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 ~~September~~June 30, ~~2022~~2023


☐	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: 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	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 ~~31,972,332~~31,757,295 shares of Common Stock, par value $0.01 per share as of ~~October 25, 2022.~~July 27, 2023.

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 Comprehensive Income	6

	Condensed Consolidated Statements of Cash Flows	7

	Condensed Consolidated Statements of Changes in Equity	8

	Notes to Condensed Consolidated Financial Statements	9

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	2321

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	3128

Item 4.	Controls and Procedures	3129

Part II.	Other Information

Item 1.	Legal Proceedings	3129

Item 1A.	Risk Factors	3129

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	3229

Item 3.	Defaults upon Senior Securities	3229

Item 4.	Mine Safety Disclosures	3229

Item 5.	Other Information	3229

Item 6.	Exhibits	3229

Index to Exhibits		3330

Signature		3431

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
3.625% Senior Notes		TopBuild's 3.625% senior unsecured notes issued March 15, 2021 and due March 15, 2029
4.125% Senior Notes		TopBuild's 4.125% senior unsecured notes issued October 14, 2021 and due February 15, 2032
~~5.625% Senior Notes~~		~~TopBuild's 5.625% senior unsecured notes which were due on May 1, 2026 and redeemed in full on March 15, 2021~~
2015 LTIP		2015 Long-Term Incentive Program authorizes the Board to grant stock options, stock appreciation rights, restricted shares, restricted share units, performance awards, and dividend equivalents
~~2022 ASR Agreement~~		~~$100 million accelerated share repurchase agreement with Bank of America, N.A.~~
~~2019 Repurchase Program~~		~~$200 million share repurchase program authorized by the Board on February 22, 2019~~
2021 Repurchase Program		$200 million share repurchase program authorized by the Board on July 26, 2021
2022 Repurchase Program		$200 million share repurchase program authorized by the Board on July 25, 2022
~~ABS~~		~~American Building Systems, Inc.~~
~~Amendment No. 1 to Credit~~2022 ASR Agreement		~~Amendment No. 1 to the Credit Agreement dated March 8, 2021~~
~~Amendment No. 2 to Credit Agreement~~		~~Amendment No. 2 to the Credit Agreement dated October 7, 2021~~$100 million accelerated share repurchase agreement with Bank of America, N.A.
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
Assured		Assured Insulating Inc.
ASU		Accounting Standards Update
~~Assured~~Best Insulation		~~Assured Insulating Inc.~~Best Insulation Holdings LLC
Board		Board of Directors of TopBuild
BofA		Bank of America, N.A.
Billings		Billings Insulation Service, Inc.
Credit Agreement		Amended and Restated Credit Agreement, dated March 20, 2020, among TopBuild, BofA as administrative agent, and the other lenders and agents party thereto.
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
CV		~~CV Insulation LLC~~
DI		DI Super Holdings, Inc.
EBITDA		Earnings before interest, taxes, depreciation, and amortization
Exchange Act		The Securities Exchange Act of 1934, as amended
FASB		Financial Accounting Standards Board
GAAP		Generally accepted accounting principles in the United States of America
~~Green Energy~~		~~Green Energy Solutions, Inc.~~
Lenders		Bank of America, N.A., together with the other lenders party to "Credit Agreement"
~~LCR~~		~~L.C.R. Contractors, LLC~~
~~LIBOR~~		~~London interbank offered rate~~
Net Leverage Ratio		As defined in the “Credit Agreement,” the ratio of outstanding indebtedness, less up to $100 million of unrestricted cash, to EBITDA
NYSE		New York Stock Exchange
~~Credit Agreement~~		Senior secured credit agreement and related security and pledge agreement dated May 5, 2017, as amended and restated on March 20, 2020, and further amended by Amendment No. 1 to Credit Agreement and Amendment No. 2 to Credit Agreement
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
Rocky Mountain		Rocky Mountain Spray Foam & Waterproofing, LLC
ROU		Right of use (asset), as defined in ASC 842
RSA		Restricted stock award
SEC		United States Securities and Exchange Commission
Secured Leverage Ratio		As defined in the “Credit Agreement,” the ratio of outstanding indebtedness, including letters of credit, to EBITDA
~~Southwest~~SOFR		~~Southwest~~Secured overnight financing rate
SPI		SPI LLC, d/b/a Specialty Products & Insulation ~~Inc.~~
SRI		SRI Holdings, LLC
Term Loan		TopBuild's secured borrowings under the Credit Agreement due October 7, 2026.
TopBuild		TopBuild Corp. and its wholly-owned consolidated domestic subsidiaries. ~~Also, the "Company,"~~ ~~"we," "us," and "our"~~

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,		June 30,		December 31,
	2022		2021		2023		2022
ASSETS
Current assets:
Cash and cash equivalents	$	159,384	$	139,779	$	526,327	$	240,069
Receivables, net of an allowance for credit losses of $14,105 at September 30, 2022, and $8,798 at December 31, 2021		815,633		668,419
Receivables, net of an allowance for credit losses of $16,778 at June 30, 2023, and $16,281 at December 31, 2022						857,664		836,071
Inventories, net		447,100		352,801		385,049		438,644
Prepaid expenses and other current assets		27,416		26,692		25,556		34,257
Total current assets		1,449,533		1,187,691		1,794,596		1,549,041

Right of use assets		191,731		177,177		204,044		205,892
Property and equipment, net		248,623		244,574		258,746		253,484
Goodwill		1,966,234		1,949,763		1,991,949		1,966,994
Other intangible assets, net		631,005		684,209		595,706		614,967
Other assets		18,991		15,116		12,905		16,453
Total assets	$	4,506,117	$	4,258,530	$	4,857,946	$	4,606,831

LIABILITIES AND EQUITY
Current liabilities:
Accounts payable	$	510,163	$	461,917	$	468,602	$	487,114
Current portion of long-term debt		37,367		38,640		45,142		40,068
Accrued liabilities		181,455		175,891		180,594		199,370
Short-term operating lease liabilities		57,268		54,591		61,825		60,880
Short-term finance lease liabilities		2,328		2,387		2,180		2,207
Total current liabilities		788,581		733,426		758,343		789,639

Long-term debt		1,428,935		1,454,483		1,394,794		1,417,257
Deferred tax liabilities, net		244,608		248,243		254,777		251,481
Long-term portion of insurance reserves		61,243		51,875		57,217		59,783
Long-term operating lease liabilities		138,923		125,339		148,709		149,943
Long-term finance lease liabilities		6,170		7,770		4,519		6,673
Other liabilities		3,218		960		1,541		2,349
Total liabilities		2,671,678		2,622,096		2,619,900		2,677,125

Commitments and contingencies

Equity:
Preferred stock, $0.01 par value: 10,000,000 shares authorized; 0 shares issued and outstanding		-		-		-		-
Common stock, $0.01 par value: 250,000,000 shares authorized; 39,325,465 shares issued and 31,974,006 outstanding at September 30, 2022, and 39,165,024 shares issued and 32,927,185 outstanding at December 31, 2021		393		391
Treasury stock, 7,351,459 shares at September 30, 2022, and 6,237,839 shares at December 31, 2021, at cost		(642,746)		(431,030)
Common stock, $0.01 par value: 250,000,000 shares authorized; 39,473,298 shares issued and 31,757,620 outstanding at June 30, 2023, and 39,325,916 shares issued and 31,642,832 outstanding at December 31, 2022						395		393
Treasury stock, 7,715,678 shares at June 30, 2023, and 7,683,084 shares at December 31, 2022, at cost						(699,149)		(692,799)
Additional paid-in capital		884,729		873,031		895,749		887,367
Retained earnings		1,612,830		1,200,676		2,056,935		1,756,665
Accumulated other comprehensive loss		(20,767)		(6,634)		(15,884)		(21,920)
Total equity		1,834,439		1,636,434		2,238,046		1,929,706
Total liabilities and equity	$	4,506,117	$	4,258,530	$	4,857,946	$	4,606,831

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 June 30,				Six Months Ended June 30,
	2022		2021		2022		2021		2023		2022		2023		2022
Net sales	$	1,300,998	$	845,757	$	3,744,201	$	2,422,810	$	1,317,262	$	1,274,285	$	2,582,500	$	2,443,203
Cost of sales		905,250		595,466		2,633,155		1,731,581		895,462		890,188		1,790,485		1,727,905
Gross profit		395,748		250,291		1,111,046		691,229		421,800		384,097		792,015		715,298

Selling, general, and administrative expense		172,874		116,485		516,997		333,252		184,697		176,876		355,481		344,123
Operating profit		222,874		133,806		594,049		357,977		237,103		207,221		436,534		371,175

Other income (expense), net:
Interest expense		(14,561)		(5,503)		(39,936)		(18,210)		(18,558)		(13,410)		(36,597)		(25,375)
Loss on extinguishment of debt		—		—		—		(13,862)
Other, net		(303)		66		103		210		4,605		(279)		6,528		406
Other expense, net		(14,864)		(5,437)		(39,833)		(31,862)		(13,953)		(13,689)		(30,069)		(24,969)
Income before income taxes		208,010		128,369		554,216		326,115		223,150		193,532		406,465		346,206

Income tax expense		(54,264)		(32,934)		(142,060)		(80,457)		(58,750)		(49,835)		(106,195)		(87,796)
Net income	$	153,746	$	95,435	$	412,156	$	245,658	$	164,400	$	143,697	$	300,270	$	258,410

Net income per common share:
Basic	$	4.79	$	2.91	$	12.72	$	7.49	$	5.20	$	4.43	$	9.51	$	7.93
Diluted	$	4.76	$	2.88	$	12.63	$	7.41	$	5.18	$	4.41	$	9.47	$	7.87

Weighted average shares outstanding:
Basic		32,076,285		32,763,311		32,404,275		32,818,145		31,599,744		32,405,292		31,575,337		32,570,988
Diluted		32,279,820		33,088,680		32,643,161		33,155,995		31,731,807		32,614,449		31,722,660		32,827,549

See notes to our unaudited condensed consolidated financial statements.

Table of Contents

TOPBUILD CORP.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)

(In thousands)


	Three Months Ended September 30,				Nine Months Ended September 30,				Three Months Ended June 30,				Six Months Ended June 30,
	2022		2021		2022		2021		2023		2022		2023		2022
Net income	$	153,746	$	95,435	$	412,156	$	245,658	$	164,400	$	143,697	$	300,270	$	258,410
Other comprehensive loss:
Other comprehensive income (loss):
Foreign currency translation adjustment		(15,158)		-		(14,133)		-		4,283		(2,193)		6,037		1,026
Comprehensive income	$	138,588	$	95,435	$	398,023	$	245,658	$	168,683	$	141,504	$	306,307	$	259,436

See notes to our unaudited condensed consolidated financial statement

Table of Contents

TOPBUILD CORP.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(In thousands)


	Nine Months Ended September 30,				Six Months Ended June 30,
	2022		2021		2023		2022
Cash Flows Provided by (Used in) Operating Activities:
Net income	$	412,156	$	245,658	$	300,270	$	258,410
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		93,051		51,005		64,652		60,621
Share-based compensation		9,673		8,375		6,886		7,061
Loss on extinguishment of debt		-		13,862
Loss on sale of property and equipment		76		1,410		621		525
Amortization of debt issuance costs		2,147		1,352		1,440		1,427
Provision for bad debt expense		8,837		5,215		4,031		6,404
Loss from inventory obsolescence		5,127		1,667		3,290		3,610
Change in certain assets and liabilities:
Receivables, net		(152,578)		(62,257)		(37,247)		(107,739)
Inventories, net		(101,148)		(30,115)		54,623		(82,621)
Prepaid expenses and other current assets		(807)		(2,984)		8,897		648
Accounts payable		49,079		47,907		(8,806)		47,540
Accrued liabilities		3,469		30,397		(13,872)		16,884
Other, net		6,548		(1,987)		1,012		4,927
Net cash provided by operating activities		335,630		309,505		385,797		217,697

Cash Flows Provided by (Used in) Investing Activities:
Purchases of property and equipment		(56,044)		(42,320)		(30,672)		(36,034)
Acquisition of businesses, net of cash acquired		(20,500)		(205,028)		(45,948)		(18,746)
Proceeds from sale of property and equipment		2,877		298		782		618
Net cash used in investing activities		(73,667)		(247,050)		(75,838)		(54,162)

Cash Flows Provided by (Used in) Financing Activities:
Proceeds from issuance of long-term debt		-		411,250
Repayment of long-term debt		(28,968)		(427,563)		(18,829)		(19,287)
Payment of debt issuance costs		-		(6,500)
Proceeds from revolving credit facility		70,000		-		—		70,000
Repayment of revolving credit facility		(70,000)		-		—		(70,000)
Taxes withheld and paid on employees' equity awards		(11,719)		(11,511)		(6,350)		(11,667)
Exercise of stock options		2,028		5,952		1,497		1,452
Repurchase of shares of common stock		(200,050)		(35,556)		—		(150,050)
Payment of contingent consideration		(1,674)		(628)		(300)		(35)
Net cash used in financing activities		(240,383)		(64,556)		(23,982)		(179,587)
Impact of exchange rate changes on cash		(1,975)		-		281		142
Net increase (decrease) in cash and cash equivalents		19,605		(2,101)		286,258		(15,910)
Cash and cash equivalents- Beginning of period		139,779		330,007		240,069		139,779
Cash and cash equivalents- End of period	$	159,384	$	327,906	$	526,327	$	123,869

Supplemental disclosure of noncash activities:
Leased assets obtained in exchange for new operating lease liabilities	$	80,186	$	51,190	$	26,310	$	36,129
Accruals for property and equipment		395		580		1,449		563

See notes to our unaudited condensed consolidated financial statements.

