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TopBuild Corp - Quarter Report: 2022 March (Form 10-Q)

Table of Contents

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, 2022

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 32,777,901 shares of Common Stock, par value $0.01 per share as of April 28, 2022.

Table of Contents

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

7

Condensed Consolidated Statements of Changes in Equity

8

Notes to Condensed Consolidated Financial Statements

9

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

30

Item 1A.

Risk Factors

30

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

30

Item 3.

Defaults upon Senior Securities

30

Item 4.

Mine Safety Disclosures

31

Item 5.

Other Information

31

Item 6.

Exhibits

31

Index to Exhibits

32

Signature

33

2

Table of Contents

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

3.625% Senior Notes

TopBuild's 3.625% senior unsecured notes issued March 15, 2021 and due March 15, 2029

4.125% Senior Notes

TopBuild's 4.125% senior unsecured notes issued October 14, 2021 and due February 15, 2032

5.625% Senior Notes

TopBuild's 5.625% senior unsecured notes which were due on May 1, 2026 and redeemed in full on March 15, 2021

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

2019 Repurchase Program

$200 million share repurchase program authorized by the Board on February 22, 2019

2021 Repurchase Program

$200 million share repurchase program authorized by the Board on July 26, 2021

ABS

American Building Systems, Inc.

Amendment No. 1 to Credit Agreement

Amendment No. 1 to the Credit Agreement dated March 8, 2021

Amendment No. 2 to Credit Agreement

Amendment No. 2 to the Credit Agreement dated October 7, 2021

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.

Billings

Billings Insulation Service, Inc.

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

DI

DI Super Holdings, Inc.

EBITDA

Earnings before interest, taxes, depreciation, and amortization

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

Garland

Garland Insulating, Ltd.

Green Energy

Green Energy Solutions, Inc.

Hunter

J.P. Hunter Enterprises, Inc.

IBR

Incremental borrowing rate, as defined in ASC 842

Lenders

Bank of America, N.A., together with the other lenders party to "Credit Agreement"

LCR

L.C.R. Contractors, LLC

LIBOR

London interbank offered rate

Net Leverage Ratio

As defined in the “Credit Agreement,” the ratio of outstanding indebtedness, less up to $100 million of unrestricted cash, to EBITDA

NYSE

New York Stock Exchange

Credit Agreement

Senior secured credit agreement and related security and pledge agreement dated May 5, 2017, as amended and restated on March 20, 2020, and further amended by Amendment No. 1 to Credit Agreement and Amendment No. 2 to Credit Agreement

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

ROU

Right of use (asset), as defined in ASC 842

RSA

Restricted stock award

SEC

United States Securities and Exchange Commission

Secured Leverage Ratio

As defined in the “Credit Agreement,” the ratio of outstanding indebtedness, including letters of credit, to EBITDA

Southwest

Southwest Insulation, Inc.

TopBuild

TopBuild Corp. and its wholly-owned consolidated domestic subsidiaries. Also, the "Company,"
"we," "us," and "our"

3

Table of Contents

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, 

2022

2021

ASSETS

Current assets:

Cash and cash equivalents

$

126,553

$

139,779

Receivables, net of an allowance for credit losses of $10,487 at March 31, 2022, and $8,798 at December 31, 2021

735,452

 

668,419

Inventories, net

390,061

 

352,801

Prepaid expenses and other current assets

29,102

 

26,692

Total current assets

1,281,168

 

1,187,691

Right of use assets

184,762

177,177

Property and equipment, net

248,438

 

244,574

Goodwill

1,964,297

 

1,949,763

Other intangible assets, net

669,797

 

684,209

Deferred tax assets, net

-

1,905

Other assets

13,101

 

13,211

Total assets

$

4,361,563

$

4,258,530

LIABILITIES AND EQUITY

Current liabilities:

Accounts payable

$

473,918

$

461,917

Current portion of long-term debt

38,723

38,640

Accrued liabilities

207,377

175,891

Short-term operating lease liabilities

55,293

54,591

Short-term finance lease liabilities

2,610

2,387

Total current liabilities

777,921

733,426

Long-term debt

1,445,473

1,454,483

Deferred tax liabilities, net

245,674

248,243

Long-term portion of insurance reserves

53,111

51,875

Long-term operating lease liabilities

133,297

125,339

Long-term finance lease liabilities

7,631

7,770

Other liabilities

1,216

960

Total liabilities

2,664,323

2,622,096

Commitments and contingencies

Equity:

Preferred stock, $0.01 par value: 10,000,000 shares authorized; 0 shares issued and outstanding

-

-

Common stock, $0.01 par value: 250,000,000 shares authorized; 39,306,564 shares issued and 32,776,363 outstanding at March 31, 2022, and 39,165,024 shares issued and 32,927,185 outstanding at December 31, 2021

393

391

Treasury stock, 6,530,201 shares at March 31, 2022, and 6,237,839 shares at December 31, 2021, at cost

(492,688)

(431,030)

Additional paid-in capital

877,564

873,031

Retained earnings

1,315,387

1,200,676

Accumulated other comprehensive loss

(3,416)

(6,634)

Total equity

1,697,240

1,636,434

Total liabilities and equity

$

4,361,563

$

4,258,530

See notes to our unaudited condensed consolidated financial statements.

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Table of Contents

TOPBUILD CORP.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

(In thousands except share and per common share data)

Three Months Ended March 31, 

2022

2021

Net sales

$

1,168,918

    

$

742,798

    

Cost of sales

837,717

545,039

Gross profit

331,201

197,759

Selling, general, and administrative expense

167,247

101,872

Operating profit

163,954

95,887

Other income (expense), net:

Interest expense

(11,966)

(6,603)

Loss on extinguishment of debt

-

(13,862)

Other, net

684

77

Other expense, net

(11,282)

(20,388)

Income before income taxes

152,672

75,499

Income tax expense

(37,961)

(15,657)

Net income

$

114,711

$

59,842

Net income per common share:

Basic

$

3.50

$

1.82

Diluted

$

3.47

$

1.80

 

Weighted average shares outstanding:

Basic

32,738,525

32,826,515

Diluted

33,042,490

33,202,563

See notes to our unaudited condensed consolidated financial statements.

