Installed Building Products, Inc. (IBP)

Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations

You should read the following in conjunction with the consolidated financial statements and related notes thereto included in Item 8, Financial Statements and Supplemental Data, of Part II of this Form 10-K. This discussion contains forward-looking statements reflecting current expectations that involve risks and uncertainties. Actual results and the timing of events may differ materially from those contained in these forward-looking statements due to a number of factors, including those discussed in the section captioned “Risk Factors” and elsewhere in this 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 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 more than 250 branch locations. 94% of our net revenue comes from the service-based installation of these products across all of our end markets and forms our Installation operating segment and single reportable segment. In addition, three regional distribution operations serve the Midwest, Mountain West, Northeast and Mid-Atlantic regions of the United States, and we operate a cellulose manufacturing facility. We believe our business is well positioned to continue to profitably grow due to our strong balance sheet, liquidity and our continuing acquisition strategy.

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 and affordability, foreclosure rates, the health of the economy and the availability of mortgage financing. Our strategic acquisitions over the last several years contributed meaningfully to our 5.9% increase in net revenue during the year ended December 31, 2024 compared to 2023.

We have omitted discussion of 2022 results in the sections that follow where it would be redundant to the discussion previously included in Part II, Item 7, of Form 10-K for the year ended December 31, 2023.

2024 Highlights

Net revenues increased 5.9%, or $162.7 million, while gross profit increased 6.9% to $994.5 million during the year ended December 31, 2024 compared to 2023. The increase in net revenue was primarily driven by the 6.4% growth in our largest end market, the single-family subset of the residential new construction market. Revenue was also positively impacted by selling price and product mix improvements, the contribution of our recent acquisitions, and same branch sales growth from all of our end markets. The 3.7% increase in our price/mix metric for our Installation segment was primarily due to selling price increases. Gross profit margin grew faster than revenue as we continued to prioritize profitability over sales volume. Specifically, gross profit outpaced sales growth due to higher selling prices and resulting leverage gained on material costs compared to the prior year. Certain net revenue and industry metrics we use to monitor our operations are discussed in the "Key Measures of Performance" section below, and further details regarding results of our various end markets are discussed further in the "Net Revenue, Cost of Sales and Gross Profit" section below.

We generated approximately $340.0 million of cash from operating activities during the year ended December 31, 2024. As of December 31, 2024, we had $327.6 million of cash and cash equivalents and have not drawn on our revolving line of credit. Our liquidity remains strong despite investing $88.6 million in our acquisition strategy, and we more than tripled the 2023 amount of shareholder return through repurchasing $145.3 million of our Company's stock and paying $84.7 million in dividends during the year ended December 31, 2024. See Note 8, Long-term Debt, in Item 8, Financial Statements and Supplementary Data, of this Form 10-K for more information on our revolving line of credit.

During the year ended December 31, 2024, we experienced overall sales growth in all of our end markets and we achieved 3.5% year over year same branch sales growth, with acquisitions contributing the remaining portion of our total sales growth. The multi-family subset of the residential new construction market grew 2024 revenue 6.5% over the same period in 2023 based on the backlog of jobs in that end market. Our commercial end market experienced sales growth of 3.0% during the year ended December 31, 2024 primarily through contributions from our recent acquisitions.

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We continue to diversify our operations through our acquisition strategy as we acquired nine businesses in 2024 that we expect to contribute approximately $104.2 million in annual aggregate revenues. We expect to also meet our goal of acquiring at least $100.0 million in annual aggregate revenue in 2025.

In March 2024, we amended our existing Term Loan Credit Agreement (as defined below) which included the issuance of a new seven-year term loan in the amount of $500.0 million. We used the net proceeds to refinance the remaining $490.0 million on our previous term loan, pay fees and increase working capital. In November 2024, we amended our Term Loan to reprice the applicable interest rate paid by 0.25% below our prior rate. We expect that this repricing will result in interest rate cost savings exceeding $1.0 million annually through the 2031 maturity date. See Note 8, Long-term Debt, for more information on our Term Loan and the Fourth Amendment. Additionally, in November 2024 we published our annual ESG report which highlights important milestones and our commitment to the environment, employees, communities and stakeholders.

The residential homebuilding market is forecasted to decline slightly in 2025 on the basis of housing starts, primarily due to elevated home and rental prices and mortgage interest rates, with the decrease expected to be concentrated in the multi-family subset of the residential end market. While total housing starts are currently projected to be slightly lower in 2025 than 2024, we believe there are several trends that should drive long-term growth in the housing market, even if there are temporary periods of slowed growth. These long-term trends include an aging housing stock, population growth, demographic changes and household formation growth. We expect that our net revenue, gross profit and operating income will benefit from this growth over time. U.S. economic growth and employment data is healthy and we anticipate our business will continue to grow organically, although we could be negatively impacted by a temporary slowdown in the homebuilding industry in the near term.

2023 Highlights

Net revenues increased 4.1%, or $108.8 million, while gross profit increased 12.4% to $930.7 million during the year ended December 31, 2023 compared to 2022. The increase in net revenue was primarily driven by the 33.3% growth in same branch multi-family sales, selling price and product mix improvements and the contribution of our recent acquisitions. The 7.7% increase in our price/mix metric for our Installation segment was primarily due to a higher mix of multi-family and commercial jobs. Gross profit margin grew faster than revenue as we continued to prioritize profitability over sales volume. Specifically, gross profit outpaced sales growth due to higher selling prices and resulting leverage gained on material costs compared to the prior year.

We generated approximately $340.2 million of cash from operating activities during the year ended December 31, 2023. As of December 31, 2023, we had $386.5 million of cash and cash equivalents and we had not drawn on our revolving line of credit. Our 2023 liquidity was strong despite investing $59.6 million in our acquisition strategy, repurchasing $6.3 million of our Company's stock and paying $63.1 million in dividends during the year ended December 31, 2023.

During the year ended December 31, 2023, we experienced overall and same branch sales growth in our multi-family and commercial end markets. Overall, the strong growth in multi-family and commercial sales helped offset the 5.4% decrease in the single-family end market, which is our largest end market. Our commercial end market experienced sales growth of 17.2% during the year ended December 31, 2023 primarily through acquisitions and organic growth as the commercial construction cycle returned to normal and project delays experienced in prior periods lessened.

Key Measures of Performance

We utilize certain net revenue and industry metrics to monitor our operations. Key metrics include 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. We also monitor sales growth for our Installation segment by end market and track volume growth and price/mix growth.

We believe the revenue growth measures shown in the table that follows 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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The following table shows certain key measures of performance we utilize to evaluate our results:

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Net revenue, cost of sales and gross profit

The components of gross profit for the years ended December 31, 2024, 2023 and 2022 were as follows (in millions):

Net revenue increased during the year ended December 31, 2024 compared to the year ended December 31, 2023 primarily due to increased sales in all of our end markets and price/mix growth as shown in the Key Measures of Performance section above. Acquisitions also meaningfully contributed to our 2024 revenue growth. Our residential end market grew 6.4% primarily due to selling price and product mix improvements and the continued success of our acquisition strategy, but that growth was partially offset by the slight decline in overall same branch job volume. Despite a reduction in the number of installation jobs completed, we were able to increase net revenue through selling price increases as we continue to prioritize profitability over volume. In addition, our commercial end market continued to improve as evidenced by a 3.0% annual growth rate in sales in 2024.

The remaining overall growth in net revenue for the year December 31, 2024 is attributable to growth in our Distribution and Manufacturing operating segments. Net revenue in these operating segments combined grew from $182.0 million to $197.9 million for the year ended December 31, 2024 over 2023.

As a percentage of net revenue, gross profit increased during the year ended December 31, 2024 compared to the year ended December 31, 2023 primarily on the strength of price/mix growth as well as leverage gained on material costs during the first half of 2024 compared to the prior year, offset by higher material and labor costs as a percentage of net revenue in the second half of 2024 due to changes in our product mix. We will continue to work with our suppliers to lessen the impact on our margins and with our customers to offset further cost increases through selling price adjustments.

Operating Expenses

Operating expenses for the years ended December 31, 2024, 2023 and 2022 were as follows (in millions):

Selling

The dollar increase in selling expenses in 2024 was primarily driven by a year-over-year increase in selling wages and commissions to support our increased net revenue of 5.9%. Selling expense increased as a percentage of sales primarily due to increased commissions due to higher profitability and margins.

Administrative

The dollar increase in administrative expenses in 2024 was primarily due to an increase in wages and benefits, which was attributable to both acquisitions and organic growth as well as favorable company performance. Facility expense and insurance cost increases due to inflationary pressures also factored into the overall increase in administrative operating expenses. During

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2024, we saw our administrative costs increase as a percentage of sales primarily due to higher salaries and bonuses due to higher profitability and margins.

Gains on acquisition earnouts

Some of our acquisitions have contingent consideration liabilities in the form of earnouts included in the total purchase price of the business. We assess the fair value of the contingent consideration liability at each reporting period, and any changes in the estimated fair value are reflected in gains on acquisition earnouts on the Consolidated Statements of Operations and Comprehensive Income. There were no gains on acquisition earnouts during the years ended December 31, 2024 and 2023.

Asset Impairment

During the second quarter of 2024, we elected to wind down the operations of a branch that installs one of our non-core building products. As a result, we deemed it necessary to perform an interim assessment of tangible and intangible assets. During the year ended December 31, 2024, we recognized an intangible impairment charge of $4.6 million related to definite-lived customer relationships, trademarks and tradenames and covenants not-to-compete within our Installation segment. In addition, we recognized an asset impairment charge of $0.3 million related to property and equipment and operating lease right-of-use assets within our Installation segment. We did not recognize any impairment losses on our tangible or intangible assets during the year ended December 31, 2023.

Amortization

Our intangible assets include non-competes, customer relationships, trade names and backlog established upon acquisition of most businesses we acquire. Amortization expense decreased in 2024 primarily due to larger 2024 acquisitions occurring later in the year as compared to 2023. See Note 18, Business Combinations, in Item 8, Financial Statements and Supplementary Data, of this Form 10-K for information on our acquisitions.

Other Expense, net

Other expense, net for the years ended December 31, 2024, 2023 and 2022 was as follows (in millions):

Other expense, net did not significantly change during 2024. Interest expense, net decreased primarily due to term loan repricing, which was offset by an increase in the write-off of debt issuance costs. See Note 8, Long-term Debt, in Item 8, Financial Statements and Supplementary Data, of this Form 10-K for further information regarding debt balances.

Income Tax Provision

Income tax provision and effective tax rates for the years ended December 31, 2024, 2023 and 2022 were as follows (in millions):

During the years ended December 31, 2024 and 2023, our tax rate was unfavorably impacted by certain expenses not being deductible for income tax reporting purposes.

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Other comprehensive income (loss), net of tax

Other comprehensive income (loss), net of tax for the years ended December 31, 2024, 2023 and 2022 were as follows (in millions):

During the year ended December 31, 2024, we recorded unrealized losses, net of taxes, of $2.0 million on our cash flow hedges primarily due to the market's expectations for interest rates to decline in the future which offset the previous unrealized gains on our existing and forward swaps. We also amortized $4.4 million of the remaining unrealized gains, off-market terms and unrealized losses on our terminated cash flow hedges to interest expense, net during the year ended December 31, 2024, not including tax effects of $1.1 million.

During the year ended December 31, 2023, we recorded unrealized losses, net of taxes, of $10.2 million on our cash flow hedges primarily due to the market's expectations for interest rates to decline in the future which offset the previous unrealized gains on our existing and forward swaps. We also amortized $4.5 million of the remaining unrealized gains, off-market terms and unrealized losses on our terminated cash flow hedges to interest expense, net during the year ended December 31, 2024, not including tax effects of $1.2 million.

We amortize the unrealized gains and losses on our terminated cash flow hedges at the time of termination over the course of the originally scheduled settlement dates of the terminated swaps. For more information on our cash flow hedges, see "Liquidity and Capital Resources, Derivative Instruments" below and Note 12, Derivatives and Hedging Activities, in Item 8, Financial Statements and Supplementary Data, of this Form 10-K.

KEY FACTORS AFFECTING OUR OPERATING RESULTS

Inflation, Housing Affordability and Mortgage Interest Rates

Inflation affected the economy as a whole in 2022 but began moderating in 2023 as the Federal Reserve took actions to stabilize inflation by raising the federal funds rate multiple times through July 2023. These rate hikes indirectly raised the 30-year fixed rate mortgage average in the United States to over 7% for the first time since 2008 during periods of 2023 and 2024. These rate-driven pressures began to curtail housing demand beginning in the second half of 2022 as mortgage financing affordability was reduced. Inflation rates in 2024 remained above the 2% stated target, however the Federal Reserve began cutting the federal funds rate in September 2024. The Federal Reserve has recently signaled plans to keep rates at their current levels in the near term. A more accommodating Federal Reserve monetary policy does not directly determine mortgage rates, as mortgage rates have remained elevated despite the federal funds rate cuts primarily due to sticky inflation and higher treasury yields. Higher mortgage rates combined with the housing cost inflation experienced in the last few years has significantly increased housing-cost-to-income ratios. We expect our business to be somewhat impacted by the current mortgage rates in 2025 since they remain elevated compared to recent history.

In addition, housing affordability is impacted by international trade as certain housing inputs are more reliant on imports than domestic production. While we purchase the large majority of the products we install and sell domestically, our business could be impacted if overall home affordability is further reduced by higher material prices due to increased tariffs.

Trends in the Construction Industry

Higher inflation and interest rates, as discussed above, reduced the demand and affordability of new homes in 2024. According to Fannie Mae's January 2025 forecast, 1.32 million housing starts are forecasted in 2025 which is a decline of 3% from 2024. These headwinds may impact our business in the near term, but stable employment and lower existing home inventory levels in some markets continue to support demand for residential new construction activity despite the affordability concerns. As a result, while we expect cyclicality to continue in the housing industry, we believe the long-term opportunities in our residential and commercial end markets are favorable. There have been housing shortages in some of the markets we serve and the backlog in our multi-family business demonstrates continued need for multi-family housing. According to Dodge Data & Analytics, commercial building starts in 2025, measured by investment dollars, are expected to increase 6% from 2024 while institutional building starts (a subset of the nonresidential construction market in which we participate) are expected to increase 4% from 2024. Regarding the repair and remodel markets, many existing homeowners are locked into low interest mortgages, and an aging housing stock exists in many areas of the United States, bolstering demand in this end market.

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Our operating results may vary based on our product mix and the mix of our end markets among new single-family, multi-family and commercial builders and owners of existing homes. We maintain a mix of business among all types of homebuilders ranging from small custom builders to large regional and national homebuilders as well as a wide range of commercial builders. Net revenue derived from our ten largest homebuilder customers in the United States was approximately 15% for the year ended December 31, 2024. The residential new construction and repair and remodel markets represented approximately 78% of our total net revenue for both the years ended December 31, 2024 and 2023. The remaining portion was attributable to our distribution businesses and the commercial construction end market.

Cost and Availability of Materials

We typically purchase the materials we use in our business directly from manufacturers. The largest fiberglass manufacturers have cut production capacity during past business cycles which has caused periods of industry-wide supply allocations. While we are not currently experiencing material supply shortages, we could incur such shortages in 2025 and beyond if these manufacturers reduce production this year. We experience price increases from our suppliers from time to time, including multiple increases over the last four years caused by supply shortages and general economic inflationary pressures. We could be subject to increased material pricing on some of the materials we install and sell due to tariffs imposed on goods imported from certain foreign nations. The extent of these increases will depend on a variety of factors including the magnitude of each tariff, the extent our vendors pass on the tariffs they incur, and the number of countries subject to tariffs in the future. Increased market pricing, regardless of the catalyst, has and could continue to impact our results of operations in 2025, to the extent that price increases cannot be passed on to our customers. Our selling price increases were able to support most material cost increases in 2024 but we may have more difficulty raising prices in 2025 if housing demand slows. We will continue to work with our customers to adjust selling prices to offset higher costs as they occur.

Cost of Labor

Our business is labor intensive. As of December 31, 2024, we had approximately 10,800 employees, most of whom work as installers on local construction sites. We expect to spend more to hire, train and retain installers to support our growing business in 2025, as tight labor availability continues within the construction industry. Our workers’ compensation costs also continue to rise as we increase our coverage for additional personnel. Labor costs as a percentage of revenue increased during the year ended December 31, 2024 compared to 2023 primarily due to market competition and expectations for higher wages. We were successful in achieving higher labor productivity as evidenced by our annual sales per installer per business day increasing 1% in 2024 as compared to 2023.

Our employee retention rates remained better than industry averages in the year ended December 31, 2024. We believe this is a result of our strong culture and the various programs meant to benefit our employees, including our financial wellness plan, emotional well-being coaching, longevity stock compensation plan and comprehensive benefit packages we offer. We also provide 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.

Environmental, Social and Governance

According to the Office of Energy Efficiency & Renewable Energy, over $400 billion is spent each year to power homes and commercial structures that consume 75% of all electricity used in the United States and 40% of the nation’s total energy. Insulation is a critical component in the construction of homes and commercial structures and helps increase energy conservation because it is the best way to prevent energy waste in most homes and commercial structures. As a leading installer of insulation products, we help ensure that insulation is properly installed to achieve the desired energy conservation and efficiency.

Beyond our service offerings, we also recognize that as a good corporate citizen, we have a responsibility to support our communities and be stewards of the environment. We continue to proactively work to find new ways to reduce our carbon footprint by formalizing a climate risk management framework to guide our climate strategy. We are committed to reducing CO2 emissions as a percentage of our revenue. For example, we purchase a large portion of our electricity supply from carbon-free energy sources and have a national waste management program to increase recycling at our facilities to reduce landfill waste. We also support the industry transition to hydrofluoro-olefin ("HFO") spray foam types which have lower greenhouse gas emissions than hydrofluorocarbon ("HFC") materials. We utilized more HFO materials than HFC materials and expect this to continue to increase.

