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
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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.⌧
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TOPBUILD CORP.
TABLE OF CONTENTS
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Management's Discussion and Analysis of Financial Condition and Results of Operations | 24 | |||
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2
GLOSSARY
We use acronyms, abbreviations, and other defined terms throughout this quarterly report on Form 10-Q, which are defined in the glossary below:
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 | |
2021 Repurchase Program | $200 million share repurchase program authorized by the Board on July 26, 2021 | |
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 | New York Stock Exchange | |
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," | |
Viking | Viking Insulation Co. |
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, | ||||
2021 | 2020 | |||||
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 lease liabilities | | | ||||
Total current liabilities | | | ||||
Long-term debt | | | ||||
Deferred tax liabilities, net | | | ||||
Long-term portion of insurance reserves | | | ||||
Long-term lease liabilities | | | ||||
Other liabilities | | | ||||
Total liabilities | | | ||||
Commitments and contingencies | ||||||
Equity: | ||||||
Preferred stock, $ | ||||||
Common stock, $ | | | ||||
Treasury stock, | ( | ( | ||||
Additional paid-in capital | | | ||||
Retained earnings | | | ||||
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, | |||||||||||
2021 | 2020 | 2021 | 2020 | |||||||||
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 CASH FLOWS (Unaudited)
(In thousands)
Six Months Ended June 30, | ||||||
2021 | 2020 | |||||
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 or abandonment of property and equipment | | | ||||
Amortization of debt issuance costs | | | ||||
Provision for bad debt expense | | | ||||
Loss from inventory obsolescence | | | ||||
Deferred income taxes, net | ( | ( | ||||
Change in certain assets and liabilities | ||||||
Receivables, net | ( | | ||||
Inventories, net | ( | | ||||
Prepaid expenses and other current assets | ( | | ||||
Accounts payable | | ( | ||||
Accrued liabilities | | | ||||
Payment of contingent consideration | — | ( | ||||
Other, net | — | | ||||
Net cash provided by operating activities | | | ||||
Cash Flows Provided by (Used in) Investing Activities: | ||||||
Purchases of property and equipment | ( | ( | ||||
Acquisition of businesses | ( | ( | ||||
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 | ( | ( | ||||
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 | ( | ( | ||||
Cash and Cash Equivalents | ||||||
(Decrease) increase for the period | ( | | ||||
Beginning of period |
| |
| | ||
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.
6
TOPBUILD CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (Unaudited)
(In thousands except share data)
Common | Treasury | Additional | ||||||||||||
Stock | Stock | Paid-in | Retained | |||||||||||
($ | at cost | Capital | Earnings | Equity | ||||||||||
Balance at December 31, 2019 | $ | | $ | ( | $ | | $ | | $ | | ||||
Cumulative-effect of accounting change | — | — | — | ( | ( | |||||||||
Net income | — | — | — | | | |||||||||
Share-based compensation | — | — | | — | | |||||||||
Issuance of | | — | ( | — | — | |||||||||
Repurchase of | — | ( | | — | — | |||||||||
Repurchase of | — | ( | — | — | ( | |||||||||
— | — | ( | — | ( | ||||||||||
Balance at March 31, 2020 | $ | | $ | ( | $ | | $ | | $ | | ||||
Net income | — | — | — | | | |||||||||
Share-based compensation | — | — | | — | | |||||||||
Repurchase of | — | ( | — | — | ( | |||||||||
— | — | ( | — | ( | ||||||||||
Balance at June 30, 2020 | $ | | $ | ( | $ | | $ | | $ | | ||||
Common | Treasury | Additional | ||||||||||||
Stock | Stock | Paid-in | Retained | |||||||||||
($ | at cost | Capital | Earnings | 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 | $ | | $ | ( | $ | | $ | | $ | | ||||
See notes to our unaudited condensed consolidated financial statements.
