TOPBUILD CORP. OVERVIEW
TopBuild , headquartered inDaytona Beach, Florida , is a leading installer and distributor of insulation and other building products to theU.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.
As ofSeptember 30, 2022 , we had approximately 230 Installation branches located acrossthe 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 building and mechanical insulation, insulation accessories and other building product materials for the residential, commercial, and industrial end markets. As ofSeptember 30, 2022 , we had approximately 165 Specialty Distribution branches located acrossthe United States and 18 branches inCanada . 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 made the material acquisition of DI inOctober 2021 and is therefore not included in the comparative periods of three and nine months endedSeptember 30, 2021 . 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 theU.S. andCanada , and leverage housing, commercial and 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, which 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 endedDecember 31, 2021 , as filed with theSEC onFebruary 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
THIRD QUARTER 2022 VERSUS THIRD 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 September 30,
2022 2021
Net sales $ 1,300,998 $ 845,757
Cost of sales 905,250 595,466
Cost of sales ratio 69.6 % 70.4 %
Gross profit 395,748 250,291
Gross profit margin 30.4 % 29.6 %
Selling, general, and administrative expense 172,874 116,485
Selling, general, and administrative expense to sales ratio 13.3 % 13.8 %
Operating profit 222,874 133,806
Operating profit margin 17.1 % 15.8 % Other expense, net (14,864) (5,437) Income tax expense (54,264) (32,934) Net income $ 153,746 $ 95,435 Net margin 11.8 % 11.3 %
Sales and Operations
Net sales increased 53.8% for the three months endedSeptember 30, 2022 , from the comparable period of 2021. The increase was primarily driven by an increase of 31.2% from our acquisitions, a 13.6% increase due to higher selling prices, and an increase of 9.1% in sales volume. Gross profit margins were 30.4% and 29.6% for the three months endedSeptember 30, 2022 and 2021, respectively. Gross profit margin improved primarily due to higher selling prices and higher sales volume, partially offset by material inflation.
Selling, general, and administrative expense, as a percent of sales, was 13.3%
and 13.8% for the three months ended
The decrease in selling, general, and administrative expense as a percent of sales was driven primarily by higher sales, partially offset by the amortization of intangible assets related to purchase accounting. Operating margins were 17.1% and 15.8% for the three months endedSeptember 30, 2022 and 2021, respectively. The increase in operating margins was due to higher selling prices and higher sales volume partially offset by material inflation and amortization of intangible assets related to purchase accounting. 24 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
2022 2021 Percent Change
Net sales by business segment:
Installation $ 783,056 $ 612,900 27.8 %
Specialty Distribution 583,543 276,398 111.1 %
Intercompany eliminations (65,601) (43,541)
Net sales$ 1,300,998 $ 845,757 53.8 % Operating profit by business segment: Installation $ 154,236$ 105,046 46.8 % Specialty Distribution 88,364 47,162 87.4 % Intercompany eliminations (10,806) (7,590) Operating profit before general corporate expense 231,794 144,618 60.3 % General corporate expense, net (8,920)
(10,812)
Operating profit $ 222,874$ 133,806 66.6 % Operating profit margins: Installation 19.7 % 17.1 % Specialty Distribution 15.1 % 17.1 % Operating profit margin before general corporate expense 17.8 % 17.1 % Operating profit margin 17.1 % 15.8 % Installation Sales
Sales in our Installation segment increased
The increase was due to a 13.8% increase in higher selling prices, a 12.3% increase in sales volume, and a 1.7% increase from our acquisitions.
Operating margins
Operating margins in our Installation segment were 19.7% and 17.1% for the three
months ended
Specialty Distribution
Sales
Sales in our Specialty Distribution segment increased$307.1 million , or 111.1%, for the three months endedSeptember 30, 2022 , as compared to the same period in 2021. Of the 111.1% increase, acquisitions accounted for 92.4%, 13.0% was due to higher selling prices and 5.7% was from an increase in sales volume.
Operating margins
Operating margins in our Specialty Distribution segment were 15.1% and 17.1% for the three months endedSeptember 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 higher sales volume. 25 Table of Contents OTHER ITEMS Other expense, net
Other expense, net, was$14.9 million and$5.4 million for the three months endedSeptember 30, 2022 and 2021, respectively. The change primarily related to interest expense, which increased by$9.0 million for the three months endedSeptember 30, 2022 , as compared to the same period in 2021. This increase was due to higher long-term debt balances during the three months endedSeptember 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$54.3 million , an effective tax rate of 26.1 percent, for the three months endedSeptember 30, 2022 , compared to$32.9 million , an effective tax rate of 25.7 percent, for the comparable period in 2021. The tax rate for the three months endedSeptember 30, 2022 , was higher due to state tax adjustments and miscellaneous items, partially offset by a decrease in tax expense related to share-based compensation.
FIRST NINE MONTHS 2022 VERSUS FIRST NINE 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:
Nine Months Ended September 30,
2022 2021
Net sales $ 3,744,201 $ 2,422,810
Cost of sales 2,633,155 1,731,581
Cost of sales ratio 70.3 % 71.5 %
Gross profit 1,111,046 691,229
Gross profit margin 29.7 % 28.5 %
Selling, general, and administrative expense 516,997 333,252
Selling, general, and administrative expense to sales ratio 13.8 % 13.8 %
Operating profit 594,049 357,977
Operating profit margin 15.9 % 14.8 % Other expense, net (39,833) (31,862) Income tax expense (142,060) (80,457) Net income $ 412,156 $ 245,658 Net margin 11.0 % 10.1 % Sales and Operations Net sales increased 54.5% for the nine months endedSeptember 30, 2022 , from the comparable period of 2021. The increase was primarily driven by a 33.8% impact from our acquisitions, a 15.0% increase due to higher selling prices and a
5.8% increase in sales volume. Gross profit margins were 29.7% and 28.5% for the nine months endedSeptember 30, 2022 and 2021, respectively. Gross profit margin improved primarily due to higher selling prices and higher sales volume partially offset by an increase in cost of material. 26 Table of Contents Selling, general, and administrative expense, as a percent of sales, was 13.8% for both the nine months endedSeptember 30, 2022 and 2021. Selling, general, and administrative expense as a percent of sales remained flat to the prior year as the impact of higher selling prices was offset by was the amortization of intangible assets related to purchase accounting and increased insurance costs. Operating margins were 15.9% and 14.8% for the nine months endedSeptember 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 and the amortization of intangible assets related to purchase accounting.
Business Segment Results
The following table sets forth our net sales and operating profit margins by business segment, in thousands:
Nine Months Ended September 30,
2022 2021 Percent Change
Net sales by business segment:
Installation $ 2,208,717 $ 1,751,278 26.1 %
Specialty Distribution 1,715,196 801,363 114.0 %
Intercompany eliminations (179,712) (129,831)
Net sales$ 3,744,201 $ 2,422,810 54.5 % Operating profit by business segment (a): Installation $ 406,835 $ 277,748 46.5 % Specialty Distribution 245,534 125,403 95.8 % Intercompany eliminations (29,949) (21,050) Operating profit before general corporate expense 622,420 382,101 62.9 % General corporate expense, net (b) (28,371)
(24,124)
Operating profit $ 594,049 $ 357,977 65.9 % Operating profit margins: Installation 18.4 % 15.9 % Specialty Distribution 14.3 % 15.6 % Operating profit margin before general corporate expense 16.6 % 15.8 % Operating profit margin 15.9 % 14.8 % Installation Sales
Sales in our Installation segment increased
The increase was due to a 13.7% increase from higher selling prices, a 8.1% increase in sales volume, and a 4.3% impact from our acquisitions.
Operating margins
Operating margins in our Installation segment were 18.4% and 15.9% for the nine months endedSeptember 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. 27 Table of Contents Specialty Distribution Sales Sales in our Specialty Distribution segment increased$913.8 million , or 114.0%, for the nine months endedSeptember 30, 2022 , as compared to the same period in 2021. This increase was due to a 93.5% impact from our acquisitions, a 18.5% increase due to higher selling prices and a 2.1% increase in sales volume.
Operating margins
Operating margins in our Specialty Distribution segment were 14.3% and 15.6% for the nine months endedSeptember 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 and higher sales volume.
OTHER ITEMS
Other expense, net
Other expense, net, which primarily consisted of interest expense, was$39.8 million and$31.9 million for the nine months endedSeptember 30, 2022 and 2021, respectively. Interest expense increased by$21.7 million for the nine months endedSeptember 30, 2022 , as compared to the same period in 2021. This increase was due to higher long-term debt balances during the nine months endedSeptember 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. 2021 was also impacted by a$13.9 million charge incurred to redeem our 5.625% Senior Notes during the nine months endedSeptember 30, 2021 .
Income tax expense
Income tax expense was$142.1 million , an effective tax rate of 25.6%, for the nine months endedSeptember 30, 2022 compared to$80.5 million , an effective tax rate of 24.7%, for the comparable period in 2021. The tax rate for the nine months endedSeptember 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:
Nine Months
Ended
2022 2021
Changes in cash and cash equivalents:
Net cash provided by operating activities $ 335,630 $ 309,505
Net cash used in investing activities (73,667) (247,050)
Net cash used in financing activities (240,383) (64,556)
Impact of exchange rate changes on cash (1,975) -
Net increase (decrease) in cash and cash equivalents $ 19,605 $ (2,101)
Net cash flows provided by operating activities increased
Net
income was up
That increase was largely offset by the impact of higher levels of working capital, also driven by the impact of our acquisitions on accounts receivable, inventories, accounts payable and accrued liabilities.
Net cash used in investing activities was
Net cash used in investing activities was$247.1 million for the nine months endedSeptember 30, 2021 , primarily composed of$205.0 million for acquisitions and$42.3 million for purchases of property and equipment, primarily vehicles. 28 Table of Contents Net cash used in financing activities was$240.4 million for the nine months endedSeptember 30, 2022 . During the nine months endedSeptember 30, 2022 , we used$200.0 million for the repurchase of common stock pursuant to the 2021 Repurchase Program,$29.0 million for debt repayments, and$9.7 million net activity related to exercise of share-based incentive awards and stock options. Additionally, we borrowed and repaid$70 million on our Revolving Facility, all within the second quarter of 2022. Net cash used in financing activities was$64.6 million for the nine months endedSeptember 30, 2021 . During the nine months endedSeptember 30, 2021 , we used$35.6 million for the repurchase of common stock pursuant to the 2019 Repurchase Program,$16.3 million net payments for redemption of our 5.625% Senior Notes, issuance of our 3.625% Senior Notes, proceeds from the increase in our term loan from 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 3.625% Senior Notes, and$5.5 million net activity related to exercise of share-based incentive awards and stock options. 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
September 30, December 31,
2022 2021
Cash and cash equivalents (a) $ 159,384 $ 139,779
Revolving facility 500,000
500,000
Less: standby letters of credit (67,689)
(69,936)
Availability under revolving facility 432,311 430,064 Total liquidity$ 591,695 $ 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 ofSeptember 30, 2022 is incorporated by reference from Note 14 - 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. Although the decreased demand may have a possible impact in the mid-term, we remain cautiously optimistic about the long-term health of theU.S. housing market. With the 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, labor constraints, and are impacted by economic volatility, our bid activity and backlog remain strong. 29 Table of Contents
OFF-BALANCE SHEET ARRANGEMENTS
We had no material off-balance sheet arrangements during the nine months endedSeptember 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 endedDecember 31, 2021 , as filed with theSEC onFebruary 22, 2022 .
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 endedDecember 31, 2021 , as filed with theSEC onFebruary 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 pandemics 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 endedDecember 31, 2021 , as filed with theSEC onFebruary 22, 2022 , as well as under the caption entitled "Risk Factors" in subsequent reports that we file with theSEC . 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. 30 Table of Contents
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