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Section 1: 10-Q (10-Q)

fbm-10q_20180930.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the quarterly period ended September 30, 2018

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to           

Commission File Number: 001-38009

 

FOUNDATION BUILDING MATERIALS, INC.

(Exact name of registrant as specified in its charter)

 

 

Delaware

81-4259606

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

 

 

2741 Walnut Avenue, Suite 200

Tustin, CA

(Address of principal executive offices)

92780

(Zip Code)

 

 

(714) 380-3127

(Registrant’s telephone number, including area code)

N/A

(Former name, former address and former fiscal year, if changed since last report)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes       No  

Indicate by check mark whether the registrant has submitted electronically and every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes       No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of "large accelerated filer," "accelerated filer," "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer

 

Accelerated filer

Non-accelerated filer

 

Smaller reporting company

 

 

 

Emerging growth company

 

If an emerging growth company, indicate by check if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes No

As of October 26, 2018, the number of shares outstanding of the registrant’s common stock, $0.001 par value, was 42,894,965.

 

 


FOUNDATION BUILDING MATERIALS, INC.

 

Table of Contents

 

 

 

Page

PART I. FINANCIAL INFORMATION

 

 

 

 

Item 1.

Financial Statements

1

 

Condensed Consolidated Balance Sheets (Unaudited)

1

 

Condensed Consolidated Statements of Operations and Comprehensive (Loss) Income (Unaudited)

2

 

Condensed Consolidated Statements of Cash Flows (Unaudited)

3

 

Notes to Condensed Consolidated Financial Statements

4

Item 2.

Management's Discussion and Analysis of Financial Condition and Results of Operations

18

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

31

Item 4.

Control and Procedures

31

 

 

 

PART II. OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

32

Item 1A.

Risk Factors

32

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

32

Item 3.

Defaults Upon Senior Securities

32

Item 4.

Mine Safety Disclosures

32

Item 5.

Other Information

32

Item 6.

Exhibits

33

Signatures

 

34

 

 


Part I. Financial Information

Item 1. Financial Statements

FOUNDATION BUILDING MATERIALS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(in thousands, except share data)

 

 

 

September 30,

2018

 

 

December 31,

2017

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

10,560

 

 

$

12,101

 

Accounts receivable—net of allowance for doubtful accounts of $3,297 and $3,494,

   respectively

 

 

316,290

 

 

 

238,091

 

Other receivables

 

 

50,808

 

 

 

55,487

 

Inventories

 

 

158,766

 

 

 

148,246

 

Prepaid expenses and other current assets

 

 

12,304

 

 

 

11,785

 

Current assets held for sale

 

 

128,188

 

 

 

82,948

 

Total current assets

 

 

676,916

 

 

 

548,658

 

Property and equipment, net

 

 

153,386

 

 

 

144,524

 

Intangible assets, net

 

 

145,379

 

 

 

164,536

 

Goodwill

 

 

481,260

 

 

 

452,728

 

Other assets

 

 

6,928

 

 

 

5,604

 

Noncurrent assets held for sale

 

 

-

 

 

 

38,220

 

Total assets

 

$

1,463,869

 

 

$

1,354,270

 

Liabilities and stockholders' equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

130,169

 

 

$

134,460

 

Accrued payroll and employee benefits

 

 

25,777

 

 

 

17,920

 

Accrued taxes

 

 

11,775

 

 

 

7,003

 

Tax receivable agreement

 

 

15,892

 

 

 

15,892

 

Current portion of term loan

 

 

3,375

 

 

 

-

 

Other current liabilities

 

 

22,995

 

 

 

37,270

 

Current liabilities held for sale

 

 

26,599

 

 

 

29,733

 

Total current liabilities

 

 

236,582

 

 

 

242,278

 

Asset-based revolving credit facility

 

 

305,704

 

 

 

47,486

 

Long-term debt, net

 

 

438,841

 

 

 

534,379

 

Tax receivable agreement

 

 

119,912

 

 

 

119,912

 

Deferred income taxes, net

 

 

5,200

 

 

 

17,912

 

Other liabilities

 

 

9,545

 

 

 

12,657

 

Noncurrent liabilities held for sale

 

 

-

 

 

 

982

 

Total liabilities

 

 

1,115,784

 

 

 

975,606

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders' equity:

 

 

 

 

 

 

 

 

Preferred stock, $0.001 par value, authorized 10,000,000 shares; 0 shares issued

 

 

-

 

 

 

-

 

Common stock, $0.001 par value, authorized 190,000,000 shares; 42,894,965 and

   42,865,407 shares issued, respectively

 

 

13

 

 

 

13

 

Additional paid-in capital

 

 

331,667

 

 

 

330,113

 

Retained earnings

 

 

15,936

 

 

 

46,184

 

Accumulated other comprehensive income

 

 

469

 

 

 

2,354

 

Total stockholders' equity

 

 

348,085

 

 

 

378,664

 

Total liabilities and stockholders' equity

 

$

1,463,869

 

 

$

1,354,270

 

 

See accompanying notes to condensed consolidated financial statements (unaudited).

1


FOUNDATION BUILDING MATERIALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE (LOSS) INCOME (UNAUDITED)

(in thousands, except share and per share data)

 

 

 

Three Months Ended

September 30,

 

 

Nine Months Ended

September 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Net sales

 

$

542,273

 

 

$

467,891

 

 

$

1,528,153

 

 

$

1,346,441

 

Cost of goods sold

 

 

388,236

 

 

 

332,008

 

 

 

1,093,412

 

 

 

957,404

 

Gross profit

 

 

154,037

 

 

 

135,883

 

 

 

434,741

 

 

 

389,037

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative

 

 

113,279

 

 

 

102,259

 

 

 

328,088

 

 

 

299,298

 

Depreciation and amortization

 

 

19,771

 

 

 

18,234

 

 

 

56,922

 

 

 

52,662

 

Total operating expenses

 

 

133,050

 

 

 

120,493

 

 

 

385,010

 

 

 

351,960

 

Income from operations

 

 

20,987

 

 

 

15,390

 

 

 

49,731

 

 

 

37,077

 

Loss on extinguishment of debt

 

 

(58,475

)

 

 

-

 

 

 

(58,475

)

 

 

-

 

Interest expense

 

 

(12,576

)

 

 

(15,054

)

 

 

(43,028

)

 

 

(45,147

)

Other (expense) income, net

 

 

(8

)

 

 

25

 

 

 

126

 

 

 

13,424

 

(Loss) income before income taxes

 

 

(50,072

)

 

 

361

 

 

 

(51,646

)

 

 

5,354

 

Income tax (benefit) expense

 

 

(12,519

)

 

 

239

 

 

 

(13,299

)

 

 

2,205

 

(Loss) income from continuing operations

 

 

(37,553

)

 

 

122

 

 

 

(38,347

)

 

 

3,149

 

Income from discontinued operations, net of tax

 

 

2,772

 

 

 

1,277

 

 

 

7,913

 

 

 

3,439

 

Net (loss) income

 

$

(34,781

)

 

$

1,399

 

 

$

(30,434

)

 

$

6,588

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Loss) earnings per share data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Loss) earnings from continuing operations per share - basic

 

$

(0.88

)

 

$

0.00

 

 

$

(0.89

)

 

$

0.08

 

(Loss) earnings from continuing operations per share - diluted

 

$

(0.88

)

 

$

0.00

 

 

$

(0.89

)

 

$

0.08

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings from discontinued operations per share - basic

 

$

0.07

 

 

$

0.03

 

 

$

0.18

 

 

$

0.08

 

Earnings from discontinued operations per share - diluted

 

$

0.07

 

 

$

0.03

 

 

$

0.18

 

 

$

0.08

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Loss) earnings per share - basic

 

$

(0.81

)

 

$

0.03

 

 

$

(0.71

)

 

$

0.16

 

(Loss) earnings per share - diluted

 

$

(0.81

)

 

$

0.03

 

 

$

(0.71

)

 

$

0.16

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

42,894,474

 

 

 

42,865,407

 

 

 

42,889,430

 

 

 

41,021,808

 

Diluted

 

 

42,917,230

 

 

 

42,870,391

 

 

 

42,905,273

 

 

 

41,023,935

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive (loss) income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net (loss) income

 

$

(34,781

)

 

$

1,399

 

 

$

(30,434

)

 

$

6,588

 

Foreign currency translation adjustment

 

 

1,481

 

 

 

3,037

 

 

 

(2,724

)

 

 

5,695

 

Unrealized (loss) gain on derivative, net of taxes of $0.5 million

   and $1.0 million, respectively and $0.5 million and $1.9

   million, respectively

 

 

(1,420

)

 

 

(1,647

)

 

 

839

 

 

 

(3,047

)

Total other comprehensive income (loss)

 

 

61

 

 

 

1,390

 

 

 

(1,885

)

 

 

2,648

 

Total comprehensive (loss) income

 

$

(34,720

)

 

$

2,789

 

 

$

(32,319

)

 

$

9,236

 

 

See accompanying notes to condensed consolidated financial statements (unaudited).

2


FOUNDATION BUILDING MATERIALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(in thousands)

 

 

 

Nine Months Ended September 30,

 

 

 

2018

 

 

2017

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net (loss) income

 

$

(30,434

)

 

$

6,588

 

Net income from discontinued operations

 

 

7,913

 

 

 

3,439

 

Net (loss) income from continuing operations

 

 

(38,347

)

 

 

3,149

 

Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities of continuing operations:

 

 

 

 

 

 

 

 

Depreciation

 

 

24,383

 

 

 

21,793

 

Amortization of intangible assets

 

 

32,539

 

 

 

30,869

 

Amortization of debt issuance costs and debt discount

 

 

6,834

 

 

 

7,352

 

Loss on extinguishment of debt

 

 

58,475

 

 

 

-

 

Inventory fair value purchase accounting adjustment

 

 

413

 

 

 

830

 

Provision for doubtful accounts

 

 

1,654

 

 

 

1,987

 

Stock-based compensation

 

 

1,512

 

 

 

1,691

 

Unrealized gain on foreign currency, net

 

 

-

 

 

 

(169

)

Unrealized gain on derivative instruments, net

 

 

(56

)

 

 

(13,045

)

Loss on disposal of property and equipment

 

 

614

 

 

 

171

 

Deferred income taxes

 

 

(13,038

)

 

 

2,730

 

Change in assets and liabilities, net of effects of acquisitions:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(65,361

)

 

 

(25,248

)

Other receivables

 

 

5,361

 

 

 

5,423

 

Inventories

 

 

(3,244

)

 

 

3,495

 

Prepaid expenses and other current assets

 

 

(496

)

 

 

(968

)

Other assets

 

 

(1,928

)

 

 

(2,180

)

Accounts payable

 

 

(8,940

)

 

 

11,816

 

Accrued payroll and employee benefits

 

 

7,929

 

 

 

(4,277

)

Accrued taxes

 

 

4,783

 

 

 

(735

)

Other liabilities

 

 

(13,960

)

 

 

(19,448

)

Net cash (used in) provided by operating activities of continuing operations

 

 

(873

)

 

 

25,236

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(28,157

)

 

 

(25,307

)

Payment of net working capital adjustments

 

 

(40

)

 

 

(405

)

Proceeds from net working capital adjustments

 

 

155

 

 

 

8,590

 

Proceeds from the disposal of fixed assets

 

 

1,605

 

 

 

528

 

Acquisitions, net of cash acquired

 

 

(70,334

)

 

 

(68,274

)

Net cash used in investing activities of continuing operations

 

 

(96,771

)

 

 

(84,868

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Proceeds from asset-based revolving credit facility

 

 

757,298

 

 

 

395,688

 

Repayments of asset-based revolving credit facility

 

 

(498,964

)

 

 

(524,782

)

Term loan proceeds

 

 

450,000

 

