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, 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 |
47-3096382
(I.R.S. Employer |
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 November 4, 2016 |
Common stock, par value $0.01 per share |
|
38,042,282 |
TABLE OF CONTENTS
|
|
Page No. |
||
|
|
|
||
|
||||
|
|
|
||
|
||||
|
|
|
||
|
3 |
|||
|
|
|
||
|
4 |
|||
|
|
|
||
|
5 |
|||
|
|
|
||
|
6 |
|||
|
|
|
||
|
7 |
|||
|
|
|
||
Management's Discussion and Analysis of Financial Condition and Results of Operations |
20 |
|||
|
|
|
||
28 |
||||
|
|
|
||
29 |
||||
|
|
|
||
|
|
|
||
|
||||
|
|
|
||
30 |
||||
|
|
|
||
30 |
||||
|
|
|
||
30 |
||||
|
|
|
||
30 |
||||
|
|
|
||
30 |
||||
|
|
|
||
31 |
||||
|
|
|
||
31 |
||||
|
|
|
||
32 |
||||
|
|
|
||
33 |
||||
|
|
|
||
|
|
|
2
PART I – FINANCIAL INFORMATION
TOPBUILD CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
(In thousands except share data)
|
|
As of |
|||||
|
|
September 30, |
|
December 31, |
|||
|
|
2016 |
|
2015 |
|||
ASSETS |
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
104,497 |
|
$ |
112,848 | |
Receivables, net of an allowance for doubtful accounts of $3,607 and $3,399 at September 30, 2016 and December 31, 2015, respectively |
|
|
265,655 |
|
|
235,549 | |
Inventories, net |
|
|
105,829 |
|
|
118,701 | |
Prepaid expenses and other current assets |
|
|
16,425 |
|
|
13,263 | |
Total current assets |
|
|
492,406 |
|
|
480,361 | |
|
|
|
|
|
|
|
|
Property and equipment, net |
|
|
91,992 |
|
|
93,066 | |
Goodwill |
|
|
1,045,058 |
|
|
1,044,041 | |
Other intangible assets, net |
|
|
2,838 |
|
|
1,987 | |
Deferred tax assets, net |
|
|
20,549 |
|
|
20,549 | |
Other assets |
|
|
3,620 |
|
|
2,245 | |
Total assets |
|
$ |
1,656,463 |
|
$ |
1,642,249 | |
|
|
|
|
|
|
|
|
LIABILITIES AND EQUITY |
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
Accounts payable |
|
$ |
217,931 |
|
$ |
253,311 | |
Current portion of long-term debt |
|
|
20,000 |
|
|
15,000 | |
Accrued liabilities |
|
|
73,524 |
|
|
58,369 | |
Total current liabilities |
|
|
311,455 |
|
|
326,680 | |
|
|
|
|
|
|
|
|
Long-term debt |
|
|
163,714 |
|
|
178,457 | |
Deferred tax liabilities, net |
|
|
181,730 |
|
|
181,254 | |
Long-term portion of insurance reserves |
|
|
39,555 |
|
|
39,655 | |
Other liabilities |
|
|
436 |
|
|
474 | |
Total liabilities |
|
|
696,890 |
|
|
726,520 | |
|
|
|
|
|
|
|
|
Commitments and contingencies |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity: |
|
|
|
|
|
|
|
Preferred stock, $0.01 par value: 10,000,000 shares authorized; 0 shares issued and outstanding at September 30, 2016 and December 31, 2015 |
|
|
— |
|
|
— |
|
Common stock, $0.01 par value: 250,000,000 shares authorized; 38,515,609 issued and 38,174,109 outstanding at September 30, 2016, and 38,217,647 shares issued and outstanding at December 31, 2015 |
|
|
385 |
|
|
377 | |
Treasury stock, 341,500 shares at September 30, 2016, at cost |
|
|
(11,377) |
|
|
— |
|
Additional paid-in capital |
|
|
842,890 |
|
|
838,976 | |
Retained earnings |
|
|
127,675 |
|
|
76,376 | |
Total equity |
|
|
959,573 |
|
|
915,729 | |
Total liabilities and equity |
|
$ |
1,656,463 |
|
$ |
1,642,249 |
See notes to our unaudited condensed consolidated financial statements.
3
TOPBUILD CORP.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(In thousands except per common share data)
|
|
Three Months Ended September 30, |
|
Nine Months Ended September 30, |
||||||||
|
|
2016 |
|
2015 |
|
2016 |
|
2015 |
||||
Net sales |
|
$ |
453,102 |
|
$ |
427,888 |
|
$ |
1,298,715 |
|
$ |
1,190,109 |
Cost of sales |
|
|
344,963 |
|
|
333,886 |
|
|
1,003,433 |
|
|
936,601 |
Gross profit |
|
|
108,139 |
|
|
94,002 |
|
|
295,282 |
|
|
253,508 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general, and administrative expense |
|
|
69,038 |
|
|
63,811 |
|
|
209,623 |
|
|
212,974 |
Operating profit |
|
|
39,101 |
|
|
30,191 |
|
|
85,659 |
|
|
40,534 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense), net: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
(1,271) |
|
|
(1,576) |
|
|
(4,315) |
|
|
(7,893) |
Other, net |
|
|
65 |
|
|
10 |
|
|
201 |
|
|
14 |
Other expense, net |
|
|
(1,206) |
|
|
(1,566) |
|
|
(4,114) |
|
|
(7,879) |
Income from continuing operations before income taxes |
|
|
37,895 |
|
|
28,625 |
|
|
81,545 |
|
|
32,655 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense from continuing operations |
|
|
(13,329) |
|
|
(12,001) |
|
|
(30,246) |
|
|
(13,201) |
Income from continuing operations |
|
|
24,566 |
|
|
16,624 |
|
|
51,299 |
|
|
19,454 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations, net |
|
|
— |
|
|
— |
|
|
— |
|
|
(234) |
Net income |
|
$ |
24,566 |
|
$ |
16,624 |
|
$ |
51,299 |
|
$ |
19,220 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic: |
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
$ |
0.65 |
|
$ |
0.44 |
|
$ |
1.36 |
|
$ |
0.52 |
Loss from discontinued operations, net |
|
|
— |
|
|
— |
|
|
— |
|
|
(0.01) |
Net income |
|
$ |
0.65 |
|
$ |
0.44 |
|
$ |
1.36 |
|
$ |
0.51 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted: |
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
$ |
0.65 |
|
$ |
0.44 |
|
$ |
1.35 |
|
$ |
0.52 |
Loss from discontinued operations, net |
|
|
— |
|
|
— |
|
|
— |
|
|
(0.01) |
Net income |
|
$ |
0.65 |
|
$ |
0.44 |
|
$ |
1.35 |
|
$ |
0.51 |
See notes to our unaudited condensed consolidated financial statements.