Certain effects of climate change that may cause severe weather events could have a material effect on our operations. Climate change and/or adverse weather conditions such as unusually prolonged cold conditions, rain, blizzards, hurricanes, earthquakes,

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fires, or other natural disasters could accelerate, delay or halt construction or installation activity or impact our suppliers. The impacts of climate change may subject us to increased costs, regulations, reporting requirements, standards or expectations regarding the environmental impacts of our business. Most, if not all, of our locations may be vulnerable to the adverse effects of climate change. Weather is one of the main reasons for annual seasonality cycles of our business, and any adverse weather conditions can enhance this seasonality.

Lastly, we expect our selling and administrative expenses to continue to increase as our business grows, which could impact our future operating profitability.

SEASONALITY

We tend to have higher sales during the second half of the year as our homebuilder customers complete construction of homes placed under contract for sale in the traditionally stronger spring selling season. In addition, some of our larger branches operate in states impacted by winter weather and as such experience a slowdown in construction activity during the first quarter of the calendar year. This winter slowdown contributes to traditionally lower sales and profitability in our first quarter. See Part I, Item 1, Business, of this Form 10-K for further information.

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. As of December 31, 2024, we had cash and cash equivalents of $327.6 million as well as access to $250.0 million under our asset-based lending credit facility (as defined below), less $4.0 million of outstanding letters of credit, resulting in total liquidity of $573.6 million. Liquidity may also be limited in the future by certain cash collateral limitations under our asset-based lending credit facility (as defined below), depending on the status of our borrowing base availability.

Short-Term Material Cash Requirements

For at least the next twelve months, our primary capital requirements are to fund working capital needs, operating expenses, acquisitions and capital expenditures and to meet principal and interest obligations and make required income tax payments. We may also use our resources to fund our optional stock repurchase program and pay quarterly and annual dividends. During 2025, we anticipate discretionary spending for capital improvements and quarterly dividends to approximate 2024 levels of approximately $88.6 million and $39.4 million, respectively, as well as approximately $47.2 million for our annual variable dividend to be paid March 31, 2025. In addition, we expect to use cash and cash equivalents to acquire various companies with at least $100.0 million in aggregate net revenue 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.

Firm commitments for funds include $67.2 million in interest and principals payments on long-term debt obligations including our Senior Notes, Term Loan, notes payable to sellers of acquisitions and vehicles purchased under the Master Loan and Security Agreement, the Master Equipment Agreement and the Master Loan Agreements. Additionally, we maintain certain production vehicles under a finance lease structure which will require $3.4 million in interest and principal payments under current agreements in 2025. We lease certain locations, vehicles and equipment under operating lease agreements that will require $38.8 million in funds over the next twelve months. Finally, we have two product supply agreements with various vendors that requires us to purchase a minimum quantity of inventory with variable and fixed rate pricing in 2025. Payments for income taxes cannot be estimated at this time, but our effective tax rate was 25.9% for the year ended December 31, 2024.

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).

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 years ended December 31, 2024, 2023 and 2022. 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 guarantee that such financing will be available on favorable terms, or at all.

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Long-Term Material Cash Requirements

Beyond the next twelve months, our principal demands for funds will be to fund working capital needs and operating expenses, to meet principal and interest obligations on our long-term debts and finance leases as they become due or mature, and to make required income tax payments. Additional funds may be spent on acquisitions, capital improvements and dividend payments, at our discretion.

Known obligations beyond the next twelve months are as follows (in millions):

Known obligations above include $1.0 billion in interest and principal payments on long-term debt obligations through 2029. In addition, our finance leases will require $5.9 million in interest and principal payments under current agreements through 2029. Operating lease obligations will require $66.6 million in payments beyond the next twelve months. Finally, we have two product supply agreements with various vendors that requires us to purchase a minimum quantity of inventory with variable and fixed rate pricing after 2025.

Sources and Uses of Cash and Related Trends

Working Capital

We carefully manage our working capital and operating expenses. As of December 31, 2024 and 2023, our working capital, including cash and cash equivalents, was $695.9 million, or 23.7% of net revenue, and $723.6 million, or 26.0% of net revenue, respectively. The decrease in working capital year-over-year was driven primarily by cash and cash equivalents decreasing $58.9 million resulting from increased acquisition activity, dividend payments and stock repurchases. We continue to look for opportunities to reduce our working capital as a percentage of net revenue.

The following table presents our cash flows (in millions):

Cash Flows from Operating Activities

Our primary source of cash provided by operations is revenues generated from installing or selling building products and the resulting operating income generated by these revenues. Operating income is adjusted for certain non-cash items, and our cash flows from operations can be impacted by the timing of our cash collections on sales and collection of retainage amounts. Our primary uses of cash from operating activities include payments for installation materials, compensation costs, leases, income taxes and other general corporate expenditures included in net income. Net cash provided by operating activities slightly decreased from 2023 to 2024 primarily driven by the increase in accounts receivable and inventory due to higher sales and material cost inflation and the decrease in accounts payable. The decrease was partially offset by higher net income due to increased consolidated sales of 5.9%.

Cash Flows from Investing Activities

Sources of cash from investing activities consist primarily of proceeds from the sales of property and equipment and, periodically, maturities from short term investments. Cash used in investing activities consists primarily of purchases of property and equipment, payments for acquisitions and, periodically, purchases of short term investments.

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Net cash used by investing activities decreased from 2023 to 2024 primarily due to the increase in payments for acquisitions and property and equipment purchases. We completed one additional acquisition in 2024 compared to 2023 and the average size of the acquisitions was larger in the year ended December 31, 2024. The amount of cash paid for an acquisition is dependent on various factors, including the size and determined value of the business being acquired. See Note 18, Business Combinations, in Item 8, Financial Statements and Supplementary Data, of this Form 10-K for more information regarding our business acquisitions in 2024, 2023 and 2022.

Additionally, total cash used to purchase property and equipment increased in 2024, and we expect to continue to support any increases in future net revenue through further capital expenditures. A significant portion 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.

Cash Flows from Financing Activities

Our sources of cash from financing activities consist of proceeds from the issuance of debt and new vehicle and equipment notes payable. Cash used in financing activities consists primarily of debt repayments, acquisition-related obligations, dividends and stock repurchases.

We had a net use of cash in financing activities in both 2024 and 2023. The increase in cash used in financing activities in 2024 was primarily due to common stock repurchases increasing to $145.3 million during the year ended December 31, 2024 from $6.3 million during the year ended December 31, 2023. Dividends paid also increased by $21.6 million in 2024 compared to 2023. This was partially offset by net proceeds from the new Term Loan (as defined below).

Debt

5.75% Senior Notes due 2028

In September 2019, we issued $300.0 million in aggregate principal amount of 5.75% senior unsecured notes (the “Senior Notes”). The Senior Notes will mature on February 1, 2028 and interest will be payable semi-annually in cash in arrears on February 1 and August 1, commencing on February 1, 2020. The net proceeds from the Senior Notes offering were $295.0 million after debt issuance costs.

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 in an aggregate amount exceeding 2.0% of market capitalization per fiscal year, or in an aggregate amount exceeding certain applicable restricted payment baskets; (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

In February 2022, we amended and extended the term of our asset-based lending credit agreement (the "ABL Credit Agreement"). The ABL Credit Agreement increased the commitment under the asset-based lending credit facility (the "ABL Revolver") to $250 million from $200.0 million, and permits us to further increased the commitment amount up to $300.0 million. The amendment also extends the maturity date from September 26, 2024 to February 17, 2027. The ABL Revolver bears interest at either the base rate or the Secured Overnight Financing Rate ("Term SOFR"), at our election, plus a margin of 0.25% or 0.50% in the case of base rate loans or 1.25% or 1.50% for Term SOFR advances (in each case based on a measure of availability under the ABL Credit Agreement). The amendment also allows for modification of specified fees depend upon achieving certain sustainability targets, in addition to making other modifications to the ABL Credit Agreement. Including outstanding letters of credit, our remaining availability under the ABL Revolver as of December 31, 2024 was $246.0 million.

The ABL Revolver 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 $100.0 million in aggregate and borrowing of swingline loans of up to $25.0 million in aggregate.

The ABL Credit Agreement contains a financial covenant requiring the satisfaction of a minimum of fixed charge coverage ratio of 1.0x in the event that we do not meet a minimum measure of availability under the ABL Revolver. The ABL Credit Agreement and the Term Loan Agreement contain restrictive covenants that, among other things, limit the ability of the

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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 in an aggregate amount exceeding the greater of 2.0% of market capitalization per fiscal year or certain applicable restricted payment basket amounts' (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.

In March 2024, we entered into Amendment No. 3 to our Term loan Credit Agreement ("Third Amendment"). The Third Amendment amended certain terms of the previous seven-year term loan facility with Royal Bank of Canada as the administrative agent and collateral agent thereunder under our credit agreement (the “Term Loan Agreement”), dated as of December 14, 2021 (as previously amended by the First Amendment thereto dated April 28, 2023 and the Second Amendment thereto dated August 14, 2023). The Third Amendment allowed for the issuance of a new term loan (the "Term Loan") in the amount of $500 million which will mature on March 28, 2031. Net proceeds of the Term Loan were used to refinance the remaining $490.0 million on our previous term loan, pay fees and increase working capital. In November 2024, we repriced our Term Loan by entering into Amendment No. 4 to our Term loan Credit Agreement ("Fourth Amendment"). The amended Term Loan now bears interest, at our option, at a rate equal to either: the adjusted Term SOFR plus 1.75% per annum, or an alternative base rate plus 0.75%.

The Term Loan amortizes in quarterly principal payments of $1.25 million, with any remaining unpaid balances due on the maturity date of March 28, 2031. As of December 31, 2024, we had $492.5 million, net of unamortized debt issuance costs, due on our Term Loan.

Subject to certain exceptions, the Term Loan will be subject to mandatory prepayments of (i) 100% of the net cash proceeds from issuances or incurrence of debt by the Company or any of its restricted subsidiaries (other than with respect to certain permitted indebtedness (excluding any refinancing indebtedness); (ii) 100% (with step-downs to 50% and 0% based on achievement of specified net leverage ratios) of the net cash proceeds from certain sales or dispositions of assets by the Company or any of its restricted subsidiaries in excess of a certain amount and subject to reinvestment provision and certain other exception; and (iii) 50% (with step-downs to 25% and 0% based upon achievement of specified net leverage ratios) of excess cash flow of the Company and its restricted subsidiaries in excess of $15.0 million, subject to certain exceptions and limitations.

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.

As of December 31, 2024, we were in compliance with all applicable covenants under the Term Loan Agreement, ABL Credit Agreement, and the Senior Notes.

Derivative Instruments

As of December 31, 2024, we had five total interest rate swaps including two forward interest rate swaps. For a summary of notional amounts, maturity dates and interest rates for each of these swaps, see Note 12, Derivatives and Hedging Activities, in Item 8, Financial Statements and Supplementary Data of this Form 10-K. Together, these five swaps serve to hedge $400.0 million of the variable cash flows on our variable rate Term Loan through maturity. The assets associated with the forward interest rate swap are included in other current and other non-current assets on the Consolidated Balance Sheets at their fair value amounts as described in Note 10, Fair Value Measurements, in Item 8, Financial Statements and Supplementary Data, of this Form 10-K.

Term SOFR is used as a reference rate for our Term Loan and our interest rate swap agreements we use to hedge our interest rate exposure. For more information on Derivatives, see Note 12, Derivatives and Hedging Activities, of this Form 10-K.

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.

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Total outstanding loan balances relating to our master loan and equipment agreements were $82.3 million and $83.0 million as of December 31, 2024 and 2023, respectively. Depreciation of assets held under these agreements is included within cost of sales on the Consolidated Statements of Operations and Comprehensive Income. See Note 8, Long-term Debt, in Item 8, Financial Statements and Supplementary Data of this Form 10-K for more information regarding our Master 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 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 millions):

We have $65.3 million included in our insurance letters of credit in the above table that are unsecured and therefore do not reduce total liquidity.

Critical Accounting Estimates

Management’s discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of our consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. Certain accounting policies involve judgments and uncertainties to such an extent that there is a reasonable likelihood that materially different amounts could have been reported using different assumptions or under different conditions. We evaluate our estimates and assumptions on a regular basis. We base our estimates on historical experience and various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of our assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates and assumptions used in preparation of our consolidated financial statements. We believe the following critical accounting estimates require judgement and estimation in the preparation of our consolidated financial statements and to be fundamental to our results of operations. See Note 2, Significant Accounting Policies included in Item 8 of the Form 10-K for a summary of all of our significant accounting policies and their effect on our financial statements.

Revenue recognition

The majority of our revenues are recognized when we complete our contracts with customers to install building products and the control of the promised good or service is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services. For contracts that are not complete at the reporting date, we recognize revenue over time utilizing a cost-to-cost input method as we believe this represents the best measure of when goods and services are transferred to the customer. When this method is used, we estimate the costs to complete individual contracts and record as revenue that portion of the total contract price that is considered complete based on the relationship of costs incurred to date to total anticipated costs. Under the cost-to-cost method, the use of estimated costs to complete each contract is a significant variable in the process of determining recognized revenue and can change throughout the duration of a contract due to contract modifications and other factors impacting job completion. Our cost estimation process is based on the knowledge, significant experience and judgement of project management, finance professionals and operational management to assess a variety of factors to determine revenues on uncompleted contracts. Such factors include historical performance, costs of materials and labor, change orders and the nature of the work to be performed. We generally review and reassess our estimates for each uncompleted contract at least quarterly to reflect the latest reliable information available. Changes in these estimates could favorably or unfavorably impact revenues and their related profits.

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Goodwill Impairment

We performed an annual quantitative goodwill impairment test as of October 1, 2024 on our Distribution operating segment which we have determined is also a reporting unit. The estimate of the reporting unit’s fair value was determined by placing a 75% weighting on a discounted cash flow model and a 25% weighting on market-related model using current industry information that involve significant unobservable inputs (Level 3 inputs). Based on the results of this evaluation, we concluded that there were no impairments of goodwill as the estimated fair value exceeded its carrying value. The estimated fair value exceeded the Distribution operating segment's carrying value by 32.1%. A 100 basis point change in either the discount rate or residual growth rate, or both, utilized in our discounted cash flow model using our weighted system would not have resulted in an impairment for our Distribution operating segment, nor would any change in the weighting of each method. The estimates and assumptions used in the test are subject to uncertainty due to the professional judgments required. We performed a qualitative evaluation for our Installation and Manufacturing operating segments and determined that it was more likely than not that the fair value of these operating segments exceeded their carrying values.

Business combinations

We have recorded a significant amount of finite lived intangible assets associated with the acquisitions of businesses through our growth strategy. These intangible assets consist of customer relationships, backlog, non-competition agreements and business trademarks and trade names. Fair values and estimated useful lives are assigned to the identified intangible assets at the date of acquisition by financial professionals using either the income approach or the market approach along with certain industry information, professional experience and knowledge. In some instances, the process of assigning values and useful lives requires using judgment and other financial professionals may come to different conclusions. We review intangible assets whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. An impairment loss is recognized when estimated future cash flows expected to result from the use of an asset and its eventual disposition are less than its carrying amount. When impairment is identified, the carrying amount of the asset is reduced to its estimated fair value. Impairment losses would negatively affect earnings.

We also record contingent consideration liabilities that arise from future earnout payments to the sellers associated with certain acquisitions and are based on predetermined calculations of certain future results. These future payments can require a significant amount of estimation by considering various factors, including business risk and projections. We have used various estimate techniques and also consult with a third party valuation expert in certain instances. The contingent consideration liabilities are measured at fair value by discounting estimated future payments to their net present value.

Insurance risks

We carry insurance policies for a number of risks, including, but not limited to, workers’ compensation, general liability, vehicle liability, property and our obligation for employee-related health care benefits. Most of our insurance policies contain an element for which we assume a significant portion of the risk by having high deductibles or a large cap on claims. For a description of our different insurance programs, see Note 2, Significant Accounting Policies in Item 8, Financial Statements and Supplementary Data in this Form 10-K.

Our largest healthcare plan is partially self-funded with an insurance company paying benefits in excess of stop loss limits per individual/family. An accrual for estimated healthcare claims incurred but not reported (“IBNR”) is included within accrued compensation on the Consolidated Balance Sheets and was $4.8 million and $3.9 million as of December 31, 2024 and 2023, respectively.

We participate in multiple workers’ compensation plans covering a significant portion of our business. Under these plans, we use a high deductible program to cover losses above the deductible amount on a per claim basis. We accrue for the estimated losses occurring from both asserted and unasserted claims. Insurance claims and reserves include accruals of estimated settlements for known claims, as well as accruals of actuarial estimates of IBNR claims. In estimating these reserves, historical loss experience and judgments about the expected levels of costs per claim are considered. These claims are accounted for based on actuarial estimates of the undiscounted claims, including IBNR. We believe the use of actuarial methods to account for these liabilities provides a consistent and effective way to measure these highly judgmental accruals. As of December 31, 2024 and 2023, we estimated total short-term and long-term known and IBNR claims for workers' compensation to be $27.7 million and $26.5 million, respectively. As of December 31, 2024 and 2023, offsets of these liabilities were $4.4 million and $3.0 million, respectively, with insurance receivables and indemnification assets for claims under fully insured policies or claims that exceeded the stop loss limit.

