NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1 ORGANIZATION
Installed Building Products,
Inc. (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, 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 100 locations and its corporate office is located in Columbus, Ohio.
We have one 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. Commercial sales have increased primarily due to the acquisition of Trilok
Industries, Inc., Alpha Insulation & Waterproofing, Inc. and Alpha Insulation & Waterproofing Company (collectively, Alpha). See Item 2, Managements Discussion and Analysis of Financial Condition and Results of
Operations, for more information. The following table sets forth the percentage of our net revenue by end market:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
September 30,
|
|
|
Nine months ended
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Residential
|
|
|
84
|
%
|
|
|
89
|
%
|
|
|
83
|
%
|
|
|
88
|
%
|
Commercial
|
|
|
16
|
|
|
|
11
|
|
|
|
17
|
|
|
|
12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
NOTE 2 SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Principles of Consolidation
The
accompanying condensed 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
condensed or 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 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, 2016 (the 2016 Form
10-K),
as filed with the SEC on February 28, 2017. The December 31, 2016 condensed consolidated balance sheet data herein was derived from the audited 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, 2017 are not necessarily
indicative of the results to be expected in future operating quarters.
See Item 1A, Risk Factors, in our 2016 Form
10-K
for additional information regarding risk factors that may impact our results.
5
INSTALLED BUILDING PRODUCTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Note 2 to the consolidated financial statements in our 2016 Form
10-K
describes the significant accounting policies and estimates used in preparation of the consolidated financial statements. There have been no changes to our significant accounting policies during the three or nine months ended September 30, 2017
except in the areas of derivative and hedging activities, revenue and cost recognition, investments, accounts receivable, share-based compensation and use of estimates as described below.
Accounting Policy for Derivative Instruments and Hedging Activities
We record all derivatives on the balance sheet at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of
the derivative, whether we have elected to designate a derivative in a hedging relationship and apply hedge accounting and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. Derivatives designated and
qualifying as a hedge of the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. Hedge accounting generally provides for the matching of the timing of gain or loss
recognition on the hedging instrument with the recognition of the earnings effect of the hedged forecasted transactions in a cash flow hedge. We may enter into derivative contracts that are intended to economically hedge certain of our risk, even
though hedge accounting does not apply or we elect not to apply hedge accounting.
Revenue and Cost Recognition
Revenue from the sale and installation of products is recognized when all of the following have occurred: (i) persuasive evidence of an arrangement
exists; (ii) delivery has occurred or services have been rendered; (iii) the price is fixed or determinable; and (iv) the ability to collect is reasonably assured. We recognize revenue using either the completed contract method or the
percentage-of-completion
method of accounting, depending primarily on length of time required to complete the contract. The completed contract method is used for
short-term contracts for which financial position and results of operations reported on the completed-contract basis would not vary materially from those resulting from use of the
percentage-of-completion
method. Revenue from the sale and installation of products is recognized net of adjustments and discounts and, for revenue using the completed
contract method of accounting, at the time the installation is complete. 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 which is considered complete based on the relationship of costs incurred to date to total anticipated costs. 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.
Investment Policy
Marketable securities with original
maturities longer than three months but less than one year from the balance sheet date are classified as investments within current assets. These investments consist of highly liquid instruments including corporate bonds and commercial paper.
Investments for which we have the ability and positive intent to hold to maturity are carried at amortized cost. The difference between the acquisition costs and face values of
held-to-maturity
investments is amortized over the remaining term of the investments and added to or subtracted from the acquisition cost and interest income. As of
September 30, 2017, all of our investments were classified as
held-to-maturity.
6
INSTALLED BUILDING PRODUCTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Accounts Receivable
We account for trade receivables based on amounts billed to customers. Past due receivables are determined based on contractual terms. We do not accrue
interest on any of our trade receivables.
Retainage receivables represent the amount retained by our customers to ensure the quality of the installation
and is received after satisfactory completion of each installation project. Management regularly reviews aging of retainage receivables and changes in payment trends and records an allowance when collection of amounts due are considered not
probable. Amounts retained by project owners under construction contracts and included in accounts receivable and other
non-current
assets were $22.1 million and $0.6 million as of September 30,
2017, respectively. Amounts retained by project owners under construction contracts and included in accounts receivable as of December 31, 2016 were $10.3 million.
Share-Based Compensation
Our share-based compensation
program is designed to attract and retain employees while also aligning employees interests with the interests of our stockholders. Restricted stock awards are periodically granted to certain employees, officers and
non-employee
members of our board of directors under the stockholder-approved 2014 Omnibus Incentive Plan.
Equity-based awards:
Certain of our stock awards are deemed to be equity-based with a service condition and do not contain a market or performance
condition with the exception of performance-based awards granted to certain officers and performance-based restricted stock units. Fair value of the
non-performance-based
awards to employees and officers is
measured at the grant date and amortized to expense over the vesting period of the awards using the straight-line attribution method for all service-based awards with a graded vesting feature. This fair value is reduced by assumed forfeitures and
adjusted for actual forfeitures until vesting. We also issue performance stock-based awards to certain officers under our 2014 Omnibus Incentive Plan. The performance-based compensation expense is recorded over the requisite service period using the
graded-vesting method for the entire award. Performance-based stock awards are accounted for at fair value at date of grant. We also periodically grant restricted stock units to certain employees under the stockholder-approved 2014 Omnibus Incentive
Plan. These units convert to shares upon meeting time- and performance-based requirements.
Liability-based awards:
Certain of our stock awards
represent a predominately-fixed monetary amount that is to be settled with a variable number of shares. These awards contain both time and performance requirements, and are deemed to be liability-based, which requires that we
re-measure
to reflect the fair value at the end of each reporting period. The change in fair value each reporting period is recorded as compensation cost, with a corresponding increase or decrease in the share-based
liability, either immediately or over the remaining service period depending on the vested status of the award.
Compensation expense for both equity and
liability-based restricted stock units is recorded based on an assessment each reporting period of the probability that certain performance goals will be met during the contingent vesting period. If performance goals are not probable of occurrence,
no compensation expense will be recognized. If performance goals that were previously deemed probable are not or are not expected to be met, the previously recognized compensation cost related to such performance goals will be reversed. Employees
and officers are subject to tax at the vesting date based on the market price of the shares on that date, or on the grant date if an election is made.
7
INSTALLED BUILDING PRODUCTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Use of Estimates
Preparation of the consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates include the
revenue, costs and reserves established under the
percentage-of-completion
method, allowance for doubtful accounts, valuation allowance on deferred tax assets, valuation
of the reporting unit, intangible assets and other long-lived assets, share-based compensation, fair value of derivative instruments and reserves for general liability, workers compensation and medical insurance. Management believes the
accounting estimates are appropriate and reasonably determined; however, due to the inherent uncertainties in making these estimates, actual amounts could differ from such estimates.
