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May 5, 2022, 2:39 p.m. EDT


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(EDGAR Online via COMTEX) -- Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

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 2021 Form 10-K.


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 throughout the 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 the District of Columbia from our national network of over 210 branch locations. 96% 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 and forms our Installation operating segment and single reportable segment. Additionally, we manufacture and distribute building products and materials to installers and distributors in new construction projects and these two operations form our Distribution operating segment and our Manufacturing operating segment, respectively. 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 "Key Factors Affecting Our Operating Results, COVID-19 Impacts" below for a discussion of short-term impacts to our business.

A large portion of our net revenue comes from the U.S. residential new construction market, which depends upon a number of economic factors, including demographic trends, interest rates, inflation, 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 34.4% increase in net revenue during the three months ended March 31, 2022 compared to 2021.

2022 First Quarter Highlights

Net revenue increased 34.4%, or $150.4 million to $587.5 million, while gross profit increased 37.5% to $172.4 million during the three months ended March 31, 2022 compared to 2021. The increase in net revenue and gross profit was primarily driven by the contribution of our recent acquisitions, selling price and product mix improvements as evidenced by the 14.6% increase in our price/mix metric, and increased sales volume of 9.7% on a same branch basis. Gross profit grew faster than revenue primarily due to higher selling prices and resulting leverage gained on labor and other costs of sales, which was partially offset by higher material costs caused by supply chain constraints and higher fuel costs. Inflationary pressures continue to contribute to higher material costs, particularly for spray foam and several complementary installed products, as some products continue to be difficult to source near volume and pricing levels secured in prior periods. Our liquidity remains strong despite repurchasing $49.9 million of our Company's stock and paying our first annual dividend plus our quarterly regular dividend, totaling $35.4 million during the three months ended March 31, 2022. As of March 31, 2022, we had $217.4 million of cash and cash equivalents, $50.0 million of short-term investments, and we have not drawn on our revolving line of credit, which we amended and extended during the three months ended March 31, 2022, increasing the commitment to $250.0 million from $200.0 million.

During the three months ended March 31, 2022, we experienced growth in all of our end markets and we achieved 22.5% year-over-year same branch sales growth. Our largest end market, the single-family subset of the residential new construction market, grew revenue 37.4% over the same period ended March 31, 2021. Our commercial end market also experienced sales growth during this period due primarily to acquisitions despite continued project delays due to macroeconomic concerns surrounding the pandemic. These fluctuations are shown in further detail in the table below and impacts from COVID-19 are discussed further in the sections that follow.

Key Measures of Performance

During the three months ended March 31, 2022, we realigned our operating segments to reflect recent changes in our business as described in Part I, Item1, "Note 10 - Information on Segments." In conjunction with this realignment, we modified the key metrics we use to monitor company and segment performance. Specifically, we now present total sales growth and same branch growth metrics for our consolidated results, our Installation reportable segment and our Other category consisting of our Distribution and Manufacturing operating segments. In addition, our volume growth and price/mix growth metrics are now only presented for the Installation reportable segment to align with how we monitor our operations. While these changes do not

significantly alter the prior period metrics previously disclosed, prior period Manufacturing operating segment growth metrics were reclassified from our Installation segment metrics to the Other category metrics.

The following table shows key measures of performance we utilize to evaluate our results:

