will impact our operations, customers, suppliers, employees and financial results is uncertain. The future impact of COVID-19 depends on numerous factors including government actions and the resulting impact on construction activity, the effect on our customers’ demand for our services, and the ability of our customers to pay for our services.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Principles of Consolidation
The accompanying consolidated financial statements include all of our wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated.
The information furnished in the Condensed Consolidated Financial Statements includes normal recurring adjustments and reflects all adjustments which are, in the opinion of management, necessary for a fair presentation of the results of operations and statements of financial position for the interim periods presented. Certain information and footnote disclosures normally included in the consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and the rules and regulations of the Securities and Exchange Commission (the “SEC”) have been omitted pursuant to such rules and regulations. We believe that the disclosures are adequate to prevent the information presented from being misleading when read in conjunction with our audited consolidated financial statements and the notes thereto included in Part II, Item 8, Financial Statements and Supplementary Data, of our Annual Report on Form
10-K
for the fiscal year ended December 31, 2019 (the “2019 Form 10-K”),
as filed with the SEC on February 27, 2020. The December 31, 2019 Condensed Consolidated Balance Sheet data herein was derived from the audited consolidated financial statements but does not include all disclosures required by U.S. GAAP.Our interim operating results for the three months ended March 31, 2020 are not necessarily indicative of the results to be expected in future operating quarters.
Note 2 to the audited consolidated financial statements in our 2019 Form
10-K
describes the significant accounting policies and estimates used in preparation of the audited consolidated financial statements. Other than the recently5
INSTALLED BUILDING PRODUCTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
implemented accounting policies described below, there have been no changes to our significant accounting policies during the three months ended March 31, 2020.
Recently Adopted Accounting Pronouncements
Standard |
Effective Date |
Adoption | ||
ASU 2016-13, Financial Instruments—Credit Losses (Topic 326) |
January 1, 2020 |
This pronouncement and subsequently-issued amendments change the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. In addition, these amendments require the measurement of all expected credit losses for financial assets, including trade accounts receivable, held at the reporting date based on historical experience, current conditions and reasonable and supportable forecasts. See Note 4, Credit Losses, for further information. | ||
ASU 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment |
January 1, 2020 |
This ASU addresses concerns over the cost and complexity of the two-step goodwill impairment test by removing the second step of the goodwill impairment test. Going forward, we will apply a one-step quantitative test and record the amount of goodwill impairment as the excess of a reporting unit’s carrying amount over its fair value, not to exceed the total amount of goodwill allocated to the reporting unit. | ||
ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement |
January 1, 2020 |
This pronouncement amends Topic 820 to eliminate, add and modify certain disclosure requirements for fair value measurements. The adoption of this standard did not impact our financial statements or have a material effect on our disclosures. | ||
ASU 2020-04, Reference Rate Reform: Facilitation of the Effects of Reference Rate Reform on Financial Reporting (Topic 848) |
Effective upon issuance |
This pronouncement contains optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform. The provisions of ASC 848 must be applied at a Topic, Subtopic or Industry Subtopic for all transactions other than derivatives, which may be applied at a hedging relationship level. The relief granted in ASC 848 is applicable only to legacy contracts if the amendments made to the agreements are solely for reference rate reform activities. We elected the practical expedient to continue to assert probability of hedged interest under our interest rate swap agreements, regardless of any expected future modification in terms related to reference rate reform. |
6
INSTALLED BUILDING PRODUCTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Recently Issued Accounting Pronouncements Not Yet Adopted
We are currently evaluating the impact of certain ASU’s on our Condensed Consolidated Financial Statements or Notes to Condensed Consolidated Financial Statements, which are described below:
Standard |
Description |
Effective Date |
Effect on the financial statements or other significant matters | |||
ASU 2019-12, Income Taxes (Topic 740), Simplifying the Accounting for Income Taxes |
This pronouncement simplifies the accounting for income taxes by removing certain exceptions to the general principles of Topic 740 and improves the consistent application of GAAP by clarifying and amending existing guidance. |
Annual periods beginning after December 15, 2020, including interim periods therein. Early adoption is permitted. |
We are currently assessing the impact of adoption on our consolidated financial statements. |
NOTE 3 - REVENUE RECOGNITION
Our revenues are derived primarily through contracts with customers whereby we install insulation and other complementary building products and are recognized when control of the promised goods or services is transferred
to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services. We account for a contract when it has approval and commitment from both parties, the rights of the parties are identified, payment terms are identified, the contract has commercial substance and
collectability of consideration is probable. An insignificant portion of our sales, primarily retail sales, is accounted for on a
point-in-time
basis when the sale occurs, adjusted accordingly for any return provisions. We do offer assurance-type warranties on certain of our installed products and services that do not represent a separate performance obligation and, as such, do not impact the timing or extent of revenue recognition.
