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, 2017

 

 

 

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from                to               

 

Commission file number: 1-36870

 

TopBuild Corp.

(Exact name of Registrant as Specified in its Charter)

 

 

 

Delaware

(State or Other Jurisdiction of Incorporation or
Organization)

47-3096382

(I.R.S. Employer
Identification No.)

 

 

 

 

475 North Williamson Boulevard

Daytona Beach, Florida

(Address of Principal Executive Offices)

32114

(Zip Code)

 

(386) 304-2200

(Registrant's telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.                                                  Yes            ☐ No

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).          Yes            ☐ No

 

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

 

Large accelerated filer     Accelerated filer  ☐    Smaller reporting company  ☐    Non-accelerated filer  ☐ (Do not check if a smaller reporting company)

Emerging growth company  ☐

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act  ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  ☐ Yes            No

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

Class

 

Shares Outstanding at November 1, 2017

Common stock, par value $0.01 per share

 

35,579,350

 

 

 

 


 

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

23

 

 

 

Item 3. 

Quantitative and Qualitative Disclosures About Market Risk

33

 

 

 

Item 4. 

Controls and Procedures

33

 

 

 

Part II. 

Other Information

 

 

 

 

Item 1. 

Legal Proceedings

34

 

 

 

Item 1A. 

Risk Factors

34

 

 

 

Item 2. 

Unregistered Sales of Equity Securities and Use of Proceeds

34

 

 

 

Item 3. 

Defaults upon Senior Securities

34

 

 

 

Item 4. 

Mine Safety Disclosures

34

 

 

 

Item 5. 

Other Information

34

 

 

 

Item 6. 

Exhibits

34

 

 

 

Index to Exhibits 

35

 

 

 

Signature 

36

 

2


 

Table of Contents

GLOSSARY

 

We use acronyms, abbreviations, and other defined terms throughout this quarterly report on form 10-Q, as 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

ASC

 

Accounting Standards Codification

ASR

 

Accelerated share repurchase

ASU

 

Accounting Standards Update

Board

 

Board of Directors

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

Effective Date

 

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

ETR

 

Effective tax rate

Exchange Act

 

The Securities Exchange Act of 1934, as amended

FASB

 

Financial Accounting Standards Board

FCCR

 

Fixed charge coverage ratio

GAAP

 

Generally accepted accounting principles in the United States of America

Guarantors

 

Certain wholly-owned domestic subsidiaries of TopBuild Corp.

Lenders

 

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

LIBOR

 

London interbank offered rate

Masco

 

Masco Corporation

Midwest

 

Midwest Fireproofing, LLC

MR Insulfoam

 

MR Insulfoam, LLC

Net Leverage Ratio

 

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

New Credit Agreement

 

Senior secured credit agreement and related security and pledge agreement dated May 5, 2017, with the "Lenders"

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

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 New Credit Agreement, a $250 million facility with applicable sublimits for letters of credit and swingline loans.

RSA 

 

Restricted stock award

SEC

 

United States Securities and Exchange Commission

Separation

 

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

Services Business

 

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

Superior

 

Superior Insulation Products, LLC

TopBuild

 

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

Total Leverage Ratio

 

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

 

 

 

 

 

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, 

 

 

2017

 

2016

ASSETS

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

18,460

 

$

134,375

Receivables, net of an allowance for doubtful accounts of $3,729 and $3,374 at September 30, 2017, and December 31, 2016, respectively

 

 

315,382

 

 

252,624

Inventories, net

 

 

116,781

 

 

116,190

Prepaid expenses and other current assets

 

 

15,043

 

 

23,364

Total current assets

 

 

465,666

 

 

526,553

 

 

 

 

 

 

 

Property and equipment, net

 

 

98,144

 

 

92,760

Goodwill

 

 

1,077,102

 

 

1,045,058

Other intangible assets, net

 

 

34,280

 

 

2,656

Deferred tax assets, net

 

 

19,469

 

 

19,469

Other assets

 

 

3,033

 

 

3,623

Total assets

 

$

1,697,694

 

$

1,690,119

 

 

 

 

 

 

 

LIABILITIES AND EQUITY

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Accounts payable

 

$

242,617

 

$

241,534

Revolving credit facility

 

 

5,000

 

 

 —

Current portion of long-term debt

 

 

12,500

 

 

