Table of Contents

 

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 June 30, 2016

 

 

 

 

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

 

For the transition period from                to               

 

Commission file number: 1-36870

 

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.)

 

 

 

 

260 Jimmy Ann Drive

Daytona Beach, Florida

(Address of Principal Executive Offices)

32114

(Zip Code)

 

(386) 304-2200

(Registrant's telephone number, including area code)

 

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 and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted 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 and post such files). 

 

                                                 Yes            No

 

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

 

Large accelerated filer        Accelerated filer        Smaller reporting company  

Non-accelerated filer (Do not check if a smaller reporting company)

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

                                                 Yes            No

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

Class

 

Shares Outstanding at July 29, 2016

Common stock, par value $.01 per share

 

38,444,480

 

 

 

 


 

Table of Contents

TOPBUILD CORP.

 

TABLE OF CONTENTS

 

 

 

 

 

 

 

Page No.

 

 

 

Part I. 

Financial Information

 

 

 

 

Item 1. 

Financial Statements (Unaudited):

 

 

 

 

 

Condensed Consolidated Balance Sheets

3

 

 

 

 

Condensed Consolidated Statements of Operations

4

 

 

 

 

Condensed Consolidated Statements of Cash Flows

5

 

 

 

 

Condensed Consolidated Statements of Changes in Equity

6

 

 

 

 

Notes to Condensed Consolidated Financial Statements

7

 

 

 

Item 2. 

Management's Discussion and Analysis of Financial Condition and Results of Operations

19

 

 

 

Item 3. 

Quantitative and Qualitative Disclosures About Market Risk

27

 

 

 

Item 4. 

Controls and Procedures

28

 

 

 

 

 

 

Part II. 

Other Information

 

 

 

 

Item 1. 

Legal Proceedings

29

 

 

 

Item 1A. 

Risk Factors

29

 

 

 

Item 2. 

Unregistered Sales of Equity Securities and Use of Proceeds

29

 

 

 

Item 3. 

Defaults upon Senior Securities

29

 

 

 

Item 4. 

Mine Safety Disclosures

29

 

 

 

Item 5. 

Other Information

29

 

 

 

Item 6. 

Exhibits

29

 

 

 

Signature 

30

 

 

 

Index to Exhibits 

31

 

 

 

 

 

 

 

 

 

 

2


 

Table of Contents

PART I – FINANCIAL INFORMATION

 

Item 1.  FINANCIAL STATEMENTS

 

TOPBUILD CORP.

CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)

(In thousands except share data)

 

 

 

 

 

 

 

 

 

 

                  As of                  

 

    

June 30, 

    

December 31, 

 

 

2016

 

2015

ASSETS

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

102,090

 

$

112,848

Receivables, net of an allowance for doubtful accounts of $3,481 and $3,399 at June 30, 2016 and December 31, 2015, respectively

 

 

254,998

 

 

235,549

Inventories, net

 

 

102,216

 

 

118,701

Prepaid expenses and other current assets

 

 

16,529

 

 

13,263

Total current assets

 

 

475,833

 

 

480,361

 

 

 

 

 

 

 

Property and equipment, net

 

 

91,829

 

 

93,066

Goodwill

 

 

1,044,041

 

 

1,044,041

Other intangible assets, net

 

 

1,584

 

 

1,987

Deferred tax assets, net

 

 

20,549

 

 

20,549

Other assets

 

 

1,581

 

 

2,245

Total assets

 

$

1,635,417

 

$

1,642,249

 

 

 

 

 

 

 

LIABILITIES AND EQUITY

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Accounts payable

 

$

214,012

 

$

253,311

Current portion of long-term debt

 

 

20,000

 

 

15,000

Accrued liabilities

 

 

73,371

 

 

58,369

Total current liabilities

 

 

307,383

 

 

326,680

 

 

 

 

 

 

 

Long-term debt

 

 

168,628

 

 

178,457

Deferred tax liabilities, net

 

 

181,251

 

 

181,254

Long-term portion of insurance reserves

 

 

37,801

 

 

39,655

Other liabilities

 

 

436

 

 

474

Total liabilities

 

 

695,499

 

 

726,520

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity:

 

 

 

 

 

 

