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BLD TopBuild

Filed: 3 Nov 20, 4:06pm

UNITED STATES

SECURITIES AND EXCHANGE

COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2020

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

For the transition period from               to               

Commission file number: 001-36870

TopBuild Corp.

(Exact name of Registrant as Specified in its Charter)

Delaware

(State or Other Jurisdiction of Incorporation or
Organization)

47-3096382

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

475 North Williamson Boulevard

Daytona Beach, Florida

(Address of Principal Executive Offices)

32114

(Zip Code)

(386) 304-2200

(Registrant's telephone number, including area code)

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

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common stock, par value $0.01 per share

BLD

New York Stock Exchange

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

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

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

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

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

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

The registrant had outstanding 33,024,441 shares of Common Stock, par value $0.01 per share as of October 30, 2020.

GLOSSARY

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

Term

Definition

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

2017 Repurchase Program

$200 million share repurchase program authorized by the Board on February 24, 2017

2018 ASR Agreement

$50 million accelerated share repurchase agreement with JPMorgan Chase Bank, N.A.

2019 Repurchase Program

$200 million share repurchase program authorized by the Board on February 22, 2019

2019 ASR Agreement

$50 million accelerated share repurchase agreement with Bank of America, N.A.

Amended Credit Agreement

Senior secured credit agreement and related security and pledge agreement dated March 20, 2020

Annual Report

Annual report filed with the SEC on Form 10-K pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

ASC

Accounting Standards Codification

ASU

Accounting Standards Update

Board

Board of Directors of TopBuild

BofA

Bank of America, N.A.

Cooper

Cooper Glass Company, LLC

Current Report

Current report filed with the SEC on Form 8-K pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

EBITDA

Earnings before interest, taxes, depreciation, and amortization

EcoFoam

Bella Insulutions Inc., DBA EcoFoam/Insulutions

Exchange Act

The Securities Exchange Act of 1934, as amended

FASB

Financial Accounting Standards Board

GAAP

Generally accepted accounting principles in the United States of America

Garland

Garland Insulating

Hunter

Hunter Insulation

IBR

Incremental borrowing rate, as defined in ASC 842

Lenders

Bank of America, N.A., together with the other lenders party to the "Amended Credit Agreement"

LIBOR

London interbank offered rate

Net Leverage Ratio

As defined in the “Amended Credit Agreement,” the ratio of outstanding indebtedness, less up to $100 million of unrestricted cash, to EBITDA

NYSE

New York Stock Exchange

Original Credit Agreement

Senior secured credit agreement and related security and pledge agreement dated May 5, 2017, as amended March 28, 2018

Quarterly Report

Quarterly report filed with the SEC on Form 10-Q pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Revolving Facility

Senior secured revolving credit facilities available under the Amended Credit Agreement, of $450 million with applicable sublimits for letters of credit and swingline loans.

ROU

Right of use (asset), as defined in ASC 842

RSA

Restricted stock award

Santa Rosa

Santa Rosa Insulation and Fireproofing, LLC

SEC

United States Securities and Exchange Commission

Secured Leverage Ratio

As defined in the “Amended Credit Agreement,” the ratio of outstanding indebtedness, including letters of credit, to EBITDA

Senior Notes

TopBuild's 5.625% senior unsecured notes due on May 1, 2026

TopBuild

TopBuild Corp. and its wholly-owned consolidated domestic subsidiaries. Also, the "Company,"
"we," "us," and "our"

Viking

Viking Insulation Co.

3

PART I – FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

TOPBUILD CORP.

CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)

(In thousands except share data)

As of

    

September 30, 

December 31, 

2020

2019

ASSETS

Current assets:

Cash and cash equivalents

$

315,338

$

184,807

Receivables, net of an allowance for credit losses of $8,122 at September 30, 2020, and allowance for doubtful accounts of $4,854 at December 31, 2019

436,548

 

428,844

Inventories, net

142,517

 

149,078

Prepaid expenses and other current assets

32,101

 

17,098

Total current assets

926,504

 

779,827

Right of use assets

81,692

87,134

Property and equipment, net

172,099

 

178,080

Goodwill

1,379,721

 

1,367,918

Other intangible assets, net

172,390

 

181,122

Deferred tax assets, net

4,397

4,259

Other assets

10,998

 

5,623

Total assets

$

2,747,801

$

2,603,963

LIABILITIES AND EQUITY

Current liabilities:

Accounts payable

$

311,696

$

307,970

Current portion of long-term debt

23,247

34,272

Accrued liabilities

117,456

98,418

Short-term lease liabilities

32,747

36,094

Total current liabilities

485,146

476,754

Long-term debt

688,870

697,955

Deferred tax liabilities, net

173,597

175,263

Long-term portion of insurance reserves

49,927

45,605

Long-term lease liabilities

52,672

54,010

Other liabilities

15,995

1,487

Total liabilities

1,466,207

1,451,074

Commitments and contingencies

Equity:

Preferred stock, $0.01 par value: 10,000,000 shares authorized; 0 shares issued and outstanding at September 30, 2020 and December 31, 2019

Common stock, $0.01 par value: 250,000,000 shares authorized; 39,030,810 shares issued and 33,053,795 outstanding at September 30, 2020, and 38,884,530 shares issued and 33,489,769 outstanding at December 31, 2019

389

388

Treasury stock, 5,977,015 shares at September 30, 2020, and 5,394,761 shares at December 31, 2019, at cost

(380,667)

(330,018)

Additional paid-in capital

855,972

849,657

Retained earnings

805,900

632,862

Total equity

1,281,594

1,152,889

Total liabilities and equity

$

2,747,801

$

2,603,963

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)

Three Months Ended September 30, 

Nine Months Ended September 30, 

2020

2019

2020

2019

Net sales

$

697,223

    

$

682,330

    

$

1,996,551

    

$

1,961,771

Cost of sales

498,895

502,999

1,448,210

1,451,822

Gross profit

198,328

179,331

548,341

509,949

Selling, general, and administrative expense

96,805

98,886

296,372

296,846

Operating profit

101,523

80,445

251,969

213,103

Other income (expense), net:

Interest expense

(7,692)

(9,507)

(24,711)

(28,740)

Loss on extinguishment of debt

(233)

Other, net

86

653

648

1,512

Other expense, net

(7,606)

(8,854)

(24,296)

(27,228)

Income before income taxes

93,917

71,591

227,673

185,875

Income tax expense

(23,921)

(16,615)

(51,407)

(40,864)

Net income

$

69,996

$

54,976

$

176,266

$

145,011

Net income per common share:

Basic

$

2.13

$

1.63

$

5.35

$

4.27

Diluted

$

2.11

$

1.60

$

5.29

$

4.20

 

Weighted average shares outstanding:

Basic

32,847,652

33,790,857

32,960,969

33,977,464

Diluted

33,210,545

34,367,902

33,337,259

34,541,635

See notes to our unaudited condensed consolidated financial statements.

5

TOPBUILD CORP.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(In thousands)

Nine Months Ended September 30, 

2020

2019

Cash Flows Provided by (Used in) Operating Activities:

    

    

    

Net income

$

176,266

$

145,011

Adjustments to reconcile net income to net cash provided by operating activities:

Depreciation and amortization

47,527

39,005

Share-based compensation

12,159

11,411

Loss on extinguishment of debt

233

Loss on sale or abandonment of property and equipment

290

885

Amortization of debt issuance costs

1,103

1,169

Provision for bad debt expense

5,625

5,697

Loss from inventory obsolescence

1,908

1,794

Deferred income taxes, net

(709)

(381)

Change in certain assets and liabilities

Receivables, net

(13,645)

(51,585)

Inventories, net

4,759

20,637

Prepaid expenses and other current assets

(14,989)

10,003

Accounts payable

2,152

(12,529)

Accrued liabilities

33,436

10,758

Payment of contingent consideration

(413)

Other, net

21

904

Net cash provided by operating activities

255,723

182,779

Cash Flows Provided by (Used in) Investing Activities:

Purchases of property and equipment

(27,206)

(34,100)

Acquisition of businesses

(21,450)

(6,452)

Proceeds from sale of property and equipment

2,332

2,239

Other, net

25

Net cash used in investing activities

(46,324)

(38,288)

Cash Flows Provided by (Used in) Financing Activities:

Proceeds from issuance of long-term debt

300,000

9,998

Repayment of long-term debt

(319,168)

(19,424)

Payment of debt issuance costs

(2,280)

Taxes withheld and paid on employees' equity awards

(14,781)

(11,135)

Exercise of stock options

1,438

Repurchase of shares of common stock

(43,149)

(52,177)

Payment of contingent consideration

(928)

(1,091)

Net cash used in financing activities

(78,868)

(73,829)

Cash and Cash Equivalents

Increase for the period

130,531

70,662

Beginning of period

 

184,807

 

100,929

End of period

$

315,338

$

171,591

Supplemental disclosure of noncash activities:

Leased assets obtained in exchange for new operating lease liabilities

$

27,098

$

120,726

Accruals for property and equipment

278

102

See notes to our unaudited condensed consolidated financial statements.

6

TOPBUILD CORP.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (Unaudited)

(In thousands except share data)

Common

Treasury

Additional

Stock

Stock

Paid-in

Retained

($0.01 par value)

at cost

Capital

Earnings

Equity

Balance at December 31, 2018

$

387

$

(216,607)

$

846,451

$

441,867

$

1,072,098

Net income

37,983

37,983

Share-based compensation

2,972

2,972

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

1

(1)

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

(10,000)

10,000

Repurchase of 72,791 shares

(4,622)

(4,622)

105,615 shares withheld to pay taxes on employees' equity awards

(5,578)

(5,578)

Balance at March 31, 2019

$

388

$

(231,229)

$

853,844

$

479,850

$

1,102,853

Net income

52,051

52,051

Share-based compensation

4,513

4,513

Repurchase of 196,885 shares

(14,878)

(14,878)

54,811 shares withheld to pay taxes on employees' equity awards

(2,893)

(2,893)

Balance at June 30, 2019

$

388

$

(246,107)

$

855,464

$

531,901

$

1,141,646

Net income

54,976

54,976

Share-based compensation

3,926

3,926

Repurchase of 364,074 shares

(32,677)

(32,677)

43,037 shares withheld to pay taxes on employees' equity awards

(2,664)

(2,664)

Balance at September 30, 2019

$

388

$

(278,784)

$

856,726

$

586,877

$

1,165,207

Balance at December 31, 2019

$

388

$

(330,018)

$

849,657

$

632,862

$

1,152,889

Net income

50,771

50,771

Share-based compensation

3,908

3,908

Cumulative-effect of accounting change

(3,225)

(3,225)

Issuance of 63,780 restricted share awards under long-term equity incentive plan

1

(1)

Repurchase of 73,455 shares pursuant to the settlement of the 2019 ASR Agreement

(7,500)

7,500

Repurchase of 188,100 shares

(14,127)

(14,127)

97,144 shares withheld to pay taxes on employees' equity awards

(10,399)

(10,399)

Balance at March 31, 2020

$

389

$

(351,645)

$

850,665

$

680,408

$

1,179,817

Net income

55,496

55,496

Share-based compensation

5,130

5,130

Repurchase of 262,889 shares

(20,025)

(20,025)

38,379 shares withheld to pay taxes on employees' equity awards

(2,766)

(2,766)

Balance at June 30, 2020

$

389

$

(371,670)

$

853,029

$

735,904

$

1,217,652

Net income

69,996

69,996

Share-based compensation

3,121

3,121

Repurchase of 57,810 shares

(8,997)

(8,997)

6,402 shares withheld to pay taxes on employees' equity awards

(1,616)

(1,616)

19,242 shares issued upon exercise of stock options

1,438

1,438

Balance at September 30, 2020

$

389

$

(380,667)

$

855,972

$

805,900

$

1,281,594

See notes to our unaudited condensed consolidated financial statements.

��

7

Table of Contents

TOPBUILD CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

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 2 segments: Installation and Distribution.  Our Installation segment primarily installs insulation and other building products.  Our Distribution segment primarily sells and distributes insulation and other building products.  Our segments are based on our operating units, for which financial information is regularly evaluated by our chief operating decision maker.

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

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

2.  ACCOUNTING POLICIES

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

Recently Adopted Accounting Pronouncements

Credit Losses

In June 2016, the FASB issued ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments,” which replaces the current incurred loss methodology with an expected loss methodology, referred to as the current expected credit loss (CECL) methodology.  We adopted Topic 326 on January 1, 2020, using the modified retrospective method, which resulted in a $3.2 million cumulative-effect adjustment recorded through retained earnings at the beginning of 2020.

