UNITED STATES
SECURITIES AND EXCHANGE
COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
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(Mark One) | |
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period SeptemberJune 30, 20222023
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☐ | 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)
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Delaware (State or Other Jurisdiction of Incorporation or | 47-3096382 (I.R.S. Employer |
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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 31,972,33231,757,295 shares of Common Stock, par value $0.01 per share as of October 25, 2022.July 27, 2023.
TOPBUILD CORP.
TABLE OF CONTENTS
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Management's Discussion and Analysis of Financial Condition and Results of Operations |
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2
GLOSSARY
We use acronyms, abbreviations, and other defined terms throughout this quarterly report on Form 10-Q, which are defined in the glossary below:
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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 |
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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 |
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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 |
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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 |
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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 |
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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 |
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Lenders | | Bank of America, N.A., together with the other lenders party to "Credit Agreement" |
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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 |
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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 |
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SPI | | SPI LLC, d/b/a Specialty Products & Insulation |
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. |
3
PART I – FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
TOPBUILD CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
(In thousands except share data)
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| | As of | | As of | ||||||||
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| 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 |
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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 |
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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 | ||
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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 | ||
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Commitments and contingencies | | | | | | | | | | | ||
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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.
4
TOPBUILD CORP.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(In thousands except share and per common share data)
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| | 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 |
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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 |
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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 |
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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 |
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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 |
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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.
5
TOPBUILD CORP.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
(In thousands)
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| | 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
6
TOPBUILD CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In thousands)
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| | Nine Months Ended September 30, | | Six Months Ended June 30, | ||||||||
| | 2022 | | 2021 | | 2023 | | 2022 | ||||
Cash Flows Provided by (Used in) Operating Activities: | | |
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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 |
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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) |
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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 |
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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 | |
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See notes to our unaudited condensed consolidated financial statements.
7
TOPBUILD CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (Unaudited)
(In thousands except share data)
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| | | | | | | | | | | | | 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 |
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| | | | | | | | | | | | | 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 |
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| | | | | | | | | | | | | 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.
8
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 SeptemberJune 30, 2022,2023, our results of operations and comprehensive income for the three and ninesix months ended SeptemberJune 30, 20222023 and 2021,2022, and our cash flows for the ninesix months ended SeptemberJune 30, 20222023 and 2021.2022. The condensed consolidated balance sheet at December 31, 20212022 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:
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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 beginningon January 1, 2023, with early adoption permitted. We are evaluating theand did not have a material impact that adoption of this standard may have onto 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 |
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9
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 |
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| | 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):
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| | | | | | | | | | | | | | | | | | | | | | | | | | 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 |
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| | | | | | | | | | | | | | | | | | | | | | | | | | 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:
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| 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 |
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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.
10
The following table represents our contract assets and contract liabilities with customers, in thousands:
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| 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 |
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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 ninesix months ended SeptemberJune 30, 2022.2023.
Changes in the carrying amount of goodwill for ninesix months ended SeptemberJune 30, 2022,2023, by segment, were as follows, in thousands:
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| | 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:
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| | As of | ||||
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| 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 |
11
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 SeptemberJune 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 toCredit 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.
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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 tothe 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 payableexpense 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 |
● | A |
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 1.001.50 percent and in the case of LIBORSOFR rate borrowings, the applicable margin ranges from 1.00 percent to 2.50 percent. Borrowings under Amendment No. 2 tothe 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.
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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 beganbeginning 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%.
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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 |
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.
15
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 theand 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 SeptemberJune 30, 20222023 (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 |
14
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
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 SHARE
Basic net income per share is calculated by dividing net income by the number of weighted average shares outstanding during the period, without consideration for common stock equivalents.
Diluted net income per share is calculated by adjusting the number of weighted average shares outstanding for the dilutive effect of common stock equivalents outstanding for the period, determined using the treasury stock method.
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.
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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 | ||||
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 |
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 | | Weighted Average | ||
RSAs | | $ | 15,203 | | | 1.0 |
Stock options | | | 677 | | | 0.7 |
Total unrecognized compensation expense related to unvested awards | | $ | 15,880 | | | |
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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 | ||||
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 | | Weighted Average | ||
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, 201917, 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.
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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
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 2023, 2022, and 2021:
| | | | | | | | | | | | |
| | 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:
| | | | | | |
|
| Estimated Fair Value |
| Weighted Average Estimated Useful Life (Years) | ||
Customer relationships | | $ | 12,020 | | | 12 |
Trademarks and trade names | | | 1,520 | | | 10 |
Non-compete agreements | | | 200 | | | 5 |
Total intangible assets acquired | | $ | 13,740 | | | 12 |
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.
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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.
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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.
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 for license and insurance.
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.
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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
TopBuild, headquartered in Daytona Beach, Florida, is a leading installer and specialty distributor of insulation and other building material products to the U.S. construction industry. We trade onindustry 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 SeptemberJune 30, 2022,2023, we had approximately 230235 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 SeptemberJune 30, 2022,2023, we had approximately 165 Specialty Distribution branches156 distribution centers located across the United States and 18 branchesdistribution 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. We 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 ofseveral 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 Distributiondistribution 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, whichdistributors. 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.
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THIRDSECOND QUARTER 20222023 VERSUS THIRDSECOND QUARTER 20212022
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 SeptemberJune 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 SeptemberJune 30, 20222023 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 percentpercentage of sales was 13.3%were 14.0% and 13.8%13.9% for the three months ended SeptemberJune 30, 2023 and 2022, and 2021, respectively. The decrease in selling,Selling, general, and administrative expenseexpenses as a percentpercentage of sales was driven primarily bywere slightly higher sales,due to increased incentive compensation and headcount costs partially offset by the amortizationcontinued 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 SeptemberJune 30, 20222023 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 inflationcosts and amortization of intangible assets relatedslightly higher selling, general, and administrative expenses compared to purchase accounting.the same quarter in 2022.
2422
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 SeptemberJune 30, 2022,2023, as compared to the same period in 2021. The increase was due to a 13.8% increase in2022. Sales increased 2.9% from both higher selling prices a 12.3% increase inand sales volume, and a 1.7% increase2.2% 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 SeptemberJune 30, 20222023 and 2021,2022, respectively. The increase in operating marginsmargin 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 $307.1decreased $13.3 million, or 111.1%2.3%, for the three months ended SeptemberJune 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 tofrom 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 SeptemberJune 30, 20222023 and 2021,2022, respectively. The decreaseincrease in operating marginsmargin was partially driven by the amortizationproductivity initiatives and continued realization of intangible assets related to purchase accounting and material inflationsynergies from our 2021 acquisition of DI, partially offset by higher selling prices and higherlower sales volume.
2523
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 SeptemberJune 30, 2023 and 2022, and 2021, respectively. The change primarily related to interestInterest expense which increased by $9.0$5.1 million for the three months ended SeptemberJune 30, 2022, as compared to the same period in 2021. This increase was2023 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 26.126.3 percent, for the three months ended SeptemberJune 30, 2022,2023, compared to $32.9$49.8 million, an effective tax rate of 25.725.8 percent, for the comparable period in 2021.2022. The tax rate for the three months ended SeptemberJune 30, 2022,2023, was higher dueprimarily related to state tax adjustments and miscellaneous items, partially offset by a decrease in tax expense related to share-based compensation.items.
FIRST NINESIX MONTHS 20222023 VERSUS FIRST NINESIX MONTHS 20212022
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 ninesix months ended SeptemberJune 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 ninesix months ended SeptemberJune 30, 20222023 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 increasehigher 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 costselling, 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
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 ninesix months ended SeptemberJune 30, 20222023 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 increasehigher 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 ninesix months ended SeptemberJune 30, 2022,2023, as compared to the same period in 2021. The increase was due to a 13.7% increase2022. Sales increased 4.3% from higher selling prices, a 8.1% increase in4.1% from higher sales volume and a 4.3% impact2.2% from our acquisitions.
Operating margins
Operating margins in our Installation segment were 18.4%20.3% and 15.9%17.7% for the ninesix months ended SeptemberJune 30, 2023 and 2022, and 2021, respectively. The increase in operating marginsmargin was primarily driven by productivity initiatives, higher sales fromvolume, and higher selling prices and volumes, partially offset by an increasehigher material costs compared to the same quarter in cost of material.2022.
27
Specialty Distribution
Sales
Sales in our Specialty Distribution segment increased $913.8$1.2 million, or 114.0%0.1%, for the ninesix months ended SeptemberJune 30, 2022,2023, as compared to the same period in 2021. This increase was due to a 93.5% impact2022. Sales increased 3.0% from our acquisitions, a 18.5% increase due to higher selling prices andwhich was offset by a 2.1% increase2.9% decline in sales volume.
25
Operating margins
Operating margins in our Specialty Distribution segment were 14.3%14.1% and 15.6%13.9% for the ninesix months ended SeptemberJune 30, 20222023 and 2021,2022, respectively. The decreaseincrease in operating margins was driven by the amortizationproductivity initiatives, continued realization of intangible assets related to purchase accountingsynergies from our 2021 acquisition of DI, and material inflationhigher selling prices partially offset by higher selling priceslower 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 ninesix months ended SeptemberJune 30, 20222023 and 2021,2022, respectively. Interest expense increased by $21.7$11.2 million for the ninesix months ended SeptemberJune 30, 2022, as compared to the same period in 2021. This increase was2023 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. 2021Agreement compared to the same period in 2022. This increase in interest expense was also impactedpartially offset by a $13.9$7.2 million charge incurredhigher 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 ninesix months ended SeptemberJune 30, 20222023 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 ninesix months ended SeptemberJune 30, 20222023 was higher dueprimarily related to permanent items includinga 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 ninesix months ended SeptemberJune 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 impactproductivity initiatives, continued realization of synergies from our acquisitions,acquisition of DI and higher salesselling prices and sale volumes. That increase was largelypartially 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 bysix months ended June 30, 2023 as compared to the impact of our acquisitions onsame 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 ninesix months ended SeptemberJune 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 ninesix months ended SeptemberJune 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.
28
Net cash used in financing activities was $240.4$24.0 million for the ninesix months ended SeptemberJune 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 ninesix months ended SeptemberJune 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
26
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 fundknown 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 outstandingadequate 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 SeptemberJune 30, 20222023, 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 numberit 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 risingthe 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 healthfundamentals of the U.S. housing market.
With the acquisitionmarket, supported by a limited supply of DI, we have diversified our mix of businessboth new and increased our penetration in the commercialexisting 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
TableWe continue to have a strong backlog and bidding activity to support our commercial/industrial sales. We see a lot of Contentsmajor 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 ninethree months ended SeptemberJune 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.
27
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 ornegative macro-economic impacts on the market at large including inflation and interest rates. Our future performance may also be affected by conditions or events relatingUnited 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, andlocations; 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.
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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 forWe have a term loan facility in an aggregateTerm Loan outstanding with a principal amountbalance 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 whichwith 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 facilityTerm 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 SeptemberJune 30, 2022, we had $573.8 million outstanding under our term loan facility, and2023, 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 SeptemberJune 30, 2022,2023, a 100 basis100-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 SeptemberJune 30, 2022.2023.
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Item 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this Quarterly Report, we carried out an evaluation, under the supervision and with the participation of our principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Based on this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective as of SeptemberJune 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 SeptemberJune 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, 202223, 2023 which are incorporated by reference herein.
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Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The following table provides information regardingOn July 25, 2022, our Board authorized the repurchase2022 Repurchase Program, pursuant to which the Company may purchase up to $200 million of our common stock forstock. There were no share repurchases executed during the threesix months ended SeptemberJune 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 | | | |
______________
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.
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INDEX TO EXHIBITS
| | | | | | | | | | |
|
| | | Incorporated by Reference | | Filed | ||||
Exhibit No. |
| Exhibit Title |
| Form |
| Exhibit |
| Filing Date |
| Herewith |
10.16 | | | | | | | | | X | |
| | | | | | | | | | |
31.1 | | | | | | | | | X | |
| | | | | | | | | | |
31.2 | | | | | | | | | X | |
| | | | | | | | | | |
32.1‡ | | | | | | | | | | |
| | | | | | | | | | |
32.2‡ | | | | | | | | | | |
| | | | | | | | | | |
101.INS | | Inline XBRL Instance Document - the Instance Document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document | | | | | | | | X |
| | | | | | | | | | |
101.SCH | | Inline XBRL Taxonomy Extension Schema Document | | | | | | | | X |
| | | | | | | | | | |
101.CAL | | Inline XBRL Taxonomy Extension Calculation Linkbase Document | | | | | | | | X |
| | | | | | | | | | |
101.DEF | | Inline XBRL Taxonomy Extension Definition Linkbase Document | | | | | | | | X |
| | | | | | | | | | |
101.LAB | | Inline XBRL Taxonomy Extension Label Linkbase Document | | | | | | | | X |
| | | | | | | | | | |
101.PRE | | Inline XBRL Taxonomy Extension Presentation Linkbase Document | | | | | | | | X |
| | | | | | | | | | |
104 | | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) | | | | | | | | X |
| | | | | | | | | | |
| | ‡Furnished herewith | | | | | | | | |
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| ||||||
| | TOPBUILD CORP. | ||||
| | |||||
|
| |||||
| ||||||
| By: | /s/ Robert Kuhns | ||||
| | Name: | Robert Kuhns | |||
| | Title: | Vice President and Chief Financial Officer | |||
| |
| (Principal Financial Officer and Principal Accounting Officer) |
November 1, 2022August 3, 2023
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