4
TOPBUILD CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In thousands)
|
|
Nine Months Ended September 30, |
||||
|
|
2016 |
|
2015 |
||
Net Cash Provided by (Used in) Operating Activities: |
|
|
|
|
|
|
Net income |
|
$ |
51,299 |
|
$ |
19,220 |
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
Depreciation and amortization |
|
|
8,923 |
|
|
9,070 |
Share-based compensation |
|
|
5,743 |
|
|
3,151 |
Loss on sale or abandonment of property and equipment |
|
|
2,399 |
|
|
2,265 |
Amortization of debt issuance costs |
|
|
257 |
|
|
86 |
Provision for bad debt expense |
|
|
2,696 |
|
|
2,658 |
Loss from inventory obsolescence |
|
|
970 |
|
|
1,194 |
Deferred income taxes, net |
|
|
476 |
|
|
5,401 |
Changes in certain assets and liabilities: |
|
|
|
|
|
|
Receivables, net |
|
|
(32,294) |
|
|
(29,729) |
Inventories, net |
|
|
12,103 |
|
|
2,378 |
Prepaid expenses and other current assets |
|
|
(3,162) |
|
|
(2,908) |
Accounts payable |
|
|
(35,023) |
|
|
10,146 |
Long-term portion of insurance reserves |
|
|
(1,599) |
|
|
1,211 |
Accrued liabilities |
|
|
15,159 |
|
|
18,983 |
Other, net |
|
|
(13) |
|
|
20 |
Net cash provided by operating activities |
|
|
27,934 |
|
|
43,146 |
|
|
|
|
|
|
|
Cash Flows Provided by (Used in) Investing Activities: |
|
|
|
|
|
|
Purchases of property and equipment |
|
|
(10,083) |
|
|
(10,589) |
Acquisition of a business |
|
|
(3,476) |
|
|
— |
Proceeds from sale of property and equipment |
|
|
379 |
|
|
771 |
Other, net |
|
|
93 |
|
|
500 |
Net cash used in investing activities |
|
|
(13,087) |
|
|
(9,318) |
|
|
|
|
|
|
|
Cash Flows Provided by (Used in) Financing Activities: |
|
|
|
|
|
|
Net transfer (to) from Former Parent |
|
|
(153) |
|
|
75,935 |
Cash distribution paid to Former Parent |
|
|
— |
|
|
(200,000) |
Proceeds from issuance of long-term debt |
|
|
— |
|
|
200,000 |
Repayment of long-term debt |
|
|
(10,000) |
|
|
(2,500) |
Payment of debt issuance costs |
|
|
— |
|
|
(1,715) |
Taxes withheld and paid on employees' equity awards |
|
|
(1,668) |
|
|
(171) |
Repurchase of shares of common stock |
|
|
(11,377) |
|
|
— |
Net cash (used in) provided by financing activities |
|
|
(23,198) |
|
|
71,549 |
|
|
|
|
|
|
|
Cash and Cash Equivalents |
|
|
|
|
|
|
(Decrease) increase for the period |
|
|
(8,351) |
|
|
105,377 |
Beginning of year |
|
|
112,848 |
|
|
2,965 |
End of period |
|
$ |
104,497 |
|
$ |
108,342 |
|
|
|
|
|
|
|
Supplemental disclosure of noncash investing activities: |
|
|
|
|
|
|
Accruals for property and equipment |
|
$ |
110 |
|
$ |
— |
See notes to our unaudited condensed consolidated financial statements.
5
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 |
|
$ |
— |
|
$ |
— |
|
$ |
— |
|
$ |
— |
|
$ |
952,291 |
|
$ |
952,291 |
Net income |
|
|
— |
|
|
— |
|
|
— |
|
|
16,624 |
|
|
2,596 |
|
|
19,220 |
Separation-related adjustments |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(120,854) |
|
|
(120,854) |
Reclassification of Former Parent investment in connection with the Separation |
|
|
— |
|
|
— |
|
|
834,033 |
|
|
— |
|
|
(834,033) |
|
|
— |
Issuance of common stock at Separation |
|
|
377 |
|
|
— |
|
|
(377) |
|
|
— |
|
|
— |
|
|
— |
Share-based compensation |
|
|
— |
|
|
— |
|
|
1,315 |
|
|
— |
|
|
— |
|
|
1,315 |
Balance at September 30, 2015 |
|
$ |
377 |
|
$ |
— |
|
$ |
834,971 |
|
$ |
16,624 |
|
$ |
— |
|
$ |
851,972 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2015 |
|
$ |
377 |
|
$ |
— |
|
$ |
838,976 |
|
$ |
76,376 |
|
$ |
— |
|
$ |
915,729 |
Net income |
|
|
— |
|
|
— |
|
|
— |
|
|
51,299 |
|
|
— |
|
|
51,299 |
Separation-related adjustments |
|
|
— |
|
|
— |
|
|
(153) |
|
|
— |
|
|
— |
|
|
(153) |
Share-based compensation |
|
|
— |
|
|
— |
|
|
5,743 |
|
|
— |
|
|
— |
|
|
5,743 |
Issuance of restricted share awards under long-term equity incentive plan |
|
|
8 |
|
|
— |
|
|
(8) |
|
|
— |
|
|
— |
|
|
— |
Repurchase of 341,500 shares of common stock pursuant to Share Repurchase Program |
|
|
— |
|
|
(11,377) |
|
|
— |
|
|
— |
|
|
— |
|
|
(11,377) |
61,906 shares of common stock withheld to pay taxes on employees' equity awards |
|
|
— |
|
|
— |
|
|
(1,668) |
|
|
— |
|
|
— |
|
|
(1,668) |
Balance at September 30, 2016 |
|
$ |
385 |
|
$ |
(11,377) |
|
$ |
842,890 |
|
$ |
127,675 |
|
$ |
— |
|
$ |
959,573 |
See notes to our unaudited condensed consolidated financial statements.
6
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 consolidated subsidiaries, the assets and liabilities of 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 reflected the historical results of operations, financial position, and cash flows of the 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 September 30, 2016, our results of operations for the three and nine months ended September 30, 2016 and 2015, and cash flows for the nine months ended September 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 $13.6 million for the six months ended June 30, 2015. These costs were included in selling, general, and administrative expenses.
7
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 $5.6 million for the six months ended June 30, 2015. 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 understated the allocation of corporate expenses reported as selling, general, and administrative expense and overstated 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 nine months ended September 30, 2015, Condensed Consolidated Statements of Operations and Condensed Consolidated Statements of Cash Flows.
Business Combinations. The purchase price for business combinations is allocated to the estimated fair values of acquired tangible and intangible assets, including goodwill, and assumed liabilities, where applicable. Additionally, we recognize customer relationships, trademarks and trade names, and non-competition agreements as identifiable intangible assets. These assets are recorded at fair value as of the transaction date. The fair value of these intangible assets is determined primarily using the income approach and using current industry information. Goodwill is recorded when consideration transferred exceeds the fair value of identifiable assets and liabilities. Measurement-period adjustments are recorded in the period they occur.
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 |
Expense |
Restricted Share Awards |
|
|
|
|
Service Condition |
Closing stock price on date of grant |
Ratably; |
Straight-line |
Fair value at grant date |
Performance Condition |
Closing stock price on date of grant |
Cliff; |
Straight-line; |
Evaluated quarterly; |
Market Condition |
Monte-Carlo Simulation |
Cliff; |
Straight-line; |
Fair value at grant date |
Stock Options† |
Black-Scholes Options Pricing Model |
Ratably; |
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.
8
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 financial position and results of operations.
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 June 2016, the FASB issued Accounting Standards Update 2016-13 (“ASU 2016-13”), “Financial Instruments - Credit Losses” (“ASU 2016-13”). This guidance introduces a current expected credit loss (“CECL”) model for the recognition of impairment losses on financial assets, including trade receivables. The CECL model replaces current GAAP’s incurred loss model. Under CECL, companies will record an allowance through current earnings for the expected credit loss for the life of the financial asset upon initial recognition of the financial asset. This update is effective for us at the beginning of 2020 with early adoption permitted at the beginning of 2019. We have not yet selected an adoption date and we are currently evaluating the effect on our financial position and results of operations.
In August 2016, the FASB issued Accounting Standards Update 2016-15 (“ASU 2016-15”) “Classification of Certain Cash Receipts and Cash Payments,” an amendment to existing guidance on presentation and classification of certain cash receipts and cash payments in the statement of cash flows. This guidance is intended to reduce diversity in the classification of transactions related to debt prepayment or debt extinguishment costs, zero-coupon debt instrument settlements, contingent consideration payments made after a business combination, insurance claim settlements and corporate-owned life insurance settlements, distributions from equity method investments and beneficial interests in securitization transactions. This guidance is effective for annual periods beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted. We have not yet selected an adoption date and we are currently evaluating the effect on our financial statements.
9
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. This update is effective for annual and interim periods beginning after December 15, 2016, and early adoption is permitted. We elected to early adopt the new guidance beginning in the third quarter of 2016.
Summary of Change in ASU 2016-09 |
Accounting Policy & Impact on |
|
All excess tax benefits and tax deficiencies should be recognized as income tax expense or benefit in the income statement. The tax effects of exercised or vested awards should be treated as discrete items in the reporting period in which they occur. |
For the third quarter of 2016, we have reported excess tax benefits and deficiencies as a component of income tax expense in our Condensed Consolidated Statements of Operations. Because we have not previously recorded excess tax benefits or deficiencies due to materiality, there is no impact on our prior-period condensed consolidated financial statements as a result of this adoption. |
|
Excess tax benefits should be classified along with other income tax cash flows as an operating activity. |
For the third quarter of 2016, we have reported excess tax benefits as a component of operating cash flows in our Condensed Consolidated Statements of Cash Flows. Because we have not previously recorded excess tax benefits due to materiality, there is no impact on our prior-period condensed consolidated financial statements as a result of this change. |
|
An entity can make an entity-wide accounting policy election to either estimate the number of awards that are expected to vest (current GAAP) or account for forfeitures when they occur. |
Because of our limited forfeiture experience, we have accounted for forfeitures in the period they occur and will continue to do so under ASU 2016-09. |
|
The threshold to qualify for equity classification permits withholding up to the maximum statutory tax rates in the applicable jurisdictions. |
We may consider withholding taxes at a rate in excess of the minimum statutory rates if permitted by any applicable long-term share-based incentive plan. We classify all share-based awards as equity. This change has no impact on our prior-period condensed consolidated financial statements. |
|
Cash paid by an employer when directly withholding shares for tax-withholding purposes should be classified as a financing activity. |
We have historically reported shares withheld for tax-withholding in the financing activities section under the caption "Taxes withheld and paid on employees' equity awards" in our Condensed Consolidated Statements of Cash Flows. This change has no impact on our prior-period condensed consolidated financial statements. |
10
3. GOODWILL AND OTHER INTANGIBLES
Changes in the carrying amount of goodwill for the nine months ended September 30, 2016, by segment, were as follows, in thousands:
|
|
Gross Goodwill |
|
|
|
Gross Goodwill |
|
Accumulated |
|
Net Goodwill |
|||||
|
|
at |
|
|
|
at |
|
Impairment |
|
at |
|||||
|
|
December 31, 2015 |
|
Additions |
|
September 30, 2016 |
|
Losses |
|
September 30, 2016 |
|||||
Installation |
|
$ |
1,389,775 |
|
$ |
1,017 |
|
$ |
1,390,792 |
|
$ |
(762,021) |
|
$ |
628,771 |
Distribution |
|
|
416,287 |
|
|
— |
|
|
416,287 |
|
|
— |
|
|
416,287 |
Total |
|
$ |
1,806,062 |
|
$ |
1,017 |
|
$ |
1,807,079 |
|
$ |
(762,021) |
|
$ |
1,045,058 |
Other intangible assets, net includes customer relationships, non-compete agreements, and trademarks. The following table sets forth our other intangible assets as of September 30, 2016, and December 31, 2015, in thousands:
|
|
|
|
|
|
|
|
As of |
||||
|
|
|
|
|
|
|
|
September 30, |
|
December 31, |
||
|
|
|
|
|
|
|
|
2016 |
|
2015 |
||
Gross definite-lived intangible assets |
|
|
|
|
|
|
|
$ |
20,932 |
|
$ |
19,472 |
Accumulated amortization |
|
|
|
|
|
|
|
|
(18,501) |
|
|
(17,892) |
Net definite-lived intangible assets |
|
|
|
|
|
|
|
|
2,431 |
|
|
1,580 |
Indefinite-lived intangible assets not subject to amortization |
|
|
|
|
|
|
|
|
407 |
|
|
407 |
Other intangible assets, net |
|
|
|
|
|
|
|
$ |
2,838 |
|
$ |
1,987 |
4. DEPRECIATION AND AMORTIZATION
The following table sets forth our depreciation and amortization expense, which is reflected in cost of sales and selling, general, and administrative expense in our Condensed Consolidated Statements of Operations, for the three and nine months ended September 30, 2016 and 2015, in thousands:
|
|
Three Months Ended September 30, |
|
Nine Months Ended September 30, |
||||||||
2016 |
2015 |
2016 |
2015 |
|||||||||
Depreciation |
|
$ |
2,809 |
|
$ |
2,709 |
|
$ |
8,314 |
|
$ |
8,317 |
Amortization |
|
|
206 |
|
|
221 |
|
|
609 |
|
|
753 |
Total |
|
$ |
3,015 |
|
$ |
2,930 |
|
$ |
8,923 |
|
$ |
9,070 |
11
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 September 30, 2016 |
|
|
|
|
|
2.02 |
% |
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 September 30, 2016, in thousands:
|
|
|
|
|
Future Principal |
|
|
|
|
|
|
Payments |
|
Schedule of Debt Maturity by Years: |
|
|
|
|
|
|
2016 |
|
|
|
|
$ |
5,000 |
2017 |
|
|
|
|
|
20,000 |
2018 |
|
|
|
|
|
20,000 |
2019 |
|
|
|
|
|
25,000 |
2020 |
|
|
|
|
|
115,000 |
Total principal maturities |
|
|
|
|
$ |
185,000 |
The following table reconciles the principal balance of our long-term debt to our Condensed Consolidated Balance Sheets, in thousands:
|
|
As of |
||||
|
|
September 30, |
|
December 31, |
||
|
|
2016 |
|
2015 |
||
Current portion of long-term debt |
|
$ |
20,000 |
|
$ |
15,000 |
Long-term portion of long-term debt |
|
|
165,000 |
|
|
180,000 |
Unamortized debt issuance costs |
|
|
(1,286) |
|
|
(1,543) |
Long-term debt |
|
$ |
183,714 |
|
$ |
193,457 |
12
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 |
||||
|
|
September 30, |
|
December 31, |
||
|
|
2016 |
|
2015 |
||
Revolving Facility |
|
$ |
125,000 |
|
$ |
125,000 |
Less: standby letters of credit |
|
|
(49,080) |
|
|
(55,096) |
Capacity under Revolving Facility |
|
$ |
75,920 |
|
$ |
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:
|
|
September 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 |
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.
13
7. SEGMENT INFORMATION
The following table sets forth our net sales and operating results by segment, in thousands:
|
|
Three Months Ended September 30, |
||||||||||
|
|
2016 |
|
2015 |
|
2016 |
|
2015 |
||||
|
|
Net Sales |
|
Operating Profit (2) |
||||||||
Our operations by segment were (1): |
|
|
|
|
|
|
|
|
|
|
|
|
Installation |
|
$ |
300,005 |
|
$ |
279,809 |
|
$ |
32,196 |
|
$ |
20,678 |
Distribution |
|
|
174,123 |
|
|
170,881 |
|
|
15,536 |
|
|
16,909 |
Intercompany eliminations and other adjustments (3) |
|
|
(21,026) |
|
|
(22,802) |
|
|
(3,665) |
|
|
(3,001) |
Total |
|
$ |
453,102 |
|
$ |
427,888 |
|
|
44,067 |
|
|
34,586 |
General corporate expense, net (4) |
|
|
|
|
|
|
|
|
(4,966) |
|
|
(4,395) |
Operating profit, as reported |
|
|
|
|
|
|
|
|
39,101 |
|
|
30,191 |
Other expense, net |
|
|
|
|
|
|
|
|
(1,206) |
|
|
(1,566) |
Income from continuing operations before income taxes |
|
|
|
|
|
|
|
$ |
37,895 |
|
$ |
28,625 |
|
|
Nine Months Ended September 30, |
||||||||||
|
|
2016 |
|
2015 |
|
2016 |
|
2015 |
||||
|
|
Net Sales |
|
Operating Profit (2) |
||||||||
Our operations by segment were (1): |
|
|
|
|
|
|
|
|
|
|
|
|
Installation |
|
$ |
860,924 |
|
$ |
778,469 |
|
$ |
68,499 |
|
$ |
26,713 |
Distribution |
|
|
499,268 |
|
|
476,333 |
|
|
43,416 |
|
|
40,183 |
Intercompany eliminations and other adjustments (3) |
|
|
(61,477) |
|
|
(64,693) |
|
|
(10,540) |
|
|
(8,340) |
Total |
|
$ |
1,298,715 |
|
$ |
1,190,109 |
|
|
101,375 |
|
|
58,556 |
General corporate expense, net (4) |
|
|
|
|
|
|
|
|
(15,716) |
|
|
(18,022) |
Operating profit, as reported |
|
|
|
|
|
|
|
|
85,659 |
|
|
40,534 |
Other expense, net |
|
|
|
|
|
|
|
|
(4,114) |
|
|
(7,879) |
Income from continuing operations before income taxes |
|
|
|
|
|
|
|
$ |
81,545 |
|
$ |
32,655 |
(1) |
All of our operations are located in the United States. |
(2) |
Segment operating profit for the three and nine months ended September 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 nine months ended September 30, 2015, includes an estimate of general corporate expense calculated based on a percentage of sales. For the three and nine months ended September 30, 2015, the $1.3 million and $5.1 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 $3.7 million and $4.2 for the three months ended September 30, 2016 and 2015, respectively, and $10.5 million and $11.6 million for the nine months ended September 30, 2016 and 2015, respectively. Other adjustments primarily include differences between estimated and actual corporate costs allocated to the segments for the three and nine months ended September 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. |
14
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 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 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 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 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 35.2 percent and 37.1 percent for the three and nine months ended September 30, 2016, respectively. The effective tax rates for the three and nine months ended September 30, 2015, were 41.9 percent and 40.4 percent, respectively. The 2016 rates are lower due to an increase in the estimate of the Domestic Production Activities Deduction and some discrete items recorded in the quarter including a benefit from the adoption of the new stock compensation rules and from return to accrual adjustments for tax returns filed related to 2015. The higher rates in 2015 were primarily due to decreases in our valuation allowance offset by increases in the Company’s current U.S. federal tax resulting from the 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.
During the third quarter of 2016, we recorded return to provision adjustments for tax returns filed related to 2015 tax year.
We early adopted ASU 2016-09 in the third quarter of 2016. As a result, a tax benefit of $0.5 million related to share-based compensation was recognized in our Condensed Consolidated Statements of Operations as a discrete item in income tax expense.
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.
15
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.
Basic and diluted income (loss) per share were computed as follows, in thousands, except share and per share amounts:
|
|
Three Months Ended September 30, |
|
Nine Months Ended September 30, |
||||||||
|
|
2016 |
|
2015 |
|
2016 |
|
2015 |
||||
Income from continuing operations |
|
$ |
24,566 |
|
$ |
16,624 |
|
$ |
51,299 |
|
$ |
19,454 |
Loss from discontinued operations, net |
|
|
— |
|