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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 March 31, 2018
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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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475 North Williamson Boulevard Daytona Beach, Florida (Address of Principal Executive Offices) |
32114 (Zip Code) |
(386) 304-2200
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒ Yes ☐ No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). ☒ Yes ☐ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☒ Accelerated filer ☐ Smaller reporting company ☐ Non-accelerated filer ☐ (Do not check if a smaller reporting company)
Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ☒ No
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
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Class |
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Shares Outstanding at April 30, 2018 |
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Common stock, par value $0.01 per share |
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35,656,363 |
TABLE OF CONTENTS
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2
GLOSSARY
We use acronyms, abbreviations, and other defined terms throughout this quarterly report on form 10-Q, which are defined in the glossary below:
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Term |
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Definition |
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2015 LTIP |
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2015 TopBuild Long-Term Incentive Plan, as amended from time to time |
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2016 Repurchase Program |
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$50 million share repurchase program authorized by the Board on March 1, 2016 |
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2017 ASR Agreement |
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$100 million accelerated share repurchase agreement with Bank of America, N.A. |
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2017 Repurchase Program |
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$200 million share repurchase program authorized by the Board on February 24, 2017 |
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ADO |
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ADO Products, LLC |
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Amended Credit Agreement |
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Senior secured credit agreement and related security and pledge agreement dated May 5, 2017, as amended March 28, 2018, with the "Lenders" |
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Annual Report |
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Annual report filed with the SEC on Form 10-K pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
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ASC |
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Accounting Standards Codification |
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ASR |
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Accelerated share repurchase |
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ASU |
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Accounting Standards Update |
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Board |
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Board of Directors |
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BofA |
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Bank of America, N.A. |
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Canyon |
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Canyon Insulation, Inc. |
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Capital |
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Capital Insulation, Inc. |
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EBITDA |
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Earnings before income taxes, depreciation, and amortization |
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EcoFoam |
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Bella Insulutions Inc., DBA EcoFoam/Insulutions |
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ETR |
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Effective tax rate |
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Exchange Act |
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The Securities Exchange Act of 1934, as amended |
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FASB |
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Financial Accounting Standards Board |
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FCCR |
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Fixed charge coverage ratio |
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GAAP |
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Generally accepted accounting principles in the United States of America |
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Guarantors |
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Certain wholly-owned domestic subsidiaries of TopBuild Corp. |
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Lenders |
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Bank of America, N.A., together with the other lenders party to the "Amended Credit Agreement" |
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LIBOR |
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London interbank offered rate |
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Midwest |
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Midwest Fireproofing, LLC |
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MR Insulfoam |
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MR Insulfoam, LLC |
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Net Leverage Ratio |
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As defined in the “Amended Credit Agreement,” the ratio of outstanding indebtedness, less up to $75 million of unrestricted cash, to EBITDA |
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NYSE |
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New York Stock Exchange |
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Old Credit Agreement |
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Senior secured credit agreement, as amended, and related collateral and guarantee documentation dated June 9, 2015, with PNC Bank, N.A. as administrative agent, and the other lenders and agents party thereto |
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Options |
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Stock option awards |
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Owens Corning |
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Owens Corning Sales, LLC |
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Quarterly Report |
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Quarterly report filed with the SEC on Form 10-Q pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
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Revolving Facility |
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Senior secured revolving credit facilities available under the credit agreements. With respect to the Old Credit Agreement, a $125 million facility with applicable sublimits for letters of credit and swingline loans. With respect to the Amended Credit Agreement, a $250 million facility with applicable sublimits for letters of credit and swingline loans. |
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RSA |
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Restricted stock award |
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Santa Rosa |
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Santa Rosa Insulation and Fireproofing, LLC |
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SEC |
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United States Securities and Exchange Commission |
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Secured Leverage Ratio |
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As defined in the “Amended Credit Agreement,” the ratio of outstanding indebtedness, including letters of credit, to EBITDA |
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Senior Notes |
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Senior unsecured obligations issued on April 25, 2018 which bear interest at 5.625% per annum and mature on May 1, 2026 |
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Superior |
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Superior Insulation Products, LLC |
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TopBuild |
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TopBuild Corp. and its wholly-owned consolidated domestic subsidiaries. Also, the "Company," "we," "us," and "our" |
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TTM |
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Trailing twelve months |
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U.S. |
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United States of America |
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USI |
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United Subcontractors, Inc. |
3
PART I – FINANCIAL INFORMATION
TOPBUILD CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
(In thousands except share data)
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As of |
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March 31, |
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December 31, |
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2018 |
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2017 |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
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$ |
37,334 |
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$ |
56,521 |
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Receivables, net of an allowance for doubtful accounts of $3,008 and $3,673 at March 31, 2018, and December 31, 2017, respectively |
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313,568 |
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308,508 |
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Inventories, net |
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138,447 |
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131,342 |
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Prepaid expenses and other current assets |
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11,532 |
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15,221 |
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Total current assets |
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500,881 |
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511,592 |
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Property and equipment, net |
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115,441 |
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107,121 |
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Goodwill |
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1,082,815 |
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1,077,186 |
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Other intangible assets, net |
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48,437 |
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33,243 |
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Deferred tax assets, net |
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18,129 |
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18,129 |
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Other assets |
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2,235 |
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2,278 |
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Total assets |
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$ |
1,767,938 |
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$ |
1,749,549 |
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LIABILITIES AND EQUITY |
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Current liabilities: |
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Accounts payable |
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$ |
254,384 |
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$ |
263,814 |
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Current portion of long-term debt - term loan |
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12,500 |
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12,500 |
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Current portion of long-term debt - equipment notes |
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1,858 |
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— |
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Accrued liabilities |
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74,534 |
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75,087 |
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Total current liabilities |
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343,276 |
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351,401 |
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Long-term debt - term loan |
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225,329 |
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229,387 |
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Long-term debt - equipment notes |
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8,208 |
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— |
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Deferred tax liabilities, net |
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132,840 |
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132,840 |
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Long-term portion of insurance reserves |
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33,818 |
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36,160 |
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Other liabilities |
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3,672 |
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3,242 |
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Total liabilities |
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747,143 |
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753,030 |
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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 March 31, 2018, and December 31, 2017 |
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— |
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— |
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Common stock, $0.01 par value: 250,000,000 shares authorized; 38,698,962 issued and 35,645,843 outstanding at March 31, 2018, and 38,626,378 shares issued and 35,586,916 outstanding at December 31, 2017 |
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387 |
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386 |
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Treasury stock, 3,053,119 shares at March 31, 2018, and 3,039,462 shares at December 31, 2017, at cost |
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(161,582) |
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(141,582) |
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Additional paid-in capital |
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848,487 |
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830,600 |
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Retained earnings |
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333,503 |
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|
307,115 |
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Total equity |
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1,020,795 |
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|
996,519 |
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Total liabilities and equity |
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$ |
1,767,938 |
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$ |
1,749,549 |
See notes to our unaudited Condensed Consolidated Financial Statements.
4
TOPBUILD CORP.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(In thousands except share and per common share data)
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Three Months Ended March 31, |
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2018 |
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2017 |
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Net sales |
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$ |
491,444 |
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$ |
441,363 |
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Cost of sales |
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380,426 |
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|
339,735 |
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Gross profit |
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111,018 |
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|
101,628 |
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Selling, general, and administrative expense (exclusive of significant legal settlement, shown separately below) |
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|
77,125 |
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|
75,091 |
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Significant legal settlement |
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|
— |
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|
30,000 |
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Operating profit (loss) |
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33,893 |
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(3,463) |
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Other income (expense), net: |
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|
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|
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Interest expense |
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(2,324) |
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|
(1,370) |
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Other, net |
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34 |
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|
107 |
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Other expense, net |
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(2,290) |
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|
(1,263) |
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Income (loss) before income taxes |
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31,603 |
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(4,726) |
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Income tax (expense) benefit |
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(5,215) |
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|
3,016 |
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Net income (loss) |
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$ |
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$ |
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Net Income (loss) per common share: |
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|
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Basic |
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$ |
0.75 |
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$ |
(0.05) |
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Diluted |
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$ |
0.74 |
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$ |
(0.05) |
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Weighted average shares outstanding: |
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Basic |
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35,059,920 |
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37,123,245 |
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Diluted |
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35,819,242 |
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37,123,245 |
See notes to our unaudited Condensed Consolidated Financial Statements .
5
TOPBUILD CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In thousands)
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Three Months Ended March 31, |
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2018 |
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2017 |
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Net Cash Provided by (Used in) Operating Activities: |
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|
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|
|
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Net income (loss) |
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$ |
26,388 |
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$ |
(1,710) |
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Adjustments to reconcile net income (loss) to net cash provided by operating activities: |
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|
|
|
|
|
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Depreciation and amortization |
|
|
5,442 |
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|
3,231 |
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Share-based compensation |
|
|
2,402 |
|
|
2,084 |
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Loss on sale or abandonment of property and equipment |
|
|
200 |
|
|
88 |
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Amortization of debt issuance costs |
|
|
107 |
|
|
86 |
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Change in fair value of contingent consideration |
|
|
70 |
|
|
— |
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Provision for bad debt expense |
|
|
760 |
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|
995 |
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Loss from inventory obsolescence |
|
|
468 |
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|
360 |
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Changes in certain assets and liabilities: |
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|
|
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|
|
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Receivables, net |
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(1,092) |
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|
(6,568) |
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Inventories, net |
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(5,143) |
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|
4,531 |
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Prepaid expenses and other current assets |
|
|
3,912 |
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|
(4,195) |
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Accounts payable |
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(11,429) |
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|
(17,842) |
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Accrued liabilities |
|
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(3,923) |
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|
33,656 |
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Other, net |
|
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(597) |
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|
118 |
|
Net cash provided by operating activities |
|
|
17,565 |
|
|
14,834 |
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Cash Flows Provided by (Used in) Investing Activities: |
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|
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|
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Purchases of property and equipment |
|
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(11,266) |
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|
(3,800) |
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Acquisition of businesses, net of cash acquired of $239 in 2018 |
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(26,956) |
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|
(41,242) |
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Proceeds from sale of property and equipment |
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|
70 |
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|
133 |
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Repayment of notes receivable |
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13 |
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32 |
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Net cash used in investing activities |
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(38,139) |
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|
(44,877) |
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Cash Flows Provided by (Used in) Financing Activities: |
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|
|
|
|
|
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Repayments of long-term debt |
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(3,125) |
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|
(5,000) |
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Proceeds from equipment notes |
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|
10,066 |
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|
— |
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Proceeds from revolving credit facility |
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|
55,000 |
|
|
— |
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Repayment of revolving credit facility |
|
|
(55,000) |
|
|
— |
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Payment of debt issuance costs |
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(1,040) |
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|
— |
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Taxes withheld and paid on employees' equity awards |
|
|
(4,514) |
|
|
(1,583) |
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Repurchase of shares of common stock |
|
|
— |
|
|
(17,379) |
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Net cash provided by (used in) financing activities |
|
|
1,387 |
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|
(23,962) |
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|
|
|
|
|
|
|
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Cash and Cash Equivalents |
|
|
|
|
|
|
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Decrease for the period |
|
|
(19,187) |
|
|
(54,005) |
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Beginning of year |
|
|
56,521 |
|
|
134,375 |
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End of period |
|
$ |
37,334 |
|
$ |
80,370 |
|
|
|
|
|
|
|
|
|
Supplemental disclosure of noncash investing activities: |
|
|
|
|
|
|
|
Accruals for property and equipment |
|
$ |
1,116 |
|
$ |
|
See notes to our unaudited Condensed Consolidated Financial Statements.
6
TOPBUILD CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (Unaudited)
(In thousands except share data)
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Common |
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Treasury |
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Additional |
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||||
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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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|
||||
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|
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($0.01 par value) |
|
at cost |
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Capital |
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Earnings |
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Equity |
|||||
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Balance at December 31, 2016 |
|
$ |
385 |
|
$ |
(22,296) |
|
$ |
845,476 |
|
$ |
148,982 |
|
$ |
972,547 |
|
Net loss |
|
|
— |
|
|
— |
|
|
— |
|
|
(1,710) |
|
|
(1,710) |
|
Share-based compensation |
|
|
— |
|
|
— |
|
|
2,084 |
|
|
— |
|
|
2,084 |
|
Issuance of 141,000 restricted share awards under long-term equity incentive plan |
|
|
1 |
|
|
— |
|
|
(1) |
|
|
— |
|
|
— |
|
Repurchase of 397,035 shares of common stock pursuant to Share Repurchase Program |
|
|
— |
|
|
(17,379) |
|
|
— |
|
|
— |
|
|
(17,379) |
|
42,629 shares of common stock withheld to pay taxes on employees' equity awards |
|
|
— |
|
|
— |
|
|
(1,583) |
|
|
— |
|
|
(1,583) |
|
Balance at March 31, 2017 |
|
$ |
386 |
|
$ |
(39,675) |
|
$ |
845,976 |
|
$ |
147,272 |
|
$ |
953,959 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 ASR Program |
|
|
— |
|
|
(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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to our unaudited Condensed Consolidated Financial Statements.
7
TopBuild is a Delaware corporation formed on June 30, 2015, and is listed on the NYSE under the symbol “BLD.” We report our business in two segments: Installation and Distribution. Our Installation segment primarily installs insulation and other building products. Our Distribution segment primarily sells and distributes insulation and other building products. Our segments are based on our operating units, for which financial information is regularly evaluated by our 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 March 31, 2018, our results of operations for the three months ended March 31, 2018 and 2017, and cash flows for the three months ended March 31, 2018 and 2017. The Condensed Consolidated Balance Sheet at December 31, 2017, 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 on Form 10-K for the year ended December 31, 2017.
2. ACCOUNTING POLICIES
Financial Statement Presentation. Our Condensed Consolidated Financial Statements have been developed in conformity with GAAP, which requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and disclosures of contingent liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting period. Actual results could differ materially from these estimates. All intercompany transactions between TopBuild entities have been eliminated.
Business Combinations . The purchase price for business combinations is allocated to the estimated fair values of acquired tangible and intangible assets, including goodwill, and assumed liabilities, where applicable. Additionally, we recognize customer relationships, trademarks and trade names, and non-competition agreements as identifiable intangible assets. These assets are recorded at fair value as of the transaction date. The fair value of these intangible assets is determined primarily using the income approach and using current industry information. Goodwill is recorded when consideration transferred exceeds the fair value of identifiable assets and liabilities. Measurement-period adjustments are recorded in the period they occur. Contingent consideration is recorded at fair value at the acquisition date.
Share-based Compensation. Our share-based compensation program currently consists of RSAs and Options. Share-based compensation expense is reported in selling, general, and administrative expense. We do not capitalize any compensation cost related to share-based compensation awards. The income tax benefits and deficiencies associated with share-based awards are reported as a component of income tax expense. Excess tax benefits and deficiencies are included in cash provided by (used in) operating activities while shares withheld for tax-withholding are reported in financing activities under the caption “Taxes withheld and paid on employees’ equity awards” in our Condensed Consolidated Statements of Cash Flows. Award forfeitures are accounted for in the period they occur.
8
The following table details our award types and accounting policies:
|
|
|
|
|
|
|
Award Type: |
Fair Value Determination |
Vesting |
Expense
|
Expense
|
|
Restricted Share Awards |
|
|
|
|
|
Service Condition |
Closing stock price on date of grant |
Ratably;
|
Straight-line |
Fair value at grant date |
|
Performance Condition |
Closing stock price on date of grant |
Cliff;
|
Straight-line;
|
Evaluated quarterly;
|
|
Market Condition |
Monte-Carlo Simulation |
Cliff;
|
Straight-line;
|
Fair value at grant date |
|
Stock Options† |
Black-Scholes Options Pricing Model |
Ratably;
|
Straight-line |
Fair value at grant date |
†Stock options expire no later than 10 years after the grant date.
‡Expense is reversed if award is forfeited prior to vesting.
Recently Adopted Accounting Pronouncements:
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. Effective January 1, 2018, we adopted ASC 606 using the modified retrospective approach. Adoption of this standard did not have a material impact on our financial position or results of operations for any periods presented. As such, a cumulative adjustment was not recorded to our beginning retained earnings balance.
Revenue Recognition
Revenue is disaggregated between our installation and distribution segments. A reconciliation of disaggregated revenue by segment is included in Note 6 – Segment Information.
We recognize revenue for our Installation segment using the percentage of completion method of accounting with respect to each particular order within a given customer’s contract, based on the amount of material installed at that customer’s location and the associated labor costs, as compared to the total expected cost for the particular order. Revenue is recognized over time as the customer is able to receive and utilize the benefits provided by our services. Each contract contains one or more individual orders, which are based on services delivered. When a contract modification is made, typically the remaining goods or services are considered distinct and we recognize revenue for the modification as a separate performance obligation. When insulation and installation services are bundled in a contract, we combine these items into one performance obligation as the overall promise is to transfer the combined item.
Revenue from our Distribution segment is recognized when title to products and risk of loss transfers to our customers. This represents the point in time when the customer is able to direct the use of and obtain substantially all the benefits from the product. The determination of when control is deemed transferred depends on the shipping terms that are agreed upon in the contract.
9
At time of sale, we record estimated reductions to revenue for customer programs and incentive offerings, including special pricing and other volume-based incentives based on historical experience, which is continuously adjusted. The duration of our contracts with customers is relatively short, generally less than a 90-day period, therefore there is not a significant financing component when considering the determination of the transaction price which gets allocated to the individual performance obligations, generally based on standalone selling prices. Additionally, we consider shipping costs charged to a customer as a fulfillment cost rather than a promised service and expense as incurred. Sales taxes, when incurred, are recorded as a liability and excluded from revenue on a net basis.
We record a contract asset when we have satisfied our performance obligation prior to billing and a contract liability generally when a customer payment is received prior to the satisfaction of our performance obligation. The difference between the beginning and ending balances of our contract assets and liabilities primarily results from the timing of our performance and the customer’s payment.
The following table represents our opening and closing balances of contract assets and contract liabilities with customers, in thousands:
|
|
|
|
|
|
|
|
|
|
|
Included in Line Item on |
|
|
As of |
|||
|
|
Condensed Consolidated |
|
March 31, |
|
December 31, |
||
|
|
Balance Sheets |
|
2018 |
|
2017 |
||
|
Contract Assets: |
|
|
|
|
|
|
|
|
Receivables, unbilled |
Receivables, net |
|
$ |
38,533 |
|
$ |
37,142 |
|
|
|
|
|
|
|
|
|
|
Contract Liabilities: |
|
|
|
|
|
|
|
|
Deferred revenue |
Accrued liabilities |
|
$ |
8,801 |
|
$ |
9,275 |
Our contract liabilities are normally recognized to net sales in the immediately subsequent reporting period due to the generally short-term nature of our contracts with customers.
In August 2016 the FASB issued ASU 2016-15, “Classification of Certain Cash Receipts and Cash Payments”. This standard addresses the diversity in practice of how certain cash receipts and payments are classified in the statement of cash flows, including contingent consideration payments made after a business combination which is relevant for us. This update was effective for us beginning January 1, 2018 and we adopted the standard using a retrospective approach. There was no impact to any prior periods as contingent consideration payments have not been made. Future payments, as applicable, will be classified between operating and financing activities as prescribed by the standard.
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 was effective for us beginning January 1, 2018, and we adopted the standard using a prospective approach. The adoption of this standard did not have a material impact on our financial position or results of operations.
Recently Issued Accounting Pronouncements Not Yet Adopted:
In February 2016 the FASB issued ASU 2016-02, “Leases.” This standard requires a lessee to recognize most leases on its balance sheet. Companies are required to use a modified retrospective transition method for all existing leases. This standard is effective for 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 of adoption of this standard on our financial position and results of operations.
In June 2016 the FASB issued ASU 2016-13, “Financial Instruments - Credit Losses”. This guidance introduces a current expected credit loss (“CECL”) model for the recognition of impairment losses on financial assets, including trade receivables. The CECL model replaces current GAAP’s incurred loss model. Under CECL, companies will record an allowance through current earnings for the expected credit loss for the life of the financial asset upon initial recognition of the financial asset. This update is effective for us at the beginning of 2020 with early adoption permitted at the beginning of 2019. We have not yet selected an adoption date, and we are currently evaluating the effect of adoption of this standard on our financial position and results of operations.
10
In January 2017 the FASB issued ASU 2017-04, “Simplifying the Test for Goodwill Impairment.” The new standard simplifies the subsequent measurement of goodwill by eliminating the second step of the goodwill impairment test. This update is effective for us beginning January 1, 2020. Early adoption is permitted and the new standard will be applied on a prospective basis. We have not yet selected an adoption date, and we are currently evaluating the effect of adoption of this standard on our financial position and results of operations.
3. GOODWILL AND OTHER INTANGIBLES
Changes in the carrying amount of goodwill for the three months ended March 31, 2018, by segment, were as follows, in thousands:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Goodwill |
|
|
|
Gross Goodwill |
|
Accumulated |
|
Net Goodwill |
|||||
|
|
|
at |
|
|
|
at |
|
Impairment |
|
at |
|||||
|
|
|
December 31, 2017 |
|
Additions |
|
March 31, 2018 |
|
Losses |
|
March 31, 2018 |
|||||
|
Goodwill, by segment: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Installation |
|
$ |
1,422,920 |
|
$ |
2,741 |
|
$ |
1,425,661 |
|
$ |
(762,021) |
|
$ |
663,640 |
|
Distribution |
|
|
416,287 |
|
|
2,888 |
|
|
419,175 |
|
|
— |
|
|
419,175 |
|
Total goodwill |
|
$ |
1,839,207 |
|
$ |
5,629 |
|
$ |
1,844,836 |
|
$ |
(762,021) |
|
$ |
1,082,815 |
The following table sets forth our other intangible assets, in thousands:
|
|
|
|
|
|
|
|
|
|
|
As of |
||||
|
|
|
March 31, |
|
December 31, |
||
|
|
|
2018 |
|
2017 |
||
|
Gross definite-lived intangible assets |
|
$ |
53,482 |
|
$ |
54,872 |
|
Accumulated amortization |
|
|
(5,045) |
|
|
(21,629) |
|
Net definite-lived intangible assets |
|
$ |
48,437 |
|
$ |
33,243 |
The following table sets forth a breakout of our intangible assets as of March 31, 2018, in thousands:
|
|
|
|
|
|
|
|
|
|
|
|
Gross definite-lived intangible assets |
|
Accumulated amortization |
|
Net definite-lived intangible assets |
|||
|
Trademarks |
$ |
2,635 |
|
$ |
(271) |
|
$ |
2,364 |
|
Customer Lists |
|
43,328 |
|
|
(3,663) |
|
|
39,665 |
|
Non-Compete |
|
7,519 |
|
|
(1,111) |
|
|
6,408 |
|
|
$ |
53,482 |
|
$ |
(5,045) |
|
$ |
48,437 |
The following table sets forth our amortization expense, in thousands:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
||||
|
|
|
2018 |
|
2017 |
||
|
Amortization expense |
|
$ |
1,302 |
|
$ |
183 |
On May 5, 2017, we and the Guarantors entered into a credit agreement with the Lenders. All obligations under the credit agreement are guaranteed by the Guarantors, and all obligations under the credit agreement, including the guarantees of those obligations, are secured by substantially all of the assets of us and the Guarantors.
On March 28, 2018, we executed an amendment to our credit agreement. The primary change of the amendment is to facilitate the acquisition of USI. Additionally, the amendment (i) extended until August 29, 2018, the period during which the Company may access the $100.0 million delayed-draw term loan feature and (ii) provides that the Company may issue up to $500.0 million of senior notes in connection with its acquisition of USI. See Note 15 – Subsequent Events for more information.
11
Interest payable on borrowings under the Amended Credit Agreement is based on an applicable margin rate plus, at our option, either:
|
|
· |
|
A base rate determined by reference to the highest of either (i) the federal funds rate plus 0.50 percent, (ii) Bank of America’s “prime rate,” or (iii) the LIBOR rate for U.S. dollar deposits with a term of one month, plus 1.00 percent; or |
|
|
· |
|
A LIBOR rate determined by reference to the costs of funds for deposits in U.S. dollars for the interest period relevant to such borrowings. |
The applicable margin rate is determined based on our Secured Leverage Ratio. In the case of base rate borrowings, the applicable margin rate ranges from 0.00 percent to 1.50 percent and in the case of LIBOR rate borrowings, the applicable margin ranges from 1.00 percent to 2.50 percent.
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.
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 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 March 31, 2018 |
|
2.90 |
% |
|
Scheduled maturity date |
|
5/05/2022 |
|
|
|
(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) |
|
We can access $100.0 million through a delayed draw term loan on the Amended Credit Agreement until August 29, 2018. |
|
|
(c) |
|
Additional borrowing capacity is available under the incremental facility, subject to certain terms and conditions (including existing or new lenders providing commitments in respect of such additional borrowing capacity). |
|
|
(d) |
|
Use of the sublimits for the issuance of letters of credit and swingline loans reduces the availability under the Revolving Facility. |
Borrowings under the Amended Credit Agreement are prepayable at the Company’s option without premium or penalty. The Company is required to make prepayments with the net cash proceeds of certain asset sales and certain extraordinary receipts.
On March 2, 2018, the company entered into a Master Loan and Security Agreement with Banc of America Leasing & Capital, LLC for the purpose of financing the purchase of vehicles and equipment. In addition, the company executed equipment notes thereunder in the amount of $10.1 million maturing on March 2, 2023.
The following table sets forth our remaining principal payments for our outstanding term loan balance and equipment notes as of March 31, 2018, in thousands:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period |
|||||||||||||||||||
|
|
2018 |
|
2019 |
|
2020 |
|
2021 |
|
2022 |
|
Thereafter |
|
Total |
|||||||
|
Term loan |
$ |
9,375 |
|
$ |
15,625 |
|
$ |
18,750 |
|
$ |
21,875 |
|
$ |
175,000 |
|
$ |
— |
|
$ |
240,625 |
|
Equipment notes |
|
1,386 |
|
|
1,913 |
|
|
1,990 |
|
|
2,070 |
|
|
2,153 |
|
|
554 |
|
|
10,066 |
|
Total |
$ |
10,761 |
|
$ |
17,538 |
|
$ |
20,740 |
|
$ |
23,945 |
|
$ |
177,153 |
|
$ |
554 |
|
$ |
250,691 |
12
The following table reconciles the principal balance of our outstanding debt to our Condensed Consolidated Balance Sheets, in thousands:
|
|
|
|
|
|
|
|
|
|
|
As of |
||||
|
|
|
March 31, |
|
December 31, |
||
|
Principal debt balances: |
|
2018 |
|
2017 |
||
|
Current portion of long-term debt - term loan |
|
$ |
12,500 |
|
$ |
12,500 |
|
Current portion of long-term debt - equipment notes |
|
|
1,858 |
|
|
— |
|
Long-term portion of long-term debt - term loan |
|
|
228,125 |
|
|
231,250 |
|
Long-term portion of long-term debt - equipment notes |
|
|
8,208 |
|
|
— |
|
Unamortized debt issuance costs |
|
|
(2,796) |
|
|
(1,863) |
|
Total debt |
|
$ |
247,895 |
|
$ |
241,887 |
The Company has outstanding standby letters of credit that secure our financial obligations related to our workers’ compensation, general insurance, and auto liability programs. These standby letters of credit, as well as any outstanding amount borrowed under our revolving credit facility, reduce the availability under the Revolving Facility. The following table summarizes our availability under the Revolving Facility, in thousands:
|
|
|
|
|
|
|
|
|
|
|
As of |
||||
|
|
|
March 31, |
|
December 31, |
||
|
|
|
2018 |
|
2017 |
||
|
Revolving Facility |
|
$ |
250,000 |
|
$ |
250,000 |
|
Less: standby letters of credit |
|
|
(47,055) |
|
|
(47,055) |
|
Capacity under Revolving Facility |
|
$ |
202,945 |
|
$ |
202,945 |
The Amended Credit Agreement contains certain covenants that limit, among other things, the ability of the Company to incur additional indebtedness or liens; to make certain investments or loans; to make certain restricted payments; to enter into consolidations, mergers, sales of material assets, and other fundamental changes; to transact with affiliates; to enter into agreements restricting the ability of subsidiaries to incur liens or pay dividends; or to make certain accounting changes. The Amended Credit Agreement contains customary affirmative covenants and events of default.
The Amended Credit Agreement requires us to maintain a Net Leverage Ratio and minimum FCCR throughout the term of the agreement. The following table sets forth the maximum Net Leverage Ratios and minimum FCCR:
|
|
|
|
|
|
|
Quarter Ending |
|
Maximum
|
|
Minimum
|
|
December 31, 2017 through September 30, 2018 |
|
3.25:1.00 |
|
1.25:1.00 |
|
December 31, 2018 and each quarter thereafter |
|
3.00:1.00 |
|
1.25:1.00 |
The following table outlines the key financial covenants effective for the period covered by this report:
|
|
|
|
|
|
|
As of March 31, 2018 |
|
Maximum Net Leverage Ratio |
|
3.25:1.00 |
|
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).
13
Fair Value on Recurring Basis
The carrying values of cash and cash equivalents, receivables, net, and accounts payable are considered to be representative of their respective fair values due to the short-term nature of these instruments. We measure our contingent consideration liabilities related to business combinations at fair value. For more information see Note 12 – Business Combinations.
Fair Value on Non-Recurring Basis
Fair value measurements were applied to our long-term debt. The carrying value of our long-term debt approximates the fair market value primarily due to the fact that the non-performance risk of servicing our debt obligations, as reflected in our business and credit risk profile, has not materially changed since we assumed our debt obligations under the Amended Credit Agreement. In addition, due to the floating-rate nature of our long-term debt, the market value is not subject to variability solely due to changes in the general level of interest rates as is the case with a fixed-rate debt obligation.
During the periods presented, there were no transfers between fair value hierarchical levels.
6. SEGMENT INFORMATION
The following table sets forth our net sales and operating results by segment, in thousands:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
||||||||||
|
|
|
2018 |
|
2017 |
|
2018 |
|
2017 |
||||
|
|
|
Net Sales |
|
Operating Profit (Loss) (b) |
||||||||
|
Our operations by segment were (a): |
|
|
|
|
|
|
|
|
|
|
|
|
|
Installation (exclusive of significant legal settlement, shown separately below) |
|
$ |
329,394 |
|
$ |
290,887 |
|
$ |
29,330 |
|
$ |
21,036 |
|
Significant legal settlement (Installation segment) (c) |
|
|
— |
|
|
— |
|
|
— |
|
|
(30,000) |
|
Distribution |
|
|
187,766 |
|
|
170,244 |
|
|
17,902 |
|
|
15,484 |
|
Intercompany eliminations |
|
|
(25,716) |
|
|
(19,768) |
|
|
(4,446) |
|
|
(3,301) |
|
Total |
|
$ |
491,444 |
|
$ |
441,363 |
|
|
42,786 |
|
|
3,219 |
|
General corporate expense, net (d) |
|
|
|
|
|
|
|
|
(8,893) |
|
|
(6,682) |
|
Operating profit (loss), as reported |
|
|
|
|
|
|
|
|
33,893 |
|
|
(3,463) |
|
Other expense, net |
|
|
|
|
|
|
|
|
(2,290) |
|
|
(1,263) |
|
Income (loss) before income taxes |
|
|
|
|
|
|
|
$ |
31,603 |
|
$ |
(4,726) |
|
|
(a) |
|
All of our operations are located in the U.S. |
|
|
(b) |
|
Segment operating profit for the three months ended March 31, 2018 and 2017, includes an allocation of general corporate expenses attributable to the operating segments which is based on direct benefit or usage (such as salaries of corporate employees who directly support the segment). |
|
|
(c) |
|
Significant legal settlement expense of $30 million incurred during the three months ended March 31, 2017, related to the settlement agreement with Owens Corning. For more information see Note 7 – Other Commitments and Contingencies . |
|
|
(d) |
|
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 . |
14
7 . OTHER COMMITMENTS AND CONTINGENCIES
Litigation . During the first quarter of 2017, we recognized a $30.0 million expense for a legal settlement with Owens Corning in connection with a breach of contract action related to our termination of an insulation supply contract. Under the terms of the settlement, we paid Owens Corning $30.0 million. The settlement resulted in the dismissal of the lawsuit filed in May 2016 in Toledo, Ohio. The settlement is reflected in the significant legal settlement line item within our Condensed Consolidated Statements of Operations for the three months ended March 31, 2017. The settlement is also reflected in our installation segment’s operating results for the three months ended March 31, 2017.
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 16.5 percent and 63.8 percent for the three months ended March 31, 2018 and 2017, respectively. The 2018 rate is lower due to the lower Federal tax rate enacted by the Tax Cuts and Jobs Act and the impact of discrete benefits related to share-based compensation. The 2017 rate was higher due to a small overall pre-tax loss and the impact of discrete benefits related to share-based compensation and a legal settlement.
Our Condensed Consolidated Statements of Operations recognized a discrete tax benefit of $2.6 million, and $0.8 million related to share-based compensation, for the three months ended March 31, 2018 and 2017, respectively. A discrete benefit of $11.8 million related to a legal settlement was recognized for the three months ended March 31, 2017.
Basic net income (loss) 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 (loss) 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.
15
Basic and diluted net income (loss) per share were computed as follows, in thousands, except share and per share amounts:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
||||
|
|
|
2018 |
|
2017 |
||
|
Net income (loss) - basic and diluted |
|
$ |
26,388 |
|
$ |
(1,710) |
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding - basic |
|
|
35,059,920 |
|
|
37,123,245 |
|
|
|
|
|
|
|
|
|
Dilutive effect of common stock equivalents: |
|
|
|
|
|
|
|
RSAs with service-based conditions |
|
|
183,123 |
|
|
— |
|
RSAs with market-based conditions |
|
|
229,722 |
|
|
— |
|
RSAs with performance-based conditions |
|
|
— |
|
|
— |
|
Stock options |
|
|
346,477 |
|
|
— |
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding - diluted |
|
|
35,819,242 |
|
|
37,123,245 |
|
|
|
|
|
|
|
|
|
Basic net income (loss) per common share |
|
$ |
0.75 |
|
$ |
(0.05) |
|
|
|
|
|
|
|
|
|
Diluted net income (loss) per common share |
|
$ |
0.74 |
|
$ |
(0.05) |
The following table summarizes shares excluded from the calculation of diluted net income (loss) per share because their effect would have been anti-dilutive:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
||||
|
|
|
2018 |
|
2017 |
||
|
Anti-dilutive common stock equivalents: |
|
|
|
|
|
|
|
RSAs with service-based conditions |
|
|
275 |
|
|
401,623 |
|
RSAs with market-based conditions |
|
|
— |
|
|
205,316 |
|
RSAs with performance-based conditions |
|
|
— |
|
|
— |
|
Stock options |
|
|
35,205 |
|
|
774,920 |
|
Total anti-dilutive common stock equivalents |
|
|
35,480 |
|
|
1,381,859 |
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 March 31, 2018, we had 2.6 million shares available under the 2015 LTIP.
Share-based compensation expense is included in selling, general, and administrative expense. The income tax effect associated with vesting of awards 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 March 31, |
||||
|
|
|
2018 |
|
2017 |
||
|
Share-based compensation expense |
|
$ |
2,402 |
|
$ |
2,084 |
|
Income tax benefit realized from award vestings |
|
$ |
2,614 |
|
$ |
828 |
16
The following table presents a summary of our share-based compensation activity for the three months ended March 31, 2018, 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, 2017 |
|
591.2 |
|
$ |
30.92 |
|
683.5 |
|
$ |
11.13 |
|
$ |
28.97 |
|
$ |
31,969.7 |
|
Granted |
|
79.0 |
|
$ |
86.25 |
|
77.3 |
|
$ |
27.44 |
|
$ |
74.50 |
|
|
|
|
Converted/Exercised |
|
(106.2) |
|
$ |
23.18 |
|
(120.1) |
|
$ |
10.97 |
|
$ |
28.52 |
|
$ |
5,528.0 |
|
Forfeited |
|
(20.4) |
|
$ |
36.06 |
|
(8.3) |
|
$ |
14.44 |
|
$ |
38.39 |
|
|
|
|
Balance March 31, 2018 |
|
543.6 |
|
$ |
40.28 |
|
632.4 |
|
$ |
13.11 |
|
$ |
34.49 |
|
$ |
26,578.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable March 31, 2018 (a) |
|
|
|
|
180.1 |
|
$ |
10.59 |
|
$ |
27.37 |
|
$ |
8,854.6 |
||
|
|
(a) |
|
The weighted average remaining contractual term for vested options is 7.5 years. |
We had unrecognized share-based compensation expense relating to unvested awards as shown in the following table, dollars in thousands:
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2018 |
||||
|
|
|
Unrecognized Compensation Expense
|
|
Weighted Average
|
||
|
Unrecognized compensation expense related to unvested awards: |
|
|
|
|
|
|
|
RSAs |
|
$ |
14,847 |
|
|
1.5 years |
|
Options |
|
|
5,483 |
|
|
1.5 years |
|
Total unrecognized compensation expense related to unvested awards |
|
$ |
20,330 |
|
|
|
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 |
|
$ |
1,896 |
|
$ |
— |
|
$ |
474 |
|
$ |
1,896 |
|
$ |
3,792 |
|
February 21, 2017 |
|
$ |
2,005 |
|
$ |
— |
|
$ |
501 |
|
$ |
2,005 |
|
$ |
4,010 |
|
February 19, 2018 |
|
$ |
2,401 |
|
$ |
— |
|
$ |
600 |
|
$ |
2,401 |
|
$ |
4,802 |
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 2018 and 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
2018 |
|
|
2017 |
|
||
|
Measurement period (years) |
|
|
2.87 |
|
|
|
2.86 |
|
|
Risk free interest rate |
|
|
2.36 |
% |
|
|
1.46 |
% |
|
Dividend yield |
|
|
0.00 |
% |
|
|
0.00 |
% |
|
Estimated fair value of market-based RSAs granted |
|
$ |
103.31 |
|
|
$ |
50.06 |
|
17
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 2018 and 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
2018 |
|
|
2017 |
|
||
|
Risk free interest rate |
|
|
2.78 |
% |
|
|
2.18 |
% |
|
Expected volatility, using historical return volatility and implied volatility |
|
|
32.50 |
% |
|
|
35.00 |
% |
|
Expected life (in years) |
|
|
6.0 |
|
|
|
6.0 |
|
|
Dividend yield |
|
|
0.00 |
% |
|
|
0.00 |
% |
|
Estimated fair value of options granted |
|
$ |
27.44 |
|
|
$ |
14.44 |
|
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 for 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. 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 March 31, |
||||
|
|
|
2018 |
|
2017 |
||
|
Number of shares repurchased |
|
|
13,657 |
|
|
397,035 |
|
Share repurchase cost (in thousands) |
|
$ |
(a) |
|
$ |
17,379 |
|
Average price per share |
|
$ |
(a) |
|
$ |
43.77 |
|
|
(a) |
|
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 expected to receive under the 2017 ASR Agreement. During the three months ended March 31, 2018, we received 13,657 shares of our common stock, representing the final settlement of the 2017 ASR Agreement. We purchased a total of 1,521,100 shares of our common stock under the 2017 ASR Agreement at an average price per share of $65.74. |
12. BUSINESS COMBINATIONS
As part of our strategy to supplement our organic growth and expand our access to additional markets and products, we completed two acquisitions during the three months ended March 31, 2018, and four acquisitions during the three months ended March 31, 2017. Each acquisition was accounted for as a business combination under ASC 805, “Business Combinations.” Acquisition related costs for the three months ended March 31, 2018 and 2017, were $3.5 million and $0.3 million, respectively. Acquisition costs are included in selling, general, 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. EcoFoam is a residential and light commercial insulation installation company with locations in Colorado Springs and Denver, Colorado. The purchase price of approximately $22.3 million was funded by cash on hand of $20.2 million and contingent consideration of $2.1 million.
18
On February 27, 2017, we acquired substantially all of 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.
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 January 10, 2018, we acquired ADO, a distributor of insulation accessories, located in Plymouth, Minnesota. The purchase price of approximately $22.4 million was funded by cash on hand of $21.6 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 $5.6 million was funded by cash on hand.
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 March 31, 2018 |
||||
|
2018 Acquisitions |
|
Net Sales |
|
Net Income |
||
|
ADO |
|
$ |
5,294 |
|
$ |
98 |
|
Santa Rosa |
|
|
1,171 |
|
|
123 |
|
|
|
$ |
6,465 |
|
$ |
221 |
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2017 |
||||
|
2017 Acquisitions |
|
Net Sales |
|
Net Income |
||
|
Midwest |
|
$ |
3,268 |
|
$ |
(91) |
|
EcoFoam |
|
|
2,389 |
|
|
91 |
|
All others |
|
|
196 |
|
|
22 |
|
|
|
$ |
5,853 |
|
$ |
22 |
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, and as if the 2017 acquisitions 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, 2017, and January 1, 2016, as applicable. 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 March 31, |
||||
|
|
|
2018 |
|
|
2017 |
|
|
Net sales |
|
$ |
492,399 |
|
$ |
455,507 |
|
Net income |
|
$ |
26,400 |
|
$ |
16,202 |
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, and as if the 2017 acquisitions had taken place on January 1, 2016. Our pro forma results are presented below, in thousands:
|
|
|
|
|
|
|
|
|
|
|
Pro Forma for the Three Months Ended March 31, |
||||
|
|
|
2018 |
|
2017 |
||
|
Amortization of intangible assets |
|
$ |
42 |
|
$ |
338 |
|
Income tax expense (using normalized 27% ETR for 2018 and 38% ETR for 2017) |
|
$ |
5 |
|
$ |
206 |
19
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 March 31, 2018, in thousands:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018 Acquisitions |
|||||||
|
|
|
Completed During the Three Months Ended March 31, 2018 |
|||||||
|
|
|
ADO |
|
Santa Rosa |
|
Total |
|||
|
Estimated fair values: |
|
|
|
|
|
|
|
|
|
|
Cash |
|
$ |
239 |
|
$ |
— |
|
$ |
239 |
|
Accounts receivable |
|
|
3,271 |
|
|
1,433 |
|
|
4,704 |
|
Inventories |
|
|
2,326 |
|
|
104 |
|
|
2,430 |
|
Prepaid and other assets |
|
|
194 |
|
|
7 |
|
|
201 |
|
Property and equipment |
|
|
951 |
|
|
522 |
|
|
1,473 |
|
Intangible assets |
|
|
14,090 |
|
|
1,850 |
|
|
15,940 |
|
Goodwill |
|
|
2,888 |
|
|
2,764 |
|
|
5,652 |
|
Accounts payable |
|
|
(908) |
|
|
(1,099) |
|
|
(2,007) |
|
Accrued liabilities |
|
|
(609) |
|
|
— |
|
|
(609) |
|
Net assets acquired |
|
$ |
22,442 |
|
$ |
5,581 |
|
$ |
28,023 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017 Acquisitions |
||||||||||
|
|
|
Completed During the Three Months Ended March 31, 2017 |
||||||||||
|
|
|
Midwest |
|
EcoFoam |
|
All others |
|
Total |
||||
|
Estimated fair values: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable |
|
$ |
6,576 |
|
$ |
3,819 |
|
$ |
678 |
|
$ |
11,073 |
|
Inventories |
|
|
75 |
|
|
1,119 |
|
|
141 |
|
|
1,335 |
|
Prepaid and other assets |
|
|
— |
|
|
27 |
|
|
6 |
|
|
33 |
|
Property and equipment |
|
|
655 |
|
|
1,544 |
|
|
357 |
|
|
2,556 |
|
Intangible assets |
|
|
2,740 |
|
|
6,700 |
|
|
3,640 |
|
|
13,080 |
|
Goodwill |
|
|
3,538 |
|
|
10,796 |
|
|
4,037 |
|
|
18,371 |
|
Accounts payable |
|
|
(1,359) |
|
|
(1,378) |
|
|
(26) |
|
|
(2,763) |
|
Accrued liabilities |
|
|
— |
|
|
(302) |
|
|
— |
|
|
(302) |
|
Net assets acquired |
|
$ |
12,225 |
|
$ |
22,325 |
|
$ |
8,833 |
|
$ |
43,383 |
The following table details the fair value of consideration transferred as of March 31, 2018, in thousands:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018 Acquisitions |
|||||||
|
|
|
Completed During the Three Months Ended March 31, 2018 |
|||||||
|
|
|
ADO |
|
Santa Rosa |
|
Total |
|||
|
Fair value of consideration: |
|
|
|
|
|
|
|
|
|
|
Cash |
|
$ |
21,614 |
|
$ |
5,581 |
|
$ |
27,195 |
|
Contingent consideration |
|
|
828 |
|
|
— |
|
|
828 |
|
Total consideration transferred |
|
$ |
22,442 |
|
$ |
5,581 |
|
$ |
28,023 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017 Acquisitions |
||||||||||
|
|
|
Completed During the Three Months Ended March 31, 2017 |
||||||||||
|
|
|
Midwest |
|
EcoFoam |
|
All others |
|
Total |
||||
|
Fair value of consideration: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash |
|
$ |
12,225 |
|
$ |
20,215 |
|
$ |
8,833 |
|
$ |
41,273 |
|
Contingent consideration |
|
|
— |
|
|
2,110 |
|
|
— |
|
|
2,110 |
|
Total consideration transferred |
|
$ |
12,225 |
|
$ |
22,325 |
|
$ |
8,833 |
|
$ |
43,383 |
20
Estimates of acquired intangible assets related to the acquisitions are as follows, as of March 31, 2018, dollars in thousands:
|
|
|
|
|
|
|
|
|
2018 Acquisitions |
|
Estimated Fair Value |
|
Weighted Average Estimated Useful Life (Years) |
||
|
Fair value of intangibles: |
|
|
|
|
|
|
|
Customer relationships |
|
$ |
14,220 |
|
|
15 |
|
Trademarks and trade names |
|
|
460 |
|
|
5 |
|
Non-competition agreements |
|
|
1,260 |
|
|
5 |
|
Total intangible assets |
|
$ |
15,940 |
|
|
13 |
|
|
|
|
|
|
|
|
|
2017 Acquisitions |
|
Estimated Fair Value |
|
Weighted Average Estimated Useful Life (Years) |
||
|
Fair value of intangibles: |
|
|
|
|
|
|
|
Customer relationships |
|
$ |
8,950 |
|
|
10 |
|
Trademarks and trade names |
|
|
1,050 |
|
|
10 |
|
Non-competition agreements |
|
|
3,080 |
|
|
5 |
|
Total intangible assets |
|
$ |
13,080 |
|
|
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 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.
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. All of the $5.7 million of goodwill recorded from the 2018 acquisitions 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%.
The acquisition of ADO includes 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%.
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.
21
The following table presents the fair value of contingent consideration, in thousands:
|
|
|
|
|
|
|
|
|
|
|
EcoFoam |
|
ADO |
||
|
Date of Acquisition |
|
February 27, 2017 |
|
February 10, 2018 |
||
|
Fair value of contingent consideration recognized at acquisition date |
|
$ |
2,110 |
|
$ |
828 |
|
|
|
|
|
|
|
|
|
Contingent consideration at December 31, 2017 |
|
$ |
2,259 |
|
$ |
— |
|
Additions |
|
|
— |
|
|
828 |
|
Change in fair value of contingent consideration during the three months ended March 31, 2018 |
|
|
51 |
|
|
19 |
|
Settlement of contingent consideration during the three months ended March 31, 2018 |
|
|
— |
|
|
— |
|
Liability balance for contingent consideration at March 31, 2018 |
|
$ |
2,310 |
|
$ |
847 |
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 during the three months ended March 31, 2017, 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 include 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 six 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, 2017 |
|
Closure Costs Incurred for the Three Months Ended
|
|
Cash Payments for the Three Months Ended
|
|
Non-cash Adjustments for the Three Months Ended
|
|
Closure Costs Liability at
|
|||||
|
Corporate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance |
|
$ |
112 |
|
$ |
— |
|
$ |
(102) |
|
$ |
(7) |
|
$ |
3 |
|
Lease abandonment |
|
|
309 |
|
|
— |
|
|
(195) |
|
|
— |
|
|
114 |
|
Other costs |
|
|
54 |
|
|
— |
|
|
(6) |
|
|
— |
|
|
48 |
|
Total Corporate: |
|
$ |
475 |
|
$ |
— |
|
$ |
(303) |
|
$ |
(7) |
|
$ |
165 |
14. ACCRUED LIABILITIES
The following table sets forth the components of accrued liabilities, in thousands:
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
|
As of |
||||
|
|
|
March 31, |
|
December 31, |
||
|
|
|
2018 |
|
2017 |
||
|
Accrued liabilities: |
|
|
|
|
|
|
|
Salaries, wages, and commissions |
|
$ |
20,370 |
|
$ |
25,470 |
|
Insurance liabilities |
|
|
19,174 |
|
|
19,770 |
|
Other |
|
|
34,990 |
|
|
29,847 |
|
Total accrued liabilities |
|
$ |
74,534 |
|
$ |
75,087 |
22
15. SUBSEQUENT EVENTS
On May 1, 2018, we closed on our previously announced acquisition of USI, a leading provider of insulation installation and distributions services to the residential and commercial construction markets, in an all-cash transaction valued at $475 million. The acquisition was funded through net proceeds from the issuance on April 25, 2018 of $400 million of 5.625% Senior Notes due 2026 together with the net proceeds from a $100 million delayed-draw term loan commitment under our Amended Credit Agreement. These funds were also used for the payment of related fees and expenses, as well as for general corporate purposes. The acquisition was accounted for as a business combination under ASC 805, “Business Combinations”. During the subsequent measurement period, we expect to receive additional detailed information to com plete the purchase allocation.
A newly-formed wholly owned subsidiary of TopBuild initially issued the Notes on April 25, 2018, and, on May 1, 2018, concurrently with our acquisition of USI, we assumed all of the subsidiary’s obligations under the Senior Notes, and all of our wholly owned subsidiaries guaranteed the Senior Notes on an unsecured senior basis. The Senior Notes are our senior unsecured obligations and bear interest at 5.625% per annum, which accrues from April 25, 2018, and is payable semiannually in arrears on May 1 and November 1 of each year, beginning on November 1, 2018. The Senior Notes mature on May 1, 2026 unless earlier redeemed or repurchased.
We have the right to redeem the Senior Notes under certain circumstances specified in the indenture governing the Senior Notes, and, if we undergo a change in control, as specified in the indenture, we must make an offer to repurchase all of the Senior Notes then outstanding at a repurchase price equal to 101% of their principal amount, plus accrued and unpaid interest (if any) to, but not including, the repurchase date. The indenture contains customary restrictive covenants that, among other things, generally limit our and our subsidiaries’ ability to (i) incur additional debt and issue preferred stock, (ii) create liens, (iii) pay dividends, acquire shares of capital stock, make payments on subordinated debt or make investments, (iv) place limitations on distributions from certain subsidiaries, (v) issue guarantees, (vi) issue or sell the capital stock of certain subsidiaries, (vii) sell assets, (viii) enter into transactions with affiliates and (ix) effect mergers. The foregoing restrictive covenants are subject to a number of important exceptions and qualifications, as set forth in the indenture. The indenture additionally 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, nor are we required to register either the Senior Notes or the guarantees in the future.
23
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
TopBuild, headquartered in Daytona Beach, Florida, is the leading purchaser, installer, and distributor of insulation products to the U.S. construction industry, based on revenue. We trade on the NYSE under the 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, as of March 31, 2018, has over 175 branches located in 41 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 procurement of material from 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, as of March 31, 2018, has over 70 branches 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 Note 6 – Segment Information in the notes to the unaudited Condensed Consolidated Financial Statements, which is incorporated herein by reference.
24
FIRST QUARTER 2018 VERSUS FIRST QUARTER 201 7
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 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 Condensed Consolidated Statements of Operations, in thousands:
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
||||
|
|
|
2018 |
|
2017 |
|
||
|
Net sales |
|
$ |
491,444 |
|
$ |
441,363 |
|
|
Cost of sales |
|
|
380,426 |
|
|
339,735 |
|
|
Cost of sales ratio |
|
|
77.4 |
% |
|
77.0 |
% |
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
111,018 |
|
|
101,628 |
|
|
Gross profit margin |
|
|
22.6 |
% |
|
23.0 |
% |
|
|
|
|
|
|
|
|
|
|
Selling, general, and administrative expense (exclusive of significant legal settlement, shown separately below) |
|
|
77,125 |
|
|
75,091 |
|
|
Selling, general, and administrative expense (exclusive of significant legal settlement, shown separately below) to sales ratio |
|
|
15.7 |
% |
|
17.0 |
% |
|
|
|
|
|
|
|
|
|
|
Significant legal settlement |
|
|
— |
|
|
30,000 |
|
|
Significant legal settlement to sales ratio |
|
|
— |
|
|
6.8 |
% |
|
|
|
|
|
|
|
|
|
|
Operating profit (loss) |
|
|
33,893 |
|
|
(3,463) |
|
|
Operating profit margin |
|
|
6.9 |
% |
|
(0.8) |
% |
|
|
|
|
|
|
|
|
|
|
Other expense, net |
|
|
(2,290) |
|
|
(1,263) |
|
|
Income tax (expense) benefit |
|
|
(5,215) |
|
|
3,016 |
|
|
Income (loss) |
|
$ |
26,388 |
|
$ |
(1,710) |
|
|
Net margin |
|
|
5.4 |
% |
|
(0.4) |
% |
Sales and Operations
Net sales increased 11.3 percent for the three months ended March 31, 2018, from the comparable period of 2017. The increase was principally driven by our six acquisitions completed during 2017, increased organic sales volume, 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.