20,000

Accrued liabilities

 

 

81,199

 

 

64,399

Total current liabilities

 

 

341,316

 

 

325,933

 

 

 

 

 

 

 

Long-term debt

 

 

232,405

 

 

158,800

Deferred tax liabilities, net

 

 

193,980

 

 

193,715

Long-term portion of insurance reserves

 

 

37,396

 

 

38,691

Other liabilities

 

 

3,196

 

 

433

Total liabilities

 

 

808,293

 

 

717,572

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity:

 

 

 

 

 

 

Preferred stock, $0.01 par value: 10,000,000 shares authorized; 0 shares issued and outstanding at September 30, 2017, and December 31, 2016

 

 

 —

 

 

 —

Common stock, $0.01 par value: 250,000,000 shares authorized; 38,619,002 issued and 35,579,540 outstanding at September 30, 2017, and 38,488,825 shares issued and 37,815,199 outstanding at December 31, 2016

 

 

386

 

 

385

Treasury stock, 3,039,462 shares at September 30, 2017, and 673,626 shares at December 31, 2016, at cost

 

 

(141,582)

 

 

(22,296)

Additional paid-in capital

 

 

828,474

 

 

845,476

Retained earnings

 

 

202,123

 

 

148,982

Total equity

 

 

889,401

 

 

972,547

Total liabilities and equity

 

$

1,697,694

 

$

1,690,119

See notes to our unaudited condensed consolidated financial statements.

4


 

Table of Contents

TOPBUILD CORP.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

(In thousands except per common share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30, 

 

Nine Months Ended September 30, 

 

 

2017

 

2016

 

2017

 

2016

Net sales

    

$

489,044

    

$

453,102

    

$

1,404,865

    

$

1,298,715

Cost of sales

 

 

368,205

 

 

344,963

 

 

1,065,789

 

 

1,003,433

Gross profit

 

 

120,839

 

 

108,139

 

 

339,076

 

 

295,282

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

71,277

 

 

69,038

 

 

222,181

 

 

209,623

Significant legal settlement

 

 

 —

 

 

 —

 

 

30,000

 

 

 —

Operating profit

 

 

49,562

 

 

39,101

 

 

86,895

 

 

85,659

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income (expense), net:

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

(2,479)

 

 

(1,271)

 

 

(5,767)

 

 

(4,315)

Loss on extinguishment of debt

 

 

 —

 

 

 —

 

 

(1,086)

 

 

 —

Other, net

 

 

27

 

 

65

 

 

239

 

 

201

Other expense, net

 

 

(2,452)

 

 

(1,206)

 

 

(6,614)

 

 

(4,114)

Income from continuing operations before income taxes

 

 

47,110

 

 

37,895

 

 

80,281

 

 

81,545

 

 

 

 

 

 

 

 

 

 

 

 

 

Income tax expense from continuing operations

 

 

(15,717)

 

 

(13,329)

 

 

(27,139)

 

 

(30,246)

Income from continuing operations

 

 

31,393

 

 

24,566

 

 

53,142

 

 

51,299

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

31,393

 

$

24,566

 

$

53,142

 

$

51,299

 

 

 

 

 

 

 

 

 

 

 

 

 

Income per common share:

 

 

 

 

 

 

 

 

 

 

 

 

Basic:

 

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

$

0.90

 

$

0.65

 

$

1.47

 

$

1.36

Net income

 

$

0.90

 

$

0.65

 

$

1.47

 

$

1.36

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted:

 

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

$

0.88

 

$

0.65

 

$

1.44

 

$

1.35

Net income

 

$

0.88

 

$

0.65

 

$

1.44

 

$

1.35

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, 

 

 

2017

 

2016

Net Cash Provided by (Used in) Operating Activities:

 

 

    

    

 

    

Net income

 

$

53,142

 

$

51,299

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

 

 

 

 

 

 

Depreciation and amortization

 

 

11,753

 

 

8,923

Share-based compensation

 

 

7,473

 

 

5,743

Loss on extinguishment of debt

 

 

1,086

 

 

 —

Loss on sale or abandonment of property and equipment

 

 

614

 

 

2,399

Amortization of debt issuance costs

 

 

293

 

 

257

Amortization of contingent consideration

 

 

98

 

 

 —

Provision for bad debt expense

 

 

2,498

 

 

