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 March 31, 2017

 

 

 

 

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.)

 

 

 

 

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)

 

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, 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  ☐    Smaller reporting company  ☐    Non-accelerated filer  ☐ (Do not check if a 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

 

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 May 2, 2017

Common stock, par value $0.01 per share

 

37,040,794

 

 

 

 


 

Table of Contents

 

TOPBUILD CORP.

TABLE OF CONTENTS

 

 

 

 

 

 

 

Page No.

Part I. 

Financial Information

 

 

 

 

Item 1. 

Financial Statements (Unaudited)

 

 

 

 

 

Condensed Consolidated Balance Sheets

4

 

 

 

 

Condensed Consolidated Statements of Operations

5

 

 

 

 

Condensed Consolidated Statements of Cash Flows

6

 

 

 

 

Condensed Consolidated Statements of Changes in Equity

7

 

 

 

 

Notes to Condensed Consolidated Financial Statements

8

 

 

 

Item 2. 

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

22

 

 

 

Item 3. 

Quantitative and Qualitative Disclosures About Market Risk

28

 

 

 

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

30

 

 

 

Item 6. 

Exhibits

31

 

 

 

Signature 

32

 

 

 

Index to Exhibits 

33

 

 

 

 

 

 

 

2


 

Table of Contents

GLOSSARY

 

We use acronyms and other defined terms for certain business terms and abbreviations throughout this quarterly report on form 10-Q, as defined on the acronyms list and glossary below:

 

 

 

 

Term

 

Definition

2015 LTIP

 

2015 TopBuild Long-Term Incentive Plan, as amended from time to time

2016 Repurchase Program

 

$50 million share repurchase program authorized March 1, 2016

2017 Repurchase Program

 

$200 million share repurchase program authorized February 24, 2017

ASC

 

Accounting Standards Codification

Amendment No. 1

 

1st Amendment to the "Credit Agreement"

ASU

 

Accounting Standards Update

Board

 

Board of Directors

Capital

 

Capital Insulation, Inc.

Credit Agreement

 

Senior secured credit agreement and related collateral and guarantee documentation

EcoFoam

 

Bella Insulutions Inc., DBA EcoFoam/Insulutions

Effective Date

 

June 30, 2015, the date of the "Separation"

ETR

 

Effective tax rate

Exchange Act

 

The Securities Exchange Act of 1934, as amended

FASB

 

Financial Accounting Standards Board

FCCR

 

Fixed charge coverage ratio

Former Parent

 

See "Masco"

GAAP

 

Generally Accepted Accounting Principles in the United States of America

Guarantors

 

See "TopBuild"

Masco

 

Masco Corporation.  Also, the "Former Parent"

Midwest

 

Midwest Fireproofing, LLC

MR Insulfoam

 

MR Insulfoam, LLC

NOL

 

Net operating loss

NYSE

 

New York Stock Exchange

Options

 

Stock option awards

Owens

 

Owens Corning Sales, LLC

RSA 

 

Restricted stock award

Revolving Facility

 

Senior secured revolving credit facility under the "Credit Agreement"

SEC

 

United States Securities and Exchange Commission

Separation

 

Distribution of 100 percent of the outstanding capital stock of TopBuild to holders of Masco
common stock

Services Business

 

Masco's Installation and Other Services segment, spun-off as TopBuild

Superior

 

Superior Insulation Products, LLC

TopBuild

 

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

 

 

 

 

 

3


 

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                  

 

    

March 31, 

  

December 31, 

 

 

2017

 

2016

ASSETS

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

80,370

 

$

134,375

Receivables, net of an allowance for doubtful accounts of $3,633 and $3,374 at March 31, 2017, and December 31, 2016, respectively

 

 

269,359

 

 

252,624

Inventories, net

 

 

112,633

 

 

116,190

Prepaid expenses and other current assets

 

 

27,592

 

 

23,364

Total current assets

 

 

489,954

 