For contracts that are not complete at the reporting date, we recognize revenue over time utilizing a
cost-to-cost
input method as we believe this represents the best measure of when goods and services are transferred to the customer. When this method is used, we estimate the costs to complete individual contracts and record as revenue that portion of the total contract price that is considered complete based on the relationship of costs incurred to date to total anticipated costs. Under the cost-to-cost
method, the use of estimated costs to complete each contract is a significant variable in the process of determining recognized revenue, requires judgment and can change throughout the duration of a contract due to contract modifications and other factors impacting job completion. The costs of earned revenue include all direct material and labor costs and those indirect costs related to contract performance, such as indirect labor, supplies, tools and repairs. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined. Our long-term contracts can be subject to modification to account for changes in contract specifications and requirements. We consider contract modifications to exist when the modification either creates new, or changes the existing, enforceable rights and obligations. Most of our contract modifications are for goods or services that are not distinct from the existing contract due to the significant integration service provided in the context of the contract and are accounted for as if they were part of that existing contract. The effect of a contract modification on the transaction price and our measure of progress for the performance obligation to which it relates, is recognized as an adjustment to revenue (either as an increase in or a reduction of revenue) on a cumulative
catch-up
basis. Payment terms typically do not exceed 30 days for short-term contracts and typically do not exceed 60 days for long-term contracts with customers. All contracts are billed either contractually or as work is performed. Billing on our long-term contracts occurs primarily on a monthly basis throughout the contract period whereby we submit invoices for customer payment based on actual or estimated costs incurred during the billing period. On certain of our long-term contracts the customer may withhold payment on an invoice equal to a percentage of the invoice amount, which will be subsequently paid after satisfactory completion of each installation project. This amount is referred to as retainage and is common practice in the construction industry, as it allows for customers to ensure the quality of the service performed prior to full payment. Retainage receivables are classified as current or long-term assets based on the expected time to project completion.
7
INSTALLED BUILDING PRODUCTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
We disaggregate our revenue from contracts with customers by end market and product, as we believe it best depicts how the nature, amount, timing and uncertainty of our revenue and cash flows are affected by economic factors. The following tables present our revenues disaggregated by end market and product (in thousands):
| Three months ended March 31, |
||||||||||||||||
| 2020 |
2019 |
|||||||||||||||
| Residential new construction |
$ | |
|
% | $ | |
|
% | ||||||||
| Repair and remodel |
|
|
% | |
|
% | ||||||||||
| Commercial |
|
|
% | |
|
% | ||||||||||
| Net revenues |
$ | |
|
% | $ | |
|
% | ||||||||
| Three months ended March 31, |
||||||||||||||||
| 2020 |
2019 |
|||||||||||||||
| Insulation |
$ | |
|
% | $ | |
|
% | ||||||||
| Waterproofing |
|
|
% | |
|
% | ||||||||||
| Shower doors, shelving and mirrors |
|
|
% | |
|
% | ||||||||||
| Garage doors |
|
|
% | |
|
% | ||||||||||
| Rain gutters |
|
|
% | |
|
% | ||||||||||
| Window blinds |
|
|
% | |
|
% | ||||||||||
| Other building products |
|
|
% | |
|
% | ||||||||||
| Net revenues |
$ | |
|
% | $ | |
|
% | ||||||||
Contract Assets and Liabilities
Our contract assets consist of unbilled amounts typically resulting from sales under contracts when the
cost-to-cost
method of revenue recognition is utilized and revenue recognized, based on costs incurred, exceeds the amount billed to the customer. Our contract assets are recorded in other current assets in our Condensed Consolidated Balance Sheets. Our contract liabilities consist of customer deposits and billings in excess of revenue recognized, based on costs incurred and are included in other current liabilities in our Condensed Consolidated Balance Sheets.Contract assets and liabilities related to our uncompleted contracts and customer deposits were as follows (in thousands):
