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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

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For the fiscal year ended December 31, 2022

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For the transition period from                to               

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Commission file number: 001-36870

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TopBuild Corp.

(Exact Name of Registrant as Specified in its Charter)

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(386) 304-2200

(Registrant’s telephone number, including area code)

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Securities registered pursuant to Section 12(b) of the Act:

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Securities registered pursuant to section 12(g) of the Act:

None

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Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

⌧ Yes            ◻ No

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Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  

◻ Yes            ⌧ No

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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.

⌧ Yes           ◻ No

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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

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Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or 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.  

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Large accelerated filer   ⌧      Accelerated filer   ◻    Non-accelerated filer    ☐   Smaller reporting company  ◻    Emerging growth company ☐

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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.  ◻

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Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐

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If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ◻

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Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ◻

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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

☐Yes            ⌧ No

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The aggregate market value of the registrant’s common stock held by non-affiliates of the registrant based on the closing price of $167.16 per share as reported on the New York Stock Exchange on June 30, 2022, the last business day of the registrant’s most recently completed second fiscal quarter, was approximately $5.4 billion.

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Number of shares of common stock outstanding as of February 16, 2023:  31,669,260

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DOCUMENTS INCORPORATED BY REFERENCE

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Portions of the Registrant’s Proxy Statement for its 2022 Annual Meeting of Shareholders, to be filed with the Securities and Exchange Commission no later than 120 days after December 31, 2022, are incorporated by reference into Part III of this Form 10-K.

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TOPBUILD CORP.

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GLOSSARY

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We use acronyms, abbreviations, and other defined terms throughout this Annual Report on Form 10-K, as defined in the glossary below:

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

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Statements contained in this Annual 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,” “may,” “project,” “estimate” 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 negative macro-economic impacts on the United States economy, specifically with respect to residential, commercial/industrial construction, our ability to collect our receivables from our customers, our reliance on residential new construction, residential repair/remodel, and commercial/industrial construction; our reliance on third-party suppliers and manufacturers; our ability to attract, develop, and retain talented personnel and our sales and labor force; our ability to maintain consistent practices across our locations; our ability to maintain our competitive position; and our ability to realize the expected benefits of our acquisitions.  We discuss the material risks we face under the caption entitled “Risk Factors” in Item 1A of this Annual Report.  Our forward-looking statements in this Annual Report speak only as of the date of this Annual Report.  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.

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PART I

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Item 1.  BUSINESS

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Overview

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TopBuild Corp., headquartered in Daytona Beach, Florida, is a leading installer and specialty distributor of insulation and other building material products to the construction industry in the United States and Canada.  On July 1, 2015, we began trading on the NYSE under the symbol “BLD.”

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Segment Overview

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We operate in two segments: our Installation segment, which accounts for approximately 59% of our sales, and our Specialty Distribution segment, which accounts for approximately 41% of our sales.  

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We believe that having both Installation and Specialty Distribution provides us with a number of distinct competitive advantages.  First, the combined buying power of our two business segments, along with our scale, strengthens our ties to the major manufacturers of insulation and other building material products.  This helps to ensure we are buying competitively and ensures the availability of supply to our local branches and distribution centers.   The overall effect is driving efficiencies through our supply chain.  Second, being a leader in both installation and specialty distribution allows us to reach a broader set of builders and contractors more effectively, regardless of their size or geographic location in the U.S. and Canada, and leverage housing and commercial/industrial construction growth wherever it occurs.  Third, during housing industry downturns, many insulation contractors who buy directly from manufacturers during industry peaks return to purchasing through specialty distributors.  As a result, this helps to reduce our exposure to cyclical swings in our business. 

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Installation

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We provide insulation installation services nationwide through our Installation segment which has approximately 230 branches located across the United States.

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Various insulation applications we install include:

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In addition to insulation products, which represented 79% of our Installation segment’s sales during the year ended December 31, 2022, we install other building products including glass and windows, rain gutters, afterpaint products, fireproofing, garage doors, and fireplaces.  

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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.  The amount of insulation installed in a new home or commercial/industrial building is regulated by various building and energy codes.  

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Our Installation customer base includes national and regional single-family homebuilders, single-family custom builders, multi-family builders, commercial/industrial general contractors, remodelers, and individual homeowners.  

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Through our TopBuild Home Services, Inc. subsidiary (“Home Services”) and our Environments for Living^® program, we offer services and tools designed to assist builders with applying the principles of building science to new home construction.  We offer pre-construction plan reviews using industry-standard home-energy analysis software, various inspection services, and diagnostic testing.  TopBuild Home Services is one of the top ten Home Energy Rating System Index (HERS) raters in the U.S.

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Specialty Distribution

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We distribute building and mechanical insulation, insulation accessories, rain gutters and other building product materials for the residential and commercial/industrial end markets through our Specialty Distribution business. Insulation and insulation accessories, primarily fiberglass and spray foam, comprise approximately 89% of our Specialty Distribution sales.  We have approximately 162 distribution centers across the United States and 17 distribution centers in Canada. Our customer base consists of thousands of insulation contractors of all sizes serving a wide variety of residential and commercial/industrial industries, gutter contractors, weatherization contractors, other contractors, dealers, metal building erectors, and modular home builders.  

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For further information on our segments, see Item 8. Financial Statements and Supplementary Data – Note 8. Segment Information.

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Demand for Our Products and Services

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Demand for our insulation products and services is driven by new single-family residential and multi-family home construction, commercial/industrial construction, residential remodel and repair activity, commercial/industrial maintenance and repair, and the growing need for more energy efficient homes, commercial structures, and industrial plants.  Being a leader in both insulation installation and specialty distribution allows us to reach a broader set of customers more effectively.  We recognize that competition for the installation and sale of insulation and other building material products occurs in localized geographic markets in the U.S. and Canada, and, as such, our operating model is based on geographically diverse branches that develop and maintain local customer relationships.  At the same time, our dispersed branches benefit from centralized functions such as purchasing, information technology, sales and marketing support, and credit and collections.

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Competitive Advantages

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The market for the distribution and installation of building product materials is highly fragmented and competitive.  Barriers to entry for local competitors are relatively low, increasing the risk that additional competitors will emerge.  Our ability to maintain our competitive position depends on a number of factors including our scale, sales channels, diversified product lines, operation capabilities and strong local presence.

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Scale.  Within our geographic footprint, we provide products and services to each major construction line of business in the U.S. and provide commercial/industrial products in Canada.  Our scale and local market presence combined with our various centralized corporate functions and corporate executive management team, enable us to successfully compete as we:

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Two avenues to reach builders and contractors.  We believe that having both installation and specialty distribution businesses provides a number of advantages to reaching our customers and driving share gains.  Our Installation business customer base includes builders of all sizes.  Our branches go to market with the local brands that regional and custom builders recognize and value, and our national footprint is appealing to large builders who value consistency across a broad geography.  Our Specialty Distribution business focuses on selling to small contractors who generally have strong local relationships with smaller custom builders and general contractors, and to industrial general contractors and facilities requiring customized solutions on a recurring basis.  Being a leader in both installation and specialty distribution allows us to more effectively reach a broader set of builder customers and contractors, regardless of their size or geographic location within the U.S. and Canada, and leverage new construction housing, and commercial/industrial growth wherever it occurs.

Diversified lines of business.  In response to the housing downturn in prior years and to mitigate the cyclicality of residential new home construction, we expanded and enhanced our ability to serve the commercial/industrial construction markets.  This included expanding our commercial/industrial operations and sales capacity, adding commercial/industrial product offerings, developing relationships with commercial/industrial general contractors, and building our expertise and reputation for quality service for both light and heavy commercial/industrial construction projects. Although commercial/industrial construction is affected by many of the same macroeconomic and local economic factors that drive residential new construction, commercial/industrial construction has historically followed different cycles than residential new construction. 

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Strong local presence.  Competition for the installation and sale of insulation and other building material products to builders occurs in localized geographic markets throughout the U.S. and Canada.  Builders and contractors in each local market have different options in terms of choosing among insulation installers and specialty distributors for their projects, and value local relationships, quality, and timeliness.  Our Installation branches are locally branded businesses that are recognized within the communities in which they operate.  Our Specialty Distribution centers service primarily local contractors, lumberyards, retail stores and others who, in turn, service local homebuilders and other customers, while also servicing industrial customers with customized recurring requirements.  Our operating model, in which individual branches and distribution centers maintain local customer relationships, enables us to develop local, long-tenured relationships with these customers, build local reputations for quality, service and timeliness, and provide specialized products and personalized services tailored to a geographic region or customer.  At the same time, our local operations benefit from centralized functions, such as purchasing, information technology, sales support, and credit and collections, and the resources and scale efficiencies of an installation and distribution business that has a presence across the U.S. and Canada.

