Installed Building Products, Inc. - Quarter Report: 2018 September (Form 10-Q)

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2018

OR

 

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Transition Period From                      To                     

Commission File Number: 001-36307

 

 

Installed Building Products, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware		45-3707650
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
495 South High Street, Suite 50 Columbus, Ohio		43215
(Address of principal executive offices)		( Zip Code)

(614) 221-3399

(Registrant’s telephone number, including area code)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☒    No  ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ☒    No  ☐

Indicate by a check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer		☒		Accelerated filer		☐
Non-accelerated filer		☐		Smaller reporting company		☐
Emerging growth company		☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b–2 of the Exchange Act).    Yes  ☐    No  ☒

On October 26, 2018, the registrant had 31,224,974 shares of common stock, par value $0.01 per share, outstanding.

 

 

 

Table of Contents

 

PART I – FINANCIAL INFORMATION			1
Item 1. Financial Statements			1
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			27
Item 3. Quantitative and Qualitative Disclosures About Market Risk			34
Item 4. Controls and Procedures			35
PART II – OTHER INFORMATION			35
Item 1. Legal Proceedings			35
Item 1A. Risk Factors			35
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			35
Item 3. Defaults Upon Senior Securities			36
Item 4. Mine Safety Disclosures			36
Item 5. Other Information			36
Item 6. Exhibits			36
SIGNATURES			37

 

i

PART I – FINANCIAL INFORMATION

 

Item 1.

Financial Statements

INSTALLED BUILDING PRODUCTS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(in thousands, except share and per share amounts)

 

		September 30,				December 31,
		2018				2017
ASSETS
Current assets
Cash and cash equivalents		$	139,089			$	62,510
Investments			15,358				30,053
Accounts receivable (less allowance for doubtful accounts of $5,405 and $4,805 at September 30, 2018 and December 31, 2017, respectively)			219,444				180,725
Inventories			51,491				48,346
Other current assets			32,836				33,308
Total current assets			458,218				354,942
Property and equipment, net			85,505				81,075
Non-current assets
Goodwill			167,738				155,466
Intangibles, net			139,709				137,991
Other non-current assets			11,936				9,272
Total non-current assets			319,383				302,729
Total assets		$	863,106			$	738,746
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Current maturities of long-term debt		$	22,481			$	16,650
Current maturities of capital lease obligations			4,954				5,666
Accounts payable			94,781				87,425
Accrued compensation			25,370				25,399
Other current liabilities			29,510				24,666
Total current liabilities			177,096				159,806
Long-term debt			433,752				330,927
Capital lease obligations, less current maturities			3,870				6,479
Deferred income taxes			7,758				6,444
Other long-term liabilities			26,279				24,562
Total liabilities			648,755				528,218
Commitments and contingencies (Note 13)
Stockholders’ equity
Preferred stock; $0.01 par value: 5,000,000 authorized and 0 shares issued and outstanding at September 30, 2018 and December 31, 2017, respectively			—				—
Common stock; $0.01 par value: 100,000,000 authorized, 32,723,972 and 32,524,934 issued and 31,224,974 and 31,862,146 shares outstanding at September 30, 2018 and December 31, 2017, respectively			327				325
Additional paid in capital			180,106				174,043
Retained earnings			88,736				48,434
Treasury stock; at cost: 1,498,998 and 662,788 shares at September 30, 2018 and December 31, 2017, respectively			(57,890	)			(12,781	)
Accumulated other comprehensive income			3,072				507
Total stockholders’ equity			214,351				210,528
Total liabilities and stockholders’ equity		$	863,106			$	738,746

See accompanying notes to consolidated financial statements

 

1

INSTALLED BUILDING PRODUCTS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE

INCOME (UNAUDITED)

(in thousands, except share and per share amounts)

 

		Three months ended September 30,								Nine months ended September 30,
		2018				2017				2018				2017
Net revenue		$	348,999			$	295,193			$	983,311			$	833,058
Cost of sales			251,665				209,612				710,358				590,377
Gross profit			97,334				85,581				272,953				242,681
Operating expenses
Selling			17,434				14,865				49,300				42,541
Administrative			48,337				41,657				137,511				122,679
Amortization			5,228				6,824				19,678				19,790
Operating income			26,335				22,235				66,464				57,671
Other expense
Interest expense, net			5,282				4,421				15,013				11,456
Other			132				83				417				366
Income before income taxes			20,921				17,731				51,034				45,849
Income tax provision			5,358				5,721				12,762				15,502
Net income		$	15,563			$	12,010			$	38,272			$	30,347
Other comprehensive income (loss), net of tax:
Unrealized gain (loss) on cash flow hedge, net of tax (provision)/benefit of ($278) and ($21) for the three months ended September 30, 2018 and 2017, respectively, and ($822) and $30 for the nine months ended September 30, 2018 and 2017, respectively			818				32				2,453				(45	)
Comprehensive income		$	16,381			$	12,042			$	40,725			$	30,302
Basic net income per share		$	0.50			$	0.38			$	1.22			$	0.96
Diluted net income per share		$	0.50			$	0.38			$	1.21			$	0.96
Weighted average shares outstanding:
Basic			31,229,086				31,659,503				31,373,871				31,632,400
Diluted			31,312,756				31,766,881				31,512,104				31,712,515

See accompanying notes to consolidated financial statements

 

2

INSTALLED BUILDING PRODUCTS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (UNAUDITED)

(in thousands, except share amounts)

 

										Additional																Accumulated Other
		Common Stock								Paid In				Retained				Treasury Stock								Comprehensive				Stockholders’
		Shares				Amount				Capital				Earnings				Shares				Amount				Loss				Equity
BALANCE - January 1, 2017			32,135,176			$	321			$	158,581			$	7,294				(650,402	)		$	(12,219	)		$	—			$	153,977
Net income															30,347																30,347
Purchase of remaining interest in subsidiary											(1,890	)																			(1,890	)
Issuance of common stock for acquisition			282,577				3				10,856																				10,859
Issuance of common stock awards to employees			101,241				1				(1	)																			—
Surrender of common stock awards by employees																			(11,971	)			(550	)							(550	)
Share-based compensation expense											4,360																				4,360
Share-based compensation issued to directors			5,940								300																				300
Other comprehensive loss, net of tax																											(45	)			(45	)
BALANCE - September 30, 2017			32,524,934			$	325			$	172,206			$	37,641				(662,373	)		$	(12,769	)		$	(45	)		$	197,358
										Additional																Accumulated Other
		Common Stock								Paid In				Retained				Treasury Stock								Comprehensive				Stockholders’
		Shares				Amount				Capital				Earnings				Shares				Amount				Income				Equity
BALANCE - January 1, 2018			32,524,934			$	325			$	174,043			$	48,434				(662,788	)		$	(12,781	)		$	507			$	210,528
Net income															38,272																38,272
Cumulative effect of accounting changes, net of tax															2,030	1											112				2,142
Issuance of common stock awards to employees			194,093				2				(2	)																			—
Surrender of common stock awards by employees																			(42,799	)			(2,282	)							(2,282	)
Share-based compensation expense											5,965																				5,965
Share-based compensation issued to directors			4,945								100																				100
Common stock repurchase																			(793,411	)			(42,827	)							(42,827	)
Other comprehensive income, net of tax																											2,453				2,453
BALANCE - September 30, 2018			32,723,972			$	327			$	180,106			$	88,736				(1,498,998	)		$	(57,890	)		$	3,072			$	214,351

