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UNITED STATES
SECURITIES AND EXCHANGE
COMMISSION
WASHINGTON, D.C. 20549
FORM
(Mark One) | |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the quarterly period ended
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:
(Exact name of Registrant as Specified in its Charter)
(State or Other Jurisdiction of Incorporation or | (I.R.S. Employer |
(Address of Principal Executive Offices) | (Zip Code) |
(
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
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.⌧
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). ⌧
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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).
The registrant had outstanding
TOPBUILD CORP.
TABLE OF CONTENTS
Page No. | ||||
4 | ||||
5 | ||||
6 | ||||
7 | ||||
8 | ||||
9 | ||||
Management's Discussion and Analysis of Financial Condition and Results of Operations | 24 | |||
31 | ||||
32 | ||||
32 | ||||
32 | ||||
32 | ||||
33 | ||||
33 | ||||
33 | ||||
33 | ||||
34 | ||||
35 | ||||
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:
Term |
| Definition |
3.625% Senior Notes | TopBuild's 3.625% senior unsecured notes issued March 15, 2021 and due March 15, 2029 | |
4.125% Senior Notes | TopBuild's 4.125% senior unsecured notes issued October 14, 2021 and due February 15, 2032 | |
5.625% Senior Notes | TopBuild's 5.625% senior unsecured notes which were due on May 1, 2026 and redeemed in full on March 15, 2021 | |
2015 LTIP | 2015 Long-Term Incentive Program authorizes the Board to grant stock options, stock appreciation rights, restricted shares, restricted share units, performance awards, and dividend equivalents | |
2022 ASR Agreement | $100 million accelerated share repurchase agreement with Bank of America, N.A. | |
2019 Repurchase Program | $200 million share repurchase program authorized by the Board on February 22, 2019 | |
2021 Repurchase Program | $200 million share repurchase program authorized by the Board on July 26, 2021 | |
2022 Repurchase Program | $200 million share repurchase program authorized by the Board on July 25, 2022 | |
ABS | American Building Systems, Inc. | |
Amendment No. 1 to Credit Agreement | Amendment No. 1 to the Credit Agreement dated March 8, 2021 | |
Amendment No. 2 to Credit Agreement | Amendment No. 2 to the Credit Agreement dated October 7, 2021 | |
Annual Report | Annual report filed with the SEC on Form 10-K pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 | |
ASC | Accounting Standards Codification | |
ASU | Accounting Standards Update | |
Assured | Assured Insulating Inc. | |
Board | Board of Directors of TopBuild | |
BofA | Bank of America, N.A. | |
Billings | Billings Insulation Service, Inc. | |
Current Report | Current report filed with the SEC on Form 8-K pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 | |
DI | DI Super Holdings, Inc. | |
EBITDA | Earnings before interest, taxes, depreciation, and amortization | |
Exchange Act | The Securities Exchange Act of 1934, as amended | |
FASB | Financial Accounting Standards Board | |
GAAP | Generally accepted accounting principles in the United States of America | |
Green Energy | Green Energy Solutions, Inc. | |
Lenders | Bank of America, N.A., together with the other lenders party to Credit Agreement | |
LCR | L.C.R. Contractors, LLC | |
LIBOR | London interbank offered rate | |
Net Leverage Ratio | As defined in the “Credit Agreement,” the ratio of outstanding indebtedness, less up to $100 million of unrestricted cash, to EBITDA | |
NYSE | New York Stock Exchange | |
Credit Agreement | Senior secured credit agreement and related security and pledge agreement dated May 5, 2017, as amended and restated on March 20, 2020, and further amended by Amendment No. 1 to Credit Agreement and Amendment No. 2 to Credit Agreement | |
Quarterly Report | Quarterly report filed with the SEC on Form 10-Q pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 | |
ROU | Right of use (asset), as defined in ASC 842 | |
RSA | Restricted stock award | |
SEC | United States Securities and Exchange Commission | |
Secured Leverage Ratio | As defined in the “Credit Agreement,” the ratio of outstanding indebtedness, including letters of credit, to EBITDA | |
Southwest | Southwest Insulation, Inc. | |
TopBuild | TopBuild Corp. and its wholly-owned consolidated domestic subsidiaries. Also, the Company, we, us, and our |
3
PART I – FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
TOPBUILD CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
(In thousands except share data)
As of | ||||||
| June 30, | December 31, | ||||
2022 | 2021 | |||||
ASSETS | ||||||
Current assets: | ||||||
Cash and cash equivalents | $ | | $ | | ||
Receivables, net of an allowance for credit losses of $ | |
| | |||
Inventories, net | |
| | |||
Prepaid expenses and other current assets | |
| | |||
Total current assets | |
| | |||
Right of use assets | | | ||||
Property and equipment, net | |
| | |||
Goodwill | |
| | |||
Other intangible assets, net | |
| | |||
Deferred tax assets, net | - | | ||||
Other assets | |
| | |||
Total assets | $ | | $ | | ||
LIABILITIES AND EQUITY | ||||||
Current liabilities: | ||||||
Accounts payable | $ | | $ | | ||
Current portion of long-term debt | | | ||||
Accrued liabilities | | | ||||
Short-term operating lease liabilities | | | ||||
Short-term finance lease liabilities | | | ||||
Total current liabilities | | | ||||
Long-term debt | | | ||||
Deferred tax liabilities, net | | | ||||
Long-term portion of insurance reserves | | | ||||
Long-term operating lease liabilities | | | ||||
Long-term finance lease liabilities | | | ||||
Other liabilities | | | ||||
Total liabilities | | | ||||
Commitments and contingencies | ||||||
Equity: | ||||||
Preferred stock, $ | ||||||
Common stock, $ | | | ||||
Treasury stock, | ( | ( | ||||
Additional paid-in capital | | | ||||
Retained earnings | | | ||||
Accumulated other comprehensive loss | ( | ( | ||||
Total equity | | | ||||
Total liabilities and equity | $ | | $ | | ||
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)
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||
2022 | 2021 | 2022 | 2021 | |||||||||
Net sales | $ | |
| $ | |
| $ | |
| $ | | |
Cost of sales | | | | | ||||||||
Gross profit | | | | | ||||||||
Selling, general, and administrative expense | | | | | ||||||||
Operating profit | | | | | ||||||||
Other income (expense), net: | ||||||||||||
Interest expense | ( | ( | ( | ( | ||||||||
Loss on extinguishment of debt | — | — | — | ( | ||||||||
Other, net | ( | | | | ||||||||
Other expense, net | ( | ( | ( | ( | ||||||||
Income before income taxes | | | | | ||||||||
Income tax expense | ( | ( | ( | ( | ||||||||
Net income | $ | | $ | | $ | | $ | | ||||
Net income per common share: | ||||||||||||
Basic | $ | | $ | | $ | | $ | | ||||
Diluted | $ | | $ | | $ | | $ | | ||||
| ||||||||||||
Weighted average shares outstanding: | ||||||||||||
Basic | | | | | ||||||||
Diluted | | | | | ||||||||
See notes to our unaudited condensed consolidated financial statements.