Our gross profit margins were 22.6 percent and 23.0 percent for the three months ended March 31, 2018 and 2017, respectively. Gross profit margin was negatively impacted by higher material costs and higher labor costs primarily related to temporary factors, partially offset by volume leverage, improved selling prices, and lower insurance costs.
Selling, general, and administrative expense, as a percent of sales, exclusive of the significant legal settlement discussed below, was 15.7 percent and 17.0 percent for the three months ended March 31, 2018 and 2017, respectively. Decreased selling, general, and administrative expense as a percent of sales was a result of overall better absorption of fixed costs, lower bonus expense, lower legal expense, and closure costs incurred in the prior year period that were not replicated in the current year period, partially offset by higher amortization expense and higher acquisition related costs. We incurred a $30 million legal settlement for the three months ended March 31, 2017, related to the settlement of our previously reported breach of contract action related to our termination of an insulation supply agreement with Owens Corning.
25
Operating margins were 6.9 percent and (0.8) percent for the three months ended March 31, 2018 and 2017, respectively. The increase in operating margins related to the $30 million legal settlement with Owens Corning incurred in the prior year, as well as overall increased sales volume, improved selling prices, lower bonus expense, lower legal expense, and lower closure and related costs as noted below, partially offset by higher material cost, higher labor costs primarily related to temporary factors, higher amortization expense, and higher acquisition related costs.
Closure and Related Costs
We incurred an expense of $1.3 million for the three months ended March 31, 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:
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
Percent Increase |
|
||||
|
|
2018 |
|
2017 |
|
2018-2017 |
|
||
|
Sales by business segment: |
|
|
|
|
|
|
|
|
|
Installation |
$ |
329,394 |
|
$ |
290,887 |
|
13.2 |
% |
|
Distribution |
|
187,766 |
|
|
170,244 |
|
10.3 |
% |
|
Intercompany eliminations and other adjustments |
|
(25,716) |
|
|
(19,768) |
|
|
|
|
Net sales |
$ |
491,444 |
|
$ |
441,363 |
|
11.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
Operating profit (loss) by business segment: |
|
|
|
|
|
|
|
|
|
Installation (exclusive of significant legal settlement, shown separately below) |
$ |
29,330 |
|
$ |
21,036 |
|
39.4 |
% |
|
Significant legal settlement (Installation segment) |
|
— |
|
|
(30,000) |
|
|
|
|
Distribution |
|
17,902 |
|
|
15,484 |
|
15.6 |
% |
|
Intercompany eliminations and other adjustments |
|
(4,446) |
|
|
(3,301) |
|
|
|
|
Operating profit before general corporate expense |
|
42,786 |
|
|
3,219 |
|
1,229.2 |
% |
|
General corporate expense, net |
|
(8,893) |
|
|
(6,682) |
|
|
|
|
Operating profit (loss) |
$ |
33,893 |
|
$ |
(3,463) |
|
1,078.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
Operating profit margins: |
|
|
|
|
|
|
|
|
|
Installation (exclusive of significant legal settlement) |
|
8.9 |
% |
|
7.2 |
% |
|
|
|
Installation (inclusive of significant legal settlement) |
|
8.9 |
% |
|
(3.1) |
% |
|
|
|
Distribution |
|
9.5 |
% |
|
9.1 |
% |
|
|
|
Operating profit margin before general corporate expense |
|
8.7 |
% |
|
0.7 |
% |
|
|
|
Operating profit margin |
|
6.9 |
% |
|
(0.8) |
% |
|
|
Installation
Sales
Sales in the Installation segment increased $38.5 million, or 13.2 percent, for the three months ended March 31, 2018, as compared to the same period in 2017. Sales increased 5.3 percent from acquired branches and 2.3 percent due to increased selling prices. Sales also increased due to increased sales volume related to a higher level of activity in new home construction and an increase in sales volume of commercial installation.
26
Operating results
Operating margins in the Installation segment, inclusive of the significant legal settlement, were 8.9 percent and (3.1) percent for the three months ended March 31, 2018 and 2017, respectively. The increase in operating margins was primarily a result of the $30 million legal settlement with Owens Corning incurred in the prior year, increased sales volume, a 2.3 percent increase in selling prices, absorption of fixed costs, lower legal expense, lower insurance costs, as well as the benefits associated with cost savings initiatives, partially offset by higher material cost, higher labor costs primarily related to temporary factors, and higher amortization expense.
Distribution
Sales
Sales in the Distribution segment increased $17.5 million, or 10.3 percent, for the three months ended March 31, 2018, as compared to the same period in 2017. Sales increased 5.6 percent due to increased selling prices and 3.1 percent from acquired branches. Sales also increased due to increased sales volume related to a higher level of activity in new home construction.
Operating results
Operating margins in the Distribution segment were 9.5 percent and 9.1 percent for the three months ended March 31, 2018 and 2017, respectively. Operating margins were positively impacted by higher selling prices, increased sales volume related to a higher level of activity in new home construction, partially offset by higher material cost.
OTHER ITEMS
Other expense, net
Other expense, net, which primarily consisted of interest expense, was $2.3 million and $1.3 million for the three months ended March 31, 2018 and 2017, respectively. The increase in other expense, net for the three months ended March 31, 2018, primarily related to our higher outstanding long-term debt balance related to our debt refinancing completed on May 5, 2017.
Income tax expense (benefit)
Income tax expense was $5.2 million, an ETR of 16.5 percent, for the three months ended March 31, 2018. The lower 2018 rate was due to the lower Federal tax rate enacted by the Tax Cuts and Jobs Act and the impact of discrete benefits related to share-based compensation.
Income tax (benefit) was $(3.0) million, an ETR of 63.8 percent, for the three months ended March 31, 2017. The higher 2017 rate was due to a small overall pre-tax loss incurred for the three months ended March 31, 2017, and discrete benefits related to a legal settlement and share-based compensation.
27
Cash Flows and Liquidity
Significant sources (uses) of cash and cash equivalents for the three months ended March 31, 2018 and 2017, are summarized as follows, in thousands:
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
||||
|
|
|
2018 |
|
2017 |
|
||
|
Changes in cash and cash equivalents: |
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
$ |
17,565 |
|
$ |
14,834 |
|
|
Purchases of property and equipment |
|
|
(11,266) |
|
|
(3,800) |
|
|
Acquisition of businesses, net of cash acquired of $239 in 2018 |
|
|
(26,956) |
|
|
(41,242) |
|
|
Proceeds from sale of property and equipment |
|
|
70 |
|
|
133 |
|
|
Repayment of notes receivable |
|
|
13 |
|
|
32 |
|
|
Repayments of long-term debt |
|
|
(3,125) |
|
|
(5,000) |
|
|
Proceeds from equipment notes |
|
|
10,066 |
|
|
— |
|
|
Proceeds from revolving credit facility |
|
|
55,000 |
|
|
— |
|
|
Repayment of revolving credit facility |
|
|
(55,000) |
|
|
— |
|
|
Payment of debt issuance costs |
|
|
(1,040) |
|
|
— |
|
|
Taxes withheld and paid on employees' equity awards |
|
|
(4,514) |
|
|
(1,583) |
|
|
Repurchase of shares of common stock |
|
|
— |
|
|
(17,379) |
|
|
Cash and cash equivalents decrease |
|
$ |
(19,187) |
|
$ |
(54,005) |
|
|
|
|
|
|
|
|
|
|
|
Working capital: |
|
|
|
|
|
|
|
|
Receivables, net |
|
$ |
313,568 |
|
$ |
269,359 |
|
|
Inventories, net |
|
|
138,447 |
|
|
112,633 |
|
|
Accounts payable |
|
|
(254,384) |
|
|
(226,974) |
|
|
Working capital |
|
$ |
197,631 |
|
$ |
155,018 |
|
|
|
|
|
|
|
|
|
|
|
Increase in working capital from prior year |
|
$ |
42,613 |
|
$ |
27,310 |
|
|
Working capital as a percentage of TTM net sales (a) |
|
|
10.0 |
% |
|
8.8 |
% |
|
|
(a) |
|
Net sales for the TTM have been adjusted for the pro forma effect of acquired branches |
Net cash flows provided by operating activities increased $2.7 million for the three months ended March 31, 2018, as compared to the prior year period. The increase was primarily due to a $28.1 million increase in net income, as well as an increase in the generation of cash for prepaid expenses related to the timing of tax payments. Generators of cash were partially offset by a decrease in the change in accrued liabilities related to the accrual of the $30 million legal settlement with Owens Corning in March 2017.
The increase in working capital as a percentage of TTM net sales as of March 31, 2018, was primarily due to higher commercial activity which has longer collection terms as well as a build up of inventory related to strategic inventory purchases.
Net cash used in investing activities was $38.1 million for the three months ended March 31, 2018, primarily comprised of $27.0 million for the acquisition of ADO and substantially all of the assets of Santa Rosa and $11.3 million for purchases of property and equipment partially related to our decision to begin purchasing rather than leasing vehicles. Net cash used in investing activities was $44.9 million for the three months ended March 31, 2017, primarily comprised of $41.2 million for the acquisitions of substantially all of the assets of Midwest, EcoFoam, MR Insulfoam, and Capital, and $3.8 million for purchases of property and equipment, partially offset by $0.1 million of proceeds from the sale of property and equipment.
28
Net cash provided by financing activities was $1.4 million for the three months ended March 31, 2018. We received $10.1 million of proceeds from equipment financing notes related to our decision to begin purchasing rather than leasing vehicles. We used $3.1 million for payments on our term loan, $1.0 million for payment of debt issuance costs related to our Amended Credit Agreement, and $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 three months ended March 31, 2018. We drew $55.0 million on our revolving credit facility and made repayments of $55.0 million during the three months ended March 31, 2018. Net cash used in financing activities was $24.0 million for the three months ended March 31, 2017, primarily comprised of $17.4 million of repurchases of our common stock related to our 2016 Repurchase Program, $5.0 million of repayments of our term loan, and $1.6 million of purchases of common stock for tax withholding obligations related to the vesting of share-based incentive awards during the three months ended March 31, 2017.
We have access to liquidity through our cash from operations and available borrowing capacity under our Amended Credit Agreement, which provides for borrowing and/or standby letter of credit issuances of up to $250 million under the Revolving Facility as well as $100 million of additional term loan capacity under a delayed draw feature, which remains available to us until August 29, 2018. For additional information see Note 4 – Long-Term Debt . 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 twelve months. Cash flows are seasonally stronger in the third and fourth quarters as a result of historically increased new construction activity during those periods.
The following table summarizes our liquidity, in thousands:
|
|
|
|
|
|
|
|
|
|
|
As of |
||||
|
|
|
March 31, |
|
December 31, |
||
|
|
|
2018 |
|
2017 |
||
|
Cash and cash equivalents |
|
$ |
37,334 |
|
$ |
56,521 |
|
|
|
|
|
|
|
|
|
Revolving Facility |
|
|
250,000 |
|
|
250,000 |
|
Less: standby letters of credit |
|
|
(47,055) |
|
|
(47,055) |
|
Capacity under Revolving Facility |
|
|
202,945 |
|
|
202,945 |
|
|
|
|
|
|
|
|
|
Additional term loan capacity under delayed draw feature |
|
|
100,000 |
|
|
100,000 |
|
Total liquidity |
|
$ |
340,279 |
|
$ |
359,466 |
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 |
||||
|
|
|
March 31, |
|
December 31, |
||
|
|
|
2018 |
|
2017 |
||
|
Outstanding bonds: |
|
|
|
|
|
|
|
Performance bonds |
|
$ |
51,240 |
|
$ |
44,765 |
|
Licensing, insurance, and other bonds |
|
|
18,302 |
|
|
17,013 |
|
Total bonds |
|
$ |
69,542 |
|
$ |
61,778 |
OUTLOOK
In general, the residential and commercial new construction industries are continuing to recover. We believe that 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 will continue to cause volatility in the housing market.
29
We prepare our Condensed Consolidated Financial Statements in conformity with GAAP. The preparation of these 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 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, 2017, as filed with the SEC on February 27, 2018.
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 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 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. 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, 2017, as 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.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
Our credit agreement became effective on May 5, 2017, which was amended on March 28, 2018. The Amended Credit Agreement consists of a senior secured term loan facility in the amount of $250.0 million, $100.0 million of additional term loan capacity under a delayed draw feature (which remains available to us until August 29, 2018), and a revolving facility in the amount of $250.0 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. As of March 31, 2018, we had $240.6 million outstanding under our term loan facility and the applicable interest rate as of such date was 2.90 percent. Based on our outstanding borrowings under the Amended Credit Agreement as of March 31, 2018, a 100 basis point increase in the interest rate would result in a $2.3 million increase in our annualized interest expense. There was no outstanding balance under the revolving facility as of March 31, 2018.
30
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, 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). Based on this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective as of March 31, 2018.
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 March 31, 2018, that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
The information set forth in
Except as set forth below, there have been no material changes to our risk factors as previously disclosed in our 2017 Annual Report as filed with the SEC on February 27, 2018.
Risks Related to the USI Acquisition
We may not be able to successfully integrate USI and other businesses that we may acquire in the future.
Our ability to successfully implement our business plan and achieve targeted financial results is dependent on our ability to successfully integrate USI and other businesses that we may acquire in the future. The process of integrating USI, and any other acquired businesses, involves risks. These risks include, but are not limited to:
|
|
· |
|
demands on management related to the increase in the size of our business; |
|
|
· |
|
diversion of management’s attention from the management of daily operations; |
|
|
· |
|
difficulties in the assimilation of different corporate cultures and business practices; |
|
|
· |
|
difficulties in conforming the acquired company’s accounting policies to ours; |
|
|
· |
|
retaining employees who may be vital to the integration of departments, information technology systems, including accounting systems, technologies, books and records, and procedures, and maintaining uniform standards, such as internal accounting controls, procedures, and policies; and |
|
|
· |
|
costs and expenses associated with any undisclosed or potential liabilities. |
Failure to successfully integrate USI, or any other acquired businesses, may result in reduced levels of revenue, earnings, or operating efficiency than might have been achieved if we had not acquired such businesses.
31
In addition, our acquisition of USI will result, and any future acquisitions could result, in the incurrence of additional debt and related interest expense, contingent liabilities, and amortization expenses related to intangible assets, which could have a material adverse effect on our financial condition, operating results, and cash flow.
We may not be able to achieve the benefits that we expect to realize as a result of the acquisition of USI. Failure to achieve such benefits could have an adverse effect on our financial condition and results of operations.
We may not be able to realize anticipated cost savings, revenue enhancements, or other synergies from the USI acquisition, either in the amount or within the time frame that we expect. In addition, the costs of achieving these benefits may be higher than, and the timing may differ from, what we expect. Our ability to realize anticipated cost savings, synergies, and revenue enhancements may be affected by a number of factors, including, but not limited to, the following:
|
|
· |
|
the use of more cash or other financial resources on integration and implementation activities than we expect; |
|
|
· |
|
unanticipated increases in expenses unrelated to the USI acquisition, which may offset the expected cost savings and other synergies from the USI acquisition; |
|
|
· |
|
our ability to eliminate duplicative back office overhead and redundant selling, general, and administrative functions; and |
|
|
· |
|
our ability to avoid labor disruptions in connection with the integration of USI, particularly in connection with any headcount reduction. |
Specifically, while we expect the USI acquisition to create significant opportunities to reduce our combined operating costs, these cost savings reflect estimates and assumptions made by our management, and it is possible that our actual results will not reflect these estimates and assumptions within our anticipated timeframe or at all.
If we fail to realize anticipated cost savings, synergies, or revenue enhancements, our financial results may be adversely affected, and we may not generate the cash flow from operations that we anticipate.
USI may have liabilities that are not known to us.
USI may have liabilities that we failed, or were unable, to discover in the course of performing our due diligence investigations of USI. We cannot assure you that the indemnification available to us under the acquisition agreement in respect of the USI acquisition or the representation and warranty insurance procured by us in connection with such agreement will be sufficient in amount, scope, or duration to fully offset the possible liabilities associated with USI’s business or property that we will assume upon consummation of the USI acquisition. We may learn additional information about USI that materially adversely affects us, such as unknown or contingent liabilities and liabilities related to compliance with applicable laws. Any such liabilities, individually or in the aggregate, could have a material adverse effect on our business, financial condition, and results of operation.
32
The following table provides information regarding the repurchase of our common stock for the three months ended March 31, 2018, 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 |
||
|
January 1, 2018 - January 31, 2018 |
|
— |
|
$ |
— |
|
— |
|
$ |
65,000 |
|
February 1, 2018 - February 28, 2018 |
|
— |
|
$ |
— |
|
— |
|
$ |
65,000 |
|
March 1, 2018 - March 31, 2018 |
|
13,657 |
|
$ |
(a) |
|
13,657 |
|
$ |
65,000 |
|
Total |
|
13,657 |
|
$ |
— |
|
13,657 |
|
|
|
(a) During the three months ended March 31, 2018, we repurchased 13,657 shares of our common stock, representing the final settlement of the 2017 ASR Agreement. We repurchased a total of 1,521,100 shares under the 2017 ASR Agreement at an average price per share of $65.74.
For more information see
Not applicable.
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-Q and incorporated herein by reference.
33
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Incorporated by Reference |
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Filed |
||||
|
Exhibit No. |
|
Exhibit Title |
|
Form |
|
Exhibit |
|
Filing Date |
|
Herewith |
|
2.1 |
|
|
8-K |
|
2.1 |
|
3/2/2018 |
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10.1 |
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X |
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31.1 |
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X |
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31.2 |
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X |
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32.1‡ |
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32.2‡ |
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101.INS |
|
XBRL Instance Document |
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X |
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101.SCH |
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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 |
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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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* The exhibits to the Agreement and Plan of Merger were omitted pursuant to Item 601(b)(2) of Regulation S-K. TopBuild will furnish copies of any such schedules and exhibits to the U.S. Securities and Exchange Commission upon request |
||||||||||
34
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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|
|
|
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By: |
/s/ John S. Peterson |
|
|
Name: |
John S. Peterson |
|
|
Title: |
Vice President and Chief Financial Officer |
|
|
|
|
May 8, 2018
35
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 |
|---|