i
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
Certain statements and information in this Annual Report on Form 10-K may constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements relate to matters such as our industry, business strategy, goals and expectations concerning our market position, future operations, margins, profitability, capital expenditures, liquidity, capital resources and other financial and operating information. We have used the words “approximately,” “anticipate,” “assume,” “believe,” “contemplate,” “continue,” “could,” “estimate,” “expect,” “future,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “seek,” “should,” “target,” “will” and similar terms and phrases to identify forward-looking statements. All of our forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those that we are expecting, including:
•the impact of the COVID-19 pandemic on the economy, demand for our products and our business, financial condition and results of operations, including the measures taken by governmental authorities in response;
•government funding of infrastructure and related construction activities;
•the level of construction activity, particularly in the residential construction and non-residential construction markets;
•the highly competitive nature of our industry and our ability to effectively compete;
•the availability and price of the raw materials and other inputs we use in our business;
•our dependence on key customers and the absence of long-term agreements with these customers;
•the level of construction activity in Texas;
•disruption at one or more of our manufacturing facilities or in our supply chain;
•construction project delays and our inventory management;
•the seasonality of our business and its susceptibility to adverse weather;
•our ability to successfully integrate acquisitions;
•labor disruptions and other union activity;
•compliance with applicable regulations;
•a tightening of mortgage lending or mortgage financing requirements;
•the ability to implement our current dispute with HeidelbergCement related to the payment of an earnout;growth strategy;
•compliance with environmental laws and regulations;
•changes in tax laws could adversely affect us;
•compliance with health and safety laws and regulations and other laws and regulations to which we are subject;regulations;
•our dependence on key executives and key management personnel;
ii
•our ability and that of the customers with which we work to retain and attract additional skilled and non-skilled technical or sales personnel;
•credit and non-payment risks of our customers;
•warranty and related claims;
•legal and regulatory claims;
•climate change or climate change legislation or regulations may adversely impact our business;
•our ability to maintain sufficient liquidity and ensure adequate financing or guarantees for large projects;
•delays or outages in our information technology systems and computer networks;
•security breaches in our information technology systems and other cybersecurity incidents;
•risks associated with merger transactions generally, such as the inability to obtain, or delays in obtaining, required approvals under applicable anti-trust legislation and other regulatory and third party consents and approvals;
•the failure to consummate or delay in consummating the merger for other reasons;
•the risk that a condition to closing of the merger may not be satisfied;
•the occurrence of any event, change or other circumstances that could give rise to the termination of the merger agreement;
•the outcome of any legal proceedings that may be instituted following announcement of the merger;
•failure of Quikrete Holdings, Inc. to obtain the financing required to consummate the merger;
•failure to retain our key management and employees;
•issues or delays in the successful integration of our operations with those of Quikrete Holdings, Inc., including incurring or experiencing unanticipated costs and/or delays or difficulties;
•unfavorable reaction to the merger by customers, competitors, suppliers and employees;and
•additional factors discussed in our filings with the Securities and Exchange Commission, or the SEC.
The forward-looking statements contained in this Annual Report on Form 10-K are based on historical performance and management’s current plans, estimates and expectations in light of information currently available to us and are subject to uncertainty and changes in circumstances. There can be no assurance that future developments affecting us will be those that we have anticipated. Actual results may differ materially from these expectations due to changes in global, regional or local political, economic, business, competitive, market, regulatory and other factors, many of which are beyond our control, as well as the other factors described in Item 1A, “Risk Factors”. The COVID-19 pandemic may also precipitate or exacerbate these and other unknown risks and uncertainties. Additional factors or events that could cause our actual results to differ may also emerge from time to time, and it is not possible for us to predict all of them. Should one or more of these risks or uncertainties materialize, or should any of our assumptions prove to be incorrect, our actual results
iii
may vary in material respects from what we may have expressed or implied by these forward-looking statements. We caution that you should not place undue reliance on any of our forward-looking statements. Any forward-looking statement made by us speaks only as of the date on which we make it. We undertake no obligation to publicly update any forward-looking statement, whether as a result of new information, future developments or otherwise, except as may be required by applicable securities laws.
iv
PART I
Item 1. Business
On March 13, 2015, through an indirect wholly owned subsidiary, Lone Star Fund IX (U.S.), L.P. (which we referis referred to, along with its affiliates and associates, but excluding the Companyus and other companies that it owns as a result of its investment activity, as Lone Star) acquired the building products business of HeidelbergCement AG, or HC, in the United States and Eastern Canada, or the Acquisition. Unless otherwise specified or where the context otherwise requires, references in this Annual Report on Form 10-K to “our,” “we,” “us,” the “Company” and “our business” (i) for the Predecessor periods prior to the completion of the Acquisition, refer to the building products business of HeidelbergCement AG in the United States and Eastern Canada, (ii) for the Successor periods after completion of the Acquisition, but prior to the internal reorganization transaction discussed in Note 1 to the consolidated financial statements in which LSF9 Concrete Holdings Ltd transferred its building products business in the United States and Eastern Canada to Forterra, Inc., or the Reorganization, the building products business of LSF9 Concrete Holdings Ltd in the United States and Eastern Canada and (iii) for the Successor periods after completion of the Reorganization, the operations of Forterra, Inc., in each case together with its consolidated subsidiaries. We are a holding company incorporated in Delaware in 2016. We are controlled by Lone Star and have a relatively shortbeen operating history as a stand-alone company.company since 2015.
Recent Developments
On February 19, 2021, we entered into an Agreement and Plan of Merger, or the Merger Agreement, with Quikrete Holdings, Inc., a Delaware corporation, or Quikrete, and Jordan Merger Sub, Inc., a Delaware corporation and a wholly-owned subsidiary of Quikrete, or Merger Sub. Pursuant to the Merger Agreement, subject to the satisfaction or waiver of specified conditions, Merger Sub will merge with and into the Company, or the Merger, with us surviving the Merger as a wholly-owned subsidiary of Quikrete. At the effective time of the Merger, each issued and outstanding share of common stock of the Company (other than (i) any shares held in the treasury of the Company or owned, directly or indirectly, by Quikrete, Merger Sub or any wholly-owned subsidiary of the Company immediately prior to the Effective Time, (ii) shares that are subject to any vesting restrictions, or Company Restricted Shares granted under the Company’s stock incentive plans, (iii) any shares owned by stockholders who have properly exercised and perfected appraisal rights under Delaware law) will be automatically canceled and converted into the right to receive $24.00 in cash, without interest, or the Merger Consideration, subject to deduction for any required withholding tax. We and Quikrete are currently working with the United States Department of Justice, or DOJ, to obtain approval to consummate the Merger under the Hart-Scot-Rodino Antitrust Improvements Act of 1976, as amended, or the HSR Act, in the timeframe contemplated by the Merger Agreement.
In order to address some of the divestitures anticipated to be required by the DOJ, we have entered into two divestiture agreements. On November 24, 2021, we entered into an agreement with Eagle Corporation and Parent pursuant to which Eagle will purchase our 50% equity interest in Concrete Pipe & Precast, LLC, or CP&P, a 50/50 joint venture with Eagle, for a purchase price of $105 million, subject to certain adjustments as described in the purchase agreement. On December 13, 2021, we entered into an agreement with Hydro Conduit, LLC d/b/a Rinker Materials, an affiliate of Parent, and Foley Products Company, Inc. pursuant to which we and Rinker will each sell to Foley certain assets and liabilities associated with reinforced concrete pipe and precast plants for an aggregate purchase price of $95 million, subject to certain adjustments described in the asset purchase agreement. Consummation of these transactions is subject to customary closing conditions, including, among others, the consummation of the Merger and approval by the DOJ.
See Item 1A, Risk Factors, and Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, in "Overview" for a more fulsome description of the Merger, the Merger Agreement, the risks related thereto and its terms and expected impact on our business.
General
We are a manufacturer of concrete pipe and precast products by sales volumeand ductile iron pipe in the United States and Eastern Canada for a variety of essential water-related infrastructure applications, includingapplications. Our products and services are used in the construction, maintenance, repair and replacement of water transmission,drainage, distribution and drainage.transmission systems.
1
We manufacture both water drainage pipe and precast structures (used primarily for storm water and drainage applications) and water transmission and distribution pipe (used primarily to transport potable water and as a component of wastewater systems) and believe our complementary product portfolio is well positioned to serve both (i) the storm water and wastewater infrastructure market and (ii) the potable water transmission and distribution market. We believe that our exposure to eachserve a diverse set of the residential, non-residential and infrastructure end markets, will allowincluding infrastructure, residential, and non-residential construction, which allows us to benefit from both secular and cyclical growth across each of these end markets.end-markets. The infrastructure, residential, non-residential and infrastructurenon-residential end markets in the United States and Eastern Canada have different growth drivers and operating dynamics, and the cyclical performance of these markets has historically been staggered during different stages of the broader economic cycle.cycle serving to mitigate the cyclical impact of any one single market on our business. In addition, given the nature of water as a basic necessity, municipalities generally repair and replace their existing water and wastewater infrastructure.
Our operational strategy is focused on our five improvement pillars:
•Health and Safety — Prioritizing the health and safety of our employees above anything else; our most productive facilities should be our safest
•Plant-level Operational Discipline — Making daily improvements using our manufacturing/process know-how to drive efficiencies with disciplined financial investment
•Enhanced Commercial Capabilities—Investing in our sales force to expand capabilities and better inform our customers of our compelling value proposition
•Working Capital Efficiency—Having the right levels of inventory in the right places at the right times and aligning our accounts receivable and accounts payable cycles
•G&A Effectiveness—Delivering deeper information faster and at a lower cost so operators can make better business decisions
Our solid execution on these five pillars has produced, and we believe will continue to produce, the earnings and cash flows that have allowed us to reach our stated net leverage goal of 3.0x to 3.5x earnings during 2021 and we believe will allow us to continue reducing our leverage over time. Our organic growth strategy is focused on leveraging our operations, high level of customer service and product innovation capabilities, as well as our product breadth and scale, to sell our products to existing customers, to increase penetration and project wins and to gain market share through new customers. Operationally, we continue to focus on efficiency and productivity improvements to reduce costs and drive unit margin improvements. We have built a strong operating platformperiodically evaluate our existing business and continuously evaluate acquisition opportunities to complement our organic growth and to furtheror enhance our scale, geographic footprint and product portfolio while simultaneously considering and making strategic divestitures or changes in our manufacturing footprint to optimize our portfolio. See Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations and Note 3 to our consolidated financial statements for a more detailed discussion of our recent acquisitions and divestitures.
Our Segments
Drainage Pipe & Products. We are the largest producer of concrete drainage pipe and precast products by sales volume in the United States and Eastern Canada. In addition, we also produce concrete pressure pipe in Eastern Canada. We have 58operate 65 active manufacturing facilities across multiple states and two Canadian provinces. These facilities provide us with a Canadian province.local presence and the necessary proximity to our customers to minimize delivery times and distribution costs to the markets we serve. We believe our product offering creates value for our customers as it eliminates the need to engage multiple suppliers of storm water and wastewater-related products for a single project, permittingenabling them to maximize efficiency and meet more aggressive timetables. We also have the ability to custom-build products to complex specifications and regulations.