5
TOPBUILD CORP.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
(In thousands)
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||
2022 | 2021 | 2022 | 2021 | |||||||||
Net income | $ | | $ | | $ | | $ | | ||||
Other comprehensive (loss) income: | ||||||||||||
Foreign currency translation adjustment | ( | - | | - | ||||||||
Comprehensive income | $ | | $ | | $ | | $ | | ||||
See notes to our unaudited condensed consolidated financial statement
6
TOPBUILD CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Six Months Ended June 30, | ||||||
2022 | 2021 | |||||
Cash Flows Provided by (Used in) Operating Activities: |
|
|
| |||
Net income | $ | | $ | | ||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||
Depreciation and amortization | | | ||||
Share-based compensation | | | ||||
Loss on extinguishment of debt | - | | ||||
Loss on sale of property and equipment | | | ||||
Amortization of debt issuance costs | | | ||||
Provision for bad debt expense | | | ||||
Loss from inventory obsolescence | | | ||||
Change in certain assets and liabilities | ||||||
Receivables, net | ( | ( | ||||
Inventories, net | ( | ( | ||||
Prepaid expenses and other current assets | | ( | ||||
Accounts payable | | | ||||
Accrued liabilities | | | ||||
Other, net | | ( | ||||
Net cash provided by operating activities | | | ||||
Cash Flows Provided by (Used in) Investing Activities: | ||||||
Purchases of property and equipment | ( | ( | ||||
Acquisition of businesses, net of cash acquired | ( | ( | ||||
Proceeds from sale of property and equipment | | | ||||
Net cash used in investing activities | ( | ( | ||||
Cash Flows Provided by (Used in) Financing Activities: | ||||||
Proceeds from issuance of long-term debt | - | | ||||
Repayment of long-term debt | ( | ( | ||||
Payment of debt issuance costs | - | ( | ||||
Proceeds from revolving credit facility | | - | ||||
Repayment of revolving credit facility | ( | - | ||||
Taxes withheld and paid on employees' equity awards | ( | ( | ||||
Exercise of stock options | | | ||||
Repurchase of shares of common stock | ( | ( | ||||
Payment of contingent consideration | ( | ( | ||||
Net cash used in financing activities | ( | ( | ||||
Impact of exchange rate changes on cash | | - | ||||
Net decrease in cash and cash equivalents | ( | ( | ||||
Cash and cash equivalents- Beginning of period |
| |
| | ||
Cash and cash equivalents- End of period | $ | | $ | | ||
Supplemental disclosure of noncash activities: | ||||||
Leased assets obtained in exchange for new operating lease liabilities | $ | | $ | | ||
Accruals for property and equipment | | | ||||
See notes to our unaudited condensed consolidated financial statements.
7
TOPBUILD CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (Unaudited)
(In thousands except share data)
Accumulated | |||||||||||||||||
Common | Treasury | Additional | Other | ||||||||||||||
Stock | Stock | Paid-in | Retained | Comprehensive | |||||||||||||
($ | at cost | Capital | Earnings | (Loss) Income | Equity | ||||||||||||
Balance at December 31, 2020 | $ | | $ | ( | $ | | $ | | $ | - | $ | | |||||
Net income | - | - | - | | - | | |||||||||||
Share-based compensation | - | - | | - | - | | |||||||||||
Issuance of | | - | ( | - | - | - | |||||||||||
Repurchase of | - | ( | - | - | - | ( | |||||||||||
- | - | ( | - | - | ( | ||||||||||||
- | - | | - | - | | ||||||||||||
Balance at March 31, 2021 | $ | | $ | ( | $ | | $ | | $ | - | $ | | |||||
Net income | - | - | - | | - | | |||||||||||
Share-based compensation | - | - | | - | - | | |||||||||||
Repurchase of | - | ( | - | - | - | ( | |||||||||||
- | - | ( | - | - | ( | ||||||||||||
Balance at June 30, 2021 | $ | | $ | ( | $ | | $ | | $ | - | $ | | |||||
Accumulated | |||||||||||||||||
Common | Treasury | Additional | Other | ||||||||||||||
Stock | Stock | Paid-in | Retained | Comprehensive | |||||||||||||
($ | at cost | Capital | Earnings | (Loss) Income | Equity | ||||||||||||
Balance at December 31, 2021 | $ | | $ | ( | $ | | $ | | $ | ( | $ | | |||||
Net income | - | - | - | | - | | |||||||||||
Share-based compensation | - | - | | - | - | | |||||||||||
Issuance of | | - | ( | - | - | - | |||||||||||
Repurchase of | - | ( | - | - | - | ( | |||||||||||
- | ( | - | - | - | ( | ||||||||||||
- | - | | - | - | | ||||||||||||
Other comprehensive income, net of tax | - | - | - | - | | | |||||||||||
Balance at March 31, 2022 | $ | | $ | ( | $ | | $ | | $ | ( | $ | | |||||
Net income | - | - | | - | | ||||||||||||
Share-based compensation | - | - | | - | - | | |||||||||||
Repurchase of | - | ( | ( | - | - | ( | |||||||||||
- | ( | - | - | - | ( | ||||||||||||
5,835 shares issued upon exercise of stock options | - | - | | - | - | | |||||||||||
Other comprehensive loss, net of tax | - | - | - | - | ( | ( | |||||||||||
Balance at June 30, 2022 | $ | | $ | ( | $ | | $ | | $ | ( | $ | | |||||
See notes to our unaudited condensed consolidated financial statements.
8
1. BASIS OF PRESENTATION
TopBuild was formed on June 30, 2015, and is listed on the NYSE under the ticker symbol “BLD.” We report our business in
We believe the accompanying unaudited condensed consolidated financial statements contain all adjustments, of a normal recurring nature, necessary to state fairly our financial position as of June 30, 2022, our results of operations and comprehensive income for the three and six months ended June 30, 2022 and 2021, and our cash flows for the six months ended June 30, 2022 and 2021. The condensed consolidated balance sheet at December 31, 2021, was derived from our audited financial statements, but does not include all disclosures required by GAAP.
These condensed consolidated financial statements and related notes should be read in conjunction with the audited Consolidated Financial Statements included in the Company’s Annual Report for the year ended December 31, 2021, as filed with the SEC on February 22, 2022.
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 periods. Actual results could differ materially from these estimates. All significant intercompany transactions between TopBuild entities have been eliminated.
Recently Adopted Accounting Pronouncements
The following table summarizes additional ASUs which were adopted, but did not have a material impact on our accounting policies or our consolidated financial statements and related disclosures:
ASU | Description | Period Adopted | Method | ||
ASU 2019-12 | Income Taxes - Simplifying the Accounting for Income Taxes | 01/01/21 | Modified Retrospective | ||
ASU 2021-01 | Reference Rate Reform | 01/01/21 | Prospective |
Recently Issued Accounting Pronouncements Not Yet Adopted
In October 2021, the FASB issued ASU 2021-08, “Accounting for Contract Assets and Contract Liabilities from Contracts with Customers”. This standard improves the accounting for acquired revenue contracts with customers in a business combination by addressing diversity in practice and inconsistency related to recognition of an acquired contract liability, as well as payment terms and their effect on subsequent revenue recognized by the acquirer. This standard is effective for us beginning January 1, 2023, with early adoption permitted. We are evaluating the impact that adoption of this standard may have on our financial position and results of operations.