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TOPBUILD CORP.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)

(In thousands)

Three Months Ended March 31, 

2022

2021

Net income

$

114,711

$

59,842

Other comprehensive income:

Foreign currency translation adjustment

3,218

-

Comprehensive income

$

117,929

$

59,842

See notes to our unaudited condensed consolidated financial statement

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TOPBUILD CORP.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

Three Months Ended March 31, 

2022

2021

Cash Flows Provided by (Used in) Operating Activities:

    

    

    

Net income

$

114,711

$

59,842

Adjustments to reconcile net income to net cash provided by operating activities:

Depreciation and amortization

30,499

15,519

Share-based compensation

3,727

3,111

Loss on extinguishment of debt

-

13,862

Loss on sale of property and equipment

207

56

Amortization of debt issuance costs

706

422

Provision for bad debt expense

2,512

1,765

Loss from inventory obsolescence

868

653

Gain on foreign exchange

(649)

-

Deferred income taxes, net

(81)

(183)

Change in certain assets and liabilities

Receivables, net

(65,031)

(20,831)

Inventories, net

(38,570)

(2,088)

Prepaid expenses and other current assets

(2,347)

3,517

Accounts payable

12,663

(2,244)

Accrued liabilities

29,523

16,591

Other, net

745

(570)

Net cash provided by operating activities

89,483

89,422

Cash Flows Provided by (Used in) Investing Activities:

Purchases of property and equipment

(18,413)

(12,284)

Acquisition of businesses, net of cash acquired

(13,967)

(61,092)

Proceeds from sale of property and equipment

253

56

Net cash used in investing activities

(32,127)

(73,320)

Cash Flows Provided by (Used in) Financing Activities:

Proceeds from issuance of long-term debt

-

411,250

Repayment of long-term debt

(9,634)

(415,856)

Payment of debt issuance costs

-

(6,500)

Taxes withheld and paid on employees' equity awards

(11,658)

(11,480)

Exercise of stock options

808

5,952

Repurchase of shares of common stock

(50,000)

(9,856)

Payment of contingent consideration

(23)

-

Net cash used in financing activities

(70,507)

(26,490)

Impact of exchange rate changes on cash

(75)

-

Net decrease in cash and cash equivalents

(13,226)

(10,388)

Cash and cash equivalents- Beginning of period

 

139,779

 

330,007

Cash and cash equivalents- End of period

$

126,553

$

319,619

Supplemental disclosure of cash paid for:

Leased assets obtained in exchange for new operating lease liabilities

$

22,449

$

20,322

Accruals for property and equipment

213

524

See notes to our unaudited condensed consolidated financial statements.

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TOPBUILD CORP.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (Unaudited)

(In thousands except share data)

Accumulated

Common

Treasury

Additional

Other

Stock

Stock

Paid-in

Retained

Comprehensive

($0.01 par value)

at cost

Capital

Earnings

(Loss) Income

Equity

Balance at December 31, 2020

$

389

$

(386,669)

$

858,414

$

876,660

$

-

$

1,348,794

Net income

-

-

-

59,842

-

59,842

Share-based compensation

-

-

3,111

-

-

3,111

Issuance of 30,284 restricted share awards under long-term equity incentive plan

1

-

(1)

-

-

-

Repurchase of 49,284 shares

-

(9,856)

-

-

-

(9,856)

43,290 shares withheld to pay taxes on employees' equity awards

-

-

(11,480)

-

-

(11,480)

51,915 shares issued upon exercise of stock options

-

-

5,952

-

-

5,952

Balance at March 31, 2021

$

390

$

(396,525)

$

855,996

$

936,502

$

-

$

1,396,363

Accumulated

Common

Treasury

Additional

Other

Stock

Stock

Paid-in

Retained

Comprehensive

($0.01 par value)

at cost

Capital

Earnings

(Loss) Income

Equity

Balance at December 31, 2021

$

391

$

(431,030)

$

873,031

$

1,200,676

$

(6,634)

$

1,636,434

Net income

-

-

-

114,711

-

114,711

Share-based compensation

-

-

3,727

-

-

3,727

Issuance of 52,940 restricted share awards under long-term equity incentive plan

2

-

(2)

-

-

-

Repurchase of 238,154 shares

-

(50,000)

-

-

-

(50,000)

53,073 shares withheld to pay taxes on employees' equity awards

-

(11,658)

-

-

-

(11,658)

12,269 shares issued upon exercise of stock options

-

-

808

-

-

808

Other comprehensive income, net of tax

-

-

-

-

3,218

3,218

Balance at March 31, 2022

$

393

$

(492,688)

$

877,564

$

1,315,387

$

(3,416)

$

1,697,240

See notes to our unaudited condensed consolidated financial statements.

8

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TOPBUILD CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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 Specialty Distribution.  Our Installation segment primarily installs insulation and other building products.  Our Specialty 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.

We believe 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, 2022, and our results of operations, comprehensive income and cash flows for the three months ended March 31, 2022 and 2021.  The condensed consolidated balance sheet at December 31, 2021, 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, 2021, as filed with the SEC on February 22, 2022.

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 periods.  Actual results could differ materially from these estimates.  All significant intercompany transactions between TopBuild entities have been eliminated.

Recently Adopted Accounting Pronouncements

The following table summarizes additional ASUs which were adopted, but did not have a material impact on our accounting policies or our consolidated financial statements and related disclosures:

ASU

Description

Period Adopted

Method

ASU 2019-12

Income Taxes - Simplifying the Accounting for Income Taxes

01/01/21

Modified Retrospective

ASU 2021-01

Reference Rate Reform

01/01/21

Prospective

Recently Issued Accounting Pronouncements Not Yet Adopted

In October 2021, the FASB issued ASU 2021-08, “Accounting for Contract Assets and Contract Liabilities from Contracts with Customers”.  This standard improves the accounting for acquired revenue contracts with customers in a business combination by addressing diversity in practice and inconsistency related to recognition of an acquired contract liability, as well as payment terms and their effect on subsequent revenue recognized by the acquirer. This standard is effective for us beginning January 1, 2023, with early adoption permitted. We are evaluating the impact that adoption of this standard may have on our financial position and results of operations.

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Table of Contents

TOPBUILD CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

3.  REVENUE RECOGNITION

Revenue is disaggregated between our Installation and Specialty 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, 2022

Installation

Specialty Distribution

Elims

Total

Residential

$

563,303

$

236,411

$

(43,421)

$

756,293

Commercial

113,390

215,514

(8,216)

320,688

Industrial

91,937

91,937

Net sales

$

676,693

$

543,862

$

(51,637)

$

1,168,918

Three Months Ended March 31, 2021

Installation

Specialty Distribution

Elims

Total

Residential

$

418,077

$

192,045

$

(33,338)

$

576,784

Commercial

114,676

59,556

(8,218)

166,014

Net sales

$

532,753

$

251,601

$

(41,556)

$

742,798

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

Three Months Ended March 31, 2022

Installation

Specialty Distribution

Elims

Total

Insulation and accessories

$

536,341

$

452,011

$

(43,810)

$

944,542

Glass and windows

51,196

51,196

Gutters

22,957

46,631

(7,002)

62,586

All other

66,199

45,220

(825)

110,594

Net sales

$

676,693

$

543,862

$

(51,637)

$

1,168,918

Three Months Ended March 31, 2021

Installation

Specialty Distribution

Elims

Total

Insulation and accessories

$

417,597

$

211,494

$

(34,527)

$

594,564

Glass and windows

43,047

43,047

Gutters

19,358

25,839

(5,305)

39,892

All other

52,751

14,268

(1,724)

65,295

Net sales

$

532,753

$

251,601

$

(41,556)

$

742,798

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

Included in Line Item on

As of

Condensed

March 31, 

December 31, 

Balance Sheets

2022

2021

Contract Assets:

Receivables, unbilled

Receivables, net

$

72,996

$

71,401

Contract Liabilities:

Deferred revenue

Accrued liabilities

$

15,926

$

14,310

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TOPBUILD CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The aggregate amount remaining on uncompleted performance obligations was $346.3 million as of March 31, 2022. We expect to satisfy the performance obligations and recognize revenue on substantially all of these uncompleted contracts over the next 18 months.

Certain customer contracts contain provisions whereby customers are entitled to withhold an agreed upon percentage of the total contract value until the customer’s project is satisfactorily complete. This amount held back is referred to as retainage and is a common practice in the construction industry. Retainage receivables are classified as a component of Receivables, net on our condensed consolidated balance sheets and were $57.1 million and $57.6 million as of March 31, 2022 and December 31, 2021, respectively.

4.  GOODWILL AND OTHER INTANGIBLES

We have two reporting units which are also our operating and reporting segments: Installation and Specialty 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 2021, 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, 2022, by segment, were as follows, in thousands:

    

    

    

Fx

    

   Accumulated   

    

Gross Goodwill

Translation

Gross Goodwill

Impairment

Net Goodwill

December 31, 2021

Additions

Adjustment

March 31, 2022

Losses

March 31, 2022

Goodwill, by segment:

Installation

$

1,818,872

$

5,348

-

$

1,824,220

$

(762,021)

$

1,062,199

Specialty Distribution

 

892,912

 

5,126

4,060

 

902,098

 

-

 

902,098

Total goodwill

$

2,711,784

$

10,474

$

4,060

$

2,726,318

$

(762,021)

$

1,964,297

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, 

December 31,

2022

2021

Gross definite-lived intangible assets

    

$

785,288

$

783,843

Accumulated amortization

    

(115,491)

(99,634)

Net definite-lived intangible assets

    

$

669,797

$

684,209

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

Three Months Ended March 31, 

    

2022

    

2021

Amortization expense

$

17,825

$

6,143

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TOPBUILD CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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, 

2022

    

2021

3.625% Senior Notes due 2029

$

400,000

$

400,000

4.125% Senior Notes due 2032

500,000

500,000

Term loan

588,750

596,250

Equipment notes

14,959

17,085

Unamortized debt issuance costs

(19,513)

(20,212)

Total debt, net of unamortized debt issuance costs

1,484,196

1,493,123

Less: current portion of long-term debt

38,723

38,640

Total long-term debt

$

1,445,473

$

1,454,483

The following table sets forth our remaining principal payments for our outstanding debt balances as of March 31, 2022, in thousands:

Payments Due by Period

2022

2023

2024

2025

2026

Thereafter

Total

3.625% Senior Notes

$

$

$

$

$

$

400,000

$

400,000

4.125% Senior Notes

500,000

500,000

Term loan

    

22,500

33,750

45,000

48,750

438,750

    

588,750

Equipment notes

6,513

6,325

2,121

14,959

Total

$

29,013

$

40,075

$

47,121

$

48,750

$

438,750

$

900,000

$

1,503,709

Amendments to Credit Agreement and Senior Secured Term Loan Facility

On March 8, 2021, the Company entered into Amendment No. 1 to Credit Agreement.  Amendment No. 1 to Credit Agreement provided for a term loan facility in an aggregate principal amount of $300.0 million, all of which was drawn on March 8, 2021, and a revolving facility with an aggregate borrowing capacity of $450.0 million, including a $100.0 million letter of credit sublimit and up to a $35.0 million swingline sublimit.

The maturity date for the loans under Amendment No. 1 to Credit Agreement was extended from March 2025 to March 2026, the floor for base rate loans was reduced from 1.5% to 1.0%, and the floor for Eurodollar rate loans was reduced from 0.5% to 0.0%. Additional provisions were made for the eventual replacement of LIBOR with another alternate benchmark rate.

On October 7, 2021, the Company entered into Amendment No. 2 to Credit Agreement. Amendment No. 2 to Credit Agreement provides for a term loan facility in an aggregate principal amount of $600.0 million, comprised of a $300.0 million term loan facility and a $300.0 million delayed draw term loan commitment, all of which was drawn on October 7, 2021, and a revolving facility with an aggregate borrowing capacity of $500.0 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 Amendment No. 2 to Credit Agreement was extended from March 2026 to October 2026. Additional provisions were also made for the eventual replacement of LIBOR with an alternative benchmark rate.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The following table outlines the key terms of our Amendment No. 2 to Credit Agreement (dollars in thousands):

Senior secured term loan facility

$

300,000

Additional delayed draw term loan

$

300,000

Additional term loan and/or revolver capacity available under incremental facility (a)

$

300,000

Revolving facility

$

500,000

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, 2022

1.46

%

Scheduled maturity date

10/7/2026

(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.

Interest payable on borrowings under the 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%.

Amendment No. 2 to Credit Agreement contemplates future amendment by the Company and the agent to provide for the replacement of LIBOR with an alternative 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 1.00 percent and in the case of LIBOR rate borrowings, the applicable margin ranges from 1.00 percent to 2.50 percent.  Borrowings under Amendment No. 2 to 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,

    

2022

    

2021

Revolving facility

$

500,000

$

500,000

Less: standby letters of credit

(69,936)

(69,936)

Availability under revolving facility

$

430,064

$

430,064

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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.

3.625% Senior Notes

On March 15, 2021, the Company completed a private offering of $400.0 million aggregate principal amount of 3.625% Senior Notes due 2029. The Company used the proceeds from the issuance of the 3.625% Senior Notes, together with cash on hand, to redeem 100% of its $400.0 million aggregate principal amount of 5.625% Senior Notes due 2026.   The 3.625% Senior Notes are our senior unsecured obligations and bear interest at 3.625% per year, payable semiannually in arrears on March 15 and September 15 of each year, which begins on September 15, 2021. The 3.625% Senior Notes mature on March 15, 2029, unless redeemed early or repurchased. If we undergo a change in control, we must make an offer to repurchase all of the 3.625% 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. 

The Company may redeem the 3.625% Senior Notes, in whole or in part, at any time on or after March 15, 2024 at the redemption prices specified in the notes.  The Company may also redeem all or part of the 3.625% Senior Notes at any time prior to March 15, 2024 at a redemption price equal to 100% of the principal amount of the notes to be redeemed, plus the Applicable Premium (as defined in the Indenture), as of, and accrued and unpaid interest to, the redemption date. Additionally, the Company may redeem up to 40% of the aggregate principal amount of the 3.625% Senior Notes prior to March 15, 2024 with the net cash proceeds of certain sales of its capital stock at 103.625% of the principal amount of the notes, plus accrued and unpaid interest, if any, to the date of redemption only if, after the redemption, at least 60% of the aggregate principal amount of the 3.625% Senior Notes originally issued remains outstanding.

4.125% Senior Notes

On October 14, 2021, the Company completed a private offering of $500.0 million aggregate principal amount of 4.125% Senior Notes due 2032. The 4.125% Senior Notes are senior unsecured obligations and bear interest at 4.125% per year, payable semiannually in arrears on February 15 and August 15, beginning on August 15, 2022. The 4.125% Senior Notes mature on February 15, 2032, unless redeemed early or repurchased. If we undergo a change in control, we must make an offer to repurchase all of the 4.125% 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. 

The Company may redeem the 4.125% Senior Notes, in whole or in part, at any time on or after October 15, 2026 at the redemption prices specified in the notes plus accrued and unpaid interest if redeemed during the 12 month period commencing on October 15 of the years set for: 2026 – 102.063%, 2027 – 101.375%, 2028 – 100.688%, 2029 and thereafter – 100.000%. The Company may also redeem a make-whole redemption of the 4.125% Senior Notes at any time prior to October 15, 2026 at the treasury rate plus 50 bps. Additionally, the Company may redeem up to 40% of the aggregate principal amount of the 4.125% Senior Notes prior to October 15, 2024 with the net cash proceeds of certain sales of its capital stock at 104.125% of the principal amount of the notes, plus accrued and unpaid interest, if any, to the date of redemption only if, after the redemption, at least 60% of the aggregate principal amount of the notes originally issued remains outstanding.

Equipment Notes

As of March 31, 2022, the company has issued $41.6 million of equipment notes for the purpose of financing the purchase of vehicles and equipment. 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%.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

  Covenant Compliance

The indentures governing our 3.625% Senior Notes and our 4.125% Senior Notes (together, our “Senior Notes”) contain restrictive covenants that, among other things, generally limit the ability of the Company and certain of its subsidiaries (subject to certain exceptions) to (i) create liens, (ii) pay dividends, acquire shares of capital stock and make payments on subordinated debt, (iii) place limitations on distributions from certain subsidiaries, (iv) issue or sell the capital stock of certain subsidiaries, (v) sell assets, (vi) enter into transactions with affiliates and (vii) effect mergers. The indentures provide for customary events of default which include (subject in certain cases to customary grace and cure periods), among others: nonpayment of principal or interest; breach of covenants or other agreements in the indenture; defaults in failure to pay certain other indebtedness; and certain events of bankruptcy or insolvency. Generally, if an event of default occurs and is continuing under the indenture, the trustee or the holders of at least 30% in aggregate principal amount of each of our Senior Notes then outstanding may declare the principal of, premium, if any, and accrued interest on the Senior Notes subject to such declaration 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 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 Credit Agreement contains customary affirmative covenants and events of default.

The 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, 2022

Maximum Net Leverage Ratio

3.50:1.00

Minimum Interest Coverage Ratio

3.00:1.00

Compliance as of period end

In Compliance

6. FAIR VALUE MEASUREMENTS

Fair Value on Recurring Basis

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

Fair Value on Non-Recurring Basis

Fair value measurements were applied to our long-term debt portfolio.  We believe the carrying value of our term loan approximates the fair market value primarily due to the fact that the non-performance risk of servicing our debt obligations, as reflected in our business and credit risk profile, has not materially changed since we assumed our debt obligations under the Amendment No.2 to 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 market trades of our 3.625% Senior Notes and our 4.125% Senior Notes close to March 31, 2022 (Level 1 fair value measurement), we estimate the fair value of each in the table below:  

As of March 31, 2022

Fair Value

Gross Carrying Value

3.625% Senior Notes

$

365,000

$

400,000

4.125% Senior Notes

$

456,250

$

500,000

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

7.  SEGMENT INFORMATION

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

Three Months Ended March 31, 

2022

2021

2022

2021

Net Sales

Operating Profit (b)

Our operations by segment were (a):

Installation

$

676,693

$

532,753

$

112,679

$

73,636

Specialty Distribution

543,862

251,601

70,420

35,385

Intercompany eliminations

(51,637)

(41,556)

(8,708)

(6,528)

Total

$

1,168,918

$

742,798

174,391

102,493

General corporate expense, net (c)

(10,437)

(6,606)

Operating profit, as reported

163,954

95,887

Other expense, net

(11,282)

(20,388)

Income before income taxes

$

152,672

$

75,499

(a)All of our operations are located in the U.S and Canada.
(b)Segment operating profit includes an allocation of general corporate expenses attributable to the operating segments which is based on direct benefit or usage (such as salaries of corporate employees who directly support the segment).
(c)General corporate expense, net includes expenses not specifically attributable to our segments for functions such as corporate human resources, finance, and legal, including salaries, benefits, and other related costs.

8. LEASES

We lease various assets to support our business including warehouses for our Installation branch locations and Specialty Distribution centers, office space for our Branch Support Center in Daytona Beach, Florida and other administrative locations, as well as fleet vehicles and certain equipment. In addition, we lease certain operating facilities from related parties, primarily former owners (and in certain cases, current management personnel) of companies acquired. These related party leases are immaterial to our condensed consolidated statements of operations.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The following table presents lease-related assets and liabilities recognized in our condensed consolidated balance sheet, in thousands:

    

As of

March 31, 

December 31, 

2022

2021

Assets

Classification

Operating

Right of use assets

$

184,762

$

177,177

Finance

Property and equipment, net

9,158

9,743

Total lease assets

$

193,920

$

186,920

Liabilities

Current

Operating

Short-term operating lease liabilities

$

55,293

$

54,591

Finance

Short-term finance lease liabilities

2,610

2,387

Non-Current

Operating

Long-term operating lease liabilities

133,297

125,339

Finance

Long-term finance lease liabilities

7,631

7,770

Total lease liabilities

$

198,831

$

190,087

Weighted-average remaining lease term:

Operating leases

4.1 years

4.1 years

Finance leases

4.2 years

4.4 years

Weighted-average discount rate:

Operating leases

3.0

%

3.1

%

Finance leases

2.9

%

2.9

%

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 for operating leases and in selling, general and administrative expenses on the accompanying unaudited condensed consolidated statement of operations for finance leases and operating leases on support centers, in thousands:

    

Three Months Ended March 31, 

2022

2021

Operating lease cost (a)

$

20,512

$

11,810

Financing lease cost:

Amortization of leased assets

795

Interest on finance lease obligations

70

Short-term lease cost

4,340

3,354

Sublease income

(218)

(206)

Net lease cost

$

25,499

$

14,958

(a)Includes variable cost components of $3,680 and $1,697 in the three months ended March 31, 2022, and 2021, respectively.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Future minimum lease payments under non-cancellable operating leases as of March 31, 2022 were as follows, in thousands:

Payments due by Period

    

2023

$

49,287

2024

54,670

2025

42,795

2026

32,669

2027

20,914

2028 and Thereafter

14,647

Total future minimum lease payments

214,982

Less: imputed interest

(16,151)

Lease liability at March 31, 2022

$

198,831

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

    

Three Months Ended March 31, 

2022

2021

Cash paid for amounts included in the measurement of lease liabilities:

Operating cash flows from finance leases

$

(70)

$

Operating cash flows from operating leases

(16,198)

(10,150)

Financing cash flows from finance leases

(557)

9.  INCOME TAXES    

Our effective tax rates were 24.9 percent and 20.7 percent for the three months ended March 31, 2022 and 2021, respectively. The higher 2022 tax rate was primarily related to a decrease in the benefit related to share-based compensation and state tax adjustments.

A tax benefit of $1.6 million and $3.1 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 months ended March 31, 2022 and 2021, respectively.

10. NET INCOME PER SHARE

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

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

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Basic and diluted net income per share were computed as follows:

Three Months Ended March 31, 

2022

2021

Net income (in thousands) - basic and diluted

$

114,711

$

59,842

Weighted average number of common shares outstanding - basic

32,738,525

32,826,515

Dilutive effect of common stock equivalents:

RSAs with service-based conditions

15,127

35,619

RSAs with market-based conditions

100,158

147,098

RSAs with performance-based conditions

64,025

49,020

Stock options

124,655

144,311

Weighted average number of common shares outstanding - diluted

33,042,490

33,202,563

Basic net income per common share

$

3.50

$

1.82

Diluted net income per common share

$

3.47

$

1.80

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 March 31, 

2022

 

2021

Anti-dilutive common stock equivalents:

RSAs with service-based conditions

10,244

2,831

RSAs with market-based conditions

382

5,512

RSAs with performance-based conditions

7,908

Stock options

16,587

11,766

Total anti-dilutive common stock equivalents

35,121

20,109

11. SHARE-BASED COMPENSATION

Effective July 1, 2015, our eligible employees commenced participation in the 2015 LTIP.  The 2015 LTIP authorizes the Board to grant stock options, stock appreciation rights, restricted shares, restricted share units, performance awards, and dividend equivalents.  All grants are made by issuing new shares and no more than 4.0 million shares of common stock may be issued under the 2015 LTIP.  As of March 31, 2022, we had 1.9 million shares remaining available for issuance under the 2015 LTIP.

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

Three Months Ended March 31, 

2022

2021

Share-based compensation expense

$

3,727

$

3,111

Income tax benefit

$

1,605

$

3,093

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The following table presents a summary of our share-based compensation activity for the three months ended March 31, 2022, 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, 2021

244.4

$

119.41

210.5

$

32.35

$

87.30

$

39,692.4

Granted

90.5

$

181.51

$

$

Converted/Exercised

(162.9)

$

71.59

(12.3)

$

23.48

$

65.74

$

1,798.4

Forfeited/Expired

(0.2)

$

252.91

$

$

Balance March 31, 2022

171.8

$

197.22

198.2

$

32.90

$

88.63

$

19,180.9

Exercisable March 31, 2022 (a)

161.9

$

26.46

$

72.42

$

17,912.5

(a)The weighted average remaining contractual term for vested stock options is approximately 6.1 years.

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

As of March 31, 2022

Unrecognized Compensation Expense
on Unvested Awards

Weighted Average
Remaining
Vesting Period

RSAs

$

20,376

1.2

Stock options

1,120

0.9

Total unrecognized compensation expense related to unvested awards

$

21,496

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 17, 2020

$

2,675

$

$

669

$

2,675

$

5,350

February 16, 2021

$

2,552

$

$

638

$

2,552

$

5,104

February 15, 2022

$

3,692

$

$

923

$

3,692

$

7,384

During the first quarter of 2022, RSAs with performance-based conditions that were granted on February 18, 2019 vested based on cumulative three-year achievement of 200%. Total compensation expense recognized over the three-year performance period, net of forfeitures, was $4.4 million.

The fair value of our RSAs with a market-based condition granted under the 2015 LTIP was determined using a Monte Carlo simulation.  The following are key inputs in the Monte Carlo analysis for awards granted in 2022 and 2021:

2022

2021

Measurement period (years)

2.87

2.87

Risk free interest rate

1.76

%

0.22

%

Dividend yield

0.00

%

0.00

%

Estimated fair value of market-based RSAs at grant date

$

298.20

$

298.66

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The fair values of stock options granted under the 2015 LTIP were calculated using the Black-Scholes Options Pricing Model.  The following table presents the assumptions used to estimate the fair values of stock options granted in 2021. There were no stock options issued in the first quarter of 2022.

2021

Risk free interest rate

0.76

%

Expected volatility, using historical return volatility and implied volatility

43.29

%

Expected life (in years)

6.0

Dividend yield

0.00

%

Estimated fair value of stock options at grant date

$

89.59

12. SHARE REPURCHASE PROGRAM

On July 26, 2021, our Board authorized the 2021 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 open market purchases, privately negotiated transactions, accelerated share repurchase transactions, or other available means.  The 2021 Repurchase Program does not obligate the Company to purchase any shares and has no expiration date.  Authorization for the 2021 Repurchase Program may be terminated, increased, or decreased by the Board at its discretion at any time.  As of March 31, 2022, the Company has $154.4 million remaining under the 2021 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 open market purchases, privately negotiated transactions, accelerated share repurchase transactions, or other available means.  The 2019 Repurchase Program does not obligate the Company to purchase any shares and has no expiration date.  Authorization for the 2019 Repurchase Program may be terminated, increased, or decreased by the Board at its discretion at any time.  As of March 31, 2022 the Company has utilized all amounts authorized under the 2019 Repurchase Program.

The following table sets forth our share repurchases under the Repurchase Programs during the periods presented. These repurchases closed out the 2019 Share Repurchase Program with the balance repurchased under the 2021 Share Repurchase Program.

Three Months Ended March 31, 

    

2022

2021

Number of shares repurchased

238,154

49,284

Share repurchase cost (in thousands)

$

50,000

$

9,856

13. BUSINESS COMBINATIONS

We continue to acquire businesses as part of our ongoing strategy to grow our company and expand our market share.  Each acquisition has been accounted for as a business combination under ASC 805, “Business Combinations.”  Acquisition related costs for the three months ended March 31, 2022 and 2021 were $0.9 million and $0.7 million, respectively. Acquisition related costs are included in selling, general, and administrative expense in our condensed consolidated statements of operations.

On January 12, 2022, we acquired substantially all the assets of Southwest, an insulation company located in Florida. The purchase price of $0.3 million was funded by cash on hand and we recognized goodwill of $0.2 million in connection with this acquisition.

On February 3, 2022, we acquired substantially all the assets of Billings, a residential insulation installer serving the Montana and Northern Wyoming markets. The purchase price of $6.9 million was funded with cash on hand and we recognized goodwill of $3.8 million in connection with this acquisition.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

On March 31, 2022, we acquired substantially all the assets of Green Energy, an insulation company located in Oregon. The purchase price of $1.2 million was funded with cash on hand and we recognized goodwill of $0.8 million in connection with this acquisition.

The table below provides a summary as of March 31, 2022 for businesses acquired during the three months ended March 31, 2021:

2021 Acquisitions

Date

    

Cash Paid

Contingent Consideration

Total Purchase Price

Goodwill Acquired

LCR

1/20/2021

$

53,700

$

$

53,700

$

19,500

Ozark

3/3/2021

7,400

7,400

2,900

Total

$

61,100

$

$

61,100

$

22,400

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. To that note, during the three months ended March 31, 2022 DI’s goodwill increased by $5.1 million primarily as a result of net working capital adjustments, true-ups to supplier rebate receivables, and sales and use tax liabilities.  

Goodwill to be recognized in connection with acquisitions is attributable to the synergies expected to be realized and improvements in the businesses after the acquisitions. Primarily all of the $4.8 million and $22.4 million of goodwill recorded from acquisitions completed in the three months ended March 31, 2022 and 2021, respectively, is expected to be deductible for income tax purposes.

14.  ACCRUED LIABILITIES

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

As of

    

March 31, 2022

    

December 31, 2021

Accrued liabilities:

Salaries, wages, and commissions

$

62,438

$

71,664

Accrued income taxes payable

38,997

2,161

Insurance liabilities

25,525

24,425

Customer rebates

8,916

15,625

Deferred revenue

15,927

14,311

Employee tax-related liabilities

12,709

12,545

Sales & Property taxes

13,389

9,364

Interest payable on long-term debt

10,318

8,798

Other

19,158

16,998

Total accrued liabilities

$

207,377

$

175,891

See Note 3 – Revenue Recognition for discussion of our deferred revenue balances.  Accrued income taxes payable increased compared to December 31, 2021 due to the timing of tax payments, which typically occur later in the year.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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 also maintain indemnification agreements with our directors and officers that may require us to indemnify them against liabilities that arise by reason of their status or service as directors or officers, except as prohibited by applicable law.

We occasionally use performance bonds to ensure completion of our work on certain larger customer contracts that can span multiple accounting periods.  Performance bonds generally do not have stated expiration dates; rather, we are released from the bonds as the contractual performance is completed.  We also have bonds outstanding for license and insurance.

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

As of

March 31, 2022

December 31 2021

Outstanding bonds:

Performance bonds

$

120,049

$

128,173

Licensing, insurance, and other bonds

22,156

21,792

Total bonds

$

142,205

$

149,965

16.  SUBSEQUENT EVENTS

On May 5, 2022, the Company announced its plan to enter into an agreement to repurchase $100.0 million of its common stock under an accelerated share repurchase program (“ASR”). The ASR will be executed under previous share repurchase program authorizations, with $154.4 million of remaining authorization as of March 31, 2022.

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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 and Specialty Distribution. Our Installation segment installs insulation and other building products nationwide which, as of March 31, 2022, had approximately 235 branches located across the United 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 glass and windows, rain gutters, after paint products, fireproofing, garage doors, and fireplaces.  We handle every stage of the installation process, including material procurement supplied by leading manufacturers, project scheduling and logistics, multi-phase professional installation, and installation quality assurance.  

Our Specialty Distribution segment sells and distributes insulation and other building products, including gutters, fireplaces, closet shelving, and roofing materials, which, as of March 31, 2022, had 160 branches located across the United States and 18 branches in Canada.  Our Specialty Distribution 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 Installation and Specialty Distribution provides us with a number of distinct competitive advantages.  First, the combined buying power of our two business segments, along with our scale, strengthens our ties to the major manufacturers of insulation and other building material products.  This helps to ensure we are buying competitively and ensures the availability of supply to our local branches and Specialty Distribution centers.   The overall effect is driving efficiencies through our supply chain.  Second, being a leader in both installation and specialty distribution allows us to reach a broader set of builders and contractors more effectively, regardless of their size or geographic location in the U.S. and Canada, and leverage housing and commercial construction growth wherever it occurs.  Third, during housing industry downturns, many insulation contractors who buy directly from manufacturers during industry peaks return to purchasing through specialty 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 7 – Segment Information to our unaudited condensed consolidated financial statements contained in Part I, Item 1 of this Quarterly Report.  For additional details regarding our strategy, material trends in our business and seasonality, please refer to Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report for the year ended December 31, 2021, as filed with the SEC on February 22, 2022.

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.

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FIRST QUARTER 2022 VERSUS FIRST QUARTER 2021

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 March 31, 

2022

2021

Net sales

$

1,168,918

$

742,798

Cost of sales

837,717

545,039

Cost of sales ratio

71.7

%

73.4

%

Gross profit

331,201

197,759

Gross profit margin

28.3

%

26.6

%

Selling, general, and administrative expense

167,247

101,872

Selling, general, and administrative expense to sales ratio

14.3

%

13.7

%

Operating profit

163,954

95,887

Operating profit margin

14.0

%

12.9

%

Other expense, net

(11,282)

(20,388)

Income tax expense

(37,961)

(15,657)

Net income

$

114,711

$

59,842

Net margin

9.8

%

8.1

%

Sales and Operations

Net sales increased 57.4 percent for the three months ended March 31, 2022, from the comparable period of 2021.  The increase was primarily driven by a 38.6 percent impact from our acquisitions, 16.5 percent increase due to higher selling prices, and 2.2 percent increase in sales volume.

 

Gross profit margins were 28.3 percent and 26.6 percent for the three months ended March 31, 2022 and 2021, respectively.  Gross profit margin improved primarily due to higher selling prices, higher sales volume, and operational efficiencies partially offset by material inflation.

Selling, general, and administrative expense, as a percent of sales, was 14.3 and 13.7 percent for the three months ended March 31, 2022 and 2021, respectively.  The increase in selling, general, and administrative expense as a percent of sales was driven primarily by the amortization of intangible assets related to purchase accounting.

Operating margins were 14.0 percent and 12.9 percent for the three months ended March 31, 2022 and 2021, respectively. The increase in operating margins was due to higher selling prices, higher sales volume and operational efficiencies partially offset by material inflation and amortization of intangible assets related to purchase accounting.

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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 March 31, 

    

2022

    

2021

    

Percent Change

 

Net sales by business segment:

Installation

$

676,693

$

532,753

27.0

%

Specialty Distribution

543,862

251,601

116.2

%

Intercompany eliminations

(51,637)

(41,556)

Net sales

$

1,168,918

$

742,798

57.4

%

Operating profit by business segment:

Installation

$

112,679

$

73,636

53.0

%

Specialty Distribution

70,420

35,385

99.0

%

Intercompany eliminations

(8,708)

(6,528)

Operating profit before general corporate expense

174,391

102,493

70.1

%

General corporate expense, net

(10,437)

(6,606)

Operating profit

$

163,954

$

95,887

71.0

%

Operating profit margins:

Installation

16.7

%

13.8

%

Specialty Distribution

12.9

%

14.1

%

Operating profit margin before general corporate expense

14.9

%

13.8

%

Operating profit margin

14.0

%

12.9

%

Installation

Sales

Sales in our Installation segment increased $143.9 million, or 27.0 percent, for the three months ended March 31, 2022, as compared to the same period in 2021.  The increase was due to a 14.0 percent increase from higher selling prices, 10.0 percent impact from our acquisitions, and 3.0 percent increase in sales volume.

Operating margins

Operating margins in our Installation segment were 16.7 percent and 13.8 percent for the three months ended March 31, 2022 and 2021, respectively.  The increase in operating margins was driven by higher selling prices, sales volume, and operational efficiencies partially offset by material inflation.

Specialty Distribution

Sales

Sales in our Specialty Distribution segment increased $292.3 million, or 116.2 percent, for the three months ended March 31, 2022, as compared to the same period in 2021.  This increase was due to a 93.3 percent impact from our acquisitions  and 22.9 percent increase due to higher selling prices.  

Operating margins

Operating margins in our Specialty Distribution segment were 12.9 percent and 14.1 percent for the three months ended March 31, 2022 and 2021, respectively.  The decrease in operating margins was partially driven by the amortization of intangible assets related to purchase accounting and material inflation partially offset by higher selling prices and operational efficiencies.

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OTHER ITEMS

Other expense, net

Other expense, net, was $11.3 million and $20.4 million for the three months ended March 31, 2022 and 2021, respectively. During the three months ended March 31, 2021, we incurred $13.9 million to redeem our 5.625% Senior Notes. The remaining change primarily relates to interest expense, which increased by $5.4 million for the three months ended March 31, 2022, as compared to the same period in 2021.  This increase was due to higher long-term debt balances during the three months ended March 31, 2022, including the balance on the 4.125% Senior Notes which were issued in the fourth quarter of 2021.

Income tax expense

Income tax expense was $38.0 million, an effective tax rate of 24.9 percent, for the three months ended March 31, 2022, compared to $15.7 million, an effective tax rate of 20.7 percent, for the comparable period in 2021.  The tax rate for the three months ended March 31, 2022, was higher primarily related to a decrease in the benefit related to share-based compensation and state tax adjustments.

Cash Flows and Liquidity

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

Three Months Ended March 31, 

    

2022

    

2021

Changes in cash and cash equivalents:

Net cash provided by operating activities

$

89,483

$

89,422

Net cash used in investing activities

 

(32,127)

 

(73,320)

Net cash used in financing activities

(70,507)

 

(26,490)

Impact of exchange rate changes on cash

(75)

-

Net decrease in cash and cash equivalents

$

(13,226)

$

(10,388)

Net cash flows provided by operating activities remained flat for the three months ended March 31, 2022, as compared to the prior year period. While net income increased compared to the prior year, this was offset by the impact of higher working capital.

Net cash used in investing activities was $32.1 million for the three months ended March 31, 2022, primarily composed of $18.4 million for purchases of property and equipment, primarily vehicles, and $14.0 million for acquisitions.  Net cash used in investing activities was $73.3 million for the three months ended March 31, 2021, primarily composed of $61.1 million for acquisitions and $12.2 million for purchases of property and equipment, primarily vehicles.

Net cash used in financing activities was $70.5 million for the three months ended March 31, 2022.  During the three months ended March 31, 2022, we used $50.0 million for the repurchase of common stock pursuant to the 2019 Repurchase Program and the 2021 Repurchase Program, $10.9 million net activity related to exercise of share-based incentive awards and stock options and $9.6 million for debt service requirements.  Net cash used in financing activities was $26.5 million for the three months ended March 31, 2021.  During the three months ended March 31, 2021, we used $9.9 million for the repurchase of common stock pursuant to the 2019 Repurchase Program, $6.5 million in debt issuance costs as a result of entering into Amendment No.1 to Credit Agreement and 3.625% Senior Notes, $5.5 million net activity related to exercise of share-based incentive awards and stock options, and $4.6 million net payments for redemption of our 5.625% Senior Notes, issuance of our 3.625% Senior Notes, proceeds from the increase in our term loan from Amendment No.1 to Credit Agreement, and payments on equipment notes.

We have access to liquidity through our cash from operations and available borrowing capacity under our Credit Agreement, which provides for borrowing and/or standby letter of credit issuances of up to $500 million under the revolving facility.  For additional information regarding our outstanding debt and borrowing capacity see Item 8. Financial Statements and Supplementary Data – Note 6. Long-Term Debt.  

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The following table summarizes our liquidity, in thousands:

As of

March 31, 

December 31, 

    

2022

    

2021

Cash and cash equivalents (a)

$

126,553

$

139,779

Revolving facility

500,000

500,000

Less: standby letters of credit

(69,936)

(69,936)

Availability under revolving facility

430,064

430,064

Total liquidity

$

556,617

$

569,843

(a) Our cash and cash equivalents consist of AAA-rated money market funds as well as cash held in our demand deposit accounts.

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 needs for at least the next twelve months.

We occasionally use performance bonds to ensure completion of our work on certain larger customer contracts that can span multiple accounting periods.  Performance bonds generally do not have stated expiration dates; rather, we are released from the bonds as the contractual performance is completed.  We also have bonds outstanding for license and insurance.  Information regarding our outstanding bonds as of March 31, 2022 is incorporated by reference from Note 15 – Other Commitments and Contingencies to our unaudited condensed consolidated financial statements contained in Part I, Item 1 of this Quarterly Report.

OUTLOOK

We believe a number of factors, including rising interest rates, inflation and the overall health of the economy, can impact consumer demand for housing, causing volatility within this industry.  While there are concerns of weakening consumer demand due to a number of these factors, we remain optimistic about the U.S. housing market.  In addition, relatively low new home inventory, specifically entry level homes, the widening gap between housing starts and housing completions, and strong household formations should support growth. 

Similarly, we expect growth in the commercial, industrial end-markets we serve in connection with construction projects and industries separate from housing.  Although these end markets are dealing with higher material costs and are impacted by economic volatility, our bid activity and backlog remain strong.

OFF-BALANCE SHEET ARRANGEMENTS

We had no material off-balance sheet arrangements during the quarter ended March 31, 2022, other than short-term leases, letters of credit, and performance and license bonds, which have been disclosed in Part 1, Item 1 of this Quarterly report.

CONTRACTUAL OBLIGATIONS

There have been no material changes to our contractual obligations from those previously disclosed in our Annual Report for the year ended December 31, 2021, as filed with the SEC on February 22, 2022.

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CRITICAL ACCOUNTING POLICIES

We prepare our condensed consolidated financial statements in conformity with GAAP.  The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities, at the date of the financial statements, and the reported amounts of sales and expenses during the reporting period.  Actual results could differ from those estimates.  Our critical accounting policies have not changed from those previously reported in our Annual Report for year ended December 31, 2021, as filed with the SEC on February 22, 2022.

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,” “should,” “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 events outside of our control affecting the economy or our industry including, but not limited to, the duration and impact of the COVID-19 pandemic or similar health emergencies, supply chain disruptions resulting from global events including conflicts, sanctions, or blockades, and economic events affecting affordability or the market at large including inflation and interest rates.  Our future performance may also be affected by conditions or events relating to our business including, but not limited to, our ability to collect receivables from our customers, our reliance on residential new construction, residential repair/remodel, and commercial construction, our reliance on third-party suppliers and manufacturers, our ability to attract, develop, and retain talented personnel and our sales and labor force, our ability to maintain consistent practices across our locations, and our ability to maintain our competitive position.  We discuss the material risks we face under the caption entitled “Risk Factors” in our Annual Report for the year ended December 31, 2021, as filed with the SEC on February 22, 2022, as well as under the caption entitled “Risk Factors” in subsequent reports that we file with the SEC.  Our forward-looking statements in this filing speak only as of the date of this filing.  Factors or events that could cause our actual results to differ may emerge from time to time and it is not possible for us to predict all of them.  Unless required by law, we undertake no obligation to update publicly any forward-looking statements as a result of new information, future events, or otherwise.

Item 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rate Risk

On October 7, 2021, the Company entered into Amendment No. 2 to Credit Agreement. Amendment No. 2 to Credit Agreement provides for a term loan facility in an aggregate principal amount of $600.0 million, comprised of a $300.0 term loan facility and $300.0 million delayed draw term loan commitment, all of which was drawn on October 7, 2021 and a revolving facility with an aggregate borrowing capacity of $500.0 million. We also have outstanding 3.625% Senior Notes with an aggregate principal balance of $400.0 million and 4.125% Senior Notes which 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 aggregate term loan facility and revolving facility under Amendment No. 2 to 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 March 31, 2022, we had $588.8 million outstanding under our term loan facility, and the applicable interest rate as of such date was 1.46%. Based on our outstanding borrowings under Amendment No. 2 to Credit Agreement as of March 31, 2022, a 100 basis point increase in the interest rate would result in a $5.8 million increase in our annualized interest expense. There was no outstanding balance under the revolving facility as of March 31, 2022.

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Table of Contents

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 March 31, 2022.

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 March 31, 2022, that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II – OTHER INFORMATION

Item 1.  LEGAL PROCEEDINGS

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

Item 1A.  RISK FACTORS

There have been no material changes to our risk factors as previously disclosed in our Annual Report for the year ended December 31, 2021, as filed with the SEC on February 22, 2022 which are incorporated by reference herein.

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

The following table provides information regarding the repurchase of our common stock for the three months ended March 31, 2022, 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

January 1, 2022 - January 31, 2022

$

$

204,406

February 1, 2022 - February 28, 2022

23,900

$

208.40

23,900

$

199,425

March 1, 2022 - March 31, 2022

214,254

$

210.12

214,254

$

154,406

Total

238,154

$

209.95

238,154

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.

Item 3.  DEFAULTS UPON SENIOR SECURITIES

Not applicable.

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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.

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INDEX TO EXHIBITS

 

Incorporated by Reference

Filed

Exhibit No.

 

Exhibit Title

 

Form

 

Exhibit

 

Filing Date

 

Herewith

4.1

First Supplemental Indenture, dated November 8, 2021, to indenture dated March 15, 2021, between Company and U.S. Bank National Association, as trustee, relating to the Company’s 3.625% Senior Notes due March 15, 2029

X

4.2

First Supplemental Indenture, dated November 8, 2021, to indenture dated October 14, 2021, between Company and U.S. Bank National Association, as trustee, relating to the Company’s 4.125% Senior Notes due February 15, 2032

X

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

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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/ Robert Kuhns

 

Name:

Robert Kuhns

 

Title:

Vice President and Chief Financial Officer

 

 

(Principal Financial Officer)

May 5, 2022

33