Item 1. Financial Statements
FOUNDATION BUILDING MATERIALS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(in thousands, except share data)
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March 31, 2018
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December 31, 2017
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Assets
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Current assets:
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Cash and cash equivalents
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$
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8,645
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$
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12,101
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Accounts receivable—net of allowance for doubtful accounts of $4,870 and $4,651, respectively
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312,787
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280,023
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Other receivables
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53,191
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59,462
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Inventories
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192,934
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184,436
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Prepaid expenses and other current assets
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11,327
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12,636
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Total current assets
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578,884
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548,658
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Property and equipment, net
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152,306
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151,408
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Intangible assets, net
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181,856
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189,770
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Goodwill
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466,614
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458,737
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Other assets
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5,352
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5,604
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Total assets
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$
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1,385,012
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$
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1,354,177
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Liabilities and stockholders' equity
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Current liabilities:
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Accounts payable
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$
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158,475
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$
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156,345
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Accrued payroll and employee benefits
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20,902
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21,158
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Accrued taxes
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11,081
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7,790
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Tax receivable agreement
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15,892
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15,892
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Other current liabilities
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27,405
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41,093
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Total current liabilities
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233,755
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242,278
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Asset-based revolving credit facility
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89,878
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47,486
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Long-term portion of notes payable, net
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536,748
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534,379
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Tax receivable agreement
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119,912
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119,912
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Deferred income taxes, net
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16,646
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17,819
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Other liabilities
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11,264
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13,639
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Total liabilities
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1,008,203
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975,513
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Commitments and contingencies
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Stockholders' equity:
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Preferred stock, $0.001 par value, authorized 10,000,000 shares; 0 shares issued
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—
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—
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Common stock, $0.001 par value, authorized 190,000,000 shares; 42,891,252 and 42,865,407 shares issued, respectively
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13
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13
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Additional paid-in capital
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330,339
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330,113
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Retained earnings
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45,311
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46,184
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Accumulated other comprehensive income
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1,146
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2,354
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Total stockholders' equity
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376,809
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378,664
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Total liabilities and stockholders' equity
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$
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1,385,012
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$
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1,354,177
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See accompanying notes to condensed consolidated financial statements (unaudited).
FOUNDATION BUILDING MATERIALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE (LOSS) INCOME (Unaudited)
(in thousands, except share and per share data)
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Three Months Ended March 31,
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2018
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2017
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Net sales
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$
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536,297
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$
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479,457
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Cost of goods sold
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381,857
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339,546
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Gross profit
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154,440
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139,911
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Operating expenses:
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Selling, general and administrative
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121,427
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113,062
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Depreciation and amortization
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19,886
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18,396
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Total operating expenses
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141,313
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131,458
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Income from operations
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13,127
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8,453
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Interest expense
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(15,132
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)
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(15,249
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)
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Other income, net
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67
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13,289
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(Loss) income before income taxes
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(1,938
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)
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6,493
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Income tax (benefit) expense
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(885
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)
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2,564
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Net (loss) income
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$
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(1,053
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)
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$
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3,929
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(Loss) earnings per share data:
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Basic
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$
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(0.02
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)
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$
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0.11
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Diluted
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$
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(0.02
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)
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$
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0.11
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Weighted average shares outstanding:
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Basic
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42,879,874
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37,273,156
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Diluted
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42,879,874
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37,273,156
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Comprehensive (loss) income:
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Net (loss) income
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$
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(1,053
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)
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$
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3,929
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Foreign currency translation adjustment
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(2,371
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)
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573
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Unrealized gain (loss) on derivative, net of taxes of $0.5 million
and $0.3 million, respectively.
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1,163
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(461
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)
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Total other comprehensive (loss) income
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(1,208
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)
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112
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Total comprehensive (loss) income
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$
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(2,261
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)
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$
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4,041
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See accompanying notes to condensed consolidated financial statements (unaudited).
FOUNDATION BUILDING MATERIALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)
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Three Months Ended March 31,
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2018
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2017
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Cash flows from operating activities:
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Net (loss) income
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$
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(1,053
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)
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$
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3,929
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Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities:
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Depreciation
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7,970
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7,131
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Amortization of intangible assets
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11,916
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11,265
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Amortization of debt issuance costs and debt discount
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2,624
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2,399
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Inventory fair value purchase accounting adjustment
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407
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71
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Provision for doubtful accounts
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551
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135
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Stock-based compensation
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271
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1,553
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Unrealized gain on derivative instruments, net
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(74
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)
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(13,219
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)
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Loss on disposal of property and equipment
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13
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152
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Deferred income taxes
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(1,614
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)
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2,543
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Change in assets and liabilities, net of effects of acquisitions:
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Accounts receivable
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(31,221
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)
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(11,273
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)
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Other receivables
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6,278
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12,595
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Inventories
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(6,129
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)
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(2,137
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)
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Prepaid expenses and other current assets
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1,423
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787
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Other assets
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36
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158
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Accounts payable
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2,423
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8,249
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Accrued payroll and employee benefits
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(202
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(7,793
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)
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Accrued taxes
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3,301
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(238
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)
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Other liabilities
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(13,461
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(15,424
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Net cash (used in) provided by operating activities
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(16,541
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)
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883
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Cash flows from investing activities:
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Purchases of property and equipment
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(7,594
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)
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(7,572
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)
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Payment of net working capital adjustments
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(15
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)
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—
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Proceeds from net working capital adjustments
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178
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—
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Proceeds from the disposal of fixed assets
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200
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98
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Acquisitions, net of cash acquired
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(21,233
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)
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(13,195
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)
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Net cash used in investing activities
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(28,464
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)
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(20,669
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)
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Cash flows from financing activities:
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Proceeds from asset-based revolving credit facility
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131,224
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114,500
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Repayments of asset-based revolving credit facility
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(88,724
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)
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(281,032
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)
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Tax withholding payment related to net settlement of equity awards
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(45
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)
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—
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Principal repayment of capital lease obligations
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(745
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)
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(691
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)
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Issuance of common stock
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—
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164,189
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Capital contributions
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—
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2,997
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Net cash provided by (used in) financing activities
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41,710
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(37
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)
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Effect of exchange rate changes on cash
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(161
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)
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64
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Net decrease in cash
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(3,456
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)
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(19,759
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)
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Cash and cash equivalents at beginning of period
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12,101
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28,552
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Cash and cash equivalents at end of period
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$
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8,645
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$
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8,793
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Supplemental disclosures of cash flow information:
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Cash paid during the period for income taxes
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$
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—
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$
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39
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Cash paid during the period for interest
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$
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24,201
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$
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25,308
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Supplemental disclosures of non-cash investing and financing activities:
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Change in fair value of derivatives, net of tax
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$
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1,163
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$
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461
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Assets acquired under capital lease
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$
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—
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$
|
378
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Goodwill adjustment for purchase price allocation
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$
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202
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$
|
723
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Tax receivable agreement
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$
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—
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$
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203,837
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See accompanying notes to condensed consolidated financial statements (unaudited).
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Foundation Building Materials, Inc.
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Notes to Condensed Consolidated Financial Statements
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1. Business and Basis of Presentation
Business
Foundation Building Materials, Inc. (the "Company") is a specialty distributor of wallboard, suspended ceiling systems, and mechanical insulation throughout the U.S. and Canada. Based in Tustin, California, the Company employs more than
3,700
people and operates more than
220
branches across the U.S. and Canada.
Organization
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 Company's authorized, issued and outstanding shares of common stock.