9
3. REVENUE RECOGNITION
Revenue is disaggregated between our Installation and Specialty Distribution segments and further based on market and product, as we believe this best depicts how the nature, amount, timing, and uncertainty of revenue and cash flows are affected by economic factors. The following tables present our revenues disaggregated by market (in thousands):
Three Months Ended June 30, | ||||||||||||||||||||||||
2022 | 2021 | |||||||||||||||||||||||
Installation | Specialty Distribution | Elims | Total | Installation | Specialty Distribution | Elims | Total | |||||||||||||||||
Residential | $ | | $ | | $ | ( | $ | | $ | | $ | | $ | ( | $ | | ||||||||
Commercial | | | ( | | | | ( | | ||||||||||||||||
Industrial | - | | - | | - | - | - | - | ||||||||||||||||
Net sales | $ | | $ | | $ | ( | $ | | $ | | $ | | $ | ( | $ | | ||||||||
Six Months Ended June 30, | ||||||||||||||||||||||||
2022 | 2021 | |||||||||||||||||||||||
Installation | Specialty Distribution | Elims | Total | Installation | Specialty Distribution | Elims | Total | |||||||||||||||||
Residential | $ | | $ | | $ | ( | $ | | $ | | $ | | $ | ( | $ | | ||||||||
Commercial | | | ( | | | | ( | | ||||||||||||||||
Industrial | - | | - | | - | - | - | - | ||||||||||||||||
Net sales | $ | | $ | | $ | ( | $ | | $ | | $ | | $ | ( | $ | | ||||||||
The following tables present our revenues disaggregated by product (in thousands):
Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | |||||||||||||||||||||||
Installation | Specialty Distribution | Elims | Total | Installation | Specialty Distribution | Elims | Total | |||||||||||||||||
Insulation and accessories | $ | | $ | | $ | ( | $ | | $ | | $ | | $ | ( | $ | | ||||||||
Glass and windows | | - | - | | | - | - | | ||||||||||||||||
Gutters | | | ( | | | | ( | | ||||||||||||||||
All other | | | ( | | | | ( | | ||||||||||||||||
Net sales | $ | | $ | | $ | ( | $ | | $ | | $ | | $ | ( | $ | | ||||||||
Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | |||||||||||||||||||||||
Installation | Specialty Distribution | Elims | Total | Installation | Specialty Distribution | Elims | Total | |||||||||||||||||
Insulation and accessories | $ | | $ | | $ | ( | $ | | $ | | $ | | $ | ( | $ | | ||||||||
Glass and windows | | - | - | | | - | - | | ||||||||||||||||
Gutters | | | ( | | | | ( | | ||||||||||||||||
All other | | | ( | | | | ( | | ||||||||||||||||
Net sales | $ | | $ | | $ | ( | $ | | $ | | $ | | $ | ( | $ | | ||||||||
10
The following table represents our contract assets and contract liabilities with customers, in thousands:
Included in Line Item on | As of | ||||||
Condensed | June 30, | December 31, | |||||
Balance Sheets | 2022 | 2021 | |||||
Contract Assets: | |||||||
Receivables, unbilled | Receivables, net | $ | | $ | | ||
Contract Liabilities: | |||||||
Deferred revenue | Accrued liabilities | $ | | $ | | ||
The aggregate amount remaining on uncompleted performance obligations was $
Certain customer contracts contain provisions whereby customers are entitled to withhold an agreed upon percentage of the total contract value until the customer’s project is satisfactorily complete. This amount held back is referred to as retainage and is a common practice in the construction industry. Retainage receivables are classified as trade receivables, which is a component of Receivables, net on our condensed consolidated balance sheets and were $
4. GOODWILL AND OTHER INTANGIBLES
We have
In the fourth quarter of 2021, we performed an annual assessment on our goodwill resulting in
Changes in the carrying amount of goodwill for the six months ended June 30, 2022, by segment, were as follows, in thousands:
|
|
| Fx |
| Accumulated |
| ||||||||||||
Gross Goodwill | Translation | Gross Goodwill | Impairment | Net Goodwill | ||||||||||||||
December 31, 2021 | Additions | Adjustment | June 30, 2022 | Losses | June 30, 2022 | |||||||||||||
Goodwill, by segment: | ||||||||||||||||||
Installation | $ | | $ | | - | $ | | $ | ( | $ | | |||||||
Specialty Distribution |
| |
| | |
| |
| - |
| | |||||||
Total goodwill | $ | | $ | | $ | | $ | | $ | ( | $ | | ||||||
See Note 13 – Business Combinations for goodwill recognized on acquisitions that occurred during the quarter.
11
Other intangible assets, net includes customer relationships, non-compete agreements, and trademarks / trade names. The following table sets forth our other intangible assets, in thousands:
As of | ||||||
| June 30, | December 31, | ||||
2022 | 2021 | |||||
Gross definite-lived intangible assets |
| $ | | $ | | |
Accumulated amortization |
| ( | ( | |||
Net definite-lived intangible assets |
| $ | | $ | | |
The following table sets forth our amortization expense, in thousands:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||
| 2022 |
| 2021 |
| 2022 |
| 2021 | |||||
Amortization expense | $ | | $ | | $ | | $ | | ||||
5. LONG-TERM DEBT
The following table reconciles the principal balances of our outstanding debt to our condensed consolidated balance sheets, in thousands:
As of | ||||||
June 30, | December 31, | |||||
2022 |
| 2021 | ||||
$ | | $ | | |||
| | |||||
Term loan | | | ||||
Equipment notes | | | ||||
Unamortized debt issuance costs | ( | ( | ||||
Total debt, net of unamortized debt issuance costs | | | ||||
Less: current portion of long-term debt | | | ||||
Total long-term debt | $ | | $ | | ||
The following table sets forth our remaining principal payments for our outstanding debt balances as of June 30, 2022, in thousands:
Payments Due by Period | |||||||||||||||||||||
2022 | 2023 | 2024 | 2025 | 2026 | Thereafter | Total | |||||||||||||||
$ | - | $ | - | $ | - | $ | - | $ | - | $ | | $ | | ||||||||
- | - | - | - | - | | | |||||||||||||||
Term loan |
| | | | | | - |
| | ||||||||||||
Equipment notes | | | | - | - | - | | ||||||||||||||
Total | $ | | $ | | $ | | $ | | $ | | $ | | $ | | |||||||
Amendments to Credit Agreement and Senior Secured Term Loan Facility
On March 8, 2021, the Company entered into Amendment No. 1 to Credit Agreement. Amendment No. 1 to Credit Agreement provided for a term loan facility in an aggregate principal amount of $
Amendment No. 1 to Credit Agreement extended the maturity date from March 2025 to March 2026, the floor for base rate loans was reduced from
12
On October 7, 2021, the Company entered into Amendment No. 2 to Credit Agreement. Amendment No. 2 to Credit Agreement provides for a term loan facility in an aggregate principal amount of $
The following table outlines the key terms of our Amendment No. 2 to Credit Agreement (dollars in thousands):
Senior secured term loan facility | $ | | |
Additional delayed draw term loan | $ | | |
Additional term loan and/or revolver capacity available under incremental facility (a) | $ | | |
Revolving facility | $ | | |
Sublimit for issuance of letters of credit under revolving facility (b) | $ | | |
Sublimit for swingline loans under revolving facility (b) | $ | | |
Interest rate as of June 30, 2022 | | % | |
Scheduled maturity date |
| (a) | 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). |
| (b) | Use of the sublimits for the issuance of letters of credit and swingline loans reduces the availability under the Revolving Facility. |
Interest payable on borrowings under the 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 |
| ● | A LIBOR rate (or a comparable successor rate) determined by reference to the costs of funds for deposits in U.S. dollars for the interest period relevant to such borrowings, subject to a floor of |
Amendment No. 2 to Credit Agreement contemplates future amendment by the Company and the agent to provide for the replacement of LIBOR with an alternative benchmark rate, giving due consideration to any evolving or then existing convention for similar U.S. dollar denominated syndicated credit facilities for such alternative benchmarks, including any related mathematical or other applicable adjustments.
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
Revolving Facility
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 Facility, reduce the availability under the Revolving Facility.
13
The following table summarizes our availability under the Revolving Facility, in thousands:
As of | ||||||
June 30, |
| December 31, | ||||
| 2022 |
| 2021 | |||
Revolving facility | $ | | $ | | ||
Less: standby letters of credit | ( | ( | ||||
Availability under revolving facility | $ | | $ | | ||
We are required to pay commitment fees to the Lenders in respect of any unutilized commitments. The commitment fees range from
On March 15, 2021, the Company completed a private offering of $
The Company may redeem the
On October 14, 2021, the Company completed a private offering of $
The Company may redeem the
14
Equipment Notes
As of June 30, 2022, the company has outstanding $
Covenant Compliance
The indentures governing our
The 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 Credit Agreement contains customary affirmative covenants and events of default.
