Financial Statement Presentation.  The condensed consolidated financial statements have been developed in conformity with accounting principles generally accepted in the United States of America which requires management to make estimates and assumptions.  These estimates and assumptions affect the reported amounts of assets and liabilities and disclosures of contingent liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting period.  Actual results could differ materially from these estimates.  Our financial statements for the periods prior to the Separation have been derived from the financial statements and accounting records of Masco using the historical results of operations and historical basis of assets and liabilities of the Services Business, and reflect Masco’s net investment in the Services Business. 

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

The accompanying condensed consolidated financial statements include allocations of general corporate expenses that were incurred by Masco for the periods prior to the Separation for functions such as corporate human resources, finance, and legal, including salaries, benefits, and other related costs.  These general corporate expenses were allocated to TopBuild on the basis of revenues.  Total allocated general corporate costs were $6.3 million for the three months ended September 30,  2014.  Total allocated general corporate costs were $13.6 million and $17.0 million for the nine months ended September 30, 2015 and 2014, respectively.  These costs were included in selling, general and administrative expenses.

Masco, prior to the Separation, incurred certain operating expenses on behalf of the Services Business that were allocated to TopBuild based on direct benefit or usage.  These allocated operating expenses were $6.5 million for the three months ended September 30,  2014, and $5.6 million and $14.5 million for the nine months ended September 30, 2015 and 2014, respectively.  These costs were included in selling, general and administrative expenses.  In TopBuild’s reporting segments’ operating profit, an estimate of these operating expenses were allocated to each reporting segment based on a percentage of sales.

For the periods prior to the Separation, these condensed consolidated financial statements may not reflect the actual expenses that would have been incurred had we operated as a stand-alone company and may not reflect the consolidated results of operations, financial position, and cash flows had we operated as a stand-alone.  Actual costs that would have been incurred if we had operated as a stand-alone company prior to the Separation would depend on multiple factors, including organizational structure and strategic decisions made in various areas, including information technology and infrastructure.

Our share-based compensation program consists of restricted stock and stock option awards.  We grant restricted stock awards with a fair value determined based on our closing stock price on the date of grant.  Restricted stock awards generally vest ratably over five years.  We also grant stock options for a fixed number of shares to certain employees with an exercise price equal to the market price of our common stock on the date of grant.  Stock options generally become exercisable (vest ratably) over five years beginning on the first anniversary from the date of grant and expire no later than 10 years after the grant date. The fair value of stock option awards is determined using the Black-Scholes Options Pricing Model.  We have elected to use the straight-line method to recognize compensation expense related to the restricted stock awards and stock option grants evenly over their respective service period.  Share-based compensation expense is reported in selling, general and administrative expense.

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