INSTALLED BUILDING PRODUCTS, INC. 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 2019 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 throughoutthe 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 theDistrict of Columbia from our national network of over 180 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 over the long-term due to our strong balance sheet, liquidity and our continuing acquisition strategy. See "COVID-19 Impacts" within the Key Factors Affecting Our Operating Results section below for a discussion of short-term impacts to our business. A large portion of our net revenue comes from theU.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 16.1% increase in net revenue during the three months endedMarch 31, 2020 compared to 2019. 2020 First Quarter Highlights Net revenue increased 16.1% to$397.3 million while gross profit increased 30.0% to$116.3 million during the three months endedMarch 31, 2020 compared to 2019. We also generated approximately$35.9 million of cash from operating activities, and atMarch 31, 2020 we had$213.7 million of cash and cash equivalents and investments. We have not drawn on our existing$200 million revolving line of credit. The increase in net revenue and gross profit was primarily driven by selling price increases, the contribution of our recent acquisitions and growth across our end markets and products. We experienced strong sales growth year-over-year as reflected in the sales and relative performance metrics detailed below. 25
--------------------------------------------------------------------------------
Table of Contents
The following table shows key measures of performance we utilize to evaluate our
results:
Three months ended March 31,
2020 2019
Period-over-period Growth
Sales Growth 16.1 % 13.4 %
Same Branch Sales Growth
(1) 12.1 % 7.4 %
Single-Family Sales Growth
(2) 11.0 % 14.4 %
Single-Family Same Branch Sales Growth
(1)(2) 5.9 % 6.5 %
Residential Sales Growth
(3) 14.2 % 13.8 %
Residential Same Branch Sales Growth
(1)(3) 9.7 % 7.0 %
Same Branch Sales Growth
Volume Growth
(1)(4) -0.2 % 3.4 %
Price/Mix Growth
(1)(5) 12.1 % 4.1 %
Large Commercial Sales Growth
(1) 14.1 % 6.6 %
U.S. Housing Market
(6)
Total Completions Growth -2.2 % 5.7 %
Single-Family Completions Growth
(2) 2.4 % 4.2 %
(1) Same-branch basis represents period-over-period growth for branch locations
owned greater than 12 months as of each financial statement date.
(2) Calculated based on period-over-period growth in the single-family subset of
the residential new construction end market.
(3) Calculated based on period-over-period growth in the residential new
construction end market.
(4) Excludes the large commercial end market; calculated as period-over-period
change in the number of completed same-branch residential new construction
and repair and remodel jobs.
(5) Excludes the large commercial end market; defined as change in the mix of
products sold and related pricing changes and calculated as the change in
period-over-period average selling price per same-branch residential new
construction and repair and remodel jobs multiplied by total current year
jobs. The mix of end customer and product would have an impact on the
year-over-year price per job.
(6)
We feel the revenue growth measures are important indicators of how our business is performing, however, we may rely on different metrics in the future. We also utilize gross profit percentage as shown in the following section to monitor our most significant variable costs and to evaluate labor efficiency and success at passing increasing costs of materials to customers.
26
--------------------------------------------------------------------------------
Table of Contents
Net revenue, cost of sales and gross profit
The components of gross profit were as follows (in thousands):
Three months ended March 31,
2020 Change 2019
Net revenue $ 397,331 16.1 % $ 342,135
Cost of sales 281,071 11.2 % 252,697
Gross profit $ 116,260 30.0 % $ 89,438
Gross profit percentage 29.3 % 26.1 %
Net revenue increased during the three months ended March 31, 2020 compared to
2019 due primarily to acquisitions, organic growth from our existing branches
and increased selling prices. We estimate net revenue during the first quarter
of 2020 was reduced by a range of $2.0 million to $2.5 million due to the
COVID-19
health crisis. As a percentage of net revenue, gross profit increased during the
three months ended March 31, 2020 compared to 2019 attributable primarily to
achieving higher selling prices on relatively stable material costs, as
evidenced by our 12.1% improvement in pricing and customer and product mix
calculated based on all our combined markets excluding the large commercial end
market. Labor utilization improved, in part, as a result of lower installer
turnover due to investments in our financial wellness plan, our longevity stock
compensation plan for installers and assistance from our Installed Building
Products Foundation . However, restrictions limiting the number of laborers on a
jobsite and our internal standards for social distancing practices impacted the
number of completed jobs and operational efficiencies across our end markets
during the first quarter of 2020. As of March 31, 2020 , approximately 90% of our
branches are located in markets where construction was deemed an "essential"
business, leaving a portion of our branches in markets where work is severely
limited. See
"COVID-19
Impacts" within the Key Factors Affecting Our Operating Results section below
for further information.