The Credit Agreement requires that we maintain a Net Leverage Ratio and minimum Interest Coverage Ratio throughout the term of the agreement. The following table outlines the key financial covenants effective for the period covered by this Quarterly Report:
As of June 30, 2022 | ||
Maximum Net Leverage Ratio | ||
Minimum Interest Coverage Ratio | ||
Compliance as of period end | In Compliance |
6. FAIR VALUE MEASUREMENTS
Fair Value on Recurring Basis
The carrying values of cash and cash equivalents, receivables, net, and accounts payable are considered to be representative of their respective fair values due to the short-term nature of these instruments. We measure our contingent consideration liabilities related to business combinations at fair value. For more information see Note 13 – Business Combinations.
15
Fair Value on Non-Recurring Basis
Fair value measurements were applied to our long-term debt portfolio. We believe the carrying value of our term loan approximates the fair market value primarily due to the fact that the non-performance risk of servicing our debt obligations, as reflected in our business and credit risk profile, has not materially changed since we assumed our debt obligations under the Amendment No.2 to Credit Agreement. In addition, due to the floating-rate nature of our term loan, the market value is not subject to variability solely due to changes in the general level of interest rates as is the case with a fixed-rate debt obligation. Based on market trades of our
As of June 30, 2022 | ||||||
Fair Value | Gross Carrying Value | |||||
$ | | $ | | |||
$ | | $ | | |||
7. SEGMENT INFORMATION
The following tables set forth our net sales and operating results by segment, in thousands:
Three Months Ended June 30, | ||||||||||||
2022 | 2021 | 2022 | 2021 | |||||||||
Net Sales | Operating Profit (b) | |||||||||||
Our operations by segment were (a): | ||||||||||||
Installation | $ | | $ | | $ | | $ | | ||||
Specialty Distribution | | | | | ||||||||
Intercompany eliminations | ( | ( | ( | ( | ||||||||
Total | $ | | $ | | | | ||||||
General corporate expense, net (c) | ( | ( | ||||||||||
Operating profit, as reported | | | ||||||||||
Other expense, net | ( | ( | ||||||||||
Income before income taxes | $ | | $ | | ||||||||
Six Months Ended June 30, | ||||||||||||
2022 | 2021 | 2022 | 2021 | |||||||||
Net Sales | Operating Profit (b) | |||||||||||
Our operations by segment were (a): | ||||||||||||
Installation | $ | | $ | | $ | | $ | | ||||
Specialty Distribution | | | | | ||||||||
Intercompany eliminations | ( | ( | ( | ( | ||||||||
Total | $ | | $ | | | | ||||||
General corporate expense, net (c) | ( | ( | ||||||||||
Operating profit, as reported | | | ||||||||||
Other expense, net | ( | ( | ||||||||||
Income before income taxes | $ | | $ | | ||||||||
| (a) | All of our operations are located primarily in the U.S and to a lesser extent Canada. |
| (b) | Segment operating profit includes an allocation of general corporate expenses attributable to the operating segments which is based on direct benefit or usage (such as salaries of corporate employees who directly support the segment). |
| (c) | General corporate expense, net includes expenses not specifically attributable to our segments for functions such as corporate human resources, finance, and legal, including salaries, benefits, and other related costs. |
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8. LEASES
We lease various assets to support our business including warehouses for our Installation branch locations and Specialty Distribution centers, office space for our Branch Support Center in Daytona Beach, Florida and other administrative locations, as well as fleet vehicles and certain equipment. In addition, we lease certain operating facilities from related parties, primarily former owners (and in certain cases, current management personnel) of companies acquired. These related party leases are immaterial to our condensed consolidated statements of operations.
The following table presents lease-related assets and liabilities recognized in our condensed consolidated balance sheet, in thousands:
| As of | |||||||||
June 30, | December 31, | |||||||||
2022 | 2021 | |||||||||
Assets | Classification | |||||||||
Operating | Right of use assets | $ | | $ | | |||||
Finance | | | ||||||||
Total lease assets | $ | | $ | | ||||||
Liabilities | ||||||||||
Current | ||||||||||
Operating | Short-term operating lease liabilities | $ | | $ | | |||||
Finance | Short-term finance lease liabilities | | | |||||||
Non-Current | ||||||||||
Operating | Long-term operating lease liabilities | | | |||||||
Finance | Long-term finance lease liabilities | | | |||||||
Total lease liabilities | $ | | $ | | ||||||
Weighted-average remaining lease term: | ||||||||||
Operating leases | ||||||||||
Finance leases | ||||||||||
Weighted-average discount rate: | ||||||||||
Operating leases | % | % | ||||||||
Finance leases | % | % | ||||||||
The components of lease expense were as follows and are primarily included in cost of sales on the accompanying unaudited condensed consolidated statement of operations for operating leases and in selling, general and administrative expenses on the accompanying unaudited condensed consolidated statement of operations for finance leases and operating leases on support centers, in thousands:
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||
2022 | 2021 | 2022 | 2021 | ||||||||||||
Operating lease cost (a) | $ | | $ | | $ | | $ | | |||||||
Financing lease cost: | |||||||||||||||
Amortization of leased assets | | - | | - | |||||||||||
Interest on finance lease obligations | | - | | - | |||||||||||
Short-term lease cost | | | | | |||||||||||
Sublease income | ( | ( | ( | ( | |||||||||||
Net lease cost | $ | | $ | | $ | | $ | | |||||||
| (a) | Includes variable cost components of $ |
17
Future minimum lease payments under non-cancellable operating leases as of June 30, 2022, were as follows, in thousands:
Payments due by Period |
| ||
2022 | $ | ||
2023 | |||
2024 | |||
2025 | |||
2026 | |||
2027 and Thereafter | |||
Total future minimum lease payments | | ||
Less: imputed interest | ( | ||
Lease liability at June 30, 2022 | $ | | |
The amount below is included in the cash flows provided by (used in) operating activities section on the accompanying unaudited condensed consolidated statements of cash flows, in thousands:
| Six Months Ended June 30, | |||||
2022 | 2021 | |||||
Cash paid for amounts included in the measurement of lease liabilities: | ||||||
Operating cash flows from finance leases | $ | ( | $ | - | ||
Operating cash flows from operating leases | ( | ( | ||||
Financing cash flows from finance leases | ( | - | ||||
9. INCOME TAXES
Our effective tax rates were
A tax benefit of $
10. NET INCOME PER SHARE
Basic net income per share is calculated by dividing net income by the number of weighted average shares outstanding during the period, without consideration for common stock equivalents.
Diluted net income per share is calculated by adjusting the number of weighted average shares outstanding for the dilutive effect of common stock equivalents outstanding for the period, determined using the treasury stock method.