Advertising Costs
Advertising costs are generally
expensed as incurred. Advertising expense was approximately $0.8 million and $2.4 million for the three and nine months ended September 30, 2017, respectively, and $0.8 million and $2.2 million for the three and nine months
ended September 30, 2016, respectively, and is included in selling expense on the Condensed Consolidated Statements of Operations and Comprehensive Income.
Recently Adopted Accounting Pronouncements
In July 2015,
the Federal Accounting Standards Board (FASB) issued Accounting Standards Update (ASU)
2015-11,
Inventory (Topic 330). This update requires an entity to measure inventory
within the scope of the update at the lower of cost and net realizable value. For public business entities, this update is effective for financial statements issued for fiscal years beginning after December 15, 2016, and interim periods within
those fiscal years. This ASU did not have a material impact on our consolidated financial statements.
In March 2016, the FASB issued ASU
2016-06,
Derivatives and Hedging (Topic 815): Contingent Put and Call Options in Debt Instruments. This ASU clarifies the requirement for assessing whether contingent call/put options that can accelerate
the payment of principal on debt instruments are clearly and closely related to their debt hosts. An entity performing the assessment under this amendment is required to assess the embedded call/put options solely in accordance with the four-step
decision sequence. Consequently, when a call/put option is contingently exercisable, an entity does not have to assess whether the event that triggers the ability to exercise a call/put option is related to interest rates or credit risks. For public
business entities, this update is effective for financial statements issued for fiscal years beginning after December 15, 2016 and interim periods within those fiscal years. This ASU did not have a material impact on our consolidated financial
statements.
In January 2017, the FASB issued ASU
2017-03,
Accounting Changes and Error Corrections (Topic
250) and Investments-Equity Method and Joint Ventures (Topic 323). The portion of this ASU related to Topic 250 states that when a registrant does not know or cannot reasonably estimate the impact that future adoption of certain ASUs (ASU
2014-09,
2016-02
and
2016-13)
are expected to have on the financial statements, then in addition to making a statement to that effect,
that registrant should consider additional qualitative financial statement disclosures to assist the reader in assessing the significance of the impact that the standard will have on the financial statements of the registrant when adopted. We have
included such disclosures for ASU
2014-09
but not for ASU
2016-02
or ASU
2016-13
since we have not yet performed sufficient
analysis on future effects upon implementation of the new standards. We have concluded that the portion of this ASU related to Topic 323 is not applicable and, therefore, did not have a material impact on our consolidated financial statements. This
ASU is effective upon issuance.
8
INSTALLED BUILDING PRODUCTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Recently Issued Accounting Pronouncements Not Yet Adopted
In May 2014, the FASB issued ASU
2014-09,
Revenue from Contracts with Customers (Topic 606). ASU
2014-09
and related subsequently issued amendments set forth a new revenue recognition model that requires identifying the contract(s) with a customer, identifying the performance obligations in the contract,
determining the transaction price, allocating the transaction price to the performance obligations and recognizing the revenue upon satisfaction of performance obligations. In July 2015, the FASB voted to defer the application of the provisions of
this standard for public companies until annual reporting periods beginning after December 15, 2017, including interim periods within those reporting periods. We have substantially completed our assessment on the applicability of the standard
on accounting for contracts with customers with the exception of certain 2017 business combinations which we are currently assessing. The standard is expected to result in the disaggregation of certain of our insulation contracts into multiple
separately identifiable performance obligations as well as additional revenue recognition disclosures. Under current accounting standards, we consider the installation service to represent one performance obligation, whereas in accordance with this
ASU, we have identified multiple phases to certain of our insulation projects that should be considered separate performance obligations. Currently, we intend to adopt the new standard using the modified retrospective approach, which would allow us
to recognize the cumulative effect of initially applying the standard as an adjustment to the opening balance of retained earnings.
In February 2016, the
FASB issued ASU
2016-02,
Leases (Topic 842). This update amends the existing accounting standards for lease accounting, including requiring lessees to recognize most leases on their balance sheets
and making targeted changes to lessor accounting. ASU
2016-02
requires a modified retrospective transition approach for all leases existing at, or entered into after, the date of initial application, with an
option to use certain transition relief. For public business entities, this update is effective for annual reporting periods beginning after December 15, 2018, including interim periods within those fiscal years, and early adoption is permitted
as of the standards issuance date. We are evaluating whether this ASU will have a material impact on our consolidated financial statements.
In May
2016, the FASB issued ASU
No. 2016-11,
Revenue Recognition (Topic 605) and Derivatives and Hedging (Topic 815): Rescission of SEC Guidance Because of Accounting Standards Updates
2014-09
and
2014-16
pursuant to Staff announcements at the March 3, 2016 EITF Meeting. This ASU rescinds from the FASB Accounting Standards Codification certain SEC
paragraphs as a result of two SEC Staff Announcements at the March 3, 2016 meeting. For public entities, the amendments related to Topic 605 are effective for interim and annual reporting periods beginning after December 15, 2017 and
amendments related to Topic 815 are effective for interim and annual reporting periods beginning after December 15, 2015. We have evaluated the applicability of this ASU and have determined it will not have a material impact on our consolidated
financial statements.
In June 2016, the FASB issued ASU
2016-13,
Financial InstrumentsCredit Losses
(Topic 326): Measurement of Credit Losses on Financial Instruments. This ASU amends 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. For public business entities, this update is effective for financial statements issued for fiscal years beginning after December 15, 2019 and interim periods within those
fiscal years. We are evaluating whether this ASU will have a material impact on our consolidated financial statements.
9
INSTALLED BUILDING PRODUCTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
In August 2016, the FASB issued ASU
2016-15,
Statement of Cash
Flows: Clarification of Certain Cash Receipts and Cash Payments (Topic 230). This ASU addresses the diversity in practice related to the classification of certain cash receipts and payments in the statement of cash flows by adding or
clarifying guidance on eight specific cash flow issues. We have determined that this update addresses one issue that specifically impacts us, which is the classification of contingent consideration payments made after a business combination, and we
are evaluating whether it will have a material impact on our consolidated financial statements. For public business entities, this update is effective for financial statements issued for fiscal years beginning after December 15, 2017 and
interim periods within those fiscal years.