Operating expenses
Operating expenses were as follows (in thousands):
Three months ended March 31,
2020 Change 2019
Selling $ 20,355 18.8 % $ 17,130
Percentage of total net revenue 5.1 % 5.0 %
Administrative $ 60,195 24.3 % $ 48,431
Percentage of total net revenue 15.1 % 14.2 %
Amortization $ 6,680 13.5 % $ 5,888
Percentage of total net revenue 1.7 % 1.7 %
Selling
The dollar increases in selling expenses for the three months endedMarch 31, 2020 were primarily driven by an increase in selling wages and commissions to support our increased net revenue of 16.1%. Selling expense as a percentage of sales slightly increased for the three months endedMarch 31, 2020 compared to 2019 primarily due to timing of credit losses and collections as well as additional loss reserves recorded as a result of adoption of ASU 2016-13, Financial Instruments - Credit Losses (Topic 326). See Note 4, Credit Losses, for more information. Administrative The dollar increases in administrative expenses for the three months endedMarch 31, 2020 were primarily due to an increase in wages, benefits and facility costs attributable to both acquisitions and organic growth. Administrative expense increased as a percentage of sales for the three months endedMarch 31, 2020 compared to 2019 primarily due to increases to variable employee expenses as a result of improved company performance and higher health insurance expenses. 27
--------------------------------------------------------------------------------
Table of Contents
Other expense, net
Other expense, net was as follows (in thousands):
Three months ended March 31,
2020 Change 2019
Interest expense, net $ 7,358 29.6 % $ 5,676
Other - -100.0 % 125
Total other expense, net $ 7,358 26.8 % $ 5,801 The increase in interest expense, net during the three months ended
Three months ended March 31,
2020 2019
Income tax provision $ 5,684 $ 3,354
Effective tax rate 26.2 % 27.5 %
During the three months ended
Three months ended
March 31,
2020 2019
Unrealized loss on cash flow hedge, net of taxes
During the three months endedMarch 31, 2020 , our cash flow hedge position decreased primarily due to interest rate declines partially driven by market responses to the COVID-19 pandemic. KEY FACTORS AFFECTING OUR OPERATING RESULTS Cost of Materials We purchase the materials that we install primarily direct from manufacturers. The industry supply of materials we install has experienced disruptions in the past but has stabilized since the beginning of 2019. Increased market pricing, regardless of the catalyst, has and could continue to impact our results of operations in 2020, 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 2020 as evidenced by our 3.2% improvement in gross profit as a percentage of sales during the three months endedMarch 31, 2020 compared to the three months endedMarch 31, 2019 . We will continue to work with our customers to adjust selling prices to offset higher costs as they occur. See "COVID-19 Impacts" below for a discussion of the short-term impacts of the current economic climate on the availability of the materials we install. 28
--------------------------------------------------------------------------------
Table of Contents Cost of Labor Our business is labor intensive and the majority of our employees work as installers on local construction sites. We offer a comprehensive benefits package, which many of our local competitors are not able to provide, which will increase costs as we hire additional personnel. Our workers' compensation costs also continue to increase as we employ additional personnel. We experienced strong employee retention, turnover and labor efficiency rates in the three months endedMarch 31, 2020 . We believe this is partially a result of various programs meant to benefit our employees, including our financial wellness plan, longevity stock compensation plan for employees and assistance from theInstalled Building Products Foundation meant to benefit our employees, their families and their communities. While improved retention drives lower costs to recruit and train new employees, resulting in greater installer productivity, these improvements are somewhat offset by the additional costs of these incentives. See "COVID-19 Impacts" below for a discussion of the short-term impacts of the current economic climate on our workforce. COVID-19 Impacts InDecember 2019 , a novel strain of coronavirus (COVID-19) surfaced inWuhan, China . Since then, the virus has spread globally, including tothe United States . In response, theWorld Health Organization declared the outbreak a pandemic and theU.S. Secretary ofHealth and Human Services has declared a public health emergency. The COVID-19 pandemic has caused significant volatility, uncertainty and economic disruption. Public health organizations and