We also participate in a high retention general liability insurance program and a high deductible auto insurance program. As of December 31, 2024 and 2023, general liability and auto insurance reserves included in other current and long-term liabilities

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were $32.0 million and $25.4 million, respectively. As of December 31, 2024 and 2023, offsets of these liabilities were $2.8 million and $1.8 million, respectively, with insurance receivables and indemnification assets for claims under fully insured policies or claims that exceeded the stop loss limit.

Liabilities relating to claims associated with these risks are estimated by considering historical claims experience, including frequency, severity, demographic factors and other actuarial assumptions. In estimating our liability for such claims, we periodically analyze our historical trends, including loss development, and apply appropriate loss development factors to the incurred costs associated with the claims with the assistance of external actuarial consultants. While we do not expect the amounts ultimately paid to differ significantly from our estimates, our reserves and corresponding expenses could be affected if future claim experience differs significantly from historical trends and actuarial assumptions.

We have not made any material changes in our methodology used to establish our insurance reserves during the years ended December 31, 2024 and 2023, and none of the adjustments to our estimates have been material.

Recent Accounting Pronouncements

For a description of recently issued and/or adopted accounting pronouncements, see Note 2, Significant Accounting Policies, in Item 8, Financial Statements and Supplementary Data, of this Form 10-K.

Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations

You should read the following in conjunction with the consolidated financial statements and related notes thereto included in Item 8, Financial Statements and Supplemental Data, of Part II of this Form 10-K. This discussion contains forward-looking statements reflecting current expectations that involve risks and uncertainties. Actual results and the timing of events may differ materially from those contained in these forward-looking statements due to a number of factors, including those discussed in the section captioned “Risk Factors” and elsewhere in this 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 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 approximately 250 branch locations. 94% of our net revenue comes from the service-based installation of these products across all of our end markets and forms our Installation operating segment and single reportable segment. In addition, two regional distribution operations serve the Midwest, Mountain West, Northeast and Mid-Atlantic regions of the United States, and we operate a cellulose manufacturing facility. We believe our business is well positioned to continue to profitably grow due to our strong balance sheet, liquidity and our continuing acquisition strategy.

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 and affordability, foreclosure rates, the health of the economy and the availability of mortgage financing. Our strategic acquisitions over the last several years contributed meaningfully to our 4.1% increase in net revenue during the year ended December 31, 2023 compared to 2022.

We have omitted discussion of 2021 results in the sections that follow where it would be redundant to the discussion previously included in Part II, Item 7, of Form 10-K for the year ended December 31, 2022.

2023 Highlights

Net revenues increased 4.1%, or $108.8 million, while gross profit increased 12.4% to $930.7 million during the year ended December 31, 2023 compared to 2022. The increase in net revenue was primarily driven by the 33.3% growth in same branch multi-family sales, selling price and product mix improvements and the contribution of our recent acquisitions. The 7.7% increase in our price/mix metric for our Installation segment was primarily due to a higher mix of multi-family and commercial jobs. Gross profit margin grew faster than revenue as we continued to prioritize profitability over sales volume. Specifically, gross profit outpaced sales growth due to higher selling prices and resulting leverage gained on material costs compared to the prior year. Certain net revenue and industry metrics we use to monitor our operations are discussed in the "Key Measures of Performance" section below, and further details regarding results of our various end markets are discussed further in the "Net Revenue, Cost of Sales and Gross Profit" section below.

We generated approximately $340.2 million of cash from operating activities during the year ended December 31, 2023. As of December 31, 2023, we had $386.5 million of cash and cash equivalents and we have not drawn on our revolving line of credit. Our liquidity remains strong despite investing $59.6 million in our acquisition strategy, repurchasing $6.3 million of our Company's stock and paying $63.1 million in dividends during the year ended December 31, 2023. See Note 8, Long-term Debt, in Item 8, Financial Statements and Supplementary Data, of this Form 10-K for more information on our revolving line of credit.

During the year ended December 31, 2023, we experienced overall and same branch sales growth in our multi-family and commercial end markets. Overall, the strong growth in multi-family and commercial sales helped offset the (5.4)% decrease in the single-family end market, which is our largest end market. Our commercial end market experienced sales growth of 17.2% during the year ended December 31, 2023 primarily through acquisitions and organic growth as the commercial construction cycle returned to normal and project delays experienced in prior periods lessened.

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We continue to diversify our operations through our acquisition strategy as we acquired 8 businesses in 2023 that we expect to contribute approximately $75.0 million in annual aggregate revenues. We expect to meet our goal of acquiring at least $100.0 million in annual aggregate revenue in 2024.

In August 2023, we amended our Term Loan (as defined below) to reprice the applicable interest rate paid by 0.25% below our prior rate (the "Second Amendment"). We expect that this repricing will result in interest rate cost savings exceeding $1.0 million annually through the 2028 maturity date. See Note 8, Long-term Debt, for more information on our Term Loan and the Second Amendment. Additionally, in August 2023 we published our annual ESG report which highlights important milestones and our commitment to the environment, employees, communities and stakeholders.

The residential homebuilding market is forecasted to decline slightly in 2024 primarily due to elevated interest rates, with the decrease concentrated in the multi-family subset of the residential end market. However, we expect to benefit from a forecasted increase in the single-family end market in 2024 over 2023 since over half of our net revenue comes from this end market. While total housing starts are currently projected to be slightly lower in 2024 than 2023, we believe there are several trends that should drive long-term growth in the housing market, even if there are temporary periods of slowed growth. These long-term trends include an aging housing stock, population growth, demographic changes and household formation growth. We expect that our net revenue, gross profit and operating income will benefit from this growth over time although we will be negatively impacted by a slowdown in the homebuilding industry in the near term.

2022 Highlights

Net revenues increased 35.6%, or $701.2 million, while gross profit increased 40.4% to $827.8 million during the year ended December 31, 2022 compared to 2021. We also generated approximately $277.9 million of cash from operating activities. 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 23.0% increase in our price/mix metric and increased sales volume of 5.5% on a same branch basis for our Installation segment. Gross profit grew faster than revenue primarily due to higher selling prices and resulting leverage gained on labor and other costs of sales. These synergies were partially offset by higher fuel costs and higher material costs due to increased Distribution segment sales which generally have higher material costs than our other segments. Supply chain constraints and inflationary pressures also contributed to higher material costs in 2022, particularly for spray foam and several complementary installed products, as some products continued to be difficult to source near volume and pricing levels secured in prior periods.

As of December 31, 2022, we had $229.6 million of cash and cash equivalents and we have not drawn on our revolving line of credit. We amended and extended our revolving line of credit in February 2022, increasing the commitment to $250.0 million from $200.0 million. Additionally, we received $25.5 million from amending the maturity dates on our three interest rate swaps in July 2022. Our liquidity remained strong despite repurchasing $137.6 million of our Company's stock and paying our variable and regular quarterly dividends of $62.7 million during the year ended December 31, 2022.

During the year ended December 31, 2022, we experienced overall sales growth in all of our end markets and we achieved 24.6% year-over-year same branch sales growth, with acquisitions contributing the remaining portion of our total sales growth. Our largest end market, the single-family subset of the residential new construction market, grew revenue 33.5% over the same period in 2021. Our commercial end market experienced sales growth of 15.2% during the year ended December 31, 2022 primarily as a result of acquisitions. We experienced commercial project delays in 2022 due to macroeconomic concerns surrounding the pandemic and general economic uncertainty.

Key Measures of Performance

We utilize certain net revenue and industry metrics to monitor our operations. Key metrics include 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. We also monitor sales growth for our Installation segment by end market and track volume growth and price/mix growth.

We believe the revenue growth measures shown in the table that follows 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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The following table shows certain key measures of performance we utilize to evaluate our results:

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Net revenue, cost of sales and gross profit

The components of gross profit for 2023, 2022 and 2021 were as follows (in millions):

Net revenue increased during the year ended December 31, 2023 compared to the year ended December 31, 2022 primarily due to increased multi-family and commercial sales and price/mix growth as shown in the Key Measures of Performance section above. Acquisitions also meaningfully contributed to our 2023 revenue growth, adding $102.2 million of revenue in 2023. Our residential end market grew 1.0% primarily due to selling price and product mix improvements and the continued success of our acquisition strategy, but that growth was partially offset by the decline in overall same branch job volume. Despite a reduction in installation jobs we completed in the single-family end market, our diverse end market mix allowed us to complete more jobs in other markets, and we continue to prioritize profitability over volume. Our commercial end market continued to improve as evidenced by a 11.5% annual growth rate in same branch sales in 2023.

The remaining overall growth in net revenue for the year December 31, 2023 is attributable to growth in our Distribution and Manufacturing operating segments. These operating segments grew from $162.4 million to $182.0 million in net revenue for the year ended December 31, 2023.

As a percentage of net revenue, gross profit increased during the year ended December 31, 2023 compared to the year ended December 31, 2022 primarily on the strength of price/mix growth as well as leverage gained on material costs compared to the prior year. The highly inflationary economic environment and supply chain issues, both of which rapidly increased material costs in prior periods, moderated during the year ended December 31, 2023, allowing us to improve and enhance our profit margins. We will continue to work with our suppliers to lessen the impact on our margins and with our customers to offset further cost increases through selling price adjustments.

Operating Expenses

Operating expenses for 2023, 2022 and 2021 were as follows (in millions):

Selling

The dollar increase in selling expenses in 2023 was primarily driven by a year-over-year increase in selling wages and commissions to support our increased net revenue of 4.1% and higher credit loss provisions due to increased sales. Selling expense increased as a percentage of sales primarily due to increased selling wages and bonuses due to higher profitability.

Administrative

The dollar increase in administrative expenses in 2023 was primarily due to an increase in wages and benefits, which was attributable to both acquisitions and organic growth as well as favorable company performance. Facility expense and insurance cost increases due to inflationary pressures also factored into the overall increase in administrative operating expenses. During

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2023, we saw our administrative costs increase as a percentage of sales primarily due to higher salaries and bonuses due to higher profitability.

Gains on acquisition earnouts

Some of our acquisitions have contingent consideration liabilities in the form of earnouts included in the total purchase price of the business. We assess the fair value of the contingent consideration liability at each reporting period, and any changes in the estimated fair value are reflected in gains on acquisition earnouts on the Consolidated Statements of Operations and Comprehensive Income. There were no gains on acquisition earnouts during the year ended December 31, 2023. The gains recorded during the year ended December 31, 2022 were primarily due to a $15.1 million gain on the Central Aluminum Supply Corporation earnout recorded as a result of revised earnout target expectations.

Amortization

Our intangible assets include non-competes, customer relationships, trade names and backlog established upon acquisition of most businesses we acquire. Amortization expense increased in 2023 resulting from the increase in new intangible assets from 2023 acquisitions, with the remaining increase due to a full year of amortization expense attributable to prior year acquisitions. See Note 18, Business Combinations, in Item 8, Financial Statements and Supplementary Data, of this Form 10-K for information on our acquisitions.

Other Expense, net

Other expense, net for 2023, 2022 and 2021 was as follows (in millions):

The year-over-year decrease in other expense, net during 2023 was primarily a result of increased interest income earned due to higher yields on cash deposits, partially offset by increased interest expense on variable rate debt. See Note 8, Long-term Debt, in Item 8, Financial Statements and Supplementary Data, of this Form 10-K for further information regarding debt balances.

Income Tax Provision

Income tax provision and effective tax rates for 2023, 2022 and 2021 were as follows (in millions):

During the years ended December 31, 2023 and 2022, our tax rate was unfavorably impacted by certain expenses not being deductible for income tax reporting purposes.

Other comprehensive (loss) income, net of tax

Other comprehensive (loss) income, net of tax for 2023, 2022 and 2021 were as follows (in millions):

During the year ended December 31, 2023, we recorded unrealized losses, net of taxes, of $10.2 million on our cash flow hedges primarily due to the market's expectations for interest rates to decline in the future which offset the previous unrealized gains on our existing and forward swaps. We also amortized $4.5 million of the remaining unrealized gains, off-market terms

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and unrealized losses on our terminated cash flow hedges to interest expense, net during the year ended December 31, 2023, not including tax effects of $1.2 million.

During the year ended December 31, 2022, we amended the maturity dates for our three existing interest rate swaps and the amendment created off-market terms due to an other-than-insignificant financing element. We amortized $3.9 million of the remaining unrealized gains, off-market terms and unrealized losses on our terminated cash flow hedges to interest expense, net during the year ended December 31, 2022, not including tax effects of $1.0 million. Also, during the year ended December 31, 2022, we recorded an unrealized gain, net of taxes, of $37.9 million on our cash flow hedges primarily due to the market's expectations for interest rates in the future relative to our three existing interest rate swaps and two forward interest rate swaps.

We amortize the unrealized gains and losses on our terminated cash flow hedges at the time of termination over the course of the originally scheduled settlement dates of the terminated swaps. For more information on our cash flow hedges, see "Liquidity and Capital Resources, Derivative Instruments" below and Note 12, Derivatives and Hedging Activities, in Item 8, Financial Statements and Supplementary Data, of this Form 10-K.

KEY FACTORS AFFECTING OUR OPERATING RESULTS

Inflation, Housing Affordability and Interest Rates

Inflation affected the economy as a whole in 2022 and 2023 as consumer price inflation peaked at 40-year highs which negatively impacted consumer sentiment and increased market uncertainty. The Federal Reserve took actions to moderate and stabilize inflation by raising the federal funds rate multiple times in 2022 and 2023. This caused the average mortgage rate in the United States to more than double since the end of 2021. Inflation has moderated, however it is still above the 2% stated target which has led the Federal Reserve to signal plans to keep the federal funds rate higher for longer than the market was anticipating. The Federal Reserve has signaled plans to end the rate hike cycle and to hold current rates with potential rate cuts later in 2024.

Interest rates began to curtail housing demand beginning in the second half of 2022 as mortgage financing affordability was reduced. As a result, the residential homebuilding market began weakening and housing starts declined by 9% in 2023. We expect to be impacted by these economic headwinds in 2024. Our largest customers are publicly traded homebuilders, and these builders have been able to increase affordability by offering mortgage rate buydowns as incentives to their customers.

Trends in the Construction Industry

Higher inflation and interest rates, as discussed above, reduced the demand and affordability of new homes in 2023. According to Wolters Kluwer’s Blue Chip Economic Indicators January 2024 forecast, 1.4 million housing starts are forecasted in 2024 which is a decline of 4% from 2023. We expect this decrease will be concentrated in the multi-family end market, and we expect the single family end market, from which we derive over half of our net revenue, will improve slightly over 2023 levels. Overall, residential housing construction activity remains resilient, despite housing affordability concerns, as stable employment and near historic lows in existing home inventory levels continue to support demand for residential new construction activity. As a result, while we expect cyclicality to continue in the housing industry, we believe the long-term opportunities in our residential and commercial end markets are favorable. We believe the large residential construction backlog of both units under construction and units not started will partially offset these challenges. Additionally, there have been housing shortages in some of the markets we serve and the backlog in our growing multi-family business has helped to partially offset the declines we have faced in the residential homebuilding market. Regarding the repair and remodel markets, many existing homeowners are locked into low interest mortgages, and an aging housing stock exists in many areas of the United States, bolstering demand in this end market. We expect that incentives from the Inflation Reduction Act of 2022 will likely support repair and remodel demand in 2024.

Our operating results may vary based on our product mix and the mix of our end markets among new single-family, multi-family and commercial builders and owners of existing homes. We maintain a mix of business among all types of homebuilders ranging from small custom builders to large regional and national homebuilders as well as a wide range of commercial builders. Net revenue derived from our ten largest homebuilder customers in the United States was approximately 15% for the year ended December 31, 2023. The residential new construction and repair and remodel markets represented approximately 78% of our total net revenue for the year ended December 31, 2023, compared to 80% in the same period in 2022. The remaining portion was attributable to our distribution businesses and the commercial construction end market.

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Cost and Availability of Materials

We typically purchase the materials we use in our business directly from manufacturers. The industry supply of these materials has experienced multiple periods of supply shortages since 2021 due to strong demand and effects from the COVID-19 pandemic. In order to meet customer demand during these shortages, we have purchased a limited amount of materials from distributors and home centers at a premium to what we typically would purchase directly from manufacturers, therefore reducing gross profit. The supply chain issues for some products moderated during the year ended December 31, 2023, however, we expect these challenges to persist to a certain degree in 2024.

In addition, we experience price increases from our suppliers from time to time, including multiple increases over the last four years caused by supply shortages and general economic inflationary pressures. Increased market pricing, regardless of the catalyst, has and could continue to impact our results of operations in 2024, to the extent that price increases cannot be passed on to our customers. Our selling price increases were able to support most material cost increases in 2023 but we may have more difficulty raising prices in 2024 if housing demand slows. We will continue to work with our customers to adjust selling prices to offset higher costs as they occur.

Cost of Labor

Our business is labor intensive. As of December 31, 2023, we had approximately 10,600 employees, most of whom work as installers on local construction sites. We expect to spend more to hire, train and retain installers to support our growing business in 2024, as tight labor availability continues within the construction industry. Our workers’ compensation costs also continue to rise as we increase our coverage for additional personnel. We were able to keep our labor costs as a percentage of revenue flat during the year ended December 31, 2023 compared to 2022 due to increased selling prices per job. However, inflation and market competition could increase these costs in the near-term. We were successful in achieving higher labor productivity as evidenced by our annual sales per installer per business day increasing 1% in 2023 as compared to 2022.

Our employee retention rates remained better than industry averages in the year ended December 31, 2023. We believe this is a result of our strong culture and the various programs meant to benefit our employees, including our financial wellness plan, emotional well-being coaching, longevity stock compensation plan and comprehensive benefit packages we offer. We also provide assistance from the 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.

Environmental, Social and Governance, Climate Change and Other Factors

According to the Office of Energy Efficiency & Renewable Energy, over $400 billion is spent each year to power homes and commercial structures that consume 75% of all electricity used in the United States and 40% of the nation’s total energy. Insulation is a critical component in the construction of homes and commercial structures and helps increase energy conservation because it is the best way to prevent energy waste in most homes and commercial structures. As a leading installer of insulation products, we help ensure that insulation is properly installed to achieve the desired energy conservation and efficiency.

Beyond our service offerings, we also recognize that as a good corporate citizen, we have a responsibility to support our communities and be stewards of the environment. We continue to proactively work to find new ways to reduce our carbon footprint by formalizing a climate risk management framework to guide our climate strategy. We are committed to reducing CO2 emissions. We have transitioned a large portion of our electricity supply to a carbon-free energy source and entered a national waste management program to increase recycling at our facilities, reducing landfill waste. We also support the industry transition to hydrofluoro-olefin ("HFO") spray foam types which have lower greenhouse gas emissions than hydrofluorocarbon ("HFC") materials. For the first time in 2022, we utilized more HFO materials than HFC materials.

Certain effects of climate change that may cause severe weather events could have a material effect on our operations. Climate change and/or adverse weather conditions such as unusually prolonged cold conditions, rain, blizzards, hurricanes, earthquakes, fires, or other natural disasters could accelerate, delay or halt construction or installation activity or impact our suppliers. The impacts of climate change may subject us to increased costs, regulations, reporting requirements, standards or expectations regarding the environmental impacts of our business. Most, if not all, of our locations may be vulnerable to the adverse effects of climate change. Weather is one of the main reasons for annual seasonality cycles of our business, and any adverse weather conditions can enhance this seasonality.

Lastly, we expect our selling and administrative expenses to continue to increase as our business grows, which could impact our future operating profitability.

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SEASONALITY

We tend to have higher sales during the second half of the year as our homebuilder customers complete construction of homes placed under contract for sale in the traditionally stronger spring selling season. In addition, some of our larger branches operate in states impacted by winter weather and as such experience a slowdown in construction activity during the first quarter of the calendar year. This winter slowdown contributes to traditionally lower sales and profitability in our first quarter. See Part I, Item 1, Business, of this Form 10-K for further information.

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. As of December 31, 2023, we had cash and cash equivalents of $386.5 million as well as access to $250.0 million under our asset-based lending credit facility (as defined below), less $5.8 million of outstanding letters of credit, resulting in total liquidity of $630.7 million. Liquidity may also be limited in the future by certain cash collateral limitations under our asset-based lending credit facility (as defined below), depending on the status of our borrowing base availability.

Short-Term Material Cash Requirements

For at least the next twelve months, our primary capital requirements are to fund working capital needs, operating expenses, acquisitions and capital expenditures and to meet principal and interest obligations and make required income tax payments. We may also use our resources to fund our optional stock repurchase program and pay quarterly and annual dividends. During 2024, we anticipate discretionary spending for capital improvements and quarterly dividends to approximate 2023 levels of approximately $61.6 million and $37.5 million, respectively, as well as approximately $45.0 million for our annual variable dividend to be paid March 31, 2024. In addition, we expect to use cash and cash equivalents to acquire various companies with at least $100.0 million in aggregate net revenue 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.

Firm commitments for funds include $68.1 million in interest and principals payments on long-term debt obligations including our Senior Notes, Term Loan, notes payable to sellers of acquisitions and vehicles purchased under the Master Loan and Security Agreement, the Master Equipment Agreement and the Master Loan Agreements. Additionally, we maintain certain production vehicles under a finance lease structure which will require $3.2 million in interest and principal payments under current agreements in 2024. We lease certain locations, vehicles and equipment under operating lease agreements that will require $31.3 million in funds over the next twelve months. Finally, we have a product supply agreement with a certain vendor that requires us to purchase a minimum quantity of inventory with variable pricing in 2024. Payments for income taxes cannot be estimated at this time, but our effective tax rate was 26.8% for the year ended December 31, 2023.

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).

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 years ended December 31, 2023, 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 guarantee that such financing will be available on favorable terms, or at all.

Long-Term Material Cash Requirements

Beyond the next twelve months, our principal demands for funds will be to fund working capital needs and operating expenses, to meet principal and interest obligations on our long-term debts and finance leases as they become due or mature, and to make required income tax payments. Additional funds may be spent on acquisitions, capital improvements and dividend payments, at our discretion.

Known obligations beyond the next twelve months are as follows (in millions):

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Known obligations above include $997.9 million in interest and principals payments on long-term debt obligations through 2028. In addition, our finance leases will require $7.3 million in interest and principal payments under current agreements through 2028. Operating lease obligations will require $53.9 million in payments beyond the next twelve months. Finally, we have a product supply agreement with a certain vendor that requires us to purchase a minimum quantity of inventory with variable pricing after 2024.

Sources and Uses of Cash and Related Trends

Working Capital

We carefully manage our working capital and operating expenses. As of December 31, 2023 and 2022, our working capital, including cash and cash equivalents, was $723.6 million, or 26.0% of net revenue, and $556.4 million, or 20.8% of net revenue, respectively. The increase in working capital year-over-year was driven primarily by cash and cash equivalents increasing $156.9 million resulting from increased profitability, less acquisition and stock repurchase activity and a $13.8 million decrease in inventories due to our supply chain getting closer to normalizing. These increases were partially offset by accounts receivable increasing $26.1 million resulting from higher net revenue as well as increased capital expenditures on property and equipment. We continue to look for opportunities to reduce our working capital as a percentage of net revenue.

The following table presents our cash flows (in millions):

Cash Flows from Operating Activities

Our primary source of cash provided by operations is revenues generated from installing or selling building products and the resulting operating income generated by these revenues. Operating income is adjusted for certain non-cash items, and our cash flows from operations can be impacted by the timing of our cash collections on sales and collection of retainage amounts. Our primary uses of cash from operating activities include payments for installation materials, compensation costs, leases, income taxes and other general corporate expenditures included in net income. Net cash provided by operating activities increased from 2022 to 2023 primarily due to higher net income due to increased operating margins and cash source of $16.5 million due to the decrease in inventory as some supply chain issues subsided and normalized. These increases were partially offset by a $25.1 million increase in accounts receivable due to higher revenues.

Cash Flows from Investing Activities

Sources of cash from investing activities consist primarily of proceeds from the sales of property and equipment and, periodically, maturities from short term investments. Cash used in investing activities consists primarily of purchases of property and equipment, payments for acquisitions and, periodically, purchases of short term investments.

Net cash used by investing activities decreased from 2022 to 2023 primarily due to the decrease in payments for acquisitions. We completed eight acquisitions in both 2022 and 2023, but the average size of the acquisitions was larger in the year ended December 31, 2022. The amount of cash paid for an acquisition is dependent on various factors, including the size and determined value of the business being acquired. See Note 18, Business Combinations, in Item 8, Financial Statements and Supplementary Data, of this Form 10-K for more information regarding our business acquisitions in 2023, 2022 and 2021.

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Additionally, total cash used to purchase property and equipment increased in 2023, and 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.

Cash Flows from Financing Activities

Our sources of cash from financing activities consist of proceeds from the issuance of debt and new vehicle and equipment notes payable. Cash used in financing activities consists primarily of debt repayments, acquisition-related obligations, dividends and stock repurchases.

We had a net use of cash in financing activities in both 2023 and 2022 compared to a net inflow of cash in 2021 primarily due to the proceeds on our Term Loan received in 2021. We did not incur any such significant new borrowings during the year ended December 31, 2023. The decrease in cash used in financing activities in 2023 was primarily due to common stock repurchases decreasing to $6.3 million during the year ended December 31, 2023 from $137.6 million during the year ended December 31, 2022.

Debt

5.75% Senior Notes due 2028

In September 2019, we issued $300.0 million in aggregate principal amount of 5.75% senior unsecured notes (the “Senior Notes”). The Senior Notes will mature on February 1, 2028 and interest will be payable semi-annually in cash in arrears on February 1 and August 1, commencing on February 1, 2020. The net proceeds from the Senior Notes offering were $295.0 million after debt issuance costs.

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 in an aggregate amount exceeding 2.0% of market capitalization per fiscal year, or in an aggregate amount exceeding certain applicable restricted payment baskets; (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

In February 2022, we amended and extended the term of our asset-based lending credit agreement (the "ABL Credit Agreement"). The ABL Credit Agreement increased the commitment under the asset-based lending credit facility (the "ABL Revolver") to $250 million from $200.0 million, and permits us to further increased the commitment amount up to $300.0 million. The amendment also extends the maturity date from September 26, 2024 to February 17, 2027. The ABL Revolver bears interest at either the base rate or the Secured Overnight Financing Rate ("Term SOFR"), at our election, plus a margin of 0.25% or 0.50% in the case of base rate loans or 1.25% or 1.50% for Term SOFR advances (in each case based on a measure of availability under the ABL Credit Agreement). The amendment also allows for modification of specified fees depend upon achieving certain sustainability targets, in addition to making other modifications to the ABL Credit Agreement. Including outstanding letters of credit, our remaining availability under the ABL Revolver as of December 31, 2023 was $244.2 million.

The ABL Revolver 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 $100.0 million in aggregate and borrowing of swingline loans of up to $25.0 million in aggregate.

The ABL Credit Agreement contains a financial covenant requiring the satisfaction of a minimum of fixed charge coverage ratio of 1.0x in the event that we do not meet a minimum measure of availability under the ABL Revolver. The ABL Credit Agreement and the Term Loan Agreement contain 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 in an aggregate amount exceeding the greater of 2.0% of market capitalization per fiscal year or certain applicable restricted payment basket amounts' (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.

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In December 2021, we entered into a new $500 million, seven-year term loan facility due December 2028 (the “Term Loan”) under our credit agreement (the “Term Loan Agreement”), dated as of December 14, 2021 with Royal Bank of Canada as the administrative agent and collateral agent thereunder. In April 2023, the Term Loan was amended (the "First Amendment") to implement Term SOFR as the benchmark rate and includes a credit spread adjustment of 0.11%, 0.26% and 0.43% for interest periods of one month, three months and six months, respectively, and it is subject to the same floor as currently set forth in the Term Loan Agreement. In August 2023, we entered into the Second Amendment. The amended Term Loan effects a repricing of the interest rate margin applicable to the existing term loans thereunder from 2.25% to 2.00% that is added to Term SOFR plus the applicable credit spread adjustment. The Second Amendment also establishes an alternate base rate equal to the highest of (i) the federal funds rate plus 1/2 of 1.00%, (ii) the prime rate and (iii) the Term SOFR rate for an interest period of one month plus 1.00%. The Second Amendment also states that there will be a six-month protection provision during which a 1.00% premium would be charged in connection with certain repricing transactions.

As a result of the Second Amendment, the Term Loan amortizes in quarterly principal payments of $1.23 million, with any remaining unpaid balances due on the maturity date of December 14, 2028. As of December 31, 2023, we had $485.6 million, net of unamortized debt issuance costs, due on our Term Loan.

Subject to certain exceptions, the Term Loan will be subject to mandatory prepayments of (i) 100% of the net cash proceeds from issuances or incurrence of debt by the Company or any of its restricted subsidiaries (other than with respect to certain permitted indebtedness (excluding any refinancing indebtedness); (ii) 100% (with step-downs to 50% and 0% based on achievement of specified net leverage ratios) of the net cash proceeds from certain sales or dispositions of assets by the Company or any of its restricted subsidiaries in excess of a certain amount and subject to reinvestment provision and certain other exception; and (iii) 50% (with step-downs to 25% and 0% based upon achievement of specified net leverage ratios) of excess cash flow of the Company and its restricted subsidiaries in excess of $15.0 million, subject to certain exceptions and limitations.

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.

As of December 31, 2023, we were in compliance with all applicable covenants under the Term Loan Agreement, ABL Credit Agreement, and the Senior Notes.

Derivative Instruments

As of December 31, 2023, we had five total interest rate swaps including two forward interest rate swaps. For a summary of notional amounts, maturity dates and interest rates for each of these swaps, see Note 12, Derivatives and Hedging Activities, in Item 8, Financial Statements and Supplementary Data of this Form 10-K. Together, these five swaps serve to hedge $400.0 million of the variable cash flows on our variable rate Term Loan through maturity. The assets associated with the forward interest rate swap are included in other current and other non-current assets on the Consolidated Balance Sheets at their fair value amounts as described in Note 10, Fair Value Measurements, in Item 8, Financial Statements and Supplementary Data, of this Form 10-K.

Term SOFR is used as a reference rate for our Term Loan and our interest rate swap agreements we use to hedge our interest rate exposure. For more information on Derivatives, see Note 12, Derivatives and Hedging Activities, of this Form 10-K.

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 outstanding loan balances relating to our master loan and equipment agreements were $83.0 million and $73.0 million as of December 31, 2023 and 2022, respectively. Depreciation of assets held under these agreements is included within cost of sales on the Consolidated Statements of Operations and Comprehensive Income. See Note 8, Long-term Debt, in Item 8, Financial Statements and Supplementary Data of this Form 10-K for more information regarding our Master Loan and Security Agreement, Master Equipment Lease Agreement and Master Loan Agreements.

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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 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 millions):

We have $58.9 million included in our insurance letters of credit in the above table that are unsecured and therefore do not reduce total liquidity.

Critical Accounting Estimates

Management’s discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of our consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. Certain accounting policies involve judgments and uncertainties to such an extent that there is a reasonable likelihood that materially different amounts could have been reported using different assumptions or under different conditions. We evaluate our estimates and assumptions on a regular basis. We base our estimates on historical experience and various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of our assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates and assumptions used in preparation of our consolidated financial statements. We believe the following critical accounting estimates require judgement and estimation in the preparation of our consolidated financial statements and to be fundamental to our results of operations. See Note 2, Significant Accounting Policies included in Item 8 of the Form 10-K for a summary of all of our significant accounting policies and their effect on our financial statements.

Revenue recognition

The majority of our revenues are recognized when we complete our contracts with customers to install building products and the control of the promised good or service is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services. For contracts that are not complete at the reporting date, we recognize revenue over time utilizing a cost-to-cost input method as we believe this represents the best measure of when goods and services are transferred to the customer. When this method is used, we estimate the costs to complete individual contracts and record as revenue that portion of the total contract price that is considered complete based on the relationship of costs incurred to date to total anticipated costs. Under the cost-to-cost method, the use of estimated costs to complete each contract is a significant variable in the process of determining recognized revenue and can change throughout the duration of a contract due to contract modifications and other factors impacting job completion. Our cost estimation process is based on the knowledge, significant experience and judgement of project management, finance professionals and operational management to assess a variety of factors to determine revenues on uncompleted contracts. Such factors include historical performance, costs of materials and labor, change orders and the nature of the work to be performed. We generally review and reassess our estimates for each uncompleted contract at least quarterly to reflect the latest reliable information available. Changes in these estimates could favorably or unfavorably impact revenues and their related profits.

Goodwill Impairment

We performed an annual quantitative goodwill impairment test as of October 1, 2023 on our Distribution operating segment which we have determined is also a reporting unit. The estimate of the reporting unit’s fair value was determined by placing an 80% weighting on a discounted cash flow model and a 20% weighting on market-related model using current industry information that involve significant unobservable inputs (Level 3 inputs). Based on the results of this evaluation, we concluded

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that there were no impairments of goodwill as the estimated fair value exceeded its carrying value. The estimated fair value exceeded the Distribution operating segment's carrying value by 11.9%. A 100 basis point change in either the discount rate or residual growth rate, or both, utilized in our discounted cash flow model using our weighted system would not have resulted in an impairment for our Distribution operating segment, nor would any change in the weighting of each method. The estimates and assumptions used in the test are subject to uncertainty due to the professional judgments required.

We elected to perform an annual quantitative goodwill impairment test as of October 1, 2023 on our Installation and Distribution reporting units. Based on the results of these evaluations, we concluded that there were no impairments of goodwill as the estimated fair value significantly exceeded its carrying value. We also performed a qualitative evaluation for our Manufacturing reporting unit and determined that it was more likely than not that the fair value of this reporting unit exceeded its carrying value.

Business combinations

We have recorded a significant amount of finite lived intangible assets associated with the acquisitions of businesses through our growth strategy. These intangible assets consist of customer relationships, backlog, non-competition agreements and business trademarks and trade names. Fair values and estimated useful lives are assigned to the identified intangible assets at the date of acquisition by financial professionals using either the income approach or the market approach along with certain industry information, professional experience and knowledge. In some instances, the process of assigning values and useful lives requires using judgment and other financial professionals may come to different conclusions. We review intangible assets whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. An impairment loss is recognized when estimated future cash flows expected to result from the use of an asset and its eventual disposition are less than its carrying amount. When impairment is identified, the carrying amount of the asset is reduced to its estimated fair value. Impairment losses would negatively affect earnings.

We also record contingent consideration liabilities that arise from future earnout payments to the sellers associated with certain acquisitions and are based on predetermined calculations of certain future results. These future payments can require a significant amount of estimation by considering various factors, including business risk and projections. We have used various estimate techniques and also consult with a third party valuation expert in certain instances. The contingent consideration liabilities are measured at fair value by discounting estimated future payments to their net present value.

Insurance risks

We carry insurance policies for a number of risks, including, but not limited to, workers’ compensation, general liability, vehicle liability, property and our obligation for employee-related health care benefits. Most of our insurance policies contain an element for which we assume a significant portion of the risk by having high deductibles or a large cap on claims. For a description of our different insurance programs, see Note 2, Significant Accounting Policies in Item 8, Financial Statements and Supplementary Data in this Form 10-K.

Our largest healthcare plan is partially self-funded with an insurance company paying benefits in excess of stop loss limits per individual/family. An accrual for estimated healthcare claims incurred but not reported (“IBNR”) is included within accrued compensation on the Consolidated Balance Sheets and was $3.9 million and $3.8 million as of December 31, 2023 and 2022, respectively.

We participate in multiple workers’ compensation plans covering a significant portion of our business. Under these plans, we use a high deductible program to cover losses above the deductible amount on a per claim basis. We accrue for the estimated losses occurring from both asserted and unasserted claims. Insurance claims and reserves include accruals of estimated settlements for known claims, as well as accruals of actuarial estimates of IBNR claims. In estimating these reserves, historical loss experience and judgments about the expected levels of costs per claim are considered. These claims are accounted for based on actuarial estimates of the undiscounted claims, including IBNR. We believe the use of actuarial methods to account for these liabilities provides a consistent and effective way to measure these highly judgmental accruals. As of December 31, 2023 and 2022, we estimated total short-term and long-term known and IBNR claims for workers' compensation to be $26.5 million and $23.7 million, respectively. As of December 31, 2023 and 2022, offsets of these liabilities were $3.0 million and $2.3 million, respectively, with insurance receivables and indemnification assets for claims under fully insured policies or claims that exceeded the stop loss limit.

We also participate in a high retention general liability insurance program and a high deductible auto insurance program. As of December 31, 2023 and 2022, general liability and auto insurance reserves included in other current and long-term liabilities were $25.4 million and $25.0 million, respectively. As of December 31, 2023 and 2022, offsets of these liabilities were $1.8

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million and $5.3 million, respectively, with insurance receivables and indemnification assets for claims under fully insured policies or claims that exceeded the stop loss limit.

Liabilities relating to claims associated with these risks are estimated by considering historical claims experience, including frequency, severity, demographic factors and other actuarial assumptions. In estimating our liability for such claims, we periodically analyze our historical trends, including loss development, and apply appropriate loss development factors to the incurred costs associated with the claims with the assistance of external actuarial consultants. While we do not expect the amounts ultimately paid to differ significantly from our estimates, our reserves and corresponding expenses could be affected if future claim experience differs significantly from historical trends and actuarial assumptions.

We have not made any material changes in our methodology used to establish our insurance reserves during the years ended December 31, 2023 and 2022, and none of the adjustments to our estimates have been material.

Recent Accounting Pronouncements

For a description of recently issued and/or adopted accounting pronouncements, see Note 2, Significant Accounting Policies, in Item 8, Financial Statements and Supplementary Data, of this Form 10-K.

Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations

You should read the following in conjunction with the consolidated financial statements and related notes thereto included in Item 8, Financial Statements and Supplemental Data, of Part II of this Form 10-K. This discussion contains forward-looking statements reflecting current expectations that involve risks and uncertainties. Actual results and the timing of events may differ materially from those contained in these forward-looking statements due to a number of factors, including those discussed in the section captioned “Risk Factors” and elsewhere in this 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 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 230 branch locations. 94% of our net revenue comes from the service-based installation of these products across all of our end markets and forms our Installation operating segment and single reportable segment. Additionally, we manufacture and distribute certain building products and materials to installers and distributors involved with various types of construction projects and these two operations form our Manufacturing operating segment and our Distribution operating segment, respectively. We believe our business is well positioned to continue to profitably grow due to our strong balance sheet, liquidity and our continuing acquisition strategy.

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 the availability and affordability of mortgage financing. Our strategic acquisitions over the last several years contributed meaningfully to our 35.6% increase in net revenue during the year ended December 31, 2022 compared to 2021.

We have omitted discussion of 2020 results in the sections that follow where it would be redundant to the discussion previously included in Part II, Item 7, of Form 10-K for the year ended December 31, 2021.

2022 Highlights

Net revenues increased 35.6%, or $701.2 million, while gross profit increased 40.4% to $827.8 million during the year ended December 31, 2022 compared to 2021. We also generated approximately $277.9 million of cash from operating activities. 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 23.0% increase in our price/mix metric and increased sales volume of 5.5% on a same branch basis for our Installation segment. Gross profit grew faster than revenue primarily due to higher selling prices and resulting leverage gained on labor and other costs of sales. These synergies were partially offset by higher fuel costs and higher material costs due to increased Distribution segment sales which generally have higher material costs than our other segments. Supply chain constraints and inflationary pressures also contributed to higher material costs in 2022, 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. Certain net revenue, end market and industry metrics we use to monitor our operations are discussed in the "Key Measures of Performance" section below.

As of December 31, 2022, we had $229.6 million of cash and cash equivalents and we have not drawn on our revolving line of credit. We amended and extended our revolving line of credit in February 2022, increasing the commitment to $250.0 million from $200.0 million. Additionally, we received $25.5 million from amending the maturity dates on our three interest rate swaps in July 2022. Our liquidity remains strong despite repurchasing $137.6 million of our Company's stock and paying our variable and regular quarterly dividends of $62.7 million during the year ended December 31, 2022.

During the year ended December 31, 2022, we experienced overall sales growth in all of our end markets and we achieved 24.6% year-over-year same branch sales growth, with acquisitions contributing the remaining portion of our total sales growth. Our largest end market, the single-family subset of the residential new construction market, grew revenue 33.5% over the same period in 2021. Our commercial end market experienced sales growth of 15.2% during the year ended December 31, 2022 primarily through acquisitions. We experienced commercial project delays in 2022 due to macroeconomic concerns surrounding the pandemic and general economic uncertainty.

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We continue to diversify our operations through our acquisition strategy and met our goal of acquiring at least $100.0 million in revenue in 2022. Our commitment to the diversification of our product mix included expanding our distribution business as evidenced by our largest acquisition in 2022, Central Aluminum Supply Corporation ("CAS"), a distributor of gutter supplies and accessories.

The homebuilding market is expected to slow in 2023 due to economic concerns, namely higher inflation and interest rates experienced in 2022. While home starts are currently projected to be lower in 2023 than 2022, we believe there are several trends that should drive long-term growth in the housing market, even if there are temporary periods of slowed growth. These long-term trends include an aging housing stock, population growth, demographic changes, household formation growth and the fact that housing starts remained below long-term historic averages for over a decade following the 2008 recession. We expect that our net revenue, gross profit and operating income will benefit from this growth over time although we will be negatively impacted by the slowdown in the homebuilding industry in the near term.

2021 Highlights

Net revenues increased 19.1%, or $315.4 million, while gross profit increased 15.6% to $589.5 million during the year ended December 31, 2021 compared to 2020. We also generated approximately $138.3 million of cash from operating activities. 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 3.3% increase in our price/mix metric and increased sales volume of 7.9% on a same branch basis for our Installation segment. Gross profit grew slower than revenue primarily due to higher material costs caused by pandemic-related supply chain constraints, higher fuel costs and reduced efficiencies within the large commercial construction market due to challenges from the COVID-19 pandemic. Inflationary pressure contributed to the year-over-year margin compression as materials, particularly spray foam, gutters, and other complementary installed products, continued to be difficult to source near volume and pricing levels secured in prior periods.

As of December 31, 2021, we had $333.5 million of cash and cash equivalents. In December 2021, we modified our debt structure to take advantage of favorable market conditions, entering into a new term loan credit agreement which provided for a seven-year $500 million term loan facility. A portion of the proceeds from the term loan were used to repay, in full, all amounts outstanding under the previous term loan agreement. We had not drawn on our $200.0 million revolving line of credit existing at December 31, 2021. Additionally, we paid our first quarterly dividends as a public company in 2021.

During the year ended December 31, 2021, we experienced overall sales growth in all of our end markets and we achieved 9.7% year-over-year same branch sales growth, with acquisitions contributing the remaining portion of our total sales growth. Our largest end market, the single-family subset of the residential new construction market, grew revenue 22.1% over the same period in 2020 for our Installation segment. Our commercial end market experienced sales growth of 10.8% during the year ended December 31, 2021 primarily through acquisitions, but we experienced project delays due to macroeconomic concerns surrounding the pandemic, resulting in a decline in same branch sales within this market. These fluctuations are shown in further detail in the "Key Measures of Performance" section below, and impacts from COVID-19 are discussed further in the sections that follow.

Key Measures of Performance

We utilize certain net revenue and industry metrics to monitor our operations. At the beginning of 2022, we realigned our operating segments to reflect recent changes in our business as described in Part II, Item 8, "Note 11 - Information on Segments" in this Form 10-K. 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 in the table below.

We believe the revenue growth measures shown in the table that follows 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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The following table shows certain key measures of performance we utilize to evaluate our results:

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Net revenue, cost of sales and gross profit

The components of gross profit for 2022, 2021 and 2020 were as follows (dollars in thousands):

Net revenue increased during the year ended December 31, 2022 compared to the year ended December 31, 2021 primarily due to increased selling prices and organic growth as shown in the Key Measures of Performance section above. Acquisitions also meaningfully contributed to our 2022 revenue growth, adding $217.1 million of revenue in 2022. Our residential end market grew 33.2% primarily due to selling price increases, higher volume and the continued success of our acquisition strategy. Our commercial end market continued to face challenges associated with project delays due to economic concerns and the COVID-19 pandemic. However, the commercial business improved from its 2021 performance as evidenced by a 6.6% annual growth rate in same branch sales in 2022, showing signs of improvement in the second half of 2022. Our price/mix metric was positively impacted during the year ended December 31, 2022 as we were able to pass along selling price increases to partially offset multiple price increases in material costs.

The remaining overall growth in net revenue for the year December 31, 2022 is attributable to the recent acquisitions of AMD Distribution and Central Aluminum which form our Distribution operating segment. This operating segment, combined with our Manufacturing operating segment, grew from $29.3 million to $162.4 million in net revenue for the year ended December 31, 2022.

As a percentage of net revenue, gross profit increased during the year ended December 31, 2022 compared to the year ended December 31, 2021 primarily on the strength of sales growth across all of our end markets as well as strong price/mix growth. Sales price increases allowed us to gain significant leverage on our labor and other cost of sales expenses as a percentage of net revenue. However, ongoing industry wide supply chain issues impacted our operating efficiency, driving our material costs higher. In order to meet customer demand during the year, we purchased materials from distributors and home centers at a premium to what we typically would purchase directly from manufacturers. As a result, during the year ended December 31, 2022, we estimate these purchases increased materials expense by approximately $4.8 million, therefore reducing gross profit by 20 basis points during the period. While inflation and material supply chain issues are likely to persist into 2023, we will continue to work with our suppliers to lessen the impact on our margins and with our customers to offset further cost increases through selling price adjustments.

Operating Expenses

Operating expenses for 2022, 2021 and 2020 were as follows (dollars in thousands):

Selling

The dollar increase in selling expenses in 2022 was primarily driven by a year-over-year increase in selling wages, benefits and commissions of $23.4 million, or 27.5%, which supported our increased net revenue of 35.6%. Selling expense decreased as a percentage of sales primarily due to increased leverage on selling wages from increased sales.

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Administrative

The dollar increase in administrative expenses in 2022 was primarily due to an increase in wages and benefits in the amount of $32.2 million, which was attributable to both acquisitions and organic growth as well as favorable company performance. Facility expense and insurance cost increases due to organic and acquisition-driven growth also factored into the overall increase in administrative operating expenses. During 2022, we saw our administrative costs decrease as a percentage of sales primarily due to the leverage gained on these costs from an increase in net revenue. 2021 and 2020 balances previously included amounts on the gains on acquisition earnouts that were recast during the year ended December 31, 2022 on the Consolidated Statements of Operations and Comprehensive Income.

Gains on acquisition earnouts

Some of our acquisitions have contingent consideration liabilities in the form of earnouts included in the total purchase price of the business. We assess the fair value of the contingent consideration liability at each reporting period, and any changes in the estimated fair value are reflected in gains on acquisition earnouts on the Consolidated Statements of Operations and Comprehensive Income. The gain recorded during the year ended December 31, 2022 increased from 2021 primarily due to a $15.1 million gain on the Central Aluminum Supply Corporation earnout recorded as a result of revised earnout target expectations. Prior period amounts were previously included in administrative expenses on the Consolidated Statements of Operations and Comprehensive Income.

Amortization

Our intangible assets include non-competes, customer relationships, trade names and backlog established upon acquisition of most businesses we acquire. Amortization expense increased $2.9 million in 2022 resulting from the increase in new intangible assets from 2022 acquisitions, with the remaining increase due to a full year of amortization expense attributable to prior year acquisitions. See Note 18, Business Combinations, in Item 8, Financial Statements and Supplementary Data, of this Form 10-K for information on our acquisitions.

Other Expense, net

Other expense, net for 2022, 2021 and 2020 was as follows (dollars in thousands):

The year-over-year increase in other expense, net during 2022 was primarily a result of increased interest rates on our variable rate debt and increased average debt levels. See Note 8, Long-Term Debt, in Item 8, Financial Statements and Supplementary Data, of this Form 10-K for further information regarding debt balances.

Income Tax Provision

Income tax provision and effective tax rates for 2022, 2021 and 2020 were as follows (dollars in thousands):

During the year ended December 31, 2022, our tax rate was unfavorably impacted by certain expenses not being deductible for income tax reporting purposes.

During the year ended December 31, 2021, our tax rate was favorably impacted by the release of a valuation allowance for a tax filing entity, excess tax benefits from share-based compensation arrangements and statute of limitation expirations of uncertain tax positions.

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Other comprehensive gain (loss), net of tax

Other comprehensive gain (loss), net of tax for 2022, 2021 and 2020 were as follows (in thousands):

During the year ended December 31, 2022, we amended the maturity dates for our three existing interest rate swaps. These swaps had unrealized gains of $51.2 million at the amendment date of July 8, 2022 and the amendment created off-market terms of $25.7 million due to an other-than-insignificant financing element. The unrealized gains will be amortized as a decrease to interest expense, net through the original maturity date of April 2030 and the off-market terms will be amortized as an increase to interest expense, net through December 2025. We amortized $3.9 million of the remaining unrealized gains, off-market terms and unrealized losses on our terminated cash flow hedges to interest expense, net during the year ended December 31, 2022, not including tax effects of $1.0 million. Also, during the year ended December 31, 2022, we recorded an unrealized gain, net of taxes, of $37.9 million on our cash flow hedges primarily due to the market's expectations for interest rates in the future relative to our three existing interest rate swaps and two forward interest rate swaps.

During the year ended December 31, 2021, we recorded an unrealized gain, net of taxes, of $6.4 million on our cash flow hedges primarily due to the market's expectations for interest rates in the future relative to our July 2021 swap. We also amortized $3.2 million of the unrealized loss on our terminated cash flow hedges to interest expense, net during the year ended December 31, 2021, not including tax effects of $1.1 million.

We amortize the unrealized gains and losses on our terminated cash flow hedges at the time of termination over the course of the originally scheduled settlement dates of the terminated swaps. For more information on our cash flow hedges, see "Liquidity and Capital Resources, Derivative Instruments" below and Note 12, Derivatives and Hedging Activities, in Item 8, Financial Statements and Supplementary Data, of this Form 10-K.

KEY FACTORS AFFECTING OUR OPERATING RESULTS

Inflation and Interest Rates

Inflation affected the economy as a whole in 2022 as consumer price inflation reached 40-year highs, negatively impacting consumer sentiment and increasing market uncertainty. The Federal Reserve took actions to moderate and stabilize inflation by raising the federal funds rate multiple times in 2022 and signaling plans to continue raising the rate in 2023. This caused the average mortgage rate in the United States to more than double since the end of 2021. Rising interest rates began to curtail housing demand in the second half of 2022, reducing mortgage financing affordability. As a result, the residential homebuilding market began showing signs of weakening in late 2022 and early 2023 and housing starts, permits and completions are forecasted to decline in 2023.

We expect to be impacted by these economic headwinds in 2023. However, we believe the large residential construction backlog of both units under construction and units not started will partially offset these challenges. Additionally, there are housing shortages in some of the markets we serve and we expect that backlog in our growing multi-family business will also help to offset any declines we may face in the residential homebuilding market. Many existing homeowners are locked into low interest mortgages and with an aging housing stock, so we expect that the repair and remodel markets we service could experience growth as well. Incentives from the Inflation Reduction Act of 2022 are also likely to support repair and remodel demand in 2023, as evidenced by growth in this market of nearly 50% in the three months ended December 31, 2022 compared to the same period in 2021.

Trends in the Construction Industry

Rising inflation and interest rates, as discussed above, began to reduce the demand and affordability of new homes in late 2022. Previously, residential housing demand experienced a rapid recovery after the onset of the COVID-19 pandemic. This quick increase in demand created material shortages, causing inflationary pressure on materials. As a result, we experienced significant price increases on most of the products we install. We anticipate these shortages will partially lessen in 2023 assuming inflationary pressures cause housing demand to lessen. This outlook may change depending on housing demand and the ability of manufacturers to produce adequate supply.

Our operating results may vary based on our product mix and the mix of our end markets among new single-family, multi-family and commercial builders and owners of existing homes. We maintain a mix of business among all types of homebuilders

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ranging from small custom builders to large regional and national homebuilders as well as a wide range of commercial builders. Net revenue derived from our ten largest homebuilder customers in the United States was approximately 16% for the year ended December 31, 2022. The residential new construction and repair and remodel markets represented approximately 80% of our total net revenue for the year ended December 31, 2022, compared to 83% in the same period in 2021. The remaining portion was attributable to our new distribution businesses and the commercial construction end market.

Cost and Availability of Materials

We typically purchase the materials we use in our business directly from manufacturers. The industry supply of these materials experienced supply shortages in 2022 due to strong demand and effects from the COVID-19 pandemic. In order to meet customer demand during the year, we purchased materials from distributors and home centers at a premium to what we typically would purchase directly from manufacturers, therefore reducing gross profit.

In addition, we experience price increases from our suppliers from time to time, including multiple increases over the last three years caused by supply shortages and general economic inflationary pressures. We have experienced unprecedented increased pricing for fiberglass and foam insulation materials over the last three years but expect manufacturers to slow the pace of price increases in 2023. Increased market pricing, regardless of the catalyst, has and could continue to impact our results of operations in 2023, to the extent that price increases cannot be passed on to our customers. Our selling price increases were able to support most material cost increases in 2022 but we may have more difficulty raising prices in 2023 if housing demand slows. We will continue to work with our customers to adjust selling prices to offset higher costs as they occur.

Cost of Labor

Our business is labor intensive. As of December 31, 2022, we had approximately 10,300 employees, most of whom work as installers on local construction sites. We expect to spend more to hire, train and retain installers to support our growing business in 2023, as tight labor availability continues within the construction industry. We offer a comprehensive benefits package unlike many of our local competitors, which will increase costs as we hire additional personnel. Our workers’ compensation costs also continue to rise as we increase our coverage for additional personnel. We obtained leverage on our labor costs during the year ended December 31, 2022, compared to 2021 due to increased selling prices per job. However, inflation and market competition could increase these costs in the near-term.

We experienced strong employee retention, turnover and labor efficiency rates in the year ended December 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. As the pandemic continues to move towards the endemic stage, 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 could continue into 2023.

In the commercial sector, we have experienced some impact to our commercial business from the pandemic, mainly in the form of project start delays and other inefficiencies. 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. We have since paid back these deferrals,

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including paying 50% back in the year ended December 31, 2022. It is important to note that this does not impact the timing of the expense, only the timing of the payment.

Environmental, Social and Governance, Climate Change and Other Factors

According to the Office of Energy Efficiency & Renewable Energy, over $400 billion is spent each year to power homes and commercial structures that consume 75% of all electricity used in the United States and 40% of the nation’s total energy. As a result, U.S. buildings account for 35% of the U.S. carbon dioxide emissions that drive the climate crisis. Insulation is a critical component in the construction of homes and commercial structures. Installing insulation also helps increase energy conservation because it is the best way to prevent energy waste in most homes and commercial structures. Beyond our service offerings, we also recognize that as a good corporate citizen, we have a responsibility to support our communities and be stewards of the environment. We have transitioned a large portion of our electricity supply to a carbon-free energy source and entered a national waste management program to increase recycling at our facilities, reducing landfill waste. We continue to work to find new ways to reduce our carbon footprint.

Certain effects of climate change that may cause severe weather events could have a material effect on our operations. Climate change and/or adverse weather conditions such as unusually prolonged cold conditions, rain, blizzards, hurricanes, earthquakes, fires, or other natural disasters could accelerate, delay or halt construction or installation activity or impact our suppliers. The impacts of climate change may subject us to increased costs, regulations, reporting requirements, standards or expectations regarding the environmental impacts of our business. Most, if not all, of our locations may be vulnerable to the adverse effects of climate change. Weather is one of the main reasons for annual seasonality cycles of our business, and any adverse weather conditions can enhance this seasonality.

Lastly, we expect our selling and administrative expenses to continue to increase as our business grows, which could impact our future operating profitability.

SEASONALITY

We tend to have higher sales during the second half of the year as our homebuilder customers complete construction of homes placed under contract for sale in the traditionally stronger spring selling season. In addition, some of our larger branches operate in states impacted by winter weather and as such experience a slowdown in construction activity during the first quarter of the calendar year. This winter slowdown contributes to traditionally lower sales and profitability in our first quarter. See Part I, Item 1, Business, of this Form 10-K for further information.

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. As of December 31, 2022, we had cash and cash equivalents of $229.6 million as well as access to $250.0 million under our asset-based lending credit facility (as defined below), less $5.8 million of outstanding letters of credit, resulting in total liquidity of $473.9 million. Our total liquidity is reduced by $1.6 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 2022. Increased market pricing on the materials we purchase has and could continue to impact our results of operations in 2023 due to the higher prices we must pay for materials.

Short-Term Material Cash Requirements

For at least the next twelve months, our primary capital requirements are to fund working capital needs, operating expenses, acquisitions and capital expenditures and to meet principal and interest obligations and make required income tax payments. We may also use our resources to fund our optional stock repurchase program and pay quarterly and annual dividends. During 2023, we anticipate discretionary spending for capital improvements and quarterly dividends to approximate 2022 levels of approximately $45.6 million and $36.0 million, respectively, as well as approximately $25.2 million for our annual variable dividend to be paid March 31, 2023. In addition, we expect to use cash and cash equivalents to acquire various companies with at least $100.0 million in aggregate net revenue. The amount of cash paid for an acquisition is dependent on various factors, including the size and determined value of the business being acquired.

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Firm commitments for funds include $68.5 million in interest and principals payments on long-term debt obligations including our Senior Notes, Term Loan, notes payable to sellers of acquisitions and vehicles purchased under the Master Loan and Security Agreement, the Master Equipment Agreement and the Master Loan Agreements. Additionally, we maintain certain production vehicles under a finance lease structure which will require $3.0 million in interest and principal payments under current agreements in 2023. We lease certain locations, vehicles and equipment under operating lease agreements that will require $28.9 million in funds over the next twelve months. Finally, we have a product supply agreement with a certain vendor that requires us to purchase a minimum of $27.0 million of inventory in 2023. Payments for income taxes cannot be estimated at this time.

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).

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 years ended December 31, 2022, 2021 and 2020. 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 guarantee that such financing will be available on favorable terms, or at all.

Long-Term Material Cash Requirements

Beyond the next twelve months, our principal demands for funds will be to fund working capital needs and operating expenses, to meet principal and interest obligations on our long-term debts and finance leases as they become due or mature, and to make required income tax payments. Additional funds may be spent on acquisitions, capital improvements and dividend payments, at our discretion.

Known obligations beyond the next twelve months include $1,036.5 million in interest and principals payments on long-term debt obligations noted above through 2028, as follows (amounts in thousands):

In addition, our finance leases will require $7.0 million in interest and principal payments under current agreements through 2026. Operating lease obligations will require $54.2 million in payments beyond the next twelve months.

Sources and Uses of Cash and Related Trends

Working Capital

We carefully manage our working capital and operating expenses. As of December 31, 2022 and 2021, our working capital, including cash and cash equivalents, was $556.4 million, or 20.8% of net revenue, and $551.7 million, or 28.0% of net revenue, respectively. The increase in working capital year-over-year was driven primarily by accounts receivable increasing $84.5 million resulting from our increased net revenue, and inventories increasing by $33.6 million due to material price inflation, increased selling activity and distribution company acquisitions. These increases were partially offset by a $103.9 million decrease in cash and cash equivalents resulting from the payment of dividends and share repurchases and an increase of $16.5 million in accounts payable primarily due to material price inflation and increased sales volume. We continue to look for opportunities to reduce our working capital as a percentage of net revenue.

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The following table presents our cash flows (in thousands):

Cash Flows from Operating Activities

Our primary source of cash provided by operations is revenues generated from installing or selling building products and the resulting operating income generated by these revenues. Operating income is adjusted for certain non-cash items, and our cash flows from operations can be impacted by the timing of our cash collections on sales and collection of retainage amounts. The COVID-19 pandemic has not had a material impact to our cash collections to date. Our primary uses of cash from operating activities include payments for installation materials, compensation costs, leases, income taxes and other general corporate expenditures included in net income.

Net cash provided by operating activities increased from 2021 to 2022 primarily due to higher net income due to increased sales. We also received a cash payment of $25.5 million for amending the maturity date of our interest rate swap derivatives.

Cash Flows from Investing Activities

Sources of cash from investing activities consist primarily of proceeds from the sales of property and equipment and, periodically, maturities from short term investments. Cash used in investing activities consists primarily of purchases of property and equipment, payments for acquisitions and, periodically, purchases of short term investments.

Net cash used by investing activities decreased from 2021 to 2022 primarily due to the decrease in payments for acquisitions. We completed three less acquisitions in 2022 compared to 2021, and the size of the acquisitions were generally larger in the year ended December 31, 2021. The amount of cash paid for an acquisition is dependent on various factors, including the size and determined value of the business being acquired. See Note 18, Business Combinations, in Item 8, Financial Statements and Supplementary Data, of this Form 10-K for more information regarding our business acquisitions in 2022, 2021 and 2020.

Additionally, total cash used to purchase property and equipment increased in 2022, and 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.

Cash Flows from Financing Activities

Our sources of cash from financing activities consist of proceeds from the issuance of debt and new vehicle and equipment notes payable. Cash used in financing activities consists primarily of debt repayments, acquisition-related obligations, dividends and stock repurchases.

We had a net use of cash in financing activities in 2022 compared to a net inflow of cash in 2021 primarily due to the proceeds on our Term Loan received in 2021. We did not incur any such significant new borrowings during the year ended December 31, 2022. We also repurchased $137.6 million of common stock during the year ended December 31, 2022 while we did not repurchase any shares under our stock repurchase plan during the year ended December 31, 2021. Our net cash (used in) provided by financing activities during the year ended December 31, 2022 also included the payment of our first variable annual dividend of $26.2 million.

Debt

5.75% Senior Notes due 2028

In September 2019, we issued $300.0 million in aggregate principal amount of 5.75% senior unsecured notes (the “Senior Notes”). The Senior Notes will mature on February 1, 2028 and interest will be payable semi-annually in cash in arrears on February 1 and August 1, commencing on February 1, 2020. The net proceeds from the Senior Notes offering were $295.0 million after debt issuance costs.

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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 in an aggregate amount exceeding 2.0% of market capitalization per fiscal year, or in an aggregate amount exceeding certain applicable restricted payment baskets; (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

In February 2022, we amended and extended the term of our asset-based lending credit agreement (the "ABL Credit Agreement"). The ABL Credit Agreement increased the commitment under the asset-based lending credit facility (the "ABL Revolver") to $250 million from $200.0 million, and permits us to further increased the commitment amount up to $300.0 million. The amendment also extends the maturity date from September 26, 2024 to February 17, 2027. The ABL Revolver bears interest at either the base rate or the Secured Overnight Financing Rate ("Term SOFR"), at our election, plus a margin of 0.25% or 0.50% in the case of base rate loans or 1.25% or 1.50% for Term SOFR advances (in each case based on a measure of availability under the ABL Credit Agreement). The amendment also allows for modification of specified fees depend upon achieving certain sustainability targets, in addition to making other modifications to the ABL Credit Agreement. Including outstanding letters of credit, our remaining availability under the ABL Revolver as of December 31, 2022 was $244.2 million.

The ABL Revolver 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 $100.0 million in aggregate and borrowing of swingline loans of up to $25.0 million in aggregate.

The ABL Credit Agreement contains a financial covenant requiring the satisfaction of a minimum of fixed charge coverage ratio of 1.0x in the event that we do not meet a minimum measure of availability under the ABL Revolver. The ABL Credit Agreement and the Term Loan Agreement contain 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 in an aggregate amount exceeding the greater of 2.0% of market capitalization per fiscal year or certain applicable restricted payment basket amounts' (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.

In December 2021, we entered into a new $500 million, seven-year term loan facility due December 2028 (the “Term Loan”) under our credit agreement (the “Term Loan Agreement”), dated as of December 14, 2021 with Royal Bank of Canada as the administrative agent and collateral agent thereunder. The Term Loan amortizes in quarterly principal payments of $1.25 million starting on March 31, 2022, with any remaining unpaid balances due on the maturity date of December 14, 2028. The Term Loan bears interest at either the base rate (which approximates the prime rate) or the Eurodollar rate, plus a margin of (A) 1.25% in the case of base rate loans or (B) 2.25% in the case of Eurodollar rate loans. Proceeds from the Term Loan were used to refinance and repay in full all amounts outstanding under our previous term loan agreement. We intend to use the remaining funds for general corporate purposes, including acquisitions and other growth initiatives. As of December 31, 2022, we had $489.2 million, net of unamortized debt issuance costs, due on our Term Loan.

Subject to certain exceptions, the Term Loan will be subject to mandatory prepayments of (i) 100% of the net cash proceeds from issuances or incurrence of debt by the Company or any of its restricted subsidiaries (other than with respect to certain permitted indebtedness (excluding any refinancing indebtedness); (ii) 100% (with step-downs to 50% and 0% based on achievement of specified net leverage ratios) of the net cash proceeds from certain sales or dispositions of assets by the Company or any of its restricted subsidiaries in excess of a certain amount and subject to reinvestment provision and certain other exception; and (iii) 50% (with step-downs to 25% and 0% based upon achievement of specified net leverage ratios) of excess cash flow of the Company and its restricted subsidiaries in excess of $15.0 million, subject to certain exceptions and limitations.

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.

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As of December 31, 2022, we were in compliance with all applicable covenants under the Term Loan Agreement, ABL Credit Agreement, and the Senior Notes.

Derivative Instruments

As of December 31, 2022, we had five total interest rate swaps including two forward interest rate swaps. For a summary of notional amounts, maturity dates and interest rates for each of these swaps, see Note 12, Derivatives and Hedging Activities, in Item 8, Financial Statements and Supplementary Data of this Form 10-K. Together, these five swaps serve to hedge $400.0 million of the variable cash flows on our variable rate Term Loan through maturity. The assets and liabilities associated with the forward interest rate swap are included in other current and other non-current assets on the Consolidated Balance Sheets at their fair value amounts as described in Note 10, Fair Value Measurements, in Item 8, Financial Statements and Supplementary Data, of this Form 10-K.

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. For more information on the discontinuance of LIBOR, see Item 7A. Quantitative and Qualitative Disclosures about Market Risk, of this Form 10-K.

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 outstanding loan balances relating to our master loan and equipment agreements were $73.0 million and $69.2 million as of December 31, 2022 and 2021, respectively. Depreciation of assets held under these agreements is included within cost of sales on the Consolidated Statements of Operations and Comprehensive Income. See Note 8, Long-Term Debt, in Item 8, Financial Statements and Supplementary Data of this Form 10-K for more information regarding our Master 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 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):

We have $58.9 million included in our insurance letters of credit in the above table that are unsecured and therefore do not reduce total liquidity. As of December 31, 2022, we have $1.6 million posted 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.

Critical Accounting Estimates

Management’s discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of our consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. Certain accounting policies involve judgments and uncertainties to such an extent that there is a reasonable likelihood that materially

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different amounts could have been reported using different assumptions or under different conditions. We evaluate our estimates and assumptions on a regular basis. We base our estimates on historical experience and various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of our assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates and assumptions used in preparation of our consolidated financial statements. We believe the following critical accounting estimate requires judgement and estimation in the preparation of our consolidated financial statements and to be fundamental to our results of operations. See Note 2, Significant Accounting Policies included in Item 8 of the Form 10-K for a summary of all of our significant accounting policies and their effect on our financial statements.

Revenue recognition

The majority of our revenues are recognized when we complete our contracts with customers to install building products and the control of the promised good or service is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services. For contracts that are not complete at the reporting date, we recognize revenue over time utilizing a cost-to-cost input method as we believe this represents the best measure of when goods and services are transferred to the customer. When this method is used, we estimate the costs to complete individual contracts and record as revenue that portion of the total contract price that is considered complete based on the relationship of costs incurred to date to total anticipated costs. Under the cost-to-cost method, the use of estimated costs to complete each contract is a significant variable in the process of determining recognized revenue and can change throughout the duration of a contract due to contract modifications and other factors impacting job completion. Our cost estimation process is based on the knowledge, significant experience and judgement of project management, finance professionals and operational management to assess a variety of factors to determine revenues on uncompleted contracts. Such factors include historical performance, costs of materials and labor, change orders and the nature of the work to be performed. We generally review and reassess our estimates for each uncompleted contract at least quarterly to reflect the latest reliable information available. Changes in these estimates could favorably or unfavorably impact revenues and their related profits.

Goodwill Impairment

We performed an annual quantitative goodwill impairment test as of October 1, 2022 on our Distribution operating segment which we have determined is also a reporting unit. The estimate of the reporting unit’s fair value was determined by placing a 75% weighting on a discounted cash flow model and a 25% weighting on market-related model using current industry information that involve significant unobservable inputs (Level 3 inputs). Based on the results of this evaluation, we concluded that there were no impairments of goodwill as the estimated fair value exceeded its carrying value. The estimated fair value exceeded the Distribution operating segment's carrying value by 8.6%. A 100 basis point change in the discount rate in our discounted cash flow model using our weighted system would not have resulted in an impairment for our Distribution operating segment, nor would reasonable changes in the weighting of each method. The estimates and assumptions used in the test are subject to uncertainty due to the professional judgments required. We performed a qualitative evaluation for our Installation and Manufacturing operating segments and determined that it was more likely than not that the fair value of these operating segments exceeded their carrying values.

Business combinations

We have recorded a significant amount of finite lived intangible assets associated with the acquisitions of businesses through our growth strategy. These intangible assets consist of customer relationships, backlog, non-competition agreements and business trademarks and trade names. Fair values and estimated useful lives are assigned to the identified intangible assets at the date of acquisition by financial professionals using either the income approach or the market approach along with certain industry information, professional experience and knowledge. In some instances, the process of assigning values and useful lives requires using judgment and other financial professionals may come to different conclusions. We review intangible assets whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. An impairment loss is recognized when estimated future cash flows expected to result from the use of an asset and its eventual disposition are less than its carrying amount. When impairment is identified, the carrying amount of the asset is reduced to its estimated fair value. Impairment losses would negatively affect earnings.

We also record contingent consideration liabilities that arise from future earnout payments to the sellers associated with certain acquisitions and are based on predetermined calculations of certain future results. These future payments can require a significant amount of estimation by considering various factors, including business risk and projections. We have used various estimate techniques and also consult with a third party valuation expert in certain instances. The contingent consideration liabilities are measured at fair value by discounting estimated future payments to their net present value.

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Insurance risks

We carry insurance policies for a number of risks, including, but not limited to, workers’ compensation, general liability, vehicle liability, property and our obligation for employee-related health care benefits. Most of our insurance policies contain an element for which we assume a portion of the risk by having high deductibles or a large cap on claims. For a description of our different insurance programs, see Note 2, Significant Accounting Policies in Item 8, Financial Statements and Supplementary Data in this Form 10-K.

Our largest healthcare plan is partially self-funded with an insurance company paying benefits in excess of stop loss limits per individual/family. An accrual for estimated healthcare claims incurred but not reported (“IBNR”) is included within accrued compensation on the Consolidated Balance Sheets and was $3.8 million and $3.3 million as of December 31, 2022 and 2021, respectively.

We participate in multiple workers’ compensation plans covering a significant portion of our business. Under these plans, we use a high deductible program to cover losses above the deductible amount on a per claim basis. We accrue for the estimated losses occurring from both asserted and unasserted claims. Insurance claims and reserves include accruals of estimated settlements for known claims, as well as accruals of actuarial estimates of IBNR claims. In estimating these reserves, historical loss experience and judgments about the expected levels of costs per claim are considered. These claims are accounted for based on actuarial estimates of the undiscounted claims, including IBNR. We believe the use of actuarial methods to account for these liabilities provides a consistent and effective way to measure these highly judgmental accruals. As of December 31, 2022 and 2021, we estimated total short-term and long-term known and IBNR claims for workers' compensation to be $23.7 million and $21.4 million, respectively. As of December 31, 2022 and 2021, offsets of these liabilities were $2.3 million and $2.1 million, respectively, with insurance receivables and indemnification assets for claims under fully insured policies or claims that exceeded the stop loss limit.

We also participate in a high retention general liability insurance program and a high deductible auto insurance program. As of December 31, 2022 and 2021, general liability and auto insurance reserves included in other current and long-term liabilities were $25.0 million and $21.9 million, respectively. As of December 31, 2022 and 2021, offsets of these liabilities were $5.3 million and $3.9 million, respectively, with insurance receivables and indemnification assets for claims under fully insured policies or claims that exceeded the stop loss limit.

Liabilities relating to claims associated with these risks are estimated by considering historical claims experience, including frequency, severity, demographic factors and other actuarial assumptions. In estimating our liability for such claims, we periodically analyze our historical trends, including loss development, and apply appropriate loss development factors to the incurred costs associated with the claims with the assistance of external actuarial consultants. While we do not expect the amounts ultimately paid to differ significantly from our estimates, our reserves and corresponding expenses could be affected if future claim experience differs significantly from historical trends and actuarial assumptions.

We have not made any material changes in our methodology used to establish our insurance reserves during the years ended December 31, 2022 and 2021, and none of the adjustments to our estimates have been material.

Recent Accounting Pronouncements

For a description of recently issued and/or adopted accounting pronouncements, see Note 2, Significant Accounting Policies, in Item 8, Financial Statements and Supplementary Data, of this Form 10-K.

Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations

You should read the following in conjunction with the consolidated financial statements and related notes thereto included in Item 8, Financial Statements and Supplemental Data, of Part II of this Form 10-K. This discussion contains forward-looking statements reflecting current expectations that involve risks and uncertainties. Actual results and the timing of events may differ materially from those contained in these forward-looking statements due to a number of factors, including those discussed in the section captioned “Risk Factors” and elsewhere in this 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 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. The vast majority 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 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 from the pandemic.

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, consumer confidence, employment rates, housing inventory levels, foreclosure rates, the health of the economy and availability of mortgage financing. Our strategic acquisitions over the last several years contributed meaningfully to our 19.1% increase in net revenue during the year ended December 31, 2021 compared to 2020.

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We have omitted discussion of 2019 results in the sections that follow where it would be redundant to the discussion previously included in Part II, Item 7, of our Form 10-K for the year ended December 31, 2020.

2021 Highlights

Net revenues increased 19.1%, or $315.4 million, while gross profit increased 15.6% to $589.5 million during the year ended December 31, 2021 compared to 2020. We also generated approximately $138.3 million of cash from operating activities. 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 3.2% increase in our price/mix metric and increased sales volume of 7.7% on a same branch basis. Gross profit grew slower than revenue primarily due to higher material costs caused by pandemic-related supply chain constraints, higher fuel costs and reduced efficiencies within the large commercial construction market due to challenges from the COVID-19 pandemic. Inflationary pressure contributed to the year-over-year margin compression as materials, particularly spray foam, gutters, and other complementary installed products, continued to be difficult to source near volume and pricing levels secured in prior periods.

As of December 31, 2021, we had $333.5 million of cash and cash equivalents. In December 2021, we modified our debt structure to take advantage of favorable market conditions, entering into a new term loan credit agreement which provided for a seven-year $500 million term loan facility. A portion of the proceeds from the term loan were used to repay, in full, all amounts outstanding under the previous term loan agreement. We had not drawn on our $200.0 million revolving line of credit existing at December 31, 2021, which was increased to $250.0 million in February of 2022. Additionally, we paid our first quarterly dividends as a public company in 2021.

During the year ended December 31, 2021, we experienced overall sales growth in all of our end markets and we achieved 9.7% year-over-year same branch sales growth, with acquisitions contributing the remaining portion of our total sales growth. Our largest end market, the single-family subset of the residential new construction market, grew revenue 21.9% over the same period in 2020. Our commercial end market experienced sales growth of 10.2% during the year ended December 31, 2021 primarily through acquisitions, but we experienced project delays due to macroeconomic concerns surrounding the pandemic, resulting in a decline in same branch sales within this market. These fluctuations are shown in further detail in the "Key Measures of Performance" section below, and impacts from COVID-19 are discussed further in the sections that follow.

We believe there are several trends that should drive long-term growth in the housing market, even if there are temporary periods of slowed growth. These long-term trends include an aging housing stock, population growth, demographic changes, renewed positive attitudes about home ownership, household formation growth and the fact that housing starts remained below long-term historic averages for over a decade following the 2008 recession. We expect that our net revenue, gross profit and operating income will benefit from this growth.

2020 Highlights

Net revenues increased 9.4%, or $141.6 million, while gross profit increased 17.3% to $510.0 million during the year ended December 31, 2020 compared to 2019. We also generated approximately $180.8 million of cash from operating activities, and at December 31, 2020 we had $231.5 million of cash and cash equivalents. We did not draw 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, lower fuel costs and increased sales volume of complementary products. We experienced sales growth year-over-year as reflected in the sales and relative performance metrics detailed below.

The highest level of growth occurred in our multi-family end market which grew by 37.5% for the year ended December 31, 2020 compared to 2019. We grew our largest end market, the single family subset of the residential new construction market, by 5.0% despite the effects of temporary business interruptions early in 2020 due to federal, state and local requirements in response to COVID-19. All of our locations serving the residential new construction end market were operating at December 31, 2020, although some continued to experience limitations depending on their local market. The large commercial end market experienced sales growth of 15.3% during the year ended December 31, 2020 primarily through acquisitions as same branch sales growth lagged resulting from certain production inefficiencies due to COVID-19 social distancing requirements as well as project delays due to macroeconomic concerns surrounding the pandemic. These fluctuations are shown in further detail in the "Key Measures of Performance" section below, and impacts from COVID-19 are discussed further in the sections that follow.

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Key Measures of Performance

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

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.

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Net revenue, cost of sales and gross profit

The components of gross profit for 2021, 2020 and 2019 were as follows (dollars in thousands):

The year-over-year growth in our residential end market was the primary driver of the increase in net revenue during the year ended December 31, 2021 compared to the year ended December 31, 2020 as shown in the Key Measures of Performance section above. Growth in our residential end market was primarily due to selling price increases, higher volume and the continued success of our acquisition strategy. In our commercial end market, challenges associated with the COVID-19 pandemic had an impact as evidenced by the 8.0% decline in same branch sales within this end market. See “Key Factors Affecting Our Operating Results, COVID-19 Impacts” below for further information. Our price/mix metric was positively impacted during the year ended December 31, 2021 as we were able to pass along selling price increases to partially offset rising material costs, especially in the second half of 2021. However, our price/mix improvement was partially offset by a higher volume of insulation sales to production builders. This shift within the single-family end market impacted price/mix as the average insulation selling price for entry level production builder jobs is typically lower than a move-up or custom home builder.

As a percentage of net revenue, gross profit decreased during the year ended December 31, 2021 compared to the year ended December 31, 2020. The building products supply chain has experienced significant disruptions in 2021 due in part to effects of the COVID-19 pandemic. Industry wide supply chain issues continue to impact our operating efficiency, driving our costs higher. In order to meet customer demand during the year, we purchased materials from distributors and home centers at a premium to what we typically would purchase directly from manufacturers. As a result, during the year ended December 31, 2021, we estimate these purchases increased materials expense by approximately $8.8 million, therefore reducing gross profit. While we expect new housing construction will remain supportive of our business in 2022, inflation and material supply chain issues are likely to persist throughout the year. Gross profit in 2021 was also impacted by higher year-over-year fuel and union costs, reducing gross profit by approximately 50 basis points as a percentage of net revenue during the year ended December 31, 2021. In addition, the impact of the February 2021 winter storms had a lingering effect on portions of 2021 as it disrupted our ability to source certain materials needed for spray foam applications. These materials were in short supply after the storms as chemical processing facilities went offline.

Operating Expenses

Operating expenses for 2021, 2020 and 2019 were as follows (dollars in thousands):

Selling

The dollar increase in selling expenses in 2021 was primarily driven by a year-over-year increase in selling wages, benefits and commissions of $13.0 million, or 18.0%, which supported our increased net revenue of 19.1%. Selling expense decreased as a percentage of sales primarily due to a lower current period provision for credit losses in 2021 compared to 2020.

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Administrative

The dollar increase in administrative expenses in 2021 was primarily due to an increase in wages and benefits in the amount of $20.2 million, which was attributable to both acquisitions and organic growth as well as favorable company performance. During 2021, we saw our administrative costs decrease as a percentage of sales primarily due to the leverage gained on these administrative wages.

Amortization

Our intangible assets include non-competes, customer relationships, trade names and backlog. Amortization of intangibles attributable to acquisitions increased by $8.5 million in 2021 resulting from the increase in new intangible assets from acquisitions. See Note 17, Business Combinations, in Item 8, Financial Statements and Supplementary Data, of this Form 10-K for information on our acquisitions.

Other Expense, net

Other expense, net for 2021, 2020 and 2019 was as follows (dollars in thousands):

The year-over-year increase in other expense, net during 2021 was primarily a result of increased debt levels associated with our debt-related financing transactions. Interest expense, net also increased during 2021 due to amortizing our terminated interest rate swap derivatives. See Note 8 and Note 11 to our audited consolidated financial statements included in this Form 10-K for further information regarding debt balances and derivatives, respectively.

Income Tax Provision

Income tax provision and effective tax rates for 2021, 2020 and 2019 were as follows (dollars in thousands):

During the year ended December 31, 2021, our tax rate was favorably impacted by the release of a valuation allowance for a tax filing entity, excess tax benefits from share-based compensation arrangements and statute of limitation expirations of uncertain tax positions.

During the year ended December 31, 2020, our tax rate was favorably impacted by the release of a valuation allowance for a tax filing entity. This favorability was offset by the tax effect of losses incurred by separate companies to which no benefit can be recognized due to a full valuation allowance against the losses as well as a tax shortfall from equity vesting.

Other comprehensive gain (loss), net of tax

Other comprehensive gain (loss), net of tax for 2021, 2020 and 2019 were as follows (in thousands):

During the year ended December 31, 2021, we recorded an unrealized gain, net of taxes, of $6.4 million on our cash flow hedges primarily due to the market's expectations for interest rates in the future relative to our July 2021 swap. We also amortized $3.2 million of the unrealized loss on our terminated cash flow hedges to interest expense, net during the year ended December 31, 2021, not including tax effects of $1.1 million.

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During the year ended December 31, 2020, we recorded an unrealized loss, net of taxes on our now-terminated cash flow hedges primarily due to interest rate declines and market responses to the COVID-19 pandemic of $6.3 million. This loss was offset by an unrealized gain, net of taxes of $3.4 million on our remaining cash flow hedge due to favorable market conditions. We also amortized $1.3 million of the unrealized loss on our terminated cash flow hedges to interest expense, net during the year ended December 31, 2020.

We amortize the unrealized loss on our terminated cash flow hedges at the time of termination over the course of the originally scheduled settlement dates of the terminated swaps. For more information on our cash flow hedges, see "Liquidity and Capital Resources, Derivative Instruments" below.

KEY FACTORS AFFECTING OUR OPERATING RESULTS

Trends in the Construction Industry

Our operating results may vary based on our product mix and the mix of our end markets among new single-family, multi-family and commercial builders and owners of existing homes. We expect to benefit from the continued growth in single-family new residential construction as housing has returned to historic stabilized levels due to a number of factors, including low interest rates, the underproduction of new homes during the housing recovery, low inventory of existing homes for sale and demographic changes. We maintain a mix of business among all types of homebuilders ranging from small custom builders to large regional and national homebuilders as well as a wide range of commercial builders. Net revenue derived from our ten largest homebuilder customers in the United States was approximately 15% for the year ended December 31, 2021. The residential new construction and repair and remodel markets represented approximately 83% of our total net revenue for the year ended December 31, 2021, compared to 82% in the same period in 2020. The remaining portion was attributable to the commercial construction end market.

The industry experienced manufacturer supply constraints for most of the materials we installed during 2021 due to an unanticipated increase in demand as well as manufacturing curtailments due to COVID-19. We anticipate these shortages will continue into 2022. Our results of operations in 2022 are likely to be impacted by the current supply constraints as we may be unable to complete jobs at our preferred pace, but we will continue to respond to the strong demand by continuing to proactively work with our suppliers and customers to offset any potential impact on our operations and profitability. This outlook may change depending on continued increased housing demand and the ability of manufacturers to produce adequate supply.

Cost and Availability of Materials

We typically purchase the materials we use in our business directly from manufacturers. The industry supply of these materials is currently experiencing supply shortages due to strong demand and effects from the COVID-19 pandemic. Manufacturers are currently allocating materials across the industry which affected the pricing of those materials during the year ended December 31, 2021. In order to meet customer demand during the year, we purchased materials from distributors and home centers at a premium to what we typically would purchase directly from manufacturers, therefore reducing gross profit.

In addition, we experience price increases from our suppliers from time to time, including multiple increases over the last two years caused by supply shortages and general economic inflationary pressures. We also experienced unprecedented increased pricing for fiberglass and foam insulation materials in 2021 and expect manufacturers to seek additional price increases in 2022. Increased market pricing, regardless of the catalyst, has and could continue to impact our results of operations in 2022, to the extent that price increases cannot be passed on to our customers. Despite our efforts to raise prices, our selling price increases lagged material cost increases in 2021 until we began to see improvement in our selling prices in the second half of 2021. 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. As of December 31, 2021, we had approximately 9,500 employees, most of whom 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 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 increase our coverage for additional personnel.

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We experienced strong employee retention, turnover and labor efficiency rates in the year ended December 31, 2021. 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. See “COVID-19 Impacts” below for a discussion of the short-term impacts of the current economic climate on our workforce.

COVID-19 Impacts

In December 2019, a novel strain of coronavirus surfaced in Wuhan, China. Since then, the virus has spread globally, including to the United States. In response, the World Health Organization declared the situation a pandemic and the U.S. Secretary of Health and Human Services declared a public health emergency. The COVID-19 pandemic has caused significant volatility, uncertainty and economic disruption. Many public health organizations and international, federal, state and local governments implemented measures to combat the spread of COVID-19 at various times since the beginning of the pandemic. Some of these measures include restrictions on movement such as quarantines, vaccine and/or masking requirements, “stay-at-home” orders and social distancing ordinances and restricting or prohibiting outright some or all forms of commercial and business activity. There is still significant uncertainty surrounding the duration and scope of the pandemic, as well as its continued impact on the economy. 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 limiting.

While the COVID-19 pandemic and related events will likely have a negative effect on us in 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. In the commercial sector, we have experienced delays in the onset of certain large-scale infrastructure programs due to the declining need for such structures and/or project funding declines. Commercial spending rose in 2021, but remains below 2019 levels. Commercial projects could decline in the future if 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 continue to impact our commercial end market.

Our management remains 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. We follow all masking requirements imposed by authorities, most of which have had no adverse effects on our business since wearing protective equipment in the process of completing our installation work is already a common practice in our industry. We have also taken advantage of available technologies which allow some employees the ability to work remotely from home. We comply with regulations from federal, state and local government agencies. Certain protocols have evolved throughout 2021 as vaccines have become available and guidelines from public health authorities such as the Centers for Disease Control are updated. 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 pandemic’s impact on our financial condition, results of operations and cash flows. We have experienced limited business disruptions to date and therefore have not needed to implement significant continuity measures and have not incurred significant related expenditures. Assuming a large 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.

Our corporate office remains fully operational. 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 some employees are still 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.

We expect some impact from the pandemic to our earnings, financial position and cash flows to continue in 2022, however there is much uncertainty surrounding the estimated magnitude of these impacts. We estimate limited impact to our Consolidated Balance Sheets other than a potential reduction in working capital due to the possibility of reduced net revenue and net income. Trade accounts receivable may also be reduced somewhat by lower net revenue and a higher allowance for credit losses due to enhanced risk of collectibility from some customers, although we have not seen a significant impact to date. We anticipate revenue and net income may continue to be negatively impacted into 2022 due to supply constraints and/or material price increases ultimately stemming from the effects of the pandemic, as well as other factors such as high demand for

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housing. 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 making timely payments to vendors given our strong liquidity and large cash reserves. See "Liquidity and Capital Resources" below for further information. Given the continued uncertainty created by the COVID-19 pandemic and its potential effects, it is not possible to estimate the full, adverse impact to our future 2022 sales or other financial results at this time.

Environmental, Social and Governance, Climate Change and Other Factors

According to the Office of Energy Efficiency & Renewable Energy, over $400 billion is spent each year to power homes and commercial structures that consume 75% of all electricity used in the United States and 40% of the nation’s total energy. As a result, U.S. buildings account for 35% of the U.S. carbon dioxide emissions that drive the climate crisis. Insulation is a critical component in the construction of homes and commercial structures. Installing insulation also helps increase energy conservation because it is the best way to prevent energy waste in most homes and commercial structures. Beyond our service offerings, we also recognize that as a good corporate citizen, we have a responsibility to support our communities and be stewards of the environment. Recently, we have transitioned a large portion of our electricity supply to a carbon-free energy source and entered a national waste management program to increase recycling at our facilities, reducing landfill waste.

We are not aware of pending climate-related regulations that would materially affect our business. However, certain effects of climate change that may cause more severe weather events could have a material effect on our operations. For example, whether caused by climate change or not, February 2021 winter storms in the southern United States significantly impacted our operations across the entire state of Texas and disrupted our ability to source certain materials needed for spray foam applications.

Lastly, we expect our selling and administrative expenses to continue to increase as our business grows, which could impact our future operating profitability.

SEASONALITY

We tend to have higher sales during the second half of the year as our homebuilder customers complete construction of homes placed under contract for sale in the traditionally stronger spring selling season. In addition, some of our larger branches operate in states impacted by winter weather and as such experience a slowdown in construction activity during the first quarter of the calendar year. This winter slowdown contributes to traditionally lower sales and profitability in our first quarter. See Part I, Item 1, Business, for further information.

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. As of December 31, 2021, we had cash and cash equivalents of $333.5 million as well as access to $200.0 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 $489.2 million. Our total liquidity is reduced by $5.3 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 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, for information on the potential and currently known impacts on our business and liquidity from the COVID-19 pandemic.

Short-Term Material Cash Requirements

For at least the next twelve months, our primary capital requirements are to fund working capital needs, operating expenses, acquisitions and capital expenditures and to meet principal and interest obligations and make required income tax payments. We may also use our resources to fund our optional stock repurchase program and pay quarterly and annual dividends. During 2022, we anticipate discretionary spending for capital improvements and quarterly dividends to approximate 2021 levels of approximately $37.0 million and $35.0 million, respectively, as well as approximately $27.0 million for our first annual variable dividend to be paid March 31, 2022. In addition, we expect to spend cash and cash equivalents to acquire various

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companies with at least $100.0 million in aggregate net revenue. The amount of cash paid for an acquisition is dependent on various factors, including the size and determined value of the business being acquired.

Firm commitments for funds include $64.8 million in interest and principals payments on long-term debt obligations including our Senior Notes, Term Loan, notes payable to sellers of acquisitions and vehicles purchased under the Master Loan and Security Agreement, the Master Equipment Agreement and the Master Loan Agreements. Additionally, we maintain certain production vehicles under a finance lease structure which will require $2.0 million in interest and principal payments under current agreements in 2022. We lease certain locations, vehicles and equipment under operating lease agreements that will require $25.2 million in funds over the next twelve months. Finally, we have a product supply agreement with a certain vendor that requires us to purchase a minimum of $46.2 million of inventory in 2022. Payments for income taxes cannot be estimated at this time.

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 years ended December 31, 2021, 2020 and 2019. 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 guarantee that such financing will be available on favorable terms, or at all.

Long-Term Material Cash Requirements

Beyond the next twelve months, our principal demands for funds will be to fund working capital needs and operating expenses, to meet principal and interest obligations on our long-term debts and finance leases as they become due or mature, and to make required income tax payments. Additional funds may be spent on acquisitions, capital improvements and dividend payments, at our discretion.

Known obligations beyond the next twelve months include $1,028.1 million in interest and principals payments on long-term debt obligations noted above through 2028, as follows (amounts in thousands):

In addition, our finance leases will require $3.5 million in interest and principal payments under current agreements through 2026. Operating lease obligations will require $49.7 million in payments beyond the next twelve months.

Sources and Uses of Cash and Related Trends

Working Capital

We carefully manage our working capital and operating expenses. As of December 31, 2021 and 2020, our working capital, including cash and cash equivalents, was $551.7 million, or 28.0% of net revenue, and $387.5 million, or 23.4% of net revenue, respectively. The increase in working capital year-over-year was driven primarily by a $102.0 million increase in cash and cash equivalents resulting from the increase in Term Loan debt and positive operating cash flows. Additionally, accounts receivable increased $46.2 million resulting from our increased net revenue, and inventories increased by $65.8 million due to material price inflation, increased selling activity and acquisitions. These increases were partially offset by an increase of $31.2 million in accounts payable primarily due material price inflation and increased sales volume. We continue to look for opportunities to reduce our working capital as a percentage of net revenue.

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The following table presents our cash flows (in thousands):

Cash Flows from Operating Activities

Our primary source of cash provided by operations are revenues generated from installing building products and the resulting operating income generated by these revenues. Operating incomes are adjusted for certain non-cash items, and our cash flows from operations can be impacted by the timing of our cash collections on sales and collection of retainage amounts. The COVID-19 pandemic has not had a material impact to our cash collections to date.

Our primary uses of cash from operating activities include payments for installation materials, compensation costs, leases, income taxes and other general corporate expenditures included in net income.

Net cash provided by operating activities decreased from 2020 to 2021 primarily due to changes in working capital due to

higher volume of inventory purchases to support our growth and increased pricing on inventory due to price inflation on

materials. During the year ended December 31, 2020, we saw a significant increase in cash from operations due to payroll tax deferrals under the CARES Act. This negatively impacted the cash from operations during the year ended December 31, 2021 when we paid a portion of this deferral.

Cash Flows from Investing Activities

Sources of cash from investing activities consists primarily of proceeds from the sales of property and equipment and, periodically, maturities from short term investments. Cash used in investing activities consists primarily of purchases of property and equipment, payments for acquisitions and, periodically, purchases of short term investments.

Net cash used by investing activities increased from 2020 to 2021 primarily due to the increase in payments for acquisitions. We completed 2 additional acquisitions in 2021 compared to 2020, and the size of the acquisitions were generally larger in the year ended December 31, 2021. The amount of cash paid is dependent on various factors, including the size and determined value of the business being acquired. See Note 17, Business Combinations, to our audited consolidated financial statements included in this Form 10-K for more information regarding our business acquisitions in 2021, 2020 and 2019.

Additionally, total cash used for property and equipment increased in 2021, and 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.

Cash Flows from Financing Activities

Our source of cash from financing activities consists of proceeds from the issuances of debt and vehicle and equipment notes payable. Cash used in financing activities consists primarily of debt repayments, acquisition-related obligations, dividends and stock repurchases.

Net cash provided by financing activities increased from 2020 to 2021 primarily due to proceeds on our new Term Loan, which was partially offset by the repayment of our previous term loan agreement. We plan to use the proceeds of the Term Loan to support our operations, pay debt issuance costs and continue our acquisition strategy. We also did not repurchase any shares under our stock repurchase plan during the year ended December 31, 2021. Our net cash provided by financing activities was further offset during the year ended December 31, 2021 by the payment of the first quarterly dividends in our history as a public company and higher acquisition-related obligations due to increased acquisition activity.

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Debt

5.75% Senior Notes due 2028

In September 2019, we issued $300.0 million in aggregate principal amount of 5.75% senior unsecured notes (the “Senior Notes”). The Senior Notes will mature on February 1, 2028 and interest will be payable semi-annually in cash in arrears on February 1 and August 1, commencing on February 1, 2020. The net proceeds from the Senior Notes offering were $295.0 million after debt issuance costs.

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 in an aggregate amount exceeding 2.0% of market capitalization per fiscal year, or in an aggregate amount exceeding certain applicable restricted payment baskets; (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

In December 2021, we entered into a $500 million, seven-year term loan facility due December 2028 (the “Term Loan”) under our credit agreement (the “Term Loan Agreement”), dated as of December 14, 2021 with Royal Bank of Canada as the administrative agent and collateral agent thereunder. The Term Loan amortizes in quarterly principal payments of $1.25 million starting on March 31, 2022, with any remaining unpaid balances due on the maturity date of December 14, 2028. The Term Loan bears interest at either the base rate (which approximated the prime rate) or the Eurodollar rate, plus a margin of (A) 1.25% in the case of base rate loans or (B) 2.25% in the case of Eurodollar rate loans. Proceeds from the Term Loan were used to refinance and repay in full all amounts outstanding under our previous term loan agreement. We intend to use the remaining funds to pay for certain fees and expenses associated with the closing of the Term Loan and for general corporate purposes, including acquisitions and other growth initiatives. As of December 31, 2021, we had $493.3 million, net of unamortized debt issuance costs, due on our Term Loan.

Subject to certain exceptions, the Term Loan will be subject to mandatory prepayments of (i) 100% of the net cash proceeds from issuances or incurrence of debt by the Company or any of its restricted subsidiaries (other than with respect to certain permitted indebtedness (excluding any refinancing indebtedness); (ii) 100% (with step-downs to 50% and 0% based on achievement of specified net leverage ratios) of the net cash proceeds from certain sales or dispositions of assets by the Company or any of its restricted subsidiaries in excess of a certain amount and subject to reinvestment provision and certain other exception; and (iii) 50% (with step-downs to 25% and 0% based upon achievement of specified net leverage ratios) of excess cash flow of the Company and its restricted subsidiaries in excess of $15 million, subject to certain exceptions and limitations.

In September 2019, we entered into an 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. 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 Term Loan Agreement, we entered into a Third Amendment (the “Third Amendment”) to the ABL/Term Loan Intercreditor Agreement with Bank of America, N.A., as ABL Agent for the lenders under the ABL Credit Agreement, and Royal Bank of Canada as collateral agent under the Term Loan Agreement. Including outstanding letters of credit, our remaining availability under the ABL Revolver as of December 31, 2021 was $155.7 million. In February 2022, we amended and extended our ABL Credit Agreement. See Note 19, Subsequent Events, for additional information.

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.

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

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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).

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. The ABL Credit Agreement and the Term Loan Agreement contain 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 in an aggregate amount exceeding 2.0% of market capitalization per fiscal year, or in an aggregate amount exceeding certain applicable restricted payment baskets; (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. At December 31, 2021, we were in compliance with all applicable covenants under the Term Loan Agreement, ABL Credit Agreement and the Senior Notes.

Derivative Instruments

As of December 31, 2021, we had three interest rate swaps. One interest rate swap began July 30, 2021 and has a fixed notional amount of $200.0 million, a fixed rate of 0.51% and a maturity date of April 15, 2030. We also had two interest rate swaps that began December 31, 2021, each with a fixed notional amount of $100.0 million, a fixed rate of 1.37%, and a maturity date of December 15, 2028. Together, these three swaps serve to hedge $400.0 million of the variable cash flows on our variable rate Term Loan through maturity. The assets and liabilities associated with the forward interest rate swap are included in other non-current assets and other current liabilities on the Consolidated Balance Sheets at their fair value amounts as described in Note 10, Fair Value Measurements.

LIBOR is used as a reference rate for our Term Loan, ABL Revolver and our interest rate swap agreements we use to hedge our interest rate exposure. For more information on the discontinuance of LIBOR, see Item 7A. Quantitative and Qualitative Disclosures about Market Risk below.

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 and respective outstanding loan balances relating to our master loan and equipment agreements were $134.5 million and $69.2 million as of December 31, 2021, respectively, and $132.2 million and $67.5 million as of December 31, 2020, respectively. See Note 8 to our audited consolidated financial statements included in this Form 10-K for more information regarding our Master 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 we obtain licenses and permits to perform work in their jurisdictions.

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The following table summarizes our outstanding bonds, letters of credit and cash-collateral (in thousands):

In 2020, we posted $5.3 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.

Critical Accounting Estimates

Management’s discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of our consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. Certain accounting policies involve judgments and uncertainties to such an extent that there is a reasonable likelihood that materially different amounts could have been reported using different assumptions or under different conditions. We evaluate our estimates and assumptions on a regular basis. We base our estimates on historical experience and various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of our assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates and assumptions used in preparation of our consolidated financial statements. We believe the following critical accounting estimate requires judgement and estimation in the preparation of our consolidated financial statements and to be fundamental to our results of operations. See Note 2, Significant Accounting Policies included in Item 8 of the Form 10-K for a summary of all of our significant accounting policies and their effect on our financial statements.

Revenue recognition

The majority of our revenues are recognized when we complete our contracts with customers to install building products and the control of the promised good or service is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services. For contracts that are not complete at the reporting date, we recognize revenue over time utilizing a cost-to-cost input method as we believe this represents the best measure of when goods and services are transferred to the customer. When this method is used, we estimate the costs to complete individual contracts and record as revenue that portion of the total contract price that is considered complete based on the relationship of costs incurred to date to total anticipated costs. Under the cost-to-cost method, the use of estimated costs to complete each contract is a significant variable in the process of determining recognized revenue and can change throughout the duration of a contract due to contract modifications and other factors impacting job completion. Our cost estimation process is based on the knowledge, significant experience and judgement of project management, finance professionals and operational management to assess a variety of factors to determine revenues on uncompleted contracts. Such factors include historical performance, costs of materials and labor, change orders and the nature of the work to be performed. We generally review and reassess our estimates for each uncompleted contract at least quarterly to reflect the latest reliable information available. Changes in these estimates could favorably or unfavorable impact revenues and their related profits.

Business combinations

We have recorded a significant amount of finite lived intangible assets associated with the acquisitions of businesses through our growth strategy. These intangible assets consist of customer relationships, backlog, non-competition agreements and business trademarks and trade names. Fair values and estimated useful lives are assigned to the identified intangible assets at the date of acquisition by financial professionals using either the income approach or the market approach along with certain industry information, professional experience and knowledge. In some instances, the process of assigning values and useful lives requires using judgment and other financial professionals may come to different conclusions. We review intangible assets whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. An impairment loss is recognized when estimated future cash flows expected to result from the use of an asset and its eventual disposition are less than its carrying amount. When impairment is identified, the carrying amount of the asset is reduced to its estimated fair value. Impairment losses would negatively affect earnings.

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Insurance risks

We carry insurance policies for a number of risks, including, but not limited to, workers’ compensation, general liability, vehicle liability, property and our obligation for employee-related health care benefits. Most of our insurance policies contain an element for which we assume a portion of the risk by having high deductibles or a large cap on claims. For a description of our different insurance programs, see Note 2, Significant Accounting Policies in Item 8, Financial Statements and Supplementary Data in this Form 10-K.

Our largest healthcare plan is partially self-funded with an insurance company paying benefits in excess of stop loss limits per individual/family. An accrual for estimated healthcare claims incurred but not reported (“IBNR”) is included within accrued compensation on the Consolidated Balance Sheets and was $3.3 million and $3.1 million as of December 31, 2021 and 2020, respectively.

We participate in multiple workers’ compensation plans covering a significant portion of our business. Under these plans, we use a high deductible program to cover losses above the deductible amount on a per claim basis. We accrue for the estimated losses occurring from both asserted and unasserted claims. Insurance claims and reserves include accruals of estimated settlements for known claims, as well as accruals of actuarial estimates of IBNR claims. In estimating these reserves, historical loss experience and judgments about the expected levels of costs per claim are considered. These claims are accounted for based on actuarial estimates of the undiscounted claims, including IBNR. We believe the use of actuarial methods to account for these liabilities provides a consistent and effective way to measure these highly judgmental accruals. As of December 31, 2021 and 2020, we estimated total short-term and long-term known and IBNR claims for workers' compensation to be $21.4 million and $19.7 million, respectively. As of December 31, 2021 and 2020, offsets of these liabilities were $2.1 million and $1.9 million, respectively, with insurance receivables and indemnification assets for claims under fully insured policies or claims that exceeded the stop loss limit.

We also participate in a high retention general liability insurance program and a high deductible auto insurance program. As of December 31, 2021 and 2020, general liability and auto insurance reserves included in other current and long-term liabilities were $21.9 million and $21.5 million, respectively. As of December 31, 2021 and 2020, offsets of these liabilities were $3.9 million and $4.7 million, respectively, with insurance receivables and indemnification assets for claims under fully insured policies or claims that exceeded the stop loss limit.

Liabilities relating to claims associated with these risks are estimated by considering historical claims experience, including frequency, severity, demographic factors and other actuarial assumptions. In estimating our liability for such claims, we periodically analyze our historical trends, including loss development, and apply appropriate loss development factors to the incurred costs associated with the claims with the assistance of external actuarial consultants. While we do not expect the amounts ultimately paid to differ significantly from our estimates, our reserves and corresponding expenses could be affected if future claim experience differs significantly from historical trends and actuarial assumptions.

We have not made any material changes in our methodology used to establish our insurance reserves during the years ended December 31, 2021 and 2020, and none of the adjustments to our estimates have been material.

Recent Accounting Pronouncements

For a description of recently issued and/or adopted accounting pronouncements, see Note 2, Significant Accounting Policies, to our audited consolidated financial statements included in this Form 10-K.