Item 7.
Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K. This discussion contains forward-looking statements and involves numerous risks and uncertainties, including but not limited to those described in Item 1A, Risk Factors, and elsewhere. Actual results may differ materially from those contained in any forward-looking statements.
Overview
We are the second largest specialty distributor of wallboard and suspended ceiling systems in the United States and Canada, and the fastest growing by revenue and branch count since our founding in 2011. We are also the second largest specialty distributor and one of the largest fabricators of commercial and industrial mechanical insulation in the United States. We have expanded from a single branch in Southern California to over 200 branches across North America, carrying a broad array of more than 35,000 SKUs. We have grown revenue faster than any U.S. publicly traded building products distributor over the same period. Our goal is to be the leading company within specialty building products distribution and to continue expanding into complementary markets.
We were founded in 2011 by our President and Chief Executive Officer Ruben Mendoza, our Chief Financial Officer John Gorey and one of our Regional Vice Presidents, Tom Fischbeck. Mr. Mendoza previously served as CEO of Acoustical Material Services where he oversaw the successful growth of the company before it was acquired by Allied Building Products, a subsidiary of CRH, in 2007. In founding our company, Mr. Mendoza applied a proven customer-centric operating model to an organization that would combine strong organic growth with an effective acquisition and integration program across a fragmented industry, where he and other members of management had long and close personal relationships with many private acquisition candidates in our industry. In our early years we were focused on opening or acquiring new branches to leverage our founders’ customer focus and strong supplier relationships. In 2012 and 2013, we began rapidly growing through both organic growth and acquisitions, and by the end of 2013, we significantly increased our number of branches and geographic footprint, and expanded from California into the Midwest, Florida and Arizona. This rapid growth resulted in the acquisition of our current ERP platform and information technology structure and added a deep bench of leaders from the acquired companies to prepare for future growth. In addition, in November 2013, we strengthened our management team with the addition of our Chief Operating Officer Pete Welly, who has 37 years of experience in our industry.
In 2014 and 2015, we expanded into Texas through three acquisitions, and acquired branches in Iowa, Illinois, Wisconsin, Colorado, Kansas, Missouri, Ohio and Pennsylvania. We also increased our market position in California and Arizona with wallboard and metal framing customers. These acquisitions further strengthened our relationship with key suppliers such as Armstrong and USG. Our nationwide presence, as well as our ability to achieve operating efficiencies while leveraging a national purchasing platform, led to favorable margin improvement.
In August 2016, we entered the Canadian market through our acquisition of Winroc-SPI for cash consideration of $314.1 million, subject to customary working capital adjustments, which increased our revenue and expanded our relationship with Armstrong. Winroc-SPI’s net sales for the year ended December 31, 2015 were $745.3 million. We also became the second largest specialty distributor and one of the largest fabricators of commercial and industrial mechanical insulation in the United States. The expansion into commercial and industrial insulation products both diversified our customer base and allowed us to capitalize on some of the strengths of our proven operating model given that wallboard distributors and commercial and industrial insulation distributors have similar business models. The Winroc-SPI acquisition strategically opened new markets in both the United States and Canada, added the industry leading suspended ceiling systems line in additional geographies, and broadened our product offering in many U.S. markets.
Initial Public Offering
On February 15, 2017, we completed our initial public offering of 12,800,000 shares of our common stock at a public offering price of $14.00 per share. Our common stock began trading on the NYSE on February 10, 2017 under the ticker symbol "FBM". After underwriting discounts and commissions and expenses payable by us, net proceeds from the IPO were approximately $161.3 million. We used these proceeds to repay $161.3 million of borrowings outstanding under our ABL Credit Facility.
Description of Segments
We have two reportable segments. Resources are allocated and performance is assessed by our CEO, whom we have determined to be our Chief Operating Decision Maker, or CODM. Management evaluates performance for each segment based on gross profit. The reportable segments are described below.
Specialty Building Products
Specialty building products, or SBP, distributes wallboard and accessories, metal framing, suspended ceiling systems and other products. Other products include stucco and exterior insulation and finish systems, or EIFS, as well as complementary offerings, such as tools, safety accessories and fasteners. The primary end markets served are new non-residential, new residential and non-residential repair and remodel construction markets.
Mechanical Insulation
Mechanical insulation, or MI, includes insulation solutions for pipes and mechanical systems and the primary end markets served are new non-residential construction, non-residential repair and remodel construction and industrial markets.
Our Customers
We sell to a diverse and highly fragmented base of over 30,000 customers, which includes commercial, residential and other specialty contractors. In addition to local contractors, we maintain strong relationships with regional construction companies. Further, as we continue to grow nationally and scale our operations, we believe we will continue to enhance our relationship with national homebuilders and contractors.
We do not have significant customer concentration, and no one customer accounted for more than 10% of our sales for the year ended December 31, 2016. While our customer base remains fragmented, we have deeply entrenched customer relationships. We believe the tenure of these relationships is a direct result of our well-earned reputation for high-quality customer service and product support.
Our Suppliers
We have been able to foster and sustain key relationships with suppliers as our business has grown. Our increased scale has allowed us to improve our procurement programs, particularly with wallboard and accessories, metal framing and commercial and industrial insulation suppliers. In suspended ceiling systems, we maintain exclusive and semi-exclusive distribution rights in key regions, including contractual exclusivity with Armstrong. Our relationship with Armstrong began with our senior management even prior to our founding in 2011, and our acquisitions continued to strengthen this key relationship, particularly via our recent acquisition of Winroc-SPI. Throughout this period, Armstrong has supported our growth strategy by renewing or awarding distribution rights following our acquisitions. We are one of the largest customers for each of our top suppliers across wallboard, suspended ceiling systems, metal framing and commercial and industrial insulation.
Our Products
Our early operations started with a narrow product line and group of suppliers, and primarily included wallboard, metal framing and stucco product offerings. The rapid growth from our 2013 acquisitions expanded our product offerings to include suspended ceiling systems supplied by Armstrong and EIFS supplied by Sto. We continue to focus on increasing our sales of other product offerings that enhance our gross margins and create value for our customers. In addition, we continually add to our product offerings to provide our customers with the correct product and when they need it.
In August 2016, the Winroc-SPI acquisition allowed us to expand our relationship with Armstrong and increase our suspended ceiling systems product line. The acquisition also brought us long-term relationships with commercial and industrial insulation product manufacturers and access to all product lines within Winroc-SPI's distribution and custom fabrication network.
Factors and Trends Affecting Our Business and Results of Operations
General Economic Conditions and Outlook
Demand for our products is impacted by changes in general economic conditions, including, in particular, conditions in the U.S. commercial construction and housing markets. Our end markets are broadly categorized as new non-residential
construction, new residential construction and non-residential repair and remodel construction. We believe each of our end markets is currently in an extended period of recovery following a deep and prolonged recession.
New Non-Residential Construction
Non-residential construction encompasses all construction other than residential structures. Non-residential construction growth is primarily influenced by economic growth, business investment, job growth, vacancy rates and availability and cost of capital. Based on U.S. Census Bureau data, growth in commercial construction spending generally lags new residential spending by approximately 18 months and we believe the commercial construction market remains in the early stages of a strong recovery. According to Dodge Data & Analytics, non-residential construction starts were 962 million square feet in 2015 and would need to increase by 32.2% to achieve the historical annual market average of 1,273 million square feet from 1970 to 2015. Given the recent growth in the residential market, management believes that non-residential construction remains in the early stages of its recovery and expects volumes to gain momentum in the coming years. According to Dodge Data & Analytics, non-residential construction starts are expected to grow at approximately a compound annual growth rate of 5.4% from 2016 to 2018 driven by accommodative underlying macroeconomic growth, greater availability of financing, underinvestment during the downturn and increasing office utilization rates.
New Residential Construction
Job growth is an important factor for a healthy housing market and unemployment has fallen from its peak of 10.0% in 2009 to 4.7% as of December 2016 according to the U.S. Bureau of Labor Statistics. According to the U.S. Bureau of Labor Statistics, total housing starts in 2016 were 1.28 million, an eight-year high. While housing starts have significantly recovered from the 0.55 million seen in 2009, they are still 11.1% below the 50-year average of 1.44 million starts per year. The National Association of Homebuilders expect housing starts will grow to approximately 1.37 million by 2018, which is still below the long-term historical average as reported by the U.S. Census Bureau.
Non-Residential Repair and Remodel Construction
Non-residential repair and remodeling spending tends to be resilient through economic downturns as new construction spending slows and investments in existing infrastructure increase. From 2011 to 2015 non-residential repair and remodeling starts grew at a 5.6% CAGR and are expected to continue to grow at a 2.1% annual growth rate through 2018 according to Dodge Data & Analytics.
Industrial
Industrial end markets represent a portion of the U.S. mechanical insulation market. Commercial and industrial insulation products are used in industrial end markets for piping and ducting in facilities. Management estimates that power generation facilities make up the largest component of the industrial end market. Stable demand for insulation is expected as power generators construct new facilities and expand old ones. Global energy consumption has historically grown at a consistent 2.0% CAGR since 1990 and is expected to continue to grow at a 1.7% CAGR through 2020, according to the U.S. Energy Information Administration.
Volume, Costs and Pricing Programs
Our product costs are directly impacted by fluctuations in supplier pricing and our purchasing volume. As one of the leading wallboard, suspended ceiling systems and commercial and industrial insulation distributors in the United States and Canada, we are able to negotiate volume discounts and favorable pricing terms with our suppliers. We have historically realized purchasing synergies almost immediately after an acquisition by taking advantage of our volume discounts. As we have continued to grow, we have negotiated with our suppliers on a national level in an effort to maximize these programs across our entire branch network, and expect to continue this trend in the future.
Acquisitions
We supplement our organic growth strategy with selective acquisitions, and since 2013, we have completed 19 acquisitions. We believe that significant opportunities exist to continue to expand our geographic footprint by executing additional strategic acquisitions, and we consistently strive to maintain an extensive and active acquisition pipeline. We generally are evaluating several acquisition opportunities at any given time. In executing our acquisition strategy and integrating acquired companies, we focus on the cost savings we can achieve through integrated procurement and pricing programs and brand consolidation. The table below reflects branches acquired since 2014 at the acquisition date, some of which have been consolidated as of the date of this filing.
|
|
|
|
Company
|
Date of Acquisition
|
# Branches Acquired
|
Dominion Interior Supply
|
January 1, 2017
|
4
|
United Drywall Supply, Inc.
|
November 30, 2016
|
1
|
Winroc-SPI
|
August 9, 2016
|
127
|
Ken Builders Supply, Inc.
|
May 31, 2016
|
8
|
Kent Gypsum Supply, Inc.
|
May 31, 2016
|
4
|
Mid America Drywall Supply, Inc.
|
April 29, 2016
|
1
|
Gypsum Supply Co.
|
December 30, 2015
|
14
|
Commercial Building Materials, LLC
|
December 30, 2015
|
1
|
J&B Assets LLC
|
July 10, 2015
|
1
|
Oxnard Building Materials, Inc., Great Western Building Materials, Inc. and ProWall Building Products, Inc.
|
March 13, 2015
|
10
|
Bloomington branch of Rose & Walker, Inc.
|
January 2, 2015
|
1
|
BAV, Inc.
|
December 5, 2014
|
2
|
Wholesale Builders Supply, Inc.
|
May 30, 2014
|
5
|
Wagner Distribution Holding Company, Inc.
|
May 30, 2014
|
8
|
Central Building Materials, LLC
|
May 1, 2014
|
2
|
Gypsum Supply, Ltd.
|
January 31, 2014
|
4
|
Total
|
|
193
|
As part of our accounting for our business combinations, we are required to value inventory acquired in the business combination at its net realizable value. The inventory adjustment is typically fully recognized in cost of goods sold within the first two months after completion of an acquisition. This step up in basis and related expense has a negative effect on margins as the related inventory is sold, generally within 60 days. For the year ended December 31, 2016, the period from October 9, 2015 to December 31, 2015, the period from January 1, 2015 to October 8, 2015 and for the year ended December 31, 2014, the impact of the acquired step up in inventory basis to cost of goods sold was $6.5 million, $7.5 million, $1.6 million and $0, respectively.
Seasonality
Our operating results are typically affected by seasonality. Warmer and drier weather during the second and third quarters typically result in higher activity and revenue levels. The first and fourth quarters typically have lower levels of activity and lower working capital requirements due to inclement weather conditions.
Financing and Public Company Readiness
As a result of our initial public offering and being a public company, we will incur additional legal, accounting and other expenses that we did not previously incur, including costs associated with SEC reporting and corporate governance requirements. These requirements include compliance with the Sarbanes-Oxley Act as well as other rules implemented by the SEC and the NYSE. Our future financial statements will reflect the impact of these expenses.
Basis of Presentation
On October 9, 2015, Lone Star, along with certain members of management, acquired 100% of the outstanding equity of FBM Intermediate Holdings LLC in the Lone Star Acquisition.
The period from January 1, 2015 through October 8, 2015 and the period from October 9, 2015 through December 31, 2015 relate, respectively, to the periods in 2015 preceding and succeeding completion of the Lone Star Acquisition. The terms Predecessor and Successor refer to the pre- and post-Lone Star Acquisition financial position and results of the Company, respectively. Due to the Lone Star Acquisition, the basis of accounting changed and reflects the application of the acquisition method. The new basis of accounting primarily impacted the values of our inventory, long-lived assets and intangible assets, and resulted in increased depreciation and amortization.
Reclassification
To conform to the presentation for the year ended December 31, 2016, the Company has reclassified acquisition expenses into Selling, General and Administrative expenses for all prior periods presented in its consolidated statement of operations. For the periods from October 9, 2015 to December 31, 2015, January 1, 2015 to October 8, 2015 and for the year ended December 31, 2014, the Company reclassified $3.5 million, $39.7 million and $4.7 million, respectively.
Results of Operations
Year ended December 31, 2016 (Successor)
The following table summarizes certain financial information relating to our operating results for the year ended December 31, 2016. As a result of the Lone Star Acquisition, the Predecessor and Successor reporting entities have applied different bases of accounting and are not comparable.
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|
|
|
|
|
Successor
|
|
Year Ended December 31, 2016
|
(in thousands)
|
|
Statements of operations data:
|
|
Net sales
|
$
|
1,392,509
|
|
Cost of goods sold (exclusive of depreciation and amortization)
|
995,704
|
|
Gross profit
|
396,805
|
|
Operating expenses:
|
|
Selling, general and administrative expenses
|
328,847
|
|
Depreciation and amortization
|
51,378
|
|
Total operating expenses
|
380,225
|
|
Income from operations
|
16,580
|
|
Interest expense
|
(52,511
|
)
|
Other expense, net
|
(7,172
|
)
|
Loss before income taxes
|
(43,103
|
)
|
Income tax benefit
|
(14,733
|
)
|
Net loss
|
$
|
(28,370
|
)
|
Net Sales
Net sales were $1,392.5 million for the year ended December 31, 2016. Our base business net sales (net sales from branches that were owned by us since January 1, 2015 and branches that were opened by us during such period) increased $49.7 million, or 9.3%, from $532.8 million to $582.5 million period over period.
The table below highlights our growth by base business net sales and branches acquired and includes the impact of branches strategically consolidated or closed.
|
|
|
|
|
(in thousands)
|
|
Net sales for the year ended December 31, 2015
|
$
|
820,605
|
|
Increase (decrease) in net sales due to:
|
|
Base business net sales
(1)
|
49,673
|
|
Branches consolidated/closed
(2)
|
40,340
|
|
Branches acquired
(3)
|
481,891
|
|
Net sales for the year ended December 31, 2016
|
$
|
1,392,509
|
|
|
|
(1)
|
Represents net sales from branches that were owned by us since January 1, 2015 and branches that were opened by us during such period.
|
|
|
(2)
|
Represents branches consolidated/closed after January 1, 2015, primarily as a result of our strategic consolidation of branches. This includes increases in net sales from branches that assumed operations of closed/acquired branches.
|
|
|
(3)
|
Represents branches acquired after January 1, 2015.
|
Specialty Building Products
. Net sales were $1,293.5 million for the year ended December 31, 2016, which were driven by the overall market growth in both the commercial and residential construction markets and our increased market share in 2016 versus 2015. Winroc-SPI, which was acquired in August 2016, contributed $193.9 million to the SBP segment. Wallboard and accessories accounted for the majority of SBP sales for the year ended December 31, 2016.
Mechanical Insulation.
Net sales were $99.0 million for the year ended December 31, 2016. We entered the mechanical insulation market as a result of the Winroc-SPI acquisition on August 9, 2016, therefore, net sales reflects sales from the acquisition date to December 31, 2016.
Cost of Goods Sold
Cost of goods sold was $995.7 million, or 71.5% of net sales, for the year ended December 31, 2016. Cost of goods sold was negatively impacted by $6.5 million of inventory fair value adjustments related to our acquisitions. Excluding the fair value adjustments, cost of goods sold was 71.0% of net sales. Cost of goods sold was impacted by favorable pricing terms with our suppliers as a result of increased purchase volumes.
Specialty Building Products.
Cost of goods sold was 71.4% of net sales for the year ended December 31, 2016. Cost of goods sold was positively impacted by favorable pricing terms with our suppliers as a result of increased purchase volumes. Cost of goods sold was negatively impacted by $6.5 million of inventory fair value adjustments related to our acquisitions. Excluding these fair value adjustments, cost of goods sold was 70.9% of sales.
Mechanical Insulation.
Cost of goods sold was 72.3% of net sales for the year ended December 31, 2016.
Gross Profit
Gross profit was $396.8 million, or 28.5% of sales, for the year ended December 31, 2016. Gross profit and gross margin were negatively impacted by $6.5 million of inventory fair value adjustments related to our acquisitions. Excluding these fair value adjustments, gross profit was $403.3 million and gross margin was 29.0% of sales. Gross margin was also impacted by favorable pricing terms with our suppliers as a result of increased purchase volumes relative to 2015.
Specialty Building Products.
Gross margin was 28.6% for the year ended December 31, 2016. Gross margin was impacted by favorable pricing terms with our suppliers as a result of increased purchase volumes relative to 2015. Gross profit and gross margin were negatively impacted by $6.5 million of inventory fair value adjustments related to our acquisitions. Excluding these fair value adjustments, gross margin was 29.1% of sales.
Mechanical Insulation.
Gross margin was 27.7% for the year ended December 31, 2016.
Selling, General & Administrative
SG&A expenses were $328.8 million for the year ended December 31, 2016. SG&A expenses were impacted by warehousing and delivery costs driven by increased net sales and acquired branches. Payroll related and other expenses also increased due to our continued investment in infrastructure and support of our operations. We also incurred expenses as a result of our initial public offering and other transaction costs of $23.2 million. ERP system implementation costs for the year were $3.9 million.
Depreciation and Amortization
Depreciation and amortization was $51.4 million for the year ended December 31, 2016, which was affected by an increase in property and equipment and intangible assets as a result of the acquisitions in 2015 and 2016. Additionally, the historical cost basis of property and equipment and intangible assets was increased to fair value as a result of the Lone Star Acquisition.
Interest Expense
Interest expense was $52.5 million for the year ended December 31, 2016, due to outstanding indebtedness related to acquisitions and funding of working capital. In addition, we incurred a loss of $7.0 million related to the refinancing of the 2015 asset based lending credit facility, or the 2015 Credit Facility, in August 2016.
Other Expense, net
Other expense, net was $7.2 million for the year ended December 31, 2016, primarily due to the $7.1 million change in fair value of the early prepayment option of our Notes.
Income Tax Benefit
An income tax benefit of $14.7 million was recorded for the year ended December 31, 2016, which represents an effective tax rate of 34.2%.
Period from October 9, 2015 to December 31, 2015 (Successor)
The following table summarizes certain financial information relating to our operating results for the period from October 9, 2015 to December 31, 2015.
|
|
|
|
|
|
Successor
|
(in thousands)
|
October 9, 2015
to December 31,
2015
|
Statements of operations data:
|
|
Net sales
|
$
|
192,539
|
|
Cost of goods sold (exclusive of depreciation and amortization)
|
143,333
|
|
Gross profit
|
49,206
|
|
Operating expenses:
|
|
Selling, general and administrative expenses
|
47,660
|
|
Depreciation and amortization
|
7,170
|
|
Total operating expenses
|
54,830
|
|
Loss from operations
|
(5,624
|
)
|
Interest expense
|
(7,044
|
)
|
Other income, net
|
9
|
|
Loss before income taxes
|
(12,659
|
)
|
Income tax benefit
|
(4,733
|
)
|
Net loss
|
$
|
(7,926
|
)
|
Net Sales
Net sales were $192.5 million, all from the SBP segment, which primarily consisted of wallboard and accessories.
Cost of Goods Sold
Cost of goods sold was $143.3 million, which included $7.5 million of inventory fair value adjustments, and resulted in gross profit of $49.2 million, or gross margin of 25.6%. Excluding inventory fair value adjustments, gross margin was 29.4%.
Selling, General & Administrative
SG&A expenses were $47.7 million, and represented 24.8% of net sales. Acquisition related expenses were $3.5 million and include costs related to legal, accounting and other professional services.
Depreciation and Amortization
Depreciation and amortization was $7.2 million, and represented 3.7% of net sales. Depreciation and amortization includes the impact of the step up in fair value as a result of the Lone Star Acquisition in October 2015.
Interest Expense
Interest expense was $7.0 million as a result of our outstanding indebtedness, which includes the debt incurred to finance the Lone Star Acquisition.
Income tax benefit
Income tax benefit was $4.7 million. As of October 9, 2015, we were considered a C-corporation for tax purposes while for periods prior to such date we had subsidiaries that were either nontaxable limited liability companies or taxable C-corporations. The effective tax rate for the period was 37.4%, which differs from the statutory rate primarily due to state taxes.
Period from January 1, 2015 to October 8, 2015 (Predecessor)
The following table summarizes certain financial information relating to our operating results for the period from January 1, 2015 to October 8, 2015.
|
|
|
|
|
|
Predecessor
|
(in thousands)
|
January 1, 2015
to October 8,
2015
|
Statements of operations data:
|
|
Net sales
|
$
|
628,066
|
|
Cost of goods sold (exclusive of depreciation and amortization)
|
452,909
|
|
Gross profit
|
175,157
|
|
Operating expenses:
|
|
Selling, general and administrative expenses
|
171,215
|
|
Depreciation and amortization
|
15,615
|
|
Total operating expenses
|
186,830
|
|
Loss from operations
|
(11,673
|
)
|
Interest expense
|
(19,090
|
)
|
Other income, net
|
14
|
|
Loss before income taxes
|
(30,749
|
)
|
Income tax benefit
|
(1,294
|
)
|
Net loss
|
$
|
(29,455
|
)
|
Net Sales
Net sales were $628.1 million, all from the SBP segment, which primarily consisted of wallboard and accessories.
Cost of Goods Sold
Cost of goods sold was $452.9 million, which included $1.6 million of inventory fair value adjustments, and resulted in gross profit of $175.2 million, or gross margin of 27.9%. Excluding inventory fair value adjustments, gross margin was 28.1%.
Selling, General & Administrative
SG&A expenses were $171.2 million and represented 27.3% of net sales. Acquisition related expenses was $39.7 million and represents acquisition activity including the Lone Star Acquisition.
Depreciation and Amortization
Depreciation and amortization was $15.6 million, and represented 2.5% of net sales. Depreciation and amortization includes the impact of the addition of property and equipment and intangible assets acquired.
Interest Expense
Interest expense was $19.1 million as a result of our outstanding indebtedness.
Income Tax Benefit
Income tax benefit was $1.3 million and reflected the fact that we had subsidiaries that were either nontaxable limited liability companies or taxable C-corporations.
Year Ended December 31, 2014 (Predecessor)
The following table summarizes certain financial information relating to our operating results for the year ended December 31, 2014.
|
|
|
|
|
|
Predecessor
|
(in thousands)
|
Year Ended
December 31,
2014
|
Statements of operations data:
|
|
Net sales
|
$
|
508,853
|
|
Cost of goods sold (exclusive of depreciation and amortization)
|
368,064
|
|
Gross profit
|
140,789
|
|
Operating expenses:
|
|
Selling, general and administrative expenses
|
120,145
|
|
Depreciation and amortization
|
11,729
|
|
Total operating expenses
|
131,874
|
|
Income from operations
|
8,915
|
|
Interest expense
|
(9,980)
|
|
Other income, net
|
36
|
|
Loss before income taxes
|
(1,029)
|
|
Income tax expense
|
812
|
|
Net loss
|
$
|
(1,841
|
)
|
Net Sales
Net sales were $508.9 million, all from the SBP segment, which primarily consisted of wallboard and accessories.
Cost of Goods Sold
Cost of goods sold was $368.1 million and resulted in gross profit of $140.8 million, or gross margin of 27.7%.
Selling, General & Administrative
SG&A expenses were $120.1 million, and represented 23.6% of net sales. Acquisition related expenses were $4.7 million and represents the related acquisition activity.
Depreciation and Amortization
Depreciation and amortization was $11.7 million, and represented 2.3% of net sales. Depreciation and amortization includes the impact of the addition of property and equipment and intangible assets acquired.
Interest Expense
Interest expense was $10.0 million as a result of our outstanding indebtedness.
Income Tax Expense
Income tax expense was $0.8 million and reflected the fact that we had subsidiaries that were either nontaxable limited liability companies or taxable C-corporations.
Liquidity and Capital Resources
Summary
We depend on cash flow from operations, cash on hand and funds available under our ABL Credit Facility, and in the future may depend on other debt financings allowed under the terms of the Notes and ABL Credit Facility and equity financings, to finance our acquisition strategy, working capital needs and capital expenditures. We believe that these sources of funds will be adequate to fund debt service requirements and provide cash, as required, to support our strategy, ongoing operations, capital expenditures, lease obligations and working capital for at least the next twelve months. However, we cannot ensure that we will be able to obtain future debt or equity financings adequate for our future cash requirements on commercially reasonable terms or at all. The tax receivable agreement may also have a negative impact on our liquidity if, among other things, payments we make under the tax receivable agreement exceed the actual cash savings we and our subsidiaries realize in respect of the tax benefits covered by the tax receivable agreement after we have paid our taxes and other obligations. In addition, as a result of either an early termination of the tax receivable agreement or a change of control, we could be required to make payments under the agreement that exceed our actual cash savings under the tax receivable agreement. In these situations, our obligations under the tax receivable agreement could have a substantial negative impact on our liquidity and could have the effect of delaying, deferring or preventing, among other things, capital expenditures and acquisitions.
If our cash flows and capital resources are insufficient to fund our debt service obligations, we may be forced to reduce or delay additional acquisitions, future investments and capital expenditures, seek additional capital, restructure or refinance our indebtedness, including the Notes, or sell assets. Significant delays in our ability to finance planned acquisitions or capital expenditures may materially and adversely affect our future revenue prospects. In addition, we cannot assure you that we will be able to refinance any of our indebtedness, including the Notes and our ABL Credit Facility, on commercially reasonable terms or at all. Our ability to restructure or refinance our debt will depend on the condition of the capital markets and our financial condition at such time. Our tax receivable agreement requires that, after Lone Star no longer controls us, any senior debt document that refinances or replaces our existing indebtedness permit our subsidiaries to make dividends to us, without any conditions, to the extent required for us to make its payments under the tax receivable agreement, unless Lone Star otherwise consents. At the time of any such refinancing, it may not be possible to include this term in such senior debt documents, and as a result, we may need Lone Star’s consent to complete such refinancing. The ABL Credit Facility and the Indenture restrict our ability to enter into certain asset sales transactions. We may not be able to consummate those asset sales to raise capital or sell assets at prices that we believe are fair, and proceeds that we do receive may not be adequate to meet any debt service obligations then due.
As of December 31, 2016, we had available aggregate undrawn borrowing capacity of approximately $83.9 million under the ABL Credit Facility. For the periods presented, our use of cash was primarily driven by our investing activities, specifically our investments in acquisitions.
Cash Flows
A summary of net cash provided by, or used in, operating, investing and financing activities is shown in the following table.
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Successor
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Predecessor
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Year
Ended
December 31,
2016
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October 9, 2015
to December 31,
2015
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January 1, 2015
to October 8,
2015
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Year Ended
December 31,
2014
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(in thousands)
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Net cash provided by (used in) operating activities
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$
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33,130
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$
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17,610
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$
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19,176
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|
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$
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(3,989
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)
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Net cash used in investing activities
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$
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(431,805
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)
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$
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(660,323
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)
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$
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(97,266
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)
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$
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(102,436
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)
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Net cash provided by financing activities
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$
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416,657
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$
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642,682
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$
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86,567
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$
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104,473
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Operating Activities
Net cash provided by, or used in, operating activities consists primarily of net loss adjusted for non-cash items, including depreciation and amortization, provision for doubtful accounts, deferred income taxes and the effects of changes in working capital.
Net cash provided by operating activities for the year ended December 31, 2016, consisted of a net loss of $28.4 million, offset by non-cash items of $61.8 million of which $51.4 million was depreciation and amortization. Cash used for working capital was $0.3 million.
Net cash provided by operating activities for the period from October 9, 2015 to December 31, 2015, consisted of a net loss of $7.9 million, offset by non-cash items of $22.4 million, of which $7.2 million was depreciation and amortization, $7.5 million related to fair value inventory adjustments and $6.5 million related to deferred taxes. Cash provided by working capital was $3.2 million.
Net cash provided by operating activities for the period from January 1, 2015 to October 8, 2015, consisted of a net loss of $29.5 million, partially offset by non-cash items of $20.5 million, of which $15.6 million was depreciation and amortization. Cash provided by working capital was $28.1 million.
Net cash used in operating activities for the year ended December 31, 2014, consisted of a net loss of $1.8 million, offset by non-cash items of $14.4 million, of which $11.7 million was depreciation and amortization. Cash used in working capital was $16.5 million.
Investing Activities
Net cash used in investing activities consists primarily of acquisitions and capital expenditures, including purchases of land, buildings, leasehold improvements, fleet assets, information technology and other equipment. Capital expenditures vary depending on prevailing business factors, including current and anticipated market conditions. Historically, capital expenditures generally have been made at relatively low levels in comparison to the operating cash flows generated during the corresponding periods.
Net cash used in investing activities was $431.8 million for the year ended December 31, 2016. During the year ended December 31, 2016, we acquired Winroc-SPI, Ken Builder Supply, Inc., or Ken API, Kent Gypsum Supply, Co., Mid America Drywall Supply, Inc. and United Drywall Supply for aggregate consideration of $401.9 million. Cash used for capital expenditures was $30.5 million.
Net cash used in investing activities for the 2015 Successor period was $660.3 million and primarily related to $549.3 million used in the Lone Star Acquisition and $103.2 million to acquire Gypsum Supply Co., or GSCIL. Cash used for capital expenditures was $2.8 million.
Net cash used in investing activities for the 2015 Predecessor period was $97.3 million and primarily related to $87.5 million used to acquire Oxnard Building Materials, Inc., Great Western Building Materials, Inc. and ProWall Building Products, Inc. (collectively, "Great Western"). Cash used for capital expenditures was $9.8 million.
Net cash used in investing activities for the year ended December 31, 2014 was $102.4 million, of which $93.2 million related to acquisitions during the period. Cash used for capital expenditures was $9.2 million.
Financing Activities
Net cash provided by, or used in, financing activities consists primarily of borrowings and related repayments under our financing agreements and proceeds from capital contributions.
Net cash provided by financing activities was $416.7 million for the year ended December 31, 2016. Net borrowings of $350.5 million and capital contributions of $66.2 million were used to finance the 2016 acquisitions and fund operations.
Net cash provided by financing activities for the 2015 Successor period was $642.7 million, and primarily consisted of net borrowings of $379.8 million to finance the Lone Star Acquisition and capital contributions of $272.9 million, offset by $10.0 million in debt repayments.
Net cash provided by financing activities for the 2015 Predecessor period was $86.6 million was primarily due to financing related to the Great Western acquisition.
For the year ended December 31, 2014, cash provided by financing activities of $104.5 million was primarily due to financing the 2014 acquisitions.
Contractual Obligations
The following table summarizes our significant contractual obligations as of December 31, 2016. Some of the amounts included in the table are based on management’s estimates and assumptions about these obligations, including their duration, the possibility of renewal, anticipated actions by third parties and other factors. Because these estimates and assumptions are necessarily subjective, our actual payments may vary from those reflected in the table.
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(in thousands)
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2017
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2018
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2019
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2020
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2021
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Thereafter
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Total
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Long-term debt
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$
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—
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$
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—
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$
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—
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$
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—
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$
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783,469
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$
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—
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$
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783,469
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Interest
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48,228
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47,438
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47,438
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47,438
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46,647
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—
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237,189
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Operating leases
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28,245
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24,247
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16,787
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11,426
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8,688
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16,646
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106,039
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Capital leases
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3,624
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2,767
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2,666
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2,763
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2,080
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1,832
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15,732
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Total Commitments
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$
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80,097
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$
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74,452
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$
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66,891
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$
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61,627
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$
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840,884
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$
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18,478
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$
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1,142,429
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We lease certain facilities and equipment under various operating lease agreements with expiration dates through 2026. These lease agreements typically contain renewal options of five to ten years. Additionally, with the acquisitions of Winroc-SPI and Ken API in 2016, we assumed capital lease obligations with lease terms ranging from five to 15 years.
ABL Credit Facility
On August 9, 2016, we entered into the ABL Credit Facility, a senior secured asset-based revolving credit facility, and on September 23, 2016, we entered into an incremental facility amendment to the ABL Credit Facility, increasing the size of the revolving commitments thereunder by $50.0 million. The ABL Credit Facility provides for a $300.0 million revolving credit facility and matures on February 9, 2021. The ABL Credit Facility includes an option to further increase the maximum commitments up to an aggregate amount not to exceed the greater of (i) $50.0 million and (ii) such amount as would not cause the total revolving credit commitments under the ABL Credit Facility to exceed the aggregate borrowing base under the ABL Credit Facility by more than $50.0 million, in each case as of the date of such incurrence, subject to the conditions set forth in the ABL Credit Agreement.
Interest on borrowings under the ABL Credit Agreement accrues at a rate equal to LIBOR or Canadian Dollar Offered Rate, or CDOR (as applicable, based on the currency of the borrowing), plus a margin of 1.25% to 1.75% based on average daily excess availability for the most recent fiscal quarter, or if selected by the borrower, ABR or the Canadian prime rate (as applicable, based on the currency of the borrowings) plus a margin of 0.25% to 0.75% based on average daily excess
availability for the most recent fiscal quarter, in all such cases subject to an additional 2.0% on overdue amounts during certain default events.
The ABL Credit Agreement contains customary covenants, representations and warranties and events of default, including covenants which generally restrict our business and limit our ability to, among other things: dispose of certain assets; incur or guarantee additional indebtedness; enter into new lines of business; make certain investments, intercompany loans or payments in respect of indebtedness; incur or maintain liens; modify certain terms of our or their organizational documents, certain agreements or certain debt instruments; declare or pay dividends or make other restricted payments (including redemption of our stock); engage in certain transactions with affiliates; enter into certain sale leaseback transactions; modify the terms of certain of our existing contractual agreements; and engage in mergers, consolidations or the sale or disposition of substantially all of its assets. The ABL Credit Agreement also includes representations and warranties which we must be able to make in order to obtain borrowings under the facility, and a financial maintenance covenant and events of default related to, among other things: the non-payment of principal, interest or fees; violations of covenants; material inaccuracy of representations or warranties; failure to timely deliver a borrowing base certificate; certain bankruptcy events; certain events under the Employee Retirement Income Security Act of 1974, as amended; invalidity of guarantees or security interests; default in payment under or the acceleration of other indebtedness; material judgments; and certain change of control events, each of which could result in the facility being terminated and any outstanding debt becoming due prior to its scheduled maturity. The financial maintenance covenant under the ABL Credit Agreement is a minimum fixed charge coverage ratio test set at a level of 1.00:1.00, which is based in part on our adjusted EBITDA as calculated pursuant to the ABL Credit Agreement. At December 31, 2016, the fixed charge coverage ratio exceeded the minimum requirement. This covenant is only tested at times when availability under the ABL Credit Facility is less than a certain threshold, which was $30.0 million at December 31, 2016.
As of December 31, 2016, the majority of our liquidity was from the $83.9 million available under the ABL Credit Facility. The fixed charge coverage ratio is a material term of the ABL Credit Facility and we believe information about how the covenant is calculated is material to an investor’s understanding of the Company’s financial condition and liquidity.
Should we not comply with the fixed charge coverage ratio, we would be in technical default of our ABL Credit Facility which could result in the facility being terminated and any outstanding debt becoming due prior to its scheduled maturity. Should all amounts become due immediately, we may be unable to pay all amounts due under the ABL Credit Facility without a material impact to our business, as we may be forced to liquidate assets to pay for all amounts due under the ABL Credit Facility.
Notes
In August 2016, we completed a private offering of $575.0 million in aggregate principal amount of Notes. In the offering we received net proceeds of approximately $563.5 million, which were used in part to repay and terminate the 2015 Credit Facility. The Notes carry a coupon of 8.25% per annum and mature August 15, 2021. The Indenture contains customary covenants, representations and warranties and events of default, including covenants which generally restrict our business and limit our ability to incur additional indebtedness, issue certain preferred shares, pay dividends, redeem our stock or make other distributions, make certain investments, limit the ability of our restricted subsidiaries to pay dividends to us or make other intercompany transfers, create liens, sell or transfer certain assets, engage in certain transactions with respect to all or substantially all of our assets, enter into certain transactions with affiliates and designate subsidiaries as unrestricted subsidiaries. The Indenture also contains events of default related to, among other things: the non-payment of principal, premium or interest on any Note; violations of any agreement or obligation contained in the Indenture and related documents; certain bankruptcy events; invalidity of guarantees or security interests; default in payment under or the acceleration of other indebtedness; and material judgments, any of which could result in the trustee for the Notes declaring the principal of the Notes together with all accrued and unpaid interest thereon to be immediately due and payable.
Off-Balance Sheet Arrangements
As of December 31, 2016 and December 31, 2015, we had no material off-balance sheet arrangements or similar obligations, such as financing or unconsolidated variable interest entities.
Critical Accounting Policies
Our management’s discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States, or GAAP. The preparation of these financial statements requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reported period.
On an ongoing basis, management evaluates its estimates, including those related to revenue recognition, allowance for doubtful accounts, inventories, taxes, and goodwill. We base our estimates and judgments on historical experience and on various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may materially differ from these estimates under different assumptions or conditions.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Estimates that are more susceptible to change in the near term are the allowance for doubtful accounts, the allowance for excess and obsolete inventory and recoverability of long-lived assets. Actual results could materially differ from those estimates.
Revenue Recognition
We recognize revenue when the risks and obligations of ownership have been transferred to the customer, which generally occurs at the time of delivery to the customer. At the time that revenue is recognized we record reductions in sales for customer rebates and discounts including volume, cash and other discounts. Rebates and discounts are recorded based on management’s best estimate when products are sold based on historical experience for similar programs and products. Management reviews these rebates and discounts on an ongoing basis and the related accruals are adjusted, if necessary, as additional information becomes available. Historically, our actual customer rebates and discounts have not been materially different from management’s original estimates.
Accounts Receivable
We sell to customers using credit terms customary in our industry. Accounts receivables are recorded at net realizable value. This value includes an appropriate allowance for estimated uncollectible accounts to reflect any loss anticipated on the trade accounts receivable balances and charged to the provision for doubtful accounts. The allowance for doubtful accounts reflects our estimate of credit exposure, determined principally on the basis of our collection experience, aging of our receivables and significant individual account credit risk. If the actual uncollected amounts significantly exceed the estimated allowance, our operating results would be significantly adversely affected.
Other Receivables
Other receivables primarily consist of vendor rebates receivables. Typical arrangements with vendors provide for us to receive a rebate of a specified amount after achieving any of a number of measures generally related to the volume of purchases over a period of time. We record these rebates to effectively reduce the cost of sales in the period in which the product is sold. Throughout the year, our estimates include the amount of rebates receivable for the vendor programs based on the expected level of purchases. We accrue for vendor rebates earned based on purchase volumes and adjust inventories to reflect the reduction in the cost basis for inventories purchased that are subject to vendor rebates. Historically, our actual vendor rebates have not been materially different from management’s original estimates.
Inventories
Inventories, consisting substantially of finished goods, are valued at the lower of cost or market (net realizable value). Cost is determined using the moving weighted-average cost method. We routinely evaluate inventory for excess or obsolescence and consider factors such as historical usage and purchase rates and record a provision for excess and obsolete inventory. If we determine that a smaller or larger reserve is appropriate, we will record a credit or a charge to cost of sales in the period in which we make such a determination.
Impairment of Long-Lived Assets
We review property and equipment for impairment when events or circumstances indicate these assets may not be recoverable. Factors considered include significant underperformance relative to expected historical or projected future operating results, significant changes in the manner of use of the acquired assets or the strategy for the overall business and significant negative industry or economic trends. In performing the review for recoverability, future cash flows expected to result from the use of the asset and its eventual disposition are estimated. If the sum of expected future undiscounted cash flows is less than the carrying amount of the asset, an impairment loss is recorded for the amount by which the carrying amount exceeds the estimated fair value. We use our best judgment based on current facts and circumstances related to its business when making these estimates.
Intangible Assets and Goodwill
Intangible assets consist of tradenames, customer relationships and favorable and unfavorable leases under market rent, and are amortized using the straight-line method, which reflects the pattern in which the economic benefits of the assets are expected to be consumed. Intangible assets with definite lives are amortized over their respective estimated useful lives. For favorable and unfavorable leases under market rent, amounts are amortized over their contractual terms.
We review intangible assets with finite lives for impairment when events or circumstances indicate these assets may not be recoverable. In performing the review for recoverability, future cash flows expected to result from the use of the asset are estimated. If the sum of expected future undiscounted cash flows is less than the carrying amount of the asset, an impairment loss is recorded for the amount by which the carrying amount exceeds the estimated fair value.
Goodwill represents the excess of purchase price over fair value of assets acquired and liabilities assumed in a business combination.
We perform our impairment test annually at the reporting unit level or more frequently if impairment indicators arise. We have defined our reporting units consistently with our operating segments. For our goodwill impairment assessment we have adopted a standard that provides us 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 (greater than 50 percent chance) that the fair value of a reporting unit is less than its carrying amount. Such qualitative factors may include the following: macroeconomic conditions; industry and market considerations; cost factors; overall financial performance; consistency of customer base; and other relevant entity-specific events. In the absence of sufficient qualitative factors, goodwill impairment is determined utilizing a two-step process. This process involves comparing the fair value to the carrying value of the reporting unit. If the carrying value of the net assets assigned to the reporting unit exceeds the fair value of the reporting unit, then we must determine the implied fair value of the reporting unit’s goodwill and compare it to the carrying value of the reporting unit’s goodwill. We determine the fair value of its reporting units using combinations of both the income and market valuation approaches.
During 2016, we performed our annual impairment assessment of goodwill, which did not indicate that an impairment existed.
Acquisition Accounting
We account for business combinations using the purchase method, which requires us to allocate the cost of an acquired business to the acquired assets and liabilities based on their estimated fair values at the acquisition date. We recognize the excess of an acquired business’s cost over the fair value of the acquired assets and liabilities as goodwill. Determining the fair value of certain assets and liabilities acquired is judgmental in nature and often involves the use of significant estimates and assumptions. We use a variety of information sources to determine the fair value of acquired assets and liabilities and we generally use third party appraisers to assist us in the determination of the fair value and useful lives of identifiable intangible assets.
Income Taxes
We use the asset and liability method of accounting for income taxes. Under this method, we recognize income tax expense for the amount of taxes payable or refundable for the current year and for the amount of deferred tax liabilities and assets for the future tax consequences of events that have been recognized in our financial statements or tax returns. We make assumptions, judgments and estimates to determine our current provision for income taxes, our deferred tax assets and liabilities, and our uncertain tax positions. Our judgments, assumptions and estimates relative to the current provision for income tax take into account current tax laws, our interpretation of current tax laws and possible outcomes of current and future audits conducted by foreign and domestic tax authorities. Changes in tax law or our interpretation of tax laws and the resolution of current and future tax audits could significantly affect the amounts provided for income taxes in our consolidated financial statements. Our assumptions, judgments and estimates relative to the value of a deferred tax asset take into account predictions of the amount and category of future taxable income. Actual operating results and the underlying amount and category of income in future years could cause our current assumptions, judgments and estimates of recoverable net deferred taxes to be inaccurate. Changes in any of the assumptions, judgments and estimates mentioned above could cause our actual income tax obligations to differ from our estimates, which could materially affect our financial position and results of operations. Our tax provision for interim periods is determined using an estimate of our annual effective tax rate, adjusted for discrete items, if any, that are taken into account in the relevant period. As the calendar year progresses, we periodically refine our estimate based on actual events and earnings by jurisdiction. This ongoing estimation process can result in changes to our expected effective tax rate for the full calendar year. When this occurs, we adjust the income tax provision during the quarter in which the change in estimate occurs so that our year-to-date provision equals our expected annual effective tax rate.
Recently Adopted Accounting Standards
In November 2015, the FASB issued Accounting Standards Update, or ASU, 2015-17,
Income Taxes
(Topic 740):
Balance Sheet Classifications of Deferred Taxes
. Companies are required to classify all deferred tax assets and liabilities as noncurrent on the balance sheet instead of separating deferred taxes into current and noncurrent amounts. Also, companies will no longer allocate valuation allowances between current and noncurrent deferred tax assets because those allowances also will be classified as noncurrent. The guidance is effective for financial statements issued for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Companies can adopt the guidance either prospectively or retrospectively. The Company early adopted ASU 2015-17 and applied the new guidance for all periods presented. The adoption of this guidance did not have a material impact on its consolidated financial statements.
In August 2014, the FASB issued ASU 2014-15,
Presentation of Financial Statements
—
Going Concern
(Subtopic 205-40):
Disclosures of Uncertainties about an Entity’s Ability to Continue as a Going Concern
. ASU 2014-15 requires management to evaluate whether there are conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued or are available to be issued. This ASU also requires management to disclose certain information depending on the results of the going concern evaluation. The provisions of this ASU are effective for annual periods ending after December 15, 2016, including interim reporting periods thereafter. The adoption of this accounting guidance on December 31, 2016 did not have a material impact on its consolidated financial statements.
In July 2015, the FASB issued ASU 2015-11,
Simplifying the Measurement of Inventory
, which applies to inventory valued at first-in, first-out (FIFO) or average cost. ASU 2015-11 requires inventory to be measured at the lower of cost and net realizable value, rather than at the lower of cost or market. ASU 2015-11 is effective on a prospective basis for annual periods beginning after December 15, 2016, and interim periods within those fiscal years. The Company adopted this guidance on January 1, 2017 and the adoption thereof did not have a material impact on the Company’s consolidated financial statements.
In September 2015, the FASB issued ASU 2015-16,
Business Combinations
(Topic 805):
Simplifying the Accounting for Measurement-Period Adjustments
. ASU 2015-16 eliminates the requirement to restate prior period financial statements for measurement period adjustments. The new guidance requires that the cumulative impact of a measurement period adjustment (including the impact on prior periods) be recognized in the reporting period in which the adjustment is identified. In addition,
separate presentation on the face of the income statement or disclosure in the notes is required regarding the portion of the adjustment recorded in the current period earnings, by line item, which would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date. ASU 2015-16 is to be applied prospectively for measurement period adjustments that occur after the effective date. ASU 2015-16 is effective for annual reporting periods beginning after December 15, 2015. The Company adopted this guidance on January 1, 2016 and the adoption thereof did not have a material impact on the Company’s consolidated financial statements.
Recently Issued Accounting Standards
In May 2014, the FASB issued ASU 2014-09,
Revenue from Contracts with Customers
(Topic 606). ASU 2014-09 amends the guidance for revenue recognition to replace numerous, industry-specific requirements. The core principle of the ASU is that an entity should recognize revenue for the transfer of goods or services equal to the amount that it expects to be entitled to receive for those goods or services. The ASU implements a five-step process for customer contract revenue recognition that focuses on transfer of control, as opposed to transfer of risk and rewards. The amendment also requires enhanced disclosures regarding the nature, amount, timing and uncertainty of revenues and cash flows arising from contracts with customers. Additional ASUs have been issued to amend or clarify the ASU as follows:
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•
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ASU No. 2016-12
Revenue from Contracts with Customers
(Topic 606):
Narrow-Scope Improvements and Practical Expedients
was issued in May 2016. ASU No. 2016-12 amends the new revenue recognition standard to clarify the guidance on assessing collectability, presenting sales taxes, measuring noncash consideration, and certain transition matters.
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•
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ASU No. 2016-10
Revenue from Contracts with Customers
(Topic 606):
Identifying Performance Obligations and Licensing
was issued in April 2016. ASU No. 2016-10 addresses implementation issues identified by the FASB-International Accounting Standards Board Joint Transition Resource Group for Revenue Recognition (TRG).
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•
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ASU No. 2016-08
Revenue from Contracts with Customers
(Topic 606):
Principal versus Agent Considerations (Reporting Revenue Gross versus Net)
was issued in March 2016. ASU No. 2016-08 requires an entity to determine whether the nature of its promise to provide goods or services to a customer is performed in a principal or agent capacity and to recognize revenue in a gross or net manner based on its principal/agent designation.
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The guidance in these ASUs is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period, and early adoption is permitted for interim and annual periods beginning after December 15, 2016. The Company is currently evaluating the impact of this guidance on its consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02,
Leases
(Topic 842). ASU 2016-02 establishes a right-of-use model that requires a lessee to record a right-of-use asset and a lease liability on the balance sheet for all leases with terms longer than twelve months. Leases will be classified as either "finance" or "operating," with classification affecting the pattern of expense recognition in the income statement. This update requires a modified retrospective transition as of the beginning of the earliest comparative period presented in the financial statements. This update is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the impact of this guidance on its consolidated financial statements.
In August 2016, the FASB issued ASU 2016-15,
Statement of Cash Flows
(Topic 230):
Classification of Certain Cash Receipts and Cash Payments.
ASU 2016-15 amended the existing accounting standards for the statement of cash flows. The amendments provide guidance on eight classification issues related to the statement of cash flows. This update is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the impact of this guidance on its consolidated financial statements.
Non-GAAP Financial Information
In addition to our results under GAAP, we also present EBITDA and Adjusted EBITDA for historical periods. EBITDA and Adjusted EBITDA are non-GAAP financial measures and have been presented as supplemental measures of financial performance that are not required by, or presented in accordance with, GAAP. We calculate EBITDA as net income (loss) before interest expense, income tax benefit (expense), depreciation and amortization. We calculate Adjusted EBITDA as EBITDA before certain non-recurring adjustments such as purchase accounting adjustments impacting margins, non-cash (gains) losses on the sale of property and equipment and derivative financial instruments and management fees paid to current and former private equity sponsors. We present these measures for the historical periods covered by our consolidated financial statements.
EBITDA and Adjusted EBITDA are presented because they are important metrics used by management as one of the means by which it assesses our financial performance. EBITDA and Adjusted EBITDA are also frequently used by analysts, investors and other interested parties to evaluate companies in our industry. These measures, when used in conjunction with related GAAP financial measures, provide investors with an additional financial analytical framework that may be useful in assessing our company and its results of operations.
EBITDA and Adjusted EBITDA have certain limitations. EBITDA and Adjusted EBITDA should not be considered as alternatives to net income (loss), or as any other measures of financial performance derived in accordance with GAAP. These measures also should not be construed as an inference that our future results will be unaffected by unusual or nonrecurring items for which these non-GAAP measures make adjustments. Additionally, EBITDA and Adjusted EBITDA are not intended to be liquidity measures because of certain limitations such as:
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•
|
they do not reflect our cash outlays for capital expenditures or future contractual commitments;
|
|
|
•
|
they do not reflect changes in, or cash requirements for, working capital;
|
|
|
•
|
they do not reflect interest expense or the cash requirements necessary to service interest or principal payments on indebtedness;
|
|
|
•
|
they do not reflect income tax expense or the cash necessary to pay income taxes; and
|
|
|
•
|
although depreciation and amortization are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future, and these non-GAAP measures do not reflect cash requirements for such replacements.
|
Other companies, including other companies in our industry, may not use such measures or may calculate one or more of the measures differently than as presented in this Annual Report on Form 10-K, limiting their usefulness as a comparative measure.
In evaluating EBITDA and Adjusted EBITDA, you should be aware that in the future we will incur expenses that are the same as or similar to some of the adjustments made in our calculations, and our presentation of EBITDA and Adjusted EBITDA should not be construed to mean that our future results will be unaffected by such adjustments. Management compensates for these limitations by using EBITDA and Adjusted EBITDA as supplemental financial metrics and in conjunction with our results prepared in accordance with GAAP. The non-GAAP information should be read in conjunction with our consolidated financial statements and the related notes.
The following is a reconciliation of EBITDA and Adjusted EBITDA to the nearest GAAP measure, net income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
Predecessor
|
|
Year
Ended
December 31,
2016
|
October 9 to
December 31,
2015
|
January 1
to
October 8,
2015
|
Year
Ended
December 31,
2014
|
(in thousands)
|
|
|
|
|
Net loss
|
$
|
(28,370
|
)
|
$
|
(7,926
|
)
|
$
|
(29,455
|
)
|
$
|
(1,841
|
)
|
Interest expense, net
(a)
|
52,487
|
|
7,035
|
|
19,076
|
|
9,944
|
|
Income tax (benefit) expense
|
(14,733
|
)
|
(4,733
|
)
|
(1,294
|
)
|
812
|
|
Depreciation and amortization
|
51,378
|
|
7,170
|
|
15,615
|
|
11,729
|
|
EBITDA
|
60,762
|
|
1,546
|
|
3,942
|
|
20,644
|
|
|
|
|
|
|
Unrealized non-cash losses on derivative financial instruments
(b)
|
7,123
|
|
—
|
|
—
|
|
—
|
|
Non-cash, purchase accounting effects
(c)
|
6,469
|
|
7,453
|
|
1,606
|
|
—
|
|
(Gain) loss on disposal of property and equipment
|
1,791
|
|
(30
|
)
|
281
|
|
202
|
|
Management fees
(d)
|
3,622
|
|
—
|
|
20
|
|
80
|
|
Adjusted EBITDA
|
$
|
79,767
|
|
$
|
8,969
|
|
$
|
5,849
|
|
$
|
20,926
|
|
|
|
(a)
|
Represents interest expense and interest income. In addition, included in interest expense, the Company incurred a loss of $7.0 million related to the refinancing of the prior credit facilities refinanced in connection with the issuance of the Notes and entry into the ABL Credit Agreement.
|
|
|
(b)
|
Represents non-cash expense related to unrealized losses on derivative financial instruments.
|
|
|
(c)
|
Adjusts for the effect of the purchase accounting step-up in the value of inventory to fair value recognized in cost of goods sold as a result recent acquisitions.
|
|
|
(d)
|
Represents fees paid to the Sponsor and former private equity sponsors for services provided pursuant to past and present management agreements. These fees are no longer being incurred subsequent to our initial public offering.
|
Item 8. Financial Statements and Supplementary Data
|
|
|
|
|
Foundation Building Materials, Inc.
|
|
|
|
AUDITED FINANCIAL STATEMENTS OF FOUNDATION BUILDING MATERIALS, INC. AS OF DECEMBER 31, 2016 AND OCTOBER 27, 2016
|
|
|
|
|
|
Report of Independent Registered Public Accounting Firm
|
|
|
|
|
|
Balance Sheet
|
|
|
|
|
|
Notes to Balance Sheet
|
|
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Member
Foundation Building Materials, Inc.
Tustin, CA
We have audited the accompanying balance sheets of Foundation Building Materials, Inc. (the "Company") as of December 31, 2016, and October 27, 2016. This financial statement is the responsibility of the Company’s management. Our responsibility is to express an opinion on this financial statement based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statement is free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statement presents fairly, in all material respects, the financial position of Foundation Building Materials, Inc. as of December 31, 2016, and October 27, 2016, in conformity with accounting principles generally accepted in the United States of America.
/s/ Deloitte & Touche LLP
Costa Mesa, CA
March 27, 2017
FOUNDATION BUILDING MATERIALS, INC.
BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
October 27, 2016
|
Assets
|
|
|
|
|
Total assets
|
|
$
|
—
|
|
|
$
|
—
|
|
Stockholder's equity
|
|
|
|
|
Common stock, $0.001 par value - 190,000,000 shares authorized and 29,974,239 shares issued and outstanding
|
|
$
|
30
|
|
|
$
|
30
|
|
Additional paid-in-capital
|
|
970
|
|
|
970
|
|
Due from stockholder
|
|
(1,000
|
)
|
|
(1,000
|
)
|
Total stockholder's equity
|
|
$
|
—
|
|
|
$
|
—
|
|
The accompanying notes are an integral part of this balance sheet.
FOUNDATION BUILDING MATERIALS, INC.
Notes to Balance Sheet
1. Organization and Nature of the Business
Foundation Building Materials, Inc. (the "Company") was formed on October 27, 2016 (inception). The initial stockholder of the Company was LSF9 Cypress Parent 2, LLC, ("Parent 2") which held all of the common shares authorized, issued and outstanding.
2. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying statement of financial position is prepared in accordance with generally accepted accounting principles in the United States of America ("GAAP"). The preparation of the financial statements in conformity with GAAP requires management to make estimates or assumptions that affect the reported amounts and disclosures in the financial statements. Actual future results could differ from these estimates and assumptions. Separate statements of operations, changes in stockholder’s equity and cash flows have not been presented as there have been no activities for this entity. The Company’s year end is December 31.
On the date of incorporation, the sole shareholder, Parent, acquired 1,000 common shares of the Company’s authorized common shares for a consideration of $1.00 per share, or total consideration of $1,000. The amount of the subscription value in excess of the par value has been recorded as additional paid in capital.
The Company has recorded a note receivable from Parent company for the contracted subscription amount.
Offering Costs
In connection with the initial public offering of the Company's common stock ("IPO"), affiliates of the Company incurred accounting and related costs, which were reimbursed by the Company upon the consummation of the IPO. Such costs were deferred and were recorded as a reduction of proceeds of the IPO or as an offset to equity issued.
Organization Costs
Organization costs were expensed as incurred. Such costs are comprised of the legal and professional fees associated with the formation of the Company.
3. Subsequent Events
On January 25, 2017, the Company’s Board authorized and the Company’s sole shareholder approved an amendment and restatement of the Company’s certificate of incorporation to increase the number of shares of common stock, par value $0.001 per share, that the Company is authorized to issue up to 190,000,000 shares. In addition, the amendment and restatement of the certificate of incorporation authorized the Company to issue 10,000,000 shares of preferred stock, par value $0.001 per share. On January 30, 2017, the Company’s Board authorized a 29,974.239 to 1 stock split of its outstanding common stock. The amendment and restatement of the certificate of incorporation became effective on February 2, 2017 and the stock split occurred immediately following the effectiveness of the amendment and restatement of the certificate of incorporation. Accordingly, all common stock amounts in this financial statement and the notes thereto have been adjusted to reflect the 29,974.239 to 1 stock split as though it had occurred as of the date presented.
Initial Public Offering
On February 15, 2017, the Company completed the IPO in which it issued 12,800,000 shares of common stock at a public offering price of $14.00 per share. The common stock began trading on the New York Stock Exchange on February 10, 2017 under the ticker symbol "FBM." After underwriting discounts, commissions and estimated expenses, the net proceeds to the Company from the IPO were approximately $161.3 million. The Company used these net proceeds to repay $161.3 million of borrowings outstanding under its asset-based credit facility. The underwriters exercised their option to purchase an additional 1,920,000 shares of common stock from the selling stockholder and those shares were sold on February 24, 2017. The Company did not receive any proceeds from the sale of shares by the selling stockholder.
FOUNDATION BUILDING MATERIALS, INC.
Notes to Balance Sheet
Prior to the consummation of the IPO, Parent transferred LSF9 Cypress Holdings LLC ("Cypress Holdings") and, indirectly, FBM Finance, Inc. ("FBM Finance"), to the Company, thereby transferring the business of Cypress Holdings. Following this internal reorganization (the "Reorganization"), the Company became a wholly owned subsidiary of LSF9 Cypress Parent 2 LLC ("Parent 2"). Cypress Holdings was formed on August 10, 2015, as a Delaware limited liability company and was a wholly owned direct subsidiary of Parent, an affiliate of Lone Star Fund IX (U.S.), L.P. (together with certain of its affiliates and associates, including Parent 2, but excluding the Company and other companies it owns as a result of its investment activities, "Lone Star") prior to the Reorganization. Cypress Holdings acquired FBM Intermediate Holdings, LLC and its consolidated subsidiaries ("Holdings" or "Predecessor") on October 9, 2015. Cypress Holdings had no operations prior to the acquisition, and therefore, Holdings is the predecessor to the Company.
Tax Receivable Agreement
In connection with the IPO, the Company entered into a tax receivable agreement with Lone Star that provides for the payment by the Company to Lone Star of 90% of the amount of cash savings, if any, in U.S. federal, state, local and non-U.S. income tax that the Company realizes (or in some circumstances are deemed to realize) as a result of the utilization of the Company and the Company’s subsidiaries’ (i) depreciation and amortization deductions, and any offset to taxable income and gain or increase to taxable loss, resulting from the tax basis the Company has in its assets at the consummation of the IPO, (ii) net operating losses, (iii) tax credits and (iv) certain other tax attributes. Based on the Company's preliminary estimates, the initial liability is estimated to be between $190 and $220 million. The agreement will remain in effect until all tax benefits have been used or expired, unless the agreement is terminated early.
|
|
|
|
|
LSF9 CYPRESS HOLDINGS, LLC AND SUBSIDIARIES
|
|
|
|
AUDITED CONSOLIDATED FINANCIAL STATEMENTS OF LSF9 CYPRESS HOLDINGS, LLC AND SUBSIDIARIES AS OF DECEMBER 31, 2016 AND 2015 AND FOR THE YEAR ENDED DECEMBER 31, 2016 AND THE PERIODS FROM OCTOBER 9, 2015 ("ACQUISITION DATE"), TO DECEMBER 31, 2015 (SUCCESSOR), AND JANUARY 1, 2015 TO OCTOBER 8, 2015 AND FOR THE YEAR ENDED DECEMBER 31, 2014 (PREDECESSOR)
|
|
|
|
|
|
Report of Independent Registered Public Accounting Firm
|
|
|
|
|
|
Consolidated Statements of Operations
|
|
|
|
|
|
Consolidated Balance Sheets
|
|
|
|
|
|
Consolidated Statements of Cash Flows
|
|
|
|
|
|
Consolidated Statements of Changes in Member's Equity
|
|
|
|
|
|
Notes to Consolidated Financial Statements
|
|
|
|
|
Quarterly Results of Operations (Unaudited)
|
|
|
|
|
|
Financial Statements Schedule: Valuation and Qualifying Accounts
|
|
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Member of
LSF9 Cypress Holdings, LLC
Tustin, CA
We have audited the accompanying consolidated balance sheets of LSF9 Cypress Holdings, LLC and subsidiaries (the "Company") as of December 31, 2016 (Successor) and 2015 (Successor), and the related consolidated statements of operations, comprehensive loss, changes in member’s equity, and cash flows for the year ended December 31, 2016 (Successor), for the period from October 9, 2015 to December 31, 2015 (Successor), for the period from January 1, 2015 to October 8, 2015 (Predecessor), and for the year ended December 31, 2014 (Predecessor). Our audits also included the financial statement schedules listed in the Index at Item 15. These consolidated financial statements and financial statement schedules are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedules based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of LSF9 Cypress Holdings, LLC and subsidiaries as of December 31, 2016 (Successor) and 2015 (Successor), and the results of their operations and their cash flows for the year ended December 31, 2016 (Successor), for the period from October 9, 2015 to December 31, 2015 (Successor), for the period from January 1, 2015 to October 8, 2015 (Predecessor), and for the year ended December 31, 2014 (Predecessor), in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly in all material respects the information set forth therein.
/s/ Deloitte & Touche LLP
Costa Mesa, CA
March 27, 2017
LSF9 CYPRESS HOLDINGS, LLC
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
Ended
December 31,
2016
|
|
October 9,
2015 to
December 31,
2015
|
|
January 1,
2015 to
October 8,
2015
|
|
Year
Ended
December 31,
2014
|
Net sales
|
$
|
1,392,509
|
|
|
$
|
192,539
|
|
|
$
|
628,066
|
|
|
$
|
508,853
|
|
Cost of goods sold (exclusive of depreciation and amortization)
|
995,704
|
|
|
143,333
|
|
|
452,909
|
|
|
368,064
|
|
Gross profit
|
396,805
|
|
|
49,206
|
|
|
175,157
|
|
|
140,789
|
|
Operating expenses:
|
|
|
|
|
|
|
|
Selling, general and administrative expenses
|
328,847
|
|
|
47,660
|
|
|
171,215
|
|
|
120,145
|
|
Depreciation and amortization
|
51,378
|
|
|
7,170
|
|
|
15,615
|
|
|
11,729
|
|
Total operating expenses
|
380,225
|
|
|
54,830
|
|
|
186,830
|
|
|
131,874
|
|
Income (loss) from operations
|
16,580
|
|
|
(5,624
|
)
|
|
(11,673
|
)
|
|
8,915
|
|
Interest expense
|
(52,511
|
)
|
|
(7,044
|
)
|
|
(19,090
|
)
|
|
(9,980
|
)
|
Other (expense) income, net
|
(7,172
|
)
|
|
9
|
|
|
14
|
|
|
36
|
|
Loss before income taxes
|
(43,103
|
)
|
|
(12,659
|
)
|
|
(30,749
|
)
|
|
(1,029
|
)
|
Income tax (benefit) expense
|
(14,733
|
)
|
|
(4,733
|
)
|
|
(1,294
|
)
|
|
812
|
|
Net loss
|
$
|
(28,370
|
)
|
|
$
|
(7,926
|
)
|
|
$
|
(29,455
|
)
|
|
$
|
(1,841
|
)
|
Pro forma loss per share data
(1)
:
|
|
|
|
|
|
|
|
Basic
|
$
|
(0.95
|
)
|
|
$
|
(0.26
|
)
|
|
-
|
|
|
-
|
|
Diluted
|
$
|
(0.95
|
)
|
|
$
|
(0.26
|
)
|
|
-
|
|
|
-
|
|
Weighted average shares outstanding:
|
|
|
|
|
|
|
|
Basic
|
29,974,239
|
|
|
29,974,239
|
|
|
-
|
|
|
-
|
|
Diluted
|
29,974,239
|
|
|
29,974,239
|
|
|
-
|
|
|
-
|
|
(1)
Please see Note 1 for additional information regarding loss per share.
See accompanying notes to the consolidated financial statements.
LSF9 CYPRESS HOLDINGS, LLC
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
Successor
|
Predecessor
|
|
Year
Ended
December 31,
2016
|
October 9,
2015 to
December 31,
2015
|
January 1,
2015 to
October 8,
2015
|
Year
Ended
December 31,
2014
|
Net loss
|
$
|
(28,370
|
)
|
$
|
(7,926
|
)
|
$
|
(29,455
|
)
|
$
|
(1,841
|
)
|
Other comprehensive (loss) income:
|
|
|
|
|
Foreign currency translation adjustment
|
(1,464
|
)
|
—
|
|
—
|
|
—
|
|
Unrealized gain on derivatives, net of taxes of $916
|
1,461
|
|
—
|
|
—
|
|
—
|
|
Total other comprehensive loss
|
(3
|
)
|
—
|
|
—
|
|
—
|
|
Total comprehensive loss
|
$
|
(28,373
|
)
|
$
|
(7,926
|
)
|
$
|
(29,455
|
)
|
$
|
(1,841
|
)
|
See accompanying notes to the consolidated financial statements.
LSF9 CYPRESS HOLDINGS, LLC
CONSOLIDATED BALANCE SHEETS
(in thousands)
|
|
|
|
|
|
|
|
|
|
December 31,
2016
|
|
December 31,
2015
|
Assets
|
|
|
|
Current assets:
|
|
|
|
Cash and cash equivalents
|
$
|
28,552
|
|
|
$
|
10,662
|
|
Accounts receivables—net of allowance for doubtful accounts of 2016—$5,685 and 2015—$6,304
|
261,686
|
|
|
138,621
|
|
Other receivables
|
52,845
|
|
|
24,673
|
|
Inventories
|
157,991
|
|
|
71,876
|
|
Prepaid expenses and other current assets
|
12,516
|
|
|
4,666
|
|
Total current assets
|
513,590
|
|
|
250,498
|
|
Property and equipment, net
|
144,387
|
|
|
66,141
|
|
Intangibles assets, net
|
215,381
|
|
|
154,458
|
|
Goodwill
|
437,935
|
|
|
289,086
|
|
Other assets
|
9,692
|
|
|
3,204
|
|
Total assets
|
$
|
1,320,985
|
|
|
$
|
763,387
|
|
Liabilities and member’s equity
|
|
|
|
Current liabilities:
|
|
|
|
Asset-based credit facility
|
$
|
—
|
|
|
$
|
70,000
|
|
Accounts payable
|
119,788
|
|
|
59,193
|
|
Accrued payroll and employee benefits
|
26,956
|
|
|
10,942
|
|
Accrued taxes
|
9,151
|
|
|
5,765
|
|
Other current liabilities
|
49,613
|
|
|
9,501
|
|
Current portion of notes payable
|
—
|
|
|
1,492
|
|
Total current liabilities
|
205,508
|
|
|
156,893
|
|
Asset-based credit facility
|
208,469
|
|
|
—
|
|
Long-term portion of notes payable, net
|
525,487
|
|
|
300,315
|
|
Deferred income taxes, net
|
26,867
|
|
|
15,310
|
|
Other liabilities
|
26,138
|
|
|
118
|
|
Total liabilities
|
992,469
|
|
|
472,636
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
Member's equity
|
364,815
|
|
|
298,677
|
|
Accumulated deficit
|
(36,296)
|
|
|
(7,926
|
)
|
Other comprehensive loss
|
(3)
|
|
|
—
|
|
Total member's equity
|
328,516
|
|
|
290,751
|
|
Total liabilities and member's equity
|
$
|
1,320,985
|
|
|
$
|
763,387
|
|
See accompanying notes to the consolidated financial statements.
LSF9 CYPRESS HOLDINGS, LLC
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
Predecessor
|
|
Year
Ended
December 31,
2016
|
|
October 9,
2015 to
December 31,
2015
|
January 1,
2015 to
October 8,
2015
|
|
Year
Ended
December 31,
2014
|
Cash flows from operating activities:
|
|
|
|
|
|
|
Net loss
|
$
|
(28,370
|
)
|
|
$
|
(7,926
|
)
|
|
$
|
(29,455
|
)
|
|
|
$
|
(1,841
|
)
|
|
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
|
|
|
|
|
|
|
Depreciation
|
16,487
|
|
|
1,973
|
|
|
7,808
|
|
|
|
7,586
|
|
|
Amortization of intangible assets
|
34,891
|
|
|
5,197
|
|
|
7,807
|
|
|
|
4,143
|
|
|
Amortization and write-off of debt issuance costs and debt discount
|
5,950
|
|
|
787
|
|
|
3,078
|
|
|
|
411
|
|
|
Inventory fair value adjustment
|
6,469
|
|
|
7,453
|
|
|
1,606
|
|
|
|
—
|
|
|
Loss on extinguishment of debt
|
5,354
|
|
|
—
|
|
|
—
|
|
|
|
—
|
|
|
Provision for doubtful accounts
|
1,608
|
|
|
483
|
|
|
1,511
|
|
|
|
1,610
|
|
|
Unrealized loss on derivative instruments, net
|
6,952
|
|
|
—
|
|
|
—
|
|
|
|
—
|
|
|
Loss (gain) on disposal of property and equipment
|
1,791
|
|
|
(30
|
)
|
|
281
|
|
|
|
202
|
|
|
Paid-in-kind interest
|
—
|
|
|
—
|
|
|
250
|
|
|
|
322
|
|
|
Deferred income taxes
|
(17,669
|
)
|
|
6,521
|
|
|
(1,837
|
)
|
|
|
113
|
|
|
Change in assets and liabilities, net of effects of acquisitions:
|
|
|
|
|
|
|
Accounts receivables
|
5,985
|
|
|
11,436
|
|
|
(24,859
|
)
|
|
|
(9,375
|
)
|
|
Other receivables
|
(13,220
|
)
|
|
(5,973
|
)
|
|
(2,806
|
)
|
|
|
(5,293
|
)
|
|
Inventories
|
(9,727
|
)
|
|
89
|
|
|
4,862
|
|
|
|
(6,267
|
)
|
|
Prepaid expenses and other current assets
|
(3,588
|
)
|
|
942
|
|
|
(1,252
|
)
|
|
|
787
|
|
|
Other assets
|
(800
|
)
|
|
10,110
|
|
|
(1,019
|
)
|
|
|
(651
|
)
|
|
Accounts payable
|
(21,622
|
)
|
|
(13,088
|
)
|
|
21,437
|
|
|
|
1,304
|
|
|
Accrued payroll and employee benefits
|
3,931
|
|
|
1,753
|
|
|
9,342
|
|
|
|
2,486
|
|
|
Accrued taxes
|
3,392
|
|
|
(1,399
|
)
|
|
4,019
|
|
|
|
1,147
|
|
|
Other liabilities
|
35,316
|
|
|
(718
|
)
|
|
18,403
|
|
|
|
(673
|
)
|
|
Net cash provided by (used in) operating activities
|
33,130
|
|
|
17,610
|
|
|
19,176
|
|
|
|
(3,989
|
)
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
Capital expenditures
|
(30,473
|
)
|
|
(2,760
|
)
|
|
(9,776
|
)
|
|
|
(9,205
|
)
|
|
Proceeds from the disposal of fixed assets
|
587
|
|
|
—
|
|
|
—
|
|
|
|
—
|
|
|
Acquisitions, net of cash acquired
|
(401,919
|
)
|
|
(657,563
|
)
|
|
(87,490
|
)
|
|
|
(93,231
|
)
|
|
Net cash used in investing activities
|
(431,805
|
)
|
|
(660,323
|
)
|
|
(97,266
|
)
|
|
|
(102,436
|
)
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
Proceeds from asset-based credit facility
|
456,469
|
|
|
80,000
|
|
|
205,915
|
|
|
|
75,993
|
|
|
Repayments of asset-based credit facility
|
(318,000
|
)
|
|
(10,000
|
)
|
|
(199,299
|
)
|
|
|
(34,892
|
)
|
|
Principal borrowings on long-term debt
|
645,000
|
|
|
307,950
|
|
|
80,000
|
|
|
|
65,000
|
|
|
Principal payments on long-term debt
|
(397,369
|
)
|
|
—
|
|
|
—
|
|
|
|
(194
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt issuance costs
|
(34,406
|
)
|
|
(8,172
|
)
|
|
(1,165
|
)
|
|
|
(904
|
)
|
|
Principal repayment of capital lease obligations
|
(1,175
|
)
|
|
—
|
|
|
—
|
|
|
|
—
|
|
|
Other financing activities
|
—
|
|
|
—
|
|
|
—
|
|
|
|
(856
|
)
|
|
Capital contributions
|
66,205
|
|
|
272,904
|
|
|
1,116
|
|
|
|
326
|
|
|
Capital distributions
|
(67
|
)
|
|
—
|
|
|
—
|
|
|
|
—
|
|
|
Net cash provided by financing activities
|
416,657
|
|
|
642,682
|
|
|
86,567
|
|
|
|
104,473
|
|
|
Effect of exchange rate changes on cash
|
(92
|
)
|
|
—
|
|
|
—
|
|
|
|
—
|
|
|
Net increase (decrease) in cash
|
17,890
|
|
|
(31
|
)
|
|
8,477
|
|
|
|
(1,952
|
)
|
|
Cash and cash equivalents at beginning of period
|
10,662
|
|
|
10,693
|
|
|
2,216
|
|
|
|
4,168
|
|
|
Cash and cash equivalents at end of period
|
$
|
28,552
|
|
|
$
|
10,662
|
|
|
$
|
10,693
|
|
|
|
$
|
2,216
|
|
|
Supplemental disclosures of cash flow information:
|
|
|
|
|
|
|
Cash paid during the period for income taxes
|
$
|
4,448
|
|
|
$
|
1
|
|
|
$
|
257
|
|
|
|
$
|
736
|
|
|
Cash paid during the period for interest
|
$
|
19,745
|
|
|
$
|
6,695
|
|
|
$
|
15,649
|
|
|
|
$
|
9,978
|
|
|
Cash paid during the period for early debt prepayment penalty
|
$
|
1,600
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
$
|
—
|
|
|
Supplemental disclosures of non-cash investing and financing activities:
|
|
|
|
|
|
|
Change in fair value of derivatives, net of tax
|
$
|
1,461
|
|
|
|
$
|
—
|
|
|
|
$
|
—
|
|
|
|
|
$
|
—
|
|
|
Assets acquired under capital lease
|
$
|
3,196
|
|
|
|
$
|
—
|
|
|
|
$
|
—
|
|
|
|
|
$
|
—
|
|
|
Embedded derivative
|
$
|
6,200
|
|
|
|
$
|
—
|
|
|
|
$
|
—
|
|
|
|
|
$
|
—
|
|
|
Goodwill adjustment for purchase price allocation
|
$
|
1,210
|
|
|
|
$
|
—
|
|
|
|
$
|
—
|
|
|
|
|
$
|
—
|
|
|
Fair value of stock issued in acquisitions
|
$
|
—
|
|
|
|
$
|
—
|
|
|
|
$
|
—
|
|
|
|
|
$
|
800
|
|
|
See accompanying notes to the consolidated financial statements.
LSF9 CYPRESS HOLDINGS, LLC
CONSOLIDATED STATEMENTS OF CHANGES IN MEMBER'S EQUITY
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor
|
Additional Paid in Capital
|
Accumulated Deficit
|
Other Comprehensive Loss
|
Total Member's Equity
|
Balance at December 31, 2013
|
$
|
48,060
|
|
$
|
(1,433
|
)
|
$
|
—
|
|
$
|
46,627
|
|
Capital contributions from parent
|
1,126
|
|
—
|
|
—
|
|
1,126
|
|
Net loss
|
—
|
|
(1,841
|
)
|
—
|
|
(1,841
|
)
|
Balance at December 31, 2014
|
49,186
|
|
(3,274
|
)
|
—
|
|
45,912
|
|
Capital contributions from parent
|
1,116
|
|
—
|
|
—
|
|
1,116
|
|
Net loss
|
|
(29,455
|
)
|
|
(29,455
|
)
|
Balance at October 8, 2015
|
50,302
|
|
(32,729
|
)
|
—
|
|
17,573
|
|
|
|
|
|
|
|
Successor
|
|
|
|
|
|
Balance at October 9, 2015
|
—
|
|
—
|
|
—
|
|
—
|
|
Capital contributions from parent
|
298,677
|
|
—
|
|
—
|
|
298,677
|
|
Net loss
|
—
|
|
(7,926
|
)
|
—
|
|
(7,926
|
)
|
Balance at December 31, 2015
|
298,677
|
|
(7,926
|
)
|
—
|
|
290,751
|
|
Capital contributions from current parent
|
66,205
|
|
—
|
|
—
|
|
66,205
|
|
Capital distributions
|
(67
|
)
|
—
|
|
—
|
|
(67
|
)
|
Other comprehensive loss
|
—
|
|
—
|
|
(3)
|
|
(3
|
)
|
Net loss
|
—
|
|
$
|
(28,370
|
)
|
—
|
|
(28,370
|
)
|
Balance at December 31, 2016
|
$
|
364,815
|
|
$
|
(36,296
|
)
|
$
|
(3
|
)
|
$
|
328,516
|
|
See accompanying notes to the consolidated financial statements.
LSF9 Cypress Holdings, LLC
Notes to Consolidated Financial Statements
1. Description of Company and Basis of Presentation
Description of Company
LSF9 Cypress Holdings, LLC ("Company" or "LSF9" or "Successor") was formed on August 10, 2015, as a Delaware limited liability company and is a wholly owned direct subsidiary of LSF9 Cypress Parent, LLC ("Parent"), an affiliate of Lone Star Fund IX (U.S.), L.P. ("Lone Star").
LSF9 acquired FBM Intermediate Holdings, LLC and its consolidated subsidiaries ("Holdings" or "Predecessor") on October 9, 2015. LSF9 had no operations prior to the acquisition, and therefore, Holdings is the predecessor to the Company.
The Company, through its subsidiaries, is engaged in the wholesale and retail distribution of wallboard, suspended ceiling systems, metal framing and other products to commercial and residential building contractors and subcontractors. The Company has over 200 branches branch throughout the United States and Canada.
The accompanying consolidated financial statements present the balance sheet as of December 31, 2016 (Successor) and December 31, 2015 (Successor), and the activity of the Successor for the year ended December 31, 2016 and the period from October 9, 2015 to December 31, 2015 (together, the "Successor Periods"), and the activity of the Predecessor for the period from January 1, 2015 to October 8, 2015 and the year ended December 31, 2014 (together, the "Predecessor Periods"). Operations of the Predecessor are presented based on its historical cost basis, which is not comparable to that of the Successor.
Principles of Consolidation
The consolidated financial statements of the Successor and Predecessor include the accounts of the Company and its consolidated subsidiaries. All intercompany balances and transactions have been eliminated.
The Company reports two reportable segments, Specialty Building Products and Mechanical Insulation. Resources are allocated and performance is assessed by the Company's CEO, who is the Chief Operating Decision Maker (CODM).
Basis of Presentation
The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP").
Reclassification
To conform to the presentation for the year ended December 31, 2016, the Company has reclassified acquisition expenses from its own financial statement line item into Selling, General and Administrative expenses for all prior periods presented in its consolidated statement of operations. For the periods from October 9, 2015 to December 31, 2015, January 1, 2015 to October 8, 2015 and for the year ended December 31, 2014, the Company reclassified $3.5 million, $39.7 million and $4.7 million, respectively.
Reorganization
Subsequent to December 31, 2016, Parent transferred the Company and, indirectly, FBM Finance, Inc. ("FBM Finance"), to Foundation Building Materials, Inc. ("FBM"), thereby transferring the business for which historical financial information is included in these financial statements, to be indirectly held by FBM. Following this internal reorganization (the "Reorganization"), FBM became a wholly owned subsidiary of LSF9 Cypress Parent 2 LLC ("Parent 2").
Initial Public Offering
Following the Reorganization, on February 15, 2017, FBM completed an IPO in which it issued 12,800,000 shares of common stock at a public offering price of $14.00 per share. The common stock began trading on the New York Stock Exchange on February 10, 2017 under the ticker symbol "FBM". After underwriting discounts, commissions and estimated expenses, the net proceeds to FBM from the IPO were approximately $161.3 million. FBM used these net proceeds to repay $161.3 million of borrowings outstanding under the Revolver. The underwriters exercised their option to purchase an
LSF9 Cypress Holdings, LLC
Notes to Consolidated Financial Statements
additional 1,920,000 shares of common stock from Parent 2 and those shares were purchased on February 24, 2017. The Company did not receive any proceeds from the sale of shares by Parent 2.
Tax Receivable Agreement
In connection with the IPO, FBM entered into a tax receivable agreement with Parent 2 that provides for the payment by FBM to Parent 2 of 90% of the amount of cash savings, if any, in U.S. federal, state, local and non-U.S. income tax that FBM realizes (or in some circumstances are deemed to realize) as a result of the utilization of FBM and FBM's subsidiaries' (i) depreciation and amortization deductions, and any offset to taxable income and gain or increase to taxable loss, resulting from the tax basis FBM has in its assets at the consummation of the IPO, (ii) net operating losses, (iii) tax credits and (iv) certain other tax attributes. Based on the Company's preliminary estimates, the initial liability is estimated to be between $190 and $220 million. The agreement will remain in effect until all tax benefits have been used or expired, unless the agreement is terminated early.
Pro Forma Loss Per Share
The pro forma loss per share data for the year ended December 31, 2016 is based on the Company's historical combined statement of operations after giving effect to the following as if they occurred at the beginning of the period: (1) a reorganization consolidating all entities under FBM; and (2) a 29,974.239 to 1 stock split with respect to the common stock of FBM that occurred subsequent to December 31, 2016. There were no pro forma adjustments made to, or reflected in, the consolidated financial statements of the Company. The pro forma loss per share is for informational purposes only.
Basic loss per share represents net income for the period common shares were outstanding, divided by the weighted average number of common shares outstanding for the period. There were no equity securities outstanding that were convertible into common stock, therefore the basic and diluted share count are the same. In addition, due to the net loss, the basic weighted average shares outstanding was used to compute loss per share.
The following are the common share amounts used to compute the basic and diluted earnings per share for each period:
|
|
|
|
|
|
|
|
Year Ended December 31, 2016
|
|
October 9, 2015 to December 31, 2015
|
Weighted average shares used in basic computations
|
29,974,239
|
|
|
29,974,239
|
|
Dilutive effect of exercise of equity grants outstanding
|
—
|
|
|
—
|
|
Weighted average shares used in diluted computations
|
29,974,239
|
|
|
29,974,239
|
|
2. Summary of Significant Accounting Policies
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions. Such estimates affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the period. The Company evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors. Significant estimates made by management include, but are not limited to, the allowance for doubtful accounts, the allowance for excess and obsolete inventory, derivatives, useful lives of property and equipment, deferred tax assets and liabilities, and self-insurance liabilities. Actual results may differ from these estimates.
Cash and Cash Equivalents
Cash and cash equivalents includes deposits in financial institutions. The Company has its cash deposits held at major banks that at times may exceed federally insured limits. Cash and cash equivalents are defined as highly liquid investments with maturities of three months or less when purchased.
LSF9 Cypress Holdings, LLC
Notes to Consolidated Financial Statements
Concentration of Risk
Financial instruments, which potentially subject the Company to concentration of credit risk, consist principally of accounts receivable. The Company’s accounts receivable are primarily from customers in the building industry located in the United States. Concentration of credit risk with respect to accounts receivable is limited due to the large number of customers comprising the Company’s customer base. The Company performs credit evaluations of its customers; however, the Company’s policy is not to require collateral. At December 31, 2016 and 2015, the Company had no significant concentrations of credit risk.
Accounts Receivable
The Company sells to customers using credit terms customary in the building industry. Accounts receivables are recorded at invoiced amounts and generally do not bear interest. The allowance for doubtful accounts reflects the Company’s estimate of credit exposure, determined principally on the basis of its collection experience, aging of its receivables and significant individual account credit risk.
Other Receivables
Other receivables consist primarily of vendor rebates receivables. The Company receives rebates from certain vendors based on the volume of inventory purchases. Throughout the year, the amount of rebates receivable for the periodic programs are estimated based upon the expected level of purchases. Vendor rebates are accrued at the time the inventory is received. The Company accounts for these rebates as a reduction of inventory until the period in which the product is sold, at which time the reduced costs are included in cost of goods sold. The Company continually revises these estimates to reflect actual rebates earned.
Inventories
Inventories, consisting substantially of finished goods, are valued at the net realizable value. Cost is determined using the moving weighted-average cost method. The Company routinely evaluates inventory for excess or obsolescence and considers factors such as historical usage rates and demand.
Property and Equipment
Property and equipment acquired outside of business combinations are stated at cost less accumulated depreciation during both the Successor and Predecessor periods. Major additions and improvements are capitalized and depreciated; maintenance and repairs are charged to expense when incurred. Assets held for sale are not depreciated. Upon disposition, the related cost and accumulated depreciation are removed from the accounts and any resulting gain or loss is recognized in selling, general, and administrative expense. Depreciation and amortization are computed using the straight-line method over the following estimated useful lives:
|
|
|
Buildings
|
5 to 39 years
|
Vehicles and equipment
|
5 to 10 years
|
Software and computers
|
3 to 5 years
|
Furniture and fixtures
|
7 years
|
Machinery and Equipment
|
3 to 10 years
|
Leasehold improvements
|
Lesser of useful life or lease term
|
Impairment of Long-Lived Assets
The Company reviews property and equipment for impairment when events or circumstances indicate these assets may not be recoverable. Factors considered include significant underperformance relative to expected historical or projected future operating results, significant changes in the manner of use of the acquired assets or the strategy for the overall business and significant negative industry or economic trends. In performing the review for recoverability, future cash flows expected to result from the use of the asset and its eventual disposition are estimated. If the sum of expected future undiscounted cash flows is less than the carrying amount of the asset, an impairment loss is recorded under the discounted cash flow method. As of December 31, 2016 and 2015, there were no impairments.
LSF9 Cypress Holdings, LLC
Notes to Consolidated Financial Statements
The Company assesses impairment of long-lived assets at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities.
Goodwill and Intangible Assets
Intangible assets consisted of tradenames, customer relationships, non-compete agreements and favorable and unfavorable leases, and are amortized using the straight-line method, which reflects the pattern in which the economic benefits of the assets are expected to be consumed. Intangible assets with definite lives are amortized over their respective estimated useful lives.
The following table summarizes the life of the intangible assets acquired:
|
|
|
Trade names
|
1 to 5 years
|
Customer relationships
|
5 to 6 years
|
Other intangible assets
|
1 to 13 years
|
The Company reviews intangible assets with finite lives for impairment when events or circumstances indicate these assets may not be recoverable. In performing the review for recoverability, future cash flows expected to result from the use of the asset are estimated. If the sum of expected future undiscounted cash flows is less than the carrying amount of the asset, an impairment loss is recorded for the amount by which the carrying amount exceeds the estimated fair value.
Goodwill represents the excess of purchase price over the fair value of assets acquired and liabilities assumed in a business combination.
The Company performs an annual impairment test or more frequently if impairment indicators arise. Such review entails comparing the carrying value to the fair value. Impairment is determined utilizing a two-step process. This process involves comparing the fair value to the carrying value of the reporting unit. If the carrying value of the net assets assigned to the reporting unit exceeds the fair value of the reporting unit, then the Company must determine the implied fair value of the reporting unit’s goodwill and compare it to the carrying value of the reporting unit’s goodwill. The Company determines the fair value of its reporting units using combinations of both the income and market valuation approaches. No impairment was recorded during the Successor Period or Predecessor Periods.
Derivatives and Hedge Accounting
The Company has entered into derivative instruments to manage its exposure to certain financial risks. Certain derivative instruments are designated for hedge accounting under Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") 815-20,
Derivatives—Hedging
. Instruments that meet hedge criteria are formally designated as hedges at the inception of the instrument. The Company measures hedge effectiveness on a quarterly basis. The Company’s derivative instruments include a net investment hedge and embedded derivatives.
In August 2016, the Company entered into foreign exchange forward contracts. The foreign exchange forward contracts were designated as a net investment hedge in accordance with ASC 815-20. The effective portion of the gains and losses on net investment hedge transactions are reported as a component of accumulated other comprehensive income (loss). To the extent the net investment hedge is ineffective, changes in value are recorded in other income (expense) in the consolidated statement of operations through the maturity date. Derivative financial instruments are recorded in the financial statements at fair value.
The Company, together with FBM Finance, its wholly owned subsidiary, issued Senior Secured Notes on August 9, 2016 due 2021 (the "Notes") (see
Note 7
). The Notes have a prepayment option feature, and this feature meets the definition of an embedded derivative and was bifurcated from the debt host and accounted for separately. The embedded derivative is recorded at fair value at each reporting period with the change in fair value at each reporting date recorded in other income (expense) in the statement of operations.
The Company classifies the cash flows at settlement from derivatives in the same category as the cash flows from the related hedged items. For designated net investment hedges, the cash settlement is classified within the "Net cash used in investing activities" component of the consolidated statements of cash flows. For undesignated hedges, the cash settlement is primarily classified within the "Net cash provided by operating activities" component of the consolidated statements of cash flows. For the year ended December 31, 2016 (Successor), the periods from October 9, 2015 to December 31, 2015
LSF9 Cypress Holdings, LLC
Notes to Consolidated Financial Statements
(Successor) and January 1, 2015 to October 8, 2015 (Predecessor) and the year ended December 31, 2014 (Predecessor), there were no cash flow settlements from any derivatives.
The Company’s derivative assets and liabilities are measured at fair value. Fair value related to the cash flows occurring within one year are classified as current and the fair value related to the cash flows occurring beyond one year are classified as non-current in the consolidated balance sheets. For those instruments designated as hedges, the Company recognizes the changes in fair value in other comprehensive income ("OCI"), and recognizes any ineffectiveness immediately in earnings.
Valuation of derivative assets and liabilities reflect the value of the instrument including counterparty credit risk. These values also take into account the Company’s own credit standing.
Foreign Currency Translation
Assets and liabilities of the Company’s foreign subsidiaries are translated at the exchange rate prevailing at the balance sheet date, while income and expenses are translated at average rates for the period. Translation gains and losses are reported as a component of other comprehensive income (loss).
Transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency, except those transactions that have been designated as hedges of identifiable foreign currency commitments, are included in the results of operations as incurred.
Capital Leases
Leased property and equipment meeting capital lease criteria are capitalized at the lower of the present value of the related lease payments or the fair value of the leased asset at the inception of the lease. The corresponding liability is included in the balance sheet as other liabilities current and non-current. Leasehold improvements and assets under capital leases are amortized using the straight-line method over the shorter of their estimated useful lives or the initial term of the related lease.
Revenue Recognition
The Company recognizes revenue at the point of sale or upon delivery to the customer’s site when the following four basic criteria are met:
|
|
•
|
persuasive evidence of an arrangement exists;
|
|
|
•
|
delivery has occurred or services have been rendered;
|
|
|
•
|
the price to the buyer is fixed or determinable; and
|
|
|
•
|
collectability is reasonably assured.
|
Revenue is recognized when sales transactions occur and title is passed, the related product is delivered, and includes any applicable shipping and handling costs invoiced to the customer. The expense related to such costs is included in "Selling, general and administrative" expenses in the accompanying Consolidated Statements of Operations. All revenues recognized are net of sales taxes collected. Sales taxes collected are subsequently remitted to the appropriate government authorities.
Cost of Goods Sold
Cost of goods sold includes the cost of merchandise, inbound freight, inventory provisions, vendor discounts and vendor rebates.
Operating Expenses
Operating expenses include selling, general and administrative expenses and depreciation and amortization. Selling, general and administrative expenses include expenses related to the delivery and warehousing of the Company's products, as well as employee compensation and benefits expenses for employees in the Company's branches and yard support center, other administrative expenses, such as legal, accounting, and information technology costs and acquisition expenses which include legal, valuation, accounting and advisory costs.
LSF9 Cypress Holdings, LLC
Notes to Consolidated Financial Statements
Depreciation and amortization expenses include depreciation expense on the Company's property and equipment as well as amortization expense on the Company's finite-lived intangible assets.
Advertising
Advertising related costs are expensed as incurred. Advertising expense was $1.7 million for the year ended December 31, 2016 (Successor), $0.4 million for the period from October 9, 2015 to December 31, 2015 (Successor), $0.7 million for the period from January 1, 2015 to October 8, 2015 (Predecessor), and $0.5 million for the year ended December 31, 2014 (Predecessor).
Income Taxes
The Predecessor as a limited liability company, under the provisions of the Internal Revenue Code and applicable state laws is generally not subject to taxation of income. However, included in the Predecessor consolidated financial statements is Home Acres Holdings, LLC, a wholly-owned subsidiary of the Company, which made an entity classification election to be taxed as a C-corporation. The Successor has made an entity classification election to be taxed as a C-Corporation and under the provisions of the Internal Revenue Code and applicable state laws is subject to taxation of income. However, in the Successor consolidated financial statements Home Acres Holdings, LLC made an entity classification election as of October 9, 2015 to be disregarded as a separate entity and under the provisions of the Internal Revenue Code and applicable state laws is generally not subject to taxation.
The Company accounts for income taxes in accordance with ASC Topic 740,
Accounting for Income Taxes.
Under ASC
740, income taxes are accounted for based upon the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis and operating loss and tax credit carry forwards. Deferred tax expense (benefit) results from the net change in deferred tax assets and liabilities during the year. A valuation allowance is recognized to reduce the carrying value of deferred income tax assets if it is believed to be more likely than not that a component of the deferred income tax assets will not be realized.
ASC Topic 740 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Based on this guidance, the Company analyzes its filing positions, as well as all open tax years in relevant jurisdictions. Tax benefits from uncertain tax positions are recognized if it is more likely than not that the position is sustainable based solely on its technical merits. The Company had no material uncertain tax positions at December 31, 2016 (Successor) and 2015 (Successor).
The Company recognizes interest related to income tax matters as interest expense and penalties related to income tax matters as other expense. The Company did not have any amounts accrued or expensed for interest and penalties as of December 31, 2016 (Successor) and December 31, 2015 (Successor), and for the year ended December 31, 2016 (Successor) or for the periods from October 9, 2015 to December 31, 2015 (Successor) and January 1, 2015 to October 8, 2015 (Predecessor) and the year ended December 31, 2014 (Predecessor).
Fair Value of Financial Instruments
Fair value is defined as the price that would be received to sell an asset or price paid to transfer a liability in an orderly transaction between market participants at the measurement date. Authoritative guidance for fair value measurements establishes a hierarchy that prioritizes the inputs to valuation models based upon the degree to which they are observable. The three levels of the fair value measurement hierarchy are as follows:
Level 1
: Inputs represent quoted prices in active markets for identical assets or liabilities at the measurement date.
Level 2
: Inputs (other than quoted prices included in Level 1) that are either directly or indirectly observable for the asset or liability through correlation with market data at the measurement date for the duration of the instrument’s anticipated life.
Level 3
: Inputs are unobservable and therefore reflect management’s best estimate of the assumptions that market participants would use in pricing the asset or liability.
The Company estimates the fair value of its assets and liabilities, which qualify as financial instruments, and includes this additional information in the notes to the consolidated financial statements when the fair value is different from the carrying value of these instruments.
Recently Adopted Accounting Standards
LSF9 Cypress Holdings, LLC
Notes to Consolidated Financial Statements
In November 2015, the FASB issued Accounting Standards Update ("ASU") 2015-17,
Income Taxes
(Topic 740):
Balance Sheet Classifications of Deferred Taxes
. Companies are required to classify all deferred tax assets and liabilities as noncurrent on the balance sheet instead of separating deferred taxes into current and noncurrent amounts. Also, companies will no longer allocate valuation allowances between current and noncurrent deferred tax assets because those allowances also will be classified as noncurrent. The guidance is effective for financial statements issued for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Companies can adopt the guidance either prospectively or retrospectively. The Company early adopted ASU 2015-17 and applied the new guidance for all periods presented. The adoption of this guidance did not have a material impact on its consolidated financial statements.
In August 2014, the FASB issued ASU 2014-15,
Presentation of Financial Statements
—
Going Concern
(Subtopic 205-40):
Disclosures of Uncertainties about an Entity’s Ability to Continue as a Going Concern
. ASU 2014-15 requires management to evaluate whether there are conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued or are available to be issued. This ASU also requires management to disclose certain information depending on the results of the going concern evaluation. The provisions of this ASU are effective for annual periods ending after December 15, 2016, including interim reporting periods thereafter. The adoption of this guidance on December 31, 2016, did not have a material impact on its consolidated financial statements.
In July 2015, the FASB issued ASU 2015-11,
Simplifying the Measurement of Inventory
, which applies to inventory valued at first-in, first-out (FIFO) or average cost. ASU 2015-11 requires inventory to be measured at the lower of cost and net realizable value, rather than at the lower of cost or market. ASU 2015-11 is effective on a prospective basis for annual periods beginning after December 15, 2016, and interim periods within those fiscal years. The Company adopted this guidance on January 1, 2017 and the adoption thereof did not have a material impact on the Company’s consolidated financial statements.
In September 2015, the FASB issued ASU 2015-16,
Business Combinations
(Topic 805):
Simplifying the Accounting for Measurement-Period Adjustments
. ASU 2015-16 eliminates the requirement to restate prior period financial statements for measurement period adjustments. The new guidance requires that the cumulative impact of a measurement period adjustment (including the impact on prior periods) be recognized in the reporting period in which the adjustment is identified. In addition, separate presentation on the face of the income statement or disclosure in the notes is required regarding the portion of the adjustment recorded in the current period earnings, by line item, which would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date. ASU 2015-16 is to be applied prospectively for measurement period adjustments that occur after the effective date. ASU 2015-16 is effective for annual reporting periods beginning after December 15, 2015. The Company adopted this guidance on January 1, 2016 and the adoption thereof did not have a material impact on the Company’s consolidated financial statements.
Recently Issued Accounting Standards
In May 2014, the FASB issued ASU 2014-09,
Revenue from Contracts with Customers
(Topic 606). ASU 2014-09 amends the guidance for revenue recognition to replace numerous, industry-specific requirements. The core principle of the ASU is that an entity should recognize revenue for the transfer of goods or services equal to the amount that it expects to be entitled to receive for those goods or services. The ASU implements a five-step process for customer contract revenue recognition that focuses on transfer of control, as opposed to transfer of risk and rewards. The amendment also requires enhanced disclosures regarding the nature, amount, timing and uncertainty of revenues and cash flows arising from contracts with customers. Additional ASUs have been issued to amend or clarify the ASU as follows:
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•
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ASU No. 2016-12
Revenue from Contracts with Customers
(Topic 606):
Narrow-Scope Improvements and Practical Expedients
was issued in May 2016. ASU No. 2016-12 amends the new revenue recognition standard to clarify the guidance on assessing collectability, presenting sales taxes, measuring noncash consideration, and certain transition matters.
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•
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ASU No. 2016-10
Revenue from Contracts with Customers
(Topic 606):
Identifying Performance Obligations and Licensing
was issued in April 2016. ASU No. 2016-10 addresses implementation issues identified by the FASB-International Accounting Standards Board Joint Transition Resource Group for Revenue Recognition (TRG).
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•
|
ASU No. 2016-08
Revenue from Contracts with Customers
(Topic 606):
Principal versus Agent Considerations (Reporting Revenue Gross versus Net)
was issued in March 2016. ASU No. 2016-08 requires an entity to determine whether the nature of its promise to provide goods or services to a customer is performed in a principal or agent capacity and to recognize revenue in a gross or net manner based on its principal/agent designation.
|
LSF9 Cypress Holdings, LLC
Notes to Consolidated Financial Statements
The guidance in these ASUs is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period, and early adoption is permitted for interim and annual periods beginning after December 15, 2016. The Company is currently evaluating the impact of this guidance on its consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02,
Leases
(Topic 842), or ASU 2016-02. ASU 2016-02 establishes a right-of-use model that requires a lessee to record a right-of-use asset and a lease liability on the balance sheet for all leases with terms longer than twelve months. Leases will be classified as either "finance" or "operating," with classification affecting the pattern of expense recognition in the income statement. This update requires a modified retrospective transition as of the beginning of the earliest comparative period presented in the financial statements. This update is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the impact of this guidance on its consolidated financial statements.
In August 2016, the FASB issued ASU 2016-15,
Statement of Cash Flows
(Topic 230):
Classification of Certain Cash Receipts and Cash Payments.
ASU 2016-15 amended the existing accounting standards for the statement of cash flows. The amendments provide guidance on eight classification issues related to the statement of cash flows. This update is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the impact of this guidance on its consolidated financial statements.
3. Acquisitions
The Company accounts for its acquisitions under the acquisition method, and accordingly the results of operations of the acquired entities were included in the Company’s consolidated financial statements from the acquisition dates. The purchase prices were allocated to the assets acquired based on estimated fair values at the acquisition date, with the excess of purchase price over the estimated fair value of the net assets acquired recorded as goodwill. Purchase accounting adjustments associated with the intangible asset valuations have been recorded as of December 31, 2016 and 2015. The fair value of acquired intangible assets primarily related to tradenames and customer relationships was estimated by applying an income approach. That measure is based on significant Level 3 inputs not observable in the market. Key assumptions developed based on the Company’s historical experience, future projections and comparable market data include future cash flows, long-term growth rates, royalty rates, attrition rates and discount rates.
2016 Acquisitions
Ken Builders Supply Inc. (Successor)
On May 31, 2016, the Company acquired certain assets and the operations of Ken Builders Supply Inc. ("Ken API") for $37.0 million. Ken API was a supplier of building materials to commercial and residential developers throughout Ohio, Kentucky, West Virginia, and central Indiana. The acquisition was accounted for as a business combination under the acquisition method of accounting. Accordingly, the assets acquired and liabilities assumed were recorded at fair value with the remaining purchase price recorded as goodwill. The Company estimated the fair value of the assets acquired and liabilities assumed as part of the business combination, including working capital, property and equipment, and customer relationships. The purchase price allocation for the acquisition is preliminary and subject to adjustment as additional information is obtained about facts and circumstances that existed as of the acquisition date.
Kent Gypsum Supply Inc. (Successor)
On May 31, 2016, the Company acquired 100% of the capital stock of Kent Gypsum Supply Inc. ("Kent") for $19.6 million. Kent is a supplier of building materials to commercial and residential developers throughout western Washington. The acquisition was accounted for as a business combination under the acquisition method of accounting. Accordingly, the assets acquired and liabilities assumed were recorded at fair value with the remaining purchase price recorded as goodwill. The Company estimated the fair value of the assets acquired and liabilities assumed as part of the business combination, including working capital, property and equipment, and customer relationships. The purchase price allocation for the acquisition is preliminary and subject to adjustment as additional information is obtained about facts and circumstances that existed as of the acquisition date.
Mid America Drywall Supply, Inc. (Successor)
On April 29, 2016, the Company acquired certain assets and the operations of Mid America Drywall Supply, Inc. ("Mid America") for $1.5 million in cash (including certain adjustments). Mid America was located in Wichita, Kansas and was
LSF9 Cypress Holdings, LLC
Notes to Consolidated Financial Statements
consolidated into the Company's local branch. Mid America was a distributor of interior products such as wallboard, and other related products. The purchase price allocation for the acquisition is preliminary and subject to adjustment as additional information is obtained about facts and circumstances that existed as of the acquisition date.
Winroc-SPI Corporation, Superior Plus Construction Products Corp., 1974303 Alberta Ltd., and The Winroc Corporation (Midwest)
(Successor)
On August 9, 2016, the Company acquired 100% of the capital stock of Winroc-SPI Corporation, Superior Plus Construction Products Corp., 1974303 Alberta Ltd., and The Winroc Corporation (Midwest) (collectively referred to as "Winroc-SPI") for cash consideration of $314.1 million, subject to customary working capital adjustments. Winroc-SPI was a supplier of building materials to commercial and residential developers throughout the United States and Canada. The acquisition was accounted for as a business combination under the acquisition method of accounting. Accordingly, the assets acquired and liabilities assumed are recorded at fair value with the remaining purchase price recorded as goodwill. The goodwill recognized was primarily attributable to synergies expected to arise after the acquisition, including expecting operating efficiencies and expansion opportunities. The purchase price allocation for the acquisition is preliminary and subject to adjustment as additional information is obtained about facts and circumstances that existed as of the acquisition date.
The Company funded the acquisition with the issuance of the senior secured notes due 2021 ("Notes") and a new revolving credit facility entered on August 9, 2016 (as further discussed in
Note 7
), a cash payment of $13.0 million and an equity contribution from Lone Star of $65.0 million.
United Drywall Supply, Inc. (Successor)
On November 30, 2016, the Company acquired the assets of United Drywall Supply, Inc. ("United Drywall Supply") for $30.0 million subject to normal working capital adjustments. United Drywall Supply was a supplier of building materials to commercial and residential developers in the Atlanta, Georgia metropolitan area. The acquisition was accounted for as a business combination under the acquisition method of accounting. Accordingly, the assets acquired and liabilities assumed are recorded at fair value with the remaining purchase price recorded as goodwill.
The following table summarizes the preliminary estimated fair values of the assets acquired and liabilities assumed as of the acquisition date
of the acquisitions summarized above (the "2016 acquisitions")
based on the purchase price during the year ended December 31, 2016 (in thousands):
LSF9 Cypress Holdings, LLC
Notes to Consolidated Financial Statements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ken API
|
|
Kent
|
|
Mid America
|
|
Winroc-SPI
|
|
United Drywall Supply
|
Assets acquired:
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
—
|
|
|
$
|
308
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Accounts receivable
|
|
9,303
|
|
|
2,820
|
|
|
478
|
|
|
112,145
|
|
|
6,536
|
|
Other receivables
|
|
1,160
|
|
|
—
|
|
|
—
|
|
|
13,361
|
|
|
663
|
|
Inventories
|
|
5,924
|
|
|
1,690
|
|
|
99
|
|
|
73,305
|
|
|
2,180
|
|
Prepaids and other current assets
|
|
312
|
|
|
80
|
|
|
—
|
|
|
3,888
|
|
|
6
|
|
Property and equipment
|
|
7,770
|
|
|
2,609
|
|
|
158
|
|
|
51,909
|
|
|
1,448
|
|
Goodwill
|
|
12,107
|
|
|
9,989
|
|
|
611
|
|
|
115,333
|
|
|
12,543
|
|
Intangible assets
|
|
6,800
|
|
|
7,500
|
|
|
341
|
|
|
71,589
|
|
|
9,800
|
|
Other assets
|
|
—
|
|
|
168
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Deferred tax asset
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total assets acquired
|
|
43,376
|
|
|
25,164
|
|
|
1,687
|
|
|
441,530
|
|
|
33,176
|
|
Liabilities assumed:
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
(3,890
|
)
|
|
(1,190
|
)
|
|
(184
|
)
|
|
(74,478
|
)
|
|
(2,921
|
)
|
Accrued expenses and other current liabilities
|
|
(1,524
|
)
|
|
(864
|
)
|
|
—
|
|
|
(14,515
|
)
|
|
(238
|
)
|
Deferred income taxes
|
|
—
|
|
|
(3,512
|
)
|
|
—
|
|
|
(26,033
|
)
|
|
—
|
|
Long-term liabilities
|
|
(982
|
)
|
|
—
|
|
|
—
|
|
|
(12,375
|
)
|
|
—
|
|
Total liabilities assumed
|
|
(6,396
|
)
|
|
(5,566
|
)
|
|
(184
|
)
|
|
(127,401
|
)
|
|
(3,159
|
)
|
Total net assets acquired
|
|
$
|
36,980
|
|
|
$
|
19,598
|
|
|
$
|
1,503
|
|
|
$
|
314,129
|
|
|
$
|
30,017
|
|
The excess of purchase price over the fair value amounts assigned to the assets acquired and liabilities assumed represents the goodwill amount resulting from the acquisitions. Goodwill attributable to the acquisitions has been recorded as a non-current asset and is not amortized, but is subject to review at least on an annual basis for impairment. Goodwill recognized was primarily attributable to expected operating efficiencies and expansion opportunities in the business acquired. Goodwill and intangible assets recognized from the acquisitions are expected to be deductible for tax purposes with the exception of Kent. The Ken API, Mid America and United Drywall Supply acquisitions were treated as an asset purchase for tax purposes and Kent and Winroc-SPI will be treated as a stock acquisition for tax purposes. Generally, the most significant intangible asset acquired is customer relationships.
The 2016 acquisitions contributed revenue of $340.5 million and income from operations of $0.8 million.
2015 Acquisitions
Oxnard Building Materials, Inc, Great Western Building Materials, Inc. and ProWall Building Products, Inc.
(Predecessor)
On March 13, 2015, Holdings acquired 100% of the shares of Oxnard Building Materials, Inc, Great Western Building Materials, Inc. and ProWall Building Products, Inc. (collectively, "GWBM") for $87.5 million in cash. With operations in California and Arizona, GWBM was a supplier of building materials to commercial and residential contractors in Arizona and California. GWBM fabricated building products through its ProWall operations. GWBM operated as a building products distributor offering wallboard, metal framing, and other products.
Foundation Building Materials, LLC (Successor)
On October 9, 2015, the Company acquired Holdings from CI Capital Partners for an aggregate consideration of $560.0 million (the "Lone Star Acquisition"). This transaction was financed by third-party loans and equity contributions by Lone Star. The Lone Star Acquisition was accounted for as a business combination under the acquisition method of accounting. Accordingly, the assets acquired and liabilities assumed were recorded at fair value with the remaining purchase price recorded as goodwill. The Company estimated the fair value of the assets acquired and liabilities assumed as part of the
LSF9 Cypress Holdings, LLC
Notes to Consolidated Financial Statements
business combination, including working capital, property and equipment, and intangible assets. Intangible assets acquired in the Lone Star Acquisition include $15.7 million attributable to the Foundations Building Materials tradename and $113.5 million for customer relationships. The tradename was determined to have an estimated useful life of 5 years. The customer relationships are being amortized over 5.8 years.
The fair value of the tradename was estimated using an income approach, specifically known as the relief from royalty method. The relief from royalty method calculates the approximate royalty saved that is attributable to the sale of products and services using the tradename. The forecasted revenue expected to be generated under the tradename were based on the projected revenue of the Successor. The fair value of the customer relationships was determined using the excess earnings method under the income approach.
The Company recognized at fair value both favorable lease assets and unfavorable lease liabilities, representing the difference between the market rates in effect for acquired leases compared to the various lease payments on individual operating leases. These assets and liabilities are amortized to rent expense on a straight-line basis over each respective operating lease term. The weighted average amortization period for the favorable lease assets is 8.6 years, and for the unfavorable lease liabilities is 5.0 years.
Commercial Building Materials, LLC (Successor)
On December 30, 2015, the Company acquired certain assets and the operations of Commercial Building Materials, LLC ("CBM") for $5.1 million in cash (including certain adjustments). Based in Ypsilanti, Michigan, CBM was a supplier of building materials to commercial and residential contractors throughout southeast Michigan, specifically the Detroit metropolitan area and Northeast Ohio, specializing in interior products such as wallboard, suspended ceiling systems, metal framing, and other products.
Gypsum Supply Co. (Successor)
On December 30, 2015, the Company acquired certain assets and the operations of Gypsum Supply Co. ("GSCIL") for $103.2 million in cash (including certain adjustments). Based in Rockford, Illinois, GSCIL was a supplier of building materials to commercial and residential contractors throughout the Midwest supplying wallboard, suspended ceiling systems, metal framing, and other products.
LSF9 Cypress Holdings, LLC
Notes to Consolidated Financial Statements
The following table summarizes the estimated fair values of the assets acquired and liabilities assumed as of the acquisition date of the acquisitions summarized above (the "2015 acquisitions") (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GWBM
|
|
CBM
|
|
GSCIL
|
|
FBM
|
Assets acquired:
|
|
|
|
|
|
|
|
Cash
|
$
|
10
|
|
|
$
|
—
|
|
|
$
|
15
|
|
|
$
|
10,693
|
|
Accounts receivables
|
29,843
|
|
|
1,415
|
|
|
18,593
|
|
|
149,230
|
|
Inventories
|
13,544
|
|
|
1,000
|
|
|
11,036
|
|
|
67,381
|
|
Prepaid expenses and other current assets
|
245
|
|
|
—
|
|
|
1,020
|
|
|
6,526
|
|
Property and equipment
|
5,200
|
|
|
998
|
|
|
20,948
|
|
|
44,235
|
|
Goodwill
|
32,854
|
|
|
931
|
|
|
31,870
|
|
|
256,020
|
|
Intangible assets
|
34,180
|
|
|
1,380
|
|
|
26,320
|
|
|
129,200
|
|
Leases under market rent
|
—
|
|
|
—
|
|
|
—
|
|
|
2,755
|
|
Other assets
|
—
|
|
|
—
|
|
|
23
|
|
|
2,231
|
|
Total assets acquired
|
115,876
|
|
|
5,724
|
|
|
109,825
|
|
|
668,271
|
|
|
|
|
|
|
|
|
|
Liabilities assumed:
|
|
|
|
|
|
|
|
Accounts payable
|
(8,889
|
)
|
|
(610
|
)
|
|
(5,438
|
)
|
|
(66,232
|
)
|
Accrued expenses and other current liabilities
|
(19,487
|
)
|
|
(14
|
)
|
|
(1,216
|
)
|
|
(42,039
|
)
|
Total liabilities assumed
|
(28,376
|
)
|
|
(624
|
)
|
|
(6,654
|
)
|
|
(108,271
|
)
|
Total net assets acquired
|
$
|
87,500
|
|
|
$
|
5,100
|
|
|
$
|
103,171
|
|
|
$
|
560,000
|
|
Supplemental Unaudited Pro Forma Information
In accordance with ASC 805, the following information for the years ended December 31, 2016 and 2015 presents the results of operations of the Company as if the 2016 acquisitions occurred as of January 1, 2015. The disclosure also reflects the 2015 acquisitions as if they occurred as of January 1, 2014. The supplemental pro forma information has been adjusted to include:
|
|
|
|
|
|
•
|
|
the pro forma impact of additional amortization and depreciation related to the fair value of acquired tangible and intangible assets,
|
|
|
|
|
|
|
•
|
|
the pro forma impact of acquisition costs which consisted of legal, advisory, and due diligence fees and expenses,
|
|
|
|
|
|
|
•
|
|
the pro forma impact to conform accounting for leases in the Winroc-SPI historical financial statements presented under International Financial Reporting Standards ("IFRS") to GAAP, inclusive of adjustments for rent expense and interest expense,
|
|
|
|
|
|
|
•
|
|
the pro forma impact of interest expense related to additional borrowings incurred as part of the acquisition and
|
|
|
|
|
|
|
•
|
|
the pro forma tax effect of the pro forma adjustments, calculated using a tax rate of 35%.
|
The pro forma results are presented for illustrative purposes only and are not necessarily indicative of, or intended to represent, the results that would have been achieved had the various acquisitions been completed on the dates indicated. For example, the pro forma results do not reflect any operating efficiencies and associated cost savings that the Company might have achieved with respect to the acquisitions (in thousands, except per share data).
LSF9 Cypress Holdings, LLC
Notes to Consolidated Financial Statements
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2016
|
|
2015
|
|
(Unaudited)
|
|
(Unaudited)
|
Net sales
|
$
|
1,925,059
|
|
|
$
|
1,831,334
|
|
Net loss
|
$
|
(12,843
|
)
|
|
$
|
(34,594
|
)
|
Net loss per share
(1)
:
|
|
|
|
Basic
|
$
|
(0.43
|
)
|
|
$
|
(1.15
|
)
|
Diluted
|
$
|
(0.43
|
)
|
|
$
|
(1.15
|
)
|
(1)
The pro forma loss per share data for the year ended December 31, 2016 and 2015 is based on our historical combined statement of operations after giving effect to the following as if they occurred at the beginning of the period: (1) a reorganization consolidating all entities under a new parent entity (Foundation Building Materials, Inc.); and (2) a 29,974.239 to 1 stock split with respect to the common stock of Foundation Building Materials, Inc. that occurred subsequent to December 31, 2016.
4. Goodwill and Intangible Assets
Identifiable intangible assets that are separable and have determinable useful lives are valued separately and amortized over their benefit period. The following is the gross carrying value and accumulated amortization of the Company’s identifiable intangible assets as of December 31, 2016 (Successor) and December 31, 2015 (Successor) (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
December 31, 2016
|
|
December 31, 2015
|
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
|
Net Carrying Amount
|
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
|
Net Carrying Amount
|
Trade names
|
$
|
15,980
|
|
|
$
|
(4,097
|
)
|
|
$
|
11,883
|
|
|
$
|
15,980
|
|
|
$
|
(724
|
)
|
|
$
|
15,256
|
|
Customer relationships
|
235,690
|
|
|
(35,550
|
)
|
|
200,140
|
|
|
140,920
|
|
|
(4,378
|
)
|
|
136,542
|
|
Other intangible assets
|
3,852
|
|
|
(494
|
)
|
|
3,358
|
|
|
2,755
|
|
|
(95
|
)
|
|
2,660
|
|
|
$
|
255,522
|
|
|
$
|
(40,141
|
)
|
|
$
|
215,381
|
|
|
$
|
159,655
|
|
|
$
|
(5,197
|
)
|
|
$
|
154,458
|
|
The weighted average amortization period of these intangible assets in the aggregate is 5.0 years. Total amortization expense of intangible assets above was $34.9 million for the year ended December 31, 2016 (Successor), $5.2 million for the period from October 9, 2015 to December 31, 2015 (Successor), $7.8 million for the period from January 1, 2015 to October 8, 2015 (Predecessor), and $4.1 million for the year ended December 31, 2014 (Predecessor), respectively.
Future amortization for the next five fiscal years and thereafter is as follows (in thousands):
|
|
|
|
|
Years Ending December 31,
|
|
2017
|
$
|
44,312
|
|
2018
|
44,408
|
|
2019
|
44,412
|
|
2020
|
43,408
|
|
2021
|
25,912
|
|
Thereafter
|
12,929
|
|
|
$
|
215,381
|
|
LSF9 Cypress Holdings, LLC
Notes to Consolidated Financial Statements
Goodwill at December 31, 2016 (Successor) and December 31, 2015 (Successor), consisted of the following (in thousands):
|
|
|
|
|
|
Carrying Value
|
Balance at October 9, 2015 (Successor)
|
$
|
—
|
|
Goodwill acquired
|
289,086
|
|
Balance at December 31, 2015 (Successor)
|
$
|
289,086
|
|
Goodwill acquired
|
150,583
|
|
Purchase price allocation from prior periods
|
(1,210
|
)
|
Impact of foreign exchange rates
|
(524
|
)
|
Balance at December 31, 2016 (Successor)
|
$
|
437,935
|
|
5. Income Taxes
The following table shows the benefit for income taxes (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
Predecessor
|
|
Year Ended December 31, 2016
|
|
October 9, 2015 to December 31, 2015
|
|
January 1, 2015 to October 8, 2015
|
Current:
|
|
|
|
|
|
Federal
|
$
|
(121
|
)
|
|
$
|
—
|
|
|
$
|
4
|
|
State
|
80
|
|
|
106
|
|
|
539
|
|
Foreign
|
2,621
|
|
|
—
|
|
|
—
|
|
|
2,580
|
|
|
106
|
|
|
543
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
Federal
|
(12,376
|
)
|
|
(3,824
|
)
|
|
(1,585
|
)
|
State
|
(2,608
|
)
|
|
(1,015
|
)
|
|
(252
|
)
|
Foreign
|
(2,329
|
)
|
|
|
|
|
|
(17,313
|
)
|
|
(4,839
|
)
|
|
(1,837
|
)
|
Income tax benefit
|
$
|
(14,733
|
)
|
|
$
|
(4,733
|
)
|
|
$
|
(1,294
|
)
|
LSF9 Cypress Holdings, LLC
Notes to Consolidated Financial Statements
The differences between income taxes expected at the U.S. federal statutory rate of 35 percent and the reported income tax benefit are summarized as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
Predecessor
|
|
Year Ended December 31, 2016
|
|
October 9, 2015 to December 31, 2015
|
|
January 1, 2015 to October 8, 2015
|
Tax computed at federal statutory rate
|
$
|
(15,086
|
)
|
|
$
|
(4,430
|
)
|
|
$
|
(10,762
|
)
|
State income tax, net of federal benefit
|
(1,410
|
)
|
|
(669
|
)
|
|
(164
|
)
|
Permanent items
|
623
|
|
|
96
|
|
|
75
|
|
Transaction costs
|
1,466
|
|
|
116
|
|
|
—
|
|
Payable return-to-provision
|
—
|
|
|
69
|
|
|
543
|
|
Non-taxable partnership income
|
—
|
|
|
—
|
|
|
8,989
|
|
Foreign rate differential
|
(77
|
)
|
|
—
|
|
|
—
|
|
Rate change
|
(126
|
)
|
|
—
|
|
|
28
|
|
Other
|
(123
|
)
|
|
85
|
|
|
(3
|
)
|
Income tax benefit
|
$
|
(14,733
|
)
|
|
$
|
(4,733
|
)
|
|
$
|
(1,294
|
)
|
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The following table shows significant components of the Company’s deferred tax assets and liabilities (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
Predecessor
|
|
Year Ended December 31, 2016
|
|
October 9, 2015 to December 31, 2015
|
|
January 1, 2015 to October 8, 2015
|
Deferred tax liabilities:
|
|
|
|
|
|
Intangible assets and goodwill
|
$
|
(48,622
|
)
|
|
$
|
(14,457
|
)
|
|
$
|
(12,364
|
)
|
Property, plant and equipment
|
(19,108
|
)
|
|
(7,914
|
)
|
|
(1,614
|
)
|
Investment in subsidiary partnership
|
—
|
|
|
—
|
|
|
(1,199
|
)
|
Deferred tax assets:
|
|
|
|
|
|
Inventories and related reserves
|
5,372
|
|
|
2,255
|
|
|
755
|
|
Accrued compensation
|
2,532
|
|
|
651
|
|
|
—
|
|
Allowance for doubtful accounts
|
3,054
|
|
|
1,901
|
|
|
215
|
|
Net operating loss carryforwards
|
19,963
|
|
|
2,129
|
|
|
378
|
|
Other, net
|
9,942
|
|
|
125
|
|
|
204
|
|
Total deferred tax liabilities, net:
|
$
|
(26,867
|
)
|
|
$
|
(15,310
|
)
|
|
$
|
(13,625
|
)
|
The ultimate realization of deferred income tax assets is dependent on the generation of future taxable income during the periods in which the related temporary differences become deductible. No valuation allowance was provided on the deferred tax assets.
At December 31, 2016, the Company had net operating loss carryforwards for federal and state tax purposes of $49.4 million and $57.3 million, respectively. These carryforwards begin to expire in 2019. At December 31, 2016, the Company had federal tax credit carryforwards of $0.2 million, these carryforwards do not expire.
The Company recognizes a tax benefit from an uncertain tax position when it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, based on the
LSF9 Cypress Holdings, LLC
Notes to Consolidated Financial Statements
technical merits. Income tax positions must meet a more-likely-than-not recognition threshold to be recognized. The Company had no material uncertain tax positions for which for which a benefit was recognized during the year ended December 31, 2016 (Successor), the period from October 9, 2015 to December 31, 2015 (Successor) and the period from January 1, 2015 to October 8, 2015 (Predecessor). The Company recognizes interest and penalties related to unrecognized tax benefits within the income tax benefit line in the accompanying consolidated statements of operations. There was no accrued interest and penalties associated with uncertain tax positions at December 31, 2016 and 2015.
The Company does not anticipate a significant change in its uncertain tax benefits over the next 12 months.
The Company is subject to taxation in the U.S. and various state jurisdictions and Canada. With a few exceptions, as of December 31, 2016, the Company is no longer subject to federal or state examinations by tax authorities for years before 2012 and 2011, respectively.
6. Property and Equipment
Property and equipment as of December 31, 2016 (Successor) and December 31, 2015 (Successor), consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
Successor
|
|
December 31, 2016
|
|
December 31, 2015
|
Vehicles and equipment
|
$
|
84,573
|
|
|
$
|
36,672
|
|
Buildings and leasehold improvements
|
20,569
|
|
|
13,918
|
|
Machinery and equipment
|
19,118
|
|
|
12,533
|
|
Software and computers
|
21,821
|
|
|
—
|
|
Land
|
14,448
|
|
|
2,590
|
|
Construction in progress
|
194
|
|
|
1,774
|
|
Furniture and fixtures
|
1,536
|
|
|
636
|
|
|
162,259
|
|
|
68,123
|
|
Less: accumulated depreciation
|
(17,872
|
)
|
|
(1,982
|
)
|
|
$
|
144,387
|
|
|
$
|
66,141
|
|
Depreciation expense for property and equipment was $16.5 million for the year ended December 31, 2016 (Successor), $2.0 million for the period from October 9, 2015 to December 31, 2015 (Successor), $7.8 million for the period from January 1, 2015 to October 8, 2015 (Predecessor), and $7.6 million for the year ended December 31, 2014 (Predecessor).
7. Asset-Based Credit Facility and Senior Notes Payable
Notes payable consisted of the following at December 31, 2016 (Successor) and December 31, 2015 (Successor) (
in thousands
):
|
|
|
|
|
|
|
|
|
|
Successor
|
|
December 31, 2016
|
|
December 31, 2015
|
Senior secured notes
|
$
|
575,000
|
|
|
$
|
—
|
|
Revolver asset-based credit facility
|
208,469
|
|
|
—
|
|
Senior lien term loan
|
—
|
|
|
245,000
|
|
Junior lien term loan
|
—
|
|
|
80,000
|
|
Unamortized debt issuance costs and debt discount
|
(53,695
|
)
|
|
(23,193
|
)
|
Less: current portion of notes payable, net
|
—
|
|
|
(1,492
|
)
|
|
$
|
729,774
|
|
|
$
|
300,315
|
|
LSF9 Cypress Holdings, LLC
Notes to Consolidated Financial Statements
December 31, 2016
Senior Secured Notes Due 2021
On August 9, 2016, the Company, together with FBM Finance, its wholly owned subsidiary which was created for the purpose of issuing the Notes (together, the "Issuers"), issued $575 million in aggregate principal amount of 8.25% senior secured notes due 2021 at an issue price of 100% of the principal amount of the Notes in a private placement.
The Notes are senior secured obligations that have priority over certain collateral of the Issuers and the guarantors of the Notes and are effectively subordinated to the obligations under the Revolver (defined below) in respect of certain other collateral of the Issuers and the guarantors of the Notes. The Notes are fully and unconditionally guaranteed on a senior secured basis, jointly and severally, by Parent and each of Parent’s domestic wholly owned restricted subsidiaries (other than certain excluded subsidiaries) (the "guarantors").
The Notes will mature on August 15, 2021 and bear interest at an annual rate of 8.25%. Interest on the Notes is payable semi-annually in arrears in February and August of each year, commencing February 2017. The Notes are governed by an indenture, dated August 9, 2016, among the Issuers, the guarantors and Wilmington Trust, National Association, as trustee (the "Indenture").
The Issuers may, at their option, redeem all or a portion of the Notes at any time on or after August 15, 2018 at the applicable redemption prices specified in the Indenture, plus any accrued and unpaid interest to, but excluding, the applicable redemption date. The Issuers are also entitled to redeem up to 40% of the aggregate principal amount of the Notes before August 15, 2018, at a redemption price equal to 108.25% of the principal amount of the Notes, plus accrued and unpaid interest, if any, to, but excluding, the applicable redemption date. In addition, before August 15, 2018, the Issuers may redeem all or a portion of the Notes, at a redemption price equal to 100% of the principal amount thereof, plus a "make-whole" premium and accrued and unpaid interest, if any, to, but excluding, the applicable redemption date.
Upon certain kinds of changes of control, holders of the Notes have the right to require the Issuers to repurchase all or any portion of such holder’s Notes at 101% of the principal amount of the notes being repurchased, plus any accrued and unpaid interest to, but excluding, the date of repurchase.
ABL Credit Agreement
On August 9, 2016, the Company entered into a new revolving credit facility (the "Revolver") with Goldman Sachs Bank USA as administrative agent, which matures on February 9, 2021. The Revolver bears interest, at the Company’s option, at either a Eurodollar rate or an alternate base rate plus an applicable margin. Based on the historical excess availability under the Revolver, the margin can range from 1.25% to 1.75% per annum in the case of Eurodollar rate loans and 0.25% to 0.75% per annum in the case of alternate base rate loans. The available borrowing capacity, or borrowing base, is derived from a percentage of the Company’s eligible receivables and inventory in both the United States and Canada, as defined in the Revolver, subject to certain reserves, with a $75 million sub-limit on the Canadian borrowing base. As of the closing of the Revolver, the available borrowing capacity was $250 million. A variable commitment fee, ranging from 0.25% to 0.375% and currently 0.25% per annum, is charged on the unused amount of the Revolver based on quarterly average loan utilization. Letters of credit under the Revolver are assessed at a rate equal to the applicable Eurodollar margin currently 1.50% as well as a fronting fee at a rate of 0.125% per annum.
These fees are payable quarterly in arrears at the end of March, June, September, and December. In addition, an administrative agent fee of $75,000 for the Revolver is due and payable each year in quarterly installments on the last day of each quarter. The Revolver is a senior secured obligation of the Company, with priority over certain collateral of the Company and its subsidiaries. There are no prepayment premiums associated with the Revolver.
In connection with the entry into the Revolver and issuance of the Notes, the Company paid off and terminated the existing
Senior Lien Term Loan Credit Agreement ("SLCA"), Junior Lien Term Credit Agreement ("JLCA") and 2015 ABL Credit Agreement ("2015 ABL")
that were entered into on October 9, 2015 (collectively, the "2015 Credit Facilities"). The Company accounted for the refinancing of the 2015 Credit Facilities as a debt modification with respect to amounts that remained in the syndicate and a debt extinguishment with respect to amounts that exited the syndicate. This resulted in a loss on extinguishment of debt of $7.0 million which has been reflected as a component of interest expense within the statement of operations.
LSF9 Cypress Holdings, LLC
Notes to Consolidated Financial Statements
On September 23, 2016, the Company entered into an Incremental Facility Amendment which extended borrowing commitments under the Revolver by an additional $50 million, resulting in total borrowing capacity of $300 million. As of December 31, 2016, the Company has $208.5 million outstanding under the Revolver.
Debt Issuance Costs
During the year ended December 31, 2016 (Successor), the Company incurred $34.4 million of debt issuance costs. Unamortized debt issuance costs as of December 31, 2016 were $53.7 million, of which $49.5 million was included in long-term portion of notes payable, net in the accompanying consolidated balance sheet and $4.2 million for the Revolver was included in other long-term assets in the accompanying consolidated balance sheet.
As of December 31, 2016, the Company was in compliance with all debt covenants.
December 31, 2015
2015 Credit Facilities
On October 9, 2015, the Company entered into a secured credit facility with a syndicate of lenders that consisted of the 2015 Credit Facilities with commitments of $245 million for the SLCA and $80 million as part of the JLCA ("Term Loans") and under the 2015 ABL, a $5 million letter of credit and a revolving credit facility of $50 million. On December 30, 2015, the Company entered into the Incremental Facility Amendment to the 2015 ABL ("2015 ABL Amendment") extending the 2015 ABL to $100 million. The 2015 Credit Facilities were used for working capital and general corporate purposes as well as to finance acquisition related business activities.
Senior Lien Term Loan Credit Agreement
As of December 31, 2015, the Company had $245.0 million outstanding under the SLCA, which would have matured on October 9, 2022. The SLCA bore interest, at the Company’s option, at either a Eurodollar rate or an alternate base rate plus an applicable margin. The margin was 6.25% per annum in the case of Eurodollar rate loans and 5.25% per annum in the case of alternate base rate loans. Beginning March 31, 2016, the SLCA had mandatory principal repayments of $0.6 million which were payable in March, June, September, and December of each year. The weighted average interest rate of the term loan was 7.25% during the year ended December 31, 2015. An administrative agent fee of $0.2 million for the SLCA was due and payable each year in quarterly installments on the last day of each quarter. With the exception of a 1% premium for prepayment in the first twelve months from closing, there were no prepayment penalties associated with the SLCA.
Junior Lien Term Loan Credit Agreement
As of December 31, 2015, the Company had $80.0 million outstanding under the JLCA, which would have matured on October 9, 2023. The JLCA bore interest, at the Company’s option, at either a Eurodollar rate or an alternate base rate plus an applicable margin. The margin was 10.50% per annum in the case of Eurodollar rate loans and 9.50% per annum in the case of alternate base rate loans. The weighted average interest rate of the term loan was 11.5% during the year ended December 31, 2015. An administrative agent fee of $0.1 million for the JLCA was due and payable each year in quarterly installments on the last day of each quarter. With the exception of a 2% premium for prepayment in the first year from closing and a 1% premium for prepayment in the second year, there were no additional prepayment penalties associated with the JLCA. The JLCA was payable in full on October 9, 2023.
ABL Credit Agreement
As of December 31, 2015, the Company had $70.0 million outstanding under the 2015 ABL, which would have matured on October 9, 2020. The 2015 ABL bore interest, at the Company’s option, at either a Eurodollar rate or an alternate base rate plus an applicable margin. Based on the historical excess availability under the 2015 ABL, the margin ranged from 1.25% to 1.75% per annum in the case of Eurodollar rate loans and 0.25% to 0.75% per annum in the case of alternate base rate loans. The available borrowing capacity, or borrowing base, was derived from a percentage of the Company’s eligible receivables and inventory, as defined by the agreement, subject to certain reserves. As of December 31, 2015, the available borrowing capacity was $100.0 million. The weighted average interest rate of the 2015 ABL was 1.45% during the year ended December 31, 2015. A variable commitment fee, ranging from 0.25% to 0.375% and currently .25% per annum, is charged on the unused amount of the revolver based on quarterly average loan utilization. Letters of credit under the 2015 ABL were assessed at a rate equal to the applicable Eurodollar margin, currently 1.25%, as well as a fronting fee at a rate of 0.125% per annum. These fees were payable quarterly in arrears at the end of March, June, September, and December. In
LSF9 Cypress Holdings, LLC
Notes to Consolidated Financial Statements
addition, an administrative agent fee of $0.1 million for the 2015 ABL was due and payable each year in quarterly installments on the last day of each quarter. There were no prepayment premiums associated with the 2015 ABL.
All obligations under the 2015 Credit Facilities were guaranteed jointly and severally by the Company and its subsidiaries. All obligations and the guarantees of those obligations were secured by substantially all of the assets of the Company and the guarantors.
The 2015 Credit Facilities contained restrictive covenants which, among other things, limited the Company’s ability to incur additional indebtedness, incur liens, engage in mergers or other fundamental changes, sell certain assets, pay dividends, make acquisitions or investments, prepay certain indebtedness, change the nature of the Company’s business, and engage in certain transactions with affiliates, respectively. In addition, the 2015 Credit Facilities also contained a financial covenant requiring the satisfaction of a minimum fixed charge ratio of 1.00 to 1.00 in the event that the Company did not meet a minimum measure of availability.
Debt Issuance Costs
During the period from October 9, 2015 to December 31, 2015 (Successor), the Company modified its debt agreements for additional borrowing, resulting in capitalized debt issuance costs of $8.2 million. The costs incurred in connection with the origination of the Company’s term loans totaled $6.9 million. Unamortized debt issuance costs as of December 31, 2015 were $6.7 million, of which $1.0 million was included in current portion of notes payable, net and $5.7 million was included in long-term portion of notes payable, net in the accompanying consolidated balance sheet. The fees incurred in connection with the origination of the Company’s asset-based credit facility totaled $1.3 million. Unamortized debt issuance costs as of December 31, 2015 were $1.2 million, of which $0.3 million was included in prepaid and other current assets and $0.9 million, was included in other long-term assets in the accompanying consolidated balance sheet.
Aggregate Contractual Maturities
The Company's Notes and Revolver both mature in 2021.
8. Derivatives and Hedging Activities
The Company uses derivatives to manage selected foreign exchange exposures for its investments in foreign subsidiaries. In general, the types of risks hedged are those relating to the variability of future earnings and cash flows caused by movements in foreign currency exchange rates and interest rates. The Company documents its risk management strategy and hedge effectiveness at the inception of and during the term of each hedge.
Net Investment Hedge
As of December 31, 2016 (Successor), the amount of notional foreign exchange contracts outstanding was approximately $88.0 million. There is no significant credit risk associated with the potential failure of any counterparty to perform under the terms of any derivative financial instrument.
The net investment hedge is measured at fair value within the consolidated balance sheet either as an asset or a liability. As of December 31, 2016 (Successor), the fair value of the derivative instrument was $2.4 million and was recorded in non-current other assets.
For the year ended December 31, 2016 (Successor), the Company recognized a gain of $1.5 million, net of tax, recorded in comprehensive loss. The Company also recorded the ineffective portion of the gain relating to the net investment hedge for the year ended December 31, 2016 (Successor) totaling $98,000 in other income. The Company did not have derivative instruments during the periods from January 1, 2015 to October 8, 2015 (Predecessor) and October 9, 2015 to December 31, 2015 (Successor).
Embedded Derivative
The Company has the option to prepay the Notes at any time prior to August 15, 2018 at a price equal to 100% of the principal amount, plus the applicable premium and any accrued and unpaid interest and redemption on and after August 15 of the subsequent years are subject to the applicable premium, in each case as set forth in the Indenture.
Prior to August 15, 2018, in the event of equity offerings, the Company has the option to prepay 40% of the Notes using the proceeds from such offering within 180 days from closing of the offering
.
However, 50% of the principal needs to remain outstanding. The redemption price is determined at 108.25% plus accrued and unpaid interest.
LSF9 Cypress Holdings, LLC
Notes to Consolidated Financial Statements
The optional prepayment subsequent to an equity offering constitutes an embedded derivative and is bifurcated from the debt host and accounted for separately. The embedded derivative is recorded at fair value at inception and on an ongoing basis, with any changes in fair value from inception recorded in earnings. As of December 31, 2016, the fair value of the embedded derivative was $13.2 million and was included in the balance sheet as non-current other liabilities. The change in fair value in the amount of $7.1 million for the year ended December 31, 2016 was included in statements of operations as other income (expense).
9. Accumulated Other Comprehensive Loss
Accumulated other comprehensive loss consists of cumulative unrealized foreign currency translation adjustments and unrealized gains on certain derivative instruments.
The components of accumulated other comprehensive loss for the year ended December 31, 2016 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative unrealized foreign currency translation losses
|
|
Unrealized gain on derivative, net of tax
|
|
Total
|
Balance at December 31, 2015
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Other comprehensive (loss) income
|
(1,464
|
)
|
|
1,461
|
|
|
(3
|
)
|
Balance at December 31, 2016
|
$
|
(1,464
|
)
|
|
$
|
1,461
|
|
|
$
|
(3
|
)
|
10. Related Parties
The Company previously paid management fees and certain expenses to an affiliate of its former parent CI (FBM) Holdings, LLC ("CIFBM"). Total management fees and expenses were $1.0 million for the period from January 1, 2015 to October 8, 2015 (Predecessor) and $0.5 million for the year end December 31, 2014 (Predecessor). The Company reports these management fees and expenses in selling, general and administrative expenses on the consolidated statements of operations. The Company also paid acquisition costs of $1.9 million in the period January 1, 2015 through October 8, 2015 (Predecessor) and $1.9 million in the year ended December 31, 2014 (Predecessor) to an affiliate of CIFBM which were properly expensed and reported as acquisition related expenses in the consolidated statements of operations.
During the year ended December 31, 2016 (Successor), the Company paid management fees and certain expenses in the amount $3.2 million to an affiliate of Lone Star. Total management fees were $0.3 million for the period from October 9, 2015 to December 31, 2015 (Successor). The Company also paid acquisition costs of $0.2 million in the year ended December 2015 to an affiliate of Lone Star which were properly expensed and reported as acquisition related expenses in the consolidated statements of operations.
Until the Lone Star Acquisition, the Company had outstanding debt with related parties totaling $0.9 million at October 9, 2015.
The Company sells products to another affiliate company that is owned by one of its executive officers. Total sales for the year ended December 31, 2016 were $0.5 million. Total sales for the period from October 9, 2015 to December 31, 2015 (Successor) and January 1, 2015 to October 8, 2015 (Predecessor) were $0.2 million and $0.6 million, respectively. There were $0.0 million and $0.3 million in accounts receivable balances from such related party as of December 31, 2016 and 2015, respectively.
11. Lease Commitments
The Company leases certain facilities and equipment under various operating lease agreements with expiration dates through 2026 and typically contain renewal options of 5 to 10 years. These agreements generally require the Company to pay rental amounts and operating expenses, and contain tenant improvement allowances, rent holidays, rent escalation clauses and/or contingent rent provisions.
LSF9 Cypress Holdings, LLC
Notes to Consolidated Financial Statements
Leasehold improvement assets, which generally represent non-structural improvements for which the Company receives reimbursement from the landlord, are depreciated over the lesser of 10 years or the initial life of the lease, prior to any lease extensions. For tenant allowances, the Company records a corresponding deferred rent liability in other liabilities on the balance sheet and amortizes the deferred rent over the initial term of the lease as a reduction to rent expense.
The Company’s leases may contain rent holidays and/or escalating rent payments, however the Company accounts for the rent expense on a straight-line basis over the lease term. The straight-line rent expense is calculated at the inception of the lease, which entails recording a monthly liability for the difference between rent paid to the landlord and straight-line rent expense as calculated at the beginning of the lease.
Rent expense was $23.6
million for the year ended December 31, 2016 (Successor), $3.2 million for the period from October 9, 2015 to December 31, 2015 (Successor), $9.6 million for the period from January 1, 2015 to October 8, 2015 (Predecessor) and $7.4 million for the year ended December 31, 2014 (Predecessor). Minimum annual lease commitments under non-cancelable leases are summarized as follows
(
in thousands
)
:
|
|
|
|
|
Years Ending December 31,
|
Total
|
2017
|
$
|
28,245
|
|
2018
|
24,247
|
|
2019
|
16,787
|
|
2020
|
11,426
|
|
2021
|
8,687
|
|
Thereafter
|
16,645
|
|
|
$
|
106,037
|
|
12. Long-Term Incentive Plan
Following the Lone Star Acquisition, Lone Star implemented the LSF9 Cypress Parent LLC
Long-Term Incentive Plan (the "LTIP"). Under the LTIP, participants were granted pool units entitling them, subject to the terms of the LTIP, to a potential cash payout upon a monetization event. The LTIP was effective October 9, 2015. The LTIP was assigned from Parent to the Company in connection with the initial public offering of the common stock of Foundation Building Materials, Inc. ("IPO").
The LTIP was established with the purpose of attracting certain key employees and other service providers of the Company and its subsidiaries and to provide motivation to put forth maximum efforts toward the continued growth, profitability and success of the Company by providing incentives.
The board of the Company administers the LTIP and awards pool units. Pool units vest 10% each year for the first 3 years. Pool units, whether vested or unvested, that are outstanding on the 5th anniversary of the date the award was granted will be forfeited on that date or, upon the date the participant ceases employment. Pool units will remain outstanding for a period of six months from the date of such termination if the termination is without cause, a resignation for good reason, death or termination due to disability. Total pool units available for grant under the LTIP is 1,000,000. At December 31, 2016 and 2015, there were 925,000 and 835,000 pool units outstanding, respectively.
The Company maintains an incentive pool account and upon a monetization event and obtaining a cumulative internal rate of return of at least 15%, the Company will credit to the incentive pool account amounts as defined in the LTIP and determined by the cumulative internal rate of return achieved at the time of the monetization event. A monetization event, as defined by the LTIP, is one of the following transactions: a) the Company is sold, transferred or otherwise disposed of to an unrelated third party for cash; b) a firm commitment underwritten public offering of the equity interests of the Company; or c) the payment by the Company of any cash distributions to investors. Following a monetization event, the value of any incentive amount to be paid to a participant will be determined by the percentage of a participant’s pool units awarded to the total pool units awarded under the LTIP times the amount in the incentive pool account. Participants will be paid within 60 days following the monetization event.
At December 31, 2016, there had not been a monetization event and therefore no amounts were accrued in the accompanying consolidated balance sheets. On February 15, 2017, the Company completed the IPO, however, it was not a monetization event and no payout has been triggered under the LTIP.
LSF9 Cypress Holdings, LLC
Notes to Consolidated Financial Statements
13. Retirement Plan
The Company has multiple retirement savings plans for all eligible full-time employees under Section 401(k) of the Internal Revenue Code. The plans allow participants to contribute a portion of their earnings to the plans. The plans allow the Company, at its discretion, to match a certain percentage of the employees’ contributions, limited to a certain percentage of eligible compensation. There were contributions to the plans of $3.5 million for the year ended December 31, 2016 (Successor), $0.4 million for the period from October 9, 2015 to December 31, 2015 (Successor), $0.8 million for the period from January 1, 2015 to October 8, 2015 (Predecessor) and $0.6 million for the year ended December 31, 2014 (Predecessor).
14. Contingencies
The Company is involved in certain legal actions arising in the ordinary course of business. Management believes that such litigation and claims will be resolved without material effect on the Company’s consolidated financial position.
The Company regularly assesses such matters to determine the degree of probability that the Company will incur a material loss as a result of such matters as well as the range of possible loss. An estimated loss contingency is accrued in the Company’s financial statements if it is probable the Company will incur a loss and the amount of the loss can be reasonably estimated. The Company reviews all claims, proceedings and investigations at least quarterly and establishes or adjusts any accruals for such matters to reflect the impact of negotiations, settlements, advice of legal counsel and other information and events pertaining to a particular matter. All legal costs associated with such matters are expensed as incurred.
Historically, the claims, proceedings and investigations brought against the Company, individually and in the aggregate, have not had a material adverse effect on the consolidated results of operations, cash flows or financial position of the Company. As of December 31, 2016, there were no proceedings or litigation involving the Company that management believes would have a material adverse impact on its business, financial position, results of operations, or cash flows.
15. Fair Value Measurement
The Company’s financial instruments consist primarily of cash and cash equivalents, trade and other receivables, derivative instruments, accounts payable, long-term debt and accrued liabilities. The carrying value of the Company’s trade receivables, trade payables, the asset based revolver and accrued liabilities approximates fair value due to their short-term maturity. The Company may adjust the carrying amount of certain nonfinancial assets to fair value on a non-recurring basis when they are impaired.
The estimated carrying amount and fair value of the Company’s financial instruments and other assets and liabilities measured and recorded at fair value on a recurring basis is as follows for the dates indicated (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at December 31, 2016
|
|
Quoted Prices in Active Markets for Identical Assets (Level 1)
|
|
Significant Other Observable Inputs (Level 2)
|
|
Significant Unobservable Inputs (Level 3)
|
|
Total Fair Value
|
Recurring:
|
|
|
|
|
|
|
|
Non-current asset (liabilities)
|
|
|
|
|
|
|
|
Derivative asset (Note 8)
|
$
|
—
|
|
|
$
|
2,475
|
|
|
$
|
—
|
|
|
$
|
2,475
|
|
Derivative (liability) (Note 8)
|
$
|
—
|
|
|
$
|
(13,250
|
)
|
|
$
|
—
|
|
|
$
|
(13,250
|
)
|
The fair values of derivative assets and liabilities are determined using quantitative models that utilize multiple market inputs including interest rates and exchange rates to generate continuous yield or pricing curves and volatility factors to value the position. The majority of market inputs are actively quoted and can be validated through external sources, including brokers, market transactions and third-party pricing services. The fair values of derivative assets and liabilities include
LSF9 Cypress Holdings, LLC
Notes to Consolidated Financial Statements
adjustments for market liquidity, counterparty credit quality and other instrument-specific factors, where appropriate. In addition, the Company incorporates within its fair value measurements a valuation adjustment to reflect the credit risk associated with the net position. Positions are netted by counterparties, and fair value for net long exposures is adjusted for counterparty credit risk while the fair value for net short exposures is adjusted for the Company’s own credit risk.
The estimated carrying amount and fair value of the Company’s financial instruments and liabilities for which fair value is only disclosed is as follows ($ in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at December 31, 2016
|
|
Carrying Amount
|
|
Quoted Prices in Active Markets for Identical Assets (Level1)
|
|
Significant Other
Observable Inputs
(Level 2)
|
|
Significant Other
Unobservable Inputs
(Level 3)
|
|
Total Fair Value
|
Senior secured notes
|
$
|
525,487
|
|
|
$
|
—
|
|
|
$
|
609,500
|
|
|
$
|
—
|
|
|
$
|
609,500
|
|
The fair value of debt is the estimated amount the Company would have to repay its debt, including any premium or discount attributable to the difference between the stated interest rate and market rate of interest at the balance sheet date. Fair values are supported by observable market transactions when available.
16. Segments
Segment information is presented in accordance with ASC 280, Segment Reporting, which establishes standards for reporting information about operating segments. It also establishes standards for related disclosures about customers, products and geographic areas. Operating segments are defined as components of an enterprise that engage in business activities that earn revenues, incur expenses and prepare separate financial information that is evaluated regularly by the Company’s CODM in order to allocate resources and assess performance. Resources are allocated and performance is assessed by the Company's CEO whom has been determined to be the Company's CODM.
Based on the provisions of ASC 280, the Company has defined its operating segments by considering management structure and product offerings. Operating segments have been aggregated into reportable segments based upon their similar economic characteristics, nature of products, type of customers, and distribution methods. This evaluation resulted in the following reportable segments:
|
|
•
|
Specialty Building Products—Specialty building products ("SBP") distributes wallboard and accessories, metal framing, suspended ceiling systems and other products. Other products include stucco and EIFS, as well as complementary offerings, such as tools, safety accessories and fasteners. The primary end markets served are new non-residential, new residential and non-residential repair and remodel construction markets.
|
|
|
•
|
Mechanical Insulation—Mechanical insulation ("MI") distributes and fabricates commercial and industrial insulation for pipes and mechanical systems and the primary end markets served are new non-residential construction, non-residential repair and remodel construction and industrial markets.
|
In addition to the two reportable segments, the Company’s consolidated results include corporate activities, which include depreciation and amortization.
For purposes of evaluation under these segment reporting principles, the CODM assesses the Company’s ongoing performance based on the periodic review of net sales and gross margin. The Company has not disclosed asset information by segment as its CODM does not use such information for purposes of allocating resources and assessing performance.
The following tables present Net sales, Gross margin, and certain other measures for each reportable segment:
LSF9 Cypress Holdings, LLC
Notes to Consolidated Financial Statements
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2016
|
|
Net Sales
|
Gross Margin
|
SBP
|
$
|
1,293,496
|
|
$
|
369,416
|
|
MI
|
99,013
|
|
27,389
|
|
Consolidated
|
$
|
1,392,509
|
|
$
|
396,805
|
|
Total segment gross margin
|
396,805
|
|
|
Total operating expenses
|
(380,225
|
)
|
|
Interest expense
|
(52,511
|
)
|
|
Other expense
|
(7,172
|
)
|
|
Loss before income taxes
|
$
|
(43,103
|
)
|
|
Revenues are attributed to each country based on the location in which sales originate and in which assets are located. The following table provides information about the Company by geographic areas.
|
|
|
|
|
|
Net Sales
|
Canada
|
$
|
87,006
|
|
United States
|
1,305,503
|
|
|
$
|
1,392,509
|
|
For the year ended December 31, 2016 (Successor), for the period from October 9, 2015 to December 31, 2015 (Successor), for the period from January 1, 2015 to October 8, 2015 (Predecessor) and for the year ended December 31, 2014 (Predecessor), no customer comprised more than 10% of net sales. The Company’s net sales from external customers by main product line are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
Predecessor
|
|
Year Ended
December 31,
2016
|
|
October 9 -
December 31,
2015
|
|
January 1-
October 8,
2015
|
|
Year Ended
December 31,
2014
|
Wallboard and accessories
|
$
|
640,122
|
|
|
$
|
99,275
|
|
|
$
|
320,246
|
|
|
$
|
276,502
|
|
Metal framing
|
218,810
|
|
|
33,093
|
|
|
109,850
|
|
|
85,229
|
|
Suspended ceiling systems
|
191,745
|
|
|
20,341
|
|
|
74,757
|
|
|
53,119
|
|
Other products
|
263,758
|
|
|
39,830
|
|
|
123,213
|
|
|
94,003
|
|
Commercial and industrial insulation
|
78,074
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Net sales
|
$
|
1,392,509
|
|
|
$
|
192,539
|
|
|
$
|
628,066
|
|
|
$
|
508,853
|
|
17. Other Current Liabilities
The balance of other current liabilities consisted of the following as of December 31 of each respective period:
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
Accrued expenses
|
$
|
14,572
|
|
|
$
|
8,801
|
|
Accrued interest
|
18,915
|
|
|
—
|
|
Accrued other
|
16,126
|
|
|
700
|
|
Total other current liabilities
|
$
|
49,613
|
|
|
$
|
9,501
|
|
LSF9 Cypress Holdings, LLC
Notes to Consolidated Financial Statements
18. Subsequent Events
Acquisitions
On January 1, 2017, the Company acquired certain assets and acquired the operations of Dominion Interior Supply Corporation and Dominion Interior Supply of Roanoke LLC (collectively, "Dominion Interior Supply") for a total purchase price of $13.1 million, subject to normal working capital adjustments. Dominion Interior Supply was a supplier of suspended ceiling systems to commercial and residential developers in the Virginia and North Carolina areas.
The purchase price allocation is in process and is subject to change as additional information becomes available concerning the fair value and tax basis of the acquired assets and liabilities. Any adjustments to the purchase price allocation will be made as soon as practicable but no later than one year from the acquisition date.
19. Quarterly Results of Operations (Unaudited)
The following tables present selected unaudited consolidated financial data for each of the four quarters in the year ended December 31, 2016 (Successor) and the period from October 9, 2015 to December 31, 2015 (Predecessor). In the Company’s opinion, this unaudited information has been prepared on the same basis as the audited information and includes all adjustments (consisting of only normal recurring adjustments) necessary for a fair statement of the financial information for the period presented.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
March 31, 2016
|
|
June 30, 2016
|
|
September 30, 2016
|
|
December 31, 2016
|
|
(in thousands, except per share data)
|
Year Ended December 31, 2016
|
|
|
|
|
|
|
|
Revenue
|
$
|
244,605
|
|
|
$
|
270,147
|
|
|
$
|
415,563
|
|
|
$
|
462,194
|
|
Gross profit
|
$
|
72,245
|
|
|
$
|
79,337
|
|
|
$
|
112,966
|
|
|
$
|
132,257
|
|
Net loss
|
$
|
(1,261
|
)
|
|
$
|
(2,961
|
)
|
|
$
|
(15,344
|
)
|
|
$
|
(8,804
|
)
|
Net loss per share - basic
(1)
|
$
|
(0.04
|
)
|
|
$
|
(0.10
|
)
|
|
$
|
(0.51
|
)
|
|
$
|
(0.29
|
)
|
Net loss per share - diluted
(1)
|
$
|
(0.04
|
)
|
|
$
|
(0.10
|
)
|
|
$
|
(0.51
|
)
|
|
$
|
(0.29
|
)
|
|
|
|
|
|
|
|
|
(1)
Earnings per share is computed independently for each of the quarters presented. The sum of the quarterly earnings per share do not equal the total earnings per share computed for the year due to rounding.
|
|
|
|
|
|
|
|
|
Period from October 9, 2015 to December 31, 2015
|
|
|
|
|
|
|
|
|
|
Revenue
|
$
|
192,539
|
|
|
|
|
|
|
|
Gross Margin
|
$
|
49,206
|
|
|
|
|
|
|
|
Net loss
|
$
|
(7,926
|
)
|
|
|
|
|
|
|
Net loss per share - basic
|
$
|
(0.26
|
)
|
|
|
|
|
|
|
Net loss per share - diluted
|
$
|
(0.26
|
)
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