TopBuild Corp - Quarter Report: 2023 June (Form 10-Q)

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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 June 30, 2023


☐	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 31,757,295 shares of Common Stock, par value $0.01 per share as of July 27, 2023.

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 Comprehensive Income	6

	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	21

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	28

Item 4.	Controls and Procedures	29

Part II.	Other Information

Item 1.	Legal Proceedings	29

Item 1A.	Risk Factors	29

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	29

Item 3.	Defaults upon Senior Securities	29

Item 4.	Mine Safety Disclosures	29

Item 5.	Other Information	29

Item 6.	Exhibits	29

Index to Exhibits		30

Signature		31

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
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
2021 Repurchase Program		$200 million share repurchase program authorized by the Board on July 26, 2021
2022 Repurchase Program		$200 million share repurchase program authorized by the Board on July 25, 2022
2022 ASR Agreement		$100 million accelerated share repurchase agreement with Bank of America, N.A.
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
Assured		Assured Insulating Inc.
ASU		Accounting Standards Update
Best Insulation		Best Insulation Holdings LLC
Board		Board of Directors of TopBuild
BofA		Bank of America, N.A.
Billings		Billings Insulation Service, Inc.
Credit Agreement		Amended and Restated Credit Agreement, dated March 20, 2020, among TopBuild, BofA as administrative agent, and the other lenders and agents party thereto.
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
Lenders		Bank of America, N.A., together with the other lenders party to "Credit Agreement"
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
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
Rocky Mountain		Rocky Mountain Spray Foam & Waterproofing, LLC
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
SOFR		Secured overnight financing rate
SPI		SPI LLC, d/b/a Specialty Products & Insulation
SRI		SRI Holdings, LLC
Term Loan		TopBuild's secured borrowings under the Credit Agreement due October 7, 2026.
TopBuild		TopBuild Corp. and its wholly-owned consolidated domestic subsidiaries.

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
	June 30,		December 31,
	2023		2022
ASSETS
Current assets:
Cash and cash equivalents	$	526,327	$	240,069
Receivables, net of an allowance for credit losses of $16,778 at June 30, 2023, and $16,281 at December 31, 2022		857,664		836,071
Inventories, net		385,049		438,644
Prepaid expenses and other current assets		25,556		34,257
Total current assets		1,794,596		1,549,041

Right of use assets		204,044		205,892
Property and equipment, net		258,746		253,484
Goodwill		1,991,949		1,966,994
Other intangible assets, net		595,706		614,967
Other assets		12,905		16,453
Total assets	$	4,857,946	$	4,606,831

LIABILITIES AND EQUITY
Current liabilities:
Accounts payable	$	468,602	$	487,114
Current portion of long-term debt		45,142		40,068
Accrued liabilities		180,594		199,370
Short-term operating lease liabilities		61,825		60,880
Short-term finance lease liabilities		2,180		2,207
Total current liabilities		758,343		789,639

Long-term debt		1,394,794		1,417,257
Deferred tax liabilities, net		254,777		251,481
Long-term portion of insurance reserves		57,217		59,783
Long-term operating lease liabilities		148,709		149,943
Long-term finance lease liabilities		4,519		6,673
Other liabilities		1,541		2,349
Total liabilities		2,619,900		2,677,125

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; 39,473,298 shares issued and 31,757,620 outstanding at June 30, 2023, and 39,325,916 shares issued and 31,642,832 outstanding at December 31, 2022		395		393
Treasury stock, 7,715,678 shares at June 30, 2023, and 7,683,084 shares at December 31, 2022, at cost		(699,149)		(692,799)
Additional paid-in capital		895,749		887,367
Retained earnings		2,056,935		1,756,665
Accumulated other comprehensive loss		(15,884)		(21,920)
Total equity		2,238,046		1,929,706
Total liabilities and equity	$	4,857,946	$	4,606,831

See notes to our unaudited condensed consolidated financial statements.

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TOPBUILD CORP.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

(In thousands except share and per common share data)


	Three Months Ended June 30,				Six Months Ended June 30,
	2023		2022		2023		2022
Net sales	$	1,317,262	$	1,274,285	$	2,582,500	$	2,443,203
Cost of sales		895,462		890,188		1,790,485		1,727,905
Gross profit		421,800		384,097		792,015		715,298

Selling, general, and administrative expense		184,697		176,876		355,481		344,123
Operating profit		237,103		207,221		436,534		371,175

Other income (expense), net:
Interest expense		(18,558)		(13,410)		(36,597)		(25,375)
Other, net		4,605		(279)		6,528		406
Other expense, net		(13,953)		(13,689)		(30,069)		(24,969)
Income before income taxes		223,150		193,532		406,465		346,206

Income tax expense		(58,750)		(49,835)		(106,195)		(87,796)
Net income	$	164,400	$	143,697	$	300,270	$	258,410

Net income per common share:
Basic	$	5.20	$	4.43	$	9.51	$	7.93
Diluted	$	5.18	$	4.41	$	9.47	$	7.87

Weighted average shares outstanding:
Basic		31,599,744		32,405,292		31,575,337		32,570,988
Diluted		31,731,807		32,614,449		31,722,660		32,827,549

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 June 30,				Six Months Ended June 30,
	2023		2022		2023		2022
Net income	$	164,400	$	143,697	$	300,270	$	258,410
Other comprehensive income (loss):
Foreign currency translation adjustment		4,283		(2,193)		6,037		1,026
Comprehensive income	$	168,683	$	141,504	$	306,307	$	259,436

