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TOPBUILD CORP.

(BLD)
  Report
Delayed Nyse  -  04:00 2022-12-05 pm EST
156.71 USD   +0.09%
11/16Transcript : TopBuild Corp. Presents at Stephens Annual Investment Conference 2022, Nov-16-2022 03:00 PM
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11/15Transcript : TopBuild Corp. Presents at Deutsche Bank Industrials Conference 2022, Nov-15-2022 10:45 AM
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TOPBUILD CORP MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (form 10-Q)

08/02/2022 | 04:14pm EST

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 June 30, 2022, had approximately 230 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 June 30, 2022, had approximately 165 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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Table of Contents

SECOND QUARTER 2022 VERSUS SECOND 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 June 30,
                                                                    2022               2021
Net sales                                                     $      1,274,285    $       834,255
Cost of sales                                                          890,188            591,075
Cost of sales ratio                                                       69.9 %             70.9 %

Gross profit                                                           384,097            243,180
Gross profit margin                                                       30.1 %             29.1 %

Selling, general, and administrative expense                           176,876            114,894
Selling, general, and administrative expense to sales ratio               13.9 %             13.8 %

Operating profit                                                       207,221            128,286
Operating profit margin                                                   16.3 %             15.4 %

Other expense, net                                                    (13,689)            (6,039)
Income tax expense                                                    (49,835)           (31,867)
Net income                                                    $        143,697    $        90,380
Net margin                                                                11.3 %             10.8 %


Sales and Operations

Net sales increased 52.7 percent for the three months ended June 30, 2022, from the comparable period of 2021. The increase was primarily driven by a 32.0 percent impact from our acquisitions, 15.2 percent increase due to higher selling prices, and 5.6 percent increase in sales volume.

Gross profit margins were 30.1 percent and 29.1 percent for the three months ended June 30, 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 13.9 and 13.8 percent for the three months ended June 30, 2022 and 2021, respectively. The increase in selling, general, and administrative expense as a percent of sales was driven primarily by costs associated with acquisitions, the amortization of intangible assets related to purchase accounting and increased insurance costs.

Operating margins were 16.3 percent and 15.4 percent for the three months ended June 30, 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.

                                       25

  Table of Contents

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,
                                                  2022                2021         Percent Change
Net sales by business segment:
Installation                                 $       748,968     $      605,625              23.7 %
Specialty Distribution                               587,791            273,364             115.0 %
Intercompany eliminations                           (62,474)           (44,734)
Net sales                                    $     1,274,285     $      834,255              52.7 %

Operating profit by business segment:
Installation                                 $       139,919     $       99,066              41.2 %
Specialty Distribution                                86,749             42,856             102.4 %
Intercompany eliminations                           (10,435)            (6,932)
Operating profit before general corporate
expense                                              216,233            134,990              60.2 %
General corporate expense, net                       (9,012)            (6,704)
Operating profit                             $       207,221     $      128,286              61.5 %

Operating profit margins:
Installation                                            18.7 %             16.4 %
Specialty Distribution                                  14.8 %             15.7 %
Operating profit margin before general
corporate expense                                       17.0 %             16.2 %
Operating profit margin                                 16.3 %             15.4 %


Installation

Sales

Sales in our Installation segment increased $143.3 million, or 23.7 percent, for the three months ended June 30, 2022, as compared to the same period in 2021.

The increase was due to a 13.3 percent increase from higher selling prices, 8.3 percent increase in sales volume, and 2.0 percent impact from our acquisitions.

Operating margins

Operating margins in our Installation segment were 18.7 percent and 16.4 percent for the three months ended June 30, 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 $314.4 million, or 115.0 percent, for the three months ended June 30, 2022, as compared to the same period in 2021. Of the 115.0 percent increase, 94.7 percent increase was due to our acquisitions and 20.0 percent was due to higher selling prices.

Operating margins

Operating margins in our Specialty Distribution segment were 14.8 percent and 15.7 percent for the three months ended June 30, 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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  Table of Contents

OTHER ITEMS

Other expense, net

Other expense, net, was $13.7 million and $6.0 million for the three months ended June 30, 2022 and 2021, respectively. The change primarily related to interest expense, which increased by $7.3 million for the three months ended June 30, 2022, as compared to the same period in 2021. This increase was due to higher long-term debt balances during the three months ended June 30, 2022, including the balance on the 4.125% Senior Notes which were issued in the fourth quarter of 2021 to finance the acquisition of DI and higher interest rates on borrowings under the Credit Agreement.

Income tax expense

Income tax expense was $49.8 million, an effective tax rate of 25.8 percent, for the three months ended June 30, 2022, compared to $31.9 million, an effective tax rate of 26.1 percent, for the comparable period in 2021. The tax rate for the three months ended June 30, 2022, was lower due to state tax adjustments and miscellaneous items partially offset by a decrease in the benefit related to share-based compensation.

FIRST SIX MONTHS 2022 VERSUS FIRST SIX MONTHS 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:

                                                                 Six Months Ended June 30,
                                                                    2022             2021
Net sales                                                      $    2,443,203     $ 1,577,053
Cost of sales                                                       1,727,905       1,136,114
Cost of sales ratio                                                      70.7 %          72.0 %

Gross profit                                                          715,298         440,939
Gross profit margin                                                      29.3 %          28.0 %

Selling, general, and administrative expense                          344,123         216,767
Selling, general, and administrative expense to sales ratio              14.1 %          13.7 %

Operating profit                                                      371,175         224,172
Operating profit margin                                                  15.2 %          14.2 %

Other expense, net                                                   (24,969)        (26,425)
Income tax expense                                                   (87,796)        (47,525)
Net income                                                     $      258,410     $   150,222
Net margin                                                               10.6 %           9.5 %


Sales and Operations

Net sales increased 54.9 percent for the six months ended June 30, 2022, from the comparable period of 2021. The increase was primarily driven by a 35.1 percent impact from our acquisitions, a 15.8 percent increase due to higher selling prices and a 4.0 percent increase in sales volume.

Gross profit margins were 29.3 percent and 28.0 percent for the six months ended June 30, 2022 and 2021, respectively. Gross profit margin improved primarily due to higher selling prices partially offset by an increase in cost of material.

Selling, general, and administrative expense, as a percent of sales, was 14.1 and 13.7 percent for the six months ended June 30, 2022 and 2021, respectively.

The increase in selling, general, and administrative expense as a percent of sales was driven primarily by costs associated with acquisitions, the amortization of intangible assets related to purchase accounting and increased insurance costs.


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  Table of Contents

Operating margins were 15.2 percent and 14.2 percent for the six months ended June 30, 2022 and 2021, respectively. The increase in operating margins was due to higher selling prices and volume, partially offset by an increase in cost of material.

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,
                                                 2022              2021        Percent Change
Net sales by business segment:
Installation                                $    1,425,661     $  1,138,378              25.2 %
Specialty Distribution                           1,131,653          524,965             115.6 %
Intercompany eliminations                        (114,111)         (86,290)
Net sales                                   $    2,443,203     $  1,577,053              54.9 %

Operating profit by business segment (a):
Installation                                $      252,598     $    172,702              46.3 %
Specialty Distribution                             157,170           78,241             100.9 %
Intercompany eliminations                         (19,144)         (13,460)
Operating profit before general corporate
expense                                            390,624          237,483              64.5 %
General corporate expense, net (b)                (19,449)         (13,311)
Operating profit                            $      371,175     $    224,172              65.6 %

Operating profit margins:
Installation                                          17.7 %           15.2 %
Specialty Distribution                                13.9 %           14.9 %
Operating profit margin before general
corporate expense                                     16.0 %           15.1 %
Operating profit margin                               15.2 %           14.2 %


Installation

Sales

Sales in our Installation segment increased $287.3 million, or 25.2 percent, for the six months ended June 30, 2022, as compared to the same period in 2021. The increase was due to a 13.7 percent increase from higher selling prices, a 5.8 percent increase in sales volume and a 5.7 percent impact from our acquisitions.

Operating margins

Operating margins in our Installation segment were 17.7 percent and 15.2 percent for the six months ended June 30, 2022 and 2021, respectively. The increase in operating margins was driven by higher sales from selling prices and volumes, partially offset by an increase in cost of material.

Specialty Distribution

Sales

Sales in our Specialty Distribution segment increased $606.7 million, or 115.6 percent, for the six months ended June 30, 2022, as compared to the same period in 2021. This increase was due to a 94.0 percent impact from our acquisition and a 21.4 percent increase due to higher selling prices.

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  Table of Contents

Operating margins

Operating margins in our Specialty Distribution segment were 13.9 percent and 14.9 percent for the six months ended June 30, 2022 and 2021, respectively. The decrease in operating margins was driven by the amortization of intangible assets related to purchase accounting and material inflation partially offset by higher selling prices.


OTHER ITEMS

Other expense, net

Other expense, net, which primarily consisted of interest expense, was $25.0 million and $26.4 million for the six months ended June 30, 2022 and 2021, respectively. Interest expense increased by $12.7 million for the six months ended June 30, 2022, as compared to the same period in 2021. This increase was due to higher long-term debt balances during the six months ended June 30, 2022, including the balance on the 4.125% Senior Notes which were issued in the fourth quarter of 2021 to finance the acquisition of DI, and higher interest rates on our borrowings under the Credit Agreement. The remaining difference primarily relates to $13.9 million incurred to redeem our 5.625% Senior Notes During the six months ended June 30, 2021.

Income tax expense

Income tax expense was $87.8 million, an effective tax rate of 25.4 percent, for the six months ended June 30, 2022 compared to $47.5 million, an effective tax rate of 24.0 percent, for the comparable period in 2021. The tax rate for the six months ended June 30, 2022 was higher due to permanent items including 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,
                                                  2022             2021

Changes in cash and cash equivalents: Net cash provided by operating activities $ 217,697 $ 202,203 Net cash used in investing activities

              (54,162)       (223,778)
Net cash used in financing activities             (179,587)        (46,693)
Impact of exchange rate changes on cash                 142               -

Net decrease in cash and cash equivalents $ (15,910) $ (68,268)

Net cash flows provided by operating activities increased $15.5 million for the six months ended June 30, 2022, as compared to the prior year period. Net income was up $108.2 million, or 72.0 percent, compared with the prior year period, driven by the impact of our acquisitions, higher sales prices and sale volumes. That increase was largely offset by the impact of higher levels of working capital, also driven by our acquisitions (principally increases in accounts receivable, inventories, accounts payable and accrued expenses).

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 investing activities was $223.8 million for the six months ended June 30, 2021, primarily composed of $195.4 million for acquisitions and $28.6 million for purchases of property and equipment, mainly vehicles.

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. During the six months ended June 30, 2021, we used $24.0 million for the repurchase of common stock pursuant to the 2019 Repurchase Program, $10.5 million net payments for redemption of our Old Senior Notes, issuance of our New Senior Notes, proceeds from the increase in our term loan from our Amended Credit Agreement, and payments on equipment notes, $6.5 million in debt issuance costs as a result of entering into our Amended Credit Agreement and New Senior Notes, and $5.5 million net activity related to exercise of share-based incentive awards and stock options.


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Table of Contents

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.

The following table summarizes our liquidity, in thousands:


                                                     As of
                                         June 30,       December 31,
                                            2022            2021
Cash and cash equivalents (a)            $  123,869    $       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                          $  553,933    $       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 June 30, 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 macroeconomic factors, including rising interest rates, inflation and the overall health of the economy, are impacting consumer demand for housing. We remain cautiously optimistic about the long-term U.S. housing market due to low new home inventory, the backlog of homes under construction, and strong household formations.

With the recent acquisition of DI, we have diversified our mix of business and increased our penetration in the commercial and industrial end markets. These end markets operate on a different cycle than residential 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 six months ended June 30, 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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  Table of Contents

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.

© Edgar Online, source Glimpses

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Financials (USD)
Sales 2022 4 988 M - -
Net income 2022 540 M - -
Net Debt 2022 1 223 M - -
P/E ratio 2022 9,38x
Yield 2022 -
Capitalization 4 979 M 4 979 M -
EV / Sales 2022 1,24x
EV / Sales 2023 1,22x
Nbr of Employees 13 006
Free-Float 80,9%
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Robert M. Buck President, CEO & Director
Robert M. Kuhns Chief Financial Officer & Vice President
Alec C. Covington Chairman
Sridhar Pullareddy Chief Information Officer
Joseph Viselli Chief Operating Officer & Vice President
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