Reorganization
On February 8, 2017, FBM Alpha LLC, (formerly known as LSF9 Cypress Parent, LLC) ("Alpha"), transferred its wholly owned direct subsidiary, Foundation Building Materials Holding Company LLC (formerly known as FBM Beta LLC and LSF9 Cypress Holdings, LLC) ("Holdco"), and indirectly FBM Finance, Inc. to the Company, thereby transferring the business for which historical financial information is included in these results of operations, to be indirectly held by the Company (the "Reorganization").
Initial Public Offering
Following the Reorganization, on
February 15, 2017
, the Company completed an initial public offering ("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 and commissions and expenses, the net proceeds to the Company from the IPO were approximately
$164.0 million
. The Company used these net proceeds to repay borrowings outstanding under its asset-based revolving credit facility (the "ABL Credit Facility"). The proceeds of
$164.0 million
were recorded in equity, with approximately
$13,000
recorded for the par value of the common stock and the remaining amount recorded in additional paid-in capital. The underwriters exercised their option to purchase an 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.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States ("GAAP") for interim financial information and Article 10 of Regulation S-X. Accordingly, they do not include all the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments, consisting of normal recurring adjustments necessary for a fair presentation with respect to the interim financial statements, have been included. The results of operations for interim periods are not necessarily indicative of the results for full fiscal years. For further information, refer to the consolidated financial statements and footnotes thereto for the year ended December 31, 2017, included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 27, 2018 (the "2017 10-K").
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its consolidated subsidiaries. All intercompany balances and transactions have been eliminated.
The Company has
two
reportable segments, Specialty Building Products ("SBP") and Mechanical Insulation ("MI"). Resources are allocated and performance is assessed by the Company's CEO, who is the Chief Operating Decision Maker ("CODM").
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Foundation Building Materials, Inc.
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Notes to Condensed Consolidated Financial Statements
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2. Recently Issued Accounting Standards
Recently Adopted Accounting Standards
On January 1, 2018, the Company adopted new revenue recognition guidance, Accounting Standard Codification ("ASC") 606, Revenue from Contracts with Customers and all related amendments, using the modified retrospective method. The Company has completed its evaluation of the impact of this standard and has concluded that it did not have a material impact on its consolidated financial statements.
Revenue Recognition
-
Revenue is recognized upon transfer of control of promised products to customers in an amount that reflects the consideration expected to be received in exchange for those products. The applicable shipping and handling costs invoiced to the customer are included in "Selling, general and administrative" expenses in the accompanying consolidated statements of operations. All revenue recognized is net of sales taxes collected, which are subsequently remitted to the appropriate government authorities.
Performance Obligations
-
The performance obligation for product sales is met at a point in time, when the product is delivered and control is transferred to the customer. At inception of a contract with a customer, the price and quantity of goods are fixed. However, the Company offers discounts on terms and rebate incentives to select customers. The Company also gives customers the right to return eligible products.
Disaggregation of Revenue
-
Refer to Note 12, Segments, for further information, including revenue by segment by product and geography.
Contract Balances
-
The Company currently discloses its accounts receivable balances on the balance sheet. The Company does not have any contract assets due to the election of the practical expedient in Financial Accounting Standards Board ("FASB") ASC 340-40-25-4, which states an entity may recognize the incremental costs of obtaining a contract as an expense when incurred if the amortization period of the asset that the entity otherwise would have recognized is one year or less. The Company does not have any material contract liabilities.
The Company is also required to disclose revenue recognized in the reporting period from performance obligations satisfied in previous reporting periods. This guidance is consistent with existing guidance related to changes in accounting estimates. The Company will continue to monitor changes in estimates related to sales returns, customer discounts and customer rebates and will disclose them if material.
Significant Judgments
-
The Company calculates the allowance for sales returns, early pay discounts and customer rebates using the expected value method and believes its current methodology properly constrains revenue. The Company does not believe that a significant reversal in the amount of cumulative revenue recognized will occur when the uncertainty associated with the variable consideration is resolved.
Practical Expedients
-
In addition to the aforementioned practical expedient, the Company has elected the practical expedient as allowed by ASC 606-10-32-18, which states that an entity need not adjust the promised amount of consideration for the effects of a significant financing component if the entity expects, at contract inception, that the period between when the entity transfers promised goods or services to a customer and when the customer pays for those goods or services will be one year or less.
In January 2016, the FASB issued Accounting Standards Update ("ASU") No. 2016-01,
Financial Instruments
–
Overall
(Subtopic 825-10):
Recognition and Measurement of Financial Assets and Financial Liabilities
. The updated guidance enhances the reporting model for financial instruments by modifying how entities measure and recognize equity investments and present changes in the fair value of financial liabilities, and by simplifying the disclosure guidance for financial instruments. The amendments in this update are effective for fiscal years beginning after December 15, 2017. The amendments in this update should be applied prospectively. The Company adopted this guidance on January 1, 2018, and it did not have a material impact on the Company’s consolidated financial statements.
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Foundation Building Materials, Inc.
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Notes to Condensed Consolidated Financial Statements
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In August 2016, the FASB issued ASU No. 2016-15,
Statement of Cash Flows
(Topic 230):
Classification of Certain Cash Receipts and Cash Payments.
ASU No. 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. The Company adopted this guidance on January 1, 2018, and it did not have a material impact on the Company’s consolidated financial statements.
In January 2017, the FASB issued ASU No. 2017-01,
Business Combinations
(Topic 805):
Clarifying the Definition of a Business
, which clarifies 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 amendment is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The Company adopted this guidance on January 1, 2018, and it did not have a material impact on the Company’s consolidated financial statements.
On January 1, 2018, the Company adopted ASU 2018-02,
Income Statement-Reporting Comprehensive Income
(Topic 220):
Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income.
As a result of income tax effects of the Tax Cut and Jobs Act (the “Tax Act”), which reduced the corporate federal tax rate from 35.0% to 21.0%, the Company reclassified
$0.2 million
from accumulated other comprehensive income to retained earnings related to its net investment hedge.
Recently Issued Accounting Standards
In
February 2016
, the FASB issued ASU No. 2016-02,
Leases
(Topic 842). ASU No. 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; however, it does expect the adoption of this guidance to have a material impact on its consolidated financial statements.
In January 2017, the FASB issued ASU No. 2017-04,
Intangibles and Other
(Topic 350):
Simplifying the Test for Goodwill Impairment
, which eliminates the requirement to calculate the implied fair value of goodwill but rather requires an entity to record an impairment charge based on the excess of a reporting unit’s carrying value over its fair value. This amendment is effective for annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted. The Company does not expect the adoption of this guidance will have a material impact on its consolidated financial statements.
3. 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
March 31, 2018
, and December 31, 2017, 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. At
March 31, 2018
and December 31, 2017, the fair value of the derivative instrument was
$0.5
million and
$2.4 million
, respectively, recorded in other long-term liabilities.
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Foundation Building Materials, Inc.
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Notes to Condensed Consolidated Financial Statements
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The Company recognized a gain of
$1.2
million, net of taxes of
$0.6 million
, for the three months ended March 31, 2018, recorded in other comprehensive (loss) income related to the net investment hedge. The Company recognized a gain of
$0.5 million
, net of taxes of
$0.3 million
, for the three months ended March 31, 2017, recorded in other comprehensive (loss) income related to the net investment hedge.
The Company recorded a gain of
$19,000
for the three months ended March 31, 2018, in other income, net, related to the ineffective portion of the net investment hedge. The Company recorded a loss of
$67,000
for the three months ended March 31, 2017, in other income, net, related to the ineffective portion of the net investment hedge.
Embedded Derivative
The Company has the option to prepay its
$575.0 million
Senior Secured Notes due 2021 (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.
In addition, prior to
August 15, 2018
and in the event of equity offerings, the Company has the option to prepay up to
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%
of the principal amount plus accrued and unpaid interest.
On or after August 15, 2018, the Company may redeem the Notes subject to a redemption price equal to a percentage of the principal amount of the Notes, with such percentage set forth in the indenture governing the Notes, plus accrued and unpaid interest.
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. The fair value of the embedded derivative at March 31, 2018, and December 31, 2017 was
$0
, due to a minimal probability of an equity offering occurring where the proceeds are used to pay down the Notes prior to the expiration of the optional prepayment time period on August 15, 2018.
For the three months ended March 31, 2018, the change in fair value was
$0
. For the three months ended March 31, 2017, the change in fair value of
$13.2 million
was included in other income, net.
4. Acquisitions
The Company accounts for its acquisitions under the acquisition method, and accordingly, the results of operations of acquired entities are included in the Company’s consolidated financial statements from the acquisition date. Acquisition related costs are expensed as incurred. The purchase price is 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 March 31, 2018. The fair value of acquired intangible assets, primarily related to customer relationships, was estimated by applying a discounted cash flow model. That measure is based on significant Level 3 inputs not observable in the market. Key assumptions were developed based on the Company’s historical experience, future projections and comparable market data including future cash flows, long-term growth rates, implied royalty rates, attrition rates and discount rates. The purchase price allocations for the acquisitions set forth below are preliminary and subject to adjustment as additional information is obtained about facts and circumstances that existed as of the applicable acquisition date.
|
|
|
|
|
|
|
|
Foundation Building Materials, Inc.
|
|
|
|
Notes to Condensed Consolidated Financial Statements
|
|
During the three months ended March 31, 2018, the Company completed the following two acquisitions:
ArmCom Distributing Company
On February 1, 2018, the Company acquired the operations and substantially all of the assets of ArmCom Distributing Company ("ArmCom"), a division of St. Paul Linoleum and Carpet Company. ArmCom was an independent distributor of ceilings products and operated
five
branches in Minnesota, North Dakota, South Dakota and Nebraska.
RM Supply
On February 1, 2018, the Company acquired all of the stock of RM Supply, Inc. and certain assets of JMB Transportation, L.L.C. (collectively, “RM Supply”). RM Supply was an independent distributor of wallboard, steel framing, insulation, and wallboard accessories. RM Supply operated
two
branches in Missouri.
During the three months ended March 31, 2018, the Company completed the above acquisitions for an aggregate purchase price of
$21.9 million
. These acquisitions are not considered material, individually or in aggregate. The following table summarizes the estimated fair values of the assets acquired and liabilities assumed as of the acquisition date for the acquisitions summarized above ("2018 acquisitions") (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2018
|
|
Assets acquired:
|
|
|
|
Cash
|
|
$
|
671
|
|
|
Accounts receivable
|
|
3,320
|
|
|
Other receivables
|
|
448
|
|
|
Inventories
|
|
3,390
|
|
|
Prepaid and other current assets
|
|
146
|
|
|
Property and equipment
|
|
1,984
|
|
|
Goodwill
|
|
8,573
|
|
|
Intangible assets
|
|
4,200
|
|
|
Other assets
|
|
50
|
|
|
Total assets acquired:
|
|
22,782
|
|
|
Liabilities assumed:
|
|
|
|
Accounts payable
|
|
(530
|
)
|
|
Accrued expenses and other current liabilities
|
|
(348
|
)
|
|
Total liabilities assumed
|
|
(878
|
)
|
|
Total net assets acquired
|
|
$
|
21,904
|
|
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 businesses acquired. Goodwill and intangible assets recognized from asset acquisitions are expected to be tax deductible. One of the 2018 acquisitions was treated as an asset purchase and the other as a stock purchase for tax purposes. Generally, the most significant intangible asset acquired is customer relationships. The Company's acquisitions are generally subject to working capital adjustments, however, the Company does not expect any such adjustments to have a material impact on its consolidated financial statements. Any adjustments to the purchase price allocation of these acquisitions will be made as soon as practicable but no later than one year from the acquisition date. The pro forma impact of the 2018 acquisitions is not presented as the 2018 acquisitions are not considered material to the Company's consolidated financial statements.
|
|
|
|
|
|
|
|
Foundation Building Materials, Inc.
|
|
|
|
Notes to Condensed Consolidated Financial Statements
|
|
5. Goodwill and Intangible Assets
The change in goodwill from December 31, 2017, to March 31, 2018, consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
Carrying Value
|
|
Balance at December 31, 2017
|
$
|
458,737
|
|
|
Goodwill acquired
|
8,573
|
|
|
Purchase price allocation adjustments
|
39
|
|
|
Impact of foreign exchange rates
|
(735
|
)
|
|
Balance at March 31, 2018
|
$
|
466,614
|
|
As of March 31, 2018, goodwill allocated to the SBP and MI segments was
$460.7 million
and
$5.9 million
, respectively. As of December 31, 2017, goodwill allocated to the SBP and MI segments was
$452.8 million
and
$5.9 million
, respectively. Changes to initial purchase price allocations related to acquisitions may arise from changes in estimates from conditions that existed at the applicable acquisition date and as a result of net working capital adjustments.
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 March 31, 2018, and December 31, 2017 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2018
|
|
December 31, 2017
|
|
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
|
Net Carrying Amount
|
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
|
Net Carrying Amount
|
|
Trade names
|
$
|
15,980
|
|
|
$
|
(8,068
|
)
|
|
$
|
7,912
|
|
|
$
|
15,980
|
|
|
$
|
(7,283
|
)
|
|
$
|
8,697
|
|
|
Customer relationships
|
260,564
|
|
|
(89,413
|
)
|
|
171,151
|
|
|
256,650
|
|
|
(78,406
|
)
|
|
178,244
|
|
|
Other intangible assets
|
3,649
|
|
|
(856
|
)
|
|
2,793
|
|
|
3,640
|
|
|
(811
|
)
|
|
2,829
|
|
|
|
$
|
280,193
|
|
|
$
|
(98,337
|
)
|
|
$
|
181,856
|
|
|
$
|
276,270
|
|
|
$
|
(86,500
|
)
|
|
$
|
189,770
|
|
The weighted average amortization period of these intangible assets in the aggregate is
4.3 years
.
6. Long-Term Debt
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
March 31, 2018
|
|
December 31, 2017
|
|
Senior secured notes
|
$
|
575,000
|
|
|
$
|
575,000
|
|
|
Unamortized debt issuance costs - senior secured notes
|
(38,252
|
)
|
|
(40,621
|
)
|
|
Revolving asset-based credit facility
|
89,878
|
|
|
47,486
|
|
|
Unamortized debt issuance costs - asset-based revolving credit facility
|
(2,910
|
)
|
|
(3,164
|
)
|
|
|
$
|
623,716
|
|
|
$
|
578,701
|
|
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 fully and unconditionally guaranteed on a senior secured basis, jointly and severally, by Alpha and each of Alpha's domestic wholly owned restricted subsidiaries (other than certain excluded subsidiaries) (the "Guarantors"). 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 ABL Credit Facility in respect of certain other collateral of the Issuers and the Guarantors of the Notes.
|
|
|
|
|
|
|
|
Foundation Building Materials, Inc.
|
|
|
|
Notes to Condensed Consolidated Financial Statements
|
|
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. 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").
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 an applicable premium and accrued and unpaid interest, if any, to, but excluding, the applicable redemption date. In addition, prior to August 15, 2018 and in the event of equity offerings, the Issuers are entitled to redeem up to
40%
of the aggregate principal amount of the Notes 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. 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.
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 Facility
On August 9, 2016, Holdco
as the initial borrower along with Alpha and additional U.S. and Canadian borrowers
entered into the ABL Credit Facility with Goldman Sachs Bank USA as administrative agent, which matures on February 9, 2021. The ABL Credit Facility bears interest, at the applicable borrower's option, at either a Eurodollar rate or an alternate base rate plus an applicable margin. Based on the historical excess availability under the ABL Credit Facility, 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 borrowers' eligible receivables and inventory in both the United States and Canada, as defined in the ABL Credit Facility, subject to certain reserves, with a
$75 million
sub-limit on the Canadian borrowing base. As of the closing of the ABL Credit Facility, 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 ABL Credit Facility based on quarterly average loan utilization. Letters of credit under the ABL Credit Facility 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 ABL Credit Facility is due and payable each year in quarterly installments on the last day of each quarter. The ABL Credit Facility is a senior secured obligation of Alpha, Holdco, and the borrowers, with priority over certain collateral of the Company and its subsidiaries. There are no prepayment premiums associated with the ABL Credit Facility.
On September 23, 2016, Alpha, Holdco and the additional U.S. and Canadian borrowers entered into an Incremental Facility Amendment to the ABL Credit Facility which extended borrowing commitments under the ABL Credit Facility by an additional
$50 million
, resulting in total borrowing capacity of
$300 million
.
As of March 31, 2018, the Company had
$89.9 million
of outstanding borrowings and
$210.1 million
of available aggregate undrawn borrowing capacity under the ABL Credit Facility. The weighted average interest rate for borrowings under the ABL Credit Facility for the three months ended March 31, 2018 was
3.1%
.
7. Tax Receivable Agreement Liability
In connection with the IPO, the Company entered into a tax receivable agreement ("TRA") with Parent 2 that provides for the payment by the Company 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 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. During the three months ended March 31, 2017, the Company recorded a liability of
$203.8 million
, with a corresponding offset to additional paid-in capital for the TRA. At the end of each reporting period, any changes in the Company's estimate of the liability are recorded in the consolidated statement of operations as a component of other income (expense). The timing and amount of future tax benefits associated with the TRA are subject to change, and future payments may be required which could be materially different from the current estimated liability. The TRA will remain in effect until all tax benefits have been used or expired, unless the agreement is terminated early.
|
|
|
|
|
|
|
|
Foundation Building Materials, Inc.
|
|
|
|
Notes to Condensed Consolidated Financial Statements
|
|
At March 31, 2018, and December 31, 2017, the TRA liability balance was
$135.8 million
. There have been no payments related to the TRA from inception to March 31, 2018. The first payment related to the TRA is anticipated to be made during the fourth quarter of 2018 and is estimated to be
$15.9 million
and was reflected as a current liability as of March 31, 2018 and December 31, 2017.
8. Accumulated Other Comprehensive Income
Accumulated other comprehensive income consists of cumulative unrealized foreign currency translation adjustments and unrealized changes in fair value on certain derivative instruments. During the three months ended March 31, 2018, $0.2 million was reclassified to retained earnings as a result of income tax effects of the Tax Act, which reduced the corporate federal tax rate from 35.0% to 21.0%. During the three months ended March 31, 2017, there were no reclassifications out of accumulated other comprehensive income.
The components of accumulated other comprehensive income for the
three months ended March 31, 2018
were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative unrealized foreign currency translation gain (loss)
|
|
Unrealized (loss) gain on derivative, net of tax
|
|
Total
|
|
Balance at December 31, 2017
|
$
|
3,863
|
|
|
$
|
(1,509
|
)
|
|
$
|
2,354
|
|
|
Other comprehensive (loss) income
|
(2,371
|
)
|
|
1,163
|
|
|
(1,208
|
)
|
|
Balance at March 31, 2018
|
$
|
1,492
|
|
|
$
|
(346
|
)
|
|
$
|
1,146
|
|
9. 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
March 31, 2018
, 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.
10. Fair Value Measurements
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 accounts receivable, trade payables and accrued liabilities approximates fair value due to their short-term maturity. The Company may adjust the carrying amount of certain non-financial assets to fair value on a non-recurring basis when they are impaired.
|
|
|
|
|
|
|
|
Foundation Building Materials, Inc.
|
|
|
|
Notes to Condensed Consolidated Financial Statements
|
|
The estimated carrying amount and fair value of the Company’s financial instruments measured and recorded at fair value on a recurring basis at March 31, 2018 is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at March 31, 2018
|
|
|
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 (Note 3)
|
$
|
—
|
|
|
$
|
(484
|
)
|
|
$
|
—
|
|
|
$
|
(484
|
)
|
The estimated carrying amount and fair value of the Company’s financial instruments measured and recorded at fair value on a recurring basis at December 31, 2017 is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at December 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
|
|
Recurring:
|
|
|
|
|
|
|
|
|
Non-current liabilities
|
|
|
|
|
|
|
|
|
Derivative liability (Note 3)
|
$
|
—
|
|
|
$
|
(2,364
|
)
|
|
$
|
—
|
|
|
$
|
(2,364
|
)
|
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, 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 for which fair value is only disclosed is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at March 31, 2018
|
|
|
Carrying Amount
|
|
Quoted Prices in Active Markets for Identical Assets (Level 1)
|
|
Significant Other Observable Inputs (Level 2)
|
|
Significant Unobservable Inputs (Level 3)
|
|
Total Fair Value
|
|
Senior secured notes
|
$
|
536,748
|
|
|
$
|
—
|
|
|
$
|
602,140
|
|
|
$
|
—
|
|
|
$
|
602,140
|
|
11. Income Taxes
For the three months ended March 31, 2018 and 2017, the Company's effective tax rates were
45.7%
and
39.5%
, respectively. The variance from the statutory federal tax rate of 21.0% for the three months ended March 31, 2018, was primarily due to a refinement of the provisional estimate of the one-time repatriation tax under the Tax Act, treated as a discrete item during the quarter, state income taxes and foreign rate differential. The variance from the statutory federal tax rate of 35.0% for the three months ended March 31, 2017, was primarily due to state income taxes.
|
|
|
|
|
|
|
|
Foundation Building Materials, Inc.
|
|
|
|
Notes to Condensed Consolidated Financial Statements
|
|
On January 1, 2018, the Company adopted ASU 2018-02,
Income Statement-Reporting Comprehensive Income
(Topic 220):
Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income.
As a result of income tax effects of the Tax Act, which reduced the corporate federal tax rate from 35.0% to 21.0%, the Company reclassified
$0.2 million
from accumulated other comprehensive income to retained earnings related to its net investment hedge.
On December 22, 2017, the United States government enacted the Tax Act resulting in significant modifications to existing law. The Company follows the guidance in Securities and Exchange Commission Staff Accounting Bulletin ("SAB") 118, which provides additional clarification regarding the application of ASC Topic 740 in situations where the Company does not have the necessary information available, prepared, or analyzed in reasonable detail to complete the accounting for certain income tax effects of the Tax Act for the reporting period in which the Tax Act was enacted. SAB 118 provides for a measurement period beginning in the reporting period that includes the Tax Act’s enactment date and ending when the Company has obtained, prepared, and analyzed the information needed in order to complete the accounting requirements but in no circumstance should the measurement period extend beyond one year from the enactment date.
At March 31, 2018, the Company has completed the accounting for the effects of the Tax Act except for the repricing of ending deferred taxes due to the reduction in the corporate tax rate and the impact of the one-time deemed repatriation transition tax on unrepatriated foreign earnings. As a result, the Company's financial statements reflect these effects of the Tax Act as provisional based on a reasonable estimate of the income tax effects. At December 31, 2017, the Company had included a provisional reduction in deferred tax liability and corresponding provisional reduction in tax provision expense of
$9.1 million
in relation to the repricing of its ending deferred tax balance. The provisional amount was and is based on information currently available at that time, including estimated book to tax adjustments. The Company continues to gather and analyze information, including any future legislative tax developments at the federal or state jurisdictions, in order to complete the accounting for the repricing of the ending deferred balances as of March 31, 2018.
The Company has also included a provisional income tax payable in the amount of
$0.2 million
related to the one-time deemed repatriation transition tax on unrepatriated foreign earnings. The provisional amount is based on information currently available, including estimated tax earnings and profits and tax pools from foreign investments. In addition, the income tax payable has been calculated by electing out of the use of net operating losses in order to maximize the use of foreign tax credits. The Company has also estimated the state tax impact of the Tax Act. The Company continues to gather and analyze information, including historical adjustments to earnings and profits of foreign subsidiaries and the available elections, in order to complete the accounting for the effects of the estimated transition tax. Any future legislative tax developments at the federal or state jurisdictions will need to be examined for potential application. It is the intention of the Company to complete the necessary analysis within the measurement period.
The Company considers the earnings of non-U.S. subsidiaries to be indefinitely invested outside the United States based on estimates that future domestic cash generation will be sufficient to meet future domestic cash needs and the Company's specific plans for reinvestment of those subsidiary earnings. As required by the Tax Act, as of March 31, 2018 and December 31, 2017, the Company has recorded a provisional tax liability related to the U.S. federal income taxes of approximately
$8.2 million
and
$10.2 million
, respectively, of undistributed earnings of foreign subsidiaries indefinitely invested outside the United States. However, the Company has not recorded a deferred tax liability for state and foreign withholding taxes associated with the repatriation of those foreign earnings. If the Company decides to repatriate the foreign earnings, it would need to adjust its income tax provision in the period it determined that the earnings will no longer be indefinitely invested outside the United States. The Company has no present intention to repatriate any of its foreign earnings.
12. 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 CODM.
|
|
|
|
|
|
|
|
Foundation Building Materials, Inc.
|
|
|
|
Notes to Condensed Consolidated Financial Statements
|
|
Based on the provisions of ASC 280, the Company has defined its operating segments by considering management structure and product offerings. This evaluation resulted in the following reportable segments:
|
|
|
|
•
|
Specialty Building Products—SBP distributes wallboard, metal framing, suspended ceiling systems and complementary and other products. Complementary and other products includes stucco and exterior insulation and finish systems, as well 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—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 and 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 profit. 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 and gross profit for each reportable segment (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
2018
|
|
2017
|
|
|
Net Sales
|
Gross Profit
|
|
Net Sales
|
Gross Profit
|
|
SBP
|
$
|
463,661
|
|
$
|
134,437
|
|
|
$
|
418,463
|
|
$
|
122,426
|
|
|
MI
|
72,636
|
|
20,003
|
|
|
60,994
|
|
17,485
|
|
|
Consolidated
|
$
|
536,297
|
|
$
|
154,440
|
|
|
$
|
479,457
|
|
$
|
139,911
|
|
|
Total gross profit
|
$
|
154,440
|
|
|
|
$
|
139,911
|
|
|
|
Total operating expenses
|
(141,313
|
)
|
|
|
(131,458
|
)
|
|
|
Interest expense
|
(15,132
|
)
|
|
|
(15,249
|
)
|
|
|
Other income, net
|
67
|
|
|
|
13,289
|
|
|
|
(Loss) income before income taxes
|
$
|
(1,938
|
)
|
|
|
$
|
6,493
|
|
|
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 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
2018
|
2017
|
|
United States
|
$
|
472,941
|
|
$
|
426,941
|
|
|
Canada
|
63,356
|
|
52,516
|
|
|
Total
|
$
|
536,297
|
|
$
|
479,457
|
|
|
|
|
|
|
|
|
|
Foundation Building Materials, Inc.
|
|
|
|
Notes to Condensed Consolidated Financial Statements
|
|
The following table sets forth property, plant and equipment, goodwill and intangibles by geographic area (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2018
|
|
December 31, 2017
|
|
Property, plant and equipment, net
|
|
|
|
|
|
|
United States
|
$
|
136,706
|
|
|
$
|
135,330
|
|
|
Canada
|
15,600
|
|
|
16,078
|
|
|
Total property, plant and equipment, net
|
$
|
152,306
|
|
|
$
|
151,408
|
|
|
Goodwill
|
|
|
|
|
|
|
United States
|
$
|
440,090
|
|
|
$
|
431,476
|
|
|
Canada
|
26,524
|
|
|
27,261
|
|
|
Total goodwill
|
$
|
466,614
|
|
|
$
|
458,737
|
|
|
Intangibles, net
|
|
|
|
|
|
|
United States
|
$
|
174,852
|
|
|
$
|
182,070
|
|
|
Canada
|
7,004
|
|
|
7,700
|
|
|
Total intangibles, net
|
$
|
181,856
|
|
|
$
|
189,770
|
|
The Company’s net sales by segment and major product line, and segment gross profit and gross margin, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
Change
|
|
|
2018
|
|
2017
|
|
$
|
|
%
|
|
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
SBP Segment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wallboard
(1)
|
$
|
180,653
|
|
39.0
|
%
|
|
$
|
168,239
|
|
40.2
|
%
|
|
$
|
12,414
|
|
|
7.4
|
%
|
|
Suspended ceiling systems
|
86,179
|
|
18.6
|
%
|
|
72,716
|
|
17.4
|
%
|
|
13,463
|
|
|
18.5
|
%
|
|
Metal framing
|
73,967
|
|
16.0
|
%
|
|
68,662
|
|
16.4
|
%
|
|
5,305
|
|
|
7.7
|
%
|
|
Complementary and other products
|
122,862
|
|
26.4
|
%
|
|
108,846
|
|
26.0
|
%
|
|
14,016
|
|
|
12.9
|
%
|
|
Total SBP net sales
|
$
|
463,661
|
|
100.0
|
%
|
|
$
|
418,463
|
|
100.0
|
%
|
|
$
|
45,198
|
|
|
10.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MI Segment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total MI net sales
(2)
|
$
|
72,636
|
|
100.0
|
%
|
|
$
|
60,994
|
|
100.0
|
%
|
|
$
|
11,642
|
|
|
19.1
|
%
|
|
Total net sales
|
$
|
536,297
|
|
|
|
$
|
479,457
|
|
|
|
$
|
56,840
|
|
|
11.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit - SBP
|
$
|
134,437
|
|
|
|
$
|
122,426
|
|
|
|
$
|
12,011
|
|
|
9.8
|
%
|
|
Gross profit - MI
|
20,003
|
|
|
|
17,485
|
|
|
|
2,518
|
|
|
14.4
|
%
|
|
Total gross profit
|
$
|
154,440
|
|
|
|
$
|
139,911
|
|
|
|
$
|
14,529
|
|
|
10.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin - SBP
|
29.0
|
%
|
|
|
29.3
|
%
|
|
|
(0.3
|
)%
|
|
|
|
|
Gross margin - MI
|
27.5
|
%
|
|
|
28.7
|
%
|
|
|
(1.2
|
)%
|
|
|
|
|
Total gross margin
|
28.8
|
%
|
|
|
29.2
|
%
|
|
|
(0.4
|
)%
|
|
|
|
|
(1)
For the three months ended March 31, 2017, wallboard accessories have been reclassified from “Wallboard” to “Complementary and other products” to conform to the current year presentation.
|
|
(2)
MI contains sales from Commercial and industrial insulation and Non-insulation products.
|
|
|
|
|
|
|
|
|
Foundation Building Materials, Inc.
|
|
|
|
Notes to Condensed Consolidated Financial Statements
|
|
13. Other Current Liabilities
The balance of other current liabilities consisted of the following at March 31, 2018 and December 31, 2017 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2018
|
|
December 31, 2017
|
|
Accrued expenses
|
$
|
5,761
|
|
|
$
|
6,919
|
|
|
Accrued interest
|
6,343
|
|
|
18,093
|
|
|
Accrued other
|
15,301
|
|
|
16,081
|
|
|
Total other current liabilities
|
$
|
27,405
|
|
|
$
|
41,093
|
|
14. (Loss) Earnings Per Share
Basic (loss) earnings per share represents net (loss) income for the period, divided by the weighted average number of shares of common stock outstanding for the period.
The following are the number of shares of common stock used to compute the basic and diluted (loss) earnings per share for each period:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
2018
|
|
2017
|
|
Weighted average shares used in basic computations
|
42,879,874
|
|
|
37,273,156
|
|
|
Dilutive effect of stock options and restricted stock units
|
—
|
|
|
—
|
|
|
Weighted average shares used in diluted computations
|
42,879,874
|
|
|
37,273,156
|
|
For the three months ended March 31, 2018 and 2017, there were approximately
290,000
and
108,000
shares respectively, not included in the computation of diluted weighted average shares because their effect would have been antidilutive.
Results of Operations
Three Months Ended March 31, 2018 Compared to the Three Months Ended March 31, 2017
The following table summarizes certain consolidated financial information related to our operating results for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
2018
|
|
2017
|
|
(dollars in thousands)
|
|
|
|
|
|
|
Statements of operations data
|
|
|
|
|
|
|
Net sales
|
$
|
536,297
|
|
100.0
|
%
|
|
$
|
479,457
|
|
100.0
|
%
|
|
Cost of goods sold
|
381,857
|
|
71.2
|
%
|
|
339,546
|
|
70.8
|
%
|
|
Gross profit
|
154,440
|
|
28.8
|
%
|
|
139,911
|
|
29.2
|
%
|
|
Operating expenses:
|
|
|
|
|
|
|
Selling, general and administrative
|
121,427
|
|
22.6
|
%
|
|
113,062
|
|
23.6
|
%
|
|
Depreciation and amortization
|
19,886
|
|
3.7
|
%
|
|
18,396
|
|
3.8
|
%
|
|
Total operating expenses
|
141,313
|
|
26.3
|
%
|
|
131,458
|
|
27.4
|
%
|
|
Income from operations
|
13,127
|
|
2.5
|
%
|
|
8,453
|
|
1.8
|
%
|
|
Interest expense
|
(15,132
|
)
|
(2.8
|
)%
|
|
(15,249
|
)
|
(3.2
|
)%
|
|
Other income, net
|
67
|
|
—
|
%
|
|
13,289
|
|
2.8
|
%
|
|
(Loss) income before income taxes
|
(1,938
|
)
|
(0.3
|
)%
|
|
6,493
|
|
1.4
|
%
|
|
Income tax (benefit) expense
|
(885
|
)
|
(0.2
|
)%
|
|
2,564
|
|
0.5
|
%
|
|
Net (loss) income
|
$
|
(1,053
|
)
|
(0.1
|
)%
|
|
$
|
3,929
|
|
0.9
|
%
|
The Company’s net sales by segment and major product line, and segment gross profit and gross margin, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
Change
|
|
|
2018
|
|
2017
|
|
$
|
|
%
|
|
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
SBP Segment
|
|
|
|
|
|
|
|
|
|
|
Wallboard
(1)
|
$
|
180,653
|
|
39.0
|
%
|
|
$
|
168,239
|
|
40.2
|
%
|
|
$
|
12,414
|
|
|
7.4
|
%
|
|
Suspended ceiling systems
|
86,179
|
|
18.6
|
%
|
|
72,716
|
|
17.4
|
%
|
|
13,463
|
|
|
18.5
|
%
|
|
Metal framing
|
73,967
|
|
16.0
|
%
|
|
68,662
|
|
16.4
|
%
|
|
5,305
|
|
|
7.7
|
%
|
|
Complementary and other products
|
122,862
|
|
26.4
|
%
|
|
108,846
|
|
26.0
|
%
|
|
14,016
|
|
|
12.9
|
%
|
|
Total SBP net sales
|
$
|
463,661
|
|
100.0
|
%
|
|
$
|
418,463
|
|
100.0
|
%
|
|
$
|
45,198
|
|
|
10.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
MI Segment
|
|
|
|
|
|
|
|
|
|
|
Total MI net sales
(2)
|
$
|
72,636
|
|
100.0
|
%
|
|
$
|
60,994
|
|
100.0
|
%
|
|
$
|
11,642
|
|
|
19.1
|
%
|
|
Total net sales
|
$
|
536,297
|
|
|
|
$
|
479,457
|
|
|
|
$
|
56,840
|
|
|
11.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit - SBP
|
$
|
134,437
|
|
|
|
$
|
122,426
|
|
|
|
$
|
12,011
|
|
|
9.8
|
%
|
|
Gross profit - MI
|
20,003
|
|
|
|
17,485
|
|
|
|
2,518
|
|
|
14.4
|
%
|
|
Total gross profit
|
$
|
154,440
|
|
|
|
$
|
139,911
|
|
|
|
$
|
14,529
|
|
|
10.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin - SBP
|
29.0
|
%
|
|
|
29.3
|
%
|
|
|
(0.3
|
)%
|
|
|
|
Gross margin - MI
|
27.5
|
%
|
|
|
28.7
|
%
|
|
|
(1.2
|
)%
|
|
|
|
Total gross margin
|
28.8
|
%
|
|
|
29.2
|
%
|
|
|
(0.4
|
)%
|
|
|
|
(1)
For the three months ended March 31, 2017, wallboard accessories have been reclassified from “Wallboard” to “Complementary and other products” to conform to the current year presentation.
|
|
(2)
MI contains sales from Commercial and industrial insulation and Non-insulation products.
|
Net Sales
Consolidated net sales for the three months ended March 31, 2018, were $536.3 million compared to $479.5 million for the three months ended March 31, 2017, representing an increase of $56.8 million, or 11.9%. Base business net sales, as defined in the table below, increased $22.5 million, or 4.9% to $485.2 million, for the three months ended March 31, 2018, compared to the three months ended March 31, 2017. Net sales from acquired branches and existing branches that were strategically combined contributed $34.3 million of the increase.
The change in our base business net sales was primarily driven by the following factors:
|
|
|
|
•
|
a decrease in wallboard sales of $1.6 million, or 1.0%, primarily due to a decrease in wallboard unit volume of 4.0% impacted by adverse weather conditions, partially offset by an increase in average selling price of 3.0%;
|
|
|
|
|
•
|
an increase in suspended ceiling systems sales of $6.7 million, or 9.7%, primarily due to increases in commercial activity;
|
|
|
|
|
•
|
an increase in Complementary and other product sales of $7.4 million, or 7.0%, primarily due to our continued initiatives to increase complementary product sales; and
|
|
|
|
|
•
|
an increase in MI net sales of $9.3 million, or 15.5%, primarily due to higher net sales to industrial end markets.
|
The table below highlights net sales from our base business and acquired and combined branches:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
Change
|
|
|
2018
|
|
2017
|
|
$
|
|
%
|
|
(dollars in thousands)
|
|
|
|
|
|
|
|
|
Base business
(1)
|
$
|
485,241
|
|
|
$
|
462,743
|
|
|
$
|
22,498
|
|
|
4.9
|
%
|
|
Acquired and combined
(2)
|
51,056
|
|
|
16,714
|
|
|
34,342
|
|
|
205.5
|
%
|
|
Net sales
|
$
|
536,297
|
|
|
$
|
479,457
|
|
|
$
|
56,840
|
|
|
11.9
|
%
|
|
(1)
Represents net sales from branches that were owned by us since January 1, 2017 and branches that were opened by us during such period.
|
|
(2)
Represents branches acquired and existing branches combined with acquired branches after January 1, 2017.
|
The table below highlights our changes in base business net sales and net sales from branches acquired and strategically combined by segment and major product line:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2017
|
|
Base Business Net Sales (Decrease) Increase
|
|
Acquired and Combined Net Sales Increase
|
|
Three Months Ended March 31, 2018
|
|
Total Net Sales % Increase
|
Base Business Net Sales % (Decrease) Increase
(1)
|
|
Acquired and Combined Net Sales % Increase
(2)
|
|
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wallboard
|
$
|
168,239
|
|
|
$
|
(1,641
|
)
|
|
$
|
14,055
|
|
|
$
|
180,653
|
|
|
7.4
|
%
|
(1.0
|
)%
|
|
203.2
|
%
|
|
Suspended ceiling systems
|
72,716
|
|
|
6,719
|
|
|
6,744
|
|
|
86,179
|
|
|
18.5
|
%
|
9.7
|
%
|
|
186.3
|
%
|
|
Metal framing
|
68,662
|
|
|
776
|
|
|
4,529
|
|
|
73,967
|
|
|
7.7
|
%
|
1.2
|
%
|
|
210.0
|
%
|
|
Complementary and other products
|
108,846
|
|
|
7,373
|
|
|
6,643
|
|
|
122,862
|
|
|
12.9
|
%
|
7.0
|
%
|
|
236.1
|
%
|
|
SBP net sales
|
418,463
|
|
|
13,227
|
|
|
31,971
|
|
|
463,661
|
|
|
10.8
|
%
|
3.3
|
%
|
|
206.2
|
%
|
|
MI net sales
|
60,994
|
|
|
9,271
|
|
|
2,371
|
|
|
72,636
|
|
|
19.1
|
%
|
15.5
|
%
|
|
196.4
|
%
|
|
Total net sales
|
$
|
479,457
|
|
|
$
|
22,498
|
|
|
$
|
34,342
|
|
|
$
|
536,297
|
|
|
11.9
|
%
|
4.9
|
%
|
|
205.5
|
%
|
|
Average daily net sales
|
$
|
7,492
|
|
|
$
|
352
|
|
|
$
|
537
|
|
|
$
|
8,380
|
|
|
11.9
|
%
|
4.9
|
%
|
|
205.5
|
%
|
|
(1)
Represents base business net sales (decrease) increase as a percentage of base business net sales for the three months ended March 31, 2017.
|
|
(2)
Represents acquired and combined net sales increase as a percentage of acquired and combined net sales for the three months ended March 31, 2017.
|
Specialty Building Products
. SBP net sales for the three months ended March 31, 2018 were $463.7 million compared to $418.5 million for the three months ended March 31, 2017, representing an increase of $45.2 million, or 10.8%. Net sales from acquired branches and existing branches that were strategically combined with acquired branches contributed $32.0 million of the increase. The change in our SBP base business net sales was driven by a decrease in wallboard sales of $1.6 million, offset by an increase in suspended ceiling systems sales and complementary other product sales of $6.7 million and $7.4 million, respectively. Wallboard volume decreased 4.0% due to adverse weather conditions, partially offset by an increase in our average selling price of 3.0%. The increase in suspended ceiling systems and complementary and other product sales was driven by an increase in commercial activity and by our continued initiatives to increase complementary product sales, respectively.
Mechanical Insulation.
MI net sales for the three months ended March 31, 2018 were $72.6 million compared to $61.0 million for the three months ended March 31, 2017, representing an increase of $11.6 million, or 19.1%. Net sales from base business branches contributed $9.3 million of the increase, which was primarily due to higher net sales to industrial end markets.
Gross Profit and Gross Margin
Consolidated gross profit for the three months ended March 31, 2018 was $154.4 million compared to $139.9 million for the three months ended March 31, 2017, representing an increase of $14.5 million, or 10.4%. The increase in gross profit was primarily due to the increase in net sales from our base business and acquired sales. Consolidated gross margin for the three months ended March 31, 2018 was 28.8% compared to 29.2% for the three months ended March 31, 2017. The decrease in gross margin was primarily due to a change in product mix with a higher contribution from lower gross margin products such as suspended ceilings systems and mechanical insulation on a percentage of net sales basis.
Specialty Building Products.
SBP gross profit for the three months ended March 31, 2018 was $134.4 million compared to $122.4 million for the three months ended March 31, 2017, representing an increase of $12.0 million, or 9.8%. SBP gross profit increased due to higher net sales from our base business and acquired sales. SBP gross margin for the three months ended March 31, 2018 was 29.0% compared to 29.3% for the three months ended March 31, 2017. The decrease in gross margin was primarily due to a change in product mix with a higher contribution from lower gross margin products such as suspended ceilings systems on a percentage of net sales basis.
Mechanical Insulation.
MI gross profit for the three months ended March 31, 2018 was $20.0 million compared to $17.5 million for the three months ended March 31, 2017, representing an increase of $2.5 million, or 14.4%. MI gross profit increased due to higher net sales from our base business. MI gross margin for the three months ended March 31, 2018 was 27.5% compared to 28.7% for the three months ended March 31, 2017. This decrease was primarily due to a higher contribution from large industrial projects for the three months ended March 31, 2018, which generally have lower margins relative to the overall MI segment.
Selling, General & Administrative
SG&A expenses consist of warehouse, delivery and general and administrative expenses. SG&A expenses for the three months ended March 31, 2018 were $121.4 million compared to $113.1 million for the three months ended March 31, 2017, representing an increase of $8.4 million, or 7.4%. As a percentage of net sales, SG&A expenses were 22.6% for the three months ended March 31, 2018 compared to 23.6% for the three months ended March 31, 2017. Excluding non-recurring adjustments of $1.6 million and $5.6 million, respectively, SG&A as a percentage of net sales for the three months ended March 31, 2018 were 22.3% compared to 22.4% for the three months ended March 31, 2017. The SG&A decrease as a percentage of net sales was due to our continued focus on operating efficiencies and cost reduction initiatives.
Depreciation and Amortization
Depreciation and amortization for the three months ended March 31, 2018 was $19.9 million compared to $18.4 million for the three months ended March 31, 2017, representing an increase of $1.5 million, or 8.1%. The increase in depreciation and amortization was primarily due to acquisitions subsequent to March 31, 2017, which increased the value of property and equipment and intangible assets subject to depreciation and amortization.
Interest Expense
Interest expense for the three months ended March 31, 2018 was $15.1 million compared to $15.2 million for the three months ended March 31, 2017, representing a decrease of $0.1 million, or 0.8%.
Other Income, Net
Other income, net for the three months ended March 31, 2018 was $0.1 million compared to $13.3 million for the three months ended March 31, 2017, representing a decrease of $13.2 million. In the 2017 period, there was a $13.2 million change in fair value of the embedded derivative related to our $575.0 million Senior Secured Notes due 2021, or the Notes, which was recorded as other income, net. There was no change in the fair value in the 2018 period. See Note 3, Derivatives and Hedging Activities, to the condensed consolidated financial statements.
Income Taxes
Income tax benefit for the three months ended March 31, 2018 was $0.9 million compared to an income tax expense of $2.6 million for the three months ended March 31, 2017, for a variance of $3.5 million. The effective tax rate for the three months ended March 31, 2018 was 45.7% compared to 39.5% for the three months ended March 31, 2017. The difference in the effective tax rates between periods was due primarily to the Tax Cut and Jobs Act, which decreased the statutory federal tax rate, offset by the refinement of the provisional estimate of the one-time repatriation tax.
Liquidity and Capital Resources
Summary
We depend on cash flow from operations, cash on hand and funds available under our asset-backed revolving credit facility, or ABL Credit Facility, and in the future we may depend on other debt financings allowed under the terms of the indenture governing the Notes, or the Indenture, and the agreement governing the ABL Credit Facility, or the ABL Credit Agreement, and equity financings, to finance our acquisition strategy, working capital needs and capital expenditures, which approximate 1.0% of net sales. 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, or TRA, may also have a negative impact on our liquidity if, among other things, payments we make under the TRA exceed the actual cash savings we and our subsidiaries realize in respect of the tax benefits covered by the TRA after we have paid our taxes and other obligations. In addition, as a result of either an early termination of the TRA or a change of control, we could be required to make payments under the TRA that exceed our actual cash savings under the TRA. In these situations, our obligations under the TRA 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 sales 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 TRA requires that, after Lone Star Fund IX (U.S.) L.P., or Lone Star, no longer controls us, any senior debt document that refinances or replaces our existing indebtedness permits our subsidiaries to make dividends to us, without any conditions, to the extent required for us to make its payments under the TRA, 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 Agreement 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 March 31, 2018, we had $89.9 million of outstanding borrowings and $210.1 million of available aggregate undrawn borrowing capacity under the ABL Credit Facility. Total liquidity was $218.6 million inclusive of $8.6 million in cash and cash equivalents as of March 31, 2018.
Cash Flows
A summary of net cash provided by, or (used in), operating, investing and financing activities is shown in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
2018
|
|
2017
|
|
(in thousands)
|
|
|
|
|
Net cash (used in) provided by operating activities
|
$
|
(16,541
|
)
|
|
$
|
883
|
|
|
Net cash used in investing activities
|
$
|
(28,464
|
)
|
|
$
|
(20,669
|
)
|
|
Net cash provided by (used in) financing activities
|
$
|
41,710
|
|
|
$
|
(37
|
)
|
Operating Activities
Net cash used in operating activities increased by $17.4 million to $16.5 million in the three months ended March 31, 2018 as compared to $0.9 million provided by operating activities for the same period in 2017. The increase was primarily due to a decrease in net income of $5.0 million, higher working capital requirements of $22.5 million as the business continues to grow and lower deferred taxes of $4.2 million, partially offset by lower unrealized gains related to the change in fair value of our derivatives of $13.1 million.
Investing Activities
Net cash used in investing activities increased by $7.8 million to $28.5 million in the three months ended March 31, 2018 as compared to $20.7 million in the same period in 2017. The increase was primarily due to two acquisitions in the current period compared to one acquisition in the prior year period, resulting in a higher aggregate purchase price of $8.0 million.
Financing Activities
Net cash provided by financing activities increased by $41.7 million to $41.7 million in the three months ended March 31, 2018 as compared to cash used in financing activities of $0 in the same period in 2017. For the three months ended March 31, 2018 net borrowings were $42.5 million, which were used to fund business operations. For the three months ended March 31, 2017 IPO proceeds and capital contributions of $167.2 million were used to repay borrowings outstanding under the ABL Credit Facility.
Tax Receivable Agreement
At March 31, 2018 and December 31, 2017, the TRA liability balance was
$135.8 million
. There have been no payments related to the TRA from inception to March 31, 2018. The first payment is anticipated to be made during the fourth quarter of 2018 and is estimated to be
$15.9 million
and is reflected in current liabilities. Payments related to the TRA are expected to be funded through one, or a combination of the following: existing cash balances, cash flow from operations, or availability under the ABL Credit Agreement. The discounted present value of the TRA at March 31, 2018, was estimated to be between $85.0 million and $95.0 million. There were no material changes during the three months ended March 31, 2018 to the estimates of annual payments related to the TRA set forth in the Contractual Obligations Table in the 2017 10-K.
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.
There have been no material changes made to the critical accounting estimates during the periods presented in the consolidated financial statements from those disclosed in the 2017 10-K except for the following:
The Company adopted Accounting Standard Codification 606, Revenue from Contracts with Customers, which became effective on January 1, 2018. For further discussion on the adoption of this new accounting standard, see Note 2 "Basis of Presentation" to the Notes to Condensed Consolidated Financial Statements in Part I, Item 1 of this Form 10-Q.
Off-Balance Sheet Arrangements
As of March 31, 2018, we had no material off-balance sheet arrangements or similar obligations, such as financing or unconsolidated variable interest entities.
New Accounting Standards
Please refer to Note 2, Recently Issued Accounting Standards to the notes to our condensed consolidated financial statements for a discussion of new accounting pronouncements and accounting pronouncements adopted during the three months ended March 31, 2018.
Non-GAAP Financial Information
In addition to our results under GAAP, we also present Adjusted EBITDA for historical periods. Adjusted EBITDA is a non-GAAP financial measure and has been presented as a supplemental measure of financial performance that is not required by, or presented in accordance with, GAAP. We calculate EBITDA as net (loss) income before interest expense net, income tax (benefit) expense, and depreciation and amortization. We calculate Adjusted EBITDA as EBITDA before unrealized gains on derivative financial instruments, IPO and public company readiness expenses, stock-based compensation, and other non-recurring adjustments such as non-cash purchase accounting effects, losses on the disposal of property and equipment, transaction costs and management fees.
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 (loss) income, or 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:
|
|
|
|
•
|
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 the measures or may calculate one or both differently than as presented in this Quarterly Report on Form 10-Q, 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 (loss) income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
2018
|
|
2017
|
|
(in thousands)
|
|
|
|
|
Net (loss) income
|
$
|
(1,053
|
)
|
|
$
|
3,929
|
|
|
Interest expense, net
|
15,111
|
|
|
15,214
|
|
|
Income tax (benefit) expense
|
(885
|
)
|
|
2,564
|
|
|
Depreciation and amortization
|
19,886
|
|
|
18,396
|
|
|
EBITDA
|
33,059
|
|
|
40,103
|
|
|
|
|
|
|
|
Unrealized gain on derivative financial instruments
|
(74
|
)
|
|
(13,219
|
)
|
|
IPO and public company readiness expenses
|
89
|
|
|
2,975
|
|
|
Stock-based compensation
|
271
|
|
|
1,553
|
|
|
Non-cash purchase accounting effects
(a)
|
407
|
|
|
71
|
|
|
Loss on disposal of property and equipment
|
13
|
|
|
152
|
|
|
Transaction costs
(b)
|
1,218
|
|
|
592
|
|
|
Management fees
(c)
|
—
|
|
|
353
|
|
|
Adjusted EBITDA
|
$
|
34,983
|
|
|
$
|
32,580
|
|
|
Adjusted EBITDA margin
(d)
|
6.5
|
%
|
|
6.8
|
%
|
|
|
|
|
(a)
|
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 of acquisitions.
|
|
|
|
|
(b)
|
Represents one-time costs related to our acquisitions, including fees to financial advisors, accountants, attorneys, other professionals and certain internal corporate development costs. Certain amounts have been reclassified for the three months ended March 31, 2017 to conform our presentation of Adjusted EBITDA to the current year presentation.
|
|
|
|
|
(c)
|
Represents fees paid to our former private equity sponsor for services provided pursuant to past management agreements. These fees are no longer being incurred.
|
|
|
|
|
(d)
|
Adjusted EBITDA margin represents Adjusted EBITDA divided by net sales.
|