18
Basic and diluted net income per share were computed as follows:
Three Months Ended June 30, |
| Six Months Ended June 30, | ||||||||||
2022 | 2021 |
| 2022 | 2021 | ||||||||
Net income (in thousands) | $ | | $ | | $ | | $ | | ||||
Weighted average number of common shares outstanding - basic | | | | | ||||||||
Dilutive effect of common stock equivalents: | ||||||||||||
RSAs with service-based conditions | | | | | ||||||||
RSAs with market-based conditions | | | | | ||||||||
RSAs with performance-based conditions | | | | | ||||||||
Stock options | | | | | ||||||||
Weighted average number of common shares outstanding - diluted | | | | | ||||||||
Basic net income per common share | $ | | $ | | $ | | $ | | ||||
Diluted net income per common share | $ | | $ | | $ | | $ | | ||||
The following table summarizes shares excluded from the calculation of diluted net income per share because their effect would have been anti-dilutive:
Three Months Ended June 30, |
| Six Months Ended June 30, | ||||||||||
2022 |
| 2021 |
| 2022 |
| 2021 | ||||||
Anti-dilutive common stock equivalents: | ||||||||||||
RSAs with service-based conditions | | | | | ||||||||
RSAs with market-based conditions | | | | | ||||||||
RSAs with performance-based conditions | - | - | | - | ||||||||
Stock options | | | | | ||||||||
Total anti-dilutive common stock equivalents | | | | | ||||||||
11. SHARE-BASED COMPENSATION
Effective July 1, 2015, our eligible employees commenced participation 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
Share-based compensation expense is included in selling, general, and administrative expense. The income tax effect associated with share-based compensation awards is included in income tax expense. The following table presents share-based compensation amounts recognized in our condensed consolidated statements of operations, in thousands:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||
2022 | 2021 | 2022 | 2021 | |||||||||
Share-based compensation expense | $ | | $ | | $ | | $ | | ||||
Income tax (expense) benefit | $ | ( | $ | | $ | | $ | | ||||
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The following table presents a summary of our share-based compensation activity for the three months ended June 30, 2022, in thousands, except per share amounts:
RSAs | Stock Options | |||||||||||||||
Number of Shares |
| Weighted Average Grant Date Fair Value Per Share |
| Number of Shares |
| Weighted Average Grant Date Fair Value Per Share |
| Weighted Average Exercise Price Per Share |
| Aggregate | ||||||
Balance December 31, 2021 | | $ | | | $ | | $ | | $ | | ||||||
Granted | | $ | | — | $ | — | $ | — | — | |||||||
Converted/Exercised | ( | $ | | ( | $ | | $ | | $ | | ||||||
Forfeited/Expired | ( | $ | | ( | $ | | $ | | — | |||||||
Balance June 30, 2022 | | $ | | | $ | | $ | | $ | | ||||||
Exercisable June 30, 2022 (a) | | $ | | $ | | $ | | |||||||||
| (a) | The weighted average remaining contractual term for vested stock options is approximately |
Unrecognized share-based compensation expense related to unvested awards is shown in the following table, dollars in thousands:
As of June 30, 2022 | ||||||
Unrecognized Compensation Expense | Weighted Average | |||||
RSAs | $ | | ||||
Stock options | | |||||
Total unrecognized compensation expense related to unvested awards | $ | | ||||
Our RSAs with performance-based conditions are evaluated on a quarterly basis with adjustments to compensation expense based on the likelihood of the performance target being achieved or exceeded. The following table shows the range of payouts and the related expense for our outstanding RSAs with performance-based conditions, in thousands:
Payout Ranges and Related Expense | |||||||||||||||
RSAs with Performance-Based Conditions | Grant Date Fair Value | ||||||||||||||
February 17, 2020 | $ | | $ | $ | $ | | $ | | |||||||
February 16, 2021 | $ | | $ | $ | $ | | $ | | |||||||
February 15, 2022 | $ | | $ | $ | $ | | $ | | |||||||
During the first quarter of 2022, RSAs with performance-based conditions that were granted on February 18, 2019 vested based on cumulative
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 2022 and 2021:
2022 | 2021 | |||||||
Measurement period (years) | ||||||||
Risk free interest rate | | % | | % | ||||
Dividend yield | | % | | % | ||||
Estimated fair value of market-based RSAs at grant date | $ | | $ | | ||||
20
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 stock options granted in 2021. There were
2021 | ||||
Risk free interest rate | | % | ||
Expected volatility, using historical return volatility and implied volatility | | % | ||
Expected life (in years) | ||||
Dividend yield | | % | ||
Estimated fair value of stock options at grant date | $ | | ||
12. SHARE REPURCHASE PROGRAM
On July 25, 2022, our Board authorized the 2022 Repurchase Program, pursuant to which the Company may purchase up to $
On July 26, 2021, our Board authorized the 2021 Repurchase Program, pursuant to which the Company may purchase up to $
On February 22, 2019, our Board authorized the 2019 Repurchase Program, pursuant to which the Company may purchase up to $
On May 5, 2022, the Company entered into the 2022 ASR Agreement under the 2021 Repurchase Program. We paid $
The following table sets forth our share repurchases under the Repurchase Programs during the periods presented. These repurchases closed out the 2019 Share Repurchase Program with the balance repurchased under the 2021 Share Repurchase Program.
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||
| 2022 | 2021 | 2022 |
| 2021 | |||||||
Number of shares repurchased | | | | | ||||||||
Share repurchase cost (in thousands) | $ | | $ | |
| $ | | $ | | |||
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13. BUSINESS COMBINATIONS
Acquiring businesses is a key part of our ongoing strategy to grow our company and expand our market share. Each acquisition has been accounted for as a business combination under ASC 805, “Business Combinations.” Acquisition related costs for the six months ended June 30, 2022 and 2021 were $
The table below provides a summary as of June 30, 2022 for the businesses acquired during the six months ended June 30, 2022:
2022 Acquisitions | Date |
| Cash Paid | Contingent Consideration | Total Purchase Price | Goodwill Acquired | ||||||||||
Southwest | 1/12/2022 | $ | | $ | — | $ | | $ | | |||||||
Billings | 2/3/2022 | | — | | | |||||||||||
Green Energy | 3/31/2022 | | — | | | |||||||||||
Assured | 4/7/2022 | | | | | |||||||||||
Total | $ | | $ | | $ | | $ | | ||||||||
The table below provides a summary as of June 30, 2022 for the businesses acquired during the six months ended June 30, 2021:
2021 Acquisitions | Date |
| Cash Paid | Contingent Consideration | Total Purchase Price | Goodwill Acquired | ||||||||||
LCR | 1/20/2021 | $ | | — | | | ||||||||||
ABS | 4/5/2021 | | — | | | |||||||||||
All others | Various | | — | | | |||||||||||
Total | $ | | $ | — | $ | | $ | | ||||||||
As third-party or internal valuations are finalized, certain tax aspects of the foregoing transactions are completed, and customer post-closing reviews are concluded, adjustments may be made to the fair value of assets acquired, and in some cases total purchase price, through the end of each measurement period, generally one year following the applicable acquisition date. To that note, during the six months ended June 30, 2022, DI’s goodwill increased by $
Primarily all of the $
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14. ACCRUED LIABILITIES
The following table sets forth the components of accrued liabilities, in thousands:
As of | ||||||
| June 30, 2022 |
| December 31, 2021 | |||
Accrued liabilities: | ||||||
Salaries, wages, and commissions | $ | | $ | | ||
Insurance liabilities | | | ||||
Customer rebates | | | ||||
Deferred revenue | | | ||||
Employee tax-related liabilities | | | ||||
Sales and property taxes | | | ||||
Interest payable on long-term debt | | | ||||
Other | | | ||||
Total accrued liabilities | $ | | $ | | ||
See Note 3 – Revenue Recognition for discussion of our deferred revenue balances.
15. OTHER COMMITMENTS AND CONTINGENCIES
Litigation. We are subject to certain claims, charges, litigation, and other proceedings in the ordinary course of our business, including those arising from or related to contractual matters, intellectual property, personal injury, environmental matters, product liability, product recalls, construction defects, insurance coverage, personnel and employment disputes, antitrust, and other matters, including class actions. We believe we have adequate defenses in these matters, and we do not believe that the ultimate outcome of these matters will have a material adverse effect on us. However, there is no assurance that we will prevail in any of these pending matters, and we could in the future incur judgments, enter into settlements of claims, or revise our expectations regarding the outcome of these matters, which could materially impact our liquidity and our results of operations.
Other Matters. We enter into contracts, which include customary indemnities that are standard for the industries in which we operate. Such indemnities include, among other things, customer claims against builders for issues relating to our products and workmanship. We generally exclude indemnity relating to product quality and warranty claims from our agreements as those claims are passed directly to the manufacturers of the products that we install or distribute. 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 also maintain indemnification agreements with our directors and officers that may require us to indemnify them against liabilities that arise by reason of their status or service as directors or officers, except as prohibited by applicable law.
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 license and insurance.
The following table summarizes our outstanding performance, licensing, insurance and other bonds, in thousands:
As of | ||||||
June 30, 2022 | December 31 2021 | |||||
Outstanding bonds: | ||||||
Performance bonds | $ | | $ | | ||
Licensing, insurance, and other bonds | | | ||||
Total bonds | $ | | $ | | ||
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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
TopBuild, headquartered in Daytona Beach, Florida, is a leading installer and distributor of insulation and other building products to the U.S. construction industry. We trade on the NYSE under the ticker symbol “BLD.”
We operate in two segments: Installation and Specialty Distribution. Our Installation segment installs insulation and other building products nationwide which, as of June 30, 2022, had approximately 230 branches located across the United 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 glass and windows, rain gutters, after paint products, fireproofing, garage doors, and fireplaces. We handle every stage of the installation process, including material procurement supplied by leading manufacturers, project scheduling and logistics, multi-phase professional installation, and installation quality assurance.
Our Specialty Distribution segment sells and distributes insulation and other building products, including gutters, fireplaces, closet shelving, and roofing materials, which, as of June 30, 2022, had approximately 165 branches located across the United States and 18 branches in Canada. Our Specialty Distribution 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 Installation and Specialty Distribution provides us with a number of distinct competitive advantages. First, the combined buying power of our two business segments, along with our scale, strengthens our ties to the major manufacturers of insulation and other building material products. This helps to ensure we are buying competitively and ensures the availability of supply to our local branches and Specialty Distribution centers. The overall effect is driving efficiencies through our supply chain. Second, being a leader in both installation and specialty distribution allows us to reach a broader set of builders and contractors more effectively, regardless of their size or geographic location in the U.S. and Canada, and leverage housing and commercial construction growth wherever it occurs. Third, during housing industry downturns, many insulation contractors who buy directly from manufacturers during industry peaks return to purchasing through specialty 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 7 – Segment Information to our unaudited condensed consolidated financial statements contained in Part I, Item 1 of this Quarterly Report. For additional details regarding our strategy, material trends in our business and seasonality, please refer to Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report for the year ended December 31, 2021, as filed with the SEC on February 22, 2022.
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.
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SECOND QUARTER 2022 VERSUS SECOND QUARTER 2021
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 June 30, | |||||||
2022 | 2021 | ||||||
Net sales | $ | 1,274,285 | $ | 834,255 | |||
Cost of sales | 890,188 | 591,075 | |||||
Cost of sales ratio | 69.9 | % | 70.9 | % | |||
Gross profit | 384,097 | 243,180 | |||||
Gross profit margin | 30.1 | % | 29.1 | % | |||
Selling, general, and administrative expense | 176,876 | 114,894 | |||||
Selling, general, and administrative expense to sales ratio | 13.9 | % | 13.8 | % | |||
Operating profit | 207,221 | 128,286 | |||||
Operating profit margin | 16.3 | % | 15.4 | % | |||
Other expense, net | (13,689) | (6,039) | |||||
Income tax expense | (49,835) | (31,867) | |||||
Net income | $ | 143,697 | $ | 90,380 | |||
Net margin | 11.3 | % | 10.8 | % | |||
Sales and Operations
Net sales increased 52.7 percent for the three months ended June 30, 2022, from the comparable period of 2021. The increase was primarily driven by a 32.0 percent impact from our acquisitions, 15.2 percent increase due to higher selling prices, and 5.6 percent increase in sales volume.
Gross profit margins were 30.1 percent and 29.1 percent for the three months ended June 30, 2022 and 2021, respectively. Gross profit margin improved primarily due to higher selling prices, higher sales volume, and operational efficiencies partially offset by material inflation.
Selling, general, and administrative expense, as a percent of sales, was 13.9 and 13.8 percent for the three months ended June 30, 2022 and 2021, respectively. The increase in selling, general, and administrative expense as a percent of sales was driven primarily by costs associated with acquisitions, the amortization of intangible assets related to purchase accounting and increased insurance costs.
Operating margins were 16.3 percent and 15.4 percent for the three months ended June 30, 2022 and 2021, respectively. The increase in operating margins was due to higher selling prices, higher sales volume and operational efficiencies partially offset by material inflation and amortization of intangible assets related to purchase accounting.
25
Business Segment Results
The following table sets forth our net sales and operating profit margins by business segment, in thousands:
Three Months Ended June 30, | |||||||||
| 2022 |
| 2021 |
| Percent Change |
| |||
Net sales by business segment: | |||||||||
Installation | $ | 748,968 | $ | 605,625 | 23.7 | % | |||
Specialty Distribution | 587,791 | 273,364 | 115.0 | % | |||||
Intercompany eliminations | (62,474) | (44,734) | |||||||
Net sales | $ | 1,274,285 | $ | 834,255 | 52.7 | % | |||
Operating profit by business segment: | |||||||||
Installation | $ | 139,919 | $ | 99,066 | 41.2 | % | |||
Specialty Distribution | 86,749 | 42,856 | 102.4 | % | |||||
Intercompany eliminations | (10,435) | (6,932) | |||||||
Operating profit before general corporate expense | 216,233 | 134,990 | 60.2 | % | |||||
General corporate expense, net | (9,012) | (6,704) | |||||||
Operating profit | $ | 207,221 | $ | 128,286 | 61.5 | % | |||
Operating profit margins: | |||||||||
Installation | 18.7 | % | 16.4 | % | |||||
Specialty Distribution | 14.8 | % | 15.7 | % | |||||
Operating profit margin before general corporate expense | 17.0 | % | 16.2 | % | |||||
Operating profit margin | 16.3 | % | 15.4 | % | |||||
Installation
Sales
Sales in our Installation segment increased $143.3 million, or 23.7 percent, for the three months ended June 30, 2022, as compared to the same period in 2021. The increase was due to a 13.3 percent increase from higher selling prices, 8.3 percent increase in sales volume, and 2.0 percent impact from our acquisitions.
Operating margins
Operating margins in our Installation segment were 18.7 percent and 16.4 percent for the three months ended June 30, 2022 and 2021, respectively. The increase in operating margins was driven by higher selling prices, sales volume, and operational efficiencies partially offset by material inflation.
Specialty Distribution
Sales
Sales in our Specialty Distribution segment increased $314.4 million, or 115.0 percent, for the three months ended June 30, 2022, as compared to the same period in 2021. Of the 115.0 percent increase, 94.7 percent increase was due to our acquisitions and 20.0 percent was due to higher selling prices.
Operating margins
Operating margins in our Specialty Distribution segment were 14.8 percent and 15.7 percent for the three months ended June 30, 2022 and 2021, respectively. The decrease in operating margins was partially driven by the amortization of intangible assets related to purchase accounting and material inflation partially offset by higher selling prices and operational efficiencies.
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OTHER ITEMS
Other expense, net
Other expense, net, was $13.7 million and $6.0 million for the three months ended June 30, 2022 and 2021, respectively. The change primarily related to interest expense, which increased by $7.3 million for the three months ended June 30, 2022, as compared to the same period in 2021. This increase was due to higher long-term debt balances during the three months ended June 30, 2022, including the balance on the 4.125% Senior Notes which were issued in the fourth quarter of 2021 to finance the acquisition of DI and higher interest rates on borrowings under the Credit Agreement.
Income tax expense
Income tax expense was $49.8 million, an effective tax rate of 25.8 percent, for the three months ended June 30, 2022, compared to $31.9 million, an effective tax rate of 26.1 percent, for the comparable period in 2021. The tax rate for the three months ended June 30, 2022, was lower due to state tax adjustments and miscellaneous items partially offset by a decrease in the benefit related to share-based compensation.