2
Drainage pipe has residential, non-residential and infrastructure applications. It is primarily used for storm water applications, such as storm drains for roads and highways, and for residential and non-residential site developments. In addition, drainage pipe is used for sanitary sewers, low-pressure sewer force mains, tunneled systems, treatment plant piping and utility tunnels.
Water Pipe & Products. We are the largest producer of ductile iron pipe, or DIP, by sales volume in the United StatesStates. Utilizing the U.S. Pipe brand, we manufacture a number of products used for the transmission of potable water and we produce concrete pressurewastewater in pipe in Eastern Canada.diameters typically ranging from three to 64 inches. Our product breadth and depth and our technical service addressesaddress a range of our customers' water transmission and distribution needs. Our 1915 manufacturing facilities are located across the United States, and Eastern Canada, with swing capacity available to support increased production levels as appropriate to satisfy increased demand.
| Key Segments | Drainage Pipe & Products | Water Pipe & Products | Key Segments | Drainage Pipe & Products | Water Pipe & Products | |||||||||||||
| Products |  |  | Products |  |  | |||||||||||||
| Product Applications | Storm water and wastewater infrastructure | Potable and wastewater transmission and distribution | Product Applications | Storm water and wastewater infrastructure | Potable and wastewater transmission and distribution | |||||||||||||
| Primary Market Channels | - Direct to Contractors - Distributors | - Distributors - Direct to Contractors, Municipalities and Utilities Waterworks | Primary Market Channels | - Direct to Contractors - Distributors | - Distributors - Direct to Contractors, Municipalities and Utilities Waterworks | |||||||||||||
| # of Manufacturing Facilities | 58 | 19 | ||||||||||||||||
| # of Active Manufacturing Facilities | # of Active Manufacturing Facilities | 65 | 15 | |||||||||||||||
Corporate and Other. Corporate, general and administrative expenses not allocated to our revenue-generating segments, such as certain shared services, executive and other administrative functions.
Our Industry and Core End Markets
We serve a range of infrastructure-related end markets. Based on the source of funding, we classify these construction markets into infrastructure,infrastructure/municipal, residential and non-residential.
Infrastructure
Infrastructure represents spending by federal, state, and local governments for the construction and repair of streets, highways, and storm and sanitary sewers, as well as the construction and repair of water lines for the delivery of potable water, which are often supported by multi-year federal and state legislation and programs. It also includes local municipalities water infrastructure spending associated with the construction, repair and replacement of water transportation and distribution systems. Spending on these items is driven by federal, state and municipal funding for both new build and repair projects. In December 2015, the Fixing America’s Surface Transportation Act, or the FAST Act, was enacted by the United States federal government, authorizing $305.0 billionaddition to availability of funding at the federal, state and municipal levels, these programs are impacted by other factors, including demographic and population shifts and the ability of contractors to obtain skilled labor.
A large proportion of U.S. water infrastructure is approaching, or has already reached, the end of its useful life. According to The American Society of Civil Engineers, or ASCE, many drinking water pipes in the U.S. were laid from 1900 to 1950. Today, aging pipelines contribute to the estimated 240,000 water main breaks per year in the U.S., wasting over two trillion gallons of treated drinking water. Additionally, lead pipes and fixtures, which were commonly installed through the mid-20th century, are still in service in some cities. The American Water Works Association estimated that the need for buried drinking water infrastructure in the U.S. through 2050 totals nearly $1.7 trillion, about 54% of which is needed for replacement of existing infrastructure and the balance being necessary to accommodate population growth and migration over that period. ASCE gave the U.S.
3
wastewater infrastructure a grade of D+ and, in 2017, estimated that 56 million new users would be connected to centralized treatment systems over the following fivenext 15 years requiring at least $271 billion to meet current and future demands and to upgrade transportation-relatedexisting infrastructure. The federal funding provided byLikewise, the FAST Act allows state departmentsASCE grades the U.S. surface transportation (roads, bridges, and transit) infrastructure D/C+/D- and has identified over $1 trillion in additional spending needed to repair and upgrade existing structures as well as construction of transportationnew facilities to plan for their long-term highway constructionaccommodate growth through 2025. As the leader in our respective markets serving the water related infrastructure industry, we believe we are well positioned to benefit from this much needed spending to repair and maintenance needs. More than 70% of the law’s budget is dedicated to highway spending.upgrade U.S. infrastructure.
Residential Construction
Residential construction includes single family homes and multi-family units such as apartments and condominiums. In this end market, our products are primarily used during the new lot development phase of construction. New residential housing starts provide a strong leading indicator of increased activity in the residential construction market for water transmission, wastewater and drainage systems. Demand for residential construction is influenced by demographic and population shifts, mortgage interest rates, and the ability of builders to obtain skilled labor. In 2017, totalU.S. residential new construction peaked in 2006 before experiencing a downturn from 2007 to 2011. Since 2011, the recovery of residential new construction has translated into increased demand for our products and we believe we are well-positioned to capitalize as and to the extent this trend continues. Since 1974, annual additions to the housing startssupply exceeded household growth by an average of 30% to accommodate replacement of older units, demand for second homes, geographic shifts in the United States increased to 1.2 million, an increasepopulation, and a normal amount of 2.4% above 2016vacancies. However, for most of the last decade, housing starts.production has barely kept pace with household formation. We believe this indicates there is significant pent up demand for housing and that the market will see continued growth.
Non-residential Construction
Non-residential construction includes all privately financed construction other than residential structures. Revenues in this end-market are driven largely by new United States non-residential construction, for which demand is generally driven by job growth, vacancy rates, private infrastructure needs and demographic trends. Our products in this end market tend to be utilized primarily in shopping centers and similar types of suburban development as opposed to development of large office buildings, and we believe that the demand for suburban development should be stable to growing over the short to medium term. The supply of non-residential construction projects is also affected by the availability and cost of funding.
Our Products
Drainage Pipe & Products Segment
We manufacture drainage pipe and precast products in the United States and Eastern Canada and concrete pressure pipe products in Eastern Canada. Drainage pipe has residential, non-residential and infrastructure applications. It is primarily used for storm water applications, such as storm drains for roads and highways, and for residential and non-residential site developments. In addition, drainage pipe is used for sanitary sewers, low-pressure sewer force mains, tunneled systems, treatment plant piping and utility tunnels.
Drainage pipe consists of concrete reinforced by a steel cage. It is manufactured by producing a steel mesh cage, enclosing it in a form or mold and then pouring concrete around it to produce the pipe. Drainage pipe is manufactured in round, elliptical and arch shapes ranging from 12 inches to 144 inches in diameter and in box sizes ranging from three feet to 1520 feet in length and width.
We also manufacture a wide variety of precast concrete products, including box culverts, utility vaults, manholes, drainage inlets and pipe end sections. These precast concrete products are used for applications such as roadway drainage, airport drainage, storm water management, utility construction and water treatment and filtration systems. Our range of precast concrete products also includes products that fall under the general description of specialty precast, including products for which we hold patents that make us the exclusive manufacturer, or which are manufactured under license agreements with third parties. These specialty products include architectural panels for buildings, modular railroad crossings, retaining wall systems, highway noise
4
barriers, storm water treatment systems and concrete vaults, which are used to house either dry utilities (such as electrical, data or communications equipment) or wet utilities (such as valves, pumps or water meters).
We also manufacture structural precast products in the United States and manufacture a range of precast concrete bridge girders for highway projects in both the United States and Eastern Canada. We manufacture a variety of structural precast products primarily for infrastructure and non-residential applications, including hollow-core planks, prestressed bridge girders, beams, columns, wall panels, stairs, garage floors and architectural cladding. These products are used as structural and architectural elements in building structures such as parking garages and arched and modular bridges.
Precast concrete products are reinforced with steel, similar to pipe, and manufactured using either a dry cast or wet cast concrete mix, depending on the size of the piece and the number of identical pieces to be manufactured. In the dry cast method, a concrete mix with low water content, known as zero-slump concrete, is poured into a mold and then densely compacted around the steel reinforcement using a variety of manufacturing methods. The concrete structure is immediately removed from the mold and allowed to cure in a high humidity environment to ensure proper hydration of the concrete. This method allows multiple pieces to be produced from the same mold each day and is most suitable for high volume, repetitive manufacturing. In the wet cast method, a concrete mix with relatively high water content is poured into a mold and allowed to cure in the mold, which can take from four to 1216 hours. Precast concrete products typically range in diameter from four to 12 feet for round products or in length and width from one foot to 12 feet for square or rectangular products.
We also regularly consider ways to innovate internally and expand our drainage pipe and precast product offerings by working to bring other products to market. Some of our recent product offerings include precast Duct Bank, Kenner Chainwall, Duct Bank, and a number of storm water innovative technologies for storm water management marketed through our Bio Clean subsidiary. Duct Bank is a precast product that consolidates and protects underground electrical and communication cables and can be used in the construction of large buildings, including in data centers, as well as installing cabling underneath roads and areas with existing structures. Kenner Chainwall is a precast concrete foundation that provides a structurally sound, on-grade or elevated foundation to support prefabricated shelters or equipment buildings. One
use is to elevate electrical equipment in flood zones such as those devastated by Hurricane Katrina. Duct bank is a precast product that consolidates and protects underground electrical and communication cables and can be used in the construction of large buildings as well as installing cabling underneath roads and areas with existing structures.hurricanes. Each of these products is now commercially available.
In addition, for larger diameter applications, we manufacture concrete pressure pipe, prestressed concrete pipe and bar-wrapped concrete pipe in Eastern Canada. Our concrete pressure pipe is used for water transmission and distribution, power plant cooling water lines, sewage force mains for wastewater and storm water and other diverse applications involving the movement of large volumes of water. Concrete-lined pressure pipe ranges from tenfourteen to 144 inches in diameter. Prestressed concrete pipe consists of a concrete core, a steel cylinder and a high tensile strength wire that is wrapped, under measured tension and at uniform spacing, around the steel cylinder. This wire wrap places the steel cylinder and concrete core in compression, developing the pipe’s ability to withstand specified hydrostatic pressures and external loads. An outside coating of mortar protects the wires. Bar-wrapped concrete cylinder pipe combines the physical strength of steel with the structural and protective properties of high strength cement mortar. In this type of pipe, a round steel bar is helically wound around a welded steel cylinder and all surfaces are encased in cement mortar. This composite pipe reacts as a unit when resisting internal pressure and external loads. The inside of the cylinder is lined with centrifugally cast cement mortar.
Our concrete pressure pipe is highly engineered and is built to order for technically demanding applications requiring various thresholds of working pressure, surge pressure and loads. Our engineers work closely with customers to design components and systems to meet specific regulatory and industrial demands.
In addition to our operations, we have a 50% equity interest in Concrete Pipe & Precast LLC, or CP&P, a joint venture with Eagle Corporation. CP&P operates 12 plants that serve the Mid-Atlantic and Southeastern United States. CP&P manufactures drainage pipe and precast concrete products and sells those products to similar types of customers as the ones to which we market. See Note 6 to our consolidated financial statements for additional information regarding CP&P. In November 2021 we entered into an agreement to sell our 50% equity interest in CP&P to Eagle, with the closing of this transaction subject to customary closing conditions, including, among others, the consummation of the Merger and approval by the DOJ.
