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UNITED STATES
SECURITIES AND EXCHANGE
COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
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(Mark One) |
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☒ |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2016
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☐ |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number: 1-36870
TopBuild Corp.
(Exact name of Registrant as Specified in its Charter)
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Delaware
(State or Other Jurisdiction of Incorporation or
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47-3096382
(I.R.S. Employer
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260 Jimmy Ann Drive Daytona Beach, Florida (Address of Principal Executive Offices) |
32114 (Zip Code) |
(386) 304-2200
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
☒ Yes ☐ No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
☒ Yes ☐ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐ Accelerated filer ☐ Smaller reporting company ☐
Non-accelerated filer ☒ (Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
☐ Yes ☒ No
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
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Class |
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Shares Outstanding at July 29, 2016 |
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Common stock, par value $.01 per share |
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38,444,480 |
TABLE OF CONTENTS
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Management's Discussion and Analysis of Financial Condition and Results of Operations |
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2
TOPBUILD CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
(In thousands except share data)
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As of |
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June 30, |
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December 31, |
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2016 |
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2015 |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
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$ |
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$ |
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Receivables, net of an allowance for doubtful accounts of $3,481 and $3,399 at June 30, 2016 and December 31, 2015, respectively |
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Inventories, net |
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Prepaid expenses and other current assets |
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Total current assets |
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Property and equipment, net |
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Goodwill |
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Other intangible assets, net |
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Deferred tax assets, net |
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Other assets |
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Total assets |
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$ |
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$ |
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LIABILITIES AND EQUITY |
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Current liabilities: |
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Accounts payable |
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$ |
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$ |
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Current portion of long-term debt |
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Accrued liabilities |
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Total current liabilities |
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Long-term debt |
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Deferred tax liabilities, net |
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Long-term portion of insurance reserves |
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Other liabilities |
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Total liabilities |
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Commitments and contingencies |
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Equity: |
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Preferred stock, $0.01 par value: 10,000,000 shares authorized; 0 shares issued and outstanding at June 30, 2016 and December 31, 2015 |
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— |
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— |
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Common stock, $0.01 par value: 250,000,000 shares authorized; 38,519,953 issued and 38,366,521 outstanding at June 30, 2016, and 38,217,647 shares issued and outstanding at December 31, 2015 |
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Treasury stock, 153,432 shares at June 30, 2016, at cost |
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— |
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Additional paid-in capital |
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Retained earnings |
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Total equity |
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Total liabilities and equity |
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$ |
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$ |
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See notes to our unaudited condensed consolidated financial statements.
3
TOPBUILD CORP.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(In thousands except per common share data)
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Three Months Ended June 30, |
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Six Months Ended June 30, |
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2016 |
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2015 |
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2016 |
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2015 |
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Net sales |
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$ |
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$ |
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$ |
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$ |
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Cost of sales |
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Gross profit |
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Selling, general, and administrative expense |
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Operating profit |
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Other income (expense), net: |
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Interest expense |
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Other, net |
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Other expense, net |
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Income from continuing operations before income taxes |
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Income tax expense from continuing operations |
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Income from continuing operations |
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Loss from discontinued operations, net |
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— |
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— |
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Net income |
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$ |
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$ |
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$ |
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$ |
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Income (loss) per common share: |
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Basic: |
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Income from continuing operations |
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$ |
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$ |
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$ |
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$ |
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Loss from discontinued operations, net |
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— |
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— |
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Net income |
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$ |
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$ |
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$ |
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$ |
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Diluted: |
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Income from continuing operations |
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$ |
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$ |
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$ |
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$ |
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Loss from discontinued operations, net |
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— |
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— |
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Net income |
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$ |
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$ |
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$ |
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$ |
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See notes to our unaudited condensed consolidated financial statements .
4
TOPBUILD CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In thousands)
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Six Months Ended June 30, |
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2016 |
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2015 |
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Net Cash From (For) Operating Activities: |
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Net income |
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$ |
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$ |
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Adjustments to reconcile net income to net cash from (for) operating activities: |
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Depreciation and amortization |
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Share-based compensation |
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Loss on sale or abandonment of property and equipment |
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Provision for bad debt expense |
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Loss from inventory obsolescence |
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Deferred income taxes, net |
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Changes in certain assets and liabilities: |
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Receivables, net |
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Inventories, net |
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Prepaid expenses and other current assets |
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Accounts payable |
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Long-term portion of insurance reserves |
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Accrued liabilities |
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Other, net |
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Net cash from (for) operating activities |
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Cash Flows From (For) Investing Activities: |
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Purchases of property and equipment |
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Proceeds from sale of property and equipment |
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Other, net |
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Net cash for investing activities |
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Cash Flows From (For) Financing Activities: |
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Net transfer from Former Parent |
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— |
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Cash distribution paid to Former Parent |
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— |
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Proceeds from issuance of long-term debt |
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— |
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Repayment of long-term debt |
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— |
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Payment of debt issuance costs |
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— |
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Taxes withheld and paid on employees' equity awards |
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— |
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Repurchase of shares of common stock |
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— |
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Net cash (for) from financing activities |
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Cash and Cash Equivalents |
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(Decrease) increase for the period |
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Beginning of year |
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End of period |
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$ |
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$ |
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Supplemental disclosure of noncash investing activities: |
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Accruals for property and equipment |
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$ |
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$ |
— |
See notes to our unaudited condensed consolidated financial statements.
5
TOPBUILD CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (Unaudited)
(In thousands except share data)
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Common |
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Treasury |
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Additional |
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Former |
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Stock |
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Stock |
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Paid-in |
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Retained |
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Parent |
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($0.01 par value) |
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at cost |
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Capital |
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Earnings |
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Investment |
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Equity |
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Balance at December 31, 2014 |
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$ |
— |
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$ |
— |
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$ |
— |
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$ |
— |
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$ |
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$ |
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Net income |
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— |
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— |
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— |
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— |
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Separation-related adjustments |
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— |
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— |
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— |
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— |
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Reclassification of Former Parent investment in connection with the Separation |
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— |
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— |
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— |
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— |
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Issuance of common stock at Separation |
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— |
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— |
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— |
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— |
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Balance at June 30, 2015 |
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$ |
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$ |
— |
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$ |
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$ |
— |
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$ |
— |
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$ |
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Balance at December 31, 2015 |
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$ |
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$ |
— |
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$ |
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$ |
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$ |
— |
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$ |
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Net income |
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— |
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— |
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— |
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— |
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Share-based compensation |
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— |
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— |
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— |
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— |
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Issuance of restricted share awards under long-term equity incentive plan |
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— |
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— |
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— |
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— |
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Repurchase of 153,432 shares of common stock pursuant to Share Repurchase Program |
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— |
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— |
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— |
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— |
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51,578 shares of common stock withheld to pay taxes on employees' equity awards |
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— |
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— |
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— |
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— |
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Balance at June 30, 2016 |
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$ |
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$ |
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$ |
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$ |
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$ |
— |
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$ |
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See notes to our unaudited condensed consolidated financial statements.
