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IBP Installed Building Products

Filed: 1 Nov 19, 11:38am
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM
10-Q
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
For the quarterly period ended September 30, 2019
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
For the Transition Period From
                
To
                
Commission File Number: 001-36307
 
Installed Building Products, Inc.
(Exact name of registrant as specified in its charter)
 
   
Delaware
 
45-3707650
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
   
495 South High Street, Suite 50
Columbus, Ohio
 
43215
(Address of principal executive offices)
 
(Zip Code)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(614)
221-3399
(Registrant’s telephone number, including area code)
 
Securities registered pursuant to Section 12(b) of the Act:
     
Title of each class
 
Trading
Symbol(s)
 
Name of each exchange
on which registered
Common stock
 
IBP
 
New York Stock Exchange
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  
    No  
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation
S-T
(Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
 
    Yes  
    No  
Indicate by a check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated
filer, smaller reporting company, or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule
12b-2
of the Exchange Act.
       
Large accelerated filer
 
 
Accelerated filer
 
       
Non-accelerated
filer
 
 
Smaller reporting company
 
       
  
Emerging growth company
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  
Indicate by check mark whether the registrant is a shell company (as defined in Rule
12b
2
of the Exchange Act).    Yes  
    No  
On October 25, 2019, the registrant had
30,016,749
 shares of common stock, par value $0.01 per share,
outstanding.
 
   
 
 
 
 

 
i
 
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements
INSTALLED BUILDING PRODUCTS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(in thousands, except share and per share amounts)
         
 
September 30,
  
December 31,
 
 
2019
  
2018
 
ASSETS
      
Current assets
      
Cash and cash equivalents
 $
234,950
  $
90,442
 
Investments
  
4,980
   
10,060
 
Accounts receivable (less allowance for doubtful accounts of $6,712 and $5,085 at September 30, 2019 and December 31, 2018, respectively)
  
242,065
   
214,121
 
Inventories
  
63,547
   
61,162
 
Other current assets
  
32,955
   
35,760
 
         
Total current assets
  
578,497
   
411,545
 
Property and equipment, net
  
102,148
   
90,117
 
Operating lease
right-of-use
assets
  
42,553
   
—  
 
Goodwill
  
184,574
   
173,049
 
Intangibles, net
  
144,321
   
149,790
 
Other
non-current
assets
  
11,589
   
10,157
 
         
Total assets
 $
 
 
1,063,682
  $
834,658
 
         
LIABILITIES AND STOCKHOLDERS’ EQUITY
      
Current liabilities
      
Current maturities of long-term debt
 $
22,734
  $
22,642
 
Current maturities of operating lease obligations
  
15,032
   
—  
 
Current maturities of finance lease obligations
  
3,133
   
4,806
 
Accounts payable
  
100,181
   
96,949
 
Accrued compensation
  
32,793
   
27,923
 
Other current liabilities
  
41,576
   
29,366
 
         
Total current liabilitie
s
  
215,449
   
181,686
 
Long-term debt
  
542,510
   
432,182
 
Operating lease obligations
  
27,129
   
—  
 
Finance lease obligations
  
3,682
   
3,824
 
Deferred income taxes
  
3,833
   
6,695
 
Other long-term liabilities
  
43,565
   
27,773
 
         
Total liabilities
  
836,168
   
652,160
 
Commitments and contingencies
        
Stockholders’ equity
      
Preferred Stock; $0.01 par value: 5,000,000 authorized and 0 shares issued and outstanding at September 30, 2019 and December 31, 2018, respectively
  
—  
   
—  
 
Common stock; $0.01 par value: 100,000,000 authorized, 32,871,504 and 32,723,972 issued and 30,016,749 and 29,915,611 shares outstanding at September 30, 2019 and December 31, 2018, respectively
  
329
   
327
 
Additional paid in capital
  
188,216
   
181,815
 
Retained earnings
  
154,177
   
105,212
 
Treasury stock; at cost: 2,854,755 and 2,808,361 shares at September 30, 2019 and December 31, 2018, respectively
  
(106,756
)  
(104,425
)
Accumulated other comprehensive loss
  
(8,452
)  
(431
)
         
Total stockholders’ equity
  
227,514
   
182,498
 
         
Total liabilities and stockholders’ equity
 $
1,063,682
  $
834,658
 
         
 
 
 
 
 
See accompanying notes to consolidated financial statements
1
INSTALLED BUILDING PRODUCTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (UNAUDITED)
(in thousands, except share and per share amounts)
                 
 
Three months ended
September 30,
  
Nine months ended
September 30,
 
 
2019
  
2018
  
2019
  
2018
 
Net revenue
 $
396,449
  $
348,999
  $
1,110,398
  $
983,311
 
Cost of sales
  
278,362
   
251,665
   
795,616
   
710,358
 
                 
Gross profit
  
118,087
   
97,334
   
314,782
   
272,953
 
Operating expenses
            
Selling
  
19,398
   
17,434
   
54,431
   
49,300
 
Administrative
  
55,098
   
48,337
   
156,022
   
137,511
 
Amortization
  
6,156
   
5,228
   
18,065
   
19,678
 
                 
Operating income
  
37,435
   
26,335
   
86,264
   
66,464
 
Other expense
            
Interest expense, net
  
8,458
   
5,282
   
19,783
   
15,013
 
Other
  
155
   
132
   
381
   
417
 
                 
Income before income taxes
  
28,822
   
20,921
   
66,100
   
51,034
 
Income tax provision
  
7,610
   
5,358
   
17,135
   
12,762
 
                 
Net income
 $
21,212
  $
15,563
  $
48,965
  $
38,272
 
                 
Other comprehensive (loss) income, net of tax:
            
Unrealized (loss) gain on cash flow hedge, net of tax benefit (provision) of $575 and ($278) for the three months ended September 30, 2019 and 2018, respectively, and $2,676 and ($822) for the nine months ended September 30, 2019 and 2018, respectively
  
(1,726
)  
818
   
(8,021
)  
2,453
 
                 
Comprehensive income
 $
19,486
  $
16,381
  $
40,944
  $
40,725
 
                 
Basic net income per share
 $
0.71
  $
0.50
  $
1.65
  $
1.22
 
                 
Diluted net income per share
 $
0.71
  $
0.50
  $
1.64
  $
1.21
 
                 
Weighted average shares outstanding:
            
Basic
  
29,785,548
   
31,229,086
   
29,741,555
   
31,373,871
 
Diluted
  
29,877,056
   
31,312,756
   
29,839,873
   
31,512,104
 
 
 
 
 
 
 
See accompanying notes to consolidated financial statements
2
INSTALLED BUILDING PRODUCTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (UNAUDITED)
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2018 AND SEPTEMBER 30, 2019
(in thousands, except share amounts)
                                 
   
Additional
        
Accumulated Other
   
 
Common Stock
  
Paid In
  
Retained
  
Treasury Stock
  
Comprehensive
  
Stockholders’
 
 
Shares
  
Amount
  
Capital
  
Earnings
  
Shares
  
Amount
  
Income
  
Equity
 
BALANCE - July 1, 2018
  
32,723,972
  $
327
  $
 
 
178,266
  $
 
 
73,919
   
(1,117,623
) $
 
 
(39,703
) $
2,254
  $
215,063
 
                                 
Net income
           
15,563
            
15,563
 
Cumulative effect of accounting changes,
net of tax
           
(746
)           
(746
)
Issuance of common stock awards to
employees
                       
—  
 
Surrender of common stock awards by
employees
              
(681
)        
—  
 
Share-based compensation expense
        
1,765
               
1,765
 
Share-based compensation issued to
directors
        
75
               
75
 
Common stock repurchase
              
(380,694
)  
(18,187
)     
(18,187
)
Other comprehensive income, net of tax
                    
818
   
818
 
                                 
BALANCE - September 30, 2018
  
32,723,972
  $
327
  $
180,106
  $
88,736
   
(1,498,998
) $
(57,890
) $
3,072
  $
214,351
 
                                 
                      
   
Additional
        
Accumulated Other
   
 
Common Stock
  
Paid In
  
Retained
  
Treasury Stock
  
Comprehensive
  
Stockholders’
 
 
Shares
  
Amount
  
Capital
  
Earnings
  
Shares
  
Amount
  
Loss
  
Equity
 
BALANCE - July 1, 2019
  
32,871,504
  $
329
  $
186,182
  $
132,965
   
(2,854,496
) $
(106,748
) $
(6,726
) $
206,002
 
                                 
Net income
           
21,212
            
21,212
 
Issuance of common stock awards to
employees
                       
—  
 
Surrender of common stock awards by
employees
              
(259
)  
(8
)     
(8
)
Share-based compensation expense
        
1,933
               
1,933
 
Share-based compensation issued to
directors
        
101
               
101
 
Other comprehensive loss, net of tax
                    
(1,726
)  
(1,726
)
                                 
BALANCE - September 30, 2019
  
32,871,504
  $
329
  $
188,216
  $
154,177
   
(2,854,755
) $
(106,756
) $
(8,452
) $
227,514
 
                                 
 
 
 
 
 
 
 
 
 
 
See accompanying notes to consolidated financial statements
3

INSTALLED BUILDING PRODUCTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2018 AND SEPTEMBER 30, 2019
(in thousands, except share amounts)
                                 
   
Additional
        
Accumulated Other
   
 
Common Stock
  
Paid In
  
Retained
  
Treasury Stock
  
Comprehensive
  
Stockholders’
 
 
Shares
  
Amount
  
Capital
  
Earnings
  
Shares
  
Amount
  
Income
  
Equity
 
BALANCE - January 1, 2018
  
32,524,934
  $
325
  $
 
 
174,043
  $
48,434
   
(662,788
) $
(12,781
) $
507
  $
210,528
 
                                 
Net income
           
38,272
            
38,272
 
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
              
(42,799
)  
(2,282
)     
(2,282
)
Share-based compensation expense
        
5,965
               
5,965
 
Share-based compensation issued to directors
  
4,945
      
100
               
100
 
Common stock repurchase
              
(793,411
)  
(42,827
)     
(42,827
)
Other comprehensive income, net of tax
                    
2,453
   
2,453
 
                                 
BALANCE - September 30, 2018
  
32,723,972
  $
327
  $
180,106
  $
88,736
   
(1,498,998
) $
(57,890
) $
3,072
  $
214,351
 
                                 
                      
   
Additional
        
Accumulated Other
   
 
Common Stock
  
Paid In
  
Retained
  
Treasury Stock
  
Comprehensive
  
Stockholders’
 
 
Shares
  
Amount
  
Capital
  
Earnings
  
Shares
  
Amount
  
Loss
  
Equity
 
BALANCE - January 1, 2019
  
32,723,972
  $
327
  $
181,815
  $
105,212
   
(2,808,361
) $
(104,425
) $
(431
) $
182,498
 
                                 
Net income
           
48,965
            
48,965
 
Issuance of common stock awards to employees
  
139,862
   
2
   
(2
)              
—  
 
Surrender of common stock awards by employees
              
(46,394
)  
(2,331
)     
(2,331
)
Share-based compensation expense
        
6,144
               
6,144
 
Share-based compensation issued to directors
  
7,670
      
259
               
259
 
Other comprehensive loss, net of tax
                    
(8,021
)  
(8,021
)
                                 
BALANCE - September 30, 2019
  
32,871,504
  $
329
  $
188,216
  $
154,177
   
(2,854,755
) $
(106,756
) $
(8,452
) $
227,514
 
                                 
 
 
 
 
 
 
 
 
 
 
See accompanying notes to consolidated financial statements
4

INSTALLED BUILDING PRODUCTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)
         