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Unique ability to offset decreases in demand for services with our Specialty Distribution business.  During industry downturns many insulation contractors, who buy directly from manufacturers during industry peaks, return to purchasing through distributors for small, “Less Than Full Truckload” shipments. This tends to drive incremental customers to our Specialty Distribution business, which could offset a decrease in demand for installation services in our Installation business because of a downturn.  We believe that our leadership position in both installation and specialty distribution businesses helps to reduce exposure to cyclical swings in our lines of business.

Strong cash flow and favorable working capital fund organic growth.  Over the last several years, we have reduced fixed costs and improved our labor utilization.  As a result, we can achieve profitability at lower levels of demand as compared to historical periods.  For further discussion on our cash flows and liquidity, see Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources.

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Major Customers

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We have a diversified portfolio of customers.  Our top customer accounted for approximately three percent of our total revenues for the year ended December 31, 2022.  Our top ten customers accounted for approximately 12 percent of our total sales in 2022.  

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Suppliers

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Our businesses depend on our ability to obtain an adequate supply of high-quality products and components from manufacturers and other suppliers.  We source the majority of our fiberglass building products from four primary U.S.-based residential fiberglass insulation manufacturers: Knauf, CertainTeed, Johns Manville, and Owens Corning.  Failure by our suppliers to provide us with an adequate supply of high-quality products on commercially reasonable terms, or to comply with applicable legal requirements, could have a material, adverse effect on our financial condition or operating results.  We believe we generally have positive relationships with our suppliers and are in continuous contact and work closely with our suppliers regarding the quality of materials.  Our current business model with material suppliers affords us flexibility in maximizing material purchasing, which is often driven by region, demand, supply, and pricing, without the constraints of exclusivity agreements.

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Human Capital

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As a leading installer of insulation and specialty distributor of insulation and building material products to the construction industry in the U.S. and Canada, our performance relies heavily on human capital and relationships with customers and suppliers.  Accordingly, our success depends on our ability to attract, retain, protect, and develop our employees.  To support these objectives, we have designed and implemented a human capital management program that fosters a culture of inclusivity, collaboration, support, and innovation where every voice is welcome, heard, and respected.

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Employee Recruiting & Retention

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As of December 31, 2022, we had 13,119 employees (excluding contingent workers), of which 7,832 were installers.  Over 800 of our employees are currently covered by 65 collective bargaining agreements that expire on various dates through 2026.  We believe that our relationship with our unions is good.

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The residential new construction housing market remained strong through most of 2022, which continued the shortage of construction industry labor.  To attract and retain experienced employees in such a tight labor market, we strive to offer a competitive compensation and benefits program to all our employees that meets their diverse needs, such as tuition reimbursement, career growth, matching 401k contributions, multiple dental and medical plan options, and paid time off, including for entry-level employees.  

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We take proactive steps to recruit construction labor, led by our Friends and Family Referral Program which we expanded in 2022.  This program has been very successful since its launch in 2020.  In 2022, it led to the hiring and retention of 1,424 installers.  In addition to hiring directly from the local communities in which our branches operate, we partner with organizations that help source talent with diverse backgrounds, including veterans, refugees, and trade school students and graduates.

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Voluntary turnover across all employees in 2022 was 33.2%.  As reported by Gallup (August 2022), annual turnover below 40% is considered low in today’s employment environment.  We attribute our effective retention rate to an engaging culture, competitive wages, comprehensive benefits, and positive employee relations.

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To build a pipeline of leadership talent, we recruit internally and externally into our Manager in Training program, which fosters development of participants into leaders of our company and high performers in our industry.  The program lasts 12-24 months and participants are supported by our executive management team as they are immersed in all aspects of our operations and directly serve and support our customers and suppliers.  At any time, we have 15-20 employees enrolled in our Manager in Training program and, upon completion of the program, they are promoted into branch leadership roles within our company.  In 2022, more than 50% of those promoted from the Manager in Training program were women.

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Diversity and Inclusion

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We are taking steps as an employer to embrace and expand diversity and inclusion as part of our culture and talent practices.  As of December 31, 2022, our employees self-identified as 44.8% Hispanic, 37.1% White, 7.8% Black, and 10.3% Other or Undisclosed.  Our employees represent a higher racial diversification in comparison to both the construction industry and the total U.S. workforce, as reported by the Bureau of Labor Statistics (December 2022).  In addition, our workforce female representation as of December 31, 2022, was higher than the U.S. construction industry. Our corporate leadership team (Managers and above) self-identifies as approximately 47% female and 24% non-white or undisclosed.

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*Sums to >100% due to multi-racial reporting.

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We acknowledge and are committed to respecting and upholding the human rights and dignity of all individuals within our operations.  We have adopted a company-wide Human Rights policy, which is designed to promote a workplace that values and respects the contributions and perspectives of all employees from a variety of backgrounds, skills, and experiences.  Company policies, including the Human Rights Policy, are published in the ESG section of our website.

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Safety

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The success of our business is fundamentally connected to safety.  Safety is one of our core values, is engrained in our culture, and is an important metric in how we measure our success as a company.  A primary responsibility of our employees is to provide a safe environment for their co-workers, our customers, and our suppliers.  To align our team with our safety goals, a portion of our annual incentive compensation for all eligible employees, including our senior leadership, is tied to our safety performance.  While our ultimate goal is to have zero incidents, we set aggressive annual targets based on reductions from prior year performance across each business segment and the company as a whole.  For 2022, the total incident rate safety target for our company was 2.55 and our actual incident rate incurred was 1.92, which significantly beat our target and remained well below the industry average of 3.4 as reported by the Bureau of Labor and Statistics for NAICS 23831 (2021).  Our focus and investment in safety has led to consistent improvement year-over-year, as reflected in the graphs below.

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We strive to achieve continuous improvement in safety by providing our employees with ongoing, specialized safety training sessions, information, and programs.  This training commences at hiring, with additional sessions delivered at every branch operation and at our Branch Support Center in Daytona Beach, Florida throughout the year.  During 2022, we assigned each of our employees an average of 17.4 hours of safety training.  In addition, our regional Safety Managers audit both field locations and our Branch Support Center to assess compliance with company policy, practices, and procedures.

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We closely monitor injury trends and conduct extensive research to better understand and improve our work environments.  We have realized continuous improvement in our safety performance year-over-year as indicated in the graphs below.  In 2022, our total incident rate improved by over 25% against prior year to 1.92 per the OSHA guidelines with no fatalities, and our lost time case rate of 0.56 remains below industry average of 1.5 as reported by the Bureau of Labor and Statistics for NAICS 23831 (2021) and has continually improved.  Our incident rate does not include the impact of acquired companies in the year of acquisition or potential work-related COVID-19 exposures.

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Community Involvement  

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TopBuild has a long-standing commitment to service in our communities.  We provided ongoing support to a number of national and local charitable organizations in 2022, including:

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Habitat For Humanity. One of our most impactful partnerships is Habitat for Humanity.  Our annual fundraiser raised $650,000 in 2022, increasing the total raised to over $2.6M over the past 6 years with this event.  In addition to monetary donations to Habitat for Humanity, our teams in the field support families on their journey towards home ownership by donating material, volunteering their time at local Habitat Builds, and attending dedication ceremonies, where the impacts of living our core values of Unity and Community are truly seen and felt. 

The Salvation Army. We continued to sponsor the Salvation Army’s Angel Tree initiative, which provides new clothing and toys to families in need each year during the holiday season.

The NASCAR Foundation. We continued our partnership with the NASCAR foundation and expanded our sponsorship commitment to fund and build playsets for pediatric cancer patients.

Payit4ward. We sponsored Payit4ward’s annual summer Back to School Drive for the 5th year running, which provided supplies and backpacks to over 3,000 children. 

The American Red Cross. We regularly donate to the American Red Cross, helping to ensure they have the necessary funding throughout the year to assist families recovering from natural disasters.  In 2022, TopBuild matched employee giving and donated more than $35,000 for those affected by hurricanes Ian and Nicole. 

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Our people are our most valuable resources, and together with our affiliate partnerships, we remain committed to supporting and improving the communities where we live and work.

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Employee Feedback

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Employee engagement is important to us as we continue to establish and develop our initiatives to create a positive employee experience.  In 2022, we added new hire and exit surveys and use their feedback to continually improve our offerings and communication.  Additionally, we conduct an all-employee survey bi-annually, most recently in 2021, and 62% of our employees responded.  Our engagement index score was 84%.  This score is made up of key questions related to pride in the company, sense of accomplishment, and intent to stay.  We shared the results with our leadership at all levels and locations and with our Board.  The leaders reviewed areas of satisfaction and dissatisfaction and continue to work with their teams to prioritize actions and activities in response.  Overall areas of strength include employee perception of a solid culture of safety within our company and satisfaction with our company’s direction and culture.

