UNITED STATES

SECURITIES AND EXCHANGE

COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q


(Mark One)
☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2020


☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number: 001-36870

TopBuild Corp.

(Exact name of Registrant as Specified in its Charter)

Delaware

(State or Other Jurisdiction of Incorporation or
Organization)

47-3096382

(I.R.S. Employer
Identification No.)

475 North Williamson Boulevard

Daytona Beach, Florida

(Address of Principal Executive Offices)

32114

(Zip Code)

(386) 304-2200

(Registrant's telephone number, including area code)

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

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common stock, par value $0.01 per share	BLD	New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.⌧ Yes ◻ No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ⌧ Yes ◻ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

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

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act ◻

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ☒ No

The registrant had outstanding 33,327,207 shares of Common Stock, par value $0.01 per share as of April 29, 2020.

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GLOSSARY

We use acronyms, abbreviations, and other defined terms throughout this quarterly report on Form 10-Q, which are defined in the glossary below:


Term		Definition
2015 LTIP		2015 Long-Term Incentive program authorizes the Board to grant stock options, stock appreciation rights, restricted shares, restricted share units, performance awards, and dividend equivalents
2017 Repurchase Program		$200 million share repurchase program authorized by the Board on February 24, 2017
2018 ASR Agreement		$50 million accelerated share repurchase agreement with JPMorgan Chase Bank, N.A.
2019 Repurchase Program		$200 million share repurchase program authorized by the Board on February 22, 2019
2019 ASR Agreement		$50 million accelerated share repurchase agreement with Bank of America, N.A.
Amended Credit Agreement		Senior secured credit agreement and related security and pledge agreement dated March 20, 2020
Annual Report		Annual report filed with the SEC on Form 10-K pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
ASC		Accounting Standards Codification
ASU		Accounting Standards Update
Board		Board of Directors of TopBuild
BofA		Bank of America, N.A.
Cooper		Cooper Glass Company, LLC
Current Report		Current report filed with the SEC on Form 8-K pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
EBITDA		Earnings before interest, taxes, depreciation, and amortization
EcoFoam		Bella Insulutions Inc., DBA EcoFoam/Insulutions
Exchange Act		The Securities Exchange Act of 1934, as amended
FASB		Financial Accounting Standards Board
GAAP		Generally accepted accounting principles in the United States of America
Hunter		Hunter Installation
IBR		Incremental borrowing rate, as defined in ASC 842
Lenders		Bank of America, N.A., together with the other lenders party to the "Amended Credit Agreement"
LIBOR		London interbank offered rate
Net Leverage Ratio		As defined in the “Amended Credit Agreement,” the ratio of outstanding indebtedness, less up to $100 million of unrestricted cash, to EBITDA
NYSE		New York Stock Exchange
Original Credit Agreement		Senior secured credit agreement and related security and pledge agreement dated May 5, 2017, as amended March 28, 2018
Quarterly Report		Quarterly report filed with the SEC on Form 10-Q pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Revolving Facility		Senior secured revolving credit facilities available under the Amended Credit Agreement, of $450 million with applicable sublimits for letters of credit and swingline loans
ROU		Right of use (asset), as defined in ASC 842
RSA		Restricted stock award
Santa Rosa		Santa Rosa Insulation and Fireproofing, LLC
SEC		United States Securities and Exchange Commission
Secured Leverage Ratio		As defined in the “Amended Credit Agreement,” the ratio of outstanding indebtedness, including letters of credit, to EBITDA
Senior Notes		TopBuild's 5.625% senior unsecured notes due on May 1, 2026
TopBuild		TopBuild Corp. and its wholly-owned consolidated domestic subsidiaries. Also, the "Company," "we," "us," and "our"
Viking		Viking Insulation Co.

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PART I – FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

TOPBUILD CORP.

CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)

(In thousands except share data)


	As of
	March 31,		December 31,
	2020		2019
ASSETS
Current assets:
Cash and cash equivalents	$	187,039	$	184,807
Receivables, net of an allowance for credit losses of $7,200 at March 31, 2020, and allowance for doubtful accounts of $4,854 at December 31, 2019		431,649		428,844
Inventories, net		152,721		149,078
Prepaid expenses and other current assets		10,918		17,098
Total current assets		782,327		779,827

Right of use assets		86,080		87,134
Property and equipment, net		185,575		178,080
Goodwill		1,379,831		1,367,918
Other intangible assets, net		182,229		181,122
Deferred tax assets, net		4,359		4,259
Other assets		11,439		5,623
Total assets	$	2,631,840	$	2,603,963

LIABILITIES AND EQUITY
Current liabilities:
Accounts payable	$	305,614	$	307,970
Current portion of long-term debt		23,091		34,272
Accrued liabilities		107,327		98,418
Short-term lease liabilities		35,051		36,094
Total current liabilities		471,083		476,754

Long-term debt		699,750		697,955
Deferred tax liabilities, net		174,230		175,263
Long-term portion of insurance reserves		50,928		45,605
Long-term lease liabilities		54,025		54,010
Other liabilities		2,007		1,487
Total liabilities		1,452,023		1,451,074

Commitments and contingencies

Equity:
Preferred stock, $0.01 par value: 10,000,000 shares authorized; 0 shares issued and outstanding at March 31, 2020 and December 31, 2019		—		—
Common stock, $0.01 par value: 250,000,000 shares authorized; 38,982,600 shares issued and 33,326,284 outstanding at March 31, 2020, and 38,884,530 shares issued and 33,489,769 outstanding at December 31, 2019		389		388
Treasury stock, 5,656,316 shares at March 31, 2020, and 5,394,761 shares at December 31, 2019, at cost		(351,645)		(330,018)
Additional paid-in capital		850,665		849,657
Retained earnings		680,408		632,862
Total equity		1,179,817		1,152,889
Total liabilities and equity	$	2,631,840	$	2,603,963

See notes to our unaudited condensed consolidated financial statements.

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TOPBUILD CORP.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

(In thousands except share and per common share data)


	Three Months Ended March 31,
	2020		2019
Net sales	$	653,228	$	619,330
Cost of sales		481,272		463,635
Gross profit		171,956		155,695

Selling, general, and administrative expense		101,967		99,077
Operating profit		69,989		56,618

Other income (expense), net:
Interest expense		(8,742)		(9,602)
Loss on extinguishment of debt		(233)		—
Other, net		472		333
Other expense, net		(8,503)		(9,269)
Income before income taxes		61,486		47,349

Income tax expense		(10,715)		(9,366)
Net income	$	50,771	$	37,983

Net income per common share:
Basic	$	1.53	$	1.11
Diluted	$	1.51	$	1.09

Weighted average shares outstanding:
Basic		33,168,453		34,169,315
Diluted		33,599,847		34,703,289

See notes to our unaudited condensed consolidated financial statements.

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TOPBUILD CORP.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(In thousands)


	Three Months Ended March 31,
	2020		2019
Cash Flows Provided by (Used in) Operating Activities:
Net income	$	50,771	$	37,983
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		14,190		12,475
Share-based compensation		3,908		2,972
Loss on extinguishment of debt		233		—
Loss on sale or abandonment of property and equipment		383		487
Amortization of debt issuance costs		328		390
Provision for bad debt expense		1,670		1,676
Loss from inventory obsolescence		529		1,109
Deferred income taxes, net		(39)		95
Change in certain assets and liabilities
Receivables, net		(5,048)		(23,341)
Inventories, net		(3,964)		7,125
Prepaid expenses and other current assets		6,193		11,192
Accounts payable		(4,173)		(31,407)
Accrued liabilities		9,981		2,100
Other, net		(2,032)		666
Net cash provided by operating activities		72,930		23,522

Cash Flows Provided by (Used in) Investing Activities:
Purchases of property and equipment		(15,892)		(10,213)
Acquisition of businesses		(20,526)		—
Proceeds from sale of property and equipment		194		75
Other, net		—		16
Net cash used in investing activities		(36,224)		(10,122)

Cash Flows Provided by (Used in) Financing Activities:
Proceeds from issuance of long-term debt		300,000		—
Repayment of long-term debt		(307,668)		(5,601)
Payment of debt issuance costs		(2,280)		—
Taxes withheld and paid on employees' equity awards		(10,399)		(5,578)
Repurchase of shares of common stock		(14,127)		(4,622)
Payment of contingent consideration		—		(250)
Net cash used in financing activities		(34,474)		(16,051)

Cash and Cash Equivalents
Increase (decrease) for the period		2,232		(2,651)
Beginning of period		184,807		100,929
End of period	$	187,039	$	98,278

Supplemental disclosure of noncash activities:
Leased assets obtained in exchange for new operating lease liabilities	$	9,167	$	105,249
Accruals for property and equipment		496		441

See notes to our unaudited condensed consolidated financial statements.

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TOPBUILD CORP.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (Unaudited)

(In thousands except share data)


	Common		Treasury		Additional
	Stock		Stock		Paid-in		Retained
	($0.01 par value)		at cost		Capital		Earnings		Equity
Balance at December 31, 2018	$	387	$	(216,607)	$	846,451	$	441,867	$	1,072,098
Net income		—		—		—		37,983		37,983
Share-based compensation		—		—		2,972		—		2,972
Issuance of 112,270 restricted share awards under long-term equity incentive plan		1		—		(1)		—		—
Repurchase of 176,327 shares pursuant to the settlement of the 2018 ASR Agreement		—		(10,000)		10,000		—		—
Repurchase of 72,791 shares pursuant to the 2019 Repurchase Program		—		(4,622)		—		—		(4,622)
105,615 shares withheld to pay taxes on employees' equity awards		—		—		(5,578)		—		(5,578)
Balance at March 31, 2019	$	388	$	(231,229)	$	853,844	$	479,850	$	1,102,853


Balance at December 31, 2019	$	388	$	(330,018)	$	849,657	$	632,862	$	1,152,889
Net income		—		—		—		50,771		50,771
Share-based compensation		—		—		3,908		—		3,908
Cumulative-effect of accounting change		—		—		—		(3,225)		(3,225)
Issuance of 63,780 restricted share awards under long-term equity incentive plan		1		—		(1)		—		—
Repurchase of 73,455 shares pursuant to the settlement of the 2019 ASR Agreement		—		(7,500)		7,500		—		—
Repurchase of 188,100 shares pursuant to the 2019 Repurchase Program		—		(14,127)		—		—		(14,127)
97,144 shares withheld to pay taxes on employees' equity awards		—		—		(10,399)		—		(10,399)
Balance at March 31, 2020	$	389	$	(351,645)	$	850,665	$	680,408	$	1,179,817

See notes to our unaudited condensed consolidated financial statements.

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TOPBUILD CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

1. BASIS OF PRESENTATION

TopBuild was formed on June 30, 2015, and is listed on the NYSE under the ticker symbol “BLD.” We report our business in two segments: Installation and Distribution. Our Installation segment primarily installs insulation and other building products. Our Distribution segment primarily sells and distributes insulation and other building products. Our segments are based on our operating units, for which financial information is regularly evaluated by our chief operating decision maker.

In our opinion, the accompanying unaudited condensed consolidated financial statements contain all adjustments, of a normal recurring nature, necessary to state fairly our financial position as of March 31, 2020, our results of operations for the three months ended March 31, 2020 and 2019 and cash flows for the three months ended March 31, 2020 and 2019. The condensed consolidated balance sheet at December 31, 2019, was derived from our audited financial statements, but does not include all disclosures required by GAAP.

These condensed consolidated financial statements and related notes should be read in conjunction with the audited Consolidated Financial Statements included in the Company’s Annual Report for the year ended December 31, 2019, as filed with the SEC on February 25, 2020.

Liquidity and Impact of COVID-19

During the quarter ended March 31, 2020, the Company began to see impacts from the economic slowdown as a result of the COVID-19 pandemic. Subsequent to March 31, 2020, the United States has continued to implement measures in response to the COVID-19 pandemic, including enhanced social distancing guidelines and additional stay-at-home orders in various municipalities, counties and states. To date, with the exception of a few states, residential and commercial construction has been deemed an essential service. In those locations, the Company continues to operate. Management continues to monitor operations and evaluate every aspect of the business, however the full extent of the impact that the COVID-19 pandemic will have on our results of operations, financial condition and cash flows is unknown and will be highly dependent on the duration and magnitude of disruptions for the remainder of 2020. However, we believe that our cash flows from operations, combined with our current cash levels and available borrowing capacity, will be adequate to support our ongoing operations and working capital needs, despite the current reductions in economic activity due to COVID-19.

2. ACCOUNTING POLICIES

Financial Statement Presentation. Our condensed consolidated financial statements have been developed in conformity with GAAP, which requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and disclosures of contingent liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting period. Actual results could differ materially from these estimates. All intercompany transactions between TopBuild entities have been eliminated.

Recently Adopted Accounting Pronouncements

Credit Losses

In June 2016, the FASB issued ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments,” which replaces the current incurred loss methodology with an expected loss methodology, referred to as the current expected credit loss (CECL) methodology. We adopted Topic 326 on January 1, 2020, using the modified retrospective method, which resulted in a $3.2 million cumulative-effect adjustment recorded through retained earnings as of the beginning of the quarter ended March 31, 2020.

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TOPBUILD CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

We measure the expected credit losses on accounts receivable by segment, using historical loss rate information adjusted for current conditions, with changes in the allowance recorded as a provision for (or reversal of) credit loss expense. Expected losses are charged against the allowance when management believes a receivable is uncollectible. Receivables, net are presented net of certain allowances, including allowance for credit losses.

Goodwill Impairment

In January 2017, the FASB issued ASU 2017-04, “Intangibles – Goodwill and Other (Topic 350), Simplifying the Test for Goodwill Impairment.” The new standard simplifies the subsequent measurement of goodwill by eliminating the second step of the goodwill impairment test. This update was effective for us beginning January 1, 2020, and did not have a material impact on our financial position and results of operations.

Fair Value

In August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820), Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement.” The new standard modifies the disclosure requirements on fair value measurements in Topic 820, Fair Value Measurement, including adjustments to Level 3 fair value measurement disclosures as well as the removal of disclosures around Level 1 and Level 2 transfers. This update was effective for us beginning January 1, 2020, and did not have a material impact on our financial position and results of operations.

Recently Issued Accounting Pronouncements Not Yet Adopted

In December 2019, the FASB issued ASU 2019-12, “Income Taxes (Topic 740), Simplifying the Accounting for Income Taxes.” This standard simplifies the accounting for income taxes by removing certain exceptions to the general principles included in current guidance, as well as improving consistent application of and simplifying GAAP for other areas by clarifying and amending existing guidance. This update is effective for us beginning January 1, 2021, with early adoption permitted. We have not yet selected an adoption date, and we are currently evaluating the effect of adoption of this standard on our financial position and results of operations.

3. REVENUE RECOGNITION

Revenue is disaggregated between our Installation and Distribution segments and further based on market and product, as we believe this best depicts how the nature, amount, timing, and uncertainty of revenue and cash flows are affected by economic factors. The following tables present our revenues disaggregated by market (in thousands):


	Three Months Ended March 31, 2020
		Installation		Distribution		Eliminations		Total
Residential	$	373,281	$	162,456	$	(29,006)	$	506,731
Commercial		102,592		51,767		(7,862)		146,497
Net sales	$	475,873	$	214,223	$	(36,868)	$	653,228


	Three Months Ended March 31, 2019
		Installation		Distribution		Eliminations		Total
Residential	$	349,874	$	153,778	$	(27,516)	$	476,136
Commercial		99,509		50,686		(7,001)		143,194
Net sales	$	449,383	$	204,464	$	(34,517)	$	619,330

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TOPBUILD CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

The following tables present our revenues disaggregated by product (in thousands):


	Three Months Ended March 31, 2020
		Installation		Distribution		Eliminations		Total
Insulation and accessories	$	369,996	$	180,249	$	(30,059)	$	520,186
Glass and windows		41,319		—		—		41,319
Gutters		18,930		19,991		(5,387)		33,534
All other		45,628		13,983		(1,422)		58,189
Net sales	$	475,873	$	214,223	$	(36,868)	$	653,228


	Three Months Ended March 31, 2019
		Installation		Distribution		Eliminations		Total
Insulation and accessories	$	349,956	$	169,582	$	(27,834)	$	491,704
Glass and windows		37,868		—		—		37,868
Gutters		18,923		18,585		(5,587)		31,921
All other		42,636		16,297		(1,096)		57,837
Net sales	$	449,383	$	204,464	$	(34,517)	$	619,330

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. Revenue is 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 a contract modification is made, typically the remaining goods or services are considered distinct and we recognize revenue for the modification as a separate performance obligation. When 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.

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

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

We record a contract asset when we have satisfied our performance obligation prior to billing and a contract liability 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. Our remaining performance obligations are expected to be recognized within the next twelve months.

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TOPBUILD CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

The following table represents our contract assets and contract liabilities with customers, in thousands:


	Included in Line Item on	As of
	Condensed Consolidated	March 31,		December 31,
	Balance Sheets	2020		2019
Contract Assets:
Receivables, unbilled	Receivables, net	$	56,608	$	57,153

Contract Liabilities:
Deferred revenue	Accrued liabilities	$	15,533	$	16,139

4. GOODWILL AND OTHER INTANGIBLES

We have two reporting units which are also our operating and reporting segments: Installation and Distribution. Both reporting units contain goodwill. Assets acquired and liabilities assumed are assigned to the applicable reporting unit based on whether the acquired assets and liabilities relate to the operations of and determination of the fair value of such unit. Goodwill assigned to the reporting unit is the excess of the fair value of the acquired business over the fair value of the individual assets acquired and liabilities assumed for the reporting unit.

In the fourth quarter of 2019, we performed an annual assessment on our goodwill resulting in no impairment.

Changes in the carrying amount of goodwill for the three months ended March 31, 2020 by segment, were as follows, in thousands:


	Gross Goodwill				Gross Goodwill		Accumulated		Net Goodwill
	at				at		Impairment		at
	December 31, 2019		Additions		March 31, 2020		Losses		March 31, 2020
Goodwill, by segment:
Installation	$	1,683,589	$	11,913	$	1,695,502	$	(762,021)	$	933,481
Distribution		446,350		—		446,350		—		446,350
Total goodwill	$	2,129,939	$	11,913	$	2,141,852	$	(762,021)	$	1,379,831

See Note 13 – Business Combinations for goodwill recognized on acquisitions that occurred during the quarter.

Other intangible assets, net includes customer relationships, non-compete agreements, and trademarks / trade names. The following table sets forth our other intangible assets, in thousands:


	As of
	March 31, 2020		December 31, 2019
Gross definite-lived intangible assets	$	227,761	$	221,382
Accumulated amortization		(45,532)		(40,260)
Net definite-lived intangible assets		182,229		181,122
Indefinite-lived intangible assets not subject to amortization		—		—
Other intangible assets, net	$	182,229	$	181,122

The following table sets forth our amortization expense, in thousands:

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TOPBUILD CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

5. LONG-TERM DEBT

The following table reconciles the principal balances of our outstanding debt to our condensed consolidated balance sheets, in thousands:


	As of
	March 31,		December 31,
	2020		2019
Senior Notes - 5.625% due May 2026	$	400,000	$	400,000
Term loan		300,000		305,625
Equipment notes		31,482		33,525
Unamortized debt issuance costs		(8,641)		(6,923)
Total debt, net of unamortized debt issuance costs		722,841		732,227
Less: current portion of long-term debt		23,091		34,272
Total long-term debt	$	699,750	$	697,955

The following table sets forth our remaining principal payments for our outstanding debt balances as of March 31, 2020, in thousands:


	Payments Due by Period
	2020		2021		2022		2023		2024		Thereafter		Total
Senior Notes	$	—	$	—	$	—	$	—	$	—	$	400,000	$	400,000
Term loan		11,250		15,000		20,625		22,500		28,125		202,500		300,000
Equipment notes		6,038		8,326		8,651		6,337		2,130		—		31,482
Total	$	17,288	$	23,326	$	29,276	$	28,837	$	30,255	$	602,500	$	731,482

Amended Credit Agreement and Senior Secured Term Loan Facility

On March 20, 2020, the Company entered into an Amended Credit Agreement, which renews, amends and restates the Original Credit Agreement in its entirety. The Amended Credit Agreement provides for a term loan facility in an aggregate principal amount of $300.0 million, all of which was drawn on March 20, 2020 and a Revolving Facility in an initial aggregate principal amount of $450.0 million, including a $100.0 million letter of credit sublimit and up to a $35.0 million swingline sublimit. The maturity date for the loans under the Amended Credit Agreement was extended from May 2022 to March 2025.

The following table outlines the key terms of our Amended Credit Agreement (dollars in thousands):


Senior secured term loan facility	$	300,000

Additional term loan and/or revolver capacity available under incremental facility (a)	$	300,000

Revolving Facility	$	450,000
Sublimit for issuance of letters of credit under Revolving Facility (b)	$	100,000
Sublimit for swingline loans under Revolving Facility (b)	$	35,000

Interest rate as of March 31, 2020		2.02	%
Scheduled maturity date		3/20/2025

(a)	Additional borrowing capacity is available under the incremental facility, subject to certain terms and conditions (including existing or new lenders providing commitments in respect of such additional borrowing capacity).

(b)	Use of the sublimits for the issuance of letters of credit and swingline loans reduces the availability under the Revolving Facility.

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TOPBUILD CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Interest payable on borrowings under the Amended Credit Agreement is based on an applicable margin rate plus, at our option, either:

●

A base rate determined by reference to the highest of either (i) the federal funds rate plus 0.50 percent, (ii) BofA’s “prime rate,” and (iii) the LIBOR rate for U.S. dollar deposits with a term of one month, plus 1.00 percent; or

●

A LIBOR rate (or a comparable successor rate) determined by reference to the costs of funds for deposits in U.S. dollars for the interest period relevant to such borrowings, subject to a floor of 0.5%.

The Amended Credit Agreement contemplates future amendment by the Company and the agent to provide for the replacement of LIBOR with the Secured Overnight Financing Rate or another alternate benchmark rate, giving due consideration to any evolving or then existing convention for similar U.S. dollar denominated syndicated credit facilities for such alternative benchmarks, including any related mathematical or other applicable adjustments.

The applicable margin rate is determined based on our Secured Leverage Ratio. In the case of base rate borrowings, the applicable margin rate ranges from 0.00 percent to 1.50 percent and in the case of LIBOR rate borrowings, the applicable margin ranges from 1.00 percent to 2.50 percent. Borrowings under the Amended Credit Agreement are prepayable at the Company’s option without premium or penalty. The Company is required to make prepayments with the net cash proceeds of certain asset sales and certain extraordinary receipts.

Revolving Facility

The Company has outstanding standby letters of credit that secure our financial obligations related to our workers’ compensation, general insurance, and auto liability programs. These standby letters of credit, as well as any outstanding amount borrowed under our Revolving Facility, reduce the availability under the Revolving Facility. The following table summarizes our availability under the Revolving Facility, in thousands:


	As of
	March 31,		December 31,
	2020		2019
Revolving Facility	$	450,000	$	250,000
Less: standby letters of credit		(61,382)		(61,382)
Availability under Revolving Facility	$	388,618	$	188,618

We are required to pay commitment fees to the Lenders in respect of any unutilized commitments. The commitment fees range from 0.15 percent to 0.275 percent per annum, depending on our Secured Leverage Ratio. We must also pay customary fees on outstanding letters of credit.

Senior Notes

The Senior Notes are our senior unsecured obligations and bear interest at 5.625% per year, payable semiannually in arrears on May 1 and November 1 of each year, which began on November 1, 2018. The Senior Notes mature on May 1, 2026, unless redeemed early or repurchased. We have the right to redeem the Senior Notes under certain circumstances, and, if we undergo a change in control, we must make an offer to repurchase all of the Senior Notes then outstanding at a repurchase price equal to 101% of their aggregate principal amount, plus accrued and unpaid interest (if any) to, but not including, the repurchase date.

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TOPBUILD CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Equipment Notes

As of December 31, 2019, the company has issued $41.6 million of equipment notes for the purpose of financing the purchase of vehicles and equipment. No equipment notes were issued during the first quarter of 2020. The Company’s equipment notes each have a five year term maturing from 2023 to 2024 and bear interest at fixed rates between 2.8% and 4.4%.

Covenant Compliance

The indenture governing our Senior Notes contains customary restrictive covenants that, among other things, generally limit our ability to incur additional debt and issue preferred stock; to create liens; to pay dividends, acquire shares of capital stock, make payments on subordinated debt or make investments; to place limitations on distributions from certain subsidiaries; to issue guarantees; to issue or sell the capital stock of certain subsidiaries; to sell assets; to enter into transactions with affiliates; and to effect mergers. The Senior Notes indenture also contains customary events of default, subject in certain cases to grace and cure periods. Generally, if an event of default occurs and is continuing, the trustee under the indenture or the holders of at least 25% in aggregate principal amount of the Senior Notes then outstanding may declare the principal of, premium, if any, and accrued interest on all the Senior Notes immediately due and payable. The Senior Notes and related guarantees have not been registered under the Securities Act of 1933, and we are not required to register either the Senior Notes or the guarantees in the future.

The Amended Credit Agreement contains certain covenants that limit, among other things, the ability of the Company to incur additional indebtedness or liens; to make certain investments or loans; to make certain restricted payments; to enter into consolidations, mergers, sales of material assets, and other fundamental changes; to transact with affiliates; to enter into agreements restricting the ability of subsidiaries to incur liens or pay dividends; or to make certain accounting changes. The Amended Credit Agreement contains customary affirmative covenants and events of default.

The Amended Credit Agreement requires that we maintain a Net Leverage Ratio and minimum Interest Coverage Ratio throughout the term of the agreement. The following table outlines the key financial covenants effective for the period covered by this Quarterly Report:


		As of March 31, 2020
Maximum Net Leverage Ratio		3.50:1.00
Minimum Interest Coverage Ratio		3.00:1.00
Compliance as of period end		In Compliance

6. FAIR VALUE MEASUREMENTS

Fair Value on Recurring Basis

The carrying values of cash and cash equivalents, receivables, net, and accounts payable are considered to be representative of their respective fair values due to the short-term nature of these instruments. We measure our contingent consideration liabilities related to business combinations at fair value. For more information see Note 13 – Business Combinations.

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TOPBUILD CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Fair Value on Non-Recurring Basis

Fair value measurements were applied to our long-term debt portfolio. We believe the carrying value of our term loan approximates the fair market value primarily due to the fact that the non-performance risk of servicing our debt obligations, as reflected in our business and credit risk profile, has not materially changed since we assumed our debt obligations under the Amended Credit Agreement. In addition, due to the floating-rate nature of our term loan, the market value is not subject to variability solely due to changes in the general level of interest rates as is the case with a fixed-rate debt obligation. Based on active market trades of our Senior Notes close to March 31, 2020 (Level 1 fair value measurement), we estimate that the fair value of the Senior Notes is approximately $364.0 million compared to a gross carrying value of $400.0 million at March 31, 2020.

7. SEGMENT INFORMATION

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


	Three Months Ended March 31,
	2020		2019		2020		2019
	Net Sales				Operating Profit (b)
Our operations by segment were (a):
Installation	$	475,873	$	449,383	$	60,351	$	51,299
Distribution		214,223		204,464		24,669		20,597
Intercompany eliminations		(36,868)		(34,517)		(5,833)		(5,674)
Total	$	653,228	$	619,330		79,187		66,222
General corporate expense, net (c)						(9,198)		(9,604)
Operating profit, as reported						69,989		56,618
Other expense, net						(8,503)		(9,269)
Income before income taxes					$	61,486	$	47,349

(a)	All of our operations are located in the U.S.

(b)	Segment operating profit includes an allocation of general corporate expenses attributable to the operating segments which is based on direct benefit or usage (such as salaries of corporate employees who directly support the segment).

(c)	General corporate expense, net includes expenses not specifically attributable to our segments for functions such as corporate human resources, finance, and legal, including salaries, benefits, and other related costs.

8. LEASES

We have operating leases for our installation branch locations, distribution centers, our Branch Support Center in Daytona Beach, Florida, vehicles and certain equipment. In addition, we lease certain operating facilities from certain related parties, primarily former owners (and in some cases, current management personnel) of companies acquired. These related party leases are immaterial to our unaudited condensed consolidated statements of operations. As of March 31, 2020, we did not have any finance leases.

At the inception of a contract, we determine whether the contract is, or contains, a lease based on the unique facts and circumstances present. Our facilities operating leases have lease and non-lease fixed cost components, which we account for as one single lease component in calculating the present value of minimum lease payments. Variable lease and non-lease cost components are expensed as incurred and are primarily included in cost of sales on the accompanying unaudited condensed consolidated statement of operations. Variable costs include common area maintenance, utilities, real estate taxes, insurance, and other operating costs that are passed on from the lessor. These variable cost components are included within our operating lease cost.

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TOPBUILD CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Operating lease payments are recognized as an expense in the unaudited condensed consolidated statements of operations on a straight-line basis over the lease term, including future option periods the Company reasonably expects to exercise, whereby an equal amount of rent expense is attributed to each period during the term of the lease, regardless of when actual payments are made. This generally results in rent expense in excess of cash payments during the early years of a lease and rent expense less than cash payments in later years. The difference between rent expense recognized and actual rental payments is typically represented as the spread between the ROU asset and lease liability.

We recognize a ROU asset and a lease liability at the lease commencement date. Our leases may include options to extend or terminate the lease, which will be reflected in the calculation of the lease liability and corresponding ROU asset when it is reasonably certain that we will exercise that option. We do not recognize ROU assets and lease liabilities for short-term leases that have an initial lease term of 12 months or less. We recognize the lease payments associated with short-term leases as an expense on a straight-line basis over the lease term.

The lease liability is initially measured as the present value of the unpaid lease payments as of the lease commencement date. The lease liability is discounted based on our IBR at the time of initial adoption of ASU 2016-02 for all existing leases or upon a modification to the lease term and at the time of lease commencement for all future leases. Our IBR includes significant assumptions regarding our secured borrowing rates obtained on equipment note issuances and adjustments for differences in the remaining lease term, underlying assets and market conditions for companies with similar credit qualities as well as interest rate index fluctuations.

The ROU asset is initially measured at cost, which comprises the initial amount of the lease liability adjusted for lease payments made at or before the lease commencement date, plus any initial direct costs incurred less any lease incentives received. The ROU asset is subsequently measured throughout the lease term as the carrying amount of the lease liability, plus initial direct costs, plus (minus) any prepaid (accrued) lease payments, less the unamortized balance of lease incentives received. Lease expense for lease payments is recognized on a straight-line basis over the lease term. Certain vehicle lease agreements have residual value guarantees at the end of the lease which require us to return the asset with a specified percentage of the original or other calculated value.

The components of lease expense were as follows and are primarily included in cost of sales on the accompanying unaudited condensed consolidated statements of operations, in thousands:


	Three Months Ended March 31,
	2020		2019
Operating lease cost (a)	$	12,271	$	13,535
Short-term lease cost		3,064		3,005
Sublease income		(62)		(154)
Net lease cost	$	15,273	$	16,386

(a)	Includes $1,444 and $1,377 of variable cost components during the three months ended March 31, 2020 and 2019, respectively.

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TOPBUILD CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Future minimum lease payments under non-cancellable operating leases as of March 31, 2020 were as follows, in thousands:


Payments due by Period
2020	$	29,893
2021		28,886
2022		19,183
2023		10,083
2024		5,423
2025 & Thereafter		5,827
Total future minimum lease payments		99,295

Less: imputed interest		(10,219)

Lease liability at March 31, 2020	$	89,076

As of March 31, 2020, the weighted average remaining lease term was 3.4 years and the related lease liability was calculated using a weighted average discount rate of 4.1%.

The amount below is included in the cash flows provided by (used in) operating activities section on the accompanying unaudited condensed consolidated statements of cash flows, in thousands:

9. INCOME TAXES

Our effective tax rates were 17.4 percent and 19.8 percent for the three months ended March 31, 2020 and 2019, respectively. The lower 2020 effective tax rate is due to a larger impact of the discrete benefits related to share-based compensation.

A tax benefit of $5.5 million and $2.2 million related to share-based compensation was recognized in our condensed consolidated statements of operations as a discrete item in income tax expense for the three months ended March 31, 2020 and 2019, respectively.

At March 31, 2020, the net deferred tax liability of $169.8 million consisted of net long-term deferred tax assets of $4.4 million and net long-term deferred tax liabilities of $174.2 million. The decrease in the net deferred tax liability was primarily related to the adoption of ASU 2016-13.

10. INCOME PER SHARE

Basic net income per share is calculated by dividing net income by the number of weighted average shares outstanding during the period, without consideration for common stock equivalents.

Diluted net income per share is calculated by adjusting the number of weighted average shares outstanding for the dilutive effect of common stock equivalents outstanding for the period, determined using the treasury stock method.

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TOPBUILD CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Basic and diluted net income per share were computed as follows:


	Three Months Ended March 31,
	2020		2019
Net income (in thousands) - basic and diluted	$	50,771	$	37,983

Weighted average number of common shares outstanding - basic		33,168,453		34,169,315

Dilutive effect of common stock equivalents:
RSAs with service-based conditions		71,221		92,081
RSAs with market-based conditions		131,024		180,032
RSAs with performance-based conditions		49,778		35,989
Stock options		179,371		225,872

Weighted average number of common shares outstanding - diluted		33,599,847		34,703,289

Basic net income per common share	$	1.53	$	1.11

Diluted net income per common share	$	1.51	$	1.09

The following table summarizes shares excluded from the calculation of diluted net income per share because their effect would have been anti-dilutive:


	Three Months Ended March 31,
	2020		2019
Anti-dilutive common stock equivalents:
RSAs with service-based conditions		5,271		14,706
RSAs with market-based conditions		8,341		19,701
RSAs with performance-based conditions		—		—
Stock options		32,067		123,688
Total anti-dilutive common stock equivalents		45,679		158,095

11. SHARE-BASED COMPENSATION

Effective July 1, 2015, our eligible employees commenced participation in the 2015 LTIP. The 2015 LTIP authorizes the Board to grant stock options, stock appreciation rights, restricted shares, restricted share units, performance awards, and dividend equivalents. All grants are made by issuing new shares and no more than 4.0 million shares of common stock may be issued under the 2015 LTIP. As of March 31, 2020, we had 2.1 million shares remaining available for issuance under the 2015 LTIP.

Share-based compensation expense is included in selling, general, and administrative expense. The income tax effect associated with share-based compensation awards is included in income tax expense. The following table presents share-based compensation amounts recognized in our condensed consolidated statements of operations, in thousands:


	Three Months Ended March 31,
	2020		2019
Share-based compensation expense	$	3,908	$	2,972
Income tax benefit realized	$	5,500	$	2,246

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TOPBUILD CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

The following table presents a summary of our share-based compensation activity for the three months ended March 31, 2020, in thousands, except per share amounts:


	RSAs			Stock Options
	Number of Shares	Weighted Average Grant Date Fair Value Per Share		Number of Shares	Weighted Average Grant Date Fair Value Per Share		Weighted Average Exercise Price Per Share		Aggregate Intrinsic Value
Balance December 31, 2019	411.6	$	57.51	373.5	$	17.06	$	45.90	$	21,356.4
Granted	87.3	$	134.81	71.0	$	39.49	$	118.58
Converted/Exercised	(222.0)	$	42.71	(68.2)	$	14.96	$	39.91	$	4,089.0
Forfeited	(8.2)	$	96.26	(5.5)	$	39.49	$	118.58
Balance March 31, 2020	268.7	$	82.04	370.8	$	21.41	$	59.84	$	7,598.9

Exercisable March 31, 2020 (a)				142.1	$	17.63	$	47.43	$	3,526.3

(a)	The weighted average remaining contractual term for vested stock options is approximately 7.2 years.

Unrecognized share-based compensation expense related to unvested awards is shown in the following table, dollars in thousands:


	As of March 31, 2020
	Unrecognized Compensation Expense on Unvested Awards		Weighted Average Remaining Vesting Period
RSAs	$	12,175		1.6 years
Stock options		2,489		1.2 years
Total unrecognized compensation expense related to unvested awards	$	14,664

Our RSAs with performance-based conditions are evaluated on a quarterly basis with adjustments to compensation expense based on the likelihood of the performance target being achieved or exceeded. The following table shows the range of payouts and the related expense for our outstanding RSAs with performance-based conditions, in thousands:


			Payout Ranges and Related Expense
RSAs with Performance-Based Conditions	Grant Date Fair Value		0%		25%		100%		200%
February 19, 2018	$	2,052	$	—	$	513	$	2,052	$	4,104
February 18, 2019	$	2,477	$	—	$	619	$	2,477	$	4,954
February 17, 2020	$	2,938	$	—	$	735	$	2,938	$	5,876

During the first quarter of 2020, RSAs with performance-based conditions that were granted on February 21, 2017 vested based on cumulative three-year achievement of 200%. Total compensation expense recognized over the three-year performance period, net of forfeitures, was $3.3 million.

The fair value of our RSAs with a market-based condition granted under the 2015 LTIP was determined using a Monte Carlo simulation. The following are key inputs in the Monte Carlo analysis for awards granted in 2020 and 2019:


	2020			2019
Measurement period (in years)		2.88			2.87
Risk free interest rate		1.40	%		2.50	%
Dividend yield		0.00	%		0.00	%
Estimated fair value of market-based RSAs at grant date	$	158.24		$	80.74

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TOPBUILD CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

The fair values of stock options granted under the 2015 LTIP were calculated using the Black-Scholes Options Pricing Model. The following table presents the assumptions used to estimate the fair values of stock options granted in 2020 and 2019:


	2020			2019
Risk free interest rate		1.53	%		2.59	%
Expected volatility, using historical return volatility and implied volatility		31.50	%		32.50	%
Expected life (in years)		6.0			6.0
Dividend yield		0.00	%		0.00	%
Estimated fair value of stock options at grant date	$	39.49		$	21.16

12. SHARE REPURCHASE PROGRAM

On February 22, 2019, our Board authorized the 2019 Repurchase Program, pursuant to which the Company may purchase up to $200.0 million of our common stock. Share repurchases may be executed through various means including, without limitation, open market purchases, privately negotiated transactions, accelerated share repurchase transactions or otherwise. The 2019 Share Repurchase Program does not obligate the Company to purchase any shares and has no expiration date. Authorization for the 2019 Share Repurchase Program may be terminated, increased, or decreased by the Board at its discretion at any time.

Effective November 4, 2019, under the 2019 Repurchase program, we entered into the 2019 ASR Agreement. We paid BofA $50.0 million in exchange for an initial delivery of 392,501 shares of our common stock on November 5, 2019, representing an estimated 85% of the total number of shares we expected to receive under the 2019 ASR Agreement, at the time we entered into the agreement. During the quarter ended March 31, 2020, we received an additional 73,455 shares of our common stock from BofA representing the final settlement of the 2019 ASR agreement. We purchased a total of 465,956 shares of our common stock under the 2019 ASR Agreement at an average price per share of $107.31.

Effective November 7, 2018, under the 2017 Repurchase Program, we entered into the 2018 ASR Agreement. We paid JPMorgan Chase Bank, N.A. $50.0 million in exchange for an initial delivery of 796,925 shares of our common stock on November 8, 2018, representing an estimated 85% of the total number of shares we expected to receive under the 2018 ASR Agreement, at the time we entered into the agreement. During the quarter ended March 31, 2019, we received an additional 176,327 shares of our common stock from JPMorgan Chase Bank, N.A., representing the final settlement of the 2018 ASR Agreement. We purchased a total of 973,252 shares of our common stock under the 2018 ASR Agreement at an average price per share of $51.37.

The following table sets forth our share repurchases under the 2019 and 2017 Repurchase Programs during the periods presented:


	Three Months Ended March 31,
	2020		2019
Number of shares repurchased		261,555 (a)		249,118 (b)
Share repurchase cost (in thousands)	$	14,127	$	4,622

(a) The three months ended March 31, 2020 includes 73,455 shares we received as final settlement of our 2019 ASR Agreement.

(b) The three months ended March 31, 2019 includes 176,327 shares we received as final settlement of our 2018 ASR Agreement.

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TOPBUILD CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

13. BUSINESS COMBINATIONS

As part of our strategy to supplement our organic growth and expand our access to additional markets and products, we completed one acquisition in 2019, and two acquisitions to date in 2020. Each acquisition was accounted for as a business combination under ASC 805, “Business Combinations.” Acquisition costs for the three months ended March 31, 2020 and 2019, were $0.2 million and $0.1 million, respectively. Acquisition costs are included in selling, general, and administrative expense in our condensed consolidated statements of operations.

Acquisitions

On July 15, 2019, we acquired Viking, an insulation company located in Burbank, California. The purchase price of approximately $7.7 million was funded by cash on hand of $6.5 million and contingent consideration of $1.2 million.

On February 20, 2020, we acquired Cooper, a commercial glass company serving the Memphis market. The purchase price of approximately $11.5 million was funded by cash on hand of $10.5 million and contingent consideration of $1.0 million. We recognized goodwill of $6.4 million in connection with this acquisition during the quarter ended March 31, 2020.

On February 24, 2020, we acquired Hunter, a residential insulation company located in Long Island, New York. The purchase price of approximately $9.1 million was funded by cash on hand. We recognized goodwill of $5.5 million in connection with this acquisition during the quarter ended March 31, 2020.

Contingent Consideration

On February 27, 2017, we acquired substantially all of the assets of EcoFoam, a residential and light commercial insulation installation company with locations in Colorado Springs and Denver, Colorado. The purchase price of approximately $22.3 million was funded by cash on hand of $20.2 million and contingent consideration of $2.1 million. The contingent consideration arrangement requires additional consideration to be paid by TopBuild to the sellers of EcoFoam based on EcoFoam’s attainment of annual revenue targets over a three-year period. The total amount of undiscounted contingent consideration which TopBuild is required to pay under the arrangement is $2.5 million. The fair value of $2.1 million contingent consideration recognized on the acquisition date was estimated by applying the income approach using discounted cash flows. That measure is based on significant Level 3 inputs not observable in the market. The significant assumption includes a discount rate of 9.5%. Changes in the fair value measurement each period reflect the passage of time as well as the impact of adjustments, if any, to the likelihood of achieving the specified targets. We made contingent payments of $0.8 million in the second quarters of 2019 and 2018. We will make the final payment of $0.8 million in the second quarter of 2020.

The acquisition of Viking included a contingent consideration arrangement that requires additional consideration to be paid by TopBuild based on the achievement of annual gross revenue targets over a three-year period. The range of undiscounted amounts TopBuild may be required to pay under the contingent consideration agreement is between zero and $1.5 million. The fair value of the contingent consideration recognized on the acquisition date of $1.2 million was estimated by applying the income approach using discounted cash flows. That measure is based on significant Level 3 inputs not observable in the market. The significant assumption includes a discount rate of 10.0%. Changes in the fair value measurement each period reflect the passage of time as well as the impact of adjustments, if any, to the likelihood of achieving the specified targets.

The acquisition of Cooper includes a contingent consideration arrangement that requires additional consideration to be paid by TopBuild based on the achievement of annual gross revenue targets over a two-year period. The range of undiscounted amounts TopBuild may be required to pay under the contingent consideration agreement is between zero and $1.0 million, which also represents the fair value recognized on the acquisition date.

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TOPBUILD CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

The following table presents the fair value of contingent consideration, in thousands:


	EcoFoam		Viking		Cooper
Date of Acquisition	February 27, 2017		July 15, 2019		February 20, 2020
Fair value of contingent consideration recognized at acquisition date	$	2,110	$	1,243	$	1,000

Contingent consideration at December 31, 2019	$	822	$	1,304	$	—
Additions		—		—		1,000
Change in fair value of contingent consideration during the three months ended March 31, 2020		19		32		—
Payment of contingent consideration during the three months ended March 31, 2020		—		—		—
Liability balance for contingent consideration at March 31, 2020	$	841	$	1,336	$	1,000

14. ACCRUED LIABILITIES

The following table sets forth the components of accrued liabilities, in thousands:


	As of
	March 31,		December 31,
	2020		2019
Accrued liabilities:
Salaries, wages, and commissions	$	30,897	$	32,154
Insurance liabilities		23,245		22,506
Deferred revenue		15,533		16,139
Interest payable on long-term debt		9,588		3,966
Other		28,064		23,653
Total accrued liabilities	$	107,327	$	98,418

See Note 3 – Revenue Recognition for discussion of our deferred revenue balances and related revenue recognition policy.

15. OTHER COMMITMENTS AND CONTINGENCIES

Litigation. We are subject to certain claims, charges, litigation, and other proceedings in the ordinary course of our business, including those arising from or related to contractual matters, intellectual property, personal injury, environmental matters, product liability, product recalls, construction defects, insurance coverage, personnel and employment disputes, antitrust, and other matters, including class actions. We believe we have adequate defenses in these matters, and we do not believe that the ultimate outcome of these matters will have a material adverse effect on us. However, there is no assurance that we will prevail in any of these pending matters, and we could in the future incur judgments, enter into settlements of claims, or revise our expectations regarding the outcome of these matters, which could materially impact our liquidity and our results of operations.

Other Matters. We enter into contracts, which include customary indemnities that are standard for the industries in which we operate. Such indemnities include, among other things, customer claims against builders for issues relating to our products and workmanship. In conjunction with divestitures and other transactions, we occasionally provide customary indemnities relating to various items including, among others: the enforceability of trademarks; legal and environmental issues; and asset valuations. We evaluate the probability that we may incur liabilities under these customary indemnities and appropriately record an estimated liability when deemed probable.

We also maintain indemnification agreements with our directors and officers that may require us to indemnify them against liabilities that arise by reason of their status or service as directors or officers, except as prohibited by applicable law.

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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

TopBuild, headquartered in Daytona Beach, Florida, is a leading installer and distributor of insulation and other building products to the U.S. construction industry. We trade on the NYSE under the ticker symbol “BLD.”

We operate in two segments: Installation (TruTeam) and Distribution (Service Partners). Our Installation segment installs insulation and other building products nationwide through our TruTeam contractor services business, which, as of March 31, 2020, had approximately 200 branches located across the United States. We install various insulation applications, including fiberglass batts and rolls, blown-in loose fill fiberglass, blown-in loose fill cellulose, and polyurethane spray foam. Additionally, we install other building products including gutters, glass and windows, afterpaint products, fireproofing, garage doors, fireplaces, shower enclosures, and closet shelving. We handle every stage of the installation process, including material procurement supplied by leading manufacturers, project scheduling and logistics, multi-phase professional installation, and installation quality assurance.

Our Distribution segment sells and distributes insulation and other building products, including gutters, fireplaces, closet shelving, and roofing materials through our Service Partners business, which, as of March 31, 2020, had approximately 75 branches located across the United States. Our Service Partners customer base consists of thousands of insulation contractors of all sizes, gutter contractors, weatherization contractors, other contractors, dealers, metal building erectors, and modular home builders.

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

For additional details pertaining to our operating results by segment, see Note 7 – Segment Information to our unaudited condensed consolidated financial statements contained in Part I, Item 1 of this Quarterly Report, which is incorporated herein by reference. For additional details regarding our strategy, material trends in our business and seasonality, please refer to Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report for the year ended December 31, 2019, as filed with the SEC on February 25, 2020, which discussion is hereby incorporated herein by reference.

COVID-19 BUSINESS UPDATE

We continue to monitor the COVID-19 pandemic and its impact on macroeconomic and local economic conditions. To date, with the exception of a few states, residential and commercial construction has been deemed an essential service. In those locations, the Company continues to operate; however, while net sales during the quarter ended March 31, 2020 increased compared to the prior year period, sales volume was down marginally due to the pandemic. There can be no guarantee that the services we provide will continue to be deemed essential or that other events making the provision of our services challenging or impossible, will not occur. We are taking efforts to ensure the safety of our employees, including increasing our cleaning and sanitizing practices at all locations and for all company vehicles and limiting travel. Additionally, we are not able to predict whether our customers will continue to operate at their current or typical volumes, and such decreases in their operations would have a negative impact on our business. For additional discussion of the potential impact of the COVID-19 pandemic on our business, see the sections entitled “Outlook” and “Risk Factors” included in this Quarterly Report.

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FIRST QUARTER 2020 VERSUS FIRST QUARTER 2019

The following discussion and analysis contains forward-looking statements and should be read in conjunction with the unaudited condensed consolidated financial statements, the notes thereto, and the section entitled “Forward-Looking Statements” included in this Quarterly Report.

The following table sets forth our net sales, gross profit, operating profit, and margins, as reported in our condensed consolidated statements of operations, in thousands:


	Three Months Ended March 31,
	2020			2019
Net sales	$	653,228		$	619,330
Cost of sales		481,272			463,635
Cost of sales ratio		73.7	%		74.9	%

Gross profit		171,956			155,695
Gross profit margin		26.3	%		25.1	%

Selling, general, and administrative expense		101,967			99,077
Selling, general, and administrative expense to sales ratio		15.6	%		16.0	%

Operating profit		69,989			56,618
Operating profit margin		10.7	%		9.1	%

Other expense, net		(8,503)			(9,269)
Income tax expense		(10,715)			(9,366)
Net income	$	50,771		$	37,983
Net margin		7.8	%		6.1	%

Sales and Operations

Net sales increased 5.5 percent for the three months ended March 31, 2020, from the comparable period of 2019. The increase was primarily driven by increased sales volume, increased selling prices, and acquisitions. Sales volume was down marginally due to the reduction in activities since the onset of the COVID-19 pandemic.

Gross profit margins were 26.3 percent and 25.1 percent for the three months ended March 31, 2020 and 2019, respectively. Gross profit margin improved primarily due to favorable fixed cost leverage on higher sales volumes, increased selling prices, and operational efficiencies, partially offset by higher material costs.

Selling, general, and administrative expense, as a percent of sales, was 15.6 percent and 16.0 percent for the three months ended March 31, 2020 and 2019, respectively. Decreased selling, general, and administrative expense as a percent of sales was primarily the result of favorable fixed cost leverage on higher sales volumes and lower acquisition and closure costs.

Operating margins were 10.7 percent and 9.1 percent for the three months ended March 31, 2020 and 2019, respectively. The increase in operating margins was due to favorable fixed cost leverage on higher sales volumes, increased selling prices, operational efficiencies, and lower acquisition and closure costs, partially offset by higher material costs.

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Business Segment Results

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


	Three Months Ended March 31,
	2020			2019			Percent Change
Sales by business segment:
Installation	$	475,873		$	449,383		5.9	%
Distribution		214,223			204,464		4.8	%
Intercompany eliminations		(36,868)			(34,517)
Net sales	$	653,228		$	619,330		5.5	%

Operating profit by business segment:
Installation	$	60,351		$	51,299		17.6	%
Distribution		24,669			20,597		19.8	%
Intercompany eliminations and other adjustments		(5,833)			(5,674)
Operating profit before general corporate expense		79,187			66,222		19.6	%
General corporate expense, net		(9,198)			(9,604)
Operating profit	$	69,989		$	56,618		23.6	%

Operating profit margins:
Installation		12.7	%		11.4	%
Distribution		11.5	%		10.1	%
Operating profit margin before general corporate expense		12.1	%		10.7	%
Operating profit margin		10.7	%		9.1	%

Installation

Sales

Sales in the Installation segment increased $26.5 million, or 5.9 percent, for the three months ended March 31, 2020, as compared to the same period in 2019. Sales increased 2.7 percent due to volume, 2.2 percent due to increased selling prices, and 1.1 percent due to acquisitions. Sales volume was down marginally due to the reduction in activities since the onset of the COVID-19 pandemic.

Operating margins

Operating margins in the Installation segment were 12.7 percent and 11.4 percent for the three months ended March 31, 2020 and 2019, respectively. The increase in operating margins was due to favorable fixed cost leverage on higher sales volumes, increased selling prices, and operational efficiencies, partially offset by higher material costs.

Distribution

Sales

Sales in the Distribution segment increased $9.8 million, or 4.8 percent, for the three months ended March 31, 2020, as compared to the same period in 2019. Sales increased 3.8 percent due to volume and 0.9 percent due to increased selling prices. Sales volume was down marginally due to the reduction in activities since the onset of the COVID-19 pandemic.

Operating margins

Operating margins in the Distribution segment were 11.5 percent and 10.1 percent for the three months ended March 31, 2020 and 2019, respectively. The increase in operating margins was due to favorable fixed cost leverage on higher sales volumes, increased selling prices, and operational efficiencies, partially offset by higher material costs.

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OTHER ITEMS

Other expense, net

Other expense, net, which primarily consisted of interest expense, was $8.5 million and $9.3 million for the three months ended March 31, 2020 and 2019, respectively. The decrease was primarily driven by lower LIBOR rates and a lower balance due on our term loan.

Income tax expense

Income tax expense was $10.7 million, an effective tax rate of 17.4 percent, for the three months ended March 31, 2020, compared to $9.4 million, an effective tax rate of 19.8 percent, for the comparable period in 2019. The lower 2020 effective tax rate was due to a larger benefit in 2020 related to share-based compensation.

Cash Flows and Liquidity

Significant sources (uses) of cash and cash equivalents are summarized for the periods indicated, in thousands:


	Three Months Ended March 31,
	2020		2019
Changes in cash and cash equivalents:
Net cash provided by operating activities	$	72,930	$	23,522
Net cash used in investing activities		(36,224)		(10,122)
Net cash used in financing activities		(34,474)		(16,051)
Increase (decrease) for the period	$	2,232	$	(2,651)

Net cash flows provided by operating activities increased $49.4 million for the three months ended March 31, 2020, as compared to the prior year period. The change was primarily due to an increase in net income, the timing of accounts receivable collections and inventory expenditures.

Net cash used in investing activities was $36.2 million for the three months ended March 31, 2020, primarily composed of $15.9 million for purchases of property and equipment, primarily vehicles, and $20.5 million for the acquisitions of Cooper and Hunter. Net cash used in investing activities was $10.1 million for the three months ended March 31, 2019, primarily composed of $10.2 million for purchases of property and equipment, primarily vehicles.

Net cash used in financing activities was $34.5 million for the three months ended March 31, 2020. During the three months ended March 31, 2020, we used $14.1 million for the repurchase of common stock pursuant to the 2019 Repurchase Program, $10.3 million on purchases of common stock for tax withholding obligations related to the vesting and exercise of share-based incentive awards, $7.7 million for payments on our term loan under our Amended Credit Agreement and on our equipment notes, and $2.3 million in debt issuance costs as a result of entering into a new term loan and revolving credit facility. Net cash used in financing activities was $16.1 million for the three months ended March 31, 2019. During the three months ended March 31, 2019, we used $5.6 million for payments on our term loan under our Original Credit Agreement and on our equipment notes, $5.6 million on purchases of common stock for tax withholding obligations related to the vesting and exercise of share-based incentive awards, and $4.6 million for the repurchase of common stock pursuant to the 2019 Repurchase Program. We also made a payment of $0.3 million of contingent consideration for Santa Rosa.

We are closely managing our balance sheet, including maximizing our cash flow, to maintain our strong foundation and provide stabilization as we continue to work through the impacts of the COVID-19 pandemic. We had solid liquidity available to us at March 31, 2020, with $187.0 million of cash and $388.6 million available borrowing capacity under our Revolving Facility. We believe that our cash flows from operations, combined with our current cash levels and available borrowing capacity, will be adequate to support our ongoing operations and working capital needs, despite the current reductions in economic activity due to COVID-19.

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The following table summarizes our liquidity, in thousands:


	As of
	March 31,		December 31,
	2020		2019
Cash and cash equivalents (a)	$	187,039	$	184,807

Revolving Facility		450,000		250,000
Less: standby letters of credit		(61,382)		(61,382)
Availability under Revolving Facility		388,618		188,618

Total liquidity	$	575,657	$	373,425

(a) Our cash and cash equivalents consist of AAA-rated money market funds as well as cash held in our demand deposit accounts.

We occasionally use performance bonds to ensure completion of our work on certain larger customer contracts that can span multiple accounting periods. Performance bonds generally do not have stated expiration dates; rather, we are released from the bonds as the contractual performance is completed. We also have bonds outstanding for license and insurance. Information regarding our outstanding bonds as March 31, 2020 is incorporated by reference from Note 15 – Other Commitments and Contingencies to our unaudited condensed consolidated financial statements contained in Part I, Item 1 of this Quarterly Report.

OUTLOOK

The United States economy has seen a widespread reduction in activities since the onset of the COVID-19 pandemic. While construction activities are generally deemed an essential service in various municipalities, uncertainty continues to persist since the declaration of a public health emergency. Management continues to evaluate every aspect of the business, and is working to continue operations in locations where installation and distribution services are permitted and can be carried out safely. The extent to which the COVID-19 pandemic impacts our business, results of operations and financial condition will depend on future developments, which are highly uncertain and cannot be predicted, including, but not limited to, the duration and spread of the pandemic, its severity, the actions to contain the virus or address its impact, and how quickly and to what extent normal economic and operating activities can resume. Even after the COVID-19 pandemic has subsided, we may continue to experience an adverse impact to our business as a result of its global economic impact, including any recession that has occurred or may occur in the future.

OFF-BALANCE SHEET ARRANGEMENTS

We had no material off-balance sheet arrangements during the quarter ended March 31, 2020, other than short-term leases, letters of credit, and performance and license bonds, which have been disclosed in Part 1, Item 1 of this Quarterly report.

CONTRACTUAL OBLIGATIONS

There have been no material changes to our contractual obligations from those previously disclosed in our Annual Report for the year ended December 31, 2019, as filed with the SEC on February 25, 2020, except for the amendment to our Original Credit Agreement on March 20, 2020. See further information as disclosed in Note 5 – Long Term Debt in our unaudited condensed consolidated financial statements contained in Part 1, Item 1 of this Quarterly Report.

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CRITICAL ACCOUNTING POLICIES

We prepare our condensed consolidated financial statements in conformity with GAAP. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities, at the date of the financial statements, and the reported amounts of sales and expenses during the reporting period. Actual results could differ from those estimates. Our critical accounting policies have not changed from those previously reported in our Annual Report for year ended December 31, 2019, as filed with the SEC on February 25, 2020, except as required by the adoption of ASU 2016-13. See further information as disclosed in Note 2 – Accounting Policies in our unaudited condensed consolidated financial statements contained in Part 1, Item 1 of this Quarterly Report.

APPLICATION OF NEW ACCOUNTING STANDARDS

Information regarding application of new accounting standards is incorporated by reference from Note 2 – Accounting Policies to our unaudited condensed consolidated financial statements contained in Part I, Item 1 of this Quarterly Report.

FORWARD-LOOKING STATEMENTS

Statements contained in this report that reflect our views about future periods, including our future plans and performance, constitute “forward-looking statements” under the Private Securities Litigation Reform Act of 1995. Forward-looking statements can be identified by words such as “will,” “would,” “anticipate,” “expect,” “believe,” “designed,” “plan,” or “intend,” the negative of these terms, and similar references to future periods. These views involve risks and uncertainties that are difficult to predict and, accordingly, our actual results may differ materially from the results discussed in our forward-looking statements. We caution you against unduly relying on any of these forward-looking statements. Our future performance may be affected by the duration and impact of the COVID-19 pandemic on the United States economy, specifically with respect to residential and commercial construction; our ability to continue operations in markets affected by the COVID-19 pandemic and our ability to collect receivables from our customers; our reliance on residential new construction, residential repair/remodel, and commercial construction; our reliance on third-party suppliers and manufacturers; our ability to attract, develop, and retain talented personnel and our sales and labor force; our ability to maintain consistent practices across our locations; and our ability to maintain our competitive position. We discuss the material risks we face under the caption entitled “Risk Factors” in our Annual Report for the year ended December 31, 2019, as filed with the SEC on February 25, 2020, as well as under the caption entitled “Risk Factors” in subsequent reports that we file with the SEC. Our forward-looking statements in this filing speak only as of the date of this filing. Factors or events that could cause our actual results to differ may emerge from time to time and it is not possible for us to predict all of them. Unless required by law, we undertake no obligation to update publicly any forward-looking statements as a result of new information, future events, or otherwise.

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rate Risk

On March 20, 2020, the Company entered into the Amended Credit Agreement, which renews, amends and restates the Original Credit Agreement. The Amended Credit Agreement consists of a senior secured term loan facility in the amount of $300.0 million and the Revolving Facility in the amount of $450.0 million. We also have outstanding Senior Notes with an aggregate principal balance of $400.0 million. The Senior Notes bear a fixed rate of interest and therefore are excluded from the calculation below as they are not subject to fluctuations in interest rates.

Interest payable on both the term loan facility and Revolving Facility under the Amended Credit Agreement is based on a variable interest rate. As a result, we are exposed to market risks related to fluctuations in interest rates on this outstanding indebtedness. As of March 31, 2020, we had $300 million outstanding under our term loan facility, and the applicable interest rate as of such date was 2.02%. Based on our outstanding borrowings under the Amended Credit Agreement as of March 31, 2020, a 100 basis point increase in the interest rate would result in a $2.9 million increase in our annualized interest expense. There was no outstanding balance under the Revolving Facility as of March 31, 2020.

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PART II – OTHER INFORMATION

Item 1. LEGAL PROCEEDINGS

The information set forth under the caption “Litigation” in Note 15 – Other Commitments and Contingencies to our unaudited condensed consolidated financial statements contained in Part I, Item 1 of this Quarterly Report, is incorporated by reference herein.

Item 1A. RISK FACTORS

The below risk factor should be read in conjunction with the risk factors disclosed in our Annual Report for the year ended December 31, 2019, as filed with the SEC on February 25, 2020, which are incorporated by reference herein.

The COVID-19 pandemic is likely to have an adverse impact on our business.

The United States economy has been significantly impacted by the COVID-19 pandemic, resulting in widespread uncertainty for individuals and businesses. The United States Department of Homeland Security considers construction services a critical infrastructure activity, and with the exception of a few states, residential and commercial construction has been allowed to continue. The Company continues to operate in those locations where installation and distribution services are permitted and can be carried out safely, however there is no guarantee that these operations will not be impacted or require total cessation in the future. Additionally, the duration of the COVID-19 pandemic and related disruptions of regular activities is not predictable, nor is the magnitude of the impact that the COVID-19 pandemic will have on the Company’s operational and financial performance.

Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

The following table provides information regarding the repurchase of our common stock for the three months ended March 31, 2020, in thousands, except share and per share data:


Period	Total Number of Shares Purchased	Average Price Paid per Common Share		Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs
January 1, 2020 - January 31, 2020	—	$	—	—	$	89,114
February 1, 2020 - February 29, 2020	—	$	—	—	$	89,114
March 1, 2020 - March 31, 2020 (a)	188,100	$	75.10	261,555	$	74,987
Total	188,100	$	75.10	261,555

(a) In the one month period ended March 31, 2020, the number of shares purchased as part of publicly announced plans or programs includes 73,455 shares we received as final settlement of our 2019 ASR Agreement. For more information see Note 12 – Share Repurchase Program to our unaudited condensed consolidated financial statements contained in Part I, Item 1 of this Quarterly Report, which note is incorporated in this Item 2 by reference.

All repurchases were made using cash resources. Excluded from this disclosure are shares repurchased to settle statutory employee tax withholding related to the vesting of stock awards and exercise of stock options.

Item 3. DEFAULTS UPON SENIOR SECURITIES

Not applicable.


		Page No.
Part I.	Financial Information

Item 1.	Financial Statements (Unaudited)

	Condensed Consolidated Balance Sheets	4

	Condensed Consolidated Statements of Operations	5

	Condensed Consolidated Statements of Cash Flows	6

	Condensed Consolidated Statements of Changes in Equity	7

	Notes to Condensed Consolidated Financial Statements	8

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	24

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	29

Item 4.	Controls and Procedures	30

Part II.	Other Information

Item 1.	Legal Proceedings	31

Item 1A.	Risk Factors	31

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	31

Item 3.	Defaults upon Senior Securities	31

Item 4.	Mine Safety Disclosures	32

Item 5.	Other Information	32

Item 6.	Exhibits	32

Index to Exhibits		33

Signature		34


	As of
	March 31, 2020		December 31, 2019
Outstanding bonds:
Performance bonds	$	87,479	$	87,286
Licensing, insurance, and other bonds		25,414		25,309
Total bonds	$	112,893	$	112,595


		Incorporated by Reference			Filed
Exhibit No.	Exhibit Title	Form	Exhibit	Filing Date	Herewith
10.1	Amended and Restated Credit Agreement, dated March 20, 2020, among TopBuild Corp., Bank of America, N.A., as administrative agent, and the other lenders and agents party thereto	8-K	10.1	3/23/2020

10.2	Amended and Restated Security and Pledge Agreement, dated March 20, 2020, among TopBuild Corp., Bank of America, N.A., as administrative agent, and the grantors party thereto	8-K	10.2	3/23/2020

31.1	Principal Executive Officer Certification required by Rules 13a-14 and 15d-14 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002				X

31.2	Principal Financial Officer Certification required by Rules 13a-14 and 15d-14 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002				X

32.1‡	Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of Sarbanes-Oxley Act of 2002

32.2‡	Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of Sarbanes-Oxley Act of 2002

101.INS	Inline XBRL Instance Document - the Instance Document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document				X

101.SCH	Inline XBRL Taxonomy Extension Schema Document				X

101.CAL	Inline XBRL Taxonomy Extension Calculation Linkbase Document				X

101.DEF	Inline XBRL Taxonomy Extension Definition Linkbase Document				X

101.LAB	Inline XBRL Taxonomy Extension Label Linkbase Document				X

101.PRE	Inline XBRL Taxonomy Extension Presentation Linkbase Document				X

104	Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)				X

	‡Furnished herewith


	TOPBUILD CORP.


	By:	/s/ John S. Peterson
	Name:	John S. Peterson
	Title:	Vice President and Chief Financial Officer
		(Principal Financial Officer)

Three Months Ended March 31,

Amortization expense