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 September 30, 2018

 

 

 

 

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

 

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

 

Large accelerated filer     Accelerated filer  ☐    Smaller reporting company    ☐    Non-accelerated filer  ☐     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 October 31, 2018

Common stock, par value $0.01 per share

 

35,384,990

 

 

 

 


 

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

27

 

 

 

Item 3. 

Quantitative and Qualitative Disclosures About Market Risk

37

 

 

 

Item 4. 

Controls and Procedures

37

 

 

 

Part II. 

Other Information

 

 

 

 

Item 1. 

Legal Proceedings

38

 

 

 

Item 1A. 

Risk Factors

38

 

 

 

Item 2. 

Unregistered Sales of Equity Securities and Use of Proceeds

40

 

 

 

Item 3. 

Defaults upon Senior Securities

40

 

 

 

Item 4. 

Mine Safety Disclosures

40

 

 

 

Item 5. 

Other Information

40

 

 

 

Item 6. 

Exhibits

40

 

 

 

Index to Exhibits 

41

 

 

 

Signature 

42

 

2


 

Table of Contents

GLOSSARY

 

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

 

 

 

 

Term

 

Definition

2015 LTIP

 

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

2016 Repurchase Program

 

$50 million share repurchase program authorized by the Board on March 1, 2016

2017 ASR Agreement

 

$100 million accelerated share repurchase agreement with Bank of America, N.A.

2017 Repurchase Program

 

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

ADO

 

ADO Products, LLC

Amended Credit Agreement

 

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

Annual Report

 

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

ASC

 

Accounting Standards Codification

ASU

 

Accounting Standards Update

Board

 

The Board of Directors of TopBuild Corp.

BofA

 

Bank of America, N.A.

Canyon

 

Canyon Insulation, Inc.

Capital

 

Capital Insulation, Inc.

EBITDA

 

Earnings before income taxes, depreciation, and amortization

EcoFoam

 

Bella Insulutions Inc., DBA EcoFoam/Insulutions

ETR

 

Effective tax rate

Exchange Act

 

The Securities Exchange Act of 1934, as amended

FASB

 

Financial Accounting Standards Board

FCCR

 

Fixed charge coverage ratio is defined in the “Amended Credit Agreement” as the ratio of EBITDA less capital expenditures, and income taxes paid to the sum of cash interest paid, debt principal payments and restricted payments made excluding stock repurchases

GAAP

 

Generally accepted accounting principles in the United States of America

Guarantors

 

All wholly-owned domestic subsidiaries of TopBuild Corp.

Lenders

 

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

LIBOR

 

London interbank offered rate

Midwest

 

Midwest Fireproofing, LLC

MR Insulfoam

 

MR Insulfoam, LLC

Net Leverage Ratio

 

As defined in the “Amended Credit Agreement,” the ratio of outstanding indebtedness, less up to $75 million of unrestricted cash, to EBITDA

NYSE

 

New York Stock Exchange

Old Credit Agreement

 

Senior secured credit agreement, as amended, and related collateral and guarantee documentation dated June 9, 2015, with PNC Bank, N.A. as administrative agent, and the other lenders and agents party thereto

Options

 

Stock option awards

Owens Corning

 

Owens Corning Sales, LLC

Quarterly Report

 

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

Revolving Facility

 

Senior secured revolving credit facilities available under the credit agreements.  With respect to the Old Credit Agreement, a $125 million facility with applicable sublimits for letters of credit and swingline loans.  With respect to the Amended Credit Agreement, a $250 million facility with applicable sublimits for letters of credit and swingline loans.

RSA 

 

Restricted stock award

Santa Rosa

 

Santa Rosa Insulation and Fireproofing, LLC

SEC

 

United States Securities and Exchange Commission

Secured Leverage Ratio

 

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

Senior Notes

 

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

Superior

 

Superior Insulation Products, LLC

TopBuild

 

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

TTM

 

Trailing twelve months

USI

 

United Subcontractors, Inc.

 

 

 

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               

 

    

September 30, 

    

December 31, 

 

 

2018

 

2017

ASSETS

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

93,463

 

$

56,521

Receivables, net of an allowance for doubtful accounts of $4,929 and $3,673 at September 30, 2018, and December 31, 2017, respectively

 

 

419,706

 

 

308,508

Inventories, net

 

 

161,875

 

 

131,342

Prepaid expenses and other current assets

 

 

24,074

 

 

15,221

Total current assets

 

 

699,118

 

 

511,592

 

 

 

 

 

 

 

Property and equipment, net

 

 

166,748

 

 

107,121

Goodwill

 

 

1,362,747

 

 

1,077,186

Other intangible assets, net

 

 

205,103

 

 

33,243

Deferred tax assets, net

 

 

17,634

 

 

18,129

Other assets

 

 

5,476

 

 

2,278

Total assets

 

$

2,456,826

 

$

1,749,549

 

 

 

 

 

 

 

LIABILITIES AND EQUITY

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Accounts payable

 

$

300,938

 

$

263,814

Current portion of long-term debt - term loan

 

 

19,688

 

 

12,500

Current portion of long-term debt - equipment notes

 

 

3,754

 

 

 —

Accrued liabilities

 

 

116,243

 

 

75,087

Total current liabilities

 

 

440,623

 

 

351,401

 

 

 

 

 

 

 

Long-term debt - term loan

 

 

309,548

 

 

229,387

Long-term debt - equipment notes

 

 

15,128

 

 

 —

Long-term debt - Senior Notes

 

 

393,769

 

 

 —

Deferred tax liabilities, net

 

 

167,508

 

 

132,840

Long-term portion of insurance reserves

 

 

42,347

 

 

36,160

Other liabilities

 

 

1,868

 

 

3,242

Total liabilities

 

 

1,370,791

 

 

753,030

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity:

 

 

 

 

 

 

Preferred stock, $0.01 par value: 10,000,000 shares authorized; 0 shares issued and outstanding at September 30, 2018, and December 31, 2017

 

 

 —

 

 

 —

Common stock, $0.01 par value: 250,000,000 shares authorized; 38,689,305 issued and 35,493,406 outstanding at September 30, 2018, and 38,626,378 shares issued and 35,586,916 outstanding at December 31, 2017

 

 

387

 

 

386

Treasury stock, 3,195,899 shares at September 30, 2018, and 3,039,462 shares at December 31, 2017, at cost

 

 

(171,075)

 

 

(141,582)

Additional paid-in capital

 

 

853,410

 

 

830,600

Retained earnings

 

 

403,313

 

 

307,115

Total equity

 

 

1,086,035

 

 

996,519

Total liabilities and equity

 

$

2,456,826

 

$

1,749,549

See notes to our unaudited condensed consolidated financial statements.

4


 

Table of Contents

TOPBUILD CORP.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

(In thousands except share and per common share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30, 

 

Nine Months Ended September 30, 

 

 

2018

 

2017

 

2018

 

2017

Net sales

    

$

647,289

    

$

489,044

    

$

1,744,702

    

$

1,404,865

Cost of sales

 

 

485,424

 

 

368,205

 

 

1,326,777

 

 

1,065,789

Gross profit

 

 

161,865

 

 

120,839

 

 

417,925

 

 

339,076

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

95,648

 

 

71,277

 

 

274,134

 

 

222,181

Significant legal settlement

 

 

 —

 

 

 —

 

 

 —

 

 

30,000

Operating profit

 

 

66,217

 

 

49,562

 

 

143,791

 

 

86,895

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income (expense), net:

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

(9,381)

 

 

(2,479)

 

 

(19,026)

 

 

(5,767)

Loss on extinguishment of debt

 

 

 —

 

 

 —

 

 

 —

 

 

(1,086)

Other, net

 

 

178

 

 

27

 

 

292

 

 

239

Other expense, net

 

 

(9,203)

 

 

(2,452)

 

 

(18,734)

 

 

(6,614)

Income before income taxes

 

 

57,014

 

 

47,110

 

 

125,057

 

 

80,281

 

 

 

 

 

 

 

 

 

 

 

 

 

Income tax expense

 

 

(14,356)

 

 

(15,717)

 

 

(28,859)

 

 

(27,139)

Net income

 

$

42,658

 

$

31,393

 

$

96,198

 

$

53,142

 

 

 

 

 

 

 

 

 

 

 

 

 

Income per common share:

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

1.22

 

$

0.90

 

$

2.74

 

$

1.47

Diluted

 

$

1.19

 

$

0.88

 

$

2.69

 

$

1.44

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

35,091,388

 

 

35,022,113

 

 

35,084,694

 

 

36,203,497

Diluted

 

 

35,789,383

 

 

35,737,629

 

 

35,815,357

 

 

36,842,144

See notes to our unaudited condensed consolidated financial statements.

5


 

Table of Contents

TOPBUILD CORP.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(In thousands)

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 

 

 

2018

 

2017

Cash Flows Provided by (Used in) Operating Activities:

 

 

    

    

 

    

Net income

 

$

96,198

 

$

53,142

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

 

 

 

 

 

 

Depreciation and amortization

 

 

27,133

 

 

11,753

Share-based compensation

 

 

8,244

 

 

7,473

Loss on extinguishment of debt

 

 

 —

 

 

1,086

Loss on sale or abandonment of property and equipment

 

 

764

 

 

614

Amortization of debt issuance costs

 

 

812

 

 

293

Change in fair value of contingent consideration

 

 

(373)

 

 

98

Provision for bad debt expense

 

 

3,003

 

 

2,498

Loss from inventory obsolescence

 

 

1,375

 

 

1,390

Deferred income taxes, net

 

 

(708)

 

 

266

Change in certain assets and liabilities

 

 

 

 

 

 

Receivables, net

 

 

(46,993)

 

 

(43,931)

Inventories, net

 

 

(15,333)

 

 

249

Prepaid expenses and other current assets

 

 

(5,560)

 

 

8,362

Accounts payable

 

 

17,768

 

 

(2,280)

Accrued liabilities

 

 

10,304

 

 

13,633

Other, net

 

 

(601)

 

 

(28)

Net cash provided by operating activities

 

 

96,033

 

 

54,618

 

 

 

 

 

 

 

Cash Flows Provided by (Used in) Investing Activities:

 

 

 

 

 

 

Purchases of property and equipment

 

 

(42,379)

 

 

(13,088)

Acquisition of businesses, net of cash acquired of $15,756 in 2018

 

 

(500,666)

 

 

(84,040)

Proceeds from sale of property and equipment

 

 

502

 

 

453

Other, net

 

 

31

 

 

178

Net cash used in investing activities

 

 

(542,512)

 

 

(96,497)

 

 

 

 

 

 

 

Cash Flows Provided by (Used in) Financing Activities:

 

 

 

 

 

 

Proceeds from issuance of Senior Notes

 

 

400,000

 

 

 —

Proceeds from issuance of term loan

 

 

100,000

 

 

250,000

Repayment of term loan

 

 

(11,875)

 

 

(183,125)

Proceeds from equipment notes

 

 

20,104

 

 

 —

Repayment of equipment notes

 

 

(1,222)

 

 

 —

Proceeds from revolving credit facility

 

 

90,000

 

 

170,000

Repayment of revolving credit facility

 

 

(90,000)

 

 

(165,000)

Payment of debt issuance costs

 

 

(7,819)

 

 

(2,150)

Taxes withheld and paid on employees' equity awards

 

 

(5,433)

 

 

(4,475)

Repurchase of shares of common stock

 

 

(9,493)

 

 

(139,286)

Payment of contingent consideration

 

 

(841)

 

 

 —

Net cash provided by (used in) financing activities

 

 

483,421

 

 

(74,036)

 

 

 

 

 

 

 

Cash and Cash Equivalents

 

 

 

 

 

 

Increase (decrease) for the period

 

 

36,942

 

 

(115,915)

Beginning of year

 

 

56,521

 

 

134,375

End of period

 

$

93,463

 

$

18,460

 

 

 

 

 

 

 

Supplemental disclosure of noncash investing activities:

 

 

 

 

 

 

Accruals for property and equipment

 

$

546

 

$

154

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, 2016

 

$

385

 

$

(22,296)

 

$

845,476

 

$

148,982

 

$

972,547

Net income

 

 

 —

 

 

 —

 

 

 —

 

 

53,142

 

 

53,142

Share-based compensation

 

 

 —

 

 

 —

 

 

7,473

 

 

 —

 

 

7,473

Issuance of 158,900 restricted share awards under long-term equity incentive plan

 

 

 1

 

 

 —

 

 

(1)

 

 

 —

 

 

 —

Repurchase of 858,393 shares of common stock pursuant to 2016 and 2017 Repurchase Programs

 

 

 —

 

 

(39,286)

 

 

 —

 

 

 —

 

 

(39,286)

Repurchase of 1,507,443 shares of common stock pursuant to the 2017 ASR Agreement

 

 

 —

 

 

(80,000)

 

 

(20,000)

 

 

 —

 

 

(100,000)

113,087 shares of common stock withheld to pay taxes on employees' equity awards

 

 

 —

 

 

 —

 

 

(4,475)

 

 

 —

 

 

(4,475)

Balance at September 30, 2017

 

$

386

 

$

(141,582)

 

$

828,473

 

$

202,124

 

$

889,401

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2017

 

$

386

 

$

(141,582)

 

$

830,600

 

$

307,115

 

$

996,519

Net income

 

 

 —

 

 

 —

 

 

 —

 

 

96,198

 

 

96,198

Share-based compensation

 

 

 —

 

 

 —

 

 

8,244

 

 

 —

 

 

8,244

Issuance of 90,760 restricted share awards under long-term equity incentive plan

 

 

 1

 

 

 —

 

 

(1)

 

 

 —

 

 

 —

Repurchase of 142,780 shares of common stock pursuant to 2017 Repurchase Program

 

 

 —

 

 

(9,493)

 

 

 —

 

 

 —

 

 

(9,493)

Repurchase of 13,657 shares of common stock pursuant to the settlement of the 2017 ASR Agreement

 

 

 —

 

 

(20,000)

 

 

20,000

 

 

 —

 

 

 —

97,429 shares of common stock withheld to pay taxes on employees' equity awards

 

 

 —

 

 

 —

 

 

(5,433)

 

 

 —

 

 

(5,433)

Balance at September 30, 2018

 

$

387

 

$

(171,075)

 

$

853,410

 

$

403,313

 

$

1,086,035

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

 

TopBuild is a Delaware corporation incorporated on June 30, 2015, and is listed on the NYSE under the ticker symbol “BLD.”  We report our business in two segments: Installation and Distribution.  Our Installation segment primarily installs insulation and other building products.  Our Distribution segment primarily sells and distributes insulation and other building products.  Our segments are based on our operating units, for which financial information is regularly evaluated by our 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, 2018, our results of operations for the three and nine months ended September 30, 2018 and 2017, and cash flows for the nine months ended September 30, 2018 and 2017.  The Condensed Consolidated Balance Sheet at December 31, 2017, was derived from our audited financial statements, but does not include all disclosures required by GAAP.

 

These condensed consolidated financial statements and related notes should be read in conjunction with the audited Consolidated Financial Statements included in the Company’s Annual Report for the year ended December 31, 2017.

 

2. ACCOUNTING POLICIES

 

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

 

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.

 

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 net 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. 

 

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Table of Contents

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

 

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 May 2014 the FASB issued a new standard for revenue recognition, ASC 606.  Subsequent to issuing ASC 606, the FASB 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.  Effective January 1, 2018, we adopted ASC 606 using the modified retrospective approach.  Adoption of this standard did not have a material impact on our financial position or results of operations for any periods presented. As such, a cumulative adjustment was not recorded to our beginning retained earnings balance.

 

Revenue Recognition

 

Revenue is disaggregated between our Installation and Distribution segments. A reconciliation of disaggregated revenue by segment is included in Note 6 – Segment Information. 

 

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

 

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

 

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

 

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

 

We record a contract asset when we have satisfied our performance obligation prior to billing and a contract liability generally when a customer payment is received prior to the satisfaction of our performance obligation. The difference between the beginning and ending balances of our contract assets and liabilities primarily results from the timing of our performance and the customer’s payment.

 

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

 

 

 

 

 

 

 

 

 

 

Included in Line Item on

 

 

As of

 

Condensed Consolidated

 

September 30, 

 

December 31, 

 

Balance Sheets

 

2018

 

2017

Contract Assets:

 

 

 

 

 

 

 

Receivables, unbilled

Receivables, net

 

$

58,755

 

$

37,142

 

 

 

 

 

 

 

 

Contract Liabilities:

 

 

 

 

 

 

 

Deferred revenue

Accrued liabilities

 

$

19,782

 

$

9,275

 

The increase in our contract asset and contract liability balances from December 31, 2017 is primarily a result of the USI acquisition.  Our contract liabilities are normally recognized to net sales in the immediately subsequent reporting period due to the generally short-term nature of our contracts with customers.

 

In August 2016 the FASB issued ASU 2016-15, “Classification of Certain Cash Receipts and Cash Payments”.  This standard addresses the diversity in practice of how certain cash receipts and payments are classified in the statement of cash flows, including contingent consideration payments made after a business combination which is relevant for us.  This update was effective for us beginning January 1, 2018, and we adopted the standard using a retrospective approach.  There was no impact to any prior periods.

 

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 was effective for us beginning January 1, 2018, and we adopted the standard using a prospective approach.  The adoption of this standard did not have a material impact on our financial position or results of operations.

 

Recently Issued Accounting Pronouncements Not Yet Adopted:

 

In February 2016 the FASB issued ASU 2016-02, “Leases.”  This standard requires a lessee to recognize most leases on its 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 with early adoption permitted.  We plan to adopt this guidance on January 1, 2019.  We have identified substantially all of our contracts that fall within the scope of this guidance and are finalizing our evaluation of the impact of adoption on our financial position and results of operations.

 

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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 of adoption of this standard on our financial position and 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 goodwill 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 of adoption of this standard on our financial position and results of operations.

 

In August 2018 the FASB issued ASU 2018-13, “Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement.”  The new standard modifies the disclosure requirements on fair value measurements in Topic 820, Fair Value Measurement, including adjustments to Level 3 fair value measurement disclosures as well as the removal of disclosures around Level 1 and Level 2 transfers.  This update 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 of adoption of this standard on our financial position and results of operations.

 

3. GOODWILL AND OTHER INTANGIBLES

 

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

 

The estimated fair values of the two reporting units substantially exceeded their respective carrying values. 

 

Changes in the carrying amount of goodwill for the nine months ended September 30, 2018,  by segment, were as follows, in thousands:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Gross Goodwill

    

 

    

Gross Goodwill

    

   Accumulated   

    

Net Goodwill

 

 

at

 

 

 

at

 

Impairment

 

at

 

 

December 31, 2017

 

Additions

 

September 30, 2018

 

Losses

 

September 30, 2018

Goodwill, by segment:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Installation

 

$

1,422,920

 

$

255,465

 

$

1,678,385

 

$

(762,021)

 

$

916,364

Distribution

 

 

416,287

 

 

30,096

 

 

446,383

 

 

 —

 

 

446,383

Total goodwill

 

$

1,839,207

 

$

285,561

 

$

2,124,768

 

$

(762,021)

 

$

1,362,747

 

The following table sets forth our other intangible assets, in thousands:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of

 

    

    

    

    

    

    

    

September 30, 

    

December 31, 

 

 

 

 

 

 

 

    

2018

    

2017

Gross definite-lived intangible assets

 

 

 

 

 

 

 

$

219,382

 

$

54,872

Accumulated amortization

 

 

 

 

 

 

 

 

(14,279)

 

 

(21,629)

Net definite-lived intangible assets

 

 

 

 

 

 

 

$

205,103

 

$

33,243

 

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

 

The following table sets forth a breakout of our intangible assets as of September 30, 2018, in thousands:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

    

    

    

Gross Definitelived Intangible Assets

    

Accumulated Amortization

    

Net Definitelived Intangible Assets

Trademarks and trade names

 

 

 

 

$

13,435

 

$

(979)

 

$

12,456

Customer relationships

 

 

 

 

 

198,428

 

 

(11,401)

 

 

187,027

Non-competition agreements

 

 

 

 

 

7,519

 

 

(1,899)

 

 

5,620

Total

 

 

 

 

$

219,382

 

$

(14,279)

 

$

205,103

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30, 

 

Nine Months Ended September 30, 

 

    

2018

    

2017

    

2018

    

2017

Amortization expense

 

$

5,242

 

$

1,516

 

$

10,536

 

$

1,955

 

 

4. LONG-TERM DEBT

 

On May 5, 2017, we and the Guarantors entered into a credit agreement with the Lenders.  All obligations under the credit agreement are guaranteed by the Guarantors, and all obligations under the credit agreement, including the guarantees of those obligations, are secured by substantially all of the assets of us and the Guarantors.

 

On March 28, 2018, we executed an amendment to our credit agreement, which primarily facilitated the acquisition of USI by (i) extending until August 29, 2018, the period during which the Company could access the $100.0 million delayed draw term loan feature and (ii) providing that the Company could issue up to $500.0 million of Senior Notes in connection with its acquisition of USI.  On May 1, 2018, we closed on our acquisition of USI.  The acquisition was funded through net proceeds from the issuance on April 25, 2018, of $400.0 million of 5.625% Senior Notes due in 2026 together with the net proceeds from the $100.0 million delayed draw term loan commitment accessed on May 1, 2018, under our Amended Credit Agreement.  These funds were also used for the payment of related fees and expenses, as well as for general corporate purposes.

 

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

 

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

 

·

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

 

·

A LIBOR rate determined by reference to the costs of funds for deposits in U.S. dollars for the interest period relevant to such borrowings.

 

The applicable margin rate is determined based on our Secured Leverage Ratio.  In the case of base rate borrowings, the applicable margin rate ranges from 0.00 percent to 1.50 percent and in the case of LIBOR rate borrowings, the applicable margin ranges from 1.00 percent to 2.50 percent.

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

 

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

 

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

 

 

 

 

 

Senior secured term loan facility (original borrowing) (a)

$

250,000

 

Additional delayed draw term loan (b)

$

100,000

 

 

 

 

 

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

$

200,000

 

 

 

 

 

Revolving Facility

$

250,000

 

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

$

100,000

 

Sublimit for swingline loans under Revolving Facility (d)

$

20,000

 

 

 

 

 

Interest rate as of September 30, 2018

 

3.33

%

Scheduled maturity date

 

5/05/2022

 


(a)

The Amended Credit Agreement provides for a term loan limit of $350.0 million; $250.0 million was drawn on May 5, 2017.

(b)

On May 1, 2018, the net proceeds from the $100.0 million delayed draw term loan were used to partially fund the USI acquisition.

(c)

Additional borrowing capacity is available under the incremental facility, subject to certain terms and conditions (including existing or new lenders providing commitments in respect of such additional borrowing capacity).

(d)

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

 

Borrowings under the Amended Credit Agreement are prepayable at the Company’s option without premium or penalty.  The Company is required to make prepayments with the net cash proceeds of certain asset sales and certain extraordinary receipts.

 

Beginning in the first quarter of 2018, the Company executed various equipment notes for the purpose of financing the purchase of vehicles and equipment.  The following table summarizes equipment notes entered into during the respective periods, in thousands:

 

 

 

 

 

 

 

 

 

    

Three Months Ended September 30, 2018

    

Nine Months Ended September 30, 2018

Equipment notes

 

$

5,038

 

$

20,104

 

The following table sets forth our remaining principal payments for our outstanding Senior Notes, term loan and equipment notes as of September 30, 2018, in thousands:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Payments Due by Period

 

2018

 

2019

 

2020

 

2021

 

2022

 

Thereafter

 

Total

Senior Notes

$

 —

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

$

400,000

 

$

400,000

Term loan

 

4,375

    

 

21,875

    

 

26,250

    

 

30,625

    

 

248,750

    

 

 —

    

 

331,875

Equipment notes

 

928

 

 

3,788

 

 

3,945

 

 

4,110

 

 

4,281

 

 

1,830

 

 

18,882

Total

$

5,303

 

$

25,663

 

$

30,195

 

$

34,735

 

$

253,031

 

$

401,830

 

$

750,757

 

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

 

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

 

 

 

 

 

 

 

 

 

 

As of

 

    

September 30, 

    

December 31, 

Principal debt balances:

 

2018

    

2017

Current portion of long-term debt - term loan

 

$

19,688

 

$

12,500

Current portion of long-term debt - equipment notes

 

 

3,754

 

 

 —

Long-term portion of long-term debt - Senior Notes

 

 

400,000

 

 

 —

Long-term portion of long-term debt - term loan

 

 

312,187

 

 

231,250

Long-term portion of long-term debt - equipment notes

 

 

15,128

 

 

 —

Unamortized debt issuance costs

 

 

(8,870)

 

 

(1,863)

Total net debt

 

$

741,887

 

$

241,887

 

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

 

 

 

 

 

 

 

 

 

 

As of

 

 

September 30, 

    

December 31, 

 

    

2018

    

2017

Revolving Facility

 

$

250,000

 

$

250,000

Less: standby letters of credit

 

 

(59,288)

 

 

(47,055)

Capacity under Revolving Facility

 

$

190,712

 

$

202,945

 

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

 

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

 

The Amended Credit Agreement requires us to maintain a Net Leverage Ratio and minimum FCCR throughout the term of the agreement.  The following table sets forth the maximum Net Leverage Ratios and minimum FCCR:

 

 

 

 

 

 

Quarter Ending

    

Maximum
Net Leverage Ratio

 

Minimum
FCCR

June 30, 2018 through September 30, 2018

 

3.75:1.00

 

1.25:1.00

December 31, 2018 through June 30, 2019

 

3.50:1.00

 

1.25:1.00

September 30, 2019 and each fiscal quarter end thereafter