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Executive Officers

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Set forth below is information about our executive officers. There are no family relationships among any of the officers named below.

Robert M. Buck, age 53

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Joseph M. Viselli, age 55

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Robert M. Kuhns, age 49

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Luis F. Machado, age 60

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Jennifer J. Shoffner, age 50 

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Steven P. Raia, age 67

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Robert J. Franklin, age 63

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Legislation and Regulation

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We are subject to U.S. and Canadian federal, state, provincial, and local laws and regulations, particularly those pertaining to health and safety (including protection of employees and consumers), labor standards/regulations, contractor licensing, and environmental issues.  In addition to complying with currently effective legal requirements and preparing for proposed future requirements, even more stringent legal requirements could eventually be imposed on our industries.  Additionally, some of our products and services require certification by industry or other organizations. Maintaining compliance with potentially changing legal requirements and industry standards may require us to alter our specialty distribution and installation processes and our sourcing, which could adversely impact our business.  Further, as discussed in our Item 1A (Risk Factors), if we do not effectively and timely comply with legal requirements and industry standards, our operating results could be negatively affected.

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Additional Information

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We provide our Annual Reports, Quarterly Reports, Current Reports and amendments to those reports free of charge on our website, www.topbuild.com, as soon as reasonably practicable after these reports are filed with or furnished to the SEC.  We also provide Environmental, Social and Governance (“ESG”) information, including with respect to certain safety metrics, on our website.  Information contained on our website is not incorporated by reference into this Form 10-K, and you should not consider information contained on our website to be part of this Form 10-K or in deciding whether to purchase shares of our common stock.

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Use of our Website to Distribute Material Company Information

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We use our website, www.topbuild.com, as a channel of distribution and routinely post important Company information including press releases, investor presentations and financial information. We may also use our website to expedite public access to time-critical information regarding our Company in advance of or in lieu of distributing a press release or a filing with the SEC disclosing the same information. Visitors to our website can also register to receive automatic e-mail and other notifications alerting them when new information is made available.

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Item 1A. RISK FACTORS

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A number of risks and uncertainties could affect our business and cause our actual results to differ from past performance or expected results.  We consider the following risks and uncertainties to be those material to our business.  If any of these risks occur, our business, financial condition and results of operations could suffer, and the trading price of our common stock could decline.  We urge investors to consider carefully the risk factors described below in evaluating the information contained in this Annual Report.  

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Risks Which May Be Material to Our Business

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Risks Relating to Products and Supply Chain

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We are dependent on third-party suppliers and manufacturers to provide us with an adequate supply of high-quality products, and the loss of a large supplier or manufacturer could negatively affect our operating results.

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Failure by our suppliers to provide us with an adequate supply of high-quality products on commercially reasonable terms, or to comply with applicable legal requirements, could have a material adverse effect on our financial condition or operating results.  While we believe that we have positive relationships with our suppliers, the fiberglass insulation industry has encountered both shortages and periods of significant oversupply during past housing market cycles, leading to volatility in prices and allocations of supply, which affect our results.  While we do not believe we depend on any sole or limited source of supply, we source the majority of our building products, primarily insulation, from a limited number of large suppliers.  The loss of a large supplier, or a substantial decrease in the availability of products or components from our suppliers, could disrupt our business and adversely affect our operating results.

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Our profit margins could decrease due to changes in the costs of the products we install and/or distribute.

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The principal building products that we install and distribute have been subject to price changes in the past, some of which have been significant.  Our results of operations for individual quarters can be, and have been, hurt by a delay between the time building product or material cost increases are implemented and the time we are able to increase prices for our installation or specialty distribution services, if at all.  Our supplier purchase prices may depend on our purchasing volume or other arrangements with any given supplier. While we have been able to achieve cost savings through volume purchasing or other arrangements with suppliers in the past, we may not be able to consistently continue to receive advantageous pricing for the products we distribute and install.  If we are unable to maintain purchase pricing consistent with prior periods or are unable to pass on price increases, our costs could increase and our margins may be adversely affected.

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The development of alternatives to distributors in the supply chain could cause a decrease in our sales and operating results and limit our ability to grow our business.

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Our Specialty Distribution customers could begin purchasing more of their products directly from manufacturers, which would result in decreases in our net sales and earnings.  Our suppliers could invest in infrastructure to expand their own local sales force and sell more products directly to our Specialty Distribution customers, which also would negatively impact our business.

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New product innovations or new product introductions could negatively impact our business. 

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New product innovations or new product introductions could negatively impact demand for the products we install and distribute.

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Issues with product quality or performance could negatively impact our business.

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Our business depends on high-quality products from manufacturers and other suppliers, and issues with the quality or performance of such products could negatively impact our business.  While we are generally indemnified by our manufacturers and suppliers for claims relating to the quality of their products, our business could be negatively impacted by product quality or performance issues, including exposure to legal claims and regulatory proceedings and damage to our reputation.

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We may not be able to identify new products or new product lines and integrate them into our specialty distribution network, which may impact our ability to compete.  Our expansion into new markets may present competitive, distribution, and regulatory challenges that differ from current ones.

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Our business depends, in part, on our ability to identify future products and product lines that complement existing products and product lines and that respond to our customers’ needs. We may not be able to compete effectively unless our product selection keeps up with trends in the markets in which we compete, or trends in new products, which could cause us to lose market share. Our expansion into new markets, new products, or new product lines may present competitive, distribution and regulatory challenges, as well as divert management’s attention away from our core business. In addition, our ability to integrate new products and product lines into our specialty distribution network could affect our ability to compete.

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Risks Relating to Events Beyond Our Control

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A decline in general economic conditions could materially reduce demand for our services or the products that we distribute.

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Demand for our products and services depends heavily on the operating level of our customers and the economic factors that affect them, including general economic conditions. In a recession or economic downturn, our customers may materially reduce construction activities because of lower consumer demand, which in turn will decrease their need for our services and the products that we distribute. Volatile economic and credit conditions also make it more difficult for our customers to forecast and plan future business activities and may prevent them from ordering our products or services as frequently or in the quantities they otherwise would. We may experience materially adverse impacts to our business because of any economic recession or slowing in the rate of growth.

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An epidemic, pandemic, or similar serious public health issue (such as COVID-19), and the measures undertaken by governmental authorities to address it, may cause business and market disruptions, impacting demand for our services or the products we distribute, our ability to provide services, or our results of operations or financial condition.

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The spread of highly infectious or contagious diseases (such as COVID-19) could cause quarantines, business shutdowns, reduction in business activity and financial transactions, labor shortages, supply chain interruptions, and overall economic and financial market instability, all of which may impact general economic conditions or consumer confidence. To the extent that economic activity, business conditions, and the industries in which we operate deteriorate as a result of such disruptions, we would expect to experience an adverse impact on demand for our services and the products we distribute, our ability to provide services, or our results of operations or financial condition.

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Risks Relating to Human Capital

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The long-term performance of our businesses relies on our ability to attract, develop, and retain talented personnel, including sales representatives, branch managers, installers, and truck drivers, while controlling our labor costs.

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We are highly dependent on the skills and experience of our senior management team and other skilled and experienced personnel.  The failure to attract and retain key employees could negatively affect our competitive position and operating results.

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Our business results also depend upon our branch managers and sales personnel, including those of businesses acquired.  Our ability to control labor costs and attract qualified labor is subject to numerous external factors including prevailing wage rates, the labor market, the demand environment, the impact of legislation or regulations governing wages and hours, labor relations, immigration, healthcare benefits, and insurance costs.  In addition, we compete with other companies to recruit and retain qualified installers and truck drivers in a tight labor market, and we invest significant resources in training and motivating them to maintain a high level of job satisfaction.  These positions generally have high turnover rates, which can lead to increased training and retention costs. If we fail to attract qualified labor on favorable terms, we may not be able to meet the demand of our customers, which could adversely impact our business, financial condition, and results of operations.

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Changes in employment and immigration laws and regulations may adversely affect our business.

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Various federal and state labor laws and regulations govern the relationship with our employees and impact operating costs.  These laws include:

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We have a significant exposure to changes in laws governing our relationships with our employees, including wage and hour laws and regulations, fair labor standards, minimum wage requirements, overtime pay, unemployment tax rates, workers’ compensation rates, citizenship requirements, payroll taxes, and the enforcement of non-competition agreements, as well as vaccination and testing mandates which may be imposed in connection with the occurrence of pandemic or health concerns, which changes would have a direct impact on our operating costs.  Significant additional government-imposed increases in the preceding areas could have a material adverse effect on our business, financial condition, and results of operations.

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In addition, various states in which we operate are considering or have already adopted new immigration laws or enforcement programs, and the U.S. Congress and Department of Homeland Security from time to time consider and implement changes to federal immigration laws, regulations, or enforcement programs.  These changes may increase our compliance and oversight obligations, which could subject us to additional costs and make our hiring process more cumbersome, or reduce the availability of potential employees. Although we verify the employment eligibility status of all our employees, including through participation in the “E-Verify” program where required, some of our employees may, without our knowledge, be unauthorized workers.  Use of the verification tools and/or “E-Verify” program does not guarantee that we will properly identify all applicants who are ineligible for employment.  Unauthorized workers are subject to deportation and may subject us to fines or penalties and, if any of our workers are found to be unauthorized, we could experience adverse publicity that negatively impacts our brand and may make it more difficult to hire and retain qualified employees, which could disrupt our operations.  We could also become subject to fines, penalties, and other costs related to claims that we did not fully comply with all recordkeeping obligations of federal and state immigration laws. These factors could have a material adverse effect on our business, financial condition, and results of operations.

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Union organizing activity and work stoppages could delay or reduce availability of products that we install and increase our costs.

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Approximately 800 of our employees are currently covered by collective bargaining or other similar labor agreements that expire on various dates through 2026.  Any inability by us to negotiate collective bargaining arrangements could cause strikes or other work stoppages, and new contracts could result in increased operating costs.  If any such strikes or other work stoppages occur, or if other employees become represented by a union, we could experience a disruption of our operations and higher labor costs.  Further, if a significant number of additional employees were to unionize, including in the wake of any future legislation or regulation that makes it easier for employees to unionize, these risks would increase.  In addition, certain of our suppliers have unionized work forces, and certain of the products we install and/or distribute are transported by unionized truckers.  Strikes, work stoppages, or slowdowns could result in slowdowns or closures of facilities where the products that we install and/or distribute are manufactured, or could affect the ability of our suppliers to deliver such products to us.  Any interruption in the production or delivery of these products could delay or reduce availability of these products and increase our costs.

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Our business relies significantly on the expertise of our employees and we generally do not have intellectual property that is protected by patents.

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Our business is significantly dependent upon our expertise in installation and distribution logistics, including significant expertise in the application of building science through our Environments for Living® program.  We rely on a combination of trade secrets and contractual confidentiality provisions and, to a much lesser extent, copyrights and trademarks, to protect our proprietary rights.  Accordingly, our intellectual property is more vulnerable than it would be if it were protected primarily by patents.  We may be required to spend significant resources to monitor and protect our proprietary rights, and in the event a misappropriation or breach of our proprietary rights occurs, our competitive position in the market may be harmed.  In addition, competitors may develop competing technologies and expertise that renders our expertise obsolete or less valuable.

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Risks Relating to Mergers and Acquisitions

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We may not be successful in identifying and making acquisitions. In addition, acquisition integrations involve risks that could negatively affect our operating results, cash flows, and liquidity.

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We have made, and in the future may continue to make, strategic acquisitions as part of our growth strategy.  We may be unable to make accretive acquisitions or realize expected benefits of any acquisitions for any of the following reasons:

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Our ability to successfully implement our business plan and achieve targeted financial results is dependent on our ability to successfully integrate acquired businesses.  The process of integrating acquired businesses, may expose us to operational challenges and risks, including, but not limited to:

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Failure to successfully integrate any acquired business may result in reduced levels of revenue, earnings, or operating efficiency than might have been achieved if we had not acquired such business.  In addition, our past acquisitions results, and any future acquisitions could result in the incurrence of additional debt and related interest expense, contingent liabilities, and amortization expenses related to intangible assets, which could have a material adverse effect on our financial condition, operating results, and cash flow.  

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We may not be able to achieve the benefits that we expect to realize as a result of future acquisitions.  Failure to achieve such benefits could have an adverse effect on our financial condition and results of operations.

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We may not be able to realize anticipated cost savings, revenue enhancements, or other synergies from future acquisitions, either in the amount or within the time frame that we expect.  In addition, the costs of achieving these benefits may be higher than, and the timing may differ from, what we expect.  Our ability to realize anticipated cost savings, synergies, and revenue enhancements may be affected by a number of factors, including, but not limited to, the following:

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While we expect future acquisitions to create opportunities to reduce our combined operating costs, these cost savings reflect estimates and assumptions made by our management, and it is possible that our actual results will not reflect these estimates and assumptions within our anticipated timeframe or at all.  

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If we fail to realize anticipated cost savings, synergies, or revenue enhancements, our financial results may be adversely affected, and we may not generate the cash flow from operations that we anticipate.  

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Risks Relating to Legal and Regulatory Matters

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Because we operate our business through highly dispersed locations across the U.S. and Canada, our operations may be materially adversely affected by inconsistent local practices, and the operating results of individual branches and centers may vary.

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We operate our business through a network of highly dispersed locations throughout the United States and Canada, supported by executives and services at our Branch Support Center in Daytona Beach, Florida, with local branch management retaining responsibility for day-to-day operations and adherence to applicable local laws.  Our operating structure can make it difficult for us to coordinate procedures across our operations.  In addition, our branches and distribution facilities may require significant oversight and coordination from headquarters to support their growth.  

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Inconsistent implementation of corporate strategy and policies at the local or regional level could materially and adversely affect our business, financial condition, results of operations, and cash flows.

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Claims and litigation could be costly.

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We are, from time to time, involved in various claims, litigation matters, and regulatory proceedings that arise in the ordinary course of our business and which could have a material adverse effect on us.  These matters may include contract disputes, automobile liability and other personal injury claims, warranty disputes, environmental claims or proceedings, other tort claims, employment and tax claims, claims relating to the quality of products sourced from our suppliers, and other proceedings and litigation, including class actions.  In addition, we are exposed to potential claims by our employees or others based on job related hazards.  

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We may also be subject to claims or liabilities arising from our acquisitions for the periods prior to our acquisition of them, including environmental, employee-related, and other liabilities and claims not covered by insurance. Our ability to seek indemnification from the former owners of our acquired businesses for these claims or liabilities may be limited by the respective acquisition agreements and the financial ability of the former owners to satisfy our indemnification claims.

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Our builder and contractor customers are subject to product liability, casualty, negligence, construction defect, breach of contract, warranty, and other claims in the ordinary course of their business. Our contractual arrangements with our builder and contractor customers may include our agreement to defend and indemnify them against various liabilities.

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We rely on manufacturers and other suppliers to provide us with most of the products we install.  Because we do not have direct control over the quality of products manufactured or supplied by third-party suppliers, we are exposed to risks relating to the quality of those products.  In addition, we are exposed to potential claims arising from the conduct of our employees, homebuilders, and other subcontractors, for which we may be liable contractually or otherwise.

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Product liability, workmanship warranty, casualty, negligence, construction defect, breach of contract, and other claims and legal proceedings can be expensive to defend and can divert the attention of management and other personnel for significant periods of time, regardless of fault or the ultimate outcome.  In addition, lawsuits relating to construction defects typically have statutes of limitations that can run as long as ten years.  Claims of this nature could also have a negative impact on customer confidence in us and our services.  

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Although we intend to defend all claims and litigation matters vigorously, given the inherently unpredictable nature of claims and litigation, we cannot predict with certainty the outcome or effect of any claim or litigation matter.

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We expect to maintain insurance against some, but not all, of our risks of loss resulting from claims and litigation.  We may elect not to obtain insurance if we believe the cost of available insurance is excessive relative to the risks presented.  The levels of insurance we maintain may not be adequate to fully cover any and all losses or liabilities.  If any significant accident, judgment, claim, or other event is not fully insured or indemnified against, it could have a material adverse impact on our business, financial condition, and results of operations.

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Compliance with government regulation and industry standards could impact our operating results.

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We are subject to national, state, provincial, and local government regulations, particularly those pertaining to health and safety, including protection of employees and consumers, employment laws, including immigration and wage and hour regulations, contractor licensing, data privacy, cybersecurity, and climate and environmental issues.  In addition to complying with current requirements, even more stringent requirements are under review by the Securities and Exchange Commission and other governmental authorities which could be imposed in the future.  Compliance with these regulations and industry standards is costly and may require us to invest additional resources into our compliance infrastructure, thereby increasing our cost structure.  We may also be required to alter our installation and distribution processes, product sourcing, or business practices, which could make recruiting and retaining labor in a tight labor market more challenging.   If we do not effectively and timely comply with such regulations and industry standards, our results of operations could be negatively affected, and we could become subject to substantial penalties or other legal liability.

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We are subject to environmental regulation and potential exposure to environmental liabilities.

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We are subject to various federal, state, provincial, and local environmental laws and regulations. Although we believe that we operate our business, including each of our locations, in compliance with applicable laws and regulations and maintain all material permits required under such laws and regulations to operate our business, we may be held liable or incur fines or penalties in connection with such requirements. In addition, environmental laws and regulations, including those related to energy use and climate change, may become more stringent over time, and any future laws and regulations could have a material impact on our operations or require us to incur material additional expenses to comply with any such future laws and regulations.

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Changes in building codes and consumer preferences could affect our ability to market our service offerings and our profitability.  Moreover, if we do not respond to evolving customer preferences or changes in building standards, or if we do not maintain or expand our leadership in building science, our business, results of operation, financial condition, and cash flow would be adversely affected.

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Each of our lines of business is impacted by building codes and consumer preferences, including a growing focus on energy efficiency.  Our competitive advantage is due, in part, to our ability to respond to changes in consumer preferences and building codes.  However, if our installation and distribution services and our leadership in building sciences do not adequately or quickly adapt to changing preferences and building standards, we may lose market share to competitors, which would adversely affect our business, results of operation, financial condition, and cash flows.  Further, our growth prospects could be harmed if consumer preferences and building standards evolve more slowly than we anticipate towards energy efficient service offerings, which are more profitable than minimum code service offerings.  

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Risks Relating to the Industry in Which We Operate

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Our business relies on residential new construction, commercial construction and industrial manufacturing activity, and to a lesser extent on residential repair/remodel, all of which are cyclical.

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Demand for our services is cyclical and highly sensitive to general macroeconomic and local economic conditions over which we have no control.  Macroeconomic and local economic conditions, including consumer confidence levels, fluctuations in home prices, unemployment and underemployment levels, income and wage growth, student loan debt, household formation rates, mortgage tax deduction limits, the age and volume of the housing stock, the availability of home equity loans and mortgages and the interest rates for such loans, and other factors, affect consumers’ discretionary spending on both residential new construction projects and residential repair/remodel activity.  The commercial and industrial construction markets are affected by macroeconomic and local economic factors including, but not limited to, general economic conditions, cost of financing, credit availability, material costs, labor rates, vacancy and absorption rates, manufacturing capacity and demand, technological advancements, foreign and domestic competition, and import and export activity.  Changes or uncertainty regarding these and similar factors could adversely affect our results of operations and our financial position.

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We face significant competition, and increased competitive pressure may adversely affect our business, financial condition, results of operations and cash flows.

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The market for the specialty distribution and installation of building products and materials is highly fragmented and competitive, and barriers to entry are relatively low.  Our Installation competitors include national contractors, regional contractors, and local contractors, and we face many or all of these competitors for each project on which we bid.  Our Specialty Distribution competitors include numerous specialty insulation distributors.  In some instances, our Specialty Distribution business sells products to companies that may compete directly with our installation service business.  We also compete with broad line building products distributors, big box retailers, and insulation manufacturers.  In addition to price, we believe that competition in our industry is based largely on existing customer relationships, customer service and the quality and timeliness of installation services and distribution product deliveries in each local market.  In the event that increased demand leads to higher prices for the products we sell and install, we may have limited ability to pass on price increases in a timely manner, or at all, due to the fragmented and competitive nature of our industry.

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Our business is seasonal and is susceptible to adverse weather conditions and natural disasters.  We also may be adversely affected by any natural or man-made disruptions to our facilities.

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We normally experience stronger sales during the third and fourth calendar quarters, corresponding with the peak season for residential new construction and residential repair/remodel activity.  Sales during the winter weather months are seasonally slower due to the lower construction activity.  Historically, the installation of insulation lags housing starts by several months.  In addition, to the extent that hurricanes, severe storms, earthquakes, droughts, floods, fires, other natural disasters, or similar events occur in the geographic areas in which we operate, our business may be adversely affected.  Any widespread disruption to our facilities resulting from a natural disaster, an act of terrorism, or any other cause could materially impair our ability to provide installation and/or distribution services for our customers.  

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We are subject to competitive pricing pressure from our customers.

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Residential homebuilders historically have exerted significant pressure on their outside suppliers to keep prices low in the highly fragmented building products and materials supply and services industry.  In addition, consolidation among homebuilders and changes in homebuilders’ purchasing policies or payment practices could result in additional pricing pressure.

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Risks Relating to Our Operations Outside of the United States

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We face risks relating to our operations outside of the United States.

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A portion of our operations are conducted in Canada.  As a result, our operating results and financial condition could be materially adversely affected by economic, political, health, regulatory and other factors existing outside of the United States.  Our foreign operations are subject to inherent risks, which may materially adversely affect us, including: political and economic changes or instability; expropriation or the imposition of government controls; changes in government regulations; export requirements; trade restrictions; earnings repatriation and expatriation restrictions; exposure to different legal standards, including related to intellectual property and data privacy; health conditions and standards; currency controls; fluctuations in exchange rates; increases in the duties and taxes we pay; inflation or deflation; greater difficulty in collecting accounts receivable and longer payment cycles; changes in labor conditions, staffing, and managing our foreign operations; limitations on insurance coverage against geopolitical risks, natural disasters, and business operations; and communication among management and foreign operations.  In addition, these same factors may also place us at a competitive disadvantage compared to foreign competitors.

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FCPA Risk

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We may face risks associated with violations of the Foreign Corrupt Practices Act (“FCPA”) and similar anti-bribery laws. The FCPA and similar anti-bribery laws in other jurisdictions generally prohibit companies and their intermediaries from making improper payments to government officials for the purpose of obtaining or retaining business.  Our Code of Ethics mandates compliance with these anti-bribery laws.  We cannot assure you that our internal controls and procedures will always protect us from the detrimental actions of our employees or agents.  If we are found to be liable for FCPA violations (either due to our own acts or inadvertence or due to the acts or inadvertence of others), we could suffer from criminal or civil penalties or other sanctions, which could have a material adverse effect on our business.

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We are exposed to fluctuations in foreign currency exchange rates that may adversely affect our business, financial condition, and operating results.

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We transact business outside of the United States.  We present our consolidated financial statements in U.S. dollars, but a portion of our revenues and expenditures are transacted in other currencies.  As a result, we are exposed to fluctuations in foreign currencies.  Additionally, we may have currency exposure arising from funds held in currencies other than U.S. dollars.  Volatility in the exchange rates between the foreign currencies and the U.S. dollar could materially harm our business, financial condition, or operating results.

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Risks Relating to Information Technology and Cybersecurity

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We rely on information technology systems, and in the event of a disruption or security incident, we could experience problems with customer service, inventory, collections, and cost control and incur substantial costs to address related issues.

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Our operations are dependent upon our information technology systems, including systems run by third-party vendors which we do not control, to manage customer orders on a timely basis, to coordinate our installation and specialty distribution activities across locations, and to manage invoicing.  If we experience problems with our information technology systems, we could experience, among other things, delays in receiving customer orders, placing orders with suppliers, and scheduling production, installation services, deliveries, or shipments.

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A substantial disruption in our information technology systems could have an adverse impact on revenue, harm our reputation, and cause us to incur legal liability and costs, which could be significant, to address and remediate such events and related security concerns.

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In addition, we could be adversely affected if any of our significant customers or suppliers experienced any similar events that disrupted their respective business operations or damaged their reputations.

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In the event of a cybersecurity incident, we could experience operational interruptions, incur substantial additional costs, become subject to legal or regulatory proceedings or suffer damage to our reputation.

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In addition to the disruptions that may occur from interruptions in our information technology systems, cybersecurity threats and sophisticated and targeted cyberattacks pose a risk to our information technology systems.  We have established security policies, processes and defenses designed to help identify and protect against intentional and unintentional misappropriation or corruption of our information technology systems and disruption of our operations.  Despite these efforts, our information technology systems may be damaged, disrupted or shut down due to attacks by unauthorized persons, malicious software, computer viruses, undetected intrusion, hardware failures, or other events, and in these circumstances our disaster recovery plans may be ineffective or inadequate.  These breaches or intrusions could lead to business interruptions, exposure of proprietary or confidential information, data corruption, damage to our reputation, exposure to legal and regulatory proceedings, and other costs.  Such events could have a material adverse impact on our financial condition, results of operations and cash flows.  In addition, we could be adversely affected if any of our significant customers or suppliers experience any similar events that disrupt their business operations or damage their reputations.

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We maintain monitoring practices and protections of our information technology to reduce these risks and test our systems on an ongoing basis for potential threats.  We carry cybersecurity insurance to help mitigate the financial exposure and related notification procedures in the event of intentional intrusion.  There can be no assurance, however, that our efforts will prevent the risk of a security breach of our databases or systems that could adversely affect our business.

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Risks Relating to Liquidity and Our Ability to Finance Our Operations

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If we are required to take significant non-cash charges, our financial resources could be reduced, and our financial flexibility may be negatively affected.

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We have significant goodwill and other intangible assets related to business combinations on our balance sheet.  The valuation of these assets is largely dependent upon the expectations for future performance of our businesses.  Expectations about the growth of residential new construction, commercial/industrial construction, residential repair/remodel activity, and the utilization of industrial facilities, may impact whether we are required to recognize noncash, pretax impairment charges for goodwill and other indefinite lived intangible assets, or other long-lived assets.  If the value of our goodwill, other intangible assets, or long-lived assets is further impaired, our earnings and stockholders’ equity would be adversely affected and may impact our ability to raise capital in the future.

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We may have future capital needs and may not be able to obtain additional financing on acceptable terms.

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Our future capital requirements will depend on many factors, including industry and market conditions, our ability to successfully complete future business combinations and the expansion of our existing operations.  We anticipate that we may need to raise additional funds in order to grow our business and implement our business strategy.  Economic and credit market conditions, the performance of the construction industry, and our financial performance, as well as other factors may constrain our financing abilities.  Our ability to secure additional financing and to satisfy our financial obligations will depend upon our future operating performance, the availability of credit, economic conditions, and financial, business, and other factors, many of which are beyond our control.  Any financing, if available, may be on terms that are not favorable to us and will be subject to changes in interest rates and the capital markets environment.  If we cannot obtain adequate capital, we may not be able to fully implement our business strategy and our business, operational results and financial condition could be adversely affected.

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Our indebtedness and restrictions in our existing credit facility, Senior Notes or any other indebtedness we may incur in the future, could adversely affect our business, financial condition, results of operations, ability to make distributions to shareholders, and the value of our common stock.

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Our indebtedness could have significant consequences on our future operations, including:

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Any of the above-listed factors could have an adverse effect on our business, financial condition, results of operations, or ability to meet our payment obligations. If we are not able to generate sufficient cash flow to service our debt obligations, we may need to refinance or restructure our debt, sell certain assets, reduce or delay capital investments, or seek to raise additional capital, and some of these activities may be on terms that are unfavorable or highly dilutive.  Our ability to refinance our indebtedness will depend on the capital markets and our financial condition at such time.  If we are unable to implement one or more of these alternatives, we may not be able to meet our payment obligations.

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Our existing term loan, revolving credit facility and the indentures governing our Senior Notes limit, and any future credit facility or other indebtedness we enter into may limit our ability to, among other things:

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Our revolving credit facility contains, and any future credit facility or other debt instrument we may enter into will also likely contain, covenants requiring us to maintain certain financial ratios and meet certain tests, such as an interest coverage ratio, a leverage ratio, and a minimum test.  Our ability to comply with those financial ratios and tests can be affected by events beyond our control, and we may not be able to comply with those ratios and tests when required to do so under the applicable debt instruments.  For additional information regarding our outstanding debt see Item 8. Financial Statements and Supplementary Data – Note 6. Long-Term Debt.

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Adverse credit ratings could increase our costs of borrowing money and limit our access to capital markets and commercial credit.

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Moody’s Investor Service and Standard & Poor’s routinely evaluate our credit ratings related to our Senior Notes.  If these rating agencies downgrade any of our current credit ratings, our borrowing costs could increase and our access to the capital and commercial credit markets could be adversely affected.

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In connection with the Separation, Masco indemnified us for certain liabilities, and we indemnified Masco for certain liabilities.  If we are required to act under these indemnities to Masco, we may need to divert cash to meet those obligations, which could adversely affect our financial results.  Moreover, the Masco indemnity may not be sufficient to compensate us for the full amount of liabilities for which it may be liable, and Masco may not be able to satisfy its indemnification obligations to us in the future.

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Indemnities that we may be required to provide Masco are not subject to any cap, may be significant, and could negatively affect our business, particularly indemnities relating to our actions that could affect the tax-free nature of the Separation.  Third parties could also seek to hold us responsible for any of the liabilities that Masco has agreed to retain, and under certain circumstances, we may be subject to continuing contingent liabilities of Masco following the Separation, such as certain shareholder litigation claims.  Further, Masco may not be able to fully satisfy its indemnification obligations, or such indemnity obligations may not be sufficient to cover our liabilities.  Moreover, even if we ultimately succeed in recovering from Masco any amounts for which we are held liable, we may be temporarily required to bear these losses ourselves.  Each of these risks could negatively affect our business, results of operations, liquidity, and financial condition.

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Compliance with and changes in tax laws could adversely affect our performance.

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We are subject to extensive tax liabilities imposed by multiple jurisdictions including income taxes; indirect taxes which include excise and duty, sales and use, and gross receipts taxes; payroll taxes; franchise taxes; withholding taxes; and ad valorem taxes.  New tax laws and regulations, and changes in existing tax laws and regulations, are continuously being enacted or proposed which could result in increased expenditures for tax liabilities in the future.  Many of these liabilities are subject to periodic audits by the respective taxing authority.  Subsequent changes to our tax liabilities as a result of these audits may subject us to interest and penalties.

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Risks Relating to Our Common Stock

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The price of our common stock may fluctuate substantially, and the value of your investment may decline.

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The market price of our common stock could fluctuate significantly due to a number of factors, many of which are beyond our control, including:

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Provisions in our certificate of incorporation and bylaws, and certain provisions of Delaware law, could delay or prevent a change in control.

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The existence of some provisions of our certificate of incorporation and bylaws and Delaware law could discourage, delay, or prevent a change in control that a stockholder may consider favorable.  These include provisions:

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In addition, we are subject to Section 203 of the Delaware General Corporation Law, which may have an anti-takeover effect with respect to transactions not approved in advance by our board of directors, including discouraging takeover attempts that could have resulted in a premium over the market price for shares of our common stock.

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These provisions apply even if a takeover offer is considered beneficial by some stockholders and could delay or prevent an acquisition that our board of directors determines is not in our and our stockholders’ best interests.

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Our bylaws designate the Court of Chancery of the State of Delaware as the sole and exclusive forum for certain types of actions and proceedings that may be initiated by our stockholders, which could limit our stockholders’ ability to obtain a preferred judicial forum for disputes with us or our directors, officers, or other employees.

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Our bylaws provide that, unless we consent in writing to the selection of an alternative forum, the sole and exclusive forum for (i) any derivative action or proceeding brought on our behalf, (ii) any action asserting a claim of breach of a fiduciary duty owed by any director, officer, or other employee to us or our stockholders, (iii) any action asserting a claim arising pursuant to any provision of Delaware General Corporation Law, our certificate of incorporation (including any certificate of designations for any class or series of our preferred stock), or our bylaws, in each case, as amended from time to time, or (iv) any action asserting a claim governed by the internal affairs doctrine, shall be the Court of Chancery of the State of Delaware (provided, however, that in the event that the Court of Chancery of the State of Delaware lacks subject matter jurisdiction over such proceeding, the sole and exclusive forum for such action or proceeding shall be another state or federal court located within the State of Delaware), in all cases subject to the court having personal jurisdiction over the indispensable parties named as defendants.  Any person or entity purchasing or otherwise acquiring any interest in shares of our capital stock is deemed to have received notice of, and consented to, the foregoing provision.  This forum selection provision may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable or cost effective for disputes with us or our directors, officers, or other employees, which may discourage such lawsuits against us and our directors, officers, and employees.

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Item 1B.  UNRESOLVED STAFF COMMENTS

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None.

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Item 2.  PROPERTIES

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We operate approximately 230 Installation branch locations and approximately 180 Specialty Distribution centers in the United States and Canada, most of which are leased.  Our 65,700 square foot Branch Support Center is leased and located at 475 North Williamson Boulevard in Daytona Beach, FL 32114.  This lease expires in June 2029, assuming no exercise of any options set forth in the lease.  We believe that our facilities have sufficient capacity and are adequate for our installation and specialty distribution requirements.

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Item 3.  LEGAL PROCEEDINGS

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For information regarding legal proceedings, see Item 8. Financial Statements and Supplementary Data – Note 11. Other Commitments and Contingencies, which we incorporate herein by reference.

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Item 4.  MINE SAFETY DISCLOSURES

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Not applicable.

