The financial and business analysis below provides information which we believe is relevant to an assessment and understanding of our financial position, results of operations, and cash flows. This financial and business analysis should be read in conjunction with the financial statements and related notes. In this section, we generally discuss the results of our operations for the year ended
December 31, 2021compared to the year ended December 31, 2020. For a discussion of the year ended December 31, 2020to the year ended December 31, 2019, please refer to Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the year ended December 31, 2020, filed with the SECon February 23, 2021, which discussion is hereby incorporated herein by reference.
We are a leading installer and distributor of insulation and other building products to the construction industry. Demand for our products and services is driven primarily by residential construction, commercial construction, and industrial construction. We serve the residential, commercial, and industrial markets in the
U.S.and the commercial and industrial markets in Canada. A number of local and national factors influence activity in each of our lines of business, including demographic trends, interest rates, employment levels, business investment, supply and demand for housing, availability of credit, foreclosure rates, consumer confidence, and general economic conditions.
Activity in the construction industry is seasonal, typically peaking in the
summer months. Because installation of insulation historically lags housing
starts by several months, we generally see a corresponding benefit in our
operating results during the third and fourth quarters.
We are the nation's leading installer and specialty distributor of residential and commercial insulation and other building products. We are committed to creating long-term value for all stakeholders - employees, customers, suppliers, and investors. Our core values include:
? Safety – We put the safety of our people first.
? Integrity – We deliver results with integrity, respect, and accountability.
? Focus – We are customer-focused, grounded in strong relationships.
? Innovation – We are continuously improving and encourage idea sharing.
? Unity – We are united as one team, valuing diversity.
? Community – We make a difference in the communities we serve.
? Empowerment – We are empowered to be our best, individually and as a team.
Our strategy is focused on growth and productivity including:
? Growing our share of the
? Expanding our business in commercial and industrial construction;
? Acquiring strategically aligned businesses;
? Driving operational efficiencies throughout the business.
Our operating results depend heavily on residential new construction activity and, to a lesser extent, on commercial construction and industrial construction, all of which are cyclical. We are also dependent on third-party suppliers and manufacturers providing us with an adequate supply of high-quality products. 26 Table of Contents COVID-19 Business Update We continue to monitor the COVID-19 pandemic and its impact on macroeconomic and local economic conditions. While we are currently able to operate in all of our locations, there is no guarantee that the services we provide will continue to be allowed or that other events making the provision of our services challenging or impossible, will not occur. For example, if there are surges in levels of COVID-19 infections in certain states, those states may respond by, among other things, deeming residential, commercial, and industrial construction as nonessential in connection with a restriction of commercial activity. We have implemented and continue to implement procedures and processes as required or recommended by governmental and medical authorities to ensure the safety of our employees, including increasing our cleaning and sanitizing practices at all locations and for all company vehicles, mandating social distancing on job sites and within our branch operations and limiting all but essential travel. However, we are not able to predict whether our customers will continue to operate at their current or typical volumes, and such decreases in their operations would have a negative impact on our business. We are also unable to predict how long the COVID-19 pandemic will last and the impact of the pandemic on demand for our products and services. For additional discussion of the potential impact of the COVID-19 pandemic on our business, see the sections entitled "Outlook" and "Risk Factors" included in this Annual Report.
Material Trends in Our Business
We remain optimistic about the
U.S.housing market. Following a brief slowdown in the market during the 2nd quarter of 2020 due to the impacts from COVID-19, housing starts increased through much of 2020 and 2021, and ended the year at 1.7 million (based on seasonally-adjusted figures from the U.S. Census Bureau), the highest level of annual starts in more than a decade. However, housing completions have not been able to keep up with housing starts due to a variety of material and labor constraints across the entire housing construction industry. This environment of strong demand and tight supply has created significant inflation in the majority of the products we sell. We anticipate that the current environment of strong demand and tight supply will continue into 2022. The commercial and industrial construction markets are also dealing with strong demand and tight supply. In addition, we have seen a number of projects pushed out or delayed. Our order volume and backlog for this work remains strong and we anticipate growth in this market in 2022.
Sales across all of our end markets are typically slower during the winter months due to lower construction activity. Historically, the installation of insulation lags housing starts by several months. However, the normal lag on residential housing starts has extended recently as demand for residential housing has surged, causing building materials and labor to be constrained. These material and labor constraints, as well as additional safety precautions related to COVID-19, have also extended the build cycle related to commercial construction. Results of Operations
We report our financial results in conformity with GAAP.
