UNITED STATES

SECURITIES AND EXCHANGE

COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended March 31, 2020

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

For the transition period from                to               

Commission file number: 001-36870

TopBuild Corp.

(Exact name of Registrant as Specified in its Charter)

Delaware (State or Other Jurisdiction of Incorporation or
Organization) 47-3096382 (I.R.S. Employer
Identification No.)

475 North Williamson Boulevard Daytona Beach, Florida (Address of Principal Executive Offices) 32114 (Zip Code)

(386) 304-2200

(Registrant's telephone number, including area code)

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

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

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

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

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

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

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

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

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

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	24
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	29
Item 4.	Controls and Procedures	30
Part II.	Other Information
Item 1.	Legal Proceedings	31
Item 1A.	Risk Factors	31
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	31
Item 3.	Defaults upon Senior Securities	31
Item 4.	Mine Safety Disclosures	32
Item 5.	Other Information	32
Item 6.	Exhibits	32
Index to Exhibits		33
Signature		34

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

3

PART I – FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

TOPBUILD CORP.

CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)

(In thousands except share data)

	As of
	March 31,		December 31,
	2020		2019
ASSETS
Current assets:
Cash and cash equivalents	$	187,039	$	184,807
Receivables, net of an allowance for credit losses of $7,200 at March 31, 2020, and allowance for doubtful accounts of $4,854 at December 31, 2019		431,649		428,844
Inventories, net		152,721		149,078
Prepaid expenses and other current assets		10,918		17,098
Total current assets		782,327		779,827
Right of use assets		86,080		87,134
Property and equipment, net		185,575		178,080
Goodwill		1,379,831		1,367,918
Other intangible assets, net		182,229		181,122
Deferred tax assets, net		4,359		4,259
Other assets		11,439		5,623
Total assets	$	2,631,840	$	2,603,963
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable	$	305,614	$	307,970
Current portion of long-term debt		23,091		34,272
Accrued liabilities		107,327		98,418
Short-term lease liabilities		35,051		36,094
Total current liabilities		471,083		476,754
Long-term debt		699,750		697,955
Deferred tax liabilities, net		174,230		175,263
Long-term portion of insurance reserves		50,928		45,605
Long-term lease liabilities		54,025		54,010
Other liabilities		2,007		1,487
Total liabilities		1,452,023		1,451,074
Commitments and contingencies
Equity:
Preferred stock, $0.01 par value: 10,000,000 shares authorized; 0 shares issued and outstanding at March 31, 2020 and December 31, 2019		—		—
Common stock, $0.01 par value: 250,000,000 shares authorized; 38,982,600 shares issued and 33,326,284 outstanding at March 31, 2020, and 38,884,530 shares issued and 33,489,769 outstanding at December 31, 2019		389		388
Treasury stock, 5,656,316 shares at March 31, 2020, and 5,394,761 shares at December 31, 2019, at cost		(351,645)		(330,018)
Additional paid-in capital		850,665		849,657
Retained earnings		680,408		632,862
Total equity		1,179,817		1,152,889
Total liabilities and equity	$	2,631,840	$	2,603,963

See notes to our unaudited condensed consolidated financial statements.

4

TOPBUILD CORP.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

(In thousands except share and per common share data)

	Three Months Ended March 31,
	2020		2019
Net sales	$	653,228	$	619,330
Cost of sales		481,272		463,635
Gross profit		171,956		155,695
Selling, general, and administrative expense		101,967		99,077
Operating profit		69,989		56,618
Other income (expense), net:
Interest expense		(8,742)		(9,602)
Loss on extinguishment of debt		(233)		—
Other, net		472		333
Other expense, net		(8,503)		(9,269)
Income before income taxes		61,486		47,349
Income tax expense		(10,715)		(9,366)
Net income	$	50,771	$	37,983
Net income per common share:
Basic	$	1.53	$	1.11
Diluted	$	1.51	$	1.09
Weighted average shares outstanding:
Basic		33,168,453		34,169,315
Diluted		33,599,847		34,703,289

See notes to our unaudited condensed consolidated financial statements.

5

TOPBUILD CORP.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(In thousands)

	Three Months Ended March 31,
	2020		2019
Cash Flows Provided by (Used in) Operating Activities:
Net income	$	50,771	$	37,983
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		14,190		12,475
Share-based compensation		3,908		2,972
Loss on extinguishment of debt		233		—
Loss on sale or abandonment of property and equipment		383		487
Amortization of debt issuance costs		328		390
Provision for bad debt expense		1,670		1,676
Loss from inventory obsolescence		529		1,109
Deferred income taxes, net		(39)		95
Change in certain assets and liabilities
Receivables, net		(5,048)		(23,341)
Inventories, net		(3,964)		7,125
Prepaid expenses and other current assets		6,193		11,192
Accounts payable		(4,173)		(31,407)
Accrued liabilities		9,981		2,100
Other, net		(2,032)		666
Net cash provided by operating activities		72,930		23,522
Cash Flows Provided by (Used in) Investing Activities:
Purchases of property and equipment		(15,892)		(10,213)
Acquisition of businesses		(20,526)		—
Proceeds from sale of property and equipment		194		75
Other, net		—		16
Net cash used in investing activities		(36,224)		(10,122)
Cash Flows Provided by (Used in) Financing Activities:
Proceeds from issuance of long-term debt		300,000		—
Repayment of long-term debt		(307,668)		(5,601)
Payment of debt issuance costs		(2,280)		—
Taxes withheld and paid on employees' equity awards		(10,399)		(5,578)
Repurchase of shares of common stock		(14,127)		(4,622)
Payment of contingent consideration		—		(250)
Net cash used in financing activities		(34,474)		(16,051)
Cash and Cash Equivalents
Increase (decrease) for the period		2,232		(2,651)
Beginning of period		184,807		100,929
End of period	$	187,039	$	98,278
Supplemental disclosure of noncash activities:
Leased assets obtained in exchange for new operating lease liabilities	$	9,167	$	105,249
Accruals for property and equipment		496		441

See notes to our unaudited condensed consolidated financial statements.

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

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

See notes to our unaudited condensed consolidated financial statements.

7

TOPBUILD CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

1.  BASIS OF PRESENTATION

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

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

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

Liquidity and Impact of COVID-19

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

2.  ACCOUNTING POLICIES

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

Recently Adopted Accounting Pronouncements

Credit Losses

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

8

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

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

Goodwill Impairment

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

Fair Value

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

Recently Issued Accounting Pronouncements Not Yet Adopted

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

3. REVENUE RECOGNITION

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

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

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

9

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

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

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

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

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

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

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

We record a contract asset when we have satisfied our performance obligation prior to billing and a contract liability when a customer payment is received prior to the satisfaction of our performance obligation. The difference between the beginning and ending balances of our contract assets and liabilities primarily results from the timing of our performance and the customer’s payment.  Our remaining performance obligations are expected to be recognized within the next twelve months.

10

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

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

	Included in Line Item on	As of
	Condensed Consolidated	March 31,		December 31,
	Balance Sheets	2020		2019
Contract Assets:
Receivables, unbilled	Receivables, net	$	56,608	$	57,153
Contract Liabilities:
Deferred revenue	Accrued liabilities	$	15,533	$	16,139

4.  GOODWILL AND OTHER INTANGIBLES

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

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

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

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

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

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

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

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

	Three Months Ended March 31,
	2020		2019
Amortization expense	$	5,272	$	5,173

11

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

5. LONG-TERM DEBT

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

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

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

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

Amended Credit Agreement and Senior Secured Term Loan Facility

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

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

Senior secured term loan facility	$	300,000
Additional term loan and/or revolver capacity available under incremental facility (a)	$	300,000
Revolving Facility	$	450,000
Sublimit for issuance of letters of credit under Revolving Facility (b)	$	100,000
Sublimit for swingline loans under Revolving Facility (b)	$	35,000
Interest rate as of March 31, 2020		2.02	%
Scheduled maturity date		3/20/2025

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

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

12

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

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

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

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

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

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

Revolving Facility

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

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

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

Senior Notes

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

13

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

Equipment Notes

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

  Covenant Compliance

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

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

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

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

6.  FAIR VALUE MEASUREMENTS

Fair Value on Recurring Basis

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

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 March 31, 2020 (Level 1 fair value measurement), we estimate that the fair value of the Senior Notes is approximately $364.0 million compared to a gross carrying value of $400.0 million at March 31, 2020.

7.  SEGMENT INFORMATION

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

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

(a)