international, federal, state and local governments have implemented measures to combat the spread of COVID-19, including restrictions on movement such as quarantines, "stay-at-home" orders and social distancing ordinances and restricting or prohibiting outright some or all forms of commercial and business activity. We cannot predict if federal, state and local governments will implement additional restrictions, when restrictions currently in place will expire or whether restrictions currently in place will become more restrictive. We do not believe the various orders and restrictions or COVID-19 itself materially impacted our business in the first quarter of 2020. TheU.S. housing market was robust in the latter months of 2019 and experienced a strong start in 2020. At the end ofMarch 2020 , there were approximately seven months of single family housing units under construction inthe United States , based onCensus Bureau data. We believe this sizable industry backlog will provide us short-term relief from the volatility in industry housing starts. For example, our net revenue for the month endedApril 30, 2020 increased approximately 2% over the same period in 2019 even though growth was limited by the closure of approximately 10% of our branches during the month (based on net revenue). Additionally, the numerous state orders for residents to shelter in place in response to COVID-19 had limited impact on IBP in the first quarter of 2020 because construction has been deemed "essential" in most of these states. The most notable exception to the "essential" classification for construction as of the filing date of this Quarterly Report on Form 10-Q is the state ofNew York , which accounted for less than 2% of our net revenue for the year endedDecember 31, 2019 . Most of the work completed by our branches in this state has been halted since the latter half ofMarch 2020 . During portions of March, April and May of 2020 through the date of this filing, we also saw a temporary but significant reduction in activity in our branches located in six other states and theBay Area ofCalifornia , which collectively accounted for an additional 8% of our net revenue during the year endedDecember 31, 2019 . The reduced activity in these areas was also attributable to construction being temporarily deemed non-essential during portions of March andApril 2020 , but those restrictions have been lifted as of the filing date of this 10-Q. Given the considerable uncertainty created by the COVID-19 pandemic and its potential effects, it is not possible to estimate the adverse impact to our second quarter or full year 2020 sales or other financial results at this time. 29
--------------------------------------------------------------------------------
Table of Contents
While we expect the COVID-19 outbreak and related events will have a negative
effect on us, the full extent and scope of the impact on our business and
industry, as well as national, regional and global markets and economies,
depends on numerous evolving factors that we may not be able to accurately
predict, including the duration and scope of the pandemic, additional government
actions taken in response to the pandemic, the impact on construction activity
and demand for homes (based on employment levels, consumer spending and consumer
confidence). We expect branch closures, as well as broader impacts to the
housing industry due to an anticipated reduction in housing starts, to
negatively impact our business. While industry information has indicated that
new home orders at some of the nation's larger builders has slowed dramatically,
home sales are still occurring. Industry experts currently anticipate housing
starts will decline approximately 30% for the full year 2020, with the most
dramatic decline in starts occurring during the second quarter and sequential
improvement in each subsequent quarter. Based on the normal lag between starts
and completions within the home building industry, we currently estimate that
the market decline will have a more pronounced impact on our business in the
third and fourth quarters of 2020. Specifically, we anticipate revenue, net
income and cash from operations to fall below normal levels during these
periods. In the commercial sector, our backlog remains strong and we have not
yet seen a meaningful decrease in operations. In the future, certain large-scale
infrastructure programs may be at risk in markets where construction has not
been deemed "essential," the need for such structures decline, project funding
declines, or as consumer behaviors change. For example, reduced demand for
office buildings and/or educational facilities, decreased airport traffic, or
decreased usage of sports arenas or similar large commercial structures could
impact our commercial end market.
Our management is focused on mitigating the impact of COVID-19 on our business
and the risk to our employees and customers. We have taken a number of
precautionary measures intended to mitigate these risks, including implementing
detailed cleaning and disinfecting processes at our facilities, adhering to
social distancing protocols, limiting the number of workers on our jobsites,
suspending non-essential air travel and encouraging employees to work remotely
when possible. As is common practice in our industry, installers are required to
wear protective equipment in the process of completing their work and this
practice has been extended to employees at our facilities and within general
office spaces. We are prepared to take additional actions if necessary as
suggested or required by various health agencies.
We continue to evaluate the nature and extent of the COVID-19 outbreak's impact
on our financial condition, results of operations and cash flows. Specific
impacts of branch closures to date, as well as potential future impacts include,
but are not limited to, the following:
• Other than branches that serve states where construction has not been
deemed "essential," we have experienced limited business disruptions to
date and therefore have not needed to implement significant continuity
measures and have not incurred related expenditures to do so. Assuming a
significant number of additional states or markets in which we operate do
not reverse their current positions about construction being an
"essential" business, we do not anticipate having to implement any
additional measures in the future.
• To date, we have not experienced a disruption in the supply of the various
insulation products we install. All insulation manufacturers from which we
purchase operate facilities in the continental U.S. and continue to timely
ship material. We are monitoring suppliers of our other products and have
had no issues to date acquiring the inventory we need to operate our
business. We currently do not anticipate any significant issues with
securing these other products in the future.
• We have laid off or furloughed 563 employees in areas where construction
has not been deemed "essential." We expect to rehire a significant portion
of those employees once restrictions are lifted and operations return to
normal levels. To date, we have rehired nearly 280 employees in various
markets after restrictions there were eased.
• Our corporate office is fully operational, even though many employees are
working remotely. As such, we have made no modifications to internal
controls over financial reporting and have confidence controls are
operating as designed. We have enhanced our efforts to mitigate cyber
threats and phishing, given the number of employees working remotely. We
are continually monitoring and assessing the COVID-19 situation on our
internal controls to minimize the impact of their design and operating
effectiveness.
30--------------------------------------------------------------------------------
Table of Contents
• While we did not experience an impact to our earnings, financial position
and cash flows during the first quarter of 2020, we expect some impact in
the remainder of 2020. There is much uncertainty surrounding these
estimates and the magnitude of these impacts is therefore ambiguous at
this time. We estimate limited impact to our Condensed Consolidated
Balance Sheets other than a potential reduction in working capital due to
the possibility of reduced net revenue and net income, although this will
be mitigated somewhat by actions taken by management to limit spending
during 2020. Trade accounts receivable may also be reduced somewhat by
lower net revenue and a higher allowance for credit losses due to enhanced
risk of uncollectibility from some customers. We anticipate revenue and
net income will be negatively impacted in the remainder of 2020. While our
cash from operations may decline over recent performance due to a decrease
in expected net income driven by lower net revenue, we do not anticipate
any issues meeting debt obligations or paying vendors timely given our
strong liquidity and large cash reserves. See discussion of impacts to our
liquidity within the Liquidity and Capital Resources section below.
On March 27, 2020 , the Coronavirus Aid, Relief, and Economic Security (CARES
Act) was signed into law. The CARES Act provides numerous tax provision and
other stimulus measures. We expect to benefit from the temporary suspension of
certain payment requirements for the employer portion of Social Security taxes.
We estimate that this will defer approximately $15 million to $20 million of
payments, depending on the number of employees, that would have been paid during
2020, such that under the CARES Act, 50% of the amount will now be paid on
December 31, 2021 and the remaining 50% will be paid on December 31, 2022 . It is
important to note that this does not impact the timing of the expense, only the
timing of the payment. We also expect to benefit from the creation of certain
refundable employee retention credits and the technical correction for qualified
leasehold improvements, which provides for tax bonus depreciation. If we
generate a net operating loss ("NOL") in 2020, we would also expect to benefit
from the five-year NOL carryback provisions. To the extent that states in which
we operate provide for similar stimulus measures, we will evaluate potential
benefits at the state-level as well.