5
Water Pipe & Products Segment
Utilizing the U.S. Pipe brand, we manufacture a number of products used for the transmission of potable water and wastewater in pipe diameters ranging from three to 64 inches.
We manufacture DIP in pipe diameters ranging from three to 64 inches in the United States. For each diameter of pipe, we offer a wide range of thicknesses with both standard and specialized linings and coatings. DIP is used for transmission and distribution of potable water and wastewater. DIP has residential and infrastructure repair replacement applications, including potable water distribution systems, small water system grids, major water transmission mains, wastewater collection systems, sewer force mains and water treatment plants. In addition to DIP, we also manufacture a full line of complementary joint restraints and fittings in Mexico, which are utilized for interlocking adjoining segments of pipe and are typically bundled with DIP. We also operate fabrication plants that modify our pipe to meet specific customer design requirements for above-ground applications.
DIP is manufactured using a process that consists of introducing molten iron into a rapidly-rotating steel mold and relying on centrifugal force to distribute the molten iron evenly around the inner surface of the mold to produce pipe of uniform size and dimensions. We also strive to innovate in our Water Pipe & Products segment, including by offering metallic zinc coating and TR-XTREME pipe. Metallic zinc coating is active corrosion protection for DIP. TR-XTREME pipe is DIP designed for areas of seismic activity and has joints that provide flexible extension capabilities.
Customers and Markets
Drainage Pipe & Products Segment
We typically sell our drainage pipe and precast products to contractors that perform construction work for various levels of government, residential and non-residential building owners, and developers in markets across the United States and Eastern Canada. Additionally, although they are not our direct customers, we view the owners and engineers who are customers of the contractors that purchase our products as our customers as well, because these owners and engineers often specify the types of products that our customers are required to use. We also sell our drainage pipe and precast products to utility companies. Several of our largest manufacturing facilities are located in close proximity to our markets. Our drainage pipe and precast products are typically shipped within a radius of 150 miles, but in some cases up to 350 miles, from our manufacturing facilities. Our concrete pressure pipe is used in projects for regional water authorities and districts, cities, counties, municipalities, port authorities, private companies and industrial clients, including power plants, and is typically shipped within a radius of 500 miles from our manufacturing facility.
Water Pipe & Products Segment
Our water transmission pipe products are sold directly to contractors as well as through some of the largest waterworks distributors.distributors and contractors. Our Water Pipe & Products segment has significant sales through distributors, including Core & Main, a key customer Core & Main, whichthat accounted for 13%18% and 16% of our consolidated net sales in 2017.2021 and 2020, respectively. We also sell to utility contractors that work on new or replacement pipeline projects, primarily in the East, South and Midwest of the United States and in Eastern Canada. Our pressure pipe is used in projects for regional water authorities and districts, cities, counties, municipalities, port authorities, private companies and industrial clients, including power plants.States. DIP is shipped within a radius of over 1,000 miles and concrete pressure pipe is typically shipped within a radius of 500 miles from our manufacturing facilities.1,000 miles.
Competition
Drainage Pipe & Products Segment
Our largest competitors in our Drainage Pipe & Products Segment include Rinker Materials (a division of the QUIKRETE Companies) and Oldcastle Inc.Infrastructure (a unit of CRH plc). We also compete with many, as well as numerous regional and local manufacturers.manufacturers servicing various geographies. Additionally, our drainage pipe products compete with high density polyethylene, or HDPE, and polypropylene pipe products where such materials would serve as an appropriate substitute for our product.
6
Within Canada, our concrete pressure pipe products compete with DECAST (formerly Munro Concrete Products, Ltd.) and several other American and Canadian competitors. Our concrete-lined pressure pipe also competes with pressure pipe made from other materials such as fiberglass, HDPE and PVC.
Our two largest competitors in DIP manufacturing are McWane, Inc. and American Cast Iron Pipe Company. Our DIP products also compete with polyvinyl chloride, or PVC, and HDPE pipe and, when pricing achieves certain levels, we may also compete with foreign manufacturers of DIP. Our national network of fabrication products competes with regional and local providers of those products and services.
Sales, Marketing and Distribution
Our products are generally made to order, but certain of our Drainage concrete pipe and DIP products are made to inventory. We have established target levels of inventory for certain products that we attempt to keep available at our manufacturing facilities to meet customer demand. Inventories are held at manufacturing facilities and, to a lesser extent, at distribution yards.
Our structural precast products, most precast concrete products and concrete pressure pipe are customized products that are made to order. Our order backlog for precast concrete products is typically two to six months, while ourmonths. Our order backlog for concrete pressure pipe and other precast offerings (bridge products) is approximately 12 months.three to eighteen months depending on the demand in the geographic area for specific products.
We seek to attract and retain customers through exceptional customer service and technical expertise, leadingas well as product quality, broadour product and service offerings and competitive pricing. Our market strategy for products with non-residential end users is centered on building and maintaining strong customer relationships rather than traditional advertising.
We maintain in-house technical sales, engineering and field service teams which provide customers technical expertise and support to assist them in finding the right product or solution for their specific need. Each of our operating segments has its own sales force. Overall, we employ more than 320approximately 275 sales and related support professionals. Our sales force and customer service functions are staffed by experienced professionals who have been trained in our product lines, processes and systems, and who maintain touch points with engineers, contractors, builders, and distributors. Additionally, we have a staff of more than 75150 engineers that we employ to work in concert with our sales force to help develop effective product solutions for our customers.
We sell our DIP products and our fittings and fabricated products primarily through distributors. Our drainage pipe, concrete pressure pipe, and precast concrete products are mostly sold direct to customers who are installing such products for or are the end users of such products. Drainage pipe, concrete pressure pipe, and certain precast products are sold through a bidding process in which we seek to place the most competitive bid. We undertake marketing efforts through our participation in trade shows and through our website. We outsource many of our product deliveries by using a combination of dedicated carriers and other third-party carriers.
Raw Materials and Inputs
The primary material for our drainage pipe and precast concrete products and our concrete pressure pipe is concrete, which consists of water, cement sand and aggregates. Another key input for our products is steel, which is used to provide reinforcement within our drainage pipe and precast concrete products. Our DIP is largely made from iron melted from recycled scrap metals. Other key materials for our DIP include foundry coke and certain additives, such as silica.alloys.
Most of our raw materials are widely available commodities. WeWhile we have experienced challenges in obtaining certain materials during 2021 as a result of a globally challenged supply chain environment, we have not experienced any significant shortages of raw materials. To the extent we do not produce any raw materials,
7
when and where possible, we try to purchase raw materials from the source, and because of their low value-to-weight ratios, we generally try to source our raw materials in the vicinity of our facilities. We usually purchase the raw materials we need in the spot market, except where we anticipate a significant need of materials for a specific project. Other than certain contracts for key materials, including cement and steel, we typically do not enter into long-term supply contracts with our suppliers that require us to purchase particular quantities or to pay particular prices. In our project-based businesses, we may pass certain raw material costs to end users through step-up mechanisms included in our price quotes tied to the timing of execution.
We purchase our steel from a number of different suppliers, but most suppliers are based in the United States in order to comply with “Buy America” government contract requirements placed on our customers. We endeavor to purchase these steel supplies from the entity which is as close as possible to the manufacturer.
Seasonality
The construction industry, and therefore demand for our products, is typically seasonal and dependent on weather conditions, with periods of snow or heavy rain negatively affecting construction activity. For a more detailed discussion, see the sections titled Item 1A., Risk Factors, and Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, for a discussion of the seasonality of our business.
As of December 31, 2017,2021, we had 4,729 employees, 1,0994,824 team members, 1,434 of which were salaried and 3,6303,390 of which were hourly. Of the total number of employees, 4,105team members, 4,272 were located in the United States, 368277 were located in Canada and 256275 were located in Mexico. The number of hourly workers we employ varies to match our labor needs during periods of fluctuating demand and varies seasonally in certain regions. We also employcontract to hire temporary workers as needed to meet production goals.
As of December 31, 2017,2021, approximately 33% of our workforce is covered by collective bargaining agreements, and approximately 27%46% of these employeesteam members are included in collective bargaining agreements that expire within one year of December 31, 2017.2021. We have not had any recent union-organized work stoppages in the United States, Canada or Mexico. We believe that we have good relationships with our employeesteam members and with the unions representing our employees.team members.
Health and Safety
We believe there is nothing more important than the health, safety and wellness of our team members; we believe this commitment is both a moral imperative and is fundamental to driving success in our business. We are committed to providing a safe and healthy working environment for our team members and are constantly looking for ways to improve our facilities and processes in order to better serve these goals. We also provide team members and their families with access to programs that promote their health and wellness, including wellness and disease prevention programs, employee assistance programs, and comprehensive health care benefits. In response to the COVID-19 pandemic, we implemented numerous policies and initiatives to assure that our team members, many of whom were essential infrastructure workers, could operate in an environment that promoted each individual’s health and safety, to provide paid leave and other benefits to employees directly impacted by the pandemic, and to allow those team members whose roles enabled them to work from home to do so. We have continued many of these policies and initiatives and are continuing to evaluate the need for such policies in the future.
8
Compensation and Benefits
In order to attract, retain, and engage our team members to drive our success, we provide compelling compensation and benefit programs that are competitive in our markets. Our programs include a combination of some or all of the following: competitive market-based pay, bonuses, stock awards, defined contribution retirement plans with Company matching contributions, healthcare and insurance benefits, health savings and flexible spending accounts, wellness programs, company-paid life insurance, paid time off, family leave, employee assistance programs, tuition assistance, flexibility to allow work from home in certain situations including in response to the COVID-19 pandemic, reimbursement for some health and fitness programs, and many others. These benefits can vary in our Canada and Mexico locations based on local availability and regulations. We are committed to ensuring equal pay for equal work regardless of gender, race or ethnicity.
Talent Development
We know that our continued success depends on our ability to engage with our team members and grow them into the future leaders our business needs. To that end, we have implemented robust learning management tools and training programs focused on developing our team members. Recent areas of focus have included implementation of a comprehensive program to develop skills for our sales professionals as well as development of a front-line leader training system for our plant-level supervisors. In addition, we periodically conduct a survey of our team members to determine where they are engaged and where we can improve.
Diversity and Inclusion
One of our core values is respect for people, and that includes providing a workplace that is committed to valuing diversity and inclusion of people of all backgrounds, regardless of race, ethnicity, gender, age, religious belief, disability, sexual orientation, gender identity, or cultural background. As of December 31, 2021, underrepresented minorities (defined as those individuals who identify as Black/African American, Hispanic/Latinx, Native American, Pacific Islander and/or two or more races) represented 49.43% of our team members, and women represented approximately 9.7% of our workforce.