 

1	See Note 3, Revenue Recognition, regarding the change in balance.

See accompanying notes to consolidated financial statements

 

3

INSTALLED BUILDING PRODUCTS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(in thousands)

 

		Nine months ended September 30,
		2018				2017
Cash flows from operating activities
Net income		$	38,272			$	30,347
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation and amortization of property and equipment			24,567				20,732
Amortization of intangibles			19,678				19,790
Amortization of deferred financing costs and debt discount			883				768
Provision for doubtful accounts			2,219				2,208
Write-off of debt issuance costs			1,164				1,201
Gain on sale of property and equipment			(551	)			(329	)
Noncash stock compensation			6,089				4,750
Changes in assets and liabilities, excluding effects of acquisitions
Accounts receivable			(35,953	)			(24,636	)
Inventories			(6,799	)			68
Other assets			(801	)			695
Accounts payable			7,523				2,665
Income taxes receivable / payable			10,542				(10,167	)
Other liabilities			2,016				5,249
Net cash provided by operating activities			68,849				53,341
Cash flows from investing activities
Purchases of investments			(22,818	)			(25,195	)
Maturities of short term investments			37,500				—
Purchases of property and equipment			(27,051	)			(22,947	)
Acquisitions of businesses, net of cash acquired of $0 and $247, respectively			(34,682	)			(130,994	)
Proceeds from sale of property and equipment			1,106				682
Other			(1,590	)			(1,845	)
Net cash used in investing activities			(47,535	)			(180,299	)
Cash flows from financing activities
Proceeds from term loan under credit agreement applicable to respective period (Note 6)			100,000				300,000
Payments on term loan under credit agreement applicable to respective period (Note 6)			(750	)			(97,000	)
Proceeds from delayed draw term loan under credit agreement applicable to respective period (Note 6)			—				112,500
Payments on delayed draw term loan under credit agreement applicable to respective period (Note 6)			—				(125,000	)
Proceeds from vehicle and equipment notes payable			20,657				15,817
Debt issuance costs			(1,992	)			(8,175	)
Principal payments on long-term debt			(10,324	)			(7,201	)
Principal payments on capital lease obligations			(4,316	)			(5,583	)
Acquisition-related obligations			(2,901	)			(3,434	)
Repurchase of common stock			(42,827	)			—
Surrender of common stock awards by employees			(2,282	)			(550	)
Purchase of remaining interest in subsidiary			—				(1,890	)
Net cash provided by financing activities			55,265				179,484
Net change in cash and cash equivalents			76,579				52,526
Cash and cash equivalents at beginning of period			62,510				14,482
Cash and cash equivalents at end of period		$	139,089			$	67,008
Supplemental disclosures of cash flow information
Net cash paid during the period for:
Interest		$	14,110			$	9,733
Income taxes, net of refunds			1,902				26,292
Supplemental disclosure of noncash investing and financing activities
Common stock issued for acquisition of business			—				10,859
Vehicles capitalized under capital leases and related lease obligations			1,034				4,073
Seller obligations in connection with acquisition of businesses			5,420				3,759
Unpaid purchases of property and equipment included in accounts payable			615				1,108

See accompanying notes to consolidated financial statements

 

4

INSTALLED BUILDING PRODUCTS, INC.

NOTES TO 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 125 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. Each of our branches has the capacity to serve all of our end markets. See Note 3, Revenue Recognition, for information on our revenues by product and end market.

NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation and Principles of Consolidation

The accompanying 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 omitted pursuant to such rules and regulations. We believe that the disclosures are adequate to prevent the information presented from being misleading when read in conjunction with our audited consolidated financial statements and the notes thereto included in Part II, Item 8, Financial Statements and Supplementary Data, of our Annual Report on Form 10-K for the fiscal year ended December 31, 2017 (the “2017 Form 10-K”), as filed with the SEC on February 28, 2018. The December 31, 2017 condensed consolidated balance sheet data herein was derived from the audited consolidated financial statements but does not include all disclosures required by U.S. GAAP.

Our interim operating results for the three and nine months ended September 30, 2018 are not necessarily indicative of the results to be expected in future operating quarters. See Item 1A, Risk Factors, in our 2017 Form 10-K for additional information regarding risk factors that may impact our results.

Note 2 to the audited consolidated financial statements in our 2017 Form 10-K describes the significant accounting policies and estimates used in preparation of the audited consolidated financial statements. During the nine months ended September 30, 2018, we changed certain of our critical accounting policies and estimates from those previously disclosed in our 2017 Form 10-K, in relation to our revenue recognition and our hedge accounting policies as a result of the adoption of new accounting standards on January 1, 2018. Our revenue recognition accounting policy is described in Note 3, Revenue Recognition, and our hedge accounting policy is described in Note 8, Derivatives and Hedging Activities.