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

Goodwill Impairment

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

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Table of Contents

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

Fair Value

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

Recently Issued Accounting Pronouncements Not Yet Adopted

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

3.  REVENUE RECOGNITION

Revenue is disaggregated between our Installation and 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, 

2020

2019

Installation

Distribution

Elims

Total

Installation

Distribution

Elims

Total

Residential

$

390,101

$

186,408

$

(30,821)

$

545,688

$

386,887

$

165,200

$

(29,581)

$

522,506

Commercial

102,105

57,705

(8,275)

151,535

111,503

55,747

(7,426)

159,824

Net sales

$

492,206

$

244,113

$

(39,096)

$

697,223

$

498,390

$

220,947

$

(37,007)

$

682,330

Nine Months Ended September 30, 

2020

2019

Installation

Distribution

Elims

Total

Installation

Distribution

Elims

Total

Residential

$

1,134,350

$

512,479

$

(88,875)

$

1,557,954

$

1,110,704

$

478,753

$

(86,157)

$

1,503,300

Commercial

300,298

162,193

(23,894)

438,597

320,096

160,146

(21,771)

458,471

Net sales

$

1,434,648

$

674,672

$

(112,769)

$

1,996,551

$

1,430,800

$

638,899

$

(107,928)

$

1,961,771

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

Three Months Ended September 30, 

2020

2019

Installation

Distribution

Elims

Total

Installation

Distribution

Elims

Total

Insulation and accessories

$

379,958

$

200,210

$

(31,816)

$

548,352

$

388,796

$

182,111

$

(27,872)

$

543,035

Glass and windows

41,912

41,912

37,885

37,885

Gutters

21,336

28,616

(5,482)

44,470

23,177

24,056

(7,270)

39,963

All other

49,000

15,287

(1,798)

62,489

48,532

14,780

(1,865)

61,447

Net sales

$

492,206

$

244,113

$

(39,096)

$

697,223

$

498,390

$

220,947

$

(37,007)

$

682,330

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Table of Contents

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

Nine Months Ended September 30, 

2020

2019

Installation

Distribution

Elims

Total

Installation

Distribution

Elims

Total

Insulation and accessories

$

1,110,952

$

556,018

$

(91,422)

$

1,575,548

$

1,116,292

$

525,717

$

(83,888)

$

1,558,121

Glass and windows

122,603

122,603

114,839

114,839

Gutters

61,843

74,585

(16,557)

119,871

63,669

65,707

(19,151)

110,225

All other

139,250

44,069

(4,790)

178,529

136,000

47,475

(4,889)

178,586

Net sales

$

1,434,648

$

674,672

$

(112,769)

$

1,996,551

$

1,430,800

$

638,899

$

(107,928)

$

1,961,771

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

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

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

 

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

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

Included in Line Item on

As of

Condensed Consolidated

September 30, 

December 31, 

Balance Sheets

2020

2019

Contract Assets:

Receivables, unbilled

Receivables, net

$

54,375

$

57,153

Contract Liabilities:

Deferred revenue

Accrued liabilities

$

16,817

$

16,139

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Table of Contents

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

4.  GOODWILL AND OTHER INTANGIBLES

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

In the fourth quarter of 2019, we performed an annual assessment on our goodwill resulting in 0 impairment.

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

    

Gross Goodwill

    

    

Gross Goodwill

    

   Accumulated   

    

Net Goodwill

at

at

Impairment

at

December 31, 2019

Additions

September 30, 2020

Losses

September 30, 2020

Goodwill, by segment:

Installation

$

1,683,589

$

11,803

$

1,695,392

$

(762,021)

$

933,371

Distribution

 

446,350

 

 

446,350

 

 

446,350

Total goodwill

$

2,129,939

$

11,803

$

2,141,742

$

(762,021)

$

1,379,721

See Note 13 – Business Combinations for goodwill recognized on acquisitions that occurred in the first half of 2020.

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, 

2020

2019

Gross definite-lived intangible assets

    

$

228,662

$

221,382

Accumulated amortization

    

(56,272)

(40,260)

Net definite-lived intangible assets

    

172,390

181,122

Indefinite-lived intangible assets not subject to amortization

    

Other intangible assets, net

    

$

172,390

$

181,122

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

Three Months Ended September 30, 

Nine Months Ended September 30, 

    

2020

    

2019

    

2020

    

2019

Amortization expense

$

5,382

$

5,197

$

16,012

$

15,543

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

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, 

2020

    

2019

Senior Notes - 5.625% due May 2026

$

400,000

$

400,000

Term loan

292,500

305,625

Equipment notes

27,484

33,525

Unamortized debt issuance costs

(7,867)

(6,923)

Total debt, net of unamortized debt issuance costs

712,117

732,227

Less: current portion of long-term debt

23,247

34,272

Total long-term debt

$

688,870

$

697,955

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

Payments Due by Period

2020

2021

2022

2023

2024

Thereafter

Total

Senior Notes

$

$

$

$

$

$

400,000

$

400,000

Term loan

    

3,750

    

15,000

    

20,625

    

22,500

    

28,125

    

202,500

    

292,500

Equipment notes

2,040

8,326

8,651

6,337

2,130

27,484

Total

$

5,790

$

23,326

$

29,276

$

28,837

$

30,255

$

602,500

$

719,984

Amended Credit Agreement and Senior Secured Term Loan Facility

On March 20, 2020, the Company entered into an Amended Credit Agreement, which renewed, amended and restated the Original Credit Agreement in its entirety.  The Amended Credit Agreement provides for a term loan facility in an aggregate principal amount of $300.0 million, all of which was drawn on March 20, 2020 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.  The maturity date for the loans under the Amended Credit Agreement was extended from May 2022 to March 2025.

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

Senior secured term loan facility

$

300,000

Additional term loan and/or revolver capacity available under incremental facility (a)

$

300,000

Revolving Facility

$

450,000

Sublimit for issuance of letters of credit under Revolving Facility (b)

$

100,000

Sublimit for swingline loans under Revolving Facility (b)

$

35,000

Interest rate as of September 30, 2020

1.50

%

Scheduled maturity date

3/20/2025

(a)Additional borrowing capacity is available under the incremental facility, subject to certain terms and conditions (including existing or new lenders providing commitments in respect of such additional borrowing capacity).
(b)Use of the sublimits for the issuance of letters of credit and swingline loans reduces the availability under the Revolving Facility.

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

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

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

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

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

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

Revolving Facility

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

As of

September 30, 

    

December 31, 

    

2020

    

2019

Revolving Facility

$

450,000

$

250,000

Less: standby letters of credit

(60,382)

(61,382)

Availability under Revolving Facility

$

389,618

$

188,618

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

Senior Notes

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

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

Equipment Notes

As of December 31, 2019, the company has issued $41.6 million of equipment notes for the purpose of financing the purchase of vehicles and equipment. NaN equipment notes were issued during the nine months ended September 30, 2020. 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 indenture governing our Senior Notes contains customary restrictive covenants that, among other things, generally limit our ability to incur additional debt and issue preferred stock; to create liens; to pay dividends, acquire shares of capital stock, make payments on subordinated debt or make investments; to place limitations on distributions from certain subsidiaries; to issue guarantees; to issue or sell the capital stock of certain subsidiaries; to sell assets; to enter into transactions with affiliates; and to effect mergers.  The Senior Notes indenture also contains customary events of default, subject in certain cases to grace and cure periods. Generally, if an event of default occurs and is continuing, the trustee under the indenture or the holders of at least 25% in aggregate principal amount of the Senior Notes then outstanding may declare the principal of, premium, if any, and accrued interest on all the Senior Notes immediately due and payable.  The Senior Notes and related guarantees have not been registered under the Securities Act of 1933, and we are not required to register either the Senior Notes or the guarantees in the future.

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

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

As of September 30, 2020

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 13 – Business Combinations.

Fair Value on Non-Recurring Basis

Fair value measurements were applied to our long-term debt portfolio.  We believe the carrying value of our term loan approximates the fair market value primarily due to the fact that the non-performance risk of servicing our debt obligations, as reflected in our business and credit risk profile, has not materially changed since we assumed our debt obligations under the Amended Credit Agreement.  In addition, due to the floating-rate nature of our term loan, the market value is not subject to variability solely due to changes in the general level of interest rates as is the case with a fixed-rate debt obligation.  Based on active market trades of our Senior Notes close to September 30, 2020 (Level 1 fair value measurement), we estimate that the fair value of the Senior Notes is approximately $417.0 million compared to a gross carrying value of $400.0 million at September 30, 2020.

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

7.  SEGMENT INFORMATION

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

Three Months Ended September 30, 

2020

2019

2020

2019

Net Sales

Operating Profit (b)

Our operations by segment were (a):

Installation

$

492,206

$

498,390

$

83,142

$

69,846

Distribution

244,113

220,947

32,787

23,406

Intercompany eliminations

(39,096)

(37,007)

(6,374)

(5,935)

Total

$

697,223

$

682,330

109,555

87,317

General corporate expense, net (c)

(8,032)

(6,872)

Operating profit, as reported

101,523

80,445

Other expense, net

(7,606)

(8,854)

Income before income taxes

$

93,917

$

71,591

Nine Months Ended September 30, 

2020

2019

2020

2019

Net Sales

Operating Profit (b)

Our operations by segment were (a):

Installation

$

1,434,648

$

1,430,800

$

213,136

$

189,568

Distribution

674,672

638,899

81,612

65,154

Intercompany eliminations

(112,769)

(107,928)

(18,169)

(18,013)

Total

$

1,996,551

$

1,961,771

276,579

236,709

General corporate expense, net (c)

(24,610)

(23,606)

Operating profit, as reported

251,969

213,103

Other expense, net

(24,296)

(27,228)

Income before income taxes

$

227,673

$

185,875

(a)All of our operations are located in the U.S.
(b)Segment operating profit includes an allocation of general corporate expenses attributable to the operating segments which is based on direct benefit or usage (such as salaries of corporate employees who directly support the segment).
(c)General corporate expense, net includes expenses not specifically attributable to our segments for functions such as corporate human resources, finance, and legal, including salaries, benefits, and other related costs.

8. LEASES

We have operating leases for our installation branch locations, distribution centers, our Branch Support Center in Daytona Beach, Florida, vehicles and certain equipment. In addition, we lease certain operating facilities from certain related parties, primarily former owners (and in some cases, current management personnel) of companies acquired.  These related party leases are immaterial to our unaudited condensed consolidated statements of operations.

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

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

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

    

Three Months Ended September 30, 

Nine Months Ended September 30, 

2020

2019

2020

2019

Operating lease cost (a)

$

11,475

$

12,393

$

35,842

$

38,597

Short-term lease cost

3,209

3,381

9,086

9,391

Sublease income

(42)

(153)

(153)

(461)

Net lease cost

$

14,642

$

15,621

$

44,775

$

47,527

(a)Includes variable cost components of $1,316 and $1,434 in the three months ended September 30, 2020 and 2019, respectively, and $4,090 and $4,201 of variable cost components in the nine months ended September 30, 2020 and 2019, respectively.

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

Payments due by Period

    

2020

$

10,234

2021

32,978

2022

22,083

2023

12,429

2024

7,135

2025 & Thereafter

7,189

Total future minimum lease payments

92,048

Less: imputed interest

(6,629)

Lease liability at September 30, 2020

$

85,419

As of September 30, 2020, the weighted average remaining lease term was 3.5 years and the related lease liability was calculated using a weighted average discount rate of 3.9%. The lease liability is initially measured as the present value of the unpaid lease payments as of the lease commencement date. The lease liability is discounted based on our IBR at the time of initial adoption of ASU 2016-02 for all existing leases or upon a modification to the lease term and at the time of lease commencement for all future leases.

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

    

Nine Months Ended September 30, 

2020

2019

Cash paid for amounts included in the measurement of lease liabilities

$

(31,862)

$

(33,914)

9.  INCOME TAXES    

Our effective tax rates were 25.5 percent and 22.6 percent for the three and nine months ended September 30, 2020, respectively. The effective tax rates for the three and nine months ended September 30, 2019, were 23.2 percent and 22.0 percent, respectively.  The higher 2020 tax rate for the three months ended September 30, 2020 was due to a smaller benefit related to share-based compensation, state filing position changes, and an unfavorable return to accrual adjustment.

A tax benefit of $0.8 million and $7.7 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 three and nine months ended September 30, 2020, respectively.

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

At September 30, 2020, the net deferred tax liability of $169.2 million consisted of net long-term deferred tax assets of $4.4 million and net long-term deferred tax liabilities of $173.6 million.  The decrease in the net deferred tax liability was primarily related to the adoption of ASU 2016-13 and a return to accrual adjustment related to 2019 returns filed in 2020.

10. INCOME PER SHARE

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

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

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

Three Months Ended September 30, 

 

Nine Months Ended September 30, 

2020

2019

 

2020

2019

Net income (in thousands) - basic and diluted

$

69,996

$

54,976

$

176,266

$

145,011

Weighted average number of common shares outstanding - basic

32,847,652

33,790,857

32,960,969

33,977,464

Dilutive effect of common stock equivalents:

RSAs with service-based conditions

42,317

82,087

53,719

86,373

RSAs with market-based conditions

159,985

195,740

145,835

183,537

RSAs with performance-based conditions

49,065

82,750

38,719

63,329

Stock options

111,526

216,468

138,017

230,932

Weighted average number of common shares outstanding - diluted

33,210,545

34,367,902

33,337,259

34,541,635

Basic net income per common share

$

2.13

$

1.63

$

5.35

$

4.27

Diluted net income per common share

$

2.11

$

1.60

$

5.29

$

4.20

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, 

2020

 

2019

 

2020

 

2019

Anti-dilutive common stock equivalents:

RSAs with service-based conditions

4,184

5,264

RSAs with market-based conditions

2,780

6,567

RSAs with performance-based conditions

Stock options

26,556

12,642

39,998

72,580

Total anti-dilutive common stock equivalents

26,556

12,642

46,962

84,411

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

11. 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, 2020, we had 2.1 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, 

2020

2019

2020

2019

Share-based compensation expense

$

3,121

$

3,926

$

12,159

$

11,411

Income tax benefit realized

$

838

$

1,304

$

7,734

$

5,110

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

RSAs

Stock Options

Number of Shares

   

Weighted Average Grant Date Fair Value Per Share

   

Number of Shares

   

Weighted Average Grant Date Fair Value Per Share

   

Weighted Average Exercise Price Per Share

   

Aggregate
Intrinsic
Value

Balance December 31, 2019

411.6

$

57.51

373.5

$

17.06

$

45.90

$

21,356.4

Granted

192.8

$

129.11

71.0

$

39.49

$

118.58

Converted/Exercised

(251.1)

$

43.44

(184.8)

$

14.84

$

39.54

$

13,222.1

Forfeited/Expired

(26.1)

$

90.81

(20.0)

$

30.13

$

87.67

Balance September 30, 2020

327.2

$

87.20

239.7

$

24.33

$

68.86

$

22,925.1

Exercisable September 30, 2020 (a)

63.8

$

18.89

$

51.04

$

7,638.0

(a)The weighted average remaining contractual term for vested stock options is approximately 6.5 years.

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

As of September 30, 2020

Unrecognized Compensation Expense
on Unvested Awards

Weighted Average
Remaining
Vesting Period

RSAs

$

11,536

1.2 years

Stock options

1,359

1.0 years

Total unrecognized compensation expense related to unvested awards

$

12,895

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

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

RSAs with Performance-Based Conditions

Grant Date Fair Value

0%

25%

100%

200%

February 19, 2018

$

1,865

$

$

466

$

1,865

$

3,730

February 18, 2019

$

2,281

$

$

570

$

2,281

$

4,562

February 17, 2020

$

2,716

$

$

679

$

2,716

$

5,432

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

2020

2019

Measurement period (in years)

2.88

2.87

Risk free interest rate

1.40

%

2.50

%

Dividend yield

0.00

%

0.00

%

Estimated fair value of market-based RSAs at grant date

$

158.24

$

80.74

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 2020 and 2019:

2020

2019

Risk free interest rate

1.53

%

2.59

%

Expected volatility, using historical return volatility and implied volatility

31.50

%

32.50

%

Expected life (in years)

6.0

6.0

Dividend yield

0.00

%

0.00

%

Estimated fair value of stock options at grant date

$

39.49

$

21.16

12. SHARE REPURCHASE PROGRAM

On February 22, 2019, our Board authorized the 2019 Repurchase Program, pursuant to which the Company may purchase up to $200.0 million of our common stock.  Share repurchases may be executed through various means including open market purchases, privately negotiated transactions, accelerated share repurchase transactions, or other available means.  The 2019 Share Repurchase Program does not obligate the Company to purchase any shares and has no expiration date.  Authorization for the 2019 Share Repurchase Program may be terminated, increased, or decreased by the Board at its discretion at any time.  As of September 30, 2020, the Company has approximately $46.0 million remaining under the 2019 Repurchase Program.

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

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

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

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

Three Months Ended September 30, 

Nine Months Ended September 30, 

    

2020

2019

2020

    

2019

Number of shares repurchased

57,810

364,074

582,254 (a)

810,077 (b)

Share repurchase cost (in thousands)

$

8,997

$

32,677

    

$

43,149

$

52,177

(a) The nine months ended September 30, 2020 includes 73,455 shares we received as final settlement of our 2019 ASR Agreement.

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

13. BUSINESS COMBINATIONS

We continue to acquire businesses as 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 for the three months ended September 30, 2020, was $0.2 million.  There were 0 acquisition related costs for the three months ended September 30, 2019. Acquisition related costs for the nine months ended September 30, 2020 and 2019, were $0.4 million and $0.1 million, respectively. Acquisition costs are included in selling, general, and administrative expense in our condensed consolidated statements of operations.

Acquisitions

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

On February 20, 2020, we acquired Cooper, a commercial glass company serving the Memphis market. The purchase price of approximately $11.5 million was funded by cash on hand of $10.5 million and contingent consideration of $1.0 million.  We recognized goodwill of $5.7 million in connection with this acquisition during the nine months ended September 30, 2020.

On February 24, 2020, we acquired Hunter, a residential insulation company located in Long Island, New York. The purchase price of approximately $9.1 million was funded by cash on hand. We recognized goodwill of $5.3 million in connection with this acquisition during the nine months ended September 30, 2020.

Contingent Consideration

On February 27, 2017, we acquired substantially all of the assets of EcoFoam, a residential and light commercial insulation installation company with locations in Colorado Springs and Denver, Colorado.  The purchase price of approximately $22.3 million was funded by cash on hand of $20.2 million and contingent consideration of $2.1 million.  We made the final contingent payment of $0.8 million during the three months ended June 30, 2020 and have 0 remaining obligation under the arrangement.

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Table of Contents

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

The acquisition of Viking included a contingent consideration arrangement that requires additional consideration to be paid by TopBuild based on the achievement of annual gross revenue targets over a three-year period. The range of undiscounted amounts TopBuild may be required to pay under the contingent consideration agreement is between 0 and $1.5 million. The fair value of the contingent consideration recognized on the acquisition date of $1.2 million was estimated by applying the income approach using discounted cash flows. That measure is based on significant Level 3 inputs not observable in the market. The significant assumption includes a discount rate of 10.0%. Changes in the fair value measurement each period reflect the passage of time as well as the impact of adjustments, if any, to the likelihood of achieving the specified targets.  We made a contingent payment of $0.5 million in the three months ended September 30, 2020.

The acquisition of Cooper includes a contingent consideration arrangement that requires additional consideration to be paid by TopBuild based on the achievement of annual gross revenue targets over a two-year period. The range of undiscounted amounts TopBuild may be required to pay under the contingent consideration agreement is between 0 and $1.0 million, which also represents the fair value recognized on the acquisition date.

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

    

EcoFoam

    

Viking

Cooper

Date of Acquisition

February 27, 2017

July 15, 2019

February 20, 2020

Fair value of contingent consideration recognized at acquisition date

$

2,110

$

1,243

$

1,000

Contingent consideration at December 31, 2019

$

822

$

1,304

$

Additions

1,000

Change in fair value of contingent consideration during the nine months ended September 30, 2020

19

85

Payment of contingent consideration during the nine months ended September 30, 2020

(841)

(500)

Liability balance for contingent consideration at September 30, 2020

$

$

889

$

1,000

14.  ACCRUED LIABILITIES

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

As of

September 30, 

December 31, 

    

2020

    

2019

Accrued liabilities:

Salaries, wages, and commissions

$

39,908

$

32,154

Insurance liabilities

23,440

22,506

Deferred revenue

16,817

16,139

Interest payable on long-term debt

9,563

3,966

Other

27,728

23,653

Total accrued liabilities

$

117,456

$

98,418

See Note 3 – Revenue Recognition for discussion of our deferred revenue balances and related revenue recognition policy.

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Table of Contents

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

15.  OTHER COMMITMENTS AND CONTINGENCIES

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

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

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

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

    

September 30, 

    

December 31, 

2020

2019

Outstanding bonds:

Performance bonds

$

102,403

$

87,286

Licensing, insurance, and other bonds

27,603

25,309

Total bonds

$

130,006

$

112,595

16.  SUBSEQUENT EVENTS


​​

On October 1, 2020, we acquired Garland, an insulation installation company, based in Texas. The acquisition was accounted for as a business combination under ASC 805, “Business Combinations.” The purchase price of approximately $62 million was funded by cash on hand. During the measurement period, we expect to receive additional detailed information to complete the purchase price allocation.

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

OVERVIEW

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

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

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

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

For additional details pertaining to our operating results by segment, see Note 7 – Segment Information to our unaudited condensed consolidated financial statements contained in Part I, Item 1 of this Quarterly Report, which is incorporated herein by reference. For additional details regarding our strategy, material trends in our business and seasonality, 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, 2019, as filed with the SEC on February 25, 2020, which discussion is hereby incorporated herein by reference.

COVID-19 BUSINESS UPDATE

We continue to monitor the COVID-19 pandemic and its impact on macroeconomic and local economic conditions. While we are currently able to operate in all of our locations, there is no guarantee that the services we provide will continue to be allowed or that other events making the provision of our services challenging or impossible, will not occur.  For example, if there are surges in levels of COVID-19 infections in certain states, those states may respond by, among other things, deeming residential and commercial construction as nonessential in connection with a restriction of commercial activity.  

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We continue to implement procedures and processes as required or recommended by governmental and medical authorities to ensure the safety of our employees, including increasing our cleaning and sanitizing practices at all locations and for all company vehicles, mandating social distancing on job sites and within our branch operations and limiting all but essential travel.  However, we are not able to predict whether our customers will continue to operate at their current or typical volumes, and such decreases in their operations would have a negative impact on our business.  We are also unable to predict how long the COVID-19 pandemic will last and the impact of the pandemic on demand for our products and services.  For additional discussion of the potential impact of the COVID-19 pandemic on our business, see the sections entitled “Outlook” and “Risk Factors” included in this Quarterly Report.

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.

THIRD QUARTER 2020 VERSUS THIRD QUARTER 2019

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, 

2020

2019

Net sales

$

697,223

$

682,330

Cost of sales

498,895

502,999

Cost of sales ratio

71.6

%

73.7

%

Gross profit

198,328

179,331

Gross profit margin

28.4

%

26.3

%

Selling, general, and administrative expense

96,805

98,886

Selling, general, and administrative expense to sales ratio

13.9

%

14.5

%

Operating profit

101,523

80,445

Operating profit margin

14.6

%

11.8

%

Other expense, net

(7,606)

(8,854)

Income tax expense

(23,921)

(16,615)

Net income

$

69,996

$

54,976

Net margin

10.0

%

8.1

%

Sales and Operations

Net sales increased 2.2 percent for the three months ended September 30, 2020, from the comparable period of 2019.  The increase was primarily driven by a 1.1 percent increase in sales volume, a 0.7 percent increase in sales from our acquisitions and 0.4 percent increase due to higher selling prices.

 

Gross profit margins were 28.4 percent and 26.3 percent for the nine months ended September 30, 2020 and 2019, respectively.  Gross profit margin improved primarily due to operational efficiencies, cost reduction initiatives, material deflation, and lower insurance costs.

Selling, general, and administrative expense, as a percent of sales, was 13.9 percent and 14.5 percent for the three months ended September 30, 2020 and 2019, respectively. The decrease in selling, general, and administrative expense as a percent of sales was primarily the result of reduced travel and entertainment activity, and savings from cost reduction activities.

Operating margins were 14.6 percent and 11.8 percent for the three months ended September 30, 2020 and 2019, respectively. The increase in operating margins was due to operational efficiencies, savings from cost reduction initiatives, material deflation, lower insurance costs, and reduced travel and entertainment activity.

24

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, 

    

2020

    

2019

    

Percent Change

 

Net sales by business segment:

Installation

$

492,206

$

498,390

(1.2)

%

Distribution

244,113

220,947

10.5

%

Intercompany eliminations

(39,096)

(37,007)

Net sales

$

697,223

$

682,330

2.2

%

Operating profit by business segment:

Installation

$

83,142

$

69,846

19.0

%

Distribution

32,787

23,406

40.1

%

Intercompany eliminations

(6,374)

(5,935)

Operating profit before general corporate expense

109,555

87,317

25.5

%

General corporate expense, net

(8,032)

(6,872)

Operating profit

$

101,523

$

80,445

26.2

%

Operating profit margins:

Installation

16.9

%

14.0

%

Distribution

13.4

%

10.6

%

Operating profit margin before general corporate expense

15.7

%

12.8

%

Operating profit margin

14.6

%

11.8

%

Installation

Sales

Sales in our Installation segment decreased $6.2 million, or 1.2 percent, for the three months ended September 30, 2020, as compared to the same period in 2019.  The decrease was due to a 3.4 percent decrease in volume driven by the negative impacts of the COVID-19 pandemic primarily on our Commercial sales, partially offset by a 1.2 percent impact from higher selling prices and a 0.9 percent increase in sales from our acquisitions.

Operating margins

Operating margins in our Installation segment were 16.9 percent and 14.0 percent for the three months ended September 30, 2020 and 2019, respectively.  The increase in operating margins was driven by operational efficiencies, savings from cost reduction initiatives, material deflation, lower insurance costs, and reduced travel and entertainment activity.

Distribution

Sales

Sales in our Distribution segment increased $23.2 million, or 10.5 percent, for the three months ended September 30, 2020, as compared to the same period in 2019.  This increase was due to a 12.2 percent increase in volume partially offset by a 1.7 percent impact from lower selling prices.  

Operating margins

Operating margins in our Distribution segment were 13.4 percent and 10.6 percent for the three months ended September 30, 2020 and 2019, respectively.  The increase in operating margins was driven by higher sales, operational efficiencies, savings from cost reduction initiatives, material deflation, and reduced travel and entertainment activity.

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OTHER ITEMS

Other expense, net

Other expense, net, which primarily consisted of interest expense, was $7.6 million and $8.9 million for the three months ended September 30, 2020 and 2019, respectively.  The decrease was primarily driven by lower LIBOR rates and a lower balance due on our term loan.

Income tax expense

Income tax expense was $23.9 million, an effective tax rate of 25.5 percent, for the three months ended September 30, 2020, compared to $16.6 million, an effective tax rate of 23.2 percent, for the comparable period in 2019.  The tax rate for the three months ended September 30, 2020 was higher due to a smaller benefit related to share-based compensation, state filing position changes, and an unfavorable return to accrual adjustment.

FIRST NINE MONTHS 2020 VERSUS FIRST NINE MONTHS 2019

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, 

    

2020

    

2019

    

Net sales

$

1,996,551

$

1,961,771

Cost of sales

1,448,210

1,451,822

Cost of sales ratio

72.5

%

74.0

%

Gross profit

548,341

509,949

Gross profit margin

27.5

%

26.0

%

Selling, general, and administrative expense

296,372

296,846

Selling, general, and administrative expense to sales ratio

14.8

%

15.1

%

Operating profit

251,969

213,103

Operating profit margin

12.6

%

10.9

%

Other expense, net

(24,296)

(27,228)

Income tax expense

(51,407)

(40,864)

Net income

$

176,266

$

145,011

Net margin

8.8

%

7.4

%

Sales and Operations

Net sales increased 1.8 percent for the nine months ended September 30, 2020, from the comparable period of 2019. The increase was primarily driven by a 0.9 percent impact from higher selling prices and a 0.8 percent increase in sales from our acquisitions, with nearly flat volumes due to the negative impacts of COVID-19 on business activity.  

Gross profit margins were 27.5 percent and 26.0 percent for the nine months ended September 30, 2020 and 2019, respectively.  Gross profit margin improved primarily due to higher selling prices, operational efficiencies and savings from cost reduction initiatives, partially offset by higher depreciation expense.

Selling, general, and administrative expense, as a percent of sales, was 14.8 percent and 15.1 percent for the nine months ended September 30, 2020 and 2019, respectively. Decreased selling, general, and administrative expense as a percent of sales was primarily the result of higher sales, savings from cost reduction initiatives, and reduced travel and entertainment activity.

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Operating margins were 12.6 percent and 10.9 percent for the nine months ended September 30, 2020 and 2019, respectively.  The increase in operating margins was due to higher selling prices, operational efficiencies, savings from cost reduction initiatives and reduced travel and entertainment activity, partially offset by higher depreciation expense.

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, 

    

2020

    

2019

    

Percent Change

Net sales by business segment:

Installation

$

1,434,648

$

1,430,800

0.3

%

Distribution

674,672

638,899

5.6

%

Intercompany eliminations

(112,769)

(107,928)

Net sales

$

1,996,551

$

1,961,771

1.8

%

Operating profit by business segment:

Installation

$

213,136

$

189,568

12.4

%

Distribution

81,612

65,154

25.3

%

Intercompany eliminations

(18,169)

(18,013)

Operating profit before general corporate expense

276,579

236,709

16.8

%

General corporate expense, net

(24,610)

(23,606)

Operating profit

$

251,969

$

213,103

18.2

%

Operating profit margins:

Installation

14.9

%

13.2

%

Distribution

12.1

%

10.2

%

Operating profit margin before general corporate expense

13.9

%

12.1

%

Operating profit margin

12.6

%

10.9

%

Installation

Sales

Sales in our Installation segment increased $3.8 million, or 0.3 percent, for the nine months ended September 30, 2020, as compared to the same period in 2019.  The increase in sales was driven by a 1.3 percent impact from higher selling prices and 1.1 percent due to sales from our acquisitions, partially offset by a 2.2 percent decrease in volume driven by the negative impact of COVID-19 on business activity.

Operating margins

Operating margins in our Installation segment were 14.9 percent and 13.2 percent for the nine months ended September 30, 2020 and 2019, respectively.  The increase in operating margins was driven by operational efficiencies, higher selling prices, cost reduction initiatives, and reduced travel and entertainment activity, partially offset by higher depreciation.

Distribution

Sales

Sales in our Distribution segment increased $35.8 million, or 5.6 percent, for the nine months ended September 30, 2020, as compared to the same period in 2019. The increase in sales was due to a 6.0 percent increase in volume despite a negative impact from COVID-19 on business activity, partially offset by a 0.4 percent negative impact from lower selling prices.  

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Operating margins

Operating margins in our Distribution segment were 12.1 percent and 10.2 percent for the nine months ended September 30, 2020 and 2019, respectively.  The increase in operating margins was driven by operational efficiencies, savings from cost reduction initiatives and reduced travel and entertainment activity, partially offset by higher depreciation.

OTHER ITEMS

Other expense, net

Other expense, net, which primarily consisted of interest expense, was $24.3 million and $27.2 million for the nine months ended September 30, 2020 and 2019, respectively. The decrease was primarily driven by lower LIBOR rates and a lower balance due on our term loan.

Income tax expense

Income tax expense was $51.4 million, an effective tax rate of 22.6 percent, for the nine months ended September 30, 2020, compared to $40.9 million, an effective tax rate of 22.0 percent, for the comparable period in 2019. The tax rate for the nine months ended September 30, 2020 was higher due to state filing position changes and an unfavorable return to accrual adjustment, partially offset by a larger 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, 

    

2020

    

2019

Changes in cash and cash equivalents:

Net cash provided by operating activities

$

255,723

$

182,779

Net cash used in investing activities

 

(46,324)

 

(38,288)

Net cash used in financing activities

(78,868)

 

(73,829)

Increase for the period

$

130,531

$

70,662

Net cash flows provided by operating activities increased $72.9 million for the nine months ended September 30, 2020, as compared to the prior year period. The change was primarily due to the timing of accounts receivable collections and accrued liability payments, as well as an increase in net income.

Net cash used in investing activities was $46.3 million for the nine months ended September 30, 2020, primarily composed of $27.2 million for purchases of property and equipment, primarily vehicles, and $21.5 million for acquisitions, partially offset by $2.3 million in proceeds from the sale of property and equipment.  Net cash used in investing activities was $38.3 million for the nine months ended September 30, 2019, primarily composed of $34.1 million for purchases of property and equipment, primarily vehicles, and $6.5 million for the acquisition of Viking, partially offset by $2.2 million in proceeds from the sale of property and equipment.

Net cash used in financing activities was $78.9 million for the nine months ended September 30, 2020.  During the nine months ended September 30, 2020, we used $43.1 million for the repurchase of common stock pursuant to the 2019 Repurchase Program, $19.2 million for payments on our term loan under our Amended Credit Agreement and on our equipment notes, $14.8 million on purchases of common stock for tax withholding obligations related to the vesting and exercise of share-based incentive awards, and $2.3 million in debt issuance costs as a result of entering into a new term loan and revolving credit facility. Net cash used in financing activities was $73.8 million for the nine months ended September 30, 2019. During the nine months ended September 30, 2019, we used $52.2 million for the repurchase of common stock pursuant to the 2019 Repurchase Program, $19.4 million for payments on our term loan under our Amended Credit Agreement and on our equipment notes, and $11.1 million on purchases of common stock for tax withholding obligations related to the vesting and exercise of share-based incentive awards. We also made payments totaling $1.1 million for contingent consideration for EcoFoam and Santa Rosa. We received $10.0 million in proceeds from the issuance of equipment notes.

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We are closely managing our balance sheet, including maximizing our cash flow, to maintain our strong foundation and provide stability as we continue to work through the impacts of the COVID-19 pandemic.  We had solid liquidity available to us at September 30, 2020, with $315.3 million of cash and $389.6 million available borrowing capacity under our Revolving Facility.  In the three months ended September 30, 2020, we resumed share repurchases under the 2019 Share Repurchase Program, as well as reengaged with companies previously in our acquisition pipeline. Both activities had been previously suspended due to the uncertainty caused by the COVID-19 pandemic.  We believe that our cash flows from operations, combined with our current cash levels and available borrowing capacity, will be adequate to support our ongoing operations and working capital needs.

The following table summarizes our liquidity, in thousands:

As of

September 30, 

December 31, 

    

2020

    

2019

Cash and cash equivalents (a)

$

315,338

$

184,807

Revolving Facility

450,000

250,000

Less: standby letters of credit

(60,382)

(61,382)

Availability under Revolving Facility

389,618

188,618

Total liquidity

$

704,956

$

373,425

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

We occasionally use performance bonds to ensure completion of our work on certain larger customer contracts that can span multiple accounting periods.  Performance bonds generally do not have stated expiration dates; rather, we are released from the bonds as the contractual performance is completed.  We also have bonds outstanding for license and insurance.  Information regarding our outstanding bonds as of September 30, 2020 is incorporated by reference from Note 15 – Other Commitments and Contingencies to our unaudited condensed consolidated financial statements contained in Part I, Item 1 of this Quarterly Report.

OUTLOOK

Throughout the COVID-19 pandemic, construction activities were generally deemed an essential service in all but a few states, resulting in our ability to continue operating in most locations until segments of the economy started to reopen during the second quarter.  Management continues to evaluate every aspect of our business and is monitoring ongoing developments which may trigger restrictions on operating activities, an economic downturn, or other adverse impact to our business resulting from the pandemic’s greater economic impact.

OFF-BALANCE SHEET ARRANGEMENTS

We had no material off-balance sheet arrangements during the quarter ended September 30, 2020, 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.

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, 2019, as filed with the SEC on February 25, 2020, except for the amendment to our Original Credit Agreement on March 20, 2020. See further information as disclosed in Note 5 – Long Term Debt in our unaudited condensed consolidated financial statements contained in Part 1, Item 1 of this Quarterly Report.

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CRITICAL ACCOUNTING POLICIES

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

APPLICATION OF NEW ACCOUNTING STANDARDS

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

FORWARD-LOOKING STATEMENTS

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

Item 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rate Risk

On March 20, 2020, the Company entered into the Amended Credit Agreement, which renews, amends and restates the Original Credit Agreement. The Amended Credit Agreement consists of a senior secured term loan facility in the amount of $300.0 million and the Revolving Facility in the amount of $450.0 million.  We also have outstanding Senior Notes with an aggregate principal balance of $400.0 million.  The Senior Notes bear a fixed rate of interest and therefore are excluded from the calculation below as they are not subject to fluctuations in interest rates.

Interest payable on both the term loan facility and Revolving Facility under the Amended Credit Agreement is based on a variable interest rate.  As a result, we are exposed to market risks related to fluctuations in interest rates on this outstanding indebtedness.  As of September 30, 2020, we had $292.5 million outstanding under our term loan facility, and the applicable interest rate as of such date was 1.50%.  Based on our outstanding borrowings under the Amended Credit Agreement as of September 30, 2020, a 100 basis point increase in the interest rate would result in a $2.8 million increase in our annualized interest expense.  There was no outstanding balance under the Revolving Facility as of September 30, 2020.

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Item 4.  CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

 

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

 

Changes in Internal Control over Financial Reporting

 

There was no change in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) in the most recent fiscal quarter ended September 30, 2020, 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 15 – Other Commitments and Contingencies to our unaudited condensed consolidated financial statements contained in Part I, Item 1 of this Quarterly Report, is incorporated by reference herein.

Item 1A.  RISK FACTORS

There have been no material changes to our risk factors as previously disclosed in our Annual Report for the year ended December 31, 2019, as filed with the SEC on February 25, 2020, and supplemented in our Quarterly Report for the three months ended March 31, 2020, as filed with the SEC on May 5, 2020, which are incorporated by reference herein.

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

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

Period

Total Number of Shares Purchased

Average Price Paid per Common Share

Number of Shares Purchased as Part of Publicly Announced Plans or Programs

Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs

July 1, 2020 - July 31, 2020

-

$

-

-

$

54,962

August 1, 2020 - August 31, 2020

24,524

$

152.87

24,524

$

51,213

September 1, 2020 - September 30, 2020

33,286

$

157.67

33,286

$

45,965

Total

57,810

$

155.63

57,810

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.

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Item 3.  DEFAULTS UPON SENIOR SECURITIES

Not applicable.

Item 4.  MINE SAFETY DISCLOSURES

Not applicable.

Item 5.  OTHER INFORMATION

Not applicable.

Item 6. EXHIBITS

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

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INDEX TO EXHIBITS

 

Incorporated by Reference

Filed

Exhibit No.

 

Exhibit Title

 

Form

 

Exhibit

 

Filing Date

 

Herewith

31.1

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

X

31.2

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

X

32.1‡

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

32.2‡

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

101.INS

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

X

101.SCH

Inline XBRL Taxonomy Extension Schema Document

X

101.CAL

Inline XBRL Taxonomy Extension Calculation Linkbase Document

X

101.DEF

Inline XBRL Taxonomy Extension Definition Linkbase Document

X

101.LAB

Inline XBRL Taxonomy Extension Label Linkbase Document

X

101.PRE

Inline XBRL Taxonomy Extension Presentation Linkbase Document

X

104

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

X

‡Furnished herewith

33

SIGNATURE

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

 

TOPBUILD CORP.

 

 

 

 

 

By:

/s/ John S. Peterson

 

Name:

John S. Peterson

 

Title:

Vice President and Chief Financial Officer

 

 

(Principal Financial Officer)

November 3, 2020

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