In addition, we are adhering to the Families First Coronavirus Response Act
(FFCRA) which requires employers to provide their employees with paid sick leave
and extended family and medical leave for specified reasons related to COVID-19.
Qualifying reasons for leave related to COVID-19 include when an employee is
quarantined, is experiencing COVID-19 systems and is seeking a medical
diagnosis, is being advised by a healthcare provider to self-quarantine, is
caring for an individual subject to a quarantine order or self-quarantine
situation, is caring for a child whose school or place of care is closed, or is
experiencing any other substantially-similar condition specified by the U.S.
Department of Health and Human Services . These provisions are in effect until
December 31, 2020 .
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 to meet required principal
and interest payments. As discussed above, our cash reserves may also be used to
fund payroll and other short-term requirements if our business is affected
significantly by
COVID-19.
From time to time, we may also use our resources to fund our optional stock
repurchase program in effect through March 1, 2021 ; however, we have temporarily
suspended our share repurchase program in response to COVID-19. Our investments
consist of highly liquid instruments primarily including corporate bonds and
commercial paper. As of March 31, 2020 , we had no outstanding borrowings under
our asset-based lending credit facility (as defined below).
We believe that our cash flows from operations, combined with our current cash
levels, highly liquid investments 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 the
three months ended March 31, 2020 and 2019.
While the general economic environment within the United States and most markets
around the world have been significantly impacted by the spread of COVID-19,
prompting governmental and health agencies to issue
31
--------------------------------------------------------------------------------
Table of Contents unprecedented orders to close businesses not deemed "essential," we believe we have robust capital resources at our immediate disposal to meet our needs. We have cash reserves and short-term investments of$213.7 million as ofMarch 31, 2020 as well as access to$161.3 million under our ABL Revolver, net of$38.7 million of outstanding letters of credit. This amount available to us is based on eligible collateral, which may be reduced over time. While our cash from operations may decline later in the year due to factors described above, we believe it will remain at a level to fund our operations and not require us to draw on our ABL Revolver. However, as necessary or desirable, we may adjust or amend the terms of our credit facilities. With the uncertainty surrounding COVID-19, our ability to engage in such transactions may be constrained by volatile credit market conditions. In response to COVID-19, we have taken a number of proactive steps to preserve cash and maximize our financial flexibility in order to efficiently manage through the COVID-19 pandemic. These actions include: • temporarily suspending stock repurchases under our share repurchase program; • temporarily delaying acquisition closings until the economic environment has stabilized; • suspending pay increases for our executive officers; and • eliminating non-essential travel.
See Part II, Item 1A, Risk Factors, for more information on the potential
impacts from the COVID-19 pandemic and resulting economic strain.
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
As of March 31, As of December 31,
2020 2019
Cash and cash equivalents $ 187,187 $ 177,889
Short-term investments 26,487 37,961
ABL Revolver 200,000 200,000
Less: outstanding letters of credit and
cash collateral (38,672 ) (38,672 )
Total liquidity
(1) $ 375,002 $ 377,178
32--------------------------------------------------------------------------------
Table of Contents
(1) Total liquidity reflects full borrowing base capacity under our asset-based
lending credit facility (as defined below) 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 March 31, 2020 ,
total liquidity would be reduced by $25.1 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 asset-based
lending credit facility (as defined below) included in the table above.
5.75% Senior Notes due 2028
In September 2019 , we issued $300.0 million in aggregate principal amount of
5.75% senior unsecured notes (the "Senior Notes"). The Senior Notes will mature
on February 1, 2028 and interest will be payable semi-annually in cash in
arrears on February 1 and August 1 , commencing on February 1, 2020 . The net
proceeds from the Senior Notes offering were $295.0 million after debt issuance
costs. We used some of the net proceeds to repay a portion of our outstanding
obligations (including accrued and unpaid interest) under our term loan credit
agreement (as defined below) and to pay fees and expenses related to the entry
into a new revolving credit facility described below.
The indenture covering the Senior Notes contains restrictive covenants that,
among other things, limit the ability of the Company and certain of our
subsidiaries (subject to certain exceptions) to: (i) incur additional debt and
issue preferred stock; (ii) pay dividends on, redeem or repurchase stock;
(iii) prepay subordinated debt; (iv) create liens; (v) make specified types of
investments; (vi) apply net proceeds from certain asset sales; (vii) engage in
transactions with affiliates; (viii) merge, consolidate or sell substantially
all of our assets; and (ix) pay dividends and make other distributions from
subsidiaries.
Credit Facilities
In December 2019 , we amended and restated our $400 million , seven-year term loan
facility due April 2025 (the "Term Loan") under our credit agreement (the "Term
Loan Agreement"), dated as of April 13, 2017 (as previously amended by the First
Amendment thereto dated November 30, 2017 and by the Second Amendment thereto
dated June 19, 2018 ). The amended Term Loan (i) effects a repricing of the
interest rate applicable to the term loans thereunder from LIBOR plus 2.50% to
LIBOR plus 2.25% and (ii) replaces Royal Bank of Canada with Bank of America,
N.A . as the administrative agent and collateral agent thereunder. As of
March 31, 2020 , we had $198.4 million , net of unamortized debt issuance costs,
due on our Term Loan. The amended Term Loan also has a margin of 1.25% in the
case of base rate loans.
In September 2019 , we entered into a new asset-based lending credit agreement
(the "ABL Credit Agreement"). The ABL Credit Agreement provides for an
asset-based lending credit facility (the "ABL Revolver") of up to $200.0 million
with a 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. In connection with the Amended
and Restated Term Loan, we entered into a Second Amendment (the "Second
Amendment") to the ABL/Term Loan Intercreditor Agreement with Bank of America,
N.A ., as ABL Agent for the lenders under the ABL Credit Agreement, and Bank of
America, N.A ., as Term Loan Agent for the lenders under the Term Loan. Including
outstanding letters of credit, our remaining availability under the ABL Revolver
as of March 31, 2020 was $161.3 million .
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).
33
--------------------------------------------------------------------------------
Table of Contents 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. All of the obligations under the Term Loan and ABL Revolver are guaranteed by all of the Company's existing restricted subsidiaries and will be guaranteed by the Company's future restricted subsidiaries. Additionally, all obligations under the Term Loan and ABL Revolver, and the guarantees of those obligations, are secured by substantially all of the assets of the Company and the guarantors, subject to certain exceptions and permitted liens, including a first-priority security interest in such assets that constitute ABL Priority Collateral, as defined in the ABL Credit Agreement, and a second-priority security interest in such assets that constitute Term Loan Priority Collateral, as defined in the Term Loan Agreement. AtMarch 31, 2020 , we were in compliance with all applicable covenants under the Term Loan Agreement, ABL Credit Agreement and the Senior Notes and we currently do not expect any covenant violations due to the impacts of COVID-19. Derivative Instruments As ofMarch 31, 2020 , 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 ofMay 31, 2022 and one that amortizes quarterly to$93.3 million at a maturity date ofApril 15, 2025 . These two swaps combined serve to hedge$195.5 million of the variable cash flows on our Term Loan as ofMarch 31, 2020 . We also had a forward interest rate swap with an associated floor beginningMay 31, 2022 with a beginning notional of$100.0 million that amortizes quarterly to$97.0 million at a maturity date ofApril 15, 2025 . These three swaps serve to hedge substantially all of the variable cash flows on our Term Loan until maturity. Vehicle and Equipment Notes We have financing loan agreements with various lenders to provide financing for the purpose of purchasing or leasing vehicles and equipment used in the normal course of business. Vehicles and equipment purchased or leased under each financing arrangement serve as collateral for the note applicable to such financing arrangement. Regular payments are due under each note for a period of typically 60 consecutive months after the incurrence of the obligation. Total gross assets relating to ourMaster Loan and Equipment Agreements were$133.8 million and$130.2 million as ofMarch 31, 2020 andDecember 31, 2019 , respectively. The net book value of assets under these agreements was$68.4 million and$68.2 million as ofMarch 31, 2020 andDecember 31, 2019 , respectively. See Note 7, Long-term Debt, for more information regarding ourMaster Loan and Security Agreement, Master Equipment Lease Agreement and Master Loan Agreements. Letters of Credit and Bonds We may use performance bonds to ensure completion of our work on certain larger customer contracts that can span multiple accounting periods. Performance bonds generally do not have stated expiration dates; rather, we are released from the bonds as the contractual performance is completed. In addition, we occasionally use letters of credit and cash to secure our performance under our general liability and workers' compensation insurance programs. Permit and license bonds are typically issued for one year and are required by certain municipalities when 34
--------------------------------------------------------------------------------
Table of Contents 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 March 31,
2020
Performance bonds $ 56,218
Insurance letters of credit and cash collateral 49,712
Permit and license bonds 7,460
Total bonds and letters of credit $ 113,390
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
collateral can be converted to a letter of credit at our discretion and is
therefore not considered to be restricted cash.
Historical cash flow information
Cash flows from operating activities
Net cash provided by operating activities was $35.9 million and $15.9 million
for the three months ended March 31, 2020 and 2019, 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. Historically, cash flows tend to be seasonally stronger in the third
and fourth quarters as a result of increased construction activity. However, we
expect cash from operating activities to fall below normal levels in these
quarters during 2020 due to the impacts of COVID-19. See "COVID-19 Impacts" with
the Key Factors Affecting our Operating Results section above for further
information on short-term impacts to our cash from operations.
Cash flows from investing activities
Business Combinations
.
During the three months ended March 31, 2020 and 2019, we made cash payments of
$8.5 million and $5.1 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. See Note 16, Business
Combinations, for more information regarding our acquisitions in 2020 and 2019.
Capital Expenditures
.
Total cash paid for property and equipment was $9.9 million and $8.7 million for
the three months ended March 31, 2020 and 2019, 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 three months ended March 31, 2020 and 2019, we invested
$0.8 million and $7.5 million , respectively, in short-term investments
consisting primarily of corporate bonds and commercial paper and had
$12.3 million and $7.5 million in short-term investments mature during the three
months ended March 31, 2020 and 2019, respectively.
Cash flows from financing activities
We utilize our credit facilities and Senior Notes to support our operations and
continuing acquisitions as well as fund our discretionary stock repurchase
program. During the three months ended March 31, 2020 and 2019, we also received
proceeds of $7.1 million and $4.9 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.
35
--------------------------------------------------------------------------------
Table of Contents We made payments on these fixed asset loans and various other notes payable of$6.7 million and$3.9 million during the three months endedMarch 31, 2020 and 2019, respectively. We also made$0.7 million and$1.4 million in principal payments on our finance leases and paid$2.4 million and$2.8 million of acquisition-related obligations during the three months endedMarch 31, 2020 and 2019, respectively. Lastly, we paid$15.8 million to repurchase 443 thousand shares of our common stock during the three months endedMarch 31, 2020 . In response to COVID-19, we have temporarily suspended our share repurchase program and temporarily delayed closing acquisitions. Contractual Obligations We had no significant changes to our obligations during the three months endedMarch 31, 2020 . Critical Accounting Policies and Estimates During the three months endedMarch 31, 2020 , we changed our accounting policy regarding allowances for credit losses and the testing of goodwill impairment. See Note 2, Significant Accounting Policies, for more information. There have been no other changes to our critical accounting policies and estimates from those previously disclosed in our 2019 Form 10-K. Recently Adopted Accounting Pronouncements Standard Adoption ASU This pronouncement and subsequently-issued amendments 2016-13, change the accounting for credit losses on Financial available-for-sale Instruments-Credit debt securities and purchased financial assets with Losses (Topic 326) credit deterioration. In addition, these amendments require the measurement of all expected credit losses for financial assets, including trade accounts receivable, held at the reporting date based on historical experience, current conditions and reasonable and supportable forecasts. See Note 4, Credit Losses, for further information. ASU This ASU addresses concerns over the cost and complexity 2017-04, of the Intangibles-Goodwill two-step and Other (Topic goodwill impairment test; this pronouncement removes the 350): Simplifying second step of the goodwill impairment test. Going the Test for forward, an entity will apply a Goodwill Impairment one-step quantitative test and record the amount of goodwill impairment as the excess of a reporting unit's carrying amount over its fair value, not to exceed the total amount of goodwill allocated to the reporting unit. ASU This pronouncement amends Topic 820 to eliminate, add and 2018-13, modify certain disclosure requirements for fair value Fair Value measurements. The adoption of this standard did not Measurement (Topic impact our financial statements or have a material effect 820): Disclosure on our disclosures. Framework-Changes to the Disclosure Requirements for Fair Value Measurement 36
--------------------------------------------------------------------------------
Table of Contents
ASU This pronouncement contains optional expedients and
2020-04, exceptions for applying GAAP to contracts, hedging
Reference Rate relationships, and other transactions affected by
Reform: Facilitation reference rate reform. The provisions of ASC 848 must be
of the Effects of applied at a Topic, Subtopic or Industry Subtopic for all
Reference Rate transactions other than derivatives, which may be applied
Reform on Financial at a hedging relationship level. The relief granted in
Reporting (Topic ASC 848 is applicable only to legacy contracts if the
848) amendments made to the agreements are solely for
reference rate reform activities. We elected the
practical expedient to continue to assert probability of
hedged interest under our interest rate swap agreements,
regardless of any expected future modification in terms
related to reference rate reform.
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, the impact of COVID-19 on
our business and the economy, 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, the impact of COVID-19 on our
financial results and expectations for demand for our services and our earnings
in 2020. 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, the duration, effect and
severity of the COVID-19 crisis; the adverse impact of the COVID-19 crisis on
our business and financial results, the economy and the markets we serve;
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 2019 Annual Report on Form 10-K and this Quarterly
Report on Form 10-Q, 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. As of March 31, 2020 , we had $198.4 million
outstanding on the Term Loan, net of unamortized debt issuance costs, no
outstanding borrowings on the ABL Revolver and no outstanding borrowings under
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 $195.5 million as of March 31, 2020 . As a result, total variable
rate debt of $4.5 million was exposed to market risks as of March 31, 2020 . A
hypothetical one percentage point increase (decrease) in interest rates on our
variable rate debt would increase (decrease) our annual interest expense by
approximately $45 thousand . Our Senior Notes accrued interest at a fixed rate of
5.75%.
For variable rate debt, interest rate changes generally do not affect the fair
value of the debt instrument, but do impact future earnings and cash flows,
assuming other factors are held constant. We have not entered into and currently
do not hold derivatives for trading or speculative purposes.
37
--------------------------------------------------------------------------------
Table of Contents 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, theFCA 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 onNovember 30, 2017 to include a mechanism to establish an alternative Eurodollar rate if certain circumstances arise such that LIBOR may no longer be used. Additionally, our ABL Credit Agreement includes a provision related to the potential discontinuance of LIBOR to be replaced with one or more Secured Overnight Financing Rate (SOFR) values or another alternate benchmark rate. However, if LIBOR ceases to exist after 2021, the interest rates under the alternative rate could be higher than LIBOR. In addition, LIBOR is used as a reference rate for our interest rate swap agreements we use to hedge our interest rate exposure. During the three months endedMarch 31, 2020 , we adopted ASU 2020-04, Reference Rate Reform: Facilitation of the Effects of Reference Rate Reform on Financial Reporting (Topic 848). The purpose of this guidance is to provide relief for impacted areas as it relates to impending reference rate reform. We elected the practical expedient to continue to assert probability of hedged interest, regardless of any expected future modification in terms related to reference rate reform. 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 ofMarch 31, 2020 . Changes in Internal Control over Financial Reporting There were no changes in our internal control over financial reporting during the three months endedMarch 31, 2020 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. We have not experienced any material impact to our internal controls over financial reporting despite the fact that many of the employees at our corporate office are working remotely due to the COVID-19 pandemic. We are continually monitoring and assessing the COVID-19 situation on our internal controls to minimize the impact on their design and operating effectiveness.
© Edgar Online, source