6
On June 30, 2015 (the “Effective Date”), Masco Corporation (“Masco” or the “Former Parent”) completed the separation (the “Separation”) of its Installation and Other Services businesses (the “Services Business”) from its other businesses. On the Effective Date, TopBuild Corp., a Delaware corporation formed in anticipation of the Separation (“TopBuild” or the “Company”), became an independent public company which holds, through its subsidiaries, the assets and liabilities associated with 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. References to “TopBuild,” the “Company,” “we,” “our,” and “us” refer to TopBuild Corp. and its consolidated subsidiaries.
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, 2015.
Prior to the Separation, the consolidated financial statements of TopBuild were prepared on a stand-alone basis and reflect the historical results of operations, financial position, and cash flows of Masco’s Services Business, including an allocable portion of corporate costs.
We report our business in two segments: Installation and Distribution. Our Installation segment principally includes the sale and installation of insulation and other building products. Our Distribution segment principally includes the distribution of insulation and other building products. Our segments are based on our operating units, for which financial information is regularly evaluated by our corporate operating executives.
In our opinion, the accompanying unaudited condensed consolidated financial statements contain all adjustments, of a normal recurring nature, necessary to state fairly our financial position as of June 30, 2016, our results of operations for the three and six months ended June 30, 2016 and 2015, and cash flows for the six months ended June 30, 2016 and 2015. The Condensed Consolidated Balance Sheet at December 31, 2015, was derived from our audited financial statements, but does not include all disclosures required by generally accepted accounting principles in the United States of America (“U.S. GAAP”).
2. ACCOUNTING POLICIES
Financial Statement Presentation. The condensed consolidated financial statements have been developed in conformity with U.S. 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. Our financial statements for the periods prior to the Separation have been derived from the financial statements and accounting records of Masco using the historical results of operations and historical basis of assets and liabilities of the Services Business, and reflect Masco’s net investment in the Services Business.
All intercompany transactions between TopBuild entities have been eliminated. Transactions between TopBuild and Masco prior to the Separation, with the exception of purchase transactions, are reflected in the Condensed Consolidated Statements of Cash Flows as a financing activity in “Net transfer from Former Parent” and in the Condensed Consolidated Statements of Changes in Equity in the column, “Former Parent Investment.”
The accompanying condensed consolidated financial statements for the periods prior to the Separation include allocations of general corporate expenses incurred by Masco for functions such as corporate human resources, finance, and legal, including salaries, benefits, and other related costs. These general corporate expenses were allocated to TopBuild on the basis of sales. Total allocated general corporate costs were $5.7 million and $13.6 million for the three and six months ended June 30, 2015, respectively. These costs were included in selling, general, and administrative expenses.
7
Prior to the Separation, Masco incurred certain operating expenses on behalf of the Services Business that were allocated to TopBuild based on direct benefit or usage. These allocated operating expenses were $1.2 million and $5.6 million for the three and six months ended June 30, 2015, respectively. These costs were included in selling, general, and administrative expenses. An estimate of these operating expenses was allocated to each of TopBuild’s reporting segments based on a percentage of sales.
For periods prior to the Separation, t hese condensed consolidated financial statements may not reflect the actual expenses that would have been incurred had we operated as a stand-alone company and may not reflect the consolidated results of operations, financial position, and cash flows had we operated as a stand-alone company. Actual costs that would have been incurred if we had operated as a stand-alone company prior to the Separation would have depended on multiple factors, including organizational structure and strategic decisions made in various areas, including, without limitation, information technology and infrastructure.
During the quarter ended March 31, 2015, we identified an error related primarily to the misallocation of a favorable legal settlement to general corporate expenses of TopBuild in the fourth quarter of 2014. The impact of the error was to understate the allocation of corporate expenses reported as selling, general, and administrative expense and overstate operating profit by $1.9 million. The error was not considered material to the previously reported 2014 financial statements. The Company recorded the correction of the error by an out-of-period adjustment in the first quarter of 2015, which is therefore reflected in the six months ended June 30, 2015, Condensed Consolidated Statements of Operations and Condensed Consolidated Statements of Cash Flows.
Share-based Compensation. Our share-based compensation program currently consists of restricted share awards (“RSAs”) and stock option awards (“Options”). Share-based compensation is reported in selling, general, and administrative expense.
The following table details our award types and accounting policies:
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|
|
|
|
Award Type: |
Fair Value Determination |
Vesting |
Expense
|
Expense
|
|
Restricted Share Awards |
|
|
|
|
|
Service Condition |
Closing stock price on date of grant |
Ratably;
|
Straight-line |
Fair value at grant date |
|
Performance Condition |
Closing stock price on date of grant |
Cliff;
|
Straight-line;
|
Evaluated quarterly;
|
|
Market Condition |
Monte-Carlo Simulation |
Cliff;
|
Straight-line;
|
Fair value at grant date |
|
Stock Options† |
Black-Scholes Options Pricing Model |
Ratably;
|
Straight-line |
Fair value at grant date |
†Stock options expire no later than 10 years after the grant date.
‡Expense is reversed if award is forfeited prior to vesting.
Recently Issued Accounting Pronouncements: In May 2014, the Financial Accounting Standards Board (“FASB”) issued a new standard for revenue recognition, Accounting Standards Codification 606 (“ASC 606”). 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 for annual periods beginning January 1, 2018. We are currently evaluating the impact the adoption of this new standard will have on our results of operations.
8
In July 2015, the FASB issued Accounting Standards Update 2015-11 (“ASU 2015-11”) “Simplifying the Measurement of Inventory.” Under the amendment, ASU 2015-11, inventory should be measured at the lower of cost and net realizable value. Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. This guidance is effective for fiscal years beginning after December 15, 2016. Early adoption is permitted; however, we do not anticipate adopting this standard until the first quarter of 2017. We do not anticipate the adoption of this amendment will have a material impact on our financial position or results of operations .
In February 2016, the FASB issued Accounting Standards Update 2016-02 (“ASU 2016-02”), “Leases.” This standard requires a lessee to recognize most leases on their balance sheet. Companies are required to use a modified retrospective transition method for all existing leases. This standard is effective for annual periods beginning after December 15, 2018, and interim periods therein. 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.
In March 2016, the FASB issued Accounting Standards Update 2016-09 (“ASU 2016-09”), “Improvements to Employee Share-Based Payment Accounting.” This update is intended to simplify several aspects of the accounting for share-based payment transactions, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. Under this guidance, an entity recognizes all excess tax benefits and tax deficiencies as income tax expense or benefit in the income statement. This update is effective for annual and interim periods beginning after December 15, 2016, which will require us to adopt these provisions in the first quarter of 2017. Early adoption is permitted. We have not yet selected an adoption date and we are currently determining the effect on our financial position and results of operations.
