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Section 1: 10-Q (10-Q)

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 UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
 

 
FORM 10-Q
 
 

ý QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
 For the quarterly period ended June 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
 
92780
(Address of principal executive offices)
 
(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  ý    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).  Yes  ý    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 ý
 
 
 
Non-accelerated filer ☐
 
Smaller reporting company ☐
 
 
 
(Do not check if 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 ý
 
As of August 3, 2018, the number of shares outstanding of the registrant’s common stock, $0.001 par value, was 42,893,982.



 
 




FOUNDATION BUILDING MATERIALS, INC.

Table of Contents
 
 
Page
PART I. FINANCIAL INFORMATION
 
 
 
 
 
 
 
 
 
 
 
 
PART II. OTHER INFORMATION
 
 
 
 
 
 
 
 
 





Part I. Financial Information

Item 1. Financial Statements


FOUNDATION BUILDING MATERIALS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(in thousands, except share data)
 
June 30, 2018
 
December 31, 2017
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
7,083

 
$
12,101

Accounts receivable—net of allowance for doubtful accounts of $4,092 and $4,651, respectively
343,382

 
280,023

Other receivables
49,286

 
59,462

Inventories
211,997

 
184,436

Prepaid expenses and other current assets
13,807

 
12,636

Total current assets
625,555

 
548,658

Property and equipment, net
156,000

 
151,408

Intangible assets, net
169,738

 
189,770

Goodwill
465,762

 
458,737

Other assets
5,790

 
5,604

Total assets
$
1,422,845

 
$
1,354,177

Liabilities and stockholders' equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
166,910

 
$
156,345

Accrued payroll and employee benefits
24,717

 
21,158

Accrued taxes
11,627

 
7,790

Tax receivable agreement
15,892

 
15,892

Other current liabilities
40,021

 
41,093

Total current liabilities
259,167

 
242,278

Asset-based revolving credit facility
94,075

 
47,486

Long-term portion of notes payable, net
539,168

 
534,379

Tax receivable agreement
119,912

 
119,912

Deferred income taxes, net
18,198

 
17,819

Other liabilities
10,195

 
13,639

Total liabilities
1,040,715

 
975,513

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; 42,893,982 and 42,865,407 shares issued, respectively
13

 
13

     Additional paid-in capital
330,995

 
330,113

     Retained earnings
50,711

 
46,184

     Accumulated other comprehensive income
411

 
2,354

          Total stockholders' equity
382,130

 
378,664

Total liabilities and stockholders' equity
$
1,422,845

 
$
1,354,177

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


1

 
 




FOUNDATION BUILDING MATERIALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (UNAUDITED)
(in thousands, except share and per share data)

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Net sales
$
604,973

 
$
529,230

 
$
1,141,270

 
$
1,008,687

Cost of goods sold
435,876

 
379,698

 
817,733

 
719,244

Gross profit
169,097

 
149,532

 
323,537

 
289,443

Operating expenses:

 

 
 
 
 
Selling, general and administrative
125,785

 
113,602

 
247,212

 
226,664

Depreciation and amortization
20,341

 
19,027

 
40,227

 
37,423

Total operating expenses
146,126

 
132,629

 
287,439

 
264,087

Income from operations
22,971

 
16,903

 
36,098

 
25,356

Interest expense
(15,345
)
 
(14,876
)
 
(30,477
)
 
(30,125
)
Other income, net
57

 
95

 
124

 
13,384

Income before income taxes
7,683

 
2,122

 
5,745

 
8,615

Income tax expense
2,283

 
862

 
1,398

 
3,426

Net income
$
5,400

 
$
1,260

 
$
4,347

 
$
5,189

Earnings per share data:
 
 
 
 
 
 
 
Basic
$
0.13

 
$
0.03

 
$
0.10

 
$
0.13

Diluted
$
0.13

 
$
0.03

 
$
0.10

 
$
0.13

Weighted average shares outstanding:
 
 
 
 
 
 
 
Basic
42,893,498

 
42,865,407

 
42,886,867

 
40,084,730

Diluted
42,910,017

 
42,879,319

 
42,903,788

 
40,084,940

 
 
 
 
 
 
 
 
Comprehensive income:
 
 
 
 
 
 
 
Net income
$
5,400

 
$
1,260

 
$
4,347

 
$
5,189

     Foreign currency translation adjustment
(1,831
)
 
2,085

 
(4,202
)
 
2,658

     Unrealized gain (loss) on derivative, net of taxes of $0.4 million
and $0.6 million, respectively and $1.0 million and $0.9 million,
respectively
1,096

 
(939
)
 
2,259

 
(1,400
)
Total other comprehensive (loss) income
(735
)
 
1,146

 
(1,943
)
 
1,258

Total comprehensive income
$
4,665

 
$
2,406

 
$
2,404

 
$
6,447



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



2

 
 




FOUNDATION BUILDING MATERIALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)
 
Six Months Ended June 30,
 
2018
 
2017
Cash flows from operating activities:
 
 
 
Net income
$
4,347

 
$
5,189

Adjustments to reconcile net income to net cash (used in) provided by operating activities:
 
 
 
     Depreciation
16,329

 
14,723

     Amortization of intangible assets
23,898

 
22,700

     Amortization of debt issuance costs and debt discount
5,298

 
4,844

     Inventory fair value purchase accounting adjustment
407

 
664

     Provision for doubtful accounts
1,050

 
766

     Stock-based compensation
927

 
1,765

     Unrealized gain on derivative instruments, net
(135
)
 
