elections; the exclusive right of our board of directors to fill a vacancy created by the expansion of the board of directors or the resignation, death or removal of a director, which prevents stockholders from being able to fill vacancies on our board of directors;
board; the ability of our board of directors to authorize the issuance of shares of preferred stock and to determine the price and other terms of those shares, including preferences and voting rights, without stockholder approval, which could be used to significantly dilute the ownership of the holders of our stock or a hostile acquirer;
approval; a prohibition on stockholder action by written consent, which forces stockholder action to be taken at an annual or special meeting of our stockholders;
consent; a requirement that a special meeting of stockholders may be called only by a resolution duly adopted by our board of directors;board; and
advance notice procedures that stockholders must comply with in order to nominate candidates to our board of directors or to propose matters to be acted upon at a stockholders’ meeting, which may discourage or determeeting.
As a potential acquirer from conducting a solicitation of proxies to elect the acquirer’s own slate of directors or otherwise attempting to obtain control of us.
We have not historically paid anypay dividends andto holders of our common stock, but may not pay any dividendsreduce, suspend, or eliminate dividend payments in the future.
Our board of directors approved the initiation of a quarterly cash dividend program in 2021. We also announced that our board of directors has approved our first annual variable dividend, payable on March 31, 2022 at a rate of 90 cents per common share.
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If securities analysts do not publish favorable reports about us or if we, or our industry, are the subject of unfavorable commentary, the price of our common stock could decline.
The trading price for our common stock depends in part on the research and reports about us that are published by analysts in the financial industry. Analysts could issue negative commentary about us or our industry, or they could downgrade our common stock. We may also not receive sufficient research coverage or visibility in the market. Any of these factors could result in the decline of the trading price of our common stock, causing investors in our common stock to lose all or a portion of their investment.
Item 1B. Unresolved Staff Comments |
None.
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Item 2. Properties
Real Property
We lease office and warehouse space in 38 states, including our corporate office in Columbus, Ohio. Our leases are typically short in duration with customary extensions at our option. We believe suitable alternative space is available in all of our markets. We also own our cellulose manufacturing facility in Bucyrus, Ohio. We believe that our facilities are suitable and adequate for present purposes, and that the productive capacity in such facilities is substantially being utilized. The table below summarizes our locations as of December 31, 2019.
2021.| State | Number of Locations | Approximate Total Square Footage | State | Number of Locations | Approximate Total Square Footage | |||||||||||||||||||||||||||
| Alabama | 3 | 29,150 | Nebraska | 2 | 23,241 | |||||||||||||||||||||||||||
| Arizona | 2 | 26,159 | Nevada | 1 | 15,350 | |||||||||||||||||||||||||||
| California | 24 | 231,269 | New Hampshire | 8 | 76,920 | |||||||||||||||||||||||||||
| Colorado | 13 | 124,621 | New Jersey | 4 | 41,100 | |||||||||||||||||||||||||||
| Connecticut | 2 | 31,292 | New York | 8 | 101,630 | |||||||||||||||||||||||||||
| Delaware | 4 | 37,175 | North Carolina | 13 | 155,765 | |||||||||||||||||||||||||||
| Florida | 26 | 234,133 | Ohio | 10 | 443,995 | |||||||||||||||||||||||||||
| Georgia | 14 | 220,471 | Oklahoma | 3 | 35,543 | |||||||||||||||||||||||||||
| Idaho | 3 | 43,000 | Oregon | 2 | 32,928 | |||||||||||||||||||||||||||
| Illinois | 6 | 80,118 | Pennsylvania | 3 | 41,894 | |||||||||||||||||||||||||||
| Indiana | 13 | 237,676 | South Carolina | 7 | 103,475 | |||||||||||||||||||||||||||
| Kansas | 1 | 14,206 | South Dakota | 2 | 50,000 | |||||||||||||||||||||||||||
| Kentucky | 4 | 46,330 | Tennessee | 7 | 111,482 | |||||||||||||||||||||||||||
| Louisiana | 2 | 19,535 | Texas | 18 | 349,982 | |||||||||||||||||||||||||||
| Maine | 3 | 38,750 | Utah | 7 | 115,523 | |||||||||||||||||||||||||||
| Maryland | 4 | 59,710 | Vermont | 1 | 31,020 | |||||||||||||||||||||||||||
| Massachusetts | 4 | 45,303 | Virginia | 6 | 73,941 | |||||||||||||||||||||||||||
| Michigan | 3 | 41,800 | Washington | 12 | 147,770 | |||||||||||||||||||||||||||
| Minnesota | 8 | 231,885 | Wisconsin | 9 | 187,131 | |||||||||||||||||||||||||||
State | Number of Locations | Approximate Total Square Footage | ||||||
Alabama | 3 | 29,150 | ||||||
Arizona | 2 | 25,846 | ||||||
California | 16 | 170,852 | ||||||
Colorado | 9 | 80,162 | ||||||
Connecticut | 2 | 26,128 | ||||||
Delaware | 4 | 31,175 | ||||||
Florida | 22 | 175,997 | ||||||
Georgia | 11 | 159,704 | ||||||
Idaho | 3 | 43,000 | ||||||
Illinois | 5 | 60,118 | ||||||
Indiana | 13 | 237,536 | ||||||
Kansas | 1 | 14,206 | ||||||
Kentucky | 4 | 46,330 | ||||||
Louisiana | 1 | 10,000 | ||||||
Maine | 4 | 38,750 | ||||||
Maryland | 3 | 34,710 | ||||||
Massachusetts | 4 | 45,303 | ||||||
Michigan | 1 | 34,800 | ||||||
Minnesota | 6 | 114,890 | ||||||
State | Number of Locations | Approximate Total Square Footage | ||||||
Mississippi | 1 | 8,000 | ||||||
Nebraska | 1 | 12,000 | ||||||
Nevada | 2 | 15,350 | ||||||
New Hampshire | 7 | 60,812 | ||||||
New Jersey | 2 | 30,300 | ||||||
New York | 10 | 100,900 | ||||||
North Carolina | 15 | 142,940 | ||||||
Ohio | 12 | 445,165 | ||||||
Oklahoma | 3 | 29,008 | ||||||
Oregon | 1 | 30,013 | ||||||
Pennsylvania | 3 | 30,200 | ||||||
South Carolina | 7 | 99,511 | ||||||
Tennessee | 6 | 71,482 | ||||||
Texas | 18 | 281,272 | ||||||
Utah | 4 | 77,955 | ||||||
Vermont | 1 | 31,020 | ||||||
Virginia | 5 | 62,341 | ||||||
Washington | 3 | 56,393 | ||||||
Wisconsin | 9 | 174,228 | ||||||
Our Fleet
As of December 31, 2019,2021, our fleet consisted of approximately 4,6005,300 total vehicles that we either leased or owned, including approximately 4,4005,100 installation vehicles whichthat our installers use to deliver and install products from our locations to job sites, and approximately 200 other vehicles that are utilized for various purposes, primarily by our sales staff, branch managers and various senior management personnel. For additional information, see Note 7,8, Long-Term Debt, and Note 15,16, Commitments and Contingencies, to our audited consolidated financial statements included in this Form
10-K.
Item 3. Legal Proceedings |
We are involved in various claims and lawsuits incidental to the conduct of our business in the ordinary course, including wage and hour lawsuits. We carry insurance coverage that we believe to be reasonable under the circumstances, although insurance may or may not cover any or all of our liabilities in respect to claims and lawsuits. While management currently believes that the ultimate resolution of these matters, individually or in the aggregate, will not have a material adverse effect on our consolidated financial position, results of operations or cash flows, such matters are subject to inherent uncertainties. See Note 15,16, Commitments and Contingencies, within Part II, Item 8, Financial Statements and Supplementary Data, of this Form
10-K
for additional information on significant legal proceedings.Item 4. Mine Safety Disclosures
Not applicable.
30
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information for Common Stock
Our common stock is traded on the NYSE under the symbol “IBP.”
Holders of Record
As of February 18, 2020,17, 2022, there were 799939 holders of record of our common stock, one of which was Cede & Co., which is the holder of shares held through the Depository Trust Company.
Dividend Policy
Stock Performance Graph
The table below compares the cumulative total shareholder return on our common stock with the cumulative total return of (i) the Russell 2000 Index (“Russell 2000”), (ii) the Standard & Poor’s Industrials Index (“S&P 500 Industrials”) and (iii) the S&P Smallcap 600 Index (“S&P Smallcap 600”). The graph assumes investments of $100 in our common stock and in each of the three indices and the reinvestment of dividends for the last five fiscal years through December 31, 2019.2021.
| 12/31/2016 | 12/29/2017 | 12/31/2018 | 12/31/2019 | 12/31/2020 | 12/31/2021 | ||||||||||||||||||||||||||||||
| IBP | 100 | 184 | 82 | 167 | 247 | 342 | |||||||||||||||||||||||||||||
| Russell 2000 | 100 | 115 | 102 | 128 | 153 | 176 | |||||||||||||||||||||||||||||
| S&P 500 Industrials | 100 | 121 | 105 | 136 | 151 | 182 | |||||||||||||||||||||||||||||
| S&P Smallcap 600 | 100 | 113 | 104 | 127 | 141 | 179 | |||||||||||||||||||||||||||||
12/31/2014 | 12/31/2015 | 12/31/2016 | 12/29/2017 | 12/31/2018 | 12/31/2019 | |||||||||||||||||||
IBP | 100 | 139 | 232 | 426 | 189 | 386 | ||||||||||||||||||
Russell 2000 | 100 | 96 | 116 | 133 | 118 | 148 | ||||||||||||||||||
S&P 500 Industrials | 100 | 97 | 116 | 140 | 121 | 157 | ||||||||||||||||||
S&P Smallcap 600 | 100 | 98 | 124 | 140 | 128 | 157 | ||||||||||||||||||
Purchases of Equity Securities by the Issuer
The following table shows the stock repurchase activity for the three months ended December 31, 2019:2021:
| Total Number of Shares Purchased | Average Price Paid Per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Approximate Dollar Value of Shares that May Yet Be Purchased under the Plans or Programs (1) | |||||||||||||||||||||||
| October 1 - 31, 2021 | 101 | $ | 106.82 | — | — | |||||||||||||||||||||
| November 1 - 30, 2021 | — | — | — | — | ||||||||||||||||||||||
| December 1 - 31, 2021 | — | — | — | — | ||||||||||||||||||||||
| 101 | $ | 106.82 | — | $ | 100.0 | million | ||||||||||||||||||||
of Shares Purchased | Paid Per Share | of Shares Purchased as Part of Publicly Announced Plans or Programs | Dollar Value of Shares that May Yet Be Purchased under the Plans or Programs (1) | |||||||||||||
(1) In February 2018, our board of directors authorized a $50.0 million stock repurchase program, and in October 2018, they increased the program by an additional $100.0 million. In February 2020, our board of directors approved an extension of the existing stock repurchase program to March 1, 2021 and in February 2021, they extended the share repurchase plan to March 1, 2022 while simultaneously approving us to purchase up to $100.0 million of our outstanding common stock.During the year ended December 31, 2021, we did not repurchase any shares of our common stock under our stock repurchase program. On February 24, 2022, we announced that our board of directors authorized an extension of our stock repurchase program through March 1, 2023 and concurrently authorized an increase in the total amount of our outstanding common stock we can purchase up to $200.0 million. For more information about our stock repurchase program, see Note 12, Stockholders' Equity within Item 8, Financial Statements and Supplementary Data, of this Form 10-K.
Recent Sales of Unregistered Securities
During 2021, we did not issue or sell any unregistered equity securities.