3. GOODWILL AND OTHER INTANGIBLES
Changes in the carrying amount of goodwill for the six months ended June 30, 2016, by segment, were as follows, in thousands:
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Gross Goodwill |
|
Gross Goodwill |
|
Accumulated |
|
Net Goodwill |
||||
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|
|
at |
|
at |
|
Impairment |
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at |
||||
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|
December 31, 2015 |
|
June 30, 2016 |
|
Losses |
|
June 30, 2016 |
||||
|
Installation |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
Distribution |
|
|
|
|
|
|
|
|
— |
|
|
|
|
Total |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
Other intangible assets, net includes customer relationships, non-compete agreements, and trademarks. The following table sets forth our other intangible assets as of June 30, 2016, and December 31, 2015, in thousands:
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|
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|
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|
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As of |
||||
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|
|
|
June 30, |
|
December 31, |
||
|
|
|
|
|
|
|
|
|
2016 |
|
2015 |
||
|
Gross definite-lived intangible assets |
|
|
|
|
|
|
|
$ |
|
|
$ |
|
|
Accumulated amortization |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net definite-lived intangible assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
Indefinite-lived intangible assets not subject to amortization |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other intangible assets, net |
|
|
|
|
|
|
|
$ |
|
|
$ |
|
9
4. DEPRECIATION AND AMORTIZATION
The following table sets forth our depreciation and amortization expense for the three and six months ended June 30, 2016 and 2015, in thousands:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
Six Months Ended June 30, |
||||||||
|
|
|
2016 |
|
2015 |
|
2016 |
|
2015 |
||||
|
Depreciation |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
Amortization |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
The Company and its wholly-owned domestic subsidiaries (collectively, the “Guarantors”) entered into a senior secured credit agreement and related collateral and guarantee documentation (collectively, the “Credit Agreement”) with PNC Bank, National Association, as administrative agent, and the other lenders and agents party thereto. The Credit Agreement became effective on June 30, 2015. The following table summarizes the key terms of the Credit Agreement, dollars in thousands:
|
|
|
|
|
|
|
|
|
|
Senior secured term loan facility (original borrowing) |
|
|
|
|
$ |
|
|
|
Additional term loan and/or revolver capacity available under incremental facility* |
|
|
|
|
$ |
|
|
|
Interest rate as of June 30, 2016 |
|
|
|
|
|
|
% |
|
Scheduled maturity date |
|
|
|
|
|
6/30/2020 |
|
|
|
|
|
|
|
|
|
|
|
Senior secured revolving credit facility ("Revolving Facility") |
|
|
|
|
$ |
|
|
|
Sublimit for issuance of letters of credit under Revolving Facility** |
|
|
|
|
$ |
|
|
|
Sublimit for swingline loans under Revolving Facility** |
|
|
|
|
$ |
|
|
*Subject to certain conditions (including existing or new lenders providing commitments in respect of such additional borrowing capacity).
** Use of the sublimits for the issuance of letters of credit and swingline loans reduces the availability under the Revolving Facility .
The following table sets forth our remaining principal payments for the following five years as of June 30, 2016, in thousands:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Future Principal |
|
|
|
|
|
|
|
Payments |
|
|
Schedule of Debt Maturity by Years: |
|
|
|
|
|
|
|
2016 |
|
|
|
|
$ |
|
|
2017 |
|
|
|
|
|
|
|
2018 |
|
|
|
|
|
|
|
2019 |
|
|
|
|
|
|
|
2020 |
|
|
|
|
|
|
|
Total principal maturities |
|
|
|
|
$ |
|
10
The following table reconciles the principal balance of our long-term debt to our Condensed Consolidated Balance Sheets, in thousands:
|
|
|
|
|
|
|
|
|
|
|
As of |
||||
|
|
|
June 30, |
|
December 31, |
||
|
|
|
2016 |
|
2015 |
||
|
Current portion of long-term debt |
|
$ |
|
|
$ |
|
|
Long-term portion of long-term debt |
|
|
|
|
|
|
|
Unamortized debt issuance costs |
|
|
|
|
|
|
|
Long-term debt |
|
$ |
|
|
$ |
|
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 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, |
||
|
|
|
2016 |
|
2015 |
||
|
Revolving Facility |
|
$ |
|
|
$ |
|
|
Less: standby letters of credit |
|
|
|
|
|
|
|
Capacity under Revolving Facility |
|
$ |
|
|
$ |
|
The Credit Agreement contains certain covenants that limit, among other things, certain actions we may take and require us to maintain certain financial ratios. On May 9, 2016, the Company and its lenders executed an Amendment to the Credit Agreement (“Amendment No. 1”). Amendment No. 1 provides for the exclusion of up to $50 million of completed share repurchases (on a trailing twelve month basis) from the Credit Agreement’s definition of “Fixed Charges” for the purposes of determining the Company’s compliance with the quarterly Fixed Charge Coverage Ratio (“FCCR”) financial covenant. Amendment No. 1 provides for an initial exclusion of up to $25 million and allows for the exclusion of an additional $25 million of completed share repurchases from the FCCR calculation, provided that the Company’s Total Leverage Ratio (as defined in the Credit Agreement) is below 2.0x at the time of such share repurchase and after giving pro forma effect to any such share repurchase.
The following table outlines the key financial covenants effective for the period covered by this report:
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
December 31, |
||
|
|
|
2016 |
|
2015 |
||
|
Maximum net leverage ratio |
|
|
3.25:1.00 |
|
|
3.50:1.00 |
|
Minimum fixed charge coverage ratio |
|
|
1.10:1.00 |
|
|
1.10:1.00 |
|
Compliance as of period end |
|
|
In Compliance |
|
|
In Compliance |
11
6. 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.
Fair Value on Non-Recurring Basis
Fair value measurements were applied to our long-term debt. The carrying value of our long-term debt approximates the fair market value primarily due to the fact that the non-performance risk of servicing our debt obligations, as reflected in our business and credit risk profile, has not materially changed since we assumed our debt obligations under the Credit Facility. In addition, due to the floating-rate nature of our long-term debt, the market value is not subject to variability solely due to changes in the general level of interest rates as is the case with a fixed-rate debt obligation. During the periods presented, there were no transfers between fair value hierarchical levels.
12
7. SEGMENT INFORMATION
Information about us by segment is as follows, in thousands:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
||||||||||
|
|
|
2016 |
|
2015 |
|
2016 |
|
2015 |
||||
|
|
|
Net Sales |
|
Operating Profit (2) |
||||||||
|
Our operations by segment were (1): |
|
|
|
|
|
|
|
|
|
|
|
|
|
Installation |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
Distribution |
|
|
|
|
|
|
|
|
|
|
|
|
|
Intercompany eliminations and other adjustments (3) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
|
|
$ |
|
|
|
|
|
|
|
|
General corporate expense, net (4) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating profit, as reported |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other expense, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before income taxes |
|
|
|
|
|
|
|
$ |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, |
||||||||||
|
|
|
2016 |
|
2015 |
|
2016 |
|
2015 |
||||
|
|
|
Net Sales |
|
Operating Profit (2) |
||||||||
|
Our operations by segment were (1): |
|
|
|
|
|
|
|
|
|
|
|
|
|
Installation |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
Distribution |
|
|
|
|
|
|
|
|
|
|
|
|
|
Intercompany eliminations and other adjustments (3) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
|
|
$ |
|
|
|
|
|
|
|
|
General corporate expense, net (4) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating profit, as reported |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other expense, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before income taxes |
|
|
|
|
|
|
|
$ |
|
|
$ |
|
|
|
(1) |
|
All of our operations are located in the United States. |
|
|
(2) |
|
Segment operating profit for the three and six months ended June 30, 2016, includes an allocation of general corporate expenses attributable to the operating segments which is based on direct benefit or usage (such as salaries of corporate employees who directly support the segment). Segment operating profit for the three and six months ended June 30, 2015, includes an estimate of general corporate expense calculated based on a percentage of sales. For the three and six months ended June 30, 2015, the $3.4 million and $3.8 million differences, respectively, between estimated expense and actual corporate expense is recorded in intercompany eliminations and other adjustments. |
|
|
(3) |
|
Intercompany eliminations include the elimination of intercompany profit of $3.5 million and $4.0 for the three months ended June 30, 2016 and 2015, respectively, and $6.9 million and $7.4 million for the six months ended June 30, 2016 and 2015, respectively. Other adjustments primarily include differences between estimated and actual corporate costs allocated to the segments for the three and six months ended June 30, 2015, as noted in footnote (2) above. |
|
|
(4) |
|
General corporate expense, net included expenses not specifically attributable to our segments for functions such as corporate human resources, finance, and legal, including salaries, benefits, and other related costs . |
13
8. OTHER COMMITMENTS AND CONTINGENCIES
Litigation . We are subject to 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 that the likelihood the outcome of these matters would have a material adverse effect on us is remote. However, there is no assurance that we will prevail in these 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 results of operations.