(13,155
)
     Loss on disposal of property and equipment
309

 
242

     Deferred income taxes
(421
)
 
3,356

     Change in assets and liabilities, net of effects of acquisitions:
 
 
 
          Accounts receivable
(63,199
)
 
(32,706
)
          Other receivables
9,918

 
10,638

          Inventories
(25,680
)
 
(2,807
)
          Prepaid expenses and other current assets
(1,155
)
 
561

          Other assets
382

 
393

          Accounts payable
11,349

 
17,875

          Accrued payroll and employee benefits
3,674

 
(4,433
)
          Accrued taxes
3,855

 
(1,474
)
          Other liabilities
(491
)
 
(7,258
)
Net cash (used in) provided by operating activities
(9,338
)
 
21,883

Cash flows from investing activities:
 
 
 
     Purchases of property and equipment
(20,463
)
 
(17,525
)
     Payment of net working capital adjustments
(40
)
 
(405
)
     Proceeds from net working capital adjustments
336

 
8,554

     Proceeds from the disposal of fixed assets
577

 
429

     Acquisitions, net of cash acquired
(21,220
)
 
(52,951
)
Net cash used in investing activities
(40,810
)
 
(61,898
)
Cash flows from financing activities:
 
 
 
     Proceeds from asset-based revolving credit facility
266,198

 
280,995

     Repayments of asset-based revolving credit facility
(219,350
)
 
(415,497
)
     Tax withholding payment related to net settlement of equity awards
(45
)
 

     Principal repayment of capital lease obligations
(1,489
)
 
(1,395
)
     Issuance of common stock

 
163,952

     Capital contributions

 
2,997

Net cash provided by financing activities
45,314

 
31,052

Effect of exchange rate changes on cash
(184
)
 
357

Net decrease in cash
(5,018
)
 
(8,606
)
Cash and cash equivalents at beginning of period
12,101

 
28,552



3

 
 




Cash and cash equivalents at end of period
$
7,083

 
$
19,946


 
 
 
Supplemental disclosures of cash flow information:
 
 
 
Cash paid during the period for income taxes
$
1,423

 
$
143

Cash paid during the period for interest
$
25,226

 
$
25,699

Supplemental disclosures of non-cash investing and financing activities:
 
 
 
Change in fair value of derivative, net of tax
$
2,259

 
$
1,400

Assets acquired under capital lease
$

 
$
658

Goodwill adjustment for purchase price allocation
$
202

 
$
1,724

Tax receivable agreement
$

 
$
203,837

Property and equipment included in accounts payable
$

 
$
198



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



4

Foundation Building Materials, Inc.
 
 
Notes to Condensed Consolidated Financial Statements
 


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").    








5

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 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 geography and by major product line.
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 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 it did not have a material impact on the Company’s consolidated financial statements.



6

Foundation Building Materials, Inc.
 
 
Notes to Condensed 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 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 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. 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 June 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 June 30, 2018, the fair value of the derivative instrument was $1.0 million and was recorded in other long-term assets. As of December 31, 2017, the fair value of the derivative instrument was $2.4 million and was recorded in other long-term liabilities.



7

Foundation Building Materials, Inc.
 
 
Notes to Condensed Consolidated Financial Statements
 

The Company recognized a gain of $1.1 million and $2.3 million, net of taxes of $0.4 million and $1.0 million, respectively, for the three and six months ended June 30, 2018, respectively, recorded in other comprehensive (loss) income related to the net investment hedge. The Company recognized a loss of $0.9 million and $1.4 million, net of taxes of $0.6 million and $0.9 million, respectively, for the three and six months ended June 30, 2017, respectively, recorded in other comprehensive (loss) income related to the net investment hedge.

The Company recorded a gain of $60,000 and $135,000 for the three and six months ended June 30, 2018, respectively, in other income, net, related to the ineffective portion of the net investment hedge. The Company recorded a loss of $64,000 and $95,000 for the three and six months ended June 30, 2017, respectively, 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 as of June 30, 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.

The change in fair value was $0 for the three and six months ended June 30, 2018. The change in fair value in the amounts $0 and $13.2 million for the three and six months ended June 30, 2017, respectively, 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 June 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 six months ended June 30, 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 six months ended June 30, 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):

 
 
Six Months Ended June 30, 2018
Assets acquired:
 
 
     Cash
 
$
671

     Accounts receivable
 
3,320

     Other receivables
 
448

     Inventories
 
3,366

     Prepaid and other current assets
 
146

     Property and equipment
 
2,164

     Goodwill
 
8,404

     Intangible assets
 
4,200

     Other assets
 
50

          Total assets acquired
 
22,769

Liabilities assumed:
 
 
     Accounts payable
 
(530
)
     Accrued expenses and other current liabilities
 
(348
)
          Total liabilities assumed
 
(878
)
Total net assets acquired
 
$
21,891


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 ArmCom acquisition was treated as an asset purchase, 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
 

5. Goodwill and Intangible Assets

The change in goodwill from December 31, 2017, to June 30, 2018, consisted of the following (in thousands):
    
 
Carrying Value
Balance at December 31, 2017
$
458,737

   Goodwill acquired
8,404

   Purchase price allocation adjustments
(93
)
   Impact of foreign exchange rates
(1,286
)
Balance at June 30, 2018
$
465,762


As of June 30, 2018, goodwill allocated to the SBP and MI segments was $459.9 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 June 30, 2018, and December 31, 2017 (in thousands):

 
June 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

 
$
(8,853
)
 
$
7,127

 
$
15,980

 
$
(7,283
)
 
$
8,697

Customer relationships
260,349

 
(100,463
)
 
159,886

 
256,650

 
(78,406
)
 
178,244

Other intangible assets
3,656

 
(931
)
 
2,725

 
3,640

 
(811
)
 
2,829

 
$
279,985

 
$
(110,247
)
 
$
169,738

 
$
276,270

 
$
(86,500
)
 
$
189,770


The weighted average amortization period of these intangible assets in the aggregate is 3.9 years.

6. Long-Term Debt

(in thousands)
June 30, 2018
 
December 31, 2017
Senior secured notes
$
575,000

 
$
575,000

Unamortized debt issuance costs - senior secured notes
(35,832
)
 
(40,621
)
Revolving asset-based credit facility
94,075

 
47,486

Unamortized debt issuance costs - asset-based revolving credit facility
(2,655
)
 
(3,164
)
 
$
630,588

 
$
578,701


Senior Secured Notes Due 2021

On August 9, 2016, the Company, together with FBM Finance, Inc., its wholly owned subsidiary which was created for the purpose of issuing the Notes (together, the "Issuers"), issued $575.0 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.


10

Foundation Building Materials, Inc.
 
 
Notes to Condensed Consolidated Financial Statements
 

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.
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 (provided 50% of the principal remains outstanding) 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 $75.0 million sub-limit on the Canadian borrowing base. As of the closing of the ABL Credit Facility, the available borrowing capacity was $250.0 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 $50.0 million, resulting in total borrowing capacity of $300.0 million.

As of June 30, 2018, the Company had $94.1 million of outstanding borrowings and $205.9 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 six months ended June 30, 2018 was 3.3%.










11

Foundation Building Materials, Inc.
 
 
Notes to Condensed Consolidated Financial Statements
 

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.
    
During the three months ended December 31, 2017, the Company recorded a gain in other income of $68.0 million due to the federal income tax rate being reduced from 35.0% to 21.0% as part of the Tax Act. As of June 30, 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 June 30, 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 is reflected as a current liability as of June 30, 2018 and December 31, 2017.

8. Accumulated Other Comprehensive (Loss) Income

Accumulated other comprehensive (loss) income consists of cumulative unrealized foreign currency translation adjustments and unrealized changes in fair value of a derivative instrument. During the six months ended June 30, 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 six months ended June 30, 2017, there were no reclassifications out of accumulated other comprehensive income.

The components of accumulated other comprehensive income for the six months ended June 30, 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
(4,202
)
 
2,259

 
(1,943
)
Balance at June 30, 2018
$
(339
)
 
$
750

 
$
411


9. Contingencies

The Company is involved in certain legal actions arising in the ordinary course of business. 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. Because of uncertainties related to pending actions, the Company is currently unable to predict the ultimate outcome of such legal actions, and, with respect to any legal action where no liability has been accrued, to make a meaningful estimate of the reasonably possible loss or range of loss that could result from an adverse outcome.



12

Foundation Building Materials, Inc.
 
 
Notes to Condensed Consolidated Financial Statements
 

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 June 30, 2018, there were no claims, 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.
The estimated carrying amount and fair value of the Company’s financial instruments measured and recorded at fair value on a recurring basis at June 30, 2018 is as follows (in thousands):

 
Fair Value Measurements as of June 30, 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 assets

 

 

 

     Derivative asset (Note 3)
$

 
$
1,047

 
$

 
$
1,047

    
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 as of 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.










13

Foundation Building Materials, Inc.
 
 
Notes to Condensed Consolidated Financial Statements
 

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 as of June 30, 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
$
539,168

 
$

 
$
599,202

 
$

 
$
599,202


11. Income Taxes

For the three and six months ended June 30, 2018, the Company's effective tax rates were 29.7% and 24.3%, respectively. The variance from the statutory federal tax rate of 21.0% for the three months ended June 30, 2018 was primarily due to state income taxes, non-deductible items and a foreign rate differential. The variance from the statutory federal rate of 21.0% for the six months ended June 30, 2018 was primarily due to state income taxes, non-deductible items and a foreign rate differential, offset by a refinement of the provisional estimate of the one-time repatriation tax under the Tax Act, treated as a discrete item during the first quarter. For the three and six months ended June 30, 2017, the Company's effective tax rates were 40.6% and 39.8%. The variance from the statutory federal tax rate of 35.0% for both periods was primarily due to state income taxes and non-deductible items.

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.

As of June 30, 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. As of 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. As of June 30, 2018, 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.

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.



14

Foundation Building Materials, Inc.
 
 
Notes to Condensed Consolidated Financial Statements
 

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 June 30, 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.

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 June 30,
 
2018
 
2017
 
Net Sales
Gross Profit
 
Net Sales
Gross Profit
SBP
$
522,219

$
146,267

 
$
460,086

$
130,729

MI
82,754

22,830

 
69,144

18,803

Consolidated
$
604,973

$
169,097

 
$
529,230

$
149,532

Total gross profit
$
169,097


 
$
149,532


Total operating expenses
(146,126
)

 
(132,629
)

Interest expense
(15,345
)

 
(14,876
)

Other income, net
57


 
95


Income before income taxes
$
7,683


 
$
2,122




15

Foundation Building Materials, Inc.
 
 
Notes to Condensed Consolidated Financial Statements
 

 
Six Months Ended June 30,
 
2018
 
2017
 
Net Sales
Gross Profit
 
Net Sales
Gross Profit
SBP
$
985,879

$
280,704

 
$
878,549

$
253,155

MI
155,391

42,833

 
130,138

36,288

Consolidated
$
1,141,270

$
323,537

 
$
1,008,687

$
289,443

Total gross profit
$
323,537

 
 
$
289,443

 
Total operating expenses
(287,439
)
 
 
(264,087
)
 
Interest expense
(30,477
)
 
 
(30,125
)
 
Other income, net
124

 
 
13,384

 
Income before income taxes
$
5,745

 
 
$
8,615

 

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 June 30,
 
Six Months Ended June 30,
 
2018
2017
 
2018
2017
United States
$
537,819

$
470,079

 
$
1,010,760

$
897,020

Canada
67,154

59,151

 
130,510

111,667

Total
$
604,973

$
529,230

 
$
1,141,270

$
1,008,687


The following table sets forth property, plant and equipment, goodwill and intangibles by geographic area (in thousands):

 
June 30, 2018
 
December 31, 2017
Property, plant and equipment, net


 


United States
$
140,803

 
$
135,330

Canada
15,197

 
16,078

Total property, plant and equipment, net
$
156,000

 
$
151,408

Goodwill


 


United States
$
439,906

 
$
431,476

Canada
25,856

 
27,261

Total goodwill
$
465,762

 
$
458,737

Intangibles, net


 


United States
$
163,389

 
$
182,070

Canada
6,349

 
7,700

Total intangibles, net
$
169,738

 
$
189,770

    










16

Foundation Building Materials, Inc.
 
 
Notes to Condensed Consolidated Financial Statements
 

The Company’s net sales by segment and major product line, and segment gross profit and gross margin, are as follows:

 
Three Months Ended June 30,
 
Change
 
2018
 
2017
 
$
 
%
(dollars in thousands)
 
 
 
 
 
 
 
 
 
SBP Segment



 



 


 

     Wallboard(1)
$
198,598

38.0
%
 
$
180,955

39.3
%
 
$
17,643

 
9.7
%
     Suspended ceiling systems
97,755

18.7
%
 
83,271

18.1
%
 
14,484

 
17.4
%
     Metal framing
91,476

17.5
%
 
72,404

15.7
%
 
19,072

 
26.3
%
     Complementary and other products
134,390

25.8
%
 
123,456

26.9
%
 
10,934

 
8.9
%
Total SBP net sales
$
522,219

100.0
%
 
$
460,086

100.0
%
 
$
62,133

 
13.5
%
 



 



 


 

MI Segment



 



 


 

Total MI net sales(2)
$
82,754

100.0
%
 
$
69,144

100.0
%
 
$
13,610

 
19.7
%
Total net sales
$
604,973


 
$
529,230


 
$
75,743

 
14.3
%
 



 



 


 

Gross profit - SBP
$
146,267


 
$
130,729


 
$
15,538

 
11.9
%
Gross profit - MI
22,830


 
18,803


 
4,027

 
21.4
%
Total gross profit
$
169,097


 
$
149,532


 
$
19,565

 
13.1
%
 



 



 


 

Gross margin - SBP
28.0
%

 
28.4
%

 
(0.4
)%
 


Gross margin - MI
27.6
%

 
27.2
%

 
0.4
 %
 


Total gross margin
28.0
%

 
28.3
%

 
(0.3
)%
 


(1) For the three months ended June 30, 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.


17

Foundation Building Materials, Inc.
 
 
Notes to Condensed Consolidated Financial Statements
 

 
Six Months Ended June 30,
 
Change
 
2018
 
2017
 
$
 
%
(dollars in thousands)
 
 
 
 
 
 
 
 
 
SBP Segment
 
 
 
 
 
 
 
 
 
     Wallboard(1)
$
379,251

38.5
%
 
$
349,195

39.7
%
 
$
30,056

 
8.6
%
     Suspended ceiling systems
183,933

18.7
%
 
155,988

17.8
%
 
27,945

 
17.9
%
     Metal framing
165,443

16.8
%
 
141,065

16.1
%
 
24,378

 
17.3
%
     Complementary and other products
257,252

26.0
%
 
232,301

26.4
%
 
24,951

 
10.7
%
Total SBP net sales
$
985,879

100.0
%
 
$
878,549

100.0
%
 
$
107,330

 
12.2
%
 
 
 
 
 
 
 
 
 
 
MI Segment
 
 
 
 
 
 
 
 
 
Total MI net sales(2)
$
155,391

100.0
%
 
$
130,138

100.0
%
 
$
25,253

 
19.4
%
Total net sales
$
1,141,270

 
 
$
1,008,687

 
 
$
132,583

 
13.1
%
 
 
 
 
 
 
 
 
 
 
Gross profit - SBP
$
280,704

 
 
$
253,155

 
 
$
27,549

 
10.9
%
Gross profit - MI
42,833

 
 
36,288

 
 
6,545

 
18.0
%
Total gross profit
$
323,537

 
 
$
289,443

 
 
$
34,094

 
11.8
%
 
 
 
 
 
 
 
 
 
 
Gross margin - SBP
28.5
%
 
 
28.8
%
 
 
(0.3
)%
 
 
Gross margin - MI
27.6
%
 
 
27.9
%
 
 
(0.3
)%
 
 
Total gross margin
28.3
%
 
 
28.7
%
 
 
(0.4
)%
 
 
(1) For the six months ended June 30, 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.

13. Other Current Liabilities    

The balance of other current liabilities consisted of the following as of June 30, 2018 and December 31, 2017 (in thousands):

 
June 30, 2018
 
December 31, 2017
Accrued expenses
$
5,617

 
$
6,919

Accrued interest
17,709

 
18,093

Accrued other
16,695

 
16,081

Total other current liabilities
$
40,021

 
$
41,093

















18

Foundation Building Materials, Inc.
 
 
Notes to Condensed Consolidated Financial Statements
 

14. Earnings Per Share

Basic earnings per share represents net 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 earnings per share for each period:

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Weighted average shares used in basic computations
42,893,498

 
42,865,407

 
42,886,867

 
40,084,730

Dilutive effect of stock options and restricted stock units
16,519

 
13,912

 
16,921

 
210

Weighted average shares used in diluted computations
42,910,017

 
42,879,319

 
42,903,788

 
40,084,940


For the three and six months ended June 30, 2018, there were approximately 66,000 and 177,000 shares, respectively, not included in the computation of diluted weighted average shares because their effect would have been antidilutive. For the three and six months ended June 30, 2017, there were approximately 83,000 and 96,000 shares, respectively, not included in the computation of diluted weighted average shares because their effect would have been antidilutive.

15. Subsequent Events

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 distributor of building materials with product offerings including wallboard, metal framing, insulation, lumber, exterior insulation and finishing systems, fasteners, tools and other related accessory products, which operated six branches in Pennsylvania and Virginia.

On July 30, 2018, the Company submitted a conditional notice of redemption to the trustee and the holders of its Notes seeking to redeem all of the outstanding Notes on August 15, 2018, conditioned on the prior completion of a new $450.0 million term loan credit facility and ABL Credit Facility (together, the “New Credit Facility”).  If the New Credit Facility has not been completed by August 15, 2018, the Company may delay the redemption until the condition is satisfied.

If the redemption of the Notes is completed as expected, the Company expects to expense approximately $35.8 million of non-cash amortization related to deferred financing costs and a $23.7 million prepayment premium during the three months ending September 30, 2018.
    
    






19

 
 




Item 2.     Management's Discussion and Analysis of Financial Condition and Results of Operations

The following is a discussion and analysis of our financial condition and the results of operations as of and for the periods presented below. The following discussion and analysis should be read in conjunction with the "Consolidated Financial Statements" and notes thereto included elsewhere in this Quarterly Report on Form 10-Q. This section and other parts of this Quarterly Report on Form 10-Q contain forward-looking statements that involve risks and uncertainties. In some cases, forward-looking statements can be identified by words such as "anticipates," "believes," "could," "estimates," "expects," "intends," "may," "plans," "potential," "predicts," "projects," "should," "will," "would" or similar expressions. Such forward-looking statements are based on current expectations, estimates and projections about our industry, and our management’s beliefs and assumptions. Forward-looking statements are not guarantees of future performance and our actual results may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such differences include, but are not limited to, those discussed in Item 1A, "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2017, filed with the Securities and Exchange Commission on February 27, 2018, or the 2017 10-K, as updated by our subsequent filings under the Securities and Exchange Act of 1934, as amended, or the Exchange Act.
 
Unless required by law, we expressly undertake no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise.

Overview

We are the second largest specialty distributor of wallboard and suspended ceiling systems in the United States and Canada. We are also the second largest specialty distributor and one of the largest fabricators of commercial and industrial mechanical insulation in the United States. Since our founding in 2011, we are the fastest growing publicly-traded specialty building products distributor by revenue and branch count, with over 220 branches and more than 35,000 SKUs.

We have a national operating model supported by local market expertise and an entrepreneurial, customer centric culture. Our strong national brand and acquisition expertise have established us as the distributor of choice for leading suppliers, and we have over 28,000 customers across a balanced mix of construction-related end markets. We believe that we are able to maintain our local market excellence due to our longstanding customer relationships, dependable service and market-specific product offerings that cater to local market trends and preferences.

Second Quarter Update

Financial Results

We reported net sales of $605.0 million for the three months ended June 30, 2018, an increase of $75.7 million, or 14.3%, compared to the three months ended June 30, 2017, including base business net sales growth of 9.5%. Our gross margin for the three months ended June 30, 2018, was 28.0% compared to 28.3% for the three months ended June 30, 2017, which reflected a change in our product mix with a higher contribution from lower margin products such as suspended ceiling systems and mechanical insulation on a percentage of net sales basis. Selling, general and administrative, or SG&A, expenses as a percentage of net sales was 20.8% for the three months ended June 30, 2018, as compared to 21.5% for the three months ended June 30, 2017. The decrease in SG&A expenses as a percentage of net sales was due to our continued focus on operating efficiencies and cost reduction initiatives. We reported net income of $5.4 million and Adjusted EBITDA(1) of $46.3 million for the three months ended June 30, 2018.

Acquisitions

We supplement our organic growth strategy with selective acquisitions, and since January 2018, through the date of this filing, we have completed three acquisitions totaling 13 branches. See Note 4, Acquisitions, and Note 15, Subsequent Events, to the condensed consolidated financial statements. We believe that significant opportunities exist to continue to expand our geographic footprint and product offerings by executing additional strategic acquisitions, and we maintain an extensive and active acquisition pipeline. We are typically evaluating several acquisition opportunities at any given time. In executing our acquisition strategy and integrating acquired companies, we focus on the cost savings we can achieve through integrated procurement and pricing programs and brand consolidation. The two acquisitions completed from January 1, 2018, to June 30, 2018, contributed $7.6 million to net sales for the three months ended June 30, 2018, and $12.6 million for the six months ended June 30, 2018.

(1) Adjusted EBITDA is a non-GAAP measure. See the Non-GAAP Financial Information at the end of the Management's Discussion and Analysis of Financial Condition and Results of Operations section for a discussion of how we define and calculate this measure, why we believe it is important and a reconciliation thereof to the most directly comparable GAAP measure.
20

 
 




Acquisitions
 
Effective Date of Acquisition
 
Branch Locations
 
# of Branches Acquired
Ciesco
 
August 1, 2018
 
PA, VA
 
6
ArmCom Distributing Company
 
February 1, 2018
 
MN, ND, SD, NE
 
5
RM Supply
 
February 1, 2018
 
MO
 
2
     Total
 
 
 
 
 
13

Description of Segments

We have two reportable segments. Resources are allocated and performance is assessed by our CEO, whom we have determined to be our Chief Operating Decision Maker, or CODM. Management evaluates performance for each segment based on gross profit. The reportable segments are:

Specialty Building Products - Specialty building products, or 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, or EIFS, as well as tools, safety accessories and fasteners. The primary end markets served are new non-residential, new residential and non-residential repair and remodel construction markets.

Mechanical Insulation - Mechanical insulation, or MI, includes insulation solutions for pipes and mechanical systems and the primary end markets served are new non-residential construction, non-residential repair and remodel construction and industrial markets.

Factors and Trends Affecting Our Business and Results of Operations

See Item 7, "Management’s Discussion and Analysis of Financial Condition and Results of Operations" in the 2017 10-K for a discussion of the general and specific factors and trends affecting our business and results of operations, which include general economic conditions, new non-residential construction, new residential construction, non-residential repair and remodel construction, industrial end markets, volume, costs and pricing programs. There were no material changes to those matters during the six months ended June 30, 2018. We believe each of our end markets is currently in an extended period of recovery following a deep and prolonged recession.

Initial Public Offering

On February 15, 2017, we completed our initial public offering, or IPO, in which we issued 12,800,000 shares of our common stock at a public offering price of $14.00 per share. Our common stock began trading on the New York Stock Exchange on February 10, 2017 under the ticker symbol "FBM." After underwriting discounts and commissions and expenses payable by us, net proceeds from the IPO were approximately $164.0 million. We used these proceeds to repay borrowings outstanding under our 2016 Asset-Based Revolving Credit Facility, or the ABL Credit Facility.





















21

 
 




Results of Operations

Three Months Ended June 30, 2018 Compared to the Three Months Ended June 30, 2017

The following table summarizes certain consolidated financial information related to our operating results for the periods indicated:

 
Three Months Ended June 30,
 
2018
 
2017
(dollars in thousands)
 
 
 
 
 
Statements of operations data
 
 
 
 
 
Net sales
$
604,973

100.0
 %
 
$
529,230

100.0
 %
Cost of goods sold
435,876

72.0
 %
 
379,698

71.7
 %
Gross profit
169,097

28.0
 %
 
149,532

28.3
 %
Operating expenses:
 
 
 
 
 
Selling, general and administrative
125,785

20.8
 %
 
113,602

21.5
 %
Depreciation and amortization
20,341

3.4
 %
 
19,027

3.6
 %
Total operating expenses
146,126

24.2
 %
 
132,629

25.1
 %
Income from operations
22,971

3.8
 %
 
16,903

3.2
 %
Interest expense
(15,345
)
(2.5
)%
 
(14,876
)
(2.8
)%
Other income, net
57

 %
 
95

 %
Income before income taxes
7,683

1.3
 %
 
2,122

0.4
 %
Income tax expense
2,283

0.4
 %
 
862

0.2
 %
Net income
$
5,400

0.9
 %
 
$
1,260

0.2
 %



22

 
 




The Company’s net sales by segment and major product line, and segment gross profit and gross margin, are as follows:
 
Three Months Ended June 30,
 
Change
 
2018
 
2017
 
$
 
%
(dollars in thousands)
 
 
 
 
 
 
 
 
 
SBP Segment
 
 
 
 
 
 
 
 
 
     Wallboard(1)
$
198,598

38.0
%
 
$
180,955

39.3
%
 
$
17,643

 
9.7
%
     Suspended ceiling systems
97,755

18.7
%
 
83,271

18.1
%
 
14,484

 
17.4
%
     Metal framing
91,476

17.5
%
 
72,404

15.7
%
 
19,072

 
26.3
%
     Complementary and other products
134,390

25.8
%
 
123,456

26.9
%
 
10,934

 
8.9
%
Total SBP net sales
$
522,219

100.0
%
 
$
460,086

100.0
%
 
$
62,133

 
13.5
%
 
 
 
 
 
 
 
 
 
 
MI Segment
 
 
 
 
 
 
 
 
 
Total MI net sales(2)
$
82,754

100.0
%
 
$
69,144

100.0
%
 
$
13,610

 
19.7
%
Total net sales
$
604,973

 
 
$
529,230

 
 
$
75,743

 
14.3
%
 
 
 
 
 
 
 
 
 
 
Gross profit - SBP
$
146,267

 
 
$
130,729

 
 
$
15,538

 
11.9
%
Gross profit - MI
22,830

 
 
18,803

 
 
4,027

 
21.4
%
Total gross profit
$
169,097

 
 
$
149,532

 
 
$
19,565

 
13.1
%
 
 
 
 
 
 
 
 
 
 
Gross margin - SBP
28.0
%
 
 
28.4
%
 
 
(0.4
)%
 
 
Gross margin - MI
27.6
%
 
 
27.2
%
 
 
0.4
 %
 
 
Total gross margin
28.0
%
 
 
28.3
%
 
 
(0.3
)%
 
 
(1) For the three months ended June 30, 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 June 30, 2018, were $605.0 million compared to $529.2 million for the three months ended June 30, 2017, representing an increase of $75.7 million, or 14.3%. Base business net sales, as defined in the table below, increased $47.5 million, or 9.5% to $546.2 million, for the three months ended June 30, 2018, compared to the three months ended June 30, 2017. Net sales from acquired branches and existing branches that were strategically combined contributed $28.2 million to the increase in consolidated net sales.
    
The change in our base business net sales was primarily driven by the following factors:

an increase in wallboard sales of $6.7 million, or 4.0%, primarily due to an increase in wallboard unit volume of 2.0% and an increase in average selling price of 2.0%;
an increase in suspended ceiling systems sales of $6.4 million, or 8.1%, primarily due to an increase in commercial activity and price increases;
an increase in metal framing sales of $16.0 million, or 23.6%, primarily due to an increase in commercial construction activity and price increases;
an increase in complementary and other product sales of $5.3 million, or 4.5%, primarily due to our continued initiatives to increase complementary product sales; and
an increase in MI sales of $13.1 million, or 19.7%, due to higher net sales from our industrial end markets.



23

 
 




The table below highlights net sales from our base business and acquired and combined branches:

 
Three Months Ended June 30,
 
Change
 
2018
 
2017
 
$
 
%
(dollars in thousands)
 
 
 
 
 
 
 
Base business(1)
$
546,206

 
$
498,704

 
$
47,502

 
9.5
%
Acquired and combined(2)
58,767

 
30,526

 
28,241

 
92.5
%
Net sales
$
604,973

 
$
529,230

 
$
75,743

 
14.3
%
(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 June 30, 2017
 
Base Business Net Sales Increase
 
Acquired and Combined Net Sales Increase
 
Three Months Ended June 30, 2018
 
Total Net Sales % Increase
Base Business Net Sales % Increase(1)
 
Acquired and Combined Net Sales % Increase(2)
(dollars in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
Wallboard(3)
$
180,955

 
$
6,710

 
$
10,933

 
$
198,598

 
9.7
%
4.0
%
 
81.9
%
Suspended ceiling systems
83,271

 
6,390

 
8,094

 
97,755

 
17.4
%
8.1
%
 
177.8
%
Metal framing
72,404

 
16,035

 
3,037

 
91,476

 
26.3
%
23.6
%
 
67.3
%
Complementary and other products
123,456

 
5,283

 
5,651

 
134,390

 
8.9
%
4.5
%
 
106.8
%
SBP net sales
460,086

 
34,418

 
27,715

 
522,219

 
13.5
%
8.0
%
 
100.1
%
MI net sales
69,144

 
13,084

 
526

 
82,754

 
19.7
%
19.7
%
 
18.6
%
Total net sales
$
529,230

 
$
47,502

 
$
28,241

 
$
604,973

 
14.3
%
9.5
%
 
92.5
%
Average daily net sales
$
8,269

 
$
742

 
$
442

 
$
9,453

 
14.3
%
9.5
%
 
92.5
%
(1) Represents base business net sales increase as a percentage of base business net sales for the three months ended June 30, 2017.
(2) Represents acquired and combined net sales increase as a percentage of acquired and combined net sales for the three months ended June 30, 2017.
(3) For the three months ended June 30, 2017, wallboard accessories have been reclassified from “Wallboard” to “Complementary and other products” to conform to the current year presentation.

Specialty Building Products. SBP net sales for the three months ended June 30, 2018, were $522.2 million compared to $460.1 million for the three months ended June 30, 2017, representing an increase of $62.1 million, or 13.5%. Net sales from base business branches contributed $34.4 million of the net increase which was driven by strong commercial activity, price increases and product expansion into new geographic markets. Net sales from acquired branches and existing branches that were strategically combined with acquired branches contributed $27.7 million of the increase.

Mechanical Insulation. MI net sales for the three months ended June 30, 2018, were $82.8 million compared to $69.1 million for the three months ended June 30, 2017, representing an increase of $13.6 million, or 19.7%. Net sales from base business branches contributed $13.1 million of the increase, which was primarily due to higher net sales from our industrial end markets.







24

 
 




Gross Profit and Gross Margin

Consolidated gross profit for the three months ended June 30, 2018, was $169.1 million compared to $149.5 million for the three months ended June 30, 2017, representing an increase of $19.6 million, or 13.1%. The increase in gross profit was primarily due to the increase in net sales. Consolidated gross margin for the three months ended June 30, 2018, was 28.0% compared to 28.3% for the three months ended June 30, 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 June 30, 2018, was $146.3 million compared to $130.7 million for the three months ended June 30, 2017, representing an increase of $15.5 million, or 11.9%. SBP gross profit increased with higher sales volume and contribution from acquired and combined branches. SBP gross margin for the three months ended June 30, 2018, was 28.0% compared to 28.4% for the three months ended June 30, 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 ceiling systems and metal framing on a percentage of net sales basis.

Mechanical Insulation. MI gross profit for the three months ended June 30, 2018, was $22.8 million compared to $18.8 million for the three months ended June 30, 2017, representing an increase of $4.0 million, or 21.4%. MI gross profit increased due to higher net sales from our base business. MI gross margin for the three months ended June 30, 2018, was 27.6% compared to 27.2% for the three months ended June 30, 2017. The increase in gross margin was primarily due to a change in product mix with an increased contribution from higher gross margin products on a percentage of net sales basis.  

Selling, General & Administrative

SG&A expenses consist of warehouse, delivery and general and administrative expenses. SG&A expenses for the three months ended June 30, 2018, were $125.8 million compared to $113.6 million for the three months ended June 30, 2017, representing an increase of $12.2 million, or 10.7%. As a percentage of net sales, SG&A expenses were 20.8% for the three months ended June 30, 2018, compared to 21.5% for the three months ended June 30, 2017. Excluding non-recurring adjustments of $3.0 million and $3.6 million for the three months ended June 30, 2018 and 2017, respectively, SG&A expenses as a percentage of net sales for the three months ended June 30, 2018, was 20.3% compared to 20.8% for the three months ended June 30, 2017. The decrease in SG&A expenses as a percentage of net sales was due to our continued focus on operating efficiencies and cost reduction initiatives, as well as our increase in net sales.

Depreciation and Amortization

Depreciation and amortization for the three months ended June 30, 2018, was $20.3 million compared to $19.0 million for the three months ended June 30, 2017, representing an increase of $1.3 million, or 6.9%. The increase in depreciation and amortization was primarily due to acquisitions subsequent to June 30, 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 June 30, 2018, was $15.3 million compared to $14.9 million for the three months ended June 30, 2017, representing an increase of $0.5 million, or 3.2%.

Income Taxes

Income tax expense for the three months ended June 30, 2018, was $2.3 million compared to $0.9 million for the three months ended June 30, 2017. The effective tax rate for the three months ended June 30, 2018 was 29.7% compared to 40.6% for the three months ended June 30, 2017. The difference in the effective tax rates between periods is due primarily to a decrease in the federal statutory rate.










25

 
 




Six Months Ended June 30, 2018 Compared to the Six Months Ended June 30, 2017

The following table summarizes certain consolidated financial information related to our operating results for the periods indicated:

 
Six Months Ended June 30,
 
2018
 
2017
(dollars in thousands)
 
 
 
 
 
Statements of operations data
 
 
 
 
 
Net sales
$
1,141,270

100.0
 %
 
$
1,008,687

100.0
 %
Cost of goods sold
817,733

71.7
 %
 
719,244

71.3
 %
Gross profit
323,537

28.3
 %
 
289,443

28.7
 %
Operating expenses:
 
 
 
 
 
Selling, general and administrative
247,212

21.7
 %
 
226,664

22.5
 %
Depreciation and amortization
40,227

3.5
 %
 
37,423

3.7
 %
Total operating expenses
287,439

25.2
 %
 
264,087

26.2
 %
Income from operations
36,098

3.1
 %
 
25,356

2.5
 %
Interest expense
(30,477
)
(2.7
)%
 
(30,125
)
(3.0
)%
Other income, net
124

 %
 
13,384

1.3
 %
Income before income taxes
5,745

0.4
 %
 
8,615

0.8
 %
Income tax expense
1,398

0.1
 %
 
3,426

0.3
 %
Net income
$
4,347

0.3
 %
 
$
5,189

0.5
 %

    
































26

 
 




The Company’s net sales by segment and major product line, and segment gross profit and gross margin, are as follows:

 
Six Months Ended June 30,
 
Change
 
2018
 
2017
 
$
 
%
(dollars in thousands)
 
 
 
 
 
 
 
 
 
SBP Segment
 
 
 
 
 
 
 
 
 
     Wallboard(1)
$
379,251

38.5
%
 
$
349,195

39.7
%
 
$
30,056

 
8.6
%
     Suspended ceiling systems
183,933

18.7
%
 
155,988

17.8
%
 
27,945

 
17.9
%
     Metal framing
165,443

16.8
%
 
141,065

16.1
%
 
24,378

 
17.3
%
     Complementary and other products
257,252

26.0
%
 
232,301

26.4
%
 
24,951

 
10.7
%
Total SBP net sales
$
985,879

100.0
%
 
$
878,549

100.0
%
 
$
107,330

 
12.2
%
 
 
 
 
 
 
 
 
 
 
MI Segment
 
 
 
 
 
 
 
 
 
Total MI net sales(2)
$
155,391

100.0
%
 
$
130,138

100.0
%
 
$
25,253

 
19.4
%
Total net sales
$
1,141,270