FIRST SIX MONTHS 2022 VERSUS FIRST SIX MONTHS 2021
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:
Six Months Ended June 30, | |||||||
| 2022 |
| 2021 |
| |||
Net sales | $ | 2,443,203 | $ | 1,577,053 | |||
Cost of sales | 1,727,905 | 1,136,114 | |||||
Cost of sales ratio | 70.7 | % | 72.0 | % | |||
Gross profit | 715,298 | 440,939 | |||||
Gross profit margin | 29.3 | % | 28.0 | % | |||
Selling, general, and administrative expense | 344,123 | 216,767 | |||||
Selling, general, and administrative expense to sales ratio | 14.1 | % | 13.7 | % | |||
Operating profit | 371,175 | 224,172 | |||||
Operating profit margin | 15.2 | % | 14.2 | % | |||
Other expense, net | (24,969) | (26,425) | |||||
Income tax expense | (87,796) | (47,525) | |||||
Net income | $ | 258,410 | $ | 150,222 | |||
Net margin | 10.6 | % | 9.5 | % | |||
Sales and Operations
Net sales increased 54.9 percent for the six months ended June 30, 2022, from the comparable period of 2021. The increase was primarily driven by a 35.1 percent impact from our acquisitions, a 15.8 percent increase due to higher selling prices and a 4.0 percent increase in sales volume.
Gross profit margins were 29.3 percent and 28.0 percent for the six months ended June 30, 2022 and 2021, respectively. Gross profit margin improved primarily due to higher selling prices partially offset by an increase in cost of material.
Selling, general, and administrative expense, as a percent of sales, was 14.1 and 13.7 percent for the six months ended June 30, 2022 and 2021, respectively. The increase in selling, general, and administrative expense as a percent of sales was driven primarily by costs associated with acquisitions, the amortization of intangible assets related to purchase accounting and increased insurance costs.
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Operating margins were 15.2 percent and 14.2 percent for the six months ended June 30, 2022 and 2021, respectively. The increase in operating margins was due to higher selling prices and volume, partially offset by an increase in cost of material.
Business Segment Results
The following table sets forth our net sales and operating profit margins by business segment, in thousands:
Six Months Ended June 30, | ||||||||
| 2022 |
| 2021 |
| Percent Change | |||
Net sales by business segment: | ||||||||
Installation | $ | 1,425,661 | $ | 1,138,378 | 25.2 | % | ||
Specialty Distribution | 1,131,653 | 524,965 | 115.6 | % | ||||
Intercompany eliminations | (114,111) | (86,290) | ||||||
Net sales | $ | 2,443,203 | $ | 1,577,053 | 54.9 | % | ||
Operating profit by business segment (a): | ||||||||
Installation | $ | 252,598 | $ | 172,702 | 46.3 | % | ||
Specialty Distribution | 157,170 | 78,241 | 100.9 | % | ||||
Intercompany eliminations | (19,144) | (13,460) | ||||||
Operating profit before general corporate expense | 390,624 | 237,483 | 64.5 | % | ||||
General corporate expense, net (b) | (19,449) | (13,311) | ||||||
Operating profit | $ | 371,175 | $ | 224,172 | 65.6 | % | ||
Operating profit margins: | ||||||||
Installation | 17.7 | % | 15.2 | % | ||||
Specialty Distribution | 13.9 | % | 14.9 | % | ||||
Operating profit margin before general corporate expense | 16.0 | % | 15.1 | % | ||||
Operating profit margin | 15.2 | % | 14.2 | % | ||||
Installation
Sales
Sales in our Installation segment increased $287.3 million, or 25.2 percent, for the six months ended June 30, 2022, as compared to the same period in 2021. The increase was due to a 13.7 percent increase from higher selling prices, a 5.8 percent increase in sales volume and a 5.7 percent impact from our acquisitions.
Operating margins
Operating margins in our Installation segment were 17.7 percent and 15.2 percent for the six months ended June 30, 2022 and 2021, respectively. The increase in operating margins was driven by higher sales from selling prices and volumes, partially offset by an increase in cost of material.
Specialty Distribution
Sales
Sales in our Specialty Distribution segment increased $606.7 million, or 115.6 percent, for the six months ended June 30, 2022, as compared to the same period in 2021. This increase was due to a 94.0 percent impact from our acquisition and a 21.4 percent increase due to higher selling prices.
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Operating margins
Operating margins in our Specialty Distribution segment were 13.9 percent and 14.9 percent for the six months ended June 30, 2022 and 2021, respectively. The decrease in operating margins was driven by the amortization of intangible assets related to purchase accounting and material inflation partially offset by higher selling prices.
OTHER ITEMS
Other expense, net
Other expense, net, which primarily consisted of interest expense, was $25.0 million and $26.4 million for the six months ended June 30, 2022 and 2021, respectively. Interest expense increased by $12.7 million for the six months ended June 30, 2022, as compared to the same period in 2021. This increase was due to higher long-term debt balances during the six months ended June 30, 2022, including the balance on the 4.125% Senior Notes which were issued in the fourth quarter of 2021 to finance the acquisition of DI, and higher interest rates on our borrowings under the Credit Agreement. The remaining difference primarily relates to $13.9 million incurred to redeem our 5.625% Senior Notes During the six months ended June 30, 2021.
Income tax expense
Income tax expense was $87.8 million, an effective tax rate of 25.4 percent, for the six months ended June 30, 2022 compared to $47.5 million, an effective tax rate of 24.0 percent, for the comparable period in 2021. The tax rate for the six months ended June 30, 2022 was higher due to permanent items including share-based compensation.
Cash Flows and Liquidity
Significant sources (uses) of cash and cash equivalents are summarized for the periods indicated, in thousands:
Six Months Ended June 30, | ||||||
| 2022 |
| 2021 | |||
Changes in cash and cash equivalents: | ||||||
Net cash provided by operating activities | $ | 217,697 | $ | 202,203 | ||
Net cash used in investing activities |
| (54,162) |
| (223,778) | ||
Net cash used in financing activities | (179,587) |
| (46,693) | |||
Impact of exchange rate changes on cash | 142 | - | ||||
Net decrease in cash and cash equivalents | $ | (15,910) | $ | (68,268) | ||
Net cash flows provided by operating activities increased $15.5 million for the six months ended June 30, 2022, as compared to the prior year period. Net income was up $108.2 million, or 72.0 percent, compared with the prior year period, driven by the impact of our acquisitions, higher sales prices and sale volumes. That increase was largely offset by the impact of higher levels of working capital, also driven by our acquisitions (principally increases in accounts receivable, inventories, accounts payable and accrued expenses).
Net cash used in investing activities was $54.2 million for the six months ended June 30, 2022, primarily composed of $36.0 million for purchases of property and equipment, mainly vehicles, and $18.7 million for acquisitions. Net cash used in investing activities was $223.8 million for the six months ended June 30, 2021, primarily composed of $195.4 million for acquisitions and $28.6 million for purchases of property and equipment, mainly vehicles.
Net cash used in financing activities was $179.6 million for the six months ended June 30, 2022. During the six months ended June 30, 2022, we used $150.1 million for the repurchase of common stock pursuant to the 2021 Repurchase Program, $19.3 million for debt repayments, and $10.2 million net activity related to exercise of share-based incentive awards and stock options. Additionally, we borrowed and repaid $70.0 million on our Revolving Facility, all within the second quarter of 2022. During the six months ended June 30, 2021, we used $24.0 million for the repurchase of common stock pursuant to the 2019 Repurchase Program, $10.5 million net payments for redemption of our Old Senior Notes, issuance of our New Senior Notes, proceeds from the increase in our term loan from our Amended Credit Agreement, and payments on equipment notes, $6.5 million in debt issuance costs as a result of entering into our Amended Credit Agreement and New Senior Notes, and $5.5 million net activity related to exercise of share-based incentive awards and stock options.
