Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE
COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2021
☐
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: 001-36870
TopBuild Corp.
(Exact name of Registrant as Specified in its Charter)
Delaware
(State or Other Jurisdiction of Incorporation orOrganization)
47-3096382
(I.R.S. EmployerIdentification No.)
475 North Williamson Boulevard
Daytona Beach, Florida
(Address of Principal Executive Offices)
32114
(Zip Code)
(386) 304-2200
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common stock, par value $0.01 per share
BLD
New York Stock Exchange
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 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). ⌧ Yes ◻ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☒ Accelerated filer ☐ Non-accelerated filer ☐ Smaller reporting company ☐ 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
The registrant had outstanding 33,061,398 shares of Common Stock, par value $0.01 per share as of April 27, 2021.
TOPBUILD CORP.
TABLE OF CONTENTS
Page No.
Part I.
Financial Information
Item 1.
Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets
4
Condensed Consolidated Statements of Operations
5
Condensed Consolidated Statements of Cash Flows
6
Condensed Consolidated Statements of Changes in Equity
7
Notes to Condensed Consolidated Financial Statements
8
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
23
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
28
Item 4.
Controls and Procedures
Part II.
Other Information
Legal Proceedings
29
Item 1A.
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
Defaults upon Senior Securities
Mine Safety Disclosures
Item 5.
Item 6.
Exhibits
Index to Exhibits
30
Signature
31
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
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
2019 ASR Agreement
$50 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
ABS
American Building Systems, Inc.
Amended Credit Agreement
Senior secured credit agreement and related security and pledge agreement dated March 8, 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
Board
Board of Directors of TopBuild
BofA
Bank of America, N.A.
Cooper
Cooper Glass Company, LLC
Creative
Creative Conservation Co.
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
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
Garland
Garland Insulating, Ltd.
Hunter
J.P. Hunter Enterprises, Inc.
IBR
Incremental borrowing rate, as defined in ASC 842
Lenders
Bank of America, N.A., together with the other lenders party to the "Amended Credit Agreement"
LCR
L.C.R. Contractors, LLC
LIBOR
London interbank offered rate
Net Leverage Ratio
As defined in the “Amended Credit Agreement,” the ratio of outstanding indebtedness, less up to $100 million of unrestricted cash, to EBITDA
New Senior Notes
TopBuild's 3.625% senior unsecured notes due on March 15, 2029
NYSE
Old Senior Notes
TopBuild's 5.625% senior unsecured notes which were due on May 1, 2026 and redeemed in full on March 15, 2021
Original Credit Agreement
Senior secured credit agreement and related security and pledge agreement dated May 5, 2017, as amended and restated on March 20, 2020
Ozark
Ozark Foam Insealators, Inc.
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
Revolving Facility
Senior secured revolving credit facilities available under the Amended Credit Agreement, of $450 million with applicable sublimits for letters of credit and swingline loans.
ROU
Right of use (asset), as defined in ASC 842
RSA
Restricted stock award
Santa Rosa
Santa Rosa Insulation and Fireproofing, LLC
SEC
United States Securities and Exchange Commission
Secured Leverage Ratio
As defined in the “Amended Credit Agreement,” the ratio of outstanding indebtedness, including letters of credit, to EBITDA
TopBuild
TopBuild Corp. and its wholly-owned consolidated domestic subsidiaries. Also, the "Company," "we," "us," and "our"
Viking
Viking Insulation Co.
3
PART I – FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
(In thousands except share data)
As of
March 31,
December 31,
2021
2020
ASSETS
Current assets:
Cash and cash equivalents
$
319,619
330,007
Receivables, net of an allowance for credit losses of $7,171 at March 31, 2021, and $6,926 at December 31, 2020
462,848
427,340
Inventories, net
163,988
161,369
Prepaid expenses and other current assets
14,255
17,689
Total current assets
960,710
936,405
Right of use assets
94,094
83,490
Property and equipment, net
187,033
180,053
Goodwill
1,430,913
1,410,685
Other intangible assets, net
205,513
190,605
Deferred tax assets, net
2,767
2,728
Other assets
11,072
11,317
Total assets
2,892,102
2,815,283
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable
330,813
331,710
Current portion of long-term debt
23,406
23,326
Accrued liabilities
124,946
107,949
Short-term lease liabilities
35,119
33,492
Total current liabilities
514,284
496,477
Long-term debt
686,493
683,396
Deferred tax liabilities, net
168,424
168,568
Long-term portion of insurance reserves
50,197
50,657
Long-term lease liabilities
62,688
53,749
Other liabilities
13,653
13,642
Total liabilities
1,495,739
1,466,489
Commitments and contingencies
Equity:
Preferred stock, $0.01 par value: 10,000,000 shares authorized; 0 shares issued and outstanding
—
Common stock, $0.01 par value: 250,000,000 shares authorized; 39,121,670 shares issued and 33,061,398 outstanding at March 31, 2021, and 39,029,913 shares issued and 33,018,925 outstanding at December 31, 2020
390
389
Treasury stock, 6,060,272 shares at March 31, 2021, and 6,010,988 shares at December 31, 2020, at cost
(396,525)
(386,669)
Additional paid-in capital
855,996
858,414
Retained earnings
936,502
876,660
Total equity
1,396,363
1,348,794
Total liabilities and equity
See notes to our unaudited condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(In thousands except share and per common share data)
Three Months Ended March 31,
Net sales
742,798
653,228
Cost of sales
545,039
481,272
Gross profit
197,759
171,956
Selling, general, and administrative expense
101,872
101,967
Operating profit
95,887
69,989
Other income (expense), net:
Interest expense
(6,603)
(8,742)