See notes to our unaudited condensed consolidated financial statement

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TOPBUILD CORP.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(In thousands)


	Six Months Ended June 30,
	2023		2022
Cash Flows Provided by (Used in) Operating Activities:
Net income	$	300,270	$	258,410
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		64,652		60,621
Share-based compensation		6,886		7,061
Loss on sale of property and equipment		621		525
Amortization of debt issuance costs		1,440		1,427
Provision for bad debt expense		4,031		6,404
Loss from inventory obsolescence		3,290		3,610
Change in certain assets and liabilities:
Receivables, net		(37,247)		(107,739)
Inventories, net		54,623		(82,621)
Prepaid expenses and other current assets		8,897		648
Accounts payable		(8,806)		47,540
Accrued liabilities		(13,872)		16,884
Other, net		1,012		4,927
Net cash provided by operating activities		385,797		217,697

Cash Flows Provided by (Used in) Investing Activities:
Purchases of property and equipment		(30,672)		(36,034)
Acquisition of businesses, net of cash acquired		(45,948)		(18,746)
Proceeds from sale of property and equipment		782		618
Net cash used in investing activities		(75,838)		(54,162)

Cash Flows Provided by (Used in) Financing Activities:
Repayment of long-term debt		(18,829)		(19,287)
Proceeds from revolving credit facility		—		70,000
Repayment of revolving credit facility		—		(70,000)
Taxes withheld and paid on employees' equity awards		(6,350)		(11,667)
Exercise of stock options		1,497		1,452
Repurchase of shares of common stock		—		(150,050)
Payment of contingent consideration		(300)		(35)
Net cash used in financing activities		(23,982)		(179,587)
Impact of exchange rate changes on cash		281		142
Net increase (decrease) in cash and cash equivalents		286,258		(15,910)
Cash and cash equivalents- Beginning of period		240,069		139,779
Cash and cash equivalents- End of period	$	526,327	$	123,869

Supplemental disclosure of noncash activities:
Leased assets obtained in exchange for new operating lease liabilities	$	26,310	$	36,129
Accruals for property and equipment		1,449		563

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, 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
Net income		-		-		-		143,697		-		143,697
Share-based compensation		-		-		3,334		-		-		3,334
Repurchase of 409,312 shares pursuant to 2022 ASR Agreement		-		(80,050)		(20,000)		-		-		(100,050)
51 shares withheld to pay taxes on employees' equity awards		-		(9)		-		-		-		(9)
5,835 shares issued upon exercise of stock options		-		-		644		-		-		644
Other comprehensive loss, net of tax		-		-		-		-		(2,193)		(2,193)
Balance at June 30, 2022	$	393	$	(572,747)	$	861,542	$	1,459,084	$	(5,609)	$	1,742,663


									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, 2022	$	393	$	(692,799)	$	887,367	$	1,756,665	$	(21,920)	$	1,929,706
Net income		-		-		-		135,870		-		135,870
Share-based compensation		-		-		3,135		-		-		3,135
Issuance of 95,012 restricted share awards under long-term equity incentive plan		2		-		-		-		-		2
32,594 shares withheld to pay taxes on employees' equity awards		-		(6,350)		-		-		-		(6,350)
28,840 shares issued upon exercise of stock options		-		-		1,028		-		-		1,028
Other comprehensive income, net of tax		-		-		-		-		1,753		1,753
Balance at March 31, 2023	$	395	$	(699,149)	$	891,530	$	1,892,535	$	(20,167)	$	2,065,144
Net income		-						164,400		-		164,400
Share-based compensation		-		-		3,751		-		-		3,751
Issuance of 18,768 restricted share awards under long-term equity incentive plan		-		-		-		-		-		-
4,762 shares issued upon exercise of stock options		-		-		468		-		-		468
Other comprehensive income, net of tax		-		-		-		-		4,283		4,283
Balance at June 30, 2023	$	395	$	(699,149)	$	895,749	$	2,056,935	$	(15,884)	$	2,238,046

See notes to our unaudited condensed consolidated financial statements.

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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 June 30, 2023, our results of operations and comprehensive income for the three and six months ended June 30, 2023 and 2022, and our cash flows for the six months ended June 30, 2023 and 2022. The condensed consolidated balance sheet at December 31, 2022 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, 2022, as filed with the SEC on February 23, 2023.

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 intercompany transactions between TopBuild entities have been eliminated.

Recently Adopted Accounting Pronouncements

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 became effective for us on January 1, 2023, and did not have a material impact to our financial statements upon adoption.

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 June 30,
	2023								2022
		Installation		Specialty Distribution		Eliminations		Total		Installation		Specialty Distribution		Eliminations		Total
Residential	$	668,172	$	227,254	$	(56,667)	$	838,759	$	634,078	$	247,827	$	(50,007)	$	831,898
Commercial/Industrial		140,883		347,234		(9,614)		478,503		114,890		339,964		(12,467)		442,387
Net sales	$	809,055	$	574,488	$	(66,281)	$	1,317,262	$	748,968	$	587,791	$	(62,474)	$	1,274,285

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TOPBUILD CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

	Six Months Ended June 30,
	2023								2022
		Installation		Specialty Distribution		Eliminations		Total		Installation		Specialty Distribution		Eliminations		Total
Residential	$	1,313,875	$	451,579	$	(108,056)	$	1,657,398	$	1,197,382	$	484,238	$	(93,429)	$	1,588,191
Commercial/Industrial		262,270		681,283		(18,451)		925,102		228,279		647,415		(20,682)		855,012
Net sales	$	1,576,145	$	1,132,862	$	(126,507)	$	2,582,500	$	1,425,661	$	1,131,653	$	(114,111)	$	2,443,203