Intellectual Property
We own various United States and foreign patents, registered trademarks, trade names and trade secrets and applications for, or licenses in respect of, the same, that relate to our various business lines including as a result of our acquisition of Bio Clean, a number of innovative technologies relating to storm water management. While the name Forterra is relatively new in our industry, we believe our customers have reacted favorably to the new name and rebranding effort that followed the Acquisition. The U.S. Pipe name has been a recognized manufacturer of ductile iron pipeDIP for more than 115 years. We also license intellectual property for use in certain of our products from unaffiliated third parties. We believe that our patents, trademarks, trade names and trade secrets are adequately protected and that any expiration or other loss of one or more of our patents or other intellectual property rights would not have a material adverse effect upon our business, financial condition or results of operations.
Environmental, Health and Safety Matters
We are subject to a broad range of federal, state, provincial, local and foreign laws and regulations governing health and safety or the protection of the environment and natural resources, including, for example:
•the federal Resource Conservation and Recovery Act, or RCRA, and comparable state laws that impose requirements for the generation, handling, transportation, treatment, storage, disposal and cleanup of waste from our operations;
•the federal Comprehensive Environmental Response, Compensation, and Liability Act, or CERCLA, also known as “Superfund,” and comparable state laws that govern the cleanup of hazardous substances that may have been released at properties currently or previously owned or operated by us or locations which we have sent waste for disposal;
9
•the federal Clean Water Act, or CWA, and analogous state laws and regulations that can impose detailed permit requirements and strict controls on discharges of waste water from our facilities; and
•the federal Clean Air Act, or CAA, and comparable state laws and regulations that impose obligations related to air emissions, including federal and state laws and regulations to address greenhouse gas, or GHG, emissions.
Environmental pre-construction and operating permits are, or may be, required for certain of the Company’s operations, and such permits are subject to modification, renewal, and revocation. It is likely that we will be subject to increasingly stringent environmental standards in the future, particularly under air quality and water quality laws.laws, as well as laws enacted to reduce climate change. It is also likely that we will be required to make additional expenditures, which could be significant, relating to environmental matters such as pollution controls and carbon emissions, on an ongoing basis. As our operations involve, and have involved, the handling, transport and distribution of materials that are, or could be classified as, toxic or hazardous or otherwise as pollutants, there is some risk of contamination and environmental damage inherent in our operations and the materials and products we handle and transport. Consequently, we are subject to environmental laws that impose liability for historical releases of hazardous substances. We are also subject to a variety of health and safety laws and regulations dealing with occupational health and safety. Manufacturing sites can be inherently dangerous workplaces. Our sites often put our employees and others in close proximity with large pieces of mechanized equipment, moving vehicles, and manufacturing processes, and highly regulated materials and there is inherent risk of related liabilities in our operations. See Item 1A. Risk Factors.
We regularly monitor and review our operations, procedures, and policies for compliance with existing laws and regulations, changes in interpretations of existing laws and enforcement policies, new laws that are adopted, and new laws that we anticipate will be adopted that could affect our operations. TheFor health and safety regulations, the Occupational Safety and Health Administration, or OSHA, published a final rule in March 2016 decreasing the levels of crystalline silica dust exposuresets minimum standards; we have adopted programs internally that are intended to which workers can be exposed. This rule must be implemented by June 2018 and requires some of our manufacturing facilities to install new controls to reduce the levels of crystalline silica dust. The incurred and additional expected cost of compliance to the Company has not been and is not expected to be material. Excessive, prolonged inhalation of very small-sized particles of crystalline silica has been associated with lung diseases, including silicosis, and several scientific organizations and some states, such as California, have reported that crystalline silica can cause lung cancer. OSHA has established occupational thresholds for crystalline silica exposure as respirable dust. We monitor occupational exposures at our facilities and implement dust control procedures and/meet or make available appropriate respiratory protective equipment to maintain the occupational exposures at or below the appropriate levels.exceed these requirements.
Despite our compliance efforts, risk of environmental, health and safety liability is inherent in the operation of our businesses,business, as it is with other companies engaged in similar businesses, and there can be no assurance that environmental, health and safety liabilities will not have a material adverse effect on us in the future.
Our consolidated financial statements include estimated liabilities for future costs arising from environmental issues relating to our properties and operations. As of December 31, 2017,2021, the Company had accrued environmental liabilities of approximately $1.6$1.3 million. We believe these accruals are adequate to cover our costs for remedial measures that may eventually be required by environmental authorities with respect to known environmental matters. Our liabilities represent our best estimate of our probable future obligations for the
We have been named as a potentially responsible party, or PRP, at sites identified by the EPA or state regulatory agencies for investigation and remediation under CERCLA, or comparable state statutes, generally referred to as Superfund sites, including Sylacauga, AL, North Birmingham, AL, Portland, OR and Chattanooga, TN. With respect to these Superfund sites for which we have received PRP notices, we are entitled to contractual indemnity byfrom a third party, subject to the terms of the indemnity provisions contained in the relevant agreement. Our estimates of current liabilities factor in these indemnification rights and our assessment of the likelihood that the indemnitor will fulfill its obligations with respect to liabilities relating to such sites. To date, the indemnifying party has been fulfilling its indemnification obligation with respect to those Superfund sites, and we have no reason to believe it will not continue to do so. However, in the future, we can provide no assurance that the
indemnifying party will continue to honor its obligations, or that the existing indemnities will be sufficient to cover the liabilities for such matters.
Available Information
Our web site address is www.forterrabp.com. Information contained on our website or connected thereto does not constitute a part of this Annual Report on Form 10-K or any other filing we make with the Securities and Exchange Commission, or the SEC. We make available on this web site under the “Investor Relations” section, free of charge, our annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K,8-
10
K, and amendments to those reports, as soon as reasonably practicable after we electronically file those materials with, or furnish them to, the SEC. Alternatively, the public may read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. The SEC also maintains a web site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC at www.sec.gov. We also make available free of charge on our website our Corporate Governance Guidelines, our Code of Ethics, and the Charters of our Audit Committee, Nominating and Corporate Governance Committee, and Compensation Committee of our Board of Directors.
Item 1A. RISK FACTORS
Our business, operations and financial condition are subject to various risks and uncertainties. We have described below significant factors that may adversely affect our business, operations, financial performance and condition or industry. Additionally, the COVID-19 pandemic has amplified many of the other risks discussed below to which we are subject and, given the unpredictable, unprecedented, and fluid nature of the pandemic, it may also materially and adversely affect our business, financial condition, and operating results in ways that are not currently anticipated by or known to us or that we do not currently consider to present material risk.
Additionally, the COVID-19 pandemic has amplified many of the other risks discussed below to which we are subject and, given the unpredictable, unprecedented, and fluid nature of the pandemic, it may also materially and adversely affect our business, financial condition, and operating results in ways that are not currently anticipated by or known to us or that we do not currently consider to present material risk. You should carefully consider these factors, together with all of the other information in this Annual Report on Form 10-K and in other documents that we file with the SEC, before making any investment decision about our securities. These risks and uncertainties are not the only ones we face. Additional risk and uncertainties presently unknown to us or currently deemed immaterial also may impair our business operations. Adverse developments or changes related to any of the factors listed below or others could
materially and adversely affect our business, financial condition, results of operations, future prospects and growth.
Risk Factor Summary
This risk factor summary contains a high-level overview of certain of the principal factors and uncertainties that make an investment in our securities risky, including risks related to our industry and end markets; risks related to our business; production, supply chain and systems related risks; employee specific risks; miscellaneous business risk; indebtedness and liquidity related risks; risks related to the proposed merger; risks related to ownership of our common stock; and risks related to our tax receivable agreement. The following summary is not complete and should be read together with the more detailed discussion of these and the other factors and uncertainties that follows before making an investment decision regarding our securities. The principal factors and uncertainties that makes an investment in our securities risky include:
Risks RelatingRelated to Our Industry and End Markets
•Our business is based in significant part on government-funded infrastructure projects and building activities, and any reductions or re-allocation of spending or related subsidies in these areas could have a material adverse effect on us.
•Residential and non-residential construction activity is cyclical and influenced by many factors, and any reduction in the activity in one or both of these markets could have a material adverse effect on us.
•We engage in a highly competitive business and any failure to effectively compete could have a material adverse effect on us.
•Changes in construction activity levels in Texas could have a material adverse effect on us.
Risks Related to Our Business
•Our business, results of operations, financial condition, cash flows and Industrystock price have been and in the future may be adversely affected by the COVID-19 pandemic.
11
•Our dependence on key customers with whom we do not have long-term contracts and consolidation within our customers’ industries could have a material adverse effect on us.
•The seasonality of our business and its susceptibility to severe and prolonged periods of adverse weather and other conditions could have a material adverse effect on us.
Production, Supply Chain and Systems Related Risks
•Decreased availability or increases in the cost of raw materials could have a material adverse effect on us.
•A material disruption or capacity constraints at one or more of our manufacturing facilities or in our supply chain could have a material adverse effect on us.
•Delays in construction projects and any failure to manage our inventory could have a material adverse effect on us.
Employee Specific Risks
•Labor disruptions and other union activity could have a material adverse effect on us.
•We depend on the services of key executives and any inability to attract and retain key management personnel could have a material adverse effect on us.
•Any failure by us or the contractors with which we work to retain and attract necessary personnel or contract labor could have a material adverse effect on us.
Miscellaneous Business Risks
•Cybersecurity attacks may threaten our confidential information, disrupt operations and result in harm to our reputation and adversely impact our business and financial performance.
•We are subject to increasingly stringent environmental laws and regulations, and any failure to comply with any current or future laws or regulations could have a material adverse effect on us.
•Climate change and climate change legislation or regulations may adversely impact our business.
•Legal and regulatory claims and proceedings could have a material adverse effect on us.
•Any inability to successfully acquire businesses in the future could have a material adverse effect on us.
Indebtedness and Liquidity Related Risks
•The terms of our debt could have a material adverse effect on us.
•Our current indebtedness and any future indebtedness we may incur could have a material adverse effect on us.
•Credit and non-payment risks of our customers could have a material adverse effect on us.
Risks Related to the Proposed Merger
•We may not complete the proposed merger within the time frame we anticipate or at all, which could adversely affect our business.
•Our business is subject to restrictions while the merger is pending.
•The announcement and pendency of the merger may disrupt business relationships, lead to employee departures, or otherwise adversely affect our business.
Risks Related to Ownership of Our Common Stock
•The trading price of our common stock has been and may in the future be volatile and could decline substantially.
•The coverage of our business or our common stock by securities or industry analysts or the absence thereof could adversely affect our stock price and trading volume.
Risks Related to Our Tax Receivable Agreement
12
•We will be required to pay Lone Star for certain tax benefits, and these amounts are expected to be material.
•We will not be reimbursed for any payments made to Lone Star under the tax receivable agreement in the event that the tax benefits are disallowed.
Risks Related to Our Industry and End Markets
Our business is based in significant part on government-funded infrastructure projects and building activities, and any reductions or re-allocation of spending or related subsidies in these areas could have a material adverse effect on us.