7
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, 2021, our results of operations for the three and six months ended June 30, 2021 and 2020, and cash flows for the six months ended June 30, 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 periods. Actual results could differ materially from these estimates. All significant 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 $
8
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 2021-01 | Reference Rate Reform | 01/01/21 | Prospective | ||
ASU 2017-04 | Simplifying the Test for Goodwill Impairment | 01/01/20 | Prospective | ||
ASU 2018-13 | Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement | 01/01/20 | Prospective |
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 June 30, | ||||||||||||||||||||||||
2021 | 2020 | |||||||||||||||||||||||
Installation | Distribution | Elims | Total | Installation | Distribution | Elims | Total | |||||||||||||||||
Residential | $ | | $ | | $ | ( | $ | | $ | | $ | | $ | ( | $ | | ||||||||
Commercial | | | ( | | | | ( | | ||||||||||||||||
Net sales | $ | | $ | | $ | ( | $ | | $ | | $ | | $ | ( | $ | | ||||||||
Six Months Ended June 30, | ||||||||||||||||||||||||
2021 | 2020 | |||||||||||||||||||||||
Installation | Distribution | Elims | Total | Installation | Distribution | Elims | Total | |||||||||||||||||
Residential | $ | | $ | | $ | ( | $ | | $ | | $ | | $ | ( | $ | | ||||||||
Commercial | | | ( | | | | ( | | ||||||||||||||||
Net sales | $ | | $ | | $ | ( | $ | | $ | | $ | | $ | ( | $ | | ||||||||
The following tables present our revenues disaggregated by product (in thousands):
Three Months Ended June 30, | ||||||||||||||||||||||||
2021 | 2020 | |||||||||||||||||||||||
Installation | Distribution | Elims | Total | Installation | Distribution | Elims | Total | |||||||||||||||||
Insulation and accessories | $ | | $ | | $ | ( | $ | | $ | | $ | | $ | ( | $ | | ||||||||
Glass and windows | | — | — | | | — | — | | ||||||||||||||||
Gutters | | | ( | | | | ( | | ||||||||||||||||
All other | | | ( | | | | ( | | ||||||||||||||||
Net sales | $ | | $ | | $ | ( | $ | | $ | | $ | | $ | ( | $ | | ||||||||
9
Six Months Ended June 30, | ||||||||||||||||||||||||
2021 | 2020 | |||||||||||||||||||||||
Installation | Distribution | Elims | Total | Installation | Distribution | Elims | Total | |||||||||||||||||
Insulation and accessories | $ | | $ | | $ | ( | $ | | $ | | $ | | $ | ( | $ | | ||||||||
Glass and windows | | — | — | | | — | — | | ||||||||||||||||
Gutters | | | ( | | | | ( | | ||||||||||||||||
All other | | | ( | | | | ( | | ||||||||||||||||
Net sales | $ | | $ | | $ | ( | $ | | $ | | $ | | $ | ( | $ | | ||||||||
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 | 2021 | 2020 | |||||
Contract Assets: | |||||||
Receivables, unbilled | Receivables, net | $ | | $ | | ||
Contract Liabilities: | |||||||
Deferred revenue | Accrued liabilities | $ | | $ | | ||
The increase in contract assets as of June 30, 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 $
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 a component of accounts receivable.
4. GOODWILL AND OTHER INTANGIBLES
We have
In the fourth quarter of 2020, we performed an annual assessment on our goodwill resulting in
10
Changes in the carrying amount of goodwill for the six months ended June 30, 2021 by segment, were as follows, in thousands:
|
|
|
| Accumulated |
| ||||||||||
Gross Goodwill | Gross Goodwill | Impairment | Net Goodwill | ||||||||||||
December 31, 2020 | Additions | June 30, 2021 | Losses | June 30, 2021 | |||||||||||
Goodwill, by segment: | |||||||||||||||
Installation | $ | | $ | | $ | | $ | ( | $ | | |||||
Distribution |
| |
| |
| |
| — |
| | |||||
Total goodwill | $ | | $ | | $ | | $ | ( | $ | | |||||
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:
As of | ||||||
| June 30, |
| December 31, | |||
2021 | 2020 | |||||
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, | |||||||||||
| 2021 |
| 2020 |
| 2021 |
| 2020 | |||||
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, | |||
2021 |
| 2020 | ||||
Senior Notes - | $ | | $ | — | ||
Senior Notes - | — | | ||||
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, 2021, in thousands:
Payments Due by Period | |||||||||||||||||||||
2021 | 2022 | 2023 | 2024 | 2025 | Thereafter | Total | |||||||||||||||
Senior Notes | $ | — | $ | — | $ | — | $ | — | $ | — | $ | | $ | | |||||||
Term loan |
| | | | | | |
| | ||||||||||||
Equipment notes | | | | | — | — | | ||||||||||||||
Total | $ | | $ | | $ | | $ | | $ | | $ | | $ | | |||||||
11
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 $
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
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) | $ | | |
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, 2021 | % | ||
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 Amended Credit Agreement is based on an applicable margin rate plus, at our option, either:
| ● | A base rate determined by reference to the highest of either (i) the federal funds rate plus |
| ● | 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 |
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
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.
