TopBuild Corp (BLD)

Item 7.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

​

The financial and business analysis below provides information which we believe is relevant to an assessment and understanding of our financial position, results of operations, and cash flows.  This financial and business analysis should be read in conjunction with the financial statements and related notes.

​

In this section, we generally discuss the results of our operations for the year ended December 31, 2024, compared to the year ended December 31, 2023. For a discussion of the year ended December 31, 2023, to the year ended December 31, 2022, please refer to Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended December 31, 2023, filed with the SEC on February 28, 2024, which discussion is hereby incorporated herein by reference.

​

Executive Summary

​

We are a leading installer and specialty distributor of insulation and related building material products to the construction industry in the United States and Canada.  Demand for our products and services is driven primarily by residential and commercial/industrial construction and by industrial manufacturing activity.  A number of local and national factors influence activity in each of our lines of business, including demographic trends, interest rates, employment levels, business investment, supply and demand for housing, availability of credit, foreclosure rates, consumer confidence, and general economic conditions.

​

The core of our business is inherently environmentally friendly.   The insulation we install and distribute drives thermal efficiency, lowers energy usage, and reduces carbon emissions.  We are a leader in delivering these benefits for new and existing homes and commercial/industrial facilities across the United States and Canada.

​

Strategy

​

We are committed to creating long-term value for all stakeholders – employees, customers, suppliers, and investors.  Our team is focused on driving operational efficiencies and sharing best practices throughout our organization.  Our core values include:

​

​

Our strategy is focused on growth and productivity including:

​

​

Our operating results depend on residential new construction activity, commercial construction activity and industrial manufacturing activity, all of which are subject to business and economic cycles.  These cycles have less of an impact on our Specialty Distribution segment due to the repair and replacement component of our mechanical insulation distribution business.  We are also dependent on third-party suppliers and manufacturers providing us with an adequate supply of high-quality products.

​

29

​

Table of Contents

Material Trends in Our Business

​

Residential New Construction

We did not see the acceleration in demand for single-family homes in the back half of 2024 that we anticipated earlier in the year.  Demand for single-family homes continues to be uneven across the country.

​

Multi-family starts were slow throughout 2024 and that has started to negatively impact sales.   We expect our multi-family sales will continue to be slow as we move into 2025.  Multi-family housing units typically require approximately 40% of the insulation that a single-family unit requires.

​

As a result of years of underbuilding in the United States an overall shortage of housing exists across the country.  In addition, we believe long-term demand for homes will continue to be supported by strengthening energy efficiency requirements and increased household formations.  As a result, we continue to be optimistic about the long-term fundamentals of our business.

​

Commercial and Industrial Construction

Our commercial backlog is strong, and our bidding activity is active, both of which continue to support our positive view of commercial/industrial sales at our Installation and Specialty Distribution segments. Some projects have been delayed in 2024, but we have not seen an uptick in cancellations. In addition, recurring maintenance and repair work on industrial sites serves as a continued driver for our Specialty Distribution business.

​

Seasonality

​

Sales across our end markets are typically slower during the winter months due to lower construction activity.

​

Results of Operations

​

We report our financial results in conformity with GAAP.

​

The following table sets forth our net sales, gross profit, operating profit, and margins, as reported in our Consolidated Statements of Operations, in thousands:

​

​

30

​

Table of Contents

Comparison of the Years Ended December 31, 2024 and December 31, 2023

​

Sales and Operations

​

Net sales for 2024 increased 2.6 percent, or $135.1 million, to $5.3 billion.  The increase was driven by a 2.5 percent increase in sales from acquisitions and a 1.1 percent impact from higher selling prices, partially offset by a 0.7 percent decline in sales volume and a decline of 0.3 percent driven by the disposition of a non-core business.

​

Our gross profit margins were 30.5 percent and 30.9 percent for 2024 and 2023, respectively. The decline in gross profit margin is primarily due to higher material costs and lower benefit of sales mix, partially offset by improved productivity and higher selling prices.

​

Selling, general, and administrative expenses as a percentage of sales were 13.9 percent and 14.0 percent for 2024 and 2023, respectively.

​

Operating margins were 16.6 percent and 16.9 percent for 2024 and 2023, respectively. The decline in operating margin was due to higher material costs and lower benefit sales mix, partially offset by higher selling prices and productivity initiatives.

​

Other Expense, Net

​

Other expense, net, decreased $7.8 million to $45.6 million in 2024 from $53.3 million in 2023. The decrease is primarily related to $5.1 million higher interest income due to higher average levels of invested cash balances throughout the year and $1.5 million lower interest expense due to declining interest rates in the fourth quarter of 2024.

​

Income Tax Expense

​

Our effective tax rate increased from 25.6 percent in 2023 to 26.0 percent in 2024.  The higher 2024 rate was primarily related to share-based compensation.

​

2024 and 2023 Business Segment Results

​

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

31

​

Table of Contents

​

2024 and 2023 Business Segment Results Discussion

​

Changes in operating profit margins in the following business segment results discussion exclude general corporate expense, net in 2024 and 2023, as applicable.

​

Installation

​

Sales

​

Sales increased $106.4 million, or 3.3 percent, in 2024 compared to 2023.  Sales increased 3.1 percent from our acquisitions and 1.3 percent from higher selling prices, partially offset by 0.6 percent decrease from lower sales volume and by a decline of 0.5 percent driven by the disposition of a non-core business.

​

Operating Results

​

Operating margins in the Installation segment were 19.7 percent and 20.2 percent for 2024 and 2023, respectively.  The decrease in operating margin was driven higher material costs and change in sales mix, partially offset by productivity initiatives and higher selling prices.

​

Specialty Distribution

​

Sales

​

Sales increased $72.5 million, or 3.2 percent, in 2024 compared to 2023.  Sales increased 1.3 percent from our acquisitions, 1.0 percent from higher sales volume and 0.9 from higher selling prices.

​

Operating Results

​

Operating margins in the Specialty Distribution segment were 15.1 percent and 14.6 percent for 2024 and 2023, respectively.  The increase in operating margin was driven by productivity initiatives and higher selling prices, partially offset by higher material costs.

Commitments and Contingencies

​

We are subject to certain claims, charges, litigation, and other proceedings in the ordinary course of our business. 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.  For additional information see Item 8. Financial Statements and Supplementary Data – Note 11. Other Commitments and Contingencies.

​

Liquidity and Capital Resources

​

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.

​

32

​

Table of Contents

The following table summarizes our total liquidity, in thousands:

​

​

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. See Item 8. Financial Statements and Supplementary Data of this Annual Report for related disclosures.

​

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:

​

​

Cash Flows

​

The following table presents a summary of our cash flows provided by (used in) operating, investing and financing activities for the periods indicated, in thousands:

​

Net cash flows provided by operating activities decreased $73.4 million for the year ended December 31, 2024, as compared to December 31, 2023.  Net income increased $8.3 million, or 1.4 percent, compared with the prior year period, driven by the impact of higher selling prices and our acquisitions, as well as productivity initiatives.  We also incurred increases in working capital accounts, specifically inventory and accounts payable, leading to more cash used in operations.

​

33

​

Table of Contents

Net cash used in investing activities was $203.5 million for the year ended December 31, 2024, primarily comprised of $136.8 million for acquisitions and $69.3 million for purchases of property and equipment (primarily vehicles, equipment and computer hardware and software). Those uses were partially offset by $2.6 million of proceeds received from the sale of assets.  Net cash used in investing activities was $198.2 million for the year ended December 31, 2023, primarily comprised of $149.2 million for acquisitions and $64.0 million for purchases of property and equipment (primarily vehicles, equipment and computer hardware and software). Those uses were partially offset by $15.0 million of proceeds received from the sale of assets.

​

Net cash used in financing activities was $1.0 billion for the year ended December 31, 2024. During the year ended December 31, 2024, we used $966.4 million for the repurchase of common stock, $47.0 million for debt repayments, and $2.9 million net activity related to exercise of share-based incentive awards and stock options. Net cash used in financing activities was $43.8 million for the year ended December 31, 2023. During the year ended December 31, 2023, we used $40.1 million for debt repayments and $3.4 million net activity related to exercise of share-based incentive awards and stock options.

​

Critical Accounting Policies and Estimates

​

We prepare our 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 and disclosure of assets and liabilities, and any related contingencies, at the date of the financial statements, as well as the reported amounts of sales and expenses during the reporting period.  Actual results could differ from those estimates.

​

Our significant accounting policies are more fully described in Item 8. Financial Statements and Supplementary Data – Note 1. Summary of Significant Accounting Policies.  However, certain of our accounting policies considered critical are those we believe are both most important to the portrayal of our financial condition and operating results and require our most difficult, subjective, or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain.  Judgments and uncertainties affecting the application of those policies may result in materially different amounts being reported under different conditions or using different assumptions.  We consider the following policies to be most critical in understanding the judgments that are involved in preparing our Consolidated Financial Statements.

​

Revenue Recognition and Receivables

​

Revenue is disaggregated between our Installation and Specialty Distribution segments.  A reconciliation of disaggregated revenue by segment is included in Item 8. Financial Statements and Supplementary Data – Note 8. Segment Information. We recognize revenue for our Installation segment over time as the related performance obligation is satisfied with respect to each particular order within a given customer’s contract. Progress toward complete satisfaction of the performance obligation is measured using a cost-to-cost measure of progress method. The cost input is based on the amount of material installed at that customer’s location and the associated labor costs, as compared to the total expected cost for the particular order. The total expected cost is an estimate in the revenue recognition process, requires judgment, and is subject to variability throughout the duration of the contract as a result of contract modifications and other circumstances impacting job completion. Generally, this results in revenue being recognized as the customer is able to receive and utilize the benefits provided by our services. Each contract contains one or more individual orders, which are based on services delivered. When material and installation services are bundled in a contract, we combine these items into one performance obligation as the overall promise is to transfer the combined item.

​

Revenue from our Specialty Distribution segment is recognized when title to products and risk of loss transfers to our customers. This represents the point in time when the customer is able to direct the use of and obtain substantially all the benefits from the product. The determination of when control is deemed transferred depends on the delivery terms that are agreed upon in the contract.

34

​

Table of Contents

​

The transaction price is the amount of consideration the Company expects to receive based on the arrangement with the customer. The duration of our contracts with customers is relatively short, generally less than a 90-day period, therefore there is not a significant financing component when considering the determination of the transaction price which gets allocated to the individual performance obligations, generally based on standalone selling prices. Additionally, we consider shipping costs charged to a customer as a fulfillment cost rather than a promised service and expense as incurred. Sales taxes, when incurred, are recorded as a liability and excluded from revenue on a net basis.

​

We record a contract asset when we have satisfied our performance obligation prior to billing and a contract liability when a customer payment is received prior to the satisfaction of our performance obligation. The difference between the beginning and ending balances of our contract assets and liabilities primarily results from the timing of our performance and the customer’s payment. See Note 3 – Revenue Recognition for more information.

​

We maintain allowances for estimated losses resulting from the inability of customers to make required payments.  In addition, we monitor our customer receivable balances and the credit worthiness of our customers on an on-going basis.  During downturns in our markets, declines in the financial condition and creditworthiness of customers impact the credit risk of the receivables involved and we have incurred additional bad debt expense related to customer defaults.

​

Business Combinations

​

The purchase price for business combinations is allocated to the estimated fair values of acquired tangible and intangible assets, including goodwill, and assumed liabilities, where applicable.  Additionally, we recognize customer relationships, trademarks and trade names, and non-compete agreements as identifiable intangible assets, which are recorded at fair value as of the transaction date. The fair value of the customer relationships intangible assets is determined by management using the multi-period excess earnings method under the income approach. Assumptions used in determining the fair value of the customer relationships intangible asset include forecasted revenue growth rate, customer attrition rate, and discount rate. The fair value of other intangible assets is determined primarily using current industry information.  Goodwill is recorded when consideration transferred exceeds the fair value of identifiable assets and liabilities.  Measurement-period adjustments to assets acquired and liabilities assumed with a corresponding offset to goodwill are recorded in the period they occur, which may include up to one year from the acquisition date.  Contingent consideration is recorded at fair value at the acquisition date.

​

Goodwill and Other Intangible Assets

​

We have two reporting units, which are also our operating and reporting segments: Installation and Specialty Distribution, and both contain goodwill.  Our operating segments engage in business activities for which discrete financial information including long range forecasts is available, and we complete the impairment testing of goodwill at this level, as defined by accounting guidance. 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 such unit and determination of its fair value.  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.

​

We perform our annual impairment testing of goodwill in the fourth quarter of each year, or as events occur or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. When assessing goodwill for impairment, we have the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events or circumstances, we determine it is more likely than not that the fair value of a reporting unit is less than its carrying amount, then we recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. If we conclude otherwise, then no further action is taken. We also have the option to bypass the qualitative assessment and only perform a quantitative assessment. For the years ended December 31, 2024 and 2023, we performed qualitative assessments.

​

35

​

Table of Contents

Fair value for our reporting units is determined using a discounted cash flow method and a market multiple approach (with a 50% weighting of each), both which include significant unobservable inputs (Level 3 inputs).  We believe these methodologies are comparable to what would be used by other market participants.  Using the discounted cash flow method requires us to make significant estimates and assumptions, including long term projections of cash flows, market conditions, and appropriate discount rates.  Our judgments are based on historical experience, current market trends, consultations with external valuation specialists and other information.  The market approach includes a comparison of the multiple of a reporting unit's carrying value to its earnings before interest, taxes, depreciation and amortization with the multiples of similar businesses or guideline companies whose securities are actively traded in the public markets.  While we believe that the estimates and assumptions underlying the valuation methodologies are reasonable, changes to estimates and assumptions could result in different outcomes.  In estimating future cash flows, we rely on internally generated long-range forecasts for sales and operating profits, and generally a one to three percent long term assumed annual growth rate of cash flows for periods after the long-range forecast.  We generally develop these forecasts based upon, among other things, recent sales data for existing products, and estimated U.S. housing starts.

​

When necessary, an impairment loss is recognized to the extent that a reporting unit’s recorded goodwill exceeds its fair value. In the fourth quarters of 2024 and 2023, we performed an assessment on our goodwill and determined that the estimated fair value of each reporting unit substantially exceeded its carrying value, and therefore the goodwill was not impaired.

​

We did not recognize any impairment charges for goodwill for the years ended December 31, 2024, 2023, and 2022. As of December 31, 2024, net goodwill reflected $762.0 million of accumulated impairment losses, relating primarily to impairment charges taken in 2008-2010 following the substantial decrease in U.S. housing starts after the financial crisis of 2007-2008.

​

Intangible assets with finite useful lives are amortized using the straight-line method over their estimated useful lives. We evaluate the remaining useful lives of amortizable identifiable intangible assets at each reporting period to determine whether events and circumstances warrant a revision to the remaining periods of amortization.

​

Income Taxes

​

If, based upon all available evidence, both positive and negative, it is more likely than not (more than 50 percent likely) deferred tax assets will not be realized, a valuation allowance is recorded.  Significant weight is given to positive and negative evidence that is objectively verifiable.  A company’s three-year cumulative loss position is significant negative evidence in considering whether deferred tax assets are realizable and the accounting guidance restricts the amount of reliance we can place on projected taxable income to support the recovery of deferred tax assets.

​

While we believe we have adequately assessed for our uncertain tax positions, amounts asserted by taxing authorities could vary from our assessment of uncertain tax positions.  Accordingly, provisions for tax-related matters, including interest and penalties, could be recorded in income tax expense in the period revised assessments are made. These unrecognized tax positions including associated interest and penalties are not material to our consolidated financial statements for the periods presented.

​

Additionally, we generally do not provide for taxes related to undistributed earnings as such earnings would not be taxable when remitted or would be considered to be indefinitely reinvested.

​

Recently Issued Accounting Pronouncements

​

Recently issued accounting pronouncements and their expected or actual effect on our reported results of operations are addressed in Item 8. Financial Statements and Supplementary Data – Note 1. Summary of Significant Accounting Policies.

​

36

​

Table of Contents

Item 7.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

​

The financial and business analysis below provides information which we believe is relevant to an assessment and understanding of our financial position, results of operations, and cash flows.  This financial and business analysis should be read in conjunction with the financial statements and related notes.

​

In this section, we generally discuss the results of our operations for the year ended December 31, 2023, compared to the year ended December 31, 2022. For a discussion of the year ended December 31, 2022, to the year ended December 31, 2021, please refer to Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended December 31, 2022, filed with the SEC on February 23, 2023, which discussion is hereby incorporated herein by reference.

​

Executive Summary

​

We are a leading installer and specialty distributor of insulation and related building material products to the construction industry in the United States and Canada.  Demand for our products and services is driven primarily by residential and commercial/industrial construction and by industrial manufacturing activity.  A number of local and national factors influence activity in each of our lines of business, including demographic trends, interest rates, employment levels, business investment, supply and demand for housing, availability of credit, foreclosure rates, consumer confidence, and general economic conditions.

​

The core of our business is inherently environmentally friendly.   The insulation we install and distribute drives thermal efficiency, lowers energy usage, and reduces carbon emissions.  We are a leader in delivering these benefits for new and existing homes and commercial/industrial facilities across the United States and Canada.

​

Strategy

​

We are committed to creating long-term value for all stakeholders – employees, customers, suppliers, and investors.  Our team is focused on driving operational efficiencies and sharing best practices throughout our organization.  Our core values include:

​

​

Our strategy is focused on growth and productivity including:

​

​

Our operating results depend on residential new construction activity, commercial construction activity and industrial manufacturing activity, all of which are subject to business and economic cycles.  These cycles have less of an impact on our Specialty Distribution segment due to the repair and replacement component of our mechanical insulation distribution business.   We are also dependent on third-party suppliers and manufacturers providing us with an adequate supply of high-quality products.

​

28

​

Table of Contents

Material Trends in Our Business

​

Residential New Construction

Home builders continue to report improving demand resulting in single-family housing starts increasing in the fourth quarter compared to prior year.  Multifamily construction activity also remains strong but starts have slowed, in comparison to the prior year.  While there is a strong backlog of multi-family units that need to be completed, we do expect multifamily activity to decline as we move through the next 12 months. Overall, despite uncertainty around the economy and the impact 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,  favorable demographic trends, and increasing household formations.

​

Commercial and Industrial Construction

Our commercial backlog is strong, and our bidding activity is active, both of which continue to support our optimistic view of commercial/industrial sales at our Installation and Specialty Distribution segments.  There are many major projects being planned across several different industries fueling demand, in particular, for our Specialty Distribution products. In addition, maintenance and repair work on industrial sites will serve as a continued driver for our Specialty Distribution business.

​

Seasonality

​

Sales across our end markets are typically slower during the winter months due to lower construction activity.

​

Results of Operations

​

We report our financial results in conformity with GAAP.

​

The following table sets forth our net sales, gross profit, operating profit, and margins, as reported in our Consolidated Statements of Operations, in thousands:

​

​

Comparison of the Years Ended December 31, 2023 and December 31, 2022

​

Sales and Operations

​

Net sales for 2023 increased 3.7 percent, or $186.0 million, to $5.2 billion.  The increase was driven by a 2.4 percent impact from higher selling prices and a 2.1 percent increase in sales from acquisitions, partially offset by a reduction in sales volume.

​

29

​

Table of Contents

Our gross profit margins were 30.9 percent and 29.7 percent for 2023 and 2022, respectively.  Gross profit margin improved primarily due to productivity initiatives, higher selling prices, partially offset by higher material costs.

​

Selling, general, and administrative expenses as a percentage of sales were 14.0 percent and 13.8 percent for 2023 and 2022, respectively.  Selling, general, and administrative expenses as a percent of sales were higher driven by increased acquisition related costs.

​

Operating margins were 16.9 percent and 15.9 percent for 2023 and 2022, respectively.  The increase in operating margin was due to productivity initiatives and higher selling prices, partially offset by higher material costs and higher acquisition related costs.

​

Other Expense, Net

​

Other expense, net, decreased $1.7 million to $53.3 million in 2023 from $55.0 million in 2022. The decrease is primarily related to $20.6 million interest income earned on higher cash balances at an increased rate, which fully offset higher rate of interest expense incurred on our Term Loan borrowings.

​

Income Tax Expense

​

Our effective tax rate increased from 25.1 percent in 2022 to 25.6 percent in 2023.  The higher 2023 rate was primarily related to an increase in non-deductible items, state tax adjustments, and a decrease in the benefit related to share-based compensation.

​

2023 and 2022 Business Segment Results

​

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

​

2023 and 2022 Business Segment Results Discussion

​

Changes in operating profit margins in the following business segment results discussion exclude general corporate expense, net in 2023 and 2022, as applicable.

​

30

​

Table of Contents

Installation

​

Sales

​

Sales increased $218.3 million, or 7.3 percent, in 2023 compared to 2022.  Sales increased 3.6 percent due to higher selling prices and 3.6 percent from our acquisitions.

​

Operating Results

​

Operating margins in the Installation segment were 20.2 percent and 18.5 percent for 2023 and 2022, respectively.  The increase in operating margin was driven by productivity initiatives and higher selling prices, partially offset by higher material costs.

​

Specialty Distribution

​

Sales

​

Sales were essentially flat in 2023 compared to 2022, a decrease of $9.9 million, or 0.4 percent.  Sales decreased 1.6 percent from lower sales volume, partially offset by a 1.1 percent increase from higher selling prices.

​

Operating Results

​

Operating margins in the Specialty Distribution segment were 14.6 percent and 14.3 percent for 2023 and 2022, respectively.  The increase in operating margin was driven by productivity initiatives and higher selling prices, partially offset by higher material costs.

Commitments and Contingencies

​

We are subject to certain claims, charges, litigation, and other proceedings in the ordinary course of our business. 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.  For additional information see Item 8. Financial Statements and Supplementary Data – Note 11. Other Commitments and Contingencies.

​

Liquidity and Capital Resources

​

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. In addition, we have availability to our $550.0 million Term Facility Two, the proceeds of which can be used to finance in part the acquisition of SPI, including the payment of related fees and expenses. 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 total liquidity, in thousands:

​

​

31

​

Table of Contents

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. See Item 8. Financial Statements and Supplementary Data of this Annual Report for related disclosures.

​

Cash Flows

​

The following table presents a summary of our cash flows provided by (used in) operating, investing and financing activities for the periods indicated, in thousands:

​

Net cash flows provided by operating activities increased $353.6 million for the year ended December 31, 2023, as compared to December 31, 2022.  Net income was up $58.3 million, or 10.5 percent, compared with the prior year period, driven by the impact of higher selling prices and our acquisitions, as well as productivity initiatives.  In addition, we generated cash from improvements in management of working capital, particularly receivables and inventory.

​

Net cash used in investing activities was $198.2 million for the year ended December 31, 2023, primarily comprised of $149.2 million for acquisitions and $64.0 million for purchases of property and equipment (primarily vehicles, equipment and computer hardware and software). Those uses were partially offset by $15.0 million of proceeds received from the sale of assets.  Net cash used in investing activities was $93.9 million for the year ended December 31, 2022, primarily comprised of $76.4 million for purchases of property and equipment (primarily vehicles, equipment and computer hardware and software), as well as $20.5 million for acquisitions.

​

Net cash used in financing activities was $43.8 million for the year ended December 31, 2023. During the year ended December 31, 2023, we used $40.1 million for debt repayments and $3.4 million net activity related to exercise of share-based incentive awards and stock options. Net cash used in financing activities was $300.1 million for the year ended December 31, 2022, primarily comprised of $250.0 million for the repurchase of common stock, $38.7 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 $70.0 million on our Revolving Facility, all within the second quarter of 2022.

​

Critical Accounting Policies and Estimates

​

We prepare our 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 and disclosure of assets and liabilities, and any related contingencies, at the date of the financial statements, as well as the reported amounts of sales and expenses during the reporting period.  Actual results could differ from those estimates.

​

Our significant accounting policies are more fully described in Item 8. Financial Statements and Supplementary Data – Note 1. Summary of Significant Accounting Policies.  However, certain of our accounting policies considered critical are those we believe are both most important to the portrayal of our financial condition and operating results and require our most difficult, subjective, or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain.  Judgments and uncertainties affecting the application of those policies may result in materially different amounts being reported under different conditions or using different assumptions.

32

​

Table of Contents

We consider the following policies to be most critical in understanding the judgments that are involved in preparing our Consolidated Financial Statements.

​

Revenue Recognition and Receivables

​

We recognize revenue for our Installation segment over time as the related performance obligation is satisfied with respect to each particular order within a given customer’s contract. Progress toward complete satisfaction of the performance obligation is measured using a cost-to-cost measure of progress method. The cost input is based on the amount of material installed at that customer’s location and the associated labor costs, as compared to the total expected cost for the particular order. The total expected cost is a significant estimate in the revenue recognition process, requires judgment, and is subject to variability throughout the duration of the contract as a result of contract modifications and other circumstances impacting job completion. Generally, this results in revenue being recognized as the customer is able to receive and utilize the benefits provided by our services. Each contract contains one or more individual orders, which are based on services delivered. When material and installation services are bundled in a contract, we combine these items into one performance obligation as the overall promise is to transfer the combined item.

​

Revenue from our Specialty Distribution segment is recognized when title to products and risk of loss transfers to our customers.  This represents the point in time when the customer is able to direct the use of and obtain substantially all the benefits from the product. The determination of when control is deemed transferred depends on the shipping terms that are agreed upon in the contract.

​

At time of sale, we record estimated reductions to revenue for customer programs and incentive offerings, including special pricing and other volume-based incentives based on historical experience, which is continuously adjusted. The duration of our contracts with customers is relatively short, generally less than a 90-day period, and therefore there is not a significant financing component when considering the determination of the transaction price which gets allocated to the individual performance obligations, generally based on standalone selling prices. Additionally, we consider shipping costs charged to a customer as a fulfillment cost rather than a promised service and expense as incurred. Sales taxes, when incurred, are recorded as a liability and excluded from revenue on a net basis.

​

We record a contract asset when we have satisfied our performance obligation prior to billing and a contract liability when a customer payment is received prior to the satisfaction of our performance obligation. The difference between the beginning and ending balances of our contract assets and liabilities primarily results from the timing of our performance and the customer’s payment.

​

We maintain allowances for estimated losses resulting from the inability of customers to make required payments.  In addition, we monitor our customer receivable balances and the credit worthiness of our customers on an on-going basis.  During downturns in our markets, declines in the financial condition and creditworthiness of customers impact the credit risk of the receivables involved and we have incurred additional bad debt expense related to customer defaults.

​

Business Combinations

​

The purchase price for business combinations is allocated to the estimated fair values of acquired tangible and intangible assets, including goodwill, and assumed liabilities, where applicable.  Additionally, we recognize customer relationships, trademarks and trade names, and non-compete agreements as identifiable intangible assets, which are recorded at fair value as of the transaction date. The fair value of the customer relationships intangible assets is determined by management using the multi-period excess earnings method under the income approach. Assumptions used in determining the fair value of the customer relationships intangible asset include forecasted revenue growth rate, customer attrition rate, and discount rate. The fair value of other intangible assets is determined primarily using current industry information.  Goodwill is recorded when consideration transferred exceeds the fair value of identifiable assets and liabilities.  Measurement-period adjustments to assets acquired and liabilities assumed with a corresponding offset to goodwill are recorded in the period they occur, which may include up to one year from the acquisition date.  Contingent consideration is recorded at fair value at the acquisition date.

​

33

​

Table of Contents

Goodwill and Other Intangible Assets

​

We have two reporting units, which are also our operating and reporting segments: Installation and Specialty Distribution, and both contain goodwill.  Our operating segments engage in business activities for which discrete financial information including long range forecasts is available, and we complete the impairment testing of goodwill at this level, as defined by accounting guidance. 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 such unit and determination of its fair value.  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.

​

We perform our annual impairment testing of goodwill in the fourth quarter of each year, or as events occur or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. When assessing goodwill for impairment, we have the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events or circumstances, we determine it is more likely than not that the fair value of a reporting unit is less than its carrying amount, then we recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. If we conclude otherwise, then no further action is taken. We also have the option to bypass the qualitative assessment and only perform a quantitative assessment. For the years ended December 31, 2023 and 2022, we performed a qualitative and quantitative assessment, respectively.

​

Fair value for our reporting units is determined using a discounted cash flow method and a market multiple approach (with a 50% weighting of each), both which include significant unobservable inputs (Level 3 inputs).  We believe these methodologies are comparable to what would be used by other market participants.  Using the discounted cash flow method requires us to make significant estimates and assumptions, including long term projections of cash flows, market conditions, and appropriate discount rates.  Our judgments are based on historical experience, current market trends, consultations with external valuation specialists and other information.  The market approach includes a comparison of the multiple of a reporting unit's carrying value to its earnings before interest, taxes, depreciation and amortization with the multiples of similar businesses or guideline companies whose securities are actively traded in the public markets.  While we believe that the estimates and assumptions underlying the valuation methodologies are reasonable, changes to estimates and assumptions could result in different outcomes.  In estimating future cash flows, we rely on internally generated long-range forecasts for sales and operating profits, and generally a one to three percent long term assumed annual growth rate of cash flows for periods after the long-range forecast.  We generally develop these forecasts based upon, among other things, recent sales data for existing products, and estimated U.S. housing starts.

​

When necessary, an impairment loss is recognized to the extent that a reporting unit’s recorded goodwill exceeds its fair value. In the fourth quarters of 2023 and 2022, we performed an assessment on our goodwill and determined that the estimated fair value of each reporting unit substantially exceeded its carrying value, and therefore the goodwill was not impaired.

​

We did not recognize any impairment charges for goodwill for the years ended December 31, 2023, 2022, and 2021. As of December 31, 2023, net goodwill reflected $762.0 million of accumulated impairment losses, relating primarily to impairment charges taken in 2008-2010 following the substantial decrease in U.S. housing starts after the financial crisis of 2007-2008.

​

Intangible assets with finite useful lives are amortized using the straight-line method over their estimated useful lives. We evaluate the remaining useful lives of amortizable identifiable intangible assets at each reporting period to determine whether events and circumstances warrant a revision to the remaining periods of amortization.

​

34

​

Table of Contents

Income Taxes

​

If, based upon all available evidence, both positive and negative, it is more likely than not (more than 50 percent likely) deferred tax assets will not be realized, a valuation allowance is recorded.  Significant weight is given to positive and negative evidence that is objectively verifiable.  A company’s three year cumulative loss position is significant negative evidence in considering whether deferred tax assets are realizable and the accounting guidance restricts the amount of reliance we can place on projected taxable income to support the recovery of deferred tax assets.

​

While we believe we have adequately assessed for our uncertain tax positions, amounts asserted by taxing authorities could vary from our assessment of uncertain tax positions.  Accordingly, provisions for tax-related matters, including interest and penalties, could be recorded in income tax expense in the period revised assessments are made.  These unrecognized tax positions including associated interest and penalties are not material to our consolidated financial statements for the periods presented.

​

Additionally, we generally do not provide for taxes related to undistributed earnings as such earnings would not be taxable when remitted or would be considered to be indefinitely reinvested.

​

Recently Issued Accounting Pronouncements

​

Recently issued accounting pronouncements and their expected or actual effect on our reported results of operations are addressed in Item 8. Financial Statements and Supplementary Data – Note 1. Summary of Significant Accounting Policies.

​

Item 7.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

​

The financial and business analysis below provides information which we believe is relevant to an assessment and understanding of our financial position, results of operations, and cash flows.  This financial and business analysis should be read in conjunction with the financial statements and related notes.

​

In this section, we generally discuss the results of our operations for the year ended December 31, 2022 compared to the year ended December 31, 2021. For a discussion of the year ended December 31, 2021 to the year ended December 31, 2020, please refer to Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended December 31, 2021, filed with the SEC on February 22, 2022, which discussion is hereby incorporated herein by reference.

​

Executive Summary

​

We are a leading installer and specialty distributor of insulation and related building material products to the construction industry in the United States and Canada.  Demand for our products and services is driven primarily by residential and commercial/industrial construction and by industrial manufacturing activity.  A number of local and national factors influence activity in each of our lines of business, including demographic trends, interest rates, employment levels, business investment, supply and demand for housing, availability of credit, foreclosure rates, consumer confidence, and general economic conditions.

​

The core of our business is inherently environmentally friendly.   The insulation we install and distribute drives thermal efficiency, lowers energy usage, and reduces carbon emissions.  We are a leader in delivering these benefits for new and existing homes and commercial/industrial facilities across the United States and Canada.

​

Strategy

​

We are a leading installer and specialty distributor of insulation for the residential and commercial/industrial end markets in the United States and Canada.  We also distribute a range of other related building material products including gutters, garage doors, windows, and glass. We are committed to creating long-term value for all stakeholders – employees, customers, suppliers, and investors. Our core values include:

​

​

Our strategy is focused on growth and productivity including:

​

​

Our operating results depend heavily on residential new construction activity and, to a lesser extent, on commercial/industrial construction and industrial manufacturing activity, all of which are cyclical.  We are also dependent on third-party suppliers and manufacturers providing us with an adequate supply of high-quality products.

​

27

​

Table of Contents

Material Trends in Our Business

​

We recognize that there is uncertainty around the economy as the Federal Reserve seeks to slow inflation by raising interest rates.  Higher interest rates and overall inflation have led to many consumers being priced out of the housing market as evidenced by our homebuilders reporting higher cancellation rates, declining order volumes, and decreasing housing starts in the second half of 2022. The backlog of houses under construction supported our sales through the back half of 2022 and we anticipate that trend to continue into the second quarter of 2023 for single family homes and into the fourth quarter of 2023 for multi-family homes.  We remain optimistic about the long-term fundamentals of the U.S. housing market and believe that when mortgage rates eventually stabilize consumer demand will rebound.

​

The commercial/industrial end-markets are showing mixed signals, in part due to higher interest rates.  However, our bidding and order activity remains strong and we remain optimistic about the long-term fundamentals for these markets as well.

​

Seasonality

​

Sales across our end markets are typically slower during the winter months due to lower construction activity.

​

Results of Operations

​

We report our financial results in conformity with GAAP.

​

The following table sets forth our net sales, gross profit, operating profit, and margins, as reported in our Consolidated Statements of Operations, in thousands:

​

​

Comparison of the Years Ended December 31, 2022 and December 31, 2021

​

Sales and Operations

​

Net sales for 2022 increased 43.7 percent, or $1.5 billion, to $5.0 billion.  The increase was driven by a 24.9 percent increase in sales from acquisitions, 13.4 percent impact from higher selling prices, and a 5.4 percent increase in sales volume.

​

Our gross profit margins were 29.7 percent and 27.9 percent for 2022 and 2021, respectively.  Gross profit margin improved primarily due to higher selling prices, higher sales volume, and productivity initiatives partially offset by an increase in cost of material.

​

28

​

Table of Contents

Selling, general, and administrative expenses as a percentage of sales were 13.8 percent and 14.3 percent for 2022 and 2021, respectively.  Decreased selling, general, and administrative expense as a percent of sales was primarily the result of higher sales, partially offset by higher amortization of intangible assets related to purchase accounting and acquisition integration costs.

​

Operating margins were 15.9 percent and 13.7 percent for 2022 and 2021, respectively.  The increase in operating margins related to higher selling prices, higher sales volume, and productivity initiatives, partially offset by an increase in cost of material, and higher amortization of intangible assets related to purchase accounting and acquisition integration costs.

​

Other Expense, Net

​

Other expense, net, which primarily consists of interest expense, increased $12.1 million to $55.0 million in 2022 compared with 2021.  The increase is primarily related to increased average debt outstanding in 2022 and higher interest rates on our Term Loan, partially offset by increased interest income.

​

Income Tax Expense

​

Our effective tax rate decreased from 25.2 percent in 2021 to 25.1 percent in 2022.  The lower 2022 rate is primarily related to a decrease in non-deductible items offset by a decrease in the benefit related to share-based compensation.

​

2022 and 2021 Business Segment Results

​

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

​

2022 and 2021 Business Segment Results Discussion

​

Changes in operating profit margins in the following business segment results discussion exclude general corporate expense, net in 2022 and 2021, as applicable.

​

29

​

Table of Contents

Installation

​

Sales

​

Sales increased $591.6 million, or 24.9 percent, in 2022 compared to 2021.  Sales increased 12.2 percent due to higher selling prices, 9.2 percent from higher sales volume and 3.4 percent from acquisitions.

​

Operating Results

​

Operating margins in the Installation segment were 18.5 percent and 16.1 percent for 2022 and 2021, respectively.  The increase in operating margin was driven by higher selling prices, higher sales volume, and productivity initiatives, partially offset by an increase in cost of material.

​

Specialty Distribution

​

Sales

​

Sales increased $991.1 million, or 77.0 percent, in 2022 compared to 2021.  Sales increased 61.8 percent from acquisitions, 15.8 percent due to higher selling prices partially offset by a slight decrease in volume of 0.6 percent.

​

Operating Results

​

Operating margins in the Specialty Distribution segment were 14.3 percent and 13.2 percent for 2022 and 2021, respectively.  The increase in operating margin was driven primarily by higher selling prices and productivity initiatives, partially offset by higher amortization of intangible assets related to purchase accounting.

Commitments and Contingencies

​

We are subject to certain claims, charges, litigation, and other proceedings in the ordinary course of our business. 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.  For additional information see Item 8. Financial Statements and Supplementary Data – Note 11. Other Commitments and Contingencies.

​

Liquidity and Capital Resources

​

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 total liquidity, in thousands:

​

​

30

​

Table of Contents

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. See Item 8. Financial Statements and Supplementary Data of this Annual Report for related disclosures.

​

Cash Flows

​

The following table presents a summary of our cash flows provided by (used in) operating, investing and financing activities for the periods indicated, in thousands:

​

Net cash flows provided by operating activities increased $92.8 million for the year ended December 31, 2022, as compared to December 31, 2021.  Net income was up $231.9 million, or 71.6%, 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, particularly receivables and inventory.

​

Net cash used in investing activities was $93.9 million for the year ended December 31, 2022, primarily comprised of $76.4 million for purchases of property and equipment (primarily vehicles, equipment and computer hardware and software), as well as $20.5 million for acquisitions. Net cash used in investing activities was $1,322.2 million for the year ended December 31, 2021, primarily comprised of $1,267.1 million for acquisitions and $55.5 million for purchases of property and equipment, primarily vehicles.

​

Net cash used in financing activities was $300.1 million for the year ended December 31, 2022. During the year ended December 31, 2022, we used $250.0 million for the repurchase of common stock, $38.7 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 provided by financing activities was $729.0 million for the year ended December 31, 2021. Cash increased by $1,218.8 million from proceeds received on Amendment No. 1 to Credit Agreement as well as the 4.125% Senior Notes issuance used to fund the acquisition of DI. These increases were partially offset by repayments of $433.1 million including $400.0 million to redeem our 5.625% Senior Notes and payments on our term loan and equipment notes as well as $15.0 million used for debt issuance costs related to Amendment No. 1 to Credit Agreement as well as the 4.125% Senior Notes issuance.  Additionally, we used $35.6 million for the repurchase of common stock as well as $5.5 million net activity related to exercise of share-based incentive awards and stock options.

​

Critical Accounting Policies and Estimates

​

We prepare our 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 and disclosure of assets and liabilities, and any related contingencies, at the date of the financial statements, as well as the reported amounts of sales and expenses during the reporting period.  Actual results could differ from those estimates.

​

31

​

Table of Contents

Our significant accounting policies are more fully described in Item 8. Financial Statements and Supplementary Data – Note 1. Summary of Significant Accounting Policies.  However, certain of our accounting policies considered critical are those we believe are both most important to the portrayal of our financial condition and operating results and require our most difficult, subjective, or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain.  Judgments and uncertainties affecting the application of those policies may result in materially different amounts being reported under different conditions or using different assumptions.  We consider the following policies to be most critical in understanding the judgments that are involved in preparing our Consolidated Financial Statements.

​

Revenue Recognition and Receivables

​

We recognize revenue for our Installation segment over time as the related performance obligation is satisfied with respect to each particular order within a given customer’s contract. Progress toward complete satisfaction of the performance obligation is measured using a cost-to-cost measure of progress method. The cost input is based on the amount of material installed at that customer’s location and the associated labor costs, as compared to the total expected cost for the particular order. The total expected cost is a significant estimate in the revenue recognition process, requires judgment, and is subject to variability throughout the duration of the contract as a result of contract modifications and other circumstances impacting job completion. Generally, this results in revenue being recognized as the customer is able to receive and utilize the benefits provided by our services. Each contract contains one or more individual orders, which are based on services delivered. When material and installation services are bundled in a contract, we combine these items into one performance obligation as the overall promise is to transfer the combined item.

​

Revenue from our Specialty Distribution segment is recognized when title to products and risk of loss transfers to our customers.  This represents the point in time when the customer is able to direct the use of and obtain substantially all the benefits from the product. The determination of when control is deemed transferred depends on the shipping terms that are agreed upon in the contract.

​

At time of sale, we record estimated reductions to revenue for customer programs and incentive offerings, including special pricing and other volume-based incentives based on historical experience, which is continuously adjusted. The duration of our contracts with customers is relatively short, generally less than a 90-day period, and therefore there is not a significant financing component when considering the determination of the transaction price which gets allocated to the individual performance obligations, generally based on standalone selling prices. Additionally, we consider shipping costs charged to a customer as a fulfillment cost rather than a promised service and expense as incurred. Sales taxes, when incurred, are recorded as a liability and excluded from revenue on a net basis.

​

We record a contract asset when we have satisfied our performance obligation prior to billing and a contract liability when a customer payment is received prior to the satisfaction of our performance obligation. The difference between the beginning and ending balances of our contract assets and liabilities primarily results from the timing of our performance and the customer’s payment.

​

We maintain allowances for estimated losses resulting from the inability of customers to make required payments.  In addition, we monitor our customer receivable balances and the credit worthiness of our customers on an on-going basis.  During downturns in our markets, declines in the financial condition and creditworthiness of customers impact the credit risk of the receivables involved and we have incurred additional bad debt expense related to customer defaults.

​

Business Combinations

​

The purchase price for business combinations is allocated to the estimated fair values of acquired tangible and intangible assets, including goodwill, and assumed liabilities, where applicable.  Additionally, we recognize customer relationships, trademarks and trade names, and non-compete agreements as identifiable intangible assets, which are recorded at fair value as of the transaction date. The fair value of the customer relationships intangible assets was determined by management using the multi-period excess earnings method under the income approach. Assumptions used in determining the fair value of the customer relationships intangible asset included forecasted revenue growth

32

​

Table of Contents

rate, customer attrition rate, and discount rate. The fair value of other intangible assets is determined primarily using current industry information.  Goodwill is recorded when consideration transferred exceeds the fair value of identifiable assets and liabilities.  Measurement-period adjustments to assets acquired and liabilities assumed with a corresponding offset to goodwill are recorded in the period they occur, which may include up to one year from the acquisition date.  Contingent consideration is recorded at fair value at the acquisition date.

​

Goodwill and Other Intangible Assets

​

We have two reporting units, which are also our operating and reporting segments: Installation and Specialty Distribution, and both contain goodwill.  Our operating segments engage in business activities for which discrete financial information including long range forecasts is available, and we complete the impairment testing of goodwill at this level, as defined by accounting guidance. 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 such unit and determination of its fair value.  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.

​

We perform our annual impairment testing of goodwill in the fourth quarter of each year, or as events occur or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. When assessing goodwill for impairment, we have the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events or circumstances, we determine it is more likely than not that the fair value of a reporting unit is less than its carrying amount, then we recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. If we conclude otherwise, then no further action is taken. We also have the option to bypass the qualitative assessment and only perform a quantitative assessment. For the year ended December 31, 2022, we performed a quantitative assessment.

​

Fair value for our reporting units is determined using a discounted cash flow method which includes significant unobservable inputs (Level 3 inputs). We believe this methodology is comparable to what would be used by other market participants.  Using the discounted cash flow method requires us to make significant estimates and assumptions, including long term projections of cash flows, market conditions, and appropriate discount rates.  Our judgments are based on historical experience, current market trends, consultations with external valuation specialists and other information.  While we believe that the estimates and assumptions underlying the valuation methodology are reasonable, changes to estimates and assumptions could result in different outcomes.  In estimating future cash flows, we rely on internally generated long-range forecasts for sales and operating profits, and generally a one to three percent long term assumed annual growth rate of cash flows for periods after the long-range forecast.  We generally develop these forecasts based upon, among other things, recent sales data for existing products, and estimated U.S. housing starts.

​

When necessary, an impairment loss is recognized to the extent that a reporting unit’s recorded goodwill exceeds its fair value. In the fourth quarters of 2022 and 2021, we performed an assessment on our goodwill and determined that the estimated fair value of each reporting unit substantially exceeded its carrying value at December 31, 2021, and therefore the goodwill was not impaired.

​

We did not recognize any impairment charges for goodwill for the years ended December 31, 2022, 2021, and 2020. As of December 31, 2022, net goodwill reflected $762.0 million of accumulated impairment losses, relating primarily to impairment charges taken in 2008-2010 following the substantial decrease in U.S. housing starts after the financial crisis of 2007-2008.

​

Intangible assets with finite useful lives are amortized using the straight-line method over their estimated useful lives. We evaluate the remaining useful lives of amortizable identifiable intangible assets at each reporting period to determine whether events and circumstances warrant a revision to the remaining periods of amortization.

​

33

​

Table of Contents

Income Taxes

​

If, based upon all available evidence, both positive and negative, it is more likely than not (more than 50 percent likely) deferred tax assets will not be realized, a valuation allowance is recorded.  Significant weight is given to positive and negative evidence that is objectively verifiable.  A company’s three year cumulative loss position is significant negative evidence in considering whether deferred tax assets are realizable and the accounting guidance restricts the amount of reliance we can place on projected taxable income to support the recovery of deferred tax assets.

​

While we believe we have adequately assessed for our uncertain tax positions, amounts asserted by taxing authorities could vary from our assessment of uncertain tax positions.  Accordingly, provisions for tax-related matters, including interest and penalties, could be recorded in income tax expense in the period revised assessments are made.

​

Recently Issued Accounting Pronouncements

​

Recently issued accounting pronouncements and their expected or actual effect on our reported results of operations are addressed in Item 8. Financial Statements and Supplementary Data – Note 1. Summary of Significant Accounting Policies.

​

Item 7.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

​

The financial and business analysis below provides information which we believe is relevant to an assessment and understanding of our financial position, results of operations, and cash flows.  This financial and business analysis should be read in conjunction with the financial statements and related notes.

​

In this section, we generally discuss the results of our operations for the year ended December 31, 2021 compared to the year ended December 31, 2020. For a discussion of the year ended December 31, 2020 to the year ended December 31, 2019, please refer to Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended December 31, 2020, filed with the SEC on February 23, 2021, which discussion is hereby incorporated herein by reference.

​

Executive Summary

​

We are a leading installer and distributor of insulation and other building products to the construction industry.  Demand for our products and services is driven primarily by residential construction, commercial construction, and industrial construction.  We serve the residential, commercial, and industrial markets in the U.S. and the commercial and industrial markets in Canada.  A number of local and national factors influence activity in each of our lines of business, including demographic trends, interest rates, employment levels, business investment, supply and demand for housing, availability of credit, foreclosure rates, consumer confidence, and general economic conditions.

​

Activity in the construction industry is seasonal, typically peaking in the summer months.  Because installation of insulation historically lags housing starts by several months, we generally see a corresponding benefit in our operating results during the third and fourth quarters.

​

Strategy

​

We are the nation’s leading installer and specialty distributor of residential and commercial insulation and other building products. We are committed to creating long-term value for all stakeholders – employees, customers, suppliers, and investors. Our core values include:

​

​

Our strategy is focused on growth and productivity including:

​

​

Our operating results depend heavily on residential new construction activity and, to a lesser extent, on commercial construction and industrial construction, all of which are cyclical.  We are also dependent on third-party suppliers and manufacturers providing us with an adequate supply of high-quality products.

​

26

​

Table of Contents

COVID-19 Business Update

​

We continue to monitor the COVID-19 pandemic and its impact on macroeconomic and local economic conditions. While we are currently able to operate in all of our locations, there is no guarantee that the services we provide will continue to be allowed or that other events making the provision of our services challenging or impossible, will not occur.  For example, if there are surges in levels of COVID-19 infections in certain states, those states may respond by, among other things, deeming residential, commercial, and industrial construction as nonessential in connection with a restriction of commercial activity.

​

We have implemented and continue to implement procedures and processes as required or recommended by governmental and medical authorities to ensure the safety of our employees, including increasing our cleaning and sanitizing practices at all locations and for all company vehicles, mandating social distancing on job sites and within our branch operations and limiting all but essential travel.  However, we are not able to predict whether our customers will continue to operate at their current or typical volumes, and such decreases in their operations would have a negative impact on our business.  We are also unable to predict how long the COVID-19 pandemic will last and the impact of the pandemic on demand for our products and services.  For additional discussion of the potential impact of the COVID-19 pandemic on our business, see the sections entitled “Outlook” and “Risk Factors” included in this Annual Report.

​

Material Trends in Our Business

​

We remain optimistic about the U.S. housing market. Following a brief slowdown in the market during the 2nd quarter of 2020 due to the impacts from COVID-19, housing starts increased through much of 2020 and 2021, and ended the year at 1.7 million (based on seasonally-adjusted figures from the U.S. Census Bureau), the highest level of annual starts in more than a decade. However, housing completions have not been able to keep up with housing starts due to a variety of material and labor constraints across the entire housing construction industry.  This environment of strong demand and tight supply has created significant inflation in the majority of the products we sell.  We anticipate that the current environment of strong demand and tight supply will continue into 2022.

​

The commercial and industrial construction markets are also dealing with strong demand and tight supply.  In addition, we have seen a number of projects pushed out or delayed.  Our order volume and backlog for this work remains strong and we anticipate growth in this market in 2022.

​

Seasonality

​

Sales across all of our end markets are typically slower during the winter months due to lower construction activity.  Historically, the installation of insulation lags housing starts by several months. However, the normal lag on residential housing starts has extended recently as demand for residential housing has surged, causing building materials and labor to be constrained.  These material and labor constraints, as well as additional safety precautions related to COVID-19, have also extended the build cycle related to commercial construction.

​

Results of Operations

​

We report our financial results in conformity with GAAP.

​

27

​

Table of Contents

The following table sets forth our net sales, gross profit, operating profit, and margins, as reported in our Consolidated Statements of Operations, in thousands:

​

​

Comparison of the Years Ended December 31, 2021 and December 31, 2020

​

Sales and Operations

​

Net sales for 2021 increased 28.3 percent, or $768.2 million, to $3.5 billion.  The increase was driven by a 15.6 percent increase in sales from acquisitions, 8.5 percent impact from higher selling prices, and a 4.1 percent increase in sales volume.

​

Our gross profit margins were 27.9 percent and 27.5 percent for 2021 and 2020, respectively.  Gross profit margin improved primarily due to higher selling prices and sales volume, and savings from cost reduction activities, partially offset by an increase in cost of material and the amortization of inventory step-up related to purchase accounting.

​

Selling, general, and administrative expenses as a percentage of sales were 14.3 percent and 14.4 percent for 2021 and 2020, respectively.  Decreased selling, general, and administrative expense as a percent of sales was primarily the result of higher sales and lower legal fees and share-based compensation expense partially offset by higher spend on acquisition-related costs such as intangible amortization and one-time transaction costs.

​

Operating margins were 13.7 percent and 13.1 percent for 2021 and 2020, respectively.  The increase in operating margins related to higher selling prices and sales volume, savings from cost reduction activities, lower legal fees and share-based compensation expense, partially offset by an increase in cost of material, the amortization of inventory step-up related to purchase accounting and other one-time transaction costs.

​

Other Expense, Net

​

Other expense, net, which primarily consists of interest expense, increased $11.0 million to $43.0 million in 2021 compared with 2020.  The increase is primarily related to costs incurred to redeem our 5.625% Senior Notes in 2021 and increased average debt outstanding in 2021, partially offset by lower interest rates on our 3.625% Senior Notes and borrowings under the Credit Agreement.

​

Income Tax Expense

​

Our effective tax rate increased from 23.5 percent in 2020 to 25.2 percent in 2021.  The higher 2021 rate was primarily related to a decrease in the benefit related to share-based compensation and an increase in non-deductible items.

28

​

Table of Contents

2021 and 2020 Business Segment Results

​

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

​

​

2021 and 2020 Business Segment Results Discussion

​

Changes in operating profit margins in the following business segment results discussion exclude general corporate expense, net in 2021 and 2020, as applicable.

​

Installation

​

Sales

​

Sales increased $434.9 million, or 22.4 percent, in 2021 compared to 2020.  Sales increased 11.4 percent from acquisitions, 6.5 percent due to higher selling prices and 4.5 percent sales volume.

​

Operating Results

​

Operating margins in the Installation segment were 16.1 percent and 15.2 percent for 2021 and 2020, respectively.  The increase in operating margin was driven by higher sales volume and selling prices, savings from cost reduction activities, and lower legal fees, partially offset by an increase in cost of material.

​

Specialty Distribution

​

Sales

​

Sales increased $361.0 million, or 39.0 percent, in 2021 compared to 2020.  Sales increased 22.0 percent from acquisitions, 13.7 percent due to higher selling prices and 3.3 percent sales volume.

​

29

​

Table of Contents

Operating Results

​

Operating margins in the Specialty Distribution segment were 13.2 percent and 12.5 percent for 2021 and 2020, respectively.  The increase in operating margin was driven by higher sales volume and selling prices and savings from cost reduction activities, partially offset by an increase in cost of material and the amortization of inventory step-up related to purchase accounting.

Commitments and Contingencies

​

We are subject to certain claims, charges, litigation, and other proceedings in the ordinary course of our business. 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.  For additional information see Item 8. Financial Statements and Supplementary Data – Note 11. Other Commitments and Contingencies.

​

Liquidity and Capital Resources

​

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 total liquidity, in thousands:

​

​

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 also have adequate liquidity to maintain off-balance sheet arrangements for short-term leases, letters of credit, and performance and license bonds. See Item 8. Financial Statements and Supplementary Data of this Annual Report for related disclosures.

​

Our material cash requirements from known contractual and other obligations primarily relate to our debt and lease obligations. Expected timing of those payments are as follows as of December 31, 2021, in thousands:

​

30

​

Table of Contents

(a) We lease certain locations, vehicles and equipment under operating lease agreements. In some instances, these lease agreements exist with related parties. For additional information, see Note 2 – Leases to our audited consolidated financial statements included in this Form 10-K.

(b) We lease certain fleet vehicles and equipment under a finance lease structure. Finance lease obligations, as disclosed above, include estimated interest expense payments using our incremental borrowing rates effective at December 31, 2021.

(c) Principal repayments of long-term debt include payments under our term loan facility, equipment notes, 3.625% Senior Notes and 4.125% Senior Notes. No borrowings are assumed under our revolving facility in the schedule above. For additional information, see Note 6 – Long-Term Debt to our audited consolidated financial statements included in this Form 10-K.

(d) Interest and fees have been calculated using the interest rate on our long-term debt as of December 31, 2021 and assumes our standby letters of credit remain constant during the term of our Credit Agreement.

​

Cash Flows

​

The following table presents a summary of our cash flows provided by (used in) operating, investing and financing activities for the periods indicated, in thousands:

​

​

Net cash flows provided by operating activities increased $45.1 million for the year ended December 31, 2021, as compared to December 31, 2020.  The increase was primarily due to an increase in net income partially offset by the impact of higher working capital seen in Accounts Receivable,  Inventory, and Accounts Payable.

​

Net cash used in investing activities was $1,322.2 million for the year ended December 31, 2021, primarily comprised of $1,267.1 million for acquisitions and $55.5 million for purchases of property and equipment, primarily vehicles.  Net cash used in investing activities was $121.9 million for the year ended December 31, 2020, primarily comprised of $83.4 million for acquisitions and $40.9 million for purchases of property and equipment, primarily vehicles, partially offset by $2.5 million of proceeds from the sale of property and equipment.

​

Net cash provided by financing activities was $729.0 million for the year ended December 31, 2021. Cash increased by $1,218.8 million from proceeds received on Amendment No. 1 to Credit Agreement in the first quarter of 2021 and again in the fourth quarter of 2021 as well as the 4.125% Senior Notes issuance in the fourth quarter of 2021, used to fund the acquisition of DI. These increases were partially offset by repayments of $433.1 million including $400.0 million to redeem our 5.625% Senior Notes and payments on our term loan and equipment notes as well as $15.0 million used for debt issuance costs related to Amendment No. 1 to Credit Agreement in the first quarter of 2021 and again in the fourth quarter of 2021 as well as the 4.125% Senior Notes issuance in the fourth quarter of 2021.  Additionally, we used $35.6 million for the repurchase of common stock pursuant to the 2019 Repurchase Program, as well as $5.5 million net activity related to exercise of share-based incentive awards and stock options.  Net cash used in financing activities was $90.8 million for the year ended December 31, 2020. We used $49.2 million for the repurchase of common stock pursuant to the 2019 Repurchase Program, $24.9 million for payments on our term loan under our Credit Agreement and on our equipment notes, $14.9 million for purchases of common stock for tax withholding obligations related to the vesting and exercise of share-based incentive awards, and $2.3 million in debt issuance costs as a result of entering into a new term loan and revolving credit facility.

​

31

​

Table of Contents

Critical Accounting Policies and Estimates

​

We prepare our 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 and disclosure of assets and liabilities, and any related contingencies, at the date of the financial statements, as well as the reported amounts of sales and expenses during the reporting period.  Actual results could differ from those estimates.

​

Our significant accounting policies are more fully described in Item 8. Financial Statements and Supplementary Data – Note 1. Summary of Significant Accounting Policies.  However, certain of our accounting policies considered critical are those we believe are both most important to the portrayal of our financial condition and operating results and require our most difficult, subjective, or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain.  Judgments and uncertainties affecting the application of those policies may result in materially different amounts being reported under different conditions or using different assumptions.  We consider the following policies to be most critical in understanding the judgments that are involved in preparing our Consolidated Financial Statements.

​

Revenue Recognition and Receivables

​

We recognize revenue for our Installation segment over time as the related performance obligation is satisfied with respect to each particular order within a given customer’s contract. Progress toward complete satisfaction of the performance obligation is measured using a cost-to-cost measure of progress method. The cost input is based on the amount of material installed at that customer’s location and the associated labor costs, as compared to the total expected cost for the particular order. The total expected cost is a significant estimate in the revenue recognition process, requires judgment, and is subject to variability throughout the duration of the contract as a result of contract modifications and other circumstances impacting job completion. Generally, this results in revenue being recognized as the customer is able to receive and utilize the benefits provided by our services. Each contract contains one or more individual orders, which are based on services delivered. When material and installation services are bundled in a contract, we combine these items into one performance obligation as the overall promise is to transfer the combined item.

​

Revenue from our Specialty Distribution segment is recognized when title to products and risk of loss transfers to our customers.  This represents the point in time when the customer is able to direct the use of and obtain substantially all the benefits from the product. The determination of when control is deemed transferred depends on the shipping terms that are agreed upon in the contract.

​

At time of sale, we record estimated reductions to revenue for customer programs and incentive offerings, including special pricing and other volume-based incentives based on historical experience, which is continuously adjusted. The duration of our contracts with customers is relatively short, generally less than a 90-day period, and therefore there is not a significant financing component when considering the determination of the transaction price which gets allocated to the individual performance obligations, generally based on standalone selling prices. Additionally, we consider shipping costs charged to a customer as a fulfillment cost rather than a promised service and expense as incurred. Sales taxes, when incurred, are recorded as a liability and excluded from revenue on a net basis.

​

We record a contract asset when we have satisfied our performance obligation prior to billing and a contract liability when a customer payment is received prior to the satisfaction of our performance obligation. The difference between the beginning and ending balances of our contract assets and liabilities primarily results from the timing of our performance and the customer’s payment.

​

We maintain allowances for estimated losses resulting from the inability of customers to make required payments.  In addition, we monitor our customer receivable balances and the credit worthiness of our customers on an on-going basis.  During downturns in our markets, declines in the financial condition and creditworthiness of customers impact the credit risk of the receivables involved and we have incurred additional bad debt expense related to customer defaults.

​

32

​

Table of Contents

Business Combinations

​

The purchase price for business combinations is allocated to the estimated fair values of acquired tangible and intangible assets, including goodwill, and assumed liabilities, where applicable.  Additionally, we recognize customer relationships, trademarks and trade names, and non-compete agreements as identifiable intangible assets, which are recorded at fair value as of the transaction date. The fair value of the customer relationships intangible assets was determined by management using the multi-period excess earnings method under the income approach. Assumptions used in determining the fair value of the customer relationships intangible asset included forecasted revenue growth rate, customer attrition rate, and discount rate. The fair value of other intangible assets is determined primarily using current industry information.  Goodwill is recorded when consideration transferred exceeds the fair value of identifiable assets and liabilities.  Measurement-period adjustments to assets acquired and liabilities assumed with a corresponding offset to goodwill are recorded in the period they occur, which may include up to one year from the acquisition date.  Contingent consideration is recorded at fair value at the acquisition date.

​

Goodwill and Other Intangible Assets

​

We have two reporting units, which are also our operating and reporting segments: Installation and Specialty Distribution, and both contain goodwill.  Our operating segments engage in business activities for which discrete financial information including long range forecasts is available, and we complete the impairment testing of goodwill at this level, as defined by accounting guidance. 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 such unit and determination of its fair value.  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.

​

We perform our annual impairment testing of goodwill in the fourth quarter of each year, or as events occur or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. When assessing goodwill for impairment, we have the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events or circumstances, we determine it is more likely than not that the fair value of a reporting unit is less than its carrying amount, then we recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. If we conclude otherwise, then no further action is taken. We also have the option to bypass the qualitative assessment and only perform a quantitative assessment. For the year ended December 31, 2021, we performed a qualitative assessment.

​

Fair value for our reporting units is determined using a discounted cash flow method which includes significant unobservable inputs (Level 3 inputs). We believe this methodology is comparable to what would be used by other market participants.  Using the discounted cash flow method requires us to make significant estimates and assumptions, including long term projections of cash flows, market conditions, and appropriate discount rates.  Our judgments are based on historical experience, current market trends, consultations with external valuation specialists and other information.  While we believe that the estimates and assumptions underlying the valuation methodology are reasonable, changes to estimates and assumptions could result in different outcomes.  In estimating future cash flows, we rely on internally generated long-range forecasts for sales and operating profits, and generally a one to three percent long term assumed annual growth rate of cash flows for periods after the long-range forecast.  We generally develop these forecasts based upon, among other things, recent sales data for existing products, and estimated U.S. housing starts.

​

When necessary, an impairment loss is recognized to the extent that a reporting unit’s recorded goodwill exceeds its fair value. In the fourth quarters of 2021 and 2020, we performed an assessment on our goodwill and determined that the estimated fair value of each reporting unit substantially exceeded its carrying value at December 31, 2021, and therefore the goodwill was not impaired.

​

33

​

Table of Contents

We did not recognize any impairment charges for goodwill for the years ended December 31, 2021, 2020, and 2019. As of December 31, 2021, net goodwill reflected $762.0 million of accumulated impairment losses, relating primarily to impairment charges taken in 2008-2010 following the substantial decrease in U.S. housing starts after the financial crisis of 2007-2008.

​

Intangible assets with finite useful lives are amortized using the straight-line method over their estimated useful lives. We evaluate the remaining useful lives of amortizable identifiable intangible assets at each reporting period to determine whether events and circumstances warrant a revision to the remaining periods of amortization.

​

Income Taxes

​

If, based upon all available evidence, both positive and negative, it is more likely than not (more than 50 percent likely) deferred tax assets will not be realized, a valuation allowance is recorded.  Significant weight is given to positive and negative evidence that is objectively verifiable.  A company’s three year cumulative loss position is significant negative evidence in considering whether deferred tax assets are realizable and the accounting guidance restricts the amount of reliance we can place on projected taxable income to support the recovery of deferred tax assets.

​

Current accounting guidance allows the recognition of only those income tax positions that have a greater than 50 percent likelihood of being sustained upon examination by taxing authorities.  We believe that there is an increased potential for volatility in our effective tax rate because this threshold allows changes in the income tax environment and the inherent complexities of income tax law in a substantial number of jurisdictions to affect the computation of the liability for uncertain tax positions to a greater extent.

​

While we believe we have adequately assessed for our uncertain tax positions, amounts asserted by taxing authorities could vary from our assessment of uncertain tax positions.  Accordingly, provisions for tax-related matters, including interest and penalties, could be recorded in income tax expense in the period revised assessments are made.

​

Recently Issued Accounting Pronouncements

​

Recently issued accounting pronouncements and their expected or actual effect on our reported results of operations are addressed in Item 8. Financial Statements and Supplementary Data – Note 1. Summary of Significant Accounting Policies.

​