# TopBuild Corp (BLD) FY 2022 MD&A

Verbatim Item 7 Management's Discussion and Analysis from TopBuild Corp's 10-K for fiscal year 2022.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1633931/000155837023001903/bld-20221231x10k.htm
Accession: 0001558370-23-001903
Filing date: 2023-02-23
Report date: 2022-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/BLD/
All MD&A years: /company/BLD/mda/
Previous year: /company/BLD/mda/fy2021/ (FY 2021)
Next year: /company/BLD/mda/fy2023/ (FY 2023)

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

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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.

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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.

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Executive Summary

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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.  

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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.  

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Strategy

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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:

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[[GREPCENT_TABLE]]
[["","\u25cf","Safety \u2013 We put the safety of our people first."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","Integrity \u2013 We deliver results with integrity, respect, and accountability."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","Focus \u2013 We are customer-focused, grounded in strong relationships."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","Innovation \u2013 We are continuously improving and encourage idea sharing."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","Unity \u2013 We are united as one team, valuing diversity."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","Community \u2013 We make a difference in the communities we serve."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","Empowerment \u2013 We are empowered to be our best, individually and as a team."]]
[[/GREPCENT_TABLE]]

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Our strategy is focused on growth and productivity including:

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[[GREPCENT_TABLE]]
[["","\u25cf","Attracting and retaining top talent"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","Leveraging technology to streamline processes;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","Expanding our business and market share in the residential and commercial/industrial end-markets;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","Acquiring strategically aligned businesses;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","Driving operational efficiencies throughout the business."]]
[[/GREPCENT_TABLE]]

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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.  

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Material Trends in Our Business

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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.  

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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.  

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Seasonality

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

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Results of Operations

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We report our financial results in conformity with GAAP.  

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

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[[GREPCENT_TABLE]]
[["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","\u200b","Year Ended December 31,","\u200b"],["\u200b","","2022","","2021"],["Net sales","\u200b","$","5,008,744","\u200b","$","3,486,207","\u200b"],["Cost of sales","\u200b","\u200b","3,522,025","\u200b","\u200b","2,511,818","\u200b"],["Cost of sales ratio","\u200b","\u200b","70.3","%","\u200b","72.1","%"],["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Gross profit","\u200b","\u200b","1,486,719","\u200b","\u200b","974,389","\u200b"],["Gross profit margin","\u200b","\u200b","29.7","%","\u200b","27.9","%"],["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Selling, general, and administrative expense","\u200b","\u200b","689,555","\u200b","\u200b","497,970","\u200b"],["Selling, general, and administrative expense to sales ratio","\u200b","\u200b","13.8","%","\u200b","14.3","%"],["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Operating profit","\u200b","\u200b","797,164","\u200b","\u200b","476,419","\u200b"],["Operating profit margin","\u200b","\u200b","15.9","%","\u200b","13.7","%"],["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Other expense, net","\u200b","\u200b","(55,029)","\u200b","\u200b","(42,976)","\u200b"],["Income tax expense","\u200b","\u200b","(186,146)","\u200b","\u200b","(109,427)","\u200b"],["Net income","\u200b","$","555,989","\u200b","$","324,016","\u200b"],["Net margin","\u200b","\u200b","11.1","%","\u200b","9.3","%"]]
[[/GREPCENT_TABLE]]

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

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Sales and Operations

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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.

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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.  

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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.

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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.

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Other Expense, Net

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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.

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Income Tax Expense

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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.

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2022 and 2021 Business Segment Results

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

[[GREPCENT_TABLE]]
[["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","Year Ended December 31,","\u200b","\u200b","\u200b","\u200b"],["","2022","","2021","","\u200b","Percent Change","\u200b"],["Net sales by business segment:","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Installation","$","2,969,978","\u200b","$","2,378,401","\u200b","\u200b","24.9","%"],["Specialty Distribution","\u200b","2,278,261","\u200b","\u200b","1,287,176","\u200b","\u200b","77.0","%"],["Intercompany eliminations","\u200b","(239,495)","\u200b","\u200b","(179,370)","\u200b","\u200b","\u200b","\u200b"],["Net sales","$","5,008,744","\u200b","$","3,486,207","\u200b","\u200b","43.7","%"],["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Operating profit by business segment (a):","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Installation","$","548,795","\u200b","$","383,722","\u200b","\u200b","43.0","%"],["Specialty Distribution","\u200b","326,226","\u200b","\u200b","169,368","\u200b","\u200b","92.6","%"],["Intercompany eliminations","\u200b","(39,839)","\u200b","\u200b","(29,653)","\u200b","\u200b","\u200b","\u200b"],["Operating profit before general corporate expense","\u200b","835,182","\u200b","\u200b","523,437","\u200b","\u200b","59.6","%"],["General corporate expense, net (b)","\u200b","(38,018)","\u200b","\u200b","(47,018)","\u200b","\u200b","\u200b","\u200b"],["Operating profit","$","797,164","\u200b","$","476,419","\u200b","\u200b","67.3","%"],["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Operating profit margins:","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Installation","\u200b","18.5","%","\u200b","16.1","%","\u200b","\u200b","\u200b"],["Specialty Distribution","\u200b","14.3","%","\u200b","13.2","%","\u200b","\u200b","\u200b"],["Operating profit margin before general corporate expense","\u200b","16.7","%","\u200b","15.0","%","\u200b","\u200b","\u200b"],["Operating profit margin","\u200b","15.9","%","\u200b","13.7","%","\u200b","\u200b","\u200b"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["(a)","Segment operating profit includes an allocation of general corporate expenses attributable to the operating segments which is based on direct benefit or usage (such as salaries of corporate employees who directly support the segment)."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["(b)","General corporate expense, net includes expenses not specifically attributable to our segments for functions such as corporate human resources, finance and legal, including salaries, benefits, and other related costs."]]
[[/GREPCENT_TABLE]]

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2022 and 2021 Business Segment Results Discussion

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

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Installation

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Sales

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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.  

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Operating Results

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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.

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Specialty Distribution

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Sales

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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.

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Operating Results

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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

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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.

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Liquidity and Capital Resources

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We have access to liquidity through our cash from operations and available borrowing capacity under our Credit Agreement, which provides for borrowing and/or standby letter of credit issuances of up to $500 million under the revolving facility.  For additional information regarding our outstanding debt and borrowing capacity see Item 8. Financial Statements and Supplementary Data – Note 6. Long-Term Debt.  

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The following table summarizes our total liquidity, in thousands:

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[[GREPCENT_TABLE]]
[["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","\u200b","As of"],["\u200b","\u200b","December 31,","\u200b","December 31,"],["\u200b","","2022","","2021"],["Cash and cash equivalents (a)","\u200b","$","240,069","\u200b","$","139,779"],["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Revolving facility","\u200b","\u200b","500,000","\u200b","\u200b","500,000"],["Less: standby letters of credit","\u200b","\u200b","(67,689)","\u200b","\u200b","(69,936)"],["Availability under revolving facility","\u200b","\u200b","432,311","\u200b","\u200b","430,064"],["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Total liquidity","\u200b","$","672,380","\u200b","$","569,843"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["(a)","Our cash and cash equivalents consist of AAA-rated money market funds as well as cash held in our demand deposit accounts."]]
[[/GREPCENT_TABLE]]

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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.

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Cash Flows

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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:

[[GREPCENT_TABLE]]
[["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","\u200b","Year Ended December 31,"],["\u200b","","2022","","2021"],["Changes in cash and cash equivalents:","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Net cash provided by operating activities","\u200b","$","495,801","\u200b","$","403,025"],["Net cash used in investing activities","\u200b","","(93,907)","\u200b","","(1,322,245)"],["Net cash (used in) provided by financing activities","\u200b","\u200b","(300,073)","\u200b","","729,007"],["Impact of exchange rate changes on cash","\u200b","\u200b","(1,531)","\u200b","\u200b","(15)"],["Net increase (decrease) in cash and cash equivalents","\u200b","$","100,290","\u200b","$","(190,228)"]]
[[/GREPCENT_TABLE]]

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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.

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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.  

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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.  

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Critical Accounting Policies and Estimates

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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. 

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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. 

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Revenue Recognition and Receivables

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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.

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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.

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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.

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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.

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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.

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Business Combinations

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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

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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.

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Goodwill and Other Intangible Assets

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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.

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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.

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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.

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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.

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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.

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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.

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Income Taxes

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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.

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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.

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Recently Issued Accounting Pronouncements

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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.

​