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, 2019
☐ |
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 |
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 ☐ Non-accelerated filer ☐ Smaller reporting company ☐ Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ☒ No
Securities registered pursuant to Section 12(b) of the Act:
Title of each class |
Trading Symbol(s) |
Name of each exchange on which registered |
Common stock, par value $0.01 per share |
BLD |
NYSE |
The registrant had outstanding 34,424,249 shares of Common Stock, par value $0.01 per share as of April 30, 2019.
TABLE OF CONTENTS
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Management's Discussion and Analysis of Financial Condition and Results of Operations |
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2
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 |
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 |
2018 ASR Agreement |
|
$50 million accelerated share repurchase agreement with JPMorgan Chase Bank, N.A. |
2019 Repurchase Program |
|
$200 million share repurchase program authorized by the Board on February 22, 2019 |
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 |
|
Board of Directors of TopBuild |
BofA |
|
Bank of America, N.A. |
Current Report |
|
Current report filed with the SEC on Form 8-K pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
EBITDA |
|
Earnings before income taxes, depreciation, and amortization |
EcoFoam |
|
Bella Insulutions Inc., DBA EcoFoam/Insulutions |
Exchange Act |
|
The Securities Exchange Act of 1934, as amended |
FASB |
|
Financial Accounting Standards Board |
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 |
Masco |
|
Masco Corporation or Former Parent |
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 |
Quarterly Report |
|
Quarterly report filed with the SEC on Form 10-Q pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
Revolving Facility |
|
Senior secured revolving credit facilities available under the Amended Credit Agreement, of $250 million 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 $400.0 million aggregate principal amount of 5.625% senior unsecured notes due May 1, 2026 |
Separation |
|
Distribution of 100 percent of the outstanding capital stock of TopBuild to holders of Masco common stock |
TopBuild |
|
TopBuild Corp. and its wholly-owned consolidated domestic subsidiaries. Also, the "Company," |
USI |
|
United Subcontractors, Inc. |
3
PART I – FINANCIAL INFORMATION
TOPBUILD CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
(In thousands except share data)
|
|
As of |
||||
|
|
March 31, |
|
December 31, |
||
|
|
2019 |
|
2018 |
||
ASSETS |
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
98,278 |
|
$ |
100,929 |
Receivables, net of an allowance for doubtful accounts of $4,753 and $3,676 at March 31, 2019, and December 31, 2018, respectively |
|
|
428,713 |
|
|
407,106 |
Inventories, net |
|
|
160,689 |
|
|
168,977 |
Prepaid expenses and other current assets |
|
|
16,494 |
|
|
27,685 |
Total current assets |
|
|
704,174 |
|
|
704,697 |
|
|
|
|
|
|
|
Right of use assets |
|
|
94,222 |
|
|
— |
Property and equipment, net |
|
|
169,891 |
|
|
167,961 |
Goodwill |
|
|
1,363,292 |
|
|
1,364,016 |
Other intangible assets, net |
|
|
194,214 |
|
|
199,387 |
Deferred tax assets, net |
|
|
11,875 |
|
|
13,176 |
Other assets |
|
|
5,159 |
|
|
5,294 |
Total assets |
|
$ |
2,542,827 |
|
$ |
2,454,531 |
|
|
|
|
|
|
|
LIABILITIES AND EQUITY |
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
Accounts payable |
|
$ |
281,346 |
|
$ |
313,172 |
Current portion of long-term debt |
|
|
29,091 |
|
|
26,852 |
Accrued liabilities |
|
|
103,412 |
|
|
104,236 |
Short-term lease liabilities |
|
|
37,501 |
|
|
— |
Total current liabilities |
|
|
451,350 |
|
|
444,260 |
|
|
|
|
|
|
|
Long-term debt |
|
|
709,172 |
|
|
716,622 |
Deferred tax liabilities, net |
|
|
174,227 |
|
|
176,212 |
Long-term portion of insurance reserves |
|
|
43,935 |
|
|
43,434 |
Long-term lease liabilities |
|
|
59,750 |
|
|
— |
Other liabilities |
|
|
1,540 |
|
|
1,905 |
Total liabilities |
|
|
1,439,974 |
|
|
1,382,433 |
|
|
|
|
|
|
|
Commitments and contingencies |
|
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Equity: |
|
|
|
|
|
|
Preferred stock, $0.01 par value: 10,000,000 shares authorized; 0 shares issued and outstanding at March 31, 2019 and December 31, 2018 |
|
|
— |
|
|
— |
Common stock, $0.01 par value: 250,000,000 shares authorized; 38,766,157 issued and 34,414,049 outstanding at March 31, 2019, and 38,676,586 shares issued and 34,573,596 outstanding at December 31, 2018 |
|
|
388 |
|
|
387 |
Treasury stock, 4,352,108 shares at March 31, 2019, and 4,102,990 shares at December 31, 2018, at cost |
|
|
(231,229) |
|
|
(216,607) |
Additional paid-in capital |
|
|
853,844 |
|
|
846,451 |
Retained earnings |
|
|
479,850 |
|
|
441,867 |
Total equity |
|
|
1,102,853 |
|
|
1,072,098 |
Total liabilities and equity |
|
$ |
2,542,827 |
|
$ |
2,454,531 |
See notes to our unaudited condensed consolidated financial statements.
4
TOPBUILD CORP.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(In thousands except share and per common share data)
|
|
Three Months Ended March 31, |
||||
|
|
2019 |
|
2018 |
||
Net sales |
|
$ |
619,330 |
|
$ |
491,444 |
Cost of sales |
|
|
463,635 |
|
|
380,426 |
Gross profit |
|
|
155,695 |
|
|
111,018 |
|
|
|
|
|
|
|
Selling, general, and administrative expense |
|
|
99,077 |
|
|
77,125 |
Operating profit |
|
|
56,618 |
|
|
33,893 |
|
|
|
|
|
|
|
Other income (expense), net: |
|
|
|
|
|
|
Interest expense |
|
|
(9,602) |
|
|
(2,324) |
Other, net |
|
|
333 |
|
|
34 |
Other expense, net |
|
|
(9,269) |
|
|
(2,290) |
Income before income taxes |
|
|
47,349 |
|
|
31,603 |
|
|
|
|
|
|
|
Income tax expense |
|
|
(9,366) |
|
|
(5,215) |
Net income |
|
$ |
37,983 |
|
$ |
26,388 |
|
|
|
|
|
|
|
Net income per common share: |
|
|
|
|
|
|
Basic |
|
$ |
1.11 |
|
$ |
0.75 |
Diluted |
|
$ |
1.09 |
|
$ |
0.74 |
|
|
|
|
|
|
|
Weighted average shares outstanding: |
|
|
|
|
|
|
Basic |
|
|
34,169,315 |
|
|
35,059,920 |
Diluted |
|
|
34,703,289 |
|
|
35,819,242 |
See notes to our unaudited condensed consolidated financial statements.
5
TOPBUILD CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In thousands)
|
|
Three Months Ended March 31, |
||||
|
|
2019 |
|
2018 |
||
Cash Flows Provided by (Used in) Operating Activities: |
|
|
|
|
|
|
Net income |
|
$ |
37,983 |
|
$ |
26,388 |
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
Depreciation and amortization |
|
|
12,475 |
|
|
5,442 |
Share-based compensation |
|
|
2,972 |
|
|
2,402 |
Loss on sale or abandonment of property and equipment |
|
|
487 |
|
|
200 |
Amortization of debt issuance costs |
|
|
390 |
|
|
107 |
Change in fair value of contingent consideration |
|
|
44 |
|
|
70 |
Provision for bad debt expense |
|
|
1,676 |
|
|
760 |
Loss from inventory obsolescence |
|
|
1,109 |
|
|
468 |
Deferred income taxes, net |
|
|
95 |
|
|
— |
Change in certain assets and liabilities |
|
|
|
|
|
|
Receivables, net |
|
|
(23,341) |
|
|
(1,092) |
Inventories, net |
|
|
7,125 |
|
|
(5,143) |
Prepaid expenses and other current assets |
|
|
11,192 |
|
|
3,912 |
Accounts payable |
|
|
(31,407) |
|
|
(11,429) |
Accrued liabilities |
|
|
2,100 |
|
|
(3,923) |
Other, net |
|
|
622 |
|
|
(597) |
Net cash provided by operating activities |
|
|
23,522 |
|
|
17,565 |
|
|
|
|
|
|
|
Cash Flows Provided by (Used in) Investing Activities: |
|
|
|
|
|
|
Purchases of property and equipment |
|
|
(10,213) |
|
|
(11,266) |
Acquisition of businesses, net of cash acquired of $239 in 2018 |
|
|
— |
|
|
(26,956) |
Proceeds from sale of property and equipment |
|
|
75 |
|
|
70 |
Other, net |
|
|
16 |
|
|
13 |
Net cash used in investing activities |
|
|
(10,122) |
|
|
(38,139) |
|
|
|
|
|
|
|
Cash Flows Provided by (Used in) Financing Activities: |
|
|
|
|
|
|
Proceeds from issuance of long-term debt |
|
|
— |
|
|
10,066 |
Repayment of long-term debt |
|
|
(5,601) |
|
|
(3,125) |
Payment of debt issuance costs |
|
|
— |
|
|
(1,040) |
Proceeds from revolving credit facility |
|
|
— |
|
|
55,000 |
Repayment of revolving credit facility |
|
|
— |
|
|
(55,000) |
Taxes withheld and paid on employees' equity awards |
|
|
(5,578) |
|
|
(4,514) |
Repurchase of shares of common stock |
|
|
(4,622) |
|
|
— |
Payment of contingent consideration |
|
|
(250) |
|
|
— |
Net cash (used in) provided by financing activities |
|
|
(16,051) |
|
|
1,387 |
|
|
|
|
|
|
|
Cash and Cash Equivalents |
|
|
|
|
|
|
Decrease for the period |
|
|
(2,651) |
|
|
(19,187) |
Beginning of period |
|
|
100,929 |
|
|
56,521 |
End of period |
|
$ |
98,278 |
|
$ |
37,334 |
|
|
|
|
|
|
|
Supplemental disclosure of noncash activities: |
|
|
|
|
|
|
Leased assets obtained in exchange for new operating lease liabilities |
|
$ |
105,249 |
|
$ |
— |
Accruals for property and equipment |
|
|
441 |
|
|
1,116 |
See notes to our unaudited condensed consolidated financial statements.
6
TOPBUILD CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (Unaudited)
(In thousands except share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common |
|
Treasury |
|
Additional |
|
|
|
|
|
||||
|
|
Stock |
|
Stock |
|
Paid-in |
|
Retained |
|
|
|
||||
|
|
($0.01 par value) |
|
at cost |
|
Capital |
|
Earnings |
|
Equity |
|||||
Balance at December 31, 2017 |
|
$ |
386 |
|
$ |
(141,582) |
|
$ |
830,600 |
|
$ |
307,115 |
|
$ |
996,519 |
Net income |
|
|
— |
|
|
— |
|
|
— |
|
|
26,388 |
|
|
26,388 |
Share-based compensation |
|
|
— |
|
|
— |
|
|
2,402 |
|
|
— |
|
|
2,402 |
Issuance of 79,010 restricted share awards under long-term equity incentive plan |
|
|
1 |
|
|
— |
|
|
(1) |
|
|
— |
|
|
— |
Repurchase of 13,657 shares of common stock pursuant to the settlement of the 2017 ASR Agreement |
|
|
— |
|
|
(20,000) |
|
|
20,000 |
|
|
— |
|
|
— |
83,754 shares of common stock withheld to pay taxes on employees' equity awards |
|
|
— |
|
|
— |
|
|
(4,514) |
|
|
— |
|
|
(4,514) |
Balance at March 31, 2018 |
|
$ |
387 |
|
$ |
(161,582) |
|
$ |
848,487 |
|
$ |
333,503 |
|
$ |
1,020,795 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2018 |
|
$ |
387 |
|
$ |
(216,607) |
|
$ |
846,451 |
|
$ |
441,867 |
|
$ |
1,072,098 |
Net income |
|
|
— |
|
|
— |
|
|
— |
|
|
37,983 |
|
|
37,983 |
Share-based compensation |
|
|
— |
|
|
— |
|
|
2,972 |
|
|
— |
|
|
2,972 |
Issuance of 112,270 restricted share awards under long-term equity incentive plan |
|
|
1 |
|
|
— |
|
|
(1) |
|
|
— |
|
|
— |
Repurchase of 176,327 shares of common stock pursuant to the settlement of the 2018 ASR Agreement |
|
|
— |
|
|
(10,000) |
|
|
10,000 |
|
|
— |
|
|
— |
Repurchase of 72,791 shares of common stock pursuant to the 2019 Repurchase Program |
|
|
— |
|
|
(4,622) |
|
|
— |
|
|
— |
|
|
(4,622) |
105,615 shares of common stock withheld to pay taxes on employees' equity awards |
|
|
— |
|
|
— |
|
|
(5,578) |
|
|
— |
|
|
(5,578) |
Balance at March 31, 2019 |
|
$ |
388 |
|
$ |
(231,229) |
|
$ |
853,844 |
|
$ |
479,850 |
|
$ |
1,102,853 |
See notes to our unaudited condensed consolidated financial statements.
7
TOPBUILD CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
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 chief operating decision maker.
In our opinion, the accompanying unaudited condensed consolidated financial statements contain all adjustments, of a normal recurring nature, necessary to state fairly our financial position as of March 31, 2019, our results of operations for the three months ended March 31, 2019 and 2018, and cash flows for the three months ended March 31, 2019 and 2018. The condensed consolidated balance sheet at December 31, 2018, 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, 2018.
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 liabilities assumed. These estimates include, but are not limited to, discount rates, projected future revenue growth, cost synergies and expected cash flows, customer attrition rates, useful lives and other prospective information. Additionally, we recognize customer relationships, trademarks and trade names, and non-competition agreements as identifiable intangible assets, which 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 to assets acquired and liabilities assumed with a corresponding offset to goodwill are recorded in the period in which they occur, which may include up to one year from the acquisition date. Contingent consideration is recorded at fair value at the acquisition date.
Share-based Compensation. Our share-based compensation program currently consists of RSAs and stock 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.
8
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 |
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.
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.
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.
9
TOPBUILD CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
The following table represents our contract assets and contract liabilities with customers, in thousands:
|
Included in Line Item on |
|
As of |
||||
|
Condensed Consolidated |
|
March 31, |
|
December 31, |
||
|
Balance Sheets |
|
2019 |
|
2018 |
||
Contract Assets: |
|
|
|
|
|
|
|
Receivables, unbilled |
Receivables, net |
|
$ |
58,328 |
|
$ |
61,339 |
|
|
|
|
|
|
|
|
Contract Liabilities: |
|
|
|
|
|
|
|
Deferred revenue |
Accrued liabilities |
|
$ |
17,081 |
|
$ |
19,963 |
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.
Recently Adopted Accounting Pronouncements:
Leases
In February 2016 the FASB issued ASU 2016-02, “Leases.” This standard requires a lessee to recognize certain leases on its balance sheet. Effective January 1, 2019, we adopted ASU 2016-02 using the modified retrospective transition method with the optional transition relief provided in targeted improvements ASU 2018-11, which allows the new standard to be applied in financial year 2019. Adoption of the new standard resulted in the recognition of right of use (ROU) assets and lease liabilities of $99.1 million and $101.6 million, respectively, as of January 1, 2019 on our unaudited condensed consolidated balance sheet. There was no cumulative adjustment required to be recorded to our beginning retained earnings balance. Adoption of this standard did not materially impact our results of operations or cash flows for any periods presented.
We elected certain practical expedients allowed under ASC 842 – Leases. As such, we did not reassess whether any existing contracts are or contain leases, the lease classification of existing leases, or the initial direct costs for any existing leases. In addition, we elected by class of underlying asset to not separate fixed non-lease components from the lease component. Further, for all leases with an initial term of 12 months or less, we elected not to record any right of use asset or lease liability. We declined the option to use hindsight in determining lease term, assessing likelihood that a lease purchase option will be exercised or in assessing impairment of right of use asset for all classes of assets. To initially measure our lease liability, we used our incremental borrowing rate (IBR) at January 1, 2019 based on the remaining lease term for all existing leases. See Note 7 – Leases for additional information.
Recently Issued Accounting Pronouncements Not Yet Adopted:
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 do not anticipate that the adoption of this standard will have a material impact on our financial position and results of operations.
10
TOPBUILD CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
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 based on the most recent annual impairment test which occurred in the fourth quarter of 2018.
Changes in the carrying amount of goodwill for the three months ended March 31, 2019, by segment, were as follows, in thousands:
|
|
|
|
|
Additions |
|
|
|
|
|
|
|
|
|
|
|
|
Gross Goodwill |
|
(Measurement |
|
Gross Goodwill |
|
Accumulated |
|
Net Goodwill |
|||||
|
|
at |
|
Period |
|
at |
|
Impairment |
|
at |
|||||
|
|
December 31, 2018 |
|
Adjustments) |
|
March 31, 2019 |
|
Losses |
|
March 31, 2019 |
|||||
Goodwill, by segment: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Installation |
|
$ |
1,679,654 |
|
$ |
(646) |
|
$ |
1,679,008 |
|
$ |
(762,021) |
|
$ |
916,987 |
Distribution |
|
|
446,383 |
|
|
(78) |
|
|
446,305 |
|
|
— |
|
|
446,305 |
Total goodwill |
|
$ |
2,126,037 |
|
$ |
(724) |
|
$ |
2,125,313 |
|
$ |
(762,021) |
|
$ |
1,363,292 |
During the first quarter of 2019, we recorded measurement-period adjustments related to the acquisition of USI, which decreased goodwill by approximately $0.7 million, primarily to record state income tax carryforward items.
Other intangible assets, net includes customer relationships, non-compete agreements, and trademarks / tradenames. The following table sets forth our other intangible assets, in thousands:
|
|
As of |
||||
|
|
March 31, 2019 |
|
December 31, 2018 |
||
Gross definite-lived intangible assets |
|
$ |
218,882 |
|
$ |
218,882 |
Accumulated amortization |
|
|
(24,668) |
|
|
(19,495) |
Net definite-lived intangible assets |
|
|
194,214 |
|
|
199,387 |
Indefinite-lived intangible assets not subject to amortization |
|
|
— |
|
|
— |
Other intangible assets, net |
|
$ |
194,214 |
|
$ |
199,387 |
Amortization expense was $5.2 million and $1.3 million for the three months ended March 31, 2019 and 2018, respectively.
11
TOPBUILD CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
4. LONG-TERM DEBT
The following table reconciles the principal balances of our outstanding debt to our condensed consolidated balance sheets, in thousands:
|
|
As of |
||||
|
|
March 31, |
|
December 31, |
||
Principal debt balances: |
|
2019 |
|
2018 |
||
Current portion of long-term debt - term loan |
|
$ |
24,063 |
|
$ |
21,875 |
Current portion of long-term debt - equipment notes |
|
|
5,028 |
|
|
4,977 |
Long-term portion of long-term debt - Senior Notes |
|
|
400,000 |
|
|
400,000 |
Long-term portion of long-term debt - term loan |
|
|
299,062 |
|
|
305,625 |
Long-term portion of long-term debt - equipment notes |
|
|
18,201 |
|
|
19,478 |
Unamortized debt issuance costs |
|
|
(8,091) |
|
|
(8,481) |
Total debt, net of unamortized debt issuance costs |
|
|
738,263 |
|
|
743,474 |
Less: current portion of long-term debt |
|
|
29,091 |
|
|
26,852 |
Total long-term debt |
|
$ |
709,172 |
|
$ |
716,622 |
The following table sets forth our remaining principal payments for our outstanding debt balances as of March 31, 2019, in thousands:
|
|
Payments Due by Period |
|||||||||||||||||||
|
|
2019 |
|
2020 |
|
2021 |
|
2022 |
|
2023 |
|
Thereafter |
|
Total |
|||||||
Senior Notes |
|
$ |
— |
|
$ |
— |
|
$ |
— |
|
$ |
— |
|
$ |
— |
|
$ |
400,000 |
|
$ |
400,000 |
Term loan |
|
|
17,500 |
|
|
26,250 |
|
|
30,625 |
|
|
248,750 |
|
|
— |
|
|
— |
|
|
323,125 |
Equipment notes |
|
|
3,751 |
|
|
5,187 |
|
|
5,407 |
|
|
5,636 |
|
|
3,248 |
|
|
— |
|
|
23,229 |
Total |
|
$ |
21,251 |
|
$ |
31,437 |
|
$ |
36,032 |
|
$ |
254,386 |
|
$ |
3,248 |
|
$ |
400,000 |
|
$ |
746,354 |
Amended Credit Agreement and Senior Secured Term Loan Facility
On March 28, 2018, the Company executed an amendment to its 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, the Company closed on its acquisition of USI. The acquisition was funded through net proceeds from the issuance of our Senior Notes on April 25, 2018 together with the net proceeds from the $100.0 million delayed draw term loan commitment accessed on May 1, 2018 under the Company’s Amended Credit Agreement. These funds were also used for the payment of related fees and expenses, as well as for general corporate purposes.
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 March 31, 2019 |
|
3.74 |
% |
Scheduled maturity date |
|
5/05/2022 |
|
12
TOPBUILD CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(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. |
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. Borrowings under the Amended Credit Agreement are prepayable at the Company’s option without premium or penalty. The Company is required to make prepayments with the net cash proceeds of certain asset sales and certain extraordinary receipts.
Revolving Facility
The Company has outstanding standby letters of credit that secure our financial obligations related to our workers’ compensation, general insurance, and auto liability programs. These standby letters of credit, as well as any outstanding amount borrowed under our Revolving Facility, reduce the availability under the Revolving Facility. The following table summarizes our availability under the Revolving Facility, in thousands:
|
|
As of |
||||
|
|
March 31, |
|
December 31, |
||
|
|
2019 |
|
2018 |
||
Revolving Facility |
|
$ |
250,000 |
|
$ |
250,000 |
Less: standby letters of credit |
|
|
(67,278) |
|
|
(59,288) |
Availability under Revolving Facility |
|
$ |
182,722 |
|
$ |
190,712 |
We are required to pay commitment fees to the Lenders in respect of any unutilized commitments. The commitment fees range from 0.15 percent to 0.275 percent per annum, depending on our Secured Leverage Ratio. We must also pay customary fees on outstanding letters of credit.
Senior Notes
The Senior Notes are our senior unsecured obligations and bear interest at 5.625% per year, payable semiannually in arrears on May 1 and November 1 of each year, which began on November 1, 2018. The Senior Notes mature on May 1, 2026, unless redeemed early or repurchased. We have the right to redeem the Senior Notes under certain circumstances, and, if we undergo a change in control, we must make an offer to repurchase all of the Senior Notes then outstanding at a repurchase price equal to 101% of their aggregate principal amount, plus accrued and unpaid interest (if any) to, but not including, the repurchase date.
13
TOPBUILD CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Equipment Notes
During 2018, the Company executed $26.6 million of equipment notes for the purpose of financing the purchase of vehicles and equipment. The Company did not issue any equipment notes during the quarter ended March 31, 2019. The Company’s equipment notes each have a five year maturity through 2023 and bear interest at fixed rates between 3.9% and 4.4%.
Covenant Compliance
The indenture governing our Senior Notes contains customary restrictive covenants that, among other things, generally limit our ability to incur additional debt and issue preferred stock; to create liens; to pay dividends, acquire shares of capital stock, make payments on subordinated debt or make investments; to place limitations on distributions from certain subsidiaries; to issue guarantees; to issue or sell the capital stock of certain subsidiaries; to sell assets; to enter into transactions with affiliates; and to effect mergers. The Senior Notes indenture also contains customary events of default, subject in certain cases to grace and cure periods. Generally, if an event of default occurs and is continuing, the trustee under the indenture or the holders of at least 25% in aggregate principal amount of the Senior Notes then outstanding may declare the principal of, premium, if any, and accrued interest on all the Senior Notes immediately due and payable. The Senior Notes and related guarantees have not been registered under the Securities Act of 1933, and we are not required to register either the Senior Notes or the guarantees in the future.
The Amended Credit Agreement contains certain covenants that limit, among other things, the ability of the Company to incur additional indebtedness or liens; to make certain investments or loans; to make certain restricted payments; to enter into consolidations, mergers, sales of material assets, and other fundamental changes; to transact with affiliates; to enter into agreements restricting the ability of subsidiaries to incur liens or pay dividends; or to make certain accounting changes. The Amended Credit Agreement contains customary affirmative covenants and events of default.
The Amended Credit Agreement requires that we maintain a Net Leverage Ratio and minimum FCCR throughout the term of the agreement. The following table sets forth the maximum Net Leverage Ratios and minimum FCCR required:
Quarter Ending |
|
Maximum |
|
Minimum |
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 |
|
3.25:1.00 |
|
1.25:1.00 |
The following table outlines the key financial covenants effective for the period covered by this Quarterly Report:
|
|
As of March 31, 2019 |
Maximum Net Leverage Ratio |
|
3.50:1.00 |
Minimum FCCR |
|
1.25:1.00 |
Compliance as of period end |
|
In Compliance |
5. FAIR VALUE MEASUREMENTS
Fair Value on Recurring Basis
The carrying values of cash and cash equivalents, receivables, net, and accounts payable are considered to be representative of their respective fair values due to the short-term nature of these instruments. We measure our contingent consideration liabilities related to business combinations at fair value. For more information see Note 12 –Business Combinations.
14
TOPBUILD CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Fair Value on Non-Recurring Basis
Fair value measurements were applied to our long-term debt portfolio. We believe the carrying value of our term loan approximates the fair market value primarily due to the fact that the non-performance risk of servicing our debt obligations, as reflected in our business and credit risk profile, has not materially changed since we assumed our debt obligations under the Amended Credit Agreement. In addition, due to the floating-rate nature of our term loan, the market value is not subject to variability solely due to changes in the general level of interest rates as is the case with a fixed-rate debt obligation. Based on active market trades of our Senior Notes close to March 31, 2019 (Level 1 fair value measurement), we estimate that the fair value of the Senior Notes is approximately $399.0 million compared to a gross carrying value of $400.0 million at March 31, 2019.
During all periods presented, there were no transfers between fair value hierarchical levels.
6. SEGMENT INFORMATION
The following table sets forth our net sales and operating results by segment, in thousands:
|
|
Three Months Ended March 31, |
||||||||||
|
|
2019 |
|
2018 |
|
2019 |
|
2018 |
||||
|
|
Net Sales |
|
Operating Profit (b) |
||||||||
Our operations by segment were (a): |
|
|
|
|
|
|
|
|
|
|
|
|
Installation |
|
$ |
449,383 |
|
$ |
329,394 |
|
$ |
51,299 |
|
$ |
29,330 |
Distribution |
|
|
204,464 |
|
|
187,766 |
|
|
20,597 |
|
|
17,902 |
Intercompany eliminations |
|
|
(34,517) |
|
|
(25,716) |
|
|
(5,674) |
|
|
(4,446) |
Total |
|
$ |
619,330 |
|
$ |
491,444 |
|
|
66,222 |
|
|
42,786 |
General corporate expense, net (c) |
|
|
|
|
|
|
|
|
(9,604) |
|
|
(8,893) |
Operating profit, as reported |
|
|
|
|
|
|
|
|
56,618 |
|
|
33,893 |
Other expense, net |
|
|
|
|
|
|
|
|
(9,269) |
|
|
(2,290) |
Income before income taxes |
|
|
|
|
|
|
|
$ |
47,349 |
|
$ |
31,603 |
(a) |
All of our operations are located in the U.S. |
(b) |
Segment operating profit includes an allocation of general corporate expenses attributable to the operating segments which is based on direct benefit or usage (such as salaries of corporate employees who directly support the segment). |
(c) |
General corporate expense, net includes expenses not specifically attributable to our segments for functions such as corporate human resources, finance, and legal, including salaries, benefits, and other related costs. |
7. LEASES
We have operating leases for our installation branch locations, distribution centers, our Branch Support Center in Daytona, Florida, vehicles and certain equipment. As of March 31, 2019, we did not have any finance leases. At the inception of a contract, we determine whether the contract is, or contains, a lease based on the unique facts and circumstances present. Our facilities operating leases have lease and non-lease fixed cost components, which we account for as one single lease component in calculating the present value of minimum lease payments. Variable lease and non-lease cost components are expensed as incurred and are included in selling, general and administrative expenses on the accompanying unaudited condensed consolidated statement of operations.
Operating lease payments are recognized as an expense in the unaudited condensed consolidated statements of operations on a straight-line basis over the lease term, including future option periods the Company reasonably expects to exercise, whereby an equal amount of rent expense is attributed to each period during the term of the lease, regardless of when actual payments are made. This generally results in rent expense in excess of cash payments during the early years of a lease and rent expense less than cash payments in later years. The difference between rent expense recognized and actual rental payments is typically represented as the spread between the ROU asset and lease liability.
15
TOPBUILD CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
We recognize a ROU asset and a lease liability at the lease commencement date. Our leases may include options to extend or terminate the lease, which will be reflected in the calculation of the lease liability and corresponding ROU asset when it is reasonably certain that we will exercise that option. We do not recognize ROU assets and lease liabilities for short-term leases that have an initial lease term of 12 months or less. We recognize the lease payments associated with short-term leases as an expense on a straight-line basis over the lease term.
The lease liability is initially measured as the present value of the unpaid lease payments as of the lease commencement date. The lease liability is discounted based on our IBR at the time of initial adoption of ASU 2016-02 for all exiting leases and at the time of lease commencement for all future leases. For existing leases, our IBR included significant assumptions regarding our secured borrowing rates obtained on equipment note issuances and adjustments for differences in the remaining lease term, underlying assets and market conditions for companies with similar credit qualities as well as interest rate index fluctuations.
The ROU asset is initially measured at cost, which comprises the initial amount of the lease liability adjusted for lease payments made at or before the lease commencement date, plus any initial direct costs incurred less any lease incentives received. The ROU asset is subsequently measured throughout the lease term as the carrying amount of the lease liability, plus initial direct costs, plus (minus) any prepaid (accrued) lease payments, less the unamortized balance of lease incentives received. Lease expense for lease payments is recognized on a straight-line basis over the lease term. Certain vehicle lease agreements have residual value guarantees at the end of the lease which require us to return the asset with a specified percentage of the original or other calculated value.
The components of lease expense were as follows and are included in selling, general and administrative expenses on the accompanying unaudited condensed consolidated statement of operations:
Three Months Ended March 31, |
|
2019 |
|
Operating lease cost |
|
$ |
12,158 |
Short-term lease cost |
|
|
3,005 |
Variable lease cost |
|
|
1,377 |
Sublease income |
|
|
(154) |
Net lease cost |
|
|
16,386 |
Future minimum lease payments under non-cancellable operating leases as of March 31, 2019 were as follows:
Payments due by Period |
|
|
|
2019 |
|
$ |
32,328 |
2020 |
|
|
31,918 |
2021 |
|
|
20,058 |
2022 |
|
|
11,174 |
2023 |
|
|
5,164 |
2024 & Thereafter |
|
|
6,198 |
Total future minimum lease payments |
|
|
106,840 |
|
|
|
|
Less: imputed interest |
|
|
(9,589) |
|
|
|
|
Lease liability at March 31, 2019 |
|
|
97,251 |
As of March 31, 2019, the weighted average remaining lease term was 3.5 years and the related lease liability was calculated using a weighted average discount rate of 4.4%.
16
TOPBUILD CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
The amount below is included in the cash flows provided by (used in) operating activities section on the accompanying unaudited condensed consolidated statement of cash flows:
Three Months Ended March 31, |
|
2019 |
|
Cash paid for amounts included in the measurement of lease liabilities |
|
$ |
(11,561) |
8. INCOME TAXES
Our effective tax rates were 19.8 percent and 16.5 percent for the three months ended March 31, 2019 and 2018, respectively. The higher 2019 tax rate is due to a smaller impact of discrete benefits related to share-based compensation.
Our condensed consolidated statements of operations recognized a discrete tax benefit of $2.2 million and $2.6 million related to share-based compensation for the three months ended March 31, 2019 and 2018, respectively.
At March 31, 2019, the net deferred tax liability of $162.3 million consisted of net long-term deferred tax assets of $11.9 million and net long-term deferred tax liabilities of $174.2 million. The decrease of the net deferred tax liability was primarily related to purchase accounting adjustments in connection with the acquisition of USI and related tax elections.
Basic net income per share is calculated by dividing net income by the number of weighted average shares outstanding during the period, without consideration for common stock equivalents.
Diluted net income per share is calculated by adjusting the number of weighted average shares outstanding for the dilutive effect of common stock equivalents outstanding for the period, determined using the treasury stock method.
Basic and diluted net income per share were computed as follows, in thousands, except share and per share amounts:
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Three Months Ended March 31, |
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2019 |
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2018 |
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Net income - basic and diluted |
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$ |
37,983 |
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$ |
26,388 |
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