2,696

Loss from inventory obsolescence

 

 

1,390

 

 

970

Deferred income taxes, net

 

 

266

 

 

476

Changes in certain assets and liabilities:

 

 

 

 

 

 

Receivables, net

 

 

(43,931)

 

 

(32,294)

Inventories, net

 

 

249

 

 

12,103

Prepaid expenses and other current assets

 

 

8,362

 

 

(3,162)

Accounts payable

 

 

(2,280)

 

 

(35,023)

Long-term portion of insurance reserves

 

 

 —

 

 

(1,599)

Accrued liabilities

 

 

13,633

 

 

15,159

Other, net

 

 

(28)

 

 

(13)

Net cash provided by operating activities

 

 

54,618

 

 

27,934

 

 

 

 

 

 

 

Cash Flows Provided by (Used in) Investing Activities:

 

 

 

 

 

 

Purchases of property and equipment

 

 

(13,088)

 

 

(10,083)

Acquisition of businesses

 

 

(84,040)

 

 

(3,476)

Proceeds from sale of property and equipment

 

 

453

 

 

379

Other, net

 

 

178

 

 

93

Net cash used in investing activities

 

 

(96,497)

 

 

(13,087)

 

 

 

 

 

 

 

Cash Flows Provided by (Used in) Financing Activities:

 

 

 

 

 

 

Net transfer to Former Parent

 

 

 —

 

 

(153)

Proceeds from issuance of long-term debt

 

 

250,000

 

 

 —

Repayment of long-term debt

 

 

(183,125)

 

 

(10,000)

Payment of debt issuance costs

 

 

(2,150)

 

 

 —

Proceeds from revolving credit facility

 

 

170,000

 

 

 —

Repayments of revolving credit facility

 

 

(165,000)

 

 

 —

Taxes withheld and paid on employees' equity awards

 

 

(4,475)

 

 

(1,668)

Repurchase of shares of common stock

 

 

(139,286)

 

 

(11,377)

Net cash used in financing activities

 

 

(74,036)

 

 

(23,198)

 

 

 

 

 

 

 

Cash and Cash Equivalents

 

 

 

 

 

 

Decrease for the period

 

 

(115,915)

 

 

(8,351)

Beginning of year

 

 

134,375

 

 

112,848

End of period

 

$

18,460

 

$

104,497

 

 

 

 

 

 

 

Supplemental disclosure of noncash investing activities:

 

 

 

 

 

 

Accruals for property and equipment

 

$

154

 

$

110

See notes to our unaudited condensed consolidated financial statements.

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Table of Contents

TOPBUILD CORP.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (Unaudited)

(In thousands except share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common

 

Treasury

 

Additional

 

 

 

 

 

 

 

Stock

 

Stock

 

Paid-in

 

Retained

 

 

 

 

 

($0.01 par value)

 

at cost

 

Capital

 

Earnings

 

Equity

Balance at December 31, 2015

 

$

377

 

$

 —

 

$

838,976

 

$

76,376

 

$

915,729

Net income

 

 

 —

 

 

 —

 

 

 —

 

 

51,299

 

 

51,299

Separation-related adjustments

 

 

 —

 

 

 —

 

 

(153)

 

 

 —

 

 

(153)

Share-based compensation

 

 

 —

 

 

 —

 

 

5,743

 

 

 —

 

 

5,743

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

 

 

 8

 

 

 —

 

 

(8)

 

 

 —

 

 

 —

Repurchase of 341,500 shares of common stock pursuant to Share Repurchase Program

 

 

 —

 

 

(11,377)

 

 

 —

 

 

 —

 

 

(11,377)

61,906 shares of common stock withheld to pay taxes on employees' equity awards

 

 

 —

 

 

 —

 

 

(1,668)

 

 

 —

 

 

(1,668)

Balance at September 30, 2016

 

$

385

 

$

(11,377)

 

$

842,890

 

$

127,675

 

$

959,573

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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 Share Repurchase Program

 

 

 —

 

 

(39,286)

 

 

 —

 

 

 —

 

 

(39,286)

Repurchase of 1,507,443 shares of common stock pursuant to Accelerated Share Repurchase Program

 

 

 —

 

 

(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

See notes to our unaudited condensed consolidated financial statements.

 

 

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Table of Contents

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

 

1. BASIS OF PRESENTATION

 

On the Effective Date, Masco completed the Separation of its Services Business from its other businesses.  On the Effective Date, TopBuild became an independent public company which holds, through its consolidated subsidiaries, the assets and liabilities of the Services Business.  The Separation was achieved through the distribution of 100 percent of the outstanding capital stock of TopBuild to holders of Masco common stock.  TopBuild is a Delaware corporation and trades on the NYSE under the symbol “BLD.”

 

These condensed consolidated financial statements and related notes should be read in conjunction with the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.

 

We report our business in two segments: Installation and Distribution.  Our Installation segment 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, 2017, our results of operations for the three and nine months ended September 30, 2017 and 2016, and cash flows for the nine months ended September 30, 2017 and 2016.  The Condensed Consolidated Balance Sheet at December 31, 2016, was derived from our audited financial statements, but does not include all disclosures required by GAAP.

 

2. ACCOUNTING POLICIES

 

Financial Statement Presentation.  The condensed consolidated financial statements have been developed in conformity with GAAP, which requires management to make estimates and assumptions.  These estimates and assumptions affect the reported amounts of assets and liabilities and disclosures of contingent liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting period.  Actual results could differ materially from these estimates.  All intercompany transactions between TopBuild entities have been eliminated.  Certain reclassifications have been made in the 2016 condensed consolidated financial statements to conform to the 2017 classifications with no impact on previously reported net income or equity.

 

Business Combinations.  The purchase price for business combinations is allocated to the estimated fair values of acquired tangible and intangible assets, including goodwill, and assumed liabilities, where applicable.  Additionally, we recognize customer relationships, trademarks and trade names, and non-competition agreements as identifiable intangible assets.  These assets are recorded at fair value as of the transaction date.  The fair value of these intangible assets is determined primarily using the income approach and using current industry information.  Goodwill is recorded when consideration transferred exceeds the fair value of identifiable assets and liabilities.  Measurement-period adjustments are recorded in the period they occur.  Contingent consideration is recorded at fair value at the acquisition date.

 

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

 

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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 July 2015 the FASB issued ASU 2015-11 “Simplifying the Measurement of Inventory.”  Under this guidance, inventory should be measured at the lower of cost or net realizable value.  Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation.  We adopted this guidance in the beginning of the first quarter of 2017.  The adoption of this amendment did not have a material impact on our financial position or results of operations.

 

Recently Issued Accounting Pronouncements Not Yet Adopted:

 

In May 2014 the FASB issued a new standard for revenue recognition, ASC 606.  Subsequent to issuing ASC 606, 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.  ASC 606 is effective for us beginning January 1, 2018, and allows for full retrospective or modified retrospective methods of adoption; early adoption is permitted.  In determining the applicability of ASC 606, we considered the general nature of our orders is short-term, based on a single deliverable, and not accounted for under industry-specific guidance.  We reviewed our revenue streams at both our Installation and Distribution segments.  Our current assessment indicates that the adoption of the standard will likely not have a material impact on the amount or timing of our revenue recognition process.  Additional disclosures related to our revenues, contract balances, and judgments affecting recognition will be required.  We plan to apply the modified retrospective approach to transition to the new guidance, which would allow us to recognize the cumulative effect of initially applying the standard as an adjustment to the opening balance of retained earnings.  We do not plan to early adopt the standard.  We will continue to evaluate additional changes, modifications, clarifications, or interpretations issued by the FASB, which may impact our current conclusions.

 

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 us beginning January 1, 2019.  Early adoption is permitted.  We have not yet selected an adoption date and we are currently evaluating the effect on our financial position and results of operations.

 

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

 

In June 2016 the FASB issued ASU 2016-13, “Financial Instruments - Credit Losses.”  This guidance introduces a current expected credit loss (“CECL”) model for the recognition of impairment losses on financial assets, including trade receivables.  The CECL model replaces current GAAP’s incurred loss model.  Under CECL, companies will record an allowance through current earnings for the expected credit loss for the life of the financial asset upon initial recognition of the financial asset.  This update is effective for us at the beginning of 2020 with early adoption permitted at the beginning of 2019.  We have not yet selected an adoption date and we are currently evaluating the effect on our financial position and results of operations.

 

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

 

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

 

3. GOODWILL AND OTHER INTANGIBLES

 

Changes in the carrying amount of goodwill for the nine months ended September 30, 2017,  by segment, were as follows, in thousands:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Gross Goodwill

    

 

    

Gross Goodwill

    

Accumulated

    

Net Goodwill

 

 

at

 

 

 

at

 

Impairment

 

at

 

 

December 31, 2016

 

Additions

 

September 30, 2017

 

Losses

 

September 30, 2017

Installation

 

$

1,390,792

 

$

32,044

 

$

1,422,836

 

$

(762,021)

 

$

660,815

Distribution

 

 

416,287

 

 

 —

 

 

416,287

 

 

 —

 

 

416,287

Total

 

$

1,807,079

 

$

32,044

 

$

1,839,123

 

$

(762,021)

 

$

1,077,102

 

Other intangible assets, net includes customer relationships, non-compete agreements, and trademarks.  The following table sets forth our other intangible assets, in thousands:

 

 

 

 

 

 

 

 

 

 

As of

 

    

September 30, 

    

December 31, 

 

 

2017

 

2016

Gross definite-lived intangible assets

 

$

54,511

 

$

20,932

Accumulated amortization

 

 

(20,638)

 

 

(18,683)

Net definite-lived intangible assets

 

 

33,873

 

 

2,249

Indefinite-lived intangible assets not subject to amortization

 

 

407

 

 

407

Other intangible assets, net

 

$

34,280

 

$

2,656

 

 

4. LONG-TERM DEBT

 

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

 

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

 

Interest payable on borrowings under the New 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 Total 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.

 

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 Total Leverage Ratio.  We must also pay customary fees on outstanding letters of credit.

 

We used a portion of the proceeds from the term loan under the New Credit Agreement to repay all amounts outstanding under the Old Credit Agreement.  The remaining proceeds were used to fund our 2017 Repurchase program, to make additional acquisitions, and for general operating purposes.  Upon executing the New Credit Agreement, we terminated the Old Credit Agreement and all associated agreements and instruments.

 

In conjunction with the New Credit Agreement, we recognized a loss on extinguishment of debt of $1.1 million for the nine months ended September 30, 2017, which is reflected under the caption, “Loss on extinguishment of debt” in our Condensed Consolidated Statements of Operations.  The following table outlines the key terms of our New Credit Agreement, dollars in thousands:

 

 

 

 

 

 

New Credit Agreement

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

$

250,000

 

Additional term loan capacity under delayed draw feature (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, 2017

 

2.74

%

Scheduled maturity date

 

5/05/2022

 


(a)

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

(b)

We can access $100.0 million through a delayed draw term loan on the New Credit Agreement until May 5, 2018.  We have not determined the timing or amounts of our delayed draws, if any.

(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 New 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.  

 

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

 

The following table sets forth our remaining principal payments for our outstanding term loan balance as of September 30, 2017, in thousands:

 

 

 

 

 

 

 

Future Principal

 

 

Payments

Schedule of Debt Maturity by Years:

 

 

 

2017

 

$

3,125

2018

 

 

12,500

2019

 

 

15,625

2020

 

 

18,750

2021

 

 

21,875

2022

 

 

175,000

Total principal maturities

 

$

246,875

 

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,

 

 

2017

 

2016

Revolving credit facility

 

$

5,000

 

$

 —

Current portion of long-term debt

 

 

12,500

 

 

20,000

Long-term portion of long-term debt

 

 

234,375

 

 

160,000

Unamortized debt issuance costs

 

 

(1,970)

 

 

(1,200)

Total debt

 

$

249,905

 

$

178,800

 

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,

 

    

2017

 

2016

Revolving Facility

 

$

250,000

 

$

125,000

Less: revolving credit facility

 

 

(5,000)

 

 

 —

Less: standby letters of credit

 

 

(47,055)

 

 

(49,080)

Capacity under Revolving Facility

 

$

197,945

 

$

75,920

 

The New 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 New Credit Agreement contains customary affirmative covenants and events of default.

 

The New 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

September 30, 2017

 

3.50:1.00

 

1.25:1.00

December 31, 2017 through September 30, 2018

 

3.25:1.00

 

1.25:1.00

December 31, 2018 and each quarter thereafter

 

3.00:1.00

 

1.25:1.00

 

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

 

The following table outlines the key financial covenants effective for the period covered by this report:

 

 

 

 

 

 

As of September 30, 2017

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

 

The fair value measurement standard defines fair value as the price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants at the measurement date (referred to as an “exit price”).  Authoritative guidance on fair value measurements and disclosures clarifies that a fair value measurement for a liability should reflect the entity’s non-performance risk.  In addition, a fair value hierarchy is established that prioritizes the inputs to valuation techniques used to measure fair value.  The hierarchy gives the highest priority to unadjusted quoted market prices in active markets for identical assets and liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements).

 

Fair Value on Recurring Basis

 

The carrying values of cash and cash equivalents, receivables, net, and accounts payable are considered to be representative of their respective fair values due to the short-term nature of these instruments.  We measure our contingent consideration liabilities related to business combinations at fair value.  For more information see Note 12 – Business Combinations.

 

Fair Value on Non-Recurring Basis

 

Fair value measurements were applied to our long-term debt.  The carrying value of our long-term debt approximates the fair market value primarily due to the fact that the non-performance risk of servicing our debt obligations, as reflected in our business and credit risk profile, has not materially changed since we assumed our debt obligations under the New Credit Agreement.  In addition, due to the floating-rate nature of our long-term debt, the market value is not subject to variability solely due to changes in the general level of interest rates as is the case with a fixed-rate debt obligation.  During the periods presented, there were no transfers between fair value hierarchical levels.

 

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

 

6. SEGMENT INFORMATION

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30, 

 

 

2017

 

2016

 

2017

 

2016

 

 

Net Sales

 

Operating Profit (b)

Our operations by segment were (a):

 

 

 

 

 

 

 

 

 

 

 

 

Installation

 

$

333,238

 

$

300,005

 

$

40,862

 

$

32,196

Distribution

 

 

181,146

 

 

174,123

 

 

18,300

 

 

15,536

Intercompany eliminations

 

 

(25,340)

 

 

(21,026)

 

 

(4,413)

 

 

(3,665)

Total

 

$

489,044

 

$

453,102

 

 

54,749

 

 

44,067

General corporate expense, net (c)

 

 

 

 

 

 

 

 

(5,187)

 

 

(4,966)

Operating profit, as reported

 

 

 

 

 

 

 

 

49,562

 

 

39,101

Other expense, net

 

 

 

 

 

 

 

 

(2,452)

 

 

(1,206)

Income from continuing operations before income taxes

 

 

 

 

 

 

 

$

47,110

 

$

37,895

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 

 

 

2017

 

2016

 

2017

 

2016

 

 

Net Sales

 

Operating Profit (b)

Our operations by segment were (a):

 

 

 

 

 

 

 

 

 

 

 

 

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

 

$

945,109

 

$

860,924

 

$

96,985

 

$

68,499

Significant legal settlement (Installation segment) (d)

 

 

 —

 

 

 —

 

 

(30,000)

 

 

 —

Distribution

 

 

526,452

 

 

499,268

 

 

50,806

 

 

43,416

Intercompany eliminations

 

 

(66,696)

 

 

(61,477)

 

 

(11,393)

 

 

(10,540)

Total

 

$

1,404,865

 

$

1,298,715

 

 

106,398

 

 

101,375

General corporate expense, net (c)

 

 

 

 

 

 

 

 

(19,503)

 

 

(15,716)

Operating profit, as reported

 

 

 

 

 

 

 

 

86,895

 

 

85,659

Other expense, net

 

 

 

 

 

 

 

 

(6,614)

 

 

(4,114)

Income from continuing operations before income taxes

 

 

 

 

 

 

 

$

80,281

 

$

81,545


(a)

All of our operations are located in the United States.

(b)

Segment operating profit for the three and nine months ended September 30, 2017 and 2016, includes an allocation of general corporate expenses attributable to the operating segments which is based on direct benefit or usage (such as salaries of corporate employees who directly support the segment).

(c)

General corporate expense, net included expenses not specifically attributable to our segments for functions such as corporate human resources, finance, and legal, including salaries, benefits, and other related costs

(d)

Significant legal settlement expense of $30 million incurred for the nine months ended September 30, 2017, related to the settlement agreement with Owens Corning.  For more information see Note 7 – Other Commitments and Contingencies.

 

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

 

 

7. OTHER COMMITMENTS AND CONTINGENCIES

 

Litigation.  During the first quarter of 2017 we recognized a $30 million expense for a legal settlement with