| March 31, 2020 |
December 31, 2019 |
|||||||
| Contract assets |
$ | |
$ | |
||||
| Contract liabilities |
( |
) | ( |
) | ||||
Uncompleted contracts were as follows (in thousands):
| March 31, 2020 |
December 31, 2019 |
|||||||
| Costs incurred on uncompleted contracts |
$ | |
$ | |
||||
| Estimated earnings |
|
|
||||||
| Total |
|
|
||||||
| Less: Billings to date |
|
|
||||||
| Net under billings |
$ | |
$ | |
||||
8
INSTALLED BUILDING PRODUCTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Net under billings were as follows (in thousands):
| March 31, 2020 |
December 31, 2019 |
|||||||
| Costs and estimated earnings in excess of billings on uncompleted contracts (contract assets) |
$ | |
$ | |
||||
| Billings in excess of costs and estimated earnings on uncompleted contracts (contract liabilities) |
( |
) | ( |
) | ||||
| Net under billings |
$ | |
$ | |
||||
The difference between contract assets and contract liabilities as of March 31, 2020 compared to December 31, 2019 is primarily the result of timing differences between our performance of obligations under contracts and customer payments. During the three months ended March 31, 2020, we recognized $6.9 million of revenue that was included in the contract liability balance at December 31, 2019. We did no
Remaining performance obligations represent the transaction price of contracts for which work has not been performed and excludes unexercised contract options and potential modifications. As of March 31, 2020, the aggregate amount of the transaction price allocated to remaining uncompleted contracts was $91.3 million. We expect to satisfy remaining performance obligations and recognize revenue on substantially all of these uncompleted contracts over the next 18 months.
Practical Expedients and Exemptions
We generally expense sales commissions and other incremental costs of obtaining a contract when incurred because the amortization period is usually one year or less. Sales commissions are recorded within selling expenses on the Condensed Consolidated Statements of Operations and Comprehensive Income.
We do not disclose the value of unsatisfied performance obligations for contracts with an original expected length of one year or less.
NOTE 4 - CREDIT LOSSES
On January 1, 2020 we adopted ASU
2016-13,
“Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” under the modified retrospective approach. Topic 326 replaces the incurred loss impairment model with an expected credit loss impairment model for financial instruments, including trade receivables, retainage receivables and contract assets (unbilled receivables). Results for reporting periods beginning after January 1, 2020 are presented under Topic 326, while prior period amounts are not adjusted. The amendment requires entities to consider forward-looking information to estimate expected credit losses, resulting in earlier recognition of losses for receivables that are current or not yet due, which were not considered under the previous accounting guidance. Upon adoption of ASC 326, we recorded a cumulative effect adjustment to retained earnings of $1.2 million, net of $0.4 million of income taxes, on the opening consolidated balance sheet as of January 1, 2020. The adoption of the credit loss standard had no impact to cash from or used in operating, financing or investing activities on our consolidated cash flow statements.
Our expected loss allowance methodology for accounts receivable is developed using historical losses, current economic conditions and future market forecasts. We also perform ongoing evaluations of our existing and potential customer’s creditworthiness. Our expected loss allowance methodology for
held-to-maturity
investments is developed using historical losses, investment grade ratings and liquidity and maturity assessments. Based on our assessment using these factors, we did not record any allowance for credit losses related to our held-to-maturity
investments.We anticipate that the COVID-19 outbreak will have a negative impact on our customers and the homebuilding industry in general and may affect the collectability of our existing trade receivables. As a result, we increased our allowance for credit losses as of March 31, 2020 to reflect this increased risk.
