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Section 1: 10-Q (10-Q)

Document
 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 March 31, 2019
 
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:
 
Large accelerated filer ☐
 
                 Accelerated filer ý
 
 
 
Non-accelerated filer ☐
 
Smaller reporting company ý
 
 
 
(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

Title of each class
 
Trading Symbol
 
Name of each exchange on which registered
Common Stock
 
FBM
 
New York Stock Exchange

 As of May 3, 2019, the number of shares outstanding of the registrant’s common stock, $0.001 par value, was 42,987,839.





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 STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS) (UNAUDITED)
(in thousands, except share and per share data)
 
Three Months Ended March 31,
 
2019
 
2018
Net sales
$
514,872

 
$
463,661

Cost of goods sold
361,912

 
329,224

Gross profit
152,960

 
134,437

Operating expenses:

 

Selling, general and administrative expenses
117,230

 
104,657

Depreciation and amortization
20,342

 
18,397

Total operating expenses
137,572

 
123,054

Income from operations
15,388

 
11,383

Interest expense
(8,556
)
 
(15,119
)
Other income, net
41

 
74

Income (loss) before income taxes
6,873

 
(3,662
)
Income tax expense (benefit)
2,045

 
(1,398
)
Income (loss) from continuing operations
4,828

 
(2,264
)
Income from discontinued operations, net of tax

 
1,211

Loss on sale of discontinued operations, net of tax
(1,346
)


Net income (loss)
$
3,482

 
$
(1,053
)
 

 

Earnings (loss) per share data:

 

Earnings (loss) from continuing operations per share - basic
$
0.11

 
$
(0.05
)
Earnings (loss) from continuing operations per share - diluted
$
0.11

 
$
(0.05
)
 


 


(Loss) earnings from discontinued operations per share - basic
$
(0.03
)
 
$
0.03

(Loss) earnings from discontinued operations per share - diluted
$
(0.03
)
 
$
0.03

 


 


Earnings (loss) per share - basic
$
0.08

 
$
(0.02
)
Earnings (loss) per share - diluted
$
0.08

 
$
(0.02
)
 

 

Weighted average shares outstanding:

 

Basic
42,932,024

 
42,879,874

Diluted
42,944,829

 
42,879,874

 

 

Comprehensive income (loss):

 

Net income (loss)
$
3,482

 
$
(1,053
)
     Foreign currency translation adjustment
1,570

 
(2,371
)
     Unrealized (loss) income on derivatives, net of taxes of $1.3 million and $0.5 million, respectively
(3,496
)
 
1,163

Total other comprehensive (loss)
(1,926
)
 
(1,208
)
Total comprehensive income (loss)
$
1,556

 
$
(2,261
)
See accompanying notes to the condensed consolidated financial statements.



FOUNDATION BUILDING MATERIALS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(in thousands, except share data)
 
March 31, 2019
 
December 31, 2018
Current assets:



Cash and cash equivalents
$
4,978


$
15,299

Accounts receivable—net of allowance for doubtful accounts of $3,578 and $3,239, respectively
303,445


276,043

Other receivables
42,908


57,472

Inventories
170,584


165,989

Prepaid expenses and other current assets
13,715


9,053

Total current assets
535,630


523,856

Property and equipment, net
148,491


151,641

Right-of-use assets, net
116,245



Intangible assets, net
134,887


145,876

Goodwill
487,888


484,941

Other assets
5,816


10,393

Total assets
$
1,428,957


$
1,316,707

Liabilities and stockholders' equity:





Current liabilities:




Accounts payable
$
149,519


$
137,773

Accrued payroll and employee benefits
21,281


28,830

Accrued taxes
11,043


11,867

Tax receivable agreement
27,676


16,667

Current portion of term loan, net
4,500


4,500

Current portion of lease liabilities
28,061



Other current liabilities
18,849


19,979

Total current liabilities
260,929


219,616

Asset-based revolving credit facility
153,500


146,000

Long-term portion of term loan, net
437,158


437,999

Tax receivable agreement
90,272


117,948

Deferred income taxes, net
19,723


20,678

Long-term portion of lease liabilities
96,006



Other liabilities
2,937


8,117

Total liabilities
1,060,525


950,358

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; 42,986,683 and 42,907,326 shares issued, respectively
13


13

     Additional paid-in capital
333,029


332,330

     Retained earnings
37,497


34,187

     Accumulated other comprehensive loss
(2,107
)

(181
)
          Total stockholders' equity
368,432


366,349

Total liabilities and stockholders' equity
$
1,428,957


$
1,316,707


See accompanying notes to the condensed consolidated financial statements.

2


FOUNDATION BUILDING MATERIALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)
 
Three Months Ended March 31,
 
2019
 
2018
Cash flows from operating activities:


 

Net income (loss)
$
3,482

 
$
(1,053
)
Less: loss on sale of discontinued operations
(1,346
)
 

Less: net income from discontinued operations

 
1,211

Net income (loss) from continuing operations
4,828

 
(2,264
)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities of continuing operations:


 

     Depreciation
8,846

 
7,685

     Amortization of intangible assets
11,496

 
10,692

     Amortization of debt issuance costs and debt discount
539

 
2,624

     Inventory fair value purchase accounting adjustment
196

 
407

     Provision for doubtful accounts
636

 
413

     Stock-based compensation
829

 
242

     Unrealized gain on derivative instruments, net

 
(74
)
     Loss on disposal of property and equipment
191

 
12

     Right-of-use assets non-cash expense
6,743



     Deferred income taxes
211

 
(1,614
)
     Change in assets and liabilities, net of effects of acquisitions:


 


          Accounts receivable
(23,860
)
 
(26,783
)
          Other receivables
16,851

 
5,112

          Inventories
(2,917
)
 
(4,554
)
          Prepaid expenses and other current assets
(2,206
)
 
1,211

          Other assets
(15
)
 
651

          Accounts payable
9,182

 
8,385

          Accrued payroll and employee benefits
(7,601
)
 
1,715

          Accrued taxes
(831
)
 
3,035

          Other liabilities
(5,409
)
 
(12,007
)
Net cash provided by (used in) operating activities from continuing operations
17,709


(5,112
)
Cash flows from investing activities from continuing operations:


 


     Purchases of property and equipment
(5,242
)
 
(7,286
)
     Payment of net working capital adjustments related to acquisitions
(13
)
 
(15
)
     Proceeds from net working capital adjustments related to acquisitions

 
178

     Proceeds from the disposal of fixed assets
238

 
200

     Acquisitions, net of cash acquired
(10,757
)
 
(21,233
)
Net cash used in investing activities from continuing operations
(15,774
)

(28,156
)
Cash flows from financing activities from continuing operations:


 


     Proceeds from asset-based revolving credit facility
145,276

 
131,224

     Repayments of asset-based revolving credit facility
(137,776
)
 
(88,724
)
     Principal payments for term loan
(1,125
)
 

     Payment related to tax receivable agreement
(16,667
)


     Tax withholding payment related to net settlement of equity awards
(130
)
 
(45
)

3


     Principal repayment of finance lease obligations
(654
)
 
(680
)
Net cash (used in) provided by financing activities from continuing operations
(11,076
)

41,775

     Net cash used in operating activities from discontinued operations

 
(11,429
)
     Net cash used in investing activities from discontinued operations
(1,346
)
 
(308
)
     Net cash used in financing activities of discontinued operations

 
(65
)
Net cash used in discontinued operations
(1,346
)
 
(11,802
)
Effect of exchange rate changes on cash
166

 
(161
)
Net decrease in cash
(10,321
)
 
(3,456
)
Cash and cash equivalents at beginning of period
15,299

 
12,101

Cash and cash equivalents at end of period
$
4,978

 
$
8,645

 


 


Supplemental disclosures of cash flow information:


 


Cash paid for income taxes
$
79

 
$

Cash paid for interest
$
8,613

 
$
24,201

Supplemental disclosures of non-cash investing and financing activities:
 
 


Change in fair value of derivatives, net of tax
$
3,496

 
$
1,163

Goodwill adjustment for purchase price allocation
$
187

 
$
202

See accompanying notes to the condensed consolidated financial statements.


4


FOUNDATION BUILDING MATERIALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)
(in thousands)
Three Months Ended March 31, 2019
 
Common Stock
 
 
 
 
 
 
 
 
 
Shares
 
Amount
 
Additional Paid in Capital
 
Retained Earnings
 
Other Comprehensive Loss
 
Total Stockholders' Equity
Balance at December 31, 2018
42,907,326

 
$
13

 
$
332,330

 
$
34,187

 
$
(181
)
 
$
366,349

Adoption of derivatives guidance



 


(172
)

172



Stock-based compensation




 
829






829

Vesting of restricted stock units
93,014

 

 

 

 

 

Shares withheld related to net settlement of equity awards
(13,657
)
 

 
(130
)
 

 

 
(130
)
Other comprehensive loss



 




(2,098
)

(2,098
)
Net income



 


3,482





3,482

Balance at March 31, 2019
42,986,683

 
$
13

 
$
333,029

 
$
37,497

 
$
(2,107
)
 
$
368,432


Three Months Ended March 31, 2018
 
Common Stock
 
 
 
 
 
 
 
 
 
Shares
 
Amount
 
Additional Paid in Capital
 
Retained Earnings
 
Other Comprehensive Income
 
Total Stockholders' Equity
Balance at December 31, 2017
42,865,407

 
$
13

 
$
330,113

 
$
46,184

 
$
2,354

 
$
378,664

Adoption of tax guidance






180


(180
)


Stock-based compensation




271






271

Vesting of restricted stock units
29,050

 

 

 

 

 

Shares withheld related to net settlement of equity awards
(3,205
)



(45
)





(45
)
Other comprehensive loss








(1,028
)

(1,028
)
Net loss






(1,053
)



(1,053
)
Balance at March 31, 2018
42,891,252

 
$
13

 
$
330,339

 
$
45,311

 
$
1,146

 
$
376,809

See accompanying notes to the condensed consolidated financial statements.


5

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


1.    Business and Basis of Presentation

Business

Foundation Building Materials, Inc. (the "Company") is a specialty building products distributor of wallboard, suspended ceiling systems, and metal framing throughout the U.S. and Canada. Based in Tustin, California, the Company employs more than 3,400 people and operates more than 175 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.

Principles of Consolidation

The accompanying condensed consolidated financial statements include the accounts of the Company and its consolidated subsidiaries. All intercompany balances and transactions have been eliminated.

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.

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, 2018, included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 26, 2019 (the "2018 10-K").

2.    Recently Issued Accounting Standards

Recently Adopted Accounting Standards

In August 2017, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2017-12, Derivative and Hedging (Topic 815): Targeted Improvement to Accounting for Hedging Activities, which amends the hedge accounting recognition and presentation requirements in Accounting Standard Codification topic 815. This amendment is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. The Company adopted this guidance on January 1, 2019, and the adoption did not have a material impact on the Company’s condensed consolidated financial statements.

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 12 months. Leases will be classified as either "finance" or "operating," with classification affecting the pattern of expense recognition in the income statement. This update was effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years.


6

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

As a result of the adoption of ASU 2016-02, on January 1, 2019, the Company recognized (a) an operating lease liability of $118.3 million, which represents the present value of our remaining lease payments and (b) a related right-of-use asset of $117.4 million. In addition, on January 1, 2019, the Company reclassified certain intangible assets related to real estate leases to right-of-use assets and reclassified its capital lease liability to a finance lease liability in accordance with the applicable transition guidance. The adoption of ASU 2016-02 did not have a material impact on the Company's statement of operations or cash flows. Due to the adoption of the standard using the retrospective cumulative-effect adjustment method, there are no changes to our previously reported results prior to January 1, 2019.

Recently Issued Accounting Standards
 
In January 2017, the FASB issued ASU 2017-04, Intangibles and Other (Topic 350): Simplifying the Test for Goodwill Impairment, which eliminates the requirement to calculate the implied fair value of goodwill but rather requires an entity to record an impairment charge based on the excess of a reporting unit’s carrying value over its fair value. This amendment is effective for annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted. The Company does not expect the adoption of this guidance will have a material impact on its consolidated financial statements.

3. Discontinued Operations

On November 1, 2018, the Company completed the sale of its mechanical insulation business (the "Disposed Business") to SPI LLC, an unrelated third party controlled by Dunes Point Capital, for total cash consideration of approximately $122.5 million and recorded a gain on the sale of $13.7 million, net of taxes. For the three months ended March 31, 2019, the Company recorded a loss on the sale of discontinued operations of $1.3 million related to a customary purchase price adjustment.

The Company reclassified the results of operations and cash flows of the Disposed Business to discontinued operations in its accompanying condensed consolidated statements of operations and condensed consolidated statements of cash flows for the three months ended March 31, 2018.

The summarized financial information related to the Disposed Business that has been excluded from continuing operations and reported as discontinued operations in the accompanying consolidated statements of operations is as follows (in thousands):

Three Months Ended
March 31, 2018
Net sales
$
72,636

Cost of goods sold
52,633

Gross profit
20,003

Operating expenses:

Selling, general and administrative expenses
16,770

Depreciation and amortization
1,489

Total operating expenses
18,259

Income from operations
1,744

Interest expense
(13
)
Other expense, net
(7
)
Income from discontinued operations before income taxes
1,724

Income tax expense
513

Net income from discontinued operations, net of tax
$
1,211


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 the Condensed Consolidated Financial Statements

4.    Right-of-Use ("ROU") Assets and Lease Liabilities

The Company leases the majority of its branch locations and office space and also leases vehicles and equipment for use in its operations. At inception, the Company determines whether an agreement represents a lease and at commencement, evaluates each lease agreement to determine whether the lease is an operating or finance lease.

These leases do not have significant rent escalations, holidays, concessions, leasehold improvement incentives, or other build-out clauses. The Company elected to adopt the practical expedient to account for both lease and non-lease components as a single lease component.

Certain leases include one or more options to renew. The exercise of lease renewal options is typically at the Company's discretion. The Company regularly evaluates the renewal options and, when the options are reasonably certain of being exercised, they are included in the lease term.

Variable lease costs consist primarily of taxes, insurance, and common area or other maintenance costs for leased facilities and vehicles and equipment, which are paid based on actual costs incurred.

Generally, leases do not provide an implicit rate; therefore, the Company uses its incremental borrowing rate based on the information available at the lease commencement date in determining the present value of the lease payments. The Company uses a portfolio approach for determining the incremental borrowing rate based on the applicable lease terms and the current economic environment.

The following table summarizes the Company's operating and finance leases by country as of March 31, 2019 (in thousands):
 
March 31, 2019
 
United States
 
Canada
Total
Operating leases:
 
 
 
 
Real estate ROU assets, gross
$
97,153

 
$
15,069

$
112,222

Accumulated amortization
(6,341
)
 
(651
)
(6,992
)
Real estate ROU assets, net
$
90,812

 
$
14,418

$
105,230

Real estate lease liability
$
89,373

 
$
14,373

$
103,746

 
 
 
 
 
Vehicle and equipment ROU assets, gross
$
11,149

 
$
586

$
11,735

Accumulated amortization
(668
)
 
(52
)
(720
)
Vehicle and equipment ROU assets, net
$
10,481

 
$
534

$
11,015

Vehicle and equipment - lease liability
$
10,480

 
$
533

$
11,013

 
 
 
 
 
Total ROU assets, net
$
101,293

 
$
14,952

$
116,245

Total operating lease liability
$
99,853

 
$
14,906

$
114,759

 
 
 
 
 
Finance leases included in property and equipment, net:

 

 
Vehicle and equipment - ROU assets
$
6,379

 
$
2,830

$
9,209

Accumulated depreciation
(488
)
 
(180
)
(668
)
Total vehicle and equipment ROU assets, net
$
5,891

 
$
2,650

$
8,541

Total vehicle and equipment lease liability
$
6,335

 
$
2,973

$
9,308









8

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

The components of lease cost for the three months ended March 31, 2019, are as follows (in thousands):
 
 
 
 
Income Statement Classification
Operating leases:
 
 
 
 
Lease cost
 
$
8,052

 
Selling, general and administrative expenses
Variable lease cost
 
1,053

 
Selling, general and administrative expenses
Operating lease cost
 
9,105

 
 
Finance leases:
 
 
 
 
Amortization of ROU assets
 
668

 
Depreciation and amortization
Interest on lease liabilities
 
124

 
Interest expense
Finance lease cost
 
792

 
 
Total lease cost
 
$
9,897

 
 

Supplemental cash flow information for leases for the three months ended March 31, 2019, is as follows (in thousands):
Cash paid for amounts included in the measurement of lease liabilities:
 
 
Operating cash flows from operating leases
 
$
6,618

Financing cash flows from finance leases
 
$
654

 
 
 
Right-of-use-assets obtained in exchange for lease obligations:
 
 
Finance leases
 
$
185

Operating leases
 
$
120,555

 
 
 

The weighted-average remaining lease term and weighted-average discount rate for operating and finance leases as of March 31, 2019, are as follows:
 
 
Operating Leases
 
Finance Leases
Weighted average remaining lease term (years)
 
5.55
 
3.89
Weighted average discount rate
 
4.6%
 
5.2%

The following table reconciles the undiscounted future lease payments for operating and finance leases to operating and finance lease liabilities recorded on the balance sheet at March 31, 2019 (in thousands):
 
 
Operating Leases
 
Finance Leases
 
Total
2019 (excluding the three months ended March 31, 2019)
 
$
23,041

 
$
2,321

 
$
25,362

2020
 
27,823

 
2,891

 
30,714

2021
 
25,349

 
2,429

 
27,778

2022
 
19,405

 
1,483

 
20,888

2023
 
13,665

 
959

 
14,624

2024 and thereafter
 
20,914

 
160

 
21,074

Total lease payments
 
$
130,197

 
$
10,243

 
$
140,440

Less amount representing interest
 
(15,438
)
 
(935
)
 
(16,373
)
Total
 
$
114,759

 
$
9,308

 
$
124,067

 
 
 
 
 
 
 
Current portion of lease liabilities
 
$
25,390

 
$
2,671

 
$
28,061

Long-term portion of lease liabilities
 
$
89,369

 
$
6,637

 
$
96,006



9

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

The Company's future minimum operating lease commitments, as of December 31, 2018, under Accounting Standards Codification ("ASC") Topic 840, the predecessor to Topic 842, were as follows:
Years Ending December 31,
Total
2019
$
29,289

2020
26,202

2021
23,796

2022
18,120

2023
12,647

Thereafter
19,856

 
$
129,910


5.    Derivatives and Hedging Activities

The Company uses derivatives to manage selected foreign currency exchange rate risk for its investments in foreign subsidiaries and interest rate risk related to its variable rate debt. In general, the types of risks hedged are those relating to the variability of future earnings and cash flows caused by foreign currency exchange rate fluctuations and interest rates. The Company documents its risk management strategy and hedge effectiveness at the inception of and during the term of each hedge.

Interest Rate Swap

On January 31, 2019, the Company executed two interest rate swaps for a total notional amount of $310.0 million to fix the London Interbank Offered Rate (“LIBOR”) portion of its interest rate on its variable rate debt at 2.52% through January 31, 2022.

There is no significant credit risk associated with the potential failure of any counterparty to perform under the terms of the interest rate swaps.

The interest rate swaps are measured at fair value within the accompanying condensed consolidated balance sheets either as an asset or a liability. As of March 31, 2019, the fair value of the interest rate swaps was $3.0 million and was recorded in non-current other liabilities. The Company did not have any interest rate swaps as of December 31, 2018.

For the three months ended March 31, 2019, the Company recognized a loss of $2.2 million, net of taxes of $0.8 million, in comprehensive income (loss). For the three months ended March 31, 2018, the Company did not have interest rate swaps outstanding.

Net Investment Hedge

As of March 31, 2019, the amount of notional foreign currency exchange rate 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 accompanying consolidated balance sheets either as an asset or a liability. As of March 31, 2019, the fair value of the derivative instrument was $2.4 million and was recorded in other current assets. As of December 31, 2018, the fair value of the derivative instrument was $4.3 million and was recorded in other non-current assets.

For the three months ended March 31, 2019, the Company recognized a loss of $1.4 million, net of taxes of $0.5 million, in comprehensive income (loss) related to the total change in fair value of the net investment hedge. The Company recognized a gain of $1.2 million, net of taxes of $0.5 million, for the three months ended March 31, 2018, in comprehensive income (loss) related to the effective portion of the net investment hedge.

On January 1, 2019, the Company adopted ASU 2017-12 - Targeted Improvements to Accounting for Hedging Activities and reclassified $0.2 million from retained earnings to other comprehensive income (loss) related to the cumulative ineffective portion of the net investment hedge.

10

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

6.    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 and liabilities assumed based on estimated fair values at the acquisition date, with the excess of purchase price over the estimated fair value of the net assets acquired recorded as goodwill. Purchase accounting adjustments associated with the intangible asset valuations have been recorded as of March 31, 2019. 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 allocation for the acquisition set forth below is preliminary and subject to adjustment as additional information is obtained about facts and circumstances that existed as of the applicable acquisition date.

During the three months ended March 31, 2019, the Company completed the following acquisition:

Builders' Supplies Limited

On February 4, 2019, the Company acquired certain assets of Builders' Supplies Limited and all of the shares of 2168828 Alberta Inc. and 2168829 Alberta Inc. (collectively, "BSL"). BSL was an independent distributor of specialty building products including wallboard, suspended ceiling systems, metal framing and insulation in the commercial market. BSL operated three branches in the Greater Toronto Area in Ontario, Canada.

During the three months ended March 31, 2019, the Company completed the BSL acquisition for $10.8 million. This acquisition is not considered material. The following table summarizes the estimated fair value of the assets acquired and liabilities assumed as of the acquisition date (in thousands):

 
 
Three Months Ended March 31, 2019
Assets acquired:
 
 
     Cash
 
$
1

     Accounts receivable
 
3,532

     Other receivables
 
2,005

     Inventories
 
1,718

     Property and equipment
 
497

     Goodwill
 
2,246

     Intangible assets
 
2,934

          Total assets acquired
 
12,933

Liabilities assumed:
 

     Accounts payable
 
(2,167
)
     Accrued expenses and other current liabilities
 
(8
)
          Total liabilities assumed
 
(2,175
)
Total net assets acquired
 
$
10,758


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 acquisition. Goodwill attributable to the acquisition has been recorded as a non-current asset and is not amortized, but is subject to review at least on an annual basis for impairment. Goodwill recognized was primarily attributable to expected operating efficiencies and expansion opportunities in the business acquired. Goodwill and intangible assets recognized from asset acquisitions are expected to be tax deductible. 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 this acquisition will be made as soon as practicable but no later than one year from the acquisition date. The pro forma impact of the acquisition is not presented as the acquisition was not considered material to the Company's condensed consolidated financial statements.


11

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

7.    Goodwill and Intangible Assets

The change in goodwill from December 31, 2018 to March 31, 2019, consisted of the following (in thousands):

 
Carrying Value
Balance at December 31, 2018
$
484,941

Goodwill acquired
2,246

Purchase price allocation adjustments from prior periods
200

Impact of foreign currency exchange rates
501

Balance at March 31, 2019
$
487,888


Identifiable intangible assets that are separable and have determinable useful lives are valued separately and amortized over their benefit period. The following is the gross carrying value and accumulated amortization of the Company’s identifiable intangible assets as of March 31, 2019 and December 31, 2018 (in thousands):
 
March 31, 2019
 
December 31, 2018
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net Carrying Amount
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net Carrying Amount
Tradenames
$
15,980

 
$
(11,208
)
 
$
4,772

 
$
15,980


$
(10,423
)
 
$
5,557

Customer relationships
253,605

 
(123,490
)
 
130,115

 
250,498


(112,757
)
 
137,741

Other intangible assets

 

 

 
3,489


(911
)
 
2,578

 
$
269,585

 
$
(134,698
)
 
$
134,887

 
$
269,967

 
$
(124,091
)
 
$
145,876

 
On January 1, 2019, the Company reclassified certain other intangible assets related to real estate leases to right-of-use assets in accordance with the applicable transition guidance in ASC 842.

The weighted average amortization period of these intangible assets in the aggregate is 3.7 years.

8.    Long-Term Debt

Notes payable consisted of the following at March 31, 2019 and December 31, 2018 (in thousands):
 
March 31, 2019
 
December 31, 2018
2018 Term Loan Facility
$
448,875

 
$
450,000

Unamortized deferred financing and issuance costs - term loan
(7,217
)
 
(7,501
)
Revolving credit facilities
153,500

 
146,000

Unamortized deferred financing costs - revolving credit facilities
(4,418
)
 
(4,673
)
 
$
590,740

 
$
583,826


12

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

2018 Term Loan Facility

On August 13, 2018, the Company entered into a credit agreement by and among Alpha, Holdco, Royal Bank of Canada, as administrative agent and collateral agent, and the lenders party thereto (the “2018 Term Loan Facility”). The 2018 Term Loan Facility provides senior secured debt financing in an aggregate principal amount of $450.0 million and the right, at the Company’s option, to request additional tranches of term loans. Availability of such additional tranches of term loans will be subject to the absence of any default, and, among other things, the receipt of commitments by existing or additional financial institutions. Borrowings under the 2018 Term Loan Facility will bear interest at Holdco’s option at either (a) LIBOR determined by reference to the costs of funds for United States dollar deposits for the interest period relevant to such borrowing adjusted for certain additional costs, which shall be no less than 0.00%, plus an applicable margin of 3.25% (or 3.00% if the first lien net leverage ratio (as defined in the 2018 Term Loan Facility) is no greater than 4.00 to 1.00) or (b) a base rate determined by reference to the highest of (i) the prime commercial lending rate published by Royal Bank of Canada as its “prime rate,” (ii) the federal funds effective rate plus 0.50% and (iii) one-month LIBOR plus 1.0%, plus an applicable margin of 2.25% (or 2.00% if the first lien net leverage ratio (as defined in the 2018 Term Loan Facility) is no greater than 4.00 to 1.00). The Company will be required to make scheduled quarterly payments in an aggregate annual amount equal to 0.25% of the aggregate principal amount of the initial term loans made on August 13, 2018, with the balance due on August 13, 2025, seven years after the closing date for the initial term loans (as defined in the 2018 Term Loan Facility).

Obligations under the 2018 Term Loan Facility are secured by a first priority lien on all Term Priority Collateral (as defined in the 2018 Term Loan Facility) and a second priority lien on all ABL Priority Collateral (as defined in the 2018 Term Loan Facility).

The 2018 Term Loan Facility contains a number of covenants that, among other things and subject to certain exceptions, restrict Alpha’s ability and the ability of its subsidiaries to incur additional indebtedness, pay dividends on its equity securities or redeem, repurchase or retire its equity securities or other indebtedness, make investments, loans and acquisitions, create restrictions on the payment of dividends or other amounts to the Company from its restricted subsidiaries, engage in transactions with its affiliates, sell assets, including equity securities of its subsidiaries, alter the business it conducts, consolidate or merge and incur liens.

2018 Revolving Credit Facility

On August 13, 2018, Alpha, Holdco, as the lead borrower, the additional U.S. borrowers party thereto from time to time, the Canadian borrowers party thereto from time to time (collectively, the “ABL Borrowers”), the lenders party thereto from time to time, Bank of America, N.A., as administrative agent and collateral agent (the “ABL Agent”), and the other agents party thereto, entered into the ABL Credit Agreement (the “2018 ABL Credit Agreement”), including the exhibits and schedules thereto (collectively, the “2018 Revolving Credit Facility”).

The 2018 Revolving Credit Facility provides for senior secured revolving credit financing, including a United States revolving credit facility of initially up to $375.0 million (the “United States Revolving Credit Facility”), a Canadian revolving credit subfacility of initially up to $75.0 million (the “Canadian Revolving Credit Subfacility”) and a “first-in-last-out” (“FILO”) subfacility in an amount of up to $25.0 million in amortizing loans (the “FILO Subfacility”), subject, in each case, to availability under the respective borrowing bases for each facility. The aggregate amount of the 2018 Revolving Credit Facility is $375.0 million. On November 9, 2018, the Company terminated the $25.0 million FILO Subfacility.

The 2018 Revolving Credit Facility includes a letter of credit subfacility, which permits up to $10.0 million of letters of credit under the United States Revolving Credit Facility (which may be denominated in United States dollars) and up to the dollar equivalent of $5.0 million of letters of credit under the Canadian Revolving Credit Subfacility (which may be denominated in Canadian dollars or United States dollars). In addition, pursuant to the 2018 Revolving Credit Facility, up to $50.0 million in the case of the United States Revolving Credit Facility, and $10.0 million in the case of the Canadian Revolving Credit Subfacility, may be short-term borrowings upon same-day notice. The 2018 Revolving Credit Facility is scheduled to mature on August 13, 2023.


13

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

The amount of available credit for each of the United States Revolving Credit Facility and the Canadian Revolving Credit Subfacility changes every month, depending on the amount of eligible trade accounts, eligible credit card receivables, eligible inventory, eligible qualifying equipment and eligible cash the United States and Canadian loan parties have available to serve as collateral. Generally, each of the United States Revolving Credit Facility and the Canadian Revolving Credit Subfacility is limited to the sum of (a) 85% of eligible trade accounts (as defined in the 2018 Revolving Credit Facility), plus (b) 90% of eligible credit card accounts (as defined in the 2018 Revolving Credit Facility), plus (c) the lesser of (i) 75% of the value of the eligible inventory (as defined in the 2018 Revolving Credit Facility) and (ii) 85% of the net orderly liquidation value of the eligible inventory, plus (d) the lesser of (i) 85% of the net orderly liquidation value of eligible qualifying equipment and (ii) the amount obtained by multiplying (A) the amount obtained by dividing (x) the amount set forth in clause (c)(i) above by (y) the net book value of all eligible qualifying equipment as of the most recent annual appraisal, by (B) the net book value of eligible qualifying equipment (subject to amounts contributed to the borrowing base pursuant to this clause (d) being capped at the lesser of $50.0 million and 15% of the loan limit (as defined in the 2018 Revolving Credit Facility)), plus (e) eligible cash (as defined in the 2018 Revolving Credit Facility), minus (f) any eligible reserves on the borrowing base (as defined in the 2018 Revolving Credit Facility). Available credit for each tranche is calculated separately, and the borrowing base components are subject to customary reserves and eligibility criteria.

Borrowings under the 2018 Revolving Credit Facility bear interest, at the Company’s option, at either an alternate base rate or Canadian prime rate, as applicable, plus an applicable margin (ranging from 0.25% to 0.75% pursuant to a grid based on average excess availability) or the LIBOR or Canadian CDOR rate (as defined therein), as applicable, plus an applicable margin (ranging from 1.25% to 1.75% pursuant to a grid based on average excess availability). In addition to paying interest on outstanding principal under the 2018 Revolving Credit Facility, the ABL Borrowers are required to pay a commitment fee in respect of the unutilized commitments under the 2018 Revolving Credit Facility ranging from 0.250% to 0.375% per annum and determined based on average utilization of the 2018 Revolving Credit Facility (increasing when utilization is low and decreasing when utilization is high).
 
As long as commitments are outstanding under the 2018 Revolving Credit Facility, the Company is subject to certain restrictions under the facility if the Company’s pro forma adjusted EBITDA to debt ratio (the “Total Net Leverage Ratio”) exceeds a certain total. The Total Net Leverage Ratio is defined as the ratio of Consolidated Total Debt to the aggregate amount of Consolidated EBITDA for the Relevant Reference Period (as such terms are defined in the 2018 Revolving Credit Facility). Consolidated Total Debt is defined in the 2018 Revolving Credit Facility and is generally calculated as an amount equal to the aggregate outstanding principal amount of all third-party debt for borrowed money, unreimbursed drawings under letters of credit, capital lease obligations and third-party debt obligations evidenced by notes or similar instruments on a consolidated basis and determined in accordance with GAAP, subject to certain exclusions. Consolidated EBITDA is defined in the 2018 Revolving Credit Facility and is calculated in a similar manner to the Company’s calculation of Adjusted EBITDA, except that the 2018 Revolving Credit Facility permits pro forma adjustments in order to give effect to, among other things, the pro forma results of the Company’s acquisitions as if the Company had owned such acquired companies for the entirety of the Relevant Reference Period. These pro forma adjustments give effect to all acquisitions consummated in the four quarters ended March 31, 2019, as though they had been consummated on the first day of the second quarter of 2018. The 2018 Revolving Credit Facility requires the Company to maintain a Total Net Leverage Ratio no greater than 6.00:1.00 to incur additional junior lien and unsecured indebtedness.

As of March 31, 2019, the Company had $153.5 million of outstanding borrowings and $221.5 million of available aggregate undrawn borrowing capacity under the 2018 Revolving Credit Facility. The weighted average interest rate for borrowings under the 2018 Revolving Credit Facility for the three months ended March 31, 2019, was 4.1%.

2016 ABL Credit Facility

On August 13, 2018, Alpha terminated its revolving commitments under its $300.0 million 2016 ABL Credit Facility. The weighted average interest rate for borrowings under the 2016 ABL Credit Facility for the three months ended March 31, 2018, was 3.1%. Upon termination of the 2016 ABL Credit Facility, the Company expensed $0.7 million in deferred financing costs and carried over $2.6 million of deferred financing costs to the 2018 Revolving Credit Facility.

14

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


Senior Secured Notes

On August 15, 2018, the Company redeemed all of the $575.0 million principal amount of its outstanding Senior Secured Notes (the "Notes") at a redemption price equal to 104.125% of the principal amount of Notes being redeemed plus accrued and unpaid interest. The Notes were issued in a private placement on August 9, 2016, at an issue price of 100% of the principal with a stated interest rate of 8.25%.

Upon redemption of the Notes, the Company expensed $57.8 million of deferred financing costs, original issuance discounts and prepayment premiums, which are included in the statement of operations in loss on extinguishment of debt.

Debt Issuance Costs

Unamortized deferred financing and issuance costs as of March 31, 2019 were $11.6 million, of which $7.2 million were included in long-term portion of term loan, net and $4.4 million for the 2018 Revolving Credit Facility was included in other long-term assets in the accompanying consolidated balance sheets. Unamortized debt issuance costs as of December 31, 2018 were $12.2 million, of which $7.5 million was included in long-term portion of notes payable, net and $4.7 million for the 2018 Revolving Credit Facility was included in other long-term assets in the accompanying consolidated balance sheets.

As of March 31, 2019, the Company was in compliance with all debt covenants under the 2018 Revolving Credit Facility and the 2018 Term Loan Facility.

9. Tax Receivable Agreement

In connection with the Company's initial public offering ("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 is deemed to realize) as a result of the utilization of the Company's and the Company’s subsidiaries’ (a) 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, (b) net operating losses, (c) tax credits and (d) certain other tax attributes. At the end of each reporting period, any changes in the Company's estimate of the liability will be 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.

As of March 31, 2019 and December 31, 2018, the TRA liability balance was $117.9 million and $134.6 million, respectively. The first payment related to the TRA was made in January 2019 for $16.7 million.

10.   Accumulated Other Comprehensive Loss

Accumulated other comprehensive loss consists of cumulative unrealized foreign currency translation adjustments and unrealized changes in fair value on certain derivative instruments.

The components of accumulated other comprehensive loss for the three months ended March 31, 2019, were as follows (in thousands):
 
Foreign Currency Translation (Losses) Gains
 
Unrealized Gain (Loss) on Derivatives, Net of Taxes
 
Total
Balance at December 31, 2018
$
(3,085
)
 
$
2,904

 
$
(181
)
Other comprehensive income (loss)
1,570


(3,496
)
 
(1,926
)
Balance at March 31, 2019
$
(1,515
)
 
$
(592
)
 
$
(2,107
)
 

15

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

11.   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.

Historically, the claims, proceedings and investigations brought against the Company, individually and in the aggregate, have not had a material adverse effect on the consolidated results of operations, cash flows or financial position of the Company. As of March 31, 2019, there were no proceedings or litigation involving the Company that management believes would have a material adverse impact on its business, financial position, results of operations, or cash flows.

12.   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 trade receivables, trade payables, the 2018 Revolving Credit Facility and accrued liabilities approximates fair value due to their short-term maturity. The Company may adjust the carrying amount of certain nonfinancial assets to fair value on a non-recurring basis when they are impaired.

The estimated carrying amount and fair value of the Company’s financial instruments and other assets and liabilities measured and recorded at fair value on a recurring basis as of March 31, 2019, is as follows (in thousands):
 
Fair Value Measurements as of March 31, 2019
 
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:
 
 
 
 
 
 
 
Other current assets
 
 
 
 
 
 
 
     Derivative asset (Note 5)
$

 
$
2,434

 
$

 
$
2,434

Non-current liabilities
 
 
 
 
 
 
 
     Derivative liability (Note 5)
$


$
(2,962
)

$


$
(2,962
)

The estimated carrying amount and fair value of the Company’s financial instruments and other assets and liabilities measured and recorded at fair value on a recurring basis as of December 31, 2018, is as follows (in thousands):
 
Fair Value Measurements as of December 31, 2018
 
Quoted Prices in Active Markets for Identical Assets (Level 1)
 
Significant Other Observable Inputs (Level 2)
 
Significant Unobservable Inputs (Level 3)
 
Total Fair Value
Recurring:
 
 
 
 
 
 
 
Non-current assets
 
 
 
 
 
 
 
Derivative asset (Note 5)
$

 
$
4,344

 
$

 
$
4,344



16

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

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.    Income Taxes

Income tax expense for the three months ended March 31, 2019, was $2.0 million compared to an income tax benefit of $1.4 million for the three months ended March 31, 2018. For the three months ended March 31, 2019 and 2018, the Company's effective tax rates were 29.8% and 38.2%, respectively. The variance from the statutory federal tax rate of 21.0% for the three months ended March 31, 2019, was primarily due to state taxes, a discrete tax benefit associated with stock-based compensation, and foreign rate differential. The variance from the statutory federal tax rate of 21.0% for the three months ended March 31, 2018, was primarily due to a refinement of the provisional estimate of the one-time repatriation tax under the 2017 Tax Cuts and Jobs Act, treated as a discrete item during the quarter, state income taxes and foreign rate differential.

14.    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 Chief Operating Decision Maker ("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 segment by considering management structure and product offerings. This evaluation resulted in one reportable segment.

As discussed in Note 3, Discontinued Operations, the Company closed the sale of the Disposed Business on November 1, 2018, 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 the three months ended March 31, 2018.

Revenues are attributed to each country based on the location in which sales originate and in which assets are located. The Company generates the majority of its revenue in the United States with the remainder being generated in Canada. For the three months ended March 31, 2019, 90.6% and 9.4% of the Company's revenue was generated in the United States and Canada, respectively. For the three months ended March 31, 2018, 87.5% and 12.5% of the Company's revenue was generated in the United States and Canada, respectively.


17

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

The following table sets forth property, plant and equipment, right-of-use assets, goodwill and intangibles by geographic area (in thousands):
 
March 31, 2019
 
December 31, 2018
Property, plant and equipment, net
 
 
 
United States
$
133,901

 
$
137,252

Canada
14,590

 
14,389

Total property, plant and equipment, net
$
148,491

 
$
151,641

Right-of-use assets, net
 
 
 
United States
$
101,293

 
$

Canada
14,952

 

Total right-of-use assets, net
$
116,245


$

Goodwill
 
 
 
United States
$
460,584

 
$
460,384

Canada
27,304

 
24,557

Total goodwill
$
487,888

 
$
484,941

Intangibles, net


 
 
United States
$
127,740

 
$
141,186

Canada
7,147

 
4,690

Total intangibles, net
$
134,887

 
$
145,876

         
The Company’s net sales by major product line are as follows (in thousands):
 
Three Months Ended March 31,
 
Change
 
2019
 
2018
 
$
 
%
 
 
 
 
 
 
 
 
 
 
Wallboard
$
202,914

39.4
%
 
$
180,653

39.0
%
 
$
22,261

 
12.3
%
Suspended ceiling systems
88,996

17.3
%
 
86,179

18.6
%
 
2,817

 
3.3
%
Metal framing
99,251

19.3
%
 
73,967

16.0
%
 
25,284

 
34.2
%
Complementary and other products
123,711

24.0
%
 
122,862

26.4
%
 
849

 
0.7
%
Total net sales
$
514,872

100.0
%
 
$
463,661

100.0
%
 
$
51,211

 
11.0
%
 

15. Other Current Liabilities

The balance of other current liabilities consisted of the following (in thousands):
 
March 31, 2019
 
December 31, 2018
Accrued expenses
$
4,914

 
$
5,080

Accrued interest
390

 
1,315

Accrued other
13,545

 
13,584

Total other current liabilities
$
18,849

 
$
19,979



18

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

16. Earnings (Loss) Per Share

Basic earnings (loss) per share represents net income (loss) 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 (loss) per share for each period:
 
 
Three Months Ended March 31,
 
 
2019
 
2018
Weighted average shares used in basic computations
 
42,932,024

 
42,879,874

Dilutive effect of stock options and restricted stock units
 
12,805

 

Weighted average shares used in diluted computations
 
42,944,829

 
42,879,874


For the three months ended March 31, 2019 and 2018, there were 628,220 and 290,000 shares, respectively, not included in the computation of diluted weighted average shares because their effect would have been antidilutive.

17.    Subsequent Events

On May 1, 2019, the Company acquired the operations and substantially all of the assets of Select Acoustic Supply Inc., ("Select"). Select was an independent distributor of suspended ceiling systems. Select operated one branch in the Greater Toronto Area in Ontario, Canada.


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 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 that could cause actual results to differ materially from the results expressed or implied by the forward-looking statement. 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, 2018, filed with the Securities and Exchange Commission, or the SEC, on February 26, 2019, or the 2018 10-K, as updated by our subsequent filings with the SEC.

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 one of the largest specialty distributors of wallboard and suspended ceiling systems in the United States and Canada. Since 2013, we have completed more than 30 acquisitions. We have over 175 branches, 3,400 employees and 30,000 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 22,000 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.

On November 1, 2018, we completed the sale of our Mechanical Insulation segment, or the Disposed Business, to SPI LLC, an unrelated third party controlled by Dunes Point Capital and its associated funds, for approximately $122.5 million (subject to certain adjustments). As a result of this sale, we operate in one segment. For the three months ended March 31, 2018, the Disposed Business is presented as discontinued operations. See Note 3, Discontinued Operations, to the condensed consolidated financial statements.

First Quarter Update

Financial Results

We reported net sales of $514.9 million for the three months ended March 31, 2019, an increase of $51.2 million, or 11.0%, compared to the three months ended March 31, 2018, including base business net sales growth of 8.5% on an average daily net sales basis. Our gross margin for the three months ended March 31, 2019, was 29.7% compared to 29.0% for the three months ended March 31, 2018, which reflected higher gross margins across various product lines. On January 31, 2019, we executed two interest rate swaps for a total notional amount of $310.0 million to fix the LIBOR portion of our interest rate on our variable rate debt at 2.52% through January 31, 2022.

Acquisitions

We supplement our organic growth strategy with selective acquisitions. Since January 2019 through the date of this filing, we have completed two acquisitions totaling four branches. See Note 6, Acquisitions, and Note 17, Subsequent Events, to the condensed consolidated financial statements. We are typically evaluating several acquisition opportunities at any given time and maintain an extensive and active acquisition pipeline. We believe expansion of our geographic footprint and product offerings by executing additional strategic acquisitions presents a significant opportunity for our business. In executing our acquisition strategy and integrating acquired companies, we focus on the cost savings we can achieve through combined procurement and pricing programs and brand consolidation. The acquisition completed on February 1, 2019 contributed $3.4 million to net sales for the three months ended March 31, 2019.


20


Acquisitions
 
Effective Date of Acquisition
 
Branch Locations
 
# of Branches Acquired
Select Acoustic Supply Inc.
 
May 1, 2019
 
Ontario, Canada
 
1
Builders' Supplies Limited
 
February 1, 2019
 
Ontario, Canada
 
3
Total
 
 
 
 
 
4

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 2018 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, volume, costs and pricing programs. There have been no material changes to those factors and trends during the three months ended March 31, 2019.




























21


Results of Operations

Three Months Ended March 31, 2019, compared to the Three Months Ended March 31, 2018

The following table summarizes certain consolidated financial information related to our operating results for the periods indicated:
 
Three Months Ended March 31,
 
2019
 
2018
(dollars in thousands)
 
 
 
 
 
Statements of operations data
 
 
 
 
 
Net sales
$
514,872

100.0
 %
 
$
463,661

100.0
 %
Cost of goods sold
361,912

70.3
 %
 
329,224

71.0
 %
Gross profit
152,960

29.7
 %
 
134,437

29.0
 %
Operating expenses:

 
 

 
Selling, general and administrative expenses
117,230

22.8
 %
 
104,657

22.6
 %
Depreciation and amortization
20,342

4.0
 %
 
18,397

4.0
 %
Total operating expenses
137,572

26.8
 %
 
123,054

26.6
 %
Income from operations
15,388

2.9
 %
 
11,383

2.4
 %
Interest expense
(8,556
)
(1.7
)%
 
(15,119
)
(3.3
)%
Other income, net
41

 %
 
74

 %
Income (loss) before income taxes
6,873

1.2
 %
 
(3,662
)
(0.9
)%
Income tax expense (benefit)
2,045

0.4
 %
 
(1,398
)
(0.3
)%
Income (loss) from continuing operations
4,828

0.8
 %
 
(2,264
)
(0.6
)%
Income from discontinued operations, net of tax

 %
 
1,211

0.3
 %
Loss on sale from discontinued operations, net of tax
(1,346
)
(0.3
)%
 

 %
Net income (loss)
$
3,482

0.5
 %
 
$
(1,053
)
(0.3
)%

Our net sales by major product line, gross profit and gross margin, are as follows:

Three Months Ended March 31,

Change

2019

2018

$

%
(dollars in thousands)












Wallboard
$
202,914

39.4
%

$
180,653

39.0
%

$
22,261


12.3
%
Suspended ceiling systems
88,996

17.3
%

86,179

18.6
%

2,817


3.3
%
Metal framing
99,251

19.3
%

73,967

16.0
%

25,284


34.2
%
Complementary and other products
123,711

24.0
%

122,862

26.4
%

849


0.7
%
Total net sales
$
514,872

100.0
%

$
463,661

100.0
%

$
51,211


11.0
%
Total gross profit
$
152,960



$
134,437



$
18,523


13.8
%
Total gross margin
29.7
%


29.0
%


0.7
%





22


Net Sales
Net sales for the three months ended March 31, 2019, were $514.9 million compared to $463.7 million for the three months ended March 31, 2018, representing an increase of $51.2 million, or 11.0%. Average daily net sales increased 12.8% over the same period. Net sales from base business branches contributed $29.5 million of the net sales increase, and average daily base business net sales increased by 8.5% over the same period. The base business increase was primarily due to strong commercial activity and product expansion into new geographic markets. Net sales from acquired branches and existing branches that were strategically combined contributed $21.7 million of the net sales increase. The change in our base business net sales was primarily driven by the following factors:

an increase in wallboard net sales of $9.5 million, or 5.5%, primarily due to an increase in average selling price of 1.4% and an increase in wallboard unit volume of 4.1%. On a daily net sales basis, wallboard increased by 7.2% driven by an average daily unit volume growth of 5.8%.

a decrease in suspended ceiling systems net sales of $0.2 million, or 0.2%. On a daily net sales basis, suspended ceiling systems increased by 1.3%, which was primarily due to favorable pricing gains.

an increase in metal framing net sales of $17.9 million, or 24.9%. On a daily net sales basis, metal framing increased by 26.8%. The increase in metal framing net sales was primarily due to an increase in commercial construction activity and pricing gains.

an increase in complementary and other product net sales of $2.2 million, or 2.0%. On a daily net sales basis, complementary and other products increased by 3.7%. The increase in complementary and other net sales was primarily due to our continued initiatives to increase complementary product sales.

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

Three Months Ended March 31,

Change

2019

2018

$

%
(dollars in thousands)











Base business (1)
$
460,901


$
431,364


$
29,537


6.8
%
Acquired and combined (2)
53,971


32,297


21,674


67.1
%
Net sales
$
514,872


$
463,661


$
51,211


11.0
%
(1) Represents net sales from branches that were owned by us since January 1, 2018 and branches that were opened by us during such period.
(2) Represents branches acquired and combined after January 1, 2018, primarily as a result of our strategic combination of branches.


23


The table below highlights our changes in base business net sales and net sales from branches acquired and combined by major product line:

Three Months Ended March 31, 2018

Base Business Net Sales Change

Acquired and Combined Net Sales Change

Three Months Ended March 31, 2019

Total Net Sales % Change
Base Business Net Sales % Change(1)

Acquired and Combined Net Sales % Change(2)
(dollars in thousands)












Wallboard
$
180,653


$
9,536


$
12,725


$
202,914


12.3
%
5.5
 %

183.7
 %
Suspended ceiling systems
86,179


(178
)

2,995


88,996


3.3
%
(0.2
)%

29.8
 %
Metal framing
73,967


17,939


7,345


99,251


34.2
%
24.9
 %

403.9
 %
Complementary and other products
122,862


2,239


(1,390
)

123,711


0.7
%
2.0
 %

(10.3
)%
Net sales
$
463,661


$
29,536


$
21,675


$
514,872


11.0
%
6.8
 %

67.1
 %
Average daily net sales(3)
$
7,245


$
576


$
352


$
8,173


12.8
%
8.5
 %

69.8
 %
(1) Represents base business net sales change as a percentage of base business net sales for the three months ended March 31, 2018.
(2) Represents acquired and combined net sales as a percentage of acquired and combined net sales for the three months ended March 31, 2018.
(3) The number of business days for the three months ended March 31, 2019 and 2018, were 63 and 64, respectively.

Gross Profit and Gross Margin

Gross profit for the three months ended March 31, 2019, was $153.0 million compared to $134.4 million for the three months ended March 31, 2018, representing an increase of $18.5 million, or 13.8%. Gross profit increased in line with higher sales volume, contributions from acquisitions and base business growth.

Gross margin for the three months ended March 31, 2019, was 29.7% compared to 29.0% for the three months ended March 31, 2018. The increase in gross margin was primarily due to the continued stabilization of our product costs and a shift in product mix.

Selling, General & Administrative ("SG&A") Expenses

SG&A expenses for the three months ended March 31, 2019, were $117.2 million compared to $104.7 million for the three months ended March 31, 2018, representing an increase of $12.6 million, or 12.0%. As a percentage of net sales, SG&A expenses were 22.8% for the three months ended March 31, 2019, compared to 22.6% for the three months ended March 31, 2018. The increase in SG&A expenses as a percentage of net sales was primarily due to our continued investment in various company-wide initiatives and higher operating costs as a result of adverse weather conditions.

Depreciation and Amortization

Depreciation and amortization for the three months ended March 31, 2019, was $20.3 million compared to $18.4 million for the three months ended March 31, 2018, representing an increase of $1.9 million, or 10.6%. The increase in depreciation and amortization was primarily due to acquisitions subsequent to March 31, 2018, which increased the value of property and equipment and intangible assets subject to depreciation and amortization.

Interest Expense

Interest expense for the three months ended March 31, 2019, was $8.6 million compared to $15.1 million for the three months ended March 31, 2018, representing a decrease of $6.6 million, or 43.4%. The decrease is primarily due to the refinancing of our senior secured notes in August 2018.




24


Income Taxes

Income tax expense for the three months ended March 31, 2019, was $2.0 million compared to an income tax benefit of $1.4 million for the three months ended March 31, 2018. The effective tax rate for the three months ended March 31, 2019 was 29.8% compared to 38.2% for the three months ended March 31, 2018. The difference in the effective tax rates between periods is due primarily to recording as a discrete item a refinement of the provisional estimate of the one-time repatriation tax under the 2017 Tax Cuts and Jobs Act during the three months ended March 31, 2018.
Liquidity and Capital Resources

Summary

We depend on cash flow from operations, cash on hand and funds available under our 2018 Revolving Credit Facility, and in the future we may depend on other debt financings allowed under the terms of the 2018 Term Loan Facility and the 2018 Revolving Credit Facility, and equity financings to finance our acquisition strategy, working capital needs and capital expenditures, which generally range between 1.0% and 1.5% of net sales. We believe that these sources of funds will be adequate to meet our debt service requirements and provide cash, as required, to support our strategy, ongoing operations, capital expenditures, lease obligations and working capital for at least the next 12 months. However, we cannot ensure that we will be able to obtain future debt or equity financings adequate for our future cash requirements on commercially reasonable terms or at all. The tax receivable agreement we are a party to, or TRA, may also have a negative impact on our liquidity if, among other things, payments we make under the TRA exceed the actual cash savings we and our subsidiaries realize in respect of the tax benefits covered by the TRA after we have paid our taxes and other obligations. In addition, as a result of either an early termination of the TRA or a change of control, we could be required to make payments under the TRA that exceed our actual cash savings under the TRA. In these situations, our obligations under the TRA could have a substantial, negative impact on our liquidity and could have the effect of delaying, deferring or preventing, among other things, capital expenditures and acquisitions.

If our cash flows and capital resources are insufficient to fund our debt service obligations, we may be forced to reduce or delay additional acquisitions, future investments and capital expenditures, seek additional capital, restructure or refinance our indebtedness, or sell assets. Significant delays in our ability to finance planned acquisitions or capital expenditures may materially and adversely affect our future sales prospects. In addition, we cannot ensure that we will be able to refinance any of our indebtedness, including the 2018 Revolving Credit Facility and 2018 Term Loan Facility, on commercially reasonable terms or at all. Our ability to restructure or refinance our debt will depend on the condition of the capital markets and our financial condition at such time. Our TRA requires that after Lone Star Fund IX (U.S.) L.P., or Lone Star, no longer controls us, any senior debt document that refinances or replaces our existing indebtedness permits our subsidiaries to make dividends to us, without any conditions, to the extent required for us to make payments under the TRA, unless Lone Star otherwise consents. At the time of any such refinancing, it may not be possible to include this term in such senior debt documents, and as a result, we may need Lone Star’s consent to complete such refinancing. The 2018 Revolving Credit Facility and 2018 Term Loan Facility restrict our ability to enter into certain asset sales transactions. We may not be able to consummate those asset sales to raise capital or sell assets at prices that we believe are fair, and proceeds that we do receive may not be adequate to meet any debt service obligations then due.
 
As of March 31, 2019, we had $153.5 million of outstanding borrowings and $221.5 million of available aggregate undrawn borrowing capacity under the 2018 Revolving Credit Facility.

Refer to Note 8, Long-Term Debt of our Condensed Consolidated Financial Statements for more information about the 2018 Revolving Credit Facility and 2018 Term Loan Facility.



25


As long as commitments are outstanding under the 2018 Revolving Credit Facility, we are subject to certain restrictions under the facility if our pro forma adjusted EBITDA to debt ratio, or the Total Net Leverage Ratio, exceeds a certain total. The Total Net Leverage Ratio is defined as the ratio of Consolidated Total Debt to the aggregate amount of Consolidated EBITDA for the Relevant Reference Period (as such terms are defined in the 2018 Revolving Credit Facility). Consolidated Total Debt is defined in the 2018 Revolving Credit Facility and is generally calculated as an amount equal to the aggregate outstanding principal amount of all third-party debt for borrowed money, unreimbursed drawings under letters of credit, capital lease obligations, and third-party debt obligations evidenced by notes or similar instruments on a consolidated basis and determined in accordance with GAAP, subject to certain exclusions. Consolidated EBITDA is defined in the 2018 Revolving Credit Facility and is calculated in a similar manner to our calculation of Adjusted EBITDA, except that the 2018 Revolving Credit Facility permits pro forma adjustments in order to give effect to, among other things, the pro forma results of our acquisitions as if we had owned such acquired companies for the entirety of the Relevant Reference Period. These pro forma adjustments give effect to all acquisitions consummated in the four quarters ended March 31, 2019, as though they had been consummated on the first day of the second quarter of 2018. The 2018 Revolving Credit Facility requires us to maintain a Total Net Leverage Ratio no greater than 6.00:1.00 to incur additional junior lien and unsecured indebtedness.

As of March 31, 2019, we were in compliance with all covenant restrictions under the 2018 Term Loan Facility and 2018 Revolving Credit Facility. The following tables present the Total Net Leverage Ratio and Net Debt Leverage Ratio as of March 31, 2019:

(dollars in thousands)
 
Four Quarters Ended March 31, 2019
Pro Forma Adjusted EBITDA (1) 
 
$
167,929

Consolidated Total Debt (2) 
 
$
611,683

Total Net Leverage Ratio
 
3.64x

Cash
 
$
4,978

Consolidated Total Debt (2) less Cash ("Net Debt")
 
$
606,705

Net Debt Leverage Ratio
 
3.61x

(1) "Pro Forma Adjusted EBITDA" is used herein instead of "Consolidated EBITDA" to avoid confusion but is calculated in the same manner as Consolidated EBITDA under the 2018 Revolving Credit Facility. The following table presents a reconciliation of Adjusted EBITDA to Pro Forma Adjusted EBITDA for the four quarters ended March 31, 2019:

 
 
Four Quarters Ended March 31, 2019
(in thousands)
 
 
Adjusted EBITDA (a)
 
$
161,210

Pro forma adjustment (b)
 
6,719

Pro Forma Adjusted EBITDA
 
$
167,929

(a) See this section for the definition of Adjusted EBITDA and the section titled "Non-GAAP Financial Information" for a reconciliation of net income (loss) from continuing operations to Adjusted EBITDA.
(b) The pro forma adjustment gives effect to all acquisitions consummated in the four quarters ended March 31, 2019, as though they had been consummated on the first day of the first quarter for the four quarters ended March 31, 2019. Other adjustments are also made to conform to the terms of the 2018 Revolving Credit Facility.

(2) The reconciliation of total debt on the balance sheet to Consolidated Total Debt is as follows:
 
 
 
As of March 31, 2019
(in thousands)
 
 
Total gross debt
 
$
602,375

Finance leases
 
9,308

Consolidated Total Debt
 
$
611,683


26


Cash Flows

A summary of net cash provided by, or used in, operating, investing and financing activities by continuing operations is shown in the following table:
 
Three Months Ended March 31,
 
2019
 
2018
(in thousands)
 
 
 
Net cash provided by (used in) operating activities
$
17,709


$
(5,112
)
Net cash used in investing activities
$
(15,774
)

$
(28,156
)
Net cash (used in) provided by financing activities
$
(11,076
)

$
41,775


Operating Activities

Net cash provided by, or used in, operating activities consists primarily of net income (loss) adjusted for non-cash items, including depreciation and amortization, provision for doubtful accounts, right-of-use assets, deferred income taxes and the effects of changes in working capital.

Net cash provided by operating activities increased by $22.8 million to $17.7 million for the three months ended March 31, 2019, as compared to net cash used in operating activities of $5.1 million in the same period in 2018. The increase was primarily due to higher net income including adjustments for higher non-cash items of $9.3 million and lower working capital requirements of $6.4 million.

Investing Activities

Net cash used in investing activities consists primarily of acquisitions and capital expenditures, including purchases of land, buildings, leasehold improvements, fleet assets, information technology and other equipment. Capital expenditures vary depending on prevailing business factors, including current and anticipated market conditions. Historically, capital expenditures generally have been made at relatively low levels in comparison to the operating cash flows generated during the corresponding periods.

Net cash used in investing activities decreased by $12.4 million to $15.8 million for the three months ended March 31, 2019, as compared to $28.2 million in the same period in 2018. The decrease was primarily due to a lower aggregate purchase price for acquisitions of $10.5 million and lower purchases of property and equipment of $2.0 million.

Financing Activities

Net cash provided by, or used in, financing activities consists primarily of borrowings and related repayments under our financing agreements.

Net cash used in financing activities increased by $52.9 million to $11.1 million in the three months ended March 31, 2019, as compared to net cash provided by financing activities of $41.8 million in the same period in 2018. The increase was primarily due to lower borrowings of $36.1 million and the first payment under the TRA of $16.7 million.

Critical Accounting Policies

Our management’s discussion and analysis of our financial condition and results of operations is based on our condensed consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States, or GAAP. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reported period.

On an ongoing basis, management evaluates its estimates, including those related to revenue recognition, allowance for doubtful accounts, inventories, taxes, and goodwill. We base our estimates and judgments on historical experience and on various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may materially differ from these estimates under different assumptions or conditions.

27


There have been no material changes made to the critical accounting estimates during the periods presented in the consolidated financial statements from those disclosed in the 2018 10-K.

Off-Balance Sheet Arrangements

As of March 31, 2019, we had no material off-balance sheet arrangements or similar obligations, such as financing or unconsolidated variable interest entities.

Non-GAAP Financial Information

In addition to our results under GAAP, we also present Adjusted EBITDA for historical periods. Adjusted EBITDA is a non-GAAP financial measure and has been presented as a supplemental measure of financial performance that is not required by, or presented in accordance with, GAAP. We calculate Adjusted EBITDA as net income (loss) from continuing operations before interest expense, net, income tax expense (benefit), depreciation and amortization, unrealized gain on derivative financial instruments, IPO and public company readiness expenses, stock-based compensation, and other non-recurring adjustments such as non-cash purchase accounting effects, loss on the disposal of property and equipment and transaction costs. We calculated Pro Forma Adjusted EBITDA as shown in the previous section entitled “Liquidity and Capital Resources,” which is also a non-GAAP financial measure.

Adjusted EBITDA is presented because it is an important metric used by management to assess our financial performance. We also believe Adjusted EBITDA is frequently used by analysts, investors and other interested parties to evaluate companies in our industry. This measure, when used in conjunction with related GAAP financial measures, provides investors with an additional financial analytical framework that may be useful in assessing our company and its financial condition and results of operations.

Adjusted EBITDA has certain limitations. Adjusted EBITDA should not be considered as an alternative to net income, or any other measure of financial performance derived in accordance with GAAP. Additionally, Adjusted EBITDA is not intended to be a liquidity measure because of certain limitations such as:

It does not reflect our cash outlays for capital expenditures or future contractual commitments;
It does not reflect changes in, or cash requirements for, working capital;
It does not reflect interest expense or the cash requirements necessary to service interest or principal payments on indebtedness;
It does not reflect income tax expense or the cash necessary to pay income taxes; and
Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future, and this non-GAAP measure does not reflect cash requirements for such replacements.
 
Other companies, including other companies in our industry, may not use these measures or may calculate one or both differently than as presented in this Quarterly Report on Form 10-Q, limiting their usefulness as a comparative measure.

In evaluating Adjusted EBITDA, you should be aware that in the future we will incur expenses that are the same as or similar to some of the adjustments made in our calculations, and our presentation of Adjusted EBITDA should not be construed to mean that our future results will be unaffected by such adjustments. Management compensates for these limitations by using Adjusted EBITDA as a supplemental financial metric and in conjunction with our results prepared in accordance with GAAP. The non-GAAP information should be read in conjunction with our accompanying consolidated financial statements and the related notes.









28


The following is a reconciliation of Adjusted EBITDA to the most directly comparable GAAP measure, net income (loss):

Three Months Ended March 31,

2019

2018
(dollars in thousands)



Net income (loss) from continuing operations
$
4,828


$
(2,264
)
Interest expense, net
8,585


15,098

Income tax expense (benefit)
2,045


(1,398
)
Depreciation and amortization
20,342


18,397

Unrealized gain on derivative financial instruments


(74
)
IPO and public company readiness expenses


89

Stock-based compensation
829


242

Non-cash purchase accounting effects(a)


407

Loss on disposal of property and equipment
191


12

Transaction costs(b)
645


917

Adjusted EBITDA
$
37,465


$
31,426

Adjusted EBITDA margin(c)
7.3
%

6.8
%
  
(a)
Adjusts for the effect of the purchase accounting step-up in the value of inventory to fair value recognized as a result of acquisitions.
(b)
Represents costs related to our transactions, including fees to financial advisors, accountants, attorneys and other professionals as well as certain internal corporate development costs.
(c)
Adjusted EBITDA margin represents Adjusted EBITDA divided by net sales.



29



Item 3.    Quantitative and Qualitative Disclosures about Market Risk

Not applicable.

Item 4.    Controls and Procedures. 

Evaluation of Disclosure Controls and Procedures

As required by Rule 13a-15(b) under the Exchange Act, our management, including our Chief Executive Officer and Chief Financial Officer, carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act), as of March 31, 2019, the end of the period covered by this Quarterly Report on Form 10-Q.

Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that, as of March 31, 2019, the end of the period covered by this Quarterly Report on Form 10-Q, our disclosure controls and procedures were effective.

Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that occurred during the quarter ended March 31, 2019, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Limitations on Effectiveness of Controls

Our management, including our principal executive officer and principal financial officer, does not expect that our disclosure controls and procedures or our system of internal control over financial reporting will prevent or detect all errors and all fraud. A control system, no matter how well designed or operated, can provide only reasonable, but not absolute, assurance that the objectives of the system of internal control are met. The design of our control system reflects the fact that there are resource constraints, and that the benefits of such control system must be considered relative to their costs. Further, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control failures and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the intentional acts of individuals, by collusion of two or more people, or by management override of the controls. The design of any system of controls is also based in part on certain assumptions about the likelihood of future events, and there can be no assurance that the design of any particular control will always succeed in achieving its objective under all potential future conditions.


30



Part II. Other Information

Item 1.    Legal Proceedings

We are not currently a party to any material legal proceedings. We are, however, subject to lawsuits, government investigations, audits and other legal proceedings from time to time in the ordinary course of our business. It is not possible to predict the outcome of any legal proceeding with any certainty. The outcome or costs we incur in connection with a legal proceeding could adversely impact our operating results and financial position.

Item 1A. Risk Factors

There have been no material changes to the risk factors disclosed under Item 1A, “Risk Factors,” in the 2018 10-K.

Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3.    Defaults Upon Senior Securities

None. 

Item 4.    Mine Safety Disclosure

Not applicable.

Item 5.    Other Information 
 
None.

Item 6.     Exhibits

Exhibit Number
 
Description
 
 
 
 
101 INS
 
XBRL Instance Document.
101 SCH
 
XBRL Taxonomy Extension Schema Document.
101 CAL
 
XBRL Taxonomy Extension Calculation Linkbase Document.
101 DEF
 
XBRL Taxonomy Extension Definition Linkbase Document.
101 LAB
 
XBRL Taxonomy Extension Label Linkbase Document
101 PRE
 
XBRL Taxonomy Extension Presentation Linkbase Document.


31


SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

FOUNDATION BUILDING MATERIALS, INC.
Date: May 7, 2019
BY:
/s/ John Gorey
 
 
John Gorey
 
 
Chief Financial Officer
 
 
(Principal Financial Officer)
 
 
 
 
 
/s/ Barbara J. Bitzer
 
 
Barbara J. Bitzer
 
 
Chief Accounting Officer
 
 
(Principal Accounting Officer)
 
 
 


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Section 2: EX-10.24 (EXHIBIT 10.24)

searsrayemploymentagreem


 


 


 


 


 


 


 


 


 


 


 


 


 


 


 


 


 


 
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Section 3: EX-31.1 (EXHIBIT 31.1)

Exhibit


Certification of CEO Pursuant to
Securities Exchange Act Rules 13a‑14 and 15d‑14
as Adopted Pursuant to
Section 302 of the Sarbanes‑Oxley Act of 2002
I, Ruben Mendoza, certify that:
1. I have reviewed this annual report on Form 10‑Q of Foundation Building Materials, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a‑15(e) and 15d‑15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent function):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: May 7, 2019
 
 
 
 
 
/s/ Ruben Mendoza
 
 
Ruben Mendoza
 
 
President and Chief Executive Officer





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Section 4: EX-31.2 (EXHIBIT 31.2)

Exhibit


Securities Exchange Act Rules 13a‑14 and 15d‑14
as Adopted Pursuant to
Section 302 of the Sarbanes‑Oxley Act of 2002
I, John Gorey, certify that:
1. I have reviewed this annual report on Form 10‑Q of Foundation Building Materials, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a‑15(e) and 15d‑15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent function):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: May 7, 2019
 
 
 
 
 
/s/ John Gorey
 
 
John Gorey
 
 
Chief Financial Officer



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Section 5: EX-32.1 (EXHIBIT 32.1)

Exhibit


Certification
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(Subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code)

Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code) (the “Act”), each of the undersigned officers of Foundation Buildings Materials, Inc., a Delaware corporation (the “Company”), does hereby certify, to each such officer’s knowledge, that:

The Quarterly Report on Form 10-Q for the quarter ended March 31, 2019 (the “Periodic Report”) of the Company fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)) and information contained in the Periodic Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
 
 
 
Date: May 7, 2019
    
/s/ Ruben Mendoza
 
 
Ruben Mendoza
 
 
President and Chief Executive Officer
 
 
 
Date: May 7, 2019
 
/s/ John Gorey
 
 
John Gorey
 
 
Chief Financial Officer

A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.



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