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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 June 30, 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 August 2, 2019, the number of shares outstanding of the registrant’s common stock, $0.001 par value, was 42,988,110.





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 June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
Net sales
$
559,911

 
$
522,219

 
$
1,074,783

 
$
985,880

Cost of goods sold
388,374

 
375,952

 
750,286

 
705,176

Gross profit
171,537

 
146,267

 
324,497

 
280,704

Operating expenses:

 

 
 
 

Selling, general and administrative expenses
122,735

 
110,153

 
239,965

 
214,810

Depreciation and amortization
20,351

 
18,751

 
40,693

 
37,148

Total operating expenses
143,086

 
128,904

 
280,658

 
251,958

Income from operations
28,451

 
17,363

 
43,839

 
28,746

Interest expense
(8,341
)
 
(15,333
)
 
(16,897
)
 
(30,452
)
Other income, net
44

 
61

 
85

 
135

Income (loss) before income taxes
20,154

 
2,091

 
27,027

 
(1,571
)
Income tax expense (benefit)
5,433

 
618

 
7,478

 
(780
)
Income (loss) from continuing operations
14,721

 
1,473

 
19,549

 
(791
)
Income from discontinued operations, net of tax

 
3,927

 

 
5,138

Loss on sale of discontinued operations, net of tax
(44
)


 
(1,390
)
 

Net income
$
14,677

 
$
5,400

 
$
18,159

 
$
4,347

 

 

 
 
 

Earnings (loss) per share data:

 

 
 
 

Earnings (loss) from continuing operations per share - basic
$
0.34

 
$
0.03

 
0.45

 
$
(0.02
)
Earnings (loss) from continuing operations per share - diluted
$
0.34

 
$
0.03

 
0.45

 
$
(0.02
)
 


 


 
 
 


Earnings (loss) earnings from discontinued operations per share - basic
$

 
$
0.10

 
(0.03
)
 
$
0.12

Earnings (loss) earnings from discontinued operations per share - diluted
$

 
$
0.10

 
(0.03
)
 
$
0.12

 


 


 
 
 


Earnings per share - basic
$
0.34

 
$
0.13

 
0.42

 
$
0.10

Earnings per share - diluted
$
0.34

 
$
0.13

 
0.42

 
$
0.10

 

 

 
 
 

Weighted average shares outstanding:

 

 
 
 

Basic
42,987,915

 
42,893,498

 
42,960,124

 
42,886,867

Diluted
43,245,353

 
42,910,017

 
43,064,496

 
42,903,788

 

 

 
 
 
 
Comprehensive income (loss):

 

 
 
 
 
Net income
$
14,677

 
$
5,400

 
$
18,159

 
$
4,347

     Foreign currency translation adjustment
1,731

 
(1,831
)
 
3,301

 
(4,202
)
     Unrealized (loss) gain on derivatives, net of taxes of $1.0 million and $0.4 million, respectively and $2.3 million and $1.0 million, respectively
(3,284
)
 
1,096

 
(6,780
)
 
2,259

Total other comprehensive (loss)
(1,553
)
 
(735
)
 
(3,479
)
 
(1,943
)
Total comprehensive income
$
13,124

 
$
4,665

 
$
14,680

 
$
2,404

See accompanying notes to the condensed consolidated financial statements.



FOUNDATION BUILDING MATERIALS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(in thousands, except share data)

June 30, 2019
 
December 31, 2018
Current assets:

 

Cash and cash equivalents
$
6,454

 
$
15,299

Accounts receivable—net of allowance for doubtful accounts of $3,631 and $3,239, respectively
325,579

 
276,043

Other receivables
46,415

 
57,472

Inventories
170,398

 
165,989

Prepaid expenses and other current assets
12,281

 
9,053

Total current assets
561,127

 
523,856

Property and equipment, net
148,054

 
151,641

Right-of-use assets, net
114,653

 

Intangible assets, net
129,565

 
145,876

Goodwill
490,607

 
484,941

Other assets
5,760

 
10,393

Total assets
$
1,449,766

 
$
1,316,707

Liabilities and stockholders' equity:


 


Current liabilities:

 


Accounts payable
$
165,314

 
$
137,773

Accrued payroll and employee benefits
25,867

 
28,830

Accrued taxes
9,508

 
11,867

Tax receivable agreement
27,676

 
16,667

Current portion of term loan, net
4,500

 
4,500

Current portion of lease liabilities
28,407

 

Other current liabilities
22,227

 
19,979

Total current liabilities
283,499

 
219,616

Asset-based revolving credit facility
136,462

 
146,000

Long-term portion of term loan, net
436,316

 
437,999

Tax receivable agreement
90,272

 
117,948

Deferred income taxes, net
18,701

 
20,678

Long-term portion of lease liabilities
93,627

 

