10-Q

UNITED STATES

SECURITIES AND EXCHANGE

COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2019

☐ 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	Trading Symbol(s)	Name of each exchange on which registered
Common stock, par value $0.01 per share	BLD	NYSE

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

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

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

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

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

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

The registrant had outstanding 33,947,722 shares of Common Stock, par value $0.01 per share as of October 25, 2019.

TOPBUILD CORP.

TABLE OF CONTENTS

		Page No.
Part I.	Financial Information
Item 1.	Financial Statements (Unaudited)
	Condensed Consolidated Balance Sheets	4
	Condensed Consolidated Statements of Operations	5
	Condensed Consolidated Statements of Cash Flows	6
	Condensed Consolidated Statements of Changes in Equity	7
	Notes to Condensed Consolidated Financial Statements	8
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	26
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	34
Item 4.	Controls and Procedures	34
Part II.	Other Information
Item 1.	Legal Proceedings	35
Item 1A.	Risk Factors	35
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	35
Item 3.	Defaults upon Senior Securities	35
Item 4.	Mine Safety Disclosures	35
Item 5.	Other Information	35
Item 6.	Exhibits	35
Index to Exhibits		36
Signature		37

2

GLOSSARY

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

Term	Definition
2017 ASR Agreement	$100 million accelerated share repurchase agreement with Bank of America, N.A.
2017 Repurchase Program	$200 million share repurchase program authorized by the Board on February 24, 2017
2018 ASR Agreement	$50 million accelerated share repurchase agreement with JPMorgan Chase Bank, N.A.
2019 Repurchase Program	$200 million share repurchase program authorized by the Board on February 22, 2019
ADO	ADO Products, LLC
Amended Credit Agreement	Senior secured credit agreement and related security and pledge agreement dated May 5, 2017, as amended March 28, 2018, with the Lenders
Annual Report	Annual report filed with the SEC on Form 10-K pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
ASC	Accounting Standards Codification
ASU	Accounting Standards Update
Board	Board of Directors of TopBuild
BofA	Bank of America, N.A.
Current Report	Current report filed with the SEC on Form 8-K pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
EBITDA	Earnings before income taxes, depreciation, and amortization
EcoFoam	Bella Insulutions Inc., DBA EcoFoam/Insulutions
Exchange Act	The Securities Exchange Act of 1934, as amended
FASB	Financial Accounting Standards Board
FCCR	Fixed charge coverage ratio is defined in the “Amended Credit Agreement” as the ratio of EBITDA less capital expenditures, and income taxes paid to the sum of cash interest paid, debt principal payments and restricted payments made excluding stock repurchases
GAAP	Generally accepted accounting principles in the United States of America
IBR	Incremental borrowing rate, as defined in ASC 842.
Lenders	Bank of America, N.A., together with the other lenders party to the "Amended Credit Agreement"
LIBOR	London interbank offered rate
Net Leverage Ratio	As defined in the “Amended Credit Agreement,” the ratio of outstanding indebtedness, less up to $75 million of unrestricted cash, to EBITDA
NYSE	New York Stock Exchange
Quarterly Report	Quarterly report filed with the SEC on Form 10-Q pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Revolving Facility	Senior secured revolving credit facilities available under the Amended Credit Agreement, of $250 million with applicable sublimits for letters of credit and swingline loans.
ROU	Right of use asset, as defined in ASC 842.
RSA	Restricted stock award
Santa Rosa	Santa Rosa Insulation and Fireproofing, LLC
SEC	United States Securities and Exchange Commission
Secured Leverage Ratio	As defined in the “Amended Credit Agreement,” the ratio of outstanding indebtedness, including letters of credit, to EBITDA
Senior Notes	TopBuild's 5.625% senior unsecured notes due on May 1, 2026
TopBuild	TopBuild Corp. and its wholly-owned consolidated domestic subsidiaries. Also, the "Company," "we," "us," and "our"
USI	United Subcontractors, Inc.
Viking	Viking Insulation Co.

3

PART I – FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

TOPBUILD CORP.

CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)

(In thousands except share data)

	As of
	September 30,		December 31,
	2019		2018
ASSETS
Current assets:
Cash and cash equivalents	$	171,591	$	100,929
Receivables, net of an allowance for doubtful accounts of $5,423 and $3,676 at September 30, 2019, and December 31, 2018, respectively		454,640		407,106
Inventories, net		146,702		168,977
Prepaid expenses and other current assets		16,457		27,685
Total current assets		789,390		704,697
Right of use assets		89,178		—
Property and equipment, net		175,274		167,961
Goodwill		1,367,918		1,364,016
Other intangible assets, net		185,844		199,387
Deferred tax assets, net		11,758		13,176
Other assets		4,760		5,294
Total assets	$	2,624,122	$	2,454,531
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable	$	300,125	$	313,172
Current portion of long-term debt		33,262		26,852
Accrued liabilities		112,286		104,236
Short-term lease liabilities		36,860		—
Total current liabilities		482,533		444,260
Long-term debt		701,955		716,622
Deferred tax liabilities, net		173,493		176,212
Long-term portion of insurance reserves		44,405		43,434
Long-term lease liabilities		55,362		—
Other liabilities		1,167		1,905
Total liabilities		1,458,915		1,382,433
Commitments and contingencies
Equity:
Preferred stock, $0.01 par value: 10,000,000 shares authorized; 0 shares issued and outstanding at September 30, 2019 and December 31, 2018		—		—
Common stock, $0.01 par value: 250,000,000 shares authorized; 38,865,055 shares issued and 33,951,988 outstanding at September 30, 2019, and 38,676,586 shares issued and 34,573,596 outstanding at December 31, 2018		388		387
Treasury stock, 4,913,067 shares at September 30, 2019, and 4,102,990 shares at December 31, 2018, at cost		(278,784)		(216,607)
Additional paid-in capital		856,726		846,451
Retained earnings		586,877		441,867
Total equity		1,165,207		1,072,098
Total liabilities and equity	$	2,624,122	$	2,454,531

See notes to our unaudited condensed consolidated financial statements.

4

TOPBUILD CORP.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

(In thousands except share and per common share data)

	Three Months Ended September 30,				Nine Months Ended September 30,
	2019		2018		2019		2018
Net sales	$	682,330	$	647,289	$	1,961,771	$	1,744,702
Cost of sales		502,999		485,424		1,451,822		1,326,777
Gross profit		179,331		161,865		509,949		417,925
Selling, general, and administrative expense		98,886		95,648		296,846		274,134
Operating profit		80,445		66,217		213,103		143,791
Other income (expense), net:
Interest expense		(9,507)		(9,381)		(28,740)		(19,026)
Other, net		653		178		1,512		292
Other expense, net		(8,854)		(9,203)		(27,228)		(18,734)
Income before income taxes		71,591		57,014		185,875		125,057
Income tax expense		(16,615)		(14,356)		(40,864)		(28,859)
Net income	$	54,976	$	42,658	$	145,011	$	96,198
Net income per common share:
Basic	$	1.63	$	1.22	$	4.27	$	2.74
Diluted	$	1.60	$	1.19	$	4.20	$	2.69
Weighted average shares outstanding:
Basic		33,790,857		35,091,388		33,977,464		35,084,694
Diluted		34,367,902		35,789,383		34,541,635		35,815,357

See notes to our unaudited condensed consolidated financial statements.

5

TOPBUILD CORP.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(In thousands)

	Nine Months Ended September 30,
	2019		2018
Cash Flows Provided by (Used in) Operating Activities:
Net income	$	145,011	$	96,198
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		39,005		27,133
Share-based compensation		11,411		8,244
Loss on sale or abandonment of property and equipment		885		764
Amortization of debt issuance costs		1,169		812
Change in fair value of contingent consideration		(119)		(373)
Provision for bad debt expense		5,697		3,003
Loss from inventory obsolescence		1,794		1,375
Deferred income taxes, net		(381)		(708)
Change in certain assets and liabilities
Receivables, net		(51,585)		(46,993)
Inventories, net		20,637		(15,333)
Prepaid expenses and other current assets		10,003		(5,560)
Accounts payable		(12,529)		17,768
Accrued liabilities		10,758		10,304
Other, net		1,023		(601)
Net cash provided by operating activities		182,779		96,033
Cash Flows Provided by (Used in) Investing Activities:
Purchases of property and equipment		(34,100)		(42,379)
Acquisition of businesses, net of cash acquired of $15,756 in 2018		(6,452)		(500,666)
Proceeds from sale of property and equipment		2,239		502
Other, net		25		31
Net cash used in investing activities		(38,288)		(542,512)
Cash Flows Provided by (Used in) Financing Activities:
Proceeds from issuance of long-term debt		9,998		520,104
Repayment of long-term debt		(19,424)		(13,097)
Payment of debt issuance costs		—		(7,819)
Proceeds from revolving credit facility		—		90,000
Repayment of revolving credit facility		—		(90,000)
Taxes withheld and paid on employees' equity awards		(11,135)		(5,433)
Repurchase of shares of common stock		(52,177)		(9,493)
Payment of contingent consideration		(1,091)		(841)
Net cash (used in) provided by financing activities		(73,829)		483,421
Cash and Cash Equivalents
Increase for the period		70,662		36,942
Beginning of period		100,929		56,521
End of period	$	171,591	$	93,463
Supplemental disclosure of noncash activities:
Leased assets obtained in exchange for new operating lease liabilities	$	120,726	$	—
Accruals for property and equipment		102		546

See notes to our unaudited condensed consolidated financial statements.

6

TOPBUILD CORP.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (Unaudited)

(In thousands except share data)

	Common		Treasury		Additional
	Stock		Stock		Paid-in		Retained
	($0.01 par value)		at cost		Capital		Earnings		Equity
Balance at December 31, 2017	$	386	$	(141,582)	$	830,600	$	307,115	$	996,519
Net income		—		—		—		26,388		26,388
Share-based compensation		—		—		2,402		—		2,402
Issuance of 79,010 restricted share awards under long-term equity incentive plan		1		—		(1)		—		—
Repurchase of 13,657 shares pursuant to the settlement of the 2017 ASR Agreement		—		(20,000)		20,000		—		—
83,754 shares withheld to pay taxes on employees' equity awards		—		—		(4,514)		—		(4,514)
Balance at March 31, 2018	$	387	$	(161,582)	$	848,487	$	333,503	$	1,020,795
Net income		—		—		—		27,152		27,152
Share-based compensation		—		—		2,995		—		2,995
228 shares withheld to pay taxes on employees' equity awards		—		—		(17)		—		(17)
Balance at June 30, 2018	$	387	$	(161,582)	$	851,465	$	360,655	$	1,050,925
Net income		—		—		—		42,658		42,658
Share-based compensation		—		—		2,847		—		2,847
Repurchase of 142,780 shares pursuant to the 2017 Repurchase Program		—		(9,493)		—		—		(9,493)
13,447 shares withheld to pay taxes on employees' equity awards		—		—		(902)		—		(902)
Balance at September 30, 2018	$	387	$	(171,075)	$	853,410	$	403,313	$	1,086,035

Balance at December 31, 2018	$	387	$	(216,607)	$	846,451	$	441,867	$	1,072,098
Net income		—		—		—		37,983		37,983
Share-based compensation		—		—		2,972		—		2,972
Issuance of 112,270 restricted share awards under long-term equity incentive plan		1		—		(1)		—		—
Repurchase of 176,327 shares pursuant to the settlement of the 2018 ASR Agreement		—		(10,000)		10,000		—		—
Repurchase of 72,791 shares pursuant to the 2019 Repurchase Program		—		(4,622)		—		—		(4,622)
105,615 shares withheld to pay taxes on employees' equity awards		—		—		(5,578)		—		(5,578)
Balance at March 31, 2019	$	388	$	(231,229)	$	853,844	$	479,850	$	1,102,853
Net income		—		—		—		52,051		52,051
Share-based compensation		—		—		4,513		—		4,513
Repurchase of 196,885 shares pursuant to the 2019 Repurchase Program		—		(14,878)		—		—		(14,878)
54,811 shares withheld to pay taxes on employees' equity awards		—		—		(2,893)		—		(2,893)
Balance at June 30, 2019	$	388	$	(246,107)	$	855,464	$	531,901	$	1,141,646
Net income		—		—		—		54,976		54,976
Share-based compensation		—		—		3,926				3,926
Repurchase of 364,074 shares pursuant to the 2019 Repurchase Program		—		(32,677)		—		—		(32,677)
43,037 shares withheld to pay taxes on employees' equity awards		—		—		(2,664)		—		(2,664)
Balance at September 30, 2019	$	388	$	(278,784)	$	856,726	$	586,877	$	1,165,207

See notes to our unaudited condensed consolidated financial statements.

7

TOPBUILD CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

1.  BASIS OF PRESENTATION

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

In our opinion, the accompanying unaudited condensed consolidated financial statements contain all adjustments, of a normal recurring nature, necessary to state fairly our financial position as of September 30, 2019, our results of operations for the three and nine months ended September 30, 2019 and 2018, and cash flows for the nine months ended September 30, 2019 and 2018.  The condensed consolidated balance sheet at December 31, 2018, was derived from our audited financial statements, but does not include all disclosures required by GAAP.

These condensed consolidated financial statements and related notes should be read in conjunction with the audited Consolidated Financial Statements included in the Company’s Annual Report for the year ended December 31, 2018.

2.  ACCOUNTING POLICIES

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

Business Combinations.  The purchase price for business combinations is allocated to the estimated fair values of acquired tangible and intangible assets, including goodwill, and liabilities assumed.  These estimates include, but are not limited to, discount rates, projected future revenue growth, cost synergies and expected cash flows, customer attrition rates, useful lives and other prospective information.  Additionally, we recognize customer relationships, trademarks and trade names, and non-competition agreements as identifiable intangible assets, which are recorded at fair value as of the transaction date.  The fair value of these intangible assets is determined primarily using the income approach and using current industry information.  Goodwill is recorded when consideration transferred exceeds the fair value of identifiable assets and liabilities.  Measurement-period adjustments to assets acquired and liabilities assumed with a corresponding offset to goodwill are recorded in the period in which they occur, which may include up to one year from the acquisition date.  Contingent consideration is recorded at fair value at the acquisition date.

Share-based Compensation.  Our share-based compensation program currently consists of RSAs and stock options.  Share-based compensation expense is reported in selling, general, and administrative expense.  We do not capitalize any compensation cost related to share-based compensation awards.  The income tax benefits and deficiencies associated with share-based awards are reported as a component of income tax expense.  Excess tax benefits and deficiencies are included in net cash provided by (used in) operating activities while shares withheld for tax-withholding are reported in financing activities under the caption “Taxes withheld and paid on employees’ equity awards” in our condensed consolidated statements of cash flows.  Award forfeitures are accounted for in the period they occur.  

8

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

The following table details our award types and accounting policies:

Award Type:	Fair Value Determination	Vesting	Expense Recognition‡	Expense Measurement
Restricted Share Awards
Service Condition	Closing stock price on date of grant	Ratably; 3 or 5 years	Straight-line	Fair value at grant date
Performance Condition	Closing stock price on date of grant	Cliff; 3 years	Straight-line; Adjusted based on meeting or exceeding performance targets	Evaluated quarterly; 0 - 200% of fair value at grant date depending on performance
Market Condition	Monte-Carlo Simulation	Cliff; 3 years	Straight-line; Recognized even if condition is not met	Fair value at grant date
Stock Options†	Black-Scholes Options Pricing Model	Ratably; 3 or 5 years	Straight-line	Fair value at grant date

†Stock options expire no later than 10 years after the grant date.

‡Expense is reversed if award is forfeited prior to vesting.

Revenue Recognition

Revenue is disaggregated between our Installation and Distribution segments. A reconciliation of disaggregated revenue by segment is included in Note 6 – Segment Information.

We recognize revenue for our Installation segment using the percentage of completion method of accounting with respect to each particular order within a given customer’s contract, based on the amount of material installed at that customer’s location and the associated labor costs, as compared to the total expected cost for the particular order. Revenue is recognized over time as the customer is able to receive and utilize the benefits provided by our services. Each contract contains one or more individual orders, which are based on services delivered. When a contract modification is made, typically the remaining goods or services are considered distinct and we recognize revenue for the modification as a separate performance obligation. When insulation and installation services are bundled in a contract, we combine these items into one performance obligation as the overall promise is to transfer the combined item.

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

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

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

9

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

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

	Included in Line Item on	As of
	Condensed Consolidated	September 30,		December 31,
	Balance Sheets	2019		2018
Contract Assets:
Receivables, unbilled	Receivables, net	$	62,072	$	61,339
Contract Liabilities:
Deferred revenue	Accrued liabilities	$	16,685	$	19,963

Our contract liabilities are normally recognized to net sales in the immediately subsequent reporting period due to the generally short-term nature of our contracts with customers.

Recently Adopted Accounting Pronouncements:

Leases

In February 2016 the FASB issued ASU 2016-02, “Leases.”  This standard requires a lessee to recognize certain leases on its balance sheet.  Effective January 1, 2019, we adopted ASU 2016-02 using the modified retrospective transition method with the optional transition relief provided in targeted improvements ASU 2018-11, which allows the new standard to be applied in financial year 2019.  Adoption of the new standard resulted in the recognition of ROU assets and lease liabilities of $99.1 million and $101.6 million, respectively, as of January 1, 2019 on our unaudited condensed consolidated balance sheet.  There was no cumulative adjustment required to be recorded to our beginning retained earnings balance.  Adoption of this standard did not materially impact our results of operations or cash flows for any periods presented.

We elected certain practical expedients allowed under ASC 842 – Leases. As such, we did not reassess whether any existing contracts are or contain leases, the lease classification of existing leases, or the initial direct costs for any existing leases.  In addition, we elected by class of underlying asset to not separate fixed non-lease components from the lease component. Further, for all leases with an initial term of 12 months or less, we elected not to record any right of use asset or lease liability.  We declined the option to use hindsight in determining lease term, assessing likelihood that a lease purchase option will be exercised or in assessing impairment of right of use asset for all classes of assets.  To initially measure our lease liability, we used our IBR at January 1, 2019 based on the remaining lease term for all existing leases.  See Note 7 – Leases for additional information.

Recently Issued Accounting Pronouncements Not Yet Adopted:

In June 2016 the FASB issued ASU 2016-13, “Financial Instruments - Credit Losses”.  This guidance introduces a current expected credit loss (CECL) model for the recognition of impairment losses on financial assets, including trade receivables.  The CECL model replaces current GAAP’s incurred loss model.  Under CECL, companies will record an allowance through current earnings for the expected credit loss for the life of the financial asset upon initial recognition of the financial asset.  This update is effective for us at the beginning of 2020 with early adoption permitted at the beginning of 2019. We plan to adopt this standard on January 1, 2020 with a cumulative adjustment to our beginning retained earnings balance. We have begun our initial evaluation of financial assets subject to this guidance and are developing a new accounting policy for CECL recognition. We are still determining the impact to our financial position upon adoption.

In January 2017 the FASB issued ASU 2017-04, “Simplifying the Test for Goodwill Impairment.”  The new standard simplifies the subsequent measurement of goodwill by eliminating the second step of the goodwill impairment test.  This update is effective for us beginning January 1, 2020.  Early adoption is permitted, and the new standard will be applied on a prospective basis.  We plan to adopt this standard on January 1, 2020, and we do not anticipate that the adoption of this standard will have a material impact on our financial position and results of operations.

10

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

In August 2018 the FASB issued ASU 2018-13, “Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement.”  The new standard modifies the disclosure requirements on fair value measurements in Topic 820, Fair Value Measurement, including adjustments to Level 3 fair value measurement disclosures as well as the removal of disclosures around Level 1 and Level 2 transfers. This update is effective for us beginning January 1, 2020 with early adoption permitted. The amendments to the guidance will be applied on a prospective or retrospective basis, in accordance with the requirements of this standard. We plan to adopt this standard on January 1, 2020, and we do not anticipate that the adoption of this standard will have a material impact on our financial position and results of operations.

3.  GOODWILL AND OTHER INTANGIBLES

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

The estimated fair values of the two reporting units substantially exceeded their respective carrying values based on the most recent annual impairment test which occurred in the fourth quarter of 2018. 

Changes in the carrying amount of goodwill for the nine months ended September 30, 2019, by segment, were as follows, in thousands:

	Gross Goodwill				Gross Goodwill		Accumulated		Net Goodwill
	at				at		Impairment		at
	December 31, 2018		Additions		September 30, 2019		Losses		September 30, 2019
Goodwill, by segment:
Installation	$	1,679,654	$	3,935	$	1,683,589	$	(762,021)	$	921,568
Distribution		446,383		(33)		446,350		—		446,350
Total goodwill	$	2,126,037	$	3,902	$	2,129,939	$	(762,021)	$	1,367,918

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

	As of
	September 30, 2019		December 31, 2018
Gross definite-lived intangible assets	$	220,882	$	218,882
Accumulated amortization		(35,038)		(19,495)
Net definite-lived intangible assets		185,844		199,387
Indefinite-lived intangible assets not subject to amortization		—		—
Other intangible assets, net	$	185,844	$	199,387

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

	Three Months Ended September 30,				Nine Months Ended September 30,
	2019		2018		2019		2018
Amortization expense	$	5,197	$	5,242	$	15,543	$	10,536

11

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

4. LONG-TERM DEBT

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

	As of
	September 30,		December 31,
Principal debt balances:	2019		2018
Senior Notes	$	400,000	$	400,000
Term loan		312,188		327,500
Equipment notes		30,341		24,455
Unamortized debt issuance costs		(7,312)		(8,481)
Total debt, net of unamortized debt issuance costs		735,217		743,474
Less: current portion of long-term debt		33,262		26,852
Total long-term debt	$	701,955	$	716,622

The following table sets forth our remaining principal payments for our outstanding debt balances as of September 30, 2019, in thousands:

	Payments Due by Period
	2019		2020		2021		2022		2023		Thereafter		Total
Senior Notes	$	—	$	—	$	—	$	—	$	—	$	400,000	$	400,000
Term loan		6,563		26,250		30,625		248,750		—		—		312,188
Equipment notes		1,728		7,082		7,366		7,661		5,345		1,159		30,341
Total	$	8,291	$	33,332	$	37,991	$	256,411	$	5,345	$	401,159	$	742,529

Amended Credit Agreement and Senior Secured Term Loan Facility

On March 28, 2018, the Company executed an amendment to its credit agreement, which primarily facilitated the acquisition of USI by (i) extending until August 29, 2018, the period during which the Company could access the $100.0 million delayed draw term loan feature and (ii) providing that the Company could issue up to $500.0 million of Senior Notes in connection with its acquisition of USI.  On May 1, 2018, the Company closed on its acquisition of USI.  The acquisition was funded through net proceeds from the issuance of our Senior Notes on April 25, 2018 together with the net proceeds from the $100.0 million delayed draw term loan commitment accessed on May 1, 2018 under the Company’s Amended Credit Agreement.  These funds were also used for the payment of related fees and expenses, as well as for general corporate purposes.

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

Senior secured term loan facility (original borrowing) (a)	$	250,000
Additional delayed draw term loan (b)	$	100,000
Additional term loan and/or revolver capacity available under incremental facility (c)	$	200,000
Revolving Facility	$	250,000
Sublimit for issuance of letters of credit under Revolving Facility (d)	$	100,000
Sublimit for swingline loans under Revolving Facility (d)	$	20,000
Interest rate as of September 30, 2019		3.36	%
Scheduled maturity date		5/05/2022

12

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

(a) The Amended Credit Agreement provides for a term loan limit of $350.0 million; $250.0 million was drawn on May 5, 2017.

(b) On May 1, 2018, the net proceeds from the $100.0 million delayed draw term loan were used to partially fund the USI acquisition.

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

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

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

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

● A LIBOR rate determined by reference to the costs of funds for deposits in U.S. dollars for the interest period relevant to such borrowings.

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

Revolving Facility

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

	As of
	September 30,		December 31,
	2019		2018
Revolving Facility	$	250,000	$	250,000
Less: standby letters of credit		(61,382)		(59,288)
Availability under Revolving Facility	$	188,618	$	190,712

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

Senior Notes

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

13

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

Equipment Notes

During 2018, the Company executed $26.6 million of equipment notes for the purpose of financing the purchase of vehicles and equipment. During 2019, the company issued additional equipment notes for approximately $10.0 million in the nine months ended September 30, 2019. The Company’s equipment notes each have a five year maturity through 2024 and bear interest at fixed rates between 2.8% and 4.4%.

Covenant Compliance

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

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

The Amended Credit Agreement requires that we maintain a Net Leverage Ratio and minimum FCCR throughout the term of the agreement.  The following table sets forth the maximum Net Leverage Ratios and minimum FCCR required:

Quarter Ending	Maximum Net Leverage Ratio	Minimum FCCR
June 30, 2018 through September 30, 2018	3.75:1.00	1.25:1.00
December 31, 2018 through September 30, 2019	3.50:1.00	1.25:1.00
September 30, 2019 and each fiscal quarter end thereafter	3.25:1.00	1.25:1.00

The following table outlines the key financial covenants effective for the period covered by this Quarterly Report:

	As of September 30, 2019
Maximum Net Leverage Ratio	3.25:1.00
Minimum FCCR	1.25:1.00
Compliance as of period end	In Compliance

5.  FAIR VALUE MEASUREMENTS

Fair Value on Recurring Basis

The carrying values of cash and cash equivalents, receivables, net, and accounts payable are considered to be representative of their respective fair values due to the short-term nature of these instruments.  We measure our contingent consideration liabilities related to business combinations at fair value.  For more information see Note 12 –Business Combinations.

14

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

Fair Value on Non-Recurring Basis

Fair value measurements were applied to our long-term debt portfolio.  We believe the carrying value of our term loan approximates the fair market value primarily due to the fact that the non-performance risk of servicing our debt obligations, as reflected in our business and credit risk profile, has not materially changed since we assumed our debt obligations under the Amended Credit Agreement.  In addition, due to the floating-rate nature of our term loan, the market value is not subject to variability solely due to changes in the general level of interest rates as is the case with a fixed-rate debt obligation.  Based on active market trades of our Senior Notes close to September 30, 2019 (Level 1 fair value measurement), we estimate that the fair value of the Senior Notes is approximately $419.0 million compared to a gross carrying value of $400.0 million at September 30, 2019.

During all periods presented, there were no transfers between fair value hierarchical levels.

6.  SEGMENT INFORMATION

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

	Three Months Ended September 30,
	2019		2018		2019		2018
	Net Sales				Operating Profit (b)
Our operations by segment were (a):
Installation	$	498,390	$	464,540	$	69,846	$	61,004
Distribution		220,947		212,948		23,406		19,229
Intercompany eliminations		(37,007)		(30,199)		(5,935)		(5,658)
Total	$	682,330	$	647,289		87,317		74,575
General corporate expense, net (c)						(6,872)		(8,358)
Operating profit, as reported						80,445		66,217
Other expense, net						(8,854)		(9,203)
Income before income taxes					$	71,591	$	57,014

	Nine Months Ended September 30,
	2019		2018		2019		2018
	Net Sales				Operating Profit (b)
Our operations by segment were (a):
Installation	$	1,430,800	$	1,223,357	$	189,568	$	139,969
Distribution		638,899		606,335		65,154		57,141
Intercompany eliminations		(107,928)		(84,990)		(18,013)		(15,382)
Total	$	1,961,771	$	1,744,702		236,709		181,728
General corporate expense, net (c)						(23,606)		(37,937)
Operating profit, as reported						213,103		143,791
Other expense, net						(27,228)		(18,734)
Income before income taxes					$	185,875	$	125,057

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

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

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

15

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

7. LEASES

We have operating leases for our installation branch locations, distribution centers, our Branch Support Center in Daytona Beach, Florida, vehicles and certain equipment.  As of September 30, 2019, we did not have any finance leases.  At the inception of a contract, we determine whether the contract is, or contains, a lease based on the unique facts and circumstances present.  Our facilities operating leases have lease and non-lease fixed cost components, which we account for as one single lease component in calculating the present value of minimum lease payments.   Variable lease and non-lease cost components are expensed as incurred and are primarily included in cost of sales on the accompanying unaudited condensed consolidated statement of operations.

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

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

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

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

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

	Three Months Ended September 30,		Nine Months Ended September 30,
	2019		2019
Operating lease cost	$	10,959	$	34,396
Short-term lease cost		3,381		9,391
Variable lease cost		1,434		4,201
Sublease income		(153)		(461)
Net lease cost	$	15,621	$	47,527

16

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

Future minimum lease payments under non-cancellable operating leases as of September 30, 2019 were as follows, in thousands:

Payments due by Period
2019	$	10,933
2020		37,598
2021		24,367
2022		14,790
2023		6,956
2024 & Thereafter		8,284
Total future minimum lease payments		102,928
Less: imputed interest		(10,706)
Lease liability at September 30, 2019	$	92,222

As of September 30, 2019, the weighted average remaining lease term was 3.4 years and the related lease liability was calculated using a weighted average discount rate of 4.3%.

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

Nine Months Ended September 30,	2019
Cash paid for amounts included in the measurement of lease liabilities	$	(33,914)

8.  INCOME TAXES    

Our effective tax rates were 23.2 percent and 22.0 percent for the three and nine months ended September 30, 2019, respectively. The effective tax rates for the three and nine months ended September 30, 2018, were 25.2 percent and 23.1 percent, respectively. The 2019 rates are lower due to the impact of discrete benefits related to share-based compensation and a favorable return to accrual adjustment when compared to prior year, partially offset by the impact of state tax rate changes.

A tax benefit of $1.3 million and $5.1 million related to share-based compensation was recognized in our Condensed Consolidated Statements of Operations as a discrete item in income tax expense for the three and nine months ended September 30, 2019, respectively.

At September 30, 2019, the net deferred tax liability of $161.7 million consisted of net long-term deferred tax assets of $11.8 million and net long-term deferred tax liabilities of $173.5 million. The change in the net deferred tax liability was primarily related to purchase accounting adjustments in connection with the acquisition of USI and related tax elections and a return to accrual adjustment for 2018 tax returns filed in 2019, partially offset by state tax rate changes.

9. INCOME PER SHARE

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

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

17

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

Basic and diluted net income per share were computed as follows, in thousands, except share and per share amounts:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2019		2018		2019		2018
Net income - basic and diluted	$	54,976	$	42,658	$	145,011	$	96,198
Weighted average number of common shares outstanding - basic		33,790,857		35,091,388		33,977,464		35,084,694
Dilutive effect of common stock equivalents:
RSAs with service-based conditions		82,087		135,347		86,373		161,474
RSAs with market-based conditions		195,740		252,278		183,537		245,127
RSAs with performance-based conditions		82,750		23,875		63,329		7,958
Stock options		216,468		286,495		230,932		316,104
Weighted average number of common shares outstanding - diluted		34,367,902		35,789,383		34,541,635		35,815,357
Basic income per common share	$	1.63	$	1.22	$	4.27	$	2.74
Diluted income per common share	$	1.60	$	1.19	$	4.20	$	2.69

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

	Three Months Ended September 30,				Nine Months Ended September 30,
	2019		2018		2019		2018
Anti-dilutive common stock equivalents:
RSAs with service-based conditions		—		9,775		5,264		3,466
RSAs with market-based conditions		—		—		6,567		—
RSAs with performance-based conditions		—		—		—		—
Stock options		12,642		76,030		72,580		62,528
Total anti-dilutive common stock equivalents		12,642		85,805		84,411		65,994

10. SHARE-BASED COMPENSATION

Effective July 1, 2015, our eligible employees commenced participation in the 2015 Long-Term Incentive Program.  The 2015 Long-Term Incentive Program authorizes the Board to grant stock options, stock appreciation rights, restricted shares, restricted share units, performance awards, and dividend equivalents.  All grants are made by issuing new shares and no more than 4.0 million shares of common stock may be issued under the 2015 Long-Term Incentive Program.  As of September 30, 2019, we had 2.3 million shares remaining available for issuance under the 2015 Long-Term Incentive Program.

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

	Three Months Ended September 30,				Nine Months Ended September 30,
	2019		2018		2019		2018
Share-based compensation expense	$	3,926	$	2,848	$	11,411	$	8,244
Income tax benefit realized	$	1,304	$	545	$	5,110	$	3,140

18

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

The following table presents a summary of our share-based compensation activity for the nine months ended September 30, 2019, in thousands, except per share amounts:

	RSAs			Stock Options
	Number of Shares	Weighted Average Grant Date Fair Value Per Share		Number of Shares	Weighted Average Grant Date Fair Value Per Share		Weighted Average Exercise Price Per Share		Aggregate Intrinsic Value
Balance December 31, 2018	499.2	$	41.29	611.4	$	13.10	$	34.45	$	8,685.8
Granted	249.1	$	67.37	103.5	$	21.16	$	58.08
Converted/Exercised	(310.0)	$	30.99	(273.8)	$	10.87	$	28.14	$	14,184.1
Forfeited	(20.6)	$	58.32	(9.7)	$	20.28	$	54.62
Expired				(2.7)	$	14.44	$	38.39
Balance September 30, 2019	417.7	$	57.35	428.7	$	16.30	$	43.71	$	22,603.3
Exercisable September 30, 2019 (a)				129.1	$	13.96	$	36.94	$	7,678.4

(a) The weighted average remaining contractual term for vested stock options is approximately 6.9 years.

We had unrecognized share-based compensation expense relating to unvested awards as shown in the following table, dollars in thousands:

	As of September 30, 2019
	Unrecognized Compensation Expense on Unvested Awards		Weighted Average Remaining Vesting Period
Unrecognized compensation expense related to unvested awards:
RSAs	$	10,319		1.2 years
Stock options		1,910		1.0 years
Total unrecognized compensation expense related to unvested awards	$	12,229

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

			Payout Ranges and Related Expense
RSAs with Performance-Based Conditions	Grant Date Fair Value		0%		25%		100%		200%
February 21, 2017	$	1,839	$	—	$	460	$	1,839	$	3,678
February 19, 2018	$	2,082	$	—	$	521	$	2,082	$	4,164
February 18, 2019	$	2,510	$	—	$	628	$	2,510	$	5,020

During the first quarter of 2019, RSAs with performance-based conditions that were granted on February 22, 2016 vested based on cumulative three-year achievement of 88.6%. Total compensation expense recognized over the three-year performance period, net of forfeitures, was $1.7 million.

The fair value of our RSAs with a market-based condition granted under the 2015 Long-Term Incentive Program was determined using a Monte Carlo simulation.  The following are key inputs in the Monte Carlo analysis for awards granted in 2019 and 2018:

19

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

	2019			2018
Measurement period (years)		2.87			2.87
Risk free interest rate		2.50	%		2.36	%
Dividend yield		0.00	%		0.00	%
Estimated fair value of market-based RSAs granted	$	80.74		$	103.31

The fair values of stock options granted under the 2015 Long-Term Incentive Program were calculated using the Black-Scholes Options Pricing Model.  The following table presents the assumptions used to estimate the fair values of stock options granted in 2019 and 2018:

	2019			2018
Risk free interest rate		2.59	%		2.78	%
Expected volatility, using historical return volatility and implied volatility		32.50	%		32.50	%
Expected life (in years)		6.0			6.0
Dividend yield		0.00	%		0.00	%
Estimated fair value of stock options granted	$	21.16		$	27.44

11. SHARE REPURCHASE PROGRAM

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

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

On May 5, 2017, under the 2017 Repurchase Program, we entered into the 2017 ASR Agreement. When the agreement became effective on July 5, 2017, we paid BofA $100.0 million in exchange for an initial delivery of 1.5 million shares of our common stock, representing an estimated 80% of the total number of shares we expected to receive under the 2017 ASR Agreement, at the time we entered into the agreement. During the quarter ended March 31, 2018, we received an additional 13,657 shares of our common stock from BofA, representing the final settlement of the 2017 ASR Agreement.  We purchased a total of 1,521,100 shares of our common stock under the 2017 ASR Agreement at an average price per share of $65.74.

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

	Three Months Ended September 30,				Nine Months Ended September 30,
	2019		2018		2019		2018
Number of shares repurchased		364,074		142,780		810,077 (b)		156,437 (a)
Share repurchase cost (in thousands)	$	32,677	$	9,493	$	52,177	$	—

(a) The nine months ended September 30, 2018 includes 13,657 shares we received as final settlement of our 2017 ASR Agreement.

(b) The nine months ended September 30, 2019 includes 176,327 shares we received as final settlement of our 2018 ASR Agreement.

20

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

12. BUSINESS COMBINATIONS

As part of our strategy to supplement our organic growth and expand our access to additional markets and products, we completed three acquisitions during 2018 and one acquisition to date in 2019.  Each acquisition was accounted for as a business combination under ASC 805, “Business Combinations.” There were no acquisition related costs for the three months ended September 30, 2019. Acquisition related costs for the nine months ended September 30, 2019, were $0.1 million.  Acquisition related costs for the three and nine months ended September 30, 2018, were $0.6 million and $13.9 million, respectively.  Acquisition costs are included in selling, general, and administrative expense in our condensed consolidated statements of operations.

Acquisitions

On January 10, 2018, we acquired ADO, a distributor of insulation accessories, located in Plymouth, Minnesota.  The purchase price of approximately $23.0 million was funded by cash on hand of $22.2 million and contingent consideration of $0.8 million.

On January 18, 2018, we acquired substantially all of the assets of Santa Rosa, a residential and commercial insulation company located in Miami, Florida.  The purchase price of approximately $5.8 million was funded by cash on hand of $5.6 million and contingent consideration of $0.2 million.

On May 1, 2018, we acquired USI, a leading distributor and installer of insulation in both residential and commercial construction markets.  Our payment of $486.5 million, which included the purchase price of $475.0 million and adjustments for cash and working capital, was funded through net proceeds from the issuance on April 25, 2018, of the Senior Notes together with the net proceeds from the $100.0 million delayed draw term loan commitment under our Amended Credit Agreement.  For additional information see Note 4 – Long-Term Debt.

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

Revenue and net income since the respective 2018 acquisition dates included in our condensed consolidated statements of operations were as follows, in thousands:

	Three Months Ended September 30, 2019				Nine Months Ended September 30, 2019
	Net Sales		Net Income		Net Sales		Net Income
ADO		7,181		58		20,057		129
Santa Rosa		2,377		338		6,919		939
USI		96,368		8,327		284,757		26,223
	$	105,926	$	8,723	$	311,733	$	27,291

Pro Forma Results

The following unaudited pro forma information has been prepared as if the 2018 acquisitions described above had taken place on January 1, 2017. The unaudited pro forma information is not necessarily indicative of the results that we would have achieved had the transactions actually taken place on January 1, 2017.  Further, the pro forma information does not purport to be indicative of future financial operating results.  The pro forma results for the three and nine months ended September 30, 2019 do not include any adjustments from our actual results as all 2018 acquisitions were wholly-owned for the entire period.  Our pro forma results are presented below, in thousands:

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

	Unaudited Pro Forma for the
	Nine Months Ended September 30,
	2019			2018
Net sales	$	1,961,771	$	1,878,179
Net income	$	145,011	$	105,410

The following table details the additional expense included in the unaudited pro forma net income as if the 2018 acquisitions described above had taken place on January 1, 2017.  Our pro forma results are presented below, in thousands:

	Unaudited Pro Forma for the
	Nine Months Ended September 30,
	2019		2018
Amortization of intangible assets	$	—	$	5,039
Income tax expense (using 26.5% and 27.0% effective tax rate in 2019 and 2018, respectively)	$	—	$	3,407

Purchase Price Allocations

The estimated fair values of the assets acquired and liabilities assumed for the 2018 acquisitions, as well as the fair value of consideration transferred, are presented below as of September 30, 2019, in thousands:

	2018 Acquisitions
	Completed During the Year Ended December 31, 2018
	ADO		Santa Rosa		USI		Total
Estimated fair values:
Cash	$	939	$	—	$	14,817	$	15,756
Accounts receivable		3,434		1,433		61,445		66,312
Inventories		2,337		104		14,029		16,470
Prepaid and other assets		135		7		3,439		3,581
Property and equipment		951		522		33,126		34,599
Intangible assets		14,090		1,850		165,400		181,340
Goodwill		2,631		3,014		281,364		287,009
Accounts payable		(908)		(1,099)		(17,927)		(19,934)
Accrued liabilities		(609)		—		(34,686)		(35,295)
Deferred tax liability		—		—		(34,469)		(34,469)
Net assets acquired	$	23,000	$	5,831	$	486,538	$	515,369

	2018 Acquisitions
	Completed During the Year Ended December 31, 2018
	ADO		Santa Rosa		USI		Total
Fair value of consideration transferred:
Cash	$	22,172	$	5,831	$	486,538	$	514,541
Deferred consideration		—		—		—		—
Contingent consideration		828		—		—		828
Total consideration transferred	$	23,000	$	5,831	$	486,538	$	515,369

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

Estimates of acquired intangible assets related to the 2018 acquisitions are as follows, as of September 30, 2019, dollars in thousands:

	Estimated Fair Value		Weighted Average Estimated Useful Life (Years)
2018 Acquisitions:
Customer relationships	$	168,820		12
Trademarks and trade names		11,260		9
Non-competition agreements		1,260		5
Total intangible assets for 2018 acquisitions	$	181,340		11

As third party or internal valuations are finalized, certain tax aspects of the foregoing transactions are completed, and customer post-closing reviews are concluded, adjustments may be made to the fair value of assets acquired, and in some cases total purchase price, through the end of each measurement period, generally one year following the applicable acquisition date.  Various insignificant adjustments to the fair value of assets acquired, and in some cases total purchase price, have been made to certain business combinations since the respective dates of acquisition.

Goodwill to be recognized in connection with these acquisitions is attributable to the synergies expected to be realized and improvements in the businesses after the acquisitions. Of the $287.0 million of goodwill recorded from the 2018 acquisitions, $33.2 million is expected to be deductible for income tax purposes.

Contingent Consideration

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

The acquisition of ADO included a contingent consideration arrangement that requires additional consideration to be paid by TopBuild to the sellers of ADO based on the achievement of certain EBITDA thresholds over a two-year period.  The range of the undiscounted amounts TopBuild may be required to pay under the contingent consideration agreement is between zero and $1.0 million.  The fair value of the contingent consideration recognized on the acquisition date of $0.8 million was estimated by applying the income approach using discounted cash flows.  That measure is based on significant Level 3 inputs not observable in the market.  The significant assumption includes a discount rate of 9.5%.  Changes in the fair value measurement each period reflect the passage of time as well as the impact of adjustments, if any, to the likelihood of achieving the specified targets.

The acquisition of Santa Rosa included a contingent consideration arrangement that required additional consideration to be paid by TopBuild based on the achievement of a gross revenue target for 2018. The range of undiscounted amounts TopBuild could be required to pay under the contingent consideration was between zero and $0.25 million, which also represents the fair value recognized on the acquisition date. In the first quarter of 2019, we paid $0.25 million in full and had no remaining contingent consideration obligation related to Santa Rosa as of March 31, 2019. 

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

Contingent consideration is recorded in the condensed consolidated balance sheets in accrued liabilities and other liabilities.  Adjustments to the fair value of contingent consideration are reflected in selling, general, and administrative expense in the condensed consolidated statements of operations and are included in the acquisition related costs above.

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

	EcoFoam		ADO		Santa Rosa
Date of Acquisition	February 27, 2017		January 10, 2018		January 18, 2018
Fair value of contingent consideration recognized at acquisition date	$	2,110	$	828	$	250
Contingent consideration at December 31, 2018	$	1,573	$	343	$	250
Additions		—		—		—
Change in fair value of contingent consideration during the nine months ended September 30, 2019		71		(220)		—
Payment of contingent consideration during the nine months ended September 30, 2019		(841)		—		(250)
Liability balance for contingent consideration at September 30, 2019	$	803	$	123	$	—

13.  CLOSURE COSTS

We generally recognize expenses related to closures and position eliminations at the time of announcement or notification.  Such costs include termination and other severance benefits, lease abandonment costs, and other transition costs.  Closure costs are reflected in our condensed consolidated statements of operations as selling, general, and administrative expense.  In our condensed consolidated balance sheets, accrued severance closure costs are reflected as accrued liabilities and accrued lease abandonment costs are reflected as short-term and long-term lease liabilities.

In connection with the acquisition of USI, management performed an evaluation of the resources necessary to effectively operate the acquired business.  During the second quarter of 2018, management committed to a plan to close the USI corporate office in St. Paul, Minnesota, and consolidate certain administrative functions to our Daytona Beach, Florida, Branch Support Center.  As a result, the Company incurred approximately $6.9 million of closure costs in connection with this activity of which $6.7 million was incurred during the year ended December 31, 2018 and $0.2 million was incurred during the first quarter of 2019, which completed the anticipated costs of the program.  Closure costs pertaining to the USI acquisition are primarily included in general corporate expenses for segment reporting purposes.

The following table details our total estimated closure costs, by cost type, pertaining to the above closure and transition related to the USI acquisition (in thousands):

Segment / Cost Type	Closure Costs Liability at December 31, 2018		Closure Costs Incurred for the Nine Months Ended September 30, 2019		Cash Payments for the Nine Months Ended September 30, 2019		Non-Cash Adjustments for the Nine Months Ended September 30, 2019		Closure Costs Liability at September 30, 2019
Corporate:
Severance	$	3,065	$	239	$	(3,155)	$	(119)	$	30
Lease abandonment		301		—		(149)		229		381
Total Corporate:	$	3,366	$	239	$	(3,304)	$	110	$	411

The remaining accrued severance closure costs will be paid by the end of 2019. Non-cash adjustments in the table above relate to true-up of estimates to actual amounts.

24

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

14.  ACCRUED LIABILITIES

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

	As of
	September 30,		December 31,
	2019		2018
Accrued liabilities:
Salaries, wages, and commissions	$	34,205	$	34,085
Insurance liabilities		25,483		25,212
Deferred revenue		16,685		19,963
Interest payable on long-term debt		9,593		3,951
Other		26,320		21,025
Total accrued liabilities	$	112,286	$	104,236

See Note 2 – Accounting Policies for discussion of our deferred revenue balances and related revenue recognition policy.

15.  OTHER COMMITMENTS AND CONTINGENCIES

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

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

We 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.  Other types of bonds outstanding were principally license and insurance related.

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

OVERVIEW

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

We operate in two segments:  Installation (TruTeam) and Distribution (Service Partners).  Our Installation segment installs insulation and other building products nationwide through our TruTeam contractor services business, which, as of September 30, 2019, had close to 200 branches located in 40 states.  We install various insulation applications, including fiberglass batts and rolls, blown-in loose fill fiberglass, blown-in loose fill cellulose, and polyurethane spray foam.  Additionally, we install other building products including rain gutters, glass and windows, fire proofing, garage doors, shower enclosures, and closet shelving.  We handle every stage of the installation process, including procurement supplied by leading manufacturers, project scheduling and logistics, multi-phase professional installation, and installation quality assurance.  

Our Distribution segment sells and distributes insulation and other building products, including rain gutters, fireplaces, closet shelving, and roofing materials through our Service Partners business, which, as of September 30, 2019, had approximately 75 branches located in 32 states.  Our Service Partners customer base consists of thousands of insulation contractors of all sizes, gutter contractors, weatherization contractors, other contractors, dealers, metal building erectors, and modular home builders.

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

For additional details pertaining to our operating results by segment, see Note 6 – Segment Information to our unaudited condensed consolidated financial statements contained in Part I, Item 1 of this Quarterly Report, which is incorporated herein by reference.

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THIRD QUARTER 2019 VERSUS THIRD QUARTER 2018

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

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

	Three Months Ended September 30,
	2019			2018
Net sales	$	682,330		$	647,289
Cost of sales		502,999			485,424
Cost of sales ratio		73.7	%		75.0	%
Gross profit		179,331			161,865
Gross profit margin		26.3	%		25.0	%
Selling, general, and administrative expense		98,886			95,648
Selling, general, and administrative expense to sales ratio		14.5	%		14.8	%
Operating profit		80,445			66,217
Operating profit margin		11.8	%		10.2	%
Other expense, net		(8,854)			(9,203)
Income tax expense		(16,615)			(14,356)
Net income	$	54,976		$	42,658
Net margin		8.1	%		6.6	%

Sales and Operations

Net sales increased 5.4 percent for the three months ended September 30, 2019, from the comparable period of 2018.  The increase was primarily driven by increased selling prices and increased sales volume in our commercial markets.

Gross profit margins were 26.3 percent and 25.0 percent for the three months ended September 30, 2019 and 2018, respectively.  Gross profit margin improved primarily due to increased selling prices, operational efficiencies, and synergies from the USI acquisition, partially offset by higher material costs.

Selling, general, and administrative expense, as a percent of sales, was 14.5 percent and 14.8 percent for the three months ended September 30, 2019 and 2018, respectively.  Decreased selling, general, and administrative expense as a percent of sales was primarily the result of lower acquisition and closure costs related to the USI acquisition.

Operating margins were 11.8 percent and 10.2 percent for the three months ended September 30, 2019 and 2018, respectively.  The increase in operating margins was due to increased selling prices, increased sales volume, operational efficiencies, synergies from the USI acquisition, and lower acquisition and closure costs related to the USI acquisition, partially offset by higher material costs.

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Business Segment Results

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

	Three Months Ended September 30,
	2019			2018			Percent Change
Sales by business segment:
Installation	$	498,390		$	464,540		7.3	%
Distribution		220,947			212,948		3.8	%
Intercompany eliminations		(37,007)			(30,199)
Net sales	$	682,330		$	647,289		5.4	%
Operating profit by business segment:
Installation	$	69,846		$	61,004		14.5	%
Distribution		23,406			19,229		21.7	%
Intercompany eliminations and other adjustments		(5,935)			(5,658)
Operating profit before general corporate expense		87,317			74,575		17.1	%
General corporate expense, net		(6,872)			(8,358)
Operating profit	$	80,445		$	66,217		21.5	%
Operating profit margins:
Installation		14.0	%		13.1	%
Distribution		10.6	%		9.0	%
Operating profit margin before general corporate expense		12.8	%		11.5	%
Operating profit margin		11.8	%		10.2	%

Installation

Sales

Sales in the Installation segment increased $33.9 million, or 7.3 percent, for the three months ended September 30, 2019, as compared to the same period in 2018.  Sales increased 3.8 percent due to volume and 3.0 percent due to increased selling prices.

Operating margins

Operating margins in the Installation segment were 14.0 percent and 13.1 percent for the three months ended September 30, 2019 and 2018, respectively.  The increase in operating margins was due to increased selling prices, increased sales volume, operational efficiencies, and synergies from the USI acquisition, partially offset by higher material costs.

Distribution

Sales

Sales in the Distribution segment increased $8.0 million, or 3.8 percent, for the three months ended September 30, 2019, as compared to the same period in 2018.  Sales increased 4.4 percent due to increased selling prices and decreased 0.7 percent due to volume. Volume decreased primarily due to deliberate decisions with respect to prices and volume, as well as the decision to exit some low margin business.

Operating margins

Operating margins in the Distribution segment were 10.6 percent and 9.0 percent for the three months ended September 30, 2019 and 2018, respectively.  The increase in operating margins was due to increased selling prices and operational efficiencies, partially offset by higher material costs.  

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OTHER ITEMS

Other expense, net

Other expense, net, which primarily consisted of interest expense, was $8.9 million and $9.2 million for the three months ended September 30, 2019 and 2018, respectively.

Income tax expense

Income tax expense was $16.6 million, an effective tax rate of 23.2 percent, for the three months ended September 30, 2019, compared to $14.4 million, an effective tax rate of 25.2 percent, for the comparable period in 2018.  The lower 2019 effective tax rate was due to a larger benefit related to share-based compensation and a favorable return to accrual adjustment, partially offset by changes in state tax rates.

FIRST NINE MONTHS 2019 VERSUS FIRST NINE MONTHS 2018

The following table sets forth our net sales, gross profit, operating profit, and margins, as reported in our condensed

consolidated statements of operations, in thousands:

	Nine Months Ended September 30,
	2019			2018
Net sales	$	1,961,771		$	1,744,702
Cost of sales		1,451,822			1,326,777
Cost of sales ratio		74.0	%		76.0	%
Gross profit		509,949			417,925
Gross profit margin		26.0	%		24.0	%
Selling, general, and administrative expense		296,846			274,134
Selling, general, and administrative expense to sales ratio		15.1	%		15.7	%
Operating profit		213,103			143,791
Operating profit margin		10.9	%		8.2	%
Other expense, net		(27,228)			(18,734)
Income tax expense		(40,864)			(28,859)
Net income	$	145,011		$	96,198
Net margin		7.4	%		5.5	%

Sales and Operations

Net sales increased 12.4 percent for the nine months ended September 30, 2019, from the comparable period of 2018.  The increase was primarily driven by our USI acquisition and increased selling prices.

Gross profit margins were 26.0 percent and 24.0 percent for the nine months ended September 30, 2019 and 2018, respectively. Gross profit margin improved primarily due to increased selling prices, higher sales growth in our Installation segment vs. Distribution segment, operational efficiencies, and synergies from the USI acquisition, partially offset by higher material costs.

Selling, general, and administrative expense as a percent of sales, was 15.1 percent and 15.7 percent for the nine months ended September 30, 2019 and 2018, respectively.  Decreased selling, general, and administrative expense as a percent of sales was primarily the result of lower acquisition and closure costs related to the USI acquisition.

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Operating margins were 10.9 percent and 8.2 percent for the nine months ended September 30, 2019 and 2018, respectively.  The increase in operating margins related to increased selling prices, increased sales volume, operational efficiencies, synergies from the USI acquisition, and lower acquisition and closure costs related to the USI acquisition, partially offset by higher material costs.

Business Segment Results

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

	Nine Months Ended September 30,
	2019			2018			Percent Change
Sales by business segment:
Installation	$	1,430,800		$	1,223,357		17.0	%
Distribution		638,899			606,335		5.4	%
Intercompany eliminations		(107,928)			(84,990)
Net sales	$	1,961,771		$	1,744,702		12.4	%
Operating profit by business segment:
Installation	$	189,568		$	139,969		35.4	%
Distribution		65,154			57,141		14.0	%
Intercompany eliminations and other adjustments		(18,013)			(15,382)
Operating profit before general corporate expense		236,709			181,728		30.3	%
General corporate expense, net		(23,606)			(37,937)
Operating profit	$	213,103		$	143,791		48.2	%
Operating profit margins:
Installation		13.2	%		11.4	%
Distribution		10.2	%		9.4	%
Operating profit margin before general corporate expense		12.1	%		10.4	%
Operating profit margin		10.9	%		8.2	%

Installation

Sales

Sales in the Installation segment increased $207.4 million, or 17.0 percent, for the nine months ended September 30, 2019, compared to the same period in 2018.  Sales increased 9.5 percent from acquired branches, 4.3 percent due to increased selling prices and 3.1 percent due to volume.  

Operating margins

Operating margins in the Installation segment were 13.2 percent and 11.4 percent for the nine months ended September 30, 2019 and 2018, respectively.  The increase in operating margins was due to increased selling prices, increased sales volume, operational efficiencies, and synergies from the USI acquisition, partially offset by higher material costs.

Distribution

Sales

Sales in the Distribution segment increased $32.6 million, or 5.4 percent, for the nine months ended September 30, 2019, compared to the same period in 2018.  Sales increased 1.8 percent from acquired branches, 5.4 percent due to increased selling prices and decreased 1.8 percent due to volume. Volume decreased primarily due to deliberate decisions with respect to prices and volume, as well as the decision to exit some low margin business.

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Operating margins

Operating margins in the Distribution segment were 10.2 percent and 9.4 percent for the nine months ended September 30, 2019 and 2018, respectively.  The increase in operating margins was due to increased selling prices and operational efficiencies, partially offset by higher material costs.  

OTHER ITEMS

Other expense, net

Other expense, net, which primarily consisted of interest expense, was $27.2 million and $18.7 million for the nine months ended September 30, 2019 and 2018, respectively.  The increase in other expense, net for the nine months ended September 30, 2019, primarily related to the issuance of our $400.0 million Senior Notes and our borrowing of the $100.0 million delayed draw term loan to fund our acquisition of USI in the second quarter of 2018 which resulted in an additional $8.5 million of interest expense.

Income tax expense

Income tax expense was $40.9 million, an effective tax rate of 22.0 percent, for the nine months ended September 30, 2019, compared to $28.9 million, an effective tax rate of 23.1 percent, for the comparable period in 2018.  The lower 2019 effective tax rate was due to a larger benefit from share-based compensation and a favorable return to accrual adjustment, partially offset by changes in state tax rates.

Cash Flows and Liquidity

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

	Nine Months Ended September 30,
	2019		2018
Changes in cash and cash equivalents:
Net cash provided by operating activities	$	182,779	$	96,033
Net cash used in investing activities		(38,288)		(542,512)
Net cash (used in) provided by financing activities		(73,829)		483,421
Increase for the period	$	70,662	$	36,942

Net cash flows provided by operating activities increased $86.7 million for the nine months ended September 30, 2019, as compared to the prior year period.  The change was primarily due to an increase in net income, the timing of accounts receivable collections and inventory expenditures, and utilization of 2018 tax prepayments.

Net cash used in investing activities was $38.3 million for the nine months ended September 30, 2019, primarily composed of $34.1 million for purchases of property and equipment, primarily vehicles, and $6.5 million for the acquisition of Viking, partially offset by $2.2 million in proceeds from the sale of property and equipment.  Net cash used in investing activities was $542.5 million for the nine months ended September 30, 2018, primarily composed of $500.7 million of net cash for the acquisition of USI and ADO and substantially all of the assets of Santa Rosa, and $42.4 million for purchases of property and equipment, partially offset by $0.5 million of proceeds from the sale of property and equipment.

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Net cash used in financing activities was $73.8 million for the nine months ended September 30, 2019.  During the nine months ended September 30, 2019, we used $52.2 million for the repurchase of common stock pursuant to the 2019 Repurchase Program, $19.4 million for payments on our term loan under our Amended Credit Agreement and on our equipment notes, and $11.1 million on purchases of common stock for tax withholding obligations related to the vesting and exercise of share-based incentive awards. We also made payments totaling $1.1 million for contingent consideration for EcoFoam and Santa Rosa. We received $10.0 million in proceeds from the issuance of equipment notes. Net cash provided by financing activities was $483.4 million for the nine months ended September 30, 2018.  We received $400.0 million for the issuance of Senior Notes and $100.0 million from our delayed draw related to our acquisition of USI.  We received $20.1 million of proceeds from equipment financing notes.  We used $11.9 million for payments on our term loan, $7.8 million for payment of debt issuance costs related to our Amended Credit Agreement and our Senior Notes, $5.4 million for purchases of common stock for tax withholding obligations related to the vesting and exercise of share-based incentive awards during the nine months ended September 30, 2018, and $1.2 million for payments on our equipment financing notes.  We also made a payment of $0.8 million of contingent consideration for EcoFoam.  We drew $90.0 million on our Revolving Facility and made repayments of $90.0 million during the nine months ended September 30, 2018. 

We have access to liquidity through our cash from operations and available borrowing capacity under our Amended Credit Agreement, which provides for borrowing and/or standby letter of credit issuances of up to $250.0 million under the Revolving Facility.  We believe that our cash flows from operations, combined with our current cash levels and available borrowing capacity, will be adequate to support our ongoing operations and to fund our debt service requirements, capital expenditures, and working capital for at least the next twelve months.  Cash flows are seasonally stronger in the third and fourth quarters as a result of historically increased new construction activity during those periods.

The following table summarizes our liquidity, in thousands:

	As of
	September 30,		December 31,
	2019		2018
Cash and cash equivalents (a)	$	171,591	$	100,929
Revolving Facility		250,000		250,000
Less: standby letters of credit		(61,382)		(59,288)
Availability under Revolving Facility		188,618		190,712
Total liquidity	$	360,209	$	291,641

(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 related contractual performance is completed.  We also have bonds outstanding for licensing and insurance.

The following table summarizes our outstanding performance, licensing, insurance and other bonds, in thousands:

	As of
	September 30,		December 31,
	2019		2018
Outstanding bonds:
Performance bonds	$	80,149	$	65,517
Licensing, insurance, and other bonds		24,019		22,287
Total bonds	$	104,168	$	87,804

32

OUTLOOK

Housing starts improved in the third quarter, on a year over year basis, for the first time this year.  Low mortgage rates, a pivot by builders to more affordable housing and a strong economy, have helped to drive this improvement.  Long-term supply and demand fundamentals continue to point towards growth in new home construction.  In addition, both light and heavy commercial remain fundamentally strong industries and attractive growth opportunities for TopBuild.

OFF-BALANCE SHEET ARRANGEMENTS

During the quarter ended June 30, 2019, we were issued additional standby letters of credit under our normal operating procedures which decreased our availability under the Revolving Facility by $4.2 million.  See Note 4 – Long-Term Debt to our unaudited condensed consolidated financial statements in Part I, Item I of this Quarterly Report for our outstanding standby letters of credit balance as of September 30, 2019.

CONTRACTUAL OBLIGATIONS

There have been no material changes to our contractual obligations from those previously disclosed in our Annual Report for the year ended December 31, 2018, as filed with the SEC on February 26, 2019, except for the impact to our operating lease obligations as a result of the adoption of ASU 2016-02 “Leases” on January 1, 2019.  For operating lease obligations calculated under the new guidance as of September 30, 2019, see Note 7 – Leases to our unaudited condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report.

CRITICAL ACCOUNTING POLICIES

We prepare our condensed consolidated financial statements in conformity with GAAP.  The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities, at the date of the financial statements, and the reported amounts of sales and expenses during the reporting period.  Actual results could differ from those estimates.  Our critical accounting policies have not changed materially from those previously reported in our Annual Report for year ended December 31, 2018, as filed with the SEC on February 26, 2019.

APPLICATION OF NEW ACCOUNTING STANDARDS

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

FORWARD-LOOKING STATEMENTS

Statements contained in this report that reflect our views about future periods, including our future plans and performance, constitute “forward-looking statements” under the Private Securities Litigation Reform Act of 1995.  Forward-looking statements can be identified by words such as “will,” “would,” “anticipate,” “expect,” “believe,” “designed,” “plan,” or “intend,” the negative of these terms, and similar references to future periods.  These views involve risks and uncertainties that are difficult to predict and, accordingly, our actual results may differ materially from the results discussed in our forward-looking statements.  We caution you against unduly relying on any of these forward-looking statements.  Our future performance may be affected by our reliance on residential new construction, residential repair/remodel, and commercial construction; our reliance on third-party suppliers and manufacturers; our ability to attract, develop, and retain talented personnel and our sales and labor force; our ability to maintain consistent practices across our locations; and our ability to maintain our competitive position.  We discuss the material risks we face under the caption entitled “Risk Factors” in our Annual Report for the year ended December 31, 2018, as filed with the SEC on February 26, 2019, as well as under the caption entitled “Risk Factors” in subsequent reports that we file with the SEC.  Our forward-looking statements in this filing speak only as of the date of this filing.  Factors or events that could cause our actual results to differ may emerge from time to time and it is not possible for us to predict all of them.  Unless required by law, we undertake no obligation to update publicly any forward-looking statements as a result of new information, future events, or otherwise.

33

Item 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rate Risk

The Amended Credit Agreement consists of a senior secured term loan facility in the amount of $250.0 million, $100.0 million of additional term loan capacity under a delayed draw feature, which we accessed on May 1, 2018 upon consummation of the acquisition of USI, and the Revolving Facility in the amount of $250.0 million.  In addition, on April 25, 2018, we issued $400.0 million aggregate principal amount of Senior Notes.  The Senior Notes bear a fixed rate of interest and therefore are excluded from the calculation below as they are not subject to fluctuations in interest rates.

Interest payable on both the term loan facility and the Revolving Facility under the Amended Credit Agreement is based on a variable interest rate.  As a result, we are exposed to market risks related to fluctuations in interest rates on this outstanding indebtedness.  As of September 30, 2019, we had $312.2 million outstanding under our term loan facility, and the applicable interest rate as of such date was 3.36%.  Based on our outstanding borrowings under the Amended Credit Agreement as of September 30, 2019, a 100 basis point increase in the interest rate would result in a $3.0 million increase in our annualized interest expense.  There was no outstanding balance under the Revolving Facility as of September 30, 2019.

Item 4.  CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

As of the end of the period covered by this Quarterly Report, we carried out an evaluation, under the supervision and with the participation of our principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act).  Based on this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective as of September 30, 2019.

Changes in Internal Control over Financial Reporting

There was no change in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) in the most recent fiscal quarter ended September 30, 2019, that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

34

PART II – OTHER INFORMATION

Item 1.  LEGAL PROCEEDINGS

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

Item 1A.  RISK FACTORS

There have been no material changes to our risk factors as previously disclosed in our 2018 Annual Report as filed with the SEC on February 26, 2019.

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

The following table provides information regarding the repurchase of our common stock for the three months ended September 30, 2019, 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
July 1, 2019 - July 31, 2019	61,971	$	81.51	61,971	$	175,449
August 1, 2019 - August 31, 2019	162,549	$	90.18	162,549	$	160,790
September 1, 2019 - September 30, 2019	139,554	$	92.92	139,554	$	147,823
Total	364,074	$	89.76	364,074

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

Item 3.  DEFAULTS UPON SENIOR SECURITIES

Not applicable.

Item 4.  MINE SAFETY DISCLOSURES

Not applicable.

Item 5.  OTHER INFORMATION

Not applicable.

Item 6. EXHIBITS

The Exhibits listed on the accompanying Index to Exhibits are filed or furnished (as noted on such Index) as part of this Quarterly Report and incorporated herein by reference.

35

INDEX TO EXHIBITS

		Incorporated by Reference			Filed
Exhibit No.	Exhibit Title	Form	Exhibit	Filing Date	Herewith
31.1	Principal Executive Officer Certification required by Rules 13a-14 and 15d-14 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002				X
31.2	Principal Financial Officer Certification required by Rules 13a-14 and 15d-14 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002				X
32.1‡	Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of Sarbanes-Oxley Act of 2002
32.2‡	Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of Sarbanes-Oxley Act of 2002
101.INS	Inline XBRL Instance Document- the Instance Document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.				X
101.SCH	Inline XBRL Taxonomy Extension Schema Document				X
101.CAL	Inline XBRL Taxonomy Extension Calculation Linkbase Document				X
101.DEF	Inline XBRL Taxonomy Extension Definition Linkbase Document				X
101.LAB	Inline XBRL Taxonomy Extension Label Linkbase Document				X
101.PRE	Inline XBRL Taxonomy Extension Presentation Linkbase Document				X
104	Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)				X
	‡Furnished herewith

36

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

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

October 31, 2019

37

EX-31.1

Exhibit 31.1

Certifications

I, Gerald Volas, certify that:

1. I have reviewed this quarterly report on Form 10-Q of TopBuild Corp.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: October 31, 2019	/s/ Gerald Volas
	Gerald Volas
	Chief Executive Officer and Director
	(Principal Executive Officer)

EX-31.2

Exhibit 31.2

Certifications

I, John S. Peterson, certify that:

1. I have reviewed this quarterly report on Form 10-Q of TopBuild Corp.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:  

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: October 31, 2019	/s/ John S. Peterson
	John S. Peterson
	Vice President and Chief Financial Officer
	(Principal Financial Officer)

EX-32.1

Exhibit 32.1

CERTIFICATION OF PERIOD REPORT

I, Gerald Volas, Chief Executive Officer and Director of TopBuild Corp. (the “Company”), certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that, to the best of my knowledge:

(1) the Quarterly Report on Form 10-Q of the Company for the quarter ended September 30, 2019 (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and

(2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: October 31, 2019	/s/ Gerald Volas
	Gerald Volas
	Chief Executive Officer and Director
	(Principal Executive Officer)

EX-32.2

Exhibit 32.2

CERTIFICATION OF PERIOD REPORT

I, John S. Peterson,  Vice President and Chief Financial Officer of TopBuild Corp. (the “Company”), certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that, to the best of my knowledge:

(1) the Quarterly Report on Form 10-Q of the Company for the quarter ended September 30, 2019 (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and

(2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: October 31, 2019	/s/ John S. Peterson
	John S. Peterson
	Vice President and Chief Financial Officer
	(Principal Financial Officer)

XML

Long-Term Debt (Tables)

9 Months Ended

Sep. 30, 2019

Long-Term Debt

Reconciliation of principal balance of outstanding debt

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

	As of
	September 30,		December 31,
Principal debt balances:	2019		2018
Senior Notes	$	400,000	$	400,000
Term loan		312,188		327,500
Equipment notes		30,341		24,455
Unamortized debt issuance costs		(7,312)		(8,481)
Total debt, net of unamortized debt issuance costs		735,217		743,474
Less: current portion of long-term debt		33,262		26,852
Total long-term debt	$	701,955	$	716,622

Schedule of remaining principal payments of debt

The following table sets forth our remaining principal payments for our outstanding debt balances as of September 30, 2019, in thousands:

	Payments Due by Period
	2019		2020		2021		2022		2023		Thereafter		Total
Senior Notes	$	—	$	—	$	—	$	—	$	—	$	400,000	$	400,000
Term loan		6,563		26,250		30,625		248,750		—		—		312,188
Equipment notes		1,728		7,082		7,366		7,661		5,345		1,159		30,341
Total	$	8,291	$	33,332	$	37,991	$	256,411	$	5,345	$	401,159	$	742,529

Summary of key terms of Amended Credit Agreement

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

Senior secured term loan facility (original borrowing) (a)	$	250,000
Additional delayed draw term loan (b)	$	100,000
Additional term loan and/or revolver capacity available under incremental facility (c)	$	200,000
Revolving Facility	$	250,000
Sublimit for issuance of letters of credit under Revolving Facility (d)	$	100,000
Sublimit for swingline loans under Revolving Facility (d)	$	20,000
Interest rate as of September 30, 2019		3.36	%
Scheduled maturity date		5/05/2022

(a) The Amended Credit Agreement provides for a term loan limit of $350.0 million; $250.0 million was drawn on May 5, 2017.

(b) On May 1, 2018, the net proceeds from the $100.0 million delayed draw term loan were used to partially fund the USI acquisition.

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

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

Schedule of availability under the Revolving Facility

The following table summarizes our availability under the Revolving Facility, in thousands:

	As of
	September 30,		December 31,
	2019		2018
Revolving Facility	$	250,000	$	250,000
Less: standby letters of credit		(61,382)		(59,288)
Availability under Revolving Facility	$	188,618	$	190,712

Schedule of maximum Net Leverage Ratios and minimum FCCR

The following table sets forth the maximum Net Leverage Ratios and minimum FCCR required:

Quarter Ending	Maximum Net Leverage Ratio	Minimum FCCR
June 30, 2018 through September 30, 2018	3.75:1.00	1.25:1.00
December 31, 2018 through September 30, 2019	3.50:1.00	1.25:1.00
September 30, 2019 and each fiscal quarter end thereafter	3.25:1.00	1.25:1.00

Schedule of the key financial covenants

The following table outlines the key financial covenants effective for the period covered by this Quarterly Report:

	As of September 30, 2019
Maximum Net Leverage Ratio	3.25:1.00
Minimum FCCR	1.25:1.00
Compliance as of period end	In Compliance

XML

Other Commitments and Contingencies

9 Months Ended

Sep. 30, 2019

Other Commitments and Contingencies

Other Commitments and Contingencies

15.  OTHER COMMITMENTS AND CONTINGENCIES

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

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

We 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.  Other types of bonds outstanding were principally license and insurance related.

XML

Long-Term Debt - Reconciliation (Details) - USD ($) $ in Thousands	Sep. 30, 2019	Dec. 31, 2018
Long-Term Debt
Long-term debt	$ 742,529
Unamortized debt issuance costs	(7,312)	$ (8,481)
Total debt, net of unamortized debt issuance costs	735,217	743,474
Less: current portion of long-term debt	33,262	26,852
Total long-term debt	701,955	716,622
Senior Notes
Long-Term Debt
Long-term debt	400,000	400,000
Term Loan Facility
Long-Term Debt
Long-term debt	312,188	327,500
Equipment Notes
Long-Term Debt
Long-term debt	$ 30,341	$ 24,455

XML

Fair Value Measurements (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2019	Sep. 30, 2018	Sep. 30, 2019	Sep. 30, 2018	Dec. 31, 2018
Fair Value on Non-Recurring Basis
Amount outstanding	$ 742,529		$ 742,529
Amount of transfers of assets and liabilities measured on a recurring and non-recurring basis between Levels 1, 2 and 3 of the fair value hierarchy	0	$ 0	0	$ 0
Senior Notes
Fair Value on Non-Recurring Basis
Amount outstanding	400,000		400,000		$ 400,000
Fair Value on Non-Recurring Basis | Level 1 fair value measurement | Senior Notes
Fair Value on Non-Recurring Basis
Fair value	$ 419,000		$ 419,000

XML

Business Combinations - Contingent Consideration (Details)					3 Months Ended	9 Months Ended	15 Months Ended
	Jul. 15, 2019 USD ($)	Jan. 18, 2018 USD ($)	Jan. 10, 2018 USD ($)	Feb. 27, 2017 USD ($)	Mar. 31, 2019 USD ($)	Sep. 30, 2019 USD ($) item	Jun. 30, 2019 USD ($)
EcoFoam
Contingent Consideration
Purchase price				$ 22,300,000
Cash consideration				20,200,000
Contingent consideration				$ 2,100,000
Contingent consideration, payment period				3 years
Contingent consideration, high end of range						$ 2,500,000
EcoFoam | Level 3
Contingent Consideration
Fair value of contingent consideration recognized at acquisition date				$ 2,110,000
Fair value of contingent consideration
Contingent consideration at beginning of period					$ 1,573,000	1,573,000
Change in fair value of contingent consideration						71,000
Settlement of contingent consideration						(841,000)
Liability balance for contingent consideration at end of period						$ 803,000
EcoFoam | Contingent Consideration | Level 3
Contingent Consideration
Business Combination, Contingent Consideration, Liability, Measurement Input [Extensible List]						us-gaap:MeasurementInputDiscountRateMember
Discount rate (as a percent)						9.5
Fair value of contingent consideration recognized at acquisition date				$ 2,100,000
Fair value of contingent consideration
Settlement of contingent consideration							$ (800,000)
ADO
Contingent Consideration
Purchase price			$ 23,000,000.0			$ 23,000,000
Cash consideration			22,200,000			22,172,000
Contingent consideration			800,000			$ 828,000
Contingent consideration, payment period						2 years
Contingent consideration, low end of range						$ 0
Contingent consideration, high end of range						1,000,000.0
ADO | Level 3
Contingent Consideration
Fair value of contingent consideration recognized at acquisition date			828,000
Fair value of contingent consideration
Contingent consideration at beginning of period					343,000	343,000
Change in fair value of contingent consideration						(220,000)
Liability balance for contingent consideration at end of period						$ 123,000
ADO | Contingent Consideration | Level 3
Contingent Consideration
Business Combination, Contingent Consideration, Liability, Measurement Input [Extensible List]						us-gaap:MeasurementInputDiscountRateMember
Discount rate (as a percent) | item						0.095
Fair value of contingent consideration recognized at acquisition date			$ 800,000
Santa Rosa
Contingent Consideration
Purchase price		$ 5,800,000				$ 5,831,000
Cash consideration		5,600,000				5,831,000
Contingent consideration		200,000
Contingent consideration, low end of range						0
Contingent consideration, high end of range						250,000
Santa Rosa | Level 3
Contingent Consideration
Fair value of contingent consideration recognized at acquisition date		$ 250,000
Fair value of contingent consideration
Contingent consideration at beginning of period					250,000	250,000
Settlement of contingent consideration						$ (250,000)
Santa Rosa | Contingent Consideration | Level 3
Fair value of contingent consideration
Settlement of contingent consideration					(250,000)
Liability balance for contingent consideration at end of period					$ 0
Viking
Contingent Consideration
Purchase price	$ 7,700,000
Cash consideration	6,500,000
Contingent consideration	$ 1,200,000

XML

Business Combinations - Summary and Pro Forma (Details) $ in Thousands					3 Months Ended		9 Months Ended		12 Months Ended
	Jul. 15, 2019 USD ($)	May 01, 2018 USD ($)	Jan. 18, 2018 USD ($)	Jan. 10, 2018 USD ($)	Sep. 30, 2019 USD ($)	Sep. 30, 2018 USD ($)	Sep. 30, 2019 USD ($) item	Sep. 30, 2018 USD ($)	Dec. 31, 2018 item
Business Combinations
Number of acquisitions | item							1		3
Acquisition related costs					$ 0	$ 600	$ 100	$ 13,900
Pro Forma Results
Net sales							1,961,771	1,878,179
Net income							$ 145,011	105,410
Amortization of intangible assets								5,039
Income tax expense (using 26.5% and 27.0% effective tax rate in 2019 and 2018, respectively)								$ 3,407
ETR (as a percent)							26.50%	27.00%
Amended Credit Agreement | Term Loan Facility
Business Combinations
Proceeds from delayed-draw term loan		$ 100,000
2018 Acquisitions
Business Combinations
Purchase price							$ 515,369
Cash consideration							514,541
Contingent consideration							828
Revenue and Net Income Since Acquisition Date
Net Sales					105,926		311,733
Net Income					8,723		27,291
ADO
Business Combinations
Purchase price				$ 23,000			23,000
Cash consideration				22,200			22,172
Contingent consideration				$ 800			828
Revenue and Net Income Since Acquisition Date
Net Sales					7,181		20,057
Net Income					58		129
Santa Rosa
Business Combinations
Purchase price			$ 5,800				5,831
Cash consideration			5,600				5,831
Contingent consideration			$ 200
Revenue and Net Income Since Acquisition Date
Net Sales					2,377		6,919
Net Income					338		939
USI
Business Combinations
Purchase price							486,538
Cash consideration		486,500					486,538
Purchase price prior to measurement period adjustments		475,000
Revenue and Net Income Since Acquisition Date
Net Sales					96,368		284,757
Net Income					$ 8,327		$ 26,223
USI | Amended Credit Agreement | Term Loan Facility
Business Combinations
Proceeds from delayed-draw term loan		$ 100,000
Viking
Business Combinations
Purchase price	$ 7,700
Cash consideration	6,500
Contingent consideration	$ 1,200

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Income Per Share - Anti-dilutive common stock equivalents (Details) - shares	3 Months Ended		9 Months Ended
	Sep. 30, 2019	Sep. 30, 2018	Sep. 30, 2019	Sep. 30, 2018
Anti-dilutive common stock equivalents
Total anti-dilutive common stock equivalents	12,642	85,805	84,411	65,994
Restricted Stock Awards | Service-based conditions
Anti-dilutive common stock equivalents
Total anti-dilutive common stock equivalents		9,775	5,264	3,466
Restricted Stock Awards | Market-based conditions
Anti-dilutive common stock equivalents
Total anti-dilutive common stock equivalents			6,567
Stock Options
Anti-dilutive common stock equivalents
Total anti-dilutive common stock equivalents	12,642	76,030	72,580	62,528

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Share Repurchase Program

9 Months Ended

Sep. 30, 2019

Share Repurchase Program

Share Repurchase Program

11. SHARE REPURCHASE PROGRAM

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

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

On May 5, 2017, under the 2017 Repurchase Program, we entered into the 2017 ASR Agreement. When the agreement became effective on July 5, 2017, we paid BofA $100.0 million in exchange for an initial delivery of 1.5 million shares of our common stock, representing an estimated 80% of the total number of shares we expected to receive under the 2017 ASR Agreement, at the time we entered into the agreement. During the quarter ended March 31, 2018, we received an additional 13,657 shares of our common stock from BofA, representing the final settlement of the 2017 ASR Agreement.  We purchased a total of 1,521,100 shares of our common stock under the 2017 ASR Agreement at an average price per share of $65.74.

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

	Three Months Ended September 30,				Nine Months Ended September 30,
	2019		2018		2019		2018
Number of shares repurchased		364,074		142,780		810,077 (b)		156,437 (a)
Share repurchase cost (in thousands)	$	32,677	$	9,493	$	52,177	$	—

(a) The nine months ended September 30, 2018 includes 13,657 shares we received as final settlement of our 2017 ASR Agreement.

(b) The nine months ended September 30, 2019 includes 176,327 shares we received as final settlement of our 2018 ASR Agreement.

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Leases

9 Months Ended

Sep. 30, 2019

Leases

Leases

7. LEASES

We have operating leases for our installation branch locations, distribution centers, our Branch Support Center in Daytona Beach, Florida, vehicles and certain equipment.  As of September 30, 2019, we did not have any finance leases.  At the inception of a contract, we determine whether the contract is, or contains, a lease based on the unique facts and circumstances present.  Our facilities operating leases have lease and non-lease fixed cost components, which we account for as one single lease component in calculating the present value of minimum lease payments.   Variable lease and non-lease cost components are expensed as incurred and are primarily included in cost of sales on the accompanying unaudited condensed consolidated statement of operations.

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

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

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

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

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

	Three Months Ended September 30,		Nine Months Ended September 30,
	2019		2019
Operating lease cost	$	10,959	$	34,396
Short-term lease cost		3,381		9,391
Variable lease cost		1,434		4,201
Sublease income		(153)		(461)
Net lease cost	$	15,621	$	47,527

Future minimum lease payments under non-cancellable operating leases as of September 30, 2019 were as follows, in thousands:

Payments due by Period
2019	$	10,933
2020		37,598
2021		24,367
2022		14,790
2023		6,956
2024 & Thereafter		8,284
Total future minimum lease payments		102,928
Less: imputed interest		(10,706)
Lease liability at September 30, 2019	$	92,222

As of September 30, 2019, the weighted average remaining lease term was 3.4 years and the related lease liability was calculated using a weighted average discount rate of 4.3%.

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

Nine Months Ended September 30,	2019
Cash paid for amounts included in the measurement of lease liabilities	$	(33,914)

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Goodwill and Other Intangibles

9 Months Ended

Sep. 30, 2019

Goodwill and Other Intangibles

Goodwill and Other Intangibles

3.  GOODWILL AND OTHER INTANGIBLES

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

The estimated fair values of the two reporting units substantially exceeded their respective carrying values based on the most recent annual impairment test which occurred in the fourth quarter of 2018. 

Changes in the carrying amount of goodwill for the nine months ended September 30, 2019, by segment, were as follows, in thousands:

	Gross Goodwill				Gross Goodwill		Accumulated		Net Goodwill
	at				at		Impairment		at
	December 31, 2018		Additions		September 30, 2019		Losses		September 30, 2019
Goodwill, by segment:
Installation	$	1,679,654	$	3,935	$	1,683,589	$	(762,021)	$	921,568
Distribution		446,383		(33)		446,350		—		446,350
Total goodwill	$	2,126,037	$	3,902	$	2,129,939	$	(762,021)	$	1,367,918

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

	As of
	September 30, 2019		December 31, 2018
Gross definite-lived intangible assets	$	220,882	$	218,882
Accumulated amortization		(35,038)		(19,495)
Net definite-lived intangible assets		185,844		199,387
Indefinite-lived intangible assets not subject to amortization		—		—
Other intangible assets, net	$	185,844	$	199,387

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

	Three Months Ended September 30,				Nine Months Ended September 30,
	2019		2018		2019		2018
Amortization expense	$	5,197	$	5,242	$	15,543	$	10,536

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Share Repurchase Program (Tables)

9 Months Ended

Sep. 30, 2019

Share Repurchase Program

Schedule of share repurchase program

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

	Three Months Ended September 30,				Nine Months Ended September 30,
	2019		2018		2019		2018
Number of shares repurchased		364,074		142,780		810,077 (b)		156,437 (a)
Share repurchase cost (in thousands)	$	32,677	$	9,493	$	52,177	$	—

(a) The nine months ended September 30, 2018 includes 13,657 shares we received as final settlement of our 2017 ASR Agreement.

(b) The nine months ended September 30, 2019 includes 176,327 shares we received as final settlement of our 2018 ASR Agreement.

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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Parentheticals) $ in Thousands	9 Months Ended
	Sep. 30, 2018 USD ($)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Acquisition, cash acquired	$ 15,756

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CONDENSED CONSOLIDATED BALANCE SHEETS - USD ($) $ in Thousands	Sep. 30, 2019	Dec. 31, 2018
Current assets:
Cash and cash equivalents	$ 171,591	$ 100,929
Receivables, net of an allowance for doubtful accounts of $5,423 and $3,676 at September 30, 2019, and December 31, 2018, respectively	454,640	407,106
Inventories, net	146,702	168,977
Prepaid expenses and other current assets	16,457	27,685
Total current assets	789,390	704,697
Right of use assets	89,178
Property and equipment, net	175,274	167,961
Goodwill	1,367,918	1,364,016
Other intangible assets, net	185,844	199,387
Deferred tax assets, net	11,758	13,176
Other assets	4,760	5,294
Total assets	2,624,122	2,454,531
Current liabilities:
Accounts payable	300,125	313,172
Current portion of long-term debt	33,262	26,852
Accrued liabilities	112,286	104,236
Short-term lease liabilities	36,860
Total current liabilities	482,533	444,260
Long-term debt	701,955	716,622
Deferred tax liabilities, net	173,493	176,212
Long-term portion of insurance reserves	44,405	43,434
Long-term lease liabilities	55,362
Other liabilities	1,167	1,905
Total liabilities	1,458,915	1,382,433
Commitments and contingencies
Equity:
Preferred stock, $0.01 par value: 10,000,000 shares authorized; 0 shares issued and outstanding at September 30, 2019 and December 31, 2018
Common stock, $0.01 par value: 250,000,000 shares authorized; 38,865,055 shares issued and 33,951,988 outstanding at September 30, 2019, and 38,676,586 shares issued and 34,573,596 outstanding at December 31, 2018	388	387
Treasury stock, 4,913,067 shares at September 30, 2019, and 4,102,990 shares at December 31, 2018, at cost	(278,784)	(216,607)
Additional paid-in capital	856,726	846,451
Retained earnings	586,877	441,867
Total equity	1,165,207	1,072,098
Total liabilities and equity	$ 2,624,122	$ 2,454,531

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Basis of Presentation (Details)	9 Months Ended
	Sep. 30, 2019 segment
Basis of Presentation
Number of reportable segments	2

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Share Repurchase Program (Details) - USD ($) $ / shares in Units, $ in Thousands	3 Months Ended			5 Months Ended	9 Months Ended
	Sep. 30, 2019	Sep. 30, 2018	Mar. 31, 2018	Mar. 31, 2019	Sep. 30, 2019	Sep. 30, 2018	Mar. 31, 2018	Feb. 22, 2019	Nov. 07, 2018	Jul. 05, 2017
Number of shares repurchased (in shares)	364,074	142,780			810,077	156,437
Share repurchase cost	$ 32,677	$ 9,493			$ 52,177
2017 ASR Agreement
Number of shares repurchased (in shares)			13,657			13,657	1,521,100
Average price per share (in dollars per share)							$ 65.74
Initial number of shares delivered under ASR agreement (in shares)										1,500,000
Initial percentage of shares delivered under ASR agreement										80.00%
Initial value of shares delivered under ASR agreement										$ 100,000
2018 ASR Agreement
Number of shares repurchased (in shares)				973,252	176,327
Average price per share (in dollars per share)				$ 51.37
Initial number of shares delivered under ASR agreement (in shares)									796,925
Initial percentage of shares delivered under ASR agreement									85.00%
Initial value of shares delivered under ASR agreement									$ 50,000
Maximum | 2019 Share Repurchase Program
Share repurchase program, authorized amount								$ 200,000

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Income Per Share - Calculation (Details) - USD ($) $ / shares in Units, $ in Thousands	3 Months Ended						9 Months Ended
	Sep. 30, 2019	Jun. 30, 2019	Mar. 31, 2019	Sep. 30, 2018	Jun. 30, 2018	Mar. 31, 2018	Sep. 30, 2019	Sep. 30, 2018
Net income - basic and diluted	$ 54,976	$ 52,051	$ 37,983	$ 42,658	$ 27,152	$ 26,388	$ 145,011	$ 96,198
Weighted average number of common shares outstanding - basic	33,790,857			35,091,388			33,977,464	35,084,694
Dilutive effect of common stock equivalents:
Stock options	216,468			286,495			230,932	316,104
Weighted average number of common shares outstanding - diluted	34,367,902			35,789,383			34,541,635	35,815,357
Basic net income per common share	$ 1.63			$ 1.22			$ 4.27	$ 2.74
Diluted net income per common share	$ 1.60			$ 1.19			$ 4.20	$ 2.69
Service-based conditions
Dilutive effect of common stock equivalents:
Restricted stock awards	82,087			135,347			86,373	161,474
Market-based conditions
Dilutive effect of common stock equivalents:
Restricted stock awards	195,740			252,278			183,537	245,127
Performance-based conditions
Dilutive effect of common stock equivalents:
Restricted stock awards	82,750			23,875			63,329	7,958

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Segment Information

9 Months Ended

Sep. 30, 2019

Segment Information

Segment Information

6.  SEGMENT INFORMATION

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

	Three Months Ended September 30,
	2019		2018		2019		2018
	Net Sales				Operating Profit (b)
Our operations by segment were (a):
Installation	$	498,390	$	464,540	$	69,846	$	61,004
Distribution		220,947		212,948		23,406		19,229
Intercompany eliminations		(37,007)		(30,199)		(5,935)		(5,658)
Total	$	682,330	$	647,289		87,317		74,575
General corporate expense, net (c)						(6,872)		(8,358)
Operating profit, as reported						80,445		66,217
Other expense, net						(8,854)		(9,203)
Income before income taxes					$	71,591	$	57,014

	Nine Months Ended September 30,
	2019		2018		2019		2018
	Net Sales				Operating Profit (b)
Our operations by segment were (a):
Installation	$	1,430,800	$	1,223,357	$	189,568	$	139,969
Distribution		638,899		606,335		65,154		57,141
Intercompany eliminations		(107,928)		(84,990)		(18,013)		(15,382)
Total	$	1,961,771	$	1,744,702		236,709		181,728
General corporate expense, net (c)						(23,606)		(37,937)
Operating profit, as reported						213,103		143,791
Other expense, net						(27,228)		(18,734)
Income before income taxes					$	185,875	$	125,057

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

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

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

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Accounting Policies

9 Months Ended

Sep. 30, 2019

Accounting Policies

Accounting Policies

2.  ACCOUNTING POLICIES

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

Business Combinations.  The purchase price for business combinations is allocated to the estimated fair values of acquired tangible and intangible assets, including goodwill, and liabilities assumed.  These estimates include, but are not limited to, discount rates, projected future revenue growth, cost synergies and expected cash flows, customer attrition rates, useful lives and other prospective information.  Additionally, we recognize customer relationships, trademarks and trade names, and non-competition agreements as identifiable intangible assets, which are recorded at fair value as of the transaction date.  The fair value of these intangible assets is determined primarily using the income approach and using current industry information.  Goodwill is recorded when consideration transferred exceeds the fair value of identifiable assets and liabilities.  Measurement-period adjustments to assets acquired and liabilities assumed with a corresponding offset to goodwill are recorded in the period in which they occur, which may include up to one year from the acquisition date.  Contingent consideration is recorded at fair value at the acquisition date.

Share-based Compensation.  Our share-based compensation program currently consists of RSAs and stock options.  Share-based compensation expense is reported in selling, general, and administrative expense.  We do not capitalize any compensation cost related to share-based compensation awards.  The income tax benefits and deficiencies associated with share-based awards are reported as a component of income tax expense.  Excess tax benefits and deficiencies are included in net cash provided by (used in) operating activities while shares withheld for tax-withholding are reported in financing activities under the caption “Taxes withheld and paid on employees’ equity awards” in our condensed consolidated statements of cash flows.  Award forfeitures are accounted for in the period they occur.  

The following table details our award types and accounting policies:

Award Type:	Fair Value Determination	Vesting	Expense Recognition‡	Expense Measurement
Restricted Share Awards
Service Condition	Closing stock price on date of grant	Ratably; 3 or 5 years	Straight-line	Fair value at grant date
Performance Condition	Closing stock price on date of grant	Cliff; 3 years	Straight-line; Adjusted based on meeting or exceeding performance targets	Evaluated quarterly; 0 - 200% of fair value at grant date depending on performance
Market Condition	Monte-Carlo Simulation	Cliff; 3 years	Straight-line; Recognized even if condition is not met	Fair value at grant date
Stock Options†	Black-Scholes Options Pricing Model	Ratably; 3 or 5 years	Straight-line	Fair value at grant date

†Stock options expire no later than 10 years after the grant date.

‡Expense is reversed if award is forfeited prior to vesting.

Revenue Recognition

Revenue is disaggregated between our Installation and Distribution segments. A reconciliation of disaggregated revenue by segment is included in Note 6 – Segment Information.

We recognize revenue for our Installation segment using the percentage of completion method of accounting with respect to each particular order within a given customer’s contract, based on the amount of material installed at that customer’s location and the associated labor costs, as compared to the total expected cost for the particular order. Revenue is recognized over time as the customer is able to receive and utilize the benefits provided by our services. Each contract contains one or more individual orders, which are based on services delivered. When a contract modification is made, typically the remaining goods or services are considered distinct and we recognize revenue for the modification as a separate performance obligation. When insulation and installation services are bundled in a contract, we combine these items into one performance obligation as the overall promise is to transfer the combined item.

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

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

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

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

	Included in Line Item on	As of
	Condensed Consolidated	September 30,		December 31,
	Balance Sheets	2019		2018
Contract Assets:
Receivables, unbilled	Receivables, net	$	62,072	$	61,339
Contract Liabilities:
Deferred revenue	Accrued liabilities	$	16,685	$	19,963

Our contract liabilities are normally recognized to net sales in the immediately subsequent reporting period due to the generally short-term nature of our contracts with customers.

Recently Adopted Accounting Pronouncements:

Leases

In February 2016 the FASB issued ASU 2016-02, “Leases.”  This standard requires a lessee to recognize certain leases on its balance sheet.  Effective January 1, 2019, we adopted ASU 2016-02 using the modified retrospective transition method with the optional transition relief provided in targeted improvements ASU 2018-11, which allows the new standard to be applied in financial year 2019.  Adoption of the new standard resulted in the recognition of ROU assets and lease liabilities of $99.1 million and $101.6 million, respectively, as of January 1, 2019 on our unaudited condensed consolidated balance sheet.  There was no cumulative adjustment required to be recorded to our beginning retained earnings balance.  Adoption of this standard did not materially impact our results of operations or cash flows for any periods presented.

We elected certain practical expedients allowed under ASC 842 – Leases. As such, we did not reassess whether any existing contracts are or contain leases, the lease classification of existing leases, or the initial direct costs for any existing leases.  In addition, we elected by class of underlying asset to not separate fixed non-lease components from the lease component. Further, for all leases with an initial term of 12 months or less, we elected not to record any right of use asset or lease liability.  We declined the option to use hindsight in determining lease term, assessing likelihood that a lease purchase option will be exercised or in assessing impairment of right of use asset for all classes of assets.  To initially measure our lease liability, we used our IBR at January 1, 2019 based on the remaining lease term for all existing leases.  See Note 7 – Leases for additional information.

Recently Issued Accounting Pronouncements Not Yet Adopted:

In June 2016 the FASB issued ASU 2016-13, “Financial Instruments - Credit Losses”.  This guidance introduces a current expected credit loss (CECL) model for the recognition of impairment losses on financial assets, including trade receivables.  The CECL model replaces current GAAP’s incurred loss model.  Under CECL, companies will record an allowance through current earnings for the expected credit loss for the life of the financial asset upon initial recognition of the financial asset.  This update is effective for us at the beginning of 2020 with early adoption permitted at the beginning of 2019. We plan to adopt this standard on January 1, 2020 with a cumulative adjustment to our beginning retained earnings balance. We have begun our initial evaluation of financial assets subject to this guidance and are developing a new accounting policy for CECL recognition. We are still determining the impact to our financial position upon adoption.

In January 2017 the FASB issued ASU 2017-04, “Simplifying the Test for Goodwill Impairment.”  The new standard simplifies the subsequent measurement of goodwill by eliminating the second step of the goodwill impairment test.  This update is effective for us beginning January 1, 2020.  Early adoption is permitted, and the new standard will be applied on a prospective basis.  We plan to adopt this standard on January 1, 2020, and we do not anticipate that the adoption of this standard will have a material impact on our financial position and results of operations.

In August 2018 the FASB issued ASU 2018-13, “Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement.”  The new standard modifies the disclosure requirements on fair value measurements in Topic 820, Fair Value Measurement, including adjustments to Level 3 fair value measurement disclosures as well as the removal of disclosures around Level 1 and Level 2 transfers. This update is effective for us beginning January 1, 2020 with early adoption permitted. The amendments to the guidance will be applied on a prospective or retrospective basis, in accordance with the requirements of this standard. We plan to adopt this standard on January 1, 2020, and we do not anticipate that the adoption of this standard will have a material impact on our financial position and results of operations.

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Share-Based Compensation

9 Months Ended

Sep. 30, 2019

Share-Based Compensation.

Share-Based Compensation

10. SHARE-BASED COMPENSATION

Effective July 1, 2015, our eligible employees commenced participation in the 2015 Long-Term Incentive Program.  The 2015 Long-Term Incentive Program authorizes the Board to grant stock options, stock appreciation rights, restricted shares, restricted share units, performance awards, and dividend equivalents.  All grants are made by issuing new shares and no more than 4.0 million shares of common stock may be issued under the 2015 Long-Term Incentive Program.  As of September 30, 2019, we had 2.3 million shares remaining available for issuance under the 2015 Long-Term Incentive Program.

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

	Three Months Ended September 30,				Nine Months Ended September 30,
	2019		2018		2019		2018
Share-based compensation expense	$	3,926	$	2,848	$	11,411	$	8,244
Income tax benefit realized	$	1,304	$	545	$	5,110	$	3,140

The following table presents a summary of our share-based compensation activity for the nine months ended September 30, 2019, in thousands, except per share amounts:

	RSAs			Stock Options
	Number of Shares	Weighted Average Grant Date Fair Value Per Share		Number of Shares	Weighted Average Grant Date Fair Value Per Share		Weighted Average Exercise Price Per Share		Aggregate Intrinsic Value
Balance December 31, 2018	499.2	$	41.29	611.4	$	13.10	$	34.45	$	8,685.8
Granted	249.1	$	67.37	103.5	$	21.16	$	58.08
Converted/Exercised	(310.0)	$	30.99	(273.8)	$	10.87	$	28.14	$	14,184.1
Forfeited	(20.6)	$	58.32	(9.7)	$	20.28	$	54.62
Expired				(2.7)	$	14.44	$	38.39
Balance September 30, 2019	417.7	$	57.35	428.7	$	16.30	$	43.71	$	22,603.3
Exercisable September 30, 2019 (a)				129.1	$	13.96	$	36.94	$	7,678.4

(a) The weighted average remaining contractual term for vested stock options is approximately 6.9 years.

We had unrecognized share-based compensation expense relating to unvested awards as shown in the following table, dollars in thousands:

	As of September 30, 2019
	Unrecognized Compensation Expense on Unvested Awards		Weighted Average Remaining Vesting Period
Unrecognized compensation expense related to unvested awards:
RSAs	$	10,319		1.2 years
Stock options		1,910		1.0 years
Total unrecognized compensation expense related to unvested awards	$	12,229

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

			Payout Ranges and Related Expense
RSAs with Performance-Based Conditions	Grant Date Fair Value		0%		25%		100%		200%
February 21, 2017	$	1,839	$	—	$	460	$	1,839	$	3,678
February 19, 2018	$	2,082	$	—	$	521	$	2,082	$	4,164
February 18, 2019	$	2,510	$	—	$	628	$	2,510	$	5,020

During the first quarter of 2019, RSAs with performance-based conditions that were granted on February 22, 2016 vested based on cumulative three-year achievement of 88.6%. Total compensation expense recognized over the three-year performance period, net of forfeitures, was $1.7 million.

The fair value of our RSAs with a market-based condition granted under the 2015 Long-Term Incentive Program was determined using a Monte Carlo simulation.  The following are key inputs in the Monte Carlo analysis for awards granted in 2019 and 2018:

	2019			2018
Measurement period (years)		2.87			2.87
Risk free interest rate		2.50	%		2.36	%
Dividend yield		0.00	%		0.00	%
Estimated fair value of market-based RSAs granted	$	80.74		$	103.31

The fair values of stock options granted under the 2015 Long-Term Incentive Program were calculated using the Black-Scholes Options Pricing Model.  The following table presents the assumptions used to estimate the fair values of stock options granted in 2019 and 2018:

	2019			2018
Risk free interest rate		2.59	%		2.78	%
Expected volatility, using historical return volatility and implied volatility		32.50	%		32.50	%
Expected life (in years)		6.0			6.0
Dividend yield		0.00	%		0.00	%
Estimated fair value of stock options granted	$	21.16		$	27.44

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Business Combinations (Tables)

9 Months Ended

Sep. 30, 2019

Business Combinations

Schedule of revenue and net income since acquisition date included in the Condensed Consolidated Statements of Operations

Revenue and net income since the respective 2018 acquisition dates included in our condensed consolidated statements of operations were as follows, in thousands:

	Three Months Ended September 30, 2019				Nine Months Ended September 30, 2019
	Net Sales		Net Income		Net Sales		Net Income
ADO		7,181		58		20,057		129
Santa Rosa		2,377		338		6,919		939
USI		96,368		8,327		284,757		26,223
	$	105,926	$	8,723	$	311,733	$	27,291

Schedule of pro forma results

Our pro forma results are presented below, in thousands:

	Unaudited Pro Forma for the
	Nine Months Ended September 30,
	2019			2018
Net sales	$	1,961,771	$	1,878,179
Net income	$	145,011	$	105,410

Schedule of additional expense included in the pro forma operating profit and net income

Our pro forma results are presented below, in thousands:

	Unaudited Pro Forma for the
	Nine Months Ended September 30,
	2019		2018
Amortization of intangible assets	$	—	$	5,039
Income tax expense (using 26.5% and 27.0% effective tax rate in 2019 and 2018, respectively)	$	—	$	3,407

Schedule of estimated fair values of the assets acquired and liabilities assumed, as well as the fair value of consideration transferred

The estimated fair values of the assets acquired and liabilities assumed for the 2018 acquisitions, as well as the fair value of consideration transferred, are presented below as of September 30, 2019, in thousands:

	2018 Acquisitions
	Completed During the Year Ended December 31, 2018
	ADO		Santa Rosa		USI		Total
Estimated fair values:
Cash	$	939	$	—	$	14,817	$	15,756
Accounts receivable		3,434		1,433		61,445		66,312
Inventories		2,337		104		14,029		16,470
Prepaid and other assets		135		7		3,439		3,581
Property and equipment		951		522		33,126		34,599
Intangible assets		14,090		1,850		165,400		181,340
Goodwill		2,631		3,014		281,364		287,009
Accounts payable		(908)		(1,099)		(17,927)		(19,934)
Accrued liabilities		(609)		—		(34,686)		(35,295)
Deferred tax liability		—		—		(34,469)		(34,469)
Net assets acquired	$	23,000	$	5,831	$	486,538	$	515,369

	2018 Acquisitions
	Completed During the Year Ended December 31, 2018
	ADO		Santa Rosa		USI		Total
Fair value of consideration transferred:
Cash	$	22,172	$	5,831	$	486,538	$	514,541
Deferred consideration		—		—		—		—
Contingent consideration		828		—		—		828
Total consideration transferred	$	23,000	$	5,831	$	486,538	$	515,369

Schedule of estimates of acquired intangible assets related to the acquisitions

Estimates of acquired intangible assets related to the 2018 acquisitions are as follows, as of September 30, 2019, dollars in thousands:

	Estimated Fair Value		Weighted Average Estimated Useful Life (Years)
2018 Acquisitions:
Customer relationships	$	168,820		12
Trademarks and trade names		11,260		9
Non-competition agreements		1,260		5
Total intangible assets for 2018 acquisitions	$	181,340		11

Schedule of fair value of contingent consideration

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

	EcoFoam		ADO		Santa Rosa
Date of Acquisition	February 27, 2017		January 10, 2018		January 18, 2018
Fair value of contingent consideration recognized at acquisition date	$	2,110	$	828	$	250
Contingent consideration at December 31, 2018	$	1,573	$	343	$	250
Additions		—		—		—
Change in fair value of contingent consideration during the nine months ended September 30, 2019		71		(220)		—
Payment of contingent consideration during the nine months ended September 30, 2019		(841)		—		(250)
Liability balance for contingent consideration at September 30, 2019	$	803	$	123	$	—

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CONDENSED CONSOLIDATED STATEMENTS OF EQUITY - USD ($) $ in Thousands	Common Stock	Treasury Stock at Cost	Additional Paid-in Capital	Retained Earnings	Total
Balance at Dec. 31, 2017	$ 386	$ (141,582)	$ 830,600	$ 307,115	$ 996,519
Increase (Decrease) in Stockholders' Equity
Net income				26,388	26,388
Share-based compensation			2,402		2,402
Issuance of restricted share awards under long-term equity incentive plan	1		(1)
Repurchase of shares pursuant to the settlement of ASR Agreement		(20,000)	20,000
Shares withheld to pay taxes on employees' equity awards			(4,514)		(4,514)
Balance at Mar. 31, 2018	387	(161,582)	848,487	333,503	1,020,795
Balance at Dec. 31, 2017	386	(141,582)	830,600	307,115	996,519
Increase (Decrease) in Stockholders' Equity
Net income					96,198
Balance at Sep. 30, 2018	387	(171,075)	853,410	403,313	1,086,035
Balance at Mar. 31, 2018	387	(161,582)	848,487	333,503	1,020,795
Increase (Decrease) in Stockholders' Equity
Net income				27,152	27,152
Share-based compensation			2,995		2,995
Shares withheld to pay taxes on employees' equity awards			(17)		(17)
Balance at Jun. 30, 2018	387	(161,582)	851,465	360,655	1,050,925
Increase (Decrease) in Stockholders' Equity
Net income				42,658	42,658
Share-based compensation			2,847		2,847
Repurchase of shares pursuant to Repurchase Program		(9,493)			(9,493)
Shares withheld to pay taxes on employees' equity awards			(902)		(902)
Balance at Sep. 30, 2018	387	(171,075)	853,410	403,313	1,086,035
Balance at Dec. 31, 2018	387	(216,607)	846,451	441,867	1,072,098
Increase (Decrease) in Stockholders' Equity
Net income				37,983	37,983
Share-based compensation			2,972		2,972
Issuance of restricted share awards under long-term equity incentive plan	1		(1)
Repurchase of shares pursuant to the settlement of ASR Agreement		(10,000)	10,000
Repurchase of shares pursuant to Repurchase Program		(4,622)			(4,622)
Shares withheld to pay taxes on employees' equity awards			(5,578)		(5,578)
Balance at Mar. 31, 2019	388	(231,229)	853,844	479,850	1,102,853
Balance at Dec. 31, 2018	387	(216,607)	846,451	441,867	1,072,098
Increase (Decrease) in Stockholders' Equity
Net income					145,011
Balance at Sep. 30, 2019	388	(278,784)	856,726	586,877	1,165,207
Balance at Mar. 31, 2019	388	(231,229)	853,844	479,850	1,102,853
Increase (Decrease) in Stockholders' Equity
Net income				52,051	52,051
Share-based compensation			4,513		4,513
Repurchase of shares pursuant to Repurchase Program		(14,878)			(14,878)
Shares withheld to pay taxes on employees' equity awards			(2,893)		(2,893)
Balance at Jun. 30, 2019	388	(246,107)	855,464	531,901	1,141,646
Increase (Decrease) in Stockholders' Equity
Net income				54,976	54,976
Share-based compensation			3,926		3,926
Repurchase of shares pursuant to Repurchase Program		(32,677)			(32,677)
Shares withheld to pay taxes on employees' equity awards			(2,664)		(2,664)
Balance at Sep. 30, 2019	$ 388	$ (278,784)	$ 856,726	$ 586,877	$ 1,165,207

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CONDENSED CONSOLIDATED BALANCE SHEETS (Parenthetical) - USD ($) $ in Thousands	Sep. 30, 2019	Dec. 31, 2018
CONDENSED CONSOLIDATED BALANCE SHEETS
Allowance for doubtful accounts	$ 5,423	$ 3,676
Preferred stock, par value (in dollars per share)	$ 0.01	$ 0.01
Preferred stock, shares authorized	10,000,000	10,000,000
Preferred stock, shares, issued	0	0
Preferred stock, shares, outstanding	0	0
Common stock, par value (in dollars per share)	$ 0.01	$ 0.01
Common stock, shares authorized	250,000,000	250,000,000
Common stock, shares issued	38,865,055	38,676,586
Common stock, shares outstanding	33,951,988	34,573,596
Treasury stock, shares at cost	4,913,067	4,102,990

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Accounting Policies - Share-Based Compensation (Details)	9 Months Ended
	Sep. 30, 2019
Stock Options | Minimum
Share-Based Compensation
Vesting period	3 years
Stock Options | Maximum
Share-Based Compensation
Vesting period	5 years
Expiration period	10 years
Service-based conditions | Restricted Stock Awards | Minimum
Share-Based Compensation
Vesting period	3 years
Service-based conditions | Restricted Stock Awards | Maximum
Share-Based Compensation
Vesting period	5 years
Performance-based conditions | Restricted Stock Awards
Share-Based Compensation
Vesting period	3 years
Performance-based conditions | Restricted Stock Awards | Minimum
Share-Based Compensation
Expense measurement, payout range (as percent)	0.00%
Performance-based conditions | Restricted Stock Awards | Maximum
Share-Based Compensation
Expense measurement, payout range (as percent)	200.00%
Market-based conditions | Restricted Stock Awards
Share-Based Compensation
Vesting period	3 years

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Goodwill and Other Intangibles (Tables)

9 Months Ended

Sep. 30, 2019

Goodwill and Other Intangibles

Changes in the carrying amount of goodwill by segment

Changes in the carrying amount of goodwill for the nine months ended September 30, 2019, by segment, were as follows, in thousands:

	Gross Goodwill				Gross Goodwill		Accumulated		Net Goodwill
	at				at		Impairment		at
	December 31, 2018		Additions		September 30, 2019		Losses		September 30, 2019
Goodwill, by segment:
Installation	$	1,679,654	$	3,935	$	1,683,589	$	(762,021)	$	921,568
Distribution		446,383		(33)		446,350		—		446,350
Total goodwill	$	2,126,037	$	3,902	$	2,129,939	$	(762,021)	$	1,367,918

Schedule of other intangible assets

The following table sets forth our other intangible assets, in thousands:

	As of
	September 30, 2019		December 31, 2018
Gross definite-lived intangible assets	$	220,882	$	218,882
Accumulated amortization		(35,038)		(19,495)
Net definite-lived intangible assets		185,844		199,387
Indefinite-lived intangible assets not subject to amortization		—		—
Other intangible assets, net	$	185,844	$	199,387

Schedule of amortization expense

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

	Three Months Ended September 30,				Nine Months Ended September 30,
	2019		2018		2019		2018
Amortization expense	$	5,197	$	5,242	$	15,543	$	10,536

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Accrued Liabilities

9 Months Ended

Sep. 30, 2019

Accrued Liabilities

Accrued Liabilities

14.  ACCRUED LIABILITIES

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

	As of
	September 30,		December 31,
	2019		2018
Accrued liabilities:
Salaries, wages, and commissions	$	34,205	$	34,085
Insurance liabilities		25,483		25,212
Deferred revenue		16,685		19,963
Interest payable on long-term debt		9,593		3,951
Other		26,320		21,025
Total accrued liabilities	$	112,286	$	104,236

See Note 2 – Accounting Policies for discussion of our deferred revenue balances and related revenue recognition policy.

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Long-Term Debt - Schedule of debt maturity (Details) - USD ($) $ in Thousands	Sep. 30, 2019	Dec. 31, 2018
Schedule of Debt Maturity by Years:
2019	$ 8,291
2020	33,332
2021	37,991
2022	256,411
2023	5,345
Thereafter	401,159
Total principal maturities	742,529
Senior Notes
Schedule of Debt Maturity by Years:
Thereafter	400,000
Total principal maturities	400,000	$ 400,000
Term Loan Facility
Schedule of Debt Maturity by Years:
2019	6,563
2020	26,250
2021	30,625
2022	248,750
Total principal maturities	312,188	327,500
Equipment Notes
Schedule of Debt Maturity by Years:
2019	1,728
2020	7,082
2021	7,366
2022	7,661
2023	5,345
Thereafter	1,159
Total principal maturities	$ 30,341	$ 24,455

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Segment Information (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2019	Sep. 30, 2018	Sep. 30, 2019	Sep. 30, 2018
Segment information
Net sales	$ 682,330	$ 647,289	$ 1,961,771	$ 1,744,702
Operating profit	80,445	66,217	213,103	143,791
Other expense, net	(8,854)	(9,203)	(27,228)	(18,734)
Income before income taxes	71,591	57,014	185,875	125,057
Operating Segment
Segment information
Net sales	682,330	647,289	1,961,771	1,744,702
Operating profit	87,317	74,575	236,709	181,728
Operating Segment | Installation
Segment information
Net sales	498,390	464,540	1,430,800	1,223,357
Operating profit	69,846	61,004	189,568	139,969
Operating Segment | Distribution
Segment information
Net sales	220,947	212,948	638,899	606,335
Operating profit	23,406	19,229	65,154	57,141
Intercompany Eliminations
Segment information
Net sales	(37,007)	(30,199)	(107,928)	(84,990)
Operating profit	(5,935)	(5,658)	(18,013)	(15,382)
Corporate
Segment information
General corporate expense, net	$ (6,872)	$ (8,358)	$ (23,606)	$ (37,937)

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Business Combinations - Goodwill (Details) - USD ($) $ in Thousands	Sep. 30, 2019	Dec. 31, 2018
Goodwill	$ 1,367,918	$ 1,364,016
2018 Acquisitions
Goodwill	287,009
Goodwill expected to be deducted for income tax purposes	33,200
USI
Goodwill	$ 281,364

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Business Combinations - Purchase Price Allocation and Consideration (Details) - USD ($) $ in Thousands					9 Months Ended
	May 01, 2018	Jan. 18, 2018	Jan. 10, 2018	Feb. 27, 2017	Sep. 30, 2019	Dec. 31, 2018
Purchase Price Allocations
Goodwill					$ 1,367,918	$ 1,364,016
2018 Acquisitions
Purchase Price Allocations
Cash					15,756
Accounts receivable					66,312
Inventories					16,470
Prepaid and other assets					3,581
Property and equipment					34,599
Intangible assets					181,340
Goodwill					287,009
Accounts payable					(19,934)
Accrued liabilities					(35,295)
Deferred tax liability					(34,469)
Net assets acquired					515,369
Fair value of consideration
Cash					514,541
Contingent consideration					828
Total consideration transferred					515,369
ADO
Purchase Price Allocations
Cash					939
Accounts receivable					3,434
Inventories					2,337
Prepaid and other assets					135
Property and equipment					951
Intangible assets					14,090
Goodwill					2,631
Accounts payable					(908)
Accrued liabilities					(609)
Net assets acquired					23,000
Fair value of consideration
Cash			$ 22,200		22,172
Contingent consideration			800		828
Total consideration transferred			$ 23,000		23,000
Santa Rosa
Purchase Price Allocations
Accounts receivable					1,433
Inventories					104
Prepaid and other assets					7
Property and equipment					522
Intangible assets					1,850
Goodwill					3,014
Accounts payable					(1,099)
Net assets acquired					5,831
Fair value of consideration
Cash		$ 5,600			5,831
Contingent consideration		200
Total consideration transferred		$ 5,800			5,831
USI
Purchase Price Allocations
Cash					14,817
Accounts receivable					61,445
Inventories					14,029
Prepaid and other assets					3,439
Property and equipment					33,126
Intangible assets					165,400
Goodwill					281,364
Accounts payable					(17,927)
Accrued liabilities					(34,686)
Deferred tax liability					(34,469)
Net assets acquired					486,538
Fair value of consideration
Cash	$ 486,500				486,538
Total consideration transferred					$ 486,538
EcoFoam
Fair value of consideration
Cash				$ 20,200
Contingent consideration				2,100
Total consideration transferred				$ 22,300

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Share-Based Compensation - Expense (Details) - USD ($) $ in Thousands, shares in Millions	3 Months Ended		9 Months Ended
	Sep. 30, 2019	Sep. 30, 2018	Sep. 30, 2019	Sep. 30, 2018
Share-Based Compensation
Share-based compensation expense	$ 3,926	$ 2,848	$ 11,411	$ 8,244
Income tax benefit realized	$ 1,304	$ 545	$ 5,110	$ 3,140
2015 Plan
Share-Based Compensation
Number of shares available	2.3		2.3
2015 Plan | Maximum
Share-Based Compensation
Number of shares authorized	4.0		4.0

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Leases - Cash flows and other (Details) $ in Thousands	9 Months Ended
	Sep. 30, 2019 USD ($)
Leases
Weighted average remaining lease term	3 years 4 months 24 days
Weighted average discount rate (as a percent)	4.30%
Cash paid for amounts included in the measurement of lease liabilities	$ (33,914)

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Share-Based Compensation (Tables)

9 Months Ended

Sep. 30, 2019

Share-Based Compensation

Schedule of share-based compensation expense and related income tax benefit

The following table presents share-based compensation amounts recognized in our condensed consolidated statements of operations, in thousands:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2019		2018		2019		2018
Share-based compensation expense	$	3,926	$	2,848	$	11,411	$	8,244
Income tax benefit realized	$	1,304	$	545	$	5,110	$	3,140

Schedule of share-based compensation activity

The following table presents a summary of our share-based compensation activity for the nine months ended September 30, 2019, in thousands, except per share amounts:

	RSAs			Stock Options
	Number of Shares	Weighted Average Grant Date Fair Value Per Share		Number of Shares	Weighted Average Grant Date Fair Value Per Share		Weighted Average Exercise Price Per Share		Aggregate Intrinsic Value
Balance December 31, 2018	499.2	$	41.29	611.4	$	13.10	$	34.45	$	8,685.8
Granted	249.1	$	67.37	103.5	$	21.16	$	58.08
Converted/Exercised	(310.0)	$	30.99	(273.8)	$	10.87	$	28.14	$	14,184.1
Forfeited	(20.6)	$	58.32	(9.7)	$	20.28	$	54.62
Expired				(2.7)	$	14.44	$	38.39
Balance September 30, 2019	417.7	$	57.35	428.7	$	16.30	$	43.71	$	22,603.3
Exercisable September 30, 2019 (a)				129.1	$	13.96	$	36.94	$	7,678.4

(a) The weighted average remaining contractual term for vested stock options is approximately 6.9 years.

Schedule of unrecognized share-based compensation expense relating to unvested awards

We had unrecognized share-based compensation expense relating to unvested awards as shown in the following table, dollars in thousands:

	As of September 30, 2019
	Unrecognized Compensation Expense on Unvested Awards		Weighted Average Remaining Vesting Period
Unrecognized compensation expense related to unvested awards:
RSAs	$	10,319		1.2 years
Stock options		1,910		1.0 years
Total unrecognized compensation expense related to unvested awards	$	12,229

Schedule of key inputs used to estimate the fair value of awards

The following are key inputs in the Monte Carlo analysis for awards granted in 2019 and 2018:

	2019			2018
Measurement period (years)		2.87			2.87
Risk free interest rate		2.50	%		2.36	%
Dividend yield		0.00	%		0.00	%
Estimated fair value of market-based RSAs granted	$	80.74		$	103.31

Schedule of assumptions used to estimate the fair values of options granted

The following table presents the assumptions used to estimate the fair values of stock options granted in 2019 and 2018:

	2019			2018
Risk free interest rate		2.59	%		2.78	%
Expected volatility, using historical return volatility and implied volatility		32.50	%		32.50	%
Expected life (in years)		6.0			6.0
Dividend yield		0.00	%		0.00	%
Estimated fair value of stock options granted	$	21.16		$	27.44

Performance-based conditions | Restricted Stock Awards

Share-Based Compensation

Schedule of the range of payouts and the related expense for RSAs with performance-based conditions

The following table shows the range of payouts and the related expense for our outstanding RSAs with performance-based conditions, in thousands:

			Payout Ranges and Related Expense
RSAs with Performance-Based Conditions	Grant Date Fair Value		0%		25%		100%		200%
February 21, 2017	$	1,839	$	—	$	460	$	1,839	$	3,678
February 19, 2018	$	2,082	$	—	$	521	$	2,082	$	4,164
February 18, 2019	$	2,510	$	—	$	628	$	2,510	$	5,020

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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - USD ($) $ in Thousands	9 Months Ended
	Sep. 30, 2019	Sep. 30, 2018
Net Cash Provided by (Used in) Operating Activities:
Net income	$ 145,011	$ 96,198
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	39,005	27,133
Share-based compensation	11,411	8,244
Loss on sale or abandonment of property and equipment	885	764
Amortization of debt issuance costs	1,169	812
Change in fair value of contingent consideration	(119)	(373)
Provision for bad debt expense	5,697	3,003
Loss from inventory obsolescence	1,794	1,375
Deferred income taxes, net	(381)	(708)
Change in certain assets and liabilities
Receivables, net	(51,585)	(46,993)
Inventories, net	20,637	(15,333)
Prepaid expenses and other current assets	10,003	(5,560)
Accounts payable	(12,529)	17,768
Accrued liabilities	10,758	10,304
Other, net	1,023	(601)
Net cash provided by operating activities	182,779	96,033
Cash Flows Provided by (Used in) Investing Activities:
Purchases of property and equipment	(34,100)	(42,379)
Acquisition of businesses, net of cash acquired of $15,756 in 2018	(6,452)	(500,666)
Proceeds from sale of property and equipment	2,239	502
Other, net	25	31
Net cash used in investing activities	(38,288)	(542,512)
Cash Flows Provided by (Used in) Financing Activities:
Proceeds from issuance of long-term debt	9,998	520,104
Repayment of long-term debt	(19,424)	(13,097)
Payment of debt issuance costs		(7,819)
Proceeds from revolving credit facility		90,000
Repayment of revolving credit facility		(90,000)
Taxes withheld and paid on employees' equity awards	(11,135)	(5,433)
Repurchase of shares of common stock	(52,177)	(9,493)
Payment of contingent consideration	(1,091)	(841)
Net cash (used in) provided by financing activities	(73,829)	483,421
Cash and Cash Equivalents
Increase for the period	70,662	36,942
Beginning of period	100,929	56,521
End of period	171,591	93,463
Supplemental disclosure of noncash activities:
Leased assets obtained in exchange for new operating lease liabilities	120,726
Accruals for property and equipment	$ 102	$ 546

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Document and Entity Information - shares	9 Months Ended
	Sep. 30, 2019	Oct. 25, 2019
Document and Entity Information
Entity Registrant Name	TopBuild Corp
Entity Central Index Key	0001633931
Document Type	10-Q
Document Quarterly Report	true
Document Period End Date	Sep. 30, 2019
Document Transition Report	false
Entity File Number	1-36870
Entity Incorporation, State or Country Code	DE
Entity Tax Identification Number	47-3096382
Entity Address, Address Line One	475 North Williamson Boulevard
Entity Address, City or Town	Daytona Beach
Entity Address, State or Province	FL
Entity Address, Postal Zip Code	32114
City Area Code	386
Local Phone Number	304-2200
Title of 12(b) Security	Common stock, par value $0.01 per share
Trading Symbol	BLD
Security Exchange Name	NYSE
Amendment Flag	false
Current Fiscal Year End Date	--12-31
Entity Current Reporting Status	Yes
Entity Interactive Data Current	Yes
Entity Filer Category	Large Accelerated Filer
Entity Common Stock, Shares Outstanding		33,947,722
Document Fiscal Year Focus	2019
Document Fiscal Period Focus	Q3
Entity Small Business	false
Entity Emerging Growth Company	false
Entity Shell Company	false

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Accrued Liabilities (Tables)

9 Months Ended

Sep. 30, 2019

Accrued Liabilities

Schedule of components of accrued liabilities

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

	As of
	September 30,		December 31,
	2019		2018
Accrued liabilities:
Salaries, wages, and commissions	$	34,205	$	34,085
Insurance liabilities		25,483		25,212
Deferred revenue		16,685		19,963
Interest payable on long-term debt		9,593		3,951
Other		26,320		21,025
Total accrued liabilities	$	112,286	$	104,236

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Basis of Presentation

9 Months Ended

Sep. 30, 2019

Basis of Presentation

Basis of Presentation

1.  BASIS OF PRESENTATION

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

In our opinion, the accompanying unaudited condensed consolidated financial statements contain all adjustments, of a normal recurring nature, necessary to state fairly our financial position as of September 30, 2019, our results of operations for the three and nine months ended September 30, 2019 and 2018, and cash flows for the nine months ended September 30, 2019 and 2018.  The condensed consolidated balance sheet at December 31, 2018, was derived from our audited financial statements, but does not include all disclosures required by GAAP.

These condensed consolidated financial statements and related notes should be read in conjunction with the audited Consolidated Financial Statements included in the Company’s Annual Report for the year ended December 31, 2018.

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Accounting Policies - ASC 842, Leases (Details) - USD ($) $ in Thousands	Sep. 30, 2019	Jan. 01, 2019
Recently Adopted Accounting Pronouncements
Right of use assets	$ 89,178
Lease liabilities	$ 92,222
Accounting Standards Update 2016-02
Recently Adopted Accounting Pronouncements
Cumulative adjustment to retained earnings on adoption of new accounting principle		$ 0
Accounting Standards Update 2016-02 | Restatement Adjustment
Recently Adopted Accounting Pronouncements
Right of use assets		99,100
Lease liabilities		$ 101,600

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Income Taxes

9 Months Ended

Sep. 30, 2019

Income Taxes

Income Taxes

8.  INCOME TAXES    

Our effective tax rates were 23.2 percent and 22.0 percent for the three and nine months ended September 30, 2019, respectively. The effective tax rates for the three and nine months ended September 30, 2018, were 25.2 percent and 23.1 percent, respectively. The 2019 rates are lower due to the impact of discrete benefits related to share-based compensation and a favorable return to accrual adjustment when compared to prior year, partially offset by the impact of state tax rate changes.

A tax benefit of $1.3 million and $5.1 million related to share-based compensation was recognized in our Condensed Consolidated Statements of Operations as a discrete item in income tax expense for the three and nine months ended September 30, 2019, respectively.

At September 30, 2019, the net deferred tax liability of $161.7 million consisted of net long-term deferred tax assets of $11.8 million and net long-term deferred tax liabilities of $173.5 million. The change in the net deferred tax liability was primarily related to purchase accounting adjustments in connection with the acquisition of USI and related tax elections and a return to accrual adjustment for 2018 tax returns filed in 2019, partially offset by state tax rate changes.

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Long-Term Debt

9 Months Ended

Sep. 30, 2019

Long-Term Debt

Long-Term Debt

4. LONG-TERM DEBT

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

	As of
	September 30,		December 31,
Principal debt balances:	2019		2018
Senior Notes	$	400,000	$	400,000
Term loan		312,188		327,500
Equipment notes		30,341		24,455
Unamortized debt issuance costs		(7,312)		(8,481)
Total debt, net of unamortized debt issuance costs		735,217		743,474
Less: current portion of long-term debt		33,262		26,852
Total long-term debt	$	701,955	$	716,622

The following table sets forth our remaining principal payments for our outstanding debt balances as of September 30, 2019, in thousands:

	Payments Due by Period
	2019		2020		2021		2022		2023		Thereafter		Total
Senior Notes	$	—	$	—	$	—	$	—	$	—	$	400,000	$	400,000
Term loan		6,563		26,250		30,625		248,750		—		—		312,188
Equipment notes		1,728		7,082		7,366		7,661		5,345		1,159		30,341
Total	$	8,291	$	33,332	$	37,991	$	256,411	$	5,345	$	401,159	$	742,529

Amended Credit Agreement and Senior Secured Term Loan Facility

On March 28, 2018, the Company executed an amendment to its credit agreement, which primarily facilitated the acquisition of USI by (i) extending until August 29, 2018, the period during which the Company could access the $100.0 million delayed draw term loan feature and (ii) providing that the Company could issue up to $500.0 million of Senior Notes in connection with its acquisition of USI.  On May 1, 2018, the Company closed on its acquisition of USI.  The acquisition was funded through net proceeds from the issuance of our Senior Notes on April 25, 2018 together with the net proceeds from the $100.0 million delayed draw term loan commitment accessed on May 1, 2018 under the Company’s Amended Credit Agreement.  These funds were also used for the payment of related fees and expenses, as well as for general corporate purposes.

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

Senior secured term loan facility (original borrowing) (a)	$	250,000
Additional delayed draw term loan (b)	$	100,000
Additional term loan and/or revolver capacity available under incremental facility (c)	$	200,000
Revolving Facility	$	250,000
Sublimit for issuance of letters of credit under Revolving Facility (d)	$	100,000
Sublimit for swingline loans under Revolving Facility (d)	$	20,000
Interest rate as of September 30, 2019		3.36	%
Scheduled maturity date		5/05/2022

(a) The Amended Credit Agreement provides for a term loan limit of $350.0 million; $250.0 million was drawn on May 5, 2017.

(b) On May 1, 2018, the net proceeds from the $100.0 million delayed draw term loan were used to partially fund the USI acquisition.

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

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

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

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

● A LIBOR rate determined by reference to the costs of funds for deposits in U.S. dollars for the interest period relevant to such borrowings.

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

Revolving Facility

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

	As of
	September 30,		December 31,
	2019		2018
Revolving Facility	$	250,000	$	250,000
Less: standby letters of credit		(61,382)		(59,288)
Availability under Revolving Facility	$	188,618	$	190,712

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

Senior Notes

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

Equipment Notes

During 2018, the Company executed $26.6 million of equipment notes for the purpose of financing the purchase of vehicles and equipment. During 2019, the company issued additional equipment notes for approximately $10.0 million in the nine months ended September 30, 2019. The Company’s equipment notes each have a five year maturity through 2024 and bear interest at fixed rates between 2.8% and 4.4%.

Covenant Compliance

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

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

The Amended Credit Agreement requires that we maintain a Net Leverage Ratio and minimum FCCR throughout the term of the agreement.  The following table sets forth the maximum Net Leverage Ratios and minimum FCCR required:

Quarter Ending	Maximum Net Leverage Ratio	Minimum FCCR
June 30, 2018 through September 30, 2018	3.75:1.00	1.25:1.00
December 31, 2018 through September 30, 2019	3.50:1.00	1.25:1.00
September 30, 2019 and each fiscal quarter end thereafter	3.25:1.00	1.25:1.00

The following table outlines the key financial covenants effective for the period covered by this Quarterly Report:

	As of September 30, 2019
Maximum Net Leverage Ratio	3.25:1.00
Minimum FCCR	1.25:1.00
Compliance as of period end	In Compliance

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Segment Information (Tables)

9 Months Ended

Sep. 30, 2019

Segment Information

Schedule of net sales and operating results by segment

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

	Three Months Ended September 30,
	2019		2018		2019		2018
	Net Sales				Operating Profit (b)
Our operations by segment were (a):
Installation	$	498,390	$	464,540	$	69,846	$	61,004
Distribution		220,947		212,948		23,406		19,229
Intercompany eliminations		(37,007)		(30,199)		(5,935)		(5,658)
Total	$	682,330	$	647,289		87,317		74,575
General corporate expense, net (c)						(6,872)		(8,358)
Operating profit, as reported						80,445		66,217
Other expense, net						(8,854)		(9,203)
Income before income taxes					$	71,591	$	57,014

	Nine Months Ended September 30,
	2019		2018		2019		2018
	Net Sales				Operating Profit (b)
Our operations by segment were (a):
Installation	$	1,430,800	$	1,223,357	$	189,568	$	139,969
Distribution		638,899		606,335		65,154		57,141
Intercompany eliminations		(107,928)		(84,990)		(18,013)		(15,382)
Total	$	1,961,771	$	1,744,702		236,709		181,728
General corporate expense, net (c)						(23,606)		(37,937)
Operating profit, as reported						213,103		143,791
Other expense, net						(27,228)		(18,734)
Income before income taxes					$	185,875	$	125,057

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

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

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

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Accounting Policies (Policies)

9 Months Ended

Sep. 30, 2019

Accounting Policies

Financial Statement Presentation

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

Business Combinations

Business Combinations.  The purchase price for business combinations is allocated to the estimated fair values of acquired tangible and intangible assets, including goodwill, and liabilities assumed.  These estimates include, but are not limited to, discount rates, projected future revenue growth, cost synergies and expected cash flows, customer attrition rates, useful lives and other prospective information.  Additionally, we recognize customer relationships, trademarks and trade names, and non-competition agreements as identifiable intangible assets, which are recorded at fair value as of the transaction date.  The fair value of these intangible assets is determined primarily using the income approach and using current industry information.  Goodwill is recorded when consideration transferred exceeds the fair value of identifiable assets and liabilities.  Measurement-period adjustments to assets acquired and liabilities assumed with a corresponding offset to goodwill are recorded in the period in which they occur, which may include up to one year from the acquisition date.  Contingent consideration is recorded at fair value at the acquisition date.

Share-based Compensation

Share-based Compensation.  Our share-based compensation program currently consists of RSAs and stock options.  Share-based compensation expense is reported in selling, general, and administrative expense.  We do not capitalize any compensation cost related to share-based compensation awards.  The income tax benefits and deficiencies associated with share-based awards are reported as a component of income tax expense.  Excess tax benefits and deficiencies are included in net cash provided by (used in) operating activities while shares withheld for tax-withholding are reported in financing activities under the caption “Taxes withheld and paid on employees’ equity awards” in our condensed consolidated statements of cash flows.  Award forfeitures are accounted for in the period they occur.  

The following table details our award types and accounting policies:

Award Type:	Fair Value Determination	Vesting	Expense Recognition‡	Expense Measurement
Restricted Share Awards
Service Condition	Closing stock price on date of grant	Ratably; 3 or 5 years	Straight-line	Fair value at grant date
Performance Condition	Closing stock price on date of grant	Cliff; 3 years	Straight-line; Adjusted based on meeting or exceeding performance targets	Evaluated quarterly; 0 - 200% of fair value at grant date depending on performance
Market Condition	Monte-Carlo Simulation	Cliff; 3 years	Straight-line; Recognized even if condition is not met	Fair value at grant date
Stock Options†	Black-Scholes Options Pricing Model	Ratably; 3 or 5 years	Straight-line	Fair value at grant date

†Stock options expire no later than 10 years after the grant date.

‡Expense is reversed if award is forfeited prior to vesting.

Revenue Recognition

Revenue Recognition

Revenue is disaggregated between our Installation and Distribution segments. A reconciliation of disaggregated revenue by segment is included in Note 6 – Segment Information.

We recognize revenue for our Installation segment using the percentage of completion method of accounting with respect to each particular order within a given customer’s contract, based on the amount of material installed at that customer’s location and the associated labor costs, as compared to the total expected cost for the particular order. Revenue is recognized over time as the customer is able to receive and utilize the benefits provided by our services. Each contract contains one or more individual orders, which are based on services delivered. When a contract modification is made, typically the remaining goods or services are considered distinct and we recognize revenue for the modification as a separate performance obligation. When insulation and installation services are bundled in a contract, we combine these items into one performance obligation as the overall promise is to transfer the combined item.

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

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

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

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

	Included in Line Item on	As of
	Condensed Consolidated	September 30,		December 31,
	Balance Sheets	2019		2018
Contract Assets:
Receivables, unbilled	Receivables, net	$	62,072	$	61,339
Contract Liabilities:
Deferred revenue	Accrued liabilities	$	16,685	$	19,963

Our contract liabilities are normally recognized to net sales in the immediately subsequent reporting period due to the generally short-term nature of our contracts with customers.

Recently Adopted and Issued Accounting Pronouncements

Recently Adopted Accounting Pronouncements:

Leases

In February 2016 the FASB issued ASU 2016-02, “Leases.”  This standard requires a lessee to recognize certain leases on its balance sheet.  Effective January 1, 2019, we adopted ASU 2016-02 using the modified retrospective transition method with the optional transition relief provided in targeted improvements ASU 2018-11, which allows the new standard to be applied in financial year 2019.  Adoption of the new standard resulted in the recognition of ROU assets and lease liabilities of $99.1 million and $101.6 million, respectively, as of January 1, 2019 on our unaudited condensed consolidated balance sheet.  There was no cumulative adjustment required to be recorded to our beginning retained earnings balance.  Adoption of this standard did not materially impact our results of operations or cash flows for any periods presented.

We elected certain practical expedients allowed under ASC 842 – Leases. As such, we did not reassess whether any existing contracts are or contain leases, the lease classification of existing leases, or the initial direct costs for any existing leases.  In addition, we elected by class of underlying asset to not separate fixed non-lease components from the lease component. Further, for all leases with an initial term of 12 months or less, we elected not to record any right of use asset or lease liability.  We declined the option to use hindsight in determining lease term, assessing likelihood that a lease purchase option will be exercised or in assessing impairment of right of use asset for all classes of assets.  To initially measure our lease liability, we used our IBR at January 1, 2019 based on the remaining lease term for all existing leases.  See Note 7 – Leases for additional information.

Recently Issued Accounting Pronouncements Not Yet Adopted:

In June 2016 the FASB issued ASU 2016-13, “Financial Instruments - Credit Losses”.  This guidance introduces a current expected credit loss (CECL) model for the recognition of impairment losses on financial assets, including trade receivables.  The CECL model replaces current GAAP’s incurred loss model.  Under CECL, companies will record an allowance through current earnings for the expected credit loss for the life of the financial asset upon initial recognition of the financial asset.  This update is effective for us at the beginning of 2020 with early adoption permitted at the beginning of 2019. We plan to adopt this standard on January 1, 2020 with a cumulative adjustment to our beginning retained earnings balance. We have begun our initial evaluation of financial assets subject to this guidance and are developing a new accounting policy for CECL recognition. We are still determining the impact to our financial position upon adoption.

In January 2017 the FASB issued ASU 2017-04, “Simplifying the Test for Goodwill Impairment.”  The new standard simplifies the subsequent measurement of goodwill by eliminating the second step of the goodwill impairment test.  This update is effective for us beginning January 1, 2020.  Early adoption is permitted, and the new standard will be applied on a prospective basis.  We plan to adopt this standard on January 1, 2020, and we do not anticipate that the adoption of this standard will have a material impact on our financial position and results of operations.

In August 2018 the FASB issued ASU 2018-13, “Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement.”  The new standard modifies the disclosure requirements on fair value measurements in Topic 820, Fair Value Measurement, including adjustments to Level 3 fair value measurement disclosures as well as the removal of disclosures around Level 1 and Level 2 transfers. This update is effective for us beginning January 1, 2020 with early adoption permitted. The amendments to the guidance will be applied on a prospective or retrospective basis, in accordance with the requirements of this standard. We plan to adopt this standard on January 1, 2020, and we do not anticipate that the adoption of this standard will have a material impact on our financial position and results of operations.

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Business Combinations

9 Months Ended

Sep. 30, 2019

Business Combinations

Business Combinations

12. BUSINESS COMBINATIONS

As part of our strategy to supplement our organic growth and expand our access to additional markets and products, we completed three acquisitions during 2018 and one acquisition to date in 2019.  Each acquisition was accounted for as a business combination under ASC 805, “Business Combinations.” There were no acquisition related costs for the three months ended September 30, 2019. Acquisition related costs for the nine months ended September 30, 2019, were $0.1 million.  Acquisition related costs for the three and nine months ended September 30, 2018, were $0.6 million and $13.9 million, respectively.  Acquisition costs are included in selling, general, and administrative expense in our condensed consolidated statements of operations.

Acquisitions

On January 10, 2018, we acquired ADO, a distributor of insulation accessories, located in Plymouth, Minnesota.  The purchase price of approximately $23.0 million was funded by cash on hand of $22.2 million and contingent consideration of $0.8 million.

On January 18, 2018, we acquired substantially all of the assets of Santa Rosa, a residential and commercial insulation company located in Miami, Florida.  The purchase price of approximately $5.8 million was funded by cash on hand of $5.6 million and contingent consideration of $0.2 million.

On May 1, 2018, we acquired USI, a leading distributor and installer of insulation in both residential and commercial construction markets.  Our payment of $486.5 million, which included the purchase price of $475.0 million and adjustments for cash and working capital, was funded through net proceeds from the issuance on April 25, 2018, of the Senior Notes together with the net proceeds from the $100.0 million delayed draw term loan commitment under our Amended Credit Agreement.  For additional information see Note 4 – Long-Term Debt.

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

Revenue and net income since the respective 2018 acquisition dates included in our condensed consolidated statements of operations were as follows, in thousands:

	Three Months Ended September 30, 2019				Nine Months Ended September 30, 2019
	Net Sales		Net Income		Net Sales		Net Income
ADO		7,181		58		20,057		129
Santa Rosa		2,377		338		6,919		939
USI		96,368		8,327		284,757		26,223
	$	105,926	$	8,723	$	311,733	$	27,291

Pro Forma Results

The following unaudited pro forma information has been prepared as if the 2018 acquisitions described above had taken place on January 1, 2017. The unaudited pro forma information is not necessarily indicative of the results that we would have achieved had the transactions actually taken place on January 1, 2017.  Further, the pro forma information does not purport to be indicative of future financial operating results.  The pro forma results for the three and nine months ended September 30, 2019 do not include any adjustments from our actual results as all 2018 acquisitions were wholly-owned for the entire period.  Our pro forma results are presented below, in thousands:

	Unaudited Pro Forma for the
	Nine Months Ended September 30,
	2019			2018
Net sales	$	1,961,771	$	1,878,179
Net income	$	145,011	$	105,410

The following table details the additional expense included in the unaudited pro forma net income as if the 2018 acquisitions described above had taken place on January 1, 2017.  Our pro forma results are presented below, in thousands:

	Unaudited Pro Forma for the
	Nine Months Ended September 30,
	2019		2018
Amortization of intangible assets	$	—	$	5,039
Income tax expense (using 26.5% and 27.0% effective tax rate in 2019 and 2018, respectively)	$	—	$	3,407

Purchase Price Allocations

The estimated fair values of the assets acquired and liabilities assumed for the 2018 acquisitions, as well as the fair value of consideration transferred, are presented below as of September 30, 2019, in thousands:

	2018 Acquisitions
	Completed During the Year Ended December 31, 2018
	ADO		Santa Rosa		USI		Total
Estimated fair values:
Cash	$	939	$	—	$	14,817	$	15,756
Accounts receivable		3,434		1,433		61,445		66,312
Inventories		2,337		104		14,029		16,470
Prepaid and other assets		135		7		3,439		3,581
Property and equipment		951		522		33,126		34,599
Intangible assets		14,090		1,850		165,400		181,340
Goodwill		2,631		3,014		281,364		287,009
Accounts payable		(908)		(1,099)		(17,927)		(19,934)
Accrued liabilities		(609)		—		(34,686)		(35,295)
Deferred tax liability		—		—		(34,469)		(34,469)
Net assets acquired	$	23,000	$	5,831	$	486,538	$	515,369

	2018 Acquisitions
	Completed During the Year Ended December 31, 2018
	ADO		Santa Rosa		USI		Total
Fair value of consideration transferred:
Cash	$	22,172	$	5,831	$	486,538	$	514,541
Deferred consideration		—		—		—		—
Contingent consideration		828		—		—		828
Total consideration transferred	$	23,000	$	5,831	$	486,538	$	515,369

Estimates of acquired intangible assets related to the 2018 acquisitions are as follows, as of September 30, 2019, dollars in thousands:

	Estimated Fair Value		Weighted Average Estimated Useful Life (Years)
2018 Acquisitions:
Customer relationships	$	168,820		12
Trademarks and trade names		11,260		9
Non-competition agreements		1,260		5
Total intangible assets for 2018 acquisitions	$	181,340		11

As third party or internal valuations are finalized, certain tax aspects of the foregoing transactions are completed, and customer post-closing reviews are concluded, adjustments may be made to the fair value of assets acquired, and in some cases total purchase price, through the end of each measurement period, generally one year following the applicable acquisition date.  Various insignificant adjustments to the fair value of assets acquired, and in some cases total purchase price, have been made to certain business combinations since the respective dates of acquisition.

Goodwill to be recognized in connection with these acquisitions is attributable to the synergies expected to be realized and improvements in the businesses after the acquisitions. Of the $287.0 million of goodwill recorded from the 2018 acquisitions, $33.2 million is expected to be deductible for income tax purposes.

Contingent Consideration

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

The acquisition of ADO included a contingent consideration arrangement that requires additional consideration to be paid by TopBuild to the sellers of ADO based on the achievement of certain EBITDA thresholds over a two-year period.  The range of the undiscounted amounts TopBuild may be required to pay under the contingent consideration agreement is between zero and $1.0 million.  The fair value of the contingent consideration recognized on the acquisition date of $0.8 million was estimated by applying the income approach using discounted cash flows.  That measure is based on significant Level 3 inputs not observable in the market.  The significant assumption includes a discount rate of 9.5%.  Changes in the fair value measurement each period reflect the passage of time as well as the impact of adjustments, if any, to the likelihood of achieving the specified targets.

The acquisition of Santa Rosa included a contingent consideration arrangement that required additional consideration to be paid by TopBuild based on the achievement of a gross revenue target for 2018. The range of undiscounted amounts TopBuild could be required to pay under the contingent consideration was between zero and $0.25 million, which also represents the fair value recognized on the acquisition date. In the first quarter of 2019, we paid $0.25 million in full and had no remaining contingent consideration obligation related to Santa Rosa as of March 31, 2019. 

Contingent consideration is recorded in the condensed consolidated balance sheets in accrued liabilities and other liabilities.  Adjustments to the fair value of contingent consideration are reflected in selling, general, and administrative expense in the condensed consolidated statements of operations and are included in the acquisition related costs above.

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

	EcoFoam		ADO		Santa Rosa
Date of Acquisition	February 27, 2017		January 10, 2018		January 18, 2018
Fair value of contingent consideration recognized at acquisition date	$	2,110	$	828	$	250
Contingent consideration at December 31, 2018	$	1,573	$	343	$	250
Additions		—		—		—
Change in fair value of contingent consideration during the nine months ended September 30, 2019		71		(220)		—
Payment of contingent consideration during the nine months ended September 30, 2019		(841)		—		(250)
Liability balance for contingent consideration at September 30, 2019	$	803	$	123	$	—

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Closure Costs (Details) - USD ($) $ in Thousands	9 Months Ended	12 Months Ended
	Sep. 30, 2019	Dec. 31, 2018
Closure Costs
Closure costs, expected amount	$ 6,900
Closure costs	200	$ 6,700
USI
Closure Costs
Closure Costs Liability, Beginning of Period	3,366
Closure Costs Incurred for the Period	239
Cash Payments for the Period	(3,304)
Non-cash adjustments for the period	110
Closure Costs Liability, Ending Balance	411	3,366
USI | Severance
Closure Costs
Closure Costs Liability, Beginning of Period	3,065
Closure Costs Incurred for the Period	239
Cash Payments for the Period	(3,155)
Non-cash adjustments for the period	(119)
Closure Costs Liability, Ending Balance	30	3,065
USI | Lease abandonment
Closure Costs
Closure Costs Liability, Beginning of Period	301
Cash Payments for the Period	(149)
Non-cash adjustments for the period	229
Closure Costs Liability, Ending Balance	$ 381	$ 301

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Goodwill and Other Intangibles - Other intangible assets (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2019	Sep. 30, 2018	Sep. 30, 2019	Sep. 30, 2018	Dec. 31, 2018
Other intangible assets
Gross Definite-lived intangible assets	$ 220,882		$ 220,882		$ 218,882
Accumulated Amortization	(35,038)		(35,038)		(19,495)
Net definite-lived intangible assets	185,844		185,844		199,387
Other intangible assets, net	185,844		185,844		$ 199,387
Amortization expense	$ 5,197	$ 5,242	$ 15,543	$ 10,536

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Long-Term Debt - Other (Details) - USD ($) $ in Thousands	9 Months Ended
	Sep. 30, 2019	Dec. 31, 2018
Amended Credit Agreement
Debt covenants
Maximum Net Leverage Ratio	3.25
Minimum FCCR	1.25
Senior Notes | Event of Default Scenario | Amended Credit Agreement
Debt covenants
Minimum percentage of principal of debt holders to declare debt immediately due and payable	25.00%
Revolving Facility
Long-Term Debt
Revolving Facility	$ 250,000	$ 250,000
Less: standby letters of credit	(61,382)	(59,288)
Availability under Revolving Facility	188,618	$ 190,712
Revolving Facility | Amended Credit Agreement
Long-Term Debt
Revolving Facility	$ 250,000
Debt Covenants Term Period One | Amended Credit Agreement
Debt covenants
Maximum Net Leverage Ratio	3.75
Minimum FCCR	1.25
Debt Covenants Term Period Two | Amended Credit Agreement
Debt covenants
Maximum Net Leverage Ratio	3.50
Minimum FCCR	1.25
Debt Covenants Term Period Three | Amended Credit Agreement
Debt covenants
Maximum Net Leverage Ratio	3.25
Minimum FCCR	1.25

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Leases - Future minimum lease payments (Details) $ in Thousands	Sep. 30, 2019 USD ($)
Future minimum lease payments under non-cancellable operating leases:
2019	$ 10,933
2020	37,598
2021	24,367
2022	14,790
2023	6,956
2024 & Thereafter	8,284
Total future minimum lease payments	102,928
Less: imputed interest	(10,706)
Lease liability at September 30, 2019	$ 92,222

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Accounting Policies (Tables)

9 Months Ended

Sep. 30, 2019

Accounting Policies

Summary of award types and accounting policies

The following table details our award types and accounting policies:

Award Type:	Fair Value Determination	Vesting	Expense Recognition‡	Expense Measurement
Restricted Share Awards
Service Condition	Closing stock price on date of grant	Ratably; 3 or 5 years	Straight-line	Fair value at grant date
Performance Condition	Closing stock price on date of grant	Cliff; 3 years	Straight-line; Adjusted based on meeting or exceeding performance targets	Evaluated quarterly; 0 - 200% of fair value at grant date depending on performance
Market Condition	Monte-Carlo Simulation	Cliff; 3 years	Straight-line; Recognized even if condition is not met	Fair value at grant date
Stock Options†	Black-Scholes Options Pricing Model	Ratably; 3 or 5 years	Straight-line	Fair value at grant date

†Stock options expire no later than 10 years after the grant date.

‡Expense is reversed if award is forfeited prior to vesting.

Schedule of opening and closing balances of contract assets and contract liabilities with customers

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

	Included in Line Item on	As of
	Condensed Consolidated	September 30,		December 31,
	Balance Sheets	2019		2018
Contract Assets:
Receivables, unbilled	Receivables, net	$	62,072	$	61,339
Contract Liabilities:
Deferred revenue	Accrued liabilities	$	16,685	$	19,963

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Closure Costs

9 Months Ended

Sep. 30, 2019

Closure Costs

Closure Costs

13.  CLOSURE COSTS

We generally recognize expenses related to closures and position eliminations at the time of announcement or notification.  Such costs include termination and other severance benefits, lease abandonment costs, and other transition costs.  Closure costs are reflected in our condensed consolidated statements of operations as selling, general, and administrative expense.  In our condensed consolidated balance sheets, accrued severance closure costs are reflected as accrued liabilities and accrued lease abandonment costs are reflected as short-term and long-term lease liabilities.

In connection with the acquisition of USI, management performed an evaluation of the resources necessary to effectively operate the acquired business.  During the second quarter of 2018, management committed to a plan to close the USI corporate office in St. Paul, Minnesota, and consolidate certain administrative functions to our Daytona Beach, Florida, Branch Support Center.  As a result, the Company incurred approximately $6.9 million of closure costs in connection with this activity of which $6.7 million was incurred during the year ended December 31, 2018 and $0.2 million was incurred during the first quarter of 2019, which completed the anticipated costs of the program.  Closure costs pertaining to the USI acquisition are primarily included in general corporate expenses for segment reporting purposes.

The following table details our total estimated closure costs, by cost type, pertaining to the above closure and transition related to the USI acquisition (in thousands):

Segment / Cost Type	Closure Costs Liability at December 31, 2018		Closure Costs Incurred for the Nine Months Ended September 30, 2019		Cash Payments for the Nine Months Ended September 30, 2019		Non-Cash Adjustments for the Nine Months Ended September 30, 2019		Closure Costs Liability at September 30, 2019
Corporate:
Severance	$	3,065	$	239	$	(3,155)	$	(119)	$	30
Lease abandonment		301		—		(149)		229		381
Total Corporate:	$	3,366	$	239	$	(3,304)	$	110	$	411

The remaining accrued severance closure costs will be paid by the end of 2019. Non-cash adjustments in the table above relate to true-up of estimates to actual amounts.

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Leases (Tables)

9 Months Ended

Sep. 30, 2019

Leases

Schedule of components of lease expense

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

	Three Months Ended September 30,		Nine Months Ended September 30,
	2019		2019
Operating lease cost	$	10,959	$	34,396
Short-term lease cost		3,381		9,391
Variable lease cost		1,434		4,201
Sublease income		(153)		(461)
Net lease cost	$	15,621	$	47,527

Schedule of future minimum lease payments

Future minimum lease payments under non-cancellable operating leases as of September 30, 2019 were as follows, in thousands:

Payments due by Period
2019	$	10,933
2020		37,598
2021		24,367
2022		14,790
2023		6,956
2024 & Thereafter		8,284
Total future minimum lease payments		102,928
Less: imputed interest		(10,706)
Lease liability at September 30, 2019	$	92,222

Schedule of cash flow information

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

Nine Months Ended September 30,	2019
Cash paid for amounts included in the measurement of lease liabilities	$	(33,914)

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Accrued Liabilities (Details) - USD ($) $ in Thousands	Sep. 30, 2019	Dec. 31, 2018
Accrued Liabilities
Salaries, wages, and commissions	$ 34,205	$ 34,085
Insurance liabilities	25,483	25,212
Deferred revenue	16,685	19,963
Interest payable on long-term debt	9,593	3,951
Other	26,320	21,025
Total accrued liabilities	$ 112,286	$ 104,236

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Leases - Components of lease expense (Details) - USD ($) $ in Thousands	3 Months Ended	9 Months Ended
	Sep. 30, 2019	Sep. 30, 2019
Components of lease expense:
Operating lease cost	$ 10,959	$ 34,396
Short-term lease cost	3,381	9,391
Variable lease cost	1,434	4,201
Sublease income	(153)	(461)
Net lease cost	$ 15,621	$ 47,527

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Goodwill and Other Intangibles - Goodwill (Details) $ in Thousands	9 Months Ended
	Sep. 30, 2019 USD ($) item	Dec. 31, 2018 USD ($)
Changes in the carrying amount of goodwill
Number of reporting units | item	2
Gross Goodwill, at beginning of period	$ 2,126,037
Additions	3,902
Gross Goodwill, at end of period	2,129,939
Accumulated Impairment Losses	(762,021)
Net Goodwill	1,367,918	$ 1,364,016
USI
Changes in the carrying amount of goodwill
Net Goodwill	281,364
Installation
Changes in the carrying amount of goodwill
Gross Goodwill, at beginning of period	1,679,654
Additions	3,935
Gross Goodwill, at end of period	1,683,589
Accumulated Impairment Losses	(762,021)
Net Goodwill	921,568
Distribution
Changes in the carrying amount of goodwill
Gross Goodwill, at beginning of period	446,383
Additions	(33)
Gross Goodwill, at end of period	446,350
Net Goodwill	$ 446,350

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Long-Term Debt - Key Terms of Credit Agreement (Details) - USD ($) $ in Thousands		9 Months Ended	12 Months Ended
	May 01, 2018	Sep. 30, 2019	Dec. 31, 2018	Mar. 28, 2018	May 05, 2017
Long-Term Debt
Amount outstanding		$ 742,529
Term Loan Facility
Long-Term Debt
Amount outstanding		312,188	$ 327,500
Senior Notes
Long-Term Debt
Amount outstanding		400,000	400,000
Equipment Notes
Long-Term Debt
Amount outstanding		30,341	24,455
Equipment notes issued		$ 10,000	26,600
Debt term		5 years
Equipment Notes | Minimum
Long-Term Debt
Interest rate		2.80%
Equipment Notes | Maximum
Long-Term Debt
Interest rate		4.40%
Revolving Facility
Long-Term Debt
Availability		$ 250,000	$ 250,000
Amended Credit Agreement
Long-Term Debt
Maximum amount of senior notes that may be issued under the credit agreement				$ 500,000
Additional term loan and/or revolver capacity available under incremental facility		$ 200,000
Scheduled maturity date		May 05, 2022
Amended Credit Agreement | Minimum
Long-Term Debt
Commitment fee (as a percent)		0.15%
Amended Credit Agreement | Maximum
Long-Term Debt
Commitment fee (as a percent)		0.275%
Amended Credit Agreement | Term Loan Facility
Long-Term Debt
Proceeds from delayed-draw term loan	$ 100,000
Availability		$ 250,000
Additional delayed draw term loan		100,000		$ 100,000
Maximum borrowing capacity including delayed draw feature		$ 350,000
Amount outstanding					$ 250,000
Amended Credit Agreement | Senior Notes
Long-Term Debt
Interest rate		5.625%
Amended Credit Agreement | Senior Notes | Change in Control Scenario
Long-Term Debt
Redemption price as a percentage of principal		101.00%
Amended Credit Agreement | Revolving Facility
Long-Term Debt
Availability		$ 250,000
Sublimit for issuance of letters of credit under Revolving Facility*		100,000
Sublimit for swingline loans under Revolving Facility*		$ 20,000
Interest rate		3.36%
Amended Credit Agreement | Base Rate Borrowings | Minimum
Long-Term Debt
Applicable margin based on total leverage ratio		0.00%
Amended Credit Agreement | Base Rate Borrowings | Maximum
Long-Term Debt
Applicable margin based on total leverage ratio		1.50%
Amended Credit Agreement | LIBOR Rate Borrowings | Minimum
Long-Term Debt
Applicable margin based on total leverage ratio		1.00%
Amended Credit Agreement | LIBOR Rate Borrowings | Maximum
Long-Term Debt
Applicable margin based on total leverage ratio		2.50%
Federal Funds Rate | Amended Credit Agreement | Base Rate Borrowings
Long-Term Debt
Basis spread		0.50%
LIBOR | Amended Credit Agreement | Base Rate Borrowings
Long-Term Debt
Basis spread		1.00%
Maturity of the reference rate		1 month

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Share-Based Compensation - Activity (Details) - USD ($)				9 Months Ended
	Feb. 18, 2019	Feb. 19, 2018	Feb. 21, 2017	Sep. 30, 2019	Sep. 30, 2018	Dec. 31, 2018
Unrecognized share-based compensation expense
Restricted stock awards, Unrecognized compensation expense				$ 10,319,000
Restricted stock awards, Weighted average remaining vesting period				1 year 2 months 12 days
Stock options, Unrecognized compensation expense				$ 1,910,000
Stock options, Weighted average remaining vesting period				1 year
Total unrecognized compensation expense related to unvested awards				$ 12,229,000
Restricted Stock Awards
Restricted Stock Awards, Number of Shares
Balance at beginning of period (in shares)				499,200
Granted (in shares)				249,100
Converted/Exercised (in shares)				(310,000.0)
Forfeited (in shares)				(20,600)
Balance at end of period (in shares)				417,700
Restricted Stock Awards, Weighted Average Grant Date Fair Value Per Share
Balance at beginning of period (in dollars per share)				$ 41.29
Granted (in dollars per share)				67.37
Converted/Exercised (in dollars per share)				30.99
Forfeited (in dollars per share)				58.32
Balance at end of period (in dollars per share)				$ 57.35
Assumptions used to estimate the fair values of the awards granted:
Measurement period (years)				2 years 10 months 13 days	2 years 10 months 13 days
Risk free interest rate (as a percent)				2.50%	2.36%
Dividend yield (as a percent)				0.00%	0.00%
Estimated fair value of awards granted (in dollars per share)				$ 80.74	$ 103.31
Stock Options
Stock Options, Number of Shares
Balance at beginning of period (in shares)				611,400
Granted (in shares)				103,500
Converted/Exercised (in shares)				(273,800)
Forfeited (in shares)				(9,700)
Expired (in shares)				(2,700)
Balance at end of period (in shares)				428,700
Stock Options, Weighted Average Grant Date Fair Value Per Share
Balance at beginning of period (in dollars per share)				$ 13.10
Granted (in dollars per share)				21.16
Converted/Exercised (in dollars per share)				10.87
Forfeited (in dollars per share)				$ 20.28
Expired (in dollars per share)				14.44
Balance at end of period (in dollars per share)				$ 16.30
Stock Options, Weighted Average Exercise Price Per Share
Balance at beginning of period (in dollars per share)				34.45
Granted (in dollars per share)				58.08
Converted/Exercised (in dollars per share)				28.14
Forfeited (in dollars per share)				54.62
Expired (in dollars per share)				38.39
Balance at end of period (in dollars per share)				$ 43.71
Stock options, additional disclosures
Aggregate intrinsic value				$ 22,603,300		$ 8,685,800
Converted/Exercised aggregate intrinsic value				$ 14,184,100
Exercisable, Number of shares				129,100
Exercisable, Weighted Average Grant Date Fair Value Per Share				$ 13.96
Exercisable Weighted Average Exercise Price Per Share				$ 36.94
Exercisable, Aggregate Intrinsic Value				$ 7,678,400
Weighted average remaining contractual term for vested stock options				6 years 10 months 24 days
Assumptions used to estimate the fair values of the awards granted:
Risk free interest rate (as a percent)				2.59%	2.78%
Expected volatility using historical return volatility and implied volatility (as a percent)				32.50%	32.50%
Expected life (in years)				6 years	6 years
Dividend yield (as a percent)				0.00%	0.00%
Estimated fair value of awards granted (in dollars per share)				$ 21.16	$ 27.44
Performance-based conditions | Restricted Stock Awards
Restricted stock awards, additional disclosures
Grant date fair value	$ 2,510,000	$ 2,082,000	$ 1,839,000
Performance-based conditions | Restricted Stock Awards | Payout Range-0%
Restricted stock awards, additional disclosures
Payout range (as a percent)	0.00%	0.00%	0.00%
Performance-based conditions | Restricted Stock Awards | Payout Range-25%
Restricted stock awards, additional disclosures
Payout range (as a percent)	25.00%	25.00%	25.00%
Related expenses	$ 628,000	$ 521,000	$ 460,000
Performance-based conditions | Restricted Stock Awards | Payout Range-100%
Restricted stock awards, additional disclosures
Payout range (as a percent)	100.00%	100.00%	100.00%
Related expenses	$ 2,510,000	$ 2,082,000	$ 1,839,000
Performance-based conditions | Restricted Stock Awards | Payout Range-200%
Restricted stock awards, additional disclosures
Payout range (as a percent)	200.00%	200.00%	200.00%
Related expenses	$ 5,020,000	$ 4,164,000	$ 3,678,000
Performance-based conditions | RSAs granted on February 22, 2016
Restricted stock awards, additional disclosures
Cumulative period of achievement				3 years
Cumulative achievement percentage				88.60%
Total compensation expense recognized over the performance period, net of forfeitures				$ 1,700,000

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Income Taxes (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2019	Sep. 30, 2018	Sep. 30, 2019	Sep. 30, 2018	Dec. 31, 2018
Income Taxes
Effective tax rate (as a percent)	23.20%	25.20%	22.00%	23.10%
Tax benefit related to share-based compensation	$ 1,304	$ 545	$ 5,110	$ 3,140
Net deferred tax liability	161,700		161,700
Net long-term deferred tax assets	11,758		11,758		$ 13,176
Net long-term deferred tax liabilities	$ 173,493		$ 173,493		$ 176,212

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Business Combinations - Intangibles (Details) - 2018 Acquisitions $ in Thousands	9 Months Ended
	Sep. 30, 2019 USD ($)
Estimates of acquired intangible assets
Estimated Fair Value	$ 181,340
Weighted Average Estimated Useful Life (Years)	11 years
Customer relationships
Estimates of acquired intangible assets
Estimated Fair Value	$ 168,820
Weighted Average Estimated Useful Life (Years)	12 years
Trademarks and trade names
Estimates of acquired intangible assets
Estimated Fair Value	$ 11,260
Weighted Average Estimated Useful Life (Years)	9 years
Non-Compete
Estimates of acquired intangible assets
Estimated Fair Value	$ 1,260
Weighted Average Estimated Useful Life (Years)	5 years

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CONDENSED CONSOLIDATED STATEMENTS OF EQUITY (Parenthetical) - $ / shares	3 Months Ended
	Sep. 30, 2019	Jun. 30, 2019	Mar. 31, 2019	Sep. 30, 2018	Jun. 30, 2018	Mar. 31, 2018
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
Common stock, par value (in dollars per share)	$ 0.01
Issuance of restricted share awards under long-term equity incentive plan (in shares)			112,270			79,010
Repurchase of shares pursuant to the settlement of ASR Agreement (in shares)			176,327			13,657
Repurchase of shares pursuant to Repurchase Program (in shares)	364,074	196,885	72,791	142,780
Number of shares withheld to pay taxes on employees' equity awards (in shares)	43,037	54,811	105,615	13,447	228	83,754

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Accounting Policies - Revenue Recognition (Details) - USD ($) $ in Thousands	9 Months Ended
	Sep. 30, 2019	Dec. 31, 2018
Revenue Recognition
Customer contract period	90 days
Contract Liabilities
Deferred revenue	$ 16,685	$ 19,963
Receivables, net
Contract Assets
Receivables, unbilled	62,072	61,339
Accrued liabilities
Contract Liabilities
Deferred revenue	$ 16,685	$ 19,963

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Income Per Share (Tables)

9 Months Ended

Sep. 30, 2019

Income Per Share

Schedule of basic and diluted income per share

Basic and diluted net income per share were computed as follows, in thousands, except share and per share amounts:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2019		2018		2019		2018
Net income - basic and diluted	$	54,976	$	42,658	$	145,011	$	96,198
Weighted average number of common shares outstanding - basic		33,790,857		35,091,388		33,977,464		35,084,694
Dilutive effect of common stock equivalents:
RSAs with service-based conditions		82,087		135,347		86,373		161,474
RSAs with market-based conditions		195,740		252,278		183,537		245,127
RSAs with performance-based conditions		82,750		23,875		63,329		7,958
Stock options		216,468		286,495		230,932		316,104
Weighted average number of common shares outstanding - diluted		34,367,902		35,789,383		34,541,635		35,815,357
Basic income per common share	$	1.63	$	1.22	$	4.27	$	2.74
Diluted income per common share	$	1.60	$	1.19	$	4.20	$	2.69

Summary of shares excluded from the calculation of diluted income per share because their effect would have been anti-dilutive

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

	Three Months Ended September 30,				Nine Months Ended September 30,
	2019		2018		2019		2018
Anti-dilutive common stock equivalents:
RSAs with service-based conditions		—		9,775		5,264		3,466
RSAs with market-based conditions		—		—		6,567		—
RSAs with performance-based conditions		—		—		—		—
Stock options		12,642		76,030		72,580		62,528
Total anti-dilutive common stock equivalents		12,642		85,805		84,411		65,994

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CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2019	Sep. 30, 2018	Sep. 30, 2019	Sep. 30, 2018
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Net sales	$ 682,330	$ 647,289	$ 1,961,771	$ 1,744,702
Cost of sales	502,999	485,424	1,451,822	1,326,777
Gross profit	179,331	161,865	509,949	417,925
Selling, general, and administrative expense	98,886	95,648	296,846	274,134
Operating profit	80,445	66,217	213,103	143,791
Other income (expense), net:
Interest expense	(9,507)	(9,381)	(28,740)	(19,026)
Other, net	653	178	1,512	292
Other expense, net	(8,854)	(9,203)	(27,228)	(18,734)
Income before income taxes	71,591	57,014	185,875	125,057
Income tax expense	(16,615)	(14,356)	(40,864)	(28,859)
Net income	$ 54,976	$ 42,658	$ 145,011	$ 96,198
Income per common share:
Basic (in dollars per share)	$ 1.63	$ 1.22	$ 4.27	$ 2.74
Diluted (in dollars per share)	$ 1.60	$ 1.19	$ 4.20	$ 2.69
Weighted average shares outstanding:
Basic (in shares)	33,790,857	35,091,388	33,977,464	35,084,694
Diluted (in shares)	34,367,902	35,789,383	34,541,635	35,815,357

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Closure Costs (Tables)

9 Months Ended

Sep. 30, 2019

Closure Costs Related to USI Acquisition

Closure Costs

Schedule of estimated closure costs by cost type

The following table details our total estimated closure costs, by cost type, pertaining to the above closure and transition related to the USI acquisition (in thousands):

Segment / Cost Type	Closure Costs Liability at December 31, 2018		Closure Costs Incurred for the Nine Months Ended September 30, 2019		Cash Payments for the Nine Months Ended September 30, 2019		Non-Cash Adjustments for the Nine Months Ended September 30, 2019		Closure Costs Liability at September 30, 2019
Corporate:
Severance	$	3,065	$	239	$	(3,155)	$	(119)	$	30
Lease abandonment		301		—		(149)		229		381
Total Corporate:	$	3,366	$	239	$	(3,304)	$	110	$	411

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Income Per Share

9 Months Ended

Sep. 30, 2019

Income Per Share

Income Per Share

9. INCOME PER SHARE

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

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

Basic and diluted net income per share were computed as follows, in thousands, except share and per share amounts:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2019		2018		2019		2018
Net income - basic and diluted	$	54,976	$	42,658	$	145,011	$	96,198
Weighted average number of common shares outstanding - basic		33,790,857		35,091,388		33,977,464		35,084,694
Dilutive effect of common stock equivalents:
RSAs with service-based conditions		82,087		135,347		86,373		161,474
RSAs with market-based conditions		195,740		252,278		183,537		245,127
RSAs with performance-based conditions		82,750		23,875		63,329		7,958
Stock options		216,468		286,495		230,932		316,104
Weighted average number of common shares outstanding - diluted		34,367,902		35,789,383		34,541,635		35,815,357
Basic income per common share	$	1.63	$	1.22	$	4.27	$	2.74
Diluted income per common share	$	1.60	$	1.19	$	4.20	$	2.69

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

	Three Months Ended September 30,				Nine Months Ended September 30,
	2019		2018		2019		2018
Anti-dilutive common stock equivalents:
RSAs with service-based conditions		—		9,775		5,264		3,466
RSAs with market-based conditions		—		—		6,567		—
RSAs with performance-based conditions		—		—		—		—
Stock options		12,642		76,030		72,580		62,528
Total anti-dilutive common stock equivalents		12,642		85,805		84,411		65,994

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Fair Value Measurements

9 Months Ended

Sep. 30, 2019

Fair Value Measurements

Fair Value Measurements

5.  FAIR VALUE MEASUREMENTS

Fair Value on Recurring Basis

The carrying values of cash and cash equivalents, receivables, net, and accounts payable are considered to be representative of their respective fair values due to the short-term nature of these instruments.  We measure our contingent consideration liabilities related to business combinations at fair value.  For more information see Note 12 –Business Combinations.

Fair Value on Non-Recurring Basis

Fair value measurements were applied to our long-term debt portfolio.  We believe the carrying value of our term loan approximates the fair market value primarily due to the fact that the non-performance risk of servicing our debt obligations, as reflected in our business and credit risk profile, has not materially changed since we assumed our debt obligations under the Amended Credit Agreement.  In addition, due to the floating-rate nature of our term loan, the market value is not subject to variability solely due to changes in the general level of interest rates as is the case with a fixed-rate debt obligation.  Based on active market trades of our Senior Notes close to September 30, 2019 (Level 1 fair value measurement), we estimate that the fair value of the Senior Notes is approximately $419.0 million compared to a gross carrying value of $400.0 million at September 30, 2019.

During all periods presented, there were no transfers between fair value hierarchical levels.