Our gross profit margins were 22 percent and 21 percent for the three and nine months ended September 30, 2015, respectively, compared with 22 percent and 21 percent for the comparable periods of 2014. 

 

Gross profit margins for the three and nine months ended September 30, 2015, were positively impacted by favorable leverage on higher sales volume, partially offset by higher insurance adjustments.

 

Selling, general and administrative expenses as a percent of sales were 15 percent and 18 percent the three and nine months ended September 30, 2015, respectively, compared with 19 percent and 20 percent for the comparable periods of 2014.  Reduced selling, general and administrative expense as a percent of sales is a result of lower corporate expenses, increased volume, benefits associated with cost savings initiatives, lower depreciation expense, and rationalization charges for the three months ended September 30, 2015.  Year-to-date changes were driven by the same factors as third quarter changes, as well as legal and insurance adjustments and losses on fixed asset disposals.

 

Our selling, general and administrative expenses include allocations of Masco general corporate expenses of $13.6 million for the nine months ended September 30, 2015.  Selling, general and administrative expenses for the three and nine months ended September 30, 2014, include allocations of Masco general corporate expenses of $6.3 million and $17.0 million, respectively.  Such expenses may not be indicative of our general corporate expense in the future. 

 

Operating margins, as reported, for the three months ended September 30, 2015 and 2014 were 7.1 percent and 3.5 percent, respectively.  Operating margins before general corporate expenses were 8.1 percent and 5.0 percent for the three months ended September 30, 2015 and 2014, respectively.  Third quarter 2015 margins were positively impacted by increased sales volumes and benefits associated with cost savings initiatives.  Operating margins, as reported, for the nine months ended September 30, 2015 and 2014 were 3.4 percent and 1.4 percent, respectively.  Operating margins before general corporate expenses were 4.9 percent and 3.0 percent for the nine months ended September 30, 2015 and 2014, respectively. Operating margins for the nine months ended September 30, 2015, were positively affected by increased sales volumes, a more favorable relationship between selling prices and commodity costs, and the benefits associated with cost savings initiatives, partially offset by higher rationalization/spin-off charges, higher legal and insurance costs, and losses on fixed asset disposals.

 

Installation

 

Sales

 

Net sales in the Installation segment increased $22.5 million and $66.8 million, or 8.7 percent and 9.4 percent, for the three and nine months ended September 30, 2015, respectively, compared to the same periods in 2014, due to increased sales volume related to a higher level of activity in new home construction and an increased sales volume of commercial installation.  Net sales also increased approximately 3 percent for the three months ended, and approximately 2 percent for the nine months ended,  September 30, 2015, due to increased selling prices.

 

Operating results

 

Operating margins in the Installation segment for the three months ended September 30, 2015 and 2014 were 7.4 percent and 4.6 percent, respectively.  Third quarter operating margins were positively impacted by increased sales volumes, benefits associated with cost savings initiatives, and lower corporate expenses which were allocated to the segments based on direct benefit or usage.  Operating margins for the nine months ended September 30, 2015 and 2014 were 3.4 percent and 1.7 percent, respectively.  The 2015 operating margins, compared to the same period of 2014, were positively impacted by increased sales volume and related absorption of fixed costs, the benefits associated from cost savings initiatives, and lower corporate expenses which were allocated to the segments based on direct benefit or usage, partially offset by higher current rationalization charges, higher legal and insurance adjustments, and losses on fixed asset disposals.

 

Distribution

 

Sales

 

Net sales in the Distribution segment increased $8.8 million and $16.0 million, or 5.4 percent and 3.5 percent, for the three and nine months ended September 30, 2015, respectively, compared to the same periods in 2014.  Sales for the three months ended September 30, 2015, increased from the same period in 2014 due to higher sales to both external customers and the Installation segment.  Sales for the nine months ended September 30, 2015, increased from the same period in 2014 due to higher sales to both external customers and the Installation segment and higher selling prices. Sales for the third quarter of 2015 compared favorably with the prior year due to increased second quarter sales in 2014, driven by higher customer purchases due to a pending, late second quarter 2014 selling price increase.  This had the effect of lowering third quarter 2014 customer purchases.

 

Operating results

 

Operating margins in the Distribution segment for the three months ended September 30, 2015 and 2014 were 9.9 percent and 9.3 percent, respectively.  Third quarter 2015 margins were positively impacted by increased volume in new residential construction and increased insulation sales driven by changing building code requirements.   Operating margins for the nine months ended September 30, 2015 and 2014 were 8.4 percent and 8.0 percent, respectively.  The operating margins for the nine months ended September 30, 2015, compared to the same period of 2014, were positively impacted by increased volume, a more favorable relationship between selling prices and material costs, and benefits associated with cost savings initiatives, partially offset by rationalization charges, and insurance reserves and claims costs.