Our business depends heavily on government spending for infrastructure and other similar building activities. As a result, demand for many of our products is heavily influenced by U.S. and Canadian federal government fiscal policies and tax incentives and other subsidies, as well as state and municipal funding of projects. The infrastructure projects in which we participate are typically funded directly by governments and/or privately-funded but are otherwise tied to or impacted by government policies and spending measures. Government infrastructure spending and governmental policies with respect thereto depend primarily on the availability of public funds, which is influenced by many factors, including governmental budgets, public debt levels, interest rates, existing and anticipated and actual federal, state, provincial and municipal tax revenues, government leadership and the general political climate, as well as other general macroeconomic and political factors. In addition, U.S. federal government funds may only be available based on states’ willingness to provide matching funding, and state funding may not be available, particularly in light of the negative impact of the COVID-19 pandemic on state budgets. Government spending is often approved only on a short-term basis and some of the projects in which our products are used require longer-term funding commitments. If government funding is not approved or funding is lowered, whether as a result of poor economic conditions, lower than expected revenues, competing spending priorities or other factors, it could limit infrastructure projects available, increase competition for projects, result in excess inventory and decrease sales, any of which could adversely affect the profitability of our business.
Additionally, certain regions or states may require or possess the means to finance only a limited number of large infrastructure projects and periods of high demand may be followed by years of little to no activity. There can be no assurances that governments will sustain or increase current infrastructure spending and tax incentive and other subsidy levels, and any reductions thereto or delays therein could have a material adverse effect on our business, financial condition and results of operations.
Residential and non-residential construction activity is cyclical and influenced by many factors, and any reduction in the activity in one or both of these markets could have a material adverse effect on us.
The construction industry and related markets are cyclical and have in the past been, and may in the future be, materially and adversely affected by general economic and global financial market conditions. These factors impact not only our business, but those of our customers and suppliers as well. This influence is true with respect to macroeconomic factors within North America, particularly within our geographic footprint in the United States and Eastern Canada. For example, in 2008, residential construction and non-residential construction activity in the United States dipped to historically low levels during the financial crisis. As a result, demand for many of our products in the United States dropped significantly. TheMore recently, the COVID-19 pandemic has impacted global supply chains, including pricing and availability of many of the materials used in residential and non-residentialconstruction. Continued supply chain issues within the construction markets in Canada also suffered during this time.industry could adversely affect demand for our products.
13
The markets in the construction industry in which we operate are also subject to other more specific factors. Residential construction activity levels are influenced by and sensitive to a number of factors, including mortgage availability, the cost of financing a home (in particular, mortgage terms and interest rates), unemployment levels, household formation rates, gross domestic product, residential vacancy and foreclosure rates, demand for second homes, existing housing prices, rental prices, housing inventory levels, building mix between single- and multi-family homes, consumer confidence, seasonal weather factors, the available labor pool and government regulation, policy and incentives. Non-residential construction activity is primarily driven by levels of business investment, availability of credit and interest rates, as well as many of the factors that impact residential construction activity levels.
We cannot control the foregoing factors, we cannot be certain that residential and althoughnon-residential construction activity and related spendingwill remain at current levels, have increased in recent years, there is still uncertainty regarding whether the recovery will be sustained, and there can be no assurances that there will not be any future downturns. There can be no assurances regarding whether more recentany growth in ourthese markets can be sustained or if demand will ever return to pre-2008 levels or historical averages.sustained. If construction activity in our markets, and more generally, does not continue to recover,remain at current levels, or if there are future downturns, whether locally, regionally or nationally, our business, financial condition and results of operations could be materially and adversely affected.
We engage in a highly competitive business and any failure to effectively compete could have a material adverse effect on us.
The markets in which we sell our products are highly competitive. We face significant competition from, depending on the segment or product, domestic and imported products produced by local, regional, national and international building product manufacturers, as well as privately owned single-site enterprises. Due in part to the costs associated with transporting our products to our customers, many of our sub-markets are relatively fragmented and include a number of regional competitors. Our primary competitors include Rinker Materials (a division of QUIKCRETE)QUIKRETE) and Oldcastle Inc.Infrastructure (a division of CRH plc), as well as numerous regional and local competitors, in our Drainage Pipe & Products segment, and McWane, Inc. and American Cast Iron Pipe Company in our Water Pipe & Products segment, particularly with respect to DIP.segment.
Competition among manufacturers in our markets is based on many factors but we primarily competewith significant emphasis on price. Our competitors may sell their products at lower prices because, among other things, they possess the ability to manufacture or supply similar products and services more efficiently or at a lower cost or have built a superior sales or distribution network. Some of our competitors may have access to greater financial or other resources than we do, which may afford them greater purchasing power, greater production efficiency, increased financial flexibility or more capital resources for expansion and improvement. In addition, some of our competitors are vertically integrated with suppliers or distributors and can leverage this structure to their advantage to offer better pricing to customers. Furthermore, our competitors’ actions, including restoring idled or expanding manufacturing capacity, competition from newly-designed or imported products or the entry of new competitors into one or more of our markets, particularly in the Drainage business where there are low barriers to entry, could cause us to lower prices in an effort to maintain our customer base. Certain of our products, including gravity pipe, are volume manufacturing products that are widely available from other manufacturers or distributors, with prices and volumes determined frequently based on participants’ perceptions of short-term supply and demand. Competitive factors, including industry overcapacity, could also lead to pricing pressures. For example, competitors may choose to pursue a volume policy to continue utilizing their manufacturing facilities or in attempt to gain market share, each to the detriment of maintaining prices. Excess product supply can result in significant declines in the market prices for these products, often within a short period of time. As a result, at times, to remain competitive, we may lower the price for any one or more of our products to or below our production costs, requiring us to sacrifice margins or incur losses. Alternatively, we may choose to forgo product sales or cease production at one or more of our manufacturing facilities. Conversely, at times when prices are maintained at higher levels, there is greater risk that foreign competitors may enter one or more of our markets, particularly with respect to DIP.
In addition to pricing, we also compete based on service, quality, range of products and product availability. Our competitors may be positioned to provide better service, including faster delivery time on products, and thereby establish stronger relationships with customers and suppliers. Our competitors may also sell preferred products, improve the design and performance of their products, develop a more comprehensive product portfolio, be better positioned to influence end-user product specifications or introduce new products with competitive
14
prices and performance characteristics. While the majority of our products are not subject to frequent or rapid stylistic changes, trends do evolve over time, and our competitors may do a better job of predicting market developments or adapt more quickly to new technologies or evolving customer requirements.
We also face competition from substitute and newly designed building products. For example, storm water pipe can be manufactured from concrete, steel, high-density polyethylene (HDPE), polypropylene (PP) or polyvinyl chloride (PVC) and potable water transmission infrastructure can be manufactured using HDPE or PVC. The market share
of HDPE and PP pipe, which compete with gravity pipe and concrete pressure pipe for certain applications, and HDPE and PVC pipe, which compete with DIP for certain applications, have increased in recent years. Governments in the past have provided, and may continue in the future, to provide incentives that support or encourage, or in certain instances pass regulations that require, the consideration ofor use of substitute products with which we compete. Lower costs and pricing of substitute products may challenge our ability to achieve pricing for our products at a level that is consistent with our business plans. Some of the substitute products with which we compete may also offer longer warranties than our typical product warranty, and we may face competitive pressures to offer longer warranties on our products, which could increase our riskexposure to claims in future years.years or cause us to lose business. Additionally, new construction techniques and materials will likely be developed in the future. Increases in customer or market preferences for any of these products could lead to a reduction in demand for our products, limit our ability to raise prices or otherwise adversely impact our competitive position.
Any failure by us to compete on price or service, to develop successful products and strategies or to generally maintain and improve our competitive position could have a material adverse effect on our business, financial condition and results of operations.
Changes in construction activity levels in Texas could have a material adverse effect on us.
We currently conduct a significant portion of our business in Texas, which we estimate represented more than 19%approximately 18% and 18% of our 20172021 and 2020 net sales. Residentialsales, respectively. Government-funded infrastructure spending, as well as residential and non-residential construction activity as well as government-funded infrastructure spending in each of these areas has declined from time to time, particularly as a result of slow economic growth, whether in the energy industry or otherwise. Local economic conditions depend on a variety of factors, including national economic conditions, local and state budgets, infrastructure spending and the impact of federal cutbacks. In addition, Texas is susceptible to severe weather and flooding, which can interrupt, delay or otherwise impact the timing of projects. Any decrease in construction activity in Texas could have a material adverse effect on our business, financial condition and results of operations.
A tightening of mortgage lending or mortgage financing requirements or other reductions in the availability of consumer credit or increases in its cost could have a material adverse effect on us.
We depend heavily on net sales generated from residential construction activity. Most home sales in the United StatesU.S. and Eastern Canada are financed through mortgage loans, and a significant percentage of renovation and other home repair activity is financed either through mortgage loans or other available credit. The financial crisis affectedTo the extent that the economy experiences a cyclical downturn, the financial position of many consumers may be impacted and caused financial institutions tomay tighten their lending criteria, as occurred after the 2008 financial crisis, each of which contributedcan and did contribute to a significant reduction in the availability of consumer credit. The mortgage lendingcredit and mortgage finance industries experienced significant instability because of, among other factors, a decline in property values and an increase in delinquencies, defaults and foreclosures. These developments resultedresult in a significant reduction in total new housing starts in the United StatesU.S. and consequently, a reduction in demand for our products in the residential sector. Similarly, the rate of interest payable on any mortgage or other form of credit will have an impact on the cost of borrowing. While base rates have remained relatively low in recent years, theyU.S. central bank authorities have recently begunindicated an intent to rise and may continueraise such rates in response to rise ininflationary pressures on the future. Any increase in interest rates willeconomy during 2022, which would increase the cost of borrowing, and may makemaking the purchase of a home less attractive, andwhich could reduce the number of new housing starts in the U.S. and Eastern Canada. Any future tightening of mortgage lending or other reductions in the availability of consumer credit or increases in its cost, including as a result of rising interest rates and inflation, could have a material adverse effect on our business, financial condition and results of operations.
15
Risks Related to Our Business
Our business, results of operations, financial condition, cash flows and stock price have been and in the future may be adversely affected by the COVID-19 pandemic.
Our operations and business have been adversely affected and could in the future be materially and adversely affected, whether directly or indirectly, by the COVID-19 pandemic and the resulting weakening of economic conditions in the United States and eastern Canada. Local, state, provincial and federal governmental authorities initially responded to the pandemic by implementing increasingly stringent measures in geographies where we operate to help control the spread of the virus, including restrictions on movement such as quarantines, “shelter in place,” “stay at home” orders, and travel restrictions, as well as restricting or prohibiting outright some or all forms of commercial and business activity, and other restrictions, including closures of school and childcare facilities. Certain states also enacted regulations that authorize local officials to close businesses where there if a lack of safety precautions in place or signs that transmission of the virus at the workplace has occurred. Although we were and have continued to be categorized as “essential” and therefore permitted to operate our facilities consistent with applicable local, state, provincial and federal orders, any changes in these governmental orders, including the imposition of new orders, changes to the extent or the duration thereof, or any further, more severe, actions taken by governmental authorities or that we may choose to take whether required or not could have a material adverse effect on our operations.
Our customers have been and could continue to be negatively impacted by the COVID-19 pandemic, including as a result of project delays and other adverse impacts on demand, which could result in adverse impacts on our sales and have a material adverse effect on our business, results of operations and financial condition. Similarly, our suppliers and other parts of our supply chain have experienced and could continue to experience disruptions and other adverse impacts as a result of the pandemic that could cause us to be unable to obtain key raw materials and supplies on a timely or cost-effective basis, or in some cases, at all, any of which could result in our being unable to service our customers’ demands, and adversely affect our business and results of operations. For example, prices for certain of our raw material costs, including costs for scrap metal, steel, cement, as well as other key materials needed in smaller amounts to produce and sell our products, such as coke, nitrogen gas, rubber gaskets, and magnesium ferrosilicon, which have historically fluctuated depending on, among other things, overall market supply and demand and general business conditions, were negatively impacted by both global and industry-wide supply chain disruptions, resulting in increases to our costs of goods sold and disruption in supply for some materials in certain of our areas. We have also encountered issues regarding timely receipt and in some cases availability of certain of these raw materials.
The COVID-19 pandemic, including any actions we have taken in response, has disrupted our internal operations, including by heightening the risk that a significant portion of our workforce will suffer illness or otherwise not be permitted or be unable to work, and required that certain of our employees work remotely, which has heightened certain risks, including those related to cybersecurity and internal controls. For example, during the second quarter of 2020, a small number of employees tested positive for COVID-19, which required us to temporarily close a small number of our manufacturing facilities, and throughout 2021 we experienced increasing numbers of employees who tested positive for COVID-19 and were required to quarantine, which impacted our ability to operate our facilities efficiently. Additionally, we cannot predict whether these conditions and concerns will continue or whether we will experience more significant or frequent disruptions in the future, including the complete closure of one or more of our facilities, which could cause delays in our ability to produce and deliver products to our customers and cause us to suffer reputational harm and incur penalties and other types of damages if we are not able to meet contractual obligations. In addition, in the event demand for our products is significantly reduced as a result of the COVID-19 pandemic and related economic impacts, we may need to assess different corporate actions and cost-cutting measures, including reducing our workforce or closing one or more facilities, and these actions could cause us to incur costs and expose us to other risks and inefficiencies, including whether we would be able to rehire our workforce or recommence operations at a given facility if our business experiences a subsequent recovery. A prolonged period of generating lower cash from operations or other pressures on our liquidity could adversely affect our financial condition, the achievement of our strategic objectives or require us to seek additional capital, which may not be available on favorable terms or at all.
16
The COVID-19 pandemic also adversely affected economies worldwide and significantly disrupted financial and other capital markets, causing a significant deceleration of economic activity. The continuing impact of this outbreak on the U.S. and world economies is uncertain and, depending on the severity of future strains, the impact of responsive government measures and the efficacy of vaccines and vaccine roll-outs, these adverse impacts could worsen, impacting all segments of the global economy, and result in a dispute with HeidelbergCementsignificant recession or worse. Although we initially took certain precautionary measures to preserve liquidity, including borrowing under our ABL Facility and suspending non-essential capital expenditures, we have since ended these measures, repaid the amounts borrowed under the ABL Facility and caught up on capital projects that were initially delayed early in the pandemic.
Considerable uncertainty still surrounds the COVID-19 virus and the pandemic's potential effects, and the extent and effectiveness of responses taken on local, national and global levels. While we expect the pandemic and related events will continue to have a negative effect on us, the paymentunpredictable and unprecedented nature and fluidity of an earnoutcurrent circumstances makes it impractical to identify all potential risks or estimate the full extent and scope of the impact on our business and industry, as well as national, regional and global markets and economies. However, our ability to conduct our business in connection with the Acquisitionmanner previously or currently expected could be materially and adversely affected, and any significant earnout paymentof the foregoing risks and uncertainties as well as those that have not yet manifested themselves or been identified could have a material adverse impact on our business, financial condition, results of operations and cash flows.
Our dependence on key customers with whom we are required to makedo not have long-term contracts and consolidation within our customers’ industries could have a material adverse effect on us.
Our business is dependent on certain key customers. In 2021 and 2020, Core & Main, our largest customer accounted for 18% and 16% of our net sales, respectively. As is customary in our industry, we do not enter into long-term contracts with many of our customers. As a result, our customers could stop purchasing our products, reduce their purchase levels or request reduced pricing structures at any time. We are currently engagedmay therefore need to adapt our manufacturing, pricing and marketing strategies in response to a dispute with HeidelbergCement regarding the earnout provisioncustomer who may seek concessions in return for its continued or increased business. In addition, a macroeconomic downturn or any other cause of consolidation in the purchase agreement entered into in connection with the Acquisition. As discussed in greater detail in Item 3, “Legal Proceedings,” HeidelbergCement has asserted (and has filed a lawsuit against us asserting) that a payment should be madeU.S. homebuilding industry or among our other customers, as occurred in the amountaftermath of $100.0 million. If it is determined that we are requiredthe 2008 financial crisis when a number of smaller businesses went out of business or were acquired, can significantly increase the market share and bargaining power of a limited number of customers and give them significant additional leverage to makenegotiate more favorable terms and place greater demands on us. A loss of one or more customers or a significant payment to HeidelbergCement, we may notmeaningful reduction in their purchases from us or further consolidation within our end markets could have sufficient cash to make such paymenta material adverse effect on our business, financial condition and may be required to incur additional indebtedness. We cannot be certain that we will be able to borrow any funds for this purpose under the termsresults of operations.
The seasonality of our business and its susceptibility to severe and prolonged periods of adverse weather and other conditions could have a material adverse effect on us.
Demand for our products in some markets is typically seasonal, with periods of snow or heavy rain negatively affecting construction activity. For example, sales of our products in Canada and the Northeast and Midwest regions of the United States are somewhat higher from spring through autumn when construction activity is greatest. Construction activity declines in these markets during the winter months in particular due to inclement weather, frozen ground and fewer hours of daylight. Construction activity can also be affected in any period by adverse weather conditions such as hurricanes, severe storms, torrential rains and floods, natural disasters such as fires and earthquakes and similar events, any of which could reduce demand for our products, push back existing indebtednessorders to later dates or on other terms acceptablelead to us, if at all. If incurred, additional indebtedness will subject us to additional interest expense, negatively impact our cash flow, increase the risk of a downgrade in our credit rating and could limitcancellations. Furthermore, our ability to incurdeliver products on time or at all to our customers can be significantly impeded by such conditions and events, such as those described above. Public holidays and vacation periods constitute an additional factor that may exacerbate certain seasonality effects, as building projects or industrial manufacturing processes may temporarily cease. These conditions, particularly when unanticipated, can leave both equipment and personnel underutilized. Additionally, the seasonal nature of our business has led to variation in our quarterly results in the past and may continue to do so in the future. This general seasonality of our business and any severe or prolonged adverse weather conditions or other indebtedness or make further acquisitions.similar events could have a material adverse effect on our business, financial condition and results of operations.
17
The use of our products is often affected by various laws and regulations in the markets in which we operate, any of which may have a material adverse effect on us.
The use of many of our products is subject to approvals by municipalities, state departments of transportation, engineers and developers. These approvals and specifications, including building codes, may affect the products our customers or their customers (the end users) are allowed or choose to use, and, consequently, failure to obtain or maintain such approvals or changes in building codes may affect the saleability of our products. Changes in applicable regulations governing the sale of some of our products or the failure of any of our products to comply with such requirements could increase our costs of doing business, reduce sales or otherwise have a material adverse effect on our business, financial condition and results of operations.
We are subject to increasingly stringent environmental laws and regulations, and any failure to comply with
any current or future laws or regulations could have a material adverse effect on us.
We are subject to federal, state, provincial, local and foreign laws and regulations governing the protection of the environment and natural resources, including those governing air emissions, wastewater discharges and the use, storage, discharge, handling, disposal, transport and cleanup of solid and hazardous materials and wastes. We are required to obtain permits from governmental authorities for certain operations, and if we expand or modify our facilities or if environmental laws change, we could be required to obtain new or modified permits.
Environmental laws and regulations, including those related to energy use and climate change, tend to become more stringent over time, and any future laws and regulations could have a material impact on our operations or require us to incur material additional expenses to comply with any such future laws and regulations. Future environmental laws and regulations may cause us to modify how we manufacture and price our products or require that we make significant capital investments to comply. For example, our manufacturing processes use a significant amount of energy, and increased regulation of energy use to address the possible emission of greenhouse gases could materially increase our manufacturing costs or require us to install emissions control or other equipment at some or all of our manufacturing facilities.
If we fail to comply with any existing or future environmental laws, regulations or permits, we could incur fines, penalties or other sanctions and suffer reputational harm. In addition, we could be held responsible for costs and damages arising from claims or liabilities under environmental laws and regulations, including with respect to any exposure to or release of hazardous materials or contamination at our facilities, whether presently or previously leased, operated, or owned, or at third-party waste disposal sites. We could also be subject to third-party claims from individuals for property damage, personal injury or nuisance if any releases from our property were to cause contamination of the air, soil or groundwater of areas near our facilities. These laws and regulations may also require us to investigate and, in certain instances, remediate contamination. Some of our sites have a history of industrial use, and while we apply strict environmental operating standards and undertake extensive environmental due diligence in relation to our facilities and acquisitions, some soil and groundwater contamination has occurred in the past at a limited number of sites. We could be held liable for the costs to address contamination of any real property we have ever owned, leased, operated or used, including as a disposal site. We could also be subject to third-party claims for property damage, personal injury or nuisance or otherwise as a result of violations of or liabilities under environmental laws in connection with releases of hazardous or other materials.
As of December 31, 2017,2021, we had accrued approximately $1.6$1.3 million for environmental liabilities. Additionally, we cannot completely eliminate the risk of future contamination. Any costs or other damage related to existing or future environmental laws, regulations or permits or any violations thereof could expose us to significant financial losses as well as civil and criminal liabilities, any of which could have a material adverse effect on our business, financial condition and results of operations.
Climate change and climate change legislation or regulations may adversely impact our business.
Many of our products, particularly in our Drainage Pipe & Products segment, are made from or use concrete, which utilizes Portland cement as a raw material, a material whose manufacturing process involves the emission of carbon dioxide, a greenhouse gas that scientists have attributed as a cause of climate change. Our products are also heavy and require transportation from our facilities to the site where they are used, which consumes energy. A number of governmental bodies have finalized, proposed or are contemplating legislative
18
and regulatory changes in response to the potential effects of climate change, which could lead to additional legislative and regulatory changes in those countries, including by means of required reporting of greenhouse gas emissions, the use of alternative fuels, the use of carbon credits (including a "cap and trade" system) and/or a carbon tax. The U.S and Canada have agreed to the Paris Agreement, in connection with the United Nations Framework Convention on Climate Change, in which the signatories aim to reduce greenhouse gas emissions, or GHGs, as soon as possible and achieve a position of net zero GHGs by 2050. In the U.S., President Biden has stated his commitment to taking action to address climate change, including by rejoining the Paris Agreement, announcing goals to achieve a 50-52% reduction in GHGs from 2005 levels by 2030, a whole-of-government initiative supported by his National Climate Task Force, and by issuing various executive orders addressing climate change policy, including an executive order in December 2021 directing the federal government to achieve net-zero greenhouse gas emissions by 2050. Based on this focus, it is possible that environmental regulators and other agencies may use their rule-making authority and procurement decisions to further address climate change Although it is uncertain at this time precisely what actions various governmental bodies will take early to address the effects of climate change and to achieve the goals outlined in various agreements, including in what timeframe those actions would be implemented, it seems clear that changes to regulate carbon emissions are a key focus for the Biden Administration and other governmental entities, including California, which has had a cap and trade system in place since 2012. In light of the uncertainty around what regulations will be implemented, we cannot at this time reasonably predict what the costs of any future compliance requirements may be, but it is likely our costs will increase in relation to any climate change legislation and regulation concerning greenhouse gases, which could have an adverse effect on our future financial position, results of operations or cash flows.
Climate change may also have adverse physical or financial impacts on our business to the extent that it causes more severe or more frequent major storm events, flooding, drought-induced wildfires, or other shifts in weather patterns. Increases in the intensity and frequency of acute weather events have been linked to climate change, and this risk may increase to the extent global warming continues or is unabated. These types of extreme weather events may include disruptions to operations or production, disruptions to supply chains or damage to our physical plants, which could lead to reduced financial performance of our business.
In addition, regardless of whether governmental bodies enact legislation to address climate change and reduce GHGs, the public perception of carbon-intensive industries may change adversely over time and additional focus on environmental, social and governance issues by the public and/or investors may harm our business as it could damage our reputation, require us to expend resources in reducing our net carbon emissions, or reduce demand for our products, which could adversely impact our results of operations and cash flows.
We are subject to health and safety laws and regulations, and the costs to comply with, or any failure to comply with, any current or future laws or regulations could have a material adverse effect on us.
Manufacturing sites are inherently dangerous workplaces. Our sites often put our employees and others in close proximity with large pieces of mechanized equipment, moving vehicles, chemical and manufacturing processes, heavy products and items and highly regulated materials. As a result, we are subject to a variety of health and safety laws and regulations dealing with occupational health and safety. Unsafe work sites have the potential to increase employee turnover and raise our operating costs. Our safety record can also impact our reputation. We maintain functional groups whose primary purpose is to ensure we implement effective work procedures throughout our organization and take other steps to ensure the health and safety of our work force, but there can be no assurances these measures or other measures we may take in the future will be successful in preventing injuries, including severe injuries and fatalities, or violations of health and safety laws and regulations. Any failure to maintain safe work sites or violations of applicable law could expose us to significant financial losses and reputational harm, as well as civil and criminal liabilities, any of which could have a material adverse effect on our business, financial condition and results of operations.
Warranty and related claims could have a material adverse effect on us.
We generally provide warranties on our products against defects in materials and workmanship, the costs of which could be significant. Many of our products such as gravity pipe are buried underground and incorporated
19
into a larger infrastructure system, such as a city’s or municipality’s water transmission system, or built into the fabric of a building or dwelling. In most cases, it is difficult to access, repair, recall or replace these products. Additionally, some of our products, such as our pressure pipe, which is used in nuclear and coal-fired power generation factories, are used in applications where a product failure or construction defect could result in significant project delay, property damage, personal injury or death or could require significant remediation expenses. Because our products, including discontinued products, are long lasting, claims can also arise many years after their manufacture and sale. Additionally, productIn certain cases, we may also offer warranties for longer periods now for certain products to compete with certain substitutes, which could increase the number, size, and frequency of warranty claims in the future. Product failures may also arise due to the quality of the raw materials we purchase from third-party suppliers or the quality of the work performed by our customers, including installation work, matters for which we have little to no control, but which may still subject us to a warranty claim. We may also assume product warranty or other similar obligations in acquisition transactions regarding the products sold by the acquired businesses prior to the transaction date for which we are not indemnified pursuant to the terms of the relevant transaction documentation. Our quality control systems and procedures and those of our suppliers and customers cannot test for all possible conditions of use or identify all defects in the design, engineering or specifications of one of our products or the raw materials we use before they are put to their intended purpose. Therefore, there can be no assurances that we will not supply defective or inferior products that cause product or system failure, which could give rise to potentially extensive warranty and other claims for damages, as well as negatively impact our reputation and the perception of our product quality and reliability. While we have established reserves for warranty and related claims that we believe to be reasonable, these claims may exceed our reserves and any such excess and any negative publicity and other issues related to such claims could have a material adverse effect on our business, financial condition and results of operations.
Sharing our brand name and logo could have a material adverse effect on us.
We share the “Forterra” brand with the operator of HeidelbergCement's former building products business in the United Kingdom, or Forterra UK, a public company listed on the London FTSE. Forterra UK is no longer affiliated with us and, to our knowledge, operates solely in the United Kingdom. We have no control over Forterra UK’s use of the “Forterra” name and logo in Europe. Any actions or negative publicity related to Forterra UK and its products could have a material adverse effect on our business, financial condition and results of operations.
Production, Supply Chain and Systems Related Risks
Decreased availability or increases in the cost of raw materials could have a material adverse effect on us.
Our ability to offer our products to our customers is dependent upon our ability to obtain adequate supplies of raw materials at reasonable costs, such as cement, aggregate, steel and scrap iron. Raw material prices for certain raw materials that are key to our products, such as steel and scrap metal, have been volatile in recent years, and the cost of some of our most critical raw materials was significantly increased in 2021 over prior years as the demand for such raw materials was significantly inflated. Increased demand for these materials could lead to the continued In addition, changes in trade policy can also impact the price and availability of raw materials. In particular, changes in U.S. trade policy, including the imposition of any tariffs by the U.S. or foreign governments, may negatively impact the availability and price of raw materials used in our production. In particular, in 2018 and 2019, the U.S. government imposed tariffs and quotas on certain imported steel articles, and other countries, such as Canada, have implemented retaliatory tariffs on certain U.S. imports, including steel. These actions resulted in increased prices for both U.S. and non-U.S. steel, one of our main raw material inputs, and the continued imposition of these tariffs, increases in tariff rates, additional tariffs on other goods, or further retaliatory actions from other governments may result in higher costs for us, and there can be no assurance we will be able to pass any of the increases in raw material costs directly resulting from the tariff to our customers. Such actions may also result in more difficulty or the inability to obtain needed materials.
Suppliers are also subject to their own viability concerns from economic, market and other pressures. In particular, many suppliers may decrease capacity during financial downturns or due to other market factors such as depressed prices. This decreased capacity, along with strong global demand for certain raw materials, has at
20
times caused and may continue to cause tighter supply and significant price increases. Factors such as adverse weather conditions and other natural disasters, as well as political and other social instability, have and will continue to disrupt raw material supplies and impact prices.
Although we have agreements with our raw material suppliers, these agreements are generally terminable by either party on limited notice or contain prices that are based upon the volume of our total purchases. To the extent agreements with any of our raw material suppliers are terminated or we need to purchase additional raw materials in the open market, there can be no assurance that we could timely find alternative sources in reasonable quantities or at reasonable prices. Furthermore, given the global issues with supply chains caused by the ongoing COVID-19 pandemic, certain raw materials may be difficult to acquire at all or may be delayed in their delivery, which may cause delays in our ability to meet production schedule for our customers and timely deliver our products. In addition, sudden or unanticipated changes in sources for certain raw materials, such as cement, may require us to engage in testing of our products for quality assurance, which also could cause delays in our ability to meet our production schedule and timely deliver products. Changes in U.S. trade policy and reactions of other governments to those changes could also negatively impact the availability of certain raw materials, such as steel, as the demand for U.S. steel could increase as a result of these changes. The inability to obtain any raw materials or unanticipated changes with respect to our suppliers could negatively impact our ability to manufacture or deliver our products and to meet customer demands.
We are susceptible to raw material price fluctuations. In recent years, prices of the raw materials we use have at times fluctuated and may be susceptible to significant price fluctuations in the future. For example, in 2021, according to industry average prices, the costs of our scrap steel, a major input in DIP, were on average at least 50% higher than in 2020 and much higher than the average price of each of the prior five years. Because of the volatility of these prices, we cannot predict whether the trend of inflation will continue during 2022 and beyond. We have hedged our positions with respect to certain raw materials in the past and may do so in the future, but we currently have no hedging in place regarding our raw material needs and are therefore more susceptible to any short-term price fluctuations. We generally attempt to pass increased costs, including higher raw material prices and government imposed costs, on to our customers, but the timing between acceptance of a customer order and the purchase of raw materials needed to fulfill such order, pricing pressure from our competitors, the market power of our customers or other pricing factors may limit our ability to pass on such price increases. If we cannot fully-offset increases in the cost of raw materials through other cost reductions, or recover these costs through price increases or otherwise, we could experience lower margins and profitability, which could have a material adverse effect on our business, financial condition and results of operations.
A material disruption or capacity constraints at one or more of our manufacturing facilities or in our supply chain could have a material adverse effect on us.
We own and operate manufacturing facilities of various ages and levels of automated control and rely on a number of third parties as part of our supply chain, including for the efficient distribution of products to our customers. Any disruption at one of our manufacturing facilities or within our supply chain could prevent us from meeting demand or require us to incur unplanned capital expenditures. Older facilities and equipment are generally less energy efficient and are at an increased risk of breakdown or equipment failure, resulting in unplanned downtime. Any unplanned downtime at our facilities may cause delays in meeting customer timelines, result in damages claims, including liquidated damages, or cause us to lose or harm customer relationships. Additionally, we require specialized equipment to manufacture certain products, and if any of our manufacturing equipment fails, the time required to repair or replace this equipment could be lengthy, which could result in extended downtime at the affected facility. Any unplanned repair or replacement work can also be very expensive. Moreover, manufacturing facilities can unexpectedly stop operating because of events unrelated to us or beyond our control, including fires and other industrial accidents, floods and other severe weather events, natural disasters, environmental incidents or other catastrophes, utility and transportation infrastructure disruptions, shortages of raw materials, and acts of war or terrorism. Work stoppages, whether union-organized or not, can also disrupt operations at manufacturing facilities. Furthermore, we are generally responsible for delivering products to the customer and, while we deliver a small percentage of our products directly to the customer using our own fleet, we outsource this function and depend on third parties to deliver the vast majority of our products, primarily by truck with some reliance on rail where possible. Any shortages in trucking or rail capacity or any
21
increase in the cost thereof, whether as a result of strikes, slowdowns, a shortage of drivers, other disruption to the highway or rail systems, or other unrelated transportation issues could limit our ability to deliver our products in a timely and cost-effective manner or at all. Any material disruption at one or more of our facilities or those of our customers or suppliers or otherwise within our supply chain, whether as a result of downtime, facility damage, an inability to deliver our products or otherwise, could prevent us from meeting demand, require us to incur unplanned capital expenditures or cause other material disruption to our operations, any of which could have a material adverse effect on our business, financial condition and results of operations.
Delays in construction projects and any failure to manage our inventory could have a material adverse effect on us.
Many of our products are used in water transmission and distribution projects and other large-scale construction projects which generally require a significant amount of planning and preparation before construction commences. However, construction projects can be delayed and rescheduled for a number of reasons, including unanticipated soil conditions, adverse weather or flooding, changes in project priorities, financing issues, difficulties in complying with environmental and other government regulations or obtaining permits and additional time required to acquire rights-of-way or property rights. These delays or reschedulings may occur with too little notice to allow us to replace those projects in our manufacturing schedules or to adjust production capacity accordingly, creating unplanned downtime, increased costs and inefficiencies in our operations and increased levels of excess or obsolete inventory. Additionally, we maintain an inventory of certain products that meet standard specifications and are ultimately purchased by a variety of end users. However, our demand forecasts are not always accurate and unexpected changes in demand for these products, whether project-driven, because of a change in preferences or otherwise, can lead to increased levels of excess or obsolete inventory. Any delays in construction projects and our customers’ orders or any inability to manage our inventory, which can lead to impairment charges, could have a material adverse effect on our business, financial condition and results of operations.
Increased costs of energy could have a material adverse effect on us.
We use significant amounts of energy, including electricity, natural gas and gasoline, in the manufacturing, transportation, distribution and sale of our products, and the related expense is significant. While we have benefited from the relatively low cost of electricity and natural gas in recent years, energy prices have been and may continue to be volatile and these reduced prices may not continue. Prices for such energy products may also increase due to global conflicts and actions taken in response to them. In addition, proposed or existing government policies, including those to address climate change by reducing greenhouse gas emissions or the effects of hydraulic fracturing could result in increased energy costs. In addition, factors such as international political and military instability, adverse weather conditions and other natural disasters may disrupt fuel supplies and increase prices in the future. Additionally, because we and other manufacturers in our industry are often responsible for delivering products to the customer, we are further exposed to increased energy prices as a component of our transportation costs. While we generally attempt to pass increased costs, including higher energy costs, on to our customers, pricing pressure from our competitors, the market power of our customers or other pricing factors may limit our ability to do so, and any increases in energy prices could have a material adverse effect on our business, financial condition and results of operations.
Our business and financial performance could be adversely impacted based on disruptions, delays, outages of our information technology systems and computer networks.
Our manufacturing facilities as well as our sales and service activities depend on the efficient and uninterrupted operation of complex and sophisticated information technology systems and computer networks, which are subject to failure and disruption. These and other problems may be caused by system updates, natural disasters, malicious attacks, human error, accidents, power disruptions, telecommunications failures, acts of terrorism or war, computer viruses, physical or electronic break-ins or other similar events. Additionally, because we have grown through various acquisitions, we have integrated and are integrating a number of disparate information technology systems across our organization, certain of which may be outdated and due for replacement, further increasing the likelihood of problems. We may in the future replace and integrate systems or
22
implement new technology systems, but these updates may not be successful, they may create new issues we currently do not face, or significantly exceed our cost estimates.
We outsource certain portions of the operations of our information technology systems to a third party. Any failure of us or of our third party provider to effectively operate such systems could cause a disruption in our information technology systems. Any disruption in our information technology systems could interrupt or damage our operations and our ability to meet customer needs as well as our ability to maintain effective controls. These events could damage our reputation and cause us to incur unanticipated liabilities, including financial losses from remedial actions, business interruptions, loss of business and other unanticipated costs which may not be covered by insurance. Despite the defensive measures we have taken to protect our data and information technology, our systems could be vulnerable to disruption and any such disruption and the resulting fallout could have a material adverse effect on our business, financial condition and results of operations.
Employee Specific Risks
Labor disruptions and other union activity could have a material adverse effect on us.
As of December 31, 2021, approximately 33% of our workforce was covered by collective bargaining agreements, and approximately 46% of these employees were included in collective bargaining agreements that are due to expire within one year. If negotiations to renew expiring collective bargaining agreements are not successful or become unproductive, the union could take actions such as strikes, work slowdowns or work stoppages. Such actions at any one of our facilities could lead to a plant shut down or a substantial modification to employment terms, thereby causing us to lose net sales or incur increased costs. We have not had any recent union-organized work stoppages in the United States, Canada or Mexico; however, we have experienced one union organizing effort directed at our non-union employees in the past ten years. There can be no assurances there will not be additional union organizing efforts, strikes, work slowdowns or work stoppages in the future. Any such disruption, or other issue related to union activity, could have a material adverse effect on our business, financial condition and results of operations.
We depend on the services of key executives and any inability to attract and retain key management personnel could have a material adverse effect on us.
Our key management personnel, including our Chief Executive Officer and Chief Financial Officer, are important to our success because they are instrumental in setting our strategic direction, operating our business and identifying expansion opportunities. Additionally, as our business grows, we may need to attract and hire additional management personnel. We have employment agreements with some members of senior management; however, we cannot prevent our executives from terminating their employment with us, and any replacements we hire may not be as effective. While we strive to mitigate the negative impact associated with changes our senior management team, there may be uncertainty among investors, employees, customers and others concerning our future direction and performance. Our ability to retain our key management personnel or to attract additional management personnel or suitable replacements when needed is dependent on a number of factors, including the competitive nature of the employment market. Any failure to retain key management personnel or to attract additional or suitable replacement personnel could have a material adverse effect on our business, financial condition and results of operations.
Any failure by us or the contractors with which we work to retain and attract necessary personnel or contract labor could have a material adverse effect on us.
Competition for hiring new and retaining existing qualified personnel is intense and our success depends in part on our ability to retain, attract and train necessary personnel, including engineering and other skilled technical personnel. Our experienced sales team has also developed a number of meaningful customer relationships that would be difficult to replace. We compete with other companies for many employees in hourly positions, which have historically had high turnover rates. Without a sufficient number of qualified employees in each of these areas, the productivity and profitability of our operations and manufacturing quality could suffer.
23
Additionally, our business relies on the ability of the contractors who install our products to obtain qualified employees, including experienced supervisors and foreman, and a shortage in the supply of these skilled personnel could cause delays in customer’s ability to take shipments of our products.
Labor shortages may impact our ability to hire skilled or unskilled workers with the necessary experience. For example, the reduction in demand for products in our industry during the financial crisis led to a number of both skilled and unskilled workers leaving our industry permanently, reducing an already limited pool of available and qualified personnel. In addition, the COVID-19 pandemic led to a decreased labor force size and participation rates, and we have observed an overall tightening and increasingly competitive labor market in many of our geographies, which causes increased costs to attract and retain qualified workers. Furthermore, if new or more restrictive immigration legislation is enacted at the federal level or in states in which we do business, or if existing regulations are interpreted or enforced differently, these changes could further tighten certain labor markets.
If we are unsuccessful in hiring and retaining the necessary workforce, we may incur additional costs to run our business. Many of these positions have historically had high turnover rates, which can lead to increased training and retention costs. Our ability to control labor costs is also subject to numerous external factors, including prevailing wage rates, the impact of legislation or regulations governing wages, regulations governing payment of workers.
There can be no assurances the labor pool from which we or the contractors with whom we work hire will increase or remain stable, nor that we will be able to control labor costs. Any failure by us or the contractors with which we work to retain our existing personnel or attract and train additional qualified personnel at reasonable costs could have a material adverse effect on our business, financial condition and results of operations.
Miscellaneous Business Risks
Cybersecurity attacks may threaten our confidential information, disrupt operations and result in harm to our reputation and adversely impact our business and financial performance.
Cybersecurity attacks across industries, including ours, are increasing in sophistication and frequency and may range from uncoordinated individual attempts to measures targeted specifically at us. These attacks include but are not limited to, malicious software or viruses, attempts to gain unauthorized access to, or otherwise disrupt, our information systems, attempts to gain unauthorized access to business, proprietary or other confidential information, and other electronic security breaches that could lead to disruptions in critical systems, unauthorized release of confidential or otherwise protected information and corruption of data. Cybersecurity failures may be caused by employee error, malfeasance, system errors or vulnerabilities, including vulnerabilities of our vendors, suppliers, and their products. We have been subject to cybersecurity attacks in the past, including breaches of our IT systems that exposed certain confidential business information as well as ransomware attacks on non-critical business systems. Based on information known to date, past attacks have not had a material impact on our business, financial condition or results of operations. We may experience these and different types of attacks in the future, potentially with more frequency or sophistication.
Failures of our IT systems as a result of cybersecurity attacks or other disruptions could result in a breach of critical operational or financial controls and lead to a disruption of our operations, commercial activities or financial processes. Cybersecurity attacks or other disruptions impacting significant customers and/or suppliers could also lead to a disruption of our operations or commercial activities. Despite our attempts to safeguard our systems and mitigate potential risks, there is no assurance that such actions will be sufficient to prevent cyberattacks or security breaches that manipulate or improperly use our systems or networks, compromise confidential or otherwise protected information, destroy or corrupt data, or otherwise disrupt our operations. The occurrence of such events could have a material adverse effect on our business, financial condition and results of operations.
Legal and regulatory claims and proceedings could have a material adverse effect on us.
24
We are subject to claims, litigation and regulatory proceedings in the normal course of business and could become subject to additional claims in the future, some of which could be material. For example, we have been, and may in the future be, subject to claims for product liability, construction defects, project delay, personal injury, property and other damages as well as allegations regarding compliance with mandated product specifications. Claims and proceedings, whether or not they have merit and regardless of the outcome, are typically expensive and can divert the attention of management and other personnel for significant periods of time. Additionally, claims and proceedings can impact customer confidence and the general public’s perception of our company and products, even if the underlying assertions are proven to be false.
We are also currently a defendant, together with several of our current and former officers and directors, in three putative class action lawsuits,a shareholder derivative suit, and in the past have been a defendant in other similar suits, each filed by a plaintiffplaintiffs seeking damages against the Company for allegations of violations of United States laws regulating securities, as discussed in greater detail in Item 3, "Legal Proceedings," and Note 1516 to theour consolidated financial statements. Lawsuits involving us, or our current or former officers and directors, could result in significant expense and divert attention and resources of our management and other key employees. In addition to any damages we may be required to pay, we are generally obligated to indemnify our current and former directors and officers in connection with lawsuits and related settlement amounts. Such amounts could exceed the coverage provided under our insurance policies.
While we have established reserves we believe to be reasonable under the facts known, the outcomes of litigation and similar disputes are often difficult to reliably predict and may result in decisions or settlements that are contrary to, or in excess of, our expectations, and losses may exceed our reserves. In addition, various factors and developments could lead us to make changes in our current estimates of liabilities and related insurance receivables or make new or modified estimates as a result of a judicial ruling or judgment, settlement, regulatory development or change in applicable law. Any claims or proceedings, particularly those in which we are
unsuccessful or for which we did not establish adequate reserves, could harm our reputation and could have a material adverse effect on our business, financial condition and results of operations or cash flows.operations.
The consummation of an acquisition also exposes us to significant risks and additional costs. We may not accurately assess the value, strengths, weaknesses or potential profitability of an acquisition target. Furthermore, we may not be able to fully or successfully integrate an acquired business or realize the expected benefits and synergies following an acquisition. Business and operational overlaps may lead to hidden costs. These costs can include unforeseen pre-acquisition liabