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