 

OTHER ITEMS

 

Other Expense, net

 

Interest expense was $1.6 million and $7.9 million for the three and nine months ended September 30, 2015, respectively, compared with $3.1 million and $9.3 million for the three and nine months ended September 30, 2014, respectively.  Prior to the Separation, interest expense was allocated by Masco and such expense may not be indicative of our interest expense in the future.  Utilizing our current interest rate of 2.20 percent as of September 30, 2015, our expected interest expense is $1.5 million for the remaining three months of 2015.

 

Income from Continuing Operations

 

Income from continuing operations was $16.6 million and $6.5 million the three months ended September 30, 2015 and 2014, respectively.  Income from continuing operations was $19.5 million and $4.6 million for the nine months ended September 30, 2015 and 2014, respectively.

 

Income Taxes

 

We file our tax returns as a member of the Masco consolidated group for U.S. Federal and certain state jurisdictions through June 30, 2015, the Effective Date. As a result, certain tax attributes, primarily the net operating loss carryforward, are treated as an asset of the Masco consolidated group and may be utilized by the Masco consolidated group through the end of December 31, 2015, Masco’s tax year end.

 

Our effective tax rate of 42 percent and 40 percent for the three and nine months ended September 30, 2015, respectively, is higher than our normalized rate of 36 percent, primarily due to (i) the change in the valuation allowance in relation to the amortization of indefinite lived assets, and (ii) the increase in the Company’s current U.S. Federal tax resulting from the use, by the Masco consolidated group, of a large portion of the U.S. Federal net operating losses.

 

For the three and nine months ended September 30, 2014, we incurred a 39 percent and a 33 percent effective tax rate, respectively, primarily due to a decrease in the valuation allowance resulting from the anticipated partial utilization of our U.S. Federal net operating loss carryforward and from a tax benefit recorded in the second quarter of 2014 to adjust certain income tax returns to amounts as filed.

 

Of the $434 million deferred tax assets on net operating loss carryforwards recorded at December 31, 2014, all but $31 million has been, and is anticipated to be, utilized by the Masco consolidated group by December 31, 2015, resulting in a reduction in the corresponding deferred tax asset and valuation allowance as of June 30, 2015.

 

Continued improvements in our operations may result in the objective positive evidence necessary to warrant the reversal of all or a portion of the valuation allowance for U.S. Federal and certain state jurisdictions by the end of 2015.  

 

Cash Flows

 

Significant sources (uses) of cash and cash equivalents for the nine months ended September 30, 2015 and 2014 are summarized as follows, in thousands:

 

 

The change in net cash from operating activities when comparing the nine months ended September 30, 2015, to the comparable period in 2014 was primarily due to improved net income and a decrease in deferred taxes, partially offset by an increase in customer receivables resulting from higher sales.

 

As of September 30, 2015 and 2014,  our working capital was 7.0 percent and 8.1 percent of net sales, respectively. One of our objectives in managing working capital is to reduce working capital as a percentage of net sales. The decrease in working capital as a percentage of net sales for the nine months ended September 30, 2015 and 2014 is primarily related to the timing of payments to our suppliers.

 

Historically, we have largely funded our growth through cash provided by our operations, combined with support from Masco, prior to the Separation, through its operating cash flows, its long-term debt, and its issuance of securities in the financial markets, including issuances for certain mergers and acquisitions.

 

On June 9, 2015, we entered into a Credit Agreement with a bank group.  The credit agreement consists of a senior secured term loan facility of $200 million and a senior secured revolving facility which provides for borrowing and/or standby letter of credit issuances of up to $125 million.  See Note E to the condensed consolidated financial statements.

 

Following the Separation, we have access to liquidity through our cash from operations and available borrowing capacity under our new credit facility.  Cash flows are seasonally stronger in the second and third quarters as a result of increased new construction activity. 

 

CRITICAL ACCOUNTING POLICIES

 

We prepare our condensed consolidated financial statements in conformity with U.S. generally accepted accounting principles. The preparation of these condensed consolidated 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, costs, and expenses during the reporting period. Actual results could differ from those estimates. Our critical accounting policies have not changed materially from those previously reported in Amendment No. 3 to our Registration Statement on Form 10 as filed with the SEC on June 8, 2015.

 

APPLICATION OF NEW ACCOUNTING STANDARDS

 

Information regarding application of new accounting standards is incorporated by reference from Note B to our unaudited condensed consolidated financial statements in Part I, Item 1 of this report.

 

FORWARD-LOOKING STATEMENTS

 

Statements contained in this report that reflect our views about our future 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,” “anticipate,” “expect,” “believe,” 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 relying on any of these forward-looking statements.  Our future performance may be affected by 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; our ability to maintain our competitive position; and our ability to realize the expected benefits of the Separation.  We discuss many of the risks we face under the caption entitled “Risk Factors” in our Registration Statement on Form 10 filed 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

 

Prior to the Separation, we participated in Masco’s centralized cash management program and were funded through an intercompany loan arrangement whereby Masco provided daily liquidity, as needed, to fund our operations.  As a result of this intercompany funding arrangement, prior to the Separation, we had no external indebtedness that exposed us to interest rate risk.    Our historical financial statements include standby letter of credit costs, as Masco allocated these costs to TopBuild in related party interest expense allocations.

 

On June 9, 2015, we entered into the Credit Agreement. The Credit Agreement consists of a senior secured term loan facility in the amount of $200 million and a senior secured revolving facility in the amount of $125 million. The proceeds from the $200 million term loan facility were used to finance a $200 million cash distribution from us to Masco, which was paid on the date of the Separation. In addition, we have standby letters of credit outstanding of approximately $57 million as of September 30, 2015. The standby letters of credit were issued to secure financial obligations related to our workers compensation, general insurance, and auto liability programs.   We expect to use the borrowing capacity under the revolving credit facility from time to time for working capital and other general corporate purposes.

 

Interest payable on both the term loan facility 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 our outstanding indebtedness. Based on the current interest rate of 2.20 percent under the senior secured term loan facility, a 100 basis point increase in the interest rate would result in a $1.9 million increase in our annualized interest expense.

 

Item 4. CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

 

Our principal executive officer and principal financial officer have concluded, based on an evaluation of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective.

 

Changes in Internal Control Over Financial Reporting

 

Before the Separation, we relied on certain financial information and resources of Masco to manage specific aspects of our business and report results. These included investor relations, corporate communications, accounting, tax, legal, human resources, benefit plan administration, benefit plan reporting, general management, real estate, treasury, insurance and risk management, and oversight functions. In conjunction with the Separation, we enhanced our financial, administrative, and other support systems and expanded our accounting, reporting, legal, and internal audit departments. We also revised and adopted policies, as needed, to meet all regulatory requirements applicable to us as a standalone publicly traded company. We continue to review and document our internal controls over financial reporting and may, from time to time, make changes aimed at enhancing their effectiveness. These efforts may lead to changes in our internal control over financial reporting.

 

Other than those noted above, there were no changes in our internal control over financial reporting during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

PART II – OTHER INFORMATION

Item 1.  LEGAL PROCEEDINGS

None.

 

Item 1A. RISK FACTORS

There have been no material changes to our risk factors as previously disclosed in Amendment No. 3 to our Registration Statement on Form 10 as filed with the SEC on June 8, 2015.

 

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

 

We did not sell any equity securities during the three months ended September 30, 2015, that were not registered under the Securities Act of 1933, as amended.

 

Item 3. DEFAULTS UPON SENIOR SECURITIES

 

Not applicable.

 

Item 4. MINE SAFETY DISCLOSURES

 

Not applicable.

 

Item 5. OTHER INFORMATION

 

Although our Board of Directors has not yet taken action to set the date for our 2016 Annual Meeting of Stockholders, we currently anticipate the meeting will be held on May 2, 2016, and expect the mailing date of our proxy materials will be on or about March 23, 2016.   Accordingly, any proper proposal which a stockholder wishes to have included in our proxy statement and form of proxy for the 2016 Annual Meeting should be received by the Secretary of the Company by November 24, 2015.   Such proposals must meet the requirements set forth in the rules and regulations of the SEC in order to be eligible for inclusion in the proxy statement for the 2016 Annual Meeting.   In addition to the SEC rules concerning stockholder proposals that may be included in our proxy statement, in order for any proposed business to be brought before the 2016 Annual Meeting, other than by or at the direction of the Board of Directors, to be considered timely, any stockholder who wishes to submit a proposal to be acted upon at the 2016 Annual Meeting should deliver written notice of such stockholder’s intent to the Secretary of the Company not later than March 18, 2016, and such written notice must otherwise comply with the applicable requirements of the Company’s Amended and Restated Bylaws.

 

Item 6. EXHIBITS

 

The Exhibits listed on the accompanying Index to Exhibits are filed part of this Form 10-Q and incorporated herein by reference.

 

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.

 

 

 

November 3, 2015

INDEX TO EXHIBITS