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


	Three Months Ended June 30,
	2023								2022
	Installation		Specialty Distribution		Eliminations		Total		Installation		Specialty Distribution		Eliminations		Total
Insulation and accessories	$	633,924	$	513,162	$	(57,599)	$	1,089,487	$	590,099	$	518,507	$	(53,343)	$	1,055,263
Glass and windows		68,841		-		-		68,841		57,121		-		-		57,121
Gutters		29,401		44,088		(7,571)		65,918		27,240		50,879		(8,094)		70,025
All other		76,889		17,238		(1,111)		93,016		74,508		18,405		(1,037)		91,876
Net sales	$	809,055	$	574,488	$	(66,281)	$	1,317,262	$	748,968	$	587,791	$	(62,474)	$	1,274,285


	Six Months Ended June 30,
	2023								2022
	Installation		Specialty Distribution		Eliminations		Total		Installation		Specialty Distribution		Eliminations		Total
Insulation and accessories	$	1,234,691	$	1,015,964	$	(109,572)	$	2,141,083	$	1,126,440	$	998,267	$	(97,153)	$	2,027,554
Glass and windows		132,283		-		-		132,283		108,317		-		-		108,317
Gutters		57,679		83,931		(14,736)		126,874		50,198		97,509		(15,096)		132,611
All other		151,492		32,967		(2,199)		182,260		140,706		35,877		(1,862)		174,721
Net sales	$	1,576,145	$	1,132,862	$	(126,507)	$	2,582,500	$	1,425,661	$	1,131,653	$	(114,111)	$	2,443,203

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


	Included in Line Item on	As of
	Condensed Consolidated	June 30,		December 31,
	Balance Sheets	2023		2022
Contract Assets:
Receivables, unbilled	Receivables, net	$	87,305	$	75,481

Contract Liabilities:
Deferred revenue	Accrued liabilities	$	16,332	$	21,940

The aggregate amount remaining on uncompleted performance obligations was $419.3 million as of June 30, 2023. We expect to satisfy the performance obligations and recognize revenue on substantially all of these uncompleted contracts over the next 18 months.

On certain of our long-term contracts, a percentage of the total project cost is withheld and not invoiced to the customer and collected until satisfactory completion of the customer’s project, typically within a year. This amount is referred to as retainage and is common practice in the construction industry. Retainage receivables are classified as a component of Receivables, net on our condensed consolidated balance sheets and were $73.5 million and $63.0 million as of June 30, 2023 and December 31, 2022, respectively.

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TOPBUILD CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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 2022, we performed an annual assessment on our goodwill resulting in no impairment and there were no indicators of impairment for the six months ended June 30, 2023.

Changes in the carrying amount of goodwill for six months ended June 30, 2023, by segment, were as follows, in thousands:


									Accumulated
	Gross Goodwill				FX Translation		Gross Goodwill		Impairment		Net Goodwill
	December 31, 2022		Additions		Adjustment		June 30, 2023		Losses		June 30, 2023
Goodwill, by segment:
Installation	$	1,826,979	$	23,568	$	-	$	1,850,547	$	(762,021)	$	1,088,526
Specialty Distribution		902,036		-		1,387		903,423		-		903,423
Total goodwill	$	2,729,015	$	23,568	$	1,387	$	2,753,970	$	(762,021)	$	1,991,949

See Note 11 – Business Combinations for goodwill recognized on acquisitions that occurred during the six months ended June 30, 2023.

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
	June 30, 2023		December 31, 2022
Gross definite-lived intangible assets	$	797,503	$	782,316
Accumulated amortization		(201,797)		(167,349)
Net definite-lived intangible assets	$	595,706	$	614,967

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


	Three Months Ended June 30,				Six Months Ended June 30,
	2023		2022		2023		2022
Amortization expense	$	17,211	$	16,809	$	34,107	$	33,839

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
	June 30, 2023		December 31, 2022
3.625% Senior Notes due 2029	$	400,000	$	400,000
4.125% Senior Notes due 2032		500,000		500,000
Term loan due 2026		551,250		566,250
Equipment notes		4,598		8,427
Unamortized debt issuance costs		(15,912)		(17,352)
Total debt, net of unamortized debt issuance costs		1,439,936		1,457,325
Less: current portion of long-term debt		45,142		40,068
Total long-term debt	$	1,394,794	$	1,417,257

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The following table sets forth our remaining principal payments for our outstanding debt balances as of June 30, 2023, in thousands:



	2023		2024		2025		2026		2027		Thereafter		Total
3.625% Senior Notes	$	-	$	-	$	-	$	-	$	-	$	400,000	$	400,000
4.125% Senior Notes		-		-		-		-		-		500,000		500,000
Term loan		18,750		45,000		48,750		438,750		-		-		551,250
Equipment notes		2,489		2,109		-		-		-		-		4,598
Total	$	21,239	$	47,109	$	48,750	$	438,750	$	-	$	900,000	$	1,455,848

Credit Agreement

The following table outlines the key terms of the 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 June 30, 2023		6.20	%
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). This incremental facility has not been accessed as of June 30, 2023.

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

Interest expense 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 SOFR rate for U.S. dollar deposits with a term of one month, plus 1.00 percent; or

●

A SOFR 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%.

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 SOFR rate borrowings, the applicable margin ranges from 1.00 percent to 2.50 percent. Borrowings under the 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.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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


	As of
	June 30, 2023		December 31, 2022
Revolving facility	$	500,000	$	500,000
Less: standby letters of credit		(67,539)		(67,689)
Availability under revolving facility	$	432,461	$	432,311

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

The 3.625% Senior Notes are $400.0 million senior unsecured obligations and bear interest at 3.625% per year, payable semiannually in arrears on March 15 and September 15, beginning 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 notes), 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

The 4.125% Senior Notes are $500.0 million 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 basis points. 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

We did not issue equipment notes during the six months ended June 30, 2023. 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 in 2023 and 2024 and bear interest at fixed rates between 2.8% and 4.4%.

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TOPBUILD CORP.

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 June 30, 2023
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.

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 and equipment notes approximate their 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 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 June 30, 2023 (Level 1 fair value measurement), we estimate the fair value of each in the table below:


	As of June 30, 2023
		Fair Value		Gross Carrying Value
3.625% Senior Notes	$	350,400	$	400,000
4.125% Senior Notes	$	430,100	$	500,000

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TOPBUILD CORP.

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 June 30,
	2023		2022		2023		2022

	Net Sales				Operating Profit (b)
Operations by segment (a):
Installation	$	809,055	$	748,968	$	172,278	$	139,919
Specialty Distribution		574,488		587,791		85,980		86,749
Intercompany eliminations		(66,281)		(62,474)		(11,198)		(10,435)
Total	$	1,317,262	$	1,274,285		247,060		216,233
General corporate expense, net (c)						(9,957)		(9,012)
Operating profit, as reported						237,103		207,221
Other expense, net						(13,953)		(13,689)
Income before income taxes					$	223,150	$	193,532


	Six Months Ended June 30,
	2023		2022		2023		2022

	Net Sales				Operating Profit (b)
Operations by segment (a):
Installation	$	1,576,145	$	1,425,661	$	319,176	$	252,598
Specialty Distribution		1,132,862		1,131,653		159,313		157,170
Intercompany eliminations		(126,507)		(114,111)		(21,169)		(19,144)
Total	$	2,582,500	$	2,443,203		457,320		390,624
General corporate expense, net (c)						(20,786)		(19,449)
Operating profit, as reported						436,534		371,175
Other expense, net						(30,069)		(24,969)
Income before income taxes					$	406,465	$	346,206

(a)	All of our operations are located primarily in the U.S and to a lesser extent 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. INCOME TAXES

Our effective tax rates were 26.3 percent and 26.1 percent for the three and six months ended June 30, 2023, and 2022, respectively. The effective rates for the three and six months ended June 30, 2022 were 25.8 percent and 25.4 percent, respectively. The higher 2023 tax rate for the three months ended June 30, 2023, compared to the three months ended June 30, 2022, was primarily related to state tax adjustments and miscellaneous items.

A tax expense of $0.2 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 six months ended June 30, 2023. A tax benefit of $1.6 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 six months ended June 30, 2022.

9. 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.

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TOPBUILD CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

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


	Three Months Ended June 30,				Six Months Ended June 30,
	2023		2022		2023		2022
Net income (in thousands)	$	164,400	$	143,697	$	300,270	$	258,410

Weighted average number of common shares outstanding - basic		31,599,744		32,405,292		31,575,337		32,570,988

Dilutive effect of common stock equivalents:
RSAs with service-based conditions		25,052		12,123		23,848		13,625
RSAs with market-based conditions		20,039		52,871		22,450		76,515
RSAs with performance-based conditions		1,974		39,677		15,503		51,851
Stock options		84,998		104,486		85,522		114,570

Weighted average number of common shares outstanding - diluted		31,731,807		32,614,449		31,722,660		32,827,549

Basic net income per common share	$	5.20	$	4.43	$	9.51	$	7.93

Diluted net income per common share	$	5.18	$	4.41	$	9.47	$	7.87

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 June 30,				Six Months Ended June 30,
	2023		2022		2023		2022
Anti-dilutive common stock equivalents:
RSAs with service-based conditions		-		18,880		5,582		14,562
RSAs with market-based conditions		-		82		4,467		232
RSAs with performance-based conditions		-		-		-		3,954
Stock options		14,801		22,875		18,541		19,731
Total anti-dilutive common stock equivalents		14,801		41,837		28,590		38,479

10. 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 June 30, 2023, we had 1.8 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.

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TOPBUILD CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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


	Three Months Ended June 30,				Six Months Ended June 30,
	2023		2022		2023		2022
Share-based compensation expense	$	3,751	$	3,334	$	6,886	$	7,061
Income tax (expense)/benefit	$	(180)	$	(32)	$	(225)	$	1,573

The following table presents a summary of our share-based compensation activity for six months ended June 30, 2023, 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, 2022	173.2	$	195.06	182.2	$	32.25	$	86.79	$	13,992.3
Granted	101.3	$	200.90	—	$	—	$	—		—
Converted/Exercised	(99.4)	$	147.26	(33.6)	$	16.81	$	47.42	$	5,041.0
Forfeited/Expired	(7.2)	$	231.79	—	$	—	$	—		—
Balance June 30, 2023	167.9	$	226.51	148.6	$	35.87	$	95.69	$	25,306.8

Exercisable June 30, 2023 (a)				141.2	$	33.04	$	89.44	$	24,924.8

(a)	The weighted average remaining contractual term for vested stock options is approximately 5.6 years.

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


	As of June 30, 2023
	Unrecognized Compensation Expense on Unvested Awards		Weighted Average Remaining Compensation Expense Period
RSAs	$	22,105		1.1
Stock options		287		0.4
Total unrecognized compensation expense related to unvested awards	$	22,392

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 16, 2021	$	2,177	$	-	$	544	$	2,177	$	4,354
February 15, 2022	$	3,062	$	-	$	766	$	3,062	$	6,124
February 21, 2023	$	4,156	$	-	$	1,039	$	4,156	$	8,312

During the first quarter of 2023, RSAs with performance-based conditions that were granted on February 17, 2020 vested based on cumulative three-year achievement of 200%. Total compensation expense recognized over the three-year performance period, net of forfeitures, was $5.0 million.

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TOPBUILD CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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 2023, 2022, and 2021:


	2023			2022			2021
Measurement period (years)		2.86			2.87			2.87
Risk free interest rate		4.42	%		1.76	%		0.22	%
Dividend yield		0.00	%		0.00	%		0.00	%
Estimated fair value of market-based RSAs at grant date	$	270.64		$	298.20		$	298.66

11. BUSINESS COMBINATIONS

Acquiring businesses is a key 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 were $1.1 million and $2.8 million in the three and six months ended June 30, 2023, respectively, and $0.9 million and $1.3 million for the three and six months ended June 30, 2022, respectively. Acquisition related costs are included in selling, general, and administrative expense in our condensed consolidated statements of operations.

On January 26, 2023, we acquired the assets of the residential insulation business of SRI. This installation acquisition enhanced our presence in Georgia, Michigan, Ohio, Florida, Alabama and South Carolina. The purchase price of $45.8 million was funded by cash on hand and the fair values of the assets acquired and liabilities assumed are as follows as of June 30, 2023, in thousands:


Purchase price fair values:
Accounts receivable	$	5,751
Inventories		4,377
Prepaid and other assets		203
Property and equipment		4,623
ROU asset (operating)		4,695
Intangible assets		13,740
Goodwill		23,687
Accounts payable		(6,368)
Lease liabilities (operating)		(4,771)
All other liabilities		(89)
Net assets acquired	$	45,848

Estimates of acquired intangible assets related to the acquisition of SRI are as follows as of June 30, 2023, dollars in thousands:

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.

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TOPBUILD CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The table below provides a summary as of June 30, 2023 for the businesses acquired during the six months ended June 30, 2022, in thousands:


2022 Acquisitions	Date		Cash Paid		Contingent Consideration		Goodwill Acquired
Billings		2/3/2022	$	7,005	$	—	$	3,313
Assured		4/7/2022		4,719		600		3,406
All others		Various		1,500		—		780
Total			$	13,224	$	600	$	7,499

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 $23.7 million and $7.5 million of goodwill recorded from acquisitions completed in the six months ended June 30, 2023 and 2022, respectively, is expected to be deductible for income tax purposes.

12. ACCRUED LIABILITIES

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


	As of
	June 30, 2023		December 31, 2022
Accrued liabilities:
Salaries, wages, and bonus/commissions	$	68,353	$	75,237
Insurance liabilities		28,663		28,870
Customer rebates		12,492		21,561
Deferred revenue		16,332		21,940
Sales and property taxes		15,765		15,757
Interest payable on long-term debt		11,978		12,146
Other		27,011		23,859
Total accrued liabilities	$	180,594	$	199,370

See Note 3 – Revenue Recognition for discussion of our deferred revenue balances.

13. 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, claims against our builder customers for issues relating to our workmanship. We generally exclude from our contracts with builder customers indemnity relating to product quality and warranty claims, as we pass such claims directly to the manufacturers of the products we install or distribute. 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.

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TOPBUILD CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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
	June 30, 2023		December 31, 2022
Outstanding bonds:
Performance bonds	$	140,363	$	152,434
Licensing, insurance, and other bonds		25,559		25,439
Total bonds	$	165,922	$	177,873

14. SUBSEQUENT EVENTS

On July 10, 2023, we acquired the assets of the residential insulation installer business Rocky Mountain. This installation acquisition enhanced our presence in the Colorado market. The purchase price of approximately $7.2 million was funded by cash on hand.

On July 17, 2023, we acquired the assets of the residential insulation business Best Insulation. This installation acquisition enhanced our presence in Texas, Arizona, Tennessee, and Florida markets. The purchase price of approximately $95.0 million was funded by cash on hand.

Both acquisitions were accounted for as a business combination under ASC 805, “Business Combinations.” During the measurement period, we expect to receive additional detailed information to complete the purchase price allocation.

On July 26, 2023, we entered into an agreement to acquire SPI, a leading installer and specialty distributor of insulation and building material products to the construction industry in the United States and Canada. SPI has 85 branches across the United States and 4 branches in Canada. We expect to fund this $960.0 million transaction with a new $550.0 million delayed draw term loan and cash on hand. The transaction is subject to customary closing conditions, including expiration or termination of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976.

On July 26, 2023, we entered into Amendment No. 4 to our Credit Agreement, which among other things, (i) increases the permitted borrowings from $300.0 million to $850.0 million, and (ii) provides for a new $550.0 million delayed draw term loan, the proceeds of which will be used, in part, to finance the acquisition of SPI.

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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 specialty distributor of insulation and other building material products to the construction industry in the United States and Canada.

We operate in two segments: Installation and Specialty Distribution. Our Installation segment installs insulation and other building products nationwide. As of June 30, 2023, we had approximately 235 Installation branches located across the United States. We install various insulation applications, including fiberglass batts and rolls, blown-in loose fill fiberglass, polyurethane spray foam, and blown-in loose fill cellulose. 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 distributes building and mechanical insulation, insulation accessories, rain gutters, and other building product materials for the residential and commercial/industrial end markets. As of June 30, 2023, we had approximately 156 distribution centers located across the United States and 18 distribution centers in Canada. Our Specialty Distribution customer base consists of thousands of insulation contractors of all sizes serving a wide variety of residential and commercial/industrial industries, 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 several 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 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/industrial 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, 2022, as filed with the SEC on February 23, 2023.

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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SECOND QUARTER 2023 VERSUS SECOND QUARTER 2022

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 June 30,
	2023			2022
Net sales	$	1,317,262		$	1,274,285
Cost of sales		895,462			890,188
Cost of sales ratio		68.0	%		69.9	%

Gross profit		421,800			384,097
Gross profit margin		32.0	%		30.1	%

Selling, general, and administrative expense		184,697			176,876
Selling, general, and administrative expense to sales ratio		14.0	%		13.9	%

Operating profit		237,103			207,221
Operating profit margin		18.0	%		16.3	%

Other expense, net		(13,953)			(13,689)
Income tax expense		(58,750)			(49,835)
Net income	$	164,400		$	143,697
Net margin		12.5	%		11.3	%

Sales and Operations

Net sales increased 3.4% for the three months ended June 30, 2023, from the comparable period of 2022. The increase was primarily driven by a 1.8% impact from higher selling prices, a 1.3% increase in sales from acquisitions, and a 0.2% increase in sales volume.

Gross profit margins were 32.0% and 30.1% for the three months ended June 30, 2023 and 2022, respectively. Gross profit margin improved primarily due to productivity initiatives, continued synergies from our 2021 acquisition of DI, and higher selling prices partially offset by higher material costs.

Selling, general, and administrative expenses as a percentage of sales were 14.0% and 13.9% for the three months ended June 30, 2023 and 2022, respectively. Selling, general, and administrative expenses as a percentage of sales were slightly higher due to increased incentive compensation and headcount costs partially offset by continued realization of synergies on our 2021 acquisition of DI.

Operating margins were 18.0% and 16.3% for the three months ended June 30, 2023 and 2022, respectively. The increase in operating margins was due to productivity initiatives, continued realization of synergies from our 2021 acquisition of DI, and higher selling prices partially offset by higher material costs and slightly higher selling, general, and administrative expenses compared to the same quarter in 2022.

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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 June 30,
	2023			2022			Percent Change
Net sales by business segment:
Installation	$	809,055		$	748,968		8.0	%
Specialty Distribution		574,488			587,791		(2.3)	%
Intercompany eliminations		(66,281)			(62,474)
Net sales	$	1,317,262		$	1,274,285		3.4	%

Operating profit by business segment:
Installation	$	172,278		$	139,919		23.1	%
Specialty Distribution		85,980			86,749		(0.9)	%
Intercompany eliminations		(11,198)			(10,435)
Operating profit before general corporate expense		247,060			216,233		14.3	%
General corporate expense, net		(9,957)			(9,012)
Operating profit	$	237,103		$	207,221		14.4	%

Operating profit margins:
Installation		21.3	%		18.7	%
Specialty Distribution		15.0	%		14.8	%
Operating profit margin before general corporate expense		18.8	%		17.0	%
Operating profit margin		18.0	%		16.3	%

Installation

Sales

Sales in our Installation segment increased $60.1 million, or 8.0%, for the three months ended June 30, 2023, as compared to the same period in 2022. Sales increased 2.9% from both higher selling prices and sales volume, and 2.2% from acquisitions.

Operating margins

Operating margins in our Installation segment were 21.3% and 18.7% for the three months ended June 30, 2023 and 2022, respectively. The increase in operating margin was primarily driven by productivity initiatives and higher sales partially offset by higher material costs compared to the same quarter in 2022.

Specialty Distribution

Sales

Sales in our Specialty Distribution segment decreased $13.3 million, or 2.3%, for the three months ended June 30, 2023, as compared to the same period in 2022. Sales decreased 2.9% from lower sales volume, which was partially offset by a 0.6% increase from higher selling prices.

Operating margins

Operating margins in our Specialty Distribution segment were 15.0% and 14.8% for the three months ended June 30, 2023 and 2022, respectively. The increase in operating margin was driven by productivity initiatives and continued realization of synergies from our 2021 acquisition of DI, partially offset by lower sales volume.

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OTHER ITEMS

Other expense, net

Other expense, net, was $14.0 million and $13.7 million for the three months ended June 30, 2023 and 2022, respectively. Interest expense increased by $5.1 million for the three months ended June 30, 2023 due to significantly higher interest rates on borrowings under the Credit Agreement compared to the same period in 2022. This increase in interest expense was partially offset by $4.8 million higher interest income over the same period as a result of higher interest rates and cash balances.

Income tax expense

Income tax expense was $58.8 million, an effective tax rate of 26.3 percent, for the three months ended June 30, 2023, compared to $49.8 million, an effective tax rate of 25.8 percent, for the comparable period in 2022. The tax rate for the three months ended June 30, 2023, was higher primarily related to state tax adjustments and miscellaneous items.

FIRST SIX MONTHS 2023 VERSUS FIRST SIX MONTHS 2022

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:


	Six Months Ended June 30,
	2023			2022
Net sales	$	2,582,500		$	2,443,203
Cost of sales		1,790,485			1,727,905
Cost of sales ratio		69.3	%		70.7	%

Gross profit		792,015			715,298
Gross profit margin		30.7	%		29.3	%

Selling, general, and administrative expense		355,481			344,123
Selling, general, and administrative expense to sales ratio		13.8	%		14.1	%

Operating profit		436,534			371,175
Operating profit margin		16.9	%		15.2	%

Other expense, net		(30,069)			(24,969)
Income tax expense		(106,195)			(87,796)
Net income	$	300,270		$	258,410
Net margin		11.6	%		10.6	%

Sales and Operations

Net sales increased 5.7% for the six months ended June 30, 2023, from the comparable period of 2022. The increase was primarily driven by a 3.7% increase due to higher selling prices, a 1.3% impact from our acquisitions and a 0.7% increase in sales volume.

Gross profit margins were 30.7% and 29.3% for the six months ended June 30, 2023 and 2022, respectively. Gross profit margin improved primarily due to productivity initiatives, continued realization of synergies from our 2021 acquisition of DI, and higher selling prices partially offset by higher material costs.

Selling, general, and administrative expense, as a percent of sales, was 13.8% and 14.1% for the six months ended June 30, 2023 and 2022, respectively. The decrease in selling, general, and administrative expenses as a percentage of sales was driven primarily by higher sales and continued realization of synergies from our 2021 acquisition of DI, partially offset by increased incentive compensation and headcount costs.

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Operating margins were 16.9% and 15.2% for the six months ended June 30, 2023 and 2022, respectively. The increase in operating margins was due to higher selling prices and sales from acquisitions, productivity initiatives and continued realization of synergies from our 2021 acquisition of DI partially offset by higher material costs and selling, general and administrative expenses compared to the same period in 2022.

Business Segment Results

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


	Six Months Ended June 30,
	2023			2022			Percent Change
Net sales by business segment:
Installation	$	1,576,145		$	1,425,661		10.6	%
Specialty Distribution		1,132,862			1,131,653		0.1	%
Intercompany eliminations		(126,507)			(114,111)
Net sales	$	2,582,500		$	2,443,203		5.7	%

Operating profit by business segment (a):
Installation	$	319,176		$	252,598		26.4	%
Specialty Distribution		159,313			157,170		1.4	%
Intercompany eliminations		(21,169)			(19,144)
Operating profit before general corporate expense		457,320			390,624		17.1	%
General corporate expense, net (b)		(20,786)			(19,449)
Operating profit	$	436,534		$	371,175		17.6	%

Operating profit margins:
Installation		20.3	%		17.7	%
Specialty Distribution		14.1	%		13.9	%
Operating profit margin before general corporate expense		17.7	%		16.0	%
Operating profit margin		16.9	%		15.2	%

Installation

Sales

Sales in our Installation segment increased $150.5 million, or 10.6%, for the six months ended June 30, 2023, as compared to the same period in 2022. Sales increased 4.3% from higher selling prices, 4.1% from higher sales volume and 2.2% from our acquisitions.

Operating margins

Operating margins in our Installation segment were 20.3% and 17.7% for the six months ended June 30, 2023 and 2022, respectively. The increase in operating margin was primarily driven by productivity initiatives, higher sales volume, and higher selling prices partially offset by higher material costs compared to the same quarter in 2022.

Specialty Distribution

Sales

Sales in our Specialty Distribution segment increased $1.2 million, or 0.1%, for the six months ended June 30, 2023, as compared to the same period in 2022. Sales increased 3.0% from higher selling prices which was offset by a 2.9% decline in sales volume.

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Operating margins

Operating margins in our Specialty Distribution segment were 14.1% and 13.9% for the six months ended June 30, 2023 and 2022, respectively. The increase in operating margins was driven by productivity initiatives, continued realization of synergies from our 2021 acquisition of DI, and higher selling prices partially offset by lower sales volume and higher material costs.

OTHER ITEMS

Other expense, net

Other expense, net, which primarily consisted of interest expense, was $30.1 million and $25.0 million for the six months ended June 30, 2023 and 2022, respectively. Interest expense increased by $11.2 million for the six months ended June 30, 2023 due to significantly higher interest rates on our borrowings under the Credit Agreement compared to the same period in 2022. This increase in interest expense was partially offset by $7.2 million higher interest income over the same period due to higher interest rates and cash balances.

Income tax expense

Income tax expense was $106.2 million, an effective tax rate of 26.1 percent, for the six months ended June 30, 2023 compared to $87.8 million, an effective tax rate of 25.4 percent, for the comparable period in 2022. The tax rate for the six months ended June 30, 2023 was higher primarily related to a decrease in the benefit related to share-based compensation.

Cash Flows and Liquidity

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


	Six Months Ended June 30,
	2023		2022
Changes in cash and cash equivalents:
Net cash provided by operating activities	$	385,797	$	217,697
Net cash used in investing activities		(75,838)		(54,162)
Net cash used in financing activities		(23,982)		(179,587)
Impact of exchange rate changes on cash		281		142
Net increase (decrease) in cash and cash equivalents	$	286,258	$	(15,910)

Net cash flows provided by operating activities increased $168.1 million for the six months ended June 30, 2023, as compared to the prior year period. Net income was up $41.9 million, or 16.2%, compared with the prior year period, driven by productivity initiatives, continued realization of synergies from our acquisition of DI and higher selling prices partially offset by lower sales volume and higher material costs. Cash flows provided by operating activities was higher in the six months ended June 30, 2023 as compared to the same period in 2022, due to changes in inventory and accounts receivable.

Net cash used in investing activities was $75.8 million for the six months ended June 30, 2023, primarily composed of $45.9 million for the acquisition of SRI and $30.7 million for purchases of property and equipment, mainly vehicles and equipment. Net cash used in investing activities was $54.2 million for the six months ended June 30, 2022, primarily composed of $36.0 million for purchases of property and equipment, mainly vehicles, and $18.7 million for acquisitions.

Net cash used in financing activities was $24.0 million for the six months ended June 30, 2023. During the six months ended June 30, 2023, we used $18.8 million for debt repayments and incurred $4.9 million net cash outflow related to exercise of share-based incentive awards and stock options. Net cash used in financing activities was $179.6 million for the six months ended June 30, 2022. During the six months ended June 30, 2022, we used $150.1 million for the repurchase of common stock pursuant to the 2021 Repurchase Program, $19.3 million for debt repayments, and $10.2 million net activity related to exercise of share-based incentive awards and stock options. Additionally, we borrowed and repaid $70.0 million on our Revolving Facility, all within the second quarter of 2022.

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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. Additional information regarding our outstanding debt and borrowing capacity is incorporated by reference from Note 5 – Long-term Debt to our unaudited condensed consolidated financial statements contained in Part 1, Item 1 of this Quarterly Report.

The following table summarizes our liquidity, in thousands:


	As of
	June 30,		December 31,
	2023		2022
Cash and cash equivalents (a)	$	526,327	$	240,069

Revolving facility		500,000		500,000
Less: standby letters of credit		(67,539)		(67,689)
Availability under revolving facility		432,461		432,311

Total liquidity	$	958,788	$	672,380

(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 known contractual obligations including funding our debt service requirements, capital expenditures, lease obligations and working capital needs for at least the next twelve months. We also have adequate liquidity to maintain off-balance sheet arrangements for short-term leases, letters of credit, and performance and license bonds. Information regarding our outstanding bonds as of June 30, 2023, is incorporated by reference from Note 13 – Other Commitments and Contingencies to our unaudited condensed consolidated financial statements contained in Part I, Item 1 of this Quarterly Report.

OUTLOOK

Residential New Construction

Recent builder sentiment and May housing starts data have increased optimism for the single family housing market. Coming into 2023, we saw a continued slowdown in single family starts and although we expect this slowdown to impact our single family volume in the second half of this year, we believe it will be less than we originally anticipated. Multifamily starts have remained strong and we expect our multifamily construction volume to remain solid through the end of the year. Our sales the first half of 2023 benefitted from the significant backlog of houses under construction and continued strong multifamily activity. While there is still some uncertainty around the economy and the impacts of higher interest rates, we remain optimistic about the long-term fundamentals of the U.S. housing market, supported by a limited supply of both new and existing homes and favorable demographic trends, including increasing household formations.

Commercial and Industrial Construction

We continue to have a strong backlog and bidding activity to support our commercial/industrial sales. We see a lot of major projects being planned across several different industries fueling demand for our Specialty Distribution products. In addition, maintenance and repair on industrial sites will serve as a continued driver for our business.

OFF-BALANCE SHEET ARRANGEMENTS

We had no material off-balance sheet arrangements during the three months ended June 30, 2023, 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.

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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, 2022, as filed with the SEC on February 23, 2023.

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 the year ended December 31, 2022, as filed with the SEC on February 23, 2023.

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,” “may,” “project,” “estimate” 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 the duration and impact of negative macro-economic impacts on the United States economy, specifically with respect to residential, commercial/industrial construction, our ability to collect our receivables from our customers, our reliance on residential new construction, residential repair/remodel, and commercial/industrial 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; our ability to maintain our competitive position; and our ability to realize the expected benefits of our acquisitions. We discuss the material risks we face under the caption entitled “Risk Factors” in our Annual Report for the year ended December 31, 2022, as filed with the SEC on February 23, 2023, 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

We have a Term Loan outstanding with a principal balance of $551.3 million 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 with an aggregate principal balance of $500.0 million. The 3.625% Senior Notes and 4.125% Senior Notes bear a fixed rate of interest and therefore are excluded from the calculation below as they are not subject to fluctuations in interest rates.

Interest payable on both the aggregate Term Loan and revolving facility 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 June 30, 2023, the applicable interest rate as of such date was 6.20%. Based on our outstanding borrowings as of June 30, 2023, a 100-basis point increase in the interest rate would result in a $5.4 million increase in our annualized interest expense. There was no outstanding balance under the revolving facility as of June 30, 2023.

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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 June 30, 2023.

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 June 30, 2023, 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 13 – 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, 2022, as filed with the SEC on February 23, 2023 which are incorporated by reference herein.

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

On July 25, 2022, our Board authorized the 2022 Repurchase Program, pursuant to which the Company may purchase up to $200 million of our common stock. There were no share repurchases executed during the six months ended June 30, 2023, leaving $154.4 million remaining under the 2022 Share Repurchase Program.

Item 3. DEFAULTS UPON SENIOR SECURITIES

Not applicable.

Item 4. MINE SAFETY DISCLOSURES

Not applicable.

Item 5. OTHER INFORMATION

During the quarter ended June 30, 2023, no director or officer (as defined in Rule 16a-1(f) promulgated under the Exchange Act) of the Company adopted or terminated a "Rule 10b5-1 trading arrangement" or "non-Rule 10b5-1 trading arrangement" (as each term is defined in Item 408 of Regulation S-K).

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
10.16	Amendment No. 4 to Amended and Restated Credit Agreement and Increase Joinder, dated July 26, 2023, among TopBuild Corp., Bank of America, N.A. as administrative agent, and the other lenders and agents party thereto.				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 and Principal Accounting Officer)

August 3, 2023