Other liabilities
8,231

 
8,117

Total liabilities
1,067,108

 
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; 42,988,110 and 42,907,326 shares issued, respectively
13

 
13

     Additional paid-in capital
334,131

 
332,330

     Retained earnings
52,174

 
34,187

     Accumulated other comprehensive loss
(3,660
)
 
(181
)
          Total stockholders' equity
382,658

 
366,349

Total liabilities and stockholders' equity
$
1,449,766

 
$
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)
 
Six Months Ended June 30,
 
2019
 
2018
Cash flows from operating activities:


 

Net income
$
18,159

 
$
4,347

Less: loss on sale of discontinued operations
(1,390
)
 

Less: net income from discontinued operations

 
5,138

Net income (loss) from continuing operations
19,549

 
(791
)
Adjustments to reconcile net income (loss) to net cash provided by operating activities from continuing operations:


 

     Depreciation
17,558

 
15,627

     Amortization of intangible assets
23,135

 
21,521

     Amortization of debt issuance costs and debt discount
992

 
5,338

     Inventory fair value purchase accounting adjustment
234

 
407

     Provision for doubtful accounts
1,525

 
1,278

     Stock-based compensation
1,939

 
878

     Unrealized gain on derivative instruments, net

 
(134
)
     (Gain) loss on disposal of property and equipment
(67
)
 
275

     Right-of-use assets non-cash expense
13,601



     Deferred income taxes
271

 
(421
)
     Change in assets and liabilities, net of effects of acquisitions:


 


          Accounts receivable
(43,441
)
 
(53,444
)
          Other receivables
13,581

 
10,052

          Inventories
(1,291
)
 
(22,209
)
          Prepaid expenses and other current assets
(3,123
)
 
(1,019
)
          Other assets
(121
)
 
977

          Accounts payable
23,429

 
15,061

          Accrued payroll and employee benefits
(3,057
)
 
5,136

          Accrued taxes
(2,291
)
 
3,216

          Other liabilities
(9,219
)
 
(1,049
)
Net cash provided by operating activities from continuing operations
53,204


699

Cash flows from investing activities from continuing operations:


 


     Purchases of property and equipment
(15,052
)
 
(19,762
)
     Proceeds from termination of net investment hedge
3,313



     Proceeds from net working capital adjustments related to acquisitions
470

 
296

     Proceeds from the disposal of fixed assets
2,376

 
577

     Acquisitions, net of cash acquired
(21,923
)
 
(21,220
)
Net cash used in investing activities from continuing operations
(30,816
)

(40,109
)
Cash flows from financing activities from continuing operations:


 


     Proceeds from asset-based revolving credit facility
281,620

 
266,198

     Repayments of asset-based revolving credit facility
(291,371
)
 
(219,350
)
     Principal payments for term loan
(2,250
)
 

     Payment related to tax receivable agreement
(16,667
)


     Tax withholding payment related to net settlement of equity awards
(138
)
 
(45
)

3


     Principal repayment of finance lease obligations
(1,319
)
 
(1,358
)
Net cash (used in) provided by financing activities from continuing operations
(30,125
)

45,445

     Net cash used in operating activities from discontinued operations

 
(10,038
)
     Net cash used in investing activities from discontinued operations
(1,390
)
 
(701
)
     Net cash used in financing activities of discontinued operations

 
(131
)
Net cash used in discontinued operations
(1,390
)
 
(10,870
)
Effect of exchange rate changes on cash
282

 
(183
)
Net decrease in cash
(8,845
)
 
(5,018
)
Cash and cash equivalents at beginning of period
15,299

 
12,101

Cash and cash equivalents at end of period
$
6,454

 
$
7,083

 


 


Supplemental disclosures of cash flow information:


 


Cash paid for income taxes
$
5,091

 
$
1,423

Cash paid for interest
$
16,477

 
$
25,201

Supplemental disclosures of non-cash investing and financing activities:
 
 


Change in fair value of derivatives, net of tax
$
6,012

 
$
2,259

Goodwill adjustment for purchase price allocation
$
57

 
$
138

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, except share data)
Six Months Ended June 30, 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

Stock-based compensation

 

 
1,110






1,110

Vesting of restricted stock units
2,149

 

 







Shares withheld related to net settlement of equity awards
(722
)
 

 
(8
)





(8
)
Other comprehensive loss

 

 




(1,553
)

(1,553
)
Net income

 

 


14,677




14,677

Balance at June 30, 2019
42,988,110

 
$
13

 
$
334,131

 
$
52,174

 
$
(3,660
)
 
$
382,658



5


Six Months Ended June 30, 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

Stock-based compensation




667






667

Vesting of restricted stock units
3,525











Shares withheld related to net settlement of equity awards
(795
)



(11
)





(11
)
Other comprehensive loss








(735
)

(735
)
Net income






5,400




5,400

Balance at June 30, 2018
42,893,982

 
$
13

 
$
330,995

 
$
50,711

 
$
411

 
$
382,130

See accompanying notes to the condensed consolidated financial statements.


6

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.

The Company holds no other operations, cash flows, material assets or liabilities other than the equity interests in Alpha.  Alpha holds no other operations, cash flows, material assets or liabilities other than the equity interests in Holdco. Holdco holds no other material assets or liabilities other than the equity interests in FBM Finance, Inc. and Foundation Building Materials, LLC. 

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles 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 Adopted and Issued Accounting Standards

Recently Adopted Accounting Standards

In August 2017, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities, which amends the hedge accounting recognition and presentation requirements in Accounting Standards Codification ("ASC") 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 consolidated financial statements.



7

Foundation Building Materials, Inc.
Notes to the 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 such classification affecting the pattern of expense recognition in the income statement. This update is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years.

As a result of the adoption of ASU No. 2016-02, on January 1, 2019, the Company recognized (a) an operating lease liability of $118.3 million, which represented 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 No. 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 August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework — Changes to the Disclosure Requirements for Fair Value Measurement. This ASU modifies the disclosure requirements on fair value measurements in Topic 820 based on the consideration of costs and benefits to promote the appropriate exercise and discretion by entities when considering fair value measurement disclosures and to clarify that materiality is an appropriate consideration of entities and their auditors when evaluating disclosure requirements. The amendments in this update are effective for reporting periods beginning after December 15, 2019, with early adoption permitted. The Company does not expect that the adoption of this guidance will have a material impact on its consolidated financial statements.

In January 2017, the FASB issued ASU No. 2017-04, Intangibles--Goodwill 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 that the adoption of this guidance will have a material impact on its consolidated financial statements.

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. This ASU changes the impairment model for most financial assets, requiring the use of an expected loss model which requires entities to estimate the lifetime expected credit loss on financial assets measured at amortized cost. Such credit losses will be recorded as an allowance to offset the amortized cost of the financial asset, resulting in a net presentation of the amount expected to be collected on the financial asset. In addition, credit losses relating to available-for-sale debt securities will now be recorded through an allowance for credit losses rather than as a direct write-down to the security. The amendments in this update are effective for reporting periods beginning after December 15, 2019, with early adoption permitted for reporting periods beginning after December 15, 2018. The Company does not expect that 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 and six months ended June 30, 2019, the Company recorded a loss on the sale of discontinued operations of $0 and $1.4 million, respectively, related to customary purchase price adjustments.

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 and six months ended June 30, 2018.


8

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

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

Three Months Ended
June 30, 2018
 
Six Months Ended
June 30, 2018
Net sales
$
82,754

 
$
155,390

Cost of goods sold
59,924

 
112,557

Gross profit
22,830

 
42,833

Operating expenses:

 

Selling, general and administrative expenses
15,632

 
32,402

Depreciation and amortization
1,590

 
3,079

Total operating expenses
17,222

 
35,481

Income from operations
5,608

 
7,352

Interest expense
(12
)
 
(25
)
Other expense, net
(4
)
 
(11
)
Income from discontinued operations before income taxes
5,592

 
7,316

Income tax expense
1,665

 
2,178

Net income from discontinued operations, net of tax
$
3,927

 
$
5,138


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.

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.

9

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


The following table summarizes the Company's operating and finance leases by country as of June 30, 2019 (in thousands):
 
June 30, 2019
 
United States
 
Canada
 
Total
Operating leases:
 
 
 
 
 
Real estate ROU assets, gross
$
100,769

 
$
16,539

 
$
117,308

Accumulated amortization
(11,307
)
 
(1,592
)
 
(12,899
)
Real estate ROU assets, net
$
89,462

 
$
14,947

 
$
104,409

Real estate lease liability
$
88,239

 
$
14,882

 
$
103,121

 
 
 
 
 
 
Vehicle and equipment ROU assets, gross
$
10,922

 
$
695

 
$
11,617

Accumulated amortization
(1,259
)
 
(114
)
 
(1,373
)
Vehicle and equipment ROU assets, net
$
9,663

 
$
581

 
$
10,244

Vehicle and equipment lease liability
$
9,614

 
$
577

 
$
10,191

 
 
 
 
 
 
Total ROU assets, net
$
99,125

 
$
15,528

 
$
114,653

Total operating lease liability
$
97,853

 
$
15,459

 
$
113,312

 
 
 
 
 
 
Finance leases included in property and equipment, net:

 

 
 
Vehicle and equipment ROU assets, gross
$
6,369

 
$
2,909

 
$
9,278

Accumulated depreciation
(988
)
 
(441
)
 
(1,429
)
Total vehicle and equipment ROU assets, net
$
5,381

 
$
2,468

 
$
7,849

Total vehicle and equipment lease liability
$
5,824

 
$
2,898

 
$
8,722



The components of lease cost for the three and six months ended June 30, 2019, are as follows (in thousands):
 
 
Three Months Ended June 30, 2019
 
Six Months Ended June 30, 2019
 
Income Statement Classification
Operating leases:
 
 
 
 
 
 
Lease cost
 
$
8,082

 
$
16,134

 
Selling, general and administrative expenses
Variable lease cost
 
1,272

 
2,325

 
Selling, general and administrative expenses
Operating lease cost
 
9,354

 
18,459

 
 
Finance leases:
 
 
 
 
 
 
Amortization of ROU assets
 
761

 
1,429

 
Depreciation and amortization
Interest on lease liabilities
 
117

 
241

 
Interest expense
Finance lease cost
 
878

 
1,670

 
 
Total lease cost
 
$
10,232

 
$
20,129

 
 


10

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

Supplemental cash flow information for leases for the six months ended June 30, 2019, is as follows (in thousands):
Cash paid for amounts included in the measurement of lease liabilities:
 
 
Operating cash flows from operating leases
 
$
13,345

Financing cash flows from finance leases
 
$
1,319

 
 
 
Right-of-use-assets obtained in exchange for lease obligations:
 
 
Finance leases
 
$
203

Operating leases
 
$
126,565

 
 
 

The weighted-average remaining lease term and weighted-average discount rate for operating and finance leases as of June 30, 2019, are as follows:
 
 
Operating Leases
 
Finance Leases
Weighted average remaining lease term (years)
 
5.42
 
3.69
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 June 30, 2019 (in thousands):
 
 
Operating Leases
 
Finance Leases
 
Total
2019 (excluding the six months ended June 30, 2019)
 
$
15,542

 
$
1,554

 
$
17,096

2020
 
28,992

 
2,913

 
31,905

2021
 
26,518

 
2,450

 
28,968

2022
 
20,568

 
1,501

 
22,069

2023
 
14,705

 
982

 
15,687

2024 and thereafter
 
21,785

 
155

 
21,940

Total lease payments
 
$
128,110

 
$
9,555

 
$
137,665

Less amount representing interest
 
(14,798
)
 
(833
)
 
(15,631
)
Total
 
$
113,312

 
$
8,722

 
$
122,034

 
 
 
 
 
 
 
Current portion of lease liabilities
 
$
25,730

 
$
2,677

 
$
28,407

Long-term portion of lease liabilities
 
$
87,582


$
6,045

 
$
93,627


The Company's future minimum operating lease commitments, as of December 31, 2018, under 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







11

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


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 June 30, 2019, the fair value of the interest rate swaps was $6.8 million and was recorded in non-current other liabilities. The Company did not have any interest rate swaps as of December 31, 2018.

The Company recorded losses of $2.9 million and $5.1 million, net of taxes of $0.9 million and $1.7 million, respectively, for the three and six months ended June 30, 2019 recorded in comprehensive income (loss). For the three and six months ended June 30, 2018, the Company did not have interest rate swaps outstanding.

Net Investment Hedge

On May 15, 2019, the Company terminated its foreign currency exchange rate contracts with total notional amounts of approximately $88.0 million. The Company recognized a gain of $2.5 million, net of taxes of $0.8 million, upon termination of the contracts, which was recorded in comprehensive income (loss). On May 15, 2019, the Company entered into new foreign currency exchange rate contracts with total notional amounts of $81.3 million. As of June 30, 2019, the amount of notional foreign currency exchange rate contracts outstanding was approximately $81.3 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 condensed consolidated balance sheets either as an asset or a liability. As of June 30, 2019, the fair value of the derivative instrument was $1.4 million and was recorded in other non-current liabilities. As of December 31, 2018, the fair value of the net investment hedge was $4.3 million and was recorded in other non-current assets.

The Company recognized losses of $0.4 million and $1.7 million, net of taxes of $0.1 million and $0.6 million, for the three and six months ended June 30, 2019, respectively, related to the total change in fair value of the net investment hedge, which was recorded in comprehensive income (loss). The Company recognized gains of $1.1 million and $2.3 million, net of taxes of $0.4 million and $1.0 million, respectively, for the three and six months ended June 30, 2018, recorded in comprehensive income (loss), related to the effective portion of the net investment hedge.

On January 1, 2019, the Company adopted ASU No. 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.

12

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 June 30, 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 allocations for the acquisitions set forth below are preliminary and subject to adjustment as additional information is obtained about facts and circumstances that existed as of the applicable acquisition dates.

During the six months ended June 30, 2019, the Company completed the following acquisitions:

Select Acoustic Supply Inc.

On May 1, 2019, the Company acquired all of the shares of Select Acoustic Supply Inc. ("Select"). Select was an independent distributor of drywall, steel framing, insulation, basement blanket and spray foam. Select operated one branch in the Greater Toronto Area in Ontario, Canada.

Builders' Supplies Limited II

On February 1, 2019, the Company acquired certain assets of Builders' Supplies Limited II 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 six months ended June 30, 2019, the Company completed the Select and BSL acquisitions ("2019 Acquisitions") for a total of $21.9 million, net of cash acquired. These acquisitions are 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):

 
 
Six Months Ended June 30, 2019
Assets acquired:
 
 
     Cash
 
$
88

     Accounts receivable
 
6,084

     Other receivables
 
2,023

     Inventories
 
2,588

     Prepaid and other current assets
 
29

     Property and equipment
 
605

     Goodwill
 
4,943

     Intangible assets
 
8,933

          Total assets acquired
 
25,293

Liabilities assumed:
 

     Accounts payable
 
(3,122
)
     Accrued expenses and other current liabilities
 
(160
)
          Total liabilities assumed
 
(3,282
)
Total net assets acquired
 
$
22,011


13

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


The excess of purchase price over the fair value amounts assigned to the assets acquired and liabilities assumed represents the goodwill amount resulting from the acquisitions. Goodwill attributable to the acquisitions has been recorded as a non-current asset and is not amortized, but is subject to review at least on an annual basis for impairment. Goodwill recognized was primarily attributable to expected operating efficiencies and expansion opportunities in the businesses acquired. Goodwill and intangible assets recognized from asset acquisitions are expected to be tax deductible. Generally, the most significant intangible asset acquired is customer relationships. The Company's acquisitions are generally subject to working capital adjustments; however, the Company does not expect any such adjustments to have a material impact on its consolidated financial statements. Any adjustments to the purchase price allocation of these acquisitions will be made as soon as practicable but no later than one year from the acquisition dates. The pro forma impact of the acquisitions is not presented as the acquisitions were not considered material to the Company's condensed consolidated financial statements.

7.    Goodwill and Intangible Assets

The change in goodwill from December 31, 2018 to June 30, 2019, consisted of the following (in thousands):

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

Goodwill acquired
4,943

Purchase price allocation adjustments from prior periods
(412
)
Impact of foreign currency exchange rates
1,135

Balance at June 30, 2019
$
490,607


Identifiable intangible assets that are separable and have determinable useful lives are valued separately and amortized over their benefit period. The following is the gross carrying value and accumulated amortization of the Company’s identifiable intangible assets as of June 30, 2019 and December 31, 2018 (in thousands):
 
June 30, 2019
 
December 31, 2018
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net Carrying Amount
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net Carrying Amount
Tradenames
$
15,980

 
$
(11,993
)
 
$
3,987

 
$
15,980


$
(10,423
)
 
$
5,557

Customer relationships
259,974

 
(134,396
)
 
125,578

 
250,498


(112,757
)
 
137,741

Other intangible assets

 

 

 
3,489


(911
)
 
2,578

 
$
275,954

 
$
(146,389
)
 
$
129,565

 
$
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 840, the predecessor to Topic 842.

The weighted average amortization period of these intangible assets in the aggregate is 3.6 years.

8.    Long-Term Debt

Debt consisted of the following at June 30, 2019 and December 31, 2018 (in thousands):
 
June 30, 2019
 
December 31, 2018
2018 Term Loan Facility
$
447,750

 
$
450,000

Unamortized deferred financing and issuance costs - term loan
(6,934
)
 
(7,501
)
2018 Revolving credit facility
136,462

 
146,000

Unamortized deferred financing costs - revolving credit facility
(4,248
)
 
(4,673
)
 
$
573,030

 
$
583,826


14

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 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. On November 9, 2018, the Company terminated the $25.0 million FILO Subfacility. The aggregate amount of the 2018 Revolving Credit Facility is $375.0 million.

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.


15

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 in the 2018 Revolving Credit Facility), 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 June 30, 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 June 30, 2019, the Company had $136.5 million of outstanding borrowings and $238.5 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 and six months ended June 30, 2019, was 4.0%.

2016 ABL Credit Facility

On August 13, 2018, Alpha terminated its revolving commitments under its $300.0 million 2016 asset-backed line of credit facility (the "2016 ABL Credit Facility"). The weighted average interest rate for borrowings under the 2016 ABL Credit Facility for the three months ended June 30, 2018, was 3.3%. 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.

16

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 were included in the statement of operations in loss on extinguishment of debt.

Debt Issuance Costs

Unamortized deferred financing and issuance costs as of June 30, 2019 were $11.2 million, of which $6.9 million was included in long-term portion of term loan, net and $4.2 million for the 2018 Revolving Credit Facility was included in other long-term assets in the accompanying condensed 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 condensed consolidated balance sheets.

As of June 30, 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 June 30, 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 six months ended June 30, 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)
3,301


(6,780
)

(3,479
)
Balance at June 30, 2019
$
216


$
(3,876
)

$
(3,660
)

17

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 June 30, 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, accounts payable, 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 June 30, 2019, is as follows (in thousands):
 
Fair Value Measurements as of June 30, 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:
 
 
 
 
 
 
 
Non-current liabilities
 
 
 
 
 
 
 
     Derivative liability (Note 5)
$


$
(8,243
)

$


$
(8,243
)

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



18

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

The fair value of derivative assets and liabilities is 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 value of derivative assets and liabilities includes 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 and six months ended June 30, 2019, was $5.4 million and $7.5 million, respectively, compared to an income tax expense of $0.6 million and a benefit of $0.8 million for the three and six months ended June 30, 2018, respectively. For the three and six months ended June 30, 2019, the Company's effective tax rates were 27.0% and 27.7%, respectively. The variance from the statutory federal tax rate of 21.0% for the three and six months ended June 30, 2019, was primarily due to state taxes, foreign rate differential and non-deductible items. 
For the three and six months ended June 30, 2018, the Company's effective tax rates were 29.6% and 49.6%, respectively. The variance from the statutory federal tax rate of 21.0% for the three months ended June 30, 2018, was primarily due to state income taxes, foreign rate differential and non-deductible items.  The variance from the statutory federal rate of 21.0% for the six months ended June 30, 2018, was primarily due to state income taxes, foreign rate differential, non-deductible items and a refinement of the provisional estimate of the one-time repatriation tax under the 2017 Tax Cuts and Jobs Act ("Tax Act").

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 and six months ended June 30, 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 June 30, 2019, 90.4% and 9.6% of the Company's revenue was generated in the United States and Canada, respectively. For the six months ended June 30, 2019, 90.5% and 9.5% of the Company's revenue was generated in the United States and Canada, respectively. For the three months ended June 30, 2018, 88.2% and 11.8% of the Company's revenue was generated in the United States and Canada, respectively. For the six months ended June 30, 2018, 87.9% and 12.1% of the Company's revenue was generated in the United States and Canada, respectively.


19

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):
 
June 30, 2019
 
December 31, 2018
Property, plant and equipment, net
 
 
 
United States
$
134,019

 
$
137,252

Canada
14,035

 
14,389

Total property, plant and equipment, net
$
148,054

 
$
151,641

Right-of-use assets, net
 
 
 
United States
$
99,125

 
$

Canada
15,528

 

Total right-of-use assets, net
$
114,653


$

Goodwill
 
 
 
United States
$
459,978

 
$
460,384

Canada
30,629

 
24,557

Total goodwill
$
490,607

 
$
484,941

Intangibles, net


 
 
United States
$
116,849

 
$
141,186

Canada
12,716

 
4,690

Total intangibles, net
$
129,565

 
$
145,876

         
The Company’s net sales by major product line are as follows (in thousands):
 
Three Months Ended June 30,
 
Change
 
2019
 
2018
 
$
 
%
 
 
 
 
 
 
 
 
 
 
Wallboard
$
214,059

38.2
%
 
$
198,598

38.0
%
 
$
15,461

 
7.8
%
Suspended ceiling systems
106,176

19.0
%
 
97,755

18.7
%
 
8,421

 
8.6
%
Metal framing
102,425

18.3
%
 
91,476

17.5
%
 
10,949

 
12.0
%
Complementary and other products
137,251

24.5
%
 
134,390

25.8
%
 
2,861

 
2.1
%
Total net sales
$
559,911

100.0
%
 
$
522,219

100.0
%
 
$
37,692

 
7.2
%
 

 
Six Months Ended June 30,
 
Change
 
2019
 
2018
 
$
 
%
 
 
 
 
 
 
 
 
 
 
Wallboard
$
416,973

38.8
%

$
379,252

38.5
%
 
$
37,721


9.9
%
Suspended ceiling systems
195,172

18.2
%

183,933

18.7
%
 
$
11,239


6.1
%
Metal framing
201,676

18.8
%

165,443

16.8
%
 
$
36,233


21.9
%
Complementary and other products
260,962

24.2
%

257,252

26.0
%
 
3,710


1.4
%
Total net sales
$
1,074,783

100.0
%

$
985,880

100.0
%
 
$
88,903


9.0
%


20

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


15. Other Current Liabilities

The balance of other current liabilities consisted of the following (in thousands):
 
June 30, 2019
 
December 31, 2018
Accrued expenses
$
4,977

 
$
5,080

Accrued interest
356

 
1,315

Accrued other
16,894

 
13,584

Total other current liabilities
$
22,227

 
$
19,979


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 June 30,
 
Six Months Ended June 30,
 
 
2019
 
2018
 
2019
 
2018
Weighted average shares used in basic computations
 
42,987,915

 
42,893,498

 
42,960,124

 
42,886,867

Dilutive effect of stock options and restricted stock units
 
257,438

 
16,519

 
104,372

 
16,921

Weighted average shares used in diluted computations
 
43,245,353

 
42,910,017

 
43,064,496

 
42,903,788


For the three and six months ended June 30, 2019, there were 38,806 and 85,918 shares, respectively, not included in the computation of diluted weighted average shares because their effect would have been antidilutive. For the three and six months ended June 30, 2018, there were 66,000 and 177,000 shares, respectively, not included in the computation of diluted weighted average shares because their effect would have been antidilutive.

21



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 "Condensed 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 and six months ended June 30, 2018, the Disposed Business is presented as discontinued operations. See Note 3, Discontinued Operations, to the condensed consolidated financial statements.

Second Quarter Update

Financial Results

We reported net sales of $559.9 million for the three months ended June 30, 2019, an increase of $37.7 million, or 7.2%, compared to the three months ended June 30, 2018, including base business net sales growth of 3.4%. Our gross margin for the three months ended June 30, 2019, was 30.6% compared to 28.0% for the three months ended June 30, 2018, due to improved profitability across our product lines driven by continued development of our pricing and purchasing initiatives.

2019 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, 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 2019 acquisitions completed contributed $5.9 million to net sales for the three months ended June 30, 2019, and $9.3 million for the six months ended June 30, 2019.


22


Acquisitions
 
Effective Date of Acquisition
 
Branch Locations
 
# of Branches Acquired
Select Acoustic Supply Inc.
 
May 1, 2019
 
Ontario, Canada
 
1
Builders' Supplies Limited II
 
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 six months ended June 30, 2019.



23


Results of Operations

Three Months Ended June 30, 2019 Compared to the Three Months Ended June 30, 2018

The following table summarizes certain consolidated financial information related to our operating results for the periods indicated:
 
Three Months Ended June 30,
 
2019
 
2018
(dollars in thousands)
 
 
 
 
 
Statements of operations data
 
 
 
 
 
Net sales
$
559,911

100.0
 %
 
$
522,219

100.0
 %
Cost of goods sold
388,374

69.4
 %
 
375,952

72.0
 %
Gross profit
171,537

30.6
 %
 
146,267

28.0
 %
Operating expenses:

 
 

 
Selling, general and administrative expenses
122,735

21.9
 %
 
110,153

21.1
 %
Depreciation and amortization
20,351

3.6
 %
 
18,751

3.6
 %
Total operating expenses
143,086

25.5
 %
 
128,904

24.7
 %
Income from operations
28,451

5.1
 %
 
17,363

3.3
 %
Interest expense
(8,341
)
(1.5
)%
 
(15,333
)
(2.9
)%
Other income, net
44

 %
 
61

 %
Income before income taxes
20,154

3.6
 %
 
2,091

0.4
 %
Income tax expense
5,433

1.0
 %
 
618

0.1
 %
Income from continuing operations
14,721

2.6
 %
 
1,473

0.3
 %
Income from discontinued operations, net of tax

 %
 
3,927

0.8
 %
Loss on sale of discontinued operations, net of tax
(44
)
 %
 

 %
Net income
$
14,677

2.6
 %
 
$
5,400

1.1
 %

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

Three Months Ended June 30,

Change

2019

2018

$

%
(dollars in thousands)












Wallboard
$
214,059

38.2
%

$
198,598

38.0
%

$
15,461


7.8
%
Suspended ceiling systems
106,176

19.0
%

97,755

18.7
%

8,421


8.6
%
Metal framing
102,425

18.3
%

91,476

17.5
%

10,949


12.0
%
Complementary and other products
137,251

24.5
%

134,390

25.8
%

2,861


2.1
%
Total net sales
$
559,911

100.0
%

$
522,219

100.0
%

$
37,692


7.2
%
Total gross profit
$
171,537



$
146,267



$
25,270


17.3
%
Total gross margin
30.6
%


28.0
%


2.6
%





24


Net Sales
Net sales for the three months ended June 30, 2019, were $559.9 million compared to $522.2 million for the three months ended June 30, 2018, representing an increase of $37.7 million, or 7.2%. Net sales from base business branches contributed $16.4 million of the net sales increase. 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 $21.3 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 $3.6 million, or 1.9%, primarily due to an increase in average selling price and product mix.

an increase in suspended ceiling systems net sales of $2.6 million, or 3.1%, primarily due to an increase in average selling price and product mix.

an increase in metal framing net sales of $4.7 million, or 5.3%, primarily due to an increase in commercial construction activity.

an increase in complementary and other product net sales of $5.4 million, or 4.6%, 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 June 30,

Change

2019

2018

$

%
(dollars in thousands)











Base business (1)
$
499,006


$
482,655


$
16,351


3.4
%
Acquired and combined (2)
60,905


39,564


21,341


53.9
%
Net sales
$
559,911


$
522,219


$
37,692


7.2
%
(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.

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 June 30, 2018

Base Business Net Sales Change

Acquired and Combined Net Sales Change

Three Months Ended June 30, 2019

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

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












Wallboard
$
198,598


$
3,593


$
11,868


$
214,059


7.8
%
1.9
%

134.5
 %
Suspended ceiling systems
97,755


2,637


5,784


106,176


8.6
%
3.1
%

47.8
 %
Metal framing
91,476


4,683


6,266


102,425


12.0
%
5.3
%

212.5
 %
Complementary and other products
134,390


5,438


(2,577
)

137,251


2.1
%
4.6
%

(16.4
)%
Net sales
$
522,219


$
16,351


$
21,341


$
559,911


7.2
%
3.4
%

53.9
 %
Average daily net sales(3)
$
8,160


$
256


$
333


$
8,749


7.2
%
3.4
%

53.9
 %
(1) Represents base business net sales change as a percentage of base business net sales for the three months ended June 30, 2018.
(2) Represents acquired and combined net sales as a percentage of acquired and combined net sales for the three months ended June 30, 2018.
(3) The number of business days for the three months ended June 30, 2019 and 2018, were 64 and 64, respectively.

25



Gross Profit and Gross Margin

Gross profit for the three months ended June 30, 2019, was $171.5 million compared to $146.3 million for the three months ended June 30, 2018, representing an increase of $25.2 million, or 17.3%. Gross profit increased due to an expansion of our gross margin, an increase in sales from acquisitions and base business growth.

Gross margin for the three months ended June 30, 2019, was 30.6% compared to 28.0% for the three months ended June 30, 2018. The increase in gross margin was primarily due to improved profitability across our product lines driven by continued development of our pricing and purchasing initiatives.

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

SG&A expenses for the three months ended June 30, 2019, were $122.7 million compared to $110.2 million for the three months ended June 30, 2018, representing an increase of $12.6 million, or 11.4%. As a percentage of net sales, SG&A expenses were 21.9% for the three months ended June 30, 2019, compared to 21.1% for the three months ended June 30, 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 June 30, 2019, was $20.4 million compared to $18.8 million for the three months ended June 30, 2018, representing an increase of $1.6 million, or 8.5%. The increase in depreciation and amortization was primarily due to acquisitions subsequent to June 30, 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 June 30, 2019, was $8.3 million compared to $15.3 million for the three months ended June 30, 2018, representing a decrease of $7.0 million, or 45.6%. The decrease is primarily due to the refinancing of our senior secured notes in August 2018. See Note 8, Long-Term Debt, to the condensed consolidated financial statements.

Income Taxes

Income tax expense for the three months ended June 30, 2019, was $5.4 million compared to an income tax expense of $0.6 million for the three months ended June 30, 2018. The effective tax rate for the three months ended June 30, 2019 was 27.0% compared to 29.6% for the three months ended June 30, 2018. The difference in the effective tax rates between periods is due primarily to the impact the foreign rate differential and non-deductible items had on lower reported earnings in 2018.

26


Six Months Ended June 30, 2019 Compared to the Six Months Ended June 30, 2018
The following table summarizes certain consolidated financial information related to our operating results for the periods indicated:
 
Six Months Ended June 30,
 
2019
 
2018
(dollars in thousands)
 
 
 
 
 
Statements of operations data
 
 
 
 
 
Net sales