Loss on extinguishment of debt
(13,862)
(233)
Other, net
77
472
Other expense, net
(20,388)
(8,503)
Income before income taxes
75,499
61,486
Income tax expense
(15,657)
(10,715)
Net income
59,842
50,771
Net income per common share:
Basic
1.82
1.53
Diluted
1.80
1.51
Weighted average shares outstanding:
32,826,515
33,168,453
33,202,563
33,599,847
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In thousands)
Cash Flows Provided by (Used in) Operating Activities:
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization
15,519
14,190
Share-based compensation
3,111
3,908
13,862
233
Loss on sale or abandonment of property and equipment
56
383
Amortization of debt issuance costs
422
328
Provision for bad debt expense
1,765
1,670
Loss from inventory obsolescence
653
529
Deferred income taxes, net
(183)
(39)
Change in certain assets and liabilities
Receivables, net
(20,831)
(5,048)
(2,088)
(3,964)
3,517
6,193
(2,244)
(4,173)
16,591
9,981
(570)
(2,032)
Net cash provided by operating activities
89,422
72,930
Cash Flows Provided by (Used in) Investing Activities:
Purchases of property and equipment
(12,284)
(15,892)
Acquisition of businesses
(61,092)
(20,526)
Proceeds from sale of property and equipment
194
Net cash used in investing activities
(73,320)
(36,224)
Cash Flows Provided by (Used in) Financing Activities:
Proceeds from issuance of long-term debt
411,250
300,000
Repayment of long-term debt
(415,856)
(307,668)
Payment of debt issuance costs
(6,500)
(2,280)
Taxes withheld and paid on employees' equity awards
(11,480)
(10,399)
Exercise of stock options
5,952
Repurchase of shares of common stock
(9,856)
(14,127)
Net cash used in financing activities
(26,490)
(34,474)
Cash and Cash Equivalents
(Decrease) increase for the period
(10,388)
2,232
Beginning of period
184,807
End of period
187,039
Supplemental disclosure of noncash activities:
Leased assets obtained in exchange for new operating lease liabilities
20,322
9,167
Accruals for property and equipment
524
496
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (Unaudited)
Common
Treasury
Additional
Stock
Paid-in
Retained
($0.01 par value)
at cost
Capital
Earnings
Equity
Balance at December 31, 2019
388
(330,018)
849,657
632,862
1,152,889
Cumulative-effect of accounting change
(3,225)
Issuance of 63,780 restricted share awards under long-term equity incentive plan
1
(1)
Repurchase of 73,455 shares pursuant to the settlement of the 2019 ASR Agreement
(7,500)
7,500
Repurchase of 188,100 shares pursuant to the 2019 Repurchase Program
97,144 shares withheld to pay taxes on employees' equity awards
Balance at March 31, 2020
(351,645)
850,665
680,408
1,179,817
Balance at December 31, 2020
Issuance of 30,284 restricted share awards under long-term equity incentive plan
Repurchase of 49,284 shares pursuant to the 2019 Repurchase Program
43,290 shares withheld to pay taxes on employees' equity awards
51,915 shares issued upon exercise of stock options
Balance at March 31, 2021
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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 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 chief operating decision maker.
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 March 31, 2021, and our results of operations and cash flows for the three months ended March 31, 2021 and 2020. The condensed consolidated balance sheet at December 31, 2020, 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, 2020, as filed with the SEC on February 23, 2021.
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.
Recently Adopted Accounting Pronouncements
Income Taxes
In December 2019, the FASB issued ASU 2019-12, “Income Taxes (Topic 740), Simplifying the Accounting for Income Taxes.” This standard simplifies the accounting for income taxes by removing certain exceptions to the general principles included in current guidance, as well as improving consistent application of and simplifying GAAP for other areas by clarifying and amending existing guidance. We adopted this standard on January 1, 2021, using the modified retrospective method related to franchise taxes. There was no cumulative-effect adjustment recorded as of the beginning of 2021.
Credit Losses
In June 2016, the FASB issued ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments,” which replaces the current incurred loss methodology with an expected loss methodology, referred to as the current expected credit loss (CECL) methodology. We adopted Topic 326 on January 1, 2020, using the modified retrospective method, which resulted in a $3.2 million cumulative-effect adjustment recorded through retained earnings at the beginning of 2020.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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:
Description
Period Adopted
Method
ASU 2021-01
Reference Rate Reform
01/01/21
Prospective
ASU 2017-04
Simplifying the Test for Goodwill Impairment
01/01/20
ASU 2018-13
Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement
3. REVENUE RECOGNITION
Revenue is disaggregated between our Installation and 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 March 31, 2021
Installation
Distribution
Elims
Total
Residential
418,077
192,045
(33,338)
576,784
Commercial
114,676
59,556
(8,218)
166,014
532,753
251,601
(41,556)
Three Months Ended March 31, 2020
373,281
162,456
(29,006)
506,731
102,592
51,767
(7,862)
146,497
475,873
214,223
(36,868)
The following tables present our revenues disaggregated by product (in thousands):
Insulation and accessories
417,597
211,494
(34,527)
594,564
Glass and windows
43,047
Gutters
19,358
25,839
(5,305)
39,892
All other
52,751
14,268
(1,724)
65,295
369,996
180,249
(30,059)
520,186
41,319
18,930
19,991
(5,387)
33,534
45,628
13,983
(1,422)
58,189
9
The following table represents our contract assets and contract liabilities with customers, in thousands:
Included in Line Item on
Condensed
Balance Sheets
Contract Assets:
Receivables, unbilled
64,519
48,839
Contract Liabilities:
Deferred revenue
8,091
6,542
The increase in contract assets as of March 31, 2021 is primarily driven by an increase in organic sales as well as sales from our acquisitions during the quarter.
The aggregate amount remaining on uncompleted performance obligations was $283.3 million as of March 31, 2021. We expect to satisfy the performance obligations and recognize revenue on substantially all of these uncompleted contracts over the next 18 months.
4. GOODWILL AND OTHER INTANGIBLES
We have two reporting units which are also our operating and reporting segments: Installation and Distribution. Both reporting units contain goodwill. Assets acquired and liabilities assumed are assigned to the applicable reporting unit based on whether the acquired assets and liabilities relate to the operations of and determination of the fair value of such unit. Goodwill assigned to the reporting unit is the excess of the fair value of the acquired business over the fair value of the individual assets acquired and liabilities assumed for the reporting unit.
In the fourth quarter of 2020, we performed an annual assessment on our goodwill resulting in no impairment.
Changes in the carrying amount of goodwill for the three months ended March 31, 2021 by segment, were as follows, in thousands:
Accumulated
Gross Goodwill
Impairment
Net Goodwill
December 31, 2020
Additions
March 31, 2021
Losses
Goodwill, by segment:
1,726,356
20,228
1,746,584
(762,021)
984,563
446,350
Total goodwill
2,172,706
2,192,934
See Note 13 – Business Combinations for goodwill recognized on acquisitions that occurred during the quarter.
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:
Gross definite-lived intangible assets
273,801
252,751
Accumulated amortization
(68,288)
(62,146)
Net definite-lived intangible assets
10
The following table sets forth our amortization expense, in thousands:
Amortization expense
6,143
5,272
5. LONG-TERM DEBT
The following table reconciles the principal balances of our outstanding debt to our condensed consolidated balance sheets, in thousands:
Senior Notes - 3.625% as of March 31, 2021
400,000
Term loan
288,750
Equipment notes
23,399
25,451
Unamortized debt issuance costs
(13,500)
(7,479)
Total debt, net of unamortized debt issuance costs
709,899
706,722
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 March 31, 2021, in thousands:
Payments Due by Period
2022
2023
2024
2025
Thereafter
Senior Notes
11,250
15,000
20,625
22,500
28,125
202,500
6,281
8,651
6,337
2,130
17,531
23,651
26,962
24,630
602,500
723,399
Amendment to Original Credit Agreement and Senior Secured Term Loan Facility
On March 8, 2021, the Company entered into an Amendment to our Original Credit Agreement (as so amended, the Amended Credit Agreement). The Amended Credit Agreement provides for a term loan facility in an aggregate principal amount of $300.0 million, all of which was drawn on March 8, 2021 and a Revolving Facility with an aggregate borrowing capacity of $450.0 million, including a $100.0 million letter of credit sublimit and up to a $35.0 million swingline sublimit. The maturity date for the loans under the Amended Credit Agreement was extended from March 2025 to March 2026, the floor for base rate loans has been reduced from 1.5% to 1.0%, and the floor for Eurodollar rate loans has been reduced from 0.5% to 0.0%. Additional provisions have also been made for the eventual replacement of LIBOR with another alternate benchmark rate.
The following table outlines the key terms of our Amended Credit Agreement (dollars in thousands):
Senior secured term loan facility
Additional term loan and/or revolver capacity available under incremental facility (a)
450,000
Sublimit for issuance of letters of credit under Revolving Facility (b)
100,000
Sublimit for swingline loans under Revolving Facility (b)
35,000
Interest rate as of March 31, 2021
1.11
%
Scheduled maturity date
3/20/2026
11
Interest payable on borrowings under the Amended Credit Agreement is based on an applicable margin rate plus, at our option, either:
The Amended Credit Agreement contemplates future amendment by the Company and the agent to provide for the replacement of LIBOR with another alternate 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 0.00 percent to 1.00 percent and in the case of LIBOR rate borrowings, the applicable margin ranges from 1.00 percent to 2.50 percent. 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.
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. The following table summarizes our availability under the Revolving Facility, in thousands:
Less: standby letters of credit
(60,382)
Availability under Revolving Facility
389,618
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.
On March 15, 2021, the Company completed a private offering of $400.0 million aggregate principal amount of 3.625% New Senior Notes due 2029. The Company used the proceeds from the issuance of the New Senior Notes, together with cash on hand, to redeem 100% of its $400.0 million aggregate principal amount of 5.625% Old Senior Notes due 2026. The New Senior Notes are our senior unsecured obligations and bear interest at 3.625% per year, payable semiannually in arrears on March 15 and September 15 of each year, which begins on September 15, 2021. The New Senior Notes mature on March 15, 2029, unless redeemed early or repurchased. If we undergo a change in control, we must make an offer to repurchase all of the Senior Notes then outstanding at a repurchase price equal to 101% of their aggregate principal amount, plus accrued and unpaid interest (if any) to, but not including, the repurchase date.
12
The Company may redeem the Notes, in whole or in part, at any time on or after March 15, 2024 at the redemption prices specified in the Notes. The Company may also redeem all or part of the Notes at any time prior to March 15, 2024 at a redemption price equal to 100% of the principal amount of the Notes to be redeemed, plus the Applicable Premium (as defined in the Indenture), as of, and accrued and unpaid interest to, the redemption date. Additionally, the Company may redeem up to 40% of the aggregate principal amount of the Notes prior to March 15, 2024 with the net cash proceeds of certain sales of its capital stock at 103.625% of the principal amount of the Notes, plus accrued and unpaid interest, if any, to the date of redemption only if, after the redemption, at least 60% of the aggregate principal amount of the Notes originally issued remains outstanding.
Equipment Notes
As of December 31, 2020, the company has issued $41.6 million of equipment notes for the purpose of financing the purchase of vehicles and equipment. No equipment notes were issued during the three months ended March 31, 2021. The Company’s equipment notes each have a five year term maturing from 2023 to 2024 and bear interest at fixed rates between 2.8% and 4.4%.
Covenant Compliance
The indenture governing our New Senior Notes contains restrictive covenants that, among other things, generally limit the ability of the Company and certain of its subsidiaries (subject to certain exceptions) to (i) create liens, (ii) pay dividends, acquire shares of capital stock and make payments on subordinated debt, (iii) place limitations on distributions from certain subsidiaries, (iv) issue or sell the capital stock of certain subsidiaries, (v) sell assets, (vi) enter into transactions with affiliates and (vii) effect mergers. The indenture provides for customary events of default which include (subject in certain cases to customary grace and cure periods), among others: nonpayment of principal or interest; breach of covenants or other agreements in the indenture; defaults in failure to pay certain other indebtedness; and certain events of bankruptcy or insolvency. Generally, if an event of default occurs and is continuing under the indenture, the trustee or the holders of at least 30% in aggregate principal amount of the New Senior Notes then outstanding may declare the principal of, premium, if any, and accrued interest on all the New Senior Notes immediately due and payable. The New Senior Notes and related guarantees have not been registered under the Securities Act of 1933, and we are not required to register either the New Senior Notes or the guarantees in the future.
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 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 March 31, 2021
Maximum Net Leverage Ratio
3.50:1.00
Minimum Interest Coverage Ratio
3.00:1.00
Compliance as of period end
In Compliance
13
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.
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 Amended 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 New Senior Notes close to March 31, 2021 (Level 1 fair value measurement), we estimate that the fair value of the New Senior Notes is approximately $415.6 million compared to a gross carrying value of $400.0 million at March 31, 2021.
7. SEGMENT INFORMATION
The following tables set forth our net sales and operating results by segment, in thousands:
Net Sales
Operating Profit (b)
Our operations by segment were (a):
73,636
60,351
35,385
24,669
Intercompany eliminations
(6,528)
(5,833)
102,493
79,187
General corporate expense, net (c)
(6,606)
(9,198)
Operating profit, as reported
8. LEASES
We have operating leases for our installation branch locations, distribution centers, our Branch Support Center in Daytona Beach, Florida, 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 consolidated statements of operations. As of March 31, 2021, we did not have any finance leases.
14
The components of lease expense were as follows and are primarily included in cost of sales on the accompanying unaudited condensed consolidated statements of operations, in thousands:
Operating lease cost (a)
11,810
12,271
Short-term lease cost
3,354
3,064
Sublease income
(206)
(62)
Net lease cost
14,958
15,273
Future minimum lease payments under non-cancellable operating leases as of March 31, 2021 were as follows, in thousands:
Payments due by Period
29,428
30,287
19,595
12,704
8,229
2026 & Thereafter
5,218
Total future minimum lease payments
105,461
Less: imputed interest
(7,654)
Lease liability at March 31, 2021
97,807
As of March 31, 2021, the weighted average remaining lease term was 3.6 years and the related lease liability was calculated using a weighted average discount rate of 3.6%.
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:
Cash paid for amounts included in the measurement of lease liabilities
(10,150)
(10,801)
9. INCOME TAXES
Our effective tax rates were 20.7 percent and 17.4 percent for the three months ended March 31, 2021 and 2020, respectively. The higher 2021 tax rate was due to permanent items including share-based compensation, partially offset by state tax adjustments.
A tax benefit of $3.1 million and $5.5 million related to share-based compensation was recognized in our condensed consolidated statements of operations as a discrete item in income tax expense for the three months ended March 31, 2021 and 2020, respectively.
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10. 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.
Basic and diluted net income per share were computed as follows:
Net income (in thousands) - basic and diluted
Weighted average number of common shares outstanding - basic
Dilutive effect of common stock equivalents:
RSAs with service-based conditions
35,619
71,221
RSAs with market-based conditions
147,098
131,024
RSAs with performance-based conditions
49,020
49,778
Stock options
144,311
179,371
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:
Anti-dilutive common stock equivalents:
2,831
5,271
5,512
8,341
11,766
32,067
Total anti-dilutive common stock equivalents
20,109
45,679
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 4.0 million shares of common stock may be issued under the 2015 LTIP. As of March 31, 2021, we had 2.0 million shares remaining available for issuance under the 2015 LTIP.
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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:
Share-based compensation expense
Income tax benefit realized
3,093
5,500
The following table presents a summary of our share-based compensation activity for the three months ended March 31, 2021, in thousands, except per share amounts:
RSAs
Stock Options
Number of Shares
Weighted Average Grant Date Fair Value Per Share
Weighted Average Exercise Price Per Share
AggregateIntrinsicValue
Balance December 31, 2020
324.8
87.79
239.7
24.33
68.86
27,612.1
Granted
56.8
248.17
24.1
89.59
214.58
Converted/Exercised
(134.1)
81.03
(51.9)
21.97
61.30
7,039.9
Forfeited/Expired
Balance March 31, 2021
247.5
109.33
211.9
32.33
87.28
25,997.0
Exercisable March 31, 2021 (a)
115.7
20.97
57.86
17,535.3
Unrecognized share-based compensation expense related to unvested awards is shown in the following table, dollars in thousands:
Unrecognized Compensation Expense on Unvested Awards
Weighted AverageRemainingVesting Period
14,062
1.4
2,801
1.3
Total unrecognized compensation expense related to unvested awards
16,863
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 18, 2019
2,281
570
4,562
February 17, 2020
2,694
674
5,388
February 16, 2021
2,596
649
5,192
During the first quarter of 2021, RSAs with performance-based conditions that were granted on February 19, 2018 vested based on cumulative three-year achievement of 200%. Total compensation expense recognized over the three-year performance period, net of forfeitures, was $3.7 million.
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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 2021 and 2020:
Measurement period (years)
2.87
2.88
Risk free interest rate
0.22
1.40
Dividend yield
0.00
Estimated fair value of market-based RSAs at grant date
298.66
158.24
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 and 2020:
0.76
Expected volatility, using historical return volatility and implied volatility
43.29
31.50
Expected life (in years)
6.0
Estimated fair value of stock options at grant date
39.49
12. SHARE REPURCHASE PROGRAM
On February 22, 2019, our Board authorized the 2019 Repurchase Program, pursuant to which the Company may purchase up to $200.0 million of our common stock. Share repurchases may be executed through various means including open market purchases, privately negotiated transactions, accelerated share repurchase transactions, or other available means. The 2019 Share Repurchase Program does not obligate the Company to purchase any shares and has no expiration date. Authorization for the 2019 Share Repurchase Program may be terminated, increased, or decreased by the Board at its discretion at any time. As of March 31, 2021, the Company has approximately $30.1 million remaining under the 2019 Repurchase Program.
Effective November 4, 2019, under the 2019 Repurchase program, we entered into the 2019 ASR Agreement. We paid BofA $50.0 million in exchange for an initial delivery of 392,501 shares of our common stock on November 5, 2019, representing an estimated 85% of the total number of shares we expected to receive under the 2019 ASR Agreement, at the time we entered into the agreement. During the quarter ended March 31, 2020, we received an additional 73,455 shares of our common stock from BofA representing the final settlement of the 2019 ASR agreement. We purchased a total of 465,956 shares of our common stock under the 2019 ASR Agreement at an average price per share of $107.31.
The following table sets forth our share repurchases under the 2019 Repurchase Program during the periods presented:
Number of shares repurchased
49,284
261,555 (a)
Share repurchase cost (in thousands)
9,856
14,127
(a) The three months ended March 31, 2020 includes 73,455 shares we received as final settlement of our 2019 ASR Agreement.
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13. BUSINESS COMBINATIONS
We continue to acquire businesses as 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 three months ended March 31, 2021 and 2020, were $0.7 million and $0.2 million, respectively. Acquisition costs are included in selling, general, and administrative expense in our condensed consolidated statements of operations.
The tables below provide a summary of businesses acquired in 2021 including, for significant acquisitions, the net sales and operating (loss) income incurred during the three months ended March 31, 2021:
Three Months Ended
2021 Acquisitions
Date
Cash Paid
Contingent Consideration
Total Purchase Price
Goodwill Acquired
Operating (Loss) Income
1/20/2021
53,833
17,863
8,306
(705)
3/3/2021
7,404
3,447
567
34
61,237
21,310
8,873
(671)
Purchase Price Allocations
The estimated fair values of the assets acquired and liabilities assumed for the 2021 acquisitions approximated the following as of March 31, 2021, in thousands:
Estimated fair values:
Accounts receivable
16,041
376
16,417
Inventories
806
378
1,184
Prepaid and other assets
83
Property and equipment
3,792
309
4,101
Intangible assets
17,750
2,900
20,650
(1,464)
(4)
(1,468)
(1,038)
(2)
(1,040)
Net assets acquired
Estimates of acquired intangible assets related to the 2021 acquisitions are as follows, as of March 31, 2021, dollars in thousands:
Estimated Fair Value
Weighted Average Estimated Useful Life (Years)
Customer relationships
19,220
Trademarks and trade names
1,430
Total intangible assets acquired
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The table below provides a summary as of March 31, 2021 for businesses acquired during the three months ended March 31, 2020:
2020 Acquisitions
2/20/2020
10,500
1,000
11,500
5,700
2/24/2020
9,100
5,300
19,600
20,600
11,000
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. Primarily all of the $21.3 million and $11.0 million of goodwill recorded from acquisitions for the three months ended March 31, 2021 and 2020, respectively, is expected to be deductible for income tax purposes.
The acquisition of Viking included a contingent consideration arrangement that requires additional consideration to be paid by TopBuild based on the achievement of annual gross revenue targets over a three-year period. The range of undiscounted amounts TopBuild may be required to pay under the contingent consideration agreement is between zero and $1.5 million. The fair value of the contingent consideration recognized on the acquisition date of $1.2 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 10.0%. Changes in the fair value measurement each period reflect the passage of time as well as the impact of adjustments, if any, to the likelihood of achieving the specified targets. We made a contingent payment of $0.5 million in the year ended December 31, 2020.
The acquisition of Cooper includes a contingent consideration arrangement that requires additional consideration to be paid by TopBuild based on the achievement of annual gross revenue targets over a two-year period. The range of undiscounted amounts TopBuild may be required to pay under the contingent consideration agreement is between zero and $1.0 million, which also represents the fair value recognized on the acquisition date. Changes in the fair value measurement each period reflect the passage of time as well as the impact of adjustments, if any, to the likelihood of achieving the specified targets.
The following table presents the fair value of contingent consideration, in thousands:
Date of Acquisition
July 15, 2019
February 20, 2020
Fair value of contingent consideration recognized at acquisition date
1,243
Contingent consideration at December 31, 2020
910
Change in fair value of contingent consideration during the three months ended March 31, 2021
22
(350)
Payment of contingent consideration during the three months ended March 31, 2021
Liability balance for contingent consideration at March 31, 2021
932
650
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14. ACCRUED LIABILITIES
The following table sets forth the components of accrued liabilities, in thousands:
Accrued liabilities:
Salaries, wages, and commissions
39,131
34,584
Insurance liabilities
22,414
22,007
Income & franchise taxes payable
13,124
129
Employee tax-related liabilities
12,666
12,603
Sales & property taxes
7,451
6,939
Customer rebates
4,720
6,191
Interest payable on long-term debt
155
3,924
Other
17,194
15,030
Total accrued liabilities
The increase in income and franchise taxes payable as of March 31, 2021 is primarily driven by the timing of tax payments, which typically occurs later in the year.
See Note 3 – Revenue Recognition for discussion of our deferred revenue balances and related revenue recognition policy.
15. OTHER COMMITMENTS AND CONTINGENCIES
Litigation. We are subject to certain claims, charges, litigation, and other proceedings in the ordinary course of our business, including those arising from or related to contractual matters, intellectual property, personal injury, environmental matters, product liability, product recalls, construction defects, insurance coverage, personnel and employment disputes, antitrust, and other matters, including class actions. We believe we have adequate defenses in these matters, and we do not believe that the ultimate outcome of these matters will have a material adverse effect on us. However, there is no assurance that we will prevail in any of these pending matters, and we could in the future incur judgments, enter into settlements of claims, or revise our expectations regarding the outcome of these matters, which could materially impact our liquidity and our results of operations.
Other Matters. We enter into contracts, which include customary indemnities that are standard for the industries in which we operate. Such indemnities include, among other things, customer claims against builders for issues relating to our products and workmanship. In conjunction with divestitures and other transactions, we occasionally provide customary indemnities relating to various items including, among others, the enforceability of trademarks, legal and environmental issues, and asset valuations. We evaluate the probability that we may incur liabilities under these customary indemnities and appropriately record an estimated liability when deemed probable.
We 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.
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The following table summarizes our outstanding performance, licensing, insurance and other bonds, in thousands:
Outstanding bonds:
Performance bonds
108,964
102,534
Licensing, insurance, and other bonds
27,716
27,633
Total bonds
136,680
130,167
16. SUBSEQUENT EVENTS
On April 5, 2021, we acquired ABS, a residential insulation and distribution business that primarily services the eastern United States. The acquisition was accounted for as a business combination under ASC 805, “Business Combinations.” The purchase price of approximately $126.2 million was funded by cash on hand. During the measurement period, we expect to receive additional detailed information to complete the purchase price allocation.
On April 7, 2021, we acquired Creative, a residential and light commercial insulation company serving customers in Richmond, Charlottesville, Roanoke and Northern Virginia. The acquisition was accounted for as a business combination under ASC 805, “Business Combinations.” The purchase price of approximately $6.8 million was funded by cash on hand. During the measurement period, we expect to receive additional detailed information to complete the purchase price allocation.
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 (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, 2021, had approximately 200 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, afterpaint 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 Distribution segment sells and distributes insulation and other building products, including gutters, fireplaces, closet shelving, and roofing materials through our Service Partners business, which, as of March 31, 2021, had approximately 75 branches located across the United 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 the availability of supply to our local branches and distribution centers at competitive prices with the overall effect of driving efficiencies through our supply chain. Second, being a leader in both installation and distribution allows us to effectively reach a broader range 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 7 – Segment Information to our unaudited condensed consolidated financial statements contained in Part I, Item 1 of this Quarterly Report, which is incorporated herein by reference. 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, 2020, as filed with the SEC on February 23, 2021, which discussion is hereby incorporated herein by reference.
COVID-19 BUSINESS UPDATE
We continue to monitor the COVID-19 pandemic and its impact on macroeconomic and local economic conditions. While we are currently able to operate in all of our locations, there is no guarantee that the services we provide will continue to be allowed or that other events making the provision of our services challenging or impossible, will not occur. For example, if there are surges in levels of COVID-19 infections in certain states, those states may respond by, among other things, deeming residential and commercial construction as nonessential in connection with a restriction of commercial activity.
We continue to implement procedures and processes as required or recommended by governmental and medical authorities to ensure the safety of our employees, including increasing our cleaning and sanitizing practices at all locations and for all company vehicles, mandating social distancing on job sites and within our branch operations and limiting all but essential travel. However, we are not able to predict whether our customers will continue to operate at their current or typical volumes, and such decreases in their operations would have a negative impact on our business. We are also unable to predict how long the COVID-19 pandemic will last and the impact of the pandemic on demand for our products and
services. For additional discussion of the potential impact of the COVID-19 pandemic on our business, see the sections entitled “Outlook” and “Risk Factors” included in this Quarterly Report.
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.
FIRST QUARTER 2021 VERSUS FIRST QUARTER 2020
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:
Cost of sales ratio
73.4
73.7
Gross profit margin
26.6
26.3
Selling, general, and administrative expense to sales ratio
13.7
15.6
Operating profit margin
12.9
10.7
Net margin
8.1
7.8
Sales and Operations
Net sales increased 13.7 percent for the three months ended March 31, 2021, from the comparable period of 2020. The increase was primarily driven by a 7.7 percent increase in sales volume, a 4.2 percent impact from our acquisitions and a 1.8 percent increase due to higher selling prices.
Gross profit margins were 26.6 percent and 26.3 percent for the three months ended March 31, 2021 and 2020, respectively. Gross profit margin improved primarily due to higher selling prices, savings from cost reduction initiatives, lower insurance costs, and operational efficiencies, partially offset by material inflation.
Selling, general, and administrative expense, as a percent of sales, was 13.7 and 15.6 percent for the three months ended March 31, 2021 and 2020, respectively. The decrease in selling, general, and administrative expense as a percent of sales was primarily the result of higher sales, lower travel and entertainment costs, lower legal fees, lower stock-based compensation expense, and overall cost reduction initiatives.
Operating margins were 12.9 percent and 10.7 percent for the three months ended March 31, 2021 and 2020, respectively. The increase in operating margins was due to higher sales volume, higher selling prices, savings from cost reduction initiatives, lower insurance costs, lower stock-based compensation expense, reduced travel and entertainment activity, lower legal fees, and operational efficiencies, partially offset by material inflation.
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Business Segment Results
The following table sets forth our net sales and operating profit margins by business segment, in thousands:
Percent Change
Net sales by business segment:
12.0
17.4
Operating profit by business segment:
22.0
43.4
Operating profit before general corporate expense
29.4
General corporate expense, net
37.0
Operating profit margins:
13.8
12.7
14.1
11.5
Operating profit margin before general corporate expense
12.1
Sales
Sales in our Installation segment increased $56.9 million, or 12.0 percent, for the three months ended March 31, 2021, as compared to the same period in 2020. The increase was due to a 5.8 percent impact from our acquisitions, a 5.1 percent increase in sales volume and a 1.1 percent increase from higher selling prices.
Operating margins
Operating margins in our Installation segment were 13.8 percent and 12.7 percent for the three months ended March 31, 2021 and 2020, respectively. The increase in operating margins was driven by higher sales volume, higher selling prices, savings from cost reduction initiatives, lower insurance costs, reduced travel and entertainment activity, and operational efficiencies, partially offset by material inflation.
Sales in our Distribution segment increased $37.4 million, or 17.4 percent, for the three months ended March 31, 2021, as compared to the same period in 2020. This increase was due to a 13.8 percent increase in sales volume and a 3.7 percent increase due to higher selling prices.
Operating margins in our Distribution segment were 14.1 percent and 11.5 percent for the three months ended March 31, 2021 and 2020, respectively. The increase in operating margins was driven by higher sales volume, higher selling prices, savings from cost reduction initiatives, reduced travel and entertainment activity, and operational efficiencies, partially offset by material inflation.
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OTHER ITEMS
Other expense, net, which primarily consisted of interest expense, was $20.4 million and $8.5 million for the three months ended March 31, 2021 and 2020, respectively. The increase was driven by costs incurred to redeem our Old Senior Notes during the quarter.
Income tax expense was $15.7 million, an effective tax rate of 20.7 percent, for the three months ended March 31, 2021, compared to $10.7 million, an effective tax rate of 17.4 percent, for the comparable period in 2020. The tax rate for the three months ended March 31, 2021, was higher due to permanent items including share-based compensation, partially offset by state tax adjustments.
Cash Flows and Liquidity
Significant sources (uses) of cash and cash equivalents are summarized for the periods indicated, in thousands:
Changes in cash and cash equivalents:
Net cash flows provided by operating activities increased $16.5 million for the three months ended March 31, 2021, as compared to the prior year period. The change was primarily due to an increase in net income, timing of accounts receivable collections and accrued liability payments.
Net cash used in investing activities was $73.3 million for the three months ended March 31, 2021, primarily composed of $61.1 million for acquisitions and $12.2 million for purchases of property and equipment, primarily vehicles. Net cash used in investing activities was $36.2 million for the three months ended March 31, 2020, primarily composed of $15.9 million for purchases of property and equipment, primarily vehicles, and $20.5 million for the acquisition of Cooper and Hunter.
Net cash used in financing activities was $26.5 million for the three months ended March 31, 2021. During the three months ended March 31, 2021, we used $9.9 million for the repurchase of common stock pursuant to the 2019 Repurchase Program, $6.5 million in debt issuance costs as a result of entering into our Amended Credit Agreement and New Senior Notes, $5.5 million net activity related to exercise of share-based incentive awards and stock options, and $4.6 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. Net cash used in financing activities was $34.5 million for the three months ended March 31, 2020. During the three months ended March 31, 2020, we used $14.1 million for the repurchase of common stock pursuant to the 2019 Repurchase Program, $10.3 million on purchases of common stock for tax withholding obligations related to the vesting and exercise of share-based incentive awards, $7.7 million for payments on our term loan under our Original Credit Agreement and on our equipment notes, and $2.3 million in debt issuance costs as a result of entering into a new term loan revolving credit facility.
We are closely managing our balance sheet, including maximizing our cash flow, to maintain our strong foundation and provide stability as we continue to navigate operations through the ongoing COVID-19 pandemic. We had solid liquidity available to us at March 31, 2021, with $319.6 million of cash and $389.6 million available borrowing capacity under our Revolving Facility. We believe that our cash flows from operations, combined with our current cash levels and available borrowing capacity, will be adequate to support our ongoing operations and working capital needs.
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The following table summarizes our liquidity, in thousands:
Cash and cash equivalents (a)
Total liquidity
709,237
719,625
(a) Our cash and cash equivalents consist of AAA-rated money market funds as well as cash held in our demand deposit accounts.
We occasionally use performance bonds to ensure completion of our work on certain larger customer contracts that can span multiple accounting periods. Performance bonds generally do not have stated expiration dates; rather, we are released from the bonds as the contractual performance is completed. We also have bonds outstanding for license and insurance. Information regarding our outstanding bonds as of March 31, 2021 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
The demand for housing is outpacing supply, however labor and material shortages are limiting the speed at which new homes can be built to meet this increased demand. All trades in our industry continue to experience constrained capacity, specifically in fiberglass and spray foam, resulting in manufacturers increasing costs on products. We expect both TruTeam and Service Partners to drive higher selling prices throughout the year in response to these cost increases. The increased demand for housing, combined with low interest rates and home affordability balance, should result in a continued strong outlook for the residential construction industry.
Similarly, the commercial business is poised to see continued improvement throughout 2021 as delayed projects get back on track, however management will continue to evaluate every aspect of our business, including monitoring ongoing developments related to the COVID-19 pandemic, which may trigger restrictions on operating activities, an economic downturn, or other adverse impact to our business.
OFF-BALANCE SHEET ARRANGEMENTS
We had no material off-balance sheet arrangements during the quarter ended March 31, 2021, 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, 2020, as filed with the SEC on February 23, 2021, except for the amendment to our Original Credit Agreement on March 8, 2021 and completion of a private offering of our New Senior Notes on March 15, 2021 for which the proceeds were used to redeem 100% of our Old Senior Notes. See further information as disclosed in Note 5 – Long Term Debt in our unaudited condensed consolidated financial statements contained in Part 1, Item 1 of this Quarterly Report.
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
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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, 2020, as filed with the SEC on February 23, 2021.
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,” “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 the duration and impact of the COVID-19 pandemic on the United States economy, specifically with respect to residential and commercial construction, our ability to continue operations in markets affected by the COVID-19 pandemic and 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, 2020, as filed with the SEC on February 23, 2021, 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 March 8, 2021, the Company entered into the Amended Credit Agreement, which renewed, amended and restated the Original Credit Agreement. The Amended Credit Agreement consists of a senior secured term loan facility in the amount of $300.0 million and a Revolving Facility in the amount of $450.0 million. We also have outstanding New Senior Notes with an aggregate principal balance of $400.0 million. The New Senior Notes bear a fixed rate of interest and therefore are excluded from the calculation below as they are not subject to fluctuations in interest rates.
Interest payable on both the term loan facility and Revolving Facility under the Amended Credit Agreement is based on a variable interest rate. As a result, we are exposed to market risks related to fluctuations in interest rates on this outstanding indebtedness. As of March 31, 2021, we had $300.0 million outstanding under our term loan facility, and the applicable interest rate as of such date was 1.11%. Based on our outstanding borrowings under the Amended Credit Agreement as of March 31, 2021, a 100 basis point increase in the interest rate would result in a $2.9 million increase in our annualized interest expense. There was no outstanding balance under the Revolving Facility as of March 31, 2021.
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 March 31, 2021.
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, 2021, 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, 2020, as filed with the SEC on February 23, 2021 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 March 31, 2021, 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
January 1, 2021 - January 31, 2021
39,962
February 1, 2021 - February 28, 2021
March 1, 2021 - March 31, 2021
199.98
30,106
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.
Item 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
Item 4. MINE SAFETY DISCLOSURES
Item 5. OTHER INFORMATION
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.
INDEX TO EXHIBITS
Incorporated by Reference
Filed
Exhibit No.
Exhibit Title
Form
Exhibit
Filing Date
Herewith
1.01
Purchase Agreement, dated February 24, 2021
8-K
3/1/2021
10.01
Amendment No. 1 to Amended and Restated Credit Agreement, dated as of March 8, 2021
3/11/2021
4.01
Indenture, dated March 15, 2021, by and among TopBuild Corp., the Guarantors party thereto and U.S. Bank National Association, as Trustee
3/16/2021
31.1
Principal Executive Officer Certification required by Rules 13a-14 and 15d-14 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
X
31.2
Principal Financial Officer Certification required by Rules 13a-14 and 15d-14 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1‡
Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of Sarbanes-Oxley Act of 2002
32.2‡
Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of Sarbanes-Oxley Act of 2002
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
101.SCH
Inline XBRL Taxonomy Extension Schema Document
101.CAL
Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF
Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB
Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE
Inline XBRL Taxonomy Extension Presentation Linkbase Document
104
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)
‡Furnished herewith
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.
By:
/s/ John S. Peterson
Name:
John S. Peterson
Title:
Vice President and Chief Financial Officer
(Principal Financial Officer)
May 6, 2021