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The following table sets forth our net sales, gross profit, operating profit, and margins, as reported in our Consolidated Statements of Operations, in thousands: Year Ended December 31, 2021 2020 Net sales
$ 3,486,207 $ 2,718,038Cost of sales 2,511,818 1,971,677 Cost of sales ratio 72.1 % 72.5 % Gross profit 974,389 746,361 Gross profit margin 27.9 % 27.5 % Selling, general, and administrative expense 497,970 391,315 Selling, general, and administrative expense to sales ratio 14.3 % 14.4 % Operating profit 476,419 355,046 Operating profit margin 13.7 % 13.1 % Other expense, net (42,976) (31,956) Income tax expense (109,427) (76,067) Net income $ 324,016 $ 247,023Net margin 9.3 % 9.1 %
Comparison of the Years Ended
Sales and Operations
Net sales for 2021 increased 28.3 percent, or
The increase was driven by a 15.6 percent increase in sales from acquisitions, 8.5 percent impact from higher selling prices, and a 4.1 percent increase in sales volume. Our gross profit margins were 27.9 percent and 27.5 percent for 2021 and 2020, respectively. Gross profit margin improved primarily due to higher selling prices and sales volume, and savings from cost reduction activities, partially offset by an increase in cost of material and the amortization of inventory step-up related to purchase accounting. Selling, general, and administrative expenses as a percentage of sales were 14.3 percent and 14.4 percent for 2021 and 2020, respectively. Decreased selling, general, and administrative expense as a percent of sales was primarily the result of higher sales and lower legal fees and share-based compensation expense partially offset by higher spend on acquisition-related costs such as intangible amortization and one-time transaction costs. Operating margins were 13.7 percent and 13.1 percent for 2021 and 2020, respectively. The increase in operating margins related to higher selling prices and sales volume, savings from cost reduction activities, lower legal fees and share-based compensation expense, partially offset by an increase in cost of material, the amortization of inventory step-up related to purchase accounting and other one-time transaction costs.
Other Expense, Net
Other expense, net, which primarily consists of interest expense, increased
primarily related to costs incurred to redeem our 5.625% Senior Notes in 2021
and increased average debt outstanding in 2021, partially offset by lower
interest rates on our 3.625% Senior Notes and borrowings under the Credit
Income Tax Expense
Our effective tax rate increased from 23.5 percent in 2020 to 25.2 percent in 2021. The higher 2021 rate was primarily related to a decrease in the benefit related to share-based compensation and an increase in non-deductible items. 28 Table of Contents
2021 and 2020 Business Segment Results
The following table sets forth our net sales and operating profit information by
business segment, in thousands:
Year Ended December 31, 2021 2020 Percent Change Net sales by business segment: Installation
$ 2,378,401 $ 1,943,46122.4 % Specialty Distribution 1,287,176 926,207 39.0 % Intercompany eliminations (179,370) (151,630) Net sales $ 3,486,207 $ 2,718,03828.3 % Operating profit by business segment (a): Installation $ 383,722 $ 294,79330.2 % Specialty Distribution 169,368 115,343 46.8 % Intercompany eliminations (29,653) (24,305) Operating profit before general corporate expense 523,437 385,831 35.7 % General corporate expense, net (b) (47,018) (30,785) Operating profit $ 476,419 $ 355,04634.2 % Operating profit margins: Installation 16.1 % 15.2 % Specialty Distribution 13.2 % 12.5 % Operating profit margin before general corporate expense 15.0 % 14.2 % Operating profit margin 13.7 % 13.1 %
Segment operating profit for years ended
(a) an allocation of general corporate expenses attributable to the operating
segments which is based on direct benefit or usage (such as salaries of corporate employees who directly support the segment).
General corporate expense, net includes expenses not specifically
(b) attributable to our segments for functions such as corporate human resources,
finance and legal, including salaries, benefits, and other related costs.
2021 and 2020 Business Segment Results Discussion
Changes in operating profit margins in the following business segment results
discussion exclude general corporate expense, net in 2021 and 2020, as
Sales increased 11.4 percent from acquisitions, 6.5 percent due to higher
selling prices and 4.5 percent sales volume.
Operating margins in the Installation segment were 16.1 percent and 15.2 percent for 2021 and 2020, respectively. The increase in operating margin was driven by higher sales volume and selling prices, savings from cost reduction activities, and lower legal fees, partially offset by an increase in cost of material.
Sales increased 22.0 percent from acquisitions, 13.7 percent due to higher
selling prices and 3.3 percent sales volume.
29 Table of Contents Operating Results Operating margins in the Specialty Distribution segment were 13.2 percent and 12.5 percent for 2021 and 2020, respectively. The increase in operating margin was driven by higher sales volume and selling prices and savings from cost reduction activities, partially offset by an increase in cost of material and the amortization of inventory step-up related to purchase accounting.
Commitments and Contingencies
We are subject to certain claims, charges, litigation, and other proceedings in the ordinary course of our business. We believe we have adequate defenses in these matters, and we do not believe that the ultimate outcome of these matters will have a material adverse effect on us. For additional information see Item 8. Financial Statements and Supplementary Data - Note 11. Other Commitments and Contingencies.
Liquidity and Capital Resources
We have access to liquidity through our cash from operations and available borrowing capacity under our Credit Agreement, which provides for borrowing and/or standby letter of credit issuances of up to
$500 millionunder the revolving facility. For additional information regarding our outstanding debt and borrowing capacity see Item 8. Financial Statements and Supplementary Data - Note 6. Long-Term Debt.
The following table summarizes our total liquidity, in thousands:
As of December 31, December 31, 2021 2020 Cash and cash equivalents (a)
$ 139,779 $ 330,007Revolving facility 500,000 450,000 Less: standby letters of credit (69,936) (60,382) Availability under revolving facility 430,064 389,618 Total liquidity $ 569,843 $ 719,625
(a) Our cash and cash equivalents consist of AAA-rated money market funds as well
as cash held in our demand deposit accounts.
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 debt service requirements, capital expenditures and working capital needs for at least the next twelve months. We also have adequate liquidity to maintain off-balance sheet arrangements for short-term leases, letters of credit, and performance and license bonds. See Item 8. Financial Statements and Supplementary Data of this Annual Report for related disclosures.
Our material cash requirements from known contractual and other obligations
primarily relate to our debt and lease obligations. Expected timing of those
payments are as follows as of
Payments Due by Period 2022 2023 2024 2025 2026 Thereafter Total Operating leases (a)
$ 59,414 $ 46,076 $ 35,388 $ 25,726 $ 15,175 $ 10,593 $ 192,372Finance leases (b) 2,641 2,419 1,663 1,524 1,064 1,608 10,919 Principal repayments of long-term debt (c) 38,639 40,075 47,121 48,750 438,750 900,000 1,513,335 Interest payments and fees on long-term debt (d) 46,823 49,526 52,417 53,756 53,869 147,881 404,272 Total $ 147,517 $ 138,096 $ 136,589 $ 129,756 $ 508,858 $ 1,060,082 $ 2,120,89830 Table of Contents
(a) We lease certain locations, vehicles and equipment under operating lease
agreements. In some instances, these lease agreements exist with related
parties. For additional information, see Note 2 – Leases to our audited
consolidated financial statements included in this Form 10-K.
(b) We lease certain fleet vehicles and equipment under a finance lease
structure. Finance lease obligations, as disclosed above, include estimated
interest expense payments using our incremental borrowing rates effective at
(c) Principal repayments of long-term debt include payments under our term loan facility, equipment notes, 3.625% Senior Notes and 4.125% Senior Notes. No borrowings are assumed under our revolving facility in the schedule above. For additional information, see Note 6 - Long-Term Debt to our audited consolidated financial statements included in this Form 10-K.
(d) Interest and fees have been calculated using the interest rate on our
long-term debt as of
remain constant during the term of our Credit Agreement.
The following table presents a summary of our cash flows provided by (used in) operating, investing and financing activities for the periods indicated, in thousands: Year Ended December 31, 2021 2020 Changes in cash and cash equivalents: Net cash provided by operating activities
Net cash used in investing activities (1,322,245)
Net cash provided by (used in) financing activities 729,007
Impact of foreign currency on cash (15)
Net (decrease) increase in cash and cash equivalents
Net cash flows provided by operating activities increased
$45.1 millionfor the year ended December 31, 2021, as compared to December 31, 2020. The increase was primarily due to an increase in net income partially offset by the impact of higher working capital seen in Accounts Receivable, Inventory, and Accounts Payable. Net cash used in investing activities was $1,322.2 millionfor the year ended December 31, 2021, primarily comprised of $1,267.1 millionfor acquisitions and $55.5 millionfor purchases of property and equipment, primarily vehicles. Net cash used in investing activities was $121.9 millionfor the year ended December 31, 2020, primarily comprised of $83.4 millionfor acquisitions and $40.9 millionfor purchases of property and equipment, primarily vehicles, partially offset by $2.5 millionof proceeds from the sale of property and equipment. Net cash provided by financing activities was $729.0 millionfor the year ended December 31, 2021. Cash increased by $1,218.8 millionfrom proceeds received on Amendment No. 1 to Credit Agreement in the first quarter of 2021 and again in the fourth quarter of 2021 as well as the 4.125% Senior Notes issuance in the fourth quarter of 2021, used to fund the acquisition of DI. These increases were partially offset by repayments of $433.1 millionincluding $400.0 millionto redeem our 5.625% Senior Notes and payments on our term loan and equipment notes as well as $15.0 millionused for debt issuance costs related to Amendment No. 1 to Credit Agreement in the first quarter of 2021 and again in the fourth quarter of 2021 as well as the 4.125% Senior Notes issuance in the fourth quarter of 2021. Additionally, we used $35.6 millionfor the repurchase of common stock pursuant to the 2019 Repurchase Program, as well as $5.5 millionnet activity related to exercise of share-based incentive awards and stock options. Net cash used in financing activities was $90.8 millionfor the year ended December 31, 2020. We used $49.2 millionfor the repurchase of common stock pursuant to the 2019 Repurchase Program, $24.9 millionfor payments on our term loan under our Credit Agreement and on our equipment notes, $14.9 millionfor purchases of common stock for tax withholding obligations related to the vesting and exercise of share-based incentive awards, and $2.3 millionin debt issuance costs as a result of entering into a new term loan and revolving credit facility. 31
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Critical Accounting Policies and Estimates
We prepare our Consolidated Financial Statements in conformity with GAAP. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts and disclosure of assets and liabilities, and any related contingencies, at the date of the financial statements, as well as the reported amounts of sales and expenses during the reporting period. Actual results could differ from those estimates. Our significant accounting policies are more fully described in Item 8. Financial Statements and Supplementary Data - Note 1. Summary of Significant Accounting Policies. However, certain of our accounting policies considered critical are those we believe are both most important to the portrayal of our financial condition and operating results and require our most difficult, subjective, or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. Judgments and uncertainties affecting the application of those policies may result in materially different amounts being reported under different conditions or using different assumptions. We consider the following policies to be most critical in understanding the judgments that are involved in preparing our Consolidated Financial Statements.
Revenue Recognition and Receivables
We recognize revenue for our Installation segment over time as the related performance obligation is satisfied with respect to each particular order within a given customer's contract. Progress toward complete satisfaction of the performance obligation is measured using a cost-to-cost measure of progress method. The cost input is based on the amount of material installed at that customer's location and the associated labor costs, as compared to the total expected cost for the particular order. The total expected cost is a significant estimate in the revenue recognition process, requires judgment, and is subject to variability throughout the duration of the contract as a result of contract modifications and other circumstances impacting job completion. Generally, this results in revenue being recognized as the customer is able to receive and utilize the benefits provided by our services. Each contract contains one or more individual orders, which are based on services delivered. When material and installation services are bundled in a contract, we combine these items into one performance obligation as the overall promise is to transfer the combined item. Revenue from our Specialty Distribution segment is recognized when title to products and risk of loss transfers to our customers. This represents the point in time when the customer is able to direct the use of and obtain substantially all the benefits from the product. The determination of when control is deemed transferred depends on the shipping terms that are agreed upon in the contract. At time of sale, we record estimated reductions to revenue for customer programs and incentive offerings, including special pricing and other volume-based incentives based on historical experience, which is continuously adjusted. The duration of our contracts with customers is relatively short, generally less than a 90-day period, and therefore there is not a significant financing component when considering the determination of the transaction price which gets allocated to the individual performance obligations, generally based on standalone selling prices. Additionally, we consider shipping costs charged to a customer as a fulfillment cost rather than a promised service and expense as incurred. Sales taxes, when incurred, are recorded as a liability and excluded from revenue on a net basis. We record a contract asset when we have satisfied our performance obligation prior to billing and a contract liability when a customer payment is received prior to the satisfaction of our performance obligation. The difference between the beginning and ending balances of our contract assets and liabilities primarily results from the timing of our performance and the customer's payment. We maintain allowances for estimated losses resulting from the inability of customers to make required payments. In addition, we monitor our customer receivable balances and the credit worthiness of our customers on an on-going basis. During downturns in our markets, declines in the financial condition and creditworthiness of customers impact the credit risk of the receivables involved and we have incurred additional bad debt expense related to customer defaults. 32 Table of Contents Business Combinations
The purchase price for business combinations is allocated to the estimated fair values of acquired tangible and intangible assets, including goodwill, and assumed liabilities, where applicable. Additionally, we recognize customer relationships, trademarks and trade names, and non-compete agreements as identifiable intangible assets, which are recorded at fair value as of the transaction date. The fair value of the customer relationships intangible assets was determined by management using the multi-period excess earnings method under the income approach. Assumptions used in determining the fair value of the customer relationships intangible asset included forecasted revenue growth rate, customer attrition rate, and discount rate. The fair value of other intangible assets is determined primarily using current industry information.
