FORTERRA, INC.
Condensed Consolidated Statements of Cash Flows
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
|
March 31,
|
|
|
2017
|
|
2016
|
CASH FLOWS FROM OPERATING ACTIVITIES
|
|
(unaudited)
|
Net loss
|
|
$
|
(22,543
|
)
|
|
$
|
(3,936
|
)
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
Depreciation & amortization expense
|
|
29,804
|
|
|
13,759
|
|
Loss (gain) on disposal of property, plant and equipment
|
|
774
|
|
|
(2
|
)
|
Amortization of debt discount and issuance costs
|
|
1,976
|
|
|
1,835
|
|
Earnings from equity method investee
|
|
(3,171
|
)
|
|
(1,303
|
)
|
Distributions from equity method investee
|
|
2,250
|
|
|
1,500
|
|
Unrealized foreign currency gains, net
|
|
(2,008
|
)
|
|
(2,782
|
)
|
Provision (recoveries) for doubtful accounts
|
|
1,677
|
|
|
83
|
|
Deferred taxes
|
|
(4,514
|
)
|
|
(11,189
|
)
|
Deferred rent
|
|
589
|
|
|
(28
|
)
|
Other non-cash items
|
|
458
|
|
|
—
|
|
Change in assets and liabilities:
|
|
|
|
|
Receivables, net
|
|
(42,066
|
)
|
|
(19,102
|
)
|
Inventories
|
|
(38,305
|
)
|
|
(5,756
|
)
|
Related party receivables
|
|
(5,972
|
)
|
|
—
|
|
Other assets
|
|
(1,354
|
)
|
|
(3,020
|
)
|
Accounts payable and accrued liabilities
|
|
2,408
|
|
|
(4,432
|
)
|
Other assets & liabilities
|
|
2,214
|
|
|
(1,461
|
)
|
NET CASH USED IN OPERATING ACTIVITIES
|
|
(77,783
|
)
|
|
(35,834
|
)
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
Purchase of property, plant and equipment
|
|
(17,077
|
)
|
|
(6,750
|
)
|
Assets and liabilities acquired, business combinations, net
|
|
(35,346
|
)
|
|
(66,751
|
)
|
NET CASH USED IN INVESTING ACTIVITIES
|
|
(52,423
|
)
|
|
(73,501
|
)
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
Payments on Senior and Junior Term Loans
|
|
(2,625
|
)
|
|
(2,191
|
)
|
Proceeds from Revolver
|
|
134,000
|
|
|
80,000
|
|
Payments on Revolver
|
|
(14,000
|
)
|
|
(6,566
|
)
|
Proceeds from settlement of derivatives
|
|
—
|
|
|
6,566
|
|
Other financing activities
|
|
(7
|
)
|
|
—
|
|
NET CASH PROVIDED BY FINANCING ACTIVITIES
|
|
117,368
|
|
|
77,809
|
|
Effect of exchange rate changes on cash
|
|
354
|
|
|
(261
|
)
|
Net change in cash and cash equivalents
|
|
(12,484
|
)
|
|
(31,787
|
)
|
Cash and cash equivalents, beginning of period
|
|
40,024
|
|
|
43,590
|
|
Cash and cash equivalents, end of period
|
|
$
|
27,540
|
|
|
$
|
11,803
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURES:
|
Cash interest paid
|
|
12,738
|
|
|
8,231
|
|
Income taxes paid
|
|
925
|
|
|
—
|
|
SUPPLEMENTAL NON-CASH INVESTING AND FINANCING DISCLOSURES:
|
Fair value changes of derivatives recorded in OCI, net of tax
|
|
(496
|
)
|
|
(1,209
|
)
|
See accompanying notes to unaudited condensed consolidated financial statements
FORTERRA, INC.
Notes to Unaudited Condensed Consolidated Financial Statements
1. Organization and description of the business
Description of the Business
Forterra, Inc. (“Forterra” or the "Company") is involved in the manufacturing, sale and distribution of building materials in the United States (‘‘U.S.’’) and Canada. Forterra’s primary products are concrete drainage pipe, precast concrete structures, and water transmission pipe used in drinking and wastewater systems. These products are used in the residential, infrastructure and non-residential sectors of the construction industry.
Forterra, a Delaware corporation, was formed on June 21, 2016 to hold the business of Forterra Building Products following the Reorganization (as defined below).
The Acquisition
The business of Forterra Building Products included indirect wholly-owned subsidiaries of LSF9 Concrete Holdings Ltd. ("LSF9"). Lone Star Fund IX (U.S.), L.P. (along with its affiliates and associates, but excluding the Company and other companies that it owns as a result of its investment activity, "Lone Star"), through its wholly-owned subsidiary LSF9, acquired the business of Forterra Building Products on March 13, 2015 (the "Acquisition"). LSF9, which was formed on February 6, 2015 for the purpose of acquiring the business of Forterra Building Products had no operations prior to the date of the Acquisition.
Prior to the Acquisition, the entities comprising the business of Forterra Building Products were indirect wholly-owned subsidiaries of HeidelbergCement A.G., or HeidelbergCement, a publicly listed company in Germany, encompassing HeidelbergCement's North American building products operations (“BP NAM"). LSF9 acquired BP NAM in a business combination which also included the acquisition of HeidelbergCement’s U.K.-based building products operations for a total initial purchase price of
$1.33 billion
cash, including customary working capital adjustments and a possible earn-out of up to
$100.0 million
as contingent consideration. The acquisition of BP NAM and HeidelbergCement's UK-based building products business was funded with an equity investment of
$432.3 million
and third-party debt in the amount of
$940.0 million
.
As HeidelbergCement's U.K.-based building products operations are not part of Forterra, Forterra was allocated a proportion of the total debt and equity used in the Acquisition. See note 11, Debt and deferred financing costs.
Initial Public Offering
On October 6, 2016, Forterra filed an Amended and Restated Certificate of Incorporation which increased the number of authorized shares of common stock from
1,000
with a par value of
$0.01
per share to
190,000,000
with a par value of
$0.001
per share, and, immediately after which, effected a
41,619.472
for one stock split of its issued and outstanding common stock previously approved by the Company's Board of Directors. Following the stock split there were
41,619,472
shares of common stock outstanding. The Company's Amended and Restated Certificate of Incorporation has also authorized
10,000,000
shares of preferred stock that may be issued at the approval of the Company's Board of Directors.
No
shares of preferred stock have been issued or were outstanding as of December 31, 2016 or March 31, 2017.
On October 25, 2016,
Forterra sold
18,420,000
shares of common stock in its initial public offering (the "Offering") at a public offering price of
$18.00
per share. The Company received net proceeds of
$313.3 million
in the Offering.
Reorganization
Prior to the consummation of the Offering, LSF9 distributed its brick operations in the United States and Eastern Canada to an affiliate of Lone Star (the "Bricks Disposition"), recognized as a return of capital in the statement of shareholders' equity. Following the Bricks Disposition and prior to the consummation of the Offering, the remaining building products operations of LSF9 in the United States and Eastern Canada, were transferred to Forterra, Inc. in an internal reorganization under common control transaction (the "Reorganization"). Following the Reorganization, Forterra, Inc. became a wholly owned subsidiary of Forterra US Holdings, LLC, which is indirectly wholly owned by an affiliate of Lone Star.
FORTERRA, INC.
Notes to Unaudited Condensed Consolidated Financial Statements
The Reorganization was accounted for as a change in reporting entity, and the consolidated financial statements have been retrospectively adjusted for all periods presented to reflect the new organizational structure following the Reorganization, including the presentation of discontinued operations associated with the Bricks Disposition.
Refinancing
Concurrent with the completion of the Offering, Forterra entered into a new
$300 million
asset based revolving credit facility for working capital and general corporate purposes (the “ 2016 Revolver”) and a new
$1.05 billion
senior term loan facility (“2016 Senior Term Loan”), the proceeds of which, together with a
$125.0 million
draw on the 2016 Revolver and
$296.0 million
in proceeds from the Offering, were used to repay in full and terminate the then-existing asset based revolving credit facility (the “2015 Revolver”),
$1.04 billion
senior term loan (the “2015 Senior Term Loan”) and
$260.0 million
junior term loan (the “Junior term Loan”) (collectively, the "Refinancing").
The terms of the 2016 Senior Term Loan and the 2016 Revolver are described in greater detail in note 11, Debt and deferred financing costs.
2. Summary of significant accounting policies
General
The Company's condensed consolidated financial statements for have been prepared in accordance with generally accepted accounting principles in the United States ("U.S. GAAP") and include the accounts and results of operations of the Company and its consolidated subsidiaries. All intercompany transactions have been eliminated in consolidation.
The condensed consolidated balance sheets and the condensed consolidated statements of operations, comprehensive income (loss) and cash flows for the periods presented herein reflect all adjustments that are of a normal recurring nature and are necessary for a fair statement of the results of the periods shown. Certain information and note disclosures normally included in annual financial statements have been condensed or omitted pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”).
The results of operations for the periods presented are not necessarily indicative of the results that may be expected for the year ended December 31, 2017. Seasonal changes and other conditions can affect the sales volumes of the Company's products. Therefore, the financial results for any interim period do not necessarily indicate the expected results for the year.
These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto for the year ended December 31, 2016 as provided in Forterra, Inc.'s Annual Report on Form 10-K for the year ended December 31, 2016 filed with the SEC on March 31, 2017 (the "2016 10-K"). The Company has continued to follow the accounting policies set forth in those financial statements.
During the first quarter of 2017, the Company identified and corrected prior period errors related to cost accrual items which should have been recognized in 2016. A cumulative correction was recorded during the quarter ended March 31, 2017 which increased pretax loss by
$4.6 million
, which consisted of a
$3.3 million
increase to cost of goods sold and a
$2.0 million
increase to selling, general and administrative expenses, partially offset by a
$0.7 million
increase in revenues. The Company evaluated the impact of correcting these errors and concluded the errors were immaterial to operating results for the year ended December 31, 2016, expected annual operating results for the year ended December 31, 2017, as well as the trend of earnings.
FORTERRA, INC.
Notes to Unaudited Condensed Consolidated Financial Statements
Credit Risk
At March 31, 2017, the Company had an individual customer within its Water Pipe & Products segment that accounted for more than
10%
of total net sales for the three months ended March 31, 2017. The customer represented approximately
13.5%
of the Company's total net sales for the three months ended March 31, 2017, and had total receivables at March 31, 2017 totaling
15.0%
of the Company total receivables, net.
Recent Accounting Guidance Adopted
In July 2015, the Financial Accounts Standards Board (the "FASB") issued Accounting Standards Update ("ASU") 2015-11,
Inventory (Topic 330): Simplifying the Measurement of Inventory,
requiring an entity to measure inventory within the scope of the ASU at the lower of cost and net realizable value. For public business entities, the amendments in this update were effective for financial statements issued for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. The adoption of this ASU during the first quarter of 2017 did not have a material impact on the condensed consolidated financial statements.
Recent Accounting Guidance Not Yet Adopted
In May 2014, the FASB issued guidance (the effective date of which was later delayed) that outlines a single comprehensive model for accounting for revenue arising from contracts with customers, which supersedes most of the existing revenue recognition guidance. This guidance requires an entity to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services and also requires certain additional disclosures. The guidance is effective for interim and annual reporting periods that begin after December 15, 2017. Early adoption of the standard is permitted, but not before the original effective date of December 15, 2016. During the second quarter of 2016, the FASB issued additional revenue recognition guidance that clarifies how an entity identifies performance obligations related to customer contracts as well as the objectives of collectability, sales and other taxes, non-cash consideration, contract modifications at transition, and technical corrections. The guidance is effective beginning in the first quarter of 2018, and the Company does not currently plan to early adopt the guidance. The guidance permits two methods of adoption, retrospectively to each prior reporting period presented (full retrospective method), or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application (modified retrospective method). The Company will utilize the modified retrospective method upon adoption, and continues to evaluate the effect that the updated standard will have on its consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02,
Leases (Topic 842)
, amending the existing accounting standards for lease accounting, including requiring lessees to recognize most leases on their balance sheets and making targeted changes to lessor accounting. For public business entities, the amendments in this update are effective for annual reporting periods beginning after December 15, 2018, including interim periods within those fiscal years, and early adoption is permitted as of the standard’s issuance date. ASU 2016-02 requires a modified retrospective transition approach for all leases existing at, or entered into after, the date of initial application, with an option to use certain transition relief. The Company believes this ASU will have a material impact on its consolidated financial statements as it will result in most of the Company’s leases and associated assets being presented on the balance sheet.
In January 2017, the FASB issued ASU 2017-01
Business Combinations (Topic 805): Clarifying the Definition of a Business
in an effort to clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. This guidance is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The adoption of this guidance is not expected to have a material impact on the Company's consolidated financial statements.
3.
Business combinations
The acquisition described below is accounted for as a business combination as defined by FASB Accounting Standards Codification ("ASC") 805,
Business Combinations
. The Company allocated the purchase price to the individually identifiable assets acquired and liabilities assumed based on their estimated fair value on the date of acquisition. The excess purchase price over those fair values was recorded as goodwill. The determination of fair values of the acquired assets and assumed liabilities required significant judgment, including estimates impacting the determination of estimated lives of tangible and intangible assets, calculation of the fair value of property, plant and equipment, inventory, and various intangibles. The fair values of assets and liabilities were determined using level 3 inputs as defined by ASC 820,
Fair Value Measurements and Disclosures
.
On February 3, 2017, Forterra acquired the assets of Royal Enterprises America, Inc. ("Royal") for aggregate consideration of
$35.3 million
, subject to customary working capital adjustments. Royal manufactures
concrete drainage pipe, precast concrete products, stormwater treatment technologies and erosion control products serving the greater Minneapolis market
. The acquisition was financed with borrowings on the 2016 Revolver.
The respective fair values of the assets acquired and liabilities assumed at the acquisition date, which are preliminary are as follows
(in thousands)
:
|
|
|
|
|
|
|
Net working capital
|
$
|
3,183
|
|
Property, plant and equipment, net
|
12,335
|
|
Customer relationship intangible
|
3,814
|
|
Non-compete agreement intangible
|
808
|
|
Other intangibles
|
621
|
|
Other assets and liabilities
|
(726
|
)
|
Net identifiable assets acquired
|
20,035
|
|
Goodwill
|
15,311
|
|
Cash consideration transferred
|
$
|
35,346
|
|
Preliminary balances may be subject to change upon the Company's final determination of the fair value of acquired assets and liabilities. The fair value allocation of the Company's 2016 acquisitions of BioClean, Precast Concepts and J&G remain as preliminary at March 31, 2017.
Goodwill recognized is attributable primarily to expected operating efficiencies and expansion opportunities in the business acquired.
Goodwill is expected to be deductible for tax purposes for the Royal acquisition.
On January 29, 2016, Forterra acquired substantially all the assets of Sherman-Dixie Concrete Industries, Inc., or Sherman-Dixie, for aggregate consideration of
$66.8 million
. Sherman-Dixie is a manufacturer of precast concrete structures operating in Kentucky, Tennessee, Alabama and Indiana. Sherman-Dixie operates as part of the Company’s
Drainage Pipe & Products
reportable segment. The Sherman Dixie acquisition was financed with borrowings on the 2015 Revolver.
Transaction costs
For the three months ended March 31 2017 and 2016, the Company recognized aggregate transaction costs,
including legal, accounting, valuation, and advisory fees,
specific to acquisitions of
$0.2 million
and
$2.6 million
, respectively
. These costs are recorded in the condensed consolidated statements of operations within selling, general & administrative expenses.
FORTERRA, INC.
Notes to Unaudited Condensed Consolidated Financial Statements
4. Receivables, net
Receivables consist of the following
(in thousands)
:
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
December 31,
|
|
2017
|
|
2016
|
Trade receivables
|
$
|
209,409
|
|
|
$
|
178,012
|
|
Amounts billed, but not yet paid under retainage provisions
|
2,064
|
|
|
1,959
|
|
Other receivables
|
33,769
|
|
|
22,408
|
|
Total receivables
|
$
|
245,242
|
|
|
$
|
202,379
|
|
Less: Allowance for doubtful accounts
|
(2,764
|
)
|
|
(898
|
)
|
Receivables, net
|
$
|
242,478
|
|
|
$
|
201,481
|
|
5. Inventories
Inventories consist of the following
(in thousands)
:
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
December 31,
|
|
2017
|
|
2016
|
Finished goods
|
$
|
216,260
|
|
|
$
|
185,507
|
|
Raw materials
|
102,461
|
|
|
90,647
|
|
Work in process
|
2,988
|
|
|
3,348
|
|
Total inventories
|
$
|
321,709
|
|
|
$
|
279,502
|
|
6.
Investment in equity method investee
On July 20, 2012, the Company entered into a joint venture agreement with
a company that produces concrete pipe and precast to form Concrete Pipe & Precast LLC (“CP&P”)
. The Company contributed plant assets and related inventory from
nine
operating locations as part of the agreement to form CP&P and in return for the contribution the Company obtained a
50%
ownership stake in the joint venture through its
500
Common Unit voting shares in CP&P.
The Company owns
50%
of CP&P voting common stock.
The Company's investment in the joint venture was
$56.2 million
at
March 31, 2017
, which is included within the Drainage Pipe & Products segment. Selected historical financial data for the investee is as follows (unaudited):
|
|
|
|
|
|
|
Three months ended
|
|
|
March 31,
|
|
|
2017
|
Net sales
|
|
34,172
|
|
Gross profit
|
|
11,175
|
|
Income from operations
|
|
6,635
|
|
Net income
|
|
6,586
|
|
FORTERRA, INC.
Notes to Unaudited Condensed Consolidated Financial Statements
7. Property, plant and equipment, net
Property, plant and equipment, net consist of the following
(in thousands)
:
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
December 31,
|
|
2017
|
|
2016
|
Machinery and equipment
|
$
|
343,897
|
|
|
$
|
329,871
|
|
Land, buildings and improvements
|
149,395
|
|
|
142,105
|
|
Other equipment
|
3,156
|
|
|
2,592
|
|
Construction-in-progress
|
45,459
|
|
|
43,855
|
|
Total property, plant and equipment
|
541,907
|
|
|
518,423
|
|
Less: accumulated depreciation
|
(79,975
|
)
|
|
(65,509
|
)
|
Property, plant and equipment, net
|
$
|
461,932
|
|
|
$
|
452,914
|
|
Depreciation expense totaled
$15.0 million
and
$8.7 million
for the
three
months ended
March 31, 2017
and
2016
, respectively, which is included in cost of goods sold and selling, general and administrative expenses in the condensed consolidated statements of operations.
FORTERRA, INC.
Notes to Unaudited Condensed Consolidated Financial Statements
8. Goodwill and other intangible assets, net
The Company has goodwill which has been recorded in connection with its acquisition of businesses. The following table summarizes the changes in goodwill by operating segment for the
three
months ended
March 31, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Drainage Pipe & Products
|
|
Water Pipe & Products
|
|
Total
|
Balance at December 31, 2016
|
$
|
168,866
|
|
|
$
|
322,581
|
|
|
$
|
491,447
|
|
Acquisitions
|
15,311
|
|
|
—
|
|
|
15,311
|
|
Foreign currency
|
252
|
|
|
26
|
|
|
278
|
|
Balance at March 31, 2017
|
$
|
184,429
|
|
|
$
|
322,607
|
|
|
$
|
507,036
|
|
Intangible assets other than goodwill at
March 31, 2017
included the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average amortization period (in years)
|
|
Gross carrying amount as of March 31, 2017
|
|
Accumulated amortization
|
|
Net carrying value as of March 31, 2017
|
Customer relationships
|
10
|
|
$
|
236,452
|
|
|
$
|
(32,998
|
)
|
|
$
|
203,454
|
|
Trade names
|
10
|
|
39,498
|
|
|
(5,881
|
)
|
|
33,617
|
|
Patents
|
10
|
|
23,628
|
|
|
(4,129
|
)
|
|
19,499
|
|
Customer backlog
|
0.5
|
|
13,171
|
|
|
(12,588
|
)
|
|
583
|
|
Non-compete agreements
|
5
|
|
10,831
|
|
|
(3,057
|
)
|
|
7,774
|
|
In-Process R&D
|
Indefinite-lived
|
|
6,692
|
|
|
0
|
|
|
6,692
|
|
Other
|
11
|
|
529
|
|
|
(39
|
)
|
|
490
|
|
Total intangible assets
|
|
|
$
|
330,801
|
|
|
$
|
(58,692
|
)
|
|
$
|
272,109
|
|
Intangible assets other than goodwill at December 31, 2016 included the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average amortization period (in years)
|
|
Gross carrying amount as of December 31, 2016
|
|
Accumulated amortization
|
|
Net carrying value as of December 31, 2016
|
Customer relationships
|
10
|
|
$
|
232,590
|
|
|
$
|
(22,653
|
)
|
|
$
|
209,937
|
|
Trade names
|
10
|
|
39,220
|
|
|
(4,449
|
)
|
|
34,771
|
|
Patents
|
10
|
|
23,557
|
|
|
(2,884
|
)
|
|
20,673
|
|
Customer backlog
|
0.5
|
|
12,900
|
|
|
(11,272
|
)
|
|
1,628
|
|
Non-compete agreements
|
5
|
|
9,918
|
|
|
(2,508
|
)
|
|
7,410
|
|
In-Process R&D
|
Indefinite-lived
|
|
6,692
|
|
|
0
|
|
|
6,692
|
|
Other
|
11
|
|
529
|
|
|
(42
|
)
|
|
487
|
|
Total intangible assets
|
|
|
$
|
325,406
|
|
|
$
|
(43,808
|
)
|
|
$
|
281,598
|
|
Amortization expense totaled
$14.8 million
, and
$2.6 million
for the
three
months ended
March 31, 2017
and
2016
, respectively, which is included in selling, general and administrative expenses in the condensed consolidated statements of operations.
9. 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, accrued liabilities, and the long-term tax receivable agreement payable. The carrying value of the Company's trade receivables, other receivables, trade payables, the asset based revolver and accrued liabilities approximates fair value due to their short-term maturity.
FORTERRA, INC.
Notes to Unaudited Condensed Consolidated Financial Statements
The Company may adjust the carrying amount of certain non-financial 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 March 31, 2017 using
|
|
|
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 assets
|
|
|
|
|
Derivative asset
|
—
|
|
$2,034
|
—
|
|
$2,034
|
Non-current liabilities
|
|
|
|
|
Derivative liability
|
—
|
|
$1,177
|
—
|
|
$1,177
|
|
|
|
|
|
|
Fair value measurements at December 31, 2016 using
|
|
|
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 liabilities
|
|
|
|
|
Derivative liability
|
—
|
|
$372
|
—
|
|
$372
|
|
|
|
|
|
Liabilities and assets classified as level 2 which are recorded at fair value are valued using observable market inputs.
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 adjustments for market liquidity, counter-party 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 counter-parties, and fair value for net long exposures is adjusted for counter-party 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 March 31, 2017 using
|
|
|
Carrying Amount March 31, 2017
|
Quoted Prices in Active Markets for Identical Assets (Level 1)
|
Significant Other Observable Inputs
(Level 2)
|
Significant Unobservable Inputs
(Level 3)
|
Total Fair Value
|
Non-current liabilities
|
|
|
|
|
2016 Senior Term Loan
|
$1,000,131
|
—
|
|
$1,055,198
|
—
|
|
$1,055,198
|
Tax receivable agreement payable
|
160,783
|
|
—
|
|
—
|
|
132,128
|
|
132,128
|
|
FORTERRA, INC.
Notes to Unaudited Condensed Consolidated Financial Statements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value measurements at December 31, 2016 using
|
|
|
Carrying Amount 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
|
Non-current liabilities
|
|
|
|
|
2016 Senior Term Loan
|
$1,000,983
|
—
|
|
$1,064,395
|
—
|
|
$1,064,395
|
Tax receivable agreement payable
|
160,783
|
|
—
|
|
—
|
|
125,614
|
|
125,614
|
|
The fair value of debt is the estimated amount the Company would have to pay to transfer 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.
The determination of the fair value of the tax receivable agreement payable was determined using a discounted cash flow methodology using level 3 inputs as defined by ASC 820. The determination of fair value required significant judgment, including estimates of the timing and amounts of various tax attributes.
These estimates are based on management’s best knowledge of current events and actions that the Company may undertake in the future.
Actual results could differ from these estimates.
10.
Accrued liabilities
Accrued liabilities consist of the following
(in thousands)
:
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
December 31,
|
|
2017
|
|
2016
|
Accrued payroll and employee benefits
|
$
|
23,344
|
|
|
$
|
29,945
|
|
Accrued taxes
|
20,571
|
|
|
32,746
|
|
Accrued rebates
|
5,239
|
|
|
7,509
|
|
Warranty
|
4,306
|
|
|
3,509
|
|
Other miscellaneous accrued liabilities
|
3,950
|
|
|
3,681
|
|
Tax receivable agreement liability
|
4,000
|
|
|
4,000
|
|
Environmental & reclamation obligation
|
776
|
|
|
775
|
|
Other
|
183
|
|
|
—
|
|
Total accrued liabilities
|
$
|
62,369
|
|
|
$
|
82,165
|
|
FORTERRA, INC.
Notes to Unaudited Condensed Consolidated Financial Statements
11. Debt and deferred financing costs
The Company’s debt consisted of the following
(in thousands)
:
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
December 31,
|
|
2017
|
|
2016
|
2016 Senior Term Loan
|
|
|
|
interest at 4.50%, net of debt issue costs and original issue discount of $44,619 and $46,392, respectively
|
$
|
1,000,131
|
|
|
$
|
1,000,983
|
|
2016 Revolver, net of debt issue costs of $3,732 and $3,936, respectively
|
215,268
|
|
|
95,064
|
|
Total debt
|
$
|
1,215,399
|
|
|
$
|
1,096,047
|
|
Less: current portion debt
|
(10,500
|
)
|
|
(10,500
|
)
|
Total long-term debt
|
$
|
1,204,899
|
|
|
$
|
1,085,547
|
|
Concurrent with the completion of the Offering, in the Refinancing the Company entered into the 2016 Revolver for working capital and general corporate purposes and the 2016 Senior Term Loan, the proceeds of which, together with the proceeds from the Offering, were used to repay in full the Junior Term Loan of
$260.0 million
, the 2015 Senior Term Loan of
$1.04 billion
, and the existing balance under the 2015 Revolver, in addition to related expenses associated with the Offering and Refinancing. Immediately subsequent to the completion of the Offering, Forterra had
$125.0 million
outstanding on its 2016 Revolver and
$1.05 billion
on its 2016 Senior Term Loan. The
$260.0 million
repayment toward the Junior Term Loan represented a full repayment of the outstanding principal on that loan, resulting in a related write-off of issue discounts and capitalized issuance costs of approximately
$22.4 million
. The repayment also triggered a prepayment penalty of approximately
$7.8 million
, which, combined with the write-off of issue discounts and capitalized issuance costs were included in interest expense on the consolidated statement of operations for the year ended December 31, 2016 included in the 2016 10-K.
The 2016 Senior Term Loan provides for a
$1.05 billion
senior secured term loan that was made available to a newly formed direct subsidiary of Forterra. Subject to the conditions set forth in the term loan agreement, the 2016 Senior Term Loan may be increased by (i) up to the greater of
$285.0 million
and 1.0x consolidated EBITDA of Forterra and its restricted subsidiaries for the four quarters most recently ended prior to such incurrence plus (ii) the aggregate amount of any voluntary prepayments, plus (iii) an additional amount, provided certain financial tests are met. The 2016 Senior Term Loan matures on October 25, 2023 and is subject to quarterly amortization equal to
0.25%
of the initial principal amount. Interest will accrue on outstanding borrowings thereunder at a rate equal to LIBOR (with a floor of
1.0%
) or an alternate base rate, in each case plus a margin of
3.50%
or
2.50%
, respectively.
The obligations of the borrower under the 2016 Senior Term Loan are guaranteed by Forterra and each of its direct and indirect material wholly-owned domestic subsidiaries other than any of Forterra's Canadian subsidiaries and certain other excluded subsidiaries (the "Guarantors"). The 2016 Senior Term Loan is secured by substantially all of the assets of Forterra, the borrower and the Guarantors; provided that the obligations under the 2016 Senior Term Loan are not secured by any liens on more than
65%
of the voting stock of the Canadian subsidiaries or assets of the Canadian subsidiaries. The 2016 Senior Term Loan contains customary representations and warranties, and affirmative and negative covenants, that, among other things, restrict the ability of Forterra and its restricted subsidiaries to incur additional debt, incur or permit liens on assets, make investments and acquisitions, consolidate or merge with any other company, engage in asset sales and pay dividends and make distributions. The 2016 Senior Term Loan does not contain any financial covenants. Obligations under the 2016 Senior Term Loan may be accelerated upon certain customary events of default (subject to grace periods, as appropriate).
The 2016 Revolver provides for an aggregate principal amount of up to
$300.0 million
, with up to
$280.0 million
to be made available to the U.S. borrowers and up to
$20.0 million
to be made available to the Canadian borrowers (the allocation may be modified periodically at the Company's request). Subject to the conditions set
FORTERRA, INC.
Notes to Unaudited Condensed Consolidated Financial Statements
forth in the revolving credit agreement related to the 2016 Revolver (the "2016 Credit Agreement"), the 2016 Revolver may be increased by up to the greater of (i)
$100.0 million
and (ii) such amount as would not cause the aggregate borrowing base to be exceeded by more than
$50.0 million
. Borrowings under the 2016 Revolver may not exceed a borrowing base equal to the sum of (i)
100%
of eligible cash, (ii)
85%
of eligible accounts receivable and (iii) the lesser of (a)
75%
of eligible inventory and (b)
85%
of the orderly liquidation value of eligible inventory, with the U.S. and Canadian borrowings being subject to separate borrowing base limitations.
The advance rates for accounts and inventory are subject to increase by
2.5%
during certain periods. The 2016 Revolver matures on October 25, 2021. The Revolver also provides for the issuance of letters of credit of up to an agreed sublimit. Interest accrues on outstanding borrowings at a rate equal to LIBOR or CDOR plus a margin ranging from
1.25%
to
1.75%
per annum, or at an alternate base rate, Canadian prime rate or Canadian base rate plus a margin ranging from
0.25%
to
0.75%
per annum, in each case, based upon the average excess availability under the 2016 Revolver for the most recently completed calendar quarter. The obligations of the borrowers under the 2016 Revolver are guaranteed by Forterra and its direct and indirect wholly-owned restricted subsidiaries other than certain excluded subsidiaries; provided that the obligations of the U.S. borrowers are not guaranteed by the Canadian subsidiaries. The 2016 Revolver is secured by substantially all of the assets of the borrowers; provided that the obligations of the U.S. borrowers are not secured by any liens on more than
65%
of the voting stock of the Canadian subsidiaries or assets of the Canadian subsidiaries.
The 2016 Revolver contains customary representations and warranties, and affirmative and negative covenants, including representations, warranties, and covenants that, among other things, restrict the ability of Forterra and its restricted subsidiaries to incur additional debt, incur or permit liens on assets, make investments and acquisitions, consolidate or merge with any other company, engage in asset sales and pay dividends and make distributions. The 2016 Credit Agreement contains a financial covenant restricting Forterra from allowing its fixed charge coverage ratio to drop below
1.00
:1.00 during a compliance period, which is triggered when the availability under the 2016 Revolver falls below a threshold set forth in the 2016 Credit Agreement. Obligations under the 2016 Credit Agreement may be accelerated upon certain customary events of default (subject to grace periods, as appropriate). The fixed charge coverage ratio is the ratio of consolidated earnings before interest, depreciation, and amortization ("EBITDA") less cash payments for capital expenditures and income taxes to consolidated fixed charges (interest expense plus scheduled payments of principal on indebtedness).
Interest on the 2016 Revolver is floating, based on a reference rate plus an applicable margin. The weighted average annual interest rate on the 2016 Revolver was
2.65%
for the
three
months ended
March 31, 2017
. In addition, Forterra pays a facility fee of between
20.0
and
32.5
basis points per annum based upon the utilization of the total 2016 Revolver. Availability under the 2016 Revolver at
March 31, 2017
based on draws, and outstanding letters of credit and allowable borrowing base was
$68.1 million
.
As of
March 31, 2017
, scheduled maturities of long-term debt were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
2016 Senior Term Loan
|
|
2016 Revolver
|
2017
|
$
|
7,875
|
|
|
$
|
7,875
|
|
|
$
|
—
|
|
2018
|
10,500
|
|
|
10,500
|
|
|
—
|
|
2019
|
10,500
|
|
|
10,500
|
|
|
—
|
|
2020
|
10,500
|
|
|
10,500
|
|
|
—
|
|
2021
|
229,500
|
|
|
10,500
|
|
|
219,000
|
|
Thereafter:
|
994,875
|
|
|
994,875
|
|
|
—
|
|
|
$
|
1,263,750
|
|
|
$
|
1,044,750
|
|
|
$
|
219,000
|
|
FORTERRA, INC.
Notes to Unaudited Condensed Consolidated Financial Statements
2015 Senior Term Loan, Junior Term Loan, and Revolving Credit Facility
In connection with the financing of the Acquisition, LSF9 entered into the 2015 Senior Term Loan for borrowings of
$635.0 million
, the Junior Term Loan for borrowings of
$260.0 million
, and drew
$45.0 million
on the 2015 Revolver (such credit agreements together, as amended from time to time, the "Initial Credit Agreements"). Approximately
$515.5 million
was the obligation of Forterra as a joint and several obligation under
ASC 405-40, Obligations Resulting from Joint and Several Liability Arrangements
.
The interest rate for both the 2015 Senior Term Loan and Junior Term Loan was set at LIBOR (with a
1%
floor) plus a margin of
5.5%
and
9.5%
, respectively.
See also note 1, Basis of Presentation-Successor to the audited consolidated financial statements included in the 2016 10-K for additional information.
In October 2015, the Company increased the size of the 2015 Senior Term Loan by
$240.0 million
for the Cretex Acquisition. Additionally, in April 2016, the Company's capacity on the 2015 Revolver was increased to
$285.0 million
. In conjunction with the issuance of debt related to the Acquisition and the acquisition of Cretex Concrete Products, Inc. (the "Cretex Acquisition"), LSF9 incurred
$71.6 million
of debt issuance costs and debt discounts; of which
$51.9 million
was attributed to the Company debt obligation.
The Initial Credit Agreements were secured by substantially all of the assets of the Company.
In April 2016, LSF9 borrowed
$205.0 million
on the 2015 Revolver in order to finance the acquisition of USP Holdings Inc. (the "USP Acquisition") of which
$203.4 million
was repaid during April 2016 with proceeds from an affiliated entity controlled by LSF9 but not included among the legal entities that comprise the Company. In connection with the additional proceeds obtained in April 2016 which benefited the Company, under ASC 405-40
, Obligations Resulting from Joint and Several Liability Arrangements,
the Company assumed an additional obligation of
$203.4 million
that was recognized as an increase to the Company’s allocated share of the 2015 Senior Term Loan balance with an associated increase in debt issuance fees and discount related to the 2015 Senior Term Loan of
$8.9 million
. The affiliated entity was subsequently released as a co-obligor and its joint and several liability under terms of all of the 3
rd
party credit agreements.
On June 17, 2016, LSF9 borrowed an incremental
$345.0 million
on the 2015 Senior Term Loan and used the proceeds to pay a dividend of
$338.3 million
, net of debt issuance costs, to the shareholders of LSF9. The dividend was recorded as a return of capital. LSF9 incurred debt issuance fees and discount of
$6.7 million
in connection with the issuance of the debt. The incremental borrowings incurred interest at the same rate as the 2015 Senior Term Loan. Under
ASC 405-40 Obligations Resulting from Joint and Several Liability Arrangements
, the Company recognized the full amount of the incremental borrowing, net of related issuance costs and discount, as an obligation in the condensed consolidated balance sheet.
Joint and Several Obligations
As discussed above, the Company recorded debt on its balance sheet as of December 31, 2015 under
ASC 405-40, Obligations Resulting from Joint and Several Liability Arrangements
.
The Company and the affiliates of LSF9 were co-obligors and jointly and severally liable under terms of the Initial Credit Agreements. The Company’s allocated portion of the
$940.0 million
of third party debt used to finance the Acquisition was
$515.5 million
. The initial obligation of
$515.5 million
was reflected on the Company’s condensed consolidated balance sheet at the Acquisition date as
$254.9 million
of 2015 Senior Term Loan,
$260.0 million
of Junior Term Loan and
$0.6 million
of 2015 Revolver obligations. The remaining
$424.5 million
of the debt was allocated to affiliates of LSF9 that are not included in these financial statements based on the amounts affiliates of LSF9 have fully repaid. In April of 2016, the Company’s affiliate co-obligors were released from joint and several liability under the Initial Credit Agreements. The Company was consequently the sole source of repayment for its
$515.5 million
share for the initial obligation under the Initial Credit Agreements, as well as other obligations recorded on the balance sheet. In addition to the initial debt obligation of
$515.5 million
recorded by the Company, additional 2015 Senior Term Loan borrowings of
$240.0 million
that in October 2015 were used to finance the Cretex Acquisition were allocated in full to the Company.
In April 2016, LSF9 borrowed an additional
$205.0 million
on the 2015 Revolver to finance the USP Acquisition. On April 26, 2016, affiliates of the Company under control of LSF9 but not included in Forterra repaid
FORTERRA, INC.
Notes to Unaudited Condensed Consolidated Financial Statements
$203.4 million
of the 2015 Revolver balance that was drawn in April 2016 and
$176.7 million
of the 2015 Senior Term Loan, after which the other affiliates were released as obligors to the loan and the Company became the sole source of repayment under the LSF9 debt agreement. The Company reflected the increased obligation as an increase in the 2015 Senior Term Loan in order to reflect the change in its obligation as a result of the additional borrowings of LSF9. A proportionate amount of debt issuance costs and discount related to the increased obligation under the 2015 Senior Term Loan was also allocated to the Company at the time of the increased obligation. Additionally, in June 2016, LSF9 incurred an additional
$345.0 million
of 2015 Senior Term Loan debt used to pay a dividend of
$338.3 million
to Lone Star which was attributed to the Company as an additional obligation under the 2015 Senior Term Loan.
Lines of Credit and Other Debt Facilities
The Company had stand-by letters of credit outstanding of
$12.9 million
as of March 31, 2017 which reduce the borrowings available under the Revolver.
12. Derivatives and hedging
The Company uses derivatives to manage selected foreign exchange and interest rate exposures. The Company does not use derivative instruments for speculative trading purposes, and cash flows from derivative instruments are included in net cash provided by (used in) financing activities in the condensed consolidated statements of cash flows.
At
March 31, 2017
, the Company had foreign exchange forward contracts, designated as cash flow hedges in accordance with ASC 815-20
Derivatives - Hedging
, which allows for the effective portion of the changes in the fair value of the instruments to be captured in accumulated other comprehensive income, and ineffective portion recorded in earnings. These instruments were assigned to Forterra by an affiliate concurrent with the Reorganization, directly prior to the Refinancing and Offering and have a termination date of March 2018. Additionally, o
n February 9, 2017, Forterra entered into interest rate swap transactions with a combined notional value of
$525 million
. Under the terms of the swap transactions, Forterra agreed to pay a fixed rate of interest of
1.52%
and receive floating rate interest indexed to one-month LIBOR with monthly settlement terms with the swap counterparties. The swaps have a
three
-year term and expires on March 31, 2020. The interest rate swaps are not designated as cash flow hedges, therefore all changes in the fair value of these instruments are captured as a component of interest expense in the condensed consolidated statements of comprehensive loss.
The instruments the Company previously held, included foreign exchange forward contracts and fixed-for-float cross currency swaps entered into in March of 2016, were settled concurrent with the Reorganization and Refinancing, resulting in a net cash settlement of approximately
$1.3 million
paid by the Company in the fourth quarter of 2016.
A quantitative analysis is utilized to assess hedge effectiveness for cash flow hedges. The Company assesses the hedge effectiveness and measures the amount of ineffectiveness for the hedge relationships based on changes in forward exchange rates. The Company elects to present all derivative assets and derivative liabilities on a net basis on its condensed consolidated balance sheets when a legally enforceable International Swaps and Derivatives Association, Inc. (“ISDA”) Master Agreement exists. An ISDA Master Agreement is an agreement between two counterparties, which may have multiple derivative transactions with each other governed by such agreement, and such ISDA Master Agreement generally provides for the net settlement of all or a specified group of these derivative transactions, through a single payment, in a single currency, in the event of a default on, or affecting any, one derivative transaction or a termination event affecting all, or a specified group of, derivative transactions. At
March 31, 2017
and December 31, 2016, the Company’s derivative instruments fall under an ISDA master netting agreement.
FORTERRA, INC.
Notes to Unaudited Condensed Consolidated Financial Statements
The following table presents the fair values of derivative assets and liabilities in the condensed consolidated balance sheets
(in thousands)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2017
|
|
Derivative Assets
|
|
Derivative Liabilities
|
|
Notional Amount
|
|
Fair Value
|
|
Notional Amount
|
|
Fair Value
|
Foreign exchange forward contracts
|
$
|
—
|
|
|
—
|
|
|
$
|
92,961
|
|
|
$
|
1,177
|
|
Interest rate swaps
|
525,000
|
|
|
2,034
|
|
|
—
|
|
|
—
|
|
Total derivatives, gross
|
|
|
2,034
|
|
|
|
|
1,177
|
|
Less: Legally enforceable master netting agreements
|
|
|
—
|
|
|
|
|
—
|
|
Total derivatives, net
|
$
|
—
|
|
|
$
|
2,034
|
|
|
$
|
—
|
|
|
$
|
1,177
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
Derivative Assets
|
|
Derivative Liabilities
|
|
Notional Amount
|
|
Fair Value
|
|
Notional Amount
|
|
Fair Value
|
Foreign exchange forward contracts
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
92,961
|
|
|
$
|
(372
|
)
|
Total derivatives, gross
|
—
|
|
|
—
|
|
|
—
|
|
|
(372
|
)
|
Less: Legally enforceable master netting agreements
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total derivatives, net
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(372
|
)
|
The following table presents the effect of derivative instruments on the condensed consolidated statements of operations
(in thousands)
:
|
|
|
|
|
|
|
|
|
Three months ended
|
|
March 31,
|
|
2017
|
2016
|
Cross currency swaps
|
|
|
Loss on derivatives recognized in Accumulated other comprehensive loss
|
$
|
(496
|
)
|
$
|
(1,209
|
)
|
Loss on derivatives not designated as hedges in other operating income (expense)
|
—
|
|
(2,463
|
)
|
Interest rate swaps
|
|
|
Gain on derivatives not designated as hedges included in interest expense
|
2,034
|
|
—
|
|
13.
Sale-Leaseback Transaction
On April 5, 2016, the Company sold properties in
47
sites throughout the U.S. and Canada to Pipe Portfolio Owner (Multi) LP (the "U.S. Buyer") and FORT-BEN Holdings (ONQC) Ltd. (the “Canadian Buyer”) for an aggregate purchase price of approximately
$204.3 million
. On April 14, 2016, the Company sold additional properties in
two
sites located in the U.S. to the U.S. Buyer for an aggregate purchase price of approximately
$11.9 million
. In connection with these transactions, the Company and U.S. Buyer and an affiliate of the Canadian Buyer entered into master land and building lease agreements under which the Company agreed to lease back each of the properties for an initial term of
twenty years
, followed by one optional renewal term of
9 years, 11 months
. Leaseback rental will escalate annually by
2%
during the initial term and based on changes in the Consumer Price Index capped at
4%
during the optional renewal period. The proceeds received from the sale-leaseback transactions net of transaction costs of
$6.5 million
amounted to
$209.7 million
.
Prior to the Reorganization, the sale-leaseback transactions were considered to have one form of prohibited “continuing involvement” at the inception of the lease which preclude sale-leaseback accounting for transactions involving real estate in the financial statements of the Company because a guarantee by LSF9 provided the buyer-lessor or the lessor, as applicable, with additional collateral that reduced the buyer-lessor’s or the lessor's, as applicable, risk of loss. As a result, the assets subject to the sale-leaseback remained on
FORTERRA, INC.
Notes to Unaudited Condensed Consolidated Financial Statements
the balance sheet and were depreciated. Additionally, the aggregate proceeds were recorded as a financing obligation in the consolidated balance sheet and under financing in the statements of cash flow. In October 2016, t
he Company entered into agreements to replace the original guarantor, LSF9, with Forterra, as the new guarantor, effective immediately following completion of the Reorganization. Due to the change in guarantor, the sale leaseback qualified for sales recognition and was classified as an operating lease beginning October 2016. Associated with the sale, in October 2016, the Company recognized a loss on the statement of operations of
$19.6 million
and a deferred gain of
$81.5 million
. The deferred gain will be amortized over the life of the lease. As of March 31, 2017, the non-current portion of the deferred gain is
$77.6 million
and the current portion of the deferred gain was
$2.8 million
in the condensed consolidated balance sheets.
14.
Commitments and contingencies
The Company is involved in legal proceedings and litigation in the ordinary course of business. In the opinion of management, the outcome of such matters will not have a material adverse effect on the Company’s condensed combined financial position, results of operations, or liquidity. Other than routine litigation incidental to the Company's business and those matters described below, there are no material legal proceedings to which the Company is a party or to which any of the Company’s properties are subject.
In connection with the Acquisition, there is an earn-out contingency including contingent consideration of up to
$100.0 million
if and to the extent the 2015 financial results of the businesses acquired by Lone Star in the Acquisition, including the Company and HeidelbergCement's former building products business in the United Kingdom, exceeded a specified Adjusted EBITDA target for fiscal year 2015, as calculated pursuant to the terms of the purchase agreement. If such Adjusted EBITDA calculation exceeds the specified target, LSF9, and therefore, Forterra would be required to pay HeidelbergCement an amount equal to a multiple of such excess Adjusted EBITDA, with any payment capped at
$100.0 million
. In April 2016, the Company provided an earn-out statement to HC demonstrating that no payment was required. On June 13, 2016, HeidelbergCement provided notification that it is disputing, among other things, the Company’s calculation of Adjusted EBITDA under the purchase agreement and asserting that a payment should be made in the amount of
$100.0 million
. The Company does not believe HeidelbergCement’s position has merit and intends to vigorously oppose HeidelbergCement's assertions.
On October 5, 2016, affiliates of
HeidelbergCement
filed a lawsuit in the Delaware Court of Chancery seeking specific performance and claiming access to the Company's books, records, and personnel; seeking a declaratory judgment concerning the scope of the neutral accounting expert’s authority; and in the alternative, cla
im
ing a breach of contract and seeking the
$100.0 million
and other damages (the "Delaware Action").
In November 2016, the defendants filed a motion to dismiss the Delaware Action, and on January 6, 2017, the plaintiffs filed a First Amended Complaint. The defendants filed a motion to dismiss the First Amended Complaint on February 22, 2017, requesting that the Court dismiss all claims in the Delaware Action.
On March 24, 2017, the plaintiffs in the Delaware Action filed a response, and the Company filed a reply on April 7, 2017.
As a result of the Reorganization, the defendants in the Delaware Action are no longer part of the Company and its consolidated subsidiaries, however the Company remains the liable party in this matter.
As of March 31, 2017,
no
liability for this contingency has been accrued as payment of any earn-out is not considered probable. However, the outcome of this matter is uncertain, and no assurance can be given to the ultimate outcome of the resulting proceedings. If the Company is unsuccessful in resolving the dispute, it could recognize a material charge to its earnings.
Long-term incentive plan
Following the Acquisition, Lone Star implemented a cash-based long term incentive plan (the “LTIP”), which entitles the participants in the LTIP a potential cash payout upon a monetization event as defined by the LTIP. Potential monetization events include the sale, transfer or otherwise disposition of all or a portion of the Company or successor entities of LSF9, an initial public offering where Lone Star reduces its ownership interest in the Company or successor entities of LSF9 below 50%, or through certain cash distribution as defined in the LTIP. Before the payout of any cash the LTIP requires Lone Star to realize in cash the full return of their investment plus a specified internal rate of return, which is calculated by comparing the return to Lone Star over the timeline of its investment in the Company and certain successor entities of LSF9. As of March 31, 2017, no monetization event
FORTERRA, INC.
Notes to Unaudited Condensed Consolidated Financial Statements
had occurred, and therefore no amounts were accrued in the accompanying consolidated balance sheet. While no payments have occurred thus far, payments under the LTIP could be significant depending upon future monetization events. The timing and amount of such payments are unknown and is dependent upon future monetization events and market conditions that are outside of the control of the Company or the participants of the plan. Subsequent to the Offering, Forterra became directly liable for any payment obligations triggered under the LTIP, but LSF9 or one of its affiliates will remain obligated to make payments to the Company in amounts equal to any payment obligations triggered under the LTIP as and when such payment obligations are triggered.
Tax receivable agreement
In connection with the Offering, the Company entered into a tax receivable agreement with Lone Star that provides for, among other things, the payment by the Company to Lone Star of
85%
of the amount of certain covered tax benefits, which may reduce the actual liability for certain taxes that the Company might otherwise be required to pay. The tax benefits subject to the tax receivable agreement include: (i) all depreciation and amortization deductions, and any offset to taxable income and gain or increase to taxable loss, resulting from the tax basis that the Company had in its assets as of the time of the consummation of the Offering, (ii) the utilization of the Company's and its subsidiaries’ net operating losses and tax credits, if any, attributable to periods prior to the Offering, (iii) deductions in respect of payments made, funded or reimbursed by an initial party to the tax receivable agreement (other than the Company or one of its subsidiaries) or an affiliate thereof to participants under the LTIP, (iv) deductions in respect of transaction expenses attributable to the USP Acquisition and (v) certain other tax benefits attributable to payments made under the tax receivable agreement.
For purposes of the tax receivable agreement, the aggregate reduction in income tax payable by the Company will be computed by comparing the Company's actual income tax liability with its hypothetical liability had it not been able to utilize the related tax benefits. The agreement will remain in effect for the period of time in which any such related tax benefits remain. The Company accounts for potential payments under the tax receivable agreement as a contingent liability, with amounts accrued when considered probable and reasonably estimable. As of the Offering date, the Company recorded a
$160.8 million
liability and a reduction to additional paid-in-capital related to the tax receivable agreement for the undiscounted value of probable future payments. Net of tax effects of
$18.5 million
, the net reduction to additional paid-in-capital related to the initial liability for the tax receivable agreement was
$142.3 million
. The Company anticipates that it will have sufficient taxable income in future periods to realize the full value of the obligation recorded. Future tax receivable agreement payments related to the tax basis of assets at the time of the Offering will be recorded as a reduction to the liability and will be recorded as a financing obligation in the statement of cash flows. At the end of each reporting period, any changes in the Company's estimate of the liability will be recorded in the statement of operations as a component of other income/expense and will be recorded as an operating activity in the statement of cash flows. As of March 31, 2017, the liability recorded is
$160.8 million
as
no
payments were made during the first quarter of 2017. The timing and amount of future tax benefits associated with the tax receivable agreement are
subject to change, and additional payments may be required which could be materially different from the current accrued liability.
15. Earnings per share
Basic earnings per share ("EPS") is calculated by dividing net earnings by the weighted average number of common shares outstanding during the period. Potentially dilutive securities include employee stock options and shares of restricted stock. Diluted EPS reflects the assumed exercise or conversion of all dilutive securities. The restricted shares are considered participating securities for the purposes of our EPS calculation.
For purposes of calculating earnings (loss) per share, weighted average shares prior to the Reorganization have been retroactively adjusted to give effect to the Reorganization for all historical periods presented in the financial statements. The computations of earnings (loss) per share for periods prior to our IPO do not include the shares issued in connection with the IPO.
FORTERRA, INC.
Notes to Unaudited Condensed Consolidated Financial Statements
The calculations of the basic and diluted EPS for the three months ended March 31, 2017 and 2016 are presented below
(in thousands, except share and per share amounts)
:
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended March 31,
|
|
|
2017
|
|
2016
|
Loss from continuing operations
|
|
$
|
(22,543
|
)
|
|
$
|
(2,162
|
)
|
Discontinued operations, net of tax
|
|
—
|
|
|
(1,774
|
)
|
Net loss
|
|
(22,543
|
)
|
|
(3,936
|
)
|
Earnings allocated to unvested restricted stock awards
|
|
(64
|
)
|
|
—
|
|
Earnings allocated to common shareholders
|
|
(22,479
|
)
|
|
(3,936
|
)
|
|
|
|
|
|
Common stock:
|
|
|
|
|
Weighted average basic shares outstanding
|
|
63,789,474
|
|
|
45,369,474
|
|
Effect of dilutive securities - stock options
|
|
—
|
|
|
—
|
|
Weighted average diluted shares outstanding
|
|
63,789,474
|
|
|
45,369,474
|
|
|
|
|
|
|
Basic earnings (loss) per share:
|
|
|
|
|
Loss from continuing operations
|
|
$
|
(0.35
|
)
|
|
$
|
(0.05
|
)
|
Loss from discontinued operations, net of taxes
|
|
$
|
—
|
|
|
$
|
(0.04
|
)
|
Net Loss
|
|
$
|
(0.35
|
)
|
|
$
|
(0.09
|
)
|
Diluted earnings (loss) per share:
|
|
|
|
|
Loss from continuing operations
|
|
$
|
(0.35
|
)
|
|
$
|
(0.05
|
)
|
Loss from discontinued operations, net of taxes
|
|
$
|
—
|
|
|
$
|
(0.04
|
)
|
Net loss
|
|
$
|
(0.35
|
)
|
|
$
|
(0.09
|
)
|
16. Stock-based plans
2016 Stock Incentive Plan
Forterra has
one
equity compensation plan under which it has granted stock awards, the Forterra, Inc. 2016 Stock Incentive Plan (the "2016 Incentive Plan"). The 2016 Incentive Plan became effective October 19, 2016, upon the approval of the Company's sole equity-holder, and serves as the umbrella plan for the Company’s stock-based and cash-based incentive compensation programs for its directors, officers and other eligible employees. The aggregate number of shares of common stock that may be issued under the 2016 Incentive Plan may not exceed
5,000,000
shares.
Effective October 19, 2016, the board of directors granted employees and independent directors
361,590
options to purchase shares of common stock at an exercise price of
$18.00
per share and
136,900
shares of restricted common stock. Both the options and restricted shares awarded to employees are subject to a
four
-year vesting period and the options and restricted shares awarded to independent directors are subject to a
one
-year vesting period. Additional grants of and aggregate of
458,118
options and
250,109
restricted shares were awarded to employees effective March 20, 2017. These options and restricted shares are subject to a
three
-year vesting period. The awards of stock options granted under the 2016 Incentive Plan have a term of
ten
years.
In accordance with ASC 718,
Compensation-Stock Compensation
, the Company recognizes stock-based compensation expense over the requisition service period for the entire award, which is generally the maximum vesting period of the award, in an amount equal to the fair value of share-based payments, which include stock options granted and restricted stock awards to employees and non-employees members of Forterra's board of
FORTERRA, INC.
Notes to Unaudited Condensed Consolidated Financial Statements
directors. The Company records stock-based compensation expense in cost of goods sold and selling, general, and administrative expenses.
Stock-based compensation expense was approximately
$0.4 million
for the three months ended March 31, 2017.
Stock Option Grants
The value of the options is determined by using a Black-Scholes pricing model that includes the following variables: 1) exercise price of the instrument, 2) fair market value of the underlying stock on date of grant, 3) expected life, 4) estimated volatility and 5) the risk-free interest rate. The Company utilized the following weighted-average assumptions in estimating the fair value of the option grants in the three months ended March 31, 2017:
|
|
|
|
Expected dividends
|
—
|
%
|
Expected volatility
|
39.60
|
%
|
Risk-free interest rate
|
0.53
|
%
|
Expected lives in years
|
6
|
|
Weighted-average fair value of options:
|
|
Granted at fair value
|
$7.26
|
Weighted-average exercise price of options:
|
|
Granted at fair value
|
$18.96
|
The Black-Scholes model requires the use of subjective assumption including expectations of future dividends and stock price volatility. Expected volatility is calculated based on an analysis of historical and implied volatility measures for a set of Forterra's peer companies. The average expected life is based on the contractual term of the option and expected employee exercise and post-vesting employment termination behavior. Such assumptions are only used for making the required fair value estimate and should not be considered as indicators of future dividend policy or stock price appreciation. Because changes in the subjective assumptions can materially affect the fair value estimate, and because employee stock option have characteristics significantly different from those of traded options, the use of the Black-Scholes option pricing model may not provide a reliable estimate of the fair value of employee stock options.
A summary of the status of stock options granted under the 2016 Incentive Plan during the three months ended March 31, 2017, and changes during the three months then ended, is presented in the table below:
|
|
|
|
|
|
Shares
|
Weighted Average Exercise Price
|
Outstanding, beginning of period
|
357,840
|
|
$18.00
|
Granted
|
458,118
|
|
$18.96
|
Exercised
|
—
|
|
n/a
|
Forfeited
|
—
|
|
n/a
|
Outstanding, end of period
|
815,958
|
|
$18.54
|
FORTERRA, INC.
Notes to Unaudited Condensed Consolidated Financial Statements
Restricted Stock Awards
Restricted stock awards are share awards that entitle the holder to receive shares of the Company's common stock which become freely transferable upon vesting. During the three months ended March 31, 2017, pursuant to the 2016 Incentive Plan, the Company issued
250,109
restricted stock awards. These restricted stock awards granted to employees generally vest on a
three
-year vesting schedule. The estimated compensation cost of the restricted stock awards, which is equal to the fair value of the awards on the date of grant net of estimated forfeitures, is recognized on a straight-line basis over the vesting period.
The following table summarizes information about restricted stock award activity during the three months ended March 31, 2017:
|
|
|
|
|
|
Shares
|
Weighted Average Grant Date Fair Value
|
Unvested balance, beginning of period
|
134,650
|
|
$18.00
|
Grants
|
250,109
|
|
$18.96
|
Vested shares
|
—
|
|
n/a
|
Forfeitures
|
—
|
|
n/a
|
Unvested balance, end of period
|
384,759
|
|
$18.62
|
17.
Income Taxes
The Company recorded income tax benefit from continuing operations of
$13.4 million
and
$10.6 million
for the three months ended March 31, 2017 and 2016, respectively.
The income tax benefit for the three months ended March 31, 2017 recorded includes an effective tax rate of
37.2%
, which differs from the federal statutory rate primarily due to the effect of state income taxes, valuation allowance in certain states and foreign jurisdictions, partially offset by the favorable foreign rate differentials and a favorable deduction for domestic production activities. The income tax expense for the three months ended March 31, 2016 is primarily attributable to the reduction of the Company's valuation allowance and corresponding recognition of a deferred tax benefit after giving consideration to deferred income tax liabilities of
$11.1 million
recorded in the acquisition of Sherman-Dixie Concrete Industries, Inc., partially offset by tax expense attributable to the profitability of foreign operations.
18.
Segment reporting
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 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 chief operating decision maker ("CODM") in order to allocate resources and assess performance. The Corporate and Other segment includes expenses related to certain
executive salaries, interest costs related to the Company's credit agreements, acquisition related costs, and other corporate costs that are not directly attributable to the Company's operating segments. The Company's segments follow the same accounting policies as the Company.
Net sales from the major products sold to external customers include drainage pipe and precast products, concrete and steel water transmission pipe, and clay bricks and concrete blocks.
The Company’s
three
geographic areas consist of the United States, Canada and Mexico for which it reports net sales, fixed assets and total assets. For purposes of evaluating segment profit, the CODM reviews
FORTERRA, INC.
Notes to Unaudited Condensed Consolidated Financial Statements
earnings before interest, taxes, depreciation and amortization (“EBITDA”) as a basis for making the decisions to allocate resources and assess performance.
The following tables set forth reportable segment information with respect to net sales and other financial information attributable to the Company's reportable segments for the three months ended March 31, 2017 and 2016
(in thousands)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended March 31, 2017:
|
|
Drainage Pipe & Products
|
Water Pipe & Products
|
Corporate and Other
|
Total
|
Net Sales
|
$
|
160,448
|
|
$
|
177,849
|
|
$
|
5
|
|
338,302
|
|
Loss from continuing operations before income taxes
|
(961
|
)
|
(335
|
)
|
(34,611
|
)
|
(35,907
|
)
|
Depreciation and amortization
|
12,276
|
|
17,446
|
|
82
|
|
29,804
|
|
Interest expense
|
96
|
|
1
|
|
13,445
|
|
13,542
|
|
EBITDA
|
$
|
11,411
|
|
$
|
17,112
|
|
$
|
(21,084
|
)
|
$
|
7,439
|
|
|
|
|
|
|
Capital expenditures
|
$
|
6,522
|
|
$
|
4,810
|
|
$
|
848
|
|
$
|
12,180
|
|
Total assets as of March 31, 2017
|
$
|
771,789
|
|
$
|
1,098,829
|
|
$
|
50,391
|
|
$
|
1,921,009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended March 31, 2016:
|
|
Drainage Pipe & Products
|
Water Pipe & Products
|
Corporate and Other
|
Total
|
Net Sales
|
$
|
144,321
|
|
$
|
40,471
|
|
$
|
2,204
|
|
186,996
|
|
Income (loss) from continuing operations before income taxes
|
18,479
|
|
2,590
|
|
(33,798
|
)
|
(12,729
|
)
|
Depreciation and amortization
|
9,470
|
|
1,563
|
|
259
|
|
11,292
|
|
Interest (income)/expense
|
—
|
|
—
|
|
17,290
|
|
17,290
|
|
EBITDA
|
$
|
27,949
|
|
$
|
4,153
|
|
$
|
(16,249
|
)
|
$
|
15,853
|
|
|
|
|
|
|
Capital expenditures
|
$
|
1,941
|
|
$
|
599
|
|
$
|
—
|
|
$
|
2,540
|
|
Total assets as of March 31, 2016
|
$
|
712,091
|
|
$
|
130,305
|
|
$
|
10,050
|
|
$
|
852,446
|
|
In addition, the Company also has an investment in an equity method investee included in the Drainage Pipe & Products segment for which earnings from equity method investee were
$3.2 million
and
$1.3 million
for the three months ended March 31, 2017 and March 31, 2016, respectively, and with the following balances
(in thousands)
:
|
|
|
|
|
|
|
|
|
|
At March 31,
|
|
At December 31,
|
|
2017
|
|
2016
|
Investment in equity method investee
|
$
|
56,157
|
|
|
$
|
55,236
|
|
FORTERRA, INC.
Notes to Unaudited Condensed Consolidated Financial Statements
The Company is also required by ASC 280 to disclose additional information related to geographic location. The Company has operations in the United States, Canada and Mexico. The Company has both revenues and long-lived assets in each country and those assets and revenues are recorded within geographic location as follows
(in thousands)
:
|
|
|
|
|
|
|
|
|
Property, plant, and equipment, net:
|
March 31,
|
|
December 31,
|
|
2017
|
|
2016
|
United States
|
$
|
431,803
|
|
|
$
|
422,853
|
|
Canada
|
19,516
|
|
|
19,584
|
|
Mexico
|
10,613
|
|
|
10,477
|
|
|
$
|
461,932
|
|
|
$
|
452,914
|
|
|
|
|
|
|
|
|
|
|
Net Sales:
|
For the three months ended March 31,
|
|
2017
|
|
2016
|
United States
|
$
|
321,136
|
|
|
$
|
169,849
|
|
Canada
|
13,967
|
|
|
17,147
|
|
Mexico
|
3,199
|
|
|
—
|
|
|
$
|
338,302
|
|
|
$
|
186,996
|
|
19. Related party transactions
Hudson Advisors
The Company had an advisory agreement with Hudson Advisors, an affiliate of Lone Star, to provide certain management oversight services to the Company, including assistance and advice on strategic plans, obtaining and maintaining certain legal documents, and communicating and coordinating with service providers. The Company incurred fees totaling
$0.9 million
for the three months ended March 31, 2016, included in selling, general and administrative expense on the consolidated statement of operations.
In conjunction with the Offering, the advisory agreement with Hudson Advisors was terminated.
Affiliates receivable
The Company pays for certain services provided for affiliates which the Company bills to its affiliates. At March 31, 2017 and December 31, 2016, the Company recorded a receivable of
$1.1 million
and
$0.1 million
, respectively for services paid on behalf of affiliates in other current assets on the consolidated balance sheet.
Tax receivable agreement
In connection with the Offering, the Company entered into a tax receivable agreement with Lone Star that provides for, among other things, the payment by the Company to Lone Star of
85%
of the amount of certain covered tax benefits, which may reduce the actual liability for certain taxes that the Company might otherwise be required to pay. See further discussion at Note 14 Commitments and contingencies.
FORTERRA, INC.
Notes to Unaudited Condensed Consolidated Financial Statements
Bricks Joint Venture
In connection with the Bricks Disposition, Forterra entered into a transition services agreement with the joint venture formed by the affiliate of Lone Star and an unaffiliated third party pursuant to which Forterra's former bricks business was contributed (the "Bricks Joint Venture"). Pursuant to the transition services agreement, Forterra continued to provide certain administrative services, including but not limited to information technology, accounting and treasury for a limited period of time following the Bricks Disposition. The Bricks Joint Venture paid the Company a total of
$0.7 million
pursuant to the transition services agreement in the three months ended March 31, 2017. Additionally, during the three months ended March 31, 2017, the Company collected cash from as well as settled invoices and payroll on behalf of its former bricks business. As a result, as of March 31, 2017, Forterra has a net receivable of
$5.5 million
from affiliates for net cash paid on behalf of the recently divested Bricks business in other current assets.
20. Discontinued operations
On August 23, 2016, an affiliate of Lone Star entered into an agreement with an unaffiliated third party to contribute Forterra's bricks business to a Bricks Joint Venture. In exchange for the contribution of the bricks business, an affiliate of Lone Star received a
50%
interest in the Bricks Joint Venture. In connection with the Reorganization described in note 1, on October 17th, 2016, Forterra distributed its bricks business to an affiliate of Lone Star in a transaction among entities under common control (the Bricks Disposition). The Bricks Disposition has been accounted for as a discontinued operation. Following the Bricks Disposition, Forterra no longer had any relation to or business affiliation with its former bricks business or the Bricks Joint Venture other than contractual arrangements regarding certain limited transition services, the temporary use of the “Forterra” name, and a short-term loan, of approximately
$11.9 million
, which was subsequently been repaid in full in 2016.
The key components of loss from discontinued operations for the three months ended March 31, 2016 consist of the following:
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Three Months Ended March 31, 2016
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(in thousands)
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Revenue
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$
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30,338
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Operating costs and expenses
|
(29,364
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)
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Depreciation and amortization
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(2,467
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)
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Operating loss
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$
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(1,493
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)
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Other expense
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(81
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)
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Income tax benefit
|
(200
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)
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Loss from discontinued operations
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$
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(1,774
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)
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21.
Subsequent events
Effective May 1, 2017 the Company amended the 2016 Senior Lien Term Loan to increase the principal outstanding by an additional
$200.0 million
and to reduce the interest margins applicable to the full balance of the 2016 Senior Lien Term Loan by 50 basis points such that applicable margin based on LIBOR has been reduced from
3.50%
to
3.00%
. The net proceeds from the incremental term loan of
$196.8 million
were used to pay down a portion of the outstanding balance on the 2016 Revolver. This amendment had no effect on the Company's ability to increase the size of the 2016 Senior Term Loan under the original provisions thereof discussed in greater detail in note 11.
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements relate to matters such as our industry, business strategy, goals and expectations concerning our market position, future operations, margins, profitability, capital expenditures, liquidity, capital resources and other financial and operating information. We have used the words “approximately,” “anticipate,” “assume,” “believe,” “contemplate,” “continue,” “could,” “estimate,” “expect,” “future,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “seek,” “should,” “target,” “will” and similar terms and phrases to identify forward-looking statements. All of our forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those that we are expecting, including:
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•
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the level of construction activity, particularly in the residential construction and non-residential construction markets;
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government funding of infrastructure and related construction activities;
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•
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the highly competitive nature of our industry and our ability to effectively compete;
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•
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the availability and price of the raw materials we use in our business;
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•
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the ability to implement our growth strategy;
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•
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our dependence on key customers and the absence of long-term agreements with these customers;
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•
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the level of construction activity in Texas and Canada;
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•
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disruption at one of our manufacturing facilities or in our supply chain;
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•
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construction project delays and our inventory management;
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our ability to successfully integrate our recent acquisitions;
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•
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labor disruptions and other union activity;
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a tightening of mortgage lending or mortgage financing requirements;
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•
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our current dispute with HeidelbergCement related to the payment of an earn-out;
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compliance with environmental laws and regulations;
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compliance with health and safety laws and regulations and other laws and regulations to which we are subject;
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our dependence on key executives and key management personnel;
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our ability to retain and attract additional skilled technical or sales personnel;
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credit and non-payment risks of our customers;
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warranty and related claims;
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legal and regulatory claims;
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the seasonality of our business and its susceptibility to severe adverse weather;
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•
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our ability to maintain sufficient liquidity and ensure adequate financing or guarantees for large projects;
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delays or outages in our information technology systems and computer networks; and
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•
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additional factors discussed in our filings with the Securities and Exchange Commission, or the SEC.
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The forward-looking statements contained in this Quarterly Report on Form 10-Q are based on historical performance and management’s current plans, estimates and expectations in light of information currently available to us and are subject to uncertainty and changes in circumstances. There can be no assurance that future developments affecting us will be those that we have anticipated. Actual results may differ materially from these expectations due to changes in global, regional or local political, economic, business, competitive, market, regulatory and other factors, many of which are beyond our control, as well as the other factors described in Item 1A, “Risk Factors” in our 2016 10-K filed with the SEC on March 31, 2017. Additional factors or events that could cause our actual results to differ may also emerge from time to time, and it is not possible for us to predict all of them. Should one or more of these risks or uncertainties materialize, or should any of our assumptions prove to be incorrect, our actual results may vary in material respects from what we may have expressed or implied by these forward-looking statements. We caution that you should not place undue reliance on any of our forward-looking statements. Any forward-looking statement made by us speaks only as of the date on which we make it. We undertake no obligation to publicly update any forward-looking statement, whether as a result of new information, future developments or otherwise, except as may be required by applicable securities laws.