                                                                                  Three months ended March 31,
                                                                                 2022                      2021
        Period-over-period Growth
        Consolidated Sales Growth                                                     34.4  %                   10.0  %
        Consolidated Same Branch Sales Growth (1)                                     22.5  %                    2.2  %
        Installation (2)
        Sales Growth (3)                                                              30.0  %                    9.8  %
        Same Branch Sales Growth (1)(3)                                               22.2  %                    2.0  %
        Single-Family Sales Growth (4)                                                37.4  %                    9.4  %
        Single-Family Same Branch Sales Growth (1)(4)                                 29.4  %                    4.7  %
        Multi-Family Sales Growth (5)                                                 24.6  %                   18.8  %
        Multi-Family Same Branch Sales Growth (1)(5)                                  23.1  %                    6.6  %
        Residential Sales Growth (6)                                                  35.2  %                   10.9  %
        Residential Same Branch Sales Growth (1)(6)                                   28.3  %                    5.0  %
        Commercial Sales Growth (7)                                                   13.0  %                    2.8  %
        Commercial Same Branch Sales Growth (1)(7)                                     5.9  %                  (14.0) %
        Other (2)
        Sales Growth (8)                                                             407.3  %                   37.3  %
        Same Branch Sales Growth (1)(8)                                               50.8  %                   37.3  %
        Same Branch Sales Growth - Installation
        Volume Growth (1)(9)                                                           9.7  %                   10.2  %
        Price/Mix Growth (1)(10)                                                      14.6  %                   (6.2) %
        Heavy Commercial Same Branch Sales Growth(1)(11)                               0.5  %                  (13.1) %
        U.S. Housing Market (12)
        Total Completions Growth                                                      (5.5) %                    9.2  %
        Single-Family Completions Growth (4)                                          (0.7) %                   11.2  %
        Multi-Family Completions Growth (5)                                          (17.3) %                    4.8  %

(1) Same-branch basis represents period-over-period growth for branch locations owned greater than 12 months as of each financial statement date.

We believe 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.

Net revenue, cost of sales and gross profit

The components of gross profit were as follows (in thousands):

                                                       Three months ended March 31,
                                                 2022                   Change         2021
                 Net revenue               $     587,492                34.4  %    $ 437,066
                 Cost of sales                   415,089                33.2  %      311,639
                 Gross profit              $     172,403                37.5  %    $ 125,427
                 Gross profit percentage            29.3   %                            28.7  %

Net revenue increased during the three months ended March 31, 2022, primarily driven by acquisitions, increased selling prices and organic growth from our existing branches, especially in our Installation residential end market (as shown in the Key Measures of Performance section above). All end markets we serve experienced sales growth, with overall sales growing 34.4% over the prior year period. For the three months ended March 31, 2022, on a same branch consolidated basis, net revenue improved 22.5% with approximately 14.6% of this increase attributable to price gains and more favorable customer and product mix with the remainder attributable to growth in the number of completed jobs. Growth in our residential end market is primarily due to selling price increases, higher volume and the continued success of our acquisition strategy. In our commercial end market, continued challenges associated with the COVID-19 pandemic had an impact as evidenced by a modest increase of 5.9% in same branch sales within this end market. See "Key Factors Affecting Our Operating Results, COVID-19 Impacts" below for further information.

As a percentage of net revenue, gross profit improved during the three months ended March 31, 2022 compared to the prior period primarily on the strength of sales growth across all end markets as well as strong price/mix growth. However, ongoing industry wide supply chain issues continue to impact our operating efficiency, driving our costs higher. In order to meet customer demand during the quarter, we purchased materials from distributors and home centers at a premium to what we typically would purchase directly from manufacturers. During the three months ended March 31, 2022, we estimate these purchases increased materials expense by approximately $1.4 million, therefore reducing gross profit by approximately 20 basis points. While inflation and material supply chain issues are likely to persist throughout the year, we believe new housing construction will remain supportive of our business due to the substantial number of permitted units that have yet to be started.

Operating expenses

Operating expenses were as follows (in thousands):

                                                           Three months ended March 31,
                                                     2022                     Change        2021
             Selling                           $      25,192                  20.8  %    $ 20,858
             Percentage of total net revenue             4.3   %                              4.8  %
             Administrative                    $      79,144                  21.6  %    $ 65,077
             Percentage of total net revenue            13.5   %                             14.9  %
             Amortization                      $      11,097                  32.2  %    $  8,396
             Percentage of total net revenue             1.9   %                              1.9  %


The dollar increase in selling expenses for the three months ended March 31, 2022 was primarily driven by an increase in selling wages and commissions to support our increased net revenue of 34.4%. Selling expense as a percentage of sales decreased for the three months ended March 31, 2022 compared to 2021 primarily due to increased leverage on wages and commissions from selling price increases.


The dollar increase in administrative expenses for the three months ended March 31, 2022 was primarily due to an increase in wages, benefits, liability insurance and facility costs to support both acquisitions and organic growth. Administrative expenses decreased as a percentage of sales for the three months ended March 31, 2022 compared to 2021 primarily due to the leverage gained on administrative wages and benefits from increased sales.

        The increase in amortization expense for the three months ended March 31, 2022
        was attributable to the increase in finite-lived intangible assets recorded as a
        result of acquisitions.
        Other expense, net
        Other expense, net was as follows (in thousands):
                                                        Three months ended March 31,
                                                       2022                  Change       2021
                Interest expense, net      $        10,600                   40.0  %    $ 7,574
                Other expense                          145                   79.0  %         81
                Total other expense, net   $        10,745                              $ 7,655

The increase in interest expense, net during the three months ended March 31, 2022 compared to 2021 was primarily due to the increase in debt levels. See Note 7, Long-Term Debt, for more information.

Income tax provision

Income tax provision and effective tax rates were as follows (in thousands):

                                                   Three months ended March 31,
                                                   2022                         2021
                    Income tax provision    $       12,403                   $ 6,150
                    Effective tax rate                26.8   %                  26.2  %

During the three months ended March 31, 2022 and 2021, our effective tax rate was 26.8% and 26.2%, respectively. The rates for both periods were unfavorably impacted by certain expenses not being deductible for income tax reporting purposes.

Other comprehensive income, net of tax

Other comprehensive income, net of tax was as follows (in thousands):

Three months ended March 31, 2022 2021 Net change on cash flow hedges, net of taxes $ 18,111 $ 10,157

During the three months ended March 31, 2022, we recorded an unrealized gain of $17.5 million, net of tax, on our cash flow hedges due to the market's expectations for higher interest rates in the future relative to our three existing interest rate swaps. We also amortized $0.8 million of our remaining unrealized loss on our terminated cash flow hedges to interest expense during the three months ended March 31, 2022, not including tax effects of $0.2 million. During the three months ended March 31, 2021, we recorded an unrealized gain on our then forward cash flow hedge due to favorable market conditions and amortized a portion of the unrealized loss on our terminated cash flow hedges.


Inflation and Interest Rates

The fast recovery in residential housing demand helped offset prolonged impacts of the pandemic already experienced. However, the strong demand for residential housing has caused inflationary pressure on materials. Inflation has also affected the economy as a whole with the Federal Reserve raising the federal funds rate in March of 2022 in addition to signaling it plans to continue raising this rate throughout 2022 and into 2023. This caused the average mortgage rate in the United States to rise each month in 2022, which could curtail housing demand.

Cost and Availability of Materials

We typically purchase the materials that we install directly from manufacturers, and the products we sell are either purchased from manufacturers or other suppliers or are manufactured by us. Since the beginning of the COVID-19 pandemic, the industry supply of many of the materials we install has been disrupted. The higher demand for materials coupled with supply chain issues including raw material shortages, supplier labor shortages, bottlenecks and shipping constraints has forced us to buy some materials at higher prices through distributors and local retailers to meet customer demand, therefore reducing gross profit. The pandemic has also resulted in the need for some of our manufacturers to allocate materials across the industry which has affected the pricing and availability of those materials. We expect the supply chain disruptions affecting most of the materials used throughout our installation work to continue throughout 2022.

In addition, we experience price increases from our suppliers from time to time, including multiple increases over the last few years caused by supply shortages and general economic inflationary pressures. During the three months ended March 31, 2022, we saw increased pricing for fiberglass insulation and many of the other products we install and expect manufacturers to seek additional price increases during the year. The increase in demand, inflationary pressures, product shortages and other supply constraints has caused these material price increases to be larger and more frequent than a normal business cycle. Increased market pricing, regardless of the catalyst, has and could continue to impact our results of operations throughout the remainder of 2022, to the extent that price increases cannot be passed on to our customers. 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.

Cost of Labor

Our business is labor intensive and the majority of our employees work as installers on local construction sites. We expect to spend more to hire, train and retain installers to support our growing business in 2022, as tight labor availability continues within the construction industry. We obtained leverage on our labor costs in the three months ended March 31, 2022 due to increased selling prices per job, however, inflation and market competition could increase these costs in the near-term. 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 may continue to rise as we increase our coverage for additional personnel.

We experienced strong employee retention, turnover and labor efficiency rates in the three months ended March 31, 2022. 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 the Installed 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.

COVID-19 Impacts

The COVID-19 pandemic has caused significant volatility, uncertainty and economic disruption. While the COVID-19 pandemic and related events will likely have a negative effect on our business during the remainder of 2022, 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). The fast recovery in residential housing demand helped offset prolonged impacts of the pandemic already experienced. However, we have experienced supply constraints and material price increases ultimately stemming from the effects of the pandemic across most of the products we install or sell, which we expect to continue throughout 2022.

In the commercial sector, we have experienced some impact to our commercial business, mainly in the form of project start delays and inefficiencies due to social distancing requirements in some areas. In the future, certain large-scale infrastructure programs may be at risk if the need for such structures decline, project funding declines or as consumer behaviors change in the wake of COVID-19 disruptions to the economy and changes to our general ways of life. For example, reduced demand for office buildings and/or educational facilities, decreased airport traffic, or decreased usage of sports arenas or similar commercial structures could impact our commercial end market. We continue to evaluate the nature and extent of the COVID-19 pandemic's impact on our financial condition, results of operations and cash flows.

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security ("CARES Act") was signed into law. The CARES Act provides numerous tax provision and other stimulus measures. We benefited from the temporary suspension of the employer portion of Social Security taxes by deferring $20.7 million of payments in 2020. 50% of the amount was paid on December 31, 2021 and the remaining 50% will be paid on December 31, 2022. It is important to note that this does not impact the timing of the expense, only the timing of the payment.


Our capital resources primarily consist of cash from operations and borrowings under our various debt agreements and capital equipment leases and loans. As of March 31, 2022, we had cash and cash equivalents of $217.4 million, short-term investments of $50.0 million, as well as access to $250.0 million under our asset-based lending credit facility (as defined below), less $44.3 million of outstanding letters of credit, resulting in total liquidity of $473.1 million. This total liquidity was reduced by $4.3 million within our cash and cash equivalents due to a deposit 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 of our asset-based lending facility (as defined below). Liquidity may also be limited in the future by certain cash collateral limitations under our asset-based credit facility (as defined below), depending on the status of our borrowing base availability.

We experienced unprecedented increases in pricing for fiberglass and foam insulation materials in 2021 and the first quarter of 2022 and expect manufacturers to seek additional price increases in 2022. Increased market pricing on the materials we purchase has and could continue to impact our results of operations in 2022 due to the higher prices we must pay for materials. See Part I, Item 1A, Risk Factors on the 2021 Form 10-K, for information on the potential and currently known impacts on our business and liquidity from the COVID-19 pandemic.

Short-Term Material Cash Requirements

Our primary capital requirements are to fund working capital needs, operating expenses, acquisitions and capital expenditures, to meet principal and interest obligations and to make required income tax payments. We may also use our resources to fund our optional stock repurchase program and pay quarterly and annual dividends. In addition, we expect to spend cash and cash equivalents to acquire various companies with at least $100.0 million in aggregate net revenue acquired each fiscal year. The amount of cash paid for an acquisition is dependent on various factors, including the size and determined value of the business being acquired.

We expect to meet our short-term liquidity requirements primarily through net cash flows from operations, our cash and cash equivalents on hand and borrowings from banks under the Master Loan and Security Agreement, the Master Equipment Agreement and the Master Loan Agreements. Additional sources of funds, should we need them, include borrowing capacity under our asset-based lending credit facility (as defined below).

Despite the current known impacts of the COVID-19 pandemic, we believe that our cash flows from operations, combined with our current cash levels and available borrowing capacity, will be adequate to support our ongoing operations and to fund our business needs, commitments and contractual obligations for at least the next 12 months as evidenced by our net positive cash flows from operations for the three months ended March 31, 2022 and 2021. We believe that we have access to additional funds, if needed, through the capital markets to obtain further debt financing under the current market conditions, but we cannot . . .

May 05, 2022


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