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 SeptemberJune 30, 20172019
For the transition period from to
Commission file number: 1-36870
TopBuild Corp.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) (386) 304-2200
(Registrant's telephone number, including area code)
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Common stock, par value $0.01 per share | BLD | NYSE |
Securities registered pursuant Section 12(b) of the Act:
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, 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 ☐ 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 numberThe registrant had outstanding 34,281,930 shares of shares outstanding of each of the issuer’s classes of common stock,Common Stock, par value $0.01 per share as of the latest practicable date.July 26, 2019.
TABLE OF CONTENTS
| | | | |
| | Page No. | ||
| ||||
| | | ||
| ||||
| | | ||
| 4 | |||
| | | ||
| 5 | |||
| | | ||
| 6 | |||
| | | ||
| 7 | |||
| | | ||
| 8 | |||
| | | ||
Management's Discussion and Analysis of Financial Condition and Results of Operations |
| |||
| | | ||
| ||||
| ||||
34 | ||||
| | | ||
34 | ||||
| | | ||
| ||||
| | | ||
35 | ||||
| | | ||
35 | ||||
| | | ||
| ||||
| ||||
| ||||
| ||||
| ||||
35 | ||||
| | | ||
35 | ||||
| | | ||
35 | ||||
| | | ||
35 | ||||
| | | ||
35 | ||||
| | | ||
36 | ||||
| | | ||
37 |
2
GLOSSARY
We use acronyms, abbreviations, and other defined terms throughout this quarterly report on formForm 10-Q, aswhich 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 |
| |
|
| |
|
| |
|
| |
|
| | 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. |
| |
|
| |
|
| Earnings before income taxes, depreciation, and amortization | |
EcoFoam | | Bella Insulutions Inc., DBA EcoFoam/Insulutions |
| |
|
|
| |
| 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 | |
|
| | Incremental borrowing rate, as defined in ASC 842. |
Lenders | | Bank of America, N.A., together with the other lenders party to the |
LIBOR | | London interbank offered rate |
Masco | | Masco Corporation or Former Parent |
|
| |
|
| |
Net Leverage Ratio | | As defined in the |
| |
|
| New York Stock Exchange | |
| |
|
| |
|
|
| |
| Senior secured revolving credit facilities available under the | |
| |
|
| | Restricted stock award |
Santa Rosa | | Santa Rosa Insulation and Fireproofing, LLC |
SEC | | United States Securities and Exchange Commission |
| | As defined in the “Amended Credit Agreement,” the ratio of outstanding indebtedness, including letters of credit, to EBITDA |
Senior Notes | | TopBuild's 5.625% senior unsecured notes due on May 1, 2026 |
Separation | | Distribution of 100 percent of the outstanding capital stock of TopBuild to holders of Masco |
| |
|
|
| |
| TopBuild Corp. and its wholly-owned consolidated domestic subsidiaries. Also, the "Company," | |
| |
|
3
PART I – FINANCIAL INFORMATION
TOPBUILD CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
(In thousands except share data)
| | | | | | |
| | As of | ||||
|
| June 30, | | December 31, | ||
| | 2019 | | 2018 | ||
ASSETS | | | | | | |
Current assets: | | | | | | |
Cash and cash equivalents | | $ | 141,767 | | $ | 100,929 |
Receivables, net of an allowance for doubtful accounts of $5,199 and $3,676 at June 30, 2019, and December 31, 2018, respectively | | | 444,823 | |
| 407,106 |
Inventories, net | | | 150,282 | |
| 168,977 |
Prepaid expenses and other current assets | | | 11,416 | |
| 27,685 |
Total current assets | | | 748,288 | |
| 704,697 |
| | | | | | |
Right of use assets | | | 90,735 | | | — |
Property and equipment, net | | | 172,719 | |
| 167,961 |
Goodwill | | | 1,363,738 | |
| 1,364,016 |
Other intangible assets, net | | | 189,041 | |
| 199,387 |
Deferred tax assets, net | | | 12,033 | | | 13,176 |
Other assets | | | 4,569 | |
| 5,294 |
Total assets | | $ | 2,581,123 | | $ | 2,454,531 |
| | | | | | |
LIABILITIES AND EQUITY | | | | | | |
Current liabilities: | | | | | | |
Accounts payable | | $ | 288,985 | | $ | 313,172 |
Current portion of long-term debt | | | 32,261 | | | 26,852 |
Accrued liabilities | | | 100,282 | | | 104,236 |
Short-term lease liabilities | | | 36,527 | | | — |
Total current liabilities | | | 458,055 | | | 444,260 |
| | | | | | |
Long-term debt | | | 705,626 | | | 716,622 |
Deferred tax liabilities, net | | | 174,269 | | | 176,212 |
Long-term portion of insurance reserves | | | 43,856 | | | 43,434 |
Long-term lease liabilities | | | 57,312 | | | — |
Other liabilities | | | 359 | | | 1,905 |
Total liabilities | | | 1,439,477 | | | 1,382,433 |
| | | | | | |
Commitments and contingencies | | | | | | |
| | | | | | |
Equity: | | | | | | |
Preferred stock, $0.01 par value: 10,000,000 shares authorized; 0 shares issued and outstanding at June 30, 2019 and December 31, 2018 | | | — | | | — |
Common stock, $0.01 par value: 250,000,000 shares authorized; 38,837,472 issued and 34,294,285 outstanding at June 30, 2019, and 38,676,586 shares issued and 34,573,596 outstanding at December 31, 2018 | | | 388 | | | 387 |
Treasury stock, 4,548,993 shares at June 30, 2019, and 4,102,990 shares at December 31, 2018, at cost | | | (246,107) | | | (216,607) |
Additional paid-in capital | | | 855,464 | | | 846,451 |
Retained earnings | | | 531,901 | | | 441,867 |
Total equity | | | 1,141,646 | | | 1,072,098 |
Total liabilities and equity | | $ | 2,581,123 | | $ | 2,454,531 |
See notes to our unaudited condensed consolidated financial statements.
|
|
|
|
|
|
|
|
| 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 |
4
TOPBUILD CORP.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(In thousands except share and per common share data)
| | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, | ||||||||
| | 2019 | | 2018 | | 2019 | | 2018 | ||||
Net sales |
| $ | 660,112 |
| $ | 605,969 |
| $ | 1,279,442 |
| $ | 1,097,412 |
Cost of sales | | | 485,190 | | | 460,928 | | | 948,824 | | | 841,353 |
Gross profit | | | 174,922 | | | 145,041 | | | 330,618 | | | 256,059 |
| | | | | | | | | | | | |
Selling, general, and administrative expense | | | 98,883 | | | 101,360 | | | 197,960 | | | 178,486 |
Operating profit | | | 76,039 | | | 43,681 | | | 132,658 | | | 77,573 |
| | | | | | | | | | | | |
Other income (expense), net: | | | | | | | | | | | | |
Interest expense | | | (9,631) | | | (7,322) | | | (19,232) | | | (9,645) |
Other, net | | | 526 | | | 82 | | | 858 | | | 115 |
Other expense, net | | | (9,105) | | | (7,240) | | | (18,374) | | | (9,530) |
Income before income taxes | | | 66,934 | | | 36,441 | | | 114,284 | | | 68,043 |
| | | | | | | | | | | | |
Income tax expense | | | (14,883) | | | (9,288) | | | (24,249) | | | (14,503) |
Net income | | $ | 52,051 | | $ | 27,153 | | $ | 90,035 | | $ | 53,540 |
| | | | | | | | | | | | |
Net income per common share: | | | | | | | | | | | | |
Basic | | $ | 1.53 | | $ | 0.77 | | $ | 2.64 | | $ | 1.53 |
Diluted | | $ | 1.51 | | $ | 0.76 | | $ | 2.60 | | $ | 1.49 |
| |
| | |
| | | | | | | |
Weighted average shares outstanding: | | | | | | | | | | | | |
Basic | | | 33,976,169 | | | 35,102,429 | | | 34,072,314 | | | 35,081,292 |
Diluted | | | 34,557,664 | | | 35,837,102 | | | 34,630,048 | | | 35,828,290 |
See notes to our unaudited condensed consolidated financial statements.
5
TOPBUILD CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In thousands)
| | | | | | |
| | Six Months Ended June 30, | ||||
| | 2019 | | 2018 | ||
Cash Flows Provided by (Used in) Operating Activities: | | |
|
| |
|
Net income | | $ | 90,035 | | $ | 53,540 |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | |
Depreciation and amortization | | | 25,538 | | | 15,185 |
Share-based compensation | | | 7,485 | | | 5,397 |
Loss on sale or abandonment of property and equipment | | | 561 | | | 487 |
Amortization of debt issuance costs | | | 779 | | | 422 |
Change in fair value of contingent consideration | | | (50) | | | 123 |
Provision for bad debt expense | | | 3,688 | | | 1,672 |
Loss from inventory obsolescence | | | 1,251 | | | 928 |
Deferred income taxes, net | | | (21) | | | 375 |
Change in certain assets and liabilities | | | | | | |
Receivables, net | | | (41,489) | | | (22,382) |
Inventories, net | | | 17,391 | | | (11,517) |
Prepaid expenses and other current assets | | | 14,969 | | | (5,363) |
Accounts payable | | | (23,823) | | | 220 |
Accrued liabilities | | | (1,131) | | | 2,901 |
Other, net | | | 1,081 | | | (595) |
Net cash provided by operating activities | | | 96,264 | | | 41,393 |
| | | | | | |
Cash Flows Provided by (Used in) Investing Activities: | | | | | | |
Purchases of property and equipment | | | (21,982) | | | (27,521) |
Acquisition of businesses, net of cash acquired of $15,756 in 2018 | | | — | | | (499,050) |
Proceeds from sale of property and equipment | | | 1,961 | | | 427 |
Other, net | | | 22 | | | 23 |
Net cash used in investing activities | | | (19,999) | | | (526,121) |
| | | | | | |
Cash Flows Provided by (Used in) Financing Activities: | | | | | | |
Proceeds from issuance of long-term debt | | | 4,998 | | | 515,066 |
Repayment of long-term debt | | | (11,364) | | | (8,033) |
Payment of debt issuance costs | | | — | | | (7,717) |
Proceeds from revolving credit facility | | | — | | | 90,000 |
Repayment of revolving credit facility | | | — | | | (90,000) |
Taxes withheld and paid on employees' equity awards | | | (8,471) | | | (4,531) |
Repurchase of shares of common stock | | | (19,499) | | | — |
Payment of contingent consideration | | | (1,091) | | | (841) |
Net cash (used in) provided by financing activities | | | (35,427) | | | 493,944 |
| | | | | | |
Cash and Cash Equivalents | | | | | | |
Increase for the period | | | 40,838 | | | 9,216 |
Beginning of period | |
| 100,929 | |
| 56,521 |
End of period | | $ | 141,767 | | $ | 65,737 |
| | | | | | |
Supplemental disclosure of noncash activities: | | | | | | |
Leased assets obtained in exchange for new operating lease liabilities | | $ | 110,192 | | $ | — |
Accruals for property and equipment | | | 497 | | | 864 |
See notes to our unaudited condensed consolidated financial statements.
46
TOPBUILD CORP.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONSCHANGES IN EQUITY (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
TOPBUILD CORP.
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 Net income — — — 27,152 27,152 Share-based compensation — — 2,995 — 2,995 228 shares of common stock withheld to pay taxes on employees' equity awards — — (17) — (17) Balance at June 30, 2018 $ 387 $ (161,582) $ 851,465 $ 360,655 $ 1,050,925CONDENSED 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 |
| | | | | | | | | | | | | | | |
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 |
Net income | | | — | | | — | | | — | | | 52,051 | | | 52,051 |
Share-based compensation | | | — | | | — | | | 4,513 | | | — | | | 4,513 |
Repurchase of 196,885 shares of common stock pursuant to the 2019 Repurchase Program | | | — | | | (14,878) | | | — | | | — | | | (14,878) |
54,811 shares of common stock withheld to pay taxes on employees' equity awards | | | — | | | — | | | (2,893) | | | — | | | (2,893) |
Balance at June 30, 2019 | | $ | 388 | | $ | (246,107) | | $ | 855,464 | | $ | 531,901 | | $ | 1,141,646 |
See notes to our unaudited condensed consolidated financial statements.
67
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.
7
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 incorporated on June 30, 2015, and tradesis listed on the NYSE under the ticker 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 corporatechief operating executives.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 SeptemberJune 30, 2017,2019, our results of operations for the three and ninesix months ended SeptemberJune 30, 20172019 and 2016,2018, and cash flows for the ninesix months ended SeptemberJune 30, 20172019 and 2016.2018. The Condensed Consolidated Balance Sheetcondensed consolidated balance sheet at December 31, 2016,2018, 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. The 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. 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.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.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. These 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.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 Options.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 Statementscondensed consolidated statements of Cash Flows.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 |
|
|
|
|
|
| ||||
| 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.
Recently Adopted Accounting Pronouncements:Revenue Recognition
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 valueRevenue 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 bothdisaggregated between our Installation and Distribution segments. Our current assessment indicates thatA reconciliation of disaggregated revenue by segment is included in Note 6 – Segment Information.
We recognize revenue for our Installation segment using the adoptionpercentage of the standard will likely not havecompletion method of accounting with respect to each particular order within a material impactgiven 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 revenue recognition process. Additional disclosures relatedperformance and the customer’s payment.
9
The following table represents our contract assets and contract liabilities with customers, in thousands:
| | | | | | | |
| Included in Line Item on | | As of | ||||
| Condensed Consolidated | | June 30, | | December 31, | ||
| Balance Sheets | | 2019 | | 2018 | ||
Contract Assets: | | | | | | | |
Receivables, unbilled | Receivables, net | | $ | 55,173 | | $ | 61,339 |
| | | | | | | |
Contract Liabilities: | | | | | | | |
Deferred revenue | Accrued liabilities | | $ | 17,261 | | $ | 19,963 |
Our contract liabilities are normally recognized to our revenues, contract balances, and judgments affecting recognition will be required. We plan to applynet sales in the modified retrospective approach to transitionimmediately subsequent reporting period due to the new guidance, which would allow us to recognize the cumulative effectgenerally short-term nature 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.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 mostcertain leases on its balance sheet. Companies are required to use aEffective 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 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 IBR at January 1, 2019 based on the remaining lease term for all existing leases. This standard is effectiveSee Note 7 – Leases 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.additional information.
9
Table of ContentsRecently Issued Accounting Pronouncements Not Yet Adopted:
TOPBUILD CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
In June 2016 the FASB issued ASU 2016-13, “Financial Instruments - Credit Losses.”Losses”. This guidance introduces a current expected credit loss (“CECL”)(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 plan to adopt this standard on January 1, 2020 with a cumulative adjustment to our beginning retained earnings balance. We have not yet selected an adoption datebegun our initial evaluation of financial assets subject to this guidance and we are currently evaluatingdeveloping a new accounting policy for CECL recognition. We are still determining the effect onimpact to our financial position and results of operations.upon adoption.
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 willgoodwill 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
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 with early adoption permitted. The amendments to the guidance will be applied on a prospective or retrospective basis, in accordance with the requirements of thisstandard.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 ninesix months ended SeptemberJune 30, 2017,2019, 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 | ||||||||||||||||||||
| | | | | | | | | | | | | | | | |||||||||||||||
| | | | | Additions | | | | | | | | | | ||||||||||||||||
|
| Gross Goodwill |
| (Measurement |
| Gross Goodwill |
| Accumulated |
| Net Goodwill | ||||||||||||||||||||
| | at | | Period | | at | | Impairment | | at | ||||||||||||||||||||
| | December 31, 2018 | | Adjustments) | | June 30, 2019 | | Losses | | June 30, 2019 | ||||||||||||||||||||
Goodwill, by segment: | | | | | | | | | | | | | | | | |||||||||||||||
Installation |
| $ | 1,390,792 |
| $ | 32,044 |
| $ | 1,422,836 |
| $ | (762,021) |
| $ | 660,815 | | $ | 1,679,654 | | $ | (245) | | $ | 1,679,409 | | $ | (762,021) | | $ | 917,388 |
Distribution |
|
| 416,287 |
|
| — |
|
| 416,287 |
|
| — |
|
| 416,287 | |
| 446,383 | |
| (33) | |
| 446,350 | |
| — | |
| 446,350 |
Total |
| $ | 1,807,079 |
| $ | 32,044 |
| $ | 1,839,123 |
| $ | (762,021) |
| $ | 1,077,102 | |||||||||||||||
Total goodwill | | $ | 2,126,037 | | $ | (278) | | $ | 2,125,759 | | $ | (762,021) | | $ | 1,363,738 |
Other intangible assets, net includes customer relationships, non-compete agreements, and trademarks.trademarks / trade names. The following table sets forth our other intangible assets, in thousands:
|
|
|
|
|
|
| ||||||
|
| As of | ||||||||||
|
| September 30, |
| December 31, | ||||||||
|
| 2017 |
| 2016 | ||||||||
| | | | | | |||||||
| | As of | ||||||||||
|
| June 30, 2019 |
| December 31, 2018 | ||||||||
Gross definite-lived intangible assets |
| $ | 54,511 |
| $ | 20,932 |
| $ | 218,882 | | $ | 218,882 |
Accumulated amortization |
|
| (20,638) |
|
| (18,683) |
| | (29,841) | | | (19,495) |
Net definite-lived intangible assets |
|
| 33,873 |
|
| 2,249 |
| | 189,041 | | | 199,387 |
Indefinite-lived intangible assets not subject to amortization |
|
| 407 |
|
| 407 |
| | — | | | — |
Other intangible assets, net |
| $ | 34,280 |
| $ | 2,656 |
| $ | 189,041 | | $ | 199,387 |
The following table sets forth our amortization expense, in thousands:
4. LONG-TERM DEBT
| | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, | ||||||||
|
| 2019 |
| 2018 |
| 2019 |
| 2018 | ||||
Amortization expense | | $ | 5,173 | | $ | 3,992 | | $ | 10,346 | | $ | 5,294 |
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.
10
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 | ||||
|
| June 30, |
| December 31, | ||
Principal debt balances: | | 2019 |
| 2018 | ||
Senior Notes | | $ | 400,000 | | $ | 400,000 |
Term loan | | | 318,750 | | | 327,500 |
Equipment notes | | | 26,839 | | | 24,455 |
Unamortized debt issuance costs | | | (7,702) | | | (8,481) |
Total debt, net of unamortized debt issuance costs | | | 737,887 | | | 743,474 |
Less: current portion of long-term debt | | | 32,261 | | | 26,852 |
Total long-term debt | | $ | 705,626 | | $ | 716,622 |
The following table sets forth our remaining principal payments for our outstanding debt balances as of June 30, 2019, in thousands:
| | | | | | | | | | | | | | | | | | | | | |
| | Payments Due by Period | |||||||||||||||||||
| | 2019 | | 2020 | | 2021 | | 2022 | | 2023 | | Thereafter | | Total | |||||||
Senior Notes | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | 400,000 | | $ | 400,000 |
Term loan |
| | 13,125 |
| | 26,250 |
| | 30,625 |
| | 248,750 |
| | — |
| | — |
| | 318,750 |
Equipment notes | | | 2,975 | | | 6,135 | | | 6,393 | | | 6,660 | | | 4,311 | | | 365 | | | 26,839 |
Total | | $ | 16,100 | | $ | 32,385 | | $ | 37,018 | | $ | 255,410 | | $ | 4,311 | | $ | 400,365 | | $ | 745,589 |
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 June 30, 2019 | | 3.69 | % |
Scheduled maturity date | | 5/05/2022 | |
12
(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 NewAmended 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 TotalSecured 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 |
|
|
|
|
|
|
|
|
|
Borrowings under the NewAmended 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.
11
Table of ContentsRevolving Facility
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,Revolving Facility, reduce the availability under the Revolving Facility. The following table summarizes our availability under the Revolving Facility, in thousands:
| | | | | | |
| | As of | ||||
| | June 30, |
| December 31, | ||
|
| 2019 |
| 2018 | ||
Revolving Facility | | $ | 250,000 | | $ | 250,000 |
Less: standby letters of credit | | | (62,882) | | | (59,288) |
Availability under Revolving Facility | | $ | 187,118 | | $ | 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.
|
|
|
|
|
|
|
|
| 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 |
13
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 issued an equipment note for approximately $5.0 million during the quarter ended June 30, 2019. The Company’s equipment notes each have a five year maturity through 2024 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 NewAmended 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 NewAmended Credit Agreement contains customary affirmative covenants and events of default.
The NewAmended Credit Agreement requires us tothat 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:FCCR required:
| | | | |
Quarter Ending |
| |||
| Maximum | | Minimum | |
|
|
| ||
| |
| | 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 | |
| | 1.25:1.00 |
12
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:Quarterly Report:
| | |
| | As of |
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–Business Combinations.
14
Fair Value on Non-Recurring Basis
Fair value measurements were applied to our long-term debt. Thedebt portfolio.We believe the carrying value of our long-term debtterm 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 NewAmended Credit Agreement. In addition, due to the floating-rate nature of our long-term debt,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 June 30, 2019 (Level 1 fair value measurement), we estimate that the fair value of the Senior Notes is approximately $412.0 million compared to a gross carrying value of $400.0 million at June 30, 2019.
During theall periods presented, there were no transfers between fair value hierarchical levels.
13
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 June 30, | ||||||||||
| | 2019 | | 2018 | | 2019 | | 2018 | ||||
| | Net Sales | | Operating Profit (b) | ||||||||
Our operations by segment were (a): | | | | | | | | | | | | |
Installation | | $ | 483,028 | | $ | 429,423 | | $ | 68,423 | | $ | 49,635 |
Distribution | | | 213,487 | | | 205,621 | | | 21,151 | | | 20,009 |
Intercompany eliminations | | | (36,403) | | | (29,075) | | | (6,405) | | | (5,277) |
Total | | $ | 660,112 | | $ | 605,969 | | | 83,169 | | | 64,367 |
General corporate expense, net (c) | | | | | | | | | (7,130) | | | (20,686) |
Operating profit, as reported | | | | | | | | | 76,039 | | | 43,681 |
Other expense, net | | | | | | | | | (9,105) | | | (7,240) |
Income before income taxes | | | | | | | | $ | 66,934 | | $ | 36,441 |
| | | | | | | | | | | | |
| | Six Months Ended June 30, | ||||||||||
| | 2019 | | 2018 | | 2019 | | 2018 | ||||
| | Net Sales | | Operating Profit (b) | ||||||||
Our operations by segment were (a): | | | | | | | | | �� | | | |
Installation | | $ | 932,410 | | $ | 758,817 | | $ | 119,722 | | $ | 78,965 |
Distribution | | | 417,951 | | | 393,387 | | | 41,748 | | | 37,912 |
Intercompany eliminations | | | (70,919) | | | (54,792) | | | (12,078) | | | (9,725) |
Total | | $ | 1,279,442 | | $ | 1,097,412 | | | 149,392 | | | 107,152 |
General corporate expense, net (c) | | | | | | | | | (16,734) | | | (29,579) |
Operating profit, as reported | | | | | | | | | 132,658 | | | 77,573 |
Other expense, net | | | | | | | | | (18,374) | | | (9,530) |
Income before income taxes | | | | | | | | $ | 114,284 | | $ | 68,043 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 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 |
(b) |
| Segment operating profit |
(c) |
| General corporate expense, net |
|
|
1415
TOPBUILD CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
7. LEASES
We have operating leases for our installation branch locations, distribution centers, our Branch Support Center in Daytona Beach, Florida, vehicles and certain equipment. As of June 30, 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 primarily included in cost of sales 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.
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 or upon a modification to the lease term and at the time of lease commencement for all future leases. Our IBR includes 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 primarily included in cost of sales on the accompanying unaudited condensed consolidated statement of operations, in thousands:
| | | | | | |
|
| Three Months Ended June 30, | | Six Months Ended June 30, | ||
| | 2019 | | 2019 | ||
Operating lease cost | | $ | 11,279 | | $ | 23,437 |
Short-term lease cost | | | 3,005 | | | 6,010 |
Variable lease cost | | | 1,389 | | | 2,767 |
Sublease income | | | (154) | | | (308) |
Net lease cost | | $ | 15,519 | | $ | 31,906 |
16
Future minimum lease payments under non-cancellable operating leases as of June 30, 2019 were as follows, in thousands:
| | | |
Payments due by Period |
| | |
2019 | | $ | 22,044 |
2020 | | | 33,998 |
2021 | | | 22,041 |
2022 | | | 12,609 |
2023 | | | 5,848 |
2024 & Thereafter | | | 6,605 |
Total future minimum lease payments | | | 103,145 |
| | | |
Less: imputed interest | | | (9,306) |
| | | |
Lease liability at June 30, 2019 | | $ | 93,839 |
LitigationAs of June 30, 2019, the weighted average remaining lease term was 3.4 years and the related lease liability was calculated using a weighted average discount rate of 4.4%.
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, in thousands:
| | | |
Six Months Ended June 30, | 2019 | ||
Cash paid for amounts included in the measurement of lease liabilities | | $ | (22,896) |
8. INCOME TAXES
Our effective tax rates were 22.2% and 21.2% for the three and six months ended June 30, 2019, respectively. The effective tax rates for the three and six months ended June 30, 2018, were 25.5% and 21.3%, respectively. The lower 2019 tax rate for the three months ended June 30, 2019 compared to the three months ended June 30, 2018 was due to a larger impact of the discrete benefits related to share-based compensation.
Our condensed consolidated statements of operations recognized a discrete tax benefit of $1.6 million and $3.8 million related to share-based compensation for the three and six months ended June 30, 2019, respectively.
At June 30, 2019, the net deferred tax liability of $162.3 million consisted of net long-term deferred tax assets of $12.0 million and net long-term deferred tax liabilities of $174.3 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.
9. INCOME PER SHARE
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.
17
Basic and diluted net income per share were computed as follows, in thousands, except share and per share amounts:
| | | | | | | | | | | | |
| | Three Months Ended June 30, |
| Six Months Ended June 30, | ||||||||
| | 2019 | | 2018 |
| 2019 | | 2018 | ||||
Net income - basic and diluted | | $ | 52,051 | | $ | 27,153 | | $ | 90,035 | | $ | 53,540 |
| | | | | | | | | | | | |
Weighted average number of common shares outstanding - basic | | | 33,976,169 | | | 35,102,429 | | | 34,072,314 | | | 35,081,292 |
| | | | | | | | | | | | |
Dilutive effect of common stock equivalents: | | | | | | | | | | | | |
RSAs with service-based conditions | | | 84,952 | | | 165,951 | | | 88,516 | | | 174,537 |
RSAs with market-based conditions | | | 174,840 | | | 253,382 | | | 177,436 | | | 241,552 |
RSAs with performance-based conditions | | | 71,246 | | | — | | | 53,618 | | | — |
Stock options | | | 250,457 | | | 315,340 | | | 238,164 | | | 330,909 |
| | | | | | | | | | | | |
Weighted average number of common shares outstanding - diluted | | | 34,557,664 | | | 35,837,102 | | | 34,630,048 | | | 35,828,290 |
| | | | | | | | | | | | |
Basic income per common share | | $ | 1.53 | | $ | 0.77 | | $ | 2.64 | | $ | 1.53 |
| | | | | | | | | | | | |
Diluted income per common share | | $ | 1.51 | | $ | 0.76 | | $ | 2.60 | | $ | 1.49 |
The following table summarizes shares excluded from the calculation of diluted net income per share because their effect would have been anti-dilutive:
| | | | | | | | | | | | |
| | Three Months Ended June 30, |
| Six Months Ended June 30, | ||||||||
| | 2019 |
| 2018 |
| 2019 |
| 2018 | ||||
Anti-dilutive common stock equivalents: | | | | | | | | | | | | |
RSAs with service-based conditions | | | 1,087 | | | 349 | | | 7,897 | | | 312 |
RSAs with market-based conditions | | | — | | | — | | | 9,851 | | | — |
RSAs with performance-based conditions | | | — | | | — | | | — | | | — |
Stock options | | | 81,411 | | | 76,349 | | | 102,550 | | | 55,777 |
Total anti-dilutive common stock equivalents | | | 82,498 | | | 76,698 | | | 120,298 | | | 56,089 |
10. SHARE-BASED COMPENSATION
Effective July 1, 2015, our eligible employees commenced participation in the 2015 Long-Term Incentive Program. The 2015 Long-Term Incentive Program authorizes the Board to grant stock options, stock appreciation rights, restricted shares, restricted share units, performance awards, and dividend equivalents. All grants are made by issuing new shares and no more than 4.0 million shares of common stock may be issued under the 2015 Long-Term Incentive Program. As of June 30, 2019, we had 2.3 million shares remaining available for issuance under the 2015 Long-Term Incentive Program.
Share-based compensation expense is included in selling, general, and administrative expense. The income tax effect associated with the vesting of awards is included in income tax expense. The following table presents share-based compensation amounts recognized in our condensed consolidated statements of operations, in thousands:
| | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, | ||||||||
| | 2019 | | 2018 | | 2019 | | 2018 | ||||
Share-based compensation expense | | $ | 4,513 | | $ | 2,995 | | $ | 7,485 | | $ | 5,397 |
Income tax benefit (expense) realized from the vesting of awards | | $ | 1,560 | | $ | (19) | | $ | 3,806 | | $ | 2,595 |
18
The following table presents a summary of our share-based compensation activity for the six months ended June 30, 2019, in thousands, except per share amounts:
| | | | | | | | | | | | | | | | |
| | RSAs | | Stock Options | ||||||||||||
| | Number of Shares |
| Weighted Average Grant Date Fair Value Per Share |
| Number of Shares |
| Weighted Average Grant Date Fair Value Per Share |
| Weighted Average Exercise Price Per Share |
| Aggregate | ||||
Balance December 31, 2018 | | 499.2 | | $ | 41.29 | | 611.4 | | $ | 13.10 | | $ | 34.45 | | $ | 8,685.8 |
Granted | | 227.1 | | $ | 67.37 | | 103.5 | | $ | 21.16 | | $ | 58.08 | | | |
Converted/Exercised | | (291.4) | | $ | 31.23 | | (183.5) | | $ | 10.53 | | $ | 27.18 | | $ | 8,824.0 |
Forfeited | | (17.4) | | $ | 56.29 | | (9.7) | | $ | 20.28 | | $ | 54.62 | | | |
Expired | | | | | | | (2.7) | | $ | 14.44 | | $ | 38.39 | | | |
Balance June 30, 2019 | | 417.5 | | $ | 55.97 | | 519.0 | | $ | 15.47 | | $ | 41.34 | | $ | 21,500.4 |
| | | | | | | | | | | | | | | | |
Exercisable June 30, 2019 (a) | | | | | 183.0 | | $ | 13.48 | | $ | 35.52 | | $ | 8,645.8 |
(a) | The weighted average remaining contractual term for vested stock options is 7.0 years. |
We had unrecognized share-based compensation expense relating to unvested awards as shown in the following table, dollars in thousands:
| | | | | | |
| | As of June 30, 2019 | ||||
| | Unrecognized Compensation Expense | | Weighted Average | ||
Unrecognized compensation expense related to unvested awards: | | | | | | |
RSAs | | $ | 12,319 | | | 1.4 years |
Stock options | | | 2,845 | | | 1.1 years |
Total unrecognized compensation expense related to unvested awards | | $ | 15,164 | | | |
Our RSAs with performance-based conditions are evaluated on a quarterly basis with adjustments to compensation expense based on the likelihood of the performance target being achieved or exceeded. The following table shows the range of payouts and the related expense for our outstanding RSAs with performance-based conditions, in thousands:
| | | | | | | | | | | | | | | |
| | | | | Payout Ranges and Related Expense | ||||||||||
RSAs with Performance-Based Conditions | | Grant Date Fair Value | | 0% | | 25% | | 100% | | 200% | |||||
February 21, 2017 | | $ | 1,839 | | $ | — | | $ | 460 | | $ | 1,839 | | $ | 3,678 |
February 19, 2018 | | $ | 2,102 | | $ | — | | $ | 526 | | $ | 2,102 | | $ | 4,204 |
February 18, 2019 | | $ | 2,533 | | $ | — | | $ | 633 | | $ | 2,533 | | $ | 5,066 |
During the first quarter of 2019, RSAs with performance-based conditions that were granted on February 22, 2016 vested based on cumulative three-year achievement of 88.6%. Total compensation expense recognized over the three-year performance period, net of forfeitures, was $1.7 million.
19
The fair value of our RSAs with a market-based condition granted under the 2015 Long-Term Incentive Program was determined using a Monte Carlo simulation. The following are key inputs in the Monte Carlo analysis for awards granted in 2019 and 2018:
| | | | | | | | |
| | 2019 | | | 2018 | | ||
Measurement period (years) | | | 2.87 | | | | 2.87 | |
Risk free interest rate | | | 2.50 | % | | | 2.36 | % |
Dividend yield | | | 0.00 | % | | | 0.00 | % |
Estimated fair value of market-based RSAs granted | | $ | 80.74 | | | $ | 103.31 | |
The fair values of stock options granted under the 2015 Long-Term Incentive Program were calculated using the Black-Scholes Options Pricing Model. The following table presents the assumptions used to estimate the fair values of stock options granted in 2019 and 2018:
| | | | | | | | |
| | 2019 | | | 2018 | | ||
Risk free interest rate | | | 2.59 | % | | | 2.78 | % |
Expected volatility, using historical return volatility and implied volatility | | | 32.50 | % | | | 32.50 | % |
Expected life (in years) | | | 6.0 | | | | 6.0 | |
Dividend yield | | | 0.00 | % | | | 0.00 | % |
Estimated fair value of stock options granted | | $ | 21.16 | | | $ | 27.44 | |
11. SHARE REPURCHASE PROGRAM
On February 22, 2019, our Board authorized the 2019 Repurchase Program, pursuant to which the Company may purchase up to $200.0 million of our common stock. Share repurchases may be executed through various means including, without limitation, open market purchases, privately negotiated transactions, accelerated share repurchase transactions or otherwise. The 2019 Share Repurchase Program does not obligate the Company to purchase any shares and has no expiration date. Authorization for the 2019 Share Repurchase Program may be terminated, increased, or decreased by the Board at its discretion at any time.
Effective November 7, 2018, under the 2017 Repurchase Program, we entered into the 2018 ASR Agreement. We paid JPMorgan Chase Bank, N.A. $50.0 million in exchange for an initial delivery of 796,925 shares of our common stock on November 8, 2018, representing an estimated 85% of the total number of shares we expected to receive under the 2018 ASR Agreement, at the time we entered into the agreement. During the quarter ended March 31, 2019, we received an additional 176,327 shares of our common stock from JPMorgan Chase Bank, N.A., representing the final settlement of the 2018 ASR Agreement. We purchased a total of 973,252 shares of our common stock under the 2018 ASR Agreement at an average price per share of $51.37.
On May 5, 2017, under the 2017 Repurchase Program, we entered into the 2017 ASR Agreement. When the agreement became effective on July 5, 2017, we recognizedpaid BofA $100.0 million in exchange for an initial delivery of 1.5 million shares of our common stock, representing an estimated 80% of the total number of shares we expected to receive under the 2017 ASR Agreement, at the time we entered into the agreement. During the three months ended March 31, 2018, we received an additional 13,657 shares of our common stock from BofA, representing the final settlement of the 2017 ASR Agreement. We purchased a $30total of 1,521,100 shares of our common stock under the 2017 ASR Agreement at an average price per share of $65.74.
20
The following table sets forth our share repurchases under the 2019 and 2017 Repurchase Programs during the periods presented:
| | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, | ||||||||
|
| 2019 | | 2018 | | 2019 |
| 2018 | ||||
Number of shares repurchased | | | 196,885 | | | — | | | 446,003 (b) | | | 13,657 (a) |
Share repurchase cost (in thousands) | | $ | 14,878 | | $ | — |
| $ | 19,499 | | $ | — |
(a) Thesix months ended June 30, 2018 includes 13,657 shares we received as final settlement of our 2017 ASR Agreement.
(b) Thesix months ended June 30, 2019 includes 176,327 shares we received as final settlement of our 2018 ASR Agreement.
12. BUSINESS COMBINATIONS
As part of our strategy to supplement our organic growth and expand our access to additional markets and products, we completed three acquisitions during 2018. Each acquisition was accounted for as a business combination under ASC 805, “Business Combinations.” There were no acquisition related costs for the three months ended June 30, 2019. Acquisition related costs for the six months ended June 30, 2019, were $0.1 million. Acquisition related costs for the three and six months ended June 30, 2018, were $9.8 million and $13.3 million, respectively. Acquisition costs are included in selling, general, and administrative expense in our condensed consolidated statements of operations.
Acquisitions
On January 10, 2018, we acquired ADO, a distributor of insulation accessories, located in Plymouth, Minnesota. The purchase price of approximately $23.0 million was funded by cash on hand of $22.2 million and contingent consideration of $0.8 million.
On January 18, 2018, we acquired substantially all of the assets of Santa Rosa, a residential and commercial insulation company located in Miami, Florida. The purchase price of approximately $5.8 million was funded by cash on hand of $5.6 million and contingent consideration of $0.2 million.
On May 1, 2018, we acquired USI, a leading distributor and installer of insulation in both residential and commercial construction markets. Our payment of $486.5 million, which included the purchase price of $475.0 million and adjustments for cash and working capital, was funded through net proceeds from the issuance on April 25, 2018, of the Senior Notes together with the net proceeds from the $100.0 million delayed draw term loan commitment under our Amended Credit Agreement. For additional information see Note 4 – Long-Term Debt.
Revenue and net income since the respective acquisition dates included in our condensed consolidated statements of operations were as follows, in thousands:
| | | | | | | | | | | | |
| | Three Months Ended June 30, 2019 | | Six Months Ended June 30, 2019 | ||||||||
2018 Acquisitions |
| Net Sales |
| Net Income | | Net Sales | | Net Income | ||||
ADO | | $ | 6,237 | | $ | 68 | | $ | 12,876 | | $ | 71 |
Santa Rosa | | | 2,354 | | | 292 | | | 4,542 | | | 601 |
USI | | | 96,261 | | | 10,269 | | | 188,389 | | | 17,897 |
| | $ | 104,852 | | $ | 10,629 | | $ | 205,807 | | $ | 18,569 |
21
Pro Forma Results
The following unaudited pro forma information has been prepared as if the 2018 acquisitions described above had taken place on January 1, 2017. The unaudited pro forma information is not necessarily indicative of the results that we would have achieved had the transactions actually taken place on January 1, 2017. Further, the pro forma information does not purport to be indicative of future financial operating results. The pro forma results for the three and six months ended June 30, 2019 do not include any adjustments from our actual results as all acquisitions were wholly-owned for the entire period. Our pro forma results are presented below, in thousands:
| | | | | | | | | | | | |
| | Unaudited Pro Forma for the | | Unaudited Pro Forma for the | ||||||||
| | Three Months Ended June 30, | | Six Months Ended June 30, | ||||||||
|
| 2019 |
| | 2018 |
| 2019 |
| | 2018 | ||
Net sales | | $ | 660,112 | | $ | 639,754 | | $ | 1,279,442 | | $ | 1,233,442 |
Net income | | $ | 52,051 | | $ | 29,287 | | $ | 90,035 | | $ | 62,103 |
The following table details the additional expense included in the unaudited pro forma net income as if the 2018 acquisitions described above had taken place on January 1, 2017. Our pro forma results are presented below, in thousands:
| | | | | | | | | | | | |
| | Unaudited Pro Forma for the | | Unaudited Pro Forma for the | ||||||||
| | Three Months Ended June 30, | | Six Months Ended June 30, | ||||||||
|
| 2019 |
| 2018 |
| 2019 |
| 2018 | ||||
Amortization of intangible assets | | $ | — | | $ | 1,250 | | $ | — | | $ | 5,039 |
Income tax expense (using 26.5% and 27.0% effective tax rate in 2019 and 2018, respectively) | | $ | — | | $ | 789 | | $ | — | | $ | 3,167 |
Purchase Price Allocations
The estimated fair values of the assets acquired and liabilities assumed for the 2018 acquisitions, as well as the fair value of consideration transferred, approximated the following as of June 30, 2019, in thousands:
| | | | | | | | | | | | |
| | 2018 Acquisitions | ||||||||||
| | Completed During the Year Ended December 31, 2018 | ||||||||||
|
| ADO |
| Santa Rosa |
| USI | | Total | ||||
Estimated fair values: | | | | | | | | | | | | |
Cash | | $ | 939 | | $ | — | | $ | 14,817 | | $ | 15,756 |
Accounts receivable | | | 3,434 | | | 1,433 | | | 61,445 | | | 66,312 |
Inventories | | | 2,337 | | | 104 | | | 14,029 | | | 16,470 |
Prepaid and other assets | | | 135 | | | 7 | | | 3,439 | | | 3,581 |
Property and equipment | | | 951 | | | 522 | | | 33,701 | | | 35,174 |
Intangible assets | | | 14,090 | | | 1,850 | | | 165,400 | | | 181,340 |
Goodwill | | | 2,631 | | | 3,014 | | | 280,930 | | | 286,575 |
Accounts payable | | | (908) | | | (1,099) | | | (17,927) | | | (19,934) |
Accrued liabilities | | | (609) | | | — | | | (34,686) | | | (35,295) |
Deferred tax liability | | | — | | | — | | | (34,610) | | | (34,610) |
Net assets acquired | | $ | 23,000 | | $ | 5,831 | | $ | 486,538 | | $ | 515,369 |
| | | | | | | | | | | | |
| | 2018 Acquisitions | ||||||||||
| | Completed During the Year Ended December 31, 2018 | ||||||||||
|
| ADO |
| Santa Rosa |
| USI |
| Total | ||||
Fair value of consideration transferred: | | | | | | | | | | | | |
Cash | | $ | 22,172 | | $ | 5,831 | | $ | 486,538 | | $ | 514,541 |
Deferred consideration | | | — | | | — | | | — | | | — |
Contingent consideration | | | 828 | | | — | | | — | | | 828 |
Total consideration transferred | | $ | 23,000 | | $ | 5,831 | | $ | 486,538 | | $ | 515,369 |
22
Estimates of acquired intangible assets related to the acquisitions are as follows, as of June 30, 2019, dollars in thousands:
| | | | | | |
|
| Estimated Fair Value |
| Weighted Average Estimated Useful Life (Years) | ||
2018 Acquisitions: | | | | | | |
Customer relationships | | $ | 168,820 | | | 12 |
Trademarks and trade names | | | 11,260 | | | 9 |
Non-competition agreements | | | 1,260 | | | 5 |
Total intangible assets for 2018 acquisitions | | $ | 181,340 | | | 11 |
As third party or internal valuations are finalized, certain tax aspects of the foregoing transactions are completed, and customer post-closing reviews are concluded, adjustments may be made to the fair value of assets acquired, and in some cases total purchase price, through the end of each measurement period, generally one year following the applicable acquisition date. Various insignificant adjustments to the fair value of assets acquired, and in some cases total purchase price, have been made to certain business combinations since the respective dates of acquisition. We made measurement-period adjustments related to the acquisition of USI during the first and second quarters of 2019 which resulted in a legal settlement with Owens Corningnet decrease to goodwill of $0.3 million. These adjustments were primarily to record state income tax carryforward items.
Goodwill to be recognized in connection with these acquisitions is attributable to the synergies expected to be realized and improvements in the businesses after the acquisitions. Of the $286.6 million of goodwill recorded from the 2018 acquisitions, $33.2 million is expected to be deductible for income tax purposes.
Contingent Consideration
On February 27, 2017, we acquired substantially all of the assets of EcoFoam, a breachresidential and light commercial insulation installation company with locations in Colorado Springs and Denver, Colorado. The purchase price of contract actionapproximately $22.3 million was funded by cash on hand of $20.2 million and contingent consideration of $2.1 million. The contingent consideration arrangement requires additional consideration to be paid by TopBuild to the sellers of EcoFoam based on EcoFoam’s attainment of annual revenue targets over a three-year period. The total amount of undiscounted contingent consideration which TopBuild may be required to pay under the arrangement is $2.5 million. The fair value of $2.1 million contingent consideration recognized on the acquisition date was estimated by applying the income approach using discounted cash flows. That measure is based on significant Level 3 inputs not observable in the market. The significant assumption includes a discount rate of 9.5%. Changes in the fair value measurement each period reflect the passage of time as well as the impact of adjustments, if any, to the likelihood of achieving the specified targets. We made contingent payments of $0.8 million in the second quarters of 2019 and 2018.
The acquisition of ADO included a contingent consideration arrangement that requires additional consideration to be paid by TopBuild to the sellers of ADO based on the achievement of certain EBITDA thresholds over a two-year period. The range of the undiscounted amounts TopBuild may be required to pay under the contingent consideration agreement is between zero and $1.0 million. The fair value of the contingent consideration recognized on the acquisition date of $0.8 million was estimated by applying the income approach using discounted cash flows. That measure is based on significant Level 3 inputs not observable in the market. The significant assumption includes a discount rate of 9.5%. Changes in the fair value measurement each period reflect the passage of time as well as the impact of adjustments, if any, to the likelihood of achieving the specified targets.
23
The acquisition of Santa Rosa included a contingent consideration arrangement that required additional consideration to be paid by TopBuild based on the achievement of a gross revenue target for 2018. The range of undiscounted amounts TopBuild could be required to pay under the contingent consideration was between zero and $0.25 million, which also represents the fair value recognized on the acquisition date. In the first quarter of 2019, we paid $0.25 million in full and had no remaining contingent consideration obligation related to our terminationSanta Rosa as of an insulation supply contract. Under the terms of the settlement, we paid Owens Corning $30 million. The settlement resultedMarch 31, 2019.
Contingent consideration is recorded in the dismissalcondensed consolidated balance sheets in accrued liabilities and other liabilities. Adjustments to the fair value of the lawsuit filed in May 2016 in Toledo, Ohio. The settlement iscontingent consideration are reflected in selling, general, and administrative expense in the significant legal settlement line item within our Condensed Consolidated Statementscondensed consolidated statements of Operations foroperations and are included in the nine months ended September 30, 2017. acquisition related costs above.
The settlement is alsofollowing table presents the fair value of contingent consideration, in thousands:
| | | | | | | | | |
|
| EcoFoam |
| ADO |
| Santa Rosa | |||
Date of Acquisition | | February 27, 2017 | | January 10, 2018 | | January 18, 2018 | |||
Fair value of contingent consideration recognized at acquisition date | | $ | 2,110 | | $ | 828 | | $ | 250 |
| | | | | | | | | |
Contingent consideration at December 31, 2018 | | $ | 1,573 | | $ | 343 | | $ | 250 |
Additions | | | — | | | — | | | — |
Change in fair value of contingent consideration during the six months ended June 30, 2019 | | | 54 | | | (104) | | | — |
Payment of contingent consideration during the six months ended June 30, 2019 | | | (841) | | | — | | | (250) |
Liability balance for contingent consideration at June 30, 2019 | | $ | 786 | | $ | 239 | | $ | — |
13. CLOSURE COSTS
We generally recognize expenses related to closures and position eliminations at the time of announcement or notification. Such costs include termination and other severance benefits, lease abandonment costs, and other transition costs. Closure costs are reflected in our installation segment’s year-to-date operating results.condensed consolidated statements of operations as selling, general, and administrative expense. In our condensed consolidated balance sheets, accrued severance closure costs are reflected as accrued liabilities and accrued lease abandonment costs are reflected as short-term and long-term lease liabilities.
In connection with the acquisition of USI, management performed an evaluation of the resources necessary to effectively operate the acquired business. During the second quarter of 2018, management committed to a plan to close the USI corporate office in St. Paul, Minnesota, and consolidate certain administrative functions to our Daytona Beach, Florida, Branch Support Center. As a result, the Company incurredapproximately $6.9 million of closure costs in connection with this activity of which $6.7 million was incurred during the year ended December 31, 2018 and $0.2 million was incurred during the first quarter of 2019, which completed the anticipated costs of the program. Closure costs pertaining to the USI acquisition are primarily included in general corporate expenses for segment reporting purposes.
The following table details our total estimated closure costs, by cost type, pertaining to the above closure and transition related to the USI acquisition (in thousands):
| | | | | | | | | | | | | | | |
Segment / Cost Type |
| Closure Costs Liability at December 31, 2018 |
| Closure Costs Incurred for the Six Months Ended |
| Cash Payments for the Six Months Ended |
| Non-cash Adjustments for the Six Months Ended |
| Closure Costs Liability at | |||||
Corporate: | | | | | | | | | | | | | | | |
Severance | | $ | 3,065 | | | 239 | | | (2,882) | | | (119) | | $ | 303 |
Lease abandonment | | | 301 | | | — | | | (99) | | | 229 | | | 431 |
Other costs | | | — | | | — | | | — | | | — | | | — |
Total Corporate: | | $ | 3,366 | | | 239 | | | (2,981) | | | 110 | | $ | 734 |
24
The remaining accrued severance closure costs will be paid by the end of 2019. Non-cash adjustments in the table above relate to true-up of estimates to actual amounts.
14. ACCRUED LIABILITIES
The following table sets forth the components of accrued liabilities, in thousands:
| | | | | | |
| | As of | ||||
| | June 30, | | December 31, | ||
|
| 2019 |
| 2018 | ||
Accrued liabilities: | | | | | | |
Salaries, wages, and commissions | | $ | 29,970 | | $ | 34,085 |
Insurance liabilities | | | 25,045 | | | 25,212 |
Deferred revenue | | | 17,261 | | | 19,963 |
Interest payable on long-term debt | | | 3,957 | | | 3,951 |
Other | | | 24,049 | | | 21,025 |
Total accrued liabilities | | $ | 100,282 | | $ | 104,236 |
See Note 2 – Accounting Policies for discussion of our deferred revenue balances and related revenue recognition policy.
15. OTHER COMMITMENTS AND CONTINGENCIES
Litigation. We are subject to certain claims, charges, litigation, and other proceedings in the ordinary course of our business, including those arising from or related to contractual matters, intellectual property, personal injury, environmental matters, product liability, product recalls, construction defects, insurance coverage, personnel and employment disputes, antitrust, and other matters, including class actions. We believe we have adequate defenses in these matters, and we do not believe that the ultimate outcome of these matters will have a material adverse effect on us. However, there is no assurance that we will prevail in any of these pending matters, and we could in the future incur judgments, enter into settlements of claims, or revise our expectations regarding the outcome of these matters, which could materially impact our liquidity and our results of operations.
Other Matters. We enter into contracts which include customary indemnities that are standard for the industries in which we operate. Such indemnities include, among other things, customer claims against builders for issues relating to our products and workmanship. In conjunction with divestitures and other transactions, we occasionally provide customary indemnities relating to various items including, among others: the enforceability of trademarks; legal and environmental issues; and asset valuations. We evaluate the probability that we may incur liabilities under these customary indemnities and appropriately record an estimated liability when deemed probable.
We occasionally use performance bonds to ensure completion of our work on certain larger customer contracts that can span multiple accounting periods. Performance bonds generally do not have stated expiration dates; rather, we are released from the bonds as the contractual performance is completed. Other types of bonds outstanding were principally license and insurance related.
8. INCOME TAXES
Our effective tax rates were 33.4 percent and 33.8 percent for the three and nine months ended September 30, 2017, respectively. The effective tax rates for the three and nine months ended September 30, 2016 were 35.2 percent and 37.1 percent, respectively. The lower 2017 rates were due to discrete benefits related to share-based compensation, an increase in the amount of the Domestic Production Activities Deduction, and from return to accrual adjustments for tax returns filed in 2017 related to 2016.16. SUBSEQUENT EVENTS
A tax benefit of $1.6 million and $2.6 million related to share-based compensation was recognized in our Condensed Consolidated Statements of Operations as a discrete item in income tax expense for the three and nine months ended September 30, 2017, respectively.
15
TOPBUILD CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Basic net income per share is calculated by dividing net income by the weighted average shares outstanding during the period, without consideration for common stock equivalents.
Diluted net income per share is calculated by adjusting weighted average shares outstanding for the dilutive effect of common stock equivalents outstanding for the period, determined using the treasury stock method.
Basic and diluted income per share were computed as follows, in thousands, except share and per share amounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended September 30, |
| Nine Months Ended September 30, | ||||||||
|
| 2017 |
| 2016 |
| 2017 |
| 2016 | ||||
Income from continuing operations |
| $ | 31,393 |
| $ | 24,566 |
| $ | 53,142 |
| $ | 51,299 |
Net income - basic and diluted |
| $ | 31,393 |
| $ | 24,566 |
| $ | 53,142 |
| $ | 51,299 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding - basic |
|
| 35,022,113 |
|
| 37,599,137 |
|
| 36,203,497 |
|
| 37,683,764 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive effect of common stock equivalents: |
|
|
|
|
|
|
|
|
|
|
|
|
RSAs with service-based conditions |
|
| 216,724 |
|
| 234,699 |
|
| 215,069 |
|
| 174,928 |
RSAs with market-based conditions |
|
| 202,292 |
|
| 37,031 |
|
| 174,559 |
|
| 31,808 |
RSAs with performance-based conditions |
|
| — |
|
| — |
|
| — |
|
| — |
Stock options |
|
| 296,500 |
|
| 81,466 |
|
| 249,019 |
|
| 52,040 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding - diluted |
|
| 35,737,629 |
|
| 37,952,333 |
|
| 36,842,144 |
|
| 37,942,540 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic income per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
| $ | 0.90 |
| $ | 0.65 |
| $ | 1.47 |
| $ | 1.36 |
Net income |
| $ | 0.90 |
| $ | 0.65 |
| $ | 1.47 |
| $ | 1.36 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted income per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
| $ | 0.88 |
| $ | 0.65 |
| $ | 1.44 |
| $ | 1.35 |
Net income |
| $ | 0.88 |
| $ | 0.65 |
| $ | 1.44 |
| $ | 1.35 |
The following table summarizes shares excluded from the calculation of diluted income per share because their effect would have been anti-dilutive:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended September 30, |
| Nine Months Ended September 30, | ||||||||
|
| 2017 |
| 2016 |
| 2017 |
| 2016 | ||||
Anti-dilutive common stock equivalents: |
|
|
|
|
|
|
|
|
|
|
|
|
RSAs with service-based conditions |
|
| — |
|
| 11,812 |
|
| 610 |
|
| 41,261 |
RSAs with market-based conditions |
|
| — |
|
| — |
|
| — |
|
| 8,431 |
RSAs with performance-based conditions |
|
| — |
|
| — |
|
| — |
|
| — |
Stock options |
|
| 5,010 |
|
| 418,517 |
|
| 59,298 |
|
| 449,332 |
Total anti-dilutive common stock equivalents: |
|
| 5,010 |
|
| 430,329 |
|
| 59,908 |
|
| 499,024 |
10. SHARE-BASED COMPENSATION
Our eligible employees currently participate in the 2015 LTIP. The 2015 LTIP authorizes the Board to grant stock options, stock appreciation rights, restricted shares, restricted share units, performance awards, and dividend equivalents. All grants are made by issuing new shares and no more than 4.0 million shares of common stock may be issued under the 2015 LTIP. As of September 30, 2017, we had 2.7 million shares available under the 2015 LTIP.
16
TOPBUILD CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Share-based compensation expense is included in selling, general, and administrative expense. The income tax effect associated with award vestings is included in income tax expense. The following table presents the amounts recognized in our Condensed Consolidated Statements of Operations, in thousands:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended September 30, |
| Nine Months Ended September 30, | ||||||||
|
| 2017 |
| 2016 |
| 2017 |
| 2016 | ||||
Share-based compensation expense |
| $ | 2,372 |
| $ | 2,038 |
| $ | 7,473 |
| $ | 5,743 |
Income tax benefit realized from award vestings |
| $ | 1,619 |
| $ | 511 |
| $ | 2,634 |
| $ | 511 |
The following table presents a summary of our share-based compensation activity for the nine months ended September 30, 2017, in thousands, except per share amounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| RSAs |
| Options | ||||||||||||
|
| Number of Shares |
| Weighted Average Grant Date Fair Value Per Share |
| Number of Shares |
| Weighted Average Grant Date Fair Value Per Share |
| Weighted Average Exercise Price Per Share |
| Aggregate | ||||
Balance December 31, 2016 |
| 653.1 |
| $ | 25.71 |
| 712.0 |
| $ | 9.73 |
| $ | 25.03 |
| $ | 7,525.8 |
Granted |
| 158.9 |
| $ | 44.28 |
| 153.0 |
| $ | 14.62 |
| $ | 38.89 |
|
| — |
Converted/Exercised |
| (183.1) |
| $ | 23.91 |
| (160.7) |
| $ | 8.34 |
| $ | 21.26 |
| $ | 5,500.8 |
Forfeited |
| (33.0) |
| $ | 31.18 |
| — |
| $ | — |
| $ | — |
|
| — |
Balance September 30, 2017 |
| 595.9 |
| $ | 30.91 |
| 704.3 |
| $ | 11.11 |
| $ | 28.90 |
| $ | 23,045.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable September 30, 2017 (a) |
|
|
|
| 162.2 |
| $ | 10.23 |
| $ | 26.48 |
| $ | 5,700.1 |
|
|
We had unrecognized share-based compensation expense relating to unvested awards as shown in the following table, dollars in thousands:
|
|
|
|
|
|
|
|
| As of September 30, 2017 | ||||
|
| Unrecognized Compensation Expense |
| Weighted Average | ||
RSAs |
| $ | 12,346 |
|
| 1.5 years |
Options |
|
| 4,724 |
|
| 1.5 years |
Total unrecognized compensation expense related to unvested awards |
| $ | 17,070 |
|
|
|
Our RSAs with performance-based conditions are evaluated on a quarterly basis with adjustments to compensation expense based on the likelihood of the performance target being achieved or exceeded. The following table shows the range of payouts and the related expense for our outstanding RSAs with performance-based conditions, in thousands:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Payout Ranges and related expense | ||||||||||
RSAs with performance-based conditions |
| Grant Date Fair Value |
| 0% |
| 25% |
| 100% |
| 200% | |||||
February 22, 2016 |
| $ | 1,988 |
| $ | — |
| $ | 497 |
| $ | 1,988 |
| $ | 3,976 |
February 21, 2017 |
| $ | 2,143 |
| $ | — |
| $ | 536 |
| $ | 2,143 |
| $ | 4,286 |
17
TOPBUILD CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
The fair value of our RSAs with a market-based condition granted under the 2015 LTIP was determined using a Monte Carlo simulation. The following are key inputs in the Monte Carlo analysis for awards granted in 2017 and 2016:
|
|
|
|
|
|
|
|
|
|
| 2017 |
| 2016 | ||||
Measurement period (years) |
|
| 2.86 |
|
|
| 2.86 |
|
Risk free interest rate |
|
| 1.46 | % |
|
| 0.90 | % |
Dividend yield |
|
| 0.00 | % |
|
| 0.00 | % |
Estimated fair value of market-based RSAs granted |
| $ | 50.06 |
|
| $ | 33.77 |
|
The fair values of stock options granted under the 2015 LTIP were calculated using the Black-Scholes Options Pricing Model. The following table presents the assumptions used to estimate the fair values of options granted in 2017 and 2016:
|
|
|
|
|
|
|
|
|
|
| 2017 |
| 2016 | ||||
Risk free interest rate |
|
| 2.18 | % |
|
| 1.51 | % |
Expected volatility, using historical return volatility and implied volatility |
|
| 35.00 | % |
|
| 38.00 | % |
Expected life (in years) |
|
| 6.00 |
|
|
| 6.00 |
|
Dividend yield |
|
| 0.00 | % |
|
| 0.00 | % |
Estimated fair value of options granted |
| $ | 14.44 |
|
| $ | 10.20 |
|
11. SHARE REPURCHASE PROGRAM
On March 1, 2016, our Board authorized the 2016 Repurchase Program, which expired on February 28, 2017. We repurchased a total of 788,399 shares forJuly 15, 2019, we acquired Viking Insulation, an approximate cost of $26.6 million, or $33.72 per share, under the 2016 Repurchase Plan.
On February 24, 2017, our Board authorized the 2017 Repurchase Program, pursuant to which we may purchase up to $200 million of our common stock. Share repurchases under the 2017 Repurchase Program may be executed through various means including, without limitation, open market purchases, privately negotiated transactions, or otherwise.insulation installation company, based in Burbank, California. The 2017 Repurchase Program does not obligate the Company to purchase any shares and expires February 24, 2019. The 2017 Repurchase Program may be terminated, increased, or decreased by our Board at its discretion at any time.
The following table sets forth our share repurchases under the 2016 and 2017 Share Repurchase Programs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended September 30, |
| Nine Months Ended September 30, | ||||||||
|
| 2017 |
| 2016 |
| 2017 |
| 2016 | ||||
Number of shares purchased |
|
| 1,507,443 |
|
| 188,068 |
|
| 2,365,836 |
|
| 341,500 |
Share repurchase cost (in thousands) |
| $ | 100,000 |
| $ | 6,415 |
| $ | 139,286 |
| $ | 11,377 |
On May 5, 2017, under the 2017 Repurchase Program, we entered into the 2017 ASR Agreement. When the agreement became effective on July 5, 2017, we paid BofA $100.0 million in exchange for an initial delivery of 1.5 million shares of our common stock, representing an estimated 80 percent of the total number of shares we expect to receive under the 2017 ASR Agreement. The actual number of shares repurchased under the 2017 ASR Agreement will be based on the average of the daily volume-weighted average prices paid for our common stock during the term of the transaction, less an agreed discount, and subject to potential adjustments pursuant to the terms and conditions of the agreement. The final settlement of the transaction under the agreement is expected to occur no later than the first quarter of 2018. At final settlement, BofA may be required to deliver additional shares of common stock to us, or, under certain circumstances, we may be required to deliver shares of our common stock or to make a cash payment, at our election, to BofA.
12. BUSINESS COMBINATIONS
As part of our strategy to supplement our organic growth and expand our access to additional markets and products, we made several acquisitions during the nine months ended September 30, 2017. Each acquisition was accounted for as a business combination under ASC Topic 805, “Business Combinations.” Acquisition related costs for the three and nine months ended September 30, 2017, were $0.3 million and $0.7 million, respectively and are included in selling, general,
18
TOPBUILD CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
and administrative expense in our Condensed Consolidated Statements of Operations.
Acquisitions
On January 16, 2017, we acquired substantially all of the assets of Midwest, a heavy commercial fireproofing and insulation company with locations in Chicago, Illinois and Indianapolis, Indiana. The purchase price of approximately $12.2 million was funded by cash on hand.
On February 27, 2017, we acquired substantially all of the assets of EcoFoam, a residential and light commercial insulation installation company with locations in Colorado Springs and Denver, Colorado. The purchase price of approximately $22.3$8.0 million was funded by cash on hand of $20.2$6.5 million and contingent consideration at an undiscounted target value of $2.1$1.5 million.
On February 27, 2017, During the measurement period, we acquired substantially all ofexpect to receive additional detailed information to complete the assets of MR Insulfoam, a residential insulation installation company located in Norwalk, Connecticut. The purchase price of approximately $1.5 million was funded by cash on hand.allocation.
On March 29, 2017, we acquired substantially all of the assets of Capital, a residential insulation installation company located in Sacramento, California. The purchase price of approximately $7.3 million was funded by cash on hand.
On April 20, 2017, we acquired substantially all of the assets of Superior, a residential insulation installation company located in Seattle, Washington. The purchase price of approximately $10.9 million was funded by cash on hand.
On June 8, 2017, we acquired substantially all of the assets of Canyon, a heavy commercial insulation and firestopping company with locations in Corona, San Diego, and Livermore, California. The purchase price of approximately $34.4 million was funded by cash on hand of $31.8 million and deferred purchase price consideration of $2.7 million.
Revenue and net income since the respective acquisition dates included in our Condensed Consolidated Statements of Operations were as follows, in thousands:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three months ended September 30, 2017 |
| Nine months ended September 30, 2017 | ||||||||
|
| Net Sales |
| Net Income |
| Net Sales |
| Net Income | ||||
Midwest |
| $ | 4,503 |
| $ | 12 |
| $ | 12,711 |
| $ | 152 |
EcoFoam |
| $ | 6,706 |
| $ | 669 |
| $ | 15,943 |
| $ | 894 |
Superior |
| $ | 3,323 |
| $ | 260 |
| $ | 6,189 |
| $ | 597 |
Canyon |
| $ | 6,556 |
| $ | 925 |
| $ | 8,289 |
| $ | 1,146 |
All others |
| $ | 2,808 |
| $ | 330 |
| $ | 5,749 |
| $ | 707 |
Pro Forma Results
The following unaudited pro forma information has been prepared as if the 2017 acquisitions described above had taken place on January 1, 2016. The unaudited pro forma information is not necessarily indicative of the results that we would have achieved had the transactions actually taken place on January 1, 2016. Further, the pro forma information does not purport to be indicative of future financial operating results. Our pro forma results are presented below, in thousands:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Pro forma for the three months ended September 30, |
| Pro forma for the nine months ended September 30, | ||||||||
|
| 2017 |
|
| 2016 |
| 2017 |
|
| 2016 | ||
Net sales |
| $ | 489,044 |
| $ | 474,647 |
| $ | 1,428,152 |
| $ | 1,364,805 |
Net income |
| $ | 31,393 |
| $ | 25,958 |
| $ | 55,017 |
| $ | 55,142 |
19
25
TOPBUILD CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
The following table details the additional expense included in the unaudited pro forma net income that would have been recorded had the acquisitions taken place on January 1, 2016, in thousands:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Pro forma for the three months ended September 30, |
| Pro forma for the nine months ended September 30, | ||||||||
|
| 2017 |
| 2016 |
| 2017 |
| 2016 | ||||
Amortization of intangible assets |
| $ | — |
| $ | 917 |
| $ | 1,131 |
| $ | 2,747 |
Income tax expense (using normalized 38% ETR) |
| $ | — |
| $ | 853 |
| $ | 1,149 |
| $ | 2,355 |
Purchase Price Allocations
The estimated fair values of the assets acquired and liabilities assumed for the acquisitions, as well as total consideration paid, approximated the following as of September 30, in thousands:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 2017 | ||||||||||||||||
|
| Midwest |
| EcoFoam |
| Superior |
| Canyon |
| All others |
| Total | ||||||
Estimated fair values: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable |
| $ | 6,690 |
| $ | 3,762 |
| $ | 2,012 |
| $ | 8,222 |
| $ | 678 |
| $ | 21,364 |
Inventories |
|
| 75 |
|
| 1,119 |
|
| 321 |
|
| 575 |
|
| 141 |
|
| 2,231 |
Prepaid and other assets |
|
| — |
|
| 27 |
|
| 1 |
|
| 6 |
|
| 6 |
|
| 40 |
Property and equipment |
|
| 655 |
|
| 1,544 |
|
| 361 |
|
| 475 |
|
| 357 |
|
| 3,392 |
Intangible assets |
|
| 2,740 |
|
| 6,700 |
|
| 5,280 |
|
| 15,220 |
|
| 3,640 |
|
| 33,580 |
Goodwill |
|
| 3,424 |
|
| 10,841 |
|
| 3,662 |
|
| 10,080 |
|
| 4,037 |
|
| 32,044 |
Accounts payable |
|
| (1,359) |
|
| (1,366) |
|
| (681) |
|
| (163) |
|
| (26) |
|
| (3,595) |
Accrued liabilities |
|
| — |
|
| (302) |
|
| (4) |
|
| — |
|
| — |
|
| (306) |
Net assets acquired |
| $ | 12,225 |
| $ | 22,325 |
| $ | 10,952 |
| $ | 34,415 |
| $ | 8,833 |
| $ | 88,750 |
The following table details the fair value of consideration transferred as of September 30, in thousands:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 2017 | ||||||||||||||||
|
| Midwest |
| EcoFoam |
| Superior |
| Canyon |
| All others |
| Total | ||||||
Fair value of consideration: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash |
| $ | 12,225 |
| $ | 20,215 |
| $ | 10,952 |
| $ | 31,815 |
| $ | 8,833 |
| $ | 84,040 |
Deferred consideration |
|
| — |
|
| — |
|
| — |
|
| 2,600 |
|
| — |
|
| 2,600 |
Contingent consideration |
|
| — |
|
| 2,110 |
|
| — |
|
| — |
|
| — |
|
| 2,110 |
Total consideration transferred |
| $ | 12,225 |
| $ | 22,325 |
| $ | 10,952 |
| $ | 34,415 |
| $ | 8,833 |
| $ | 88,750 |
Estimates of acquired intangible assets related to the acquisitions are as follows, as of September 30, dollars in thousands:
|
|
|
|
|
|
|
|
| 2017 | ||||
|
| Estimated Fair Value |
| Weighted Average Estimated Useful Life (Years) | ||
Customer relationships |
| $ | 26,170 |
|
| 10 |
Trademarks and trade names |
|
| 1,780 |
|
| 10 |
Non-competition agreements |
|
| 5,630 |
|
| 5 |
Total intangible assets |
| $ | 33,580 |
|
| 9 |
As third party or internal valuations are finalized, certain tax aspects of the transaction are completed, and customer post-closing reviews are concluded, adjustments may be made to the fair value of assets acquired, and in some cases total purchase price, through the end of each measurement period, generally one year from the acquisition date. During the three months ended September 30, 2017 we evaluated certain data related to our intangible assets and as a result recorded an adjustment of $7.1m to increase our customer relationships intangible assets. Other insignificant adjustments to the fair value of assets acquired, and in some cases total purchase price, have been made to certain business combinations since the date of acquisition.
20
TOPBUILD CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Goodwill to be recognized in connection with these acquisitions is attributable to the synergies expected to be realized and improvements in the businesses after the acquisitions. The goodwill will be recognized entirely by our Installation segment. All of the $32.0 million of goodwill is expected to be deductible for income tax purposes.
Contingent Consideration
The acquisition of EcoFoam includes a contingent consideration arrangement that requires additional consideration to be paid by TopBuild to the sellers of EcoFoam based on certain future revenues of EcoFoam over a three-year period. The range of the undiscounted amounts TopBuild may be required to pay under the contingent consideration agreement is between zero and $2.5 million. The fair value of the contingent consideration recognized on the acquisition date of $2.1 million was estimated by applying the income approach using discounted cash flows. That measure is based on significant Level 3 inputs not observable in the market. The significant assumption includes a discount rate of 9.5%.
Contingent consideration is recorded in the Condensed Consolidated Balance Sheets in accrued liabilities and other liabilities. Adjustments to the fair value of contingent consideration are reflected in selling, general, and administrative expense in the Condensed Consolidated Statements of Operations and are included in the acquisition related costs above.
The following table presents the fair value of contingent consideration as of September 30, 2017, in thousands:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Fair Value of Contingent Consideration Recognized at Acquisition Date |
| Settlement of Contingent Consideration |
| Adjustment to Contingent Consideration Charged to Expense |
| Liability Balance for Contingent Consideration | ||||
EcoFoam |
| $ | 2,110 |
| $ | — |
| $ | 98 |
| $ | 2,208 |
13. CLOSURE COSTS
We continually evaluate our national footprint to ensure we are strategically located throughout the U.S. to serve our customers and position ourselves for continued growth. As a result of this evaluation, management approved a plan to consolidate certain back-office support operations to our Daytona Beach, Florida, Branch Support Center. We recognize expenses related to closures and position eliminations at the time of announcement or notification. Such costs included termination and other severance benefits, lease abandonment costs, and other transition costs. Closure costs are reflected in our Condensed Consolidated Statements of Operations as selling, general, and administrative expense. Accrued closure costs are reflected in our Condensed Consolidated Balance Sheets as accrued liabilities. We expect to pay the remaining lease termination and other accrued closure costs within twelve months.
The following table details our total estimated closure costs, by cost type, related to the above closure and transition, in thousands:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment / Cost Type |
| Closure Costs Liability at December 31, |
| Closure Costs Incurred for the Nine Months Ended |
| Cash Payments for the Nine Months Ended |
| Non-cash Adjustments for the Nine Months Ended |
| Closure Costs Liability at | |||||
Corporate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance |
| $ | — |
| $ | 706 |
| $ | (270) |
| $ | (285) |
| $ | 151 |
Lease abandonment |
|
| — |
|
| 582 |
|
| (105) |
|
| (115) |
|
| 362 |
Other costs |
|
| — |
|
| 1,097 |
|
| (1,039) |
|
| — |
|
| 58 |
Total Corporate: |
| $ | — |
| $ | 2,385 |
| $ | (1,414) |
| $ | (400) |
| $ | 571 |
21
TOPBUILD CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
14. ACCRUED LIABILITIES
The following table sets forth the components of accrued liabilities, in thousands:
|
|
|
|
|
|
|
|
| As of | ||||
|
| September 30, |
| December 31, | ||
|
| 2017 |
| 2016 | ||
Salaries, wages, and commissions |
| $ | 25,773 |
| $ | 20,684 |
Insurance liabilities |
|
| 21,777 |
|
| 20,410 |
Other |
|
| 33,649 |
|
| 23,305 |
Total accrued liabilities |
| $ | 81,199 |
| $ | 64,399 |
22
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
TopBuild, headquartered in Daytona Beach, Florida, is thea leading purchaser, installer and distributor of insulation and other building products to the U.S. construction industry, based on revenue.industry. We trade on the NYSE under the ticker symbol “BLD.”
We operate in two segments: Installation (TruTeam) and Distribution (Service Partners). Our Installation segment installs insulation and other building products nationwide through our TruTeam contractor services business, which, has over 175as of June 30, 2019, had close to 200 branches located in 4140 states. We install various insulation applications, including fiberglass batts and rolls, blown-in loose fill fiberglass, blown-in loose fill cellulose, and polyurethane spray foam. Additionally, we install other building products including rain gutters, glass and windows, fire proofing, garage doors, fireplaces, shower enclosures, and closet shelving. We handle every stage of the installation process, including procurement of material fromsupplied by leading manufacturers, project scheduling and logistics, multi-phase professional installation, and installation quality assurance.
Our Distribution segment sells and distributes insulation and other building products, including rain gutters, fireplaces, closet shelving, and roofing materials through our Service Partners business, which, hasas of June 30, 2019, had over 7075 branches located in 32 states. Our Service Partners customer base consists of thousands of insulation contractors of all sizes, gutter contractors, weatherization contractors, other contractors, dealers, metal building erectors, and modular home builders.
We believe that having both TruTeam and Service Partners provides us with a number of distinct competitive advantages. First, the combined buying power of our two business segments, along with our national scale, strengthens our ties to the major manufacturers of insulation and other building products. This helps to ensure we are buying competitively and ensures the availability of supply to our local branches and distribution centers. The overall effect is driving efficiencies through our supply chain. Second, being a leader in both installation and distribution allows us to more effectively reach a broader set of builder customers, regardless of their size or geographic location in the U.S., and leverage housing growth wherever it occurs. Third, during industry downturns, many insulation contractors who buy directly from manufacturers during industry peaks return to purchasing through distributors. As a result, this helps to reduce our exposure to cyclical swings in our business.
For additional details pertaining to our operating results by segment, see in the notes to theour unaudited condensed consolidated financial statements contained in Part I, Item 1 of this Quarterly Report, which is incorporated herein by reference.
23
26
SECOND QUARTER 2019 VERSUS SECOND QUARTER 2018
THIRD QUARTER 2017 VERSUS THIRD QUARTER 2016
The following discussion and analysis contains forward-looking statements and should be read in conjunction with the unaudited condensed consolidated financial statements, the notes thereto, and the section entitled “Forward-Looking Statements” included elsewhere in this Quarterly Report on Form 10-Q.Report.
The following table sets forth our net sales, gross profit, operating profit, and margins, as reported in our Condensed Consolidated Statementscondensed consolidated statements of Operations,operations, in thousands:
|
|
|
|
|
| |||||||||
|
| Three Months Ended September 30, |
| |||||||||||
|
| 2017 |
| 2016 |
| |||||||||
| | | | | | | | |||||||
| | Three Months Ended June 30, | | |||||||||||
| | 2019 | | 2018 | | |||||||||
Net sales |
| $ | 489,044 |
| $ | 453,102 |
| | $ | 660,112 | | $ | 605,969 | |
Cost of sales |
| 368,205 |
| 344,963 |
| | | 485,190 | | | 460,928 | | ||
Cost of sales ratio |
| 75.3 | % |
| 76.1 | % | | | 73.5 | % | | 76.1 | % | |
|
|
|
|
|
|
|
| |||||||
| | | | | | | | |||||||
Gross profit |
| 120,839 |
| 108,139 |
| | | 174,922 | | | 145,041 | | ||
Gross profit margin |
| 24.7 | % |
| 23.9 | % | | | 26.5 | % | | 23.9 | % | |
|
|
|
|
|
| |||||||||
| | | | | | | | |||||||
Selling, general, and administrative expense |
| 71,277 |
| 69,038 |
| | | 98,883 | | | 101,360 | | ||
Selling, general, and administrative expense to sales ratio |
| 14.6 | % |
| 15.2 | % | | | 15.0 | % | | 16.7 | % | |
|
|
|
|
|
|
|
| |||||||
| | | | | | | | |||||||
Operating profit |
| 49,562 |
| 39,101 |
| | | 76,039 | | | 43,681 | | ||
Operating profit margin |
| 10.1 | % |
| 8.6 | % | | | 11.5 | % | | 7.2 | % | |
|
|
|
|
|
| |||||||||
| | | | | | | | |||||||
Other expense, net |
| (2,452) |
| (1,206) |
| | | (9,105) | | | (7,240) | | ||
Income tax expense from continuing operations |
|
| (15,717) |
|
| (13,329) |
| |||||||
Income from continuing operations |
| $ | 31,393 |
| $ | 24,566 |
| |||||||
Net margin on continuing operations |
| 6.4 | % |
| 5.4 | % | ||||||||
Income tax expense | | | (14,883) | | | (9,288) | | |||||||
Net income | | $ | 52,051 | | $ | 27,153 | | |||||||
Net margin | | | 7.9 | % | | 4.5 | % |
Sales and Operations
Net sales increased 7.98.9 percent for the three months ended SeptemberJune 30, 2017,2019, from the comparable period of 2016.2018. The increase was principallyprimarily driven by our seven acquisitions completed during 2017 and 2016, increased organic sales volume,USI acquisition and increased selling prices. Our sales benefited from the overall continued improvement in the housing market, as well as our continued focus on organically growing our residential and commercial activity.
The following table details our same branch sales and sales from acquired businesses, in thousands:
|
|
|
|
|
|
|
|
| Three Months Ended September 30, | ||||
|
| 2017 |
| 2016 | ||
Net sales |
|
|
|
|
|
|
Same branch (a) |
| $ | 464,622 |
| $ | 452,430 |
Acquired |
|
| 24,422 |
|
| 672 |
Total |
| $ | 489,044 |
| $ | 453,102 |
|
|
Our grossGross profit margins were 24.726.5 percent and 23.9 percent for the three months ended SeptemberJune 30, 20172019 and 2016,2018, respectively. Gross profit margin was positively impacted by favorable leverage on overall higher sales volume, improved primarily due to increased selling prices, higher growth of commercial vs. residential sales, operational efficiencies, and improved labor productivity,synergies from the USI acquisition, partially offset by higher health insurance costs and higher material cost.costs.
24
Selling, general, and administrative expense, as a percent ofsales, was 14.615.0 percent and 15.216.7 percent for the three months ended SeptemberJune 30, 20172019 and 2016,2018, respectively. Decreased selling, general, and administrative expense as a percent of sales was aprimarily the result of better absorption of fixedlower acquisition and closure costs lower bonus expense, and lower legal expense, partially offset by higher share-basedcompensation and higher salaries expense. related to the USI acquisition.
Operating margins were 10.111.5 percent and 8.67.2 percent for the three months ended SeptemberJune 30, 20172019 and 2016,2018, respectively. The increase in operating margins was a result of better absorption of fixed costs, overalldue to increasedsales volume, improved selling prices, improved labor productivity,higher growth of commercial vs. residential sales, operational efficiencies, synergies from the USI acquisition, and lower bonus expense,acquisition and closure costs related to the USI acquisition, partially offset by higher material cost, higher share-basedcompensation, and higher salaries expense.costs.
27
Closure and Related Costs
Business Segment Results
The following table sets forth our net sales and operating profit margins by business segment, in thousands:
|
|
|
|
|
|
|
|
| ||||||||||
|
| Three Months Ended September 30, |
|
|
| |||||||||||||
|
| 2017 |
| 2016 |
| Percent Change |
| |||||||||||
| | | | | | | | | | |||||||||
| | Three Months Ended June 30, | | | | |||||||||||||
|
| 2019 |
| 2018 |
| Percent Change |
| |||||||||||
Sales by business segment: |
|
|
|
|
|
|
|
| | | | | | | | | | |
Installation |
| $ | 333,238 |
| $ | 300,005 |
| 11.1 | % | | $ | 483,028 | | $ | 429,423 | | 12.5 | % |
Distribution |
|
| 181,146 |
| 174,123 |
| 4.0 | % | | | 213,487 | | | 205,621 | | 3.8 | % | |
Intercompany eliminations and other adjustments |
|
| (25,340) |
|
| (21,026) |
|
|
| |||||||||
Intercompany eliminations | | | (36,403) | | | (29,075) | | | | |||||||||
Net sales |
| $ | 489,044 |
| $ | 453,102 |
| 7.9 | % | | $ | 660,112 | | $ | 605,969 | | 8.9 | % |
|
|
|
|
|
|
|
|
| ||||||||||
| | | | | | | | | | |||||||||
Operating profit by business segment: |
|
|
|
|
|
|
|
| | | | | | | | | | |
Installation |
| $ | 40,862 |
| $ | 32,196 |
| 26.9 | % | | $ | 68,423 | | $ | 49,635 | | 37.9 | % |
Distribution |
|
| 18,300 |
| 15,536 |
| 17.8 | % | | | 21,151 | | | 20,009 | | 5.7 | % | |
Intercompany eliminations and other adjustments |
|
| (4,413) |
|
| (3,665) |
|
|
| | | (6,405) | | | (5,277) | | | |
Operating profit before general corporate expense |
|
| 54,749 |
| 44,067 |
| 24.2 | % | | | 83,169 | | | 64,367 | | 29.2 | % | |
General corporate expense, net |
|
| (5,187) |
|
| (4,966) |
| 4.5 | % | | | (7,130) | | | (20,686) | | | |
Operating profit |
| $ | 49,562 |
| $ | 39,101 |
| 26.8 | % | | $ | 76,039 | | $ | 43,681 | | 74.1 | % |
|
|
|
|
|
|
|
|
| ||||||||||
| | | | | | | | | | |||||||||
Operating profit margins: |
|
|
|
|
|
|
|
| | | | | | | | | | |
Installation |
|
| 12.3 | % |
| 10.7 | % |
|
| | | 14.2 | % | | 11.6 | % | | |
Distribution |
|
| 10.1 | % |
| 8.9 | % |
|
| | | 9.9 | % | | 9.7 | % | | |
Operating profit margin before general corporate expense |
|
| 11.2 | % |
| 9.7 | % |
|
| | | 12.6 | % | | 10.6 | % | | |
Operating profit margin |
|
| 10.1 | % |
| 8.6 | % |
|
| | | 11.5 | % | | 7.2 | % | | |
Installation
Sales
Sales in the Installation segment increased $33.2$53.6 million, or 11.112.5 percent, for the three months ended SeptemberJune 30, 2017,2019, as compared to the same period in 2016.2018. Sales increased 8.16.8 percent from acquired branches, and 1.54.3 percent due to increased selling prices. Sales also increasedprices, and 1.4 percent due to increased sales volume related to a higher level of activity in new home construction and an increased sales volume of commercial installation.volume.
25
Operating margins
Operating results
Operating margins in the Installation segment were 12.3 14.2 percent and 10.711.6 percent for the three months ended SeptemberJune 30, 20172019 and 2016,2018, respectively. The increase in operating margins was a result ofdue to increased sales volume and related absorption of fixed costs, a 1.5 percent increase in selling prices, improvedhigher growth of commercial vs. residential sales, productivity, lower bonus expense, as well asoperational efficiencies, and synergies from the benefits associated with cost savings initiatives,USI acquisition, partially offset by higher material cost and higher amortization expense.costs.
Distribution
Sales
Sales in the Distribution segment increased $7.0$7.9 million, or 4.03.8 percent, for the three months ended SeptemberJune 30, 2017,2019, as compared to the same period in 2016. The increase was2018. Sales increased 1.3 percent from acquired branches, 5.1 percent due to increased selling prices and decreased 2.6 percent due to volume. Volume decreased primarily due to increased salesdeliberate decisions with respect to prices and volume, related to a higher level of activity in new home construction as well as a 1.0 percent increase in selling prices.the decision to exit some low margin business.
Operating resultsmargins
Operating margins in the Distribution segment were 10.19.9 percent and 8.99.7 percent for the three months ended SeptemberJune 30, 20172019 and 2016,2018, respectively. The increase in operating margins was a result of better absorption of fixed costs, increased sales volume, anddue to increased selling prices and improved sales mix, partially offset by higher material cost. Sales volume increased due to a higher levelcosts.
28
OTHER ITEMS
Other expense, net
Other expense, net, which primarily consisted of interest expense, was $2.5$9.1 million and $1.2$7.2 million for the three months ended SeptemberJune 30, 20172019 and 2016,2018, respectively. The increase in other expense, net for the three months ended SeptemberJune 30, 2017,2019, primarily related to the issuance of our higher outstanding long-term debt balance related$400.0 million Senior Notes and our borrowing of the $100.0 million delayed draw term loan to fund our debt refinancing completed on May 5, 2017.acquisition of USI in the second quarter of 2018 which resulted in an additional $1.9 million of interest expense.
Income tax expense
Income tax expense from continuing operations
Income tax expense from continuing operations was $15.7$14.9 million, an ETReffective tax rate of 33.422.2 percent, for the three months ended SeptemberJune 30, 2017,2019, compared to $13.3$9.3 million, an ETReffective tax rate of 35.225.5 percent, for the comparable period in 2016.2018. The lower 20172019 tax rate was due to a discretelarger benefit in 2019 related to share-based compensation and an increase in the amount of the Domestic Production Activities Deduction.compensation.
26
FIRST NINESIX MONTHS 20172019 VERSUS FIRST NINESIX MONTHS 20162018
The following table sets forth our net sales, gross profit, operating profit, and margins, as reported in our Condensed Consolidated Statementscondensed
consolidated statements of Operations,operations, in thousands:
|
|
|
|
|
| |||||||||
|
| Nine Months Ended September 30, |
| |||||||||||
|
| 2017 |
| 2016 |
| |||||||||
| | | | | | |||||||||
| | Six Months Ended June 30, | ||||||||||||
|
| 2019 |
| 2018 |
| |||||||||
Net sales |
| $ | 1,404,865 |
| $ | 1,298,715 |
| | $ | 1,279,442 | | $ | 1,097,412 | |
Cost of sales |
| 1,065,789 |
| 1,003,433 |
| | 948,824 | | 841,353 | | ||||
Cost of sales ratio |
| 75.9 | % |
| 77.3 | % | | 74.2 | % | | 76.7 | % | ||
|
|
|
|
|
|
|
| |||||||
| | | | | | | | |||||||
Gross profit |
| 339,076 |
| 295,282 |
| | 330,618 | | 256,059 | | ||||
Gross profit margin |
| 24.1 | % |
| 22.7 | % | | | 25.8 | % | | 23.3 | % | |
|
|
|
|
|
| |||||||||
Selling, general, and administrative expense (exclusive of significant legal settlement, shown separately below) |
| 222,181 |
| 209,623 |
| |||||||||
Selling, general, and administrative expense (exclusive of significant legal settlement, show separately below) to sales ratio |
| 15.8 | % |
| 16.1 | % | ||||||||
|
|
|
|
|
| |||||||||
Significant legal settlement |
| 30,000 |
| — |
| |||||||||
Significant legal settlement to sales ratio |
| 2.1 | % |
| — |
| ||||||||
|
|
|
|
|
|
|
| |||||||
| | | | | | | | |||||||
Selling, general, and administrative expense | | | 197,960 | | | 178,486 | | |||||||
Selling, general, and administrative expense to sales ratio | | | 15.5 | % | | 16.3 | % | |||||||
| | | | | | | | |||||||
Operating profit |
| 86,895 |
| 85,659 |
| | | 132,658 | | 77,573 | | |||
Operating profit margin |
| 6.2 | % |
| 6.6 | % | | | 10.4 | % | | 7.1 | % | |
|
|
|
|
|
| |||||||||
| | | | | | | ||||||||
Other expense, net |
| (6,614) |
| (4,114) |
| | | (18,374) | | (9,530) | | |||
Income tax expense from continuing operations |
|
| (27,139) |
|
| (30,246) |
| |||||||
Income from continuing operations |
| $ | 53,142 |
| $ | 51,299 |
| |||||||
Net margin on continuing operations |
| 3.8 | % |
| 3.9 | % | ||||||||
Income tax expense | | | (24,249) | | | (14,503) | | |||||||
Net income | | $ | 90,035 | | $ | 53,540 | | |||||||
Net margin | | 7.0 | % | | 4.9 | % |
Sales and Operations
Net sales increased 8.216.6 percent for the ninesix months ended SeptemberJune 30, 2017,2019, from the comparable period of 2016. 2018. The increase was principallyprimarily driven by our seven acquisitions completed during 2017 and 2016, increased organic sales volume,USI acquisition and increased selling prices. Our sales benefited from the overall continued improvement in the housing market, as well as our continued focus on organically growing our residential and commercial activity.
The following table details our same branch sales and sales from acquired businesses, in thousands:
|
|
|
|
|
|
|
|
| Nine Months Ended September 30, | ||||
|
| 2017 |
| 2016 | ||
Net sales |
|
|
|
|
|
|
Same branch (a) |
| $ | 1,352,048 |
| $ | 1,298,043 |
Acquired |
|
| 52,817 |
|
| 672 |
Total |
| $ | 1,404,865 |
| $ | 1,298,715 |
|
|
Our grossGross profit margins were 24.125.8 percent and 22.723.3 percent for the ninesix months ended SeptemberJune 30, 20172019 and 2016,2018, respectively. Gross profit margin was positively impacted by favorable leverage on overallimproved primarily due to increased selling prices, higher sales volumegrowth in our Installation segment vs. Distribution segment, higher growth of commercial sales vs. residential sales, operational efficiencies, and selling prices, with lower health insurancesynergies from the USI acquisition, partially offset by higher material costs.
Selling, general, and administrative expense exclusive of the significant legal settlement discussed below, as a percent of sales, was 15.815.5 percent and 16.116.3 percent for the ninesix months ended SeptemberJune 30, 20172019 and 2016,2018, respectively. Decreased selling, general, and administrative expense as a percent of sales was aprimarily the result of lower salariesacquisition and group health expense, partially offset by higher bonus and share-based compensation expense, as well as closure and related costs noted below. We incurred a $30 million legal settlement during the nine months ended September 30, 2017, related to the settlement ofUSI acquisition.
27
29
a breach of contract action related to our termination of an insulation supply agreement with Owens Corning. Operating margins exclusive of the significant legal settlement discussed above were 8.310.4 percent and 6.67.1 percent for the ninesix months ended SeptemberJune 30, 20172019 and 2016,2018, respectively. The increase in operating margins was a result of overall increased sales volume, higherrelated to improved selling prices, improved sales mix, synergies from the USI acquisition, and lower health insuranceacquisition and closure costs related to the USI acquisition, partially offset by higher share-based compensation expense, and bonus expense.material costs.
Closure and Related Costs
We incurred expense of $2.0 million during the nine months ended September 30, 2017, related to the consolidation of certain back-office operations to our Daytona Beach, Florida, Branch Support Center.
Business Segment Results
The following table sets forth our net sales and operating profit margins by business segment, in thousands:
|
|
|
|
|
|
|
| |||||||||
| Nine Months Ended September 30, |
|
|
| ||||||||||||
| | | | | | | | | ||||||||
| Six Months Ended June 30, | | | | ||||||||||||
| 2017 |
| 2016 |
| Percent Change |
| 2019 |
| 2018 |
| Percent Change | | ||||
Sales by business segment: |
|
|
|
|
|
|
| | | | | | | | | |
Installation | $ | 945,109 |
| $ | 860,924 |
| 9.8 | % | $ | 932,410 | | $ | 758,817 | | 22.9 | % |
Distribution |
| 526,452 |
| 499,268 |
| 5.4 | % | | 417,951 | | | 393,387 | | 6.2 | % | |
Intercompany eliminations and other adjustments |
| (66,696) |
|
| (61,477) |
|
|
| ||||||||
Intercompany eliminations | | (70,919) | | | (54,792) | | | | ||||||||
Net sales | $ | 1,404,865 |
| $ | 1,298,715 |
| 8.2 | % | $ | 1,279,442 | | $ | 1,097,412 | | 16.6 | % |
|
|
|
|
|
|
|
| |||||||||
| | | | | | | | | ||||||||
Operating profit by business segment: |
|
|
|
|
|
|
| | | | | | | | | |
Installation (exclusive of significant legal settlement, shown separately below) | $ | 96,985 |
| $ | 68,499 |
| 41.6 | % | ||||||||
Significant legal settlement (Installation segment) |
| (30,000) |
| — |
|
|
| |||||||||
Installation | $ | 119,722 | | $ | 78,965 | | 51.6 | % | ||||||||
Distribution |
| 50,806 |
| 43,416 |
| 17.0 | % | | 41,748 | | | 37,912 | | 10.1 | % | |
Intercompany eliminations and other adjustments |
| (11,393) |
|
| (10,540) |
|
|
| | (12,078) | | | (9,725) | | | |
Operating profit before general corporate expense |
| 106,398 |
| 101,375 |
| 5.0 | % | | 149,392 | | | 107,152 | | 39.4 | % | |
General corporate expense, net |
| (19,503) |
|
| (15,716) |
|
|
| | (16,734) | | | (29,579) | | | |
Operating profit | $ | 86,895 |
| $ | 85,659 |
| 1.4 | % | $ | 132,658 | | $ | 77,573 | | 71.0 | % |
|
|
|
|
|
|
|
| |||||||||
| | | | | | | | | ||||||||
Operating profit margins: |
|
|
|
|
|
|
| | | | | | | | | |
Installation (exclusive of significant legal settlement) |
| 10.3 | % |
| 8.0 | % |
|
| ||||||||
Installation (inclusive of significant legal settlement) |
| 7.1 | % |
|
|
|
|
| ||||||||
Installation | | 12.8 | % | | 10.4 | % | | | ||||||||
Distribution |
| 9.7 | % |
| 8.7 | % |
|
| | 10.0 | % | | 9.6 | % | | |
Operating profit margin before general corporate expense |
| 7.6 | % |
| 7.8 | % |
|
| | 11.7 | % | | 9.8 | % | | |
Operating profit margin |
| 6.2 | % |
| 6.6 | % |
|
| | 10.4 | % | | 7.1 | % | | |
Installation
Sales
Sales in the Installation segment increased $84.2$173.6 million, or 9.822.9 percent, for the ninesix months ended SeptemberJune 30, 2017,2019, compared to the same period in 2016.2018. Sales increased 6.115.1 percent from acquired branches, and 1.65.1 percent due to increased selling prices. Sales also increasedprices and 2.7 percent due to increased sales volume related to a higher level of activity in new home construction and an increased sales volume of commercial installation.volume.
28
Operating margins
Operating results
Operating margins in the Installation segment were 7.112.8 percent and 8.010.4 percent for the ninesix months ended SeptemberJune 30, 20172019 and 2016,2018, respectively. The decreaseincrease in operating margins was a resultdue to increased selling prices, higher growth of commercial sales vs. residential sales, operational efficiencies, and synergies from the $30 million legal settlement with Owens Corning, as well as legal fee expense. The decrease wasUSI acquisition, partially offset by increased sales volume and related absorption of fixed costs, higher selling prices, improved sales productivity, as well as the benefits associated with cost savings initiatives. Exclusive of the significant legal settlement, operating margins were 10.3 percent for the nine months ended September 30, 2017.material costs.
Distribution
Sales
Sales in the Distribution segment increased $27.2$24.6 million, or 5.46.2 percent, for the ninesix months ended SeptemberJune 30, 2017,2019, compared to the same period in 2016. The increase was2018. Sales increased 2.8 percent from acquired branches, 5.9 percent due to increased selling prices and decreased 2.5 percent due to volume. Volume decreased primarily due to increased salesdeliberate decisions with respect to prices and volume, relatedas well as the decision to a higher levelexit some low margin business.
30
Operating margins
Operating results
Operating margins in the Distribution segment were 9.710.0 percent and 8.79.6 percent for the ninesix months ended SeptemberJune 30, 20172019 and 2016,2018, respectively. OperatingThe increase in operating margins were positively impacted bywas due to increased selling prices and improved sales volume related to a higher level of activity in new home construction as well as improved labor productivitymix, partially offset by lower selling prices.higher material costs.
OTHER ITEMS
Other expense, net
Other expense, net, which primarily consisted of interest expense, was $6.6$18.4 million and $4.1$9.5 million for the ninesix months ended SeptemberJune 30, 20172019 and 2016,2018, respectively. The increase in other expense, net for the ninesix months ended SeptemberJune 30, 2017,2019, primarily related to a $1.1the issuance of our $400.0 million loss on extinguishmentSenior Notes and our borrowing of debt as wellthe $100.0 million delayed draw term loan to fund our higher outstanding long-term debt balance related to our debt refinancing completed on May 5, 2017. Utilizing our currentacquisition of USI in the second quarter of 2018 which resulted in an additional $8.4 million of interest rate of 2.74 percent as of September 30, 2017, our expected interestexpense.
Income tax expense including the amortization of debt issuance costs and other fees, is estimated to be $2.4 million for the remaining three months of 2017.
Income tax expense from continuing operations
Income tax expense from continuing operations was $27.1$24.2 million, an ETReffective tax rate of 33.821.2 percent, for the ninesix months ended SeptemberJune 30, 2017,2019, compared to $30.2$14.5 million, an ETReffective tax rate of 37.121.3 percent, for the comparable period in 2016.2018. The lower rate for 2019 was primarily duecomparable to a discrete benefit related to share-based compensation and an increase in the amount of the Domestic Production Activities Deduction.rate for 2018.
29
Cash Flows and Liquidity
Significant sources (uses) of cash and cash equivalents are summarized for the nine months ended September 30, 2017 and 2016, are summarized as follows,periods indicated, in thousands:
|
|
|
|
|
|
|
|
|
| Nine Months Ended September 30, |
| ||||
|
| 2017 |
| 2016 |
| ||
Net cash provided by operating activities |
| $ | 54,618 |
| $ | 27,934 |
|
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 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) |
|
Cash and cash equivalents decrease |
| $ | (115,915) |
| $ | (8,351) |
|
Working capital (receivables, net plus inventories, net less accounts payable) as a percentage of net sales for the trailing 12 months (a) |
|
| 10.0 | % |
| 8.9 | % |
|
|
| | | | | | |
| | Six Months Ended June 30, | ||||
|
| 2019 |
| 2018 | ||
Changes in cash and cash equivalents: | | | | | | |
Net cash provided by operating activities | | $ | 96,264 | | $ | 41,393 |
Net cash used in investing activities | | | (19,999) | | | (526,121) |
Net cash (used in) provided by financing activities | | | (35,427) | | | 493,944 |
Increase for the period | | $ | 40,838 | | $ | 9,216 |
Net cash flows provided by operating activities were $54.6 million and $27.9increased $54.9 million for the ninesix months ended SeptemberJune 30, 2017 and 2016, respectively. The increase was due2019, as compared to the satisfaction of payables during the first nine months of 2016 related to strategic inventory purchases in the fourth quarter of 2015 which were not replicated in 2016, as well as nominal changes to payment terms for select suppliers which accelerated payments in 2016.prior year period. The increase in the generation of cash for prepaid expenses and other current assets related to a change in our prepaid income tax account tied to the timing of estimated tax payments. The generators of cash were partially offset by the change in the inventory balances as discussed hereafter. The aforementioned strategic inventory purchase in the fourth quarter of 2015, which was not replicated in 2016, resulted in a higher inventory balance as of December 31, 2015, which was not duplicated as of December 31, 2016, thereby resulting in a smaller generator of cash for the nine months ended September 30, 2017, compared with the similar period in 2016.As of September 30, 2017 and 2016, our working capital was 10.0 percent and 8.9 percent of net sales for the trailing twelve months, adjusted for the pro forma effect of our acquired companies, respectively. Working capital increased $36.0 million to $189.5 million at September 30, 2017, compared to September 30, 2016. The increase in working capital as a percentage of net sales for the trailing 12 months was primarily due to acquired receivables from commercial activity which has longer collection terms, inefficiencies in acquired companies collections processes, increased receivables driven by higher organic commercial sales mix which comes with longer collection terms, relative to the trailing 12 months’ net sales collections processes as well as adverse weather conditions incurred during the month of September 2017 affecting our collections process, partially offset by an increase in our accounts payable balance related to improved managementnet income, the timing of our supplierworking capital collections and expenditures, and the timing of income tax payments.
Net cash used in investing activities was $96.5$20.0 million for the ninesix months ended SeptemberJune 30, 2017,2019, primarily comprisedcomposed of $84.0 million for the acquisitions of substantially all of the assets of Midwest, EcoFoam, MR Insulfoam, Capital, Superior, and Canyon and $13.1$22.0 million for purchases of property and equipment, primarily vehicles, partially offset by $0.5$2.0 million ofin proceeds from the sale of property and equipment. Net cash used in investing activities was $13.1$526.1 million for the ninesix months ended SeptemberJune 30, 2016,2018, primarily comprisedcomposed of$10.1 $499.1 million of purchases of property and equipment and $3.5 millionnet cash for the acquisition of USI and ADO and substantially all of the assets of Valley,Santa Rosa, and $27.5 million for purchases of property and equipment, partially offset by $0.4 million of proceeds from the sale of property andequipment.
30
31
Net cash used in financing activities was $74.0$35.4 million for the ninesix months ended SeptemberJune 30, 2017.2019. During the six months ended June 30, 2019, we used $11.4 million for payments on our term loan under our Amended Credit Agreement and on our equipment notes, $19.5 million for the repurchase of common stock pursuant to the 2019 Repurchase Program, and $8.5 million on purchases of common stock for tax withholding obligations related to the vesting and exercise of share-based incentive awards. We also made payments totaling $1.1 million for contingent consideration for EcoFoam and Santa Rosa. Net cash provided by financing activities was $493.9 million for the six months ended June 30, 2018. We received $250$400.0 million for the issuance of Senior Notes and $100.0 million from our delayed draw related to our acquisition of USI. We received $15.1 million of proceeds from issuance of long-term debt related to our New Credit Agreement.equipment financing notes. We used $175$7.5 million of the proceeds to pay off all amounts outstanding underfor payments on our Old Credit Agreement, we used $139.3 million of cash for common stock repurchases related to our share repurchase programs including our ASR program, $5.0 million of repayments of our previous long-term debt, $3.1 million of payments for our New Credit Agreement, $2.2term loan, $7.7 million for payment of debt issuance costs related to our Amended Credit Agreement and our Senior Notes, $4.5 million for purchases of common stock for tax withholding obligations related to the vesting and exercise of share-based incentive awards during the ninesix months ended SeptemberJune 30, 2017.2018, and $0.5 million for payments on our equipment financing notes. We also made a payment of $0.8 million of contingent consideration for EcoFoam. We drew $170.0$90.0 million on our revolving credit facility and made repayments of $165.0$90.0 million during the ninesix months ended SeptemberJune 30, 2017. Net cash used in financing activities was $23.2 million for the nine months ended September 30, 2016, primarily comprised of $11.4 million of repurchases of our common stock related to our $50 million share repurchase program announced in March 2016, $10.0 million of repayments of our long-term debt, and $1.7 million of purchases of common stock for tax withholding obligations related to the vesting of share-based incentive awards during the nine months ended September 30, 2016.2018.
We have access to liquidity through our cash from operations and available borrowing capacity under our NewAmended Credit Agreement, which provides for borrowing and/or standby letter of credit issuances of up to $250$250.0 million under athe Revolving Facility as well as $100 million of additional term loan capacity under a delayed draw feature.Facility. We believe that our cash flows from operations, combined with our current cash levels and available borrowing capacity, will be adequate to support our ongoing operations and to fund our debt service requirements, capital expenditures, and working capital for at least the next 12twelve months. Cash flows are seasonally stronger in the third and fourth quarters as a result of historically increased new construction activity. activity during those periods.
The following table summarizes our liquidity, in thousands:
| | | | | | |
| | As of | ||||
| | June 30, | | December 31, | ||
|
| 2019 |
| 2018 | ||
Cash and cash equivalents (a) | | $ | 141,767 | | $ | 100,929 |
| | | | | | |
Revolving Facility | | | 250,000 | | | 250,000 |
Less: standby letters of credit | | | (62,882) | | | (59,288) |
Availability under Revolving Facility | | | 187,118 | | | 190,712 |
| | | | | | |
Total liquidity | | $ | 328,885 | | $ | 291,641 |
|
|
|
|
|
|
|
|
| As of | ||||
|
| September 30, |
| December 31, | ||
|
| 2017 |
| 2016 | ||
Cash and cash equivalents |
| $ | 18,460 |
| $ | 134,375 |
Revolving Facility |
|
| 250,000 |
|
| 125,000 |
Less: revolving credit facility |
|
| (5,000) |
|
| ― |
Less: standby letters of credit |
|
| (47,055) |
|
| (49,080) |
Liquidity excluding term loan delayed draw feature |
|
| 216,405 |
|
| 75,920 |
Additional term loan capacity under delayed draw feature |
|
| 100,000 |
|
| ― |
Total liquidity |
| $ | 316,405 |
| $ | 210,295 |
(a) Our cash and cash equivalents consist of AAA-rated money market funds as well as cash held in our demand deposit accounts.
We occasionally use performance bonds to ensure completion of our work on certain larger customer contracts that can span multiple accounting periods. Performance bonds generally do not have stated expiration dates; rather, we are released from the bonds as the related contractual performance is completed. We also have bonds outstanding for licensing and insurance.
The following table summarizes our outstanding performance, licensing, insurance and other bonds, in thousands:
|
|
|
|
| ||||||||
|
| As of | ||||||||||
|
| September 30, |
| December 31, | ||||||||
|
| 2017 |
| 2016 | ||||||||
| | | | | ||||||||
| | As of | ||||||||||
| | June 30, | | December 31, | ||||||||
|
| 2019 |
| 2018 | ||||||||
Outstanding bonds: | | | | | | | ||||||
Performance bonds |
| $ | 38,524 |
| $ | 22,312 | | $ | 69,755 | | $ | 65,517 |
Licensing, insurance, and other bonds |
|
| 15,563 |
|
| 13,480 | | | 22,158 | | | 22,287 |
Total |
| $ | 54,087 |
| $ | 35,792 | ||||||
Total bonds | | $ | 91,913 | | $ | 87,804 |
31
32
OUTLOOK
OUTLOOK
In general,To date, housing starts in 2019 have decreased from the residentialsame period one year ago but we believe that trend will improve as the year progresses. Housing affordability, while still a challenge, is improving. Long-term supply and commercial new construction industries are continuing to recover. Household formations and the available housing supply point towards continued growth in new home construction. Increasing rental demand across multiple markets has led to an increase in multi-family housing construction and the demand for commercial space is also increasing. However, residential construction activity remains below historical averages. We believe a number of factors, including credit availability, student debt, labor availability, and attitudes towards home ownership willfundamentals continue to cause volatilitysuggest a healthy construction environment for the next several years. In addition, both light and heavy commercial remain fundamentally strong industries and attractive options for TopBuild.
OFF-BALANCE SHEET ARRANGEMENTS
During the quarter ended June 30, 2019, we were issued additional standby letters of credit under our normal operating procedures which decreased our availability under the Revolving Facility by $4.2 million. See Note 4 – Long-Term Debt to our unaudited condensed consolidated financial statements in the housing market.
Our 2017 full year revenue outlook is estimated between $1.890 billion and $1.905 billion. This outlook reflects our current view of present and future market conditions and is based on assumptions such as housing starts. This outlook does not include any effects related to potential acquisitions or divestitures that may occur after the datePartI, Item I of this filing. Factors that could cause actual 2017 resultsQuarterly Report for our outstanding standby letters of credit balance as of June 30, 2019.
CONTRACTUAL OBLIGATIONS
There have been no material changes to differ materiallyour contractual obligations from our current expectations are discussed below and are also detailedthose previously disclosed in our 2016 Annual Report for the year ended December 31, 2018, as filed with the SEC on Form 10-K and subsequent SEC reports.February 26, 2019, except for the impact to our operating lease obligations as a result of the adoption of ASU 2016-02 “Leases” on January 1, 2019. For operating lease obligations calculated under the new guidance as of June 30, 2019, see Note 7 – Leases to our unaudited condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report.
CRITICAL ACCOUNTING POLICIES
We prepare our condensed consolidated financial statements in conformity with GAAP. The preparation of these condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities, at the date of the financial statements, and the reported amounts of sales costs, and expenses during the reporting period. Actual results could differ from those estimates. Our critical accounting policies have not changed materially from those previously reported in our Annual Report on Form 10-K for year ended December 31, 2016,2018, as filed with the SEC on February 28, 2017.26, 2019.
APPLICATION OF NEW ACCOUNTING STANDARDS
Information regarding application of new accounting standards is incorporated by reference from Note 2 – Accounting Policies to our unaudited condensed consolidated financial statements contained in Part I, Item 1 of this Quarterly Report on Form 10-Q.Report.
FORWARD-LOOKING STATEMENTS
Statements contained in this report that reflect our views about future periods, including our future plans and performance, constitute “forward-looking statements” under the Private Securities Litigation Reform Act of 1995. Forward-looking statements can be identified by words such as “will,” “would,” “anticipate,” “expect,” “believe,” “designed,” “plan,” or “intend,” the negative of these terms, and similar references to future periods. These views involve risks and uncertainties that are difficult to predict and, accordingly, our actual results may differ materially from the results discussed in our forward-looking statements. We caution you against unduly relying on any of these forward-looking statements. Our future performance may be affected by our reliance on residential new construction, residential repair/remodel, and commercial construction; our reliance on third-party suppliers and manufacturers; our ability to attract, develop, and retain talented personnel and our sales and labor force; our ability to maintain consistent practices across our locations; and our ability to maintain our competitive position; and our ability to realize the expected benefits of the Separation.position. We discuss the material risks we face under the caption entitled “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2016,2018, as filed with the SEC on February 26, 2019, as well as under the caption entitled “Risk Factors” in subsequent reports that we file with the SEC. Our forward-looking statements in this filing speak only as of the date of this filing. Factors or events that could cause our actual results to differ may emerge from time to time and it is not possible for us to predict all of them. Unless required by law, we undertake no obligation to update publicly any forward-looking statements as a result of new information, future events, or otherwise.
3233
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
Our New Credit Agreement became effective on May 5, 2017. The Amended Credit Agreement consists of a senior secured term loan facility in the amount of $250$250.0 million, $100$100.0 million of additional term loan capacity under a delayed draw feature, which we accessed on May 1, 2018 upon consummation of the acquisition of USI, and a revolving facilitythe Revolving Facility in the amount of $250$250.0 million. In addition, on April 25, 2018, we issued $400.0 million aggregate principal amount of Senior Notes. The Senior Notes bear a fixed rate of interest and therefore are excluded from the calculation below as they are not subject to fluctuations in interest rates.
Interest payable on both the term loan facility and revolving facilitythe Revolving Facility under the Amended Credit Agreement is based on a variable interest rate. As a result, we are exposed to market risks related to fluctuations in interest rates on ourthis outstanding indebtedness. Based onAs of June 30, 2019, we had $318.8 million outstanding under our term loan facility, and the currentapplicable interest rate as of September 30, 2017, of 2.74 percentsuch date was 3.69%. Based on our outstanding borrowings under the senior secured term loan facility,Amended Credit Agreement as of June 30, 2019, a 100 basis point increase in the interest rate would result in a $2.4$3.0 million increase in our annualized interest expense.
There was anno outstanding balance of $5.0 million under the Revolving Facility as of SeptemberJune 30, 2017. Based on the current interest rate, as of September 30, 2017, of 2.74 percent and assuming we held a $5.0 million outstanding balance for the revolving credit facility, a 100 basis point increase would result in a $0.1 million increase in our annualized interest expense.2019.
Item 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this quarterly report on Form 10-Q,Quarterly Report, we carried out an evaluation, under the supervision and with the participation of our principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act), as amended (the “Exchange Act”). Based on this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective as of SeptemberJune 30, 2017.2019.
Changes in Internal Control over Financial Reporting
There was no change in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) in the most recent fiscal quarter ended SeptemberJune 30, 2017,2019, that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
3334
PART II – OTHER INFORMATION
The information set forth under the caption “Litigation” in Part I. Financial InformationNote 15 – Note 7. Other Commitments and Contingenciesunder the caption “Litigation” to our unaudited condensed consolidated financial statements contained in Part I, Item 1 of this Quarterly Report, is incorporated by reference herein.
There have been no material changes to our risk factors as previously disclosed in our 20162018 Annual Report on Form as filed with the SEC on February
10-K28, 2017.26, 2019.
Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The following table provides information regarding the repurchase of our common stock for the three months ended SeptemberJune 30, 2017,2019, in thousands, except share and per share data:
|
|
|
|
|
|
|
|
|
|
|
Period |
| Total Number of Shares Purchased |
| Average Price Paid per Common Share |
| Number of Shares Purchased as Part of Publicly Announced Plans or Programs |
| Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs | ||
July 1, 2017 - July 31, 2017 |
| 1,507,443 |
| $ | TBD |
| 1,507,443 |
| $ | 65,000 |
August 1, 2017 - August 31, 2017 |
| — |
| $ | — |
| — |
| $ | 65,000 |
September 1, 2017 - September 30, 2017 |
| — |
| $ | — |
| — |
| $ | 65,000 |
Total |
| 1,507,443 |
| $ | TBD |
| 1,507,443 |
|
|
|
| | | | | | | | | | |
Period | | Total Number of Shares Purchased | | Average Price Paid per Common Share | | Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs | ||
April 1, 2019 - April 30, 2019 | | 71,306 | | $ | 69.11 | | 71,306 | | $ | 190,450 |
May 1, 2019 - May 31, 2019 | | 63,458 | | $ | 78.73 | | 63,458 | | $ | 185,454 |
June 1, 2019 - June 30, 2019 | | 62,121 | | $ | 79.75 | | 62,121 | | $ | 180,501 |
Total | | 196,885 | | $ | 75.57 | | 196,885 | | | |
During the three months ended September 30, 2017, we paid $100.0 million for an initial delivery of 1,507,443 shares of our common stock, representing an estimated 80 percent of the total number of shares we expect to receive under the 2017 ASR Agreement. For more information see Note 11 – Share Repurchase Program. All repurchases were made using cash resources. Excluded from this disclosure are shares repurchased to settle statutory employee tax withholding related to the vesting of stock awards and exercise of stock options.
Item 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
Item 4. MINE SAFETY DISCLOSURES
Not applicable.
Not applicable.
The Exhibits listed on the accompanying Index to Exhibits are filed or furnished (as noted on such Index) as part of this Form 10-QQuarterly Report and incorporated herein by reference.
34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Incorporated by Reference |
| Filed | ||||
Exhibit No. |
| Exhibit Title |
| Form |
| Exhibit |
| Filing Date |
| Herewith |
10.1 |
|
| 10-Q |
| 10.1 |
| 8/8/2017 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
10.2 |
|
| 10-Q |
| 10.2 |
| 8/8/2017 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
10.3 |
|
| 10-Q |
| 10.3 |
| 8/8/2017 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
10.4 |
|
| 10-Q |
| 10.4 |
| 8/8/2017 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
10.5 |
|
| 10-Q |
| 10.5 |
| 8/8/2017 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
31.1 |
|
|
|
|
|
|
|
| X | |
|
|
|
|
|
|
|
|
|
|
|
31.2 |
|
|
|
|
|
|
|
| X | |
|
|
|
|
|
|
|
|
|
|
|
32.1‡ |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
32.2‡ |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
101.INS |
| XBRL Instance Document |
|
|
|
|
|
|
| X |
|
|
|
|
|
|
|
|
|
|
|
101.SCH |
| XBRL Taxonomy Extension Schema Document |
|
|
|
|
|
|
| X |
|
|
|
|
|
|
|
|
|
|
|
101.CAL |
| XBRL Taxonomy Extension Calculation Linkbase Document |
|
|
|
|
|
|
| X |
|
|
|
|
|
|
|
|
|
|
|
101.DEF |
| XBRL Taxonomy Extension Definition Linkbase Document |
|
|
|
|
|
|
| X |
|
|
|
|
|
|
|
|
|
|
|
101.LAB |
| XBRL Taxonomy Extension Label Linkbase Document |
|
|
|
|
|
|
| X |
|
|
|
|
|
|
|
|
|
|
|
101.PRE |
| XBRL Taxonomy Extension Presentation Linkbase Document |
|
|
|
|
|
|
| X |
|
|
|
|
|
|
|
|
|
|
|
|
| ‡Furnished herewith |
|
|
|
|
|
|
|
|
|
| *Confidential treatment has been requested for portions of this exhibit. The copy filed herewith omits the information |
35
INDEX TO EXHIBITS
| | | | | | | | | | |
|
| | | Incorporated by Reference | | Filed | ||||
Exhibit No. |
| Exhibit Title |
| Form |
| Exhibit |
| Filing Date |
| Herewith |
3.1 | | | 8-K | | 3.1 | | 4/30/2019 | | | |
| | | | | | | | | | |
31.1 | | | | | | | | | X | |
| | | | | | | | | | |
31.2 | | | | | | | | | X | |
| | | | | | | | | | |
32.1‡ | | | | | | | | | | |
| | | | | | | | | | |
32.2‡ | | | | | | | | | | |
| | | | | | | | | | |
101.INS | | Inline XBRL Instance Document | | | | | | | | X |
| | | | | | | | | | |
101.SCH | | Inline XBRL Taxonomy Extension Schema Document | | | | | | | | X |
| | | | | | | | | | |
101.CAL | | Inline XBRL Taxonomy Extension Calculation Linkbase Document | | | | | | | | X |
| | | | | | | | | | |
101.DEF | | Inline XBRL Taxonomy Extension Definition Linkbase Document | | | | | | | | X |
| | | | | | | | | | |
101.LAB | | Inline XBRL Taxonomy Extension Label Linkbase Document | | | | | | | | X |
| | | | | | | | | | |
101.PRE | | Inline XBRL Taxonomy Extension Presentation Linkbase Document | | | | | | | | X |
| | | | | | | | | | |
| | ‡Furnished herewith | | | | | | | | |
36
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| TOPBUILD CORP. | |
|
| |
|
| |
| By: | /s/ John S. Peterson |
| Name: | John S. Peterson |
| Title: | Vice President and Chief Financial Officer |
|
| (Principal Financial Officer) |
August 1, 2019
November 7, 2017
3637