In October 2016, the FASB issued ASU
2016-16,
Income Taxes
(Topic 740): Intra-Entity Transfers of Assets Other than Inventory. This ASU aligns the recognition of income tax consequences for intra-entity transfers of assets other than inventory with International Financial Reporting Standards
(IFRS). For public business entities, this update is effective for financial statements issued for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years. We have evaluated the applicability of
this ASU and have determined it will not have a material impact on our consolidated financial statements.
In November 2016, the FASB issued ASU
No. 2016-18,
Statement of Cash Flows (Topic 230): Restricted Cash. This ASU provides guidance on the presentation of restricted cash or restricted cash equivalents in the statement of cash flows.
This standard is effective for interim and annual reporting periods beginning after December 15, 2017. We will adopt this standard effective January 1, 2018 as we expect it to be applicable to us at that time.
In January 2017, the FASB issued ASU
2017-01,
Business Combinations (Topic 805): Clarifying the Definition of a
Business. This ASU clarifies the definition of a business to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. For public business entities, this update is
effective for financial statements issued for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years. We have evaluated the applicability of this ASU and have determined it will not have a material impact
on our consolidated financial statements.
In May 2017, the FASB issued ASU
2017-09,
CompensationStock
Compensation (Topic 718): Scope of Modification Accounting. This ASU provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. The amendments should be
applied prospectively to an award modified on or after the adoption date. For public business entities, this update is effective for financial statements issued for fiscal years beginning after December 15, 2017 and interim periods within those
fiscal years. Early adoption is permitted. We have evaluated the applicability of this ASU and have determined it will not have a material impact on our consolidated financial statements.
In August 2017, the FASB issued ASU
2017-12,
Derivatives and Hedging (Topic 815): Targeted Improvements to
Accounting for Hedging Activities. This ASU better aligns a companys risk management activities and financial reporting for hedging relationships and makes certain improvements to simplify the application of hedge accounting guidance.
For public business entities, this update is effective for financial statements issued for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years. We are evaluating whether this ASU will have a material
impact on our consolidated financial statements.
10
INSTALLED BUILDING PRODUCTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 3 INVESTMENTS
Cash and cash equivalents includes investments in money market funds that are valued based on the net asset value of the funds. The cash equivalents consist
primarily of money market funds that are Level 1 measurements. The investments in these funds were $58.8 million as of September 30, 2017. We had no such investments as of December 31, 2016.
All other investments are classified as
held-to-maturity
and consist of highly
liquid instruments including corporate bonds and commercial paper. As of September 30, 2017, the amortized cost of these investments equaled the net carrying value, which was $25.1 million. We had no such investments as of
December 31, 2016. All
held-to-maturity
securities as of September 30, 2017 mature in one year or less and are Level 2 measurements. See Note 7, Fair
Value Measurements, for additional information.
NOTE 4 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, 2017
|
|
$
|
177,090
|
|
|
$
|
(70,004
|
)
|
|
$
|
107,086
|
|
Business Combinations
|
|
|
46,059
|
|
|
|
|
|
|
|
46,059
|
|
Other
|
|
|
515
|
|
|
|
|
|
|
|
515
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2017
|
|
$
|
223,664
|
|
|
$
|
(70,004
|
)
|
|
$
|
153,660
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other changes included in the above table represent minor adjustments for the allocation of certain acquisitions still under
measurement and three immaterial acquisitions completed during the nine months ended September 30, 2017.
We test goodwill for impairment annually
during the fourth quarter of our fiscal year or earlier if there is an impairment indicator. No impairment was recognized during either of the nine month periods ended September 30, 2017 and 2016.
11
INSTALLED BUILDING PRODUCTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Intangibles, net
The following table provides the gross carrying amount and accumulated amortization for each major class of intangibles (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2017
|
|
|
As of December 31, 2016
|
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net
Book
Value
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net
Book
Value
|
|
Amortized intangibles:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships
|
|
$
|
118,448
|
|
|
$
|
35,560
|
|
|
$
|
82,888
|
|
|
$
|
80,909
|
|
|
$
|
27,533
|
|
|
$
|
53,376
|
|
Covenants
not-to-compete
|
|
|
11,581
|
|
|
|
4,139
|
|
|
|
7,442
|
|
|
|
8,602
|
|
|
|
2,466
|
|
|
|
6,136
|
|
Trademarks and trade names
|
|
|
56,781
|
|
|
|
13,097
|
|
|
|
43,684
|
|
|
|
37,303
|
|
|
|
10,498
|
|
|
|
26,805
|
|
Backlog
|
|
|
13,400
|
|
|
|
6,700
|
|
|
|
6,700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
200,210
|
|
|
$
|
59,496
|
|
|
$
|
140,714
|
|
|
$
|
126,814
|
|
|
$
|
40,497
|
|
|
$
|
86,317
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The gross carrying amount of intangibles increased approximately $73.4 million during the nine months ended
September 30, 2017 primarily due to business combinations. See Note 13, 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 2017
|
|
$
|
6,916
|
|
2018
|
|
|
22,983
|
|
2019
|
|
|
17,928
|
|
2020
|
|
|
17,212
|
|
2021
|
|
|
16,194
|
|
Thereafter
|
|
|
59,481
|
|
NOTE 5 LONG-TERM DEBT
Debt consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
As of September 30,
|
|
|
As of December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Term loans under agreements applicable to respective period, in effect, net of unamortized
original issue discount and debt issuance costs of $6,184 and $447, respectively
|
|
$
|
293,066
|
|
|
$
|
95,803
|
|
Delayed draw term loans, in effect, net of unamortized debt issuance costs of $0 and $50,
respectively
|
|
|
|
|
|
|
12,450
|
|
Vehicle and equipment notes, maturing June 2022 to September 2022; payable in various monthly
installments, including interest rates ranging from 2% to 4%
|
|
|
46,713
|
|
|
|
38,186
|
|
Various notes payable, maturing through March 2025; payable in various installments, including
interest rates ranging from 4% to 6%
|
|
|
4,066
|
|
|
|
4,988
|
|
|
|
|
|
|
|
|
|
|
|
|
|
343,845
|
|
|
|
151,427
|
|
Less: current maturities
|
|
|
(15,550
|
)
|
|
|
(17,192
|
)
|
|
|
|
|
|
|
|
|
|
Long-term debt, less current maturities
|
|
$
|
328,295
|
|
|
$
|
134,235
|
|
|
|
|
|
|
|
|
|
|
12
INSTALLED BUILDING PRODUCTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Senior Secured Credit Agreements
On April 13, 2017, we entered into a term loan credit agreement (the Term Loan Agreement) which provides for a seven-year $300.0 million
term loan facility (the Term Loan) and an asset-based lending credit agreement (the ABL Credit Agreement and together with the Term Loan Agreement, the Senior Secured Credit Agreements) which provides for up to
approximately $100.0 million with a sublimit up to $50.0 million for the issuance of letters of credit (the ABL Revolver and together with the Term Loan, the Senior Secured Facilities), which may be reduced or
increased pursuant to the ABL Credit Agreement. The borrowing base for the ABL Revolver, which determines availability under the facility, is based on a percentage of the value of certain assets securing the obligations of the Company and the
subsidiary guarantors under the ABL Credit Agreement.
Proceeds from the Senior Secured Credit Facilities were used to repay in full all amounts
outstanding under the credit and security agreement, dated as of February 29, 2016, by and among the Company and the lenders named therein (the Credit and Security Agreement).
The Term Loan amortizes in quarterly principal payments of approximately $0.8 million starting on September 30, 2017, with any remaining unpaid
balances due on April 15, 2024, which is the maturity date. Loans incurred under the ABL Revolver will have a final maturity of April 13, 2022.
Subject to certain exceptions, the Term Loan will be subject to mandatory
pre-payments
equal to (i) 100% of the net
cash proceeds from issuances or incurrence of debt by the Company or any of its restricted subsidiaries (other than with respect to certain permitted indebtedness); (ii) 100% of the net cash proceeds from certain sales or dispositions of assets by
the Company or any of its restricted subsidiaries in excess of a certain amount and subject to customary reinvestment provisions and certain other expenses; and (iii) 50% (with step-downs to 25% and 0% based upon achievement of specified net
leverage ratios) of excess cash flow of the Company and its restricted subsidiaries in excess of $5.0 million, subject to customary exceptions and limitations.
Loans under the Senior Secured Credit Facilities bear interest based on, at the Companys election, either the base rate or the Eurodollar rate plus, in
each case, an applicable margin (the Applicable Margin). The Applicable Margin in respect of loans under (i) the Term Loan Agreement will be (A) 3.00% in the case of Eurodollar rate loans and (B) 2.00% in the case of base rate
loans, and (ii) the ABL Facility will be (A) 1.25%, 1.50% or 1.75% in the case of Eurodollar rate loans (based on a measure of availability under the ABL Facility) and (B) 0.25%, 0.50% or 0.75% in the case of base rate loans (based on a measure
of availability under the ABL Facility).
In addition, we will pay customary commitment fees and letter of credit fees under the ABL Credit Agreement. The
commitment fees will vary based upon a measure of our utilization under the ABL Revolver.
The Senior Secured Credit Agreements each contain a number of
customary affirmative and negative
non-financial
covenants, and the ABL Credit Agreement also contains a financial covenant requiring the satisfaction of a minimum fixed charge coverage ratio of 1.00 to 1.00
in the event that we do not meet a minimum measure of availability under the ABL Revolver.
Vehicle and Equipment Notes
We are party to a Master Loan and Security Agreement (Master Loan and Security Agreement), a Master Equipment Lease Agreement (Master
Equipment Agreement) and one or more Master Loan Agreements (Master Loan Agreements) with various lenders to provide financing for the purpose of purchasing or leasing vehicles and equipment used in the normal course of business.
Each financing
13
INSTALLED BUILDING PRODUCTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
arrangement under these agreements constitutes a separate note and obligation. Vehicles and equipment purchased or leased under each financing arrangement serve as collateral for the note
applicable to such financing arrangement. Regular payments are due under each note for a period of typically 60 consecutive months after the incurrence of the obligation. The specific terms of each note are based on specific criteria, including the
type of vehicle or equipment and the market interest rates at the time. No termination date applies to these agreements.
Total gross assets relating to
our master loan and equipment agreements were $66.8 million and $48.7 million as of September 30, 2017 and December 31, 2016, respectively, none of which were fully depreciated as of September 30, 2017 or December 31,
2016, respectively. The net book value of assets under these agreements was $47.3 million and $38.0 million as of September 30, 2017 and December 31, 2016, respectively. Depreciation of assets held under these agreements is
included within cost of sales on the Condensed Consolidated Statements of Operations and Comprehensive Income.
NOTE 6 COSTS AND ESTIMATED
EARNINGS ON UNCOMPLETED CONTRACTS
Uncompleted contracts were as follows for the nine months ended September 30 (in thousands):
|
|
|
|
|
|
|
2017
|
|
Costs incurred on uncompleted contracts
|
|
$
|
70,403
|
|
Estimated earnings
|
|
|
38,691
|
|
|
|
|
|
|
Total
|
|
|
109,094
|
|
Less: Billings to date
|
|
|
108,798
|
|
|
|
|
|
|
Net under (over) billings
|
|
$
|
296
|
|
|
|
|
|
|
Net under (over) billings were as follows as of September 30 (in thousands):
|
|
|
|
|
|
|
2017
|
|
Costs and estimated earnings in excess of billings on uncompleted contracts
|
|
$
|
5,323
|
|
Billings in excess of costs and estimated earnings on uncompleted contracts
|
|
|
(5,027
|
)
|
|
|
|
|
|
Net under (over) billings
|
|
$
|
296
|
|
|
|
|
|
|
The asset, costs and estimated earnings in excess of billings on uncompleted contracts, represents revenues recognized in
excess of amounts billed and is included in other current assets in our Condensed Consolidated Balance Sheets. The liability, billings in excess of costs and estimated earnings on uncompleted contracts, represents billings in excess of revenues
recognized and is included in other current liabilities in our Condensed Consolidated Balance Sheets.
NOTE 7 FAIR VALUE MEASUREMENTS
Fair Values
Fair value is the price that would be
received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.
14
INSTALLED BUILDING PRODUCTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
ASC 820, Fair Value Measurement, establishes a fair value hierarchy that requires an entity to
maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:
Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of
the measurement date.
Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar
assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
Level 3: Significant unobservable inputs that reflect a reporting entitys own assumptions about the assumptions that market
participants would use in pricing an asset or liability.
Estimated Fair Value of Financial Instruments
Accounts receivable, accounts payable and accrued liabilities as of September 30, 2017 and December 31, 2016 approximate fair value due to the
short-term maturities of these financial instruments. The carrying amounts of our long-term debt, including the Term Loan and ABL Revolver as of September 30, 2017 and the term loan, delayed draw term loan and revolving line of credit as of
December 31, 2016, approximate fair value due to the variable rate nature of the agreements. The carrying amounts of the obligations associated with our capital leases and vehicle and equipment notes approximate fair value as of
September 30, 2017 and December 31, 2016 because we have incurred the obligations within recent fiscal years when the interest rate markets have been low and stable. All debt classifications represent Level 2 fair value measurements.
The fair values of financial assets and liabilities were as follows as of September 30 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value as of September 30, 2017
|
|
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Financial assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents
|
|
$
|
58,825
|
|
|
$
|
58,825
|
|
|
$
|
|
|
|
$
|
|
|
Investments
|
|
|
25,106
|
|
|
|
|
|
|
|
25,106
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total financial assets
|
|
$
|
83,931
|
|
|
$
|
58,825
|
|
|
$
|
25,106
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative financial instruments, net of tax
|
|
$
|
45
|
|
|
$
|
|
|
|
$
|
45
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We had no such items upon which to report fair value as of December 31, 2016. See Note 3, Investments, for more
information on cash equivalents and investments included in the table above. Also see Note 8, Derivatives and Hedging Activities, for more information on derivative financial instruments.
NOTE 8 DERIVATIVES AND HEDGING ACTIVITIES
Risk
Management Objective of Using Derivatives
We are exposed to certain risks arising from both our business operations and economic conditions. We manage
exposure to a wide variety of business and operational risks through our core business activities.
15
INSTALLED BUILDING PRODUCTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
We manage economic risks, including interest rate, liquidity and credit risk primarily by overseeing the amount, sources and duration of debt funding and the use of derivative financial
instruments. Specifically, we have entered into derivative financial instruments to manage exposure to interest rate movements that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by
interest rates. Our derivative financial instruments are used to manage differences in the amount, timing and duration of our known or expected cash receipts and known or expected cash payments principally related to our investments and borrowings.
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. 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, 2017, we have two interest rate swaps with a beginning notional of $100.0 million that amortize quarterly to $95.3 million at a maturity date of May 31, 2022.
The effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges is recorded in accumulated other
comprehensive income and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. During 2017, such derivatives were used to hedge the variable cash flows associated with existing
variable-rate debt. The ineffective portion of the change in fair value of the derivatives, when present, is recognized directly in earnings. During the nine months ended September 30, 2017, we did not record any hedge ineffectiveness in
earnings.
Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to interest expense as interest payments
are made on our variable-rate debt. Over the next twelve months, we estimate that an additional $0.5 million will be reclassified as an increase to interest expense.
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, 2017, the Company has not posted any collateral related to these agreements.
NOTE 9 EMPLOYEE BENEFITS
Healthcare
Our healthcare benefit expense (net of
employee contributions) for all plans was approximately $4.1 million and $3.7 million for the three months ended September 30, 2017 and 2016, respectively, and $12.4 million and $11.4 million for the nine months ended
September 30, 2017 and 2016, 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 $1.9 million
and $1.7 million as of September 30, 2017 and December 31, 2016, respectively.
16
INSTALLED BUILDING PRODUCTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Workers Compensation
Workers compensation expense totaled $3.1 million and $3.4 million for the three months ended September 30, 2017 and 2016, respectively,
and $9.8 million and $9.2 million for the nine months ended September 30, 2017 and 2016, respectively. Workers compensation known claims and IBNR reserves included on the Condensed Consolidated Balance Sheets were as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30,
2017
|
|
|
December 31,
2016
|
|
Included in other current liabilities
|
|
$
|
4,913
|
|
|
$
|
4,595
|
|
Included in other long-term liabilities
|
|
|
8,837
|
|
|
|
7,052
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
13,750
|
|
|
$
|
11,647
|
|
|
|
|
|
|
|
|
|
|
We also had an insurance receivable for claims that exceeded the stop loss limit included on the Condensed Consolidated
Balance Sheets. That receivable offsets an equal liability included within other long-term liabilities noted above and was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30,
2017
|
|
|
December 31,
2016
|
|
Included in other
non-current
assets
|
|
$
|
1,828
|
|
|
$
|
1,249
|
|
Share-Based Compensation
Directors
During the nine months ended September 30,
2017 and 2016, we granted approximately six thousand and nine thousand shares of our common stock, respectively, under our 2014 Omnibus Incentive Plan to
non-employee
members of our Board of Directors.
Accordingly, for the nine months ended September 30, 2017 and 2016, we recorded $0.3 million in compensation expense within administrative expenses on the Condensed Consolidated Statements of Operations and Comprehensive Income at the time
of the grant.
Employees Common Stock Awards
During the nine months ended September 30, 2017, we granted approximately 0.1 million shares of our common stock under our 2014 Omnibus Incentive
Plan to our employees, which vest in three equal installments (rounded to the nearest whole share) on each of April 20, 2018, April 20, 2019 and April 20, 2020. These awards have a time-based requirement but are not classified as
performance-based.
During the nine months ended September 30, 2017, our employees surrendered approximately ten thousand shares of our common stock
to satisfy tax withholding obligations arising in connection with the vesting of common stock awards issued under our 2014 Omnibus Incentive Plan. Share-based compensation expense associated with common stock awards was $0.8 million and
$1.9 million for the three and nine months ended September 30, 2017, respectively, and $0.4 million and $1.2 million for the three and nine months ended September 30, 2016, respectively. We recognized excess tax benefits of
$0.6 million and $0.3 million within the income tax provision in the Condensed Consolidated Statements of Operations and Comprehensive Income for the nine months ended September 30, 2017 and 2016, respectively. We did not recognize
any such excess tax benefits in the three months ended September 30, 2017 or 2016.
As of September 30, 2017, there was $6.2 million of
unrecognized compensation expense related to these nonvested common stock awards. 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
2.2 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.
17
INSTALLED BUILDING PRODUCTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Employees Performance-Based Stock Awards
During the nine months ended September 30, 2017, we established, and our Board of Directors approved, performance-based targets in connection with common
stock awards to be issued to certain officers in 2018 contingent upon achievement of these targets. Share-based compensation expense associated with these performance-based awards was $0.3 million and $0.7 million for the three and nine
months ended September 30, 2017, respectively.
As of September 30, 2017, there was $2.4 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 2.1 years using the graded-vesting method. See
the table below for changes in shares and related weighted average fair market value per share.
Employees Performance-Based Restricted Stock
Units
During the nine months ended September 30, 2017, we established, and our Board of Directors approved, performance-based restricted stock
units in connection with common stock awards to be issued to certain employees in 2018 contingent 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. Share-based compensation expense associated with these performance-based awards was $1.0 million and $1.7 million for the three and nine months ended September 30, 2017, respectively.
As of September 30, 2017, there was $2.1 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.