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We have access to liquidity through our cash from operations and available borrowing capacity under our Credit Agreement, which provides for borrowing and/or standby letter of credit issuances of up to $500 million under the revolving facility. For additional information regarding our outstanding debt and borrowing capacity see Item 8. Financial Statements and Supplementary Data – Note 6. Long-Term Debt.
The following table summarizes our liquidity, in thousands:
As of | ||||||
June 30, | December 31, | |||||
| 2022 |
| 2021 | |||
Cash and cash equivalents (a) | $ | 123,869 | $ | 139,779 | ||
Revolving facility | 500,000 | 500,000 | ||||
Less: standby letters of credit | (69,936) | (69,936) | ||||
Availability under revolving facility | 430,064 | 430,064 | ||||
Total liquidity | $ | 553,933 | $ | 569,843 | ||
(a) Our cash and cash equivalents consist of AAA-rated money market funds as well as cash held in our demand deposit accounts.
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 needs for at least the next twelve months.
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 license and insurance. Information regarding our outstanding bonds as of June 30, 2022 is incorporated by reference from Note 15 – Other Commitments and Contingencies to our unaudited condensed consolidated financial statements contained in Part I, Item 1 of this Quarterly Report.
OUTLOOK
We believe a number of macroeconomic factors, including rising interest rates, inflation and the overall health of the economy, are impacting consumer demand for housing. We remain cautiously optimistic about the long-term U.S. housing market due to low new home inventory, the backlog of homes under construction, and strong household formations.
With the recent acquisition of DI, we have diversified our mix of business and increased our penetration in the commercial and industrial end markets. These end markets operate on a different cycle than residential housing. Although these end markets are dealing with higher material costs and are impacted by economic volatility, our bid activity and backlog remain strong.
OFF-BALANCE SHEET ARRANGEMENTS
We had no material off-balance sheet arrangements during the six months ended June 30, 2022, other than short-term leases, letters of credit, and performance and license bonds, which have been disclosed in Part 1, Item 1 of this Quarterly report.
CONTRACTUAL OBLIGATIONS
There have been no material changes to our contractual obligations from those previously disclosed in our Annual Report for the year ended December 31, 2021, as filed with the SEC on February 22, 2022.
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CRITICAL ACCOUNTING POLICIES
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 from those previously reported in our Annual Report for year ended December 31, 2021, as filed with the SEC on February 22, 2022.
APPLICATION OF NEW ACCOUNTING STANDARDS
Information regarding application of new accounting standards is incorporated by reference from Note 2 – Accounting Policies to our unaudited condensed consolidated financial statements contained in Part I, Item 1 of this Quarterly Report.
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,” “should,” “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 events outside of our control affecting the economy or our industry including, but not limited to, the duration and impact of the COVID-19 pandemic or similar health emergencies, supply chain disruptions resulting from global events including conflicts, sanctions, or blockades, and economic events affecting affordability or the market at large including inflation and interest rates. Our future performance may also be affected by conditions or events relating to our business including, but not limited to, our ability to collect receivables from our customers, 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 for the year ended December 31, 2021, as filed with the SEC on February 22, 2022, as well as under the caption entitled “Risk Factors” in subsequent reports that we file with the SEC. Our forward-looking statements in this filing speak only as of the date of this filing. Factors or events that could cause our actual results to differ may emerge from time to time and it is not possible for us to predict all of them. Unless required by law, we undertake no obligation to update publicly any forward-looking statements as a result of new information, future events, or otherwise.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
On October 7, 2021, the Company entered into Amendment No. 2 to Credit Agreement. Amendment No. 2 to Credit Agreement provides for a term loan facility in an aggregate principal amount of $600.0 million, comprised of a $300.0 term loan facility and $300.0 million delayed draw term loan commitment, all of which was drawn on October 7, 2021 and a revolving facility with an aggregate borrowing capacity of $500.0 million. We also have outstanding 3.625% Senior Notes with an aggregate principal balance of $400.0 million and 4.125% Senior Notes which bear a fixed rate of interest and therefore are excluded from the calculation below as they are not subject to fluctuations in interest rates.
Interest payable on both the aggregate term loan facility and revolving facility under Amendment No. 2 to Credit Agreement is based on a variable interest rate. As a result, we are exposed to market risks related to fluctuations in interest rates on this outstanding indebtedness. As of June 30, 2022, we had $581.3 million outstanding under our term loan facility, and the applicable interest rate as of such date was 2.06%. Based on our outstanding borrowings under Amendment No. 2 to Credit Agreement as of June 30, 2022, a 100 basis point increase in the interest rate would result in a $5.7 million increase in our annualized interest expense. There was no outstanding balance under the revolving facility as of June 30, 2022.
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Item 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this Quarterly Report, we carried out an evaluation, under the supervision and with the participation of our principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Based on this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective as of June 30, 2022.
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 June 30, 2022, that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II – OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
The information set forth under the caption “Litigation” in Note 15 – Other Commitments and Contingencies to our unaudited condensed consolidated financial statements contained in Part I, Item 1 of this Quarterly Report, is incorporated by reference herein.
Item 1A. RISK FACTORS
There have been no material changes to our risk factors as previously disclosed in our Annual Report for the year ended December 31, 2021, as filed with the SEC on February 22, 2022 which are incorporated by reference herein.
Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The following table provides information regarding the repurchase of our common stock for the three months ended June 30, 2022, in thousands, except share and per share data:
Period | Total Number of Shares Purchased | Average Price Paid per Common Share | Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs | ||||||
April 1, 2022 - April 30, 2022 | - | $ | - | - | $ | 154,406 | ||||
May 1, 2022 - May 31, 2022 (a) | 409,312 | $ | 195.45 | 409,312 | $ | 54,406 | ||||
June 1, 2022 - June 30, 2022 | - | $ | - | - | $ | 54,406 | ||||
Total | 409,312 | $ | 195.45 | 409,312 | ||||||
____________________
(a) The one-month period ended May 31, 2022 includes payment of $100.0 million in connection with our 2022 ASR Agreement, with approximately 80% of the shares delivered. The remainder of the shares to be repurchased are expected to be delivered in the third quarter of 2022. For more information see Note 12 – Share Repurchase Program to our unaudited condensed consolidated financial statements contained in Part I, Item 1 of this Quarterly Report, which note is incorporated in this Item 2 by reference.
All repurchases were made using cash resources. Excluded from this disclosure are shares repurchased to settle statutory employee tax withholding related to the vesting of stock awards.
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Item 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
Item 4. MINE SAFETY DISCLOSURES
Not applicable.
Item 5. OTHER INFORMATION
Not applicable.
Item 6. EXHIBITS
The Exhibits listed on the accompanying Index to Exhibits are filed or furnished (as noted on such Index) as part of this Quarterly Report and incorporated herein by reference.
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INDEX TO EXHIBITS
| Incorporated by Reference | Filed | ||||||||
Exhibit No. |
| Exhibit Title |
| Form |
| Exhibit |
| Filing Date |
| Herewith |
31.1 | X | |||||||||
31.2 | X | |||||||||
32.1‡ | ||||||||||
32.2‡ | ||||||||||
101.INS | Inline XBRL Instance Document - the Instance Document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document | X | ||||||||
101.SCH | Inline XBRL Taxonomy Extension Schema Document | X | ||||||||
101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document | X | ||||||||
101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document | X | ||||||||
101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document | X | ||||||||
101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document | X | ||||||||
104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) | X | ||||||||
‡Furnished herewith | ||||||||||
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| TOPBUILD CORP. | |
|
| |
|
| |
| By: | /s/ Robert Kuhns |
| Name: | Robert Kuhns |
| Title: | Vice President and Chief Financial Officer |
|
| (Principal Financial Officer) |
August 2, 2022
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