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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K


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

For the fiscal year ended December 31, 2016


☐	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: 1-36870

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		Name of each exchange on which registered
Common stock, par value $0.01 per share		New York Stock Exchange

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

None

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

☒ Yes ☐ No

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

☐ Yes ☒ No

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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files.

☒ Yes ☐ No

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form
10-K.☒

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

Large accelerated filer ☒ Accelerated filer ☐ Smaller reporting company ☐ Non-accelerated filer ☐ (Do not check if a smaller reporting company)

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

☐ Yes ☒ No

The aggregate market value of the voting and non-voting common stock held by non-affiliates of the registrant based on the closing price of $36.20 per share as reported on the New York Stock Exchange on June 30, 2016, was approximately $1.4 billion.

Number of shares of common stock outstanding as of February 21, 2017: 37,718,605

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant’s Proxy Statement for its 2017 Annual Meeting of Shareholders, to be filed with the Securities and Exchange Commission no later than 120 days after December 31, 2016, are incorporated by reference into Part III of this Form 10-K.

PART I

Item 1. BUSINESS

Overview

TopBuild Corp., headquartered in Daytona Beach, Florida, is the leading installer and distributor of insulation products to the United States construction industry, based on revenue. Prior to June 30, 2015, we operated as a subsidiary of Masco Corporation (“Masco” or “Former Parent”), which trades on the New York Stock Exchange (“NYSE”) under the symbol “MAS.” We were incorporated in Delaware in February 2015 as Masco SpinCo Corp. and we changed our name to TopBuild Corp. on March 20, 2015. On June 30, 2015, the separation from Masco (“Separation”) was completed and on July 1, 2015, we began trading on the NYSE under the symbol “BLD.”

Segment Overview

We operate in two segments: TruTeam, our Installation segment, which accounts for 62% of our sales and Service Partners, our Distribution segment, which accounts for 38% of our sales.

Installation (TruTeam)

We provide insulation installation services nationwide through our TruTeam contractor services business which has over 170 installation branches located in 41 states.

Various insulation applications we install include:

Fiberglass batts and rolls

Blown-in loose fill fiberglass

Blown-in loose fill cellulose

Polyurethane spray foam

In addition to insulation products, which represented 74% of our installation segment’s sales, we also install other building products including rain gutters, 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. The amount of insulation in a new home is regulated by various building and energy codes.

Our TruTeam customer base includes the largest single-family homebuilders in the United States (“U.S.”) as well as local/single-family custom builders, multi-family builders, commercial general contractors, remodelers, and individual homeowners.

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

Distribution (Service Partners)

We distribute insulation and other building products including rain gutters, fireplaces, closet shelving, and roofing materials through our Service Partners business, which has over 70 distribution centers located in 33 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.

For further information on our segments, see Item 8, Financial Statements and Supplementary Data, Note 7 - Segment Information.

Demand for Our Products and Services

Demand for our insulation products and services is driven by new single-family residential and multi-family home construction, commercial construction, remodeling and repair activity, changing building codes which require additional insulation, and the growing need for energy efficiency. Being a leader in both installation and distribution allows us to more effectively reach a broader set of customers, regardless of their size or geographic location within the U.S. We recognize that competition for the installation and sale of insulation and other building products occurs in localized geographic markets throughout the country, and as such our operating model is based on branches building and maintaining local customer relationships. At the same time, our local operations benefit from centralized functions such as information technology, credit, and purchasing.

Competitive Advantages

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

National scale. With our national footprint, we provide products and services to each major construction line of business in the U.S. Our national scale, together with our centralized TopBuild executive management team, allows us to compete locally by:

•Providing national and regional builders with broad geographic reach, while maintaining consistent policies and practices that enable reliable, high‑quality products and services across many geographies and building sites

•Establishing strong ties to major manufacturers of insulation and other building products that help ensure we are buying competitively, have availability of supply to our local branches and distribution centers and are driving efficiencies throughout our supply chain

•Providing consistent, customized support and geographic coverage to our customers

•Maintaining an operating capacity that allows us to ramp‑up rapidly, without major incremental investment, to target forecasted growth in housing starts and construction activity in each of our lines of business anywhere in the U.S.

•Leveraging investments in systems and processes and sharing best practices across both our installation and distribution businesses

Two avenues to reach the builder. We believe having both an installation and distribution business provides a number of advantages to reaching our customers and driving share gains. Our installation business customer base includes builders of all sizes. Our branches go to market with the local brands that small builders recognize and value, and our national footprint is appealing to large builders who value consistency across a broad geography. Our distribution business focuses on selling to small contractors who are particularly adept at cultivating the local relationships with small custom builders. 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 within the U.S., and leverage housing growth wherever it occurs.

Diversified lines of business. In response to the housing downturn in prior years, we enhanced our ability to serve the commercial construction markets and residential repair/remodel. Although the commercial construction and residential repair/remodel markets are affected by many of the same macroeconomic and local economic factors that drive residential new construction, commercial construction and residential repair/remodel have historically followed different cycles than residential new construction. We have thus positioned our business to benefit from a greater mix of residential repair/remodel activity and commercial construction activity than we have historically, which helps reduce volatility because we are less dependent on residential new construction, and also enables us to better respond to changes in customer demand.

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

Reduced exposure to residential housing cyclicality. During industry downturns, many insulation contractors who buy directly from manufacturers during industry peaks, return to purchasing through distributors for small, “Less Than Truckload” shipments, reduced warehousing needs, and access to purchases on credit. This drives incremental customers to Service Partners during these points in the business cycle, offsetting decreases at TruTeam as a result of a downturn. Our leadership position in both installation and distribution helps to reduce exposure to cyclical swings in our lines of business.

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

Major Customers

We have a diversified portfolio of customers and no single customer accounted for 3 percent or more of our total revenues. Our top ten customers accounted for approximately 11 percent of our total sales in 2016.

Backlog

Due to our customers’ need for timely installation of our products, our installation jobs are scheduled and completed within a short timeframe. We do not consider backlog material to our business.

Suppliers

Our businesses depend on our ability to obtain an adequate supply of high quality products and components from manufacturers and other suppliers. We rely heavily on third party suppliers for our products and key components. We source the majority of our building products from four primary U.S. based residential fiberglass insulation manufacturers: CertainTeed, Johns Manville, Knauf, and Owens Corning. Failure by our suppliers to provide us with an adequate supply of high quality products on commercially reasonable terms, or to comply with applicable legal requirements, could have a material, adverse effect on our financial condition or operating results. We believe we have generally positive relationships with our suppliers.

Employees

At December 31, 2016, we had approximately 7,900 employees. Approximately 600 of our employees are currently covered by collective bargaining or other similar labor agreements.

Executive Management

See Item 10, Directors, Executive Officers, and Corporate Governance.

Legislation and Regulation

We are subject to U.S., state and local regulations, particularly those pertaining to health and safety (including protection of employees and consumers), labor standards/regulations, contractor licensing, and environmental issues. In addition to complying with current effective requirements and requirements that will become effective at a future date, even more stringent requirements could eventually be imposed on our industries. Additionally, some of our products and services may require certification by industry or other organizations. Compliance with these regulations and industry standards may require us to alter our distribution and installation processes and our sourcing, which could adversely impact our competitive position. Further, if we do not effectively and timely comply with such regulations and industry standards, our operating results could be negatively affected.

Additional Information

We make available free of charge on our website, www.topbuild.com, our Annual Report on Form 10-K (the “Report”), our Quarterly Reports on Form 10-Q, and our Current Reports on Form 8-K as soon as reasonably practicable after these reports are filed with or furnished to the Securities and Exchange Commission (the “SEC”).

Item 1A. RISK FACTORS

There are a number of business risks and uncertainties that could affect our business and cause our actual results to differ from past performance or expected results. We consider the following risks and uncertainties to be most relevant to our business activities. Additional risks and uncertainties not presently known to us, or that we currently believe to be immaterial, also may impact our business, financial condition, and results of operations. We urge investors to consider carefully the risk factors described below in evaluating the information contained in this Report.

Our historical financial information is not necessarily indicative of our future financial condition or future results of operations, nor does it reflect what our financial condition or results of operations would have been as an independent public company during the periods presented prior to the Separation.

Our historical financial results for the periods prior to the Separation reflect allocations of expenses for services historically provided by Masco, and this allocation of Masco corporate expenses may be significantly lower than the comparable expenses we would have incurred as an independent company.

Our working capital requirements and capital expenditures for the periods prior to the Separation were satisfied as part of Masco’s corporate‑wide cash management and capital expenditure programs, and our cost of debt and other capital may have significantly differed from that reflected in our historical financial statements.

The historical financial information prior to the Separation may not fully reflect the costs associated with being an independent public company.

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

Macroeconomic and local economic conditions, including consumer confidence levels, fluctuations in home prices, unemployment and underemployment levels, student loan debt, household formation rates, the age and volume of the housing stock, the availability of home equity loans and mortgages and the interest rates for such loans, and other factors, affect consumers’ discretionary spending on both residential new construction projects and residential repair/remodel activity. The commercial construction market is affected by macroeconomic and local economic factors such as interest rates, credit availability for commercial construction projects, material costs, employment rates, office vacancy rates, and office absorption rates. Changes or uncertainty regarding these and other factors could adversely affect our results of operations and our financial position.

We may not be successful in identifying and making or integrating acquisitions.

Part of our growth strategy is dependent on our ability to make acquisitions. We may be unable to make accretive acquisitions or realize expected benefits of any acquisitions for any of the following reasons:

failure to identify attractive targets in the marketplace;

incorrect assumptions regarding the future results of acquired operations or assets or expected cost reductions or other synergies expected to be realized as a result of acquiring operations or assets;

failure to obtain acceptable financing;

restrictions in our debt agreements;

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

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

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

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

Our ability to control labor costs and attract qualified labor is subject to numerous external factors including prevailing wage rates, labor shortages, the impact of legislation or regulations governing wages and hours, labor relations, immigration, healthcare benefits, and other insurance costs. In addition, we compete with other companies to recruit and retain qualified installers and truck drivers in a tight labor market, and we invest significant resources in training and motivating them to maintain a high level of job satisfaction. These positions generally have high turnover rates, which can lead to increased training and retention costs.

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

Our operating structure can make it difficult for us to coordinate procedures across our operations. In addition, our branches and distribution facilities may require significant oversight and coordination from headquarters to support their growth. Inconsistent implementation of corporate strategy at the local or regional level could materially and adversely affect our overall profitability, business, results of operations, financial condition, and prospects.

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

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

We face significant competition.

The market for the distribution and installation of building products is highly fragmented and competitive and barriers to entry are relatively low. Our installation competitors include national contractors, regional contractors, and local contractors, and we face many or all of these competitors for each project on which we bid. Our insulation distribution competitors include specialty insulation distributors (one multi‑regional, several regional, and numerous local). In some instances, our insulation distribution business sells products to companies that may compete directly with our installation service business. We also compete with broad line building products distributors, big box retailers, and insulation manufacturers. In addition to price, we believe that competition in our industry is based largely on customer service and the quality and timeliness of installation services and distribution product deliveries in each local market.

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

We normally experience stronger sales during the third and fourth calendar quarters, corresponding with the peak season for residential new construction and residential repair/remodel activity. Sales during the winter weather months are seasonally slower due to the lower construction activity. Historically, the installation of insulation lags housing starts by several months.

In addition, to the extent that hurricanes, severe storms, earthquakes, droughts, floods, fires, other natural disasters, or similar events occur in the geographic areas in which we operate, our business may be adversely affected.

Any widespread disruption to our facilities resulting from a natural disaster, an act of terrorism, or any other cause could damage a significant portion of our inventory and supply stock, and could materially impair our ability to provide installation and/or distribution services for our customers.

Claims and litigation could be costly.

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

We have also experienced class action lawsuits in recent years predicated upon claims for antitrust, product liability, construction defects, competition, and wage and hour issues. We have generally denied liability and have vigorously defended these cases. Due to their scope and complexity, however, these lawsuits can be particularly costly to defend and resolve, and we have and may continue to incur significant costs as a result of these types of lawsuits.

Our builder and contractor customers are subject to construction defect and warranty claims in the ordinary course of their business. Our contractual arrangements with these customers may include our agreement to defend and indemnify them against various liabilities.

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

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

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

Our business depends in part on our ability to identify future products and product lines that complement existing products and product lines and that respond to our customers’ needs. We may not be able to compete effectively unless our product selection keeps up with trends in the markets in which we compete or trends in new products. In addition, our ability to integrate new products and product lines into our distribution network could affect our ability to compete.

We are subject to competitive pricing pressure from our customers.

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

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

Our distribution customers could begin purchasing more of their product needs directly from manufacturers, which would result in decreases in our net sales and earnings. Our suppliers could invest in infrastructure to expand their own local sales force and sell more products directly to our distribution customers, which also would negatively impact our business. In addition, our distribution customers may elect to establish their own building products manufacturing and distribution facilities, or give advantages to manufacturing or distribution intermediaries in which they have an economic stake.

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

Approximately 600 of our employees are currently covered by collective bargaining or other similar labor agreements that expire on various dates from June 2017 through January 2027. Any inability by us to negotiate collective bargaining arrangements could cause strikes or other work stoppages, and new contracts could result in increased operating costs. If any such strikes or other work stoppages occur, or if other employees become represented by a union, we could experience a disruption of our operations and higher labor costs. Further, if a significant number of additional employees were to unionize, including in the wake of any future legislation that makes it easier for employees to unionize, these risks would increase. In addition, certain of our suppliers have unionized work forces, and certain of the products we install and/or distribute are transported by unionized truckers. Strikes, work stoppages, or slowdowns could result in slowdowns or closures of facilities where the products that we install and/or distribute are manufactured, or could affect the ability of our suppliers to deliver such products to us. Any interruption in the production or delivery of these products could delay or reduce availability of these products and increase our costs.

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

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

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

We are subject to federal, state, and local government regulations, particularly those pertaining to health and safety, including protection of employees and consumers; employment laws, including immigration and wage and hour regulations; contractor licensing; and environmental issues. In addition to complying with current requirements, even more stringent requirements could be imposed in the future. Compliance with these regulations and industry standards is costly and may require us to alter our installation and distribution processes, product sourcing, or business practices, and makes recruiting and retaining labor in a tight labor market more challenging. Compliance with these regulations and industry standards could also divert our attention and resources to compliance activities, and could cause us to incur higher costs. Further, if we do not effectively and timely comply with such regulations and industry standards, our results of operations could be negatively affected and we could become subject to substantial penalties or other legal liability.

If we encounter difficulties with our information technology systems, we could experience problems with customer service, inventory, collections, and cost control.

Our operations are dependent upon our information technology systems to manage customer orders on a timely basis, to coordinate our installation and distribution activities across locations, and to manage invoicing. If we experience problems with our information technology systems, we could experience, among other things, delays in receiving customer orders, placing orders with suppliers, and scheduling production, installation services, or shipments.

Since we rely heavily on information technology, both in serving our customers and in our enterprise infrastructure, in order to achieve our objectives, we may be vulnerable to damage or intrusion from a variety of cyber‑attacks including computer viruses, worms, or other malicious software programs that gain access to our systems. Such events could have an adverse impact on revenue, harm our reputation, and cause us to incur legal liability and costs, which could be significant, to address and remediate such events and related security concerns.

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

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

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

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

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

Economic and credit market conditions, the performance of the construction industry, and our financial performance, as well as other factors including restrictions under the Tax Matters Agreement related to the Separation which expires June 30, 2017, may constrain our financing abilities (see Item 8, Financial Statements and Supplementary Data, Note 2 - Related Parties). Our ability to secure additional financing and to satisfy our financial obligations will depend upon our future operating performance; the availability of credit; economic conditions; and financial, business, and other factors, many of which are beyond our control. In addition, the Tax Matters Agreement generally prohibits us and our affiliates from taking certain actions that could cause the Separation and certain related transactions to fail to qualify as tax‑free transactions, which includes certain issuances of our common stock.

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

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

Incur or guarantee additional debt

Make distributions or dividends on, or redeem or repurchase shares of common stock

Make certain investments, acquisitions, or other restricted payments

Incur certain liens or permit them to exist

Acquire, merge, or consolidate with another company

Transfer, sell, or otherwise dispose of substantially all of our assets

Our revolving credit facility contains, and any future credit facility or other debt instrument we may enter into will also likely contain, covenants requiring us to maintain certain financial ratios and meet certain tests, such as a fixed charge coverage ratio, a leverage ratio, and a minimum test (see Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations). Our ability to comply with those financial ratios and tests can be affected by events beyond our control, and we may not be able to comply with those ratios and tests when required to do so under the applicable debt instruments.

The provisions of our credit facility, or other debt instruments, may affect our ability to obtain future financing and pursue attractive business opportunities and our flexibility in planning for, and reacting to, changes in business conditions. In addition, a failure to comply with the provisions of our existing credit facility, any future credit facility, or other debt instruments could result in a default or an event of default that could enable our lenders or other debt holders to declare the outstanding principal of that debt, together with accrued and unpaid interest, to be immediately due and payable. If the payment of our debt is accelerated, our assets may be insufficient to repay such debt in full, and our stockholders could experience a partial or total loss of their investment.

Any adverse credit rating could increase our costs of borrowing money and limit our access to capital markets and commercial credit.

We do not currently intend to seek credit ratings from Moody’s Investor Service, Standard & Poor’s, or another rating service. However, if Moody’s, Standard & Poor’s, or another rating service rates our credit, such rating could be below investment grade.

We may be affected by significant restrictions due to the Separation in order to avoid triggering significant tax‑related liabilities.

The Tax Matters Agreement generally prohibits us from taking certain actions prior to July 1, 2017 that could cause the Separation and certain related transactions to fail to continue to qualify as tax‑free transactions, including the following:

Neither we nor any of our subsidiaries may sell, exchange, distribute, or otherwise dispose of any assets held by us or our subsidiaries, except for assets that, in the aggregate, do not constitute more than 15% of our total assets.

We may not cause or permit any business combination or transaction which, individually or in the aggregate, could result in one or more persons acquiring directly or indirectly a forty percent (40%) or greater interest in us for purposes of Section 355(e) of the Code.

We may not discontinue the active conduct of our business (within the meaning of Section 355(b)(2) of the Code).

We may not sell or otherwise issue our common stock, other than pursuant to issuances that satisfy certain regulatory safe harbors set forth in Treasury Regulations related to stock issued to employees and retirement plans.

We may not redeem or otherwise acquire any of our common stock, other than pursuant to open‑market repurchases of less than 20% of our common stock (in the aggregate).

We may not amend our certificate of incorporation or other organizational documents, or take any other action, whether through a stockholder vote or otherwise, affecting the voting rights of our common stock.

More generally, we may not take any action that could reasonably be expected to cause the Separation and certain related transactions to fail to qualify as tax‑free transactions under Section 368(a)(1)(D) and Section 355 of the Code.

If we take any of the actions above and such actions result in tax‑related losses to Masco, then we generally will be required to indemnify Masco for such tax‑related losses.

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

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

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

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

Risks Relating to Our Common Stock

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

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

Fluctuations in our quarterly or annual earnings results, or those of other companies in our industry

Failures of our operating results to meet the estimates of securities analysts or the expectations of our stockholders, or changes by securities analysts in their estimates of our future earnings

Announcements by us or our customers, suppliers, or competitors

Changes in laws or regulations which adversely affect our industry or us

Changes in accounting standards, policies, guidance, interpretations, or principles

General economic, industry, and stock market conditions

Future sales of our common stock by our stockholders

Future issuances of our common stock by us

Other factors described in these “Risk Factors” and elsewhere in this Report

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

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

Providing for a classified board of directors

Providing that our directors may be removed by our stockholders only for cause

Establishing supermajority vote requirements for our stockholders to amend certain provisions of our certificate of incorporation and our bylaws

Authorizing a large number of shares of stock that are not yet issued, which could have the effect of preventing or delaying a change in control if our board of directors issued shares to persons that did not support such change in control, or which could be used to dilute the stock ownership of persons seeking to obtain control

Prohibiting stockholders from calling special meetings of stockholders or taking action by written consent

Establishing advance notice requirements for nominations of candidates for election to our board of directors or for proposing matters that can be acted on by stockholders at the annual stockholder meetings

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

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

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

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

PART II

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

Market Information. Our common stock is traded on the NYSE under the symbol “BLD”. The following table presents the high and low sales prices of our common stock for each quarter starting July 1, 2015, the date on which our stock began trading “regular way” on the NYSE:


2015		High		Low
Third quarter	$	36.36	$	26.67
Fourth quarter	$	33.33	$	27.58
2016
First quarter	$	30.65	$	23.02
Second quarter	$	38.05	$	29.23
Third quarter	$	38.94	$	32.03
Fourth quarter	$	39.51	$	28.81

As of February 26, 2016, there were approximately 3,300 holders of our issued and outstanding common stock.

Dividends. No dividends were paid during the years ended December 31, 2016 and 2015. Our credit agreement, in certain circumstances, limits the amount of dividends we may distribute. We do not anticipate declaring any such cash dividends to holders of our common stock in the foreseeable future.

Issuer Purchases of Equity Securities. The following table provides information regarding the repurchase of our common stock for the three months ended December 31, 2016, 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 (a)
October 1, 2016 - October 31, 2016	131,600	$	32.01	131,600	$	34,411
November 1, 2016 - November 30, 2016	139,900	$	31.86	139,900	$	29,953
December 1, 2016 - December 31, 2016	60,626	$	37.10	60,626	$	27,704
Total	332,126	$	32.87	332,126

(a)

On March 1, 2016, our Board of Directors authorized a share repurchase program, which we publicly announced on March 3, 2016 (the “Share Repurchase Program”), pursuant to which we may purchase up to $50 million of our common stock. The Share Repurchase program does not obligate us to purchase any shares and expires February 28, 2017. The Share Repurchase Program may be terminated, increased, or decreased by our Board of Directors at its discretion at any time.

During the three months ended December 31, 2016, we repurchased 332,126 shares of our common stock for approximately $10.9 million under the $50 million Share Repurchase Program. All repurchases were made using cash resources. Our common stock repurchases occurred on the open market pursuant to a Rule 10b5-1 plan. Excluded from this disclosure are shares repurchased to settle statutory employee tax withholding related to the vesting of stock awards and exercise of options.

Performance Graph and Table. The following graph and table compares the cumulative total return of our common stock from July 1, 2015, the date on which our stock began trading “regular way” on the NYSE, through December 31, 2016, with the total cumulative return of the Russel 2000 Index and the Standard and Poor’s 500 Index (“S&P 500 Index”). The graph and table assumes an initial investment of $100 in our common stock and each of the two indices at the close of business on July 1, 2015, and reinvestment of dividends.


	Period ended:
	7/1/2015		9/30/2015		12/31/2015		3/31/2016		6/30/2016		9/30/2016		12/31/2016
TopBuild Corp.	$	100	$	115	$	114	$	110	$	134	$	123	$	132
S&P 500 Index		100		92		98		99		101		104		108
Russel 2000 Index		100		88		90		89		92		100		108

Item 6. SELECTED HISTORICAL FINANCIAL DATA

The following table sets forth selected historical financial data that should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our financial statements and notes thereto, included in this Report. The Consolidated Statements of Operations data for the years ended December 31, 2016, 2015, and 2014, and the Consolidated Balance Sheet data as of December 31, 2016, and 2015, are derived from our audited financial statements included in this Report. The Consolidated Statements of Operations data for the years ended December 31, 2013 and 2012, and the Consolidated Balance Sheet data as of December 31, 2014 and 2013, were derived from our audited financial statements not included in this report. The Consolidated Balance Sheet data as of December 31, 2012, was derived from our unaudited financial statements not included in this Report. The selected historical financial data in this section is not intended to replace our historical financial statements and the related notes thereto. Prior to the Separation, our historical financial results included allocations of general and corporate expense from Masco and as such our historical results are not necessarily indicative of future results. For more information, see Item 8. Financial Statements and Supplementary Data, Note 1 – Summary of Significant Accounting Policies: Basis of Presentation.


	Year ended December 31,
(in thousands)	2016		2015		2014		2013		2012 (b)
Net sales	$	1,742,850	$	1,616,580	$	1,512,077	$	1,411,524	$	1,207,889
Operating profit (loss)	$	121,604	$	83,531	$	40,717	$	24,103	$	(115,928)
Income (loss) from continuing operations	$	72,606	$	79,123	$	10,496	$	(11,551)	$	(154,375)

Income (loss) per common share on income (loss) from continuing operations (a):
Basic	$	1.93	$	2.10	$	0.28	$	(0.31)	$	(4.10)
Diluted	$	1.92	$	2.09	$	0.28	$	(0.31)	$	(4.10)

At period end:
Total assets	$	1,690,119	$	1,642,249	$	1,476,424	$	1,466,946	$	1,450,663
Total debt	$	178,800	$	193,457	$	—	$	—	$	—
Equity	$	972,547	$	915,729	$	952,291	$	1,002,685	$	1,026,749

(a)

For comparative purposes, the computation of basic and diluted earnings per common share for the year ended December 31, 2014 and prior periods presented were calculated using the shares distributed at Separation.

(b)

In July 2012, Masco reached a settlement agreement to the Columbus Drywall litigation. Masco and its insulation installation companies named in the suit agreed to pay $76 million in return for dismissal with prejudice and full release of all claims. Masco and its insulation installation companies denied that the challenged conduct was unlawful and admitted no wrongdoing as part of the settlement. A settlement was reached to eliminate the considerable expense and uncertainty of this lawsuit.

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

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

The following discussion and certain other sections of this Report contain statements reflecting our views about our future performance. Forward‑looking statements can be identified by words such as “anticipate,” “intend,” “plan,” “believe,” “estimate,” “expect,” “assume,” “seek,” “appear,” “may,” “should,” “will,” “forecast,” 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 such forward‑looking statements. We caution you against relying on any of these forward‑looking statements. In addition to the various factors included in the “Executive Summary,” “Competitive Advantages,” “Strategy,” “Material Trends in Our Business,” and “Critical Accounting Policies and Estimates” sections, our future performance may be affected by 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; our ability to maintain consistent practices across our locations; our ability to maintain our competitive position; and our ability to realize the expected benefits of the Separation. These and other factors are discussed in detail under the caption “Risk Factors” in Item 1A of this Report. Any forward‑looking statement made by us speaks only as of the date on which it was made. 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.

Executive Summary

We are the leading installer and distributor of insulation products to the U.S. construction industry, based on revenue. Demand for our products and services is driven primarily by residential new construction, commercial construction, and residential repair/remodel activity throughout the U.S. A number of local and national factors influence activity in each of our lines of business, including demographic trends, interest rates, employment levels, business investment, supply and demand for housing stock, availability of credit, foreclosure rates, consumer confidence, and general economic conditions.

Activity in the construction industry is seasonal, typically peaking in the summer months. Because installation of insulation historically lags housing starts by several months, we generally see a corresponding benefit in our operating results during the third and fourth quarters.

Competitive Advantages

We believe we are well positioned to organically grow our business as a result of a number of competitive advantages including:

National Scale. Our national scale enables us to drive supply chain efficiencies and provide the tools necessary for our branches and distribution centers to effectively compete locally. Given the highly fragmented homebuilding industry, our leadership positions in installation, distribution, and building science services allow us to tailor our approach to each local market, which differs in characteristics such as customer mix, competitive activity, building codes, and labor availability. Moreover, serving multiple lines of business provides additional revenue growth potential with which to leverage our fixed costs, and reduces our exposure to the cyclical swings in residential new construction.

Strong Local Presence. Competition for the installation and sale of insulation and other building products to builders occurs in localized geographic markets across the country. Builders in each local market have different options in terms of choosing among insulation installers and distributors for their projects and value local relationships, quality, and timeliness. Our national footprint includes over 170 branches in our Installation segment, which are locally branded businesses that are recognized within the communities in which they operate. We also have over 70 distribution centers in our Distribution segment, primarily serving local contractors, lumberyards, retails stores, and others who, in turn, service local homebuilders and other customers. Through both businesses we have developed local, long-tenured relationships with a reputation for quality, service, and timeliness.

Two Avenues to Reach the Builder. 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 within the United States, and leverage housing growth wherever it occurs.

Strategy

Our long-term strategy is to grow net sales, income, and operating cash flows and remain the leading insulation installer and distributor by revenue. In order to achieve these goals we plan to:

Capitalize on the U.S. housing market recovery through focused organic growth and accretive aligned acquisitions

Gain share in commercial construction

Continue to leverage our expertise in building science through our Environments for Living® program to benefit from the increasing focus on energy efficiency and trends in building codes

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

We are optimistic on housing and expect the current moderate pace of improvement to continue for several years. The U.S. housing market has grown from approximately 587,000 housing starts in 2010 to approximately 1,166,000 housing starts in 2016, well below the 50-year historical average of approximately 1.5 million housing starts per year. While the current headwinds of credit availability, student debt, and labor shortages within the construction industry are moderating the rate of recovery, they are also extending the recovery cycle. We believe there is pent-up demand for housing, and this demand will eventually be satisfied with higher levels of new construction.

2016 Results

In 2016, our results were positively affected by increased sales volume of residential new construction and commercial construction activity and increased selling prices. Our sales volume increased across our businesses. Compared to 2015, our Installation segment contributed sales volume increases of 6.2 percent and our Distribution segment contributed sales volume increases of 7.0 percent to our total sales increase, prior to intercompany eliminations. Selling price increases in our Installation segment increased our sales by 2.6 percent compared to 2015. Our operating results were positively impacted by increased sales volume, overall increased selling prices, lower material costs, lower corporate expenses, lower rationalization charges, and benefits associated with cost savings initiatives, partially offset by higher insurance costs, bonus expense, and share-based compensation expense.

Liquidity and Capital Resources

Prior to the Separation, we largely funded our growth through cash provided by our operations combined with support from Masco through its operating cash flows, its long‑term bank debt, and its issuance of securities in the financial markets.

In June 2015, we entered into a credit agreement and related collateral and guarantee documentation (collectively, the “Credit Agreement”) with a bank group. The Credit Agreement consists of a senior secured term loan facility of $200 million, which was used to finance a $200 million cash distribution to Masco in connection with the Separation, and a senior secured revolving credit facility, which provides for borrowing and/or standby letter of credit issuances of up to $125 million (together, the term loan facility and revolving credit facility are referred to as the “Credit Facility”). We may access additional borrowing capacity under the Credit Facility may be accessed by the Company in an aggregate amount not to exceed $100 million without the consent of the lenders, subject to certain conditions including existing or new lenders providing commitments in respect of such additional borrowing capacity. For additional information, see Item 8, Financial Statements and Supplementary Data, Note 5 – Long-term Debt.

Following the Separation, we have access to liquidity through our cash from operations and available borrowing capacity under our Credit 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 to fund our debt service requirements, capital expenditures, and working capital for at least the next 12 months. Cash flows are seasonally stronger in the third and fourth quarters as a result of increased new construction activity.

The following table summarizes our total liquidity, in thousands:


	Years Ended December 31,
	2016		2015		2014
Cash and cash equivalents (a)	$	134,375	$	112,848	$	2,965
Revolving Facility		125,000		125,000		―
Less: standby letters of credit		(49,080)		(55,096)		―
Capacity under Revolving Facility		75,920		69,904		―
Total liquidity	$	210,295	$	182,752	$	2,965

(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 licensing and insurance. The following table summarizes our outstanding bonds, in thousands:


	As of December 31,
	2016		2015
Performance bonds	$	22,312	$	19,475
Licensing, insurance, and other bonds		13,480		9,976
Total	$	35,792	$	29,451

Cash Flows

Significant sources and (uses) of cash and cash equivalents are as follows, in thousands:


	Year Ended December 31,
	2016			2015			2014
Net cash provided by operating activities	$	76,785		$	56,011		$	71,861
Purchases of property and equipment		(14,156)			(13,644)			(13,141)
Acquisition of a business		(3,476)			—			—
Proceeds from sale of property and equipment		718			805			999
Other investing, net		113			632			880
Net transfer from (to) Former Parent		664			72,965			(60,655)
Cash distribution paid to Former Parent		—			(200,000)			—
Proceeds from issuance of long-term debt		—			200,000			—
Repayment of long-term debt		(15,000)			(5,000)			—
Taxes withheld and paid on employees' equity awards		(1,825)			(171)			—
Repurchase of shares of common stock		(22,296)			—			—
Payment of debt issuance costs		—			(1,715)			—
Cash and cash equivalents increase (decrease)	$	21,527		$	109,883		$	(56)

Working capital (receivables, net plus inventories, net less accounts payable) as a percentage of net sales for the trailing 12 months		7.3	%		6.2	%		6.5	%

Cash provided by operating activities for the year ended December 31, 2016, increased $20.8 million from the comparable period ended December 31, 2015, primarily due to increased operating profit, changes in deferred income taxes, a reduction in inventory levels, partially offset by decreased accounts payable resulting from a change in mix of supplier payments and the timing of purchases. Cash provided by operating activities for the year ended December 31, 2015, decreased $15.9 million from the comparable period ended December 31, 2014, primarily due to changes in deferred income taxes, the recognition of a non-cash employee benefit policy change, reduced depreciation, the non-recurring impact of improved supplier terms received in 2014, and amortization expense related to a software system which was fully depreciated in 2014, partially offset by an increase in net income.

As of December 31, 2016 and 2015, our working capital was 7.3 percent and 6.2 percent of net sales for the trailing 12 months, respectively. Working capital increased $26.3 million to $127.3 million as of December 31, 2016, compared to December 31, 2015. The increase in working capital as a percentage of net sales for the trailing 12 months was primarily due to increased net receivables driven by higher commercial sales mix which comes with longer collection terms and reduced accounts payables driven by a change in mix of supplier payments, partially offset by lower levels of net inventory relative to the trailing 12 months net sales. The reduction in working capital as a percentage of net sales in 2015, compared with 2014, was primarily the result of improved supplier terms.

Net cash used for investing activities was $16.8 million for the year ended December 31, 2016, which was primarily comprised of $14.2 million in purchases of property and equipment and $3.5 million for the acquisition of substantially all of the assets of Valley Insulation, Inc. during the third quarter of 2016, partially offset by $0.7 million of proceeds from the sale of property and equipment. Net cash used for investing activities was $12.2 million for the year ended December 31, 2015, which was primarily comprised of $13.6 million in purchases of property and equipment, partially offset by $0.8 million of proceeds from the sale of property and equipment. Net cash used for investing activities was $11.3 million for the year ended December 31, 2014, which was primarily comprised of $13.1 million in purchases of property and equipment, partially offset by $1.0 million of proceeds from the sale of property and equipment.

Net cash (used in) provided by financing activities was $(38.5) million, $66.1 million, and $(60.7) million for the years ended December 31, 2016, 2015, and 2014, respectively. During the year ended December 31, 2016, we purchased $22.3 million of our common stock under our Share Repurchase program and we repaid $15.0 million of indebtedness outstanding under our Credit Facility. During the year ended December 31, 2015, we received $200.0 million in proceeds from the issuance of long-term debt which was remitted to our Former Parent in connection with the Separation. Additionally, we received a transfer from our Former Parent of $73.0 million, partially offset by repayments of our long-term debt and payment of debt issuance costs. During the year ended December 31, 2014, we made a transfer of $60.7 million to our Former Parent.

Results of Operations

We report our financial results in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”).

The following table sets forth our results from continuing operations, as reported in our Consolidated Statements of Operations, in thousands:


	Year Ended December 31,
	2016			2015			2014
Net sales	$	1,742,850		$	1,616,580		$	1,512,077
Cost of sales		1,342,506			1,258,551			1,180,409
Cost of sales ratio		77.0	%		77.9	%		78.1	%

Gross profit		400,344			358,029			331,668
Gross profit margin		23.0	%		22.1	%		21.9	%

Selling, general, and administrative expense		278,740			274,498			290,951
Selling, general, and administrative expense to sales ratio		16.0	%		17.0	%		19.2	%

Operating profit		121,604			83,531			40,717
Operating profit margin		7.0	%		5.2	%		2.7	%

Other expense, net		(5,331)			(9,416)			(12,379)
Income tax (expense) benefit from continuing operations		(43,667)			5,008			(17,842)
Income from continuing operations	$	72,606		$	79,123		$	10,496
Net margin on continuing operations		4.2	%		4.9	%		0.7	%

2016, 2015, and 2014 Comparison

Sales and Operations

Net sales for 2016 increased 7.8 percent, or $126.3 million, to $1.7 billion. The increase was principally driven by overall increased sales volume and overall increased selling prices. Our sales benefited primarily from the overall continued improvement in the housing market, as well as continued focus on organically growing our residential and commercial activity.

Net sales for 2015 increased 6.9 percent, or $104.5 million, to $1.6 billion. The increase was driven by sales volume growth in both Installation and Distribution segments. Our sales benefited from increased volume in residential new construction and commercial construction activity, increased insulation sales driven by changing building code requirements, and increased selling prices.

Our gross profit margins were 23.0 percent, 22.1 percent, and 21.9 percent for 2016, 2015, and 2014, respectively. Gross profit margin was positively impacted by favorable leverage on overall higher sales volume, overall increased selling prices, improved labor utilization, and lower material cost.

Selling, general, and administrative expense as a percent of sales was 16.0 percent, 17.0 percent, and 19.2 percent for 2016, 2015, and 2014, respectively. Reduced selling, general, and administrative expense as a percent of sales is a result of overall increasing sales volume and price, benefits associated with business rationalizations, and other cost savings initiatives, partially offset by higher bonus and share-based compensation expense.

For the periods prior to the Separation, our selling, general, and administrative expense includes allocations of Masco general corporate expense of $13.6 million and $21.9 million in 2015 and 2014, respectively. Such expense may not be indicative of our general corporate expense in the future.

During the fourth quarter of 2015, we modified our vacation policy from being granted based on prior year service to being earned on a per pay period approach. This employee benefit policy change resulted in a $9.9 million expense reduction, which is reflected as a $6.1 million reduction of cost of sales and a $3.8 million reduction of selling, general, and administrative expenses in our Consolidated Statements of Operations. This item is reflected as a non-cash employee benefit policy change in our Consolidated Statements of Cash Flows.

Operating margins for 2016, 2015, and 2014 were 7.0 percent, 5.2 percent, and 2.7 percent, respectively. Changes in operating margins were positively impacted by increased sales volume, overall increased selling prices, lower material cost, improved labor utilization, lower corporate expenses, lower rationalization charges, and benefits associated with cost savings initiatives, partially offset by higher bonus and share-based compensation expense, and closure costs discussed below.

Closure and Related Costs

As part of the closure of 13 locations within our Installation and Distribution segments and the elimination of certain positions at our corporate headquarters, as announced in the first quarter of 2016, we incurred expenses of $0.9 million.

Other Income (Expense), Net

Interest expense was $5.6 million in 2016 incurred under the Credit Facility. Interest expense was $9.5 million in 2015 of which $3.2 million was incurred under the Credit Facility while $6.3 million was allocated by Masco prior to the Separation. Interest expense was $12.4 million in 2014 and was exclusively related to a Masco allocation. Such expense may not be indicative of our interest expense in the future.

Income Tax Benefit (Expense) from Continuing Operations

Our effective tax rates (“ETR”) for income from continuing operations were 37.6 percent, (6.8) percent, and 63.0 percent in 2016, 2015, and 2014, respectively. Compared to our normalized tax rate of 38.0 percent, the variance in the ETR in 2016 was primarily due to the release of a valuation allowance related to State net operating losses. The variances in 2015 and 2014 were primarily due to changes in the U.S. Federal and certain state valuation allowances.

Income from Continuing Operations

Income from continuing operations was $72.6 million, $79.1 million, and $10.5 million in 2016, 2015, and 2014, respectively.

Material Trends in Our Business

We believe there are several meaningful trends that indicate U.S. housing demand will recover to levels consistent with the historical average of the past 50 years. These trends include low interest rates relative to historical averages, the aging of housing stock, population growth, and household formation. We expect these trends to also drive long‑term growth in repair/remodel expenditures and commercial construction activity.

We normally experience stronger sales during the third and fourth calendar quarters, corresponding with the peak season for residential new construction and residential repair/remodel activity. Sales during the winter weather months are seasonally slower due to lower construction activity. Historically, the installation of insulation lags housing starts by several months.

2016, 2015, and 2014 Business Segment Results

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


	Year Ended December 31,									Percent Change
	2016			2015			2014			2016-2015		2015-2014
Sales by business segment (a):
Installation	$	1,150,168		$	1,057,553		$	963,351		8.8	%	9.8	%
Distribution		676,672			646,441			628,810		4.7	%	2.8	%
Intercompany eliminations and other adjustments (b)		(83,990)			(87,414)			(80,084)
Net sales	$	1,742,850		$	1,616,580		$	1,512,077		7.8	%	6.9	%

Operating profit by business segment (c):
Installation	$	97,140		$	55,232		$	23,970		75.9	%	130.4	%
Distribution		59,654			55,700			52,334		7.1	%	6.4	%
Intercompany eliminations and other adjustments		(14,388)			(4,796)			(13,639)
Operating profit before general corporate expense		142,406			106,136			62,665		34.2	%	69.4	%
General corporate expense, net (d)		(20,802)			(22,605)			(21,948)
Operating profit	$	121,604		$	83,531		$	40,717		45.6	%	105.2	%

Operating profit margins:
Installation		8.4	%		5.2	%		2.5	%
Distribution		8.8	%		8.6	%		8.3	%
Operating profit margin before general corporate expense		8.2	%		6.6	%		4.1	%
Operating profit margin		7.0	%		5.2	%		2.7	%

(a)

All of our operations are located in the United States.

(b)

Intercompany eliminations include the elimination of intercompany profit of $14.4 million, $15.6 million, and $14.1 million for the years ended December 31, 2016, 2015, and 2014, respectively. Other adjustments primarily include differences between estimated and actual corporate costs allocated to the segments for years ended December 31, 2015 and 2014, as noted in footnote (c) below.

(c)

Segment operating profit for year ended December 31, 2016, 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). Segment operating profit for years ended December 31, 2015 and 2014 include an estimate of general corporate expense calculated based on a percentage of sales. For the years ended December 31, 2015 and 2014, the $7.2 million and $0.5 million differences, respectively, between estimated expense and actual corporate expense, are recorded in intercompany eliminations and other adjustments.

(d)

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

2016, 2015, and 2014 Business Segment Results Discussion

Changes in operating profit margins in the following business segment results discussion exclude general corporate expense, net in 2016, 2015, and 2014, as applicable.

The construction industry is expanding both in residential new home and commercial construction, and is subject to inflationary pressures on costs. While we are seeing the impact of this growth with increases in the cost of building materials, we have been successful to date in achieving price increases, which more than offsets the increased commodity costs.

Installation

Sales

Sales increased $92.6 million, or 8.8 percent, in 2016 compared to 2015. The increase in sales was primarily due to increased sales volume related to a higher level of activity in new home construction and an increased sales volume of commercial installation. Sales also increased 2.6 percent due to increased selling prices.

Sales increased $94.2 million, or 9.8 percent, in 2015 compared to 2014. Such increases were primarily due to increased sales volume. Increased sales volume was primarily related to a higher level of activity in residential new construction and commercial construction as well as changing building code requirements. Sales also increased by 2.3 percent due to increased selling prices.

Operating Results

Operating profit increased $41.9 million, or 75.9 percent, in 2016 compared to 2015, primarily due to increased sales volume, higher selling prices, and related absorption of fixed costs, improved labor utilization, lower material cost, as well as the benefits associated with cost savings initiatives, partially offset by increased legal and bonus expenses.

Operating profit increased $31.3 million, or 130.4 percent, in 2015 compared to 2014, primarily due to increased sales volume and a more favorable relationship between selling prices and commodity costs. Operating profit was also positively affected by cost savings initiatives including process improvements, sourcing savings, and an employee benefit policy change. These changes were partially offset by a less favorable product mix due to higher multi-family housing starts (which use less insulation per unit) than in the prior years, as well as higher insurance costs.

Distribution

Sales

Sales increased $30.2 million, or 4.7 percent, in 2016 compared to 2015. The increase was primarily due to increased sales volume related to a higher level of activity in new home construction. Sales were partially offset by a 2.3 percent decrease in selling prices.

Sales increased $17.6 million, or 2.8 percent, in 2015 compared to 2014. The increase was primarily due to increased sales volume which was driven by a higher level of activity in residential new construction and commercial construction, including metal building insulation. Sales volume increases were partially offset in the first quarter of 2015 by an acceleration of sales in the fourth quarter of 2014, following the announcement of a price increase for fiberglass insulation. We also saw lower roofing sales due to consolidation in the industry. Sales increased by 1.3% due to increased selling prices.

Operating Results

Operating profit increased $4.0 million, or 7.1 percent, in 2016 compared to 2015. The increase was primarily due to increased sales volume related to a higher level of activity in new home construction and lower material cost, partially offset by a 2.3 percent decrease in selling prices.

Operating profit increased $3.4 million, or 6.4 percent, in 2015 compared to 2014, primarily due to increased sales volume and a more favorable product mix, including increased sales of higher margin insulation products compared to lower margin roofing products. This segment also benefited from a more favorable relationship between selling prices and commodity costs.

Commitments and Contingencies

Litigation

On May 9, 2016, the Company was named as a defendant in a breach of contract action related to our termination of an insulation supply agreement with plaintiff Owens Corning Sales, LLC. The complaint seeks damages and declaratory relief. We have counterclaimed for breach of contract related to Owens Corning’s failure to honor the supply agreement’s pricing provisions. The case is pending in the Court of Common Pleas for Lucas County, Ohio and a jury trial is presently scheduled for October 2017. We are defending this lawsuit vigorously. However, at this stage of the litigation, we are unable to predict the ultimate outcome or estimate a range of reasonably possible losses, if any.

We are subject to certain other 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 other matters and we do not believe that the ultimate outcome of these other 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 Commitments

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 a liability when deemed probable and estimable.

Critical Accounting Policies and Estimates

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

Revenue Recognition and Receivables

We recognize revenue for our Installation segment by order within the contract, based on the amount of material installed and associated labor costs at our customers’ locations. The amount of revenue recognized for our Installation segment which had not been billed as of December 31, 2016 and 2015, was $28.9 million and $23.7 million, respectively. Revenue from our distribution segment is recognized when title to products and risk of loss transfers to our customers. We record estimated reductions to revenue for customer programs and incentive offerings, including special pricing and other volume‑based incentives. We maintain allowances for doubtful accounts receivable for estimated losses resulting from the inability of customers to make required payments. In addition, we monitor our customer receivable balances and the credit worthiness of our customers on an on‑going basis. During downturns in our markets, declines in the financial condition and creditworthiness of customers impact the credit risk of the receivables involved and we have incurred additional bad debt expense related to customer defaults.

Goodwill and Other Intangible Assets

We record the excess of the purchase price for business combinations over the fair value of identifiable tangible and intangible assets as goodwill. We perform our annual impairment testing of goodwill in the fourth quarter of each year, or as events occur or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. When assessing goodwill for impairment, we have the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events or circumstances, we determine it is more likely than not that the fair value of a reporting unit is less than its carrying amount, then we perform a two-step impairment test. If we conclude otherwise, then no further action is taken.

We also have the option to bypass the qualitative assessment and only perform a quantitative assessment, which is the first step of the two-step impairment test. In completing the two-step impairment test, we complete the impairment testing utilizing a discounted cash flow method. We selected this methodology because we believe that it is comparable to what would be used by other market participants. Our operating segments are reporting units that engage in business activities for which discrete financial information, including long range forecasts, is available. We have identified our segments as our reporting units and complete the impairment testing of goodwill at the operating segment level, as defined by accounting guidance. Fair value for our reporting units is determined using a discounted cash flow method which includes significant unobservable inputs (Level 3 inputs).

Determining market values using a discounted cash flow method requires us to make significant estimates and assumptions, including long term projections of cash flows, market conditions, and appropriate discount rates. Our judgments are based on historical experience, current market trends, consultations with external valuation specialists, and other information. While we believe that the estimates and assumptions underlying the valuation methodology are reasonable, changes to estimates and assumptions could result in different outcomes. In estimating future cash flows, we rely on internally generated long range forecasts for sales and operating profits, including capital expenditures, and generally a one to three percent long term assumed annual growth rate of cash flows for periods after the long range forecast. We generally develop these forecasts based upon, among other things, recent sales data for existing products, and estimated U.S. housing starts.

When necessary, an impairment loss is recognized to the extent that a reporting unit’s recorded goodwill exceeds its implied fair value.

We did not recognize any impairment charges for goodwill for the years ended December 31, 2016, 2015, and 2014. As of December 31, 2016, net goodwill reflected $762.0 million of accumulated impairment losses, relating primarily to impairment charges taken in 2008-2010 following the substantial decrease in U.S. housing starts after the financial crisis of 2007-2008.

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

Income Taxes

Accounting guidance for income taxes requires that the future realization of deferred tax assets depends on the existence of sufficient taxable income in future periods. Possible sources of taxable income include taxable income in carryback periods, the future reversal of existing taxable temporary differences recorded as a deferred tax liability, tax planning strategies that generate future income or gains in excess of anticipated losses in the carryforward period, and projected future taxable income.

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

In a prior period, we had recorded a valuation allowance against our U.S. Federal and certain state deferred tax assets as a non‑cash charge to income tax expense. In reaching this conclusion, we considered the significant decline in residential new construction, high level of foreclosure activity, and the slower than anticipated recovery in the U.S. housing market which led to U.S. operating losses, causing us to be in a three-year cumulative U.S. loss position.

During the years ended December, 31, 2010, 2011, and 2012, objective and verifiable negative evidence, such as continued U.S. operating losses and significant impairment charges for U.S. goodwill in 2010, continued to outweigh positive evidence necessary to reduce the valuation allowance. As a result, we recorded increases in the valuation allowance against our U.S. Federal and certain state deferred tax assets as a non-cash charge to income tax expense during the years ended December 31, 2010, 2011, and 2012.

A return to sustainable profitability in the U.S. is required before we would change our judgment regarding the need for a valuation allowance against our deferred tax assets.

Although the strengthening in residential new construction activity resulted in profitability for our operations in 2013 and 2014, we continued to record a full valuation allowance against the U.S. Federal and certain state deferred tax assets. We arrived at this conclusion due to the Company’s (i) low amount of profit in 2013 and 2014, (ii) continued the three year cumulative loss position throughout the year ended December 31, 2014, and (iii) lack of taxable income after evaluating the four sources of taxable income generally allowed under ASC 740 in determining whether or not a deferred asset may be realized.

In the fourth quarter of 2015 we recorded a $35.5 million tax benefit ($13.5 million of Federal and $22.0 million of State and local net of federal benefit) from the release of the valuation allowance against its U.S. Federal and certain state deferred tax assets due primarily to a return to sustainable profitability in our U.S. operations. In reaching this conclusion, we considered the Company’s strong results in the third and fourth quarters reflecting (i) continued improvement in both new home construction and repair/remodel activity in the U.S. and (ii) the Company’s ability to function as a standalone business. We also considered our progress on strategic initiatives to reduce costs and expand the breadth of our market positions, which contributed to the continued improvement in our operations over the past few years.

The reduction in the valuation allowance in 2015 resulted in a net positive income tax benefit of $5.0 million and a negative effective tax rate of 6.8 percent for the year. Excluding the valuation allowance release of $35.5 million, our effective tax rate would have been 41.0 percent for the year ended December 31, 2015, comprised of a 35.0 percent U.S. Federal statutory rate and 6.0 percent of State and local taxes, net of U.S. Federal tax benefit and Other, net. This rate is higher than would normally be expected due to various nondeductible expenses related to the Separation transaction and other adjustments primarily related to the Separation.

In the fourth quarter of 2016 we recorded a $0.8 million tax benefit from the release of the valuation allowance against certain state deferred tax assets (primarily State net operating losses) due primarily to a return to sustainable profitability in our U.S. operations. In reaching this conclusion, we considered the Company’s strong results though out the 2016 year reflecting (i) continued improvement in both new home construction and repair/remodel activity in the U.S. and (ii) the Company’s ability to function as a standalone business. We also considered our continued progress on strategic initiatives to reduce costs and expand the breadth of our market positions, which contributed to the continued improvement in our operations over the past few years. This was the Company’s last remaining valuation allowance.

The reduction in the valuation allowance in 2016 resulted in a net positive income tax benefit of $0.8 million and an effective tax rate of 37.6 percent for the year. Excluding the valuation allowance release of $0.8 million, our effective tax rate would have been 38.3 percent for the year ended December 31, 2016, comprised of a 35.0 percent U.S. Federal statutory rate and 5.7 percent of State and local taxes, net of U.S. Federal tax benefit, a 1.7 percent benefit from the Domestic Production Activities Credit and 0.7 percent benefit of Other, net.

Current accounting guidance allows the recognition of only those income tax positions that have a greater than 50 percent likelihood of being sustained upon examination by taxing authorities. We believe that there is an increased potential for volatility in our effective tax rate because this threshold allows changes in the income tax environment and the inherent complexities of income tax law in a substantial number of jurisdictions to affect the computation of the liability for uncertain tax positions to a greater extent.

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

Recently Issued Accounting Pronouncements

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

Off-Balance Sheet Arrangements

As of December 31, 2016 and 2015, other than operating leases, letters of credit issued under our revolving credit facility, and performance and license bonds, we had no material off-balance sheet arrangements.

Contractual Obligations

The following table provides payment obligations related to current contracts at December 31, 2016, in thousands:


	Payments Due by Period
	2017		2018		2019		2020		2021		Thereafter		Total
Operating leases	$	37,404	$	28,329	$	19,133	$	9,634	$	3,545	$	7,384	$	105,429
Principal repayments of long-term debt		20,000		20,000		25,000		115,000		—		—		180,000
Interest payments on long-term debt (a)		3,640		3,218		2,783		1,174		—		—		10,815
Standby Letters of Credit and Commitment Fees (b)		968		968		968		485		—		—		3,389
Total	$	62,012	$	52,515	$	47,884	$	126,293	$	3,545	$	7,384	$	299,633

(a)

Interest has been calculated using the interest rate on our long-term debt as of December 31, 2016, of 2.11%.

(b)

Assumes our standby letters of credit remain constant during the term of our credit facility.

Item 8. FINANCIAL STATEMENTS

Report of Independent Registered Certified Public Accounting Firm

To the Board of Directors and Shareholders of TopBuild Corp.

In our opinion, the consolidated financial statements listed in the index appearing under Item 15(a)(i) present fairly, in all material respects, the financial position of TopBuild Corp. and its subsidiaries as of December 31, 2016 and 2015, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2016 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 15(a)(ii) presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2016, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company's management is responsible for these financial statements and financial statement schedule, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Management's Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on these financial statements, on the financial statement schedule, and on the Company's internal control over financial reporting based on our audits (which was an integrated audit in 2016). We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/PricewaterhouseCoopers LLP

Orlando, Florida

February 28, 2017

TOPBUILD CORP.

CONSOLIDATED BALANCE SHEETS

(In thousands except share amounts)


	As of December 31,
	2016		2015
ASSETS
Current assets:
Cash and cash equivalents	$	134,375	$	112,848
Receivables, net of an allowance for doubtful accounts of $3,374 and $3,399 at December 31, 2016 and December 31, 2015, respectively		252,624		235,549
Inventories, net		116,190		118,701
Prepaid expenses and other current assets		23,364		13,263
Total current assets		526,553		480,361

Property and equipment, net		92,760		93,066
Goodwill		1,045,058		1,044,041
Other intangible assets, net		2,656


		Page No.
Part I.

Item 1.	Business	3

Item 1A.	Risk Factors	6

Item 1B.	Unresolved Staff Comments	15

Item 2.	Properties	15

Item 3.	Legal Proceedings	15

Item 4.	Mine Safety Disclosures	15

Part II.

Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities	16

Item 6.	Selected Historical Financial Data	18

Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	19

Item 7A.	Quantitative and Qualitative Disclosures about Market Risk	31

Item 8.	Financial Statements	32

	Report of Independent Registered Certified Public Accounting Firm	32

	Consolidated Balance Sheets	33

	Consolidated Statements of Operations	34

	Consolidated Statements of Cash Flows	35

	Consolidated Statements of Changes in Equity	36

	Notes to Consolidated Financial Statements	37

	Schedule II. Valuation and Qualifying Accounts	61

Item 9.	Changes in Disagreements with Accountants on Accounting and Financial Disclosure	62

Item 9A.	Controls and Procedures	62

Item 9B.	Other Information	62

Part III.

Item 10.	Directors, Executive Officers, and Corporate Governance	63

Item 11.	Executive Compensation	63

Item 12.	Security Ownership of Certain Beneficial Owners and Management, and Related Stockholder Matters	63

Item 13.	Certain Relationships and Related Transactions, and Director Independence	63

Item 14.	Principal Accountant Fees and Services	63

Part IV.

Item 15.	Exhibits and Financial Statement Schedule	64

Item 16.	Form 10-K Summary	64

	Index to Exhibits	65

Signatures		67