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PART II

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Item 5.  MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES

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Market Information and Holders of our Common Stock.  Our common stock is traded on the NYSE under the symbol “BLD”.  As of February 16, 2023, there were approximately 1,590 holders of our issued and outstanding common stock.

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Dividends.  No dividends were paid during the years ended December 31, 2022 and 2021. Our Credit Agreement, in certain circumstances, limits the amount of dividends we may distribute.  We do not anticipate declaring cash dividends to holders of our common stock in the foreseeable future.

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Issuer Purchases of Equity Securities.  We have $154.4 million of shares remaining under for repurchase under our 2022 Share Repurchase Program. The following table provides information regarding the repurchase of our common stock for the three months ended December 31, 2022, in thousands, except share and per share data:

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Excluded from this disclosure are shares repurchased to settle statutory employee tax withholdings related to the vesting of stock awards.

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Performance Graph and Table. The following graph and table compare the cumulative total return of our common stock for the five-year period beginning January 1, 2018, through December 31, 2022, with the total cumulative return of the Russell 2000 Index, the Standard & Poor’s 500 Index, and the Standard & Poor’s 1500 Building Products Index. The graph and table assume an initial investment of $100 in our common stock and each of the three indices at the opening of business on January 1, 2018, and reinvestment of dividends.

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Item 6.  [Reserved]

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Item 7.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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The financial and business analysis below provides information which we believe is relevant to an assessment and understanding of our financial position, results of operations, and cash flows.  This financial and business analysis should be read in conjunction with the financial statements and related notes.

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In this section, we generally discuss the results of our operations for the year ended December 31, 2022 compared to the year ended December 31, 2021. For a discussion of the year ended December 31, 2021 to the year ended December 31, 2020, please refer to Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended December 31, 2021, filed with the SEC on February 22, 2022, which discussion is hereby incorporated herein by reference.

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Executive Summary

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We are a leading installer and specialty distributor of insulation and related building material products to the construction industry in the United States and Canada.  Demand for our products and services is driven primarily by residential and commercial/industrial construction and by industrial manufacturing activity.  A number of local and national factors influence activity in each of our lines of business, including demographic trends, interest rates, employment levels, business investment, supply and demand for housing, availability of credit, foreclosure rates, consumer confidence, and general economic conditions.  

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The core of our business is inherently environmentally friendly.   The insulation we install and distribute drives thermal efficiency, lowers energy usage, and reduces carbon emissions.  We are a leader in delivering these benefits for new and existing homes and commercial/industrial facilities across the United States and Canada.  

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Strategy

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We are a leading installer and specialty distributor of insulation for the residential and commercial/industrial end markets in the United States and Canada.  We also distribute a range of other related building material products including gutters, garage doors, windows, and glass. We are committed to creating long-term value for all stakeholders – employees, customers, suppliers, and investors. Our core values include:

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Our strategy is focused on growth and productivity including:

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Our operating results depend heavily on residential new construction activity and, to a lesser extent, on commercial/industrial construction and industrial manufacturing activity, all of which are cyclical.  We are also dependent on third-party suppliers and manufacturers providing us with an adequate supply of high-quality products.  

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Material Trends in Our Business

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We recognize that there is uncertainty around the economy as the Federal Reserve seeks to slow inflation by raising interest rates.  Higher interest rates and overall inflation have led to many consumers being priced out of the housing market as evidenced by our homebuilders reporting higher cancellation rates, declining order volumes, and decreasing housing starts in the second half of 2022. The backlog of houses under construction supported our sales through the back half of 2022 and we anticipate that trend to continue into the second quarter of 2023 for single family homes and into the fourth quarter of 2023 for multi-family homes.  We remain optimistic about the long-term fundamentals of the U.S. housing market and believe that when mortgage rates eventually stabilize consumer demand will rebound.  

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The commercial/industrial end-markets are showing mixed signals, in part due to higher interest rates.  However, our bidding and order activity remains strong and we remain optimistic about the long-term fundamentals for these markets as well.  

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Seasonality

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Sales across our end markets are typically slower during the winter months due to lower construction activity.

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Results of Operations

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We report our financial results in conformity with GAAP.  

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The following table sets forth our net sales, gross profit, operating profit, and margins, as reported in our Consolidated Statements of Operations, in thousands:

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Comparison of the Years Ended December 31, 2022 and December 31, 2021

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Sales and Operations

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Net sales for 2022 increased 43.7 percent, or $1.5 billion, to $5.0 billion.  The increase was driven by a 24.9 percent increase in sales from acquisitions, 13.4 percent impact from higher selling prices, and a 5.4 percent increase in sales volume.

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Our gross profit margins were 29.7 percent and 27.9 percent for 2022 and 2021, respectively.  Gross profit margin improved primarily due to higher selling prices, higher sales volume, and productivity initiatives partially offset by an increase in cost of material.  

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Selling, general, and administrative expenses as a percentage of sales were 13.8 percent and 14.3 percent for 2022 and 2021, respectively.  Decreased selling, general, and administrative expense as a percent of sales was primarily the result of higher sales, partially offset by higher amortization of intangible assets related to purchase accounting and acquisition integration costs.

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Operating margins were 15.9 percent and 13.7 percent for 2022 and 2021, respectively.  The increase in operating margins related to higher selling prices, higher sales volume, and productivity initiatives, partially offset by an increase in cost of material, and higher amortization of intangible assets related to purchase accounting and acquisition integration costs.

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Other Expense, Net

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Other expense, net, which primarily consists of interest expense, increased $12.1 million to $55.0 million in 2022 compared with 2021.  The increase is primarily related to increased average debt outstanding in 2022 and higher interest rates on our Term Loan, partially offset by increased interest income.

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Income Tax Expense

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Our effective tax rate decreased from 25.2 percent in 2021 to 25.1 percent in 2022.  The lower 2022 rate is primarily related to a decrease in non-deductible items offset by a decrease in the benefit related to share-based compensation.

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2022 and 2021 Business Segment Results

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The following table sets forth our net sales and operating profit information by business segment, in thousands:

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2022 and 2021 Business Segment Results Discussion

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Changes in operating profit margins in the following business segment results discussion exclude general corporate expense, net in 2022 and 2021, as applicable.

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Installation

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Sales

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Sales increased $591.6 million, or 24.9 percent, in 2022 compared to 2021.  Sales increased 12.2 percent due to higher selling prices, 9.2 percent from higher sales volume and 3.4 percent from acquisitions.  

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Operating Results

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Operating margins in the Installation segment were 18.5 percent and 16.1 percent for 2022 and 2021, respectively.  The increase in operating margin was driven by higher selling prices, higher sales volume, and productivity initiatives, partially offset by an increase in cost of material.

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Specialty Distribution

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Sales

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Sales increased $991.1 million, or 77.0 percent, in 2022 compared to 2021.  Sales increased 61.8 percent from acquisitions, 15.8 percent due to higher selling prices partially offset by a slight decrease in volume of 0.6 percent.

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Operating Results

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Operating margins in the Specialty Distribution segment were 14.3 percent and 13.2 percent for 2022 and 2021, respectively.  The increase in operating margin was driven primarily by higher selling prices and productivity initiatives, partially offset by higher amortization of intangible assets related to purchase accounting.

Commitments and Contingencies

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We are subject to certain claims, charges, litigation, and other proceedings in the ordinary course of our business. 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.  For additional information see Item 8. Financial Statements and Supplementary Data – Note 11. Other Commitments and Contingencies.

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Liquidity and Capital Resources

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We have access to liquidity through our cash from operations and available borrowing capacity under our Credit Agreement, which provides for borrowing and/or standby letter of credit issuances of up to $500 million under the revolving facility.  For additional information regarding our outstanding debt and borrowing capacity see Item 8. Financial Statements and Supplementary Data – Note 6. Long-Term Debt.  

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The following table summarizes our total liquidity, in thousands:

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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 known contractual obligations including funding our debt service requirements, capital expenditures, lease obligations and working capital needs for at least the next twelve months. We also have adequate liquidity to maintain off-balance sheet arrangements for short-term leases, letters of credit, and performance and license bonds. See Item 8. Financial Statements and Supplementary Data of this Annual Report for related disclosures.

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Cash Flows

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The following table presents a summary of our cash flows provided by (used in) operating, investing and financing activities for the periods indicated, in thousands:

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Net cash flows provided by operating activities increased $92.8 million for the year ended December 31, 2022, as compared to December 31, 2021.  Net income was up $231.9 million, or 71.6%, compared with the prior year period, driven by the impact of our acquisitions, higher sales prices and sale volumes.  That increase was largely offset by the impact of higher levels of working capital, particularly receivables and inventory.

