IBP(IBP) - 2020 Q2 - Quarterly Report

PART I – FINANCIAL INFORMATION Financial Statements The company's financial statements for the period ended June 30, 2020, reflect revenue growth, improved profitability, and increased cash flow from operations Condensed Consolidated Balance Sheets As of June 30, 2020, total assets increased to $1.131 billion, driven by higher cash, while total stockholders' equity grew to $272.7 million Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | June 30, 2020 | December 31, 2019 | | :--- | :--- | :--- | | Total Assets | $1,131,050 | $1,099,479 | | Cash and cash equivalents | $252,488 | $177,889 | | Goodwill | $200,264 | $195,652 | | Total Liabilities | $858,314 | $849,448 | | Long-term debt | $544,976 | $545,031 | | Total Stockholders' Equity | $272,736 | $250,031 | Condensed Consolidated Statements of Operations For Q2 2020, net revenue increased 6.0% to $393.9 million and net income rose 33.9% to $25.3 million, with diluted EPS at $0.86 Statement of Operations Summary (in thousands, except per share data) | Metric | Q2 2020 | Q2 2019 | YTD 2020 | YTD 2019 | | :--- | :--- | :--- | :--- | :--- | | Net Revenue | $393,939 | $371,814 | $791,270 | $713,949 | | Gross Profit | $127,139 | $107,257 | $243,399 | $196,695 | | Operating Income | $42,344 | $30,840 | $71,374 | $48,829 | | Net Income | $25,337 | $18,919 | $41,325 | $27,753 | | Diluted EPS | $0.86 | $0.63 | $1.39 | $0.93 | Condensed Consolidated Statements of Cash Flows Net cash from operations more than doubled to $105.5 million for the first six months of 2020, driven by higher net income and favorable working capital changes Cash Flow Summary for Six Months Ended June 30 (in thousands) | Cash Flow Category | 2020 | 2019 | | :--- | :--- | :--- | | Net cash provided by operating activities | $105,525 | $52,400 | | Net cash used in investing activities | ($8,722) | ($39,284) | | Net cash used in financing activities | ($22,204) | ($7,811) | | Net change in cash and cash equivalents | $74,599 | $5,305 | Notes to Condensed Consolidated Financial Statements Notes detail accounting policies, revenue recognition, business combinations, debt, and COVID-19 impact, including a new credit loss standard adoption and recent acquisitions - The company operates as a single reportable segment, primarily installing insulation and other products for residential and commercial builders across the U.S.[21][22] - The COVID-19 pandemic did not have a significant impact on business in the first or second quarters of 2020, though future impacts remain uncertain[23] Revenue by End Market (Six Months Ended June 30) | End Market | 2020 Revenue | % of Total | 2019 Revenue | % of Total | | :--- | :--- | :--- | :--- | :--- | | Residential new construction | $596,661 | 75% | $543,804 | 76% | | Commercial | $147,532 | 19% | $123,920 | 17% | | Repair and remodel | $47,077 | 6% | $46,225 | 7% | - The company adopted a new credit loss standard (ASU 2016-13) on January 1, 2020, resulting in a $1.2 million cumulative effect adjustment to retained earnings, net of tax[45][46] - During the first six months of 2020, the company completed three business combinations for a total cash payment of $12.6 million[130][132] - Subsequent to the quarter end, on August 4, 2020, the company terminated its existing interest rate swaps for a cash payment of $17.8 million and entered into a new forward interest rate swap[141] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses Q2 2020 performance, highlighting a 6.0% revenue increase, improved gross profit margin, and strong liquidity, while detailing COVID-19 impacts and cash preservation measures Results of Operations Q2 2020 net revenue grew 6.0% to $393.9 million, with gross profit increasing 18.5% and gross margin expanding to 32.3%, driven by price increases and acquisitions Key Performance Metrics (Q2 2020 vs Q2 2019) | Metric | Q2 2020 | Q2 2019 | | :--- | :--- | :--- | | Sales Growth | 6.0% | 11.8% | | Same Branch Sales Growth | 2.3% | 7.8% | | Same Branch Volume Growth | -2.1% | 0.7% | | Same Branch Price/Mix Growth | 4.8% | 5.7% | - The company estimates that COVID-19 disruptions reduced net revenue by approximately $10.0 million to $12.0 million in Q2 2020[154] - Gross profit as a percentage of net revenue increased to 32.3% in Q2 2020 from 28.8% in Q2 2019, primarily due to lower fuel costs and higher selling prices on stable material costs[153][154] Key Factors Affecting Our Operating Results Operating results are influenced by material and labor costs, and the COVID-19 pandemic, which caused temporary disruptions and is expected to impact latter half 2020 results - The company has successfully passed on material price increases to customers, contributing to a 3.5% improvement in gross profit margin in Q2 2020 compared to Q2 2019[162] - The COVID-19 pandemic led to temporary but significant reductions in activity in seven states and the Bay Area of California during March, April, and May 2020[166] - Due to the lag between housing starts and completions, the company expects to see an impact from the Q2 2020 decline in housing starts during the third and fourth quarters of 2020[167] - The company expects to benefit from the CARES Act, primarily through the deferral of approximately $15 million to $20 million in employer Social Security tax payments from 2020 to 2021 and 2022[173] Liquidity and Capital Resources The company maintains strong liquidity of $430.5 million as of June 30, 2020, including $252.5 million in cash and an undrawn $200.0 million ABL Revolver Liquidity Summary (in thousands) | Component | As of June 30, 2020 | As of December 31, 2019 | | :--- | :--- | :--- | | Cash and cash equivalents | $252,488 | $177,889 | | Short-term investments | $16,688 | $37,961 | | ABL Revolver Availability (net of letters of credit) | $161,328 | $161,328 | | Total Liquidity | $430,504 | $377,178 | - Proactive steps taken to preserve cash in response to COVID-19 include: - Temporarily suspending stock repurchases - Delaying acquisition closings - Temporarily suspending executive pay increases - Eliminating non-essential travel[182] - Net cash provided by operating activities increased significantly to $105.5 million for the first six months of 2020, compared to $52.4 million in the prior year period, due to higher net income and tax deferrals[198] Quantitative and Qualitative Disclosures About Market Risk The company faces interest rate risk on its variable-rate debt, with hedging instruments significantly reducing exposure, though a recent change increased unhedged debt to $200.0 million - As of June 30, 2020, a hypothetical 1% change in interest rates would impact annual interest expense by approximately $50 thousand due to effective hedging[207] - Following the termination of existing swaps on August 4, 2020, the company's exposure to interest rate risk increased significantly, with a hypothetical 1% change in rates now impacting 2020 interest expense by approximately $0.8 million[207] Controls and Procedures Management concluded the company's disclosure controls and procedures were effective as of June 30, 2020, with no material changes to internal control over financial reporting - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of June 30, 2020[212] - No material changes were made to internal control over financial reporting during the second quarter of 2020[213] PART II – OTHER INFORMATION Legal Proceedings The company is involved in various claims and litigation, but management does not expect any pending matters to materially affect financial position or results - The company refers to Note 15 of the financial statements for information on legal proceedings, stating that no pending matters are expected to have a material adverse effect[128][215] Risk Factors The primary risk is the COVID-19 pandemic's potential impact on operations, demand, and supply chain, alongside risks associated with interest rate hedging instruments - The COVID-19 pandemic poses a significant risk, with potential adverse effects from economic slowdown, reduced demand for homes, and possible future business shutdowns in jurisdictions where construction is deemed non-essential[217][221] - The company's use of interest rate derivatives exposes it to risks such as counterparty non-performance, mismatch between the hedge and the liability, and potential significant costs for early termination, as evidenced by a $17.8 million cash payment on August 4, 2020, to terminate existing swaps[226][227][229] Unregistered Sales of Equity Securities and Use of Proceeds The company temporarily suspended its share repurchase program in Q2 2020 due to COVID-19, with $44.9 million remaining authorized for future repurchases - The company temporarily suspended its share repurchase program in response to COVID-19 and did not repurchase any shares under the program during the three months ended June 30, 2020[236] - As of the end of Q2 2020, $44.9 million remained authorized for purchase under the company's stock repurchase plan, which is effective through March 1, 2021[228][236] Other Information Base salary increases for named executive officers, previously waived due to COVID-19, were reinstated effective July 27, 2020 - Base salary increases for named executive officers, previously waived due to COVID-19, were reinstated effective July 27, 2020[233]