9
INSTALLED BUILDING PRODUCTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Changes in our allowance for credit losses are as follows (in thousands):
Balance as of January 1, 2020 |
$ |
|||
Cumulative effect of change in accounting principle |
||||
Current period provision |
||||
Recoveries collected and other |
||||
Amounts written off |
( |
) | ||
Balance as of March 31, 2020 |
$ | |||
NOTE 5 - INVESTMENTS
Cash and cash equivalents includes investments in money market funds that are valued based on the net asset value of the funds. The investments in these funds were $104.6 million and $99.2 million as of March 31, 2020 and December 31, 2019, respectively.
All other investments are classified as 26.5 million and $38.0 million, respectively. All
held-to-maturity
and consist of highly liquid instruments, primarily including corporate bonds and commercial paper. As of March 31, 2020 and December 31, 2019, the amortized cost of these investments equaled the net carrying value, which was $held-to-maturity
securities as of March 31, 2020 mature in one year or less. See Note 9, Fair Value Measurements, for additional information.NOTE 6 - GOODWILL AND INTANGIBLES
Goodwill
The change in carrying amount of goodwill was as follows (in thousands):
Goodwill (Gross) |
Accumulated Impairment Losses |
Goodwill (Net) |
||||||||||
January 1, 2020 |
$ | $ | ( |
) | $ | |||||||
Business Combinations |
||||||||||||
Other |
( |
) | ( |
) | ||||||||
March 31, 2020 |
$ | $ | ( |
) | $ | |||||||
Other changes included in the above table include minor adjustments for the allocation of certain acquisitions still under measurement. For additional information regarding changes to goodwill resulting from acquisitions, see Note 16, Business Combinations.
We test goodwill for impairment annually during the fourth quarter of our fiscal year or earlier if there is an impairment indicator. We anticipate that the COVID-19 outbreak could have an impact on our customers and the homebuilding industry in general, as it could affect, among other factors, employment levels, consumer spending and consumer confidence, which could decrease demand for homes, adversely affecting our business. As such, we considered whether impairment indicators arose through the date of filing of this Quarterly Report on Form 10-Q for our goodwill, long-lived assets and other intangible assets and concluded that no such factors exist. While we ultimately concluded that our goodwill, long-lived assets and other intangibles assets were not impaired as of March 31, 2020, we will continue to assess impairment indicators related to the impact of the COVID-19 outbreak on our business. Accumulated impairment losses included within the above table were incurred over multiple periods, with the latest impairment charge being recorded during the year ended December 31, 2010.
10
INSTALLED BUILDING PRODUCTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Intangibles, net
The following table provides the gross carrying amount, accumulated amortization and net book value for each major class of intangibles (in thousands):
As of March 31, |
As of December 31, |
|||||||||||||||||||||||
2020 |
2019 |
|||||||||||||||||||||||
Gross Carrying Amount |
Accumulated Amortization |
Net Book Value |
Gross Carrying Amount |
Accumulated Amortization |
Net Book Value |
|||||||||||||||||||
Amortized intangibles: |
||||||||||||||||||||||||
Customer relationships |
$ | $ | $ | $ | $ | $ | ||||||||||||||||||
Covenants not-to-compete |
||||||||||||||||||||||||
Trademarks and tradenames |
||||||||||||||||||||||||
Backlog |
||||||||||||||||||||||||
| $ | $ | $ | $ | $ | $ | |||||||||||||||||||
The gross carrying amount of intangibles increased approximately $4.5 million during the three months ended March 31, 2020 primarily due to business combinations. For more information, see Note 16, Business Combinations. Remaining estimated aggregate annual amortization expense is as follows (amounts, in thousands, are for the fiscal year ended):
| Remainder of 2020 |
$ | |
||
| 2021 |
|
|||
| 2022 |
|
|||
| 2023 |
|
|||
| 2024 |
|
|||
| Thereafter |
|
NOTE 7 - LONG-TERM DEBT
Long-term debt consisted of the following (in thousands):
| As of March 31, |
As of December 31, |
|||||||
| 2020 |
2019 |
|||||||
| Senior Notes due 2028, net of unamortized debt issuance costs of $ |
$ | |
$ | |
||||
| Term loan, net of unamortized debt issuance costs of $ |
|
|
||||||
| Vehicle and equipment notes, maturing through |
|
|
||||||
| Various notes payable, maturing through |
|
|
||||||
| |
|
|||||||
| Less: current maturities |
( |
) | ( |
) | ||||
| Long-term debt, less current maturities |
$ | |
$ | |
||||
11
INSTALLED BUILDING PRODUCTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Remaining required repayments of debt principal, gross of
unamortized debt issuance costs, as of March 31, 2020 are as follows (in thousands):
| Remainder of 2020 |
$ | |
||
| 2021 |
|
|||
| 2022 |
|
|||
| 2023 |
|
|||
| 2024 |
|
|||
| Thereafter |
|
5.75% Senior Notes due 2028
In September 2019, we issued $300.0 million in aggregate principal amount of 5.75 % senior unsecured notes (the “Senior Notes”). The Senior Notes will mature on and interest will be payable semi-annually in cash in arrears on February 1 and August 1, commencing on February 1, 2020. The net proceeds from the Senior Notes offering were $295.0 million after debt issuance costs. We used some of the net proceeds to repay a portion of our outstanding obligations (including accrued and unpaid interest) under our term loan credit agreement (as defined below) and to pay fees and expenses related to the entry into a new revolving credit facility described below.
The indenture covering the Senior Notes contains restrictive covenants that, among other things, limit the ability of the Company and certain of our subsidiaries (subject to certain exceptions) to: (i) incur additional debt and issue preferred stock; (ii) pay dividends on, redeem or repurchase stock; (iii) prepay subordinated debt; (iv) create liens; (v) make specified types of investments; (vi) apply net proceeds from certain asset sales; (vii) engage in transactions with affiliates; (viii) merge, consolidate or sell substantially all of our assets; and (ix) pay dividends and make other distributions from subsidiaries.
Credit Facilities
In December 2019, we amended and restated our $400 million, -year term loan facility due (the “Term Loan”) under our credit agreement (the “Term Loan Agreement”), dated as of April 13, 2017 (as previously amended by the First Amendment thereto dated November 30, 2017 and by the Second Amendment thereto dated June 19, 2018). The amended Term Loan (i) effects a repricing of the interest rate applicable to the term loans thereunder from LIBOR plus 2.50 % to LIBOR plus 2.25 % and (ii) replaces Royal Bank of Canada with Bank of America, N.A. as the administrative agent and collateral agent thereunder. As of March 31, 2020, we had $198.4 million, net of unamortized debt issuance costs, due on our Term Loan. The amended Term Loan also has a margin of 1.25 % in the case of base rate loans.
In September 2019, we entered into a new asset-based lending credit agreement (the “ABL Credit Agreement”). The ABL Credit Agreement provides for an asset-based lending credit facility (the “ABL Revolver”) of up to $200.0 million with a -year maturity, which replaced the Company’s previous revolving credit facility. Borrowing availability under the ABL Revolver is based on a percentage of the value of certain assets securing the Company’s obligations and those of the subsidiary guarantors thereunder. In connection with the Amended and Restated Term Loan, we entered into a Second Amendment (the “Second Amendment”) to the ABL/Term Loan Intercreditor Agreement with Bank of America, N.A., as ABL Agent for the lenders under the ABL Credit Agreement, and Bank of America, N.A., as Term Loan Agent for the lenders under the Amended and Restated Term Loan. Including outstanding letters of credit, our remaining availability under the ABL Revolver as of March 31, 2020 was $161.3 million.