Preferred stock, $0.01 par value: 10,000,000 shares authorized; 0 shares issued and outstanding at June 30, 2016 and December 31, 2015

 

 

 —

 

 

 —

Common stock, $0.01 par value: 250,000,000 shares authorized; 38,519,953 issued and 38,366,521 outstanding at June 30, 2016, and 38,217,647 shares issued and outstanding at December 31, 2015

 

 

385

 

 

377

Treasury stock, 153,432 shares at June 30, 2016, at cost

 

 

(4,962)

 

 

 —

Additional paid-in capital

 

 

841,388

 

 

838,976

Retained earnings

 

 

103,107

 

 

76,376

Total equity

 

 

939,918

 

 

915,729

Total liabilities and equity

 

$

1,635,417

 

$

1,642,249

See notes to our unaudited condensed consolidated financial statements.

3


 

Table of Contents

TOPBUILD CORP.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

(In thousands except per common share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30, 

 

Six Months Ended June 30, 

 

 

2016

 

2015

 

2016

 

2015

Net sales

    

$

431,589

    

$

403,761

    

$

845,613

    

$

762,221

Cost of sales

 

 

333,901

 

 

318,071

 

 

658,470

 

 

602,715

Gross profit

 

 

97,688

 

 

85,690

 

 

187,143

 

 

159,506

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling, general, and administrative expense

 

 

70,898

 

 

74,200

 

 

140,586

 

 

149,163

Operating profit

 

 

26,790

 

 

11,490

 

 

46,557

 

 

10,343

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income (expense), net:

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

(1,371)

 

 

(3,156)

 

 

(3,044)

 

 

(6,317)

Other, net

 

 

61

 

 

(4)

 

 

136

 

 

4

Other expense, net

 

 

(1,310)

 

 

(3,160)

 

 

(2,908)

 

 

(6,313)

Income from continuing operations before income taxes

 

 

25,480

 

 

8,330

 

 

43,649

 

 

4,030

 

 

 

 

 

 

 

 

 

 

 

 

 

Income tax expense from continuing operations

 

 

(9,865)

 

 

(1,700)

 

 

(16,918)

 

 

(1,200)

Income from continuing operations

 

 

15,615

 

 

6,630

 

 

26,731

 

 

2,830

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss from discontinued operations, net

 

 

 —

 

 

(235)

 

 

 —

 

 

(234)

Net income

 

$

15,615

 

$

6,395

 

$

26,731

 

$

2,596

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) per common share:

 

 

 

 

 

 

 

 

 

 

 

 

Basic:

 

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

$

0.41

 

$

0.18

 

$

0.71

 

$

0.08

Loss from discontinued operations, net

 

 

 —

 

 

(0.01)

 

 

 —

 

 

(0.01)

Net income

 

$

0.41

 

$

0.17

 

$

0.71

 

$

0.07

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted:

 

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

$

0.41

 

$

0.18

 

$

0.70

 

$

0.08

Loss from discontinued operations, net

 

 

 —

 

 

(0.01)

 

 

 —

 

 

(0.01)

Net income

 

$

0.41

 

$

0.17

 

$

0.70

 

$

0.07

See notes to our unaudited condensed consolidated financial statements.

4


 

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TOPBUILD CORP.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended June 30, 

 

 

2016

 

2015

Net Cash From (For) Operating Activities:

 

 

    

    

 

    

Net income

 

$

26,731

 

$

2,596

Adjustments to reconcile net income to net cash from (for) operating activities:

 

 

 

 

 

 

Depreciation and amortization

 

 

5,908

 

 

6,140

Share-based compensation

 

 

3,705

 

 

1,666

Loss on sale or abandonment of property and equipment

 

 

1,477

 

 

2,299

Provision for bad debt expense

 

 

1,986

 

 

2,507

Loss from inventory obsolescence

 

 

667

 

 

792

Deferred income taxes, net

 

 

(3)

 

 

1,202

Changes in certain assets and liabilities:

 

 

 

 

 

 

Receivables, net

 

 

(21,436)

 

 

(19,415)

Inventories, net

 

 

15,819

 

 

7,293

Prepaid expenses and other current assets

 

 

(3,266)

 

 

(412)