Item 6. [Reserved]
Years ended December 31, | ||||||||||||||||||||
2019 (1) | 2018 (2) | 2017 | 2016 | 2015 | ||||||||||||||||
Statement of operations (in thousands, except per share amounts): | ||||||||||||||||||||
Net revenue | $ | 1,511,629 | $ | 1,336,432 | $ | 1,132,927 | $ | 862,980 | $ | 662,719 | ||||||||||
Cost of sales | 1,076,809 | 964,841 | 808,901 | 610,532 | 474,426 | |||||||||||||||
Gross profit | 434,820 | 371,591 | 324,026 | 252,448 | 188,293 | |||||||||||||||
Operating expenses | ||||||||||||||||||||
Selling | 75,016 | 67,105 | 58,450 | 49,667 | 37,702 | |||||||||||||||
Administrative and other | 238,644 | 211,269 | 191,310 | 136,731 | 105,639 | |||||||||||||||
Operating income | 121,160 | 93,217 | 74,266 | 66,050 | 44,952 | |||||||||||||||
Other expense | 28,555 | 21,031 | 18,446 | 6,440 | 3,022 | |||||||||||||||
Income before income taxes | 92,605 | 72,186 | 55,820 | 59,610 | 41,930 | |||||||||||||||
Income tax provision | 24,446 | 17,438 | 14,680 | 21,174 | 15,413 | |||||||||||||||
Net income | 68,159 | 54,748 | 41,140 | 38,436 | 26,517 | |||||||||||||||
Basic net income per share | $ | 2.29 | $ | 1.76 | $ | 1.30 | $ | 1.23 | $ | 0.85 | ||||||||||
Diluted net income per share | $ | 2.28 | $ | 1.75 | $ | 1.30 | $ | 1.23 | $ | 0.85 | ||||||||||
Cash flow data (in thousands): | ||||||||||||||||||||
Net cash provided by operating activities | $ | 123,067 | $ | 96,633 | $ | 68,772 | $ | 73,266 | $ | 34,547 | ||||||||||
Net cash used in investing activities | $ | (131,733 | ) | $ | (74,069 | ) | $ | (200,443 | ) | $ | (79,597 | ) | $ | (111,365 | ) | |||||
Net cash provided by financing activities | $ | 96,113 | $ | 5,368 | $ | 179,699 | $ | 13,995 | $ | 72,875 | ||||||||||
Balance sheet data (in thousands): | ||||||||||||||||||||
Cash | $ | 177,889 | $ | 90,442 | $ | 62,510 | $ | 14,482 | $ | 6,818 | ||||||||||
Total current assets | $ | 581,949 | $ | 411,545 | $ | 354,942 | $ | 192,391 | $ | 150,232 | ||||||||||
Property and equipment, net | $ | 106,410 | $ | 90,117 | $ | 81,075 | $ | 67,788 | $ | 57,592 | ||||||||||
Total assets | $ | 1,099,479 | $ | 834,658 | $ | 738,746 | $ | 462,095 | $ | 373,572 | ||||||||||
Total debt (3) | $ | 575,539 | $ | 463,454 | $ | 359,722 | $ | 166,720 | $ | 143,677 | ||||||||||
Total stockholders’ equity | $ | 250,031 | $ | 182,498 | $ | 210,528 | $ | 153,977 | $ | 114,483 | ||||||||||
You should read the following in conjunction with the consolidated financial statements and related notes thereto included in Item 8, Financial Statements and Supplemental Data, of Part II of this Form
10-K.
This discussion contains forward-looking statements reflecting current expectations that involve risks and uncertainties. Actual results and the timing of events may differ materially from those contained in these forward-looking statements due to a number of factors, including those discussed in the section captioned “Risk Factors” and elsewhere in this Form10-K.
OVERVIEW
We are one of the nation’s largest insulation installers for the residential new construction market and are also a diversified installer of complementary building products, including waterproofing, fire-stopping and fireproofing, garage doors, rain gutters, window blinds, shower doors, closet shelving, mirrors and other products throughout the United States. We offer our portfolio of services for new and existing single-family and multi-family residential and commercial building projects in all 48 continental states and the District of Columbia from our national network of over 180210 branch locations. Substantially allThe vast majority of our net revenue comes from service-based installation of these products in the residential new construction, repair and remodel and commercial construction end markets. We believe our business is well positioned to continue to profitably grow due to our strong balance sheet, liquidity and our continuing acquisition strategy. See “Key Factors Affecting Our Operating Results, COVID-19 Impacts” below for a discussion of short-term impacts to our business from the pandemic.
A large portion of our net revenue comes from the U.S. residential new construction market, which depends upon a number of economic factors, including demographic trends, interest rates, consumer confidence, employment rates, housing inventory levels, foreclosure rates, the health of the economy and availability of mortgage financing. TheOur strategic acquisitions of multiple companies over the last several years contributed meaningfully to our 13.1%19.1% increase in net revenue during the year ended December 31, 20192021 compared to 2018.2020.
32
We have omitted discussion of 20172019 results in the sections that follow where it would be redundant to the discussion previously included in Part II, Item 7, of our Annual Report on Form2018.2020.
10-K
for the year ended December 31, Net revenues increased 13.1%19.1%, or $175.2$315.4 million, while gross profit increased 15.6% to $589.5 million during 2019the year ended December 31, 2021 compared to 2018,2020. We also generated approximately $138.3 million of cash from operating activities. The increase in net revenue and gross profit was primarily driven by increased selling prices, the continued recovery of housing markets, the contributionscontribution of our recent acquisitions, selling price and growth across our end markets and products. We experienced strong sales growth year-over-year of approximately 11%product mix improvements as evidenced by the 3.2% increase in our combined residential newprice/mix metric and increased sales volume of 7.7% on a same branch basis. Gross profit grew slower than revenue primarily due to higher material costs caused by pandemic-related supply chain constraints, higher fuel costs and reduced efficiencies within the large commercial construction market due to challenges from the COVID-19 pandemic. Inflationary pressure contributed to the year-over-year margin compression as materials, particularly spray foam, gutters, and repairother complementary installed products, continued to be difficult to source near volume and remodel end marketspricing levels secured in prior periods.
As of December 31, 2021, we had $333.5 million of cash and approximately 25% in our commercialend-market.Gross margin of 28.8% benefited from selling price increases in 2019 resulting from significant insulation materials price increases in 2018.
cash equivalents. In September 2019,December 2021, we modified our debt structure in order to take advantage of the attractivefavorable market conditions. We issued $300.0 million aggregate principal amount at maturity of senior unsecured notes (the “Senior Notes”) with interest 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,conditions, entering into a portion of which we used to partially repay our outstanding obligations (including accrued and unpaid interest) under ournew term loan credit agreement (the “Term Loan Agreement”) and pay fees and expenses relatedwhich provided for a seven-year $500 million term loan facility. A portion of the proceeds from the term loan were used to entry intorepay, in full, all amounts outstanding under the ABL Credit Agreement as defined below. In September 2019, we also entered into a new asset-based lending
During the ABL Revolver. Inyear ended December 2019,31, 2021, we amendedexperienced overall sales growth in all of our end markets and restatedwe achieved 9.7% year-over-year same branch sales growth, with acquisitions contributing the remaining portion of our Term Loan. The amended Term Loan (i) effects a repricingtotal sales growth. Our largest end market, the single-family subset of the interest rate applicable toresidential new construction market, grew revenue 21.9% over the term loans thereunder from LIBOR plus 2.50% to LIBOR plus 2.25% and (ii) replaces Royal Banksame period in 2020. Our commercial end market experienced sales growth of Canada with Bank of America, N.A. as the administrative agent and collateral agent thereunder. See Liquidity and Capital Resources section below for further information about our debt.
We believe there are several trends that should drive long-term growth in the housing market, even if there are temporary periods of slowed growth. These long-term trends include an aging housing stock, population growth, demographic changes, renewed positive attitudes about home ownership, household formation growth and the fact that housing starts are currentlyremained below long-term historic averages.averages for over a decade following the 2008 recession. We expect that our net revenue, gross profit and operating income will benefit from this growth.
Net revenues increased 18.0%9.4%, or $203.5$141.6 million, during 2018 compared to 2017, primarily driven by the continued recovery of housing markets, the contributions of our recent acquisitions and growth across our end markets and products. However, gross margin was affected by price increases on our insulation materials and costs to organically expand our commercial branches. During 2018, we maintained momentum in our acquisition strategy, as we completed ten acquisitions, not including several smalltuck-inacquisitions merged into existing operations, which expanded our product line offerings and geographical reach. Acquisitions accounted for $73.5 million of the increase in net revenues.
2019 | Change | 2018 | Change | 2017 | ||||||||||||||||
Net revenue | $ | 1,511,629 | 13.1% | $ | 1,336,432 | 18.0% | $ | 1,132,927 | ||||||||||||
Cost of sales | 1,076,809 | 11.6% | 964,841 | 19.3% | 808,901 | |||||||||||||||
Gross profit | $ | 434,820 | 17.0% | $ | 371,591 | 14.7% | $ | 324,026 | ||||||||||||
Gross profit percentage | 28.8% | 27.8% | 28.6% | |||||||||||||||||
The highest level of growth occurred in our multi-family end market which grew by 37.5% for the year ended December 31, 2018, primarily driven2020 compared to 2019. We grew our largest end market, the single family subset of the residential new construction market, by acquisitions, organic5.0% despite the effects of temporary business interruptions early in 2020 due to federal, state and local requirements in response to COVID-19. All of our locations serving the residential new construction end market were operating at December 31, 2020, although some continued to experience limitations depending on their local market. The large commercial end market experienced sales growth from our existing branches and increased selling prices. As a percentage of net revenues, gross profit increased15.3% during the year ended December 31, 2019 compared to the year ended December 31, 2018 attributable2020 primarily to achieving higher selling pricesthrough acquisitions as same branch sales growth lagged resulting from the higher material costs we experienced in 2018. Labor utilization improved, in part, as a result of lower installer turnovercertain production inefficiencies due to investmentsCOVID-19 social distancing requirements as well as project delays due to macroeconomic concerns surrounding the pandemic. These fluctuations are shown in our financial wellness plan, our longevity stock compensation plan for installersfurther detail in the "Key Measures of Performance" section below, and our Installed Building Products Foundation. On a dollar basis, costimpacts from COVID-19 are discussed further in the sections that follow.
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Key Measures of sales included increases from acquired businesses of approximately $43.1 million and depreciation expense increased $5.4 million as a result of increased investment in vehicles and equipment to support our growth, including growth from acquisitions. See Note 16, Business Combinations, in Part II, Item 8, Financial Statements and Supplementary Data, of this Form10-KPerformancefor information on our acquisitions.
The following table shows additional key measures of performance we utilize to evaluate our results:
Twelve months ended December 31, | ||||||||||||
2019 | 2018 | 2017 | ||||||||||
Period-over-period Growth | ||||||||||||
Sales Growth | 13.1 | % | 18.0 | % | 31.3 | % | ||||||
Same Branch Sales Growth (1) | 8.6 | % | 11.5 | % | 9.8 | % | ||||||
Single-Family Sales Growth (2) | 10.5 | % | 20.0 | % | 17.6 | % | ||||||
Single-Family Same Branch Sales Growth (1)(2) | 4.8 | % | 12.1 | % | 7.9 | % | ||||||
Residential Sales Growth (3) | 10.9 | % | 18.4 | % | 24.6 | % | ||||||
Residential Same Branch Sales Growth (1)(3) | 5.9 | % | 11.4 | % | 11.3 | % | ||||||
Same Branch Sales Growth | ||||||||||||
Volume Growth (1)(4) | 2.6 | % | 6.1 | % | 5.8 | % | ||||||
Price/Mix Growth (1)(5) | 5.4 | % | 5.4 | % | 4.0 | % | ||||||
Large Commercial Sales Growth (1) | 14.3 | % | 11.5 | % | N/A | |||||||
U.S. Housing Market | ||||||||||||
Total Completions Growth | 6.0 | % | 2.8 | % | 8.8 | % | ||||||
Single-Family Completions Growth (2) | 7.6 | % | 5.6 | % | 7.7 | % | ||||||
| Years ended December 31, | ||||||||||||||||||||
| 2021 | 2020 | 2019 | ||||||||||||||||||
| Period-over-Period Growth | ||||||||||||||||||||
| Sales Growth | 19.1 | % | 9.4 | % | 13.1 | % | ||||||||||||||
Same Branch Sales Growth (1) | 9.7 | % | 4.5 | % | 8.6 | % | ||||||||||||||
Single-Family Sales Growth (2) | 21.9 | % | 5.0 | % | 10.5 | % | ||||||||||||||
Single-Family Same Branch Sales Growth (1)(2) | 14.0 | % | 0.4 | % | 4.8 | % | ||||||||||||||
Multi-Family Sales Growth (3) | 14.7 | % | 37.5 | % | 13.5 | % | ||||||||||||||
Multi-Family Same Branch Sales Growth (1)(3) | 6.7 | % | 33.2 | % | 13.2 | % | ||||||||||||||
Residential Sales Growth (4) | 20.7 | % | 9.2 | % | 10.9 | % | ||||||||||||||
Residential Same Branch Sales Growth (1)(4) | 12.8 | % | 4.7 | % | 5.9 | % | ||||||||||||||
Commercial Sales Growth (5) | 10.2 | % | 10.4 | % | 24.7 | % | ||||||||||||||
Commercial Same Branch Sales Growth (1)(5) | (8.0) | % | 3.6 | % | 21.5 | % | ||||||||||||||
Same Branch Sales Growth(6) | ||||||||||||||||||||
Volume Growth (1)(7) | 7.7 | % | 1.9 | % | 2.6 | % | ||||||||||||||
Price/Mix Growth (1)(8) | 3.2 | % | 2.8 | % | 5.4 | % | ||||||||||||||
Large Commercial Same Branch Sales Growth (1)(9) | (3.8) | % | 2.8 | % | 14.3 | % | ||||||||||||||
U.S. Housing Market (10) | ||||||||||||||||||||
| Total Completions Growth | 4.0 | % | 2.5 | % | 5.9 | % | ||||||||||||||
Single-Family Completions Growth (2) | 6.1 | % | 0.9 | % | 7.5 | % | ||||||||||||||
Multi-Family Completions Growth (3) | (0.3) | % | 6.3 | % | 2.2 | % | ||||||||||||||
| (1) | Same-branch basis represents period-over-period growth for branch locations owned greater than 12 months as of each financial statement date. | ||||
| (2) | Calculated based on period-over-period growth in the single-family subset of the residential new construction end market. |
| (3) | Calculated based on period-over-period growth in the multi-family subset of the residential new construction end market. | ||||
| (4) | Calculated based on period-over-period growth in the residential new construction end market. |
| Calculated based on period-over-period growth in the total commercial end market. Our commercial end market consists of large and light commercial projects. | |||||
| (6) | During the year ended December 31, 2021, we changed the classification of one of our branches to the large commercial subset of the commercial end market, based on the type of work this branch performs. While this change is immaterial to the sales growth calculations, it affects comparability to the corresponding prior year metrics as the change was made prospectively beginning January 1, 2021. We continually evaluate the branch classifications utilized in our sales growth metrics based on changes in our business and operations over time and future changes may occur to these classifications. | ||||
| (7) | Excludes the large commercial end market; calculated as period-over-period change in the number of completed same-branch residential new construction and repair and remodel jobs. |
| Excludes the large commercial end market; defined as change in the mix of products sold and related pricing changes and calculated as the change in period-over-period average selling price per same-branch residential new construction and repair and remodel jobs multiplied by total current year jobs. The mix of end customer and product would have an impact on the year-over-year price per job. |
| The large commercial end market, as a subset of our total commercial end market, comprises certain of our branches working on projects constructed primarily out of steel and concrete, which are much larger than our average residential job. This market in excluded from the above same branch price/mix and volume growth metrics as to not skew the rates given the much larger per-job revenue compared to our average job. | |||||
| (10) | U.S. Census Bureau data, as revised. |
We feelbelieve the revenue growth measures are important indicators of how our business is performing, during the current growth phase of the company; however, we may rely on different metrics in the future as the company matures and enters a new phase.future. We also utilize gross profit percentage as shown in the following section to monitor our most significant variable costs and to evaluate labor efficiency and success at passing increasing costs of materials to customers.
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2019 | Change | 2018 | Change | 2017 | ||||||||||||||||
Selling | $ | 75,016 | 11.8% | $ | 67,105 | 14.8% | $ | 58,450 | ||||||||||||
Percentage of total net revenue | 5.0% | 5.0% | 5.2% | |||||||||||||||||
Administrative | $ | 214,134 | 15.2% | $ | 185,850 | 13.0% | $ | 164,453 | ||||||||||||
Percentage of total net revenue | 14.2% | 13.9% | 14.5% | |||||||||||||||||
Amortization | $ | 24,510 | -3.6% | $ | 25,419 | -5.4% | $ | 26,857 | ||||||||||||
Percentage of total net revenue | 1.6% | 1.9% | 2.4% | |||||||||||||||||
| 2021 | Change | 2020 | Change | 2019 | |||||||||||||||||||||||||
| Net revenue | $ | 1,968,650 | 19.1 | % | $ | 1,653,225 | 9.4 | % | $ | 1,511,629 | |||||||||||||||||||
| Cost of sales | 1,379,131 | 20.6 | % | 1,143,251 | 6.2 | % | 1,076,809 | ||||||||||||||||||||||
| Gross profit | $ | 589,519 | 15.6 | % | $ | 509,974 | 17.3 | % | $ | 434,820 | |||||||||||||||||||
| Gross profit percentage | 29.9 | % | 30.8 | % | 28.8 | % | |||||||||||||||||||||||
The year-over-year growth in our residential end market was the primary driver of the increase in net revenue during the year ended December 31, 2021 compared to the year ended December 31, 2020 as shown in the Key Measures of Performance section above. Growth in our residential end market was primarily due to selling price increases, higher volume and the continued success of our acquisition strategy. In our commercial end market, challenges associated with the COVID-19 pandemic had an impact as evidenced by the 8.0% decline in same branch sales within this end market. See “Key Factors Affecting Our Operating Results, COVID-19 Impacts” below for further information. Our price/mix metric was positively impacted during the year ended December 31, 2021 as we were able to pass along selling price increases to partially offset rising material costs, especially in the second half of 2021. However, our price/mix improvement was partially offset by a higher volume of insulation sales to production builders. This shift within the single-family end market impacted price/mix as the average insulation selling price for entry level production builder jobs is typically lower than a move-up or custom home builder.
As a percentage of net revenue, gross profit decreased during the year ended December 31, 2021 compared to the year ended December 31, 2020. The building products supply chain has experienced significant disruptions in 2021 due in part to effects of the COVID-19 pandemic. Industry wide supply chain issues continue to impact our operating efficiency, driving our costs higher. In order to meet customer demand during the year, we purchased materials from distributors and home centers at a premium to what we typically would purchase directly from manufacturers. As a result, during the year ended December 31, 2021, we estimate these purchases increased materials expense by approximately $8.8 million, therefore reducing gross profit. While we expect new housing construction will remain supportive of our business in 2022, inflation and material supply chain issues are likely to persist throughout the year. Gross profit in 2021 was also impacted by higher year-over-year fuel and union costs, reducing gross profit by approximately 50 basis points as a percentage of net revenue during the year ended December 31, 2021. In addition, the impact of the February 2021 winter storms had a lingering effect on portions of 2021 as it disrupted our ability to source certain materials needed for spray foam applications. These materials were in short supply after the storms as chemical processing facilities went offline.
Operating Expenses
Operating expenses for 2021, 2020 and 2019 were as follows (dollars in thousands):
| 2021 | Change | 2020 | Change | 2019 | |||||||||||||||||||||||||
| Selling | $ | 93,204 | 14.2 | % | $ | 81,613 | 8.8 | % | $ | 75,016 | |||||||||||||||||||
| Percentage of total net revenue | 4.7 | % | 4.9 | % | 5.0 | % | |||||||||||||||||||||||
| Administrative | $ | 271,356 | 14.0 | % | $ | 237,959 | 11.1 | % | $ | 214,134 | |||||||||||||||||||
| Percentage of total net revenue | 13.8 | % | 14.4 | % | 14.2 | % | |||||||||||||||||||||||
| Amortization | $ | 37,079 | 29.9 | % | $ | 28,535 | 16.4 | % | $ | 24,510 | |||||||||||||||||||
| Percentage of total net revenue | 1.9 | % | 1.7 | % | 1.6 | % | |||||||||||||||||||||||
Selling
The dollar increase in selling expenses in 20192021 was primarily driven by a year-over-year increase in selling wages, benefits and commissions of $6.0$13.0 million, or 10.0%18.0%, which supported our increased net revenue of 13.1%19.1%. Selling expense remained flatdecreased as a percentage of sales primarily due to maintaining our selling leverage as we increased sales.
a lower current period provision for credit losses in 2021 compared to 2020.Administrative
The dollar increase in administrative expenses in 20192021 was primarily due to an increase in wages and benefits in the amount of $16.1$20.2 million, which was attributable to both acquisitions and organic growth as well as favorable company performance. During 2019,2021, we saw our administrative costs related to liability insurance increase $5.2 million and our costs related to facilities increase $4.0 milliondecrease as a percentage of sales primarily due to overall growth in our business.
the leverage gained on these administrative wages.Amortization
Our intangible assets includelistings,relationships, trade names and backlog. Amortization of intangibles attributable to acquisitions decreasedincreased by $0.9$8.5 million in 2019 due to no longer amortizing2021 resulting from the backlog intangible asset associated with our acquisition of Alpha during the year ended December 31, 2019 compared to expense of $13.9 million during the year ended December 31, 2018. This decrease was offset by additional amortization expense resulting fromincrease in new intangible assets from 2019acquisitions. See Note 17, Business Combinations, in Item 8, Financial Statements and Supplementary Data, of this Form 10-K for information on our acquisitions.
non-competes,
customer Other Expense, net
Other expense, net for 2019, 20182021, 2020 and 20172019 was as follows (dollars in thousands):
2019 | Change | 2018 | Change | 2017 | ||||||||||||||||
Interest expense, net | $ | 28,104 | 37.1% | $ | 20,496 | 17.9% | $ | 17,381 | ||||||||||||
Other | 451 | -15.7% | 535 | -49.8% | 1,065 | |||||||||||||||
Total other expense | $ | 28,555 | 35.8% | $ | 21,031 | 14.0% | $ | 18,446 | ||||||||||||
| 2021 | Change | 2020 | Change | 2019 | |||||||||||||||||||||||||
| Interest expense, net | $ | 32,842 | 8.4 | % | $ | 30,291 | 7.8 | % | $ | 28,104 | |||||||||||||||||||
| Other | (437) | -209.5 | % | 399 | -11.5 | % | 451 | ||||||||||||||||||||||
| Total other expense, net | $ | 32,405 | 5.6 | % | $ | 30,690 | 7.5 | % | $ | 28,555 | |||||||||||||||||||
The year-over-year increase in other expense, net during 2019 and 20182021 was primarily a result of increased debt levels associated with our debt-related financing transactionstransactions. Interest expense, net also increased during 2021 due to support acquisition-related growth.amortizing our terminated interest rate swap derivatives. See Note 78 and Note 11 to our audited consolidated financial statements included in this Formour Senior Notes offering and Term Loan modification/extinguishment.derivatives, respectively.
10-K
for further information regarding debt balances Income Tax Provision
Income tax provision and effective tax rates for 2019, 20182021, 2020 and 20172019 were as follows (dollars in thousands):
| 2021 | 2020 | 2019 | |||||||||||||||
| Income tax provision | $ | 36,712 | $ | 33,938 | $ | 24,446 | |||||||||||
| Effective tax rate | 23.6 | % | 25.9 | % | 26.4 | % | |||||||||||
2019 | 2018 | 2017 | ||||||||||
Income tax provision | $ | 24,446 | $ | 17,438 | $ | 14,680 | ||||||
Effective tax rate | 26.4% | 24.2% | 26.3% | |||||||||
During the year ended December 31, 2019, our tax rate was unfavorably impacted by the tax effect of losses incurred by separate companies to which no benefit can be recognized due to a full valuation allowance against the losses and various permanent items.
During the year ended December 31, 2020, our tax rate was favorably impacted by the usagerelease of net operating lossesa valuation allowance for a tax filing entity which previously had a full valuation allowance.entity. This favorability was offset by the tax effect of losses incurred by separate companies to which no benefit can be recognized due to a full valuation allowance against the losses.losses as well as a tax shortfall from equity vesting.
Other comprehensive gain (loss) income,, net of tax
Other comprehensive gain (loss) income,, net of tax wasfor 2021, 2020 and 2019 were as follows (in thousands):
| 2021 | 2020 | 2019 | |||||||||||||||
| Unrealized gain (loss) on cash flow hedge, net of taxes | $ | 8,536 | $ | (1,620) | $ | (6,712) | |||||||||||
2019 | 2018 | 2017 | ||||||||||
Unrealized (loss) gain on cash flow hedge, net of taxes | $ | (6,712) | $ | (1,050) | $ | 507 | ||||||
During the yearsyear ended December 31, 2019 and 2018,2021, we recorded an unrealized gain, net of taxes, of $6.4 million on our cash flow hedge position decreasedhedges primarily due to unexpectedthe market's expectations for interest rates in the future relative to our July 2021 swap. We also amortized $3.2 million of the unrealized loss on our terminated cash flow hedges to interest expense, net during the year ended December 31, 2021, not including tax effects of $1.1 million.
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During the year ended December 31, 2020, we recorded an unrealized loss, net of taxes on our now-terminated cash flow hedges primarily due to interest rate declines inand market responses to the COVID-19 pandemic of $6.3 million. This loss was offset by an unrealized gain, net of taxes of $3.4 million on our remaining cash flow hedge due to favorable market conditions. We also amortized $1.3 million of the unrealized loss on our terminated cash flow hedges to interest rates.
expense, net during the year ended December 31, 2020.We amortize the unrealized loss on our terminated cash flow hedges at the time of termination over the course of the originally scheduled settlement dates of the terminated swaps. For more information on our cash flow hedges, see "Liquidity and Capital Resources, Derivative Instruments" below.
KEY FACTORS AFFECTING OUR OPERATING RESULTS
Trends in the Construction Industry
Our operating results may vary based on the amount and type of products we installour product mix and the mix of our end markets among new single-family, multi-family and commercial builders and owners of existing homes. We expect to benefit from the continued growth in single-family new residential construction as housing returnshas returned to historic stabilized levels.levels due to a number of factors, including low interest rates, the underproduction of new homes during the housing recovery, low inventory of existing homes for sale and demographic changes. We maintain a mix of business among all types of homebuilders ranging from small custom builders to large regional and national homebuilders as well as a wide range of commercial builders. Net revenue derived from our ten largest homebuilder customers in the United States was approximately 15% for the year ended December 31, 2019.2021. The residential new construction and repair and remodel markets represented approximately 82% and 84%83% of our total net revenue for the yearsyear ended December 31, 2019 and 2018, respectively, with2021, compared to 82% in the same period in 2020. The remaining portion was attributable to the commercial construction end market.
The industry experienced manufacturer supply constraints for most of the materials we installed during 2021 due to an unanticipated increase in demand as well as manufacturing curtailments due to COVID-19. We anticipate these shortages will continue into 2022. Our results of operations in 2022 are likely to be impacted by the current supply constraints as we may be unable to complete jobs at our preferred pace, but we will continue to respond to the strong demand by continuing to proactively work with our suppliers and customers to offset any potential impact on our operations and profitability. This outlook may change depending on continued increased housing demand and the ability of manufacturers to produce adequate supply.
Cost and Availability of Materials
We typically purchase the materials that we install primarilyuse in our business directly from manufacturers. The industry supply of these materials is currently experiencing supply shortages due to strong demand and effects from the COVID-19 pandemic. Manufacturers are currently allocating materials across the industry which affected the pricing of those materials during the year ended December 31, 2021. In order to meet customer demand during the year, we install haspurchased materials from distributors and home centers at a premium to what we typically would purchase directly from manufacturers, therefore reducing gross profit.
In addition, we experience price increases from our suppliers from time to time, including multiple increases over the last two years caused by supply shortages and general economic inflationary pressures. We also experienced disruptionsunprecedented increased pricing for fiberglass and foam insulation materials in the past but stabilized2021 and expect manufacturers to seek additional price increases in 2019.2022. Increased market pricing, regardless of the catalyst, has and could continue to impact our results of operations in 2020,2022, to the extent that price increases cannot be passed on to our customers. WeDespite our efforts to raise prices, our selling price increases lagged material cost increases in 2021 until we began to see improvement in our selling prices in the second quarterhalf of 2019, and this continued throughout 2019 as evidenced by our 1.0% improvement in gross profit as a percentage of sales during the year ended December 31, 2019 compared to the year ended December 31, 2018.2021. We will continue to work with our customers to adjust selling prices to offset higher costs as they occur.
Cost of Labor
Our business is labor intensive. As of December 31, 2019,2021, we had approximately 8,5009,500 employees, most of whom work as installers on local construction sites. We expect to spend more to hire, train and retain installers to support our growing business in 2020,2022, as tight labor availability continues within the construction industry. We offer a comprehensive benefits package, which many of our local competitors are not able to provide, which will increase costs as we hire additional personnel. Our workers’ compensation costs also continue to increase as we increase our coverage for additional personnel.
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We experienced improvedstrong employee retention, turnover and labor efficiency rates in the year ended December 31, 2019.2021. We believe this is partially a result of various programs meant to benefit our employees, including our financial wellness plan, longevity stock compensation plan for employees and our newassistance from the Installed Building Products Foundation meant to benefit our employees, their families and their communities. While improved retention drives lower costs to recruit and train new employees, resulting in greater installer productivity, these improvements are somewhat offset by the additional costs of these incentives. See “COVID-19 Impacts” below for a discussion of the short-term impacts of the current economic climate on our workforce.
COVID-19 Impacts
In December 2019, we donated $1.4 milliona novel strain of coronavirus surfaced in Wuhan, China. Since then, the virus has spread globally, including to the Foundation.United States. In response, the World Health Organization declared the situation a pandemic and the U.S. Secretary of Health and Human Services declared a public health emergency. The COVID-19 pandemic has caused significant volatility, uncertainty and economic disruption. Many public health organizations and international, federal, state and local governments implemented measures to combat the spread of COVID-19 at various times since the beginning of the pandemic. Some of these measures include restrictions on movement such as quarantines, vaccine and/or masking requirements, “stay-at-home” orders and social distancing ordinances and restricting or prohibiting outright some or all forms of commercial and business activity. There is still significant uncertainty surrounding the duration and scope of the pandemic, as well as its continued impact on the economy. We cannot predict if federal, state and local governments will implement additional restrictions, when restrictions currently in place will expire or whether restrictions currently in place will become more limiting.
While the COVID-19 pandemic and related events will likely have a negative effect on us in 2022, the full extent and scope of the impact on our business and industry, as well as national, regional and global markets and economies, depends on numerous evolving factors that we may not be able to accurately predict, including the duration and scope of the pandemic, additional government actions taken in response to the pandemic, the impact on construction activity and demand for homes (based on employment levels, consumer spending and consumer confidence). The fast recovery in residential housing demand helped offset prolonged impacts of the pandemic already experienced. In the commercial sector, we have experienced delays in the onset of certain large-scale infrastructure programs due to the declining need for such structures and/or project funding declines. Commercial spending rose in 2021, but remains below 2019 levels. Commercial projects could decline in the future if consumer behaviors change in the wake of COVID-19 disruptions to the economy and changes to our general ways of life. For example, reduced demand for office buildings and/or educational facilities, decreased airport traffic, or decreased usage of sports arenas or similar commercial structures could continue to impact our commercial end market.
Our management remains focused on mitigating the impact of COVID-19 on our business and the risk to our employees and customers. We have taken a number of precautionary measures intended to mitigate these risks. We follow all masking requirements imposed by authorities, most of which have had no adverse effects on our business since wearing protective equipment in the process of completing our installation work is already a common practice in our industry. We have also taken advantage of available technologies which allow some employees the ability to work remotely from home. We comply with regulations from federal, state and local government agencies. Certain protocols have evolved throughout 2021 as vaccines have become available and guidelines from public health authorities such as the Centers for Disease Control are updated. We are prepared to take additional actions if necessary as suggested or required by various health agencies.
We continue to evaluate the nature and extent of the COVID-19 pandemic’s impact on our financial condition, results of operations and cash flows. We have experienced limited business disruptions to date and therefore have not needed to implement significant continuity measures and have not incurred significant related expenditures. Assuming a large number of additional states or markets in which we operate do not reverse their current positions about construction being an “essential” business, we do not anticipate having to implement any additional measures in the future.
Our corporate office remains fully operational. As such, we have made no modifications to internal controls over financial reporting and have confidence controls are operating as designed. We have enhanced our efforts to mitigate cyber threats and phishing, given some employees are still working remotely. We are continually monitoring and assessing the COVID-19 situation on our internal controls to minimize the impact of their design and operating effectiveness.
We expect some impact from the pandemic to our earnings, financial position and cash flows to continue in 2022, however there is much uncertainty surrounding the estimated magnitude of these impacts. We estimate limited impact to our Consolidated Balance Sheets other than a potential reduction in working capital due to the possibility of reduced net revenue and net income. Trade accounts receivable may also be reduced somewhat by lower net revenue and a higher allowance for credit losses due to enhanced risk of collectibility from some customers, although we have not seen a significant impact to date. We anticipate revenue and net income may continue to be negatively impacted into 2022 due to supply constraints and/or material price increases ultimately stemming from the effects of the pandemic, as well as other factors such as high demand for
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housing. While our cash from operations may decline over recent performance due to a decrease in expected net income driven by lower net revenue, we do not anticipate any issues meeting debt obligations or making timely payments to vendors given our strong liquidity and large cash reserves. See "Liquidity and Capital Resources" below for further information. Given the continued uncertainty created by the COVID-19 pandemic and its potential effects, it is not possible to estimate the full, adverse impact to our future 2022 sales or other financial results at this time.
Environmental, Social and Governance, Climate Change and Other Factors
According to the Office of Energy Efficiency & Renewable Energy, over $400 billion is spent each year to power homes and commercial structures that consume 75% of all electricity used in the United States and 40% of the nation’s total energy. As a result, U.S. buildings account for 35% of the U.S. carbon dioxide emissions that drive the climate crisis. Insulation is a critical component in the construction of homes and commercial structures. Installing insulation also helps increase energy conservation because it is the best way to prevent energy waste in most homes and commercial structures. Beyond our service offerings, we also recognize that as a good corporate citizen, we have a responsibility to support our communities and be stewards of the environment. Recently, we have transitioned a large portion of our electricity supply to a carbon-free energy source and entered a national waste management program to increase recycling at our facilities, reducing landfill waste.
We are not aware of pending climate-related regulations that would materially affect our business. However, certain effects of climate change that may cause more severe weather events could have a material effect on our operations. For example, whether caused by climate change or not, February 2021 winter storms in the southern United States significantly impacted our operations across the entire state of Texas and disrupted our ability to source certain materials needed for spray foam applications.
SEASONALITY
We tend to have higher sales during the second half of the year as our homebuilder customers complete construction of homes placed under contract for sale in the traditionally stronger spring selling season. In addition, some of our larger branches operate in states impacted by winter weather and as such experience a slowdown in construction activity during the first quarter of the calendar year. This winter slowdown contributes to traditionally lower sales and profitability in our first quarter. See Part I, Item 1, Business, for further information.
Our capital resources primarily consist of cash from operations and borrowings under our various debt agreements and capital equipment leases and loans. As of December 31, 2021, we had cash and cash equivalents of $333.5 million as well as access to $200.0 million under our asset-based lending credit facility (as defined below), less $44.3 million of outstanding letters of credit, resulting in total liquidity of $489.2 million. Our total liquidity is reduced by $5.3 million within our cash and cash equivalents due to a deposit into a trust to serve as additional collateral for our workers' compensation and general liability policies. This amount can be converted to a letter of credit at our discretion and would reduce the availability of our asset-based lending facility (as defined below). Liquidity may also be limited in the future by certain cash collateral limitations under our asset-based credit facility (as defined below), depending on the status of our borrowing base availability.
We experienced unprecedented increases in pricing for fiberglass and foam insulation materials in 2021 and expect manufacturers to seek additional price increases in 2022. Increased market pricing on the materials we purchase has and could continue to impact our results of operations in 2022 due to the higher prices we must pay for materials. See Part I, Item 1A, Risk Factors, for information on the potential and currently known impacts on our business and liquidity from the COVID-19 pandemic.
Short-Term Material Cash Requirements
For at least the next twelve months, our primary capital requirements are to fund working capital needs, operating expenses, acquisitions and capital expenditures and to meet required principal and interest obligations and make required income tax payments. We may also use our resources to fund our optional stock repurchase program. Our investments consistprogram and pay quarterly and annual dividends. During 2022, we anticipate discretionary spending for capital improvements and quarterly dividends to approximate 2021 levels of highly liquid instrumentsapproximately $37.0 million and $35.0 million, respectively, as well as approximately $27.0 million for our first annual variable dividend to be paid March 31, 2022. In addition, we expect to spend cash and cash equivalents to acquire various
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companies with at least $100.0 million in aggregate net revenue. The amount of cash paid for an acquisition is dependent on various factors, including the size and determined value of the business being acquired.
Firm commitments for funds include $64.8 million in interest and principals payments on long-term debt obligations including our Senior Notes, Term Loan, notes payable to sellers of acquisitions and vehicles purchased under the Master Loan and Security Agreement, the Master Equipment Agreement and the Master Loan Agreements. Additionally, we maintain certain production vehicles under a finance lease structure which will require $2.0 million in interest and principal payments under current agreements in 2022. We lease certain locations, vehicles and equipment under operating lease agreements that will require $25.2 million in funds over the next twelve months. Finally, we have a product supply agreement with a certain vendor that requires us to purchase a minimum of $46.2 million of inventory in 2022. Payments for income taxes cannot be estimated at this time.
We expect to meet our short-term liquidity requirements primarily including corporate bondsthrough net cash flows from operations, our cash and commercial paper. Ascash equivalents on hand and borrowings from banks under the Master Loan and Security Agreement, the Master Equipment Agreement and the Master Loan Agreements. Additional sources of December 31, 2019,funds, should we had no outstanding borrowingsneed them, include borrowing capacity under our asset-based lending credit facility (as defined below).
Long-Term Material Cash Requirements
| 2023 | $57,945 | ||||
| 2024 | 51,568 | ||||
| 2025 | 49,442 | ||||
| 2026 | 39,868 | ||||
| Thereafter | 829,246 | ||||
Sources and Uses of ContentsCash and Related Trends
Working Capital
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The following table summarizespresents our liquidity as of December 31cash flows (in thousands):
2019 | 2018 | |||||||
Cash and cash equivalents | $ | 177,889 | $ | 90,442 | ||||
Short-term investments | 37,961 | 10,060 | ||||||
ABL Revolver | 200,000 | 150,000 | ||||||
Less: outstanding letters of credit and cash collateral | (38,672 | ) | (28,887 | ) | ||||
Total liquidity (1) | $ | 377,178 | $ | 221,615 | ||||
| Years ended December 31, | |||||||||||||||||
| 2021 | 2020 | 2019 | |||||||||||||||
| Net cash provided by operating activities | $ | 138,314 | $ | 180,789 | $ | 123,067 | |||||||||||
| Net cash used in investing activities | $ | (278,439) | $ | (77,794) | $ | (131,733) | |||||||||||
| Net cash provided by (used in) financing activities | $ | 242,090 | $ | (49,364) | $ | 96,113 | |||||||||||
Cash Flows from Operating Activities
Our primary source of cash provided by operations are revenues generated from installing building products and the resulting operating income generated by these revenues. Operating incomes are adjusted for certain non-cash items, and our cash flows from operations can be impacted by the timing of our cash collections on sales and collection of retainage amounts. The COVID-19 pandemic has not had a material impact to our cash collections to date.
Our primary uses of cash from operating activities include payments for installation materials, compensation costs, leases, income taxes and other general corporate expenditures included in net income.
Net cash provided by operating activities decreased from 2020 to 2021 primarily due to changes in working capital due to
higher volume of inventory purchases to support our growth and increased pricing on inventory due to price inflation on
materials. During the year ended December 31, 2020, we saw a significant increase in cash from operations due to payroll tax deferrals under the CARES Act. This negatively impacted the cash from operations during the year ended December 31, 2021 when we paid a portion of this deferral.
Cash Flows from Investing Activities
Sources of cash from investing activities consists primarily of proceeds from the sales of property and equipment and, periodically, maturities from short term investments. Cash used in investing activities consists primarily of purchases of property and equipment, payments for acquisitions and, periodically, purchases of short term investments.
Net cash used by investing activities increased from 2020 to 2021 primarily due to the increase in payments for acquisitions. We completed 2 additional acquisitions in 2021 compared to 2020, and the size of the acquisitions were generally larger in the year ended December 31, 2021. The amount of cash paid is dependent on various factors, including the size and determined value of the business being acquired. See Note 17, Business Combinations, to our audited consolidated financial statements included in this Form 10-K for more information regarding our business acquisitions in 2021, 2020 and 2019.
Additionally, total cash used for property and equipment increased in 2021, and we expect to continue to support any increases in future net revenue through further capital expenditures. A majority of these capital expenditures were subsequently reimbursed via various vehicle and equipment notes payable, with related cash inflows shown in cash flows from financing activities.
Cash Flows from Financing Activities
Our source of cash from financing activities consists of proceeds from the issuances of debt and vehicle and equipment notes payable. Cash used in financing activities consists primarily of debt repayments, acquisition-related obligations, dividends and stock repurchases.
Net cash provided by financing activities increased from 2020 to 2021 primarily due to proceeds on our new Term Loan, which was partially offset by the repayment of our previous term loan agreement. We plan to use the proceeds of the Term Loan to support our operations, pay debt issuance costs and continue our acquisition strategy. We also did not repurchase any shares under our stock repurchase plan during the year ended December 31, 2021. Our net cash provided by financing activities was further offset during the year ended December 31, 2021 by the payment of the first quarterly dividends in our history as a public company and higher acquisition-related obligations due to increased acquisition activity.
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Debt
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 February 1, 2028 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;stock in an aggregate amount exceeding 2.0% of market capitalization per fiscal year, or in an aggregate amount exceeding certain applicable restricted payment baskets; (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 2019,2021, we amended and restated our $400entered into a $500 million, seven-year term loan facility due April 2025December 2028 (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) replacesDecember 14, 2021 with Royal Bank of Canada with Bank of America, N.A. as the administrative agent and collateral agent thereunder. The Term Loan amortizes in quarterly principal payments of $1.25 million starting on March 31, 2022, with any remaining unpaid balances due on the maturity date of December 14, 2028. The Term Loan bears interest at either the base rate (which approximated the prime rate) or the Eurodollar rate, plus a margin of (A) 1.25% in the case of base rate loans or (B) 2.25% in the case of Eurodollar rate loans. Proceeds from the Term Loan were used to refinance and repay in full all amounts outstanding under our previous term loan agreement. We intend to use the remaining funds to pay for certain fees and expenses associated with the closing of the Term Loan and for general corporate purposes, including acquisitions and other growth initiatives. As of December 31, 2019,2021, we had $198.3$493.3 million, net of unamortized debt issuance costs, due on our Term Loan. The amended
Subject to certain exceptions, the Term Loan also haswill be subject to mandatory prepayments of (i) 100% of the net cash proceeds from issuances or incurrence of debt by the Company or any of its restricted subsidiaries (other than with respect to certain permitted indebtedness (excluding any refinancing indebtedness); (ii) 100% (with step-downs to 50% and 0% based on achievement of specified net leverage ratios) of the net cash proceeds from certain sales or dispositions of assets by the Company or any of its restricted subsidiaries in excess of a margincertain amount and subject to reinvestment provision and certain other exception; and (iii) 50% (with step-downs to 25% and 0% based upon achievement of 1.50%specified net leverage ratios) of excess cash flow of the Company and its restricted subsidiaries in the caseexcess of base rate loans.$15 million, subject to certain exceptions and limitations.
In September 2019, we entered into a newan 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 five-year maturity, which replaced the Company’s previous revolving credit facility.maturity. 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 Agreement, we entered into a SecondThird Amendment (the “Second“Third 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 Royal Bank of America, N.A.,Canada as Term Loan Agent for the lenderscollateral agent under the Term Loan.Loan Agreement. Including outstanding letters of credit, our remaining availability under the ABL Revolver as of December 31, 20192021 was $161.3$155.7 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-prioritysecond- priority security interest in such assets that constitute Term Loan Priority Collateral, as defined in the Term Loan Agreement.
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) 1.25% or 1.50% in the case of Eurodollar rate loans (based on a measure of
42
availability under the ABL Credit Agreement) and (B) 0.25% or 0.50% 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 requiring the satisfaction of a minimum fixed charge coverage ratio of 1.0x in the event that we do not meet a minimum measure of availability under the ABL Revolver. The ABL Credit Agreement and the Term Loan Agreement contain 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 in an aggregate amount exceeding 2.0% of market capitalization per fiscal year, or in an aggregate amount exceeding certain applicable restricted payment baskets; (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. At December 31, 2019,2021, we were in compliance with all applicable covenants under the Term Loan Agreement, ABL Credit Agreement and the Senior Notes.
Derivative Instruments
As of December 31, 2019,2021, we had twothree interest rate swaps, each with an associated floor, withswaps. One interest rate swap began July 30, 2021 and has a total beginningfixed notional amount of $200.0 million, one that amortizes quarterly to $95.3 million at a maturity datefixed rate of May 31, 20220.51% and one that amortizes quarterly to $93.3 million at a maturity date of April 15, 2025. These2030. We also had two interest rate swaps combinedthat began December 31, 2021, each with a fixed notional amount of $100.0 million, a fixed rate of 1.37%, and a maturity date of December 15, 2028. Together, these three swaps serve to hedge $196.5$400.0 million of the variable cash flows on our variable rate Term Loan as of December 31, 2019. We also had athrough maturity. The assets and liabilities associated with the forward interest rate swap with an associated floor beginning May 31, 2022 withare included in other non-current assets and other current liabilities on the Consolidated Balance Sheets at their fair value amounts as described in Note 10, Fair Value Measurements.
LIBOR is used as a beginning notional of $100.0 million that amortizes quarterly to $97.0 million at a maturity date of April 15, 2025. These three swaps serve to hedge substantially all of the variable cash flows onreference rate for our Term Loan, until maturity.
Vehicle and Equipment Notes
We have financing loan agreements with various lenders to provide financing for the purpose of purchasing or leasing vehicles and equipment used in the normal course of business. 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.
Total gross assets and respective outstanding loan balances relating to our master loan and equipment agreements were $130.2$134.5 million and $72.7$69.2 million as of December 31, 2019,2021, respectively, and $98.7$132.2 million and $60.4$67.5 million as of December 31, 2018,2020, respectively. See Note 78 to our audited consolidated financial statements included in this Form
10-K
for more information regarding our Master Loan and Security Agreement, Master Equipment Lease Agreement and Master Loan Agreements.Letters of Credit and Bonds
We may use performance bonds to ensure completion of our work on certain larger customer contracts that can span multiple accounting periods. Performance bonds generally do not have stated expiration dates; rather, we are released from the bonds as the contractual performance is completed. In addition, we occasionally use letters of credit and cash to secure our performance under our general liability and workers’ compensation insurance programs. Permit and license bonds are typically issued for one year and are required by certain municipalities when we obtain licenses and permits to perform work in their jurisdictions.
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The following table summarizes our outstanding bonds, letters of credit and cash-collateral (in thousands):
| As of December 31, 2021 | |||||
| Performance bonds | $ | 66,838 | |||
| Insurance letters of credit and cash collateral | 51,393 | ||||
| Permit and license bonds | 7,002 | ||||
| Total bonds and letters of credit | $ | 125,233 | |||
As of December 31, 2019 | ||||
Performance bonds | $ | 59,816 | ||
Insurance letters of credit and cash collateral | 49,712 | |||
Permit and license bonds | 7,156 | |||
Total bonds and letters of credit | $ | 116,684 | ||
In January 2018,2020, we posted $10.0$5.3 million into a trust to serve as additional collateral for our workers’ compensation and general liability policies. This $10.0 millioncollateral can be converted to a letter of credit at our discretion and is therefore not considered to be restricted cash.
Payments due by period | ||||||||||||||||||||||||||||
(in thousands) | Total | 2020 | 2021 | 2022 | 2023 | 2024 | Thereafter | |||||||||||||||||||||
Long-term debt obligations (1) | $ | 764,694 | $ | 52,368 | $ | 46,588 | $ | 42,025 | $ | 36,142 | $ | 30,014 | $ | 557,557 | ||||||||||||||
Finance lease obligations (2) | 7,023 | 3,081 | 1,973 | 1,037 | 673 | 259 | — | |||||||||||||||||||||
Operating lease obligations (3) | 50,407 | 17,047 | 12,247 | 7,438 | 4,207 | 2,643 | 6,825 | |||||||||||||||||||||
Purchase obligations (4) | 35,132 | 21,132 | 14,000 | — | — | — | — | |||||||||||||||||||||
Critical Accounting Policies and Estimates
Management’s discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of our consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. Certain accounting policies involve judgments and uncertainties to such an extent that there is a reasonable likelihood that materially different amounts could have been reported using different assumptions or under different conditions. We evaluate our estimates and assumptions on a regular basis. We base our estimates on historical experience and various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of our assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates and assumptions used in preparation of our consolidated financial statements. We provide discussion of our more significantbelieve the following critical accounting policies, estimates, assumptionsestimate requires judgement and judgments usedestimation in the preparation of our consolidated financial statements below.and to be fundamental to our results of operations. See Note 2, Significant Accounting Policies included in Item 8 of the Form 10-K for a summary of all of our significant accounting policies and their effect on our financial statements.
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 therequires significant 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.
cost-to-cost
method, the use of estimated costs to complete each contract is a significant variable in the process of determining recognized revenue 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,cost estimation process is recognized as an adjustment to revenue (either as an increase in or a reduction of revenue) on a cumulativecatch-upbasis.
Business combinations
We have recorded a significant amount of finite lived intangible assets associated with the acquisitions of businesses through our growth strategy. These intangible assets consist of customer relationships, backlog, non-competition agreements and business trademarks and trade names. Fair values and estimated useful lives are assigned to the identified intangible assets at the date of acquisition by financial professionals using either the income approach or the market approach along with certain industry information, professional experience and knowledge. In some instances, the process of assigning values and useful lives requires using judgment and other financial professionals may come to different conclusions. We review intangible assets whenever events or changes in circumstances indicate that the faircarrying value of an asset may not be recoverable. An impairment loss is recognized when estimated future cash flows expected to result from the reporting unit isuse of an asset and its eventual disposition are less than its carrying amount and if itamount. When impairment is necessary to performidentified, the quantitativetwo-stepgoodwill impairment test. If we perform the quantitative test, we compare the carrying value of the reporting unit to an estimate of the reporting unit’s fair value to identify potential impairment. The estimate of the reporting unit’s fair value is determined by weighting a discounted cash flow model and a market-related model using current industry information that involve significant unobservable inputs (Level 3 inputs). In determining the estimated future cash flow, we consider and apply certain estimates and judgments, including current and projected future levels of income based on management’s plans, business trends, prospects, market and economic conditions and market-participant considerations. If the estimated fair value of the reporting unit is less than the carrying value, a second step is performed to determine the amount of the potential goodwill impairment. If impaired, goodwillasset is written downreduced to its estimated implied fair value.
Impairment losses would negatively affect earnings.
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Insurance Liabilitiesrisks
We carry insurance policies for a number of risks, including, but not limited to, workers’ compensation, general liability, vehicle liability, property and our obligation for employee-related health care benefits. Most of our insurance policies contain an element for which we assume a portion of the risk by having high deductibles or a large cap on claims. For a description of our different insurance programs, see Note 2, Significant Accounting Policies in Item 8, Financial Statements and Supplementary Data in this Form 10-K.
Our largest healthcare plan is partially self-funded with an insurance company paying benefits in excess of stop loss limits per individual/family. An accrual for estimated healthcare claims incurred but not reported (“IBNR”) is included within accrued compensation on the Consolidated Balance Sheets and was $3.3 million and $3.1 million as of December 31, 2021 and 2020, respectively.
We participate in multiple workers’ compensation plans covering a significant portion of our business. Under these plans, we use a high deductible program to cover losses above the deductible amount on a per claim basis. We accrue for the estimated losses occurring from both asserted and unasserted claims. Insurance claims and reserves include accruals of estimated settlements for known claims, as well as accruals of actuarial estimates of IBNR claims. In estimating these reserves, historical loss experience and judgments about the expected levels of costs per claim are considered. These claims are accounted for based on actuarial estimates of the undiscounted claims, including IBNR. We believe the use of actuarial methods to account for these liabilities provides a consistent and effective way to measure these highly judgmental accruals. As of December 31, 2021 and 2020, we estimated total short-term and long-term known and IBNR claims for workers' compensation to be $21.4 million and $19.7 million, respectively. As of December 31, 2021 and 2020, offsets of these liabilities were $2.1 million and $1.9 million, respectively, with insurance receivables and indemnification assets for claims under fully insured policies or claims that exceeded the stop loss limit.
We also participate in a high retention general liability insurance program and a high deductible auto insurance program. As of December 31, 2021 and 2020, general liability and auto insurance reserves included in other current and long-term liabilities were $21.9 million and $21.5 million, respectively. As of December 31, 2021 and 2020, offsets of these liabilities were $3.9 million and $4.7 million, respectively, with insurance receivables and indemnification assets for claims under fully insured policies or claims that exceeded the stop loss limit.
Liabilities relating to claims associated with these risks are estimated by considering historical claims experience, including frequency, severity, demographic factors and other actuarial assumptions. In estimating our liability for such claims, we periodically analyze our historical trends, including loss development, and apply appropriate loss development
factors to the incurred costs associated with the claims with the assistance of external actuarial consultants. While we do not expect the amounts ultimately paid to differ significantly from our estimates, our reserves and corresponding expenses could be affected if future claim experience differs significantly from historical trends and actuarial assumptions.
We account for income taxes using the asset and liability method. Under this method, the amount of taxes currently payable or refundable are accrued and deferred tax assets and liabilities are recognized for the estimated future tax consequences of temporary differences that currently exist between the tax basis and financial reporting basis of our assets and liabilities.
Recent Accounting Pronouncements
For a description of recently issued and/or adopted accounting pronouncements, see Note 2, Significant Accounting Policies, to our audited consolidated financial statements included in this Form
10-K.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
We are exposed to market risks related to fluctuations in interest rates on our outstanding variable rate debt. As of December 31, 2019,2021, we had $198.3$493.3 million outstanding on the Term Loan, net of unamortized debt issuance costs, no outstanding borrowings on the ABL Revolver and $0.1 millionno outstanding borrowings under various finance leases subject to variable interest rates. Our twoWe had three interest rate swaps each with an associated floor, combinewhich, when combined, serve to reduce exposure to market riskshedge $400.0 million of the variable cash flows on our Term Loan by $196.0 millionuntil its maturity as of December 31, 2019.2021. As a result, total variable rate debt of $4.1$100.0 million was exposed to market risks as of December 31, 2019.2021. A hypothetical one percentage point increase (decrease) in interest rates on our variable rate debt would increase (decrease) our annual interest expense by approximately $41 thousand.$1.0 million. Our Senior Notes accrued interest at a fixed rate of 5.75%.
For variable rate debt, interest rate changes generally do not affect the fair value of the debt instrument, but do impact future earnings and cash flows, assuming other factors are held constant. We have not entered into and currently do not hold derivatives for trading or speculative purposes.
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LIBOR is used as a reference rate for our Term Loan, ABL Revolver and our interest rate swap agreements we use to hedge our interest rate exposure. In 2017, the FCAFinancial Conduct Authority (“FCA”), the authority that regulates LIBOR, announced that it intends to stop compelling banks to submit rates for the calculation of LIBOR after 2021, and it is unclear whether new methods of calculating LIBOR will be established. The Intercontinental Exchange Benchmark Administration, the administrator of LIBOR, announced in March 2021 its intention to extend the publication of certain LIBOR settings, including the setting we use as a reference rate, to June 2023. Our Term Loan Agreement, was amended on November 30, 2017 to include a mechanism to establish an alternative Eurodollarinterest rate if certain circumstances arise such that LIBOR may no longer be used. Additionally, ourswap agreements and ABL Credit Agreement includesinclude a provision related to the potential discontinuance of LIBOR to be replaced with one or more Secured Overnight Financing Rate (SOFR)("SOFR") values or another alternatealternative benchmark rate. However, ifwhen LIBOR ceases to exist after 2021,June 2023, the interest rates under the alternative rate could be higher than LIBOR. In addition,During the valueyear ended December 31, 2020, we adopted ASU 2020-04, Reference Rate Reform: Facilitation of derivative instruments tiedthe Effects of Reference Rate Reform on Financial Reporting (Topic 848). The purpose of this guidance is to LIBOR could alsoprovide relief for impacted areas as it relates to impending reference rate reform. We elected to apply the hedge accounting expedients related to probability and the assessments of effectiveness for future LIBOR-indexed cash flows to assume that the index upon which future hedged transactions will be impacted if LIBOR is limited or discontinued. We continue to reviewbased matches the impact the LIBORphase-outwill haveindex on the Company.corresponding derivatives. Application of these expedients preserves the presentation of derivatives consistent with past presentation.
Item 8. Financial Statements and Supplementary Data |
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the stockholders and the Board of Directors of Installed Building Products, IncInc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Installed Building Products, Inc. (the “Company”) as of December 31, 20192021 and 2018,2020, the related consolidated statements of operations and comprehensive income, stockholders’ equity, and cash flows, for each of the three years in the period ended December 31, 2019,2021, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 20192021 and 2018,2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2019,2021, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2019,2021, based on criteria established inissued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 27, 2020,24, 2022, expressed an unqualified opinion on the Company’s internal control over financial reporting.
Internal Control — Integrated Framework (2013)
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that waswere communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinionopinions on the critical audit matter or on the accounts or disclosures to which it relates.they relate.
Revenue on certain contracts recognized over time – Refer to Notes 2 and 3 to the financial statements
Critical Audit Matter Description
The Company recognizes revenue from the majority of its installation contracts when control of the promised goods or services is transferred to customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services. For contracts that are not complete at the reporting date (“uncompleted contracts”), the Company recognizes revenue over time utilizing a cost-to-cost input method, as the Company believes this represents the best measure of when goods and services are transferred to the customer. When this method is used, the Company estimates the costcosts to complete individual contracts and records 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 estimated costscost to complete each contract requires judgment and can change throughout the duration of a contract due to contract modifications and other factors impacting job completion. The costs related to 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.
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The Company’s estimation process for determining revenues for uncompleted contracts accounted for under the cost-to-cost approachmethod is based upon historical experience, the professional judgment and knowledge of the Company’s project management, operational and financial professionals, and an assessment of the key underlying factors, such as the value of executed contracts, change orders, and related contract costs, that may impact the revenues and costs of uncompleted contracts.
Given the judgments necessary to estimate the relationship between executed contract value and contract costs, auditing the amount of revenue recognized for uncompleted contracts involves a high degree of auditor judgment.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to estimated revenue recognized on uncompleted contracts included the following, among others:
•We tested the effectiveness of the Company’s controls over the determination of uncompleted contract revenue, including those over estimated total costs and revenues recognized through performance obligations.
•We inquired of project managers observed selected projects, and evaluated the reasonableness of management’s ability to accurately estimate costs by comparing incurred contract costs on uncompleted contracts to management’s projections.
•We compared accounting records to executed contracts and change orders to verify accuracy of contract values in the Company’s estimates.
•We considered the impact of change orders and other related contract costs that may impact the determination of revenue and estimated costs to completion.
•We tested the mathematical accuracy of the Company’s calculation of revenue recognized over time.
•We selected a sample of contract costs incurred as of December 31, 2019,2021, agreed the costs to supplier invoices or other supporting documents, and evaluated whether the costs were properly allocated to the contracts included in management’s calculation of revenue recognized over time.
•We developed an expectation of revenue for uncompleted contracts with remaining performance obligations as of December 31, 20192021 based on (1) consideration of incurred contract costs and (2) results realized by the Company on completed contracts. We compared this expectation to the Company’s revenue recognized on uncompleted contracts at December 31, 2019.2021.
/s/ Deloitte & Touche LLP
Columbus, Ohio
February 27, 202024, 2022
We have served as the Company’s auditor since 2013.
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INSTALLED BUILDING PRODUCTS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
| As of December 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| ASSETS | |||||||||||
| Current assets | |||||||||||
| Cash and cash equivalents | $ | 333,485 | $ | 231,520 | |||||||
| Accounts receivable (less allowance for credit losses of $8,717 and $8,789 at December 31, 2021 and 2020, respectively) | 312,767 | 266,566 | |||||||||
| Inventories | 143,039 | 77,179 | |||||||||
| Prepaid expenses and other current assets | 70,025 | 48,678 | |||||||||
| Total current assets | 859,316 | 623,943 | |||||||||
| Property and equipment, net | 105,933 | 104,022 | |||||||||
| Operating lease right-of-use assets | 69,871 | 53,766 | |||||||||
| Goodwill | 322,517 | 216,870 | |||||||||
| Customer relationships, net | 178,264 | 108,504 | |||||||||
| Other intangibles, net | 86,157 | 62,889 | |||||||||
| Other non-current assets | 31,144 | 17,682 | |||||||||
| Total assets | $ | 1,653,202 | $ | 1,187,676 | |||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||||||
| Current liabilities | |||||||||||
| Current maturities of long-term debt | $ | 30,839 | $ | 23,355 | |||||||
| Current maturities of operating lease obligations | 23,224 | 18,758 | |||||||||
| Current maturities of finance lease obligations | 1,747 | 2,073 | |||||||||
| Accounts payable | 132,705 | 101,462 | |||||||||
| Accrued compensation | 50,964 | 45,876 | |||||||||
| Other current liabilities | 68,090 | 44,951 | |||||||||
| Total current liabilities | 307,569 | 236,475 | |||||||||
| Long-term debt | 832,193 | 541,957 | |||||||||
| Operating lease obligations | 46,075 | 34,413 | |||||||||
| Finance lease obligations | 3,297 | 2,430 | |||||||||
| Deferred income taxes | 4,819 | 35 | |||||||||
| Other long-term liabilities | 42,409 | 53,184 | |||||||||
| Total liabilities | 1,236,362 | 868,494 | |||||||||
| Commitments and contingencies (Note 16) | 0 | 0 | |||||||||
| Stockholders’ equity | |||||||||||
| Preferred Stock; $0.01 par value: 5,000,000 authorized and 0 shares issued and outstanding at December 31, 2021 and 2020, respectively | — | — | |||||||||
| Common stock; $0.01 par value: 100,000,000 authorized, 33,271,659 and 33,141,879 issued and 29,706,401 and 29,623,272 shares outstanding at December 31, 2021 and 2020, respectively | 333 | 331 | |||||||||
| Additional paid in capital | 211,430 | 199,847 | |||||||||
| Retained earnings | 352,543 | 269,420 | |||||||||
| Treasury stock; at cost: 3,565,258 and 3,518,607 shares at December 31, 2021 and 2020, respectively | (147,239) | (141,653) | |||||||||
| Accumulated other comprehensive loss | (227) | (8,763) | |||||||||
| Total stockholders’ equity | 416,840 | 319,182 | |||||||||
| Total liabilities and stockholders’ equity | $ | 1,653,202 | $ | 1,187,676 | |||||||
As of December 31, | ||||||||
2019 | 2018 | |||||||
ASSETS | ||||||||
Current assets | ||||||||
Cash and cash equivalents | $ | 177,889 | $ | 90,442 | ||||
Investments | 37,961 | 10,060 | ||||||
Accounts receivable (less allowance for doubtful accounts of $ 6,878 and $5,085 at December 31, 2019 and 2018, respectively) | 244,519 | 214,121 | ||||||
Inventories | 74,606 | 61,162 | ||||||
Other current assets | 46,974 | 35,760 | ||||||
Total current assets | 581,949 | 411,545 | ||||||
Property and equipment, net | 106,410 | 90,117 | ||||||
Operating lease right-of-use assets | 45,691 | — | ||||||
Goodwill | 195,652 | 173,049 | ||||||
Intangibles, net | 153,562 | 149,790 | ||||||
Other non-current assets | 16,215 | 10,157 | ||||||
Total assets | $ | 1,099,479 | $ | 834,658 | ||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
Current liabilities | ||||||||
Current maturities of long-term debt | $ | 24,164 | $ | 22,642 | ||||
Current maturities of operating lease obligations | 15,459 | — | ||||||
Current maturities of finance lease obligations | 2,747 | 4,806 | ||||||
Accounts payable | 98,871 | 96,949 | ||||||
Accrued compensation | 33,636 | 27,923 | ||||||
Other current liabilities | 39,272 | 29,366 | ||||||
Total current liabilities | 214,149 | 181,686 | ||||||
Long-term debt | 545,031 | 432,182 | ||||||
Operating lease obligations | 29,785 | — | ||||||
Finance lease obligations | 3,597 | 3,824 | ||||||
Deferred income taxes | 9,175 | 6,695 | ||||||
Other long-term liabilities | 47,711 | 27,773 | ||||||
Total liabilities | 849,448 | 652,160 | ||||||
Commitments and contingencies (Note 15) | ||||||||
Stockholders’ equity | ||||||||
Preferred Stock; $0.01 par value: 5,000,000 authorized and 0 shares issued and outstanding at December 31, 2019 and 2018, respectively | — | — | ||||||
Common stock; $0.01 par value: 100,000,000 authorized, 32,871,504 and 32,723,972 issued and 30,016,340 and 29,915,611 shares outstanding at December 31, 2019 and 2018, respectively | 329 | 327 | ||||||
Additional paid in capital | 190,230 | 181,815 | ||||||
Retained earnings | 173,371 | 105,212 | ||||||
Treasury stock; at cost: 2,855,164and 2,808,361 shares at December 31, 2019 and 2018, respectively | (106,756 | ) | (104,425 | ) | ||||
Accumulated other comprehensive loss | (7,143 | ) | (431 | ) | ||||
Total stockholders’ equity | 250,031 | 182,498 | ||||||
Total liabilities and stockholders’ equity | $ | 1,099,479 | $ | 834,658 | ||||
See accompanying notes to consolidated financial statements
INSTALLED BUILDING PRODUCTS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(in thousands, except share and per share amounts)
| Years ended December 31, | |||||||||||||||||
| 2021 | 2020 | 2019 | |||||||||||||||
| Net revenue | $ | 1,968,650 | $ | 1,653,225 | $ | 1,511,629 | |||||||||||
| Cost of sales | 1,379,131 | 1,143,251 | 1,076,809 | ||||||||||||||
| Gross profit | 589,519 | 509,974 | 434,820 | ||||||||||||||
| Operating expenses | |||||||||||||||||
| Selling | 93,204 | 81,613 | 75,016 | ||||||||||||||
| Administrative | 271,356 | 237,959 | 214,134 | ||||||||||||||
| Amortization | 37,079 | 28,535 | 24,510 | ||||||||||||||
| Operating income | 187,880 | 161,867 | 121,160 | ||||||||||||||
| Other expense | |||||||||||||||||
| Interest expense, net | 32,842 | 30,291 | 28,104 | ||||||||||||||
| Other (income) expense | (437) | 399 | 451 | ||||||||||||||
| Income before income taxes | 155,475 | 131,177 | 92,605 | ||||||||||||||
| Income tax provision | 36,712 | 33,938 | 24,446 | ||||||||||||||
| Net income | $ | 118,763 | $ | 97,239 | $ | 68,159 | |||||||||||
| Other comprehensive gain (loss), net of tax: | |||||||||||||||||
| Net change on cash flow hedges, net of tax (provision) benefit of $(2,773), $550 and $2,225 for the twelve months ended December 31, 2021, 2020 and 2019, respectively | 8,536 | (1,620) | (6,712) | ||||||||||||||
| Comprehensive income | $ | 127,299 | $ | 95,619 | $ | 61,447 | |||||||||||
| Earnings Per Share: | |||||||||||||||||
| Basic | $ | 4.04 | $ | 3.30 | $ | 2.29 | |||||||||||
| Diluted | $ | 4.01 | $ | 3.27 | $ | 2.28 | |||||||||||
| Weighted average shares outstanding: | |||||||||||||||||
| Basic | 29,367,676 | 29,504,115 | 29,752,644 | ||||||||||||||
| Diluted | 29,628,527 | 29,717,609 | 29,873,106 | ||||||||||||||
| Cash dividends declared per share | $ | 1.20 | $ | — | $ | — | |||||||||||
Years ended December 31, | ||||||||||||
2019 | 2018 | 2017 | ||||||||||
Net revenue | $ | 1,511,629 | $ | 1,336,432 | $ | 1,132,927 | ||||||
Cost of sales | 1,076,809 | 964,841 | 808,901 | |||||||||
Gross profit | 434,820 | 371,591 | 324,026 | |||||||||
Operating expenses | ||||||||||||
Selling | 75,016 | 67,105 | 58,450 | |||||||||
Administrative | 214,134 | 185,850 | 164,453 | |||||||||
Amortization | 24,510 | 25,419 | 26,857 | |||||||||
Operating income | 121,160 | 93,217 | 74,266 | |||||||||
Other expense | ||||||||||||
Interest expense, net | 28,104 | 20,496 | 17,381 | |||||||||
Other | 451 | 535 | 1,065 | |||||||||
Income before income taxes | 92,605 | 72,186 | 55,820 | |||||||||
Income tax provision | 24,446 | 17,438 | 14,680 | |||||||||
Net income | $ | 68,159 | $ | 54,748 | $ | 41,140 | ||||||
Other comprehensive (loss) income, net of tax: | ||||||||||||
Unrealized (loss) gain on cash flow hedge, net of tax benefit (provision) of $ 2,225, $284 and ($206) for the twelve months ended December 31, 2019, 2018 and 2017, respectively | (6,712 | ) | (1,050 | ) | 507 | |||||||
Comprehensive income | $ | 61,447 | $ | 53,698 | $ | 41,647 | ||||||
Basic net income per share | $ | 2.29 | $ | 1.76 | $ | 1.30 | ||||||
Diluted net income per share | $ | 2.28 | $ | 1.75 | $ | 1.30 | ||||||
Weighted average shares outstanding: | ||||||||||||
Basic | 29,752,644 | 31,107,231 | 31,639,283 | |||||||||
Diluted | 29,873,106 | 31,229,558 | 31,756,363 | |||||||||
See accompanying notes to consolidated financial statements
50
INSTALLED BUILDING PRODUCTS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands, except share amounts)
| Common Stock | Additional Paid In Capital | Retained Earnings | Treasury Stock | Accumulated Other Comprehensive Loss | Stockholders’ Equity | ||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | ||||||||||||||||||||||||||||||||||||||||||||
| BALANCE—January 1, 2019 | 32,723,972 | $ | 327 | $ | 181,815 | $ | 105,212 | (2,808,361) | $ | (104,425) | $ | (431) | $ | 182,498 | |||||||||||||||||||||||||||||||||
| Net income | 68,159 | 68,159 | |||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock awards to employees | 139,862 | 2 | (2) | — | |||||||||||||||||||||||||||||||||||||||||||
| Surrender of common stock awards | (46,803) | (2,331) | (2,331) | ||||||||||||||||||||||||||||||||||||||||||||
| Share-based compensation expense | 8,057 | 8,057 | |||||||||||||||||||||||||||||||||||||||||||||
| Share-based compensation issued to directors | 7,670 | 360 | 360 | ||||||||||||||||||||||||||||||||||||||||||||
| Net change in cash flow hedges, net of tax | (6,712) | (6,712) | |||||||||||||||||||||||||||||||||||||||||||||
| BALANCE—January 1, 2020 | 32,871,504 | $ | 329 | $ | 190,230 | $ | 173,371 | (2,855,164) | $ | (106,756) | $ | (7,143) | $ | 250,031 | |||||||||||||||||||||||||||||||||
| Net income | 97,239 | 97,239 | |||||||||||||||||||||||||||||||||||||||||||||
| Cumulative effect of accounting change | (1,190) | (1,190) | |||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock awards to employees | 264,004 | 2 | (2) | — | |||||||||||||||||||||||||||||||||||||||||||
| Surrender of common stock awards | (30,223) | (973) | (973) | ||||||||||||||||||||||||||||||||||||||||||||
| Share-based compensation expense | 9,286 | 9,286�� | |||||||||||||||||||||||||||||||||||||||||||||
| Share-based compensation issued to directors | 6,371 | 333 | 333 | ||||||||||||||||||||||||||||||||||||||||||||
| Common stock repurchase | (633,220) | (33,924) | (33,924) | ||||||||||||||||||||||||||||||||||||||||||||
| Net change in cash flow hedges, net of tax | (1,620) | (1,620) | |||||||||||||||||||||||||||||||||||||||||||||
| BALANCE—January 1, 2021 | 33,141,879 | $ | 331 | $ | 199,847 | $ | 269,420 | (3,518,607) | $ | (141,653) | $ | (8,763) | $ | 319,182 | |||||||||||||||||||||||||||||||||
| Net income | 118,763 | 118,763 | |||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock awards to employees | 125,550 | 2 | (2) | — | |||||||||||||||||||||||||||||||||||||||||||
| Surrender of common stock awards | (46,651) | (5,586) | (5,586) | ||||||||||||||||||||||||||||||||||||||||||||
| Share-based compensation expense | 11,118 | 11,118 | |||||||||||||||||||||||||||||||||||||||||||||
| Share-based compensation issued to directors | 4,230 | 467 | 467 | ||||||||||||||||||||||||||||||||||||||||||||
| Dividends Declared ($1.20 per share) | (35,640) | (35,640) | |||||||||||||||||||||||||||||||||||||||||||||
| Net change in cash flow hedges, net of tax | 8,536 | 8,536 | |||||||||||||||||||||||||||||||||||||||||||||
| BALANCE—December 31, 2021 | 33,271,659 | $ | 333 | $ | 211,430 | $ | 352,543 | (3,565,258) | $ | (147,239) | $ | (227) | $ | 416,840 | |||||||||||||||||||||||||||||||||
Common Stock | Additional Paid In | Retained | Treasury Stock | Accumulated Other Comprehensive | Stockholders’ | |||||||||||||||||||||||||||
Shares | Amount | Capital | Earnings | Shares | Amount | Income (Loss) | Equity | |||||||||||||||||||||||||
BALANCE—January 1, 2017 | 32,135,176 | $ | 321 | $ | 158,581 | $ | 7,294 | (650,402 | ) | $ | (12,219 | ) | $ | — | $ | 153,977 | ||||||||||||||||
Net income | 41,140 | 41,140 | ||||||||||||||||||||||||||||||
Purchase of remaining interest in subsidiary | (1,888 | ) | (1,888 | ) | ||||||||||||||||||||||||||||
Issuance of common stock for acquisition | 282,577 | 3 | 10,856 | 10,859 | ||||||||||||||||||||||||||||
Issuance of common stock awards to employees | 101,241 | 1 | (1 | ) | — | |||||||||||||||||||||||||||
Surrender of common stock awards by employees | (12,386 | ) | (562 | ) | (562 | ) | ||||||||||||||||||||||||||
Share-based compensation expense | 6,195 | 6,195 | ||||||||||||||||||||||||||||||
Share-based compensation issued to directors | 5,940 | 300 | 300 | |||||||||||||||||||||||||||||
Other comprehensive income, net of tax | 507 | 507 | ||||||||||||||||||||||||||||||
BALANCE—January 1, 2018 | 32,524,934 | $ | 325 | $ | 174,043 | $ | 48,434 | (662,788 | ) | $ | (12,781 | ) | $ | 507 | $ | 210,528 | ||||||||||||||||
Net income | 54,748 | 54,748 | ||||||||||||||||||||||||||||||
Cumulative effect of accounting changes, net of tax | 2,030 | 112 | 2,142 | |||||||||||||||||||||||||||||
Issuance of common stock awards to employees | 194,093 | 2 | (2 | ) | — | |||||||||||||||||||||||||||
Surrender of common stock awards by employees | (43,871 | ) | (2,282 | ) | (2,282 | ) | ||||||||||||||||||||||||||
Share-based compensation expense | 7,598 | 7,598 | ||||||||||||||||||||||||||||||
Share-based compensation issued to directors | 4,945 | 176 | 176 | |||||||||||||||||||||||||||||
Common stock repurchase | (2,101,702 | ) | (89,362 | ) | (89,362 | ) | ||||||||||||||||||||||||||
Other comprehensive loss, net of tax | (1,050 | ) | (1,050 | ) | ||||||||||||||||||||||||||||
BALANCE—January 1, 2019 | 32,723,972 | $ | 327 | $ | 181,815 | $ | 105,212 | (2,808,361 | ) | $ | (104,425 | ) | $ | (431 | ) | $ | 182,498 | |||||||||||||||
Net income | 68,159 | 68,159 | ||||||||||||||||||||||||||||||
Issuance of common stock awards to employees | 139,862 | 2 | (2 | ) | — | |||||||||||||||||||||||||||
Surrender of common stock awards by employees | (46,803 | ) | (2,331 | ) | (2,331 | ) | ||||||||||||||||||||||||||
Share-based compensation expense | 8,057 | 8,057 | ||||||||||||||||||||||||||||||
Share-based compensation issued to directors | 7,670 | 360 | 360 | |||||||||||||||||||||||||||||
Other comprehensive loss, net of tax | (6,712 | ) | (6,712 | ) | ||||||||||||||||||||||||||||
BALANCE—December 31, 2019 | 32,871,504 | $ | 329 | $ | 190,230 | $ | 173,371 | (2,855,164 | ) | $ | (106,756 | ) | $ | (7,143 | ) | $ | 250,031 | |||||||||||||||
See accompanying notes to consolidated financial statements
INSTALLED BUILDING PRODUCTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
| Years ended December 31, | |||||||||||||||||
| 2021 | 2020 | 2019 | |||||||||||||||
| Cash flows from operating activities | |||||||||||||||||
| Net income | $ | 118,763 | $ | 97,239 | $ | 68,159 | |||||||||||
| Adjustments to reconcile net income to net cash provided by operating activities | |||||||||||||||||
| Depreciation and amortization of property and equipment | 43,562 | 41,339 | 38,862 | ||||||||||||||
| Amortization of operating lease right-of-use assets | 22,258 | 18,122 | 15,691 | ||||||||||||||
| Amortization of intangibles | 37,079 | 28,535 | 24,510 | ||||||||||||||
| Amortization of deferred financing costs and debt discount | 1,354 | 1,332 | 1,184 | ||||||||||||||
| Provision for credit losses | 2,227 | 4,444 | 4,312 | ||||||||||||||
| Write-off of debt issuance costs | 1,767 | — | 3,725 | ||||||||||||||
| Gain on sale of property and equipment | (1,840) | (786) | (140) | ||||||||||||||
| Noncash stock compensation | 13,752 | 10,826 | 8,727 | ||||||||||||||
| Deferred income taxes | (438) | (8,475) | 5,341 | ||||||||||||||
| Amortization of terminated interest rate swap | 3,223 | 1,326 | — | ||||||||||||||
| Changes in assets and liabilities, excluding effects of acquisitions | |||||||||||||||||
| Accounts receivable | (16,775) | (10,489) | (29,582) | ||||||||||||||
| Inventories | (54,003) | 187 | (10,597) | ||||||||||||||
| Other assets | (19,885) | (870) | (16,959) | ||||||||||||||
| Accounts payable | 26,424 | (203) | 947 | ||||||||||||||
| Income taxes receivable/payable | (4,403) | 4,296 | (3,944) | ||||||||||||||
| Other liabilities | (34,751) | (6,034) | 12,831 | ||||||||||||||
| Net cash provided by operating activities | 138,314 | 180,789 | 123,067 | ||||||||||||||
| Cash flows from investing activities | |||||||||||||||||
| Purchases of investments | — | (776) | (52,795) | ||||||||||||||
| Maturities of short term investments | — | 38,693 | 25,061 | ||||||||||||||
| Purchases of property and equipment | (36,979) | (33,587) | (50,167) | ||||||||||||||
| Acquisitions of businesses, net of cash acquired of $1,707, $0 and $334 in 2021, 2020 and 2019, respectively | (241,308) | (76,446) | (51,706) | ||||||||||||||
| Proceeds from sale of property and equipment | 2,694 | 1,187 | 761 | ||||||||||||||
| Other | (2,846) | (6,865) | (2,887) | ||||||||||||||
| Net cash used in investing activities | (278,439) | (77,794) | (131,733) | ||||||||||||||
| Cash flows from financing activities | |||||||||||||||||
| Proceeds from senior notes (Note 8) | — | — | 300,000 | ||||||||||||||
| Proceeds from term loan (Note 8) | 500,000 | — | — | ||||||||||||||
| Payments on term loan (Note 8) | (200,000) | — | (195,750) | ||||||||||||||
| Proceeds from vehicle and equipment notes payable | 27,834 | 21,290 | 33,090 | ||||||||||||||
| Debt issuance costs | (7,520) | (157) | (6,691) | ||||||||||||||
| Principal payments on long-term debt | (26,301) | (26,685) | (21,316) | ||||||||||||||
| Principal payments on finance lease obligations | (2,125) | (2,632) | (4,157) | ||||||||||||||
| Acquisition-related obligations | (8,918) | (6,283) | (6,732) | ||||||||||||||
| Dividends paid | (35,294) | — | — | ||||||||||||||
| Repurchase of common stock | — | (33,924) | — | ||||||||||||||
| Surrender of common stock awards by employees | (5,586) | (973) | (2,331) | ||||||||||||||
| Net cash provided by (used in) financing activities | 242,090 | (49,364) | 96,113 | ||||||||||||||
| Net change in cash and cash equivalents | 101,965 | 53,631 | 87,447 | ||||||||||||||
| Cash and cash equivalents at beginning of period | 231,520 | 177,889 | 90,442 | ||||||||||||||
| Cash and cash equivalents at end of period | $ | 333,485 | $ | 231,520 | $ | 177,889 | |||||||||||
| Supplemental disclosures of cash flow information | |||||||||||||||||
| Net cash paid during the period for: | |||||||||||||||||
| Interest | $ | 25,976 | $ | 26,324 | $ | 20,943 | |||||||||||
| Income taxes, net of refunds | 39,241 | 37,072 | 22,633 | ||||||||||||||
| Supplemental disclosure of noncash activities | |||||||||||||||||
| Right-of-use assets obtained in exchange for operating lease obligations | 38,084 | 26,001 | 18,907 | ||||||||||||||
| Release of indemnification of acquisition-related debt | 2,036 | — | — | ||||||||||||||
| Termination of operating lease obligations and right-of-use assets | — | — | (2,946) | ||||||||||||||
| Property and equipment obtained in exchange for finance lease obligations | 2,735 | 1,000 | 2,809 | ||||||||||||||
| Seller obligations in connection with acquisition of businesses | 29,169 | 14,086 | 7,543 | ||||||||||||||
| Unpaid purchases of property and equipment included in accounts payable | 441 | 1,013 | 1,903 | ||||||||||||||
Years ended December 31, | ||||||||||||
2019 | 2018 | 2017 | ||||||||||
Cash flows from operating activities | ||||||||||||
Net income | $ | 68,159 | $ | 54,748 | $ | 41,140 | ||||||
Adjustments to reconcile net income to net cash provided by operating activities | ||||||||||||
Depreciation and amortization of property and equipment | 38,862 | 33,306 | 28,285 | |||||||||
Amortization of operating lease right-of-use assets | 15,691 | — | — | |||||||||
Amortization of intangibles | 24,510 | 25,419 | 26,857 | |||||||||
Amortization of deferred financing costs and debt discount | 1,184 | 1,164 | 1,093 | |||||||||
Provision for doubtful accounts | 4,312 | 2,630 | 2,834 | |||||||||
Write-off of debt issuance costs | 3,725 | 1,164 | 2,113 | |||||||||
Gain on sale of property and equipment | (140 | ) | (1,098 | ) | (492 | ) | ||||||
Noncash stock compensation | 8,727 | 7,839 | 6,592 | |||||||||
Deferred income taxes | 5,341 | 470 | (6,160 | ) | ||||||||
Changes in assets and liabilities, excluding effects of acquisitions | ||||||||||||
Accounts receivable | (29,582 | ) | (30,166 | ) | (19,955 | ) | ||||||
Inventories | (10,597 | ) | (15,717 | ) | (3,667 | ) | ||||||
Other assets | (16,959 | ) | (4,552 | ) | (4,602 | ) | ||||||
Accounts payable | 947 | 8,146 | 6,303 | |||||||||
Income taxes receivable/payable | (3,944 | ) | 10,273 | (18,605 | ) | |||||||
Other liabilities | 12,831 | 3,007 | 7,036 | |||||||||
Net cash provided by operating activities | 123,067 | 96,633 | 68,772 | |||||||||
Cash flows from investing activities | ||||||||||||
Purchases of investments | (52,795 | ) | (22,818 | ) | (30,194 | ) | ||||||
Maturities of short term investments | 25,061 | 42,782 | — | |||||||||
Purchases of property and equipment | (50,167 | ) | (35,232 | ) | (31,668 | ) | ||||||
Acquisitions of businesses, net of cash acquired of $334, $0 and $247 in 2019, 2018 and 2017, respectively | (51,706 | ) | (57,740 | ) | (137,120 | ) | ||||||
Proceeds from sale of property and equipment | 761 | 1,958 | 959 | |||||||||
Other | (2,887 | ) | (3,019 | ) | (2,420 | ) | ||||||
Net cash used in investing activities | (131,733 | ) | (74,069 | ) | (200,443 | ) | ||||||
Cash flows from financing activities | ||||||||||||
Proceeds from senior notes (Note 7) | 300,000 | — | — | |||||||||
Proceeds from term loan (Note 7) | — | 100,000 | 300,000 | |||||||||
Payments on term loan (Note 7) | (195,750 | ) | (2,750 | ) | (97,750 | ) | ||||||
Proceeds from delayed draw term loan | — | — | 112,500 | |||||||||
Payments on delayed draw term loan | — | — | (125,000 | ) | ||||||||
Proceeds from vehicle and equipment notes payable | 33,090 | 25,443 | 22,460 | |||||||||
Debt issuance costs | (6,691 | ) | (1,992 | ) | (8,281 | ) | ||||||
Principal payments on long-term debt | (21,316 | ) | (14,130 | ) | (10,002 | ) | ||||||
Principal payments on finance lease obligations | (4,157 | ) | (5,604 | ) | (7,314 | ) | ||||||
Acquisition-related obligations | (6,732 | ) | (3,954 | ) | (4,464 | ) | ||||||
Repurchase of common stock | — | (89,363 | ) | — | ||||||||
Surrender of common stock awards by employees | (2,331 | ) | (2,282 | ) | (562 | ) | ||||||
Purchase of remaining interest in subsidiary | — | — | (1,888 | ) | ||||||||
Net cash provided by financing activities | 96,113 | 5,368 | 179,699 | |||||||||
Net change in cash and cash equivalents | 87,447 | 27,932 | 48,028 | |||||||||
Cash and cash equivalents at beginning of period | 90,442 | 62,510 | 14,482 | |||||||||
Cash and cash equivalents at end of period | $ | 177,889 | $ | 90,442 | $ | 62,510 | ||||||
Supplemental disclosures of cash flow information | ||||||||||||
Net cash paid during the period for: | ||||||||||||
Interest | $ | 20,943 | $ | 20,075 | $ | 13,758 | ||||||
Income taxes, net of refunds | 22,633 | 4,950 | 38,887 | |||||||||
Supplemental disclosure of noncash activities | ||||||||||||
Common stock issued for acquisition of business | — | — | 10,859 | |||||||||
Right-of-use assets obtained in exchange for operating lease obligations | 18,907 | — | — | |||||||||
Termination of operating lease obligations and right-of-use assets | (2,946 | ) | — | — | ||||||||
Property and equipment obtained in exchange for finance lease obligations | 2,809 | 2,208 | 4,440 | |||||||||
Seller obligations in connection with acquisition of businesses | 7,543 | 7,540 | 5,128 | |||||||||
Unpaid purchases of property and equipment included in accounts payable | 1,903 | 1,773 | 2,003 | |||||||||
See accompanying notes to consolidated financial statements
INSTALLED BUILDING PRODUCTS,,INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – ORGANIZATONORGANIZATION
Installed Building Products (“IBP”), a Delaware corporation formed on October 28, 2011,180210 locations and its corporate office is located in Columbus, Ohio.
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 We have 1
operating segment and a single reportable segment. Substantially allThe vast majority 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 pandemic has caused significant volatility, uncertainty and economic disruption. Many public health organizations and international, federal, state and local governments implemented measures to combat the spread of COVID-19 at various times since the beginning of the pandemic with some of these restrictions still in place as of the date of filing of this Annual Report on Form 10-K ("Form 10-K"). Some of these measures included quarantines, vaccine and/or masking requirements, “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 significantly impacted our business during the year ended December 31, 2021. However, COVID-19 has caused disruptions in the building products supply chain, impacting our ability to purchase certain materials through our typical channels.
NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Principles of Consolidation
We prepare our consolidated financial statements in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The accompanying consolidated financial statements include all of our wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated.
Use of Estimates
Preparation of the consolidated financial statements in conformity with U.S. GAAP requires management to make estimates,, judgements and assumptions that affect the reported amounts in the consolidated financial statements and accompanying notes.Management believes the accounting estimates are appropriate and reasonably determined; however, due to the inherent uncertainties in making these estimates, actual amounts could differ from such estimates.
Cash and Cash Equivalents
We consider all highly-liquid investments purchased with original term to maturity of three months or less to be cash equivalents. We had $99.2 million and $69.8 million of cash equivalents as of December 31, 2019 and 2018, respectively. Substantially all cash is held in banks providing FDIC coverage of $0.25 million per depositor.
Revenue and Cost Recognition
53
INSTALLED BUILDING PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For contracts that were not completed as of January 1, 2018. Results for reporting periods beginning after January 1, 2018 are presented under Topic 606, while prior period amounts are not adjustedcomplete 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 continueservices 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 reportedsubject to modification to account for changes in accordance withcontract 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 historic accounting under Topic 605. See Note 3, Revenue Recognition,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 detailedperformance obligation to which it relates, is recognized as an adjustment to revenue recognition policy.
(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. See "Accounts Receivable" below for further discussion of our retainage receivables.
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 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.
Derivative Instruments and Hedging Activities
We record all derivatives on the balance sheet at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether we have elected to designate a derivative in a hedging relationship and apply hedge accounting and whether the hedging relationship has satisfied the criteria
necessary to apply hedge accounting. Derivatives designated and qualifying as a hedge of the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. Hedge accounting generally provides for the matching of the timing of gain or loss recognition on the hedging instrument with the recognition of the earnings effect of the hedged forecasted transactions in a cash flow hedge. We may enter into derivative contracts that are intended to economically hedge certain of our risks, even though hedge accounting does not apply or we elect not to apply hedge accounting. See Note 10,11, Derivatives and Hedging Activities, for additional information on our accounting policy for derivative instruments and hedging activities.
Business Combinations
The purchase price for business combinations is allocated to the estimated fair values of acquired tangible and intangible assets, including goodwill and assumed liabilities, where applicable. Additionally, we recognize customer relationships, trademarks and trade names, backlog andprimarily using either the income approach andor the market approach using current industry information which involves significant unobservable inputs (Level 3 inputs). These inputs include projected sales, margin and tax rate.
non-competition
agreements as identifiable intangible assets. These assets are recorded at fair value as of the transaction date. The fair value of these intangibles is determined 54
INSTALLED BUILDING PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At times, the total purchase price for a business combination could be less than the estimated fair values of acquired tangible and intangible assets. In these cases, we record a gain on bargain purchase within other expenses in the Consolidated Statements of Operations and Comprehensive Income rather than goodwill in accordance with U.S. GAAP.