Installed Building Products, Inc. (IBP) FY 2021 MD&A

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.