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
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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.
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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 endedMarch 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$2.5 million due to the COVID-19 health crisis. As a percentage of net revenue, gross profit increased during the three months endedMarch 31, 2020 compared to 2019 attributable primarily to achieving higher selling prices on relatively stable material costs, as evidenced by our 12.1% improvement in pricing and customer and product mix calculated based on all our combined markets excluding the large commercial end market. Labor utilization improved, in part, as a result of lower installer turnover due to investments in our financial wellness plan, our longevity stock compensation plan for installers and assistance from ourInstalled Building Products Foundation . However, restrictions limiting the number of laborers on a jobsite and our internal standards for social distancing practices impacted the number of completed jobs and operational efficiencies across our end markets during the first quarter of 2020. As ofMarch 31, 2020 , approximately 90% of our branches are located in markets where construction was deemed an "essential" business, leaving a portion of our branches in markets where work is severely limited. See "COVID-19 Impacts" within the Key Factors Affecting Our Operating Results section below for further information. Operating expenses Operating expenses were as follows (in thousands): Three months ended March 31, 2020 Change 2019 Selling$ 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
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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 endedMarch 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
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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
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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 continentalU.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
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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. OnMarch 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 ofSocial 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 onDecember 31, 2021 and the remaining 50% will be paid onDecember 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 theU.S. Department of Health and Human Services . These provisions are in effect untilDecember 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 throughMarch 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 ofMarch 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 endedMarch 31, 2020 and 2019. While the general economic environment withinthe 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
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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
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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 ofMarch 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 InSeptember 2019 , we issued$300.0 million in aggregate principal amount of 5.75% senior unsecured notes (the "Senior Notes"). The Senior Notes will mature onFebruary 1, 2028 and interest will be payable semi-annually in cash in arrears onFebruary 1 andAugust 1 , commencing onFebruary 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 InDecember 2019 , we amended and restated our$400 million , seven-year term loan facility dueApril 2025 (the "Term Loan") under our credit agreement (the "Term Loan Agreement"), dated as ofApril 13, 2017 (as previously amended by the First Amendment thereto datedNovember 30, 2017 and by the Second Amendment thereto datedJune 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 withBank of America, N.A . as the administrative agent and collateral agent thereunder. As ofMarch 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. InSeptember 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 withBank of America, N.A ., as ABL Agent for the lenders under the ABL Credit Agreement, andBank 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 ofMarch 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
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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
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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 InJanuary 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 endedMarch 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 endedMarch 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 endedMarch 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 endedMarch 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 endedMarch 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 endedMarch 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
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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
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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 theSEC . 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 ofMarch 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 ofMarch 31, 2020 . As a result, total variable rate debt of$4.5 million was exposed to market risks as ofMarch 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
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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.
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