12
The following table summarizes our availability under the Revolving Facility, in thousands:
As of | ||||||
June 30, |
| December 31, | ||||
| 2021 |
| 2020 | |||
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
Senior Notes
On March 15, 2021, the Company completed a private offering of $
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
Equipment Notes
As of December 31, 2020, the company has issued $
13
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
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 June 30, 2021 | ||
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.
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 June 30, 2021 (Level 1 fair value measurement), we estimate that the fair value of the New Senior Notes is approximately $
14
7. SEGMENT INFORMATION
The following tables set forth our net sales and operating results by segment, in thousands:
Three Months Ended June 30, | ||||||||||||
2021 | 2020 | 2021 | 2020 | |||||||||
Net Sales | Operating Profit (b) | |||||||||||
Our operations by segment were (a): | ||||||||||||
Installation | $ | | $ | | $ | | $ | | ||||
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, | ||||||||||||
2021 | 2020 | 2021 | 2020 | |||||||||
Net Sales | Operating Profit (b) | |||||||||||
Our operations by segment were (a): | ||||||||||||
Installation | $ | | $ | | $ | | $ | | ||||
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 in the U.S. |
| (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. |
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 June 30, 2021, we did not have any finance leases.
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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:
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||
2021 | 2020 | 2021 | 2020 | |||||||||
Operating lease cost (a) | $ | | $ | | $ | | $ | | ||||
Short-term lease cost | | | | | ||||||||
Sublease income | ( | ( | ( | ( | ||||||||
Net lease cost | $ | | $ | | $ | | $ | | ||||
| (a) | Includes variable cost components of $ |
Future minimum lease payments under non-cancellable operating leases as of June 30, 2021 were as follows, in thousands:
Payments due by Period |
| ||
2021 | $ | ||
2022 | |||
2023 | |||
2024 | |||
2025 | |||
2026 & Thereafter | |||
Total future minimum lease payments | | ||
Less: imputed interest | ( | ||
Lease liability at June 30, 2021 | $ | | |
As of June 30, 2021, the weighted average remaining lease term was
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, | |||||
2021 | 2020 | |||||
Cash paid for amounts included in the measurement of lease liabilities | $ | ( | $ | ( | ||
9. INCOME TAXES
Our effective tax rates were
A tax benefit of $
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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:
Three Months Ended June 30, |
| Six Months Ended June 30, | ||||||||||
2021 | 2020 |
| 2021 | 2020 | ||||||||
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 | | | | | ||||||||
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, | |||||||||||
2021 |
| 2020 |
| 2021 |
| 2020 | |||||||
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
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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:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||
2021 | 2020 | 2021 | 2020 | |||||||||
Share-based compensation expense | $ | | $ | | $ | | $ | | ||||
Income tax benefit realized | $ | | $ | | $ | | $ | | ||||
The following table presents a summary of our share-based compensation activity for the six months ended June 30, 2021, 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, 2020 | | $ | | | $ | | $ | | $ | | ||||||
Granted | | $ | | | $ | | $ | | ||||||||
Converted/Exercised | ( | $ | | ( | $ | | $ | | $ | | ||||||
Forfeited/Expired | ( | $ | | — | $ | — | $ | — | ||||||||
Balance June 30, 2021 | | $ | | | $ | | $ | | $ | | ||||||
Exercisable June 30, 2021 (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, 2021 | ||||||
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 18, 2019 | $ | | $ | — | $ | | $ | | $ | | |||||
February 17, 2020 | $ | | $ | — | $ | | $ | | $ | | |||||
February 16, 2021 | $ | | $ | — | $ | | $ | | $ | | |||||
During the first quarter of 2021, RSAs with performance-based conditions that were granted on February 19, 2018 vested based on cumulative
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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:
2021 | 2020 | |||||||
Measurement period (years) | ||||||||
Risk free interest rate | | % | | % | ||||
Dividend yield | | % | | % | ||||
Estimated fair value of market-based RSAs at grant date | $ | | $ | | ||||
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:
2021 | 2020 | |||||||
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 February 22, 2019, our Board authorized the 2019 Repurchase Program, pursuant to which the Company may purchase up to $
Effective November 4, 2019, under the 2019 Repurchase program, we entered into the 2019 ASR Agreement. We paid BofA $
The following table sets forth our share repurchases under the 2019 Repurchase Program during the periods presented:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||
| 2021 | 2020 | 2021 |
| 2020 | |||||||
Number of shares repurchased | | | | |||||||||
Share repurchase cost (in thousands) | $ | | $ | |
| $ | | $ | | |||
(a) The six months ended June 30, 2020 includes
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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.” There were
The tables below provide a summary of businesses acquired in 2021 including, for significant acquisitions, the net sales and net income (loss) incurred for the three and six months ended June 30, 2021:
Three Months Ended | Six Months Ended | ||||||||||||||||||||||||||
June 30, 2021 | June 30, 2021 | ||||||||||||||||||||||||||
2021 Acquisitions | Date |
| Cash Paid | Contingent Consideration | Total Purchase Price | Goodwill Acquired | Net Sales | Net Income (Loss) | Net Sales | Net Income (Loss) | |||||||||||||||||
LCR | 1/20/2021 | $ | | $ | — | $ | | $ | | $ | | $ | ( | | ( | ||||||||||||
ABS | 4/5/2021 | | — | | | | | | | ||||||||||||||||||
All others | Various | | — | | | | | | | ||||||||||||||||||
Total | $ | | $ | — | $ | | $ | | $ | | $ | | $ | | $ | | |||||||||||
Pro Forma Results
The following unaudited pro forma information has been prepared as if the 2021 acquisitions described above had taken
place on January 1, 2020, and as if the 2020 acquisitions had taken place on January 1, 2019. The unaudited pro forma
information is not necessarily indicative of the results that we would have achieved had the transactions actually taken
place on January 1, 2020, and January 1, 2019, as applicable. Further, the unaudited pro forma information does not purport to be indicative of future financial operating results. Our unaudited pro forma results are presented below, in thousands:
Unaudited Pro Forma for the | Unaudited Pro Forma for the | |||||||||||
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||
| 2021 |
| 2020 |
| 2021 |
| 2020 | |||||
Net sales | $ | | $ | | $ | | $ | | ||||
Net income | $ | | $ | | $ | | $ | | ||||
The following table details the additional expense included in the unaudited pro forma operating income as if the 2021
acquisitions described above had taken place on January 1, 2020, and as if the 2020 acquisitions had taken place on January 1, 2019. Our unaudited pro forma results are presented below, in thousands:
Unaudited Pro Forma for the | Unaudited Pro Forma for the | |||||||||||
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||
| 2021 |
| 2020 |
| 2021 |
| 2020 | |||||
Depreciation & amortization | $ | | $ | | $ | | $ | | ||||
Income tax expense (using | $ | | $ | | $ | | $ | | ||||
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Purchase Price Allocations
The estimated fair values of the assets acquired and liabilities assumed for the 2021 acquisitions approximated the following as of June 30, 2021, in thousands:
2021 Acquisitions | ||||||||||||
| LCR |
| ABS | All Others | Total | |||||||
Estimated fair values: | ||||||||||||
Cash | $ | — | $ | | $ | — | $ | | ||||
Accounts receivable | | | | | ||||||||
Inventories | | | | | ||||||||
Prepaid and other assets | | | — | | ||||||||
Property and equipment | | | | | ||||||||
ROU assets | | | | | ||||||||
Intangible assets | | | | | ||||||||
Goodwill | | | | | ||||||||
Accounts payable | ( | — | ( | ( | ||||||||
Lease liabilities | ( | ( | ( | ( | ||||||||
All other liabilities | ( | ( | | ( | ||||||||
Net assets acquired | $ | | $ | | $ | | $ | | ||||
Estimates of acquired intangible assets related to the 2021 acquisitions are as follows, as of June 30, 2021, dollars in thousands:
| Estimated Fair Value |
| Weighted Average Estimated Useful Life (Years) | |||
2021 Acquisitions | ||||||
Customer relationships | $ | | ||||
Trademarks and trade names | | |||||
Total intangible assets acquired | $ | | ||||
The table below provides a summary as of June 30, 2021 for businesses acquired during the six months ended June 30, 2020:
2020 Acquisitions | Date |
| Cash Paid | Contingent Consideration | Total Purchase Price | Goodwill Acquired | |||||||||
Cooper | 2/20/2020 | $ | | $ | | $ | | $ | | ||||||
Hunter | 2/24/2020 | | — | | | ||||||||||
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. Goodwill to be recognized in connection with these acquisitions is attributable to the synergies expected to be realized and improvements in the businesses after the acquisitions. Primarily all of the $
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Contingent Consideration
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
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
Payments of contingent consideration are classified as either financing or operating activities on our condensed consolidated statement of cash flows in accordance with ASC 230-10-45. The following table presents the fair value of contingent consideration, in thousands:
| Viking |
| Cooper | |||
Date of Acquisition | July 15, 2019 | February 20, 2020 | ||||
Fair value of contingent consideration recognized at acquisition date | $ | | $ | | ||
Contingent consideration at December 31, 2020 | $ | | $ | | ||
Change in fair value of contingent consideration during the six months ended June 30, 2021 | | ( | ||||
Payment of contingent consideration during the six months ended June 30, 2021 | — | ( | ||||
Liability balance for contingent consideration at June 30, 2021 | $ | | $ | — | ||
14. ACCRUED LIABILITIES
The following table sets forth the components of accrued liabilities, in thousands:
As of | ||||||
June 30, | December 31, | |||||
| 2021 |
| 2020 | |||
Accrued liabilities: | ||||||
Salaries, wages, and commissions | $ | | $ | | ||
Insurance liabilities | | | ||||
Employee tax-related liabilities | | | ||||
Deferred revenue | | | ||||
Sales & property taxes | | | ||||
Customer rebates | | | ||||
Interest payable on long-term debt | | | ||||
Other | | | ||||
Total accrued liabilities | $ | | $ | | ||
See Note 3 – Revenue Recognition for discussion of our deferred revenue balances.
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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.
The following table summarizes our outstanding performance, licensing, insurance and other bonds, in thousands:
As of | ||||||
| June 30, |
| December 31, | |||
2021 | 2020 | |||||
Outstanding bonds: | ||||||
Performance bonds | $ | | $ | | ||
Licensing, insurance, and other bonds | | | ||||
Total bonds | $ | | $ | | ||
16. SUBSEQUENT EVENTS
On July 26, 2021, our Board authorized a share repurchase program (the “2021 Share Repurchase Program”), pursuant to which the Company may purchase up to $
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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 (TruTeam) and Distribution (Service Partners). Our Installation segment installs insulation and other building products nationwide through our TruTeam contractor services business which, as of June 30, 2021, had approximately 235 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 June 30, 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
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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.
SECOND QUARTER 2021 VERSUS SECOND 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:
Three Months Ended June 30, | |||||||
2021 | 2020 | ||||||
Net sales | $ | 834,255 | $ | 646,099 | |||
Cost of sales | 591,075 | 468,045 | |||||
Cost of sales ratio | 70.9 | % | 72.4 | % | |||
Gross profit | 243,180 | 178,054 | |||||
Gross profit margin | 29.1 | % | 27.6 | % | |||
Selling, general, and administrative expense | 114,894 | 97,600 | |||||
Selling, general, and administrative expense to sales ratio | 13.8 | % | 15.1 | % | |||
Operating profit | 128,286 | 80,454 | |||||
Operating profit margin | 15.4 | % | 12.5 | % | |||
Other expense, net | (6,039) | (8,188) | |||||
Income tax expense | (31,867) | (16,770) | |||||
Net income | $ | 90,380 | $ | 55,496 | |||
Net margin | 10.8 | % | 8.6 | % | |||
Sales and Operations
Net sales increased 29.1 percent for the three months ended June 30, 2021, from the comparable period of 2020. The increase was primarily driven by a 11.8 percent increase in sales volume, a 10.9 percent impact from our acquisitions and a 6.5 percent increase due to higher selling prices.
Gross profit margins were 29.1 percent and 27.6 percent for the three months ended June 30, 2021 and 2020, respectively. Gross profit margin improved primarily due to higher selling prices, lower depreciation expense and lower insurance costs, partially offset by an increase in cost of material.
Selling, general, and administrative expense, as a percent of sales, was 13.8 and 15.1 percent for the three months ended June 30, 2021 and 2020, respectively. The decrease in selling, general, and administrative expense as a percent of sales was primarily the result of higher sales and lower share-based compensation expense and legal fees.
Operating margins were 15.4 percent and 12.5 percent for the three months ended June 30, 2021 and 2020, respectively. The increase in operating margins was due to higher sales volume and selling prices, lower depreciation expense, share-based compensation expense, and legal fees, partially offset by an increase in cost of material.
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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, | |||||||||
| 2021 |
| 2020 |
| Percent Change |
| |||
Net sales by business segment: | |||||||||
Installation | $ | 605,625 | $ | 466,569 | 29.8 | % | |||
Distribution | 273,364 | 216,336 | 26.4 | % | |||||
Intercompany eliminations | (44,734) | (36,806) | |||||||
Net sales | $ | 834,255 | $ | 646,099 | 29.1 | % | |||
Operating profit by business segment: | |||||||||
Installation | $ | 99,066 | $ | 69,643 | 42.2 | % | |||
Distribution | 42,856 | 24,155 | 77.4 | % | |||||
Intercompany eliminations | (6,932) | (5,961) | |||||||
Operating profit before general corporate expense | 134,990 | 87,837 | 53.7 | % | |||||
General corporate expense, net | (6,704) | (7,383) | |||||||
Operating profit | $ | 128,286 | $ | 80,454 | 59.5 | % | |||
Operating profit margins: | |||||||||
Installation | 16.4 | % | 14.9 | % | |||||
Distribution | 15.7 | % | 11.2 | % | |||||
Operating profit margin before general corporate expense | 16.2 | % | 13.6 | % | |||||
Operating profit margin | 15.4 | % | 12.5 | % | |||||
Installation
Sales
Sales in our Installation segment increased $139.1 million, or 29.8 percent, for the three months ended June 30, 2021, as compared to the same period in 2020. The increase was due to a 14.4 percent impact from our acquisitions, a 10.4 percent increase in sales volume and a 5.0 percent increase from higher selling prices.
Operating margins
Operating margins in our Installation segment were 16.4 percent and 14.9 percent for the three months ended June 30, 2021 and 2020, respectively. The increase in operating margins was driven by higher sales volume and selling prices, and lower depreciation expense, partially offset by an increase in cost of material.
Distribution
Sales
Sales in our Distribution segment increased 57.0 million, or 26.4 percent, for the three months ended June 30, 2021, as compared to the same period in 2020. This increase was due to a 14.3 percent increase in sales volume, a 10.3 percent increase due to higher selling prices and a 1.8 percent impact from our acquisition.
Operating margins
Operating margins in our Distribution segment were 15.7 percent and 11.2 percent for the three months ended June 30, 2021 and 2020, respectively. The increase in operating margins was driven by higher sales volume and selling prices, and lower depreciation expense, partially offset by an increase in cost of material.
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OTHER ITEMS
Other expense, net
Other expense, net, which primarily consisted of interest expense, was $6.0 million and $8.2 million for the three months ended June 30, 2021 and 2020, respectively. The decrease was driven by lower interest rates on our New Senior Notes and borrowings under the Amended Credit Agreement.