In addition, during the three months ended September 30, 2017, we established, and our Board of Directors approved,
performance-based restricted stock units in connection with common stock awards to be issued to certain employees between 2018 and 2022 contingent upon achievement of certain performance targets. These units will be accounted for as liability-based
awards since they represent a predominantly-fixed monetary amount that will be settled with a variable number of common shares and as such are included in other long-term liabilities on the Condensed Consolidated Balance Sheets. Share-based
compensation expense associated with these performance-based awards was $0.1 million for the three and nine months ended September 30, 2017. The unrecognized compensation expense associated with the liability-based awards is subject to
fair value adjustment each reporting period, and is expected to be recognized on a straight-line basis over the remaining vesting period of 4.25 years.
18
INSTALLED BUILDING PRODUCTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Share-Based Compensation Summary
Amounts for each category of equity-based award for employees as of December 31, 2016 and changes during the nine months ended September 30, 2017
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock Awards
|
|
|
Performance-Based
Stock Awards
|
|
|
Performance-Based
Restricted Stock Units
|
|
|
|
Awards
|
|
|
Weighted
Average Fair
Market Value
Per Share
|
|
|
Awards
|
|
|
Weighted
Average Fair
Market Value
Per Share
|
|
|
Units
|
|
|
Weighted
Average Fair
Market Value
Per Share
|
|
Nonvested awards/units at December 31, 2016
|
|
|
161,174
|
|
|
$
|
26.36
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
|
|
Granted
|
|
|
101,241
|
|
|
|
52.00
|
|
|
|
77,254
|
|
|
|
41.00
|
|
|
|
73,880
|
|
|
|
52.00
|
|
Vested
|
|
|
(57,816
|
)
|
|
|
26.30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited/Cancelled
|
|
|
(1,541
|
)
|
|
|
36.33
|
|
|
|
|
|
|
|
|
|
|
|
(475
|
)
|
|
|
52.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested awards/units at September 30, 2017
|
|
|
203,058
|
|
|
$
|
39.09
|
|
|
|
77,254
|
|
|
$
|
41.00
|
|
|
|
73,405
|
|
|
$
|
52.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2017, approximately 2.6 million shares of common stock were available for issuance under the
2014 Omnibus Incentive Plan.
NOTE 10 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, 2017, the effective tax rate was 32.3% and 33.8%, respectively.
These rates were favorably impacted by deductions related to domestic production activities, usage of net operating losses for a tax filing entity which previously had a full valuation allowance, excess tax benefits from share-based compensation
arrangements and the statute expiring for various uncertain tax positions. The favorable impact was partially offset by the tax effect of losses incurred by separate companies to which no benefit can be recognized due to a full valuation allowance
against the losses.
NOTE 11 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 12, Commitments and Contingencies, for future minimum lease payments to be paid to these related parties.
For the three and nine months ended September 30, 2017 and 2016, 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,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Sales
|
|
$
|
2,641
|
|
|
$
|
2,182
|
|
|
$
|
7,363
|
|
|
$
|
5,282
|
|
Purchases
|
|
|
302
|
|
|
|
114
|
|
|
|
901
|
|
|
|
370
|
|
Rent
|
|
|
290
|
|
|
|
163
|
|
|
|
875
|
|
|
|
472
|
|
As of September 30, 2017 and December 31, 2016, we had related party balances of approximately $2.0 million and
$1.5 million, respectively, included in accounts receivable on our Condensed Consolidated Balance Sheets. These balances primarily represent trade accounts receivable arising during the normal
19
INSTALLED BUILDING PRODUCTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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
$1.0 million and $0.8 million of these balances as of September 30, 2017 and December 31, 2016, respectively.
NOTE 12
COMMITMENTS AND CONTINGENCIES
Accrued General Liability
Accrued general insurance reserves included on the Condensed Consolidated Balance Sheets were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30,
2017
|
|
|
December 31,
2016
|
|
Included in other current liabilities
|
|
$
|
2,069
|
|
|
$
|
1,949
|
|
Included in other long-term liabilities
|
|
|
7,627
|
|
|
|
7,104
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
9,696
|
|
|
$
|
9,053
|
|
|
|
|
|
|
|
|
|
|
We also had insurance receivables 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,
2017
|
|
|
December 31,
2016
|
|
Insurance receivable and indemnification asset for claims under a
fully insured
policy
|
|
$
|
2,773
|
|
|
$
|
2,773
|
|
Insurance receivable for claims that exceeded the stop loss limit
|
|
|
2
|
|
|
|
26
|
|
|
|
|
|
|
|
|
|
|
Total insurance receivables included in other
non-current
assets
|
|
$
|
2,775
|
|
|
$
|
2,799
|
|
|
|
|
|
|
|
|
|
|
Leases
We are obligated
under capital leases covering vehicles and certain equipment. The vehicle and equipment leases generally have initial terms ranging from four to six years. Total gross assets relating to capital leases were approximately $64.2 million and
$64.2 million as of September 30, 2017 and December 31, 2016, respectively, and a total of approximately $23.7 million and $22.8 million were fully depreciated as of September 30, 2017 and December 31, 2016,
respectively. The net book value of assets under capital leases was approximately $14.4 million and $16.4 million as of September 30, 2017 and December 31, 2016, respectively. Amortization of assets held under capital leases is
included within cost of sales on the Condensed Consolidated Statements of Operations and Comprehensive Income.
We also have several noncancellable
operating leases, primarily for buildings, improvements, equipment and certain vehicles. These leases generally contain renewal options for periods ranging from one to five years and require us to pay all executory costs such as property taxes,
maintenance and insurance.
20
INSTALLED BUILDING PRODUCTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Future minimum lease payments under noncancellable operating leases (with initial or remaining lease terms in
excess of one year) with related parties as of September 30, 2017 are as follows (in thousands):
|
|
|
|
|
Remainder of 2017
|
|
$
|
295
|
|
2018
|
|
|
988
|
|
2019
|
|
|
829
|
|
2020
|
|
|
566
|
|
2021
|
|
|
583
|
|
Thereafter
|
|
|
600
|
|
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.
NOTE 13
BUSINESS COMBINATIONS
As part of our ongoing strategy to increase market share in certain markets, we completed seven business combinations during the
nine months ended September 30, 2017 and six business combinations during the nine months ended September 30, 2016 in which we acquired 100% of the voting equity interests in each. The largest of these acquisitions were Alpha, Columbia
Shelving & Mirror Inc. and Charleston Shelving & Mirror, Inc. (collectively, Columbia) and All In Insulation, LLC d/b/a Astro Insulation (collectively, Astro). The remaining acquisitions were individually
insignificant but material in the aggregate, as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value
|
|
|
Total
|
|
|
Three months ended
September 30, 2017
|
|
|
Nine months ended
September 30, 2017
|
|
2017 Acquisitions
|
|
Date
|
|
|
Acquisition
Type
|
|
|
Cash Paid
|
|
|
Seller
Obligations
|
|
|
of Common
Stock Issued
|
|
|
Purchase
Price
|
|
|
Revenue
|
|
|
Net (Loss)
Income
|
|
|
Revenue
|
|
|
Net Income
(Loss)
|
|
Alpha(1)
|
|
|
1/5/2017
|
|
|
|
Share
|
|
|
$
|
103,810
|
|
|
$
|
2,002
|
|
|
$
|
10,859
|
|
|
$
|
116,671
|
|
|
$
|
29,334
|
|
|
$
|
(271
|
)
|
|
$
|
87,830
|
|
|
$
|
190
|
|
Columbia
|
|
|
6/26/2017
|
|
|
|
Asset
|
|
|
|
8,768
|
|
|
|
225
|
|
|
|
|
|
|
|
8,993
|
|
|
|
3,026
|
|
|
|
73
|
|
|
|
3,241
|
|
|
|
80
|
|
Astro
|
|
|
9/18/2017
|
|
|
|
Asset
|
|
|
|
8,851
|
|
|
|
490
|
|
|
|
|
|
|
|
9,341
|
|
|
|
264
|
|
|
|
46
|
|
|
|
264
|
|
|
|
46
|
|
Other
|
|
|
Various
|
|
|
|
Asset
|
|
|
|
9,812
|
|
|
|
1,042
|
|
|
|
|
|
|
|
10,854
|
|
|
|
6,499
|
|
|
|
84
|
|
|
|
11,671
|
|
|
|
366
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
$
|
131,241
|
|
|
$
|
3,759
|
|
|
$
|
10,859
|
|
|
$
|
145,859
|
|
|
$
|
39,123
|
|
|
$
|
(68
|
)
|
|
$
|
103,006
|
|
|
$
|
682
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
The cash paid included $21.7 million in contingent consideration to satisfy purchase price adjustments related to cash and net working capital requirements, earnout consideration based on Alphas change in
EBITDA from 2015 and a customary holdback. We issued 282,577 shares of our common stock with a fair value of $10.9 million.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
September 30, 2016
|
|
|
Nine months ended
September 30, 2016
|
|
2016 Acquisitions
|
|
Date
|
|
|
Acquisition
Type
|
|
|
Cash Paid
|
|
|
Seller
Obligations
|
|
|
Total
Purchase
Price
|
|
|
Revenue
|
|
|
Net Income
(Loss)
|
|
|
Revenue
|
|
|
Net Income
(Loss)
|
|
Alpine Insulation Co., Inc.
|
|
|
4/12/2016
|
|
|
|
Asset
|
|
|
$
|
21,151
|
|
|
$
|
1,560
|
|
|
$
|
22,711
|
|
|
$
|
7,957
|
|
|
$
|
806
|
|
|
$
|
14,734
|
|
|
$
|
1,238
|
|
Other
|
|
|
Various
|
|
|
|
Asset
|
|
|
|
15,276
|
|
|
|
1,289
|
|
|
|
16,565
|
|
|
|
5,519
|
|
|
|
(200
|
)
|
|
|
12,283
|
|
|
|
(664
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
$
|
36,427
|
|
|
$
|
2,849
|
|
|
$
|
39,276
|
|
|
$
|
13,476
|
|
|
$
|
606
|
|
|
$
|
27,017
|
|
|
$
|
574
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21
INSTALLED BUILDING PRODUCTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Acquisition-related costs recorded within administrative expenses on the Condensed Consolidated Statements of
Operations and Comprehensive Income amounted to $0.9 million and $0.5 million for the three months ended September 30, 2017 and 2016, respectively, and $2.3 million and $1.3 million for the nine months ended
September 30, 2017 and 2016, respectively. The goodwill recognized in conjunction with these business combinations is attributable to expected improvement in the business of these acquired companies. We expect to deduct approximately
$45.6 million of goodwill for tax purposes as a result of 2017 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 as of September 30, 2017 and 2016 and may be adjusted during the valuation period since acquisition (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
2016
|
|
|
|
Alpha
|
|
|
Columbia
|
|
|
Astro
|
|
|
Other
|
|
|
Total
|
|
|
Alpine
|
|
|
Other
|
|
|
Total
|
|
Estimated fair values:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
247
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
247
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Accounts receivable
|
|
|
30,361
|
|
|
|
990
|
|
|
|
924
|
|
|
|
2,137
|
|
|
|
34,412
|
|
|
|
3,959
|
|
|
|
2,080
|
|
|
|
6,039
|
|
Inventories
|
|
|
1,851
|
|
|
|
704
|
|
|
|
296
|
|
|
|
1,014
|
|
|
|
3,865
|
|
|
|
700
|
|
|
|
888
|
|
|
|
1,588
|
|
Other current assets
|
|
|
4,827
|
|
|
|
8
|
|
|
|
36
|
|
|
|
8
|
|
|
|
4,879
|
|
|
|
|
|
|
|
12
|
|
|
|
12
|
|
Property and equipment
|
|
|
1,528
|
|
|
|
659
|
|
|
|
640
|
|
|
|
1,144
|
|
|
|
3,971
|
|
|
|
656
|
|
|
|
1,188
|
|
|
|
1,844
|
|
Intangibles
|
|
|
57,100
|
|
|
|
4,760
|
|
|
|
4,966
|
|
|
|
5,939
|
|
|
|
72,765
|
|
|
|
12,800
|
|
|
|
8,492
|
|
|
|
21,292
|
|
Goodwill
|
|
|
38,679
|
|
|
|
2,211
|
|
|
|
2,808
|
|
|
|
2,361
|
|
|
|
46,059
|
|
|
|
6,642
|
|
|
|
5,270
|
|
|
|
11,912
|
|
Other
non-current
assets
|
|
|
150
|
|
|
|
31
|
|
|
|
|
|
|
|
191
|
|
|
|
372
|
|
|
|
|
|
|
|
94
|
|
|
|
94
|
|
Accounts payable and other current liabilities
|
|
|
(18,072
|
)
|
|
|
(370
|
)
|
|
|
(329
|
)
|
|
|
(1,940
|
)
|
|
|
(20,711
|
)
|
|
|
(2,046
|
)
|
|
|
(1,459
|
)
|
|
|
(3,505
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of assets acquired and purchase price
|
|
|
116,671
|
|
|
|
8,993
|
|
|
|
9,341
|
|
|
|
10,854
|
|
|
|
145,859
|
|
|
|
22,711
|
|
|
|
16,565
|
|
|
|
39,276
|
|
Less fair value of common stock issued
|
|
|
10,859
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,859
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less seller obligations
|
|
|
2,002
|
|
|
|
225
|
|
|
|
490
|
|
|
|
1,042
|
|
|
|
3,759
|
|
|
|
1,560
|
|
|
|
1,289
|
|
|
|
2,849
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid
|
|
$
|
103,810
|
|
|
$
|
8,768
|
|
|
$
|
8,851
|
|
|
$
|
9,812
|
|
|
$
|
131,241
|
|
|
$
|
21,151
|
|
|
$
|
15,276
|
|
|
$
|
36,427
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 4, Goodwill and Intangibles, during the nine months ended September 30, 2017 due to minor adjustments to goodwill for the
allocation of certain acquisitions still under measurement as well as other immaterial intangible assets added and written off during the ordinary course of business. In addition, goodwill and intangibles increased during the nine months ended
September 30, 2017 due to three immaterial
tuck-in
acquisitions that do not appear in the above table.
The
provisional amounts for Alpha originally reported in our Condensed Consolidated Balance Sheets included in our Quarterly Report on Form
10-Q
for the period ended March 31, 2017 were adjusted to reflect
the review and ongoing analysis of the fair value measurements. As a result of our continued evaluation during the measurement period, we increased goodwill by approximately $2.2 million, offset by a corresponding net reduction in various
working capital accounts.
The provisional amounts for Columbia originally reported in our Condensed Consolidated Balance Sheets included in our Quarterly
Report on Form
10-Q
for the period ended June 30, 2017 were adjusted to reflect the review and ongoing analysis of the fair value measurements. As a result of an independent appraisal, we increased
goodwill by approximately $0.5 million and our seller obligations by approximately $0.4 million for an adjustment to the fair value of a working capital contingent liability. These adjustments, as well as various other insignificant
adjustments, resulted in a total purchase price increase for Columbia of approximately $0.6 million as reflected within the above table and were within applicable measurement period guidelines.
22
INSTALLED BUILDING PRODUCTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Estimates of acquired intangible assets related to the acquisitions are as follows for the nine months ended
September 30 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
2016
|
|
Acquired intangibles assets
|
|
Estimated
Fair Value
|
|
|
Weighted
Average
Estimated
Useful
Life (yrs.)
|
|
|
Estimated
Fair Value
|
|
|
Weighted
Average
Estimated
Useful
Life (yrs.)
|
|
Customer relationships
|
|
$
|
37,533
|
|
|
|
8
|
|
|
$
|
12,862
|
|
|
|
9
|
|
Trademarks and trade names
|
|
|
19,403
|
|
|
|
15
|
|
|
|
6,116
|
|
|
|
15
|
|
Non-competition
agreements
|
|
|
2,429
|
|
|
|
5
|
|
|
|
2,315
|
|
|
|
5
|
|
Backlog
|
|
|
13,400
|
|
|
|
1.5
|
|
|
|
|
|
|
|
|
|
Pro Forma Information
The unaudited pro forma information for the combined results of the Company has been prepared as if the 2017 acquisitions had taken place on January 1,
2016 and the 2016 acquisitions had taken place on January 1, 2015. 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, 2016
and 2015, respectively, and the unaudited pro forma information does not purport to be indicative of future financial operating results. See Note 12, Business Combinations, to our audited financial statements in Item 8 of Part II of our 2016 Form
10-K
for additional information on 2016 acquisitions included in the table below (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma for the three months
ended September 30,
|
|
|
Pro forma for the nine months
ended September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Net revenue
|
|
$
|
297,820
|
|
|
$
|
272,010
|
|
|
$
|
853,897
|
|
|
$
|
771,313
|
|
Net income
|
|
|
11,836
|
|
|
|
12,328
|
|
|
|
31,544
|
|
|
|
32,117
|
|
Basic net income per share
|
|
|
0.37
|
|
|
|
0.39
|
|
|
|
1.00
|
|
|
|
1.02
|
|
Diluted net income per share
|
|
|
0.37
|
|
|
|
0.39
|
|
|
|
0.99
|
|
|
|
1.02
|
|
Unaudited pro forma net income reflects additional intangible asset amortization expense of $0.1 million and
$0.9 million for the three and nine months ended September 30, 2017 and $4.2 million and $13.1 million for the three and nine months ended September 30, 2016, respectively, as well as additional income tax (benefit) expense
of ($0.1) million and $0.6 million for the three and nine months ended September 30, 2017, and $0.5 million and $2.6 million for the three and nine months ended September 30, 2016, respectively, and additional interest
expense of $0.5 million and $1.4 million for the three and nine months ended September 30, 2016, respectively, that would have been recorded had the 2017 acquisitions taken place on January 1, 2016 and the 2016 acquisitions taken
place on January 1, 2015. There was no additional interest expense for the three or nine months ended September 30, 2017. In addition, we included 282,577 shares of our common stock issued upon acquisition of Alpha in the weighted average
shares used to calculate unaudited basic and diluted net income per share for the three and nine months ended September 30, 2016 that would have been recorded had the acquisition taken place on January 1, 2016.
23
INSTALLED BUILDING PRODUCTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 14 INCOME PER COMMON SHARE
Basic net income per 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 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 share calculation when dilutive. Diluted net income per share was as follows (in thousands, except share
and per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended
September 30,
|
|
|
For the nine months ended
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Net income - basic and diluted
|
|
$
|
12,010
|
|
|
$
|
11,549
|
|
|
$
|
30,347
|
|
|
$
|
27,355
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding
|
|
|
31,659,503
|
|
|
|
31,323,600
|
|
|
|
31,632,400
|
|
|
|
31,294,596
|
|
Dilutive effect of outstanding common stock awards after application of the Treasury Stock
Method
|
|
|
107,378
|
|
|
|
54,190
|
|
|
|
80,115
|
|
|
|
57,395
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted shares outstanding
|
|
|
31,766,881
|
|
|
|
31,377,790
|
|
|
|
31,712,515
|
|
|
|
31,351,991
|
|
Basic and diluted net income per share
|
|
$
|
0.38
|
|
|
$
|
0.37
|
|
|
$
|
0.96
|
|
|
$
|
0.87
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
None of the
non-vested
common stock awards had an antidilutive effect on diluted net
income per share for either of the three or nine months ended September 30, 2017 and 2016.
NOTE 15 SUBSEQUENT EVENTS
On October 30, 2017, we acquired substantially all of the assets of A+ Insulation, LLC for total consideration of approximately $2.4 million, subject
to a working capital adjustment. The initial accounting for the business combination was not complete at the time the financial statements were issued due to the timing of the acquisition and the filing of this Quarterly Report on Form
10-Q.
As a result, disclosures required under ASC
805-10-50,
Business Combinations, cannot be made at this time.
24