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Net cash used in investing activities was $93.9 million for the year ended December 31, 2022, primarily comprised of $76.4 million for purchases of property and equipment (primarily vehicles, equipment and computer hardware and software), as well as $20.5 million for acquisitions. Net cash used in investing activities was $1,322.2 million for the year ended December 31, 2021, primarily comprised of $1,267.1 million for acquisitions and $55.5 million for purchases of property and equipment, primarily vehicles.  

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Net cash used in financing activities was $300.1 million for the year ended December 31, 2022. During the year ended December 31, 2022, we used $250.0 million for the repurchase of common stock, $38.7 million for debt repayments, and $9.7 million net activity related to exercise of share-based incentive awards and stock options.  Additionally, we borrowed and repaid $70 million on our Revolving Facility, all within the second quarter of 2022. Net cash provided by financing activities was $729.0 million for the year ended December 31, 2021. Cash increased by $1,218.8 million from proceeds received on Amendment No. 1 to Credit Agreement as well as the 4.125% Senior Notes issuance used to fund the acquisition of DI. These increases were partially offset by repayments of $433.1 million including $400.0 million to redeem our 5.625% Senior Notes and payments on our term loan and equipment notes as well as $15.0 million used for debt issuance costs related to Amendment No. 1 to Credit Agreement as well as the 4.125% Senior Notes issuance.  Additionally, we used $35.6 million for the repurchase of common stock as well as $5.5 million net activity related to exercise of share-based incentive awards and stock options.  

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Critical Accounting Policies and Estimates

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We prepare our 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 and disclosure of assets and liabilities, and any related contingencies, at the date of the financial statements, as well as the reported amounts of sales and expenses during the reporting period.  Actual results could differ from those estimates. 

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Our significant accounting policies are more fully described in Item 8. Financial Statements and Supplementary Data – Note 1. Summary of Significant Accounting Policies.  However, certain of our accounting policies considered critical are those we believe are both most important to the portrayal of our financial condition and operating results and require our most difficult, subjective, or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain.  Judgments and uncertainties affecting the application of those policies may result in materially different amounts being reported under different conditions or using different assumptions.  We consider the following policies to be most critical in understanding the judgments that are involved in preparing our Consolidated Financial Statements. 

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Revenue Recognition and Receivables

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We recognize revenue for our Installation segment over time as the related performance obligation is satisfied with respect to each particular order within a given customer’s contract. Progress toward complete satisfaction of the performance obligation is measured using a cost-to-cost measure of progress method. The cost input is based on the amount of material installed at that customer’s location and the associated labor costs, as compared to the total expected cost for the particular order. The total expected cost is a significant estimate in the revenue recognition process, requires judgment, and is subject to variability throughout the duration of the contract as a result of contract modifications and other circumstances impacting job completion. Generally, this results in revenue being recognized as the customer is able to receive and utilize the benefits provided by our services. Each contract contains one or more individual orders, which are based on services delivered. When material and installation services are bundled in a contract, we combine these items into one performance obligation as the overall promise is to transfer the combined item.

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Revenue from our Specialty Distribution segment is recognized when title to products and risk of loss transfers to our customers.  This represents the point in time when the customer is able to direct the use of and obtain substantially all the benefits from the product. The determination of when control is deemed transferred depends on the shipping terms that are agreed upon in the contract.

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At time of sale, we record estimated reductions to revenue for customer programs and incentive offerings, including special pricing and other volume-based incentives based on historical experience, which is continuously adjusted. The duration of our contracts with customers is relatively short, generally less than a 90-day period, and therefore there is not a significant financing component when considering the determination of the transaction price which gets allocated to the individual performance obligations, generally based on standalone selling prices. Additionally, we consider shipping costs charged to a customer as a fulfillment cost rather than a promised service and expense as incurred. Sales taxes, when incurred, are recorded as a liability and excluded from revenue on a net basis.

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We record a contract asset when we have satisfied our performance obligation prior to billing and a contract liability when a customer payment is received prior to the satisfaction of our performance obligation. The difference between the beginning and ending balances of our contract assets and liabilities primarily results from the timing of our performance and the customer’s payment.

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We maintain allowances for estimated losses resulting from the inability of customers to make required payments.  In addition, we monitor our customer receivable balances and the credit worthiness of our customers on an on-going basis.  During downturns in our markets, declines in the financial condition and creditworthiness of customers impact the credit risk of the receivables involved and we have incurred additional bad debt expense related to customer defaults.

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Business Combinations

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The purchase price for business combinations is allocated to the estimated fair values of acquired tangible and intangible assets, including goodwill, and assumed liabilities, where applicable.  Additionally, we recognize customer relationships, trademarks and trade names, and non-compete agreements as identifiable intangible assets, which are recorded at fair value as of the transaction date. The fair value of the customer relationships intangible assets was determined by management using the multi-period excess earnings method under the income approach. Assumptions used in determining the fair value of the customer relationships intangible asset included forecasted revenue growth

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rate, customer attrition rate, and discount rate. The fair value of other intangible assets is determined primarily using current industry information.  Goodwill is recorded when consideration transferred exceeds the fair value of identifiable assets and liabilities.  Measurement-period adjustments to assets acquired and liabilities assumed with a corresponding offset to goodwill are recorded in the period they occur, which may include up to one year from the acquisition date.  Contingent consideration is recorded at fair value at the acquisition date.

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Goodwill and Other Intangible Assets

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We have two reporting units, which are also our operating and reporting segments: Installation and Specialty Distribution, and both contain goodwill.  Our operating segments engage in business activities for which discrete financial information including long range forecasts is available, and we complete the impairment testing of goodwill at this level, as defined by accounting guidance. 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 such unit and determination of its fair value.  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.

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We perform our annual impairment testing of goodwill in the fourth quarter of each year, or as events occur or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. When assessing goodwill for impairment, we have the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events or circumstances, we determine it is more likely than not that the fair value of a reporting unit is less than its carrying amount, then we recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. If we conclude otherwise, then no further action is taken. We also have the option to bypass the qualitative assessment and only perform a quantitative assessment. For the year ended December 31, 2022, we performed a quantitative assessment.

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Fair value for our reporting units is determined using a discounted cash flow method which includes significant unobservable inputs (Level 3 inputs). We believe this methodology is comparable to what would be used by other market participants.  Using the discounted cash flow method requires us to make significant estimates and assumptions, including long term projections of cash flows, market conditions, and appropriate discount rates.  Our judgments are based on historical experience, current market trends, consultations with external valuation specialists and other information.  While we believe that the estimates and assumptions underlying the valuation methodology are reasonable, changes to estimates and assumptions could result in different outcomes.  In estimating future cash flows, we rely on internally generated long-range forecasts for sales and operating profits, and generally a one to three percent long term assumed annual growth rate of cash flows for periods after the long-range forecast.  We generally develop these forecasts based upon, among other things, recent sales data for existing products, and estimated U.S. housing starts.

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When necessary, an impairment loss is recognized to the extent that a reporting unit’s recorded goodwill exceeds its fair value. In the fourth quarters of 2022 and 2021, we performed an assessment on our goodwill and determined that the estimated fair value of each reporting unit substantially exceeded its carrying value at December 31, 2021, and therefore the goodwill was not impaired.

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We did not recognize any impairment charges for goodwill for the years ended December 31, 2022, 2021, and 2020. As of December 31, 2022, net goodwill reflected $762.0 million of accumulated impairment losses, relating primarily to impairment charges taken in 2008-2010 following the substantial decrease in U.S. housing starts after the financial crisis of 2007-2008.

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Intangible assets with finite useful lives are amortized using the straight-line method over their estimated useful lives. We evaluate the remaining useful lives of amortizable identifiable intangible assets at each reporting period to determine whether events and circumstances warrant a revision to the remaining periods of amortization.

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Income Taxes

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If, based upon all available evidence, both positive and negative, it is more likely than not (more than 50 percent likely) deferred tax assets will not be realized, a valuation allowance is recorded.  Significant weight is given to positive and negative evidence that is objectively verifiable.  A company’s three year cumulative loss position is significant negative evidence in considering whether deferred tax assets are realizable and the accounting guidance restricts the amount of reliance we can place on projected taxable income to support the recovery of deferred tax assets.

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While we believe we have adequately assessed for our uncertain tax positions, amounts asserted by taxing authorities could vary from our assessment of uncertain tax positions.  Accordingly, provisions for tax-related matters, including interest and penalties, could be recorded in income tax expense in the period revised assessments are made.

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Recently Issued Accounting Pronouncements

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Recently issued accounting pronouncements and their expected or actual effect on our reported results of operations are addressed in Item 8. Financial Statements and Supplementary Data – Note 1. Summary of Significant Accounting Policies.

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Item 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK