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 June 30, 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 33,080,596 shares of Common Stock, par value $0.01 per share as of July 28, 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 Insulation
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
	June 30,		December 31,
	2020		2019
ASSETS
Current assets:
Cash and cash equivalents	$	258,837	$	184,807
Receivables, net of an allowance for credit losses of $7,541 at June 30, 2020, and allowance for doubtful accounts of $4,854 at December 31, 2019		423,000		428,844
Inventories, net		147,304		149,078
Prepaid expenses and other current assets		7,962		17,098
Total current assets		837,103		779,827

Right of use assets		85,236		87,134
Property and equipment, net		176,179		178,080
Goodwill		1,379,821		1,367,918
Other intangible assets, net		176,871		181,122
Deferred tax assets, net		4,358		4,259
Other assets		11,011		5,623
Total assets	$	2,670,579	$	2,603,963

LIABILITIES AND EQUITY
Current liabilities:
Accounts payable	$	293,224	$	307,970
Current portion of long-term debt		23,168		34,272
Accrued liabilities		120,689		98,418
Short-term lease liabilities		34,444		36,094
Total current liabilities		471,525		476,754

Long-term debt		694,320		697,955
Deferred tax liabilities, net		174,229		175,263
Long-term portion of insurance reserves		50,608		45,605
Long-term lease liabilities		54,798		54,010
Other liabilities		7,447		1,487
Total liabilities		1,452,927		1,451,074

Commitments and contingencies

Equity:
Preferred stock, $0.01 par value: 10,000,000 shares authorized; 0 shares issued and outstanding at June 30, 2020 and December 31, 2019		—		—
Common stock, $0.01 par value: 250,000,000 shares authorized; 39,021,348 shares issued and 33,102,143 outstanding at June 30, 2020, and 38,884,530 shares issued and 33,489,769 outstanding at December 31, 2019		389		388
Treasury stock, 5,919,205 shares at June 30, 2020, and 5,394,761 shares at December 31, 2019, at cost		(371,670)		(330,018)
Additional paid-in capital		853,029		849,657
Retained earnings		735,904		632,862
Total equity		1,217,652		1,152,889
Total liabilities and equity	$	2,670,579	$	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 June 30,				Six Months Ended June 30,
	2020		2019		2020		2019
Net sales	$	646,099	$	660,112	$	1,299,327	$	1,279,442
Cost of sales		468,045		485,190		949,316		948,824
Gross profit		178,054		174,922		350,011		330,618

Selling, general, and administrative expense		97,600		98,883		199,568		197,960
Operating profit		80,454		76,039		150,443		132,658

Other income (expense), net:
Interest expense		(8,277)		(9,631)		(17,018)		(19,232)
Loss on extinguishment of debt		—		—		(233)		—
Other, net		89		526		561		858
Other expense, net		(8,188)		(9,105)		(16,690)		(18,374)
Income before income taxes		72,266		66,934		133,753		114,284

Income tax expense		(16,770)		(14,883)		(27,485)		(24,249)
Net income	$	55,496	$	52,051	$	106,268	$	90,035

Net income per common share:
Basic	$	1.69	$	1.53	$	3.22	$	2.64
Diluted	$	1.67	$	1.51	$	3.18	$	2.60

Weighted average shares outstanding:
Basic		32,867,842		33,976,169		33,018,148		34,072,314
Diluted		33,202,423		34,557,664		33,401,135		34,630,048

See notes to our unaudited condensed consolidated financial statements.

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TOPBUILD CORP.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(In thousands)


	Six Months Ended June 30,
	2020		2019
Cash Flows Provided by (Used in) Operating Activities:
Net income	$	106,268	$	90,035
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		33,311		25,538
Share-based compensation		9,038		7,485
Loss on extinguishment of debt		233		—
Loss on sale or abandonment of property and equipment		320		561
Amortization of debt issuance costs		716		779
Provision for bad debt expense		3,756		3,688
Loss from inventory obsolescence		1,313		1,251
Deferred income taxes, net		(38)		(21)
Change in certain assets and liabilities
Receivables, net		1,894		(41,489)
Inventories, net		538		17,391
Prepaid expenses and other current assets		9,151		14,969
Accounts payable		(16,390)		(23,823)
Accrued liabilities		28,188		(1,131)
Payment of contingent consideration		(413)		—
Other, net		277		1,031
Net cash provided by operating activities		178,162		96,264

Cash Flows Provided by (Used in) Investing Activities:
Purchases of property and equipment		(20,937)		(21,982)
Acquisition of businesses		(20,526)		—
Proceeds from sale of property and equipment		763		1,961
Other, net		—		22
Net cash used in investing activities		(40,700)		(19,999)

Cash Flows Provided by (Used in) Financing Activities:
Proceeds from issuance of long-term debt		300,000		4,998
Repayment of long-term debt		(313,407)		(11,364)
Payment of debt issuance costs		(2,280)		—
Taxes withheld and paid on employees' equity awards		(13,165)		(8,471)
Repurchase of shares of common stock		(34,152)		(19,499)
Payment of contingent consideration		(428)		(1,091)
Net cash used in financing activities		(63,432)		(35,427)

Cash and Cash Equivalents
Increase for the period		74,030		40,838
Beginning of period		184,807		100,929
End of period	$	258,837	$	141,767

Supplemental disclosure of noncash activities:
Leased assets obtained in exchange for new operating lease liabilities	$	19,257	$	110,192
Accruals for property and equipment		323		497

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
Net income		—		—		—		52,051		52,051
Share-based compensation		—		—		4,513		—		4,513
Repurchase of 196,885 shares of common stock pursuant to the 2019 Repurchase Program		—		(14,878)		—		—		(14,878)
54,811 shares of common stock withheld to pay taxes on employees' equity awards		—		—		(2,893)		—		(2,893)
Balance at June 30, 2019	$	388	$	(246,107)	$	855,464	$	531,901	$	1,141,646


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
Net income		—		—		—		55,496		55,496
Share-based compensation		—		—		5,130		—		5,130
Repurchase of 262,889 shares of common stock pursuant to the 2019 Repurchase Program				(20,025)		—		—		(20,025)
38,372 shares of common stock withheld to pay taxes on employees' equity awards		—		—		(2,766)		—		(2,766)
Balance at June 30, 2020	$	389	$	(371,670)	$	853,029	$	735,904	$	1,217,652

See notes to our unaudited condensed consolidated financial statements.

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

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 June 30,
	2020								2019
		Installation		Distribution		Elims		Total		Installation		Distribution		Elims		Total
Residential	$	370,969	$	163,615	$	(29,050)	$	505,534	$	373,945	$	159,774	$	(29,060)	$	504,659
Commercial		95,600		52,721		(7,756)		140,565		109,083		53,713		(7,343)		155,453
Net sales	$	466,569	$	216,336	$	(36,806)	$	646,099	$	483,028	$	213,487	$	(36,403)	$	660,112


	Six Months Ended June 30,
	2020								2019
		Installation		Distribution		Elims		Total		Installation		Distribution		Elims		Total
Residential	$	744,250	$	326,071	$	(58,055)	$	1,012,266	$	723,818	$	313,552	$	(56,576)	$	980,794
Commercial		198,192		104,487		(15,618)		287,061		208,592		104,399		(14,343)		298,648
Net sales	$	942,442	$	430,558	$	(73,673)	$	1,299,327	$	932,410	$	417,951	$	(70,919)	$	1,279,442

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


	Three Months Ended June 30,
	2020								2019
		Installation		Distribution		Elims		Total		Installation		Distribution		Elims		Total
Insulation and accessories	$	360,999	$	175,559	$	(29,548)	$	507,010	$	377,541	$	174,024	$	(28,182)	$	523,383
Glass and windows		39,371		—		—		39,371		39,086		—		—		39,086
Gutters		21,577		25,979		(5,687)		41,869		21,569		23,066		(6,294)		38,341
All other		44,622		14,798		(1,571)		57,849		44,832		16,397		(1,927)		59,302
Net sales	$	466,569	$	216,336	$	(36,806)	$	646,099	$	483,028	$	213,487	$	(36,403)	$	660,112

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


	Six Months Ended June 30,
	2020								2019
		Installation		Distribution		Elims		Total		Installation		Distribution		Elims		Total
Insulation and accessories	$	730,995	$	355,808	$	(59,607)	$	1,027,196	$	727,496	$	343,606	$	(56,016)	$	1,015,086
Glass and windows		80,690		—		—		80,690		76,954		—		—		76,954
Gutters		40,506		45,970		(11,074)		75,402		40,492		41,651		(11,881)		70,262
All other		90,251		28,780		(2,992)		116,039		87,468		32,694		(3,022)		117,140
Net sales	$	942,442	$	430,558	$	(73,673)	$	1,299,327	$	932,410	$	417,951	$	(70,919)	$	1,279,442

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.

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


	Included in Line Item on	As of
	Condensed Consolidated	June 30,		December 31,
	Balance Sheets	2020		2019
Contract Assets:
Receivables, unbilled	Receivables, net	$	53,120	$	57,153

Contract Liabilities:
Deferred revenue	Accrued liabilities	$	15,719	$	16,139

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

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 six months ended June 30, 2020 by segment, were as follows, in thousands:


	Gross Goodwill				Gross Goodwill		Accumulated		Net Goodwill
	at				at		Impairment		at
	December 31, 2019		Additions		June 30, 2020		Losses		June 30, 2020
Goodwill, by segment:
Installation	$	1,683,589	$	11,903	$	1,695,492	$	(762,021)	$	933,471
Distribution		446,350		—		446,350		—		446,350
Total goodwill	$	2,129,939	$	11,903	$	2,141,842	$	(762,021)	$	1,379,821

See Note 13 – Business Combinations for goodwill recognized on acquisitions that occurred in the first half of 2020.

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


	As of
	June 30,		December 31,
	2020		2019
Gross definite-lived intangible assets	$	227,761	$	221,382
Accumulated amortization		(50,890)		(40,260)
Net definite-lived intangible assets		176,871		181,122
Indefinite-lived intangible assets not subject to amortization		—		—
Other intangible assets, net	$	176,871	$	181,122

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


	Three Months Ended June 30,				Six Months Ended June 30,
	2020		2019		2020		2019
Amortization expense	$	5,358	$	5,173	$	10,630	$	10,346

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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
	June 30,		December 31,
	2020		2019
Senior Notes - 5.625% due May 2026	$	400,000	$	400,000
Term loan		296,250		305,625
Equipment notes		29,492		33,525
Unamortized debt issuance costs		(8,254)		(6,923)
Total debt, net of unamortized debt issuance costs		717,488		732,227
Less: current portion of long-term debt		23,168		34,272
Total long-term debt	$	694,320	$	697,955

The following table sets forth our remaining principal payments for our outstanding debt balances as of June 30, 2020, in thousands:


	Payments Due by Period
	2020		2021		2022		2023		2024		Thereafter		Total
Senior Notes	$	—	$	—	$	—	$	—	$	—	$	400,000	$	400,000
Term loan		7,500		15,000		20,625		22,500		28,125		202,500		296,250
Equipment notes		4,048		8,326		8,651		6,337		2,130		—		29,492
Total	$	11,548	$	23,326	$	29,276	$	28,837	$	30,255	$	602,500	$	725,742

Amended Credit Agreement and Senior Secured Term Loan Facility

On March 20, 2020, the Company entered into an Amended Credit Agreement, which renewed, amended and restated 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 with an aggregate borrowing capacity of $450.0 million, including a $100.0 million letter of credit sublimit and up to a $35.0 million swingline sublimit. The maturity date for the loans under the Amended Credit Agreement was extended from 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 June 30, 2020		1.75	%
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
	June 30,		December 31,
	2020		2019
Revolving Facility	$	450,000	$	250,000
Less: standby letters of credit		(60,382)		(61,382)
Availability under Revolving Facility	$	389,618	$	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 six months ended June 30, 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 June 30, 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.

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 June 30, 2020 (Level 1 fair value measurement), we estimate that the fair value of the Senior Notes is approximately $414.0 million compared to a gross carrying value of $400.0 million at June 30, 2020.

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

7. SEGMENT INFORMATION

The following tables set forth our net sales and operating results by segment, in thousands:


	Three Months Ended June 30,
	2020		2019		2020		2019

	Net Sales				Operating Profit (b)
Our operations by segment were (a):
Installation	$	466,569	$	483,028	$	69,643	$	68,423
Distribution		216,336		213,487		24,155		21,151
Intercompany eliminations		(36,806)		(36,403)		(5,961)		(6,405)
Total	$	646,099	$	660,112		87,837		83,169
General corporate expense, net (c)						(7,383)		(7,130)
Operating profit, as reported						80,454		76,039
Other expense, net						(8,188)		(9,105)
Income before income taxes					$	72,266	$	66,934


	Six Months Ended June 30,
	2020		2019		2020		2019

	Net Sales				Operating Profit (b)
Our operations by segment were (a):
Installation	$	942,442	$	932,410	$	129,994	$	119,722
Distribution		430,558		417,951		48,825		41,748
Intercompany eliminations		(73,673)		(70,919)		(11,795)		(12,078)
Total	$	1,299,327	$	1,279,442		167,024		149,392
General corporate expense, net (c)						(16,581)		(16,734)
Operating profit, as reported						150,443		132,658
Other expense, net						(16,690)		(18,374)
Income before income taxes					$	133,753	$	114,284

(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 June 30, 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. In addition, certain vehicle lease agreements have residual value guarantees at the end of the lease term which require us to return the asset with a specified percentage of the original or other calculated value. 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.

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


	Three Months Ended June 30,				Six Months Ended June 30,
	2020		2019		2020		2019
Operating lease cost (a)	$	12,096	$	12,668	$	24,367	$	26,204
Short-term lease cost		2,813		3,005		5,877		6,010
Sublease income		(49)		(154)		(111)		(308)
Net lease cost	$	14,860	$	15,519	$	30,133	$	31,906

(a)	Includes variable cost components of $1,330 and $1,389 in the three months ended June 30, 2020 and 2019, respectively, and $2,774 and $2,767 of variable cost components in the six months ended June 30, 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 June 30, 2020 were as follows, in thousands:


Payments due by Period
2020	$	20,072
2021		30,979
2022		20,751
2023		11,043
2024		6,287
2025 & Thereafter		6,390
Total future minimum lease payments		95,522

Less: imputed interest		(6,280)

Lease liability at June 30, 2020	$	89,242

As of June 30, 2020, the weighted average remaining lease term was 3.5 years and the related lease liability was calculated using a weighted average discount rate of 4.0%.

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 23.2 percent and 20.5 percent for the three and six months ended June 30, 2020, respectively. The effective tax rates for the three and six months ended June 30, 2019, were 22.2 percent and 21.2 percent, respectively. The higher 2020 tax rate for the three months ended June 30, 2020 compared to the three months ended June 30, 2019 was due to a smaller impact related to the discrete tax benefit for share-based compensation.

A tax benefit of $1.4 million and $6.9 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 and six months ended June 30, 2020, respectively.

At June 30, 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 June 30,				Six Months Ended June 30,
	2020		2019		2020		2019
Net income (in thousands) - basic and diluted	$	55,496	$	52,051	$	106,268	$	90,035

Weighted average number of common shares outstanding - basic		32,867,842		33,976,169		33,018,148		34,072,314

Dilutive effect of common stock equivalents:
RSAs with service-based conditions		47,618		84,952		59,419		88,516
RSAs with market-based conditions		146,496		174,840		138,760		177,436
RSAs with performance-based conditions		17,314		71,246		33,546		53,618
Stock options		123,153		250,457		151,262		238,164

Weighted average number of common shares outstanding - diluted		33,202,423		34,557,664		33,401,135		34,630,048

Basic net income per common share	$	1.69	$	1.53	$	3.22	$	2.64

Diluted net income per common share	$	1.67	$	1.51	$	3.18	$	2.60

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


	Three Months Ended June 30,				Six Months Ended June 30,
	2020		2019		2020		2019
Anti-dilutive common stock equivalents:
RSAs with service-based conditions		7,281		1,087		6,276		7,897
RSAs with market-based conditions		—		—		4,171		9,851
RSAs with performance-based conditions		—		—		—		—
Stock options		61,370		81,411		46,718		102,550
Total anti-dilutive common stock equivalents		68,651		82,498		57,165		120,298

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 June 30, 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 June 30,				Six Months Ended June 30,
	2020		2019		2020		2019
Share-based compensation expense	$	5,130	$	4,513	$	9,038	$	7,485
Income tax benefit realized	$	1,396	$	1,560	$	6,896	$	3,806

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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 six months ended June 30, 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	166.3	$	128.86	71.0	$	39.49	$	118.58
Converted/Exercised	(233.9)	$	44.72	(165.6)	$	15.15	$	40.41	$	11,135.5
Forfeited/Expired	(17.0)	$	91.77	(19.2)	$	30.50	$	88.89
Balance June 30, 2020	327.0	$	82.72	259.7	$	23.42	$	66.10	$	12,670.8

Exercisable June 30, 2020 (a)				47.5	$	22.69	$	61.81	$	2,467.1

(a)	The weighted average remaining contractual term for vested stock options is approximately 7.5 years.

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


	As of June 30, 2020
	Unrecognized Compensation Expense on Unvested Awards		Weighted Average Remaining Vesting Period
RSAs	$	11,929		1.4 years
Stock options		1,620		1.0 years
Total unrecognized compensation expense related to unvested awards	$	13,549

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	$	2,020	$	—	$	505	$	2,020	$	4,040
February 18, 2019	$	2,392	$	—	$	598	$	2,392	$	4,784
February 17, 2020	$	2,800	$	—	$	700	$	2,800	$	5,600

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 June 30,				Six Months Ended June 30,
	2020		2019		2020		2019
Number of shares repurchased		262,889		196,885		524,444 (a)		446,003 (b)
Share repurchase cost (in thousands)	$	20,025	$	14,878	$	34,152	$	19,499

(a) The six months ended June 30, 2020 includes 73,455 shares we received as final settlement of our 2019 ASR Agreement.

(b) The six months ended June 30, 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)

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 six months ended June 30, 2020		19		64		—
Payment of contingent consideration during the six months ended June 30, 2020		(841)		—		—
Liability balance for contingent consideration at June 30, 2020	$	—	$	1,368	$	1,000

14. ACCRUED LIABILITIES

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


	As of
	June 30,		December 31,
	2020		2019
Accrued liabilities:
Salaries, wages, and commissions	$	33,463	$	32,154
Insurance liabilities		22,344		22,506
Deferred revenue		15,719		16,139
Interest payable on long-term debt		4,134		3,966
Income taxes payable		19,360		50
Other		25,669		23,603
Total accrued liabilities	$	120,689	$	98,418

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

Income taxes payable as of June 30, 2020 increased to $19.4 million primarily as a result of the government’s response to COVID-19, which delayed the due date for certain tax payments which would have historically been paid by June 30, 2020. In the prior year, these payments were represented as prepaid expenses and other current assets on the condensed consolidated balance sheet.

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.

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We continue to implement procedures and processes to ensure the safety of our employees, including increasing our cleaning and sanitizing practices at all locations and for all company vehicles, mandating social distancing on job sites and within our branch operations and limiting all but essential travel. 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. We are also unable to predict how long the COVID-19 pandemic will last and the impact of the pandemic on demand for our products and services. For additional discussion of the potential impact of the COVID-19 pandemic on our business, see the sections entitled “Outlook” and “Risk Factors” included in this Quarterly Report.

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

SECOND QUARTER 2020 VERSUS SECOND QUARTER 2019

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


	Three Months Ended June 30,
	2020			2019
Net sales	$	646,099		$	660,112
Cost of sales		468,045			485,190
Cost of sales ratio		72.4	%		73.5	%

Gross profit		178,054			174,922
Gross profit margin		27.6	%		26.5	%

Selling, general, and administrative expense		97,600			98,883
Selling, general, and administrative expense to sales ratio		15.1	%		15.0	%

Operating profit		80,454			76,039
Operating profit margin		12.5	%		11.5	%

Other expense, net		(8,188)			(9,105)
Income tax expense		(16,770)			(14,883)
Net income	$	55,496		$	52,051
Net margin		8.6	%		7.9	%

Sales and Operations

Net sales decreased 2.1 percent for the three months ended June 30, 2020, from the comparable period of 2019. The decrease was primarily driven by a 3.6 percent reduction in sales volume driven by the negative impacts of the COVID-19 pandemic on business activity, partially offset by an increase in sales from our acquisitions.

Gross profit margins were 27.6 percent and 26.5 percent for the three months ended June 30, 2020 and 2019, respectively. Gross profit margin improved primarily due to increased operational efficiencies, cost reduction initiatives, and lower insurance costs partially offset by higher depreciation expense.

Selling, general, and administrative expense, as a percent of sales, was 15.1 percent and 15.0 percent for the three months ended June 30, 2020 and 2019, respectively. The increase in selling, general, and administrative expense as a percent of sales was primarily the result of lower sales volume and higher restructuring expenses, offset by savings from cost reduction initiatives and lower travel and entertainment costs.

Operating margins were 12.5 percent and 11.5 percent for the three months ended June 30, 2020 and 2019, respectively. The increase in operating margins was due to operational efficiencies, savings from cost reduction initiatives, lower insurance costs, and lower travel and entertainment costs partially offset by higher depreciation and restructuring expenses.

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Business Segment Results

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


	Three Months Ended June 30,
	2020			2019			Percent Change
Net sales by business segment:
Installation	$	466,569		$	483,028		(3.4)	%
Distribution		216,336			213,487		1.3	%
Intercompany eliminations		(36,806)			(36,403)
Net sales	$	646,099		$	660,112		(2.1)	%

Operating profit by business segment:
Installation	$	69,643		$	68,423		1.8	%
Distribution		24,155			21,151		14.2	%
Intercompany eliminations		(5,961)			(6,405)
Operating profit before general corporate expense		87,837			83,169		5.6	%
General corporate expense, net		(7,383)			(7,130)
Operating profit	$	80,454		$	76,039		5.8	%

Operating profit margins:
Installation		14.9	%		14.2	%
Distribution		11.2	%		9.9	%
Operating profit margin before general corporate expense		13.6	%		12.6	%
Operating profit margin		12.5	%		11.5	%

Installation

Sales

Sales in the Installation segment decreased $16.5 million, or 3.4 percent, for the three months ended June 30, 2020, as compared to the same period in 2019. Sales decreased 5.5 percent due to volume and increased 1.4 percent due to acquisitions and 0.7 percent due to increased selling prices.

Operating margins

Operating margins in the Installation segment were 14.9 percent and 14.2 percent for the three months ended June 30, 2020 and 2019, respectively. The increase in operating margins was driven by operational efficiencies, savings from cost reduction initiatives, lower insurance costs, and lower travel and entertainment costs partially offset by higher depreciation and restructuring expenses.

Distribution

Sales

Sales in the Distribution segment increased $2.8 million, or 1.3 percent, for the three months ended June 30, 2020, as compared to the same period in 2019. Sales increased 1.7 percent due to volume and declined 0.4 percent due to pricing decreases.

Operating margins

Operating margins in the Distribution segment were 11.2 percent and 9.9 percent for the three months ended June 30, 2020 and 2019, respectively. The increase in operating margins was driven by operational efficiencies, savings from cost reduction initiatives, and lower travel and entertainment costs partially offset by higher depreciation and restructuring expenses.

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OTHER ITEMS

Other expense, net

Other expense, net, which primarily consisted of interest expense, was $8.2 million and $9.1 million for the three months ended June 30, 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 $16.8 million, an effective tax rate of 23.2 percent, for the three months ended June 30, 2020, compared to $14.9 million, an effective tax rate of 22.2 percent, for the comparable period in 2019. The higher 2020 effective tax rate was due to a smaller benefit in 2020 related to share-based compensation.

FIRST SIX MONTHS 2020 VERSUS FIRST SIX MONTHS 2019

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


	Six Months Ended June 30,
	2020			2019
Net sales	$	1,299,327		$	1,279,442
Cost of sales		949,316			948,824
Cost of sales ratio		73.1	%		74.2	%

Gross profit		350,011			330,618
Gross profit margin		26.9	%		25.8	%

Selling, general, and administrative expense		199,568			197,960
Selling, general, and administrative expense to sales ratio		15.4	%		15.5	%

Operating profit		150,443			132,658
Operating profit margin		11.6	%		10.4	%

Other expense, net		(16,690)			(18,374)
Income tax expense		(27,485)			(24,249)
Net income	$	106,268		$	90,035
Net margin		8.2	%		7.0	%

Sales and Operations

Net sales increased 1.6 percent for the six months ended June 30, 2020, from the comparable period of 2019. The increase was primarily driven by increased selling prices and acquisitions, with nearly flat volumes due to the negative impacts of COVID-19 on business activity.

Gross profit margins were 26.9 percent and 25.8 percent for the six months ended June 30, 2020 and 2019, respectively. Gross profit margin improved primarily due to increased selling prices, operational efficiencies, and savings from cost reduction initiatives, partially offset by higher depreciation expense and higher material costs.

Selling, general, and administrative expense, as a percent of sales, was 15.4 percent and 15.5 percent for the six months ended June 30, 2020 and 2019, respectively. Decreased selling, general, and administrative expense as a percent of sales was primarily the result of savings from cost reduction initiatives and lower travel and entertainment costs.

Operating margins were 11.6 percent and 10.4 percent for the six months ended June 30, 2020 and 2019, respectively. The increase in operating margins was due to increased selling prices, operational efficiencies, savings from cost reduction initiatives and lower travel and entertainment costs, partially offset by higher depreciation expense and 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:


	Six Months Ended June 30,
	2020			2019			Percent Change
Net sales by business segment:
Installation	$	942,442		$	932,410		1.1	%
Distribution		430,558			417,951		3.0	%
Intercompany eliminations		(73,673)			(70,919)
Net sales	$	1,299,327		$	1,279,442		1.6	%

Operating profit by business segment:
Installation	$	129,994		$	119,722		8.6	%
Distribution		48,825			41,748		17.0	%
Intercompany eliminations		(11,795)			(12,078)
Operating profit before general corporate expense		167,024			149,392		11.8	%
General corporate expense, net		(16,581)			(16,734)
Operating profit	$	150,443		$	132,658		13.4	%

Operating profit margins:
Installation		13.8	%		12.8	%
Distribution		11.3	%		10.0	%
Operating profit margin before general corporate expense		12.9	%		11.7	%
Operating profit margin		11.6	%		10.4	%

Installation

Sales

Sales in the Installation segment increased $10.0 million, or 1.1 percent, for the six months ended June 30, 2020, as compared to the same period in 2019. Sales increased 1.4 percent due to increased selling prices and 1.2 percent due to acquisitions, but decreased 1.6 percent in volume driven by the negative impact of COVID-19 on business activity.

Operating margins

Operating margins in the Installation segment were 13.8 percent and 12.8 percent for the six months ended June 30, 2020 and 2019, respectively. The increase in operating margins was driven by operational efficiencies, increased selling prices, cost reduction initiatives, and lower travel and entertainment costs, partially offset by higher depreciation and higher material costs.

Distribution

Sales

Sales in the Distribution segment increased $12.6 million, or 3.0 percent, for the six months ended June 30, 2020, as compared to the same period in 2019. Sales increased 2.8 percent due to volume despite a negative impact from COVID-19 on business activity, and 0.3 percent due to increased selling prices.

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Operating margins

Operating margins in the Distribution segment were 11.3 percent and 10.0 percent for the six months ended June 30, 2020 and 2019, respectively. The increase in operating margins was driven by operational efficiencies, increased selling prices, savings from cost reduction initiatives and lower travel and entertainment costs, partially offset by higher depreciation and higher material costs.

OTHER ITEMS

Other expense, net

Other expense, net, which primarily consisted of interest expense, was $16.7 million and $18.4 million for the six months ended June 30, 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 $27.5 million, an effective tax rate of 20.5 percent, for the six months ended June 30, 2020, compared to $24.2 million, an effective tax rate of 21.2 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:


	Six Months Ended June 30,
	2020		2019
Changes in cash and cash equivalents:
Net cash provided by operating activities	$	178,162	$	96,264
Net cash used in investing activities		(40,700)		(19,999)
Net cash used in financing activities		(63,432)		(35,427)
Increase for the period	$	74,030	$	40,838

Net cash flows provided by operating activities increased $81.9 million for the six months ended June 30, 2020, as compared to the prior year period. The change was primarily due to the timing of accounts receivable collections and accrued liability payments, as well as an increase in net income.

Net cash used in investing activities was $40.7 million for the six months ended June 30, 2020, primarily composed of $20.9 million for purchases of property and equipment, primarily vehicles, partially offset by $0.8 million in proceeds from the sale of property and equipment, and $20.5 million for the acquisitions of Cooper and Hunter. Net cash used in investing activities was $20.0 million for the six months ended June 30, 2019, primarily composed of $22.0 million for purchases of property and equipment, primarily vehicles, partially offset by $2.0 million in proceeds from the sale of property and equipment.

Net cash used in financing activities was $63.4 million for the six months ended June 30, 2020. During the six months ended June 30, 2020, we used $34.2 million for the repurchase of common stock pursuant to the 2019 Repurchase Program, $13.2 million on purchases of common stock for tax withholding obligations related to the vesting and exercise of share-based incentive awards, $13.4 million for payments on our term loan under our 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 $35.4 million for the six months ended June 30, 2019. During the six months ended June 30, 2019, we used $11.4 million for payments on our term loan under our Amended Credit Agreement and on our equipment notes, $19.5 million for the repurchase of common stock pursuant to the 2019 Repurchase Program, and $8.5 million on purchases of common stock for tax withholding obligations related to the vesting and exercise of share-based incentive awards. We also made payments totaling $1.1 million for contingent consideration for EcoFoam and Santa Rosa.

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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 June 30, 2020, with $258.8 million of cash and $389.6 million available borrowing capacity under our Revolving Facility. In May 2020, we temporarily suspended share repurchases under the 2019 Share Repurchase Program and acquisitions, due to the uncertainty caused by the COVID-19 pandemic. 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 future unknown impacts from COVID-19.

The following table summarizes our liquidity, in thousands:


	As of
	June 30,		December 31,
	2020		2019
Cash and cash equivalents (a)	$	258,837	$	184,807

Revolving Facility		450,000		250,000
Less: standby letters of credit		(60,382)		(61,382)
Availability under Revolving Facility		389,618		188,618

Total liquidity	$	648,455	$	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 of June 30, 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

At the start of the second quarter, the United States was in the middle of a historic shut-down as a result of the COVID-19 pandemic, resulting in the cessation of nearly all economic activities. From the start of the shut-down, construction activities were generally deemed an essential service in all but a few states, resulting in our ability to continue operating in most locations until segments of the economy started to open back up during the second quarter. Management continues to evaluate every aspect of our business and is monitoring ongoing developments with regards to if operating activities will be restricted again, as well as if there will be a downturn or other adverse impact to our business as a result of the pandemic’s greater economic impact.

OFF-BALANCE SHEET ARRANGEMENTS

We had no material off-balance sheet arrangements during the quarter ended June 30, 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 June 30, 2020, we had $296.3 million outstanding under our term loan facility, and the applicable interest rate as of such date was 1.75%. Based on our outstanding borrowings under the Amended Credit Agreement as of June 30, 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 June 30, 2020.

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Item 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

As of the end of the period covered by this Quarterly Report, we carried out an evaluation, under the supervision and with the participation of our principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Based on this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective as of June 30, 2020.

Changes in Internal Control over Financial Reporting

There was no change in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) in the most recent fiscal quarter ended June 30, 2020, that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II – OTHER INFORMATION

Item 1. LEGAL PROCEEDINGS

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

Item 1A. RISK FACTORS

There have been no material changes to our risk factors as previously disclosed in our Annual Report for the year ended December 31, 2019, as filed with the SEC on February 25, 2020, and our 10-Q for the three months ended March, 31, 2020, as filed with the SEC on May 5, 2020, which are incorporated by reference herein.

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

The following table provides information regarding the repurchase of our common stock for the three months ended June 30, 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
April 1, 2020 - April 30, 2020	227,687	$	73.51	227,687	$	58,250
May 1, 2020 - May 31, 2020	35,202	$	93.40	35,202	$	54,962
June 1, 2020 - June 30, 2020	—	$	—	—	$	54,962
Total	262,889	$	76.17	262,889

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.

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INDEX TO EXHIBITS


		Incorporated by Reference			Filed
Exhibit No.	Exhibit Title	Form	Exhibit	Filing Date	Herewith
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


	As of
	June 30,		December 31,
	2020		2019
Outstanding bonds:
Performance bonds	$	98,435	$	87,286
Licensing, insurance, and other bonds		25,528		25,309
Total bonds	$	123,963	$	112,595


	TOPBUILD CORP.


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


		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	31

Item 4.	Controls and Procedures	32

Part II.	Other Information

Item 1.	Legal Proceedings	32

Item 1A.	Risk Factors	32

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	32

Item 3.	Defaults upon Senior Securities	32

Item 4.	Mine Safety Disclosures	33

Item 5.	Other Information	33

Item 6.	Exhibits	33

Index to Exhibits		34

Signature		35

Six Months Ended June 30,

Cash paid for amounts included in the measurement of lease liabilities