Table of Contents

TOPBUILD CORP.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (Unaudited)

(In thousands except share data)

Accumulated

Common

Treasury

Additional

Other

Stock

Stock

Paid-in

Retained

Comprehensive

($0.01 par value)

at cost

Capital

Earnings

(Loss) Income

Equity
Balance at December 31, 2020
$
389

$
(386,669)

$
858,414

$
876,660

$
-

$
1,348,794
Net income

-

-

-

59,842

-

59,842
Share-based compensation

-

-

3,111

-

-

3,111
Issuance of 30,284 restricted share awards under long-term equity incentive plan

1

-

(1)

-

-

-
Repurchase of 49,284 shares

-

(9,856)

-

-

-

(9,856)
43,290 shares withheld to pay taxes on employees' equity awards

-

-

(11,480)

��
-

-

(11,480)
51,915 shares issued upon exercise of stock options

-

-

5,952

-

-

5,952
Balance at March 31, 2021
$
390

$
(396,525)

$
855,996

$
936,502

$
-

$
1,396,363
Net income

-

-

-

90,380

-

90,380
Share-based compensation

-

-

2,266

-

-

2,266
Repurchase of 73,747 shares

-

(14,182)

-

-

-

(14,182)
50 shares withheld to pay taxes on employees' equity awards

-

-

(11)

-

-

(11)
Balance at June 30, 2021
$
390

$
(410,707)

$
858,251

$
1,026,882

$
-

$
1,474,816
Net income

-

-

-

95,435

-

95,435
Share-based compensation

-

-

2,998

-

-

2,998
Issuance of 897 restricted share awards under long-term equity incentive plan

1

-

(1)

-

-

-
Repurchase of 60,105 shares

-

(11,518)

-

-

-

(11,518)
100 shares withheld to pay taxes on employees' equity awards

-

-

(20)

-

-

(20)
Balance at September 30, 2021
$
391

$
(422,225)

$
861,228

$
1,122,317

$
-

$
1,561,711


									Accumulated
	Common		Treasury		Additional				Other
	Stock		Stock		Paid-in		Retained		Comprehensive
	($0.01 par value)		at cost		Capital		Earnings		(Loss) Income		Equity
Balance at December 31, 2021	$	391	$	(431,030)	$	873,031	$	1,200,676	$	(6,634)	$	1,636,434
Net income		-		-		-		114,711		-		114,711
Share-based compensation		-		-		3,727		-		-		3,727
Issuance of 52,940 restricted share awards under long-term equity incentive plan		2		-		(2)		-		-		-
Repurchase of 238,154 shares		-		(50,000)		-		-		-		(50,000)
53,073 shares withheld to pay taxes on employees' equity awards		-		(11,658)		-		-		-		(11,658)
12,269 shares issued upon exercise of stock options		-		-		808		-		-		808
Other comprehensive income, net of tax		-		-		-		-		3,218		3,218
Balance at March 31, 2022	$	393	$	(492,688)	$	877,564	$	1,315,387	$	(3,416)	$	1,697,240
Net income		-		-		-		143,697		-		143,697
Share-based compensation		-		-		3,334		-		-		3,334
Repurchase of 409,312 shares pursuant to 2022 ASR Agreement		-		(80,050)		(20,000)		-		-		(100,050)
51 shares withheld to pay taxes on employees' equity awards		-		(9)		-		-		-		(9)
5,835 shares issued upon exercise of stock options		-		-		644		-		-		644
Other comprehensive loss, net of tax		-		-		-		-		(2,193)		(2,193)
Balance at June 30, 2022	$	393	$	(572,747)	$	861,542	$	1,459,084	$	(5,609)	$	1,742,663

Accumulated

Common

Treasury

Additional

Other

Stock

Stock

Paid-in

Retained

Comprehensive

($0.01 par value)

at cost

Capital

Earnings

(Loss) Income

Equity
Balance at December 31, 2021
$
391

$
(431,030)

$
873,031

$
1,200,676

$
(6,634)

$
1,636,434
Net income

-

-

-

114,711

-

114,711
Share-based compensation

-

-

3,727

-

-

3,727
Issuance of 52,940 restricted share awards under long-term equity incentive plan

2

-

(2)

-

-

-
Repurchase of 238,154 shares

-

(50,000)

-

-

-

(50,000)
53,073 shares withheld to pay taxes on employees' equity awards

-

(11,658)

-

-

-

(11,658)
12,269 shares issued upon exercise of stock options

-

-

808

-

-

808
Other comprehensive income, net of tax

-

-

-

-

3,218

3,218
Balance at March 31, 2022
$
393

$
(492,688)

$
877,564

$
1,315,387

$
(3,416)

$
1,697,240
Net income

-

-

143,697

-

143,697
Share-based compensation

-

-

3,334

-

-

3,334
Repurchase of 409,312 shares pursuant to 2022 ASR Agreement

-

(80,050)

(20,000)

-

-

(100,050)
51 shares withheld to pay taxes on employees' equity awards

-

(9)

-

-

-

(9)
5,835 shares issued upon exercise of stock options

-

-

644

-

-

644
Other comprehensive loss, net of tax

-

-

-

-

(2,193)

(2,193)
Balance at June 30, 2022
$
393

$
(572,747)

$
861,542

$
1,459,084

$
(5,609)

$
1,742,663
Net income

-

-

-

153,746

-

153,746
Share-based compensation

-

-

2,611

-

-

2,611
Repurchase of 142,351 shares pursuant to the settlement of the 2022 ASR Agreement

-

(20,000)

20,000

-

-

-
Repurchase of 269,544 shares

-

(49,999)

-

-

-

(49,999)
7,111 shares issued upon exercise of stock options

-

-

576

-

-

576
Other comprehensive loss, net of tax

-

-

-

-

(15,158)

(15,158)
Balance at September 30, 2022
$
393

$
(642,746)

$
884,729

$
1,612,830

$
(20,767)

$
1,834,439


									Accumulated
	Common		Treasury		Additional				Other
	Stock		Stock		Paid-in		Retained		Comprehensive
	($0.01 par value)		at cost		Capital		Earnings		(Loss) Income		Equity
Balance at December 31, 2022	$	393	$	(692,799)	$	887,367	$	1,756,665	$	(21,920)	$	1,929,706
Net income		-		-		-		135,870		-		135,870
Share-based compensation		-		-		3,135		-		-		3,135
Issuance of 95,012 restricted share awards under long-term equity incentive plan		2		-		-		-		-		2
32,594 shares withheld to pay taxes on employees' equity awards		-		(6,350)		-		-		-		(6,350)
28,840 shares issued upon exercise of stock options		-		-		1,028		-		-		1,028
Other comprehensive income, net of tax		-		-		-		-		1,753		1,753
Balance at March 31, 2023	$	395	$	(699,149)	$	891,530	$	1,892,535	$	(20,167)	$	2,065,144
Net income		-						164,400		-		164,400
Share-based compensation		-		-		3,751		-		-		3,751
Issuance of 18,768 restricted share awards under long-term equity incentive plan		-		-		-		-		-		-
4,762 shares issued upon exercise of stock options		-		-		468		-		-		468
Other comprehensive income, net of tax		-		-		-		-		4,283		4,283
Balance at June 30, 2023	$	395	$	(699,149)	$	895,749	$	2,056,935	$	(15,884)	$	2,238,046

See notes to our unaudited condensed consolidated financial statements.

Table of Contents

TOPBUILD CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. BASIS OF PRESENTATION

TopBuild was formed on June 30, 2015, and is listed on the NYSE under the ticker symbol “BLD.” We report our business in two segments: Installation and Specialty Distribution. Our Installation segment primarily installs insulation and other building products. Our Specialty 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.

We believe 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~~June 30, ~~2022,~~2023, our results of operations and comprehensive income for the three and ~~nine~~six months ended ~~September~~June 30, ~~2022~~2023 and ~~2021,~~2022, and our cash flows for the ~~nine~~six months ended ~~September~~June 30, ~~2022~~2023 and ~~2021.~~2022. The condensed consolidated balance sheet at December 31, ~~2021~~2022 was derived from our audited financial statements, but does not include all disclosures required by GAAP. ~~We made the material acquisition of DI in October 2021 and it is therefore not included in the comparative periods of three and nine months ended September 30, 2021.~~

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, ~~2021,~~2022, as filed with the SEC on February ~~22, 2022.~~23, 2023.

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 periods. Actual results could differ materially from these estimates. All ~~significant~~ intercompany transactions between TopBuild entities have been eliminated.

Recently Adopted Accounting Pronouncements

~~The following table summarizes additional ASUs which were adopted, but did not have a material impact on our accounting policies or our consolidated financial statements and related disclosures:~~


~~ASU~~	~~Description~~	~~Period Adopted~~	~~Method~~
~~ASU 2019-12~~	~~Income Taxes - Simplifying the Accounting for Income Taxes~~	~~01/01/21~~	~~Modified Retrospective~~
~~ASU 2021-01~~	~~Reference Rate Reform~~	~~01/01/21~~	~~Prospective~~

~~Recently Issued Accounting Pronouncements Not Yet Adopted~~

In October 2021, the FASB issued ASU 2021-08, “Accounting for Contract Assets and Contract Liabilities from Contracts with Customers”. This standard improves the accounting for acquired revenue contracts with customers in a business combination by addressing diversity in practice and inconsistency related to recognition of an acquired contract liability, as well as payment terms and their effect on subsequent revenue recognized by the acquirer. This standard isbecame effective for us ~~beginning~~on January 1, 2023, ~~with early adoption permitted. We are evaluating the~~and did not have a material impact ~~that adoption of this standard may have on~~to our financial ~~position and results of operations.~~statements upon adoption.

3. REVENUE RECOGNITION

Revenue is disaggregated between our Installation and Specialty Distribution 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 by market (in thousands):


	Three Months Ended June 30,
	2023								2022
		Installation		Specialty Distribution		Eliminations		Total		Installation		Specialty Distribution		Eliminations		Total
Residential	$	668,172	$	227,254	$	(56,667)	$	838,759	$	634,078	$	247,827	$	(50,007)	$	831,898
Commercial/Industrial		140,883		347,234		(9,614)		478,503		114,890		339,964		(12,467)		442,387
Net sales	$	809,055	$	574,488	$	(66,281)	$	1,317,262	$	748,968	$	587,791	$	(62,474)	$	1,274,285

Table of Contents

TOPBUILD CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

~~3. REVENUE RECOGNITION~~

	Six Months Ended June 30,
	2023								2022
		Installation		Specialty Distribution		Eliminations		Total		Installation		Specialty Distribution		Eliminations		Total
Residential	$	1,313,875	$	451,579	$	(108,056)	$	1,657,398	$	1,197,382	$	484,238	$	(93,429)	$	1,588,191
Commercial/Industrial		262,270		681,283		(18,451)		925,102		228,279		647,415		(20,682)		855,012
Net sales	$	1,576,145	$	1,132,862	$	(126,507)	$	2,582,500	$	1,425,661	$	1,131,653	$	(114,111)	$	2,443,203

~~Revenue is disaggregated between our Installation and Specialty Distribution 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 by market (in thousands):~~

Three Months Ended September 30,

2022

2021

Installation

Specialty Distribution

Elims

Total

Installation

Specialty Distribution

Elims

Total
Residential

$
662,005

$
245,549

$
(54,533)

$
853,021

$
501,494

$
206,951

$
(36,018)

$
672,427
Commercial

121,051

228,433

(11,068)

338,416

111,406

69,447

(7,523)

173,330
Industrial

-

109,561

-

109,561

-

-

-

-
Net sales

$
783,056

$
583,543

$
(65,601)

$
1,300,998

$
612,900

$
276,398

$
(43,541)

$
845,757

Nine Months Ended September 30,

2022

2021

Installation

Specialty Distribution

Elims

Total

Installation

Specialty Distribution

Elims

Total
Residential

$
1,859,386

$
729,787

$
(147,962)

$
2,441,211

$
1,405,837

$
602,059

$
(106,076)

$
1,901,820
Commercial

349,331

677,775

(31,750)

995,356

345,441

199,304

(23,755)

520,990
Industrial

-

307,634

-

307,634

-

-

-

-
Net sales

$
2,208,717

$
1,715,196

$
(179,712)

$
3,744,201

$
1,751,278

$
801,363

$
(129,831)

$
2,422,810

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


																	Three Months Ended June 30,
	Three Months Ended September 30, 2022								Three Months Ended September 30, 2021								2023								2022
		Installation		Specialty Distribution		Elims		Total		Installation		Specialty Distribution		Elims		Total	Installation		Specialty Distribution		Eliminations		Total		Installation		Specialty Distribution		Eliminations		Total
Insulation and accessories	$	619,613	$	516,214	$	(56,368)	$	1,079,459	$	487,798	$	219,441	$	(36,406)	$	670,833	$	633,924	$	513,162	$	(57,599)	$	1,089,487	$	590,099	$	518,507	$	(53,343)	$	1,055,263
Glass and windows		60,375		-		-		60,375		46,096		-		-		46,096		68,841		-		-		68,841		57,121		-		-		57,121
Gutters		28,729		48,972		(8,110)		69,591		23,057		40,555		(6,422)		57,190		29,401		44,088		(7,571)		65,918		27,240		50,879		(8,094)		70,025
All other		74,339		18,357		(1,123)		91,573		55,949		16,402		(713)		71,638		76,889		17,238		(1,111)		93,016		74,508		18,405		(1,037)		91,876
Net sales	$	783,056	$	583,543	$	(65,601)	$	1,300,998	$	612,900	$	276,398	$	(43,541)	$	845,757	$	809,055	$	574,488	$	(66,281)	$	1,317,262	$	748,968	$	587,791	$	(62,474)	$	1,274,285


																	Six Months Ended June 30,
	Nine Months Ended September 30, 2022								Nine Months Ended September 30, 2021								2023								2022
		Installation		Specialty Distribution		Elims		Total		Installation		Specialty Distribution		Elims		Total	Installation		Specialty Distribution		Eliminations		Total		Installation		Specialty Distribution		Eliminations		Total
Insulation and accessories	$	1,746,054	$	1,514,481	$	(153,520)	$	3,107,015	$	1,383,472	$	651,192	$	(108,125)	$	1,926,539	$	1,234,691	$	1,015,964	$	(109,572)	$	2,141,083	$	1,126,440	$	998,267	$	(97,153)	$	2,027,554
Glass and windows		168,692		-		-		168,692		136,309		-		-		136,309		132,283		-		-		132,283		108,317		-		-		108,317
Gutters		78,926		146,481		(23,207)		202,200		64,831		103,244		(17,992)		150,083		57,679		83,931		(14,736)		126,874		50,198		97,509		(15,096)		132,611
All other		215,045		54,234		(2,985)		266,294		166,666		46,927		(3,714)		209,879		151,492		32,967		(2,199)		182,260		140,706		35,877		(1,862)		174,721
Net sales	$	2,208,717	$	1,715,196	$	(179,712)	$	3,744,201	$	1,751,278	$	801,363	$	(129,831)	$	2,422,810	$	1,576,145	$	1,132,862	$	(126,507)	$	2,582,500	$	1,425,661	$	1,131,653	$	(114,111)	$	2,443,203

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


	Included in Line Item on	As of
	Condensed Consolidated	June 30,		December 31,
	Balance Sheets	2023		2022
Contract Assets:
Receivables, unbilled	Receivables, net	$	87,305	$	75,481

Contract Liabilities:
Deferred revenue	Accrued liabilities	$	16,332	$	21,940

The aggregate amount remaining on uncompleted performance obligations was $419.3 million as of June 30, 2023. We expect to satisfy the performance obligations and recognize revenue on substantially all of these uncompleted contracts over the next 18 months.

On certain of our long-term contracts, a percentage of the total project cost is withheld and not invoiced to the customer and collected until satisfactory completion of the customer

’s project, typically within a year. This amount is referred to as retainage and is common practice in the construction industry. Retainage receivables are classified as a component of Receivables, net on our condensed consolidated balance sheets and were $73.5 million and $63.0 million as of June 30, 2023 and December 31, 2022, respectively.

Table of Contents

TOPBUILD CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

Included in Line Item on

As of

Condensed

September 30,

December 31,

Balance Sheets

2022

2021
Contract Assets:

Receivables, unbilled
Receivables, net

$
83,232

$
71,401

Contract Liabilities:

Deferred revenue
Accrued liabilities

$
21,991

$
14,310

The aggregate amount remaining on uncompleted performance obligations was $425.5 million as of September 30, 2022. We expect to satisfy the performance obligations and recognize revenue on substantially all of these uncompleted contracts over the next 18 months.

Certain customer contracts contain provisions whereby customers are entitled to withhold an agreed upon percentage of the total contract value until the customer’s project is satisfactorily complete. This amount held back is referred to as retainage and is a common practice in the construction industry. Retainage receivables are classified as trade receivables, which is a component of Receivables, net on our condensed consolidated balance sheets and were $59.8 million and $57.6 million as of September 30, 2022 and December 31, 2021, respectively.

4. GOODWILL AND OTHER INTANGIBLES

We have two reporting units which are also our operating and reporting segments: Installation and Specialty 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.

In the fourth quarter of ~~2021,~~2022, we performed an annual assessment on our goodwill resulting in no impairment and there were no indicators of impairment for the ~~nine~~six months ended ~~September~~June 30, ~~2022.~~2023.

Changes in the carrying amount of goodwill for ~~nine~~six months ended ~~September~~June 30, ~~2022,~~2023, by segment, were as follows, in thousands:


					Fx				Accumulated												Accumulated
	Gross Goodwill				Translation		Gross Goodwill		Impairment		Net Goodwill		Gross Goodwill				FX Translation		Gross Goodwill		Impairment		Net Goodwill
	December 31, 2021		Additions		Adjustment		September 30, 2022		Losses		September 30, 2022		December 31, 2022		Additions		Adjustment		June 30, 2023		Losses		June 30, 2023
Goodwill, by segment:
Installation	$	1,818,872	$	8,107		-	$	1,826,979	$	(762,021)	$	1,064,958	$	1,826,979	$	23,568	$	-	$	1,850,547	$	(762,021)	$	1,088,526
Specialty Distribution		892,912		10,585		(2,221)		901,276		-		901,276		902,036		-		1,387		903,423		-		903,423
Total goodwill	$	2,711,784	$	18,692	$	(2,221)	$	2,728,255	$	(762,021)	$	1,966,234	$	2,729,015	$	23,568	$	1,387	$	2,753,970	$	(762,021)	$	1,991,949

See Note 1211 – Business Combinations for goodwill recognized on acquisitions that occurred during the ~~quarter.~~six months ended June 30, 2023.

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
	June 30, 2023		December 31, 2022
Gross definite-lived intangible assets	$	797,503	$	782,316
Accumulated amortization		(201,797)		(167,349)
Net definite-lived intangible assets	$	595,706	$	614,967

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


	Three Months Ended June 30,				Six Months Ended June 30,
	2023		2022		2023		2022
Amortization expense	$	17,211	$	16,809	$	34,107	$	33,839

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
	June 30, 2023		December 31, 2022
3.625% Senior Notes due 2029	$	400,000	$	400,000
4.125% Senior Notes due 2032		500,000		500,000
Term loan due 2026		551,250		566,250
Equipment notes		4,598		8,427
Unamortized debt issuance costs		(15,912)		(17,352)
Total debt, net of unamortized debt issuance costs		1,439,936		1,457,325
Less: current portion of long-term debt		45,142		40,068
Total long-term debt	$	1,394,794	$	1,417,257

Table of Contents

TOPBUILD CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

~~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


September 30,

December 31,

2022

2021
Gross definite-lived intangible assets

$
781,374

$
783,843
Accumulated amortization


(150,369)

(99,634)
Net definite-lived intangible assets

$
631,005

$
684,209

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

Three Months Ended September 30,

Nine Months Ended September 30,


2022

2021

2022

2021
Amortization expense

$
16,970

$
7,082

$
50,809

$
20,424

~~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

September 30,

December 31,

2022

2021
3.625% Senior Notes due 2029

$
400,000

$
400,000
4.125% Senior Notes due 2032

500,000

500,000
Term loan

573,750

596,250
Equipment notes

10,625

17,085
Unamortized debt issuance costs

(18,073)

(20,212)
Total debt, net of unamortized debt issuance costs

1,466,302

1,493,123
Less: current portion of long-term debt

37,367

38,640
Total long-term debt

$
1,428,935

$
1,454,483

The following table sets forth our remaining principal payments for our outstanding debt balances as of ~~September~~June 30, ~~2022,~~2023, in thousands:


	Payments Due by Period
	2022		2023		2024		2025		2026		Thereafter		Total		2023		2024		2025		2026		2027		Thereafter		Total
3.625% Senior Notes	$	-	$	-	$	-	$	-	$	-	$	400,000	$	400,000	$	-	$	-	$	-	$	-	$	-	$	400,000	$	400,000
4.125% Senior Notes		-		-		-		-		-		500,000		500,000		-		-		-		-		-		500,000		500,000
Term loan		7,500		33,750		45,000		48,750		438,750		-		573,750		18,750		45,000		48,750		438,750		-		-		551,250
Equipment notes		2,191		6,325		2,109		-		-		-		10,625		2,489		2,109		-		-		-		-		4,598
Total	$	9,691	$	40,075	$	47,109	$	48,750	$	438,750	$	900,000	$	1,484,375	$	21,239	$	47,109	$	48,750	$	438,750	$	-	$	900,000	$	1,455,848

~~Amendments to~~Credit Agreement ~~and Senior Secured Term Loan Facility~~

On March 8, 2021, the Company entered into Amendment No. 1 to Credit Agreement. Amendment No. 1 to Credit Agreement provided for a term loan facility in an aggregate principal amount of $300.0 million, all of which was drawn on March 8, 2021, and a revolving facility with an aggregate borrowing capacity of $450.0 million, including a $100.0 million letter of credit sublimit and up to a $35.0 million swingline sublimit.

Amendment No. 1 to Credit Agreement extended the maturity date from March 2025 to March 2026, the floor for base rate loans was reduced from 1.5% to 1.0%, and the floor for Eurodollar rate loans was reduced from 0.5% to 0.0%. Additional provisions were made for the eventual replacement of LIBOR with another alternate benchmark rate.

~~Table of Contents~~

~~TOPBUILD CORP.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)~~

On October 7, 2021, the Company entered into Amendment No. 2 to Credit Agreement. Amendment No. 2 to Credit Agreement provides for a term loan facility in an aggregate principal amount of $600.0 million, comprised of a $300.0 million term loan facility and a $300.0 million delayed draw term loan commitment, all of which was drawn on October 7, 2021, and a revolving facility with an aggregate borrowing capacity of $500.0 million, including a $100.0 million letter of credit sublimit and up to a $35.0 million swingline sublimit. The maturity date for the loans under Amendment No. 2 to Credit Agreement was extended from March 2026 to October 2026. Additional provisions were also made for the eventual replacement of LIBOR with an alternative benchmark rate.

The following table outlines the key terms of ~~our Amendment No. 2 to~~the Credit Agreement (dollars in thousands):


Senior secured term loan facility	$	300,000		$	300,000
Additional delayed draw term loan	$	300,000		$	300,000

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

Revolving facility	$	500,000		$	500,000
Sublimit for issuance of letters of credit under revolving facility (b)	$	100,000		$	100,000
Sublimit for swingline loans under revolving facility (b)	$	35,000		$	35,000

Interest rate as of September 30, 2022		3.52	%
Interest rate as of June 30, 2023					6.20	%
Scheduled maturity date		10/7/2026			10/7/2026

(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). This incremental facility has not been accessed as of June 30, 2023.

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

Interest ~~payable~~expense on borrowings under the 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) BofA’s “prime rate,” and (iii) the ~~LIBOR~~SOFR rate for U.S. dollar deposits with a term of one month, plus 1.00 percent; or

●

A ~~LIBOR~~SOFR 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, subject to a floor of 0%.

Amendment No. 2 to Credit Agreement contemplates future amendment by the Company and the agent to provide for the replacement of LIBOR with an alternative 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 ~~1.00~~1.50 percent and in the case of ~~LIBOR~~SOFR rate borrowings, the applicable margin ranges from 1.00 percent to 2.50 percent. Borrowings under ~~Amendment No. 2 to~~the 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.

1312

Table of Contents

TOPBUILD CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The following table summarizes our availability under the Revolving Facility, in thousands:


	As of
	September 30,		December 31,		As of
	2022		2021		June 30, 2023		December 31, 2022
Revolving facility	$	500,000	$	500,000	$	500,000	$	500,000
Less: standby letters of credit		(67,689)		(69,936)		(67,539)		(67,689)
Availability under revolving facility	$	432,311	$	430,064	$	432,461	$	432,311

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.

3.625% Senior Notes

On March 15, 2021, the Company completed a private offering of $400.0 million aggregate principal amount of 3.625% Senior Notes due 2029. The Company used the proceeds from the issuance of the 3.625% Senior Notes, together with cash on hand, to redeem 100% of its $400.0 million aggregate principal amount of 5.625% Senior Notes due 2026. The 3.625% Senior Notes are ~~our~~$400.0 million senior unsecured obligations and bear interest at 3.625% per year, payable semiannually in arrears on March 15 and September 15, ~~of each year, which began~~beginning on September 15, 2021. The 3.625% Senior Notes mature on March 15, 2029, unless redeemed early or repurchased. If we undergo a change in control, we must make an offer to repurchase all of the 3.625% 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.

The Company may redeem the 3.625% Senior Notes, in whole or in part, at any time on or after March 15, 2024 at the redemption prices specified in the notes. The Company may also redeem all or part of the 3.625% Senior Notes at any time prior to March 15, 2024 at a redemption price equal to 100% of the principal amount of the notes to be redeemed, plus the Applicable Premium (as defined in the ~~Indenture)~~notes), as of, and accrued and unpaid interest to, the redemption date. Additionally, the Company may redeem up to 40% of the aggregate principal amount of the 3.625% Senior Notes prior to March 15, 2024 with the net cash proceeds of certain sales of its capital stock at 103.625% of the principal amount of the notes, plus accrued and unpaid interest, if any, to the date of redemption only if, after the redemption, at least 60% of the aggregate principal amount of the 3.625% Senior Notes originally issued remains outstanding.

4.125% Senior Notes

~~On October 14, 2021, the Company completed a private offering of $500.0 million aggregate principal amount of 4.125% Senior Notes due 2032.~~ The 4.125% Senior Notes are $500.0 million senior unsecured obligations and bear interest at 4.125% per year, payable semiannually in arrears on February 15 and August 15, beginning on August 15, 2022. The 4.125% Senior Notes mature on February 15, 2032, unless redeemed early or repurchased. If we undergo a change in control, we must make an offer to repurchase all of the 4.125% 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.

The Company may redeem the 4.125% Senior Notes, in whole or in part, at any time on or after October 15, 2026 at the redemption prices specified in the notes plus accrued and unpaid interest if redeemed during the 12 month period commencing on October 15 of the years set for: 2026 – 102.063%, 2027 – 101.375%, 2028 – 100.688%, 2029 and thereafter – 100.000%. The Company may also redeem a make-whole redemption of the 4.125% Senior Notes at any time prior to October 15, 2026 at the treasury rate plus 50 ~~bps.~~basis points. Additionally, the Company may redeem up to 40% of the aggregate principal amount of the 4.125% Senior Notes prior to October 15, 2024 with the net cash proceeds of certain sales of its capital stock at 104.125% of the principal amount of the notes, plus accrued and unpaid interest, if any, to the date of redemption only if, after the redemption, at least 60% of the aggregate principal amount of the notes originally issued remains outstanding.

Equipment Notes

We did not issue equipment notes during the six months ended June 30, 2023. The company has issued $41.6 million of equipment notes for the purpose of financing the purchase of vehicles and equipment. The Company’s equipment notes each have a five year term maturing in 2023 and 2024 and bear interest at fixed rates between 2.8% and 4.4%.

1413

Table of Contents

TOPBUILD CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

~~Equipment Notes~~

As of September 30, 2022, the company has outstanding $10.6 million of equipment notes for the purpose of financing the purchase of vehicles and equipment. No equipment notes were issued during the nine months ended September 30, 2022. The Company’s equipment notes each have a five year term maturing from 2023 to 2024 and bear interest at fixed rates between 2.8% and 4.4%.

Covenant Compliance

The indentures governing our 3.625% Senior Notes and our 4.125% Senior Notes (together, our “Senior Notes”) contain restrictive covenants that, among other things, generally limit the ability of the Company and certain of its subsidiaries (subject to certain exceptions) to (i) create liens, (ii) pay dividends, acquire shares of capital stock and make payments on subordinated debt, (iii) place limitations on distributions from certain subsidiaries, (iv) issue or sell the capital stock of certain subsidiaries, (v) sell assets, (vi) enter into transactions with affiliates and (vii) effect mergers. The indentures provide for customary events of default which include (subject in certain cases to customary grace and cure periods), among others: nonpayment of principal or interest; breach of covenants or other agreements in the indenture; defaults in failure to pay certain other indebtedness; and certain events of bankruptcy or insolvency. Generally, if an event of default occurs and is continuing under the indenture, the trustee or the holders of at least 30% in aggregate principal amount of each of our Senior Notes then outstanding may declare the principal of, premium, if any, and accrued interest on the Senior Notes subject to such declaration 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 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 Credit Agreement contains customary affirmative covenants and events of default.

The Credit Agreement requires that we maintain a Net Leverage Ratio and minimum Interest Coverage Ratio throughout the term of the agreement. The following table outlines the key financial covenants effective for the period covered by this Quarterly Report:


		As of ~~September~~June 30, ~~2022~~2023
Maximum Net Leverage Ratio		3.50:1.00
Minimum Interest Coverage Ratio		3.00:1.00
Compliance as of period end		In Compliance

6. 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 Combinations.~~

~~Table of Contents~~

~~TOPBUILD CORP.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)~~

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~~and equipment notes approximate their 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 ~~Amendment No.2 to~~ 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 market trades of our 3.625% Senior Notes and our 4.125% Senior Notes close to ~~September~~June 30, ~~2022~~2023 (Level 1 fair value measurement), we estimate the fair value of each in the table below:


	As of September 30, 2022				As of June 30, 2023
		Fair Value		Gross Carrying Value		Fair Value		Gross Carrying Value
3.625% Senior Notes	$	321,000	$	400,000	$	350,400	$	400,000
4.125% Senior Notes	$	391,250	$	500,000	$	430,100	$	500,000

Table of Contents

TOPBUILD CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

7. SEGMENT INFORMATION

The following tables set forth our net sales and operating results by segment, in thousands:


	Three Months Ended September 30,								Three Months Ended June 30,
	2022		2021		2022		2021		2023		2022		2023		2022

	Net Sales				Operating Profit (b)				Net Sales				Operating Profit (b)
Our operations by segment were (a):
Operations by segment (a):
Installation	$	783,056	$	612,900	$	154,236	$	105,046	$	809,055	$	748,968	$	172,278	$	139,919
Specialty Distribution		583,543		276,398		88,364		47,162		574,488		587,791		85,980		86,749
Intercompany eliminations		(65,601)		(43,541)		(10,806)		(7,590)		(66,281)		(62,474)		(11,198)		(10,435)
Total	$	1,300,998	$	845,757		231,794		144,618	$	1,317,262	$	1,274,285		247,060		216,233
General corporate expense, net (c)						(8,920)		(10,812)						(9,957)		(9,012)
Operating profit, as reported						222,874		133,806						237,103		207,221
Other expense, net						(14,864)		(5,437)						(13,953)		(13,689)
Income before income taxes					$	208,010	$	128,369					$	223,150	$	193,532


	Nine Months Ended September 30,								Six Months Ended June 30,
	2022		2021		2022		2021		2023		2022		2023		2022

	Net Sales				Operating Profit (b)				Net Sales				Operating Profit (b)
Our operations by segment were (a):
Operations by segment (a):
Installation	$	2,208,717	$	1,751,278	$	406,835	$	277,748	$	1,576,145	$	1,425,661	$	319,176	$	252,598
Specialty Distribution		1,715,196		801,363		245,534		125,403		1,132,862		1,131,653		159,313		157,170
Intercompany eliminations		(179,712)		(129,831)		(29,949)		(21,050)		(126,507)		(114,111)		(21,169)		(19,144)
Total	$	3,744,201	$	2,422,810		622,420		382,101	$	2,582,500	$	2,443,203		457,320		390,624
General corporate expense, net (c)						(28,371)		(24,124)						(20,786)		(19,449)
Operating profit, as reported						594,049		357,977						436,534		371,175
Other expense, net						(39,833)		(31,862)						(30,069)		(24,969)
Income before income taxes					$	554,216	$	326,115					$	406,465	$	346,206

(a)	All of our operations are located primarily in the U.S and to a lesser extent Canada.

(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.

8. INCOME TAXES

Our effective tax rates were 26.3 percent and 26.1 percent for the three and six months ended June 30, 2023, and 2022, respectively. The effective rates for the three and six months ended June 30, 2022 were 25.8 percent and 25.4 percent, respectively. The higher 2023 tax rate for the three months ended June 30, 2023, compared to the three months ended June 30, 2022, was primarily related to state tax adjustments and miscellaneous items.

A tax expense of $0.2 million related to share-based compensation was recognized in our condensed consolidated statements of operations as a discrete item in income tax expense for the six months ended June 30, 2023. A tax benefit of $1.6 million related to share-based compensation was recognized in our condensed consolidated statements of operations as a discrete item in income tax expense for the six months ended June 30, 2022.

9. NET 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.

1615

Table of Contents

TOPBUILD CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

~~8. INCOME TAXES~~

Our effective tax rates were 26.1 percent and 25.6 percent for the three and nine months ended September 30, 2022, respectively. The effective tax rates for the three and nine months ended September 30, 2021 were 25.7 percent and 24.7 percent, respectively. The higher tax rate for the three months ended September 30, 2022, compared to the three months ended September 30, 2021 was due to state tax adjustments and miscellaneous items, partially offset by a decrease in tax expense related to share-based compensation.

A tax benefit of $1.5 million related to share-based compensation was recognized in our condensed consolidated statements of operations as a discrete item in income tax expense for the nine months ended September 30, 2022.

~~9. NET INCOME PER SHAR~~E

~~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.

Basic and diluted net income per share were computed as follows:


	Three Months Ended September 30,				Nine Months Ended September 30,				Three Months Ended June 30,				Six Months Ended June 30,
	2022		2021		2022		2021		2023		2022		2023		2022
Net income (in thousands)	$	153,746	$	95,435	$	412,156	$	245,658	$	164,400	$	143,697	$	300,270	$	258,410

Weighted average number of common shares outstanding - basic		32,076,285		32,763,311		32,404,275		32,818,145		31,599,744		32,405,292		31,575,337		32,570,988

Dilutive effect of common stock equivalents:
RSAs with service-based conditions		17,175		15,058		14,808		22,044		25,052		12,123		23,848		13,625
RSAs with market-based conditions		44,001		115,105		65,677		126,769		20,039		52,871		22,450		76,515
RSAs with performance-based conditions		40,995		73,597		48,232		60,595		1,974		39,677		15,503		51,851
Stock options		101,364		121,609		110,169		128,442		84,998		104,486		85,522		114,570

Weighted average number of common shares outstanding - diluted		32,279,820		33,088,680	��	32,643,161		33,155,995		31,731,807		32,614,449		31,722,660		32,827,549

Basic net income per common share	$	4.79	$	2.91	$	12.72	$	7.49	$	5.20	$	4.43	$	9.51	$	7.93

Diluted net income per common share	$	4.76	$	2.88	$	12.63	$	7.41	$	5.18	$	4.41	$	9.47	$	7.87

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 June 30,				Six Months Ended June 30,
	2022		2021		2022		2021		2023		2022		2023		2022
Anti-dilutive common stock equivalents:
RSAs with service-based conditions		15,222		176		14,782		1,607		-		18,880		5,582		14,562
RSAs with market-based conditions		134		11,065		200		9,235		-		82		4,467		232
RSAs with performance-based conditions		14,611		-		7,506		-		-		-		-		3,954
Stock options		22,280		24,066		20,581		19,966		14,801		22,875		18,541		19,731
Total anti-dilutive common stock equivalents		52,247		35,307		43,069		30,808		14,801		41,837		28,590		38,479

10. SHARE-BASED COMPENSATION

Effective July 1, 2015, our eligible employees commenced participation in the 2015 LTIP. The 2015 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 LTIP. As of June 30, 2023, we had 1.8 million shares remaining available for issuance under the 2015 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.

1716

Table of Contents

TOPBUILD CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

~~10. SHARE-BASED COMPENSATION~~

Effective July 1, 2015, our eligible employees commenced participation in the 2015 LTIP. The 2015 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 LTIP. As of September 30, 2022, we had 1.9 million shares remaining available for issuance under the 2015 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,

2022

2021

2022

2021
Share-based compensation expense

$
2,611

$
2,998

$
9,673

$
8,375
Income tax (expense) benefit

$
(56)

$
(130)

$
1,517

$
3,190

~~The following table presents a summary of our share-based compensation activity for nine months ended September 30, 2022 in thousands, except per share amounts:~~

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
Balance December 31, 2021

244.4

$
119.41

210.5

$
32.35

$
87.30

$
39,692.4
Granted

105.8

$
177.36

—

$
—

$
—

—
Converted/Exercised

(168.1)

$
75.65

(25.2)

$
27.92

$
80.40

$
3,183.0
Forfeited/Expired

(10.6)

$
223.63

(3.1)

$
68.81

$
174.76

—
Balance September 30, 2022

171.5

$
194.71

182.2

$
32.25

$
86.79

$
15,317.8

Exercisable September 30, 2022 (a)

148.4

$
25.71

$
69.94

$
14,443.4

~~(a)~~

~~The weighted average remaining contractual term for vested stock options is approximately 5.5 years.~~

~~Unrecognized share-based compensation expense related to unvested awards is shown in the following table, dollars in thousands:~~

As of September 30, 2022

Unrecognized Compensation Expense
on Unvested Awards

Weighted Average
Remaining
Compensation Expense Period
RSAs

$
15,203

1.0
Stock options

677

0.7
Total unrecognized compensation expense related to unvested awards

$
15,880

~~Table of Contents~~

~~TOPBUILD CORP.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)~~

The following table presents share-based compensation amounts recognized in our condensed consolidated statements of operations, in thousands:


	Three Months Ended June 30,				Six Months Ended June 30,
	2023		2022		2023		2022
Share-based compensation expense	$	3,751	$	3,334	$	6,886	$	7,061
Income tax (expense)/benefit	$	(180)	$	(32)	$	(225)	$	1,573

The following table presents a summary of our share-based compensation activity for six months ended June 30, 2023, in thousands, except per share amounts:


	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
Balance December 31, 2022	173.2	$	195.06	182.2	$	32.25	$	86.79	$	13,992.3
Granted	101.3	$	200.90	—	$	—	$	—		—
Converted/Exercised	(99.4)	$	147.26	(33.6)	$	16.81	$	47.42	$	5,041.0
Forfeited/Expired	(7.2)	$	231.79	—	$	—	$	—		—
Balance June 30, 2023	167.9	$	226.51	148.6	$	35.87	$	95.69	$	25,306.8

Exercisable June 30, 2023 (a)				141.2	$	33.04	$	89.44	$	24,924.8

(a)	The weighted average remaining contractual term for vested stock options is approximately 5.6 years.

We have unrecognized share-based compensation expense related to unvested awards as shown in the following table, dollars in thousands:


	As of June 30, 2023
	Unrecognized Compensation Expense on Unvested Awards		Weighted Average Remaining Compensation Expense Period
RSAs	$	22,105		1.1
Stock options		287		0.4
Total unrecognized compensation expense related to unvested awards	$	22,392

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 17, 2020	$	2,526	$	0	$	632	$	2,526	$	5,052
February 16, 2021	$	2,374	$	0	$	594	$	2,374	$	4,748	$	2,177	$	-	$	544	$	2,177	$	4,354
February 15, 2022	$	3,411	$	0	$	853	$	3,411	$	6,822	$	3,062	$	-	$	766	$	3,062	$	6,124
February 21, 2023											$	4,156	$	-	$	1,039	$	4,156	$	8,312

During the first quarter of ~~2022,~~2023, RSAs with performance-based conditions that were granted on February ~~18, 2019~~17, 2020 vested based on cumulative three-year achievement of 200%. Total compensation expense recognized over the three-year performance period, net of forfeitures, was ~~$4.4~~$5.0 million.

The fair value of our RSAs with a market-based condition granted under the 2015 LTIP was determined using a Monte Carlo simulation. The following are key inputs in the Monte Carlo analysis for awards granted in 2022 and 2021:

2022

2021

Measurement period (years)

2.87

2.87

Risk free interest rate

1.76
%

0.22
%
Dividend yield

0.00
%

0.00
%
Estimated fair value of market-based RSAs at grant date

$
298.20

$
298.66

The fair values of stock options granted under the 2015 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 2021. There were no stock options issued in the first nine months of 2022.

2021

Risk free interest rate

0.76
%
Expected volatility, using historical return volatility and implied volatility

43.29
%
Expected life (in years)

6.0

Dividend yield

0.00
%
Estimated fair value of stock options at grant date

$
89.59

~~11. SHARE REPURCHASE PROGRAM~~

On July 25, 2022, our Board authorized the 2022 Repurchase Program, pursuant to which the Company may purchase up to $200 million of our common stock. Share repurchases may be executed through various means including open market purchases, privately negotiated transactions, accelerated share repurchase transactions, or other available means. The 2022 Repurchase Program does not obligate the Company to purchase any shares and has no expiration date. Authorization for the 2022 Repurchase Program may be terminated, increased, or decreased by the Board at its discretion at any time.

On July 26, 2021, our Board authorized the 2021 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 open market purchases, privately negotiated transactions, accelerated share repurchase transactions, or other available means. The 2021 Repurchase Program does not obligate the Company to purchase any shares and has no expiration date. Authorization for the 2021 Repurchase Program may be terminated, increased, or decreased by the Board at its discretion at any time. As of September 30, 2022, the Company has $4.4 million remaining under the 2021 Repurchase Program.

~~Table of Contents~~

~~TOPBUILD CORP.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)~~

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 open market purchases, privately negotiated transactions, accelerated share repurchase transactions, or other available means. The 2019 Repurchase Program does not obligate the Company to purchase any shares and has no expiration date. Authorization for the 2019 Repurchase Program may be terminated, increased, or decreased by the Board at its discretion at any time. As of September 30, 2022 the Company has utilized all amounts authorized under the 2019 Repurchase Program.

On May 5, 2022, the Company entered into the 2022 ASR Agreement under the 2021 Repurchase Program. We paid $100 million in exchange for an initial delivery of 409,312 shares of our common stock on May 9, 2022, representing an estimated 80% of the total number of shares we expected to receive under the 2022 ASR Agreement at the time we entered into the agreement. During the quarter ended September 30, 2022, we received an additional 142,351 shares of our common stock representing the final settlement of the 2022 ASR Agreement. We purchased a total of 551,663 shares of our common stock under the 2022 ASR Agreement at an average price per share of $181.27.

The following table sets forth our share repurchases under the Repurchase Programs during the periods presented. These repurchases closed out the 2019 Share Repurchase Program with the balance repurchased under the 2021 Share Repurchase Program.

Three Months Ended September 30,

Nine Months Ended September 30,


2022

2021

2022

2021
Number of shares repurchased

411,895 (a)

60,105

1,059,361

183,136
Share repurchase cost (in thousands)

$
50,000

$
11,518

$
200,050

$
35,556

~~(a) The three months ended September 30, 2022 includes~~ ~~142,351 shares we received as a final settlement of our 2022 ASR Agreement.~~

~~12. BUSINESS COMBINATIONS~~

Acquiring businesses is a key part of our ongoing strategy to grow our company and expand our market share. Each acquisition has been accounted for as a business combination under ASC 805, “Business Combinations.” We incurred no acquisition related costs for the three months ended September 30, 2022 and incurred $2.7 million of acquisition related costs in the three months ended September 30, 2021. Acquisition related costs for the nine months ended September 30, 2022 and 2021 were $1.3 million and $3.4 million, respectively. Acquisition related costs are included in selling, general, and administrative expense in our condensed consolidated statements of operations. On October 15, 2021, we acquired DI for $1.0 billion and its results of operations and financial position are aggregated within our Specialty Distribution segment.

~~The table below provides a summary as of September 30, 2022 for the businesses acquired during the nine months ended September 30, 2022:~~

2022 Acquisitions

Date

Cash Paid

Contingent Consideration

Total Purchase Price

Goodwill Acquired

Southwest

1/12/2022

$
300

$
—

$
300

$
215

Billings

2/3/2022

7,005

—

7,005

3,313

Green Energy

3/31/2022

1,200

—

1,200

565

Assured

4/7/2022

4,719

500

5,219

3,317

CV

7/21/2022

1,758

—

1,758

946

Total

$
14,982

$
500

$
15,482

$
8,356

2017

Table of Contents

TOPBUILD CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)


	2023			2022			2021
Measurement period (years)		2.86			2.87			2.87
Risk free interest rate		4.42	%		1.76	%		0.22	%
Dividend yield		0.00	%		0.00	%		0.00	%
Estimated fair value of market-based RSAs at grant date	$	270.64		$	298.20		$	298.66

11. BUSINESS COMBINATIONS

Acquiring businesses is a key part of our ongoing strategy to grow our company and expand our market share. Each acquisition has been accounted for as a business combination under ASC 805, “Business Combinations.” Acquisition related costs were $1.1 million and $2.8 million in the three and six months ended June 30, 2023, respectively, and $0.9 million and $1.3 million for the three and six months ended June 30, 2022, respectively. Acquisition related costs are included in selling, general, and administrative expense in our condensed consolidated statements of operations.

On January 26, 2023, we acquired the assets of the residential insulation business of SRI. This installation acquisition enhanced our presence in Georgia, Michigan, Ohio, Florida, Alabama and South Carolina. The purchase price of $45.8 million was funded by cash on hand and the fair values of the assets acquired and liabilities assumed are as follows as of June 30, 2023, in thousands:


Purchase price fair values:
Accounts receivable	$	5,751
Inventories		4,377
Prepaid and other assets		203
Property and equipment		4,623
ROU asset (operating)		4,695
Intangible assets		13,740
Goodwill		23,687
Accounts payable		(6,368)
Lease liabilities (operating)		(4,771)
All other liabilities		(89)
Net assets acquired	$	45,848

Estimates of acquired intangible assets related to the acquisition of SRI are as follows as of June 30, 2023, dollars in thousands:

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. To that note, during the nine months ended September 30, 2022, DI’s goodwill increased by $10.7 million primarily as a result of the finalization of purchase price adjustments to acquisition date sales and use tax liabilities, net working capital adjustments, property, plant and equipment, and true-ups to supplier rebate receivables.

~~The table below represents the final fair value of DI’s assets and liabilities assumed as of September 30, 2022:~~

Finalized purchase price fair values:

Accounts receivable

145,042
Inventories

133,004
Prepaid and other assets

8,820
Property and equipment

37,562
ROU asset (operating)

66,698
Intangible assets

458,000
Goodwill

450,716
Accounts payable

(68,367)
Lease liabilities

(76,066)
Deferred tax liabilities

(83,590)
All other liabilities

(35,854)
Net assets acquired

$
1,035,965

~~The table below provides a summary as of September 30, 2022 for the businesses acquired during the nine months ended September 30, 2021:~~

2021 Acquisitions

Date

Cash Paid

Contingent Consideration

Total Purchase Price

Goodwill Acquired

LCR

1/20/2021

$
53,700

—

53,700

19,500

ABS

4/5/2021

124,348

—

124,348

54,229

All others

Various

26,977

1,200

28,177

12,001

Total

$
205,025

$
1,200

$
206,225

$
85,730

Primarily all of the $8.4 million and $85.7 million of goodwill recorded from acquisitions completed in the nine months ended September 30, 2022 and 2021, respectively, is expected to be deductible for income tax purposes.

~~13. ACCRUED LIABILITIES~~

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

As of

September 30, 2022

December 31, 2021
Accrued liabilities:

Salaries, wages, and commissions

$
72,367

$
71,664
Insurance liabilities

29,435

24,425
Customer rebates

15,659

15,625
Deferred revenue

21,991

14,311
Employee tax-related liabilities

10,654

12,545
Sales and property taxes

14,552

9,364
Interest payable on long-term debt

3,366

8,798
Other

13,431

19,159
Total accrued liabilities

$
181,455

$
175,891

~~See~~ ~~Note 3 – Revenue Recognition~~ ~~for discussion of our deferred revenue balances.~~

2118

Table of Contents

TOPBUILD CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The table below provides a summary as of June 30, 2023 for the businesses acquired during the six months ended June 30, 2022, in thousands:


2022 Acquisitions	Date		Cash Paid		Contingent Consideration		Goodwill Acquired
Billings		2/3/2022	$	7,005	$	—	$	3,313
Assured		4/7/2022		4,719		600		3,406
All others		Various		1,500		—		780
Total			$	13,224	$	600	$	7,499

Goodwill to be recognized in connection with acquisitions is attributable to the synergies expected to be realized and improvements in the businesses after the acquisitions. Primarily all of the $23.7 million and $7.5 million of goodwill recorded from acquisitions completed in the six months ended June 30, 2023 and 2022, respectively, is expected to be deductible for income tax purposes.

~~14.~~12. ACCRUED LIABILITIES

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


	As of
	June 30, 2023		December 31, 2022
Accrued liabilities:
Salaries, wages, and bonus/commissions	$	68,353	$	75,237
Insurance liabilities		28,663		28,870
Customer rebates		12,492		21,561
Deferred revenue		16,332		21,940
Sales and property taxes		15,765		15,757
Interest payable on long-term debt		11,978		12,146
Other		27,011		23,859
Total accrued liabilities	$	180,594	$	199,370

See Note 3 – Revenue Recognition for discussion of our deferred revenue balances.

13. 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, claims against our builder customers for issues relating to our workmanship. We generally exclude from our contracts with builder customers indemnity relating to product quality and warranty claims, as we pass such claims directly to the manufacturers of the products we install or distribute. 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.

Table of Contents

TOPBUILD CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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.

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


	As of				As of
	September 30, 2022		December 31, 2021		June 30, 2023		December 31, 2022
Outstanding bonds:
Performance bonds	$	153,358	$	128,173	$	140,363	$	152,434
Licensing, insurance, and other bonds		24,346		21,792		25,559		25,439
Total bonds	$	177,704	$	149,965	$	165,922	$	177,873

14. SUBSEQUENT EVENTS

On July 10, 2023, we acquired the assets of the residential insulation installer business Rocky Mountain. This installation acquisition enhanced our presence in the Colorado market. The purchase price of approximately $7.2 million was funded by cash on hand.

On July 17, 2023, we acquired the assets of the residential insulation business Best Insulation. This installation acquisition enhanced our presence in Texas, Arizona, Tennessee, and Florida markets. The purchase price of approximately $95.0 million was funded by cash on hand.

Both acquisitions were accounted for as a business combination under ASC 805, “Business Combinations.” During the measurement period, we expect to receive additional detailed information to complete the purchase price allocation.

On July 26, 2023, we entered into an agreement to acquire SPI, a leading installer and specialty distributor of insulation and building material products to the construction industry in the United States and Canada. SPI has 85 branches across the United States and 4 branches in Canada. We expect to fund this $960.0 million transaction with a new $550.0 million delayed draw term loan and cash on hand. The transaction is subject to customary closing conditions, including expiration or termination of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976.

On July 26, 2023, we entered into Amendment No. 4 to our Credit Agreement, which among other things, (i) increases the permitted borrowings from $300.0 million to $850.0 million, and (ii) provides for a new $550.0 million delayed draw term loan, the proceeds of which will be used, in part, to finance the acquisition of SPI.

2220

Table of Contents

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 specialty distributor of insulation and other building material products to the ~~U.S.~~ construction ~~industry. We trade on~~industry in the ~~NYSE under the ticker symbol “BLD.”~~United States and Canada.

We operate in two segments: Installation and Specialty Distribution. Our Installation segment installs insulation and other building products nationwide. As of ~~September~~June 30, ~~2022,~~2023, we had approximately ~~230~~235 Installation branches located across the United States. We install various insulation applications, including fiberglass batts and rolls, blown-in loose fill fiberglass, polyurethane spray foam, and blown-in loose fill ~~cellulose, and polyurethane spray foam.~~cellulose. Additionally, we install other building products including glass and windows, rain gutters, after paint products, fireproofing, garage doors, and fireplaces. 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 Specialty Distribution segment ~~sells and~~ distributes building and mechanical insulation, insulation accessories, rain gutters, and other building product materials for the residential ~~commercial,~~ and commercial/industrial end markets. As of ~~September~~June 30, ~~2022,~~2023, we had approximately ~~165 Specialty Distribution branches~~156 distribution centers located across the United States and 18 ~~branches~~distribution centers in Canada. Our Specialty Distribution customer base consists of thousands ofinsulation contractors of all sizes serving a wide variety of residential and commercial/industrial industries, gutter contractors, weatherization contractors, other contractors, dealers, metal buildingerectors, and modular home builders. W~~e made the material acquisition of DI in October 2021 and is therefore not included in the comparative periods of three and nine months ended September 30, 2021.~~

We believe that having both Installation and Specialty Distribution provides us with ~~a number of~~several distinct competitiveadvantages. First, the combined buying power of our two business segments, along with our scale, strengthens our ties tothe major manufacturers of insulation and other building material products. This helps to ensure we are buyingcompetitively and ensures the availability of supply to our local branches and ~~Specialty Distribution~~distribution centers. The overalleffect is driving efficiencies through our supply chain. Second, being a leader in both installation and specialty distributionallows us to reach a broader set of builders and contractors more effectively, regardless of their size or geographic locationin the U.S. and Canada, and leverage housing ~~commercial~~ and commercial/industrial construction growth wherever it occurs. Third, during housing industry downturns, many insulation contractors who buy directly from manufacturers during industry peaksreturn to purchasing through specialty ~~distributors, which~~distributors. As a result, this helps to reduce our exposure to cyclical swings in ourbusiness.

For additional details pertaining to our operating results by segment, see Note 7 – Segment Information to our unaudited condensed consolidated financial statements contained in Part I, Item 1 of this Quarterly Report. For additional details regarding our strategy, material trends in our business and seasonality, please refer to Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report for the year ended December 31, ~~2021,~~2022, as filed with the SEC on February ~~22, 2022.~~23, 2023.

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.

2321

Table of Contents

~~THIRD~~SECOND QUARTER ~~2022~~2023 VERSUS ~~THIRD~~SECOND QUARTER ~~2021~~2022

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 June 30,
	2022			2021			2023			2022
Net sales	$	1,300,998		$	845,757		$	1,317,262		$	1,274,285
Cost of sales		905,250			595,466			895,462			890,188
Cost of sales ratio		69.6	%		70.4	%		68.0	%		69.9	%

Gross profit		395,748			250,291			421,800			384,097
Gross profit margin		30.4	%		29.6	%		32.0	%		30.1	%

Selling, general, and administrative expense		172,874			116,485			184,697			176,876
Selling, general, and administrative expense to sales ratio		13.3	%		13.8	%		14.0	%		13.9	%

Operating profit		222,874			133,806			237,103			207,221
Operating profit margin		17.1	%		15.8	%		18.0	%		16.3	%

Other expense, net		(14,864)			(5,437)			(13,953)			(13,689)
Income tax expense		(54,264)			(32,934)			(58,750)			(49,835)
Net income	$	153,746		$	95,435		$	164,400		$	143,697
Net margin		11.8	%		11.3	%		12.5	%		11.3	%

Sales and Operations

Net sales increased ~~53.8%~~3.4% for the three months ended ~~September~~June 30, ~~2022,~~2023, from the comparable period of ~~2021.~~2022. The increase was primarily driven by ~~an increase of 31.2%~~a 1.8% impact from ~~our acquisitions, a 13.6% increase due to~~ higher selling prices, a 1.3% increase in sales from acquisitions, and ana 0.2% increase ~~of 9.1%~~ in sales volume.

Gross profit margins were ~~30.4%~~32.0% and ~~29.6%~~30.1% for the three months ended ~~September~~June 30, ~~2022~~2023 and ~~2021,~~2022, respectively. Gross profit margin improved primarily due to productivity initiatives, continued synergies from our 2021 acquisition of DI, and higher selling prices ~~and higher sales volume,~~ partially offset by higher material ~~inflation.~~costs.

Selling, general, and administrative ~~expense,~~expenses as a ~~percent~~percentage of sales ~~was 13.3%~~were 14.0% and ~~13.8%~~13.9% for the three months ended ~~September~~June 30, 2023 and 2022, ~~and 2021,~~ respectively. ~~The decrease in selling,~~Selling, general, and administrative ~~expense~~expenses as a ~~percent~~percentage of sales ~~was driven primarily by~~were slightly higher ~~sales,~~due to increased incentive compensation and headcount costs partially offset by ~~the amortization~~continued realization of ~~intangible assets related to purchase accounting.~~synergies on our 2021 acquisition of DI.

Operating margins were ~~17.1%~~18.0% and ~~15.8%~~16.3% for the three months ended ~~September~~June 30, ~~2022~~2023 and ~~2021,~~2022, respectively. The increase in operating margins was due to productivity initiatives, continued realization of synergies from our 2021 acquisition of DI, and higher selling prices ~~and higher sales volume~~ partially offset by higher material ~~inflation~~costs and ~~amortization of intangible assets related~~slightly higher selling, general, and administrative expenses compared to ~~purchase accounting.~~the same quarter in 2022.

2422

Table of Contents

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 June 30,
	2022			2021			Percent Change		2023			2022			Percent Change
Net sales by business segment:
Installation	$	783,056		$	612,900		27.8	%	$	809,055		$	748,968		8.0	%
Specialty Distribution		583,543			276,398		111.1	%		574,488			587,791		(2.3)	%
Intercompany eliminations		(65,601)			(43,541)					(66,281)			(62,474)
Net sales	$	1,300,998		$	845,757		53.8	%	$	1,317,262		$	1,274,285		3.4	%

Operating profit by business segment:
Installation	$	154,236		$	105,046		46.8	%	$	172,278		$	139,919		23.1	%
Specialty Distribution		88,364			47,162		87.4	%		85,980			86,749		(0.9)	%
Intercompany eliminations		(10,806)			(7,590)					(11,198)			(10,435)
Operating profit before general corporate expense		231,794			144,618		60.3	%		247,060			216,233		14.3	%
General corporate expense, net		(8,920)			(10,812)					(9,957)			(9,012)
Operating profit	$	222,874		$	133,806		66.6	%	$	237,103		$	207,221		14.4	%

Operating profit margins:
Installation		19.7	%		17.1	%				21.3	%		18.7	%
Specialty Distribution		15.1	%		17.1	%				15.0	%		14.8	%
Operating profit margin before general corporate expense		17.8	%		17.1	%				18.8	%		17.0	%
Operating profit margin		17.1	%		15.8	%				18.0	%		16.3	%

Installation

Sales

Sales in our Installation segment increased ~~$170.2~~$60.1 million, or ~~27.8%~~8.0%, for the three months ended ~~September~~June 30, ~~2022,~~2023, as compared to the same period in ~~2021. The increase was due to a 13.8% increase in~~2022. Sales increased 2.9% from both higher selling prices ~~a 12.3% increase in~~and sales volume, and ~~a 1.7% increase~~2.2% from ~~our~~ acquisitions.

Operating margins

Operating margins in our Installation segment were ~~19.7%~~21.3% and ~~17.1%~~18.7% for the three months ended ~~September~~June 30, ~~2022~~2023 and ~~2021,~~2022, respectively. The increase in operating ~~margins~~margin was primarily driven by productivity initiatives and higher ~~selling prices and~~ sales ~~volume,~~ partially offset by higher material ~~inflation.~~costs compared to the same quarter in 2022.

Specialty Distribution

Sales

Sales in our Specialty Distribution segment ~~increased $307.1~~decreased $13.3 million, or ~~111.1%~~2.3%, for the three months ended ~~September~~June 30, ~~2022,~~2023, as compared to the same period in ~~2021. Of the 111.1%~~2022. Sales decreased 2.9% from lower sales volume, which was partially offset by a 0.6% increase ~~acquisitions accounted for 92.4%, 13.0% was due to~~from higher selling ~~prices and 5.7% was from an increase in sales volume.~~ prices.

Operating margins

Operating margins in our Specialty Distribution segment were ~~15.1%~~15.0% and ~~17.1%~~14.8% for the three months ended ~~September~~June 30, ~~2022~~2023 and ~~2021,~~2022, respectively. The ~~decrease~~increase in operating ~~margins~~margin was ~~partially~~ driven by ~~the amortization~~productivity initiatives and continued realization of ~~intangible assets related to purchase accounting and material inflation~~synergies from our 2021 acquisition of DI, partially offset by ~~higher selling prices and higher~~lower sales volume.

2523

Table of Contents

OTHER ITEMS

Other expense, net

Other expense, net, was ~~$14.9~~$14.0 million and ~~$5.4~~$13.7 million for the three months ended ~~September~~June 30, 2023 and 2022, ~~and 2021,~~ respectively. ~~The change primarily related to interest~~Interest expense ~~which~~ increased by ~~$9.0~~$5.1 million for the three months ended ~~September~~June 30, ~~2022, as compared to the same period in 2021. This increase was~~2023 due to higher long-term debt balances during the three months ended September 30, 2022, including the balance on the 4.125% Senior Notes which were issued in the fourth quarter of 2021 to finance the acquisition of DI andsignificantly higher interest rates on borrowings under the Credit ~~Agreement.~~Agreement compared to the same period in 2022. This increase in interest expense was partially offset by $4.8 million higher interest income over the same period as a result of higher interest rates and cash balances.

Income tax expense

Income tax expense was ~~$54.3~~$58.8 million, an effective tax rate of ~~26.1~~26.3 percent, for the three months ended ~~September~~June 30, ~~2022,~~2023, compared to ~~$32.9~~$49.8 million, an effective tax rate of ~~25.7~~25.8 percent, for the comparable period in ~~2021.~~2022. The tax rate for the three months ended ~~September~~June 30, ~~2022,~~2023, was higher ~~due~~primarily related to state tax adjustments and miscellaneous ~~items, partially offset by a decrease in tax expense related to share-based compensation.~~items.

FIRST ~~NINE~~SIX MONTHS ~~2022~~2023 VERSUS FIRST ~~NINE~~SIX MONTHS ~~2021~~2022

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,						Six Months Ended June 30,
	2022			2021			2023			2022
Net sales	$	3,744,201		$	2,422,810		$	2,582,500		$	2,443,203
Cost of sales		2,633,155			1,731,581			1,790,485			1,727,905
Cost of sales ratio		70.3	%		71.5	%		69.3	%		70.7	%

Gross profit		1,111,046			691,229			792,015			715,298
Gross profit margin		29.7	%		28.5	%		30.7	%		29.3	%

Selling, general, and administrative expense		516,997			333,252			355,481			344,123
Selling, general, and administrative expense to sales ratio		13.8	%		13.8	%		13.8	%		14.1	%

Operating profit		594,049			357,977			436,534			371,175
Operating profit margin		15.9	%		14.8	%		16.9	%		15.2	%

Other expense, net		(39,833)			(31,862)			(30,069)			(24,969)
Income tax expense		(142,060)			(80,457)			(106,195)			(87,796)
Net income	$	412,156		$	245,658		$	300,270		$	258,410
Net margin		11.0	%		10.1	%		11.6	%		10.6	%

Sales and Operations

Net sales increased ~~54.5%~~5.7% for the ~~nine~~six months ended ~~September~~June 30, ~~2022,~~2023, from the comparable period of ~~2021.~~2022. The increase was primarily driven by a ~~33.8% impact from our acquisitions, a 15.0%~~3.7% increase due to higher selling prices, a 1.3% impact from our acquisitions and a ~~5.8%~~0.7% increase in sales volume.

Gross profit margins were ~~29.7%~~30.7% and ~~28.5%~~29.3% for the ~~nine~~six months ended ~~September~~June 30, ~~2022~~2023 and ~~2021,~~2022, respectively. Gross profit margin improved primarily due to productivity initiatives, continued realization of synergies from our 2021 acquisition of DI, and higher selling prices ~~and higher sales volume~~ partially offset by ~~an increase~~higher material costs.

Selling, general, and administrative expense, as a percent of sales, was 13.8% and 14.1% for the six months ended June 30, 2023 and 2022, respectively. The decrease in ~~cost~~selling, general, and administrative expenses as a percentage of ~~material.~~sales was driven primarily by higher sales and continued realization of synergies from our 2021 acquisition of DI, partially offset by increased incentive compensation and headcount costs.

2624

Table of Contents

Selling, general, and administrative expense, as a percent of sales, was 13.8% for both the nine months ended September 30, 2022 and 2021. Selling, general, and administrative expense as a percent of sales remained flat to the prior year as the impact of higher selling prices was offset by was the amortization of intangible assets related to purchase accounting and increased insurance costs.

Operating margins were ~~15.9%~~16.9% and ~~14.8%~~15.2% for the ~~nine~~six months ended ~~September~~June 30, ~~2022~~2023 and ~~2021,~~2022, respectively. The increase in operating margins was due to higher selling prices and ~~volume,~~sales from acquisitions, productivity initiatives and continued realization of synergies from our 2021 acquisition of DI partially offset by ~~an increase~~higher material costs and selling, general and administrative expenses compared to the same period in ~~cost of material and the amortization of intangible assets related to purchase accounting.~~2022.

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,


2022

2021


Percent Change

Net sales by business segment:

Installation
$
2,208,717

$
1,751,278

26.1
%
Specialty Distribution

1,715,196

801,363

114.0
%
Intercompany eliminations

(179,712)

(129,831)

Net sales
$
3,744,201

$
2,422,810

54.5
%

Operating profit by business segment (a):

Installation
$
406,835

$
277,748

46.5
%
Specialty Distribution

245,534

125,403

95.8
%
Intercompany eliminations

(29,949)

(21,050)

Operating profit before general corporate expense

622,420

382,101

62.9
%
General corporate expense, net (b)

(28,371)

(24,124)

Operating profit
$
594,049

$
357,977

65.9
%

Operating profit margins:

Installation

18.4
%

15.9
%

Specialty Distribution

14.3
%

15.6
%

Operating profit margin before general corporate expense

16.6
%

15.8
%

Operating profit margin

15.9
%

14.8
%


	Six Months Ended June 30,
	2023			2022			Percent Change
Net sales by business segment:
Installation	$	1,576,145		$	1,425,661		10.6	%
Specialty Distribution		1,132,862			1,131,653		0.1	%
Intercompany eliminations		(126,507)			(114,111)
Net sales	$	2,582,500		$	2,443,203		5.7	%

Operating profit by business segment (a):
Installation	$	319,176		$	252,598		26.4	%
Specialty Distribution		159,313			157,170		1.4	%
Intercompany eliminations		(21,169)			(19,144)
Operating profit before general corporate expense		457,320			390,624		17.1	%
General corporate expense, net (b)		(20,786)			(19,449)
Operating profit	$	436,534		$	371,175		17.6	%

Operating profit margins:
Installation		20.3	%		17.7	%
Specialty Distribution		14.1	%		13.9	%
Operating profit margin before general corporate expense		17.7	%		16.0	%
Operating profit margin		16.9	%		15.2	%

Installation

Sales

Sales in our Installation segment increased ~~$457.4~~$150.5 million, or ~~26.1%~~10.6%, for the ~~nine~~six months ended ~~September~~June 30, ~~2022,~~2023, as compared to the same period in ~~2021. The increase was due to a 13.7% increase~~2022. Sales increased 4.3% from higher selling prices, ~~a 8.1% increase in~~4.1% from higher sales volume and ~~a 4.3% impact~~2.2% from our acquisitions.

Operating margins

Operating margins in our Installation segment were ~~18.4%~~20.3% and ~~15.9%~~17.7% for the ~~nine~~six months ended ~~September~~June 30, 2023 and 2022, ~~and 2021,~~ respectively. The increase in operating ~~margins~~margin was primarily driven by productivity initiatives, higher sales ~~from~~volume, and higher selling prices ~~and volumes,~~ partially offset by ~~an increase~~higher material costs compared to the same quarter in ~~cost of material.~~2022.

~~Table of Contents~~

Specialty Distribution

Sales

Sales in our Specialty Distribution segment increased ~~$913.8~~$1.2 million, or ~~114.0%~~0.1%, for the ~~nine~~six months ended ~~September~~June 30, ~~2022,~~2023, as compared to the same period in ~~2021. This increase was due to a 93.5% impact~~2022. Sales increased 3.0% from ~~our acquisitions, a 18.5% increase due to~~ higher selling prices ~~and~~which was offset by a ~~2.1% increase~~2.9% decline in sales volume.

Table of Contents

Operating margins

Operating margins in our Specialty Distribution segment were ~~14.3%~~14.1% and ~~15.6%~~13.9% for the ~~nine~~six months ended ~~September~~June 30, ~~2022~~2023 and ~~2021,~~2022, respectively. The ~~decrease~~increase in operating margins was driven by ~~the amortization~~productivity initiatives, continued realization of ~~intangible assets related to purchase accounting~~synergies from our 2021 acquisition of DI, and ~~material inflation~~higher selling prices partially offset by ~~higher selling prices~~lower sales volume and higher ~~sales volume.~~material costs.

OTHER ITEMS

Other expense, net

Other expense, net, which primarily consisted of interest expense, was ~~$39.8~~$30.1 million and ~~$31.9~~$25.0 million for the ~~nine~~six months ended ~~September~~June 30, ~~2022~~2023 and ~~2021,~~2022, respectively. Interest expense increased by ~~$21.7~~$11.2 million for the ~~nine~~six months ended ~~September~~June 30, ~~2022, as compared to the same period in 2021. This increase was~~2023 due to higher long-term debt balances during the nine months ended September 30, 2022, including the balance on the 4.125% Senior Notes which were issued in the fourth quarter of 2021 to finance the acquisition of DI, andsignificantly higher interest rates on our borrowings under the Credit ~~Agreement. 2021~~Agreement compared to the same period in 2022. This increase in interest expense was ~~also impacted~~partially offset by ~~a $13.9~~$7.2 million ~~charge incurred~~higher interest income over the same period due to ~~redeem our 5.625% Senior Notes during the nine months ended September 30, 2021.~~ higher interest rates and cash balances.

Income tax expense

Income tax expense was ~~$142.1~~$106.2 million, an effective tax rate of ~~25.6%,~~26.1 percent, for the ~~nine~~six months ended ~~September~~June 30, ~~2022~~2023 compared to ~~$80.5~~$87.8 million, an effective tax rate of ~~24.7%,~~25.4 percent, for the comparable period in ~~2021.~~2022. The tax rate for the ~~nine~~six months ended ~~September~~June 30, ~~2022~~2023 was higher ~~due~~primarily related to ~~permanent items including~~a decrease in the benefit related to share-based 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,				Six Months Ended June 30,
	2022		2021		2023		2022
Changes in cash and cash equivalents:
Net cash provided by operating activities	$	335,630	$	309,505	$	385,797	$	217,697
Net cash used in investing activities		(73,667)		(247,050)		(75,838)		(54,162)
Net cash used in financing activities		(240,383)		(64,556)		(23,982)		(179,587)
Impact of exchange rate changes on cash		(1,975)		-		281		142
Net increase (decrease) in cash and cash equivalents	$	19,605	$	(2,101)	$	286,258	$	(15,910)

Net cash flows provided by operating activities increased ~~$26.1~~$168.1 million for the ~~nine~~six months ended ~~September~~June 30, ~~2022,~~2023, as compared to the prior year period. Net income was up ~~$166.5~~$41.9 million, or ~~67.8%~~16.2%, compared with the prior year period, driven by ~~the impact~~productivity initiatives, continued realization of synergies from our ~~acquisitions,~~acquisition of DI and higher ~~sales~~selling prices ~~and sale volumes. That increase was largely~~partially offset by lower sales volume and higher material costs. Cash flows provided by operating activities was higher in the ~~impact of higher levels of working capital, also driven by~~six months ended June 30, 2023 as compared to the ~~impact of our acquisitions on~~same period in 2022, due to changes in inventory and accounts ~~receivable, inventories, accounts payable and accrued liabilities.~~receivable.

Net cash used in investing activities was ~~$73.7~~$75.8 million for the ~~nine~~six months ended ~~September~~June 30, ~~2022,~~2023, primarily composed of ~~$56.0~~$45.9 million for the acquisition of SRI and $30.7 million for purchases of property and equipment, mainly vehicles and ~~$20.5 million for acquisitions.~~equipment. Net cash used in investing activities was ~~$247.1~~$54.2 million for the ~~nine~~six months ended ~~September~~June 30, ~~2021,~~2022, primarily composed of ~~$205.0 million for acquisitions and $42.3~~$36.0 million for purchases of property and equipment, ~~primarily vehicles.~~mainly vehicles, and $18.7 million for acquisitions.

~~Table of Contents~~

Net cash used in financing activities was ~~$240.4~~$24.0 million for the ~~nine~~six months ended ~~September~~June 30, 2023. During the six months ended June 30, 2023, we used $18.8 million for debt repayments and incurred $4.9 million net cash outflow related to exercise of share-based incentive awards and stock options. Net cash used in financing activities was $179.6 million for the six months ended June 30, 2022. During the ~~nine~~six months ended ~~September~~June 30, 2022, we used ~~$200.0~~$150.1 million for the repurchase of common stock pursuant to the 2021 Repurchase Program, ~~$29.0~~$19.3 million for debt repayments, and ~~$9.7~~$10.2 million net activity related to exercise of share-based incentive awards and stock options. Additionally, we borrowed and repaid ~~$70~~$70.0 million on our Revolving Facility, all within the second quarter of 2022. ~~Net cash used in financing activities was $64.6 million for the nine months ended September 30, 2021. During the nine months ended September 30, 2021, we used $35.6 million for the repurchase~~

Table of common stock pursuant to the 2019 Repurchase Program, $16.3 million net payments for redemption of our 5.625% Senior Notes, issuance of our 3.625% Senior Notes, proceeds from the increase in our term loan from our Amended Credit Agreement, and payments on equipment notes, $6.5 million in debt issuance costs as a result of entering into our Amended Credit Agreement and 3.625% Senior Notes, and $5.5 million net activity related to exerciseContents

~~of share-based incentive awards and stock options~~.

We have access to liquidity through our cash from operations and available borrowing capacity under our Credit Agreement, which provides for borrowing and/or standby letter of credit issuances of up to $500 million under the revolving facility. Additional information regarding our outstanding debt and borrowing capacity is incorporated by reference from Note 5 – Long-term Debt to our unaudited condensed consolidated financial statements contained in Part 1, Item 1 of this Quarterly Report.

The following table summarizes our liquidity, in thousands:


	As of				As of
	September 30,		December 31,		June 30,		December 31,
	2022		2021		2023		2022
Cash and cash equivalents (a)	$	159,384	$	139,779	$	526,327	$	240,069

Revolving facility		500,000		500,000		500,000		500,000
Less: standby letters of credit		(67,689)		(69,936)		(67,539)		(67,689)
Availability under revolving facility		432,311		430,064		432,461		432,311

Total liquidity	$	591,695	$	569,843	$	958,788	$	672,380

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

We believe that our cash flows from operations, combined with our current cash levels and available borrowing capacity, will be adequate to support our ongoing operations and ~~to fund~~known contractual obligations including funding our debt service requirements, capital expenditures, lease obligations and working capital needs for at least the next twelve months.

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 contractual performance is completed. We also have ~~bonds outstanding~~adequate liquidity to maintain off-balance sheet arrangements for short-term leases, letters of credit, and performance and license ~~and insurance.~~ bonds. Information regarding our outstanding bonds as of ~~September~~June 30, ~~2022~~2023, is incorporated by reference from Note 1413 – Other Commitments and Contingencies to our unaudited condensed consolidated financial statements contained in Part I, Item 1 of this Quarterly Report.

OUTLOOK

WeResidential New Construction

Recent builder sentiment and May housing starts data have increased optimism for the single family housing market. Coming into 2023, we saw a continued slowdown in single family starts and although we expect this slowdown to impact our single family volume in the second half of this year, we believe ~~a number~~it will be less than we originally anticipated. Multifamily starts have remained strong and we expect our multifamily construction volume to remain solid through the end of ~~macroeconomic factors, including rising~~the year. Our sales the first half of 2023 benefitted from the significant backlog of houses under construction and continued strong multifamily activity. While there is still some uncertainty around the economy and the impacts of higher interest rates, ~~inflation and the overall health of the economy, are impacting consumer demand for housing. Although the decreased demand may have a possible impact in the mid-term,~~ we remain ~~cautiously~~ optimistic about the long-term ~~health~~fundamentals of the U.S. housing ~~market.~~

~~With the acquisition~~market, supported by a limited supply of ~~DI, we have diversified our mix of business~~both new and ~~increased our penetration in the commercial~~existing homes and industrial end markets. These end markets operate on a different cycle than residential housing. Although these end markets are dealing with higher material costs, labor constraints, and are impacted by economic volatility, our bid activity and backlog remain strong.favorable demographic trends, including increasing household formations.

29Commercial and Industrial Construction

~~Table~~We continue to have a strong backlog and bidding activity to support our commercial/industrial sales. We see a lot of ~~Contents~~major projects being planned across several different industries fueling demand for our Specialty Distribution products. In addition, maintenance and repair on industrial sites will serve as a continued driver for our business.

OFF-BALANCE SHEET ARRANGEMENTS

We had no material off-balance sheet arrangements during the ~~nine~~three months ended ~~September~~June 30, ~~2022,~~2023, other than short-term leases, letters of credit, and performance and license bonds, which have been disclosed in Part 1, Item 1 of this Quarterly report.

Table of Contents

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, ~~2021,~~2022, as filed with the SEC on February ~~22, 2022.~~23, 2023.

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 from those previously reported in our Annual Report for the year ended December 31, ~~2021,~~2022, as filed with the SEC on February ~~22, 2022.~~23, 2023.

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,” “should,” “anticipate,” “expect,” “believe,” “designed,” “plan,” “may,” “project,” “estimate” 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 ~~events outside of our control affecting the economy or our industry including, but not limited to,~~ the duration and impact of ~~pandemics or similar health emergencies, supply chain disruptions resulting from global events including conflicts, sanctions, or blockades, and economic events affecting affordability or~~negative macro-economic impacts on the ~~market at large including inflation and interest rates. Our future performance may also be affected by conditions or events relating~~United States economy, specifically with respect to ~~our business including, but not limited to,~~residential, commercial/industrial construction, our ability to collect our receivables from our customers, our reliance on residential new construction, residential repair/remodel, and ~~commercial construction,~~commercial/industrial construction; our reliance on third-party suppliers and ~~manufacturers,~~manufacturers; our ability to attract, develop, and retain talented personnel and our sales and labor ~~force,~~force; our ability to maintain consistent practices across our ~~locations, and~~locations; our ability to maintain our competitive ~~position.~~position; and our ability to realize the expected benefits of our acquisitions. We discuss the material risks we face under the caption entitled “Risk Factors” in our Annual Report for the year ended December 31, ~~2021,~~ 2022, as filed with the SEC on February ~~22, 2022~~,23, 2023, 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.

~~Table of Contents~~

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rate Risk

~~On October 7, 2021, the Company entered into Amendment No. 2 to Credit Agreement. Amendment No. 2 to Credit Agreement provides for~~We have a ~~term loan facility in an aggregate~~Term Loan outstanding with a principal ~~amount~~balance of ~~$600.0~~$551.3 million ~~comprised of a $300.0 term loan facility and $300.0 million delayed draw term loan commitment, all of which was drawn on October 7, 2021~~ and a revolving facility with an aggregate borrowing capacity of $500.0 million. We also have outstanding 3.625% Senior Notes with an aggregate principal balance of $400.0 million and 4.125% Senior Notes ~~which~~with an aggregate principal balance of $500.0 million. The 3.625% Senior Notes and 4.125% 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 aggregate ~~term loan facility~~Term Loan and revolving facility ~~under Amendment No. 2 to 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~~June 30, ~~2022, we had $573.8 million outstanding under our term loan facility, and~~2023, the applicable interest rate as of such date was ~~3.52%~~6.20%. Based on our outstanding borrowings ~~under Amendment No. 2 to Credit Agreement~~ as of ~~September~~June 30, ~~2022,~~2023, a ~~100 basis~~100-basis point increase in the interest rate would result in a ~~$5.6~~$5.4 million increase in our annualized interest expense. There was no outstanding balance under the revolving facility as of ~~September~~June 30, ~~2022.~~2023.

Table of Contents

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~~June 30, ~~2022.~~2023.

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~~June 30, ~~2022,~~2023, that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II – OTHER INFORMATION

Item 1. LEGAL PROCEEDINGS

The information set forth under the caption “Litigation” in Note 1513 – 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 risk factors as previously disclosed in our Annual Report for the year ended December 31, ~~2021,~~2022, as filed with the SEC on February ~~22, 2022~~23, 2023 which are incorporated by reference herein.

~~Table of Contents~~

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

~~The following table provides information regarding~~On July 25, 2022, our Board authorized the ~~repurchase~~2022 Repurchase Program, pursuant to which the Company may purchase up to $200 million of our common ~~stock for~~stock. There were no share repurchases executed during the ~~three~~six months ended ~~September~~June 30, 2023, leaving $154.4 million remaining under the 2022 ~~in thousands, except share and per share data:~~

Share Repurchase Program.

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
July 1, 2022 - July 31, 2022

-

$
-

-

$
54,406
August 1, 2022 - August 31, 2022

158,201

$
189.39

158,201

$
24,445
September 1, 2022 - September 30, 2022 (a)

111,343

$
179.97

253,694

$
4,406
Total

269,544

$
185.50

411,895

~~______________~~

~~(a)~~

In the one month period ended September 30, 2022, the number of shares purchased as part of publicly announced plans or programs includes 142,351 shares we received as final settlement of our 2022 ASR Agreement. For more information, see ~~Note 11 – 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.~~

Item 3. DEFAULTS UPON SENIOR SECURITIES

Not applicable.

Item 4. MINE SAFETY DISCLOSURES

Not applicable.

Item 5. OTHER INFORMATION

~~Not applicable.~~During the quarter ended June 30, 2023, no director or officer (as defined in Rule 16a-1(f) promulgated under the Exchange Act) of the Company adopted or terminated a "Rule 10b5-1 trading arrangement" or "non-Rule 10b5-1 trading arrangement" (as each term is defined in Item 408 of Regulation S-K).

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.

3229

Table of Contents

INDEX TO EXHIBITS


		Incorporated by Reference			Filed
Exhibit No.	Exhibit Title	Form	Exhibit	Filing Date	Herewith
10.16	Amendment No. 4 to Amended and Restated Credit Agreement and Increase Joinder, dated July 26, 2023, among TopBuild Corp., Bank of America, N.A. as administrative agent, and the other lenders and agents party thereto.				X

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

3330

Table of Contents

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/ Robert Kuhns
	Name:	Robert Kuhns
	Title:	Vice President and Chief Financial Officer
		(Principal Financial Officer and Principal Accounting Officer)

~~November 1, 2022~~August 3, 2023

3431


	Included in Line Item on	As of
	Condensed	September 30,		December 31,
	Balance Sheets	2022		2021
Contract Assets:
Receivables, unbilled	Receivables, net	$	83,232	$	71,401

Contract Liabilities:
Deferred revenue	Accrued liabilities	$	21,991	$	14,310


	2021
Risk free interest rate		0.76	%
Expected volatility, using historical return volatility and implied volatility		43.29	%
Expected life (in years)		6.0
Dividend yield		0.00	%
Estimated fair value of stock options at grant date	$	89.59


Finalized purchase price fair values:
Accounts receivable		145,042
Inventories		133,004
Prepaid and other assets		8,820
Property and equipment		37,562
ROU asset (operating)		66,698
Intangible assets		458,000
Goodwill		450,716
Accounts payable		(68,367)
Lease liabilities		(76,066)
Deferred tax liabilities		(83,590)
All other liabilities		(35,854)
Net assets acquired	$	1,035,965


2021 Acquisitions	Date		Cash Paid		Contingent Consideration		Total Purchase Price		Goodwill Acquired
LCR		1/20/2021	$	53,700		—		53,700		19,500
ABS		4/5/2021		124,348		—		124,348		54,229
All others		Various		26,977		1,200		28,177		12,001
Total			$	205,025	$	1,200	$	206,225	$	85,730


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
July 1, 2022 - July 31, 2022	-	$	-	-	$	54,406
August 1, 2022 - August 31, 2022	158,201	$	189.39	158,201	$	24,445
September 1, 2022 - September 30, 2022 (a)	111,343	$	179.97	253,694	$	4,406
Total	269,544	$	185.50	411,895

Estimated Fair Value

Weighted Average Estimated Useful Life (Years)

Customer relationships

Trademarks and trade names

Non-compete agreements

Total intangible assets acquired