UNITED STATES

SECURITIES AND EXCHANGE

COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q


(Mark One)
☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended~~September 30, 2019~~March 31, 2020


☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number: ~~1-36870~~001-36870

TopBuild Corp.

(Exact name of Registrant as Specified in its Charter)

Delaware

(State or Other Jurisdiction of Incorporation or
Organization)

47-3096382

(I.R.S. Employer
Identification No.)

475 North Williamson Boulevard

Daytona Beach, Florida

(Address of Principal Executive Offices)

32114

(Zip Code)

(386) 304-2200

(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common stock, par value $0.01 per share	BLD	~~NYSE~~New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.⌧ Yes ◻ No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ⌧ Yes ◻ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ☒ Accelerated filer ☐ Non-accelerated filer ☐ Smaller reporting company ☐ Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act ◻

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ☒ No

The registrant had outstanding ~~33,947,722~~33,327,207 shares of Common Stock, par value $0.01 per share as of ~~October 25, 2019.~~April 29, 2020.

Table of Contents

TOPBUILD CORP.

TABLE OF CONTENTS


		Page No.
Part I.	Financial Information

Item 1.	Financial Statements (Unaudited)

	Condensed Consolidated Balance Sheets	4

	Condensed Consolidated Statements of Operations	5

	Condensed Consolidated Statements of Cash Flows	6

	Condensed Consolidated Statements of Changes in Equity	7

	Notes to Condensed Consolidated Financial Statements	8

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	2624

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	3429

Item 4.	Controls and Procedures	3430

Part II.	Other Information

Item 1.	Legal Proceedings	3531

Item 1A.	Risk Factors	3531

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	3531

Item 3.	Defaults upon Senior Securities	3531

Item 4.	Mine Safety Disclosures	3532

Item 5.	Other Information	3532

Item 6.	Exhibits	3532

Index to Exhibits		3633

Signature		3734

Table of Contents

GLOSSARY

We use acronyms, abbreviations, and other defined terms throughout this quarterly report on Form 10-Q, which are defined in the glossary below:


Term		Definition
~~2017 ASR Agreement~~2015 LTIP		~~$100 million accelerated~~2015 Long-Term Incentive program authorizes the Board to grant stock options, stock appreciation rights, restricted shares, restricted share ~~repurchase agreement with Bank of America, N.A.~~units, performance awards, and dividend equivalents
2017 Repurchase Program		$200 million share repurchase program authorized by the Board on February 24, 2017
2018 ASR Agreement		$50 million accelerated share repurchase agreement with JPMorgan Chase Bank, N.A.
2019 Repurchase Program		$200 million share repurchase program authorized by the Board on February 22, 2019
~~ADO~~2019 ASR Agreement		~~ADO Products, LLC~~$50 million accelerated share repurchase agreement with Bank of America, N.A.
Amended Credit Agreement		Senior secured credit agreement and related security and pledge agreement dated ~~May 5, 2017, as amended~~ March ~~28, 2018, with the Lenders~~20, 2020
Annual Report		Annual report filed with the SEC on Form 10-K pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
ASC		Accounting Standards Codification
ASU		Accounting Standards Update
Board		Board of Directors of TopBuild
BofA		Bank of America, N.A.
Cooper		Cooper Glass Company, LLC
Current Report		Current report filed with the SEC on Form 8-K pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
EBITDA		Earnings before ~~income~~interest, taxes, depreciation, and amortization
EcoFoam		Bella Insulutions Inc., DBA EcoFoam/Insulutions
Exchange Act		The Securities Exchange Act of 1934, as amended
FASB		Financial Accounting Standards Board
~~FCCR~~		Fixed charge coverage ratio is defined in the “Amended Credit Agreement” as the ratio of EBITDA less capital expenditures, and income taxes paid to the sum of cash interest paid, debt principal payments and restricted payments made excluding stock repurchases
GAAP		Generally accepted accounting principles in the United States of America
Hunter		Hunter Installation
IBR		Incremental borrowing rate, as defined in ASC ~~842.~~842
Lenders		Bank of America, N.A., together with the other lenders party to the "Amended Credit Agreement"
LIBOR		London interbank offered rate
Net Leverage Ratio		As defined in the “Amended Credit Agreement,” the ratio of outstanding indebtedness, less up to ~~$75~~$100 million of unrestricted cash, to EBITDA
NYSE		New York Stock Exchange
Original Credit Agreement		Senior secured credit agreement and related security and pledge agreement dated May 5, 2017, as amended March 28, 2018
Quarterly Report		Quarterly report filed with the SEC on Form 10-Q pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Revolving Facility		Senior secured revolving credit facilities available under the Amended Credit Agreement, of ~~$250~~$450 million with applicable sublimits for letters of credit and swingline ~~loans.~~loans
ROU		Right of use ~~asset,~~(asset), as defined in ASC ~~842.~~842
RSA		Restricted stock award
Santa Rosa		Santa Rosa Insulation and Fireproofing, LLC
SEC		United States Securities and Exchange Commission
Secured Leverage Ratio		As defined in the “Amended Credit Agreement,” the ratio of outstanding indebtedness, including letters of credit, to EBITDA
Senior Notes		TopBuild's 5.625% senior unsecured notes due on May 1, 2026
TopBuild		TopBuild Corp. and its wholly-owned consolidated domestic subsidiaries. Also, the "Company," "we," "us," and "our"
~~USI~~		~~United Subcontractors, Inc.~~
Viking		Viking Insulation Co.

Table of Contents

PART I – FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

TOPBUILD CORP.

CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)

(In thousands except share data)


	As of				As of
	September 30,		December 31,		March 31,		December 31,
	2019		2018		2020		2019
ASSETS
Current assets:
Cash and cash equivalents	$	171,591	$	100,929	$	187,039	$	184,807
Receivables, net of an allowance for doubtful accounts of $5,423 and $3,676 at September 30, 2019, and December 31, 2018, respectively		454,640		407,106
Receivables, net of an allowance for credit losses of $7,200 at March 31, 2020, and allowance for doubtful accounts of $4,854 at December 31, 2019						431,649		428,844
Inventories, net		146,702		168,977		152,721		149,078
Prepaid expenses and other current assets		16,457		27,685		10,918		17,098
Total current assets		789,390		704,697		782,327		779,827

Right of use assets		89,178		—		86,080		87,134
Property and equipment, net		175,274		167,961		185,575		178,080
Goodwill		1,367,918		1,364,016		1,379,831		1,367,918
Other intangible assets, net		185,844		199,387		182,229		181,122
Deferred tax assets, net		11,758		13,176		4,359		4,259
Other assets		4,760		5,294		11,439		5,623
Total assets	$	2,624,122	$	2,454,531	$	2,631,840	$	2,603,963

LIABILITIES AND EQUITY
Current liabilities:
Accounts payable	$	300,125	$	313,172	$	305,614	$	307,970
Current portion of long-term debt		33,262		26,852		23,091		34,272
Accrued liabilities		112,286		104,236		107,327		98,418
Short-term lease liabilities		36,860		—		35,051		36,094
Total current liabilities		482,533		444,260		471,083		476,754

Long-term debt		701,955		716,622		699,750		697,955
Deferred tax liabilities, net		173,493		176,212		174,230		175,263
Long-term portion of insurance reserves		44,405		43,434		50,928		45,605
Long-term lease liabilities		55,362		—		54,025		54,010
Other liabilities		1,167		1,905		2,007		1,487
Total liabilities		1,458,915		1,382,433		1,452,023		1,451,074

Commitments and contingencies

Equity:
Preferred stock, $0.01 par value: 10,000,000 shares authorized; 0 shares issued and outstanding at September 30, 2019 and December 31, 2018		—		—
Common stock, $0.01 par value: 250,000,000 shares authorized; 38,865,055 shares issued and 33,951,988 outstanding at September 30, 2019, and 38,676,586 shares issued and 34,573,596 outstanding at December 31, 2018		388		387
Treasury stock, 4,913,067 shares at September 30, 2019, and 4,102,990 shares at December 31, 2018, at cost		(278,784)		(216,607)
Preferred stock, $0.01 par value: 10,000,000 shares authorized; 0 shares issued and outstanding at March 31, 2020 and December 31, 2019						—		—
Common stock, $0.01 par value: 250,000,000 shares authorized; 38,982,600 shares issued and 33,326,284 outstanding at March 31, 2020, and 38,884,530 shares issued and 33,489,769 outstanding at December 31, 2019						389		388
Treasury stock, 5,656,316 shares at March 31, 2020, and 5,394,761 shares at December 31, 2019, at cost						(351,645)		(330,018)
Additional paid-in capital		856,726		846,451		850,665		849,657
Retained earnings		586,877		441,867		680,408		632,862
Total equity		1,165,207		1,072,098		1,179,817		1,152,889
Total liabilities and equity	$	2,624,122	$	2,454,531	$	2,631,840	$	2,603,963

See notes to our unaudited condensed consolidated financial statements.

Table of Contents

TOPBUILD CORP.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

(In thousands except share and per common share data)


	Three Months Ended September 30,				Nine Months Ended September 30,				Three Months Ended March 31,
	2019		2018		2019		2018		2020		2019
Net sales	$	682,330	$	647,289	$	1,961,771	$	1,744,702	$	653,228	$	619,330
Cost of sales		502,999		485,424		1,451,822		1,326,777		481,272		463,635
Gross profit		179,331		161,865		509,949		417,925		171,956		155,695

Selling, general, and administrative expense		98,886		95,648		296,846		274,134		101,967		99,077
Operating profit		80,445		66,217		213,103		143,791		69,989	��	56,618

Other income (expense), net:
Interest expense		(9,507)		(9,381)		(28,740)		(19,026)		(8,742)		(9,602)
Loss on extinguishment of debt										(233)		—
Other, net		653		178		1,512		292		472		333
Other expense, net		(8,854)		(9,203)		(27,228)		(18,734)		(8,503)		(9,269)
Income before income taxes		71,591		57,014		185,875		125,057		61,486		47,349

Income tax expense		(16,615)		(14,356)		(40,864)		(28,859)		(10,715)		(9,366)
Net income	$	54,976	$	42,658	$	145,011	$	96,198	$	50,771	$	37,983

Net income per common share:
Basic	$	1.63	$	1.22	$	4.27	$	2.74	$	1.53	$	1.11
Diluted	$	1.60	$	1.19	$	4.20	$	2.69	$	1.51	$	1.09

Weighted average shares outstanding:
Basic		33,790,857		35,091,388		33,977,464		35,084,694		33,168,453		34,169,315
Diluted		34,367,902		35,789,383		34,541,635		35,815,357		33,599,847		34,703,289

See notes to our unaudited condensed consolidated financial statements.

Table of Contents

TOPBUILD CORP.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(In thousands)


	Nine Months Ended September 30,				Three Months Ended March 31,
	2019		2018		2020		2019
Cash Flows Provided by (Used in) Operating Activities:
Net income	$	145,011	$	96,198	$	50,771	$	37,983
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		39,005		27,133		14,190		12,475
Share-based compensation		11,411		8,244		3,908		2,972
Loss on extinguishment of debt						233		—
Loss on sale or abandonment of property and equipment		885		764		383		487
Amortization of debt issuance costs		1,169		812		328		390
Change in fair value of contingent consideration		(119)		(373)
Provision for bad debt expense		5,697		3,003		1,670		1,676
Loss from inventory obsolescence		1,794		1,375		529		1,109
Deferred income taxes, net		(381)		(708)		(39)		95
Change in certain assets and liabilities
Receivables, net		(51,585)		(46,993)		(5,048)		(23,341)
Inventories, net		20,637		(15,333)		(3,964)		7,125
Prepaid expenses and other current assets		10,003		(5,560)		6,193		11,192
Accounts payable		(12,529)		17,768		(4,173)		(31,407)
Accrued liabilities		10,758		10,304		9,981		2,100
Other, net		1,023		(601)		(2,032)		666
Net cash provided by operating activities		182,779		96,033		72,930		23,522

Cash Flows Provided by (Used in) Investing Activities:
Purchases of property and equipment		(34,100)		(42,379)		(15,892)		(10,213)
Acquisition of businesses, net of cash acquired of $15,756 in 2018		(6,452)		(500,666)
Acquisition of businesses						(20,526)		—
Proceeds from sale of property and equipment		2,239		502		194		75
Other, net		25		31		—		16
Net cash used in investing activities		(38,288)		(542,512)		(36,224)		(10,122)

Cash Flows Provided by (Used in) Financing Activities:
Proceeds from issuance of long-term debt		9,998		520,104		300,000		—
Repayment of long-term debt		(19,424)		(13,097)		(307,668)		(5,601)
Payment of debt issuance costs		—		(7,819)		(2,280)		—
Proceeds from revolving credit facility		—		90,000
Repayment of revolving credit facility		—		(90,000)
Taxes withheld and paid on employees' equity awards		(11,135)		(5,433)		(10,399)		(5,578)
Repurchase of shares of common stock		(52,177)		(9,493)		(14,127)		(4,622)
Payment of contingent consideration		(1,091)		(841)		—		(250)
Net cash (used in) provided by financing activities		(73,829)		483,421
Net cash used in financing activities						(34,474)		(16,051)

Cash and Cash Equivalents
Increase for the period		70,662		36,942
Increase (decrease) for the period						2,232		(2,651)
Beginning of period		100,929		56,521		184,807		100,929
End of period	$	171,591	$	93,463	$	187,039	$	98,278

Supplemental disclosure of noncash activities:
Leased assets obtained in exchange for new operating lease liabilities	$	120,726	$	—	$	9,167	$	105,249
Accruals for property and equipment		102		546		496		441

See notes to our unaudited condensed consolidated financial statements.

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TOPBUILD CORP.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (Unaudited)

(In thousands except share data)

Common

Treasury

Additional

Stock

Stock

Paid-in

Retained

($0.01 par value)

at cost

Capital

Earnings

Equity
Balance at December 31, 2017

$
386

$
(141,582)

$
830,600

$
307,115

$
996,519
Net income

—

—

—

26,388

26,388
Share-based compensation

—

—

2,402

—

2,402
Issuance of 79,010 restricted share awards under long-term equity incentive plan

1

—

(1)

—

—
Repurchase of 13,657 shares pursuant to the settlement of the 2017 ASR Agreement

—

(20,000)

20,000

—

—
83,754 shares withheld to pay taxes on employees' equity awards

—

—

(4,514)

—

(4,514)
Balance at March 31, 2018

$
387

$
(161,582)

$
848,487

$
333,503

$
1,020,795
Net income

—

—

—

27,152

27,152
Share-based compensation

—

—

2,995

—

2,995
228 shares withheld to pay taxes on employees' equity awards

—

—

(17)

—

(17)
Balance at June 30, 2018

$
387

$
(161,582)

$
851,465

$
360,655

$
1,050,925
Net income

—

—

—

42,658

42,658
Share-based compensation

—

—

2,847

—

2,847
Repurchase of 142,780 shares pursuant to the 2017 Repurchase Program

—

(9,493)

—

—

(9,493)
13,447 shares withheld to pay taxes on employees' equity awards

—

—

(902)

—

(902)
Balance at September 30, 2018

$
387

$
(171,075)

$
853,410

$
403,313

$
1,086,035


	Common		Treasury		Additional
	Stock		Stock		Paid-in		Retained
	($0.01 par value)		at cost		Capital		Earnings		Equity
Balance at December 31, 2018	$	387	$	(216,607)	$	846,451	$	441,867	$	1,072,098
Net income		—		—		—		37,983		37,983
Share-based compensation		—		—		2,972		—		2,972
Issuance of 112,270 restricted share awards under long-term equity incentive plan		1		—		(1)		—		—
Repurchase of 176,327 shares pursuant to the settlement of the 2018 ASR Agreement		—		(10,000)		10,000		—		—
Repurchase of 72,791 shares pursuant to the 2019 Repurchase Program		—		(4,622)		—		—		(4,622)
105,615 shares withheld to pay taxes on employees' equity awards		—		—		(5,578)		—		(5,578)
Balance at March 31, 2019	$	388	$	(231,229)	$	853,844	$	479,850	$	1,102,853

Balance at December 31, 2018

$
387

$
(216,607)

$
846,451

$
441,867

$
1,072,098
Net income

—

—

—

37,983

37,983
Share-based compensation

—

—

2,972

—

2,972
Issuance of 112,270 restricted share awards under long-term equity incentive plan

1

—

(1)

—

—
Repurchase of 176,327 shares pursuant to the settlement of the 2018 ASR Agreement

—

(10,000)

10,000

—

—
Repurchase of 72,791 shares pursuant to the 2019 Repurchase Program

—

(4,622)

—

—

(4,622)
105,615 shares withheld to pay taxes on employees' equity awards

—

—

(5,578)

—

(5,578)
Balance at March 31, 2019

$
388

$
(231,229)

$
853,844

$
479,850

$
1,102,853
Net income

—

—

—

52,051

52,051
Share-based compensation

—

—

4,513

—

4,513
Repurchase of 196,885 shares pursuant to the 2019 Repurchase Program

—

(14,878)

—

—

(14,878)
54,811 shares withheld to pay taxes on employees' equity awards

—

—

(2,893)

—

(2,893)
Balance at June 30, 2019

$
388

$
(246,107)

$
855,464

$
531,901

$
1,141,646
Net income

—

—

—

54,976

54,976
Share-based compensation

—

—

3,926

3,926
Repurchase of 364,074 shares pursuant to the 2019 Repurchase Program

—

(32,677)

—

—

(32,677)
43,037 shares withheld to pay taxes on employees' equity awards

—

—

(2,664)

—

(2,664)
Balance at September 30, 2019

$
388

$
(278,784)

$
856,726

$
586,877

$
1,165,207


Balance at December 31, 2019	$	388	$	(330,018)	$	849,657	$	632,862	$	1,152,889
Net income		—		—		—		50,771		50,771
Share-based compensation		—		—		3,908		—		3,908
Cumulative-effect of accounting change		—		—		—		(3,225)		(3,225)
Issuance of 63,780 restricted share awards under long-term equity incentive plan		1		—		(1)		—		—
Repurchase of 73,455 shares pursuant to the settlement of the 2019 ASR Agreement		—		(7,500)		7,500		—		—
Repurchase of 188,100 shares pursuant to the 2019 Repurchase Program		—		(14,127)		—		—		(14,127)
97,144 shares withheld to pay taxes on employees' equity awards		—		—		(10,399)		—		(10,399)
Balance at March 31, 2020	$	389	$	(351,645)	$	850,665	$	680,408	$	1,179,817

See notes to our unaudited condensed consolidated financial statements.

Table ofContents

TOPBUILD CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

1. BASIS OF PRESENTATION

TopBuild ~~is a Delaware corporation incorporated~~was formed on June 30, 2015, and is listed on the NYSE under the ticker symbol “BLD.” We report our business in 2 segments: Installation and Distribution. Our Installation segment primarily installs insulation and other building products. Our Distribution segment primarily sells and distributes insulation and other building products. Our segments are based on our operating units, for which financial information is regularly evaluated by our chief operating decision maker.

In our opinion, the accompanying unaudited condensed consolidated financial statements contain all adjustments, of a normal recurring nature, necessary to state fairly our financial position as of ~~September 30, 2019,~~March 31, 2020, our results of operations for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2020 and 2019 ~~and 2018,~~ and cash flows for the ~~nine~~three months ended ~~September 30, 2019~~March 31, 2020 and ~~2018.~~2019. The condensed consolidated balance sheet at December 31, ~~2018,~~2019, was derived from our audited financial statements, but does not include all disclosures required by GAAP.

These condensed consolidated financial statements and related notes should be read in conjunction with the audited Consolidated Financial Statements included in the Company’s Annual Report for the year ended December 31, ~~2018.~~2019, as filed with the SEC on February 25, 2020.

Liquidity and Impact of COVID-19

During the quarter ended March 31, 2020, the Company began to see impacts from the economic slowdown as a result of the COVID-19 pandemic. Subsequent to March 31, 2020, the United States has continued to implement measures in response to the COVID-19 pandemic, including enhanced social distancing guidelines and additional stay-at-home orders in various municipalities, counties and states. To date, with the exception of a few states, residential and commercial construction has been deemed an essential service. In those locations, the Company continues to operate. Management continues to monitor operations and evaluate every aspect of the business, however the full extent of the impact that the COVID-19 pandemic will have on our results of operations, financial condition and cash flows is unknown and will be highly dependent on the duration and magnitude of disruptions for the remainder of 2020. However, 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 working capital needs, despite the current reductions in economic activity due to COVID-19.

2. ACCOUNTING POLICIES

Financial Statement Presentation. Our condensed consolidated financial statements have been developed in conformity with GAAP, which requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and disclosures of contingent liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting period. Actual results could differ materially from these estimates. All intercompany transactions between TopBuild entities have been eliminated.

~~Business Combinations.~~ The purchase price for business combinations is allocated to the estimated fair values of acquired tangible and intangible assets, including goodwill, and liabilities assumed. These estimates include, but are not limited to, discount rates, projected future revenue growth, cost synergies and expected cash flows, customer attrition rates, useful lives and other prospective information. Additionally, we recognize customer relationships, trademarks and trade names, and non-competition agreements as identifiable intangible assets, which are recorded at fair value as of the transaction date. The fair value of these intangible assets is determined primarily using the income approach and using current industry information. Goodwill is recorded when consideration transferred exceeds the fair value of identifiable assets and liabilities. Measurement-period adjustments to assets acquired and liabilities assumed with a corresponding offset to goodwill are recorded in the period in which they occur, which may include up to one year from the acquisition date. Contingent consideration is recorded at fair value at the acquisition date.Recently Adopted Accounting Pronouncements

Credit Losses

~~Share-based Compensation.~~ ~~Our share-based compensation program currently consists~~

In June 2016, the FASB issued ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326), Measurement of ~~RSAs and stock options. Share-based compensation expense is reported~~Credit Losses on Financial Instruments,” which replaces the current incurred loss methodology with an expected loss methodology, referred to as the current expected credit loss (CECL) methodology. We adopted Topic 326 on January 1, 2020, using the modified retrospective method, which resulted in selling, general, and administrative expense. We do not capitalize any compensation cost related to share-based compensation awards. The income tax benefits and deficiencies associated with share-based awards are reporteda $3.2 million cumulative-effect adjustment recorded through retained earnings as ~~a component~~ of income tax expense. Excess tax benefits and deficiencies are included in net cash provided by (used in) operating activities while shares withheld for tax-withholding are reported in financing activities under the ~~caption “Taxes withheld and paid on employees’ equity awards” in our condensed consolidated statements~~beginning of ~~cash flows. Award forfeitures are accounted for in~~ the ~~period they occur.~~ quarter ended March 31, 2020.

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TOPBUILD CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

~~The following table details our award types and accounting policies:~~We measure the expected credit losses on accounts receivable by segment, using historical loss rate information adjusted for current conditions, with changes in the allowance recorded as a provision for (or reversal of) credit loss expense. Expected losses are charged against the allowance when management believes a receivable is uncollectible. Receivables, net are presented net of certain allowances, including allowance for credit losses.

Goodwill Impairment
~~Award Type:~~	~~Fair Value Determination~~	~~Vesting~~	Expense Recognition‡	Expense Measurement
~~Restricted Share Awards~~
~~Service Condition~~	~~Closing stock price on date of grant~~	~~Ratably;~~ ~~3 or 5 years~~	~~Straight-line~~	~~Fair value at grant date~~
~~Performance Condition~~	~~Closing stock price on date of grant~~	~~Cliff;~~ ~~3 years~~	Straight-line; Adjusted based on meeting or exceeding performance targets	~~Evaluated quarterly;~~ ~~0 - 200% of fair value at grant date depending on performance~~
~~Market Condition~~	~~Monte-Carlo Simulation~~	~~Cliff;~~ ~~3 years~~	Straight-line; Recognized even if condition is not met	~~Fair value at grant date~~
~~Stock Options†~~	~~Black-Scholes Options Pricing Model~~	~~Ratably;~~ ~~3 or 5 years~~	~~Straight-line~~	~~Fair value at grant date~~

†~~Stock options expire no later than 10 years after the grant date.~~

In January 2017, the FASB issued ASU 2017-04, “Intangibles – Goodwill and Other (Topic 350), Simplifying the Test for Goodwill Impairment.” The new standard simplifies the subsequent measurement of goodwill by eliminating the second step of the goodwill impairment test. This update was effective for us beginning January 1, 2020, and did not have a material impact on our financial position and results of operations.

‡

Fair Value

~~Expense is reversed if award is forfeited prior~~

In August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820), Disclosure Framework –Changes to ~~vesting.~~the Disclosure Requirements for Fair Value Measurement.” The new standard modifies the disclosure requirements on fair value measurements in Topic 820, Fair Value Measurement, including adjustments to Level 3 fair value measurement disclosures as well as the removal of disclosures around Level 1 and Level 2 transfers. This update was effective for us beginning January 1, 2020, and did not have a material impact on our financial position and results of operations.

Recently Issued Accounting Pronouncements Not Yet Adopted

In December 2019, the FASB issued ASU 2019-12, “Income Taxes (Topic 740), Simplifying the Accounting for Income Taxes.” This standard simplifies the accounting for income taxes by removing certain exceptions to the general principles included in current guidance, as well as improving consistent application of and simplifying GAAP for other areas by clarifying and amending existing guidance. This update is effective for us beginning January 1, 2021, with early adoption permitted. We have not yet selected an adoption date, and we are currently evaluating the effect of adoption of this standard on our financial position and results of operations.

~~Revenue Recognition~~

3. REVENUE RECOGNITION

Revenue is disaggregated between our Installation and Distribution ~~segments. A reconciliation~~segments and further based on market and product, as we believe this best depicts how the nature, amount, timing, and uncertainty of revenue and cash flows are affected by economic factors.The following tables present our revenues disaggregated ~~revenue~~ by ~~segment is included in~~ ~~Note 6 – Segment Information.~~market (in thousands):


	Three Months Ended March 31, 2020
		Installation		Distribution		Eliminations		Total
Residential	$	373,281	$	162,456	$	(29,006)	$	506,731
Commercial		102,592		51,767		(7,862)		146,497
Net sales	$	475,873	$	214,223	$	(36,868)	$	653,228


	Three Months Ended March 31, 2019
		Installation		Distribution		Eliminations		Total
Residential	$	349,874	$	153,778	$	(27,516)	$	476,136
Commercial		99,509		50,686		(7,001)		143,194
Net sales	$	449,383	$	204,464	$	(34,517)	$	619,330

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TOPBUILD CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

The following tables present our revenues disaggregated by product (in thousands):


	Three Months Ended March 31, 2020
		Installation		Distribution		Eliminations		Total
Insulation and accessories	$	369,996	$	180,249	$	(30,059)	$	520,186
Glass and windows		41,319		—		—		41,319
Gutters		18,930		19,991		(5,387)		33,534
All other		45,628		13,983		(1,422)		58,189
Net sales	$	475,873	$	214,223	$	(36,868)	$	653,228


	Three Months Ended March 31, 2019
		Installation		Distribution		Eliminations		Total
Insulation and accessories	$	349,956	$	169,582	$	(27,834)	$	491,704
Glass and windows		37,868		—		—		37,868
Gutters		18,923		18,585		(5,587)		31,921
All other		42,636		16,297		(1,096)		57,837
Net sales	$	449,383	$	204,464	$	(34,517)	$	619,330

We recognize revenue for our Installation segment ~~using~~over time as the ~~percentage of completion method of accounting~~related performance obligation is satisfied with respect to each particular order within a given customer’s ~~contract,~~contract. Progress toward complete satisfaction of the performance obligation is measured using a cost-to-cost measure of progress method. The cost input is based on the amount of material installed at that customer’s location and the associated labor costs, as compared to the total expected cost for the particular order. Revenue is recognized ~~over time~~ as the customer is able to receive and utilize the benefits provided by our services. Each contract contains one or more individual orders, which are based on services delivered. When a contract modification is made, typically the remaining goods or services are considered distinct and we recognize revenue for the modification as a separate performance obligation. When ~~insulation~~material and installation services are bundled in a contract, we combine these items into one performance obligation as the overall promise is to transfer the combined item.

Revenue from our Distribution segment is recognized when title to products and risk of loss transfers to our customers. This represents the point in time when the customer is able to direct the use of and obtain substantially all the benefits from the product. The determination of when control is deemed transferred depends on the shipping terms that are agreed upon in the contract.

At time of sale, we record estimated reductions to revenue for customer programs and incentive offerings, including special pricing and other volume-based incentives based on historical experience, which is continuously adjusted. The duration of our contracts with customers is relatively short, generally less than a 90-day period, therefore there is not a significant financing component when considering the determination of the transaction price which gets allocated to the individual performance obligations, generally based on standalone selling prices. Additionally, we consider shipping costs charged to a customer as a fulfillment cost rather than a promised service and expense as incurred. Sales taxes, when incurred, are recorded as a liability and excluded from revenue on a net basis.

We record a contract asset when we have satisfied our performance obligation prior to billing and a contract liability ~~generally~~ when a customer payment is received prior to the satisfaction of our performance obligation. The difference between the beginning and ending balances of our contract assets and liabilities primarily results from the timing of our performance and the customer’s payment.Our remaining performance obligations are expected to be recognized within the next twelve months.

910

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TOPBUILD CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

The following table represents our contract assets and contract liabilities with customers, in thousands:


	Included in Line Item on	As of				Included in Line Item on	As of
	Condensed Consolidated	September 30,		December 31,		Condensed Consolidated	March 31,		December 31,
	Balance Sheets	2019		2018		Balance Sheets	2020		2019
Contract Assets:
Receivables, unbilled	Receivables, net	$	62,072	$	61,339	Receivables, net	$	56,608	$	57,153

Contract Liabilities:
Deferred revenue	Accrued liabilities	$	16,685	$	19,963	Accrued liabilities	$	15,533	$	16,139

~~Our contract liabilities are normally recognized to net sales in the immediately subsequent reporting period due to the generally short-term nature of our contracts with customers.~~

~~Recently Adopted Accounting Pronouncements:~~

~~Leases~~

In February 2016 the FASB issued ASU 2016-02, “Leases.” This standard requires a lessee to recognize certain leases on its balance sheet. Effective January 1, 2019, we adopted ASU 2016-02 using the modified retrospective transition method with the optional transition relief provided in targeted improvements ASU 2018-11, which allows the new standard to be applied in financial year 2019. Adoption of the new standard resulted in the recognition of ROU assets and lease liabilities of $99.1 million and $101.6 million, respectively, as of January 1, 2019 on our unaudited condensed consolidated balance sheet. There was 0 cumulative adjustment required to be recorded to our beginning retained earnings balance. Adoption of this standard did not materially impact our results of operations or cash flows for any periods presented.

We elected certain practical expedients allowed under ASC 842 – Leases. As such, we did not reassess whether any existing contracts are or contain leases, the lease classification of existing leases, or the initial direct costs for any existing leases. In addition, we elected by class of underlying asset to not separate fixed non-lease components from the lease component. Further, for all leases with an initial term of 12 months or less, we elected not to record any right of use asset or lease liability. We declined the option to use hindsight in determining lease term, assessing likelihood that a lease purchase option will be exercised or in assessing impairment of right of use asset for all classes of assets. To initially measure our lease liability, we used our IBR at January 1, 2019 based on the remaining lease term for all existing leases. See ~~Note 7 – Leases~~ ~~for additional information.~~

~~Recently Issued Accounting Pronouncements Not Yet Adopted:~~

In June 2016 the FASB issued ASU 2016-13, “Financial Instruments - Credit Losses”. This guidance introduces a current expected credit loss (CECL) model for the recognition of impairment losses on financial assets, including trade receivables. The CECL model replaces current GAAP’s incurred loss model. Under CECL, companies will record an allowance through current earnings for the expected credit loss for the life of the financial asset upon initial recognition of the financial asset. This update is effective for us at the beginning of 2020 with early adoption permitted at the beginning of 2019. We plan to adopt this standard on January 1, 2020 with a cumulative adjustment to our beginning retained earnings balance. We have begun our initial evaluation of financial assets subject to this guidance and are developing a new accounting policy for CECL recognition. We are still determining the impact to our financial position upon adoption.

In January 2017 the FASB issued ASU 2017-04, “Simplifying the Test for Goodwill Impairment.” The new standard simplifies the subsequent measurement of goodwill by eliminating the second step of the goodwill impairment test. This update is effective for us beginning January 1, 2020. Early adoption is permitted, and the new standard will be applied on a prospective basis. We plan to adopt this standard on January 1, 2020, and we do not anticipate that the ~~adoption of this standard will have a material impact~~ ~~on our financial position and results of operations.~~

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TOPBUILD CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

In August 2018 the FASB issued ASU 2018-13, “Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement.” The new standard modifies the disclosure requirements on fair value measurements in Topic 820, Fair Value Measurement, including adjustments to Level 3 fair value measurement disclosures as well as the removal of disclosures around Level 1 and Level 2 transfers. This update is effective for us beginning January 1, 2020 with early adoption permitted. The amendments to the guidance will be applied on a prospective or retrospective basis, in accordance with the requirements ~~of thisstandard.We plan to adopt this standard on January 1, 2020, and we do not anticipate that the adoption of this standard will have a material impact on our financial position and results of operations.~~

3.4. GOODWILL AND OTHER INTANGIBLES

We have 2 reporting units which are also our operating and reporting segments: Installation and Distribution. Both reporting units contain goodwill. Assets acquired and liabilities assumed are assigned to the applicable reporting unit based on whether the acquired assets and liabilities relate to the operations of and determination of the fair value of such unit. Goodwill assigned to the reporting unit is the excess of the fair value of the acquired business over the fair value of the individual assets acquired and liabilities assumed for the reporting unit.

~~The estimated fair values of the 2 reporting units substantially exceeded their respective carrying values based on the most recent annual impairment test which occurred in~~In the fourth quarter of ~~2018.~~ 2019, we performed an annual assessment on our goodwill resulting in 0 impairment.

Changes in the carrying amount of goodwill for the ~~nine~~three months ended ~~September 30, 2019,~~March 31, 2020 by segment, were as follows, in thousands:



	Gross Goodwill				Gross Goodwill		Accumulated		Net Goodwill		Gross Goodwill				Gross Goodwill		Accumulated		Net Goodwill
	at				at		Impairment		at		at				at		Impairment		at
	December 31, 2018		Additions		September 30, 2019		Losses		September 30, 2019		December 31, 2019		Additions		March 31, 2020		Losses		March 31, 2020
Goodwill, by segment:
Installation	$	1,679,654	$	3,935	$	1,683,589	$	(762,021)	$	921,568	$	1,683,589	$	11,913	$	1,695,502	$	(762,021)	$	933,481
Distribution		446,383		(33)		446,350		—		446,350		446,350		—		446,350		—		446,350
Total goodwill	$	2,126,037	$	3,902	$	2,129,939	$	(762,021)	$	1,367,918	$	2,129,939	$	11,913	$	2,141,852	$	(762,021)	$	1,379,831

See Note 13 – Business Combinations for goodwill recognized on acquisitions that occurred during the quarter.

Other intangible assets, net includes customer relationships, non-compete agreements, and trademarks / trade names. The following table sets forth our other intangible assets, in thousands:


	As of				As of
	September 30, 2019		December 31, 2018		March 31, 2020		December 31, 2019
Gross definite-lived intangible assets	$	220,882	$	218,882	$	227,761	$	221,382
Accumulated amortization		(35,038)		(19,495)		(45,532)		(40,260)
Net definite-lived intangible assets		185,844		199,387		182,229		181,122
Indefinite-lived intangible assets not subject to amortization		—		—		—		—
Other intangible assets, net	$	185,844	$	199,387	$	182,229	$	181,122

The following table sets forth our amortization expense, in thousands:

Three Months Ended September 30,

Nine Months Ended September 30,


2019

2018

2019

2018
Amortization expense

$
5,197

$
5,242

$
15,543

$
10,536

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TOPBUILD CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

4.5. LONG-TERM DEBT

The following table reconciles the principal balances of our outstanding debt to our condensed consolidated balance sheets, in thousands:


	As of				As of
	September 30,		December 31,		March 31,		December 31,
Principal debt balances:	2019		2018
Senior Notes	$	400,000	$	400,000
					2020		2019
Senior Notes - 5.625% due May 2026					$	400,000	$	400,000
Term loan		312,188		327,500		300,000		305,625
Equipment notes		30,341		24,455		31,482		33,525
Unamortized debt issuance costs		(7,312)		(8,481)		(8,641)		(6,923)
Total debt, net of unamortized debt issuance costs		735,217		743,474		722,841		732,227
Less: current portion of long-term debt		33,262		26,852		23,091		34,272
Total long-term debt	$	701,955	$	716,622	$	699,750	$	697,955

The following table sets forth our remaining principal payments for our outstanding debt balances as of ~~September 30, 2019,~~March 31, 2020, in thousands:


	Payments Due by Period														Payments Due by Period
	2019		2020		2021		2022		2023		Thereafter		Total		2020		2021		2022		2023		2024		Thereafter		Total
Senior Notes	$	—	$	—	$	—	$	—	$	—	$	400,000	$	400,000	$	—	$	—	$	—	$	—	$	—	$	400,000	$	400,000
Term loan		6,563		26,250		30,625		248,750		—		—		312,188		11,250		15,000		20,625		22,500		28,125		202,500		300,000
Equipment notes		1,728		7,082		7,366		7,661		5,345		1,159		30,341		6,038		8,326		8,651		6,337		2,130		—		31,482
Total	$	8,291	$	33,332	$	37,991	$	256,411	$	5,345	$	401,159	$	742,529	$	17,288	$	23,326	$	29,276	$	28,837	$	30,255	$	602,500	$	731,482

Amended Credit Agreement and Senior Secured Term Loan Facility

On March ~~28, 2018,~~20, 2020, the Company ~~executed~~entered into an ~~amendment to~~Amended Credit Agreement, which renews, amends and restates the Original Credit Agreement in its ~~credit agreement,~~entirety. The Amended Credit Agreement provides for a term loan facility in an aggregate principal amount of $300.0 million, all of which ~~primarily facilitated the acquisition~~was drawn on March 20, 2020 and a Revolving Facility in an initial aggregate principal amount of ~~USI by (i) extending until August 29, 2018, the period during which the Company could access the~~$450.0 million, including a $100.0 million ~~delayed draw term loan feature~~letter of credit sublimit and ~~(ii) providing that the Company could issue~~ up to ~~$500.0~~a $35.0 million ~~of Senior Notes in connection with its acquisition of USI. On May 1, 2018,~~swingline sublimit. The maturity date for the Company closed on its acquisition of USI. The acquisition was funded through net proceeds from the issuance of our Senior Notes on April 25, 2018 together with the net proceeds from the $100.0 million delayed draw term loan commitment accessed on May 1, 2018loans under the ~~Company’s~~ Amended Credit ~~Agreement. These funds were also used for the payment of related fees and expenses, as well as for general corporate purposes.~~Agreement was extended from May 2022 to March 2025.

The following table outlines the key terms of our Amended Credit Agreement (dollars in thousands):

Senior secured term loan facility (original borrowing) (a)
$
250,000

Additional delayed draw term loan (b)
$
100,000

Additional term loan and/or revolver capacity available under incremental facility (c)
$
200,000

Revolving Facility
$
250,000

Sublimit for issuance of letters of credit under Revolving Facility (d)
$
100,000

Sublimit for swingline loans under Revolving Facility (d)
$
20,000

Interest rate as of September 30, 2019

3.36
%
Scheduled maturity date

5/05/2022


Senior secured term loan facility	$	300,000

Additional term loan and/or revolver capacity available under incremental facility (a)	$	300,000

Revolving Facility	$	450,000
Sublimit for issuance of letters of credit under Revolving Facility (b)	$	100,000
Sublimit for swingline loans under Revolving Facility (b)	$	35,000

Interest rate as of March 31, 2020		2.02	%
Scheduled maturity date		3/20/2025

(a)	Additional borrowing capacity is available under the incremental facility, subject to certain terms and conditions (including existing or new lenders providing commitments in respect of such additional borrowing capacity).

(b)	Use of the sublimits for the issuance of letters of credit and swingline loans reduces the availability under the Revolving Facility.

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TOPBUILD CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

~~(a)~~

~~The Amended Credit Agreement provides for a term loan limit of $350.0 million; $250.0 million was drawn on May 5, 2017.~~

~~(b)~~

~~On May 1, 2018, the net proceeds from the $100.0 million delayed draw term loan were used to partially fund the USI acquisition.~~

~~(c)~~

Additional borrowing capacity is available under the incremental facility, subject to certain terms and conditions (including existing or new lenders providing commitments in respect of such additional borrowing capacity).

~~(d)~~

~~Use of the sublimits for the issuance of letters of credit and swingline loans reduces the availability under the Revolving Facility.~~

Interest payable on borrowings under the Amended Credit Agreement is based on an applicable margin rate plus, at our option, either:

●

A base rate determined by reference to the highest of either (i) the federal funds rate plus 0.50 percent, (ii) ~~Bank of America’s~~BofA’s “prime rate,” orand (iii) the LIBOR rate for U.S. dollar deposits with a term of one month, plus 1.00 percent; or

●

A LIBOR rate (or a comparable successor rate) determined by reference to the costs of funds for deposits in U.S. dollars for the interest period relevant to such ~~borrowings.~~borrowings, subject to a floor of 0.5%.

The Amended Credit Agreement contemplates future amendment by the Company and the agent to provide for the replacement of LIBOR with the Secured Overnight Financing Rate or another alternate benchmark rate, giving due consideration to any evolving or then existing convention for similar U.S. dollar denominated syndicated credit facilities for such alternative benchmarks, including any related mathematical or other applicable adjustments.

The applicable margin rate is determined based on our Secured Leverage Ratio. In the case of base rate borrowings, the applicable margin rate ranges from 0.00 percent to 1.50 percent and in the case of LIBOR rate borrowings, the applicable margin ranges from 1.00 percent to 2.50 percent. Borrowings under the Amended Credit Agreement are prepayable at the Company’s option without premium or penalty. The Company is required to make prepayments with the net cash proceeds of certain asset sales and certain extraordinary receipts.

Revolving Facility

The Company has outstanding standby letters of credit that secure our financial obligations related to our workers’ compensation, general insurance, and auto liability programs. These standby letters of credit, as well as any outstanding amount borrowed under our Revolving Facility, reduce the availability under the Revolving Facility. The following table summarizes our availability under the Revolving Facility, in thousands:


	As of				As of
	September 30,		December 31,		March 31,		December 31,
	2019		2018		2020		2019
Revolving Facility	$	250,000	$	250,000	$	450,000	$	250,000
Less: standby letters of credit		(61,382)		(59,288)		(61,382)		(61,382)
Availability under Revolving Facility	$	188,618	$	190,712	$	388,618	$	188,618

We are required to pay commitment fees to the Lenders in respect of any unutilized commitments. The commitment fees range from 0.15 percent to 0.275 percent per annum, depending on our Secured Leverage Ratio. We must also pay customary fees on outstanding letters of credit.

Senior Notes

The Senior Notes are our senior unsecured obligations and bear interest at 5.625% per year, payable semiannually in arrears on May 1 and November 1 of each year, which began on November 1, 2018. The Senior Notes mature on May 1, 2026, unless redeemed early or repurchased. We have the right to redeem the Senior Notes under certain circumstances, and, if we undergo a change in control, we must make an offer to repurchase all of the Senior Notes then outstanding at a repurchase price equal to 101% of their aggregate principal amount, plus accrued and unpaid interest (if any) to, but not including, the repurchase date.

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TOPBUILD CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Equipment Notes

~~During 2018,~~As of December 31, 2019, the ~~Company executed $26.6~~company has issued $41.6 million of equipment notes for the purpose of financing the purchase of vehicles and equipment. ~~During 2019, the company issued additional~~NaN equipment notes ~~for approximately $10.0 million in~~were issued during the ~~nine months ended September 30, 2019.~~first quarter of 2020. The Company’s equipment notes each have a five year ~~maturity through~~term maturing from 2023 to 2024 and bear interest at fixed rates between 2.8% and 4.4%.

Covenant Compliance

The indenture governing our Senior Notes contains customary restrictive covenants that, among other things, generally limit our ability to incur additional debt and issue preferred stock; to create liens; to pay dividends, acquire shares of capital stock, make payments on subordinated debt or make investments; to place limitations on distributions from certain subsidiaries; to issue guarantees; to issue or sell the capital stock of certain subsidiaries; to sell assets; to enter into transactions with affiliates; and to effect mergers. The Senior Notes indenture also contains customary events of default, subject in certain cases to grace and cure periods. Generally, if an event of default occurs and is continuing, the trustee under the indenture or the holders of at least 25% in aggregate principal amount of the Senior Notes then outstanding may declare the principal of, premium, if any, and accrued interest on all the Senior Notes immediately due and payable. The Senior Notes and related guarantees have not been registered under the Securities Act of 1933, and we are not required to register either the Senior Notes or the guarantees in the future.

The Amended Credit Agreement contains certain covenants that limit, among other things, the ability of the Company to incur additional indebtedness or liens; to make certain investments or loans; to make certain restricted payments; to enter into consolidations, mergers, sales of material assets, and other fundamental changes; to transact with affiliates; to enter into agreements restricting the ability of subsidiaries to incur liens or pay dividends; or to make certain accounting changes. The Amended Credit Agreement contains customary affirmative covenants and events of default.

The Amended Credit Agreement requires that we maintain a Net Leverage Ratio and minimum ~~FCCR~~Interest Coverage Ratio throughout the term of the agreement. ~~The following table sets forth the maximum Net Leverage Ratios and minimum FCCR required:~~


~~Quarter Ending~~	Maximum Net Leverage Ratio	Minimum FCCR
~~June 30, 2018 through September 30, 2018~~	~~3.75:1.00~~	~~1.25:1.00~~
~~December 31, 2018 through September 30, 2019~~	~~3.50:1.00~~	~~1.25:1.00~~
~~September 30, 2019 and each fiscal quarter end thereafter~~	~~3.25:1.00~~	~~1.25:1.00~~

The following table outlines the key financial covenants effective for the period covered by this Quarterly Report:


		As of ~~September 30, 2019~~March 31, 2020
Maximum Net Leverage Ratio		~~3.25:~~3.50:1.00
Minimum ~~FCCR~~Interest Coverage Ratio		~~1.25:~~3.00:1.00
Compliance as of period end		In Compliance

56. FAIR VALUE MEASUREMENTS

Fair Value on Recurring Basis

The carrying values of cash and cash equivalents, receivables, net, and accounts payable are considered to be representative of their respective fair values due to the short-term nature of these instruments. We measure our contingent consideration liabilities related to business combinations at fair value. For more information see Note ~~12 –Business~~13 – Business Combinations.

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TOPBUILD CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Fair Value on Non-Recurring Basis

Fair value measurements were applied to our long-term debt portfolio. We believe the carrying value of our term loan approximates the fair market value primarily due to the fact that the non-performance risk of servicing our debt obligations, as reflected in our business and credit risk profile, has not materially changed since we assumed our debt obligations under the Amended Credit Agreement. In addition, due to the floating-rate nature of our term loan, the market value is not subject to variability solely due to changes in the general level of interest rates as is the case with a fixed-rate debt obligation. Based on active market trades of our Senior Notes close to ~~September 30, 2019~~March 31, 2020 (Level 1 fair value measurement), we estimate that the fair value of the Senior Notes is approximately ~~$419.0~~$364.0 million compared to a gross carrying value of $400.0 million at ~~September 30, 2019.~~

~~During all periods presented, there were 0 transfers between fair value hierarchical levels.~~March 31, 2020.

6.7. SEGMENT INFORMATION

The following table sets forth our net sales and operating results by segment, in thousands:

Three Months Ended September 30,

2019

2018

2019

2018

Net Sales

Operating Profit (b)
Our operations by segment were (a):

Installation

$
498,390

$
464,540

$
69,846

$
61,004
Distribution

220,947

212,948

23,406

19,229
Intercompany eliminations

(37,007)

(30,199)

(5,935)

(5,658)
Total

$
682,330

$
647,289

87,317

74,575
General corporate expense, net (c)

(6,872)

(8,358)
Operating profit, as reported

80,445

66,217
Other expense, net

(8,854)

(9,203)
Income before income taxes

$
71,591

$
57,014


	Nine Months Ended September 30,								Three Months Ended March 31,
	2019		2018		2019		2018		2020		2019		2020		2019
	Net Sales				Operating Profit (b)				Net Sales				Operating Profit (b)
Our operations by segment were (a):
Installation	$	1,430,800	$	1,223,357	$	189,568	$	139,969	$	475,873	$	449,383	$	60,351	$	51,299
Distribution		638,899		606,335		65,154		57,141		214,223		204,464		24,669		20,597
Intercompany eliminations		(107,928)		(84,990)		(18,013)		(15,382)		(36,868)		(34,517)		(5,833)		(5,674)
Total	$	1,961,771	$	1,744,702		236,709		181,728	$	653,228	$	619,330		79,187		66,222
General corporate expense, net (c)						(23,606)		(37,937)						(9,198)		(9,604)
Operating profit, as reported						213,103		143,791						69,989		56,618
Other expense, net						(27,228)		(18,734)						(8,503)		(9,269)
Income before income taxes					$	185,875	$	125,057					$	61,486	$	47,349

(a)	All of our operations are located in the U.S.

(b)	Segment operating profit includes an allocation of general corporate expenses attributable to the operating segments which is based on direct benefit or usage (such as salaries of corporate employees who directly support the segment).

(c)	General corporate expense, net includes expenses not specifically attributable to our segments for functions such as corporate human resources, finance, and legal, including salaries, benefits, and other related costs.

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TOPBUILD CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

78. LEASES

We have operating leases for our installation branch locations, distribution centers, our Branch Support Center in Daytona Beach, Florida, vehicles and certain equipment. In addition, we lease certain operating facilities from certain related parties, primarily former owners (and in some cases, current management personnel) of companies acquired. These related party leases are immaterial to our unaudited condensed consolidated statements of operations. As of ~~September 30, 2019,~~March 31, 2020, we did not have any finance leases.

At the inception of a contract, we determine whether the contract is, or contains, a lease based on the unique facts and circumstances present. Our facilities operating leases have lease and non-lease fixed cost components, which we account for as one single lease component in calculating the present value of minimum lease payments. Variable lease and non-lease cost components are expensed as incurred and are primarily included in cost of sales on the accompanying unaudited condensed consolidated statement of operations. Variable costs include common area maintenance, utilities, real estate taxes, insurance, and other operating costs that are passed on from the lessor. These variable cost components are included within our operating lease cost.

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TOPBUILD CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Operating lease payments are recognized as an expense in the unaudited condensed consolidated statements of operations on a straight-line basis over the lease term, including future option periods the Company reasonably expects to exercise, whereby an equal amount of rent expense is attributed to each period during the term of the lease, regardless of when actual payments are made. This generally results in rent expense in excess of cash payments during the early years of a lease and rent expense less than cash payments in later years. The difference between rent expense recognized and actual rental payments is typically represented as the spread between the ROU asset and lease liability.

We recognize a ROU asset and a lease liability at the lease commencement date. Our leases may include options to extend or terminate the lease, which will be reflected in the calculation of the lease liability and corresponding ROU asset when it is reasonably certain that we will exercise that option. We do not recognize ROU assets and lease liabilities for short-term leases that have an initial lease term of 12 months or less. We recognize the lease payments associated with short-term leases as an expense on a straight-line basis over the lease term.

The lease liability is initially measured as the present value of the unpaid lease payments as of the lease commencement date. The lease liability is discounted based on our IBR at the time of initial adoption of ASU 2016-02 for all ~~exiting~~existing leases or upon a modification to the lease term and at the time of lease commencement for all future leases. Our IBR includes significant assumptions regarding our secured borrowing rates obtained on equipment note issuances and adjustments for differences in the remaining lease term, underlying assets and market conditions for companies with similar credit qualities as well as interest rate index fluctuations.

The ROU asset is initially measured at cost, which comprises the initial amount of the lease liability adjusted for lease payments made at or before the lease commencement date, plus any initial direct costs incurred less any lease incentives received. The ROU asset is subsequently measured throughout the lease term as the carrying amount of the lease liability, plus initial direct costs, plus (minus) any prepaid (accrued) lease payments, less the unamortized balance of lease incentives received. Lease expense for lease payments is recognized on a straight-line basis over the lease term. Certain vehicle lease agreements have residual value guarantees at the end of the lease which require us to return the asset with a specified percentage of the original or other calculated value.

The components of lease expense were as follows and are primarily included in cost of sales on the accompanying unaudited condensed consolidated ~~statement~~statements of operations, in thousands:


	Three Months Ended September 30,		Nine Months Ended September 30,		Three Months Ended March 31,
	2019		2019		2020		2019
Operating lease cost(a)	$	10,959	$	34,396	$	12,271	$	13,535
Short-term lease cost		3,381		9,391		3,064		3,005
Variable lease cost		1,434		4,201
Sublease income		(153)		(461)		(62)		(154)
Net lease cost	$	15,621	$	47,527	$	15,273	$	16,386

(a)	Includes $1,444 and $1,377 of variable cost components during the three months ended March 31, 2020 and 2019, respectively.

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TOPBUILD CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Future minimum lease payments under non-cancellable operating leases as of ~~September 30, 2019~~March 31, 2020 were as follows, in thousands:


Payments due by Period
2019	$	10,933
2020		37,598	$	29,893
2021		24,367		28,886
2022		14,790		19,183
2023		6,956		10,083
2024 & Thereafter		8,284
2024				5,423
2025 & Thereafter				5,827
Total future minimum lease payments		102,928		99,295

Less: imputed interest		(10,706)		(10,219)

Lease liability at September 30, 2019	$	92,222
Lease liability at March 31, 2020			$	89,076

As of ~~September 30, 2019,~~March 31, 2020, the weighted average remaining lease term was 3.4 years and the related lease liability was calculated using a weighted average discount rate of ~~4.3%~~4.1%.

The amount below is included in the cash flows provided by (used in) operating activities section on the accompanying unaudited condensed consolidated ~~statement~~statements of cash flows, in thousands:


~~Nine Months Ended September 30,~~	~~2019~~
~~Cash paid for amounts included in the measurement of lease liabilities~~	$	~~(33,914)~~

8.9. INCOME TAXES

Our effective tax rates were ~~23.2~~17.4 percent and ~~22.0~~19.8 percent for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2020 and 2019, respectively. The lower 2020 effective tax ~~rates for the three and nine months ended September 30, 2018, were 25.2 percent and 23.1 percent, respectively. The 2019 rates are lower~~rate is due to ~~the~~a larger impact of the discrete benefits related to share-based ~~compensation and a favorable return to accrual adjustment when compared to prior year, partially offset by the impact of state tax rate changes.~~compensation.

A tax benefit of ~~$1.3~~$5.5 million and ~~$5.1~~$2.2 million related to share-based compensation was recognized in our ~~Condensed Consolidated Statements~~condensed consolidated statements of ~~Operations~~operations as a discrete item in income tax expense for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2020 and 2019, respectively.

At ~~September 30, 2019,~~March 31, 2020, the net deferred tax liability of ~~$161.7~~$169.8 million consisted of net long-term deferred tax assets of ~~$11.8~~$4.4 million and net long-term deferred tax liabilities of ~~$173.5~~$174.2 million. The ~~change~~decrease in the net deferred tax liability was primarily related to ~~purchase accounting adjustments in connection with~~ the ~~acquisition~~adoption of ~~USI and related tax elections and a return to accrual adjustment for 2018 tax returns filed in 2019, partially offset by state tax rate changes.~~ASU 2016-13.

9.10. INCOME PER SHARE

Basic net income per share is calculated by dividing net income by the number of weighted average shares outstanding during the period, without consideration for common stock equivalents.

Diluted net income per share is calculated by adjusting the number of weighted average shares outstanding for the dilutive effect of common stock equivalents outstanding for the period, determined using the treasury stock method.

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TOPBUILD CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Basic and diluted net income per share were computed as ~~follows, in thousands, except share and per share amounts:~~follows:


	Three Months Ended September 30,				Nine Months Ended September 30,				Three Months Ended March 31,
	2019		2018		2019		2018		2020		2019
Net income - basic and diluted	$	54,976	$	42,658	$	145,011	$	96,198
Net income (in thousands) - basic and diluted									$	50,771	$	37,983

Weighted average number of common shares outstanding - basic		33,790,857		35,091,388		33,977,464		35,084,694		33,168,453		34,169,315

Dilutive effect of common stock equivalents:
RSAs with service-based conditions		82,087		135,347		86,373		161,474		71,221		92,081
RSAs with market-based conditions		195,740		252,278		183,537		245,127		131,024		180,032
RSAs with performance-based conditions		82,750		23,875		63,329		7,958		49,778		35,989
Stock options		216,468		286,495		230,932		316,104		179,371		225,872

Weighted average number of common shares outstanding - diluted		34,367,902		35,789,383		34,541,635		35,815,357		33,599,847		34,703,289

Basic income per common share	$	1.63	$	1.22	$	4.27	$	2.74
Basic net income per common share									$	1.53	$	1.11

Diluted income per common share	$	1.60	$	1.19	$	4.20	$	2.69
Diluted net income per common share									$	1.51	$	1.09

The following table summarizes shares excluded from the calculation of diluted net income per share because their effect would have been anti-dilutive:


	Three Months Ended September 30,				Nine Months Ended September 30,				Three Months Ended March 31,
	2019		2018		2019		2018		2020		2019
Anti-dilutive common stock equivalents:
RSAs with service-based conditions		—		9,775		5,264		3,466		5,271		14,706
RSAs with market-based conditions		—		—		6,567		—		8,341		19,701
RSAs with performance-based conditions		—		—		—		—		—		—
Stock options		12,642		76,030		72,580		62,528		32,067		123,688
Total anti-dilutive common stock equivalents		12,642		85,805		84,411		65,994		45,679		158,095

~~10.~~11. SHARE-BASED COMPENSATION

Effective July 1, 2015, our eligible employees commenced participation in the 2015 ~~Long-Term Incentive Program.~~LTIP. The 2015 ~~Long-Term Incentive Program~~LTIP authorizes the Board to grant stock options, stock appreciation rights, restricted shares, restricted share units, performance awards, and dividend equivalents. All grants are made by issuing new shares and no more than 4.0 million shares of common stock may be issued under the 2015 ~~Long-Term Incentive Program.~~LTIP. As of ~~September 30, 2019,~~March 31, 2020, we had ~~2.3~~2.1 million shares remaining available for issuance under the 2015 ~~Long-Term Incentive Program.~~LTIP.

Share-based compensation expense is included in selling, general, and administrative expense. The income tax effect associated with share-based compensation awards is included in income tax expense. The following table presents share-based compensation amounts recognized in our condensed consolidated statements of operations, in thousands:


	Three Months Ended September 30,				Nine Months Ended September 30,				Three Months Ended March 31,
	2019		2018		2019		2018		2020		2019
Share-based compensation expense	$	3,926	$	2,848	$	11,411	$	8,244	$	3,908	$	2,972
Income tax benefit realized	$	1,304	$	545	$	5,110	$	3,140	$	5,500	$	2,246

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TOPBUILD CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

The following table presents a summary of our share-based compensation activity for the ~~nine~~three months ended ~~September 30, 2019,~~March 31, 2020, in thousands, except per share amounts:


	RSAs			Stock Options								RSAs			Stock Options
	Number of Shares	Weighted Average Grant Date Fair Value Per Share		Number of Shares	Weighted Average Grant Date Fair Value Per Share		Weighted Average Exercise Price Per Share		Aggregate Intrinsic Value			Number of Shares	Weighted Average Grant Date Fair Value Per Share		Number of Shares	Weighted Average Grant Date Fair Value Per Share		Weighted Average Exercise Price Per Share		Aggregate Intrinsic Value
Balance December 31, 2018	499.2	$	41.29	611.4	$	13.10	$	34.45	$	8,685.8
Balance December 31, 2019												411.6	$	57.51	373.5	$	17.06	$	45.90	$	21,356.4
Granted	249.1	$	67.37	103.5	$	21.16	$	58.08				87.3	$	134.81	71.0	$	39.49	$	118.58
Converted/Exercised	(310.0)	$	30.99	(273.8)	$	10.87	$	28.14	$	14,184.1		(222.0)	$	42.71	(68.2)	$	14.96	$	39.91	$	4,089.0
Forfeited	(20.6)	$	58.32	(9.7)	$	20.28	$	54.62				(8.2)	$	96.26	(5.5)	$	39.49	$	118.58
Expired				(2.7)	$	14.44	$	38.39
Balance September 30, 2019	417.7	$	57.35	428.7	$	16.30	$	43.71	$	22,603.3
Balance March 31, 2020												268.7	$	82.04	370.8	$	21.41	$	59.84	$	7,598.9

Exercisable September 30, 2019 (a)				129.1	$	13.96	$	36.94	$	7,678.4
Exercisable March 31, 2020 (a)											Exercisable March 31, 2020 (a)				142.1	$	17.63	$	47.43	$	3,526.3

(a)	The weighted average remaining contractual term for vested stock options is approximately ~~6.9~~7.2 years.

~~We had unrecognized~~Unrecognized share-based compensation expense ~~relating~~related to unvested awards asis shown in the following table, dollars in thousands:


	As of September 30, 2019				As of March 31, 2020
	Unrecognized Compensation Expense on Unvested Awards		Weighted Average Remaining Vesting Period		Unrecognized Compensation Expense on Unvested Awards		Weighted Average Remaining Vesting Period
Unrecognized compensation expense related to unvested awards:
RSAs	$	10,319		1.2 years	$	12,175		1.6 years
Stock options		1,910		1.0 years		2,489		1.2 years
Total unrecognized compensation expense related to unvested awards	$	12,229			$	14,664

Our RSAs with performance-based conditions are evaluated on a quarterly basis with adjustments to compensation expense based on the likelihood of the performance target being achieved or exceeded. The following table shows the range of payouts and the related expense for our outstanding RSAs with performance-based conditions, in thousands:


			Payout Ranges and Related Expense										Payout Ranges and Related Expense
RSAs with Performance-Based Conditions	Grant Date Fair Value		0%		25%		100%		200%		Grant Date Fair Value		0%		25%		100%		200%
February 21, 2017	$	1,839	$	—	$	460	$	1,839	$	3,678
February 19, 2018	$	2,082	$	—	$	521	$	2,082	$	4,164	$	2,052	$	—	$	513	$	2,052	$	4,104
February 18, 2019	$	2,510	$	—	$	628	$	2,510	$	5,020	$	2,477	$	—	$	619	$	2,477	$	4,954
February 17, 2020											$	2,938	$	—	$	735	$	2,938	$	5,876

During the first quarter of ~~2019,~~2020, RSAs with performance-based conditions that were granted on February ~~22, 2016~~21, 2017 vested based on cumulative three-year achievement of ~~88.6%~~200%. Total compensation expense recognized over the three-year performance period, net of forfeitures, was ~~$1.7~~$3.3 million.

The fair value of our RSAs with a market-based condition granted under the 2015 ~~Long-Term Incentive Program~~LTIP was determined using a Monte Carlo simulation. The following are key inputs in the Monte Carlo analysis for awards granted in ~~2019~~2020 and ~~2018:~~2019:


	2020			2019
Measurement period (in years)		2.88			2.87
Risk free interest rate		1.40	%		2.50	%
Dividend yield		0.00	%		0.00	%
Estimated fair value of market-based RSAs at grant date	$	158.24		$	80.74

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TOPBUILD CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

2019

2018

Measurement period (years)

2.87

2.87

Risk free interest rate

2.50
%

2.36
%
Dividend yield

0.00
%

0.00
%
Estimated fair value of market-based RSAs granted

$
80.74

$
103.31

The fair values of stock options granted under the 2015 ~~Long-Term Incentive Program~~LTIP were calculated using the Black-Scholes Options Pricing Model. The following table presents the assumptions used to estimate the fair values of stock options granted in ~~2019~~2020 and ~~2018:~~2019:


	2019			2018			2020			2019
Risk free interest rate		2.59	%		2.78	%		1.53	%		2.59	%
Expected volatility, using historical return volatility and implied volatility		32.50	%		32.50	%		31.50	%		32.50	%
Expected life (in years)		6.0			6.0			6.0			6.0
Dividend yield		0.00	%		0.00	%		0.00	%		0.00	%
Estimated fair value of stock options granted	$	21.16		$	27.44
Estimated fair value of stock options at grant date							$	39.49		$	21.16

~~11.~~12. SHARE REPURCHASE PROGRAM

On February 22, 2019, our Board authorized the 2019 Repurchase Program, pursuant to which the Company may purchase up to $200.0 million of our common stock. Share repurchases may be executed through various means including, without limitation, open market purchases, privately negotiated transactions, accelerated share repurchase transactions or otherwise. The 2019 Share Repurchase Program does not obligate the Company to purchase any shares and has no expiration date. Authorization for the 2019 Share Repurchase Program may be terminated, increased, or decreased by the Board at its discretion at any time.

Effective November 4, 2019, under the 2019 Repurchase program, we entered into the 2019 ASR Agreement. We paid BofA $50.0 million in exchange for an initial delivery of 392,501 shares of our common stock on November 5, 2019, representing an estimated 85% of the total number of shares we expected to receive under the 2019 ASR Agreement, at the time we entered into the agreement. During the quarter ended March 31, 2020, we received an additional 73,455 shares of our common stock from BofA representing the final settlement of the 2019 ASR agreement. We purchased a total of 465,956 shares of our common stock under the 2019 ASR Agreement at an average price per share of $107.31.

Effective November 7, 2018, under the 2017 Repurchase Program, we entered into the 2018 ASR Agreement. We paid JPMorgan Chase Bank, N.A. $50.0 million in exchange for an initial delivery of 796,925 shares of our common stock on November 8, 2018, representing an estimated 85% of the total number of shares we expected to receive under the 2018 ASR Agreement, at the time we entered into the agreement. During the quarter ended March 31, 2019, we received an additional 176,327 shares of our common stock from JPMorgan Chase Bank, N.A., representing the final settlement of the 2018 ASR Agreement. We purchased a total of 973,252 shares of our common stock under the 2018 ASR Agreement at an average price per share of $51.37.

On May 5, 2017, under the 2017 Repurchase Program, we entered into the 2017 ASR Agreement. When the agreement became effective on July 5, 2017, we paid BofA $100.0 million in exchange for an initial delivery of 1.5 million shares of our common stock, representing an estimated 80% of the total number of shares we expected to receive under the 2017 ASR Agreement, at the time we entered into the agreement. During the quarter ended March 31, 2018, we received an additional 13,657 shares of our common stock from BofA, representing the final settlement of the 2017 ASR Agreement. We purchased a total of 1,521,100 shares of our common stock under the 2017 ASR Agreement at an average price per share of $65.74.

The following table sets forth our share repurchases under the 2019 and 2017 Repurchase Programs during the periods presented:


	Three Months Ended September 30,				Nine Months Ended September 30,				Three Months Ended March 31,
	2019		2018		2019		2018		2020		2019
Number of shares repurchased		364,074		142,780		810,077 (b)		156,437 (a)		261,555 (a)		249,118 (b)
Share repurchase cost (in thousands)	$	32,677	$	9,493	$	52,177	$	—	$	14,127	$	4,622

(a) The~~nine~~ three months ended ~~September 30, 2018~~March 31, 2020 includes ~~13,657~~73,455 shares we received as final settlement of our ~~2017~~2019 ASR Agreement.

(b) The~~nine~~ three months ended ~~September 30,~~March 31, 2019 includes 176,327 shares we received as final settlement of our 2018 ASR ~~Agreement.~~Agreement.

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TOPBUILD CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

~~12.~~13. BUSINESS COMBINATIONS

As part of our strategy to supplement our organic growth and expand our access to additional markets and products, we completed ~~3 acquisitions during 2018 and~~ 1 acquisition in 2019, and 2 acquisitions to date in ~~2019.~~2020. Each acquisition was accounted for as a business combination under ASC 805, “Business Combinations.” ~~There were 0 acquisition related~~Acquisition costs for the three months ended ~~September 30, 2019. Acquisition related costs for the nine months ended September 30,~~March 31, 2020 and 2019, were ~~$0.1 million. Acquisition related costs for the three and nine months ended September 30, 2018, were $0.6~~$0.2 million and ~~$13.9~~$0.1 million, respectively. Acquisition costs are included in selling, general, and administrative expense in our condensed consolidated statements of operations.

Acquisitions

On January 10, 2018, we acquired ADO, a distributor of insulation accessories, located in Plymouth, Minnesota. The purchase price of approximately $23.0 million was funded by cash on hand of $22.2 million and contingent consideration of $0.8 million.

On January 18, 2018, we acquired substantially all of the assets of Santa Rosa, a residential and commercial insulation company located in Miami, Florida. The purchase price of approximately $5.8 million was funded by cash on hand of $5.6 million and contingent consideration of $0.2 million.

On May 1, 2018, we acquired USI, a leading distributor and installer of insulation in both residential and commercial construction markets. Our payment of $486.5 million, which included the purchase price of $475.0 million and adjustments for cash and working capital, was funded through net proceeds from the issuance on April 25, 2018, of the Senior Notes together with the net proceeds from the $100.0 million delayed draw term loan commitment under our Amended Credit Agreement. For additional information see ~~Note 4 – Long-Term Debt~~.

On July 15, 2019, we acquired Viking, an insulation company located in Burbank, California. The purchase price of approximately $7.7 million was funded by cash on hand of $6.5 million and contingent consideration of $1.2 million.

~~Revenue~~On February 20, 2020, we acquired Cooper, a commercial glass company serving the Memphis market. The purchase price of approximately $11.5 million was funded by cash on hand of $10.5 million and ~~net income since~~contingent consideration of $1.0 million. We recognized goodwill of $6.4 million in connection with this acquisition during the ~~respective 2018 acquisition dates included in our condensed consolidated statements of operations were as follows, in thousands:~~

Three Months Ended September 30, 2019

Nine Months Ended September 30, 2019

Net Sales

Net Income

Net Sales

Net Income
ADO

7,181

58

20,057

129
Santa Rosa

2,377

338

6,919

939
USI

96,368

8,327

284,757

26,223

$
105,926

$
8,723

$
311,733

$
27,291

~~Pro Forma Results~~quarter ended March 31, 2020.

The following unaudited pro forma information has been prepared as if the 2018 acquisitions described above had taken place on January 1, 2017. The unaudited pro forma information is not necessarily indicative of the results thatOn February 24, 2020, we ~~would have achieved had the transactions actually taken place on January 1, 2017. Further, the pro forma information does not purport to be indicative of future financial operating results.~~acquired Hunter, a residential insulation company located in Long Island, New York. The pro forma results for the three and nine months ended September 30, 2019 do not include any adjustments from our actual results as all 2018 acquisitions were wholly-owned for the entire period. Our pro forma results are presented below, in thousands:

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TOPBUILD CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Unaudited Pro Forma for the

Nine Months Ended September 30,

2019

2018
Net sales

$
1,961,771

$
1,878,179
Net income

$
145,011

$
105,410

The following table details the additional expense included in the unaudited pro forma net income as if the 2018 acquisitions described above had taken place on January 1, 2017. Our pro forma results are presented below, in thousands:

Unaudited Pro Forma for the

Nine Months Ended September 30,

2019

2018
Amortization of intangible assets

$
—

$
5,039
Income tax expense (using 26.5% and 27.0% effective tax rate in 2019 and 2018, respectively)

$
—

$
3,407

~~Purchase Price Allocations~~

The estimated fair values of the assets acquired and liabilities assumed for the 2018 acquisitions, as well as the fair value of consideration transferred, are presented below as of September 30, 2019, in thousands:

2018 Acquisitions

Completed During the Year Ended December 31, 2018


ADO

Santa Rosa

USI

Total
Estimated fair values:

Cash

$
939

$
—

$
14,817

$
15,756
Accounts receivable

3,434

1,433

61,445

66,312
Inventories

2,337

104

14,029

16,470
Prepaid and other assets

135

7

3,439

3,581
Property and equipment

951

522

33,126

34,599
Intangible assets

14,090

1,850

165,400

181,340
Goodwill

2,631

3,014

281,364

287,009
Accounts payable

(908)

(1,099)

(17,927)

(19,934)
Accrued liabilities

(609)

—

(34,686)

(35,295)
Deferred tax liability

—

—

(34,469)

(34,469)
Net assets acquired

$
23,000

$
5,831

$
486,538

$
515,369

2018 Acquisitions

Completed During the Year Ended December 31, 2018


ADO

Santa Rosa

USI

Total
Fair value of consideration transferred:

Cash

$
22,172

$
5,831

$
486,538

$
514,541
Deferred consideration

—

—

—

—
Contingent consideration

828

—

—

828
Total consideration transferred

$
23,000

$
5,831

$
486,538

$
515,369

~~Table ofContents~~

TOPBUILD CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

~~Estimates of acquired intangible assets related to the 2018 acquisitions are as follows, as of September 30, 2019, dollars in thousands:~~

Estimated Fair Value

Weighted Average Estimated Useful Life (Years)
2018 Acquisitions:

Customer relationships

$
168,820

12
Trademarks and trade names

11,260

9
Non-competition agreements

1,260

5
Total intangible assets for 2018 acquisitions

$
181,340

11

As third party or internal valuations are finalized, certain tax aspects of the foregoing transactions are completed, and customer post-closing reviews are concluded, adjustments may be made to the fair value of assets acquired, and in some cases total purchase price ~~through the end~~ of ~~each measurement period, generally one year following the applicable acquisition date. Various insignificant adjustments to the fair value~~approximately $9.1 million was funded by cash on hand. We recognized goodwill of ~~assets acquired, and in some cases total purchase price, have been made to certain business combinations since the respective dates of acquisition.~~

~~Goodwill to be recognized~~$5.5 million in connection with ~~these acquisitions is attributable to~~this acquisition during the synergies expected to be realized and improvements in the businesses after the acquisitions. Of the $287.0 million of goodwill recorded from the 2018 acquisitions, $33.2 million is expected to be deductible for income tax purposes.quarter ended March 31, 2020.

Contingent Consideration

On February 27, 2017, we acquired substantially all of the assets of EcoFoam, a residential and light commercial insulation installation company with locations in Colorado Springs and Denver, Colorado. The purchase price of approximately $22.3 million was funded by cash on hand of $20.2 million and contingent consideration of $2.1 million. The contingent consideration arrangement requires additional consideration to be paid by TopBuild to the sellers of EcoFoam based on EcoFoam’s attainment of annual revenue targets over a three-year period. The total amount of undiscounted contingent consideration which TopBuild ~~may be~~is required to pay under the arrangement is $2.5 million. The fair value of $2.1 million contingent consideration recognized on the acquisition date was estimated by applying the income approach using discounted cash flows. That measure is based on significant Level 3 inputs not observable in the market. The significant assumption includes a discount rate of 9.5%. Changes in the fair value measurement each period reflect the passage of time as well as the impact of adjustments, if any, to the likelihood of achieving the specified targets. We made contingent payments of $0.8 million in the second quarters of 2019 and 2018. We will make the final payment of $0.8 million in the second quarter of 2020.

The acquisition of ~~ADO~~Viking included a contingent consideration arrangement that requires additional consideration to be paid by TopBuild ~~to the sellers of ADO~~ based on the achievement of ~~certain EBITDA thresholds~~annual gross revenue targets over a ~~two-year~~three-year period. The range of ~~the~~ undiscounted amounts TopBuild may be required to pay under the contingent consideration agreement is between 0 and ~~$1.0~~$1.5 million. The fair value of the contingent consideration recognized on the acquisition date of ~~$0.8~~$1.2 million was estimated by applying the income approach using discounted cash flows. That measure is based on significant Level 3 inputs not observable in the market. The significant assumption includes a discount rate of ~~9.5%~~10.0%. Changes in the fair value measurement each period reflect the passage of time as well as the impact of adjustments, if any, to the likelihood of achieving the specified targets.

The acquisition of ~~Santa Rosa included~~Cooper includes a contingent consideration arrangement that ~~required~~requires additional consideration to be paid by TopBuild based on the achievement of aannual gross revenue ~~target for 2018.~~targets over a two-year period. The range of undiscounted amounts TopBuild ~~could~~may be required to pay under the contingent consideration ~~was~~agreement is between 0 and ~~$0.25~~$1.0 million, which also represents the fair value recognized on the acquisition date. ~~In the first quarter of 2019, we paid $0.25 million in full and had 0 remaining contingent consideration obligation related to Santa Rosa as of March 31, 2019.~~

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TOPBUILD CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Contingent consideration is recorded in the condensed consolidated balance sheets in accrued liabilities and other liabilities. Adjustments to the fair value of contingent consideration are reflected in selling, general, and administrative expense in the condensed consolidated statements of operations and are included in the acquisition related costs above.

The following table presents the fair value of contingent consideration, in thousands:

EcoFoam

ADO

Santa Rosa
Date of Acquisition

February 27, 2017

January 10, 2018

January 18, 2018
Fair value of contingent consideration recognized at acquisition date

$
2,110

$
828

$
250

Contingent consideration at December 31, 2018

$
1,573

$
343

$
250
Additions

—

—

—
Change in fair value of contingent consideration during the nine months ended September 30, 2019

71

(220)

—
Payment of contingent consideration during the nine months ended September 30, 2019

(841)

—

(250)
Liability balance for contingent consideration at September 30, 2019

$
803

$
123

$
—


	EcoFoam		Viking		Cooper
Date of Acquisition	February 27, 2017		July 15, 2019		February 20, 2020
Fair value of contingent consideration recognized at acquisition date	$	2,110	$	1,243	$	1,000

Contingent consideration at December 31, 2019	$	822	$	1,304	$	—
Additions		—		—		1,000
Change in fair value of contingent consideration during the three months ended March 31, 2020		19		32		—
Payment of contingent consideration during the three months ended March 31, 2020		—		—		—
Liability balance for contingent consideration at March 31, 2020	$	841	$	1,336	$	1,000

~~13. CLOSURE COSTS~~

We generally recognize expenses related to closures and position eliminations at the time of announcement or notification. Such costs include termination and other severance benefits, lease abandonment costs, and other transition costs. Closure costs are reflected in our condensed consolidated statements of operations as selling, general, and administrative expense. In our condensed consolidated balance sheets, accrued severance closure costs are reflected as accrued liabilities and accrued lease abandonment costs are reflected as short-term and long-term lease liabilities.

In connection with the acquisition of USI, management performed an evaluation of the resources necessary to effectively operate the acquired business. During the second quarter of 2018, management committed to a plan to close the USI corporate office in St. Paul, Minnesota, and consolidate certain administrative functions to our Daytona Beach, Florida, Branch Support Center. As a result, the Company incurredapproximately $6.9 million of closure costs in connection with this activity of which $6.7 million was incurred during the year ended December 31, 2018 and $0.2 million was incurred during the first quarter of 2019, which completed the anticipated costs of the program. Closure costs pertaining to the USI acquisition are primarily included in general corporate expenses for segment reporting purposes.

~~The following table details our total estimated closure costs, by cost type, pertaining to the above closure and transition related to the USI acquisition (in thousands):~~

Segment / Cost Type

Closure Costs Liability at December 31, 2018

Closure Costs Incurred for the Nine Months Ended September 30, 2019

Cash Payments for the Nine Months Ended September 30, 2019

Non-Cash Adjustments for the Nine Months Ended September 30, 2019

Closure Costs Liability at September 30, 2019
Corporate:

Severance

$
3,065

$
239

$
(3,155)

$
(119)

$
30
Lease abandonment

301

—

(149)

229

381
Total Corporate:

$
3,366

$
239

$
(3,304)

$
110

$
411

~~The remaining accrued severance closure costs will be paid by the end of 2019. Non-cash adjustments in the table above relate to true-up of estimates to actual amounts.~~

~~Table ofContents~~

TOPBUILD CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

14. ACCRUED LIABILITIES

The following table sets forth the components of accrued liabilities, in thousands:


	As of				As of
	September 30,		December 31,		March 31,		December 31,
	2019		2018		2020		2019
Accrued liabilities:
Salaries, wages, and commissions	$	34,205	$	34,085	$	30,897	$	32,154
Insurance liabilities		25,483		25,212		23,245		22,506
Deferred revenue		16,685		19,963		15,533		16,139
Interest payable on long-term debt		9,593		3,951		9,588		3,966
Other		26,320		21,025		28,064		23,653
Total accrued liabilities	$	112,286	$	104,236	$	107,327	$	98,418

See Note 23 – ~~Accounting Policies~~Revenue Recognition for discussion of our deferred revenue balances and related revenue recognition policy.

15. OTHER COMMITMENTS AND CONTINGENCIES

Litigation. We are subject to certain claims, charges, litigation, and other proceedings in the ordinary course of our business, including those arising from or related to contractual matters, intellectual property, personal injury, environmental matters, product liability, product recalls, construction defects, insurance coverage, personnel and employment disputes, antitrust, and other matters, including class actions. We believe we have adequate defenses in these matters, and we do not believe that the ultimate outcome of these matters will have a material adverse effect on us. However, there is no assurance that we will prevail in any of these pending matters, and we could in the future incur judgments, enter into settlements of claims, or revise our expectations regarding the outcome of these matters, which could materially impact our liquidity and our results of operations.

Other Matters. We enter into contracts, which include customary indemnities that are standard for the industries in which we operate. Such indemnities include, among other things, customer claims against builders for issues relating to our products and workmanship. In conjunction with divestitures and other transactions, we occasionally provide customary indemnities relating to various items including, among others: the enforceability of trademarks; legal and environmental issues; and asset valuations. We evaluate the probability that we may incur liabilities under these customary indemnities and appropriately record an estimated liability when deemed probable.

We also maintain indemnification agreements with our directors and officers that may require us to indemnify them against liabilities that arise by reason of their status or service as directors or officers, except as prohibited by applicable law.

Table ofContents

TOPBUILD CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

The following table summarizes our outstanding performance, licensing, insurance ~~related.~~and other bonds, in thousands:


	As of
	March 31, 2020		December 31, 2019
Outstanding bonds:
Performance bonds	$	87,479	$	87,286
Licensing, insurance, and other bonds		25,414		25,309
Total bonds	$	112,893	$	112,595

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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

TopBuild, headquartered in Daytona Beach, Florida, is a leading installer and distributor of insulation and other building products to the U.S. construction industry. We trade on the NYSE under the ticker symbol “BLD.”

We operate in two segments: Installation (TruTeam) and Distribution (Service Partners). Our Installation segment installs insulation and other building products nationwide through our TruTeam contractor services business, which, as of ~~September 30, 2019,~~March 31, 2020, had ~~close to~~approximately 200 branches located ~~in 40 states.~~across the United States. We install various insulation applications, including fiberglass batts and rolls, blown-in loose fill fiberglass, blown-in loose fill cellulose, and polyurethane spray foam. Additionally, we install other building products including ~~rain~~ gutters, glass and windows, ~~fire proofing,~~afterpaint products, fireproofing, garage doors, fireplaces, shower enclosures, and closet shelving. We handle every stage of the installation process, including material procurement supplied by leading manufacturers, project scheduling and logistics, multi-phase professional installation, and installation quality assurance.

Our Distribution segment sells and distributes insulation and other building products, including ~~rain~~ gutters, fireplaces, closet shelving, and roofing materials through our Service Partners business, which, as of ~~September 30, 2019,~~March 31, 2020, had approximately 75 branches located ~~in 32 states.~~across the United States. Our Service Partners customer base consists of thousands of insulation contractors of all sizes, gutter contractors, weatherization contractors, other contractors, dealers, metal building erectors, and modular home builders.

We believe that having both TruTeam and Service Partners provides us with a number of distinct competitive advantages. First, the combined buying power of our two business segments, along with our national scale, strengthens our ties to the major manufacturers of insulation and other building products. This helps to ensure we are buying competitively and ensures the availability of supply to our local branches and distribution centers. The overall effect is driving efficiencies through our supply chain. Second, being a leader in both installation and distribution allows us to more effectively reach a broader set of builder customers, regardless of their size or geographic location in the U.S., and leverage housing growth wherever it occurs. Third, during industry downturns, many insulation contractors who buy directly from manufacturers during industry peaks return to purchasing through distributors. As a result, this helps to reduce our exposure to cyclical swings in our business.

For additional details pertaining to our operating results by segment, see Note 67 – Segment Informationto our unaudited condensed consolidated financial statements contained in Part I, Item 1 of this Quarterly Report, which is incorporated herein by reference.For additional details regarding our strategy, material trends in our business and seasonality, pleaserefer to Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” inour Annual Report for the year ended December 31, 2019, as filed with the SEC on February 25, 2020, which discussionis hereby incorporated herein by reference.

COVID-19 BUSINESS UPDATE

We continue to monitor the COVID-19 pandemic and its impact on macroeconomic and local economic conditions. To date, with the exception of a few states, residential and commercial construction has been deemed an essential service. In those locations, the Company continues to operate; however, while net sales during the quarter ended March 31, 2020 increased compared to the prior year period, sales volume was down marginally due to the pandemic. There can be no guarantee that the services we provide will continue to be deemed essential or that other events making the provision of our services challenging or impossible, will not occur. We are taking efforts to ensure the safety of our employees, including increasing our cleaning and sanitizing practices at all locations and for all company vehicles and limiting travel. Additionally, we are not able to predict whether our customers will continue to operate at their current or typical volumes, and such decreases in their operations would have a negative impact on our business. For additional discussion of the potential impact of the COVID-19 pandemic on our business, see the sections entitled “Outlook” and “Risk Factors” included in this Quarterly Report.

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~~THIRD~~FIRST QUARTER ~~2019~~2020 VERSUS ~~THIRD~~FIRST QUARTER 20189

The following discussion and analysis contains forward-looking statements and should be read in conjunction with the unaudited condensed consolidated financial statements, the notes thereto, and the section entitled “Forward-Looking Statements” included in this Quarterly Report.

The following table sets forth our net sales, gross profit, operating profit, and margins, as reported in our condensed consolidated statements of operations, in thousands:


	Three Months Ended September 30,						Three Months Ended March 31,
	2019			2018			2020			2019
Net sales	$	682,330		$	647,289		$	653,228		$	619,330
Cost of sales		502,999			485,424			481,272			463,635
Cost of sales ratio		73.7	%		75.0	%		73.7	%		74.9	%

Gross profit		179,331			161,865			171,956			155,695
Gross profit margin		26.3	%		25.0	%		26.3	%		25.1	%

Selling, general, and administrative expense		98,886			95,648			101,967			99,077
Selling, general, and administrative expense to sales ratio		14.5	%		14.8	%		15.6	%		16.0	%

Operating profit		80,445			66,217			69,989			56,618
Operating profit margin		11.8	%		10.2	%		10.7	%		9.1	%

Other expense, net		(8,854)			(9,203)			(8,503)			(9,269)
Income tax expense		(16,615)			(14,356)			(10,715)			(9,366)
Net income	$	54,976		$	42,658		$	50,771		$	37,983
Net margin		8.1	%		6.6	%		7.8	%		6.1	%

Sales and Operations

Net sales increased ~~5.4~~5.5 percent for the three months ended ~~September 30, 2019,~~March 31, 2020, from the comparable period of ~~2018.~~2019. The increase was primarily driven by increased sales volume, increased selling prices, and ~~increased sales~~acquisitions. Sales volume was down marginally due to the reduction in ~~our commercial markets.~~activities since the onset of the COVID-19 pandemic.

Gross profit margins were 26.3 percent and ~~25.0~~25.1 percent for the three months ended ~~September 30,~~March 31, 2020 and 2019, ~~and 2018,~~ respectively. Gross profit margin improved primarily due to favorable fixed cost leverage on higher sales volumes, increased selling prices, and operational efficiencies, ~~and synergies from the USI acquisition,~~ partially offset by higher material costs.

Selling, general, and administrative expense, as a percent of sales, was ~~14.5~~15.6 percent and ~~14.8~~16.0 percent for the three months ended ~~September 30,~~March 31, 2020 and 2019, ~~and 2018,~~ respectively. Decreased selling, general, and administrative expense as a percent of sales was primarily the result of favorable fixed cost leverage on higher sales volumes and lower acquisition and closure ~~costs related to the USI acquisition.~~costs.

Operating margins were ~~11.8~~10.7 percent and ~~10.2~~9.1 percent for the three months ended ~~September 30,~~March 31, 2020 and 2019, ~~and 2018,~~ respectively. The increase in operating margins was due to favorable fixed cost leverage on higher sales volumes, increased selling prices, ~~increased sales volume,~~ operational efficiencies, ~~synergies from the USI acquisition,~~ and lower acquisition and closure costs, ~~related to the USI acquisition,~~ partially offset by higher material costs.

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Business Segment Results

The following table sets forth our net sales and operating profit margins by business segment, in thousands:


	Three Months Ended September 30,								Three Months Ended March 31,
	2019			2018			Percent Change		2020			2019			Percent Change
Sales by business segment:
Installation	$	498,390		$	464,540		7.3	%	$	475,873		$	449,383		5.9	%
Distribution		220,947			212,948		3.8	%		214,223			204,464		4.8	%
Intercompany eliminations		(37,007)			(30,199)					(36,868)			(34,517)
Net sales	$	682,330		$	647,289		5.4	%	$	653,228		$	619,330		5.5	%

Operating profit by business segment:
Installation	$	69,846		$	61,004		14.5	%	$	60,351		$	51,299		17.6	%
Distribution		23,406			19,229		21.7	%		24,669			20,597		19.8	%
Intercompany eliminations and other adjustments		(5,935)			(5,658)					(5,833)			(5,674)
Operating profit before general corporate expense		87,317			74,575		17.1	%		79,187			66,222		19.6	%
General corporate expense, net		(6,872)			(8,358)					(9,198)			(9,604)
Operating profit	$	80,445		$	66,217		21.5	%	$	69,989		$	56,618		23.6	%

Operating profit margins:
Installation		14.0	%		13.1	%				12.7	%		11.4	%
Distribution		10.6	%		9.0	%				11.5	%		10.1	%
Operating profit margin before general corporate expense		12.8	%		11.5	%				12.1	%		10.7	%
Operating profit margin		11.8	%		10.2	%				10.7	%		9.1	%

Installation

Sales

Sales in the Installation segment increased ~~$33.9~~$26.5 million, or ~~7.3~~5.9 percent, for the three months ended ~~September 30, 2019,~~March 31, 2020, as compared to the same period in ~~2018.~~2019. Sales increased ~~3.8~~2.7 percent due to volume, ~~and 3.0~~2.2 percent due to increased selling ~~prices.~~prices, and 1.1 percent due to acquisitions. Sales volume was down marginally due to the reduction in activities since the onset of the COVID-19 pandemic.

Operating margins

Operating margins in the Installation segment were 12.7 ~~14.0~~ percent and ~~13.1~~11.4 percent for the three months ended ~~September 30,~~March 31, 2020 and 2019, ~~and 2018,~~ respectively. The increase in operating margins was due to favorable fixed cost leverage on higher sales volumes, increased selling prices, ~~increased sales volume,~~and operational efficiencies, ~~and synergies from the USI acquisition,~~ partially offset by higher material costs.

Distribution

Sales

Sales in the Distribution segment increased ~~$8.0~~$9.8 million, or ~~3.8~~4.8 percent, for the three months ended ~~September 30, 2019,~~March 31, 2020, as compared to the same period in ~~2018.~~2019. Sales increased ~~4.4~~3.8 percent due to volume and 0.9 percent due to increased selling ~~prices and decreased 0.7 percent~~prices. Sales volume was down marginally due to ~~volume. Volume decreased primarily due to deliberate decisions with respect to prices and volume, as well as~~ the ~~decision to exit some low margin business.~~reduction in activities since the onset of the COVID-19 pandemic.

Operating margins

Operating margins in the Distribution segment were ~~10.6~~11.5 percent and ~~9.0~~10.1 percent for the three months ended ~~September 30,~~March 31, 2020 and 2019, ~~and 2018,~~ respectively. The increase in operating margins was due to favorable fixed cost leverage on higher sales volumes, increased selling prices, and operational efficiencies, partially offset by higher material costs.

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OTHER ITEMS

Other expense, net

Other expense, net, which primarily consisted of interest expense, was ~~$8.9~~$8.5 million and ~~$9.2~~$9.3 million for the three months ended ~~September 30,~~March 31, 2020 and 2019, respectively. The decrease was primarily driven by lower LIBOR rates and ~~2018, respectively.~~a lower balance due on our term loan.

Income tax expense

Income tax expense was ~~$16.6~~$10.7 million, an effective tax rate of ~~23.2~~17.4 percent, for the three months ended ~~September 30, 2019,~~March 31, 2020, compared to ~~$14.4~~$9.4 million, an effective tax rate of ~~25.2~~19.8 percent, for the comparable period in ~~2018.~~2019. The lower ~~2019~~2020 effective tax rate was due to a larger benefit in 2020 related to share-based ~~compensation and a favorable return to accrual adjustment, partially offset by changes in state tax rates.~~

~~FIRST NINE MONTHS 2019 VERSUS FIRST NINE MONTHS 2018~~

~~The following table sets forth our net sales, gross profit, operating profit, and margins, as reported in our condensed~~

~~consolidated statements of operations, in thousands:~~

Nine Months Ended September 30,


2019

2018

Net sales

$
1,961,771

$
1,744,702

Cost of sales

1,451,822

1,326,777

Cost of sales ratio

74.0
%

76.0
%

Gross profit

509,949

417,925

Gross profit margin

26.0
%

24.0
%

Selling, general, and administrative expense

296,846

274,134

Selling, general, and administrative expense to sales ratio

15.1
%

15.7
%

Operating profit

213,103

143,791

Operating profit margin

10.9
%

8.2
%

Other expense, net

(27,228)

(18,734)

Income tax expense

(40,864)

(28,859)

Net income

$
145,011

$
96,198

Net margin

7.4
%

5.5
%

~~Sales and Operations~~

~~Net sales increased 12.4 percent for the nine months ended September 30, 2019, from the comparable period of 2018.~~ ~~The increase was primarily driven by our USI acquisition and increased selling prices.~~

~~Gross profit margins were 26.0 percent and 24.0 percent for the nine months ended September 30, 2019 and 2018, respectively.~~ Gross profit margin improved primarily due to increased selling prices, higher sales growth in our Installation segment vs. Distribution segment, operational efficiencies, and synergies from the USI acquisition, partially offset by higher material costs.

Selling, general, and administrative expense as a percent of sales, was 15.1 percent and 15.7 percent for the nine months ended September 30, 2019 and 2018, respectively. Decreased selling, general, and administrative expense as a percent of sales was primarily the result of lower acquisition and closure costs related to the USI acquisition.

~~Table of Contents~~

~~Operating margins were 10.9 percent and 8.2 percent for the nine months ended~~ ~~September 30, 2019~~ ~~and 2018, respectively. The increase in operating margins related to~~ increased selling prices, increased sales volume, operational efficiencies, synergies from the USI acquisition, and lower acquisition and closure costs related to the USI acquisition, partially offset by higher material costs.

~~Business Segment Results~~

~~The following table sets forth our net sales and operating profit margins by business segment, in thousands:~~

Nine Months Ended September 30,


2019

2018

Percent Change

Sales by business segment:

Installation
$
1,430,800

$
1,223,357

17.0
%
Distribution

638,899

606,335

5.4
%
Intercompany eliminations

(107,928)

(84,990)

Net sales
$
1,961,771

$
1,744,702

12.4
%

Operating profit by business segment:

Installation
$
189,568

$
139,969

35.4
%
Distribution

65,154

57,141

14.0
%
Intercompany eliminations and other adjustments

(18,013)

(15,382)

Operating profit before general corporate expense

236,709

181,728

30.3
%
General corporate expense, net

(23,606)

(37,937)

Operating profit
$
213,103

$
143,791

48.2
%

Operating profit margins:

Installation

13.2
%

11.4
%

Distribution

10.2
%

9.4
%

Operating profit margin before general corporate expense

12.1
%

10.4
%

Operating profit margin

10.9
%

8.2
%

~~Installation~~

~~Sales~~

Sales in the Installation segment increased $207.4 million, or 17.0 percent, for the nine months ended September 30, 2019, compared to the same period in 2018. Sales increased 9.5 percent from acquired branches, 4.3 percent due to increased selling prices and 3.1 percent due to volume.

~~Operating margins~~

Operating margins in the Installation segment were 13.2 percent and 11.4 percent for the nine months ended September 30, 2019 and 2018, respectively. The increase in operating margins was due to increased selling prices, increased sales volume, operational efficiencies, and synergies from the USI acquisition, partially offset by higher material costs.

~~Distribution~~

~~Sales~~

Sales in the Distribution segment increased $32.6 million, or 5.4 percent, for the nine months ended September 30, 2019, compared to the same period in 2018. Sales increased 1.8 percent from acquired branches, 5.4 percent due to increased selling prices and decreased 1.8 percent due to volume. Volume decreased primarily due to deliberate decisions with respect to prices and volume, as well as the decision to exit some low margin business.

~~Table of Contents~~

~~Operating margins~~

Operating margins in the Distribution segment were 10.2 percent and 9.4 percent for the nine months ended September 30, 2019 and 2018, respectively. The increase in operating margins was due to increased selling prices and operational efficiencies, partially offset by higher material costs.

~~OTHER ITEMS~~

~~Other expense, net~~

Other expense, net, which primarily consisted of interest expense, was $27.2 million and $18.7 million for the nine months ended September 30, 2019 and 2018, respectively. The increase in other expense, net for the nine months ended September 30, 2019, primarily related to the issuance of our $400.0 million Senior Notes and our borrowing of the $100.0 million delayed draw term loan to fund our acquisition of USI in the second quarter of 2018 which resulted in an additional $8.5 million of interest expense.

~~Income tax expense~~

Income tax expense was $40.9 million, an effective tax rate of 22.0 percent, for the nine months ended September 30, 2019, compared to $28.9 million, an effective tax rate of 23.1 percent, for the comparable period in 2018. The lower 2019 effective tax rate was due to a larger benefit from share-based compensation and a favorable return to accrual adjustment, partially offset by changes in state tax rates.compensation.

Cash Flows and Liquidity

Significant sources (uses) of cash and cash equivalents are summarized for the periods indicated, in thousands:


	Nine Months Ended September 30,				Three Months Ended March 31,
	2019		2018		2020		2019
Changes in cash and cash equivalents:
Net cash provided by operating activities	$	182,779	$	96,033	$	72,930	$	23,522
Net cash used in investing activities		(38,288)		(542,512)		(36,224)		(10,122)
Net cash (used in) provided by financing activities		(73,829)		483,421
Increase for the period	$	70,662	$	36,942
Net cash used in financing activities						(34,474)		(16,051)
Increase (decrease) for the period					$	2,232	$	(2,651)

Net cash flows provided by operating activities increased ~~$86.7~~$49.4 million for the ~~nine~~three months ended ~~September 30, 2019,~~March 31, 2020, as compared to the prior year period. The change was primarily due to an increase in net income, the timing of accounts receivable collections and inventory ~~expenditures, and utilization of 2018 tax prepayments.~~expenditures.

Net cash used in investing activities was ~~$38.3~~$36.2 million for the ~~nine~~three months ended ~~September 30, 2019,~~March 31, 2020, primarily composed of ~~$34.1~~$15.9 million for purchases of property and equipment, primarily vehicles, and ~~$6.5~~$20.5 million for the ~~acquisition~~acquisitions of ~~Viking, partially offset by $2.2 million in proceeds from the sale of property~~Cooper and ~~equipment.~~Hunter. Net cash used in investing activities was ~~$542.5~~$10.1 million for the ~~nine~~three months ended ~~September 30, 2018,~~March 31, 2019, primarily composed of ~~$500.7 million of net cash for the acquisition of USI and ADO and substantially all of the assets of Santa Rosa, and $42.4~~$10.2 million for purchases of property and equipment, ~~partially offset by $0.5 million of proceeds from the sale of property and equipment.~~primarily vehicles.

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Net cash used in financing activities was ~~$73.8~~$34.5 million for the ~~nine~~three months ended ~~September 30, 2019.~~March 31, 2020. During the ~~nine~~three months ended ~~September 30, 2019,~~March 31, 2020, we used ~~$52.2~~$14.1 million for the repurchase of common stock pursuant to the 2019 Repurchase Program, ~~$19.4 million for payments on our term loan under our Amended Credit Agreement and on our equipment notes, and $11.1~~$10.3 million on purchases of common stock for tax withholding obligations related to the vesting and exercise of share-based incentive awards. We also made payments totaling $1.1 million for contingent consideration for EcoFoam and Santa Rosa. We received $10.0 million in proceeds from the issuance of equipment notes. Net cash provided by financing activities was $483.4 million for the nine months ended September 30, 2018. We received $400.0 million for the issuance of Senior Notes and $100.0 million from our delayed draw related to our acquisition of USI. We received $20.1 million of proceeds from equipment financing notes. We used $11.9awards, $7.7 million for payments on our term loan ~~$7.8 million for payment of debt issuance costs related to~~under our Amended Credit Agreement and on our ~~Senior Notes, $5.4~~equipment notes, and $2.3 million in debt issuance costs as a result of entering into a new term loan and revolving credit facility. Net cash used in financing activities was $16.1 million for the three months ended March 31, 2019. During the three months ended March 31, 2019, we used $5.6 million for payments on our term loan under our Original Credit Agreement and on our equipment notes, $5.6 million on purchases of common stock for tax withholding obligations related to the vesting and exercise of share-based incentive awards, ~~during the nine months ended September 30, 2018,~~ and ~~$1.2~~$4.6 million for ~~payments on our equipment financing notes.~~the repurchase of common stock pursuant to the 2019 Repurchase Program. We also made a payment of ~~$0.8~~$0.3 million of contingent consideration for ~~EcoFoam. We drew $90.0 million on our Revolving Facility and made repayments of $90.0 million during the nine months ended September 30, 2018.~~ Santa Rosa.

We ~~have access to liquidity through~~are closely managing our balance sheet, including maximizing our cash ~~from operations~~flow, to maintain our strong foundation and provide stabilization as we continue to work through the impacts of the COVID-19 pandemic. We had solid liquidity available to us at March 31, 2020, with $187.0 million of cash and $388.6 million available borrowing capacity under our ~~Amended Credit Agreement, which provides for borrowing and/or standby letter of credit issuances of up to $250.0 million under the~~ Revolving Facility. We believe that our cash flows from operations, combined with our current cash levels and available borrowing capacity, will be adequate to support our ongoing operations and ~~to fund our debt service requirements, capital expenditures, and~~ working capital ~~for at least~~needs, despite the ~~next twelve months. Cash flows are seasonally stronger~~current reductions in ~~the third and fourth quarters as a result of historically increased new construction~~economic activity ~~during those periods.~~due to COVID-19.

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The following table summarizes our liquidity, in thousands:


	As of				As of
	September 30,		December 31,		March 31,		December 31,
	2019		2018		2020		2019
Cash and cash equivalents (a)	$	171,591	$	100,929	$	187,039	$	184,807

Revolving Facility		250,000		250,000		450,000		250,000
Less: standby letters of credit		(61,382)		(59,288)		(61,382)		(61,382)
Availability under Revolving Facility		188,618		190,712		388,618		188,618

Total liquidity	$	360,209	$	291,641	$	575,657	$	373,425

(a) Our cash and cash equivalents consist of AAA-rated money market funds as well as cash held in our demand deposit accounts.

We occasionally 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 ~~related~~ contractual performance is completed. We also have bonds outstanding for ~~licensing~~license and insurance. Information regarding our outstanding bonds as March 31, 2020 is incorporated by reference from Note 15 – Other Commitments and Contingencies to our unaudited condensed consolidated financial statements contained in Part I, Item 1 of this Quarterly Report.

~~The following table summarizes our outstanding performance, licensing, insurance and other bonds, in thousands:~~

As of

September 30,

December 31,

2019

2018
Outstanding bonds:

Performance bonds

$
80,149

$
65,517
Licensing, insurance, and other bonds

24,019

22,287
Total bonds

$
104,168

$
87,804

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OUTLOOK

~~Housing starts improved~~The United States economy has seen a widespread reduction in activities since the onset of the COVID-19 pandemic. While construction activities are generally deemed an essential service in various municipalities, uncertainty continues to persist since the declaration of a public health emergency. Management continues to evaluate every aspect of the business, and is working to continue operations in locations where installation and distribution services are permitted and can be carried out safely. The extent to which the COVID-19 pandemic impacts our business, results of operations and financial condition will depend on future developments, which are highly uncertain and cannot be predicted, including, but not limited to, the duration and spread of the pandemic, its severity, the actions to contain the virus or address its impact, and how quickly and to what extent normal economic and operating activities can resume. Even after the COVID-19 pandemic has subsided, we may continue to experience an adverse impact to our business as a result of its global economic impact, including any recession that has occurred or may occur in the third quarter, on a year over year basis, for the first time this year. Low mortgage rates, a pivot by builders to more affordable housing and a strong economy, have helped to drive this improvement. Long-term supply and demand fundamentals continue to point towards growth in new home construction. In addition, both light and heavy commercial remain fundamentally strong industries and attractive growth opportunities for TopBuild.future.

OFF-BALANCE SHEET ARRANGEMENTS

~~During~~We had no material off-balance sheet arrangements during the quarter ended ~~June 30, 2019, we were issued additional standby~~March 31, 2020, other than short-term leases, letters of credit, ~~under our normal operating procedures~~and performance and license bonds, which ~~decreased our availability under the Revolving Facility by $4.2 million. See~~ ~~Note 4 – Long-Term Debt~~ ~~to our unaudited condensed consolidated financial statements~~have been disclosed in PartI, 1, Item I1 of this Quarterly ~~Report for our outstanding standby letters of credit balance as of September 30, 2019.~~report.

CONTRACTUAL OBLIGATIONS

There have been no material changes to our contractual obligations from those previously disclosed in our Annual Report for the year ended December 31, ~~2018,~~2019, as filed with the SEC on February ~~26, 2019,~~25, 2020, except for the ~~impact~~amendment to our ~~operating lease obligations~~Original Credit Agreement on March 20, 2020. See further information as ~~a result of the adoption of ASU 2016-02 “Leases” on January 1, 2019. For operating lease obligations calculated under the new guidance as of September 30, 2019, see~~disclosed in Note 75 – ~~Leases~~ Long Term Debtto in our unaudited condensed consolidated financial statements contained in Part I,1, Item 1 of this Quarterly Report.

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CRITICAL ACCOUNTING POLICIES

We prepare our condensed consolidated financial statements in conformity with GAAP. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities, at the date of the financial statements, and the reported amounts of sales and expenses during the reporting period. Actual results could differ from those estimates. Our critical accounting policies have not changed ~~materially~~ from those previously reported in our Annual Report for year ended December 31, ~~2018,~~2019, as filed with the SEC on February ~~26, 2019.~~25, 2020, except as required by the adoption of ASU 2016-13. See further information as disclosed in Note 2 – Accounting Policies in our unaudited condensed consolidated financial statements contained in Part 1, Item 1 of this Quarterly Report.

APPLICATION OF NEW ACCOUNTING STANDARDS

Information regarding application of new accounting standards is incorporated by reference from Note 2 – Accounting Policies to our unaudited condensed consolidated financial statements contained in Part I, Item 1 of this Quarterly Report.

FORWARD-LOOKING STATEMENTS

Statements contained in this report that reflect our views about future periods, including our future plans and performance, constitute “forward-looking statements” under the Private Securities Litigation Reform Act of 1995. Forward-looking statements can be identified by words such as “will,” “would,” “anticipate,” “expect,” “believe,” “designed,” “plan,” or “intend,” the negative of these terms, and similar references to future periods. These views involve risks and uncertainties that are difficult to predict and, accordingly, our actual results may differ materially from the results discussed in our forward-looking statements. We caution you against unduly relying on any of these forward-looking statements. Our future performance may be affected by the duration and impact of the COVID-19 pandemic on the United States economy, specifically with respect to residential and commercial construction; our ability to continue operations in markets affected by the COVID-19 pandemic and our ability to collect receivables from our customers; our reliance on residential new construction, residential repair/remodel, and commercial construction; our reliance on third-party suppliers and manufacturers; our ability to attract, develop, and retain talented personnel and our sales and labor force; our ability to maintain consistent practices across our locations; and our ability to maintain our competitive position. We discuss the material risks we face under the caption entitled “Risk Factors” in our Annual Report for the year ended December 31, ~~2018,~~2019, as filed with the SEC on February ~~26, 2019,~~25, 2020, as well as under the caption entitled “Risk Factors” in subsequent reports that we file with the SEC. Our forward-looking statements in this filing speak only as of the date of this filing. Factors or events that could cause our actual results to differ may emerge from time to time and it is not possible for us to predict all of them. Unless required by law, we undertake no obligation to update publicly any forward-looking statements as a result of new information, future events, or otherwise.

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Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rate Risk

On March 20, 2020, the Company entered into the Amended Credit Agreement, which renews, amends and restates the Original Credit Agreement. The Amended Credit Agreement consists of a senior secured term loan facility in the amount of ~~$250.0~~$300.0 million ~~$100.0 million of additional term loan capacity under a delayed draw feature, which we accessed on May 1, 2018 upon consummation of the acquisition of USI,~~ and the Revolving Facility in the amount of ~~$250.0~~$450.0 million. ~~In addition, on April 25, 2018, we issued $400.0 million~~We also have outstanding Senior Notes with an aggregate principal ~~amount~~balance of ~~Senior Notes.~~$400.0 million. The Senior Notes bear a fixed rate of interest and therefore are excluded from the calculation below as they are not subject to fluctuations in interest rates.

Interest payable on both the term loan facility and ~~the~~ Revolving Facility under the Amended Credit Agreement is based on a variable interest rate. As a result, we are exposed to market risks related to fluctuations in interest rates on this outstanding indebtedness. As of ~~September 30, 2019,~~March 31, 2020, we had ~~$312.2~~$300 million outstanding under our term loan facility, and the applicable interest rate as of such date was ~~3.36%~~2.02%. Based on our outstanding borrowings under the Amended Credit Agreement as of ~~September 30, 2019,~~March 31, 2020, a 100 basis point increase in the interest rate would result in a ~~$3.0~~$2.9 million increase in our annualized interest expense. There was no outstanding balance under the Revolving Facility as of ~~September 30, 2019.~~March 31, 2020.

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Item 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

As of the end of the period covered by this Quarterly Report, we carried out an evaluation, under the supervision and with the participation of our principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Based on this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective as of ~~September 30, 2019.~~March 31, 2020.

Changes in Internal Control over Financial Reporting

There was no change in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) in the most recent fiscal quarter ended ~~September 30, 2019,~~March 31, 2020, that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II – OTHER INFORMATION

Item 1. LEGAL PROCEEDINGS

The information set forth under the caption “Litigation” in Note 15 – Other Commitments and Contingencies to our unaudited condensed consolidated financial statements contained in Part I, Item 1 of this Quarterly Report, is incorporated by reference herein.

Item 1A. RISK FACTORS

~~There have been no material changes to our~~The below risk factor should be read in conjunction with the risk factors ~~as previously~~ disclosed in our ~~2018~~ Annual Report for the year ended December 31, 2019, as filed with the SEC on February ~~26, 2019.~~25, 2020, which are incorporated by reference herein.

The COVID-19 pandemic is likely to have an adverse impact on our business.

The United States economy has been significantly impacted by the COVID-19 pandemic, resulting in widespread uncertainty for individuals and businesses. The United States Department of Homeland Security considers construction services a critical infrastructure activity, and with the exception of a few states, residential and commercial construction has been allowed to continue. The Company continues to operate in those locations where installation and distribution services are permitted and can be carried out safely, however there is no guarantee that these operations will not be impacted or require total cessation in the future. Additionally, the duration of the COVID-19 pandemic and related disruptions of regular activities is not predictable, nor is the magnitude of the impact that the COVID-19 pandemic will have on the Company’s operational and financial performance.

Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

The following table provides information regarding the repurchase of our common stock for the three months ended ~~September 30, 2019,~~March 31, 2020, in thousands, except share and per share data:


Period	Total Number of Shares Purchased	Average Price Paid per Common Share		Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs		Total Number of Shares Purchased	Average Price Paid per Common Share		Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs
July 1, 2019 - July 31, 2019	61,971	$	81.51	61,971	$	175,449
August 1, 2019 - August 31, 2019	162,549	$	90.18	162,549	$	160,790
September 1, 2019 - September 30, 2019	139,554	$	92.92	139,554	$	147,823
January 1, 2020 - January 31, 2020							—	$	—	—	$	89,114
February 1, 2020 - February 29, 2020							—	$	—	—	$	89,114
March 1, 2020 - March 31, 2020 (a)							188,100	$	75.10	261,555	$	74,987
Total	364,074	$	89.76	364,074			188,100	$	75.10	261,555

(a) In theone month period ended March 31, 2020, the number of shares purchased as part of publicly announced plans or programs includes 73,455 shares we received as final settlement of our 2019 ASR Agreement. For more information see Note 12 – Share Repurchase Program to our unaudited condensed consolidated financial statements contained in Part I, Item 1 of this Quarterly Report, which note is incorporated in this Item 2 by reference.

All repurchases were made using cash resources. Excluded from this disclosure are shares repurchased to settle statutory employee tax withholding related to the vesting of stock awards and exercise of stock options.

Item 3. DEFAULTS UPON SENIOR SECURITIES

Not applicable.

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Item 4. MINE SAFETY DISCLOSURES

Not applicable.

Item 5. OTHER INFORMATION

Not applicable.

Item 6. EXHIBITS

The Exhibits listed on the accompanying Index to Exhibits are filed or furnished (as noted on such Index) as part of this Quarterly Report and incorporated herein by reference.

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INDEX TO EXHIBITS


		~~Incorporated by Reference~~			~~Filed~~
~~Exhibit No.~~	~~Exhibit Title~~	~~Form~~	~~Exhibit~~	~~Filing Date~~	~~Herewith~~
~~31.1~~	~~Principal Executive Officer Certification required by Rules 13a-14 and 15d-14 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002~~				X

~~31.2~~	~~Principal Financial Officer Certification required by Rules 13a-14 and 15d-14 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002~~				X

~~32.1‡~~	~~Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of Sarbanes-Oxley Act of 2002~~

~~32.2‡~~	~~Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of Sarbanes-Oxley Act of 2002~~

~~101.INS~~	~~Inline XBRL Instance Document- the Instance Document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.~~				X

~~101.SCH~~	~~Inline XBRL Taxonomy Extension Schema Document~~				X

~~101.CAL~~	~~Inline XBRL Taxonomy Extension Calculation Linkbase Document~~				X

~~101.DEF~~	~~Inline XBRL Taxonomy Extension Definition Linkbase Document~~				X

~~101.LAB~~	~~Inline XBRL Taxonomy Extension Label Linkbase Document~~				X

~~101.PRE~~	~~Inline XBRL Taxonomy Extension Presentation Linkbase Document~~				X

~~104~~	~~Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)~~				X

	~~‡Furnished herewith~~


		Incorporated by Reference			Filed
Exhibit No.	Exhibit Title	Form	Exhibit	Filing Date	Herewith
10.1	Amended and Restated Credit Agreement, dated March 20, 2020, among TopBuild Corp., Bank of America, N.A., as administrative agent, and the other lenders and agents party thereto	8-K	10.1	3/23/2020

10.2	Amended and Restated Security and Pledge Agreement, dated March 20, 2020, among TopBuild Corp., Bank of America, N.A., as administrative agent, and the grantors party thereto	8-K	10.2	3/23/2020

31.1	Principal Executive Officer Certification required by Rules 13a-14 and 15d-14 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002				X

31.2	Principal Financial Officer Certification required by Rules 13a-14 and 15d-14 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002				X

32.1‡	Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of Sarbanes-Oxley Act of 2002

32.2‡	Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of Sarbanes-Oxley Act of 2002

101.INS	Inline XBRL Instance Document - the Instance Document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document				X

101.SCH	Inline XBRL Taxonomy Extension Schema Document				X

101.CAL	Inline XBRL Taxonomy Extension Calculation Linkbase Document				X

101.DEF	Inline XBRL Taxonomy Extension Definition Linkbase Document				X

101.LAB	Inline XBRL Taxonomy Extension Label Linkbase Document				X

101.PRE	Inline XBRL Taxonomy Extension Presentation Linkbase Document				X

104	Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)				X

	‡Furnished herewith

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SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


	TOPBUILD CORP.


	By:	/s/ John S. Peterson
	Name:	John S. Peterson
	Title:	Vice President and Chief Financial Officer
		(Principal Financial Officer)

~~October 31, 2019~~May 5, 2020

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Senior secured term loan facility (original borrowing) (a)	$	250,000
Additional delayed draw term loan (b)	$	100,000

Additional term loan and/or revolver capacity available under incremental facility (c)	$	200,000

Revolving Facility	$	250,000
Sublimit for issuance of letters of credit under Revolving Facility (d)	$	100,000
Sublimit for swingline loans under Revolving Facility (d)	$	20,000

Interest rate as of September 30, 2019		3.36	%
Scheduled maturity date		5/05/2022


	2019			2018
Measurement period (years)		2.87			2.87
Risk free interest rate		2.50	%		2.36	%
Dividend yield		0.00	%		0.00	%
Estimated fair value of market-based RSAs granted	$	80.74		$	103.31


	Three Months Ended September 30, 2019				Nine Months Ended September 30, 2019
	Net Sales		Net Income		Net Sales		Net Income
ADO		7,181		58		20,057		129
Santa Rosa		2,377		338		6,919		939
USI		96,368		8,327		284,757		26,223
	$	105,926	$	8,723	$	311,733	$	27,291


	Unaudited Pro Forma for the
	Nine Months Ended September 30,
	2019			2018
Net sales	$	1,961,771	$	1,878,179
Net income	$	145,011	$	105,410


	2018 Acquisitions
	Completed During the Year Ended December 31, 2018
	ADO		Santa Rosa		USI		Total
Estimated fair values:
Cash	$	939	$	—	$	14,817	$	15,756
Accounts receivable		3,434		1,433		61,445		66,312
Inventories		2,337		104		14,029		16,470
Prepaid and other assets		135		7		3,439		3,581
Property and equipment		951		522		33,126		34,599
Intangible assets		14,090		1,850		165,400		181,340
Goodwill		2,631		3,014		281,364		287,009
Accounts payable		(908)		(1,099)		(17,927)		(19,934)
Accrued liabilities		(609)		—		(34,686)		(35,295)
Deferred tax liability		—		—		(34,469)		(34,469)
Net assets acquired	$	23,000	$	5,831	$	486,538	$	515,369


	Estimated Fair Value		Weighted Average Estimated Useful Life (Years)
2018 Acquisitions:
Customer relationships	$	168,820		12
Trademarks and trade names		11,260		9
Non-competition agreements		1,260		5
Total intangible assets for 2018 acquisitions	$	181,340		11


Segment / Cost Type	Closure Costs Liability at December 31, 2018		Closure Costs Incurred for the Nine Months Ended September 30, 2019		Cash Payments for the Nine Months Ended September 30, 2019		Non-Cash Adjustments for the Nine Months Ended September 30, 2019		Closure Costs Liability at September 30, 2019
Corporate:
Severance	$	3,065	$	239	$	(3,155)	$	(119)	$	30
Lease abandonment		301		—		(149)		229		381
Total Corporate:	$	3,366	$	239	$	(3,304)	$	110	$	411

Three Months Ended March 31,

Amortization expense