Accounts payable

 

 

(39,237)

 

 

(21,771)

Long-term portion of insurance reserves

 

 

(1,360)

 

 

1,882

Accrued liabilities

 

 

15,002

 

 

6,311

Other, net

 

 

153

 

 

(47)

Net cash from (for) operating activities

 

 

6,146

 

 

(8,957)

 

 

 

 

 

 

 

Cash Flows From (For) Investing Activities:

 

 

 

 

 

 

Purchases of property and equipment

 

 

(6,023)

 

 

(7,111)

Proceeds from sale of property and equipment

 

 

219

 

 

440

Other, net

 

 

147

 

 

460

Net cash for investing activities

 

 

(5,657)

 

 

(6,211)

 

 

 

 

 

 

 

Cash Flows From (For) Financing Activities:

 

 

 

 

 

 

Net transfer from Former Parent

 

 

 —

 

 

77,186

Cash distribution paid to Former Parent

 

 

 —

 

 

(200,000)

Proceeds from issuance of long-term debt

 

 

 —

 

 

200,000

Repayment of long-term debt

 

 

(5,000)

 

 

 —

Payment of debt issuance costs

 

 

 —

 

 

(1,715)

Taxes withheld and paid on employees' equity awards

 

 

(1,285)

 

 

 —

Repurchase of shares of common stock

 

 

(4,962)

 

 

 —

Net cash (for) from financing activities

 

 

(11,247)

 

 

75,471

 

 

 

 

 

 

 

Cash and Cash Equivalents

 

 

 

 

 

 

(Decrease) increase for the period

 

 

(10,758)

 

 

60,303

Beginning of year

 

 

112,848

 

 

2,965

End of period

 

$

102,090

 

$

63,268

 

 

 

 

 

 

 

Supplemental disclosure of noncash investing activities:

 

 

 

 

 

 

Accruals for property and equipment

 

$

521

 

$

 —

See notes to our unaudited condensed consolidated financial statements.

5


 

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TOPBUILD CORP.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (Unaudited)

(In thousands except share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common

 

Treasury

 

Additional

 

 

 

Former

 

 

 

 

 

Stock

 

Stock

 

Paid-in

 

Retained

 

Parent

 

 

 

 

 

($0.01 par value)

 

at cost

 

Capital

 

Earnings

 

Investment

 

Equity

Balance at December 31, 2014

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

$

952,292

 

$

952,292

Net income

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

2,596

 

 

2,596

Separation-related adjustments

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(118,249)

 

 

(118,249)

Reclassification of Former Parent investment in connection with the Separation

 

 

 —

 

 

 —

 

 

836,639

 

 

 —

 

 

(836,639)

 

 

 —

Issuance of common stock at Separation

 

 

377

 

 

 —

 

 

(377)

 

 

 —

 

 

 —

 

 

 —

Balance at June 30, 2015

 

$

377

 

$

 —

 

$

836,262

 

$

 —

 

$

 —

 

$

836,639

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2015

 

$

377

 

$

 —

 

$

838,976

 

$

76,376

 

$

 —

 

$

915,729

Net income

 

 

 —

 

 

 —

 

 

 —

 

 

26,731

 

 

 —

 

 

26,731

Share-based compensation

 

 

 —

 

 

 —

 

 

3,705

 

 

 —

 

 

 —

 

 

3,705

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

 

 

8

 

 

 —

 

 

(8)

 

 

 —

 

 

 —

 

 

 —

Repurchase of 153,432 shares of common stock pursuant to Share Repurchase Program

 

 

 —

 

 

(4,962)

 

 

 —

 

 

 —

 

 

 —

 

 

(4,962)

51,578 shares of common stock withheld to pay taxes on employees' equity awards

 

 

 —

 

 

 —

 

 

(1,285)

 

 

 —

 

 

 —

 

 

(1,285)

Balance at June 30, 2016

 

$

385

 

$

(4,962)

 

$

841,388

 

$

103,107

 

$

 —

 

$

939,918

See notes to our unaudited condensed consolidated financial statements.

 

 

6


 

Table of Contents

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

 

1. BASIS OF PRESENTATION

 

On June 30, 2015 (the “Effective Date”), Masco Corporation (“Masco” or the “Former Parent”) completed the separation (the “Separation”) of its Installation and Other Services businesses (the “Services Business”) from its other businesses.  On the Effective Date, TopBuild Corp., a Delaware corporation formed in anticipation of the Separation (“TopBuild” or the “Company”), became an independent public company which holds, through its subsidiaries, the assets and liabilities associated with the Services Business.  The Separation was achieved through the distribution of 100 percent of the outstanding capital stock of TopBuild to holders of Masco common stock.  References to “TopBuild,” the “Company,” “we,” “our,” and “us” refer to TopBuild Corp. and its consolidated subsidiaries.

 

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 on Form 10-K for the year ended December 31, 2015.

 

Prior to the Separation, the consolidated financial statements of TopBuild were prepared on a stand-alone basis and reflect the historical results of operations, financial position, and cash flows of Masco’s Services Business, including an allocable portion of corporate costs. 

 

We report our business in two segments: Installation and Distribution.  Our Installation segment principally includes the sale and installation of insulation and other building products.  Our Distribution segment principally includes the distribution of insulation and other building products.  Our segments are based on our operating units, for which financial information is regularly evaluated by our corporate operating executives.

 

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 June 30, 2016, our results of operations for the three and six months ended June 30, 2016 and 2015, and cash flows for the six months ended June 30, 2016 and 2015.  The Condensed Consolidated Balance Sheet at December 31, 2015, was derived from our audited financial statements, but does not include all disclosures required by generally accepted accounting principles in the United States of America (“U.S. GAAP”).

 

2. ACCOUNTING POLICIES

 

Financial Statement Presentation.  The condensed consolidated financial statements have been developed in conformity with U.S. 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.  Our financial statements for the periods prior to the Separation have been derived from the financial statements and accounting records of Masco using the historical results of operations and historical basis of assets and liabilities of the Services Business, and reflect Masco’s net investment in the Services Business. 

 

All intercompany transactions between TopBuild entities have been eliminated.  Transactions between TopBuild and Masco prior to the Separation, with the exception of purchase transactions, are reflected in the Condensed Consolidated Statements of Cash Flows as a financing activity in “Net transfer from Former Parent” and in the Condensed Consolidated Statements of Changes in Equity in the column, “Former Parent Investment.”

 

The accompanying condensed consolidated financial statements for the periods prior to the Separation include allocations of general corporate expenses incurred by Masco for functions such as corporate human resources, finance, and legal, including salaries, benefits, and other related costs.  These general corporate expenses were allocated to TopBuild on the basis of sales.  Total allocated general corporate costs were $5.7 million and $13.6 million for the three and six months ended June 30, 2015, respectively.  These costs were included in selling, general, and administrative expenses.

 

7


 

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

 

Prior to the Separation, Masco incurred certain operating expenses on behalf of the Services Business that were allocated to TopBuild based on direct benefit or usage.  These allocated operating expenses were $1.2 million and $5.6 million for the three and six months ended June 30, 2015, respectively.  These costs were included in selling, general, and administrative expenses.  An estimate of these operating expenses was allocated to each of TopBuild’s reporting segments based on a percentage of sales.

 

For periods prior to the Separation, these condensed consolidated financial statements may not reflect the actual expenses that would have been incurred had we operated as a stand-alone company and may not reflect the consolidated results of operations, financial position, and cash flows had we operated as a stand-alone company.  Actual costs that would have been incurred if we had operated as a stand-alone company prior to the Separation would have depended on multiple factors, including organizational structure and strategic decisions made in various areas, including, without limitation, information technology and infrastructure.

 

During the quarter ended March 31, 2015, we identified an error related primarily to the misallocation of a favorable legal settlement to general corporate expenses of TopBuild in the fourth quarter of 2014.  The impact of the error was to understate the allocation of corporate expenses reported as selling, general, and administrative expense and overstate operating profit by $1.9 million.  The error was not considered material to the previously reported 2014 financial statements.  The Company recorded the correction of the error by an out-of-period adjustment in the first quarter of 2015, which is therefore reflected in the six months ended June 30, 2015, Condensed Consolidated Statements of Operations and Condensed Consolidated Statements of Cash Flows.

 

Share-based Compensation.  Our share-based compensation program currently consists of restricted share awards (“RSAs”) and stock option awards (“Options”).  Share-based compensation is reported in selling, general, and administrative expense.

 

The following table details our award types and accounting policies:

 

 

 

 

 

 

Award Type:

Fair Value Determination

Vesting

Expense
Recognition‡

Expense
Measurement

Restricted Share Awards

 

 

 

 

Service Condition

Closing stock price on date of grant

Ratably;
3 or 5 years

Straight-line

Fair value at grant date

Performance Condition

Closing stock price on date of grant

Cliff;
3 years

Straight-line;
Adjusted based on meeting or exceeding performance targets

Evaluated quarterly;
0 - 200% of fair value at grant date depending on performance

Market Condition

Monte-Carlo Simulation

Cliff;
3 years

Straight-line;
Recognized even if condition is not met

Fair value at grant date

Stock Options†

Black-Scholes Options Pricing Model

Ratably;
3 or 5 years

Straight-line

Fair value at grant date

 


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

‡Expense is reversed if award is forfeited prior to vesting.

 

Recently Issued Accounting Pronouncements:    In May 2014, the Financial Accounting Standards Board (“FASB”) issued a new standard for revenue recognition, Accounting Standards Codification 606 (“ASC 606”).  The purpose of ASC 606 is to provide a single, comprehensive revenue recognition model for all contracts with customers to improve comparability across industries.  ASC 606 is effective for us for annual periods beginning January 1, 2018.  We are currently evaluating the impact the adoption of this new standard will have on our results of operations.

 

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

 

In July 2015, the FASB issued Accounting Standards Update 2015-11 (“ASU 2015-11”) “Simplifying the Measurement of Inventory.”  Under the amendment, ASU 2015-11, inventory should be measured at the lower of cost and net realizable value.  Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation.  This guidance is effective for fiscal years beginning after December 15, 2016.  Early adoption is permitted; however, we do not anticipate adopting this standard until the first quarter of 2017.  We do not anticipate the adoption of this amendment will have a material impact on our financial position or results of operations.

 

In February 2016, the FASB issued Accounting Standards Update 2016-02 (“ASU 2016-02”), “Leases.”  This standard requires a lessee to recognize most leases on their balance sheet.  Companies are required to use a modified retrospective transition method for all existing leases.  This standard is effective for annual periods beginning after December 15, 2018, and interim periods therein.  Early adoption is permitted.  We have not yet selected an adoption date and we are currently evaluating the effect on our financial position and results of operations.

 

In March 2016, the FASB issued Accounting Standards Update 2016-09 (“ASU 2016-09”), “Improvements to Employee Share-Based Payment Accounting.”  This update is intended to simplify several aspects of the accounting for share-based payment transactions, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows.  Under this guidance, an entity recognizes all excess tax benefits and tax deficiencies as income tax expense or benefit in the income statement.  This update is effective for annual and interim periods beginning after December 15, 2016, which will require us to adopt these provisions in the first quarter of 2017.  Early adoption is permitted.  We have not yet selected an adoption date and we are currently determining the effect on our financial position and results of operations.

 

3. GOODWILL AND OTHER INTANGIBLES

 

Changes in the carrying amount of goodwill for the six months ended June 30, 2016, by segment, were as follows, in thousands:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Gross Goodwill

    

Gross Goodwill

    

Accumulated

    

Net Goodwill

 

 

at

 

at

 

Impairment

 

at

 

 

December 31, 2015

 

June 30, 2016

 

Losses

 

June 30, 2016

Installation

 

$

1,389,775

 

$

1,389,775

 

$

(762,021)

 

$

627,754

Distribution

 

 

416,287

 

 

416,287

 

 

 —

 

 

416,287

Total

 

$

1,806,062

 

$

1,806,062

 

$

(762,021)

 

$

1,044,041

 

Other intangible assets, net includes customer relationships, non-compete agreements, and trademarks.  The following table sets forth our other intangible assets as of June 30, 2016, and December 31, 2015, in thousands:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of

 

    

 

 

 

    

 

    

      June 30,       

    

December 31, 

 

 

 

 

 

 

 

 

2016

    

2015

Gross definite-lived intangible assets

 

 

 

 

 

 

 

$

19,472

 

$

19,472

Accumulated amortization

 

 

 

 

 

 

 

 

(18,295)

 

 

(17,892)

Net definite-lived intangible assets

 

 

 

 

 

 

 

 

1,177

 

 

1,580

Indefinite-lived intangible assets not subject to amortization

 

 

 

 

 

 

 

 

407

 

 

407

Other intangible assets, net

 

 

 

 

 

 

 

$

1,584

 

$

1,987

 

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

 

4. DEPRECIATION AND AMORTIZATION

 

The following table sets forth our depreciation and amortization expense for the three and six months ended June 30, 2016 and 2015, in thousands:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30, 

 

Six Months Ended June 30, 

 

    

2016

    

2015

    

2016

    

2015

Depreciation

 

$

2,819

 

$

2,825

 

$

5,505

 

$

5,608

Amortization

 

 

194

 

 

262

 

 

403

 

 

532

Total

 

$

3,013

 

$

3,087

 

$

5,908

 

$

6,140

 

 

5. LONG-TERM DEBT

 

The Company and its wholly-owned domestic subsidiaries (collectively, the “Guarantors”) entered into a senior secured credit agreement and related collateral and guarantee documentation (collectively, the “Credit Agreement”) with PNC Bank, National Association, as administrative agent, and the other lenders and agents party thereto.  The Credit Agreement became effective on June 30, 2015.  The following table summarizes the key terms of the Credit Agreement, dollars in thousands:

 

 

 

 

 

 

 

 

 

Senior secured term loan facility (original borrowing)

 

 

 

 

$

200,000

 

Additional term loan and/or revolver capacity available under incremental facility*

 

 

 

 

$

100,000

 

Interest rate as of June 30, 2016

 

 

 

 

 

1.95

%

Scheduled maturity date

 

 

 

 

 

6/30/2020

 

 

 

 

 

 

 

 

 

Senior secured revolving credit facility ("Revolving Facility")

 

 

 

 

$

125,000

 

Sublimit for issuance of letters of credit under Revolving Facility**

 

 

 

 

$

100,000

 

Sublimit for swingline loans under Revolving Facility**

 

 

 

 

$

15,000

 


*Subject to certain conditions (including existing or new lenders providing commitments in respect of such additional borrowing capacity).

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

 

The following table sets forth our remaining principal payments for the following five years as of June 30, 2016, in thousands:

 

 

 

 

 

 

 

 

 

    

 

 

 

Future Principal

 

 

 

 

 

Payments

Schedule of Debt Maturity by Years:

 

 

 

 

 

 

2016

 

 

 

 

$

10,000

2017

 

 

 

 

 

20,000

2018

 

 

 

 

 

20,000

2019

 

 

 

 

 

25,000

2020

 

 

 

 

 

115,000

Total principal maturities

 

 

 

 

$

190,000

 

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

 

The following table reconciles the principal balance of our long-term debt to our Condensed Consolidated Balance Sheets, in thousands:

 

 

 

 

 

 

 

 

 

 

As of

 

 

June 30, 

 

December 31, 

 

    

2016

 

2015

Current portion of long-term debt

 

$

20,000

 

$

15,000

Long-term portion of long-term debt

 

 

170,000

 

 

180,000

Unamortized debt issuance costs

 

 

(1,372)

 

 

(1,543)

Long-term debt

 

$

188,628

 

$

193,457

 

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

 

 

 

 

 

 

 

 

 

 

As of

 

 

June 30, 

 

December 31, 

 

    

2016

 

2015

Revolving Facility

 

$

125,000

 

$

125,000

Less: standby letters of credit

 

 

(55,096)

 

 

(55,096)

Capacity under Revolving Facility

 

$

69,904

 

$

69,904

 

The Credit Agreement contains certain covenants that limit, among other things, certain actions we may take and require us to maintain certain financial ratios.  On May 9, 2016, the Company and its lenders executed an Amendment to the Credit Agreement (“Amendment No. 1”).  Amendment No. 1 provides for the exclusion of up to $50 million of completed share repurchases (on a trailing twelve month basis) from the Credit Agreement’s definition of “Fixed Charges” for the purposes of determining the Company’s compliance with the quarterly Fixed Charge Coverage Ratio (“FCCR”) financial covenant.  Amendment No. 1 provides for an initial exclusion of up to $25 million and allows for the exclusion of an additional $25 million of completed share repurchases from the FCCR calculation, provided that the Company’s Total Leverage Ratio (as defined in the Credit Agreement) is below 2.0x at the time of such share repurchase and after giving pro forma effect to any such share repurchase. 

 

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

 

 

 

 

 

 

 

 

 

 

June 30, 

 

December 31, 

 

    

2016

 

2015

Maximum net leverage ratio

 

 

3.25:1.00

 

 

3.50:1.00

Minimum fixed charge coverage ratio

 

 

1.10:1.00

 

 

1.10:1.00

Compliance as of period end

 

 

In Compliance

 

 

In Compliance

 

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

 

6. FAIR VALUE MEASUREMENTS

 

The fair value measurement standard defines fair value as the price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants at the measurement date (referred to as an “exit price”).  Authoritative guidance on fair value measurements and disclosures clarifies that a fair value measurement for a liability should reflect the entity’s non-performance risk.  In addition, a fair value hierarchy is established that prioritizes the inputs to valuation techniques used to measure fair value.  The hierarchy gives the highest priority to unadjusted quoted market prices in active markets for identical assets and liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 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. 

 

Fair Value on Non-Recurring Basis

 

Fair value measurements were applied to our long-term debt.  The carrying value of our long-term debt 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 Credit Facility.  In addition, due to the floating-rate nature of our long-term debt, 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.  During the periods presented, there were no transfers between fair value hierarchical levels.

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

 

7. SEGMENT INFORMATION

 

Information about us by segment is as follows, in thousands:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30, 

 

    

2016

    

2015

    

2016

    

2015

 

 

Net Sales

 

Operating Profit (2)

Our operations by segment were (1):

 

 

 

 

 

 

 

 

 

 

 

 

Installation

 

$

288,042

 

$

265,296

 

$

22,797

 

$

7,067

Distribution

 

 

164,257

 

 

160,841

 

 

13,547

 

 

11,897

Intercompany eliminations and other adjustments (3)

 

 

(20,710)

 

 

(22,376)

 

 

(3,524)

 

 

(1,750)

Total

 

$

431,589

 

$

403,761

 

 

32,820

 

 

17,214

General corporate expense, net (4)

 

 

 

 

 

 

 

 

(6,030)

 

 

(5,724)

Operating profit, as reported

 

 

 

 

 

 

 

 

26,790

 

 

11,490

Other expense, net

 

 

 

 

 

 

 

 

(1,310)

 

 

(3,160)

Income from continuing operations before income taxes

 

 

 

 

 

 

 

$

25,480

 

$

8,330

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended June 30, 

 

 

2016

    

2015

    

2016

    

2015

 

 

Net Sales

 

Operating Profit (2)

Our operations by segment were (1):

 

 

 

 

 

 

 

 

 

 

 

 

Installation

 

$

560,920

 

$

498,659

 

$

36,303

 

$

6,035

Distribution

 

 

325,145

 

 

305,452

 

 

27,880

 

 

23,274

Intercompany eliminations and other adjustments (3)

 

 

(40,452)

 

 

(41,890)

 

 

(6,876)

 

 

(5,339)

Total

 

$

845,613

 

$

762,221

 

 

57,307

 

 

23,970

General corporate expense, net (4)

 

 

 

 

 

 

 

 

(10,750)

 

 

(13,627)

Operating profit, as reported

 

 

 

 

 

 

 

 

46,557

 

 

10,343

Other expense, net

 

 

 

 

 

 

 

 

(2,908)

 

 

(6,313)

Income from continuing operations before income taxes

 

 

 

 

 

 

 

$

43,649

 

$

4,030

(1)

All of our operations are located in the United States.

 

(2)

Segment operating profit for the three and six months ended June 30, 2016, 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).  Segment operating profit for the three and six months ended June 30, 2015, includes an estimate of general corporate expense calculated based on a percentage of sales.  For the three and six months ended June 30, 2015, the $3.4 million and $3.8 million differences, respectively, between estimated expense and actual corporate expense is recorded in intercompany eliminations and other adjustments.

 

(3)

Intercompany eliminations include the elimination of intercompany profit of $3.5 million and $4.0 for the three months ended June 30, 2016 and 2015, respectively, and $6.9 million and $7.4 million for the six months ended June 30, 2016 and 2015, respectively.  Other adjustments primarily include differences between estimated and actual corporate costs allocated to the segments for the three and six months ended June 30, 2015, as noted in footnote (2) above.

 

(4)

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

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

 

8. OTHER COMMITMENTS AND CONTINGENCIES

 

Litigation.  We are subject to 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 that the likelihood the outcome of these matters would have a material adverse effect on us is remote.  However, there is no assurance that we will prevail in these 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 results of operations.

 

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

 

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.  Other types of bonds outstanding were principally license and insurance related.

 

9. INCOME TAXES

 

Our effective tax rates were 38.7 percent and 38.8 percent for the three and six months ended June 30, 2016, respectively.  The effective tax rates for the three and six months ended June 30, 2015, were 20.4 percent and 29.8 percent, respectively.  The lower rate in 2015 was primarily due to decreases in our valuation allowance resulting from a partial use of our Federal net operating loss carryforward by Masco.

 

For 2015 activity through the Separation, we filed our tax returns as a member of the Masco consolidated group for U.S. Federal and certain State jurisdictions.  As a result, certain tax attributes, primarily the Federal and State net operating loss carryforwards, were treated as assets of the Masco consolidated group, which they were able to utilize through December 31, 2015.  Masco fully utilized the Federal net operating loss and certain State net operating losses by the end of 2015.

 

In the fourth quarter of 2015, we released all but $0.8 million of our valuation allowance against U.S. Federal and certain state deferred tax assets, due primarily to a return to sustainable operating profitability.

 

10. INCOME (LOSS) PER SHARE

 

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

 

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

 

For comparative purposes, the computation of basic and diluted income per common share for prior year periods presented was calculated using the shares distributed at Separation.  On June 30, 2015, we distributed 37.7 million shares of our common stock to Masco stockholders in conjunction with the Separation.

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

 

Basic and diluted income (loss) per share were computed as follows, in thousands, except share and per share amounts:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30, 

 

Six Months Ended June 30, 

 

 

2016

 

2015

 

2016

 

2015

Income from continuing operations

 

$

15,615

 

$

6,630

 

$

26,731

 

$

2,830

Loss from discontinued operations, net

 

 

 —

 

 

(235)

 

 

 —

 

 

(234)

Net income - basic and diluted

 

$

15,615

 

$

6,395

 

$

26,731

 

$

2,596

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of common shares outstanding - basic

 

 

37,691,259

 

 

37,667,947

 

 

37,726,542

 

 

37,667,947

 

 

 

 

 

 

 

 

 

 

 

 

 

Dilutive effect of common stock equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

RSAs with service-based conditions

 

 

176,401

 

 

 —

 

 

145,042

 

 

 —

RSAs with market-based conditions

 

 

58,392

 

 

 —

 

 

29,196

 

 

 —

RSAs with performance-based conditions

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Stock options

 

 

50,651

 

 

 —

 

 

37,328

 

 

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of common shares outstanding - diluted

 

 

37,976,703

 

 

37,667,947

 

 

37,938,108

 

 

37,667,947

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic income (loss) per common share:

 

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

$

0.41

 

$

0.18

 

$

0.71

 

$

0.08

Loss from discontinued operations, net

 

 

 —

 

 

(0.01)

 

 

 —

 

 

(0.01)

Net income

 

$

0.41

 

$

0.17

 

$

0.71

 

$

0.07

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted income (loss) per common share:

 

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

$

0.41

 

$

0.18

 

$

0.70

 

$

0.08

Loss from discontinued operations, net

 

 

 —

 

 

(0.01)

 

 

 —

 

 

(0.01)

Net income

 

$

0.41

 

$

0.17

 

$

0.70

 

$

0.07

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30, 

 

Six Months Ended June 30, 

 

 

2016

 

2015

 

2016

 

2015

Anti-dilutive common stock equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

RSAs with service-based conditions

 

 

12,238