 

5

INSTALLED BUILDING PRODUCTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

Recently Adopted Accounting Pronouncements

 

Standard		Adoption
ASU 2014-09, Revenue from Contracts with Customers (Topic 606)		ASC 606 sets 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. We adopted the provisions of ASU 2014-09 and related subsequently-issued amendments beginning on January 1, 2018 using the modified retrospective approach and, as such, recognized a $2.1 million cumulative effect, net of tax, of initially applying the standard as an increase to the opening balance of retained earnings on January 1, 2018. See Note 3, Revenue Recognition, for further information regarding our revenue recognition policies and the revisions to correct certain immaterial misstatements.
ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to accounting for Hedging Activities		ASU 2017-12 better aligns a company’s 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, with early adoption permitted. We elected to early adopt this ASU effective January 1, 2018 and, as such, recognized a $0.1 million adjustment to our opening retained earnings and accumulated other comprehensive income as of January 1, 2018 to reclassify the cash flow hedge ineffectiveness previously recorded in net income in the fourth quarter of 2017 to accumulated other comprehensive income.
ASU 2018-05, Income Taxes (Topic 740): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118		In March 2018, the Financial Accounting Standards Board issued ASU 2018-05, which became effective immediately. ASU 2018-05 adds various SEC paragraphs pursuant to the issuance of the December 2017 SEC Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (“SAB 118”). See Note 11, Income Taxes, for additional information regarding the adoption of ASU 2018-05.
ASU 2018-15, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (a consensus of the FASB Emerging Issues Task Force)		ASU 2018-15 amends the existing accounting standards for capitalizing implementation costs of internal-use software by including service contracts in a cloud computing arrangement. For public business entities, this update is effective for financial statements issued for fiscal years beginning after December 15, 2019 and interim periods therein, with early adoption permitted. We elected to early adopt this ASU using the prospective approach effective July 1, 2018 and, as such, have capitalized certain implementation costs associated with service contracts in a cloud computing arrangement. The effects of adoption were not significant.

 

6

INSTALLED BUILDING PRODUCTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

Recently Issued Accounting Pronouncements Not Yet Adopted

We are currently evaluating the impact of certain ASUs on our Condensed Consolidated Financial Statements or Notes to Consolidated Financial Statements, which are described below:

 

Standard		Description		Effective Date		Effect on the financial statements or other significant matters
ASU 2016-02, Leases (Topic 842)		This pronouncement and related subsequently-issued amendments change 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. ASC 842 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.		Annual periods beginning after December 15, 2018, including interim periods therein. Early adoption is permitted.		This ASU requires substantially all leases, with the exception of leases with a term of one year or less, to be recorded on the balance sheet as a lease liability measured as the present value of the future lease payments with a corresponding right-of-use asset. This ASU also requires disclosures designed to give financial statement users information on the amount, timing and uncertainty of cash flows. We anticipate taking advantage of the practical expedient options which allow an entity to not reassess whether any existing or expired contracts contain leases, not reassess lease classifications for existing or expired leases and not reassess initial direct costs for an existing lease. We are also evaluating other optional practical expedients and policy elections. The cumulative effect of adoption will be recorded to retained earnings in the period of adoption. We have completed the design phase of our implementation of this standard and are in the process of implementing changes to our systems and processes in conjunction with a review of existing lease agreements. Based on a preliminary assessment, we expect that substantially all of our operating lease commitments will be subject to the new guidance and recognized as operating lease liabilities and right-of-use assets upon adoption. We will adopt these standards effective January 1, 2019.

 

7

INSTALLED BUILDING PRODUCTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

ASU 2016-13, Financial Instruments-Credit Losses (Topic 326)		This pronouncement 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.		Annual periods beginning after December 15, 2019, including interim periods therein. Early adoption is permitted.		We are currently evaluating whether this ASU will have a material impact on our consolidated financial statements.
ASU 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment		To address concerns over the cost and complexity of the two-step goodwill impairment test, this pronouncement removes the second step of the goodwill impairment test. Going forward, an entity will apply a one-step quantitative test and record the amount of goodwill impairment as the excess of a reporting unit’s carrying amount over its fair value, not to exceed the total amount of goodwill allocated to the reporting unit.		Annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2019, including interim periods therein. Early adoption is permitted.		We are currently evaluating the provisions of this ASU and the impact it will have on our disclosures.
ASU 2018-13, Fair Value Measurement (Topic 820):Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement		This pronouncement amends Topic 820 to eliminate, add and modify certain disclosure requirements for fair value measurements.		Annual periods beginning after December 15, 2019, including interim periods therein. Early adoption is permitted.		We are currently evaluating the provisions of this ASU and the impact it will have on our disclosures.

 

8

INSTALLED BUILDING PRODUCTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

NOTE 3 – REVENUE RECOGNITION

Adoption of ASC Topic 606, “Revenue from Contracts with Customers”

On January 1, 2018, we adopted the new accounting standard ASC 606, “Revenue from Contracts with Customers” using the modified retrospective method applied to those contracts that were not completed as of January 1, 2018. Results for reporting periods beginning after January 1, 2018 are presented under Topic 606, while prior period amounts are not adjusted and continue to be reported in accordance with our historic accounting under Topic 605.

We recorded a $2.1 million cumulative effect adjustment as an increase to opening retained earnings, a $2.8 million increase to other current assets and a $0.7 million increase to deferred income taxes, respectively, on January 1, 2018 due to the impact of adopting Topic 606, with the impact primarily related to the change in accounting for certain of our short-term contracts that were previously accounted for on a completed contract basis, whereas, under ASC 606, we now recognize revenue associated with these contracts over time as service is performed and the transfer of control occurs, based on a percentage-of-completion method using cost-to-cost input methods as a measure of progress. The comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods. The cumulative effect adjustment has been revised from the amount previously disclosed in our interim financial statements filed on Form 10-Q for the quarterly periods ended March 31, 2018 and June 30, 2018 to correct certain immaterial misstatements. The result of correcting these misstatements was an $0.8 million decrease to opening retained earnings, a $1.0 million decrease to other current assets and a $0.2 million decrease to deferred income taxes recorded in the three months ended September 30, 2018.

Impact of New Revenue Recognition Standard on Financial Statement Line Items

The following table summarizes the impact of the new revenue standard on the Condensed Consolidated Balance Sheet as of September 30, 2018, including the cumulative effect of applying the new standard to all contracts upon adoption (in thousands):

 

		Impact of Change in Accounting Policy
		As reported				Adjustments				Without adoption
Inventories		$	51,491			$	7,003			$	58,494
Other current assets			32,836				(10,689	)			22,147
Total assets			863,106				(3,686	)			859,420
Deferred income taxes			7,758				(921	)			6,837
Retained earnings			88,736				(2,765	)			85,971
Total liabilities and stockholders’ equity			863,106				(3,686	)			859,420

 

9

INSTALLED BUILDING PRODUCTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

The following table summarizes the impact of the new revenue standard on the Condensed Consolidated Statements of Operations and Comprehensive Income (in thousands):

 

		Three months ended September 30, 2018												Nine months ended September 30, 2018
		As reported				Adjustments				Without adoption				As reported				Adjustments				Without adoption
Net revenue		$	348,999			$	60			$	349,059			$	983,311			$	(2,612	)		$	980,699
Cost of sales			251,665				(207	)			251,458				710,358				(1,781	)			708,577
Income before income taxes		$	20,921			$	267			$	21,188			$	51,034			$	(831	)		$	50,203
Income tax provision			5,358				68				5,426				12,762				(208	)			12,554
Net income		$	15,563			$	199			$	15,762			$	38,272			$	(623	)		$	37,649

Revenue Recognition

Our revenues are derived primarily through contracts with customers whereby we install insulation and other complementary building products and are recognized when control of the promised goods or services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services. We account for a contract when it has approval and commitment from both parties, the rights of the parties are identified, payment terms are identified, the contract has commercial substance and collectability of consideration is probable. We recognize revenue using the percentage-of-completion method of accounting, utilizing a cost-to-cost input approach as we believe this represents the best measure of when goods and services are transferred to the customer. An insignificant portion of our sales, primarily retail sales, is accounted for on a point-in-time basis when the sale occurs, adjusted accordingly for any return provisions. We do offer assurance-type warranties on certain of our installed products and services that do not represent a separate performance obligation and, as such, do not impact the timing or extent of revenue recognition.

When the percentage-of-completion method is used, we estimate the costs to complete individual contracts and record as revenue that portion of the total contract price that is considered complete based on the relationship of costs incurred to date to total anticipated costs (the cost-to-cost approach). Under the cost-to-cost approach, the use of estimated costs to complete each contract is a significant variable in the process of determining recognized revenue, requires significant judgment and can change throughout the duration of a contract due to contract modifications and other factors impacting job completion. The costs of earned revenue include all direct material and labor costs and those indirect costs related to contract performance, such as indirect labor, supplies, tools and repairs. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined.

Our long-term contracts can be subject to modification to account for changes in contract specifications and requirements. We consider contract modifications to exist when the modification either creates new, or changes the existing, enforceable rights and obligations. Most of our contract modifications are for goods or services that are not distinct from the existing contract due to the significant integration service provided in the context of the contract and are accounted for as if they were part of that existing contract. The effect of a contract modification on the transaction price and our measure of progress for the performance obligation to which it relates, is recognized as an adjustment to revenue (either as an increase in or a reduction of revenue) on a cumulative catch-up basis.

Billing on our long-term contracts occurs primarily on a monthly basis throughout the contract period whereby we submit invoices for customer payment based on actual or estimated costs incurred during the billing period. On certain of our long-term contracts the customer may withhold payment on an invoice equal to a percentage of the invoice amount, which will be subsequently paid after satisfactory completion of each installation project. This amount is referred to as retainage and is common practice in the construction industry, as it allows for customers to ensure the quality of the service performed prior to full payment. Retainage receivables are classified as current or long-term assets based on the expected time to project completion.

 

10

INSTALLED BUILDING PRODUCTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

We disaggregate our revenue from contracts with customers by end market and product, as we believe it best depicts how the nature, amount, timing and uncertainty of our revenue and cash flows are affected by economic factors. The following tables present our revenues disaggregated by end market and product (in thousands):

 

		Three months ended September 30,																Nine months ended September 30,
		2018								2017(1)								2018								2017(1)
Residential new construction		$	268,254				77	%		$	228,526				77	%		$	755,800				77	%		$	637,915				77	%
Repair and remodel			23,107				7	%			18,722				6	%			65,453				7	%			53,597				6	%
Commercial			57,638				16	%			47,945				17	%			162,058				16	%			141,546				17	%
Net revenues		$	348,999				100	%		$	295,193				100	%		$	983,311				100	%		$	833,058				100	%

 

		Three months ended September 30,																Nine months ended September 30,
		2018								2017(1)								2018								2017(1)
Insulation		$	225,503				65	%		$	195,872				66	%		$	646,270				66	%		$	561,462				67	%
Waterproofing			25,980				7	%			21,571				7	%			73,477				7	%			64,695				8	%
Shower doors, shelving and mirrors			23,190				7	%			21,849				7	%			66,222				7	%			53,107				6	%
Garage doors			21,781				6	%			15,874				6	%			56,574				6	%			45,338				5	%
Rain gutters			12,163				4	%			10,863				4	%			31,429				3	%			29,493				4	%
Blinds			7,811				2	%			2,634				1	%			21,196				2	%			5,909				1	%
Other building products			32,571				9	%			26,530				9	%			88,143				9	%			73,054				9	%
Net revenues		$	348,999				100	%		$	295,193				100	%		$	983,311				100	%		$	833,058				100	%

 

(1)	As noted above, prior period amounts have not been adjusted under the modified retrospective method.

Contract Assets and Liabilities

Our contract assets consist of unbilled amounts typically resulting from sales under contracts when the cost-to-cost method of revenue recognition is utilized and revenue recognized, based on costs incurred, exceeds the amount billed to the customer. Our contract assets are recorded in other current assets in our Consolidated Balance Sheets. Our contract liabilities consist of customer deposits and billings in excess of revenue recognized, based on costs incurred and is included in other current liabilities in our Consolidated Balance Sheets. For presentation purposes, uncompleted contracts as of December 31, 2017 have been restated to reflect the adoption of ASC 606 on January 1, 2018.

Contract assets and liabilities related to our uncompleted contracts and customer deposits were as follows (in thousands):

 

		September 30,				December 31,
		2018				2017
Contract assets		$	17,229			$	14,476
Contract liabilities			(8,039	)			(7,519	)

 

11

INSTALLED BUILDING PRODUCTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

Uncompleted contracts were as follows (in thousands):

 

		September 30, 2018				December 31, 2017
Costs incurred on uncompleted contracts		$	112,444			$	84,563
Estimated earnings			57,834				47,000
Total			170,278				131,563
Less: Billings to date			158,218				122,144
Net under (over) billings		$	12,060			$	9,419

Net under (over) billings were as follows (in thousands):

 

		September 30, 2018				December 31, 2017
Costs and estimated earnings in excess of billings on uncompleted contracts (contract assets)		$	17,229			$	14,476
Billings in excess of costs and estimated earnings on uncompleted contracts (contract liabilities)			(5,169	)			(5,057	)
Net under (over) billings		$	12,060			$	9,419

During the three and nine months ended September 30, 2018, we recognized $0.1 and $7.0 million of revenue, respectively, that was included in the contract liability balance at December 31, 2017. We did not recognize any impairment losses on our receivables and contract assets during the three and nine months ended September 30, 2018.

Remaining performance obligations represent the transaction price of contracts for which work has not been performed and excludes unexercised contract options and potential modifications. As of September 30, 2018, the aggregate amount of the transaction price allocated to remaining uncompleted contracts was $87.1 million. We expect to recognize revenue on substantially all of these uncompleted contracts over the next 18 months.

Practical Expedients and Exemptions

We generally expense sales commissions and other incremental costs of obtaining a contract when incurred because the amortization period is usually one year or less. Sales commissions are recorded within selling expenses on the Condensed Consolidated Statements of Operations and Comprehensive Income.

We do not disclose the value of unsatisfied performance obligations for contracts with an original expected length of one year or less.

NOTE 4 – INVESTMENTS

Cash and cash equivalents includes investments in money market funds that are valued based on the net asset value of the funds. The investments in these funds were $117.7 million and $55.6 million as of September 30, 2018 and December 31, 2017, respectively. The increase from December 31, 2017 primarily stems from an additional $100.0 million in loan proceeds received in connection with our term loan amendment that took place on June 19, 2018. See Note 6, Long-Term Debt, for additional information.

 

12

INSTALLED BUILDING PRODUCTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

All other investments are classified as held-to-maturity and consist of highly liquid instruments, primarily including corporate bonds and commercial paper. As of September 30, 2018 and December 31, 2017, the amortized cost of these investments equaled the net carrying value, which was $15.4 million and $30.1 million, respectively. All held-to-maturity securities as of September 30, 2018 mature in one year or less. See Note 7, Fair Value Measurements, for additional information.

NOTE 5 – GOODWILL AND INTANGIBLES

Goodwill

The change in carrying amount of goodwill was as follows (in thousands):

 

		Goodwill (Gross)				Accumulated Impairment Losses				Goodwill (Net)
January 1, 2018		$	225,470			$	(70,004	)		$	155,466
Business Combinations			11,771				—				11,771
Other			501				—				501
September 30, 2018		$	237,742			$	(70,004	)		$	167,738

Other changes included in the above table represent minor adjustments for the allocation of certain acquisitions still under measurement and one immaterial acquisition completed during the nine months ended September 30, 2018.

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, 2018 or 2017.

Intangibles, net

The following table provides the gross carrying amount, accumulated amortization and net book value for each major class of intangibles (in thousands):

 

		As of September 30, 2018												As of December 31, 2017
		Gross Carrying Amount				Accumulated Amortization				Net Book Value				Gross Carrying Amount				Accumulated Amortization				Net Book Value
Amortized intangibles:
Customer relationships		$	135,900			$	48,668			$	87,232			$	121,015			$	38,651			$	82,364
Covenants not-to-compete			13,780				6,826				6,954				11,807				4,773				7,034
Trademarks and trade names			62,248				17,166				45,082				58,136				14,076				44,060
Backlog			14,060				13,619				441				13,600				9,067				4,533
		$	225,988			$	86,279			$	139,709			$	204,558			$	66,567			$	137,991

The gross carrying amount of intangibles increased approximately $21.4 million during the nine months ended September 30, 2018 primarily due to business combinations. See Note 14, Business Combinations, for more information. Remaining estimated aggregate annual amortization expense is as follows (amounts, in thousands, are for the fiscal year ended):

 

13

INSTALLED BUILDING PRODUCTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

Remainder of 2018			5,442
2019			21,332
2020			20,400
2021			19,094
2022			18,176
Thereafter			55,265

NOTE 6 – LONG-TERM DEBT

Long-term debt consisted of the following (in thousands):

 

		As of September 30,				As of December 31,
		2018				2017
Term loan, net of unamortized debt issuance costs of $5,026 and $5,146, respectively		$	392,724			$	293,354
Vehicle and equipment notes, maturing September 2023; payable in various monthly installments, including interest rates ranging from 2.5% to 4.8%			59,992				50,357
Various notes payable, maturing through March 2025; payable in various monthly installments, including interest rates ranging from 4% to 6%			3,517				3,866
			456,233				347,577
Less: current maturities			(22,481	)			(16,650	)
Long-term debt, less current maturities		$	433,752			$	330,927

On April 13, 2017, we entered into, and subsequently amended on November 30, 2017, a term loan credit agreement (the “Term Loan Agreement”) which provided for a seven-year $300.0 million term loan facility (the “Term Loan”) and an asset-based lending credit agreement (the “ABL Credit Agreement”) which provided 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”), which may be reduced or increased pursuant to the ABL Credit Agreement.

On June 19, 2018, we entered into a second amendment to the Term Loan Agreement (the “Term Loan Second Amendment”) to (i) extend the maturity date from April 15, 2024 to April 15, 2025 and (ii) increase the aggregate principal amount of the facility from $297.8 million to $397.8 million. In conjunction with the Term Loan Second Amendment, we wrote off fees of $1.1 million. All other provisions of the Term Loan Agreement were unchanged.

Also on June 19, 2018, we entered into a third amendment to the ABL Credit Agreement (the “ABL Third Amendment”) to (i) extend the maturity date from April 13, 2022 to June 19, 2023, (ii) increase the aggregate revolving loan commitments from $100.0 million to $150.0 million and (iii) provide enhanced borrowing availability against certain types of accounts receivable.

 

14

INSTALLED BUILDING PRODUCTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

NOTE 7 – FAIR VALUE MEASUREMENTS

Assets and Liabilities Measured at Fair Value on a Recurring Basis

In many cases, a valuation technique used to measure fair value includes inputs from multiple levels of the fair value hierarchy. The lowest level of significant input determines the placement of the entire fair value measurement in the hierarchy. During the periods presented, there were no transfers between fair value hierarchical levels.

Assets Measured at Fair Value on a Nonrecurring Basis

Certain assets, specifically other intangible and long-lived assets, are measured at fair value on a nonrecurring basis in periods subsequent to initial recognition. Assets measured at fair value on a nonrecurring basis as of September 30, 2018 and December 31, 2017 are categorized based on the lowest level of significant input to the valuation. The assets are measured at fair value when our impairment assessment indicates a carrying value for each of the assets in excess of the asset’s estimated fair value. Undiscounted cash flows, a Level 3 input, are utilized in determining estimated fair values. During each of the three and nine months ended September 30, 2018 and 2017, we did not record any impairments on these assets required to be measured at fair value on a nonrecurring basis.

Estimated Fair Value of Financial Instruments

Accounts receivable, accounts payable and accrued liabilities as of September 30, 2018 and December 31, 2017 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, 2018 and December 31, 2017, 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, 2018 and December 31, 2017. All debt classifications represent Level 2 fair value measurements.

Derivative financial instruments are measured at fair value based on observable market information and appropriate valuation methods. Contingent consideration liabilities arise from future earnout payments to the sellers associated with certain acquisitions and are based on predetermined calculations of certain future results. These future payments are estimated by considering various factors, including business risk and projections. The contingent consideration liabilities are measured at fair value by discounting estimated future payments to their net present value using the appropriate weighted average cost of capital (WACC). The fair values of financial assets and liabilities that are recorded at fair value in the Condensed Consolidated Balance Sheets and not described above were as follows (in thousands):

 

		As of September 30, 2018																As of December 31, 2017
		Total				Level 1				Level 2				Level 3				Total				Level 1				Level 2				Level 3
Financial assets:
Cash equivalents		$	117,688			$	117,688			$	—			$	—			$	55,634			$	55,634			$	—			$	—
Derivative financial instruments			4,370				—				4,370				—				618				—				618				—
Total financial assets		$	122,058			$	117,688			$	4,370			$	—			$	56,252			$	55,634			$	618			$	—
Financial liabilities:
Derivative financial instruments		$	271			$	—			$	271			$	—			$	—			$	—			$	—			$	—
Contingent consideration			4,900				—				—				4,900				1,834				—				—				1,834
Total financial liabilities		$	5,171			$	—			$	271			$	4,900			$	1,834			$	—			$	—			$	1,834

 

15

INSTALLED BUILDING PRODUCTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

The change in fair value of the contingent consideration was as follows (in thousands):

 

Contingent consideration liability - January 1, 2018		$	1,834
Preliminary purchase price			3,653
Fair value adjustments			(586	)
Accretion in value			399
Amounts paid to sellers			(400	)
Contingent consideration liability - September 30, 2018		$	4,900

The accretion in value of contingent consideration liabilities is included within administrative expenses on the Condensed Consolidated Statements of Operations and Comprehensive Income.

The carrying values and associated fair values of financial assets and liabilities that are not recorded at fair value in the Condensed Consolidated Balance Sheets and not described above include investments which represent a Level 2 fair value measurement and are as follows (in thousands):

 

		As of September 30, 2018								As of December 31, 2017
		Carrying Value				Fair Value				Carrying Value				Fair Value
Financial assets:
Investments		$	15,358			$	15,343			$	30,053			$	30,038

See Note 4, 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

Cash Flow Hedges of Interest Rate Risk

Our purpose for using interest rate derivatives is to add stability to interest expense and to manage our exposure to interest rate movements. During the first nine months of 2018, such derivatives were used to hedge the variable cash flows associated with existing variable-rate debt. To accomplish these objectives, we primarily use interest rate swaps as part of our interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty in exchange for making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. As of September 30, 2018, we had two interest rate swaps, each with an associated floor, with a total beginning notional of $200.0 million, one that amortizes quarterly to $95.3 million at a maturity date of May 31, 2022 and one that amortizes quarterly to $93.3 million at a maturity date of April 15, 2025. We also had a forward interest rate swap with an associated floor beginning May 31, 2022 with a beginning notional of $100.0 million that amortizes quarterly to $97.0 million at a maturity date of April 15, 2025. Combined, these three swaps serve to hedge $200.0 million of the variable cash flows on our Term Loan until maturity. As of December 31, 2017, we had one interest rate swap with an associated floor with a beginning notional of $100.0 million that amortizes quarterly to $95.3 million at a maturity date of May 31, 2022.

The changes in the fair value of derivatives designated and that qualify as cash flow hedges are recorded in accumulated other comprehensive income and subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. We had no such changes during the nine months ended September 30, 2018.

 

16

INSTALLED BUILDING PRODUCTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to interest expense, net as interest payments are made on our variable-rate debt. Over the next twelve months, we estimate that an additional $0.4 million will be reclassified as a decrease to interest expense, net.

Additionally, we do not use derivatives for trading or speculative purposes and we currently do not have any derivatives that are not designated as hedges. As of September 30, 2018, the Company has not posted any collateral related to these agreements.

We elected to early adopt ASU 2017-12, “Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities.” as of January 1, 2018 and, as such, recognized a $0.1 million adjustment to our opening retained earnings and accumulated other comprehensive income as of January 1, 2018 to reclassify the cash flow hedge ineffectiveness previously recorded in net income in the fourth quarter of 2017 to accumulated other comprehensive income.

NOTE 9 – STOCKHOLDERS’ EQUITY

As of September 30, 2018, we had $3.1 million in accumulated other comprehensive income on our Condensed Consolidated Balance Sheet, which represents the unrealized gain on our derivative instruments. For additional information, see Note 8, Derivatives and Hedging Activities.

On February 28, 2018, we announced that our Board of Directors authorized a $50.0 million stock repurchase program effective March 2, 2018 through February 28, 2019, unless extended by the Board of Directors. See Note 16, Subsequent Events, for information regarding an additional stock repurchase program authorized by the Board of Directors effective November 5, 2018. During the three and nine months ended September 30, 2018, we repurchased approximately 380 thousand and 793 thousand shares of our common stock, respectively. The aggregate purchase price of our 2018 stock repurchase plan was approximately $18.2 million and $42.8 million, or $47.75 and $53.96 average price per share, for the three and nine months ended September 30, 2018, respectively. The effect of these treasury shares reducing the number of common shares outstanding is reflected in our earnings per share calculation.

NOTE 10 – EMPLOYEE BENEFITS

Healthcare

Our healthcare benefit expense (net of employee contributions) for all plans was approximately $4.5 million and $4.1 million for the three months ended September 30, 2018 and 2017, respectively, and $13.3 million and $12.4 million for the nine months ended September 30, 2018 and 2017, respectively. An accrual for estimated healthcare claims incurred but not reported (“IBNR”) is included within accrued compensation on the Condensed Consolidated Balance Sheets and was $2.1 million and $1.9 million as of September 30, 2018 and December 31, 2017, respectively.

Workers’ Compensation

Workers’ compensation expense totaled $4.4 million and $3.1 million for the three months ended September 30, 2018 and 2017, respectively, and $9.7 million and $9.8 million for the nine months ended September 30, 2018 and 2017, respectively. Workers’ compensation known claims and IBNR reserves included on the Condensed Consolidated Balance Sheets were as follows (in thousands):

 

17

INSTALLED BUILDING PRODUCTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

		September 30,				December 31,
		2018				2017
Included in other current liabilities		$	5,276			$	5,899
Included in other long-term liabilities			10,190				8,721
		$	15,466			$	14,620

We also had an insurance receivable for claims that exceeded the stop loss limit included on the Condensed Consolidated Balance Sheets. This receivable offsets an equal liability included within the reserve amounts noted above and was as follows (in thousands):

 

		September 30,				December 31,
		2018				2017
Included in other non-current assets		$	1,894			$	1,826

Retirement Plans

We participate in multiple 401(k) plans, whereby we provide a matching contribution of wages deferred by employees and can also make discretionary contributions to each plan. Certain plans allow for discretionary employer contributions only. These plans cover substantially all our eligible employees. We recognized 401(k) plan expenses of $0.3 million and $1.2 million during the three and nine months ended September 30, 2018 and $0.4 million and $1.3 million during the three and nine months ended September 30, 2017, respectively. These expenses are included in administrative expenses on the accompanying Condensed Consolidated Statements of Operations and Comprehensive Income.

Share-Based Compensation

Common Stock Awards

During the nine months ended September 30, 2018 and 2017, we granted approximately five thousand and six thousand shares of our common stock on June 1, respectively, under our 2014 Omnibus Incentive Plan to non-employee members of our Board of Directors. The stock issued to the Board of Directors on June 1, 2017 vested immediately, whereas the stock issued on June 1, 2018 will vest over a one year service term. Accordingly, for the nine months ended September 30, 2017, we recorded approximately $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, while $25 thousand and $0.1 million of compensation expense was recorded during the three and nine months ending September 30, 2018.

In addition, during each of the nine months ended September 30, 2018 and 2017, we granted approximately 0.1 million shares of our common stock under our 2014 Omnibus Incentive Plan to our employees. The shares granted during each of the nine months ended September 30, 2018 and 2017 vest in three equal installments (rounded to the nearest whole share) annually on April 20^th through 2021.

During the nine months ended September 30, 2018 and 2017, our employees surrendered approximately forty-one thousand shares and ten thousand shares, respectively, 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 non-performance-based awards issued to employees was $1.0 million and $2.9 million for the three and nine months ended

 

18

INSTALLED BUILDING PRODUCTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

September 30, 2018, respectively, and $0.8 million and $1.9 million for the three and nine months ended September 30, 2017, respectively. We recognized excess tax benefits of $0.5 million and $0.6 million within the income tax provision in the Condensed Consolidated Statements of Operations and Comprehensive Income for the nine months ended September 30, 2018 and 2017, respectively. We did not recognize any such excess tax benefits in the three months ended September 30, 2018 or 2017.

As of September 30, 2018, we had $6.1 million of unrecognized compensation expense related to these nonvested common stock awards issued to the Board of Directors and our employees. This expense is subject to future adjustments for forfeitures and is expected to be recognized on a straight-line basis over the remaining weighted-average period of 1.9 years. Shares forfeited are returned as treasury shares and available for future issuances. See the table below for changes in shares and related weighted average fair market value per share.

Employees – Performance-Based Stock Awards

During the nine months ended September 30, 2018, we granted under our 2014 Omnibus Incentive Plan approximately 0.1 million shares of our common stock to certain officers, which vest in two equal installments on each of April 20, 2019 and April 20, 2020. These shares were issued in connection with the performance-based targets established in 2017. In addition, during the nine months ended September 30, 2018, we established, and our Board of Directors approved, performance-based targets in connection with common stock awards to be issued to certain officers in 2019 contingent upon achievement of these 2018 targets. Share-based compensation expense associated with these performance-based awards was $0.6 million and $1.6 million for the three and nine months ended September 30, 2018, respectively, and $0.3 million and $0.7 million for the three and nine months ended September 30, 2017, respectively.

As of September 30, 2018, we had $3.6 million of unrecognized compensation expense related to nonvested performance-based common stock awards. This expense is subject to future adjustments for forfeitures and is expected to be recognized over the remaining weighted-average period of 1.8 years using the graded-vesting method. See the table below for changes in shares and related weighted average fair market value per share.

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 which we issued to certain employees during the nine months ended September 30, 2018. In addition, during the nine months ended September 30, 2018, 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 2019 based upon achievement of a performance target. Share-based compensation expense associated with these performance-based awards was $0.3 million and $1.5 million for the three and nine months ended September 30, 2018, respectively, and $1.0 million and $1.7 million for the three and nine months ended September 30, 2017, respectively. All restricted stock units are accounted for as equity-based awards that are settled with a fixed number of common shares.

As of September 30, 2018, we had $0.4 million of unrecognized compensation expense related to nonvested performance-based common stock units. This expense is subject to future adjustments for forfeitures and is expected to be recognized on a straight-line basis over the remaining weighted-average period of 0.5 years. See the table below for changes in shares and related weighted average fair market value per share.

 

19

INSTALLED BUILDING PRODUCTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

Share-Based Compensation Summary

Amounts for each category of equity-based award for employees as of December 31, 2017 and changes during the nine months ended September 30, 2018 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, 2017			202,331			$	39.09				77,254			$	41.00				72,000			$	52.16
Granted			65,112				57.51				52,892				65.60				14,072				55.92
Vested			(90,952	)			36.10				—				—				(71,120	)			52.15
Forfeited/Cancelled			(2,010	)			48.63				(14,448	)			41.00				(1,564	)			53.14
Nonvested awards/units at September 30, 2018			174,481			$	47.42				115,698			$	52.25				13,388			$	56.05

During the three and nine months ended September 30, 2018 and 2017, we recorded the following stock compensation expense, by income statement category (in thousands):

 

		Three months ended September 30,								Nine months ended September 30,
		2018				2017				2018				2017
Cost of sales		$	94			$	507			$	749			$	507
Selling			30				292				402				292
Administrative			1,769				1,380				4,938				3,950
		$	1,893			$	2,179			$	6,089			$	4,749

Administrative stock compensation expense includes all stock compensation earned by our administrative personnel, while cost of sales and selling stock compensation represents all stock compensation earned by our installation and sales employees, respectively.

NOTE 11 – 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, 2018, our effective tax rate was 25.6% and 25.0%, respectively. This rate was favorably impacted primarily by the enactment of Pub.L. 115–97, an Act to provide for reconciliation pursuant to titles II and V of the concurrent resolution on the budget for fiscal year 2018 (the “Tax Act”). The Tax Act reduced the U.S federal corporate tax rate from 35% to 21% effective January 1, 2018, among other changes. ASC Topic 740, Accounting for Income Taxes, requires companies to recognize the effect of tax law changes in the period of enactment. Pursuant to ASU 2018-05 and Staff Accounting Bulletin No. 118 (“SAB 118”) issued by the Securities and Exchange Commission, a company is expected to record a provisional amount when it does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain tax effects of the Tax Act, but a reasonable estimate can be determined. A provisional amount is not required to be recorded if a reasonable estimate cannot be determined.

We have recognized the provisional tax impacts of the Tax Act in our consolidated financial statements for the year ended December 31, 2017 included within our 2017 Form 10-K. Based on a review of the guidance issued by the Internal Revenue Service in the first, second and third quarters of 2018, no

 

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INSTALLED BUILDING PRODUCTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

adjustment to the provisional amount recorded in the Condensed Consolidated Financial Statements for the year ended December 31, 2017 was deemed necessary. We continue to assess new guidance and refine our computation of these provisional amounts and will complete our analysis within the one-year measurement period ending December 22, 2018.

NOTE 12 – 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 13, Commitments and Contingencies, for future minimum lease payments to be paid to these related parties.

For the three and nine months ended September 30, 2018 and 2017, 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,
		2018				2017				2018				2017
Sales		$	3,259			$	2,641			$	9,361			$	7,363
Purchases			372				302				1,207				901
Rent			257				290				829				875

As of September 30, 2018 and December 31, 2017, we had related party balances of approximately $2.4 million and $2.0 million, respectively, included in accounts receivable on our Condensed Consolidated Balance Sheets. These balances primarily represent trade accounts receivable arising during the normal course of business with various related parties. M/I Homes, Inc., a customer whose Chairman, President and Chief Executive Officer is a member of our Board of Directors, accounted for $1.4 million and $1.0 million of these balances as of each of September 30, 2018 and December 31, 2017, respectively.

NOTE 13 – COMMITMENTS AND CONTINGENCIES

Accrued General Liability

Accrued general insurance reserves included on the Condensed Consolidated Balance Sheets were as follows (in thousands):

 

		September 30,				December 31,
		2018				2017
Included in other current liabilities		$	2,029			$	2,033
Included in other long-term liabilities			7,787				7,073
		$	9,816			$	9,106

We also had insurance receivables and an indemnification asset, totaling $2.5 million and $2.8 million included in other non-current assets on the Condensed Consolidated Balance Sheets as of September 30, 2018 and December 31, 2017, respectively, that, in aggregate, offset an equal liability included within the reserve amounts noted above.

 

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INSTALLED BUILDING PRODUCTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

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 $60.9 million and $63.4 million as of September 30, 2018 and December 31, 2017, respectively, and a total of approximately $32.3 million and $26.8 million were fully depreciated as of September 30, 2018 and December 31, 2017, respectively. The net book value of assets under capital leases was approximately $9.7 million and $13.0 million as of September 30, 2018 and December 31, 2017, 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.

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, 2018 are as follows (in thousands):

 

Remainder of 2018		$	294
2019			1,249
2020			1,277
2021			1,154
2022			1,073
Thereafter			51

Other Commitments and Contingencies

From time to time, various claims and litigation are asserted or commenced against us principally arising from contractual matters and personnel and employment disputes. In determining loss contingencies, management considers the likelihood of loss as well as the ability to reasonably estimate the amount of such loss or liability. An estimated loss is recorded when it is considered probable that such a liability has been incurred and when the amount of loss can be reasonably estimated. As litigation is subject to inherent uncertainties, we cannot be certain that we will prevail in these matters. However, we do not believe that the ultimate outcome of any pending matters will have a material adverse effect on our consolidated financial position, results of operations or cash flows.

During the nine months ended September 30, 2018, we entered into an agreement with one of our suppliers to purchase a portion of the insulation materials we utilize across our business. This agreement is effective January 1, 2019 through December 31, 2021 with a purchase obligation of $25.8 million for 2019, $20.8 million for 2020 and $14.6 million for 2021.

NOTE 14 – BUSINESS COMBINATIONS

As part of our ongoing strategy to expand geographically and increase market share in certain markets, we completed eight business combinations and one minor acquisition merged into existing operations during the nine months ended September 30, 2018 and seven business combinations and two minor acquisitions merged into existing operations during the nine months ended September 30, 2017, respectively, in which we acquired 100% of the ownership interests in each.

 

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INSTALLED BUILDING PRODUCTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

The largest of these acquisitions were Custom Overhead Door, LLC dba Custom Door & Gate (collectively, “CDG”) in March 2018, Trilok Industries, Inc., Alpha Insulation and Waterproofing Inc. and Alpha Insulation and Waterproofing Company (collectively, “Alpha”) in January 2017, Columbia Shelving & Mirror, Inc. and Charleston Shelving & Mirror, Inc. (collectively, “Columbia”) in June 2017, and All In Insulation, LLC d/b/a/ Astro Insulation (collectively, “Astro”) in September 2017. The remaining acquisitions were individually insignificant, but material in the aggregate, and are included in “Other” within each table below. Net Income, as noted below, includes amortization, taxes and interest allocations when appropriate.

For the three and nine months ended September 30, 2018 (in thousands):

 

																		Total Purchase Price				Three months ended								Nine months ended
						Acquisition								Seller								September 30, 2018								September 30, 2018
2018 Acquisitions		Date				Type				Cash Paid				Obligations								Revenue				Net Income				Revenue				Net Income
CDG			3/19/2018				Asset			$	9,440			$	1,973			$	11,413			$	3,848			$	164			$	7,572			$	229
Other			Various				Shares/Asset				25,242				3,447				28,689				7,003				42				12,782				423
Total										$	34,682			$	5,420			$	40,102			$	10,851			$	206			$	20,354			$	652

For the three and nine months ended September 30, 2017 (in thousands):

 

																		Fair Value of Common Stock				Total Purchase Price				Three months ended September 30, 2017								Nine months ended September 30, 2017
2017 Acquisitions		Date				Acquisition Type				Cash Paid				Seller Obligations												Revenue				Net (Loss) Income				Revenue				Net Income
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				9,144				482				—				9,626				264				46				264				46
Other			Various				Asset				9,812				1,042				—				10,854				6,499				84				11,671				366
Total										$	131,534			$	3,751			$	10,859			$	146,144			$	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 Alpha’s change in EBITDA from 2015 and a customary holdback. These payments were based on fair value of each contingent payment at the time of acquisition and subsequently adjusted during the measurement period. We issued 282,577 shares of our common stock with a fair value of $10.9 million.

Acquisition-related costs recorded within administrative expenses on the Condensed Consolidated Statements of Operations and Comprehensive Income amounted to $0.7 million and $1.9 million for the three and nine months ended September 30, 2018, respectively, and $0.9 million and $2.3 million for the three and nine months ended September 30, 2017, respectively. The goodwill recognized in conjunction with these business combinations represents the excess cost of the acquired entity over the net amount assigned to assets acquired and liabilities assumed. We expect to deduct approximately $12.4 million of goodwill for tax purposes as a result of 2018 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 (in thousands):

 

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