Other Matters . We enter into contracts, which include customary indemnifications that are standard for the industries in which we operate. Such indemnifications include customer claims against builders for issues relating to our products and workmanship. In conjunction with divestitures and other transactions, we occasionally provide customary indemnifications relating to various items including: the enforceability of trademarks; legal and environmental issues; and asset valuations. We evaluate the probability that amounts may be incurred 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.
9. INCOME TAXES
Our effective tax rates were 38.7 percent and 38.8 percent for the three and six months ended June 30, 2016, respectively. The effective tax rates for the three and six months ended June 30, 2015, were 20.4 percent and 29.8 percent, respectively. The lower rate in 2015 was primarily due to decreases in our valuation allowance resulting from a partial use of our Federal net operating loss carryforward by Masco.
For 2015 activity through the Separation, we filed our tax returns as a member of the Masco consolidated group for U.S. Federal and certain State jurisdictions. As a result, certain tax attributes, primarily the Federal and State net operating loss carryforwards, were treated as assets of the Masco consolidated group, which they were able to utilize through December 31, 2015. Masco fully utilized the Federal net operating loss and certain State net operating losses by the end of 2015.
In the fourth quarter of 2015, we released all but $0.8 million of our valuation allowance against U.S. Federal and certain state deferred tax assets, due primarily to a return to sustainable operating profitability.
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.
For comparative purposes, the computation of basic and diluted income per common share for prior year periods presented was calculated using the shares distributed at Separation. On June 30, 2015, we distributed 37.7 million shares of our common stock to Masco stockholders in conjunction with the Separation.
14
Basic and diluted income (loss) per share were computed as follows, in thousands, except share and per share amounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
Six Months Ended June 30, |
||||||||
|
|
|
2016 |
|
2015 |
|
2016 |
|
2015 |
||||
|
Income from continuing operations |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
Loss from discontinued operations, net |
|
|
— |
|
|
|
|
|
— |
|
|
|
|
Net income - basic and diluted |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding - basic |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive effect of common stock equivalents: |
|
|
|
|
|
|
|
|
|
|
|
|
|
RSAs with service-based conditions |
|
|
|
|
|
— |
|
|
|
|
|
— |
|
RSAs with market-based conditions |
|
|
|
|
|
— |
|
|
|
|
|
— |
|
RSAs with performance-based conditions |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
Stock options |
|
|
|
|
|
— |
|
|
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding - diluted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic income (loss) per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
Loss from discontinued operations, net |
|
|
— |
|
|
|
|
|
— |
|
|
|
|
Net income |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted income (loss) per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
Loss from discontinued operations, net |
|
|
— |
|
|
|
|
|
— |
|
|
|
|
Net income |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
The following table summarizes shares excluded from the calculation of diluted income (loss) per share because their effect would have been anti-dilutive:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
Six Months Ended June 30, |
||||||||
|
|
|
2016 |
|
2015 |
|
2016 |
|
2015 |
||||
|
Anti-dilutive common stock equivalents: |
|
|
|
|
|
|
|
|
|
|
|
|
|
RSAs with service-based conditions |
|
|
|
|
|
— |
|
|
|
|
|
— |
|
RSAs with market-based conditions |
|
|
— |
|
|
— |
|
|
|
|
|
— |
|
RSAs with performance-based conditions |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
Stock options |
|
|
|
|
|
— |
|
|
|
|
|
— |
|
Total anti-dilutive common stock equivalents: |
|
|
|
|
|
— |
|
|
|
|
|
— |
11. SHARE-BASED COMPENSATION
Prior to the Separation, our eligible employees participated in the Masco share-based compensation program and received restricted share awards and stock options. Effective July 1, 2015, our eligible employees participate in the 2015 TopBuild Long-Term Incentive Plan (the “2015 Plan”). The 2015 Plan authorizes the Board of Directors to grant stock options, stock appreciation rights, restricted shares, restricted share units, performance awards, and dividend equivalents. No more than 4.0 million shares of common stock may be issued under the 2015 Plan. As of June 30, 2016, we had 2.4 million shares available under the 2015 Plan.
Prior to the Separation, share-based compensation expense was allocated to TopBuild based on the awards and options previously granted by Masco to TopBuild employees. Outstanding, unvested Masco stock options and restricted share awards held by employees of TopBuild as of June 30, 2015, were forfeited upon Separation and replaced with TopBuild long-term incentive awards, issued under the 2015 Plan, immediately subsequent to the Separation. The replacement awards are subject to the same terms and conditions in effect prior to the Separation and are of generally equivalent value.
15
Included in selling, general, and administrative expense is share-based compensation expense as presented in the following table, in thousands:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
Six Months Ended June 30, |
||||||||
|
|
|
2016 |
|
2015 |
|
2016 |
|
2015 |
||||
|
Share-based compensation expense |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
The following table presents a summary of our share-based compensation activity for the six months ended June 30, 2016, in thousands, except per share amounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted Share Awards |
|
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 Intrinsic Value |
||||
|
Balance December 31, 2015 |
|
|
|
$ |
|
|
|
|
$ |
|
|
$ |
|
|
$ |
|
|
Granted |
|
|
|
$ |
|
|
|
|
$ |
|
|
$ |
|
|
|
|
|
Converted/Exercised |
|
|
|
$ |
|
|
|
|
$ |
|
|
$ |
|
|
|
|
|
Forfeited |
|
|
|
$ |
|
|
|
|
$ |
|
|
$ |
|
|
|
|
|
Balance June 30, 2016 |
|
|
|
$ |
|
|
|
|
$ |
|
|
$ |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable June 30, 2016 |
|
|
|
|
|
|
|
|
$ |
|
|
$ |
|
|
$ |
|
As of June 30, 2016, we had unrecognized share-based compensation expense relating to unvested awards as shown in the following table, dollars in thousands:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2016 |
|||||||
|
|
|
Unrecognized Compensation Expense
|
|
Weighted Average
|
|
Weighted Average
|
|||
|
Restricted stock awards |
|
$ |
|
|
|
1.9 years |
|
|
|
|
Stock options |
|
|
|
|
|
2.0 years |
|
|
9.1 years |
|
Total unrecognized compensation expense related to unvested awards |
|
$ |
|
|
|
|
|
|
|
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 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 |
|
$ |
|
|
$ |
— |
|
$ |
|
|
$ |
|
|
$ |
|
16
The fair value of our RSAs with a market-based condition granted under the 2015 Plan was determined using a Monte Carlo simulation. The following are key inputs in the Monte Carlo analysis for awards granted in 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016 |
||
|
Remaining measurement period (years) |
|
|
|
|
|
|
|
|
|
Risk free interest rate |
|
|
|
|
|
|
|
% |
|
Dividend yield |
|
|
|
|
|
|
|
% |
|
Estimated fair value of market-based RSAs granted |
|
|
|
|
|
$ |
|
|
The fair values of stock options granted under the 2015 Plan 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 2016 and 2015:
|
|
|
|
|
|
|
|
|
|
|
|
|
2016 |
|
2015 |
||||
|
Risk free interest rate |
|
|
|
% |
|
|
|
% |
|
Expected volatility |
|
|
|
% |
|
|
|
% |
|
Expected life (in years) |
|
|
|
|
|
|
|
|
|
Dividend yield |
|
|
|
% |
|
|
|
% |
|
Estimated fair value of options granted |
|
$ |
|
|
|
$ |
|
|
12. SHARE REPURCHASE PROGRAM
On March 1, 2016, our Board of Directors authorized a share repurchase program (the “Share Repurchase Program”), pursuant to which we may purchase up to $50 million of our common stock. Share repurchases may be executed through various means including, without limitation, open market purchases, privately negotiated transactions, or otherwise, including pursuant to a Rule 10b5-1 plan. The Share Repurchase Program does not obligate us to purchase any shares and expires February 28, 2017. In its discretion, the Board of Directors may terminate, modify, or amend the Share Repurchase Program at any time.
The following table sets forth our share repurchases under the Share Repurchase Program:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
||
|
|
|
June 30, |
|
June 30, |
||
|
|
|
2016 |
|
2016 |
||
|
Number of shares purchased |
|
|
|
|
|
|
|
Share repurchase cost (in thousands) |
|
$ |
|
|
$ |
|
|
Average price per share |
|
$ |
|
|
$ |
|
17
13. CLOSURE COSTS
We continuously 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 close 13 locations within our Installation and Distribution segments during the first and second quarters of 2016. In conjunction with this evaluation, we eliminated certain positions at our corporate headquarters located in Daytona Beach, Florida. We recognize expenses related to branch closures and position eliminations at the time of announcement or notification. Such costs may include termination and other severance benefits, lease abandonment costs, and other contract termination costs. Closure costs are accrued on our Condensed Consolidated Balance Sheets as part of accrued liabilities and reflected in our Condensed Consolidated Statements of Operations as selling, general, and administrative expense. Unpaid amounts noted as of June 30, 2016, are expected to be paid within the next nine months.
The following table details our total estimated closure costs by cost type and segment related to the above closures and position eliminations, in thousands:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment / Cost Type |
|
Closure Costs Liability at December 31,
|
|
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
|
|||||
|
Installation: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance |
|
$ |
— |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
Lease abandonment |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Installation: |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distribution: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance |
|
|
— |
|
|
|
|
|
|
|
|
— |
|
|
— |
|
Lease abandonment |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Distribution: |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance |
|
|
— |
|
|
|
|
|
|
|
|
— |
|
|
|
|
Total Corporate: |
|
|
— |
|
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease abandonment |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Consolidated: |
|
$ |
— |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
18
OVERVIEW
TopBuild Corp., headquartered in Daytona Beach, Florida, is the leading purchaser, installer, and distributor of insulation products to the United States construction industry, based on revenue. Prior to June 30, 2015, we operated as a subsidiary of Masco Corporation. We were incorporated in Delaware in February 2015 as Masco SpinCo Corp. and we changed our name to TopBuild Corp. on March 20, 2015. On June 30, 2015, the separation from Masco (the “Separation”) was completed and on July 1, 2015, we began trading on the NYSE under the symbol “BLD.”
We operate in two segments: Installation (TruTeam) and Distribution (Service Partners). Through our Installation segment, we provide insulation installation services nationwide through our TruTeam contractor services business which has over 175 branches located in 42 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, garage doors, fireplaces, shower enclosures, and closet shelving. We handle every stage of the installation process, including material procurement supplied by leading manufacturers, project scheduling and logistics, multi-phase professional installation, and installation quality assurance.
Through our Distribution segment, we distribute insulation and other building products, including rain gutters, fireplaces, closet shelving, and roofing materials through our Service Partners business, which has over 70 branches in 33 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.
For additional details pertaining to our operating results by segment see Note 7 – Segment Information – in the notes to the unaudited condensed consolidated financial statements, which is incorporated herein by reference.
19
SECOND QUARTER 2016 AND THE FIRST SIX MONTHS 2016 VERSUS SECOND QUARTER 2015 AND THE FIRST SIX MONTHS 2015
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.
The following table sets forth our net sales, gross profit, operating profit, and margins, as reported in our Consolidated Statements of Operations, in thousands:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
Six Months Ended June 30, |
|
||||||||
|
|
|
2016 |
|
2015 |
|
2016 |
|
2015 |
|
||||
|
Net sales |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
|
Cost of sales |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales ratio |
|
|
|
% |
|
|
% |
|
|
% |
|
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit margin |
|
|
|
% |
|
|
% |
|
|
% |
|
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general, and administrative expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general, and administrative expense to sales ratio |
|
|
|
% |
|
|
% |
|
|
% |
|
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating profit |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating profit margin |
|
|
|
% |
|
|
% |
|
|
% |
|
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other expense, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense from continuing operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
|
Net margin on continuing operations |
|
|
|
% |
|
|
% |
|
|
% |
|
|
% |
We report our financial results in accordance with generally accepted accounting principles (“GAAP”) in the United States. However, we believe that certain non-GAAP performance measures and ratios used in managing the business may provide users of this financial information with additional meaningful comparisons between current results and results in prior periods. Non-GAAP performance measures and ratios should be viewed in addition to, and not as an alternative for, our financial results reported in accordance with GAAP.
Sales and Operations
Net sales increased 6.9 percent for the three months ended June 30, 2016, from the comparable period of 2015. The increase was principally driven by sales volume growth in both the Installation and Distribution segments. Our sales benefited primarily from the overall continued improvement in the housing market, as well as continued focus on organically growing our residential and commercial activity. Net sales also benefited from increased selling prices for the three months ended June 30, 2016, compared to the same period in the prior year.
Net sales increased 10.9 percent for the six months ended June 30, 2016, from the comparable period of 2015. The increase was principally driven by sales volume growth in both the Installation and Distribution segments. Our sales benefited primarily from the overall continued improvement in the housing market, as well as continued focus on organically growing our residential and commercial activity, mild winter weather conditions, and one additional business day for the six month period ending June 30, 2016, compared with the same period in the prior year. Net sales also benefited from increased selling prices for the six months ended June 30, 2016, compared to the same period in the prior year.
Our gross profit margin was 22.6 percent and 21.2 percent for the three months ended June 30, 2016 and 2015, respectively. Gross profit margin was positively impacted by favorable leverage on higher sales volume and increased selling prices, partially offset by higher insurance claims.
20
Our gross profit margin was 22.1 percent and 20.9 percent for the six months ended June 30, 2016 and 2015, respectively. Gross profit margin was positively impacted by favorable leverage on higher sales volume and increased selling prices, partially offset by higher insurance claims.
Selling, general, and administrative expense, as a percent of sales, was 16.4 percent and 18.4 percent for the three months ended June 30, 2016 and 2015, respectively. Reduced selling, general, and administrative expense as a percent of sales was a result of lower corporate expenses, increased sales volume, benefits associated with cost savings initiatives, and lower rationalization charges related to our spin-off from Masco, partially offset by higher share-based compensation expense. Selling, general, and administrative expense for the three months ended June 30, 2015, included allocations of Masco general corporate expenses of $5.7 million.
Selling, general, and administrative expense, as a percent of sales, was 16.6 percent and 19.6 percent for the six months ended June 30, 2016 and 2015, respectively. Reduced selling, general, and administrative expense as a percent of sales was a result of lower corporate expenses, increased sales volume, benefits associated with cost savings initiatives, and lower rationalization charges related to our spin-off from Masco, partially offset by higher share-based compensation expense and closure costs discussed below. Selling, general, and administrative expense for the six months ended June 30, 2015, included allocations of Masco general corporate expenses of $13.6 million.
Operating margins were 6.2 percent and 2.8 percent for the three months ended June 30, 2016 and 2015, respectively. Operating margins before general corporate expenses were 7.6 percent and 4.3 percent for the three months ended June 30, 2016 and 2015, respectively. Operating margins were positively impacted by increased sales volume, increased selling prices, lower corporate expenses, and benefits associated with cost savings initiatives, partially offset by higher insurance claims, share-based compensation expense, and closure costs discussed below.
Operating margins were 5.5 percent and 1.4 percent for the six months ended June 30, 2016 and 2015, respectively. Operating margins before general corporate expenses were 6.8 percent and 3.1 percent for the six months ended June 30, 2016 and 2015, respectively. Changes in operating margins were positively impacted by increased sales volume, increased selling prices, lower corporate expenses, and benefits associated with cost savings initiatives, partially offset by higher insurance claims, share-based compensation expense, and closure costs discussed below.
Closure and Related Costs
We incurred expense of $1.0 million during the six months ended June 30, 2016, related to the closure of 13 locations within our Installation and Distribution segments and the elimination of certain positions at our corporate headquarters. We anticipate recovering these costs within the next nine months.
21
Business Segment Results
The following table sets forth our net sales and operating profit margins by business segment, in thousands:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
|
||||
|
|
|
2016 |
|
2015 |
|
Percent Change |
|
||
|
Sales by business segment: |
|
|
|
|
|
|
|
|
|
|
Installation |
|
$ |
|
|
$ |
|
|
|
% |
|
Distribution |
|
|
|
|
|
|
|
|
% |
|
Intercompany eliminations and other adjustments |
|
|
|
|
|
|
|
|
|
|
Net sales |
|
$ |
|
|
$ |
|
|
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
Operating profit by business segment: |
|
|
|
|
|
|
|
|
|
|
Installation |
|
$ |
|
|
$ |
|
|
|
% |
|
Distribution |
|
|
|
|
|
|
|
|
% |
|
Intercompany eliminations and other adjustments |
|
|
|
|
|
|
|
|
|
|
Operating profit before general corporate expense |
|
|
|
|
|
|
|
|
% |
|
General corporate expense, net |
|
|
|
|
|
|
|
|
|
|
Operating profit |
|
$ |
|
|
$ |
|
|
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
Operating profit margins: |
|
|
|
|
|
|
|
|
|
|
Installation |
|
|
|
% |
|
|
% |
|
|
|
Distribution |
|
|
|
% |
|
|
% |
|
|
|
Operating profit margin before general corporate expense |
|
|
|
% |
|
|
% |
|
|
|
Operating profit margin |
|
|
|
% |
|
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, |
|
|
|
||||
|
|
|
2016 |
|
2015 |
|
Percent Change |
|
||
|
Sales by business segment: |
|
|
|
|
|
|
|
|
|
|
Installation |
|
$ |
|
|
$ |
|
|
|
% |
|
Distribution |
|
|
|
|
|
|
|
|
% |
|
Intercompany eliminations and other adjustments |
|
|
|
|
|
|
|
|
|
|
Net sales |
|
$ |
|
|
$ |
|
|
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
Operating profit by business segment: |
|
|
|
|
|
|
|
|
|
|
Installation |
|
$ |
|
|
$ |
|
|
|
% |
|
Distribution |
|
|
|
|
|
|
|
|
% |
|
Intercompany eliminations and other adjustments |
|
|
|
|
|
|
|
|
|
|
Operating profit before general corporate expense |
|
|
|
|
|
|
|
|
% |
|
General corporate expense, net |
|
|
|
|
|
|
|
|
|
|
Operating profit |
|
$ |
|
|
$ |
|
|
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
Operating profit margins: |
|
|
|
|
|
|
|
|
|
|
Installation |
|
|
|
% |
|
|
% |
|
|
|
Distribution |
|
|
|
% |
|
|
% |
|
|
|
Operating profit margin before general corporate expense |
|
|
|
% |
|
|
% |
|
|
|
Operating profit margin |
|
|
|
% |
|
|
% |
|
|
22
Installation
Sales
Sales in the Installation segment increased $22.7 million, or 8.6 percent, for the three months ended June 30, 2016, compared to the same period in 2015. The increase in sales was primarily due to increased sales volume related to a higher level of activity in new home construction and an increased sales volume of commercial installation. Sales also increased 3.7 percent due to increased selling prices.
Sales in the Installation segment increased $62.3 million, or 12.5 percent, for the six months ended June 30, 2016, compared to the same period in 2015. The increase in sales was primarily due to increased sales volume related to a higher level of activity in new home construction and commercial activity, mild winter weather conditions, as well as one additional business day during the six months ended June 30, 2016. Sales also increased 3.4 percent due to increased selling prices.
Operating results
Operating margins in the Installation segment were 7.9 percent and 2.7 percent for the three months ended June 30, 2016 and 2015, respectively. Operating margins were positively impacted by increased sales volume, higher selling prices, and related absorption of fixed costs, as well as the benefits associated with cost savings initiatives, and lower corporate expenses which were allocated to the segments based on direct benefit or usage, partially offset by higher insurance claims, increased legal expense, and increased bonus expense.
Operating margins in the Installation segment were 6.5 percent and 1.2 percent for the six months ended June 30, 2016 and 2015, respectively. Operating margins were positively impacted by increased sales volume, higher selling prices, and related absorption of fixed costs, as well as the benefits associated with cost savings initiatives, lower corporate expenses which were allocated to the segments based on direct benefit or usage, and lower professional fees incurred related to the spin-off in the prior year, partially offset by higher insurance claims and current rationalization charges related to the closure costs noted above.
Distribution
Sales
Sales in the Distribution segment increased $3.4 million, or 2.1 percent, for the three months ended June 30, 2016, compared to the same period in 2015. The increase was primarily due to increased sales volume related to a higher level of activity in new home construction. Sales were partially offset by a 2.2 percent decrease in selling prices.
Sales in the Distribution segment increased $19.7 million, or 6.4 percent, for the six months ended June 30, 2016, compared to the same period in 2015. The increase in sales was primarily due to an increase in sales volume related to a higher level of activity in new home construction, mild winter weather conditions, and one additional business day during the six months ended June 30, 2016. Sales were partially offset by a 2.0 percent decrease in selling prices.
Operating results
Operating margins in the Distribution segment were 8.2 percent and 7.4 percent for the three months ended June 30, 2016 and 2015 , respectively. Operating margins were positively impacted by increased volume and related absorption of fixed costs, lower corporate expenses which were allocated to the segments based on direct benefit or usage, and benefits associated with cost savings initiatives, partially offset by a decrease in selling prices.
23
Operating margins in the Distribution segment were 8.6 percent and 7.6 percent for the six months ended June 30, 2016 and 2015, respectively. Operating margins were positively impacted by increased volume and related absorption of fixed costs, lower corporate expenses which were allocated to the segments based on direct benefit or usage, as well as benefits associated with cost savings initiatives, partially offset by a decrease in selling prices.
OTHER ITEMS
Other expense, net
Other expense net, which primarily consisted of interest expense, was $1.3 million and $3.2 million for the three months ended June 30, 2016 and 2015, respectively.
Other expense net, which primarily consisted of interest expense, was $2.9 million and $6.3 million for the six months ended June 30, 2016 and 2015, respectively.
For both the three and six month periods ended June 30, 2015, prior to the Separation, interest expense was allocated to us by Masco; as such, this expense is not indicative of our future interest expense. Utilizing our current interest rate of 1.95 percent as of June 30, 2016, our expected interest expense, including the amortization of debt issuance costs, is estimated to be $ 2.0 million for the remaining six months of 2016.
Income tax expense from continuing operations
Income tax expense from continuing operations was $ 9.9 million, an effective tax rate (“ETR”) of 38.7 percent, for the three months ended June 30, 2016, compared to $1.7 million, an ETR of 20.4 percent, for the comparable period in 2015. The lower 2015 rate was primarily due to the decrease in our valuation allowance resulting from the partial use of the Federal net operating loss carryforward by Masco.
Income tax expense from continuing operations was $ 16.9 million, an ETR of 38.8 percent, for the six months ended June 30, 2016, compared to $1.2 million, an ETR of 29.8 percent, for the comparable period in 2015. The lower 2015 rate was primarily due to the decrease in our valuation allowance resulting from the partial use of the Federal net operating loss carryforward by Masco.
24
Cash Flows and Liquidity
Significant sources (uses) of cash and cash equivalents for the six months ended June 30, 2016 and 2015, were summarized as follows, in thousands:
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, |
|
||||
|
|
|
2016 |
|
2015 |
|
||
|
Net cash from (for) operating activities |
|
$ |
|
|
$ |
|
|
|
Purchases of property and equipment |
|
|
|
|
|
|
|
|
Proceeds from sale of property and equipment |
|
|
|
|
|
|
|
|
Other investing, net |
|
|
|
|
|
|
|
|
Net transfer from Former Parent |
|
|
— |
|
|
|
|
|
Cash distribution paid to Former Parent |
|
|
— |
|
|
|
|
|
Proceeds from issuance of long-term debt |
|
|
— |
|
|
|
|
|
Repayment of long-term debt |
|
|
|
|
|
— |
|
|
Taxes withheld and paid on employees' equity awards |
|
|
|
|
|
— |
|
|
Repurchase of shares of common stock |
|
|
|
|
|
— |
|
|
Payment of debt issuance costs |
|
|
— |
|
|
|
|
|
Cash and cash equivalents (decrease) increase |
|
$ |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
Working capital (receivables, net plus inventories, less accounts payable) as a percentage of net sales for the trailing 12 months |
|
|
|
% |
|
|
% |
As of as of June 30, 2016 and 2015, our working capital was 8.4 percent and 8.3 percent of net sales for the trailing twelve months, respectively. Working capital increased $14.2 million to $143.2 million at June 30, 2016, compared to June 30, 2015. The marginal increase in working capital as a percentage of net sales for the trailing 12 months ended June 30, 2016, compared to June 30, 2015, was due primarily to slightly accelerated supplier payment terms reducing accounts payable levels, offset by lower levels of net receivables and net inventory relative to the trailing 12 months net sales.
Net cash flows generated from (used for) operating activities were $6.1 million and $(9.0) million for the six months ended June 30, 2016 and 2015, respectively. The increase was due primarily to improved net income for the six months ended June 30, 2016, compared with the same period in 2015. Further benefiting net cash flows generated from operating activities was improved management of inventory purchases driven by higher sales levels during the six months ended June 30, 2016, relative to June 30, 2015. Accrued liabilities also increased for the six months ended June 30, 2016, relative to June 30, 2015, primarily related to additional days of accrued payroll for the comparative periods, increased state income taxes payable related to our increased profitability for the comparative periods, and an increase in our group health insurance reserve based on our year-to-date claims experience compared with the prior year period. These changes were partially offset by a larger decrease in our accounts payable for the six months ended June 30, 2016, compared to the same period for 2015, due to the satisfaction of payables related to strategic inventory purchases in the fourth quarter of 2015 and a nominal change to payment terms for select suppliers w hich accelerated payments.
Net cash used for investing activities was $5.7 million for the six months ended June 30, 2016, primarily comprised of $6.0 million in purchases of property and equipment, partially offset by $0.2 million of proceeds from sale of property and equipment. Net cash used for investing activities was $6.2 million for the six months ended June 30, 2015, primarily comprised of $7.1 million in purchases of property and equipment, partially offset by $0.4 million of proceeds from sale of property and equipment.
25
Net cash used for financing activities was $11.2 million for the six months ended June 30, 2016, primarily comprised of $5.0 million of repayments of our long-term debt, $5.0 million of repurchases of our common stock related to our $50 million share repurchase program announced in March 2016, and $1.3 million of purchases of common stock for tax withholding obligations related to the vesting of restricted share awards during the six months ended June 30, 2016. Net cash from financing activities for the six months ended June 30, 2015, was $75.5 million, comprised of a $77.2 million transfer from Masco, partially offset by a $1.7 million payment of debt issuance costs. Financing activities for this period in 2015 also included $200 million proceeds from the issuance of long term debt fully offset by a $200 million distribution to Masco in conjunction with the Separation.
Prior to the Separation, we largely funded our growth through cash provided by our operations, combined with support from Masco, through its operating cash flows, its long-term debt, and its issuance of securities in the financial markets.
In June 2015, we entered into the Credit Agreement with a bank group. The Credit Agreement consists of a senior secured term loan facility of $200 million, which was used to finance a $200 million cash distribution to Masco in connection with the Separation, and a senior secured revolving credit facility which provides for borrowing and/or standby letter of credit issuances of up to $125 million. Additional borrowing capacity under the credit facility may be accessed by the Company without the consent of the lenders in an aggregate amount not to exceed $100 million, subject to certain conditions.
Following the Separation, we have access to liquidity through our cash from operations and available borrowing capacity under our Credit Agreement. 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 12 months. Cash flows are seasonally stronger in the third and fourth quarters as a result of increased new construction activity.
The following table summarizes our liquidity, in thousands:
|
|
|
|
|
|
|
|
|
|
|
As of |
||||
|
|
|
June 30, |
|
December 31, |
||
|
|
|
2016 |
|
2015 |
||
|
Cash and cash equivalents |
|
$ |
|
|
$ |
|
|
Revolving Facility |
|
|
|
|
|
|
|
Less: standby letters of credit |
|
|
|
|
|
|
|
Capacity under Revolving Facility |
|
|
|
|
|
|
|
Total liquidity |
|
$ |
|
|
$ |
|
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. We also have bonds outstanding for licensing and insurance. The following table summarizes our outstanding bonds, in thousands:
|
|
|
|
|
|
|
|
|
|
|
As of |
||||
|
|
|
June 30, |
|
December 31, |
||
|
|
|
2016 |
|
2015 |
||
|
Performance bonds |
|
$ |
|
|
$ |
|
|
Licensing, insurance, and other bonds |
|
|
|
|
|
|
|
Total |
|
$ |
|
|
$ |
|
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, 2015, as filed with the SEC on March 3, 2016.
26
APPLICATION OF NEW ACCOUNTING STANDARDS
Information regarding application of new accounting standards is incorporated by reference from Note 2 to our unaudited condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q.
FORWARD-LOOKING STATEMENTS
Statements contained in this report that reflect our views about our future 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,” 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; our ability to maintain our competitive position; and our ability to realize the expected benefits of the Separation. 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, 2015, filed 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.
Interest Rate Risk
Prior to the Separation, we participated in Masco’s centralized cash management program and were funded through an intercompany loan arrangement whereby Masco provided daily liquidity, as needed, to fund our operations. As a result of this intercompany funding arrangement, prior to the Separation, we had no external indebtedness that exposed us to interest rate risk. Our historical financial statements include standby letter of credit costs, as Masco allocated these costs to TopBuild in related party interest expense allocations.
Our Credit Agreement became effective on June 30, 2015. The Credit Agreement consists of a senior secured term loan facility in the amount of $200 million and a senior secured revolving facility in the amount of $125 million.
Interest payable on both the term loan facility and revolving facility is based on a variable interest rate. As a result, we are exposed to market risks related to fluctuations in interest rates on our outstanding indebtedness. Based on the current interest rate of 1.95 percent under the senior secured term loan facility, a 100 basis point increase in the interest rate would result in a $1.8 million increase in our annualized interest expense. There was no outstanding balance under the revolving facility as of June 30, 2016.
27
Evaluation of Disclosure Controls and Procedures
Our principal executive officer and principal financial officer have concluded, based on an evaluation of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective.
Changes in Internal Control over Financial Reporting
During the three months ended June 30, 2016, we did not make any changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. We continue to review and document our internal controls over financial reporting and may, from time to time, make changes aimed at enhancing their effectiveness.
28
None.
There have been no material changes to our risk factors as previously disclosed in our Annual Report on Form 10-K as filed with the SEC on March 3, 2016.
The following table provides information regarding the repurchase of our common stock for the three months ended June 30, 2016, in thousands, except share and per share data:
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|
|
|
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 (a) |
||
|
April 1, 2016 - April 30, 2016 |
|
|
|
$ |
|
|
|
|
$ |
|
|
May 1, 2016 - May 31, 2016 |
|
|
|
$ |
|
|
|
|
$ |
|
|
June 1, 2016 - June 30, 2016 |
|
|
|
$ |
|
|
|
|
$ |
|
|
Total |
|
|
|
$ |
|
|
|
|
|
|
|
|
(a) |
|
On March 1, 2016, our Board of Directors authorized a share repurchase program, which we publicly announced on March 3, 2016 (the “Share Repurchase Program”), pursuant to which we may purchase up to $50 million of our common stock. The Share Repurchase program does not obligate us to purchase any shares and expires February 28, 2017. The Share Repurchase Program may be terminated, increased, or decreased by our Board of Directors at its discretion at any time. |
During the three months ended June 30, 2016, we repurchased 100,024 shares of our common stock for approximately $3.4 million under the $50 million Share Repurchase Program. All repurchases were made using cash resources. Our common stock repurchases occurred on the open market pursuant to a Rule 10b5-1 plan. Excluded from this disclosure are shares repurchased to settle statutory employee tax withholding related to the vesting of stock awards and exercise of options.
Not applicable.
Not applicable.
None
The Exhibits listed on the accompanying Index to Exhibits are filed or furnished (as noted on such Index) as part of this Form 10-Q and incorporated herein by reference.
29
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.
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TOPBUILD CORP. |
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By: |
/s/ John S. Peterson |
|
|
Name: |
John S. Peterson |
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|
Title: |
Vice President and Chief Financial Officer |
|
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|
|
August 4, 2016
30
|
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Incorporated By Reference |
|
Filed |
||||
|
Exhibit No. |
|
Exhibit Title |
|
Form |
|
Exhibit |
|
Filing Date |
|
Herewith |
|
|
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|
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10.1 |
|
1st Amendment to Credit Agreement, dated May 9, 2016, among TopBuild Corp. and PNC Bank, National Association, as administrative agent, and the other lenders and agents party thereto. |
|
10-Q |
|
10.1 |
|
5/11/2016 |
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10.2 |
|
Amended and Restated TopBuild Corp. 2015 Long Term Stock Incentive Plan ("A&R LTIP"). |
|
10-Q |
|
10.2 |
|
5/11/2016 |
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10.3 |
|
Form of Restricted Stock Award ("RSA") Agreement under A&R LTIP. |
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|
X |
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10.4 |
|
Form of Performance RSA Agreement (EPS) under A&R LTIP. |
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X |
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10.5 |
|
Form of Performance RSA Agreement (RTSR) under A&R LTIP. |
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|
X |
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10.6 |
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Form of Option Award Agreement under A&R LTIP. |
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|
X |
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10.7 |
|
Form of RSA Agreement for Non-Employee Director under A&R LTIP. |
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X |
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31.1 |
|
Principal Executive Officer Certification required by Rules 13a-14 and 15d-14 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
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X |
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31.2 |
|
Principal Financial Officer Certification required by Rules 13a-14 and 15d-14 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
|
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|
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|
X |
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|
32.1† |
|
Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of Sarbanes-Oxley Act of 2002. |
|
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32.2† |
|
Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of Sarbanes-Oxley Act of 2002. |
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|
101.INS |
|
XBRL Instance Document. |
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X |
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101.SCH |
|
XBRL Taxonomy Extension Schema Document. |
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X |
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101.CAL |
|
XBRL Taxonomy Extension Calculation Linkbase Document. |
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X |
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|
101.DEF |
|
XBRL Taxonomy Extension Definition Linkbase Document. |
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|
X |
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101.LAB |
|
XBRL Taxonomy Extension Label Linkbase Document |
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X |
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|
101.PRE |
|
XBRL Taxonomy Extension Presentation Linkbase Document |
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X |
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|
†Furnished herewith. |
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|
31
No information found
* THE VALUE IS THE MARKET VALUE AS OF THE LAST DAY OF THE QUARTER FOR WHICH THE 13F WAS FILED.
| FUND | NUMBER OF SHARES | VALUE ($) | PUT OR CALL |
|---|
| DIRECTORS | AGE | BIO | OTHER DIRECTOR MEMBERSHIPS |
|---|
No information found
No Customers Found
No Suppliers Found
Price
Yield
| Owner | Position | Direct Shares | Indirect Shares |
|---|