 

 

-

 

Term loan original issuance discount and deferred finance costs

 

 

(7,935

)

 

 

-

 

Repayment of bond principal

 

 

(575,000

)

 

 

-

 

Prepayment premium on senior secured notes

 

 

(23,872

)

 

 

 

 

Tax withholding payment related to net settlement of equity awards

 

 

(61

)

 

 

-

 

Principal repayment of capital lease obligations

 

 

(2,094

)

 

 

(1,920

)

Issuance of common stock

 

 

-

 

 

 

163,952

 

Capital contributions

 

 

-

 

 

 

2,997

 

Net cash provided by financing activities of continuing operations

 

 

99,372

 

 

 

35,935

 

Cash flows from discontinued operations

 

 

 

 

 

 

 

 

Operating activities of discontinued operations

 

 

(2,063

)

 

 

7,319

 

Investing activities of discontinued operations

 

 

(928

)

 

 

(6,035

)

Financing activities of discontinued operations

 

 

(140

)

 

 

(190

)

Net cash (used in) provided by discontinued operations

 

 

(3,131

)

 

 

1,094

 

Effect of exchange rate changes on cash

 

 

(138

)

 

 

363

 

Net decrease in cash

 

 

(1,541

)

 

 

(22,240

)

Cash and cash equivalents at beginning of period

 

 

12,101

 

 

 

28,552

 

Cash and cash equivalents at end of period

 

$

10,560

 

 

$

6,312

 

 

 

 

 

 

 

 

 

 

Supplemental disclosures of cash flow information for continuing operations:

 

 

 

 

 

 

 

 

Cash paid during the period for income taxes

 

$

1,504

 

 

$

3,236

 

Cash paid during the period for interest

 

$

52,288

 

 

$

49,937

 

Supplemental disclosures of non-cash investing and financing activities:

 

 

 

 

 

 

 

 

Change in fair value of derivative, net of tax

 

$

839

 

 

$

3,047

 

Assets acquired under capital leases

 

$

-

 

 

$

667

 

Goodwill adjustment for purchase price allocation

 

$

202

 

 

$

518

 

Tax receivable agreement

 

$

-

 

 

$

203,837

 

 

See accompanying notes to condensed consolidated financial statements (unaudited).

 

3


 

Foundation Building Materials, Inc.

Notes to Condensed Consolidated Financial Statements

1. Business and Basis of Presentation

Business

Foundation Building Materials, Inc. (the "Company"), based in Tustin, California is a specialty distributor of wallboard, suspended ceiling systems, and metal framing throughout the U.S. and Canada.

On September 26, 2018, the Company entered into a definitive agreement to sell its mechanical insulation business. Refer to Note 3, Discontinued Operations, for further details. Excluding its mechanical insulation business, the Company employs more than 3,400 people and operates more than 170 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 then-existing asset-based revolving credit facility (the "2016 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"), which do not include the discontinued operations from the sale of the mechanical insulation segment. The Company plans to retrospectively adjust previously reported audited financial statements to recognize the discontinued operations for the sale of the mechanical insulation segment when it files its 2018 10-K in 2019. When the sale of the mechanical insulation segment closes, the Company will file a Current Report on Form 8-K with pro forma financial statements that will include full year 2016 and 2017 statements of operations.

As discussed in Note 3, Discontinued Operations, the Company has entered into a definitive agreement to sell its mechanical insulation business, which was previously reported as the mechanical insulation segment. The previously reported amounts for the mechanical insulation segment have been reclassified to discontinued operations for all periods presented. The Company’s continuing operations now consist of what was previously reported as the Specialty Building Products segment for all periods presented

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.    

4


Foundation Building Materials, Inc.

Notes to Condensed Consolidated Financial Statements

 

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 concluded that the adoption 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 governmental 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.

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 InstrumentsOverall (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 the adoption did not have a material impact on the Company’s consolidated financial statements.

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 the adoption 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 the adoption 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.

5


Foundation Building Materials, Inc.

Notes to Condensed Consolidated Financial Statements

 

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 continues to implement this guidance and upon adoption on January 1, 2019, the Company expects to record in its consolidated financial statements a right-of-use asset and related lease liability between $90.0 million and $110.0 million; however, the Company will continue to implement this guidance, and this estimate is subject to change.

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 instead 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 to have a material impact on its consolidated financial statements.

 

3. Discontinued Operations

On September 26, 2018, the Company entered into a Stock and Asset Purchase Agreement (the “Purchase Agreement”) with SPI LLC ( the “Purchaser”), pursuant to which the Company agreed to sell, and the Purchaser agreed to acquire, (i) all right, title and interest in, to and under all of the assets, properties and business of the mechanical insulation segment of the Company in the U.S. (the “U.S. Business”), excepting certain excluded assets (the “Purchased Assets”), and (ii) all outstanding shares of FBM Canada SPI, Inc. (the “Stock”), representing the Company’s mechanical insulation business in Canada (the “Canadian Business”). The U.S. Business and the Canadian Business are referred to collectively as the “Disposed Business.”

As aggregate consideration for the Purchased Assets and the Stock, the Purchaser will pay $122.5 million in cash at the closing of the transaction (subject to certain working capital and other pre- and post-closing adjustments as set forth in the Purchase Agreement) and assume certain post-closing liabilities. The Purchase Agreement contains customary representations, warranties and covenants made by each of the Purchaser and the Sellers, as well as mutual indemnification obligations.

Based on its magnitude and because the Company is exiting the mechanical insulation business, the pending sale represents a significant strategic shift that will have a material effect on the Company’s operations and financial results. Accordingly, the Company has applied discontinued operations treatment for the Disposed Business as required by Accounting Standards Codification—Discontinued Operations (ASC 205-20). In accordance with ASC 205-20, the Company reclassified the Disposed Business to assets and liabilities held for sale on its consolidated balance sheets as of September 30, 2018 and December 31, 2017 and reclassified the financial results of the Disposed Business in its consolidated statements of operations and consolidated statements of cash flows for all periods presented. The Company also revised its discussion and presentation of operating and financial results to be reflective of its continuing operations as required by ASC 205-20.

6


Foundation Building Materials, Inc.

Notes to Condensed Consolidated Financial Statements

 

The carrying amount of the assets, and liabilities of the Disposed Business, have been reclassified from their historical balance sheet presentation to current and noncurrent assets and current and noncurrent liabilities held for sale as follows:

 

 

 

September 30,

2018

 

 

December 31,

2017

 

Accounts receivable—net of allowance for doubtful accounts of $410 and

   $655, respectively

 

$

51,520

 

 

$

41,932

 

Other receivables

 

 

3,952

 

 

 

3,975

 

Inventories

 

 

37,243

 

 

 

36,190

 

Prepaid expenses and other current assets

 

 

1,108

 

 

 

851

 

Property and equipment, net

 

 

6,753

 

 

 

-

 

Intangible assets, net

 

 

21,605

 

 

 

-

 

Goodwill

 

 

6,007

 

 

 

-

 

Other assets

 

 

-

 

 

 

-

 

Current assets held for sale

 

$

128,188

 

 

$

82,948

 

Property and equipment, net

 

$

-

 

 

$

6,884

 

Intangible assets, net

 

 

-

 

 

 

25,234

 

Goodwill

 

 

-

 

 

 

6,009

 

Deferred income taxes

 

 

-

 

 

 

93

 

Other assets

 

 

-

 

 

 

-

 

Noncurrent assets held for sale

 

$

-

 

 

$

38,220

 

Accounts payable

 

$

17,197

 

 

$

21,885

 

Accrued payroll and employee benefits

 

 

2,619

 

 

 

3,238

 

Accrued taxes

 

 

1,381

 

 

 

787

 

Other liabilities

 

 

5,328

 

 

 

3,823

 

Deferred income taxes

 

 

74

 

 

 

-

 

Current liabilities held for sale

 

$

26,599

 

 

$

29,733

 

Other liabilities

 

$

-

 

 

$

982

 

Noncurrent liabilities held for sale

 

$

-

 

 

$

982

 

 

The operating results of the Disposed Business that are reflected in the unaudited condensed consolidated statements of operations within net income from discontinued operations are as follows:

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Net sales

 

$

82,533

 

 

$

67,555

 

 

$

237,923

 

 

$

197,692

 

Cost of goods sold

 

 

60,125

 

 

 

48,655

 

 

 

172,682

 

 

 

142,503

 

Gross profit

 

 

22,408

 

 

 

18,900

 

 

 

65,241

 

 

 

55,189

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative

 

 

17,078

 

 

 

15,150

 

 

 

49,481

 

 

 

44,775

 

Depreciation and amortization

 

 

1,561

 

 

 

1,495

 

 

 

4,637

 

 

 

4,490

 

Total operating expenses

 

 

18,639

 

 

 

16,645

 

 

 

54,118

 

 

 

49,265

 

Income from operations

 

 

3,769

 

 

 

2,255

 

 

 

11,123

 

 

 

5,924

 

Interest expense

 

 

(11

)

 

 

(15

)

 

 

(36

)

 

 

(47

)

Other income (expense), net

 

 

5

 

 

 

10

 

 

 

(5

)

 

 

(5

)

Income from discontinued operations before income taxes

 

 

3,763

 

 

 

2,250

 

 

 

11,082

 

 

 

5,872

 

Income tax expense

 

 

991

 

 

 

973

 

 

 

3,169

 

 

 

2,433

 

Net income from discontinued operations, net of tax

 

$

2,772

 

 

$

1,277

 

 

$

7,913

 

 

$

3,439

 

 

The operating results reflected above do not fully represent the Disposed Business’ historical operating results, as the results reported within net income from discontinued operations only include expenses that are directly attributable to the Disposed Business.

7


Foundation Building Materials, Inc.

Notes to Condensed Consolidated Financial Statements

 

4. 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 September 30, 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. As of September 30, 2018, and December 31, 2017, the fair value of the derivative instrument was $1.0 million and $2.4 million, respectively, and was recorded in other long-term liabilities.

For the three months ended September 30, 2018, the Company recognized a loss of $1.4 million, net of taxes of $0.5 million, recorded in other comprehensive income (loss) related to the net investment hedge. For the nine months ended September 30, 2018, the Company recognized a gain of $0.8 million, net of taxes of $0.5 million, recorded in other comprehensive income (loss) related to the net investment hedge. The Company recognized a loss of $1.6 million and $3.0 million, net of taxes of $1.0 million and $1.9 million, respectively, for the three and nine months ended September 30, 2017, respectively, recorded in other comprehensive income (loss) related to the net investment hedge.

For the three months ended September 30, 2018, the Company recorded a loss of $78,000, in other (expense) income, net, related to the ineffective portion of the net investment hedge. For the nine months ended September 30, 2018, the Company recognized a gain of $56,000, in other (expense) income, net, related to the ineffective portion of the net investment hedge. The Company recorded a loss of $111,000 and $205,000 for the three and nine months ended September 30, 2017, respectively, in other (expense) income, net, related to the ineffective portion of the net investment hedge.

Embedded Derivative

On August 15, 2018, the Company redeemed its $575.0 million Senior Secured Notes (the “Notes”) at a price equal to 104.125% of the principal amount, plus accrued and unpaid interest.

The Company had the option to prepay its Notes at any time prior to August 15, 2018, at a price equal to 100% of the principal amount, plus an applicable premium and any accrued and unpaid interest.

Included in the Notes was an optional prepayment period through August 15, 2018, using proceeds from an equity offering, which constituted an embedded derivative and was bifurcated from the debt host and accounted for separately. The embedded derivative was recorded at fair value at inception until August 15, 2018, with any changes in fair value from inception recorded in earnings. The fair value of the embedded derivative as of 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.

The change in fair value was $0 for the three and nine months ended September 30, 2018. The change in fair value of $0 and $13.2 million for the three and nine months ended September 30, 2017, respectively, were included in other income, net.     

5. 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 September 30, 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.

8


Foundation Building Materials, Inc.

Notes to Condensed Consolidated Financial Statements

 

During the nine months ended September 30, 2018, the Company completed the following three acquisitions:

Ciesco, Inc. and Commercial Specialty Supply LLC

On August 1, 2018, the Company acquired the operations and substantially all of the assets of Ciesco, Inc. and Commercial Specialty Supply LLC (collectively, "Ciesco"). Ciesco was a leading independent distributor of wallboard, metal framing, suspended ceiling systems, insulation and complementary products and operated six branches in Pennsylvania and Virginia.

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 suspended ceilings systems 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, metal framing, insulation, and wallboard accessories. RM Supply operated two branches in Missouri.

During the nine months ended September 30, 2018, the Company completed the above acquisitions for an aggregate purchase price of $71.0 million. These acquisitions are not considered material, individually or in the 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 (collectively, the "2018 acquisitions") (in thousands):

 

 

 

Nine Months Ended

September 30, 2018

 

Assets acquired:

 

 

 

 

Cash

 

$

672

 

Accounts receivable

 

 

15,798

 

Other receivables

 

 

1,164

 

Inventories

 

 

8,363

 

Prepaid and other current assets

 

 

73

 

Property and equipment

 

 

7,864

 

Goodwill

 

 

29,286

 

Intangible assets

 

 

13,600

 

Other assets

 

 

74

 

Total assets acquired

 

 

76,894

 

Liabilities assumed:

 

 

 

 

Accounts payable

 

 

(5,446

)

Accrued expenses and other current liabilities

 

 

(442

)

Total liabilities assumed

 

 

(5,888

)

Total net assets acquired

 

$

71,006

 

 

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. The Ciesco and ArmCom acquisitions were treated as asset purchases, and the RM Supply acquisition was treated 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.

9


Foundation Building Materials, Inc.

Notes to Condensed Consolidated Financial Statements

 

6. Goodwill and Intangible Assets

The change in goodwill from December 31, 2017, to September 30, 2018, consisted of the following (in thousands):

 

 

 

Carrying Value

 

Balance at December 31, 2017

 

$

452,728

 

Goodwill acquired

 

 

29,286

 

Purchase price allocation adjustments

 

 

87

 

Impact of foreign exchange rates

 

 

(841

)

Balance at September 30, 2018

 

$

481,260

 

 

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 September 30, 2018, and December 31, 2017 (in thousands):

 

 

 

September 30, 2018

 

 

December 31, 2017

 

 

 

Gross Carrying

Amount

 

 

Accumulated

Amortization

 

 

Net Carrying

Amount

 

 

Gross Carrying

Amount

 

 

Accumulated

Amortization

 

 

Net Carrying

Amount

 

Trade names

 

$

15,980

 

 

$

(9,636

)

 

$

6,344

 

 

$

15,980

 

 

$

(7,283

)

 

$

8,697

 

Customer relationships

 

 

238,785

 

 

 

(102,315

)

 

 

136,470

 

 

 

225,488

 

 

 

(72,349

)

 

 

153,139

 

Other intangible assets

 

 

3,472

 

 

 

(907

)

 

 

2,565

 

 

 

3,462

 

 

 

(763

)

 

 

2,700

 

 

 

$

258,237

 

 

$

(112,858

)

 

$

145,379

 

 

$

244,930

 

 

$

(80,395

)

 

$

164,536

 

 

The weighted average amortization period of these intangible assets in the aggregate is 3.5 years.

7. Long-Term Debt

 

(in thousands)

 

September 30, 2018

 

 

December 31, 2017

 

2018 Term Loan Facility

 

$

446,625

 

 

$

-

 

Unamortized deferred financing costs - term loan

 

 

(7,784

)

 

 

-

 

Revolving credit facilities

 

 

305,704

 

 

 

47,486

 

Unamortized deferred financing costs - revolving credit facilities

 

 

(4,901

)

 

 

(3,164