Goodwillis recorded when consideration transferred exceeds the fair value of identifiable assets and liabilities. Measurement-period adjustments to assets acquired and liabilities assumed with a corresponding offset to goodwill are recorded in the period they occur, which may include up to one year from the acquisition date.
Contingent consideration is recorded at fair value at the acquisition date.
We have two reporting units, which are also our operating and reporting segments: Installation and Specialty Distribution, and both contain goodwill. Our operating segments engage in business activities for which discrete financial information including long range forecasts is available, and we complete the impairment testing of goodwill at this level, as defined by accounting guidance. Assets acquired and liabilities assumed are assigned to the applicable reporting unit based on whether the acquired assets and liabilities relate to the operations of such unit and determination of its fair value.
Goodwillassigned to the reporting unit is the excess of the fair value of the acquired business over the fair value of the individual assets acquired and liabilities assumed for the reporting unit. We perform our annual impairment testing of goodwill in the fourth quarter of each year, or as events occur or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. When assessing goodwill for impairment, we have the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events or circumstances, we determine it is more likely than not that the fair value of a reporting unit is less than its carrying amount, then we recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value. If we conclude otherwise, then no further action is taken. We also have the option to bypass the qualitative assessment and only perform a quantitative assessment. For the year ended December 31, 2021, we performed a qualitative assessment. Fair value for our reporting units is determined using a discounted cash flow method which includes significant unobservable inputs (Level 3 inputs). We believe this methodology is comparable to what would be used by other market participants. Using the discounted cash flow method requires us to make significant estimates and assumptions, including long term projections of cash flows, market conditions, and appropriate discount rates. Our judgments are based on historical experience, current market trends, consultations with external valuation specialists and other information. While we believe that the estimates and assumptions underlying the valuation methodology are reasonable, changes to estimates and assumptions could result in different outcomes. In estimating future cash flows, we rely on internally generated long-range forecasts for sales and operating profits, and generally a one to three percent long term assumed annual growth rate of cash flows for periods after the long-range forecast. We generally develop these forecasts based upon, among other things, recent sales data for existing products, and estimated U.S.housing starts. When necessary, an impairment loss is recognized to the extent that a reporting unit's recorded goodwill exceeds its fair value. In the fourth quarters of 2021 and 2020, we performed an assessment on our goodwill and determined that the estimated fair value of each reporting unit substantially exceeded its carrying value at December 31, 2021, and therefore the goodwill was not impaired. 33
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We did not recognize any impairment charges for goodwill for the years ended
December 31, 2021, 2020, and 2019. As of December 31, 2021, net goodwill reflected $762.0 millionof accumulated impairment losses, relating primarily to impairment charges taken in 2008-2010 following the substantial decrease in U.S.housing starts after the financial crisis of 2007-2008. Intangible assets with finite useful lives are amortized using the straight-line method over their estimated useful lives. We evaluate the remaining useful lives of amortizable identifiable intangible assets at each reporting period to determine whether events and circumstances warrant a revision to the remaining periods of amortization. Income Taxes If, based upon all available evidence, both positive and negative, it is more likely than not (more than 50 percent likely) deferred tax assets will not be realized, a valuation allowance is recorded. Significant weight is given to positive and negative evidence that is objectively verifiable. A company's three year cumulative loss position is significant negative evidence in considering whether deferred tax assets are realizable and the accounting guidance restricts the amount of reliance we can place on projected taxable income to support the recovery of deferred tax assets. Current accounting guidance allows the recognition of only those income tax positions that have a greater than 50 percent likelihood of being sustained upon examination by taxing authorities. We believe that there is an increased potential for volatility in our effective tax rate because this threshold allows changes in the income tax environment and the inherent complexities of income tax law in a substantial number of jurisdictions to affect the computation of the liability for uncertain tax positions to a greater extent. While we believe we have adequately assessed for our uncertain tax positions, amounts asserted by taxing authorities could vary from our assessment of uncertain tax positions. Accordingly, provisions for tax-related matters, including interest and penalties, could be recorded in income tax expense in the period revised assessments are made.
Recently Issued Accounting Pronouncements
Recently issued accounting pronouncements and their expected or actual effect on our reported results of operations are addressed in Item 8. Financial Statements and Supplementary Data - Note 1. Summary of Significant Accounting Policies.
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