Income tax expense
Income tax expense was $31.9 million, an effective tax rate of 26.1 percent, for the three months ended June 30, 2021, compared to $16.8 million, an effective tax rate of 23.2 percent, for the comparable period in 2020. The tax rate for the three months ended June 30, 2021, was higher due to permanent items including share-based compensation and state tax adjustments.
FIRST SIX MONTHS 2021 VERSUS FIRST SIX MONTHS 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:
Six Months Ended June 30, | |||||||
| 2021 |
| 2020 |
| |||
Net sales | $ | 1,577,053 | $ | 1,299,327 | |||
Cost of sales | 1,136,114 | 949,316 | |||||
Cost of sales ratio | 72.0 | % | 73.1 | % | |||
Gross profit | 440,939 | 350,011 | |||||
Gross profit margin | 28.0 | % | 26.9 | % | |||
Selling, general, and administrative expense | 216,767 | 199,568 | |||||
Selling, general, and administrative expense to sales ratio | 13.7 | % | 15.4 | % | |||
Operating profit | 224,172 | 150,443 | |||||
Operating profit margin | 14.2 | % | 11.6 | % | |||
Other expense, net | (26,425) | (16,690) | |||||
Income tax expense | (47,525) | (27,485) | |||||
Net income | $ | 150,222 | $ | 106,268 | |||
Net margin | 9.5 | % | 8.2 | % | |||
Sales and Operations
Net sales increased 21.4 percent for the six months ended June 30, 2021, from the comparable period of 2020. The increase was primarily driven by a 9.7 percent increase in sales volume, a 7.5 percent impact from our acquisitions and a 4.1 percent increase due to higher selling prices.
Gross profit margins were 28.0 percent and 26.9 percent for the six months ended June 30, 2021 and 2020, respectively. Gross profit margin improved primarily due to higher selling prices, lower insurance costs and depreciation expense, partially offset by an increase in cost of material.
Selling, general, and administrative expense, as a percent of sales, was 13.7 and 15.4 percent for the six months ended June 30, 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 share-based compensation expense and legal fees, and overall cost reduction initiatives.
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Operating margins were 14.2 percent and 11.6 percent for the three months ended June 30, 2021 and 2020, respectively. The increase in operating margins was due to higher sales volume and selling prices, lower insurance costs, depreciation expense, share-based compensation expense and legal fees, and savings from cost reduction initiatives, 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, | ||||||||
| 2021 |
| 2020 |
| Percent Change | |||
Net sales by business segment: | ||||||||
Installation | $ | 1,138,378 | $ | 942,442 | 20.8 | % | ||
Distribution | 524,965 | 430,558 | 21.9 | % | ||||
Intercompany eliminations | (86,290) | (73,673) | ||||||
Net sales | $ | 1,577,053 | $ | 1,299,327 | 21.4 | % | ||
Operating profit by business segment (a): | ||||||||
Installation | $ | 172,702 | $ | 129,994 | 32.9 | % | ||
Distribution | 78,241 | 48,825 | 60.2 | % | ||||
Intercompany eliminations | (13,460) | (11,795) | ||||||
Operating profit before general corporate expense | 237,483 | 167,024 | 42.2 | % | ||||
General corporate expense, net (b) | (13,311) | (16,581) | ||||||
Operating profit | $ | 224,172 | $ | 150,443 | 49.0 | % | ||
Operating profit margins: | ||||||||
Installation | 15.2 | % | 13.8 | % | ||||
Distribution | 14.9 | % | 11.3 | % | ||||
Operating profit margin before general corporate expense | 15.1 | % | 12.9 | % | ||||
Operating profit margin | 14.2 | % | 11.6 | % | ||||
Installation
Sales
Sales in our Installation segment increased $195.9 million, or 20.8 percent, for the six months ended June 30, 2021, as compared to the same period in 2020. The increase was due to a 10.1 percent impact from our acquisitions, a 7.7 percent increase in sales volume and a 3.0 percent increase from higher selling prices.
Operating margins
Operating margins in our Installation segment were 15.2 percent and 13.8 percent for the six months ended June 30, 2021 and 2020, respectively. The increase in operating margins was driven by higher sales volume and selling prices, lower insurance costs, depreciation expense, and savings from cost reduction initiatives, partially offset by an increase in cost of material.
Distribution
Sales
Sales in our Distribution segment increased $94.4 million, or 21.9 percent, for the six months ended June 30, 2021, as compared to the same period in 2020. This increase was due to a 14.0 percent increase in sales volume, a 7.0 percent increase due to higher selling prices, and a 0.9 percent impact from our acquisition.
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Operating margins
Operating margins in our Distribution segment were 14.9 percent and 11.3 percent for the six months ended June 30, 2021 and 2020, respectively. The increase in operating margins was driven by higher sales volume and selling prices, lower insurance expense and depreciation expense, and savings from cost reduction initiatives, partially offset by an increase in cost of material.
OTHER ITEMS
Other expense, net
Other expense, net, which primarily consisted of interest expense, was $26.4 million and $16.7 million for the six months ended June 30, 2021 and 2020, respectively. The increase was driven by costs incurred to redeem our Old Senior Notes during the first half of 2021, partially offset by lower interest rates on our New Senior Notes and borrowings under the Amended Credit Agreement during the second quarter.
Income tax expense
Income tax expense was $47.5 million, an effective tax rate of 24.0 percent, for the six months ended June 30, 2021 compared to $27.5 million, an effective tax rate of 20.5 percent, for the comparable period in 2020. The tax rate for six months ended June 30, 2021 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, | ||||||
| 2021 |
| 2020 | |||
Changes in cash and cash equivalents: | ||||||
Net cash provided by operating activities | $ | 202,203 | $ | 178,162 | ||
Net cash used in investing activities |
| (223,778) |
| (40,700) | ||
Net cash used in financing activities | (46,693) |
| (63,432) | |||
(Decrease) increase for the period | $ | (68,268) | $ | 74,030 | ||
Net cash flows provided by operating activities increased $24.0 million for the six months ended June 30, 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 $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, primarily vehicles. Net cash used in investing activities was $40.7 million for the six months ended June 30, 2020, primarily composed of $20.9 million for purchases of property and equipment, primarily vehicles, partially offset by $0.8 million in proceeds from the sale of property and equipment, and $20.5 million for the acquisition of Cooper and Hunter.
Net cash used in financing activities was $46.7 million for the six months ended June 30, 2021. 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. Net cash used in financing activities was $63.4 million for the six months ended June 30, 2020. During the six months ended June 30, 2020, we used $34.2 million for the repurchase of common stock pursuant to the 2019 Repurchase Program, $13.2 million on purchases of common stock for tax withholding obligations related to the vesting and exercise of share-based incentive awards, $13.4 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.
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Our liquidity at June 30, 2021 consisted of $261.7 million of cash and $378.8 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.
The following table summarizes our liquidity, in thousands:
As of | ||||||
June 30, | December 31, | |||||
| 2021 |
| 2020 | |||
Cash and cash equivalents (a) | $ | 261,739 | $ | 330,007 | ||
Revolving Facility | 450,000 | 450,000 | ||||
Less: standby letters of credit | (71,211) | (60,382) | ||||
Availability under Revolving Facility | 378,789 | 389,618 | ||||
Total liquidity | $ | 640,528 | $ | 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 June 30, 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 June 30, 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.
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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, 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 June 30, 2021, we had $296.3 million outstanding under our term loan facility, and the applicable interest rate as of such date was 1.09%. Based on our outstanding borrowings under the Amended Credit Agreement as of June 30, 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 June 30, 2021.
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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, 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 June 30, 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 June 30, 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 | ||||||
April 1, 2021 - April 30, 2021 | 3,338 | $ | 209.80 | 3,338 | $ | 29,406 | ||||
May 1, 2021 - May 31, 2021 | 11,261 | $ | 201.62 | 11,261 | $ | 27,135 | ||||
June 1, 2021 - June 30, 2021 | 59,148 | $ | 189.54 | 59,148 | $ | 15,924 | ||||
Total | 73,747 | $ | 192.30 | 73,747 | ||||||
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.
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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/ John S. Peterson |
| Name: | John S. Peterson |
| Title: | Vice President and Chief Financial Officer |
|
| (Principal Financial Officer) |
August 3, 2021
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