All of the obligations under the Term Loan and ABL Revolver are guaranteed by all of the Company’s existing restricted subsidiaries and will be guaranteed by the Company’s future restricted subsidiaries. Additionally, all obligations under the Term Loan and ABL Revolver, and the guarantees of those obligations, are secured by substantially all of the assets of the Company and the guarantors, subject to certain exceptions and permitted liens, including a first-priority security interest in such assets that constitute ABL Priority Collateral, as defined in the ABL Credit Agreement, and a second-priority security interest in such assets that constitute Term Loan Priority Collateral, as defined in the Term Loan Agreement.
12
INSTALLED BUILDING PRODUCTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The ABL Revolver bears interest at either the Eurodollar rate or the base rate (which approximated the prime rate), at the Company’s election, plus a margin of (A)
% or
% in the case of Eurodollar rate loans (based on a measure of availability under the ABL Credit Agreement) and (B)
% or
% in the case of base rate loans (based on a measure of availability under the ABL Credit Agreement).
The ABL Revolver also provides incremental revolving credit facility commitments of up to $50.0 million. The terms and conditions of any incremental revolving credit facility commitments must be no more favorable than the terms of the ABL Revolver. The ABL Revolver also allows for the issuance of letters of credit of up to $75.0 million in aggregate and borrowing of swingline loans of up to $20.0 million in aggregate.
The ABL Credit Agreement contains a financial covenant the satisfaction of a minimum fixed charge coverage ratio of 1.0 x in the event that we do not meet a minimum measure of availability under the ABL Revolver.
Vehicle and Equipment Notes
We are party to a Master Loan and Security Agreement (“Master Loan and Security Agreement”), a Master Equipment Lease Agreement (“Master Equipment Agreement”) and one or more Master Loan Agreements (“Master Loan Agreements” and together with the Master Loan and Security Agreement and Master Equipment Agreement the “Master Loan Equipment Agreements”) with various lenders to provide financing for the purpose of purchasing or leasing vehicles and equipment used in the normal course of business. Each financing arrangement under these agreements constitutes a separate note and obligation. Vehicles and equipment purchased or leased under each financing arrangement serve as collateral for the note applicable to such financing arrangement. Regular payments are due under each note for a period of typically 60 consecutive months after the incurrence of the obligation. The specific terms of each note are based on specific criteria, including the type of vehicle or equipment and the market interest rates at the time. No termination date applies to these agreements. As of March 31, 2020, approximately $78.3 million of the various loan agreements was available for purchases of equipment.
Total gross assets relating to our Master Loan and Equipment Agreements were $133.8 million and $130.2 million as of March 31, 2020 and December 31, 2019, respectively. The net book value of assets under these agreements was $68.4 million and $68.2 million as of March 31, 2020 and December 31, 2019, respectively. Depreciation of assets held under these agreements is included within cost of sales on the Condensed Consolidated Statements of Operations and Comprehensive Income.
NOTE 8 - LEASES
We lease various assets in the ordinary course of business as follows: warehouses to store our materials and perform staging activities for certain products we install; various office spaces for selling and administrative activities to support our business; and certain vehicles and equipment to facilitate our operations, including, but not limited to, trucks, forklifts and office equipment.
13
INSTALLED BUILDING PRODUCTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The table below presents the lease-related assets and liabilities recorded on the Condensed Consolidated Balance Sheet:
| (in thousands) |
Classification |
As of March 31, 2020 |
As of December 31, 2019 |
|||||||
| Assets |
||||||||||
| Non-Current |
||||||||||
| Operating |
Operating lease right-of-use assets |
$ | |
$ | |
|||||
| Finance |
Property and equipment, net |
|
|
|||||||
| Total lease assets |
$ | |
$ | |
||||||
| Liabilities |
||||||||||
| Current |
||||||||||
| Operating |
Current maturities of operating lease obligations |
$ | |
$ | |
|||||
| Financing |
Current maturities of finance lease obligations |
|
|
|||||||
| Non-Current |
||||||||||
| Operating |
Operating lease obligations |
|
|
|||||||
| Financing |
Finance lease obligations |
|
|
|||||||
| Total lease liabilities |
$ | |
$ | |
||||||
| Weighted-average remaining lease term: |
|
|
| |||||
| Operating leases |
|
|
|
|
| |||
| Finance leases |
|
|
|
|
| |||