 
Nine months ended September 30,
 
 
2019
  
2018
 
Cash flows from operating activities
      
Net income
 $
48,965
  $
 
 
38,272
 
Adjustments to reconcile net income to net cash provided by operating activities
      
Depreciation and amortization of property and equipment
  
28,575
   
24,567
 
Amortization of operating lease
right-of-use
assets
  
11,597
   
—  
 
Amortization of intangibles
  
18,065
   
19,678
 
Amortization of deferred financing costs and debt discount
  
845
   
883
 
Provision for doubtful accounts
  
3,173
   
2,219
 
Write-off
of debt issuance costs
  
2,774
   
1,164
 
Gain on sale of property and equipment
  
(69
)  
(551
)
Noncash stock compensation
  
6,442
   
6,089
 
Changes in assets and liabilities, excluding effects of acquisitions
      
Accounts receivable
  
(29,144
)  
(35,953
)
Inventories
  
(852
)  
(6,799
)
Other assets
  
(4,845
)  
(801
)
Accounts payable
  
2,535
   
7,523
 
Income taxes receivable/payable
  
13,487
   
10,542
 
Other liabilities
  
4,969
   
2,016
 
         
Net cash provided by operating activities
  
106,517
   
68,849
 
         
Cash flows from investing activities
      
Purchases of investments
  
(17,352
)  
(22,818
)
Maturities of short term investments
  
22,560
   
37,500
 
Purchases of property and equipment
  
(37,267
)  
(27,051
)
Acquisitions of businesses
  
(24,740
)  
(34,682
)
Proceeds from sale of property and equipment
  
563
   
1,106
 
Other
  
(1,795
)  
(1,590
)
         
Net cash used in investing activities
  
(58,031
)  
(47,535
)
         
Cash flows from financing activities
      
Proceeds from senior notes (Note 6)
  
300,000
   
—  
 
Proceeds from term loan (Note 6)
  
—  
   
100,000
 
Payments on term loan (Note 6)
  
(195,750
)  
(750
)
Proceeds from vehicle and equipment notes payable
  
23,767
   
20,657
 
Debt issuance costs
  
(5,191
)  
(1,992
)
Principal payments on long-term debt
  
(15,278
)  
(10,324
)
Principal payments on finance lease obligations
  
(3,398
)  
(4,316
)
Acquisition-related obligations
  
(5,797
)  
(2,901
)
Repurchase of common stock
  
—  
   
(42,827
)
Surrender of common stock awards by employees
  
(2,331
)  
(2,282
)
         
Net cash provided by financing activities
  
96,022
   
55,265
 
         
Net change in cash and cash equivalents
  
144,508
   
76,579
 
Cash and cash equivalents at beginning of period
  
90,442
   
62,510
 
         
Cash and cash equivalents at end of period
 $
234,950
  $
139,089
 
         
Supplemental disclosures of cash flow information
      
Net cash paid during the period for:
      
Interest
 $
17,746
  $
14,110
 
Income taxes, net of refunds
  
3,790
   
1,902
 
Supplemental disclosure of noncash activities
      
Right-of-use
assets obtained in exchange for operating lease obligations
  
11,593
   
—  
 
Termination of operating lease obligations and
right-of-use
assets
  
(2,814
)  
—  
 
Property and equipment obtained in exchange for finance lease obligations
  
2,175
   
1,034
 
Seller obligations in connection with acquisition of businesses
  
4,322
   
5,420
 
Unpaid purchases of property and equipment included in accounts payable
  
1,527
   
615
 
 
 
 
 
 
 
 
 
 
 
 
See accompanying notes to consolidated financial statements
5
 

INSTALLED BUILDING PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1 - ORGANIZATION
Installed Building Products (“IBP”), a Delaware corporation formed on October 28, 2011, and its wholly-owned subsidiaries (collectively referred to as the “Company,” and “we,” “us” and “our”) primarily install insulation, waterproofing, fire-stopping, fireproofing, garage doors, rain gutters, window blinds, shower doors, closet shelving and mirrors and other products for residential and commercial builders located in the continental United States. The Company operates in over 175 locations and its corporate office is located in Columbus, Ohio.
We have 1 operating segment and a single reportable segment. We offer our portfolio of services for new and existing single-family and multi-family residential and commercial building projects 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.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Principles of Consolidation
The accompanying consolidated financial statements include all of our wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated.
The information furnished in the Condensed Consolidated Financial Statements includes normal recurring adjustments and reflects all adjustments which are, in the opinion of management, necessary for a fair presentation of the results of operations and statements of financial position for the interim periods presented. Certain information and footnote disclosures normally included in the consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and the rules and regulations of the Securities and Exchange Commission (the “SEC”) have been omitted pursuant to such rules and regulations. We believe that the disclosures are adequate to prevent the information presented from being misleading when read in conjunction with our audited consolidated financial statements and the notes thereto included in Part II, Item 8, Financial Statements and Supplementary Data, of our Annual Report on Form
10-K
for the fiscal year ended December 31, 2018 (the “2018 Form
10-K”),
as filed with the SEC on February 28, 2019. The December 31, 2018 Condensed Consolidated Balance Sheet data herein was derived from the audited consolidated financial statements but does not include all disclosures required by U.S. GAAP.
Our interim operating results for the three and nine months ended September 30, 2019 are not necessarily indicative of the results to be expected in future operating quarters.
See Item 1A, Risk Factors, in our 2018 Form
10-K
for additional information regarding risk factors that may impact our results.
Note 2 to the audited consolidated financial statements in our 2018 Form
10-K
describes the significant accounting policies and estimates used in preparation of the audited consolidated financial statements. There have been no changes to our significant accounting policies during the three or nine months ended September 30, 2019, except for the manner in which we account for leases as described in Note 7, Leases.
 
 
 
6

INSTALLED BUILDING PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Recently Adopted Accounting Pronouncements
   
Standard
 
Adoption
ASU
2016-02,
Leases
(Topic 842)
 
This Accounting Standards Update (“ASU”) requires substantially all leases, with the exception of leases with a term of one year or less, to be recorded on the balance sheet as a lease liability measured as the present value of the future lease payments with a corresponding
right-of-use
asset. This ASU also requires disclosures designed to give financial statement users information on the amount, timing and uncertainty of cash flows. See Note 7, Leases, for further information regarding our lease accounting policies.
 
 
 
 
 
 
 
 
Recently Issued Accounting Pronouncements Not Yet Adopted
We are currently evaluating the impact of certain ASU’s on our Condensed Consolidated Financial Statements or Notes to Consolidated Financial Statements, which are described below:
       
Standard
 
Description
 
Effective Date
 
Effect on the financial statements
 
or
other significant matters
ASU
2016-13,
Financial Instruments-Credit Losses (Topic 326)
 
This pronouncement and subsequently-issued amendments change the accounting for credit losses on
available-for-sale
debt securities and purchased financial assets with credit deterioration. In addition, these amendments require the measurement of all expected credit losses for financial assets, including trade accounts receivable, held at the reporting date based on historical experience, current conditions and reasonable and supportable forecasts.
 
Annual periods beginning after December 15, 2019, including interim periods therein. Early adoption is permitted.
 
Upon adoption of this pronouncement, we expect the accounts receivable balance and the contract assets balance included in other current assets on our Condensed Consolidated Balance Sheets to be affected, with an offsetting amount recorded to retained earnings in the period of adoption. We are currently assessing the quantitative impact the adoption will have on our financial statements.
 
 
 
 
 
 
 
 
7

INSTALLED BUILDING PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
       
ASU
2017-04,
Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment
 
To address concerns over the cost and complexity of the
two-step
goodwill impairment test, this pronouncement removes the second step of the goodwill impairment test. Going forward, an entity will apply a
one-step
quantitative test and record the amount of goodwill impairment as the excess of a reporting unit’s carrying amount over its fair value, not to exceed the total amount of goodwill allocated to the reporting unit.
 
Annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2019, including interim periods therein. Early adoption is permitted.
 
We anticipate the adoption of this ASU will not have a material impact on our consolidated financial statements or disclosures.
       
ASU
2018-13,
Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement
 
This pronouncement amends Topic 820 to eliminate, add and modify certain disclosure requirements for fair value measurements.
 
Annual periods beginning after December 15, 2019, including interim periods therein. Early adoption is permitted.
 
We are currently evaluating the provisions of this ASU and the impact it will have on our disclosures.
 
 
 
 
 
 
 
 
NOTE 3 - REVENUE RECOGNITION
Our revenues are derived primarily through contracts with customers whereby we install insulation and other complementary building products and are recognized when control of the promised goods or services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services. We account for a contract when it has approval and commitment from both parties, the rights of the parties are identified, payment terms are identified, the contract has commercial substance and collectability of consideration is probable. We recognize revenue using the
percentage-of-completion
method of accounting, utilizing a
cost-to-cost
input approach as we believe this represents the best measure of when control of goods and services are transferred to the customer. An insignificant portion of our sales, primarily retail sales, is accounted for on a
point-in-time
basis when the sale occurs, adjusted accordingly for any return provisions. We do offer assurance-type warranties on certain of our installed products and services that do not represent a separate performance obligation and, as such, do not impact the timing or extent of revenue recognition.
8

INSTALLED BUILDING PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
When the
percentage-of-completion
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 (the
cost-to-cost
approach). Under the
cost-to-cost
approach, the use of estimated costs to complete each contract is a significant variable in the process of determining recognized revenue, requires judgment and can change throughout the duration of a contract due to contract modifications and other factors impacting job completion. The costs of earned revenue include all direct material and labor costs and those indirect costs related to contract performance, such as indirect labor, supplies, tools and repairs. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined.
Our long-term contracts can be subject to modification to account for changes in contract specifications and requirements. We consider contract modifications to exist when the modification either creates new, or changes the existing, enforceable rights and obligations. Most of our contract modifications are for goods or services that are not distinct from the existing contract due to the significant integration service provided in the context of the contract and are accounted for as if they were part of that existing contract. The effect of a contract modification on the transaction price and our measure of progress for the performance obligation to which it relates, is recognized as an adjustment to revenue (either as an increase in or a reduction of revenue) on a cumulative
catch-up
basis.
Sales 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.
We disaggregate our revenue from contracts with customers by end market and product, as we believe it best depicts how the nature, amount, timing and uncertainty of our revenue and cash flows are affected by economic factors. The following tables present our revenues disaggregated by end market and product (in thousands):
 
Three months ended September 30,
  
Nine months ended September 30,
 
 
2019
  
2018
  
2019
  
2018
 
Residential new construction
 $
 
 
297,003
   
75
% $
 
 
268,254
   
77
% $
840,806
   
76
% $
 
 
755,800
   
77
%
Repair and remodel
  
25,029
   
6
%  
23,107
   
7
%  
71,254
   
6
%  
65,453
   
7
%
Commercial
  
74,417
   
19
%  
57,638
   
16
%  
198,338
   
18
%  
162,058
   
16
%
                                 
Net revenues
 $
396,449
   
100
% $
348,999
   
100
% $
 
 
1,110,398
   
100
% $
983,311
   
100
%
                                 
 
Three months ended September 30,
  
Nine months ended September 30,
 
 
2019
  
2018
  
2019
  
2018
 
Insulation
 $
 
253,311
   
64
% $
225,503
   
65
% $
710,005
   
64
% $
 
 
646,270
   
66
%
Waterproofing
  
32,781
   
8
%  
25,980
   
7
%  
84,024
   
8
%  
73,477
   
7
%
Shower doors, shelving and mirrors
  
27,011
   
7
%  
23,190
   
7
%  
77,828
   
7
%  
66,222
   
7
%
Garage doors
  
22,336
   
6
%  
21,781
   
6
%  
65,790
   
6
%  
56,574
   
6
%
Rain gutters
  
13,366
   
3
%  
12,163
   
4
%  
37,561
   
3
%  
31,429
   
3
%
Window blinds
  
10,615
   
3
%  
7,811
   
2
%  
30,780
   
3
%  
21,196
   
2
%
Other building products
  
37,029
   
9
%  
32,571
   
9
%  
104,410
   
9
%  
88,143
   
9
%
                                 
Net revenues
 $
 
 
396,449
   
100
% $
 
 
348,999
   
100
% $
 
 
1,110,398
   
100
% $
983,311
   
100
%
                                 
9

INSTALLED BUILDING PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Contract Assets and Liabilities
Our contract assets consist of unbilled amounts typically resulting from sales under contracts when the
cost-to-cost
method of revenue recognition is utilized and revenue recognized, based on costs incurred, exceeds the amount billed to the customer. Our contract assets are recorded in other current assets in our Condensed Consolidated Balance Sheets. Our contract liabilities consist of customer deposits and billings in excess of revenue recognized, based on costs incurred and is included in other current liabilities in our Consolidated Balance Sheets.
Contract assets and liabilities related to our uncompleted contracts and customer deposits were as follows (in thousands):
 
September 30,
  
December 31,
 
 
2019
  
2018
 
Contract assets
 $
22,278
  $
15,092
 
Contract liabilities
  
(8,729
)  
(7,468
)
Uncompleted contracts were as follows (in thousands):
 
September 30,
  
December 31,
 
 
2019
  
2018
 
Costs incurred on uncompleted contracts
 $
120,905
  $
114,826
 
Estimated earnings
  
64,436
   
58,952
 
         
Total
  
185,341
   
173,778
 
Less: Billings to date
  
168,587
   
163,112
 
         
Net under billings
 $
16,754
  $
10,666
 
         
Net under billings were as follows (in thousands):
 
September 30,
  
December 31,
 
 
2019
  
2018
 
Costs and estimated earnings in excess of billings on uncompleted contracts (contract assets)
 $
22,278
  $
15,092
 
Billings in excess of costs and estimated earnings on uncompleted contracts (contract liabilities)
  
(5,524
)  
(4,426
)
         
Net under billings
 $
16,754
  $
10,666
 
         
The difference between contract assets and contract liabilities as of September 30, 2019 compared to December 31, 2018 is primarily the result of timing ​​​​​​​differences between our performance of obligations under contracts and customer payments. During the nine months ended September 30, 2019, we
recognized $7.1 million
of revenue that was included in the contract liability balance at December 31, 2018. We did
0
​​​​​​​t recognize any such revenue during the three months ended September 30, 2019. During the three and nine months ended September ​​​​​​​30, 2019 or 2018, we did 0t recognize any impairment losses on our receivables and contract assets.
Remaining performance obligations represent the transaction price of contracts for which work has not been performed and excludes unexercised contract options and potential modifications. As of September 30, 2019, the aggregate amount of the transaction price allocated to remaining uncompleted contracts was $83.5 million. We expect to satisfy remaining performance obligations and recognize revenue on substantially all of these uncompleted contracts over the next 18 months.
10
INSTALLED BUILDING PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Practical Expedients and Exemptions
We generally expense sales commissions and other incremental costs of obtaining a contract when incurred because the amortization period is usually one year or less. Sales commissions are recorded within selling expenses on the Condensed Consolidated Statements of Operations and Comprehensive Income.
We do not disclose the value of unsatisfied performance obligations for contracts with an original expected length of one year or less.
NOTE 4 - INVESTMENTS
Cash and cash equivalents includes investments in money market funds that are valued based on the net asset value of the funds. The investments in these funds were $107.5 million and $69.8 million as of September 30, 2019 and December 31, 2018, respectively.
All other investments are classified as
held-to-maturity
and consist of highly liquid instruments, primarily including corporate bonds and commercial paper. As of September 30, 2019 and December 31, 2018, the amortized cost of these investments equaled the net carrying value, which was $5.0 million and $10.1 million, respectively. All
held-to-maturity
securities as of September 30, 2019 mature in one year or less. See Note 8, Fair Value Measurements, for additional information.
NOTE 5 - GOODWILL AND INTANGIBLES
Goodwill
The change in carrying amount of goodwill was as follows (in thousands):
 
             
 
Goodwill
(Gross)
  
Accumulated
Impairment
Losses
  
Goodwill
(Net)
 
January 1, 2019
 $
 
 
243,053
  $
(70,004
) $
 
 
173,049
 
Business Combinations
  
11,332
   
—  
   
11,332
 
Other
  
193
   
—  
   
193
 
             
September 30, 2019
 $
 
254,578
  $
(70,004
) $
 
184,574
 
             
 
 
 
 
Other changes included in the above table represent minor adjustments for the allocation of certain acquisitions still under measurement and four immaterial acquisitions completed during the nine months ended September 30, 2019.    
We test goodwill for impairment annually during the fourth quarter of our fiscal year or earlier if there is an impairment indicator. NaN impairment was recognized during either of the nine month periods ended September 30, 2019 or 2018. Accumulated impairment losses included within the above table were incurred over multiple periods, with the latest impairment charge being recorded during the year ended December 31, 2010.
11

INSTALLED BUILDING PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Intangibles, net
The following table provides the gross carrying amount, accumulated amortization and net book value for each major class of intangibles (in thousands):
                         
 
As of September 30, 2019
  
As of December 31, 2018
 
 
Gross
    
Net
  
Gross
    
Net
 
 
Carrying
  
Accumulated
  
Book
  
Carrying
  
Accumulated
  
Book
 
 
Amount
  
Amortization
  
Value
  
Amount
  
Amortization
  
Value
 
Amortized intangibles:
                  
Customer relationships
 $
 
 
157,242
  $
64,884
  $
92,358
  $
148,635
  $
52,514
  $
96,121
 
Covenants
not-to-compete
  
16,035
   
9,857
   
6,178
   
14,682
   
7,572
   
7,110
 
Trademarks and trade names
  
67,048
   
21,489
   
45,559
   
64,432
   
18,256
   
46,176
 
Backlog
  
14,080
   
13,854
   
226
   
14,060
   
13,677
   
383
 
                         
 $
254,405
  $
110,084
  $
 
 
144,321
  $
 
 
241,809
  $
92,019
  $
 
 
149,790
 
                         
 
 
 
 
The gross carrying amount of intangibles increased approximately $12.6 million during the nine months ended September 30, 2019 primarily due to business combinations. See Note 15, Business Combinations, for more information. Remaining estimated aggregate annual amortization expense is as follows (amounts, in thousands, are for the fiscal year ended):
     
Remainder of 2019
 $
6,147
 
2020
  
23,867
 
2021
  
22,525
 
2022
  
21,604
 
2023
  
18,693
 
Thereafter
  
51,485
 
 
 
 
 
NOTE 6 - LONG-TERM DEBT
Long-term debt consisted of the following (in thousands):
         
 
As of September 30,
  
As of December 31,
 
 
2019
  
2018
 
Senior Notes due 2028, net of unamortized debt issuance costs of $4,989 and $0, respectively
 $
295,011
  $
—  
 
Term loan, net of unamortized debt issuance costs of $2,164 and $4,834, respectively
  
197,836
   
390,916
 
Vehicle and equipment notes, maturing through September 2024; payable in various monthly installments, including interest rates ranging from 2.5% to 4.8%
  
69,430
   
60,391
 
Various notes payable, maturing through March 2025; payable in various monthly installments, including interest rates ranging from 4% to 6%
  
2,967
   
3,517
 
         
  
565,244
   
454,824
 
Less: current maturities
  
(22,734
)  
(22,642
)
         
Long-term debt, less current maturities
 $
542,510
  $
432,182
 
         
 
5.75% Senior Notes due 2028
In September 2019, we issued $300.0 million in aggregate principal amount of 5.75%
s
enior
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.
 
T
he
 net
12
INSTALLED BUILDING PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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 Senior Notes offering and the entry into a new revolving credit facility described below
.
The indenture covering the Senior Notes contain
s
restrictive covenants that, among other things, limit the ability of the Company and certain of our subsidiaries (subject to certain exceptions) to: (i) incur additional debt and issue preferred stock; (ii) pay dividends on, redeem or repurchase stock; (iii) prepay subordinated debt; (iv) create liens; (v) make specified types of investments; (vi) apply net proceeds from certain asset sales; (vii) engage in transactions with affiliates; (viii) merge, consolidate or sell substantially all of our assets; and (ix) pay dividends and make other distributions from subsidiaries.
Credit Facilities
As of September 30, 2019, we had $197.8 million, net of unamortized debt issuance costs, due on our $400 million, seven-year term​​​​​​​ loan facility (the “Term Loan”) under our credit agreement (the “Term Loan Agreement”). The Term Loan is due April 2025 and has a margin of (A) 2.50% in the case of Eurodollar rate loans and (B) 1.50% in the case of base rate loans.
In September 2019, we also entered into a ne
w
 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. 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. As of September 30, 2019, there were 0​​​​​​​​​​​​​​ borrowings outstanding under the ABL Revolver.
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 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.
In connection with the
 S
eptember 2019
 transactions, we wrote off $2.8 million in previously capitalized loan costs during the three months ended September 30, 2019. This amount is included in interest expense, net on the Condensed Consolidated Statements of Operations and Comprehensive Income. We also had $9.0 million of capitalized deferred financing costs and debt issuance costs, net of accumulated amortization, as of September 30, 2019, which includes $6.2 million in new costs associated with the above transactions incurred during the three months ended September 30, 2019. The deferred financing costs are included in other
non-current
assets while the debt issuance costs are included in long-term debt on the Condensed Consolidated Balance Sheets. These costs are amortized over the term of the related debt on a straight-line basis which approximates the effective interest method.
13

INSTALLED BUILDING PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 7 - LEASES
On January 1, 2019, we adopted ASC 842, “Leases” which, among other changes, requires us to record liabilities classified as operating leases on our Condensed Consolidated Balance Sheets along with a corresponding
right-of-use
asset. Results for reporting periods beginning after January 1, 2019 are presented under Topic 842, while prior period amounts are not adjusted and continue to be reported in accordance with our historic accounting under Topic 840. We elected the package of practical expedients available for expired or existing contracts, which allowed us to carryforward our historical assessments of whether contracts are or contain leases, lease classification tests and treatment of initial direct costs. We also elected to not separate lease components from
non-lease
components for all fixed payments, and we exclude variable lease payments in the measurement of
right-of-use
assets and lease obligations.
Upon adoption of ASC 842, we recorded a $44.9 million increase in other assets, a $1.4 million decrease to other current assets, a $1.0 million decrease to other current liabilities and a $44.5 million increase to operating lease obligations. These adjustments are the result of assigning a
right-of-use
asset and related lease liability to our operating leases. We did not record any cumulative effect adjustments to opening retained earnings, and adoption of the lease standard had no impact to cash from or used in operating, financing, or investing activities on our consolidated cash flow statements.
We determine if an arrangement is a lease at inception. Most of our operating leases do not provide an implicit rate so we use our incremental borrowing rate based on the information available at the commencement date to determine the present value of future payments. We lease various assets in the ordinary course of business as follows: warehouses to store our materials and perform staging activities for certain products we install; various office spaces for selling and administrative activities to support our business; certain manufacturing facilities to produce insulation materials; and certain vehicles and equipment to facilitate our operations, including, but not limited to, trucks, forklifts and office equipment. Leases with an initial term of 12 months or less are not recorded on the balance sheet as we recognize lease expense for these leases on a straight-line basis over the lease term.
Most lease agreements include one or more renewal options, all of which are at our sole discretion. Generally, future renewal options that have not been executed as of the balance sheet date are excluded from
right-of-use
assets and related lease liabilities. Certain leases also include options to purchase the leased property. The depreciable life of assets and leasehold improvements are limited by the expected lease term, unless there is a transfer of title or purchase option reasonably certain of exercise. Some of our vehicle lease agreements include provisions for residual value guarantees and any expected payment is included in our lease liability.
14
INSTALLED BUILDING PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Lease Position as of September 30, 2019
The table below presents the lease-related assets and liabilities recorded on the Condensed Consolidated Balance Sheet:
 
       
(in thousands)
 
Classification
 
As of September 30,
2019
 
Assets
    
Non-Current
    
Operating
 
Operating lease
right-of-use
assets
 $
42,553
 
Finance
 
Property and equipment, net
  
7,691
 
       
Total lease assets
  $
50,244
 
Liabilities
    
Current
    
Operating
 
Current maturities of operating lease obligations
 $
15,032
 
Financing
 
Current maturities of finance lease obligations
  
3,133
 
Non-Current
    
Operating
 
Operating lease obligations
  
27,129
 
Financing
 
Finance lease obligations
  
3,682
 
       
Total lease liabilities
  $
48,976
 
       
 
 
 
 
 
 
 
     
Weighted-average remaining lease term
   
Operating leases
  
3.8 years
 
Finance leases
  
2.6 years
 
Weighted-average discount rate
 
(1)
   
Operating leases
  
4.85
%
Finance leases
  
4.75
%
 
 
 
(1)Upon adoption of the new lease standard, discount rates used for existing leases were established at January 1, 2019.
 
 
 
 
 
Lease Costs
The table below presents certain information related to the lease costs for finance and operating leases during 2019:
 
           
(in thousands)
 
Classification
 
Three months ended
September 30, 2019
  
Nine months ended
September 30, 2019
 
Operating lease cost
 
(1)
 
Administrative
 $
5,225
  $
15,266
 
Finance lease cost
       
Amortization of leased assets
 (2)
 
Cost of sales
  
1,144
   
3,955
 
Interest on finance lease obligations
 
Interest expense, net
  
84
   
268
 
           
Total lease costs
  $
6,453
  $
19,489
 
           
 
 
 
 
 
 
 
(1)Includes variable lease costs of $0.5 million and $1.5 million, respectively, and short-term lease costs of $0.2 million and $0.6 million, respectively.
 
 
 
 
 
 
 
(2)Includes variable lease costs of $0.2 million and $0.7 million, respectively.
 
 
 
 
 
15

INSTALLED BUILDING PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Other Information
The table below presents supplemental cash flow information related to leases during 2019 (in thousands):
         
 
Three months ended
September 30, 2019
  
Nine months ended
September 30, 2019
 
Cash paid for amounts included in the measurement of lease liabilities:
   
Operating cash flows for operating leases
 $
4,488
  $
13,009
 
Operating cash flows for finance leases
  
84
   
268
 
Financing cash flows for finance leases
  
917
   
3,398
 
 
 
 
 
 
Undiscounted Cash Flows
The table below reconciles the undiscounted cash flows for each of the first five years and total of the remaining years for the finance lease obligations and operating lease obligations recorded on the Condensed Consolidated Balance Sheet as of September 30, 2019 (in thousands):
                 
 
Finance Leases
  
Operating Leases
 
   
Related Party
  
Other
  
Total Operating
 
Remainder of 2019
 $
1,233
  $
260
  $
4,213
  $
4,473
 
2020
  
2,854
   
1,055
   
14,490
   
15,545
 
2021
  
1,845
   
910
   
9,947
   
10,857
 
2022
  
911
   
836
   
5,708
   
6,544
 
2023
  
532
   
415
   
3,386
   
3,801
 
Thereafter
  
131
   
823
   
4,304
   
5,127
 
Total minimum lease payments
  
7,506
  $
4,299
  $
42,048
   
46,347
 
Less: Amounts representing executory costs
  
(195
)        
—  
 
Less: Amounts representing interest
  
(496
)        
(4,186
)
                 
Present value of future minimum lease payments
  
6,815
         
42,161
 
Less: Current obligation under leases
  
(3,133
)        
(15,032
)
                 
Long-term lease obligations
 $
3,682
        $
27,129
 
                 
 
 
 
 
 
Disclosures Related to Periods Prior to Adoption of ASC 842 under ASU 2016-02
Lease amounts presented as of December 31, 2018 and for the nine months ended September 30, 2018 are in accordance with accounting guidance in effect prior to adoption of ASC 842, “Leases,” on January 1, 2019. Total assets relating to capital leases were approximately $58.7 million and a total of approximately $32.0 million were fully depreciated as of December 31, 2018. The net book value of assets under capital leases was approximately $9.5 million as of December 31, 2018. Amortization of assets held under capital leases is included within cost of sales on the Consolidated Statements of Operations and Comprehensive Income.
16
INSTALLED BUILDING PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Future minimum lease payments under noncancellable operating leases (with initial or remaining lease terms in excess of one year) and future minimum capital lease payments as of December 31, 2018 were as follows (in thousands):
 
Capital Leases
  
Operating Leases
 
   
Related Party
  
Other
  
Total Operating
 
2019
 $
5,207
  $
1,159
  $
 
14,418
  $
15,577
 
2020
  
2,253
   
1,184
   
11,293
   
12,477
 
2021
  
1,339
   
1,058
   
7,014
   
8,072
 
2022
  
452
   
972
   
4,335
   
5,307
 
2023
  
93
   
51
   
2,613
   
2,664
 
Thereafter
  
—  
   
—  
   
4,695
   
4,695
 
                 
  
9,344
  $
4,424
  $
 
 
44,368
  $
48,792
 
                 
Less: Amounts representing executory costs
  
(255
)         
Less: Amounts representing interest
  
(459
)         
                 
Total obligation under capital leases
  
8,630
          
Less: Current portion of capital leases
  
(4,806
)         
                 
Long term capital lease obligation
 $
3,824
          
                 
NOTE 8 - FAIR VALUE MEASUREMENTS
Assets and Liabilities Measured at Fair Value on a Recurring Basis
In many cases, a valuation technique used to measure fair value includes inputs from multiple levels of the fair value hierarchy. The lowest level of significant input determines the placement of the entire fair value measurement in the hierarchy. During the periods presented, there were no transfers between fair value hierarchical levels.
Assets Measured at Fair Value on a Nonrecurring Basis
Certain assets, specifically other intangible and long-lived assets, are measured at fair value on a nonrecurring basis in periods subsequent to initial recognition. Assets measured at fair value on a nonrecurring basis as of September 30, 2019 and December 31, 2018 are categorized based on the lowest level of significant input to the valuation. The assets are measured at fair value when our impairment assessment indicates a carrying value for each of the assets in excess of the asset’s estimated fair value. Undiscounted cash flows, a Level 3 input, are utilized in determining estimated fair values. During each of the three and nine months ended September 30, 2019 and 2018, we did not record any impairments on these assets required to be measured at fair value on a nonrecurring basis.
Estimated Fair Value of Financial Instruments
Accounts receivable, accounts payable and accrued liabilities as of September 30, 2019 and December 31, 2018 approximate fair value due to the short-term maturities of these financial instruments. The carrying amounts of certain long-term debt, including the Term Loan and ABL Revolver as of September 30, 2019 and December 31, 2018, approximate fair value due to the variable rate nature of the agreements. The carrying amounts of our operating lease
right-of-use
assets and the obligations associated with our operating and finance leases as well as our vehicle and equipment notes approximate fair value as of September 30, 2019 and December 31, 2018. All debt classifications represent Level 2 fair value measurements.
17

INSTALLED BUILDING PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Derivative financial instruments are measured at fair value based on observable market information and appropriate valuation methods. Contingent consideration liabilities arise from future earnout payments to the sellers associated with certain acquisitions and are based on predetermined calculations of certain future results. These future payments are estimated by considering various factors, including business risk and projections. The contingent consideration liabilities are measured at fair value by discounting estimated future payments to their net present value using the appropriate weighted average cost of capital (WACC). The fair values of financial assets and liabilities that are recorded at fair value in the Condensed Consolidated Balance Sheets and not described above were as follows (in thousands):
 
As of September 30, 2019
  
As of December 31, 2018
 
 
Total
  
Level 1
  
Level 2
  
Level 3
  
Total
  
Level 1
  
Level 2
  
Level 3
 
Financial assets:
                        
Cash equivalents
 $
107,535
  $
107,535
  $
—  
  $
—  
  $
69,807
  $
69,807
  $
—  
  $
—  
 
Derivative financial instruments
  
—  
   
—  
   
—  
   
—  
   
1,765
   
—  
   
1,765
   
—  
 
                                 
Total financial assets
 $
107,535
  $
107,535
  $
—  
  $
—  
  $
 
 
71,572
  $
69,807
  $
1,765
  $
—  
 
                                 
Financial liabilities:
                        
Derivative financial instruments
 $
11,207
  $
—  
  $
11,207
  $
—  
  $
2,275
  $
—  
  $
2,275
  $
—  
 
Contingent consideration
  
3,724
   
—  
   
—  
   
3,724
   
5,098
   
—  
   
—  
   
5,098
 
                                 
Total financial liabilities
 $
 
 
14,931
  $
 
 
—  
  $
 
 
11,207
  $
 
 
3,724
  $
7,373
  $
 
 
—  
  $
 
 
2,275
  $
 
 
5,098
 
                                 
See Note 4, Investments, for more information on cash equivalents included in the table above. Also see Note 9, Derivatives and Hedging Activities, for more information on derivative financial instruments.
The change in fair value of the contingent consideration (a Level 3 input) was as follows (in thousands):
Contingent consideration liability - January 1, 2019
 $
5,098
 
Preliminary purchase price
  
2,275
 
Fair value adjustments
  
(410
)
Accretion in value
  
434
 
Amounts paid to sellers
  
(371
)
Amounts cancelled
  
(3,302
)
     
Contingent consideration liability - September 30, 2019
 $
3,724
 
     
The accretion in value of contingent consideration liabilities is included within administrative expenses on the Condensed Consolidated Statements of Operations and Comprehensive Income.
The carrying values and associated fair values of financial assets and liabilities that are not recorded at fair value in the Condensed Consolidated Balance Sheets and not described above include our Senior Notes and investments. To estimate fair values of these items, we utilized third-party quotes which are derived all or in part from model prices, external sources, market prices, or the third-party’s internal records. Both represent a Level 2 fair value measurement and are as follows (in thousands):
 
As of September 30, 2019
  
As of December 31, 2018
 
 
Carrying Value
  
Fair Value
  
Carrying Value
  
Fair Value
 
Investments
 $
4,980
  $
4,983
  $
10,060
  $
 
 
10,053
 
Senior Notes
 
(1)
  
300,000
   
309,000
   
—  
   
—  
 
 
(1)
Excludes the impact of unamortized debt issuance costs.
18
INSTALLED BUILDING PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 9 - DERIVATIVES AND HEDGING ACTIVITIES
Cash Flow Hedges of Interest Rate Risk
Our purpose for using interest rate derivatives is to add stability to interest expense and to manage our exposure to interest rate movements. During the first nine months of 2019, such derivatives were used to hedge the variable cash flows associated with existing variable-rate debt. To accomplish these objectives, we primarily use interest rate swaps as part of our interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty in exchange for making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. As of September 30, 2019, we had 2 interest rate swaps, each with an associated floor, with a total beginning notional of $200.0 million, 1 that amortizes quarterly to $95.3 million at a maturity date of May 31, 2022 and 1 that amortizes quarterly to $93.3 million at a maturity date of April 15, 2025. We also had a forward interest rate swap with an associated floor beginning May 31, 2022 with a beginning notional of $100.0 million that amortizes quarterly to $97.0 million at a maturity date of April 15, 2025.
T
hese three swaps serve to hedge
substantially all
 of the variable cash flows on our Term Loan until maturity. The assets and liabilities associated with these derivative instruments are included in other current assets, other
non-current
assets, other current liabilities, and other long-term liabilities on the Condensed Consolidated Balance Sheets at their fair value amounts as described in Note 8, Fair Value Measurements.
The changes in the fair value of derivatives designated and that qualify as cash flow hedges are recorded in other comprehensive income, net of tax on the Condensed Consolidated Statements of Operations and Comprehensive Income and in accumulated other comprehensive income on the Condensed Consolidated Balance Sheets and subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. We had 0 such changes during the nine months ended September 30, 2019 or 2018.
Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to interest expense, net as interest payments are made on our variable-rate debt. Over the next twelve months, we estimate that an additional $1.5 million will be reclassified as an increase to interest expense, net.
Additionally, we do not use derivatives for trading or speculative purposes and we currently do not have any derivatives that are not designated as hedges. As of September 30, 2019, the Company has not posted any collateral related to these agreements.
NOTE 10 - STOCKHOLDERS’ EQUITY
As of September 30, 2019, we had $8.5 million in accumulated other comprehensive loss on our Condensed Consolidated Balance Sheet, which represents the unrealized loss on our derivative instruments. For additional information, see Note 9, Derivatives and Hedging Activities.
During the three and nine months ended September 30, 2018, we repurchased approximately 380 thousand and 793 thousand shares of our outstanding common stock, respectively. The aggregate purchase price of our 2018 stock repurchases was $18.2 million and $42.8 million, or $47.75 and $53.96 average price per share, for the three and nine months ended September 30, 2018, respectively. We did not repurchase any shares during the three or nine months ended September 30, 2019. The stock repurchase plan is in effect through February 28, 2020, unless extended by our board of directors. The effect of these treasury shares reducing the number of common shares outstanding is reflected in our earnings per share calculation.
19

INSTALLED BUILDING PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 11 - EMPLOYEE BENEFITS
Healthcare
Our healthcare benefit expense (net of employee contributions) for all plans was approximately $5.6 million and $4.5 million for the three months ended September 30, 2019 and 2018, respectively, and $15.7 million and $13.3 million for the nine months ended September 30, 2019 and 2018, respectively. An accrual for estimated healthcare claims incurred but not reported (“IBNR”) is included within accrued compensation on the Condensed Consolidated Balance Sheets and was $2.9 million and $2.3 million as of September 30, 2019 and December 31, 2018, respectively.
Workers’ Compensation
Workers’ compensation expense totaled $4.0 million and $4.4 million for the three months ended September 30, 2019 and 2018, respectively, and $11.8 million and $9.7 million for the nine months ended September 30 2019 and 2018, respectively.
Workers’ compensation kno
w
n claims and IBNR reserves included on the Condensed Consolidated Balance Sheets were as follows (in thousands):
         
 
September 30,
2019
  
December 31,
2018
 
Included in other current liabilities
 $
5,768
  $
5,795
 
Included in other long-term liabilities
  
11,813
   
9,447
 
         
 $
17,581
  $
15,242
 
         
 
 
We also had an insurance receivable for claims that exceeded the stop loss limit included on the Condensed Consolidated Balance Sheets. This receivable offsets an equal liability included within the reserve amounts noted above and was as follows (in thousands):
         
 
September 30,
2019
  
December 31,
2018
 
Included in other
non-current
assets
 $
1,819
  $
1,888
 
 
 
 
 
 
Retirement Plans
We participate in multiple 401(k) plans, whereby we provide a matching contribution of wages deferred by employees and can also make discretionary contributions to each plan. Certain plans allow for discretionary employer contributions only. These plans cover substantially all our eligible employees. We recognized 401(k) plan expenses of $0.5 million and $0.3 million during the three months ended September 30, 2019 and 2018, respectively, and we recognized $1.5 million and $1.2 million for the nine months ended September 30, 2019 and 2018, respectively. These expenses are included in administrative expenses on the accompanying Condensed Consolidated Statements of Operations and Comprehensive Income.
20
INSTALLED BUILDING PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Share-Based Compensation
Common Stock Awards
We periodically grant shares of our common stock to our board of directors and our employees. During the nine months ended September 30, 2019 and 2018, we granted approximately 8 thousand and 5 thousand shares of our common stock, respectively, under our Omnibus Incentive Plan to
non-employee
members of our board of directors. The stock issued will vest over a one year service term. Accordingly, we recorded $0.1 million and $0.3 million of compensation expense during the three and nine months ended September 30, 2019 and $25 thousand and $0.1 million during the three and nine months ended September 30, 2018.
In addition, we granted approximately 0.1 million shares of our common stock under our 2014 Omnibus Incentive Plan to employees during the nine months ended September 30, 2019 and 2018. The shares granted during the nine months ended September 30, 2019 and 2018 vest in 3 equal installments (rounded to the nearest whole share) annually on April 20 through 2022.
Share-based compensation expense associated with
non-performance
based awards issued to employees was $1.0 million and $3.3 million for the three and nine months ended September 30, 2019, respectively, and $1.0 million and $2.9 million for the three and nine months ended September 30, 2018, respectively.
As of September 30, 2019, we had $5.9 million of unrecognized compensation expense related to these nonvested common stock awards issued to the board of directors and our employees. This expense is subject to future adjustments for forfeitures and is expected to be recognized on a straight-line basis over the remaining weighted-average period of 1.9 years. Shares forfeited are returned as treasury shares and available for future issuances. See the table below for changes in shares and related weighted average fair market value per share.
Employees – Performance-Based Stock Awards
During the nine months ended September 30, 2019, we issued under our 2014 Omnibus Incentive Plan approximately 46 thousand shares of our common stock to certain officers, which vest in 2 equal installments on each of April 20, 2020 and April 20, 2021. In addition, during the nine months ended September 30, 2019, we established, and our Board of Directors approved, performance-based targets in connection with common stock awards to be issued to certain officers in 2020 contingent upon achievement of these targets. Share-based compensation expense associated with these performance-based awards and prior performance-based grants was $0.8 million and $2.3 million for the three and nine months ended September 30, 2019, respectively, and $0.6 million and $1.6 million for the three and nine months ended September 30, 2018, respectively.
As of September 30, 2019, we had $4.2 million of unrecognized compensation expense related to nonvested performance-based common stock awards. This expense is subject to future adjustments for forfeitures and is expected to be recognized over the remaining weighted-average period of 1.8 years using the graded-vesting method. See the table below for changes in shares and related weighted average fair market value per share.
21

INSTALLED BUILDING PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Employees – Performance-Based Restricted Stock Units
During 2018, we established, and our board of directors approved, performance-based restricted stock units in connection with common stock awards which were issued to certain employees during the nine months ended September 30, 2019 based upon achievement of a performance target. In addition, during the nine months ended September 30, 2019, we established, and our board of directors approved, performed-based restricted stock units in connection with common stock awards to be issued to certain employees in 2020 based upon achievement of a performance target. These units will be accounted for as equity-based awards that will be settled with a fixed number of common shares. We recorded $0.2 million and $0.5 million in compensation expense associated with these performance-based units during the three and nine months ended September 30, 2019, respectively, and $0.3 million and $1.5 million for the three and nine months ended September 30, 2018, respectively.
As of September 30, 2019, we had $0.4 million of unrecognized compensation expense related to nonvested performance-based common stock units. This expense is subject to future adjustments for forfeitures and is expected to be recognized on a straight-line basis over the remaining weighted-average period of 0.6 years. See the table below for changes in shares and related weighted average fair market value per share.
Share-Based Compensation Summary
During the nine months ended September 30, 2019 and 2018, our employees surrendered approximately 45 thousand and 41 thousand shares of our common stock, respectively, to satisfy tax withholding obligations arising in connection with the vesting of common stock awards issued under our 2014 Omnibus Incentive Plan. We recognized excess tax benefits of $0.3 million and $0.5 million for the nine months ended September 30, 2019 and 2018, respectively, within the income tax provision in the Condensed Consolidated Statements of Operations and Comprehensive Income.
Amounts and changes for each category of equity-based award for employees were as follows:
 
Common Stock Awards
  
Performance-Based Stock
Awards
  
Performance-Based
 Restricted
Stock Units
 
 
Awards
  
Weighted
Average
 Grant

Dat
e
 
Fair
Value
 
Per
Share
  
Awards
  
Weighted
Average 
Grant

Dat
e
 
Fair
Value
 
Per
Share
  
Units
  
Weighted
Average
 Grant

Dat
e
 
Fair
Value
 
Per
Share
 
Nonvested awards/units at December 31, 2018
  
173,189
  $
47.40
   
115,698
  $
52.25
   
13,248
  $
56.05
 
Granted
  
88,529
   
50.94
   
82,692
   
45.65
   
13,933
   
51.62
 
Vested
  
(106,347
)  
42.27
   
(31,404
)  
41.00
   
(12,808
)  
56.05
 
Forfeited/Cancelled
  
(1,767
)  
52.25
   
(6,697
)  
65.60
   
(840
)  
53.94
 
                         
Nonvested awards/units at September 30, 2019
  
153,604
  $
52.93
   
160,289
  $
50.49
   
13,533
  $
51.62
 
                         
We recorded the following stock compensation expense by income statement category (in thousands):
 
Three months ended September 30,
  
Nine months ended September 30,
 
 
2019
  
2018
  
2019
  
2018
 
Cost of sales
 $
 
 
 
97
  $
 
 
 
94
  $
 
 
280
  $
 
 
749
 
Selling
  
48
   
30
   
149
   
402
 
Administrative
  
1,954
   
1,769
   
6,012
   
4,938
 
                 
 $
2,099
  $
1,893
  $
6,441
  $
6,089
 
                 
Administrative stock compensation expense includes all stock compensation earned by our administrative personnel, while cost of sales and selling stock compensation represents all stock compensation earned by our installation and sales employees, respectively.
22
INSTALLED BUILDING PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 12 - INCOME TAXES
Our provision for income taxes as a percentage of pretax earnings is based on a current estimate of the annual effective income tax rate adjusted to reflect the impact of discrete items.
During the three and nine months ended September 30, 2019, our effective tax rate was 26.4% and 25.9%, respectively. The rate for the nine months ended September 
3
0, 2019 was favorably impacted by excess tax benefits from share-based compensation arrangements. The rates for both periods were unfavorably impacted by separate tax filing entities in a loss position for which a full valuation allowance is required, resulting in no tax benefit for recognized losses.
NOTE 13 - RELATED PARTY TRANSACTIONS
We sell installation services to other companies related to us through common or affiliated ownership and/or board of directors and/or management relationships. We also purchase services and materials and pay rent to companies with common or affiliated ownership.
We lease our headquarters and certain other facilities from related parties. See Note 7, Leases, for future minimum lease payments to be paid to these related parties.
The amount of sales to related parties as well as the purchases from and rent expense paid to related parties were as follows (in thousands):
                 
 
Three months ended September 30,
  
Nine months ended September 30,
 
 
2019
  
2018
  
2019
  
2018
 
Sales
 $
 
3,736
  $
 
3,259
  $
9,658
  $
9,361
 
Purchases
  
469
   
372
   
1,327
   
1,207
 
Rent
  
256
   
257
   
773
   
829
 
 
 
 
 
 
 
 
As of September 30, 2019 and December 31, 2018, we had related party balances of approximately $1.8 million and $2.3 million, respectively, included in accounts receivable on our Condensed Consolidated Balance Sheets. These balances primarily represent trade accounts receivable arising during the normal course of business with various related parties. M/I Homes, Inc., a customer whose Chairman, President and Chief Executive Officer is a member of our board of directors, accounted for $1.4 million and $1.2 million of these balances as of September 30, 2019 and December 31, 2018, respectively.
NOTE 14 - COMMITMENTS AND CONTINGENCIES
Accrued General Liability and Auto Insurance
Accrued general liability and auto insurance reserves included on the Condensed Consolidated Balance Sheets were as follows (in thousands):
         
 
September 30,
2019
  
December 31,
2018
 
Included in other current liabilities
 $
2,514
  $
1,848
 
Included in other long-term liabilities
  
12,511
   
6,608
 
         
 $
15,025
  $
8,456
 
         
 
 
 
 
 
 
 
23

INSTALLED BUILDING PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
We also had insurance receivables and an indemnification asset included on the Condensed Consolidated Balance Sheets that, in aggregate, offset an equal liability included within the reserve amounts noted above. The amounts were as follows (in thousands):
         
 
September 30,
2019
  
December 31,
2018
 
Insurance receivable and indemnification asset for claims under a
fully insured policy
 $
2,484
  $
2,484
 
Insurance receivable for claims that exceeded the stop loss limit
  
2,738
   
53
 
         
 
Total insurance receivables included in other
non-current
assets
 $
5,222
  $
2,537
 
         
 
 
 
 
 
 
 
Leases
See Note 7, Leases, for further information regarding our lease commitments.
Other Commitments and Contingencies
From time to time, various claims and litigation are asserted or commenced against us principally arising from contractual matters and personnel and employment disputes. In determining loss contingencies, management considers the likelihood of loss as well as the ability to reasonably estimate the amount of such loss or liability. An estimated loss is recorded when it is considered probable that such a liability has been incurred and when the amount of loss can be reasonably estimated. As litigation is subject to inherent uncertainties, we cannot be certain that we will prevail in these matters. However, we do not believe that the ultimate outcome of any pending matters will have a material adverse effect on our consolidated financial position, results of operations or cash flows.
During the year ended December 31, 2018, we entered into an agreement with one of our suppliers to purchase a portion of the insulation materials we utilize across our business. This agreement is effective January 1, 2019 through December 31, 2021 with a purchase obligation of $16.4 million for 2019, $21.4 million for 2020 and $15.0 million for 2021. For the nine months ended September 30, 2019, we have satisfied $7.2 million of our purchase obligation under this agreement. Additionally, we entered into an agreement with a chemical supplier with a purchase obligation of $0.6 million in 2019. Actual purchases made under this agreement for the nine months ended September 30, 2019 was $0.4 million.
NOTE 15 - BUSINESS COMBINATIONS
As part of our ongoing strategy to expand geographically and increase market share in certain markets, we completed 4 business combinations and 4 insignificant
tuck-in
acquisitions merged into existing operations during the nine months ended September 30, 2019 and 8 business combinations and 1 insignificant
tuck-in
acquisition merged into existing operations during the nine months ended September 30, 2018, respectively, in which we acquired 100% of the ownership interests in each.
24
INSTALLED BUILDING PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The largest of these acquisitions were 1st State Insulation, LLC (“1st State Insulation”) in March 2019, Expert Insulation, Inc. and Expert Insulation of Brainerd, Inc. (collectively, “Expert Insulation”) in June 2019 and Custom Overhead Door, LLC dba Custom Door & Gate (collectively, “CDG”) in March 2018. Net Income, as noted below, includes amortization, taxes and interest allocations when appropriate.
Belo
w
 is a summary of each significant acquisition by year, including revenue and net income (loss) since date of acquisition, shown for the year of acquisition (in thousands):
                                     
         
Total
Purchase
Price
  
Three months ended
September 30, 2019
  
Nine months ended
September 30, 2019
 
2019 Acquisitions
 
Date
  
Acquisition
Type
  
Cash Paid
  
Seller
Obligations
 
Revenue
  
Net Income
  
Revenue
  
Net Income
 
 
1st State Insulation
  
3/18/2019
   
Asset
  $
5,125
  $
1,355
  $
6,480
  $
3,156
  $
174
  $
6,586
  $
374
 
Expert Insulation
  
6/24/2019
   
Asset
   
16,165
   
1,993
   
18,158
   
3,147
   
193
   
3,339
   
160
 
Other
  
Various
   
Asset
   
3,450
   
974
   
4,424
   
7,262
   
591
   
7,262
   
591
 
                                     
Total
       $
 
 
24,740
  $
 
 
 
 
4,322
  $
 
 
29,062
  $
 
 
13,565
  $
958
  $
 
 
17,187
  $
 
 
 
 
1,125
 
                                     
 
 
 
 
 
 
 
 
 
 
 
                                     
         
Total
Purchase
Price
  
Three months ended
September 30, 2018
  
Nine months ended
September 30, 2018
 
2018 Acquisitions
 
Date
  
Acquisition
Type
  
Cash Paid
  
Seller
Obligations
 
Revenue
  
Net Income
  
Revenue
  
Net Income
 
CDG
  
3/19/2018
   
Asset
  $
9,440
  $
1,973
  $
11,413
  $
3,848
  $
164
  $
7,572
  $
229
 
Other
  
Various
   
Shares/Asset
   
25,242
   
3,447
   
28,689
   
7,003
   
42
   
12,782
   
423
 
                                     
Total
       $
 
 
34,682
  $
 
 
 
 
5,420
  $
 
 
40,102
  $
 
 
10,851
  $
206
  $
 
 
20,354
  $
 
 
 
 
 
 
 
652
 
                                     
 
 
 
Acquisition-related costs recorded within administrative expenses on the Condensed Consolidated Statements of Operations and Comprehensive Income amounted to $0.3 million and $1.3 million for the three and nine months ended September 30, 2019, respectively, and $0.7 million and $1.9 million for the three and nine months ended September 30, 2018, respectively. The goodwill recognized in conjunction with these business combinations represents the excess cost of the acquired entity over the net amount assigned to assets acquired and liabilities assumed. We expect to deduct approximately $9.6 million of goodwill for tax purposes as a result of 2019 acquisitions.
Purchase Price Allocations
The estimated fair values of the assets acquired and liabilities assumed for the acquisitions, as well as total purchase prices and cash paid, approximated the following (in thousands):
                             
 
As of September 30, 2019
  
As of September 30, 2018
 
 
1st State
  
Expert
  
Other
  
Total
  
CDG
  
Other
  
Total
 
Estimated fair values:
                     
Accounts receivable
 $
—  
  $
1,796
  $
254
  $
2,050
  $
1,731
  $
3,229
  $
4,960
 
Inventories
  
291
   
723
   
338
   
1,352
   
514
   
1,027
   
1,541
 
Other current assets
  
—  
   
—  
   
3
   
3
   
28
   
879
   
907
 
Property and equipment
  
989
   
235
   
667
   
1,891
   
933
   
1,893
   
2,826
 
Intangibles
  
3,382
   
6,740
   
2,242
   
12,364
   
3,711
   
16,681
   
20,392
 
Goodwill
  
1,857
   
8,545
   
930
   
11,332
   
4,898
   
7,007
   
11,905
 
Other
non-current
assets
  
—  
   
161
   
13
   
174
   
36
   
19
   
55
 
Accounts payable and other current liabilities
  
(39
)  
(42
)  
(23
)  
(104
)  
(438
)  
(2,046
)  
(2,484
)
                             
Fair value of assets acquired and purchase price
  
6,480
   
18,158
   
4,424
   
29,062
   
11,413
   
28,689
   
40,102
 
Less seller obligations
  
1,355
   
1,993
   
974
   
4,322
   
1,973
   
3,447
   
5,420
 
                             
Cash paid
 $
 
 
5,125
  $
 
 
16,165
  $
 
 
3,450
  $
 
 
24,740
  $
9,440
  $
 
 
25,242
  $
 
 
34,682
 
                             
 
 
 
 
 
 
 
Contingent consideration is included as “seller obligations” in the above table or within “fair value of assets acquired” if subsequently paid during the period presented. These contingent payments consist primarily of earnouts based on performance that are recorded at fair value at the time of acquisition, and/or
non-complete
agreements and amounts based on working capital calculations. When these payments are expected to be made over one year from the acquisition date, the contingent consideration is discounted to net present value using our weighted average cost of capital (WACC), when appropriate.
25

INSTALLED BUILDING PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Further adjustments to the allocation for each acquisition still under its measurement period are expected as third-party and internal valuations are finalized, certain tax aspects of the transaction are completed and customary post-closing reviews are concluded during the measurement period attributable to each individual business combination. As a result, insignificant adjustments to the fair value of assets acquired, and in some cases total purchase price, have been made to certain business combinations since the date of acquisition and future adjustments may be made through the end of each measurement period. Goodwill and intangibles per the above table do not agree to the total gross increases of these assets as shown in Note 5, Goodwill and Intangibles, during each of the three months ended September 30, 2019 and 2018 due to minor adjustments to goodwill for the allocation of certain acquisitions still under measurement as well as other immaterial intangible assets added during the ordinary course of business. In addition, goodwill and intangibles increased during each of the nine months ended September 30, 2019 and 2018 due to small
tuck-in
acquisitions merged into existing operations that do not appear in the above table as discussed above.
Estimates of acquired intangible assets related to the acquisitions are as follows (in thousands):
                 
 
For the nine months ended September 30,
 
 
2019
  
2018
 
Acquired intangibles assets
 
Estimated
Fair Value
  
Weighted
Average
Estimated
Useful
Life
 
(yrs.)
  
Estimated
Fair Value
  
Weighted
Average
Estimated
Useful
Life
 
(yrs.)
 
Customer relationships
 $
8,566
   
8
  $
 
 
14,480
   
8
 
Trademarks and trade names
  
2,615
   
15
   
3,920
   
14
 
Non-competition
agreements
  
1,183
   
5
   
1,530
   
5
 
Backlog
        
460
   
2
 
 
 
 
 
 
 
 
Pro Forma Information
The unaudited pro forma information for the combined results of the Company has been prepared as if the 2019 acquisitions had taken place on January 1, 2018 and the 2018 acquisitions had taken place on January 1, 2017. The unaudited pro forma information is not necessarily indicative of the results that we would have achieved had the transactions actually taken place on January 1, 2018 and 2017, respectively, and the unaudited pro forma information does not purport to be indicative of future financial operating results (in thousands, except per share data):
                 
 
Unaudited pro forma for the three
months ended September 30,
  
Unaudited pro forma for the nine
months ended September 30,
 
 
2019
  
2018
  
2019
  
2018
 
Net revenue
 $
397,839
  $
367,600
  $
 
1,123,820
  $
 
1,046,717
 
Net income
  
21,240
   
16,856
   
49,154
   
41,997
 
Basic net income per share
  
0.71
   
0.54
   
1.65
   
1.34
 
Diluted net income per share
  
0.71
   
0.54
   
1.65
   
1.33
 
 
 
 
 
 
 
 
Unaudited pro forma net income reflects additional intangible asset amortization expense of $29 thousand and $0.6 million for the three and nine months ended September 30, 2019, respectively, and $1.1 million and $3.8 million for the three and nine months ended September 30, 2018, respectively, as well as additional income tax expense of $10 thousand and $66 thousand for the three and nine months ended September 30, 2019, respectively, and $0.5 million and $1.2 million for the three and nine months ended September 30, 2018, respectively, that would have been recorded had the 2019 acquisitions taken place on January 1, 2018 and the 2018 acquisitions taken place on January 1, 2017.
26

INSTALLED BUILDING PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 16 - INCOME PER COMMON SHARE
Basic net income per common share is calculated by dividing net income by the weighted average shares outstanding during the period, without consideration for common stock equivalents.
Diluted net income per common share is calculated by adjusting weighted average shares outstanding for the dilutive effect of common stock equivalents outstanding for the period, determined using the treasury stock method. Potential common stock is included in the diluted income per common share calculation when dilutive. The dilutive effect of outstanding restricted stock awards after application of the treasury stock method was 92 thousand and 98 thousand shares for the three and nine months ended September 30, 2019, respectively, and 84 thousand and 138 thousand shares for the three and nine months ended September 30, 2018, respectively.
27

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
This Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our consolidated financial statements and related notes in “Item 1. Financial Statements” of this Form
 10-Q,
as well as our 2018 Form
10-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 175 branch locations. Substantially all 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.
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. The strategic acquisitions of multiple companies over the last several years contributed meaningfully to our consistent increase in net revenue during that time.
2019 Third Quarter Highlights
Net revenue increased 13.6% to $396.4 million while gross profit increased 21.3% to $118.1 million during the three months ended September 30, 2019 compared to 2018. This increase in net revenue and gross profit was primarily driven by selling price increases, the continued recovery of the housing markets, the contribution of our recent acquisitions and growth across our end markets and products. We experienced strong sales growth year-over-year of approximately 11% in our combined residential new construction and repair and remodel end markets and approximately 29% in our commercial
end-market.
During the three months ended September 30, 2019, we modified our debt structure in order to take advantage of the current attractive bond market. 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, a portion of which we used to partially repay our outstanding obligations (including accrued and unpaid interest) under our term loan credit agreement (the “Term Loan Agreement”) and pay fees and expenses related to the Senior Notes offering and entry into the ABL Credit Agreement as defined below. As of September 30, 2019, we had $197.8 million, net of unamortized debt issuance costs, due on our $400 million, seven-year term loan facility (the “Term Loan”) under our Term Loan Agreement. We intend to use the remaining net proceeds for general corporate purposes. In addition, during the three months ended September 30, 2019, we entered into a new asset-based lending credit agreement (the “ABL Credit Agreement”). The ABL Credit Agreement provides for an asset-based lending credit facility (the “ABL Revolver”) of up to $200.0 million with a five-year maturity, which replaced our previous revolving credit facility of up to $150.0 million. As of September 30, 2019, we had no amounts outstanding on the ABL Revolver. See Liquidity and Capital Resources section below for further information about our debt.
28

We were successful at realizing selling price increases during the last two quarters to offset previous material cost increases. While we continue to proactively work with customers and suppliers to mitigate these cost impacts, we will likely continue to experience inflation on our materials in 2020.
We believe there are several trends that should drive long-term growth in the housing market, even if there are temporary periods of slower or declining growth. These long-term trends include an aging housing stock, population growth, household formation growth and the fact that housing starts are currently below long-term historic averages. We expect that our net revenue, gross profit and operating income will benefit from this growth.
Net revenue, cost of sales and gross profit
The components of gross profit were as follows (in thousands):
                         
 
Three months ended September 30,
  
Nine months ended September 30,
 
 
2019
  
Change
  
2018
  
2019
  
Change
  
2018
 
Net revenues
 $
  396,449
   
13.6
% $
  348,999
  $
  1,110,398
   
12.9
% $
  983,311
 
Cost of sales
  
278,362
   
10.6
%  
251,665
   
795,616
   
12.0
%  
710,358
 
                         
Gross profit
 $
118,087
   
21.3
% $
97,334
  $
314,782
   
15.3
% $
272,953
 
                         
Gross profit percentage
  
29.8
%     
27.9
%  
28.3
%     
27.8
%
 
 
 
 
Net revenues increased during the three and nine months ending September 30, 2019 compared to 2018, primarily driven by acquisitions, organic growth from our existing branches and increased selling prices. For the three and nine months ended September 30, 2019, on a same branch basis, net revenue improved 9.3% and 8.2%, respectively, with approximately 5.4% and 5.1% of this increase attributable to price gains and more favorable customer and product mix with the remainder attributable to growth in the number of completed jobs. We also saw organic growth in our commercial construction end market of 29.1% and 22.4% during the three and nine months ended September 30, 2019, respectively, over 2018.
As a percentage of net revenue, gross profit improved from 27.9% to 29.8% during the three months ended September 30, 2019 compared to 2018 primarily due to selling price increases.
Operating expenses
Operating expenses were as follows (in thousands):
                         
 
Three months ended September 30,
  
Nine months ended September 30,
 
 
2019
  
Change
  
2018
  
2019
  
Change
  
2018
 
Selling
 $
  19,398
   
11.3
% $
  17,434
  $
54,431
   
10.4
% $
49,300
 
Percentage of total net revenue
  
4.9
%     
5.0
%  
4.9
%     
5.0
%
Administrative
 $
55,098
   
14.0
% $
48,337
  $
  156,022
   
13.5
% $
  137,511
 
Percentage of total net revenue
  
13.9
%     
13.9
%  
14.1
%     
14.0
%
Amortization
 $
6,156
   
17.8
% $
5,228
  $
18,065
   
-8.2
% $
19,678
 
Percentage of total net revenue
  
1.6
%     
1.5
%  
1.6
%     
2.0
%
 
 
 
 
Selling
The dollar increases in selling expenses for the three and nine months ended September 30, 2019 were primarily driven by an increase in selling wages and commissions to support our increased net revenue of 13.6%. Selling expense as a percentage of sales slightly decreased for the three and nine months ended September 30, 2019 compared to 2018 primarily due to the leverage on expenses gained through increased net revenue.
29

Administrative
The dollar increases in administrative expenses for the three and nine months ended September 30, 2019 were primarily due to an increase in wages, benefits and facility costs attributable to both acquisitions and organic growth. Administrative expense remained flat as a percentage of sales for the three months ended September 30, 2019 compared to 2018 as expenses remained proportional to the increase in net revenue.
Other expense
Other expense, net was as follows (in thousands):
                         
 
Three months ended September 30,
  
Nine months ended September 30,
 
 
2019
  
Change
  
2018
  
2019
  
Change
  
2018
 
Interest expense, net
 $
  8,458
   
60.1
% $
  5,282
  $
  19,783
   
31.8
% $
  15,013
 
Other
  
155
   
17.4
%  
132
   
381
   
-8.6
%  
417
 
                         
Total other expense
 $
8,613
   
59.1
% $
5,414
  $
20,164
   
30.7
% $
15,430
 
                         
 
 
 
 
The increase in interest expense, net during the three and nine months ended September 30, 2019 compared to 2018 was primarily due to a $2.8 million write off of previously capitalized loan costs associated with debt transactions completed during September 2019.
Income tax provision
Income tax provision and effective tax rates were as follows (in thousands):
                 
 
Three months ended September 30,
  
Nine months ended September 30,
 
 
2019
  
2018
  
2019
  
2018
 
Income tax provision
 $
  7,610
  $
  5,358
  $
  17,135
  $
  12,762
 
Effective tax rate
  
26.4
%  
25.6
%  
25.9
%  
25.0
%
 
 
 
 
During the three and nine months ended September 30, 2019, our effective tax rate was 26.4% and 25.9%, respectively. The rate for the nine months ended September 30, 2019 was favorably impacted by excess tax benefits from share-based compensation arrangements. The rates for both periods were unfavorably impacted by separate tax filing entities in a loss position for which a full valuation allowance is required, resulting in no tax benefit for recognized losses.
Other comprehensive (loss) income, net of tax
Other comprehensive (loss) income, net of tax was as follows (in thousands):
                 
 
Three months ended September 30,
  
Nine months ended September 30,
 
 
2019
  
2018
  
2019
  
2018
 
Unrealized (loss) gain on cash flow hedge, net of taxes
 $
  (1,726
) $
  818
  $
  (8,021
) $
  2,453
 
 
 
 
 
During the three and nine months ended September 30, 2019, our cash flow hedge position decreased primarily due to unexpected declines in interest rates.
30

KEY FACTORS AFFECTING OUR OPERATING RESULTS
Cost of Materials
We purchase the materials that we install primarily from manufacturers. The industry supply of materials we install was disrupted due to a catastrophic failure at a manufacturer’s facility during the fourth quarter of 2017, resulting in insulation material allocation for certain insulation products and, as a result, contributed to increased market pricing throughout 2018. Increased market pricing, regardless of the catalyst, has and could continue to impact our results of operations in 2019, to the extent that price increases cannot be passed on to our customers. We began to see improvement in our selling prices in the second quarter of 2019, and this continued into the third quarter as evidenced by our 21.3% improvement in gross profit during the three months ended September 30, 2019 compared to the three months ended September 20, 2018. We will continue to work with our customers to adjust selling prices to offset the aforementioned higher costs.
Labor Costs and Charitable Activities
Our business is labor intensive. While the availability of labor in many markets continued to tighten as the demand for employees, particularly installers, increases, we experienced improved employee retention, turnover and labor efficiency rates in the nine months ended September 30, 2019. We believe this is partially a result of various programs meant to benefit our employees, including our financial wellness plan and longevity stock compensation plan for employees. While improved retention drives lower costs to recruit and train new employees and improves installer productivity, these improvements are somewhat offset by the additional costs of these incentives. We expect to continue to spend more to hire, train and retain installers to support our growing business in 2019, as tight labor availability continues within the construction industry. During the nine months ended September 30, 2019, we also launched the Installed Building Products Foundation meant to benefit IBP employees, their families and their communities. We set a goal to donate more than $1.0 million to
not-for-profit
entities and individuals in 2019 through the Foundation’s programs and as of the date of this filing, expect to meet or exceed this goal.
LIQUIDITY AND CAPITAL RESOURCES
Our capital resources primarily consist of cash from operations and borrowings under our various debt agreements and capital equipment leases and loans. Our primary capital requirements are to fund working capital needs, operating expenses, acquisitions and capital expenditures and meet required principal and interest payments. We may also use our resources to fund our optional stock repurchase program. Our investments consist of highly liquid instruments including corporate bonds and commercial paper. As of September 30, 2019, we had no outstanding borrowings under our ABL Revolver.
5.75% Senior Notes due 2028
In September 2019, we issued $300.0 million in aggregate principal amount of 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 Agreement and to pay fees and expenses related to the Senior Notes offering and entry into the ABL Credit Agreement.
31

The indenture covering the Senior Notes contains restrictive covenants that, among other things, limit the ability of the Company and certain of our subsidiaries (subject to certain exceptions) to: (i) incur additional debt and issue preferred stock; (ii) pay dividends on, redeem or repurchase stock; (iii) prepay subordinated debt; (iv) create liens; (v) make specified types of investments; (vi) apply net proceeds from certain asset sales; (vii) engage in transactions with affiliates; (viii) merge, consolidate or sell substantially all of our assets; and (ix) pay dividends and make other distributions from subsidiaries.
Credit Facilities
As of September 30, 2019, we had $197.8 million, net of unamortized debt issuance costs, due on our $400 million, seven-year Term Loan. The Term Loan is due April 2025 and has a margin of (A) 2.50% in the case of Eurodollar rate loans and (B) 1.50% in the case of base rate loans.
In September 2019, we also entered into an ABL Credit Agreement, which provides an ABL Revolver of up to $200.0 million with a five-year maturity, which replaced the Company’s previous revolving credit facility. Borrowing availability under the ABL Revolver is based on a percentage of the value of certain assets securing the Company’s obligations and those of the subsidiary guarantors thereunder. As of September 30, 2019, there were no borrowings outstanding under the ABL Revolver.
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 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 1.0xin the event that we do not meet a minimum measure of availability under the ABL Revolver.
In connection with the September 2019 transactions, we wrote off $2.8 million in previously capitalized loan costs during the three months ended September 30, 2019. This amount is included in interest expense, net on the Condensed Consolidated Statements of Operations and Comprehensive Income. We also had $9.0 million of capitalized deferred financing costs and debt issuance costs, net of accumulated amortization, as of September 30, 2019, which includes $6.2 million in new costs associated with the above transactions incurred during the three months ended September 30, 2019. The deferred financing costs are included in other
non-current
assets while the debt issuance costs are included in long-term debt on the Condensed Consolidated Balance Sheets. These costs are amortized over the term of the related debt on a straight-line basis which approximates the effective interest method.
At September 30, 2019, we were in compliance with all applicable covenants under the Term Loan Agreement, ABL Credit Agreement and the Senior Notes.
Derivative Instruments
As of September 30, 2019, we had two interest rate swaps, each with an associated floor, with a total beginning notional of $200.0 million, one that amortizes quarterly to $95.3 million at a maturity date of May 31, 2022 and one that amortizes quarterly to $93.3 million at a maturity date of April 15, 2025. These two swaps combined serve to hedge $196.5 million of the variable cash flows on our Term Loan as of September 30, 2019. We also had a forward interest rate swap with an associated floor beginning May 31, 2022 with 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 on our Term Loan until maturity.
32

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 outstanding loan balances relating to our master loan and equipment agreements were $69.4 million and $60.4 million as of September 30, 2019 and December 31, 2018, respectively.
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. The following table summarizes our outstanding bonds, letters of credit and cash-collateral (in thousands):
     
 
As of September 30,
2019
 
Performance bonds
 $
52,264
 
Insurance letters of credit and cash-collateral
(1)
  
44,498
 
Permit and license bonds
  
6,964
 
     
Total bonds and letters of credit
 $
 103,726
 
     
 
 
 
(1)Subsequent to September 30, 2019, we increased our outstanding letters of credit by a net amount of $7.0 million in conjunction with renewals of certain insurance programs.
 
 
 
In January 2018, we posted $10.0 million into a trust to serve as additional collateral for our workers’ compensation and general liability policies. This $10.0 million can be converted to a letter of credit at our discretion and is therefore not considered to be restricted cash.
Summary
The following table summarizes our liquidity (in thousands):
         
 
As of September 30,
2019
  
As of December 31,
2018
 
Cash and cash equivalents
 $
  234,950
  $
90,442
 
Short-term investments
  
4,980
   
10,060
 
ABL Revolver
  
200,000
   
150,000
 
Less: outstanding letters of credit and cash-collateral
(1)
  
(34,498
)  
(28,887
)
         
Total liquidity
(2)
 $
 405,432
  $
  221,615
 
         
 
 
 
(1)Subsequent to September 30, 2019, we increased our outstanding letters of credit by a net amount of $7.0 million in conjunction with renewals of certain insurance programs.
 
 
 
(2)Total liquidity reflects full borrowing base capacity under our ABL Revolver and may be limited by certain cash collateral limitations depending upon the status of our borrowing base availability. These potential deductions would lower our available cash and cash equivalents balance shown in the table above. As of September 30, 2019, total liquidity would be reduced by $51.9 million due to these cash collateral limitations. In addition, total liquidity is further reduced by $10.0 million within cash and cash equivalents above which was deposited 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 on our ABL Revolver included in the table above.
 
 
 
 
 
 
33

We believe that our cash flows from operations, combined with our current cash levels and available borrowing capacity, will be adequate to support our ongoing operations and to fund our debt service requirements, capital expenditures and working capital for at least the next 12 months as evidenced by our net positive cash flows from operations for each of the nine months ended September 30, 2019 and 2018.
Historical cash flow information
Cash flows from operating activities
Net cash provided by operating activities was $106.5 million and $68.8 million for the nine months ended September 30, 2019 and 2018, respectively. Generally, the primary driver of our cash flows from operating activities is operating income adjusted for certain noncash items, offset by cash payments for taxes and interest on our outstanding debt. Our cash flows from operations can be impacted by the timing of our cash collections on sales and collection of retainage amounts. In addition, cash flows are seasonally stronger in the third and fourth quarters as a result of increased construction activity.
Cash flows from investing activities
Business Combinations
. During the nine months ended September 30, 2019 and 2018, we made cash payments of $24.7 million and $34.7 million, respectively, on various business combinations. The amount of cash paid is dependent on various factors, including the size and determined value of the business being acquired.
Capital Expenditures
. Total cash paid for property and equipment was $37.3 million and $27.1 million for the nine months ended September 30, 2019 and 2018, respectively, and was primarily related to purchases of vehicles and various equipment to support our growing operations. 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.
Other
. During the nine months ended September 30, 2019 and 2018, we invested $17.4 million and $22.8 million, respectively, in short-term investments consisting primarily of corporate bonds and commercial paper and had $22.6 million and $37.5 million in short-term investments mature during the nine months ended September 30, 2019 and 2018, respectively.
34

Cash flows from financing activities
We utilize our credit facilities primarily to support our operations as well as fund acquisitions and our discretionary stock repurchase program. To support those initiatives, we received $300.0 million in proceeds from issuance of our Senior Notes, paid off $195.8 million of our Term Loan balance and paid $5.2 million in debt issuance costs during the nine months ended September 30, 2019, resulting in a net cash inflow of $99.0 million. We received $100.0 million in cash, reduced by $2.0 million in debt issuance costs, by amending our Term Loan during the nine months ended September 30, 2018. During the nine months ended September 30, 2019 and 2018, we also received proceeds of $23.8 million and $20.7 million, respectively, from our fixed asset loans which serve to offset a significant portion of the capital expenditures included in cash outflows from investing activities as described above. We made payments on these fixed asset loans and various other notes payable of $15.3 million and $10.3 million during the nine months ended September 30, 2019 and 2018, respectively. We also made $3.4 million and $4.3 million in principal payments on our finance leases and paid $5.8 million and $2.9 million of acquisition-related obligations during the nine months ended September 30, 2019 and 2018, respectively. Lastly, we repurchased approximately 793 thousand shares of our common stock for $42.8 million during the nine months ended September 30, 2018 as part of our stock repurchase plan.
Contractual Obligations
During the nine months ended September 30, 2019, our long-term debt obligations changed due to the issuance of our Senior Notes, the lowered aggregate principal of our Term Loan, and additional vehicle-related borrowings. The updated future expected payments are shown in the table below. During the nine months ended September 30, 2019, we had no significant changes to the other obligations disclosed in our 2018 Form
10-K.
See Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations within our 2018 Form
10-K
for additional information on these other contractual obligations.
                             
 
Payments due by period
 
(in thousands)
 
Total
  
2019
  
2020
  
2021
  
2022
  
2023
  
Thereafter
 
Long-term debt obligations 
(1)
 $
  768,482
  $
  9,821
  $
  51,118
  $
  45,329
  $
  40,759
  $
  34,864
  $
  586,591
 
 
 
 
 
(1)Long-term debt obligations include interest payments on our Senior Notes, Term Loan, our 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. Long-term debt obligations do not include commitment fees on the unused portion of the ABL Revolver since those fees are subject to change based on the factors described in the ABL Credit Agreement. Interest on seller obligations maturing through March 2025 is estimated using current market rates. For additional information, see Part II, Item 8 Financial Statements and Supplementary Data, Note 7, Long-Term Debt within our 2018 Form
10-K.
 
 
 
 
Critical Accounting Policies and Estimates
During the nine months ended September 30, 2019, we changed our accounting policy regarding leases upon adoption of ASC 842. See Note 7, Leases, for more information. There have been no other changes to our critical accounting policies and estimates from those previously disclosed in our 2018 Form
10-K.
35

Recently Adopted Accounting Pronouncements
   
Standard
 
Adoption
ASU
2016-02,
Leases (Topic 842)
 
This ASU requires substantially all leases, with the exception of leases with a term of one year or less, to be recorded on the balance sheet as a lease liability measured as the present value of the future lease payments with a corresponding
right-of-use
asset. This ASU also requires disclosures designed to give financial statement users information on the amount, timing and uncertainty of cash flows. See Note 7, Leases, for further information regarding our lease accounting policies.
 
 
 
 
Forward-Looking Statements
This report contains forward-looking statements within the meaning of the federal securities laws, including with respect to the housing market and industry conditions, our financial and business model, our efforts to navigate the material pricing environment, our ability to increase selling prices, our material and labor costs, demand for our services and product offerings, expansion of our national footprint and diversification, our ability to capitalize on the new home and commercial construction recovery, our ability to grow and strengthen our market position, our ability to pursue and integrate value-enhancing acquisitions, our ability to improve sales and profitability and expectations for demand for our services and our earnings in 2019. Forward-looking statements may generally be identified by the use of words such as “anticipate,” “believe,” “estimate,” “project,” “predict,” “possible,” “forecast,” “may,” “could,” “would,” “should,” “expect,” “intends,” “plan,” and “will” or, in each case, their negative, or other variations or comparable terminology. These forward-looking statements include all matters that are not historical facts. By their nature, forward-looking statements involve risks and uncertainties because they relate to events and depend on circumstances that may or may not occur in the future. Any forward-looking statements that we make herein and in any future reports and statements are not guarantees of future performance, and actual results may differ materially from those expressed in or suggested by such forward-looking statements as a result of various factors, including, without limitation, general economic and industry conditions, the material price environment, the timing of increases in our selling prices and the factors discussed in the “Risk Factors” section of our 2018 Form
10-K,
as the same may be updated from time to time in our subsequent filings with the SEC. Any forward-looking statement made by the Company in this report speaks only as of the date hereof. New risks and uncertainties arise from time to time and it is impossible for the Company to predict these events or how they may affect it. The Company has no obligation, and does not intend, to update any forward-looking statements after the date hereof, except as required by federal securities laws.
Item 3. 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. Upon the issuance of our Senior Notes during the three months ended September 30, 2019, we used a portion of the proceeds to lower our Term Loan aggregate principal amount to $200.0 million. As of September 30, 2019, we had $197.8 million outstanding on the Term Loan, net of unamortized debt issuance costs, no outstanding borrowings on the ABL Revolver and $0.1 million outstanding under various finance leases subject to variable interest rates. Our two interest rate swaps, each with an associated floor, combine to reduce exposure to market risks on our Term Loan by $196.5 million as of September 30, 2019. As a result, total variable rate debt of $3.6 million was exposed to market risks as of September 30, 2019. A hypothetical one percentage point increase (decrease) in interest rates on our variable rate debt would increase (decrease) our annual interest expense by approximately $36 thousand.
36

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.
LIBOR is used as a reference rate for our Term Loan and our interest rate swap agreements we use to hedge our interest rate exposure. In 2017, the Financial Conduct Authority (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. Our Term Loan Agreement was amended on November 30, 2017 to include a mechanism to establish an alternative Eurodollar rate if certain circumstances arise such that LIBOR may no longer be used. We continue to review the impact the LIBOR
phase-out
will have on the Company.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We have evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report with the participation of our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”) as required by Exchange Act Rules
13a-15(e)
and
15d-15(e).
Based on that evaluation, our CEO and CFO concluded that our disclosure controls and procedures were effective as of September 30, 2019.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting during the three months ended September 30, 2019 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II – OTHER INFORMATION
Item 1. Legal Proceedings
See Part I, Item 1. Financial Statements, Note 14, Commitments and Contingencies – Other Commitments and Contingencies, for information about existing legal proceedings.
Item 1A. Risk Factors
There have been no material changes for the three months ended September 30, 2019 from the risk factors as disclosed in our 2018 Form
10-K.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
37

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The following table shows the stock repurchase activity for the three months ended September 30, 2019:
                 
 
Total
Number of
Shares
Purchased 
(1)
  
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
(2)
 
July 1 - 31, 2019
  
124
  $
59.22
   
—  
   
—  
 
August 1 - 31, 2019
  
—  
   
—  
   
—  
   
—  
 
September 1 - 30, 2019
  
—  
   
—  
   
—  
   
—  
 
                 
  
124
  $
  59.22
   
—  
  $
60.6 million
 
                 
 
 
 
 
(1)Represents shares surrendered to the Company by employees to satisfy tax withholding obligations arising in connection with the vesting of 403 shares of restricted stock awarded under our 2014 Omnibus Incentive Plan.
 
 
 
 
(2)On February 28, 2018, our board of directors authorized a $50 million stock repurchase program effective March 2, 2018 through February 28, 2019, unless extended by the board of directors. On October 31, 2018, our board of directors approved an additional stock repurchase program, effective November 5, 2018, pursuant to which we may purchase up to an additional $100 million of our outstanding common stock. The program will remain in effect until February 28, 2020, unless extended by the board of directors. During the three or nine months ended September 30, 2019, we did not repurchase any shares under our stock repurchase program.
 
 
 
 
Item 3. Defaults Upon Senior Securities
There have been no material defaults in senior securities.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.
 
 
 
 
 
38

Item 6. Exhibits
(a)(3) Exhibits
The following exhibits are being filed as part of this Quarterly Report on Form
10-Q:
     
Exhibit
Number
  
Description
     
 
    4.1
  
     
 
  10.1
  
     
 
  10.2
  
     
 
  10.3
  
     
 
  31.1*
  
     
 
  31.2*
  
     
 
  32.1*
  
     
 
  32.2*
  
     
 
101.INS**
  
Inline XBRL Instance Document - the instance document does not appear in the interactive date file because its XBRL tags are embedded within the Inline XBRL document
     
 
101.SCH**
  
Inline XBRL Taxonomy Extension Schema Document
     
 
101. CAL**
  
Inline XBRL Taxonomy Extension Calculation Linkbase Document
     
 
101. LAB**
  
Inline XBRL Taxonomy Extension Label Linkbase Document
     
 
101. PRE**
  
Inline XBRL Taxonomy Extension Presentation Linkbase Document
     
 
101. DEF**
  
Inline XBRL Taxonomy Extension Definition Linkbase Document
     
 
104**
  
Cover Page Interactive Data File (formatted in Inline XBRL)
 
 
*Filed herewith.
 
 
**Submitted electronically with the report.
 
 
 
 
 

39
 
 
 
 
 
 

SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: November 1, 2019
   
INSTALLED BUILDING PRODUCTS, INC.
   
By:
 
/s/ Jeffrey W. Edwards
 
Jeffrey W. Edwards
 
President and Chief Executive Officer
   
By:
 
/s/ Michael T. Miller
 
Michael T. Miller
 
Executive Vice President and Chief Financial Officer
 
 
 
 
 
40