 

526,553

 

 

 

 

 

 

 

Property and equipment, net

 

 

95,788

 

 

92,760

Goodwill

 

 

1,063,518

 

 

1,045,058

Other intangible assets, net

 

 

15,952

 

 

2,656

Deferred tax assets, net

 

 

19,469

 

 

19,469

Other assets

 

 

3,258

 

 

3,623

Total assets

 

$

1,687,939

 

$

1,690,119

 

 

 

 

 

 

 

LIABILITIES AND EQUITY

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Accounts payable

 

$

226,974

 

$

241,534

Current portion of long-term debt

 

 

20,000

 

 

20,000

Accrued liabilities

 

 

99,647

 

 

64,399

Total current liabilities

 

 

346,621

 

 

325,933

 

 

 

 

 

 

 

Long-term debt

 

 

153,885

 

 

158,800

Deferred tax liabilities, net

 

 

193,715

 

 

193,715

Long-term portion of insurance reserves

 

 

37,867

 

 

38,691

Other liabilities

 

 

1,892

 

 

433

Total liabilities

 

 

733,980

 

 

717,572

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity:

 

 

 

 

 

 

Preferred stock, $0.01 par value: 10,000,000 shares authorized; 0 shares issued and outstanding at March 31, 2017, and December 31, 2016

 

 

 —

 

 

 —

Common stock, $0.01 par value: 250,000,000 shares authorized; 38,575,699 issued and 37,505,038 outstanding at March 31, 2017, and 38,488,825 shares issued and 37,815,199 outstanding at December 31, 2016

 

 

386

 

 

385

Treasury stock, 1,070,661 shares at March 31, 2017, and 673,626 shares at December 31, 2016, at cost

 

 

(39,675)

 

 

(22,296)

Additional paid-in capital

 

 

845,976

 

 

845,476

Retained earnings

 

 

147,272

 

 

148,982

Total equity

 

 

953,959

 

 

972,547

Total liabilities and equity

 

$

1,687,939

 

$

1,690,119

See notes to our unaudited condensed consolidated financial statements.

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TOPBUILD CORP.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

(In thousands except per common share data)

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 

 

 

2017

 

2016

Net sales

    

$

441,363

    

$

414,024

Cost of sales

 

 

339,735

 

 

324,569

Gross profit

 

 

101,628

 

 

89,455

 

 

 

 

 

 

 

Selling, general, and administrative expense (exclusive of significant legal settlement, shown separately below)

 

 

75,091

 

 

69,688

Significant legal settlement (See Note 8 – Other Commitments & Contingencies)

 

 

30,000

 

 

 —

Operating (loss) profit

 

 

(3,463)

 

 

19,767

 

 

 

 

 

 

 

Other income (expense), net:

 

 

 

 

 

 

Interest expense

 

 

(1,370)

 

 

(1,673)

Other, net

 

 

107

 

 

75

Other expense, net

 

 

(1,263)

 

 

(1,598)

(Loss) income from continuing operations before income taxes

 

 

(4,726)

 

 

18,169

 

 

 

 

 

 

 

Income tax benefit (expense) from continuing operations

 

 

3,016

 

 

(7,053)

(Loss) income from continuing operations

 

 

(1,710)

 

 

11,116

 

 

 

 

 

 

 

Net (loss) income

 

$

(1,710)

 

$

11,116

 

 

 

 

 

 

 

Income (loss) per common share:

 

 

 

 

 

 

Basic:

 

 

 

 

 

 

(Loss) income from continuing operations

 

$

(0.05)

 

$

0.29

Net (loss) income

 

$

(0.05)

 

$

0.29

 

 

 

 

 

 

 

Diluted:

 

 

 

 

 

 

(Loss) income from continuing operations

 

$

(0.05)

 

$

0.29

Net (loss) income

 

$

(0.05)

 

$

0.29

See notes to our unaudited condensed consolidated financial statements.

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Table of Contents

TOPBUILD CORP.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(In thousands)

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 

 

 

2017

 

2016

Net Cash Provided by (Used in) Operating Activities:

 

 

    

    

 

    

Net (loss) income

 

$

(1,710)

 

$

11,116

Adjustments to reconcile net (loss) income to net cash provided by operating activities:

 

 

 

 

 

 

Depreciation and amortization

 

 

3,231

 

 

2,895

Share-based compensation

 

 

2,084

 

 

1,600

Loss on sale or abandonment of property and equipment

 

 

88

 

 

950

Amortization of debt issuance costs

 

 

86

 

 

86

Provision for bad debt expense

 

 

995

 

 

1,054

Loss from inventory obsolescence

 

 

360

 

 

335

Deferred income taxes, net

 

 

 —

 

 

(3)

Changes in certain assets and liabilities:

 

 

 

 

 

 

Receivables, net

 

 

(6,568)

 

 

(8,505)

Inventories, net

 

 

4,531

 

 

10,350

Prepaid expenses and other current assets

 

 

(4,195)

 

 

7,167

Accounts payable

 

 

(17,842)

 

 

(29,846)

Accrued liabilities

 

 

33,656

 

 

6,181

Other, net

 

 

118

 

 

(27)

Net cash provided by operating activities

 

 

14,834

 

 

3,353

 

 

 

 

 

 

 

Cash Flows Provided by (Used in) Investing Activities:

 

 

 

 

 

 

Purchases of property and equipment

 

 

(3,800)

 

 

(2,900)

Acquisition of businesses

 

 

(41,242)

 

 

 —

Proceeds from sale of property and equipment

 

 

133

 

 

76

Other, net

 

 

32

 

 

68

Net cash used in investing activities

 

 

(44,877)

 

 

(2,756)

 

 

 

 

 

 

 

Cash Flows Provided by (Used in) Financing Activities:

 

 

 

 

 

 

Repayment of long-term debt

 

 

(5,000)

 

 

(2,500)

Taxes withheld and paid on employees' equity awards

 

 

(1,583)

 

 

(1,256)

Repurchase of shares of common stock

 

 

(17,379)

 

 

(1,539)

Net cash used in financing activities

 

 

(23,962)

 

 

(5,295)

 

 

 

 

 

 

 

Cash and Cash Equivalents

 

 

 

 

 

 

Decrease for the period

 

 

(54,005)

 

 

(4,698)

Beginning of year

 

 

134,375

 

 

112,848

End of period

 

$

80,370

 

$

108,150

 

 

 

 

 

 

 

Supplemental disclosure of noncash investing activities:

 

 

 

 

 

 

Accruals for property and equipment

 

$

237

 

$

426

See notes to our unaudited condensed consolidated financial statements.

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Table of Contents

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, 2015

 

$

377

 

$

 —

 

$

838,976

 

$

76,376

 

$

915,729

Net income

 

 

 —

 

 

 —

 

 

 —

 

 

11,116

 

 

11,116

Share-based compensation

 

 

 —

 

 

 —

 

 

1,600

 

 

 —

 

 

1,600

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

 

 

 8

 

 

 —

 

 

(8)

 

 

 —

 

 

 —

Repurchase of 53,408 shares of common stock pursuant to Share Repurchase Program

 

 

 —

 

 

(1,539)

 

 

 —

 

 

 —

 

 

(1,539)

50,728 shares of common stock withheld to satisfy statutory withholding requirements

 

 

 —

 

 

 —

 

 

(1,256)

 

 

 —

 

 

(1,256)

Balance at March 31, 2016

 

$

385

 

$

(1,539)

 

$

839,312

 

$

87,492

 

$

925,650

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2016

 

$

385

 

$

(22,296)

 

$

845,476

 

$

148,982

 

$

972,547

Net loss

 

 

 —

 

 

 —

 

 

 —

 

 

(1,710)

 

 

(1,710)

Share-based compensation

 

 

 —

 

 

 —

 

 

2,084

 

 

 —

 

 

2,084

Issuance of 141,000 restricted share awards under long-term equity incentive plan

 

 

 1

 

 

 —

 

 

(1)

 

 

 —

 

 

 —

Repurchase of 397,035 shares of common stock pursuant to Share Repurchase Program

 

 

 —

 

 

(17,379)

 

 

 —

 

 

 —

 

 

(17,379)

42,629 shares of common stock withheld to pay taxes on employees' equity awards

 

 

 —

 

 

 —

 

 

(1,583)

 

 

 —

 

 

(1,583)

Balance at March 31, 2017

 

$

386

 

$

(39,675)

 

$

845,976

 

$

147,272

 

$

953,959

See notes to our unaudited condensed consolidated financial statements.

 

 

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Table of Contents

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

 

1. BASIS OF PRESENTATION

 

On the Effective Date, Masco completed the Separation of its Services Business from its other businesses.  On the Effective Date, TopBuild 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.  TopBuild is a Delaware corporation and trades on the NYSE under the symbol “BLD.”

 

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, 2016.

 

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 March 31, 2017, our results of operations for the three months ended March 31, 2017 and 2016, and cash flows for the three months ended March 31, 2017 and 2016.  The Condensed Consolidated Balance Sheet at December 31, 2016, was derived from our audited financial statements, but does not include all disclosures required by GAAP.

 

2. ACCOUNTING POLICIES

 

Financial Statement Presentation.  The 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.  Certain reclassifications have been made in the 2016 condensed consolidated financial statements to conform to the 2017 classifications with no impact on previously reported net income or equity.

 

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.  Contingent consideration is recorded at fair value at the acquisition date.

 

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Table of Contents

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

 

Share-based Compensation.  Our share-based compensation program currently consists of RSAs and Options.  Share-based compensation expense is reported in selling, general, and administrative expense.  We do not capitalize any compensation cost related to share-based compensation awards. The income tax benefits and deficiencies associated with share-based awards are reported as a component of income tax expense.  Excess tax benefits and deficiencies are included in cash provided by (used in) operating activities while shares withheld for tax-withholding are reported in financing activities under the caption “Taxes withheld and paid on employees’ equity awards” in our Condensed Consolidated Statements of Cash Flows.  Award forfeitures are accounted for in the period they occur. 

 

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 Adopted Accounting Pronouncements:

 

In July 2015, the FASB issued ASU 2015-11 “Simplifying the Measurement of Inventory.”  Under this guidance, 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.  We adopted this guidance in the beginning of the first quarter of 2017.  The adoption of this amendment did not have a material impact on our financial position or results of operations.

 

Recently Issued Accounting Pronouncements Not Yet Adopted:

 

In May 2014, the FASB issued a new standard for revenue recognition, ASC 606.  Subsequent to issuing ASC 606, FASB has issued a number of updates and technical improvements which do not change the core principles of the guidance.  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 beginning January 1, 2018, (with early adoption permitted) and allows for full retrospective or modified retrospective methods of adoption.  In determining the applicability of ASC 606, we considered the general nature of our orders is short-term, based on a single deliverable, and not accounted for under industry-specific guidance.  Our initial review has indicated additional disclosures may be necessary.  We have not yet determined an adoption date or method of adoption.

 

In February 2016, the FASB issued 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 us beginning January 1, 2019.  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.

 

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Table of Contents

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

 

In June 2016, the FASB issued ASU 2016-13, “Financial Instruments - Credit Losses.”  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 January 2017, the FASB issued ASU 2017-01, “Clarifying the Definition of a Business.  The new standard narrows the definition of a business and provides a framework for evaluation.  This update is effective for us beginning January 1, 2018 and will be applied prospectively.  We do not expect this update to have a material impact on our financial position or results of operations.

 

In January 2017, the FASB issued ASU 2017-04, “Simplifying the Test for Goodwill Impairment.”  The new standard simplifies the subsequent measurement of goodwill by eliminating the second step of the good will impairment test.  This update is effective for us beginning January 1, 2020.  Early adoption is permitted and the new standard will be applied on a prospective basis.  We have not yet selected an adoption date and we are currently evaluating the effect on our financial position and results of operations.

3. GOODWILL AND OTHER INTANGIBLES

 

Changes in the carrying amount of goodwill for the three months ended March 31, 2017,  by segment, were as follows, in thousands:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Gross Goodwill

    

 

    

Gross Goodwill

    

   Accumulated   

    

Net Goodwill

 

 

at

 

 

 

at

 

Impairment

 

at

 

 

December 31, 2016

 

       Additions       

 

March 31, 2017

 

Losses

 

March 31, 2017

Installation

 

$

1,390,792

 

$

18,462

 

$

1,409,254

 

$

(762,023)

 

$

647,231

Distribution

 

 

416,287

 

 

 —

 

 

416,287

 

 

 —

 

 

416,287

Total

 

$

1,807,079

 

$

18,462

 

$

1,825,541

 

$

(762,023)

 

$

1,063,518

 

Other intangible assets, net includes customer relationships, non-compete agreements, and trademarks.  The following table sets forth our other intangible assets as of March 31, 2017, and December 31, 2016, in thousands:

 

 

 

 

 

 

 

 

 

 

As of

 

    

March 31, 

    

December 31, 

 

 

2017

    

2016

Gross definite-lived intangible assets

 

$

34,411

 

$

20,932

Accumulated amortization

 

 

(18,866)

 

 

(18,683)

Net definite-lived intangible assets

 

 

15,545

 

 

2,249

Indefinite-lived intangible assets not subject to amortization

 

 

407

 

 

407

Other intangible assets, net

 

$

15,952

 

$

2,656

 

 

 

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Table of Contents

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

 

4. LONG-TERM DEBT

 

The Guarantors entered into a 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 (a)

 

 

 

 

$

100,000

 

Interest rate as of March 31, 2017

 

 

 

 

 

2.28

%

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 (b)

 

 

 

 

$

100,000

 

Sublimit for swingline loans under Revolving Facility (b)

 

 

 

 

$

15,000

 


(a)

Subject to certain 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.

 

The following table sets forth our remaining principal payments for the following four years as of March 31, 2017, in thousands:

 

 

 

 

 

 

 

 

 

    

 

 

Future Principal

 

 

 

 

Payments

Schedule of Debt Maturity by Years:

 

 

 

 

 

 

2017

 

 

 

 

$

15,000

2018

 

 

 

 

 

20,000

2019

 

 

 

 

 

25,000

2020

 

 

 

 

 

115,000

Total principal maturities

 

 

 

 

$

175,000

 

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

 

 

 

 

 

 

 

 

 

 

As of

 

 

March 31,

 

December 31,

 

    

2017

 

2016

Current portion of long-term debt

 

$

20,000

 

$

20,000

Long-term portion of long-term debt

 

 

155,000

 

 

160,000

Unamortized debt issuance costs

 

 

(1,115)

 

 

(1,200)

Long-term debt

 

$

173,885

 

$

178,800

 

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

 

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

 

 

March 31,

 

December 31,

 

    

2017

 

2016

Revolving Facility

 

$

125,000

 

$

125,000

Less: standby letters of credit

 

 

(49,080)

 

 

(49,080)

Capacity under Revolving Facility

 

$

75,920

 

$

75,920

 

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 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 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:

 

 

 

 

 

 

 

 

 

 

As of

 

 

March 31,

 

December 31,

 

    

2017

 

2016

Maximum net leverage ratio

 

 

3.00:1.00

 

 

3.00:1.00

Minimum fixed charge coverage ratio

 

 

1.10:1.00

 

 

1.10:1.00

Compliance as of period end

 

 

In Compliance

 

 

In Compliance

 

 

5.  ACCRUED LIABILITIES

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

 

 

 

 

 

 

 

 

 

As of

 

 

March 31, 

 

December 31, 

 

 

2017

 

2016

Salaries, wages, and commissions

 

$

19,219

 

$

20,684

Insurance reserves

 

 

21,511

 

 

20,410

Significant legal settlement

 

 

30,000

 

 

 —

Other

 

 

28,917

 

 

23,305

Total accrued liabilities

 

$

99,647

 

$

64,399

 

 

 

 

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).

 

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

 

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.  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 Agreement.  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.

 

7. SEGMENT INFORMATION

 

The following table sets forth our net sales and operating results by segment, in thousands:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 

 

    

2017

    

2016

    

2017

    

2016

 

 

Net Sales

 

Operating (Loss) Profit (b)

Our operations by segment were (a):

 

 

 

 

 

 

 

 

 

 

 

 

Installation (exclusive of significant legal settlement, shown separately below)

 

$

290,887

 

$

272,878

 

$

21,036

 

$

13,506

Significant legal settlement (Installation segment) (c)

 

 

 —

 

 

 —

 

 

(30,000)

 

 

 —

Distribution

 

 

170,244

 

 

160,888

 

 

15,484

 

 

14,333

Intercompany eliminations and other adjustments (d)

 

 

(19,768)

 

 

(19,742)

 

 

(3,301)

 

 

(3,352)

Total

 

$

441,363

 

$

414,024

 

 

3,219

 

 

24,487

General corporate expense, net (e)

 

 

 

 

 

 

 

 

(6,682)

 

 

(4,720)

Operating (loss) profit, as reported

 

 

 

 

 

 

 

 

(3,463)

 

 

19,767

Other expense, net

 

 

 

 

 

 

 

 

(1,263)

 

 

(1,598)

(Loss) income from continuing operations before income taxes

 

 

 

 

 

 

 

$

(4,726)

 

$

18,169

 


(a)

All of our operations are located in the United States.

 

(b)

Segment operating (loss) profit for the three months ended March 31, 2017 and 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). 

 

(c)

Significant legal settlement expense of $30 million incurred during the three months ended March 31, 2017 related to the settlement of our previously reported breach of contract action related to our termination of an insulation supply agreement with Owens.  For more information see Note 8 – Other Commitments and Contingencies.

 

(d)

Intercompany eliminations include the elimination of intercompany profits of $3.3 million and $3.4 for the three months ended March 31, 2017 and 2016, respectively. 

 

(e)

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.  During the second quarter of 2017, we entered into a settlement with Owens in connection with our previously reported breach of contract action related to our termination of an insulation supply agreement.  Under the terms of the settlement, we will pay Owens $30 million.  The settlement will also result in the dismissal of the lawsuit filed in May, 2016 in Toledo, Ohio.  The settlement is reflected in the significant legal settlement line item within our Condensed Consolidated Statements of Operations for the three months ended March 31, 2017.  The settlement is also reflected in our installation segment’s operating results.

 

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 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 63.8 percent and 38.8 percent for the three months ended March 31, 2017 and 2016 respectively.  The higher 2017 rate was due to a small overall pre-tax loss and the impact of discrete benefits related to share-based compensation and a legal settlement.  Based on the current information, we still expect the annual ETR to be approximately 38 percent.

 

Our Condensed Consolidated Statements of Operations recognized a tax benefit related to discrete items of $12.6 million for the three months ended March 31, 2017.  The tax benefit was comprised of two discrete items:  $11.8 million for a legal settlement and $0.8 million for share-based compensation.

 

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

 

10. INCOME (LOSS) PER SHARE

 

Basic net (loss) 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 (loss) 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.    No common stock equivalents were included in the computation of loss per share for the three months ended March 31, 2017, as their effect would have been anti-dilutive.

 

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

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 

 

 

2017

 

2016

(Loss) income  from continuing operations

 

$

(1,710)

 

$

11,116

Net (loss) income - basic and diluted

 

$

(1,710)

 

$

11,116

 

 

 

 

 

 

 

Weighted average number of common shares outstanding - basic

 

 

37,123,245

 

 

37,761,423

 

 

 

 

 

 

 

Dilutive effect of common stock equivalents:

 

 

 

 

 

 

RSAs with service-based conditions

 

 

 —

 

 

113,683

RSAs with market-based conditions

 

 

 —

 

 

 —

RSAs with performance-based conditions

 

 

 —

 

 

 —

Stock options

 

 

 —

 

 

24,004

 

 

 

 

 

 

 

Weighted average number of common shares outstanding - diluted

 

 

37,123,245

 

 

37,899,110

 

 

 

 

 

 

 

Basic (loss) income per common share:

 

 

 

 

 

 

(Loss) income from continuing operations

 

$

(0.05)

 

$

0.29

Net (loss) income

 

$

(0.05)

 

$

0.29

 

 

 

 

 

 

 

Diluted (loss) income per common share:

 

 

 

 

 

 

(Loss) income from continuing operations

 

$

(0.05)

 

$

0.29

Net (loss) income

 

$

(0.05)

 

$

0.29

 

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

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 

 

 

2017

 

2016

Anti-dilutive common stock equivalents:

 

 

 

 

 

 

RSAs with service-based conditions

 

 

401,623

 

 

99,734

RSAs with market-based conditions

 

 

205,316

 

 

25,293

RSAs with performance-based conditions

 

 

 —

 

 

 —

Stock options

 

 

774,920

 

 

484,284

Total anti-dilutive common stock equivalents:

 

 

1,381,859

 

 

609,311

 

 

11. SHARE-BASED COMPENSATION

 

Our eligible employees currently participate in the 2015 LTIP.  The 2015 LTIP authorizes the Board of Directors 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 March 31, 2017, we had 2.8 million shares available under the 2015 LTIP.

 

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Table of Contents

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

 

Share-based compensation expense is included in selling, general, and administrative expense.  The income tax effect associated with award vestings is included in income tax expense.  The following table presents the amounts recognized in our Condensed Consolidated Statements of Operations, in thousands:

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 

 

 

2017

 

2016

Share-based compensation expense

 

$

2,084

 

$

1,600

Income tax benefit realized from award vestings

 

$

828

 

$

 —

 

The following table presents a summary of our share-based compensation activity for the three months ended March 31, 2017, in thousands, except per share amounts:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Restricted Share Awards

 

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 31,2016

 

653.1

 

$

25.71

 

712.0

 

$

9.73

 

$

25.03

 

$

7,525.8

Granted

 

141.0

 

$

43.25

 

145.3

 

$

14.40

 

$

38.39

 

 

 

Converted/Exercised

 

(130.8)

 

$

21.41

 

 —

 

$

 —

 

$

 —

 

$

 —

Forfeited

 

(11.5)

 

$

26.98

 

 —

 

$

 —

 

$

 —

 

 

 

Balance March 31, 2017

 

651.8

 

$

30.34

 

857.3

 

$

10.53

 

$

27.29

 

$

16,893.0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Exercisable March 31, 2017 (a)

 

 

 

 

244.9

 

$

8.79

 

$

22.49

 

$

6,002.3


(a)

The weighted average remaining contractual term for vested options is 7.2 years.

 

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

 

 

 

 

 

 

 

 

 

 

As of March 31, 2017

 

 

Unrecognized Compensation Expense
on Unvested Awards

 

Weighted Average
Remaining
Vesting Period

Restricted stock awards

 

$

15,889

 

 

1.9 years

Stock options

 

 

6,211

 

 

1.9 years

Total unrecognized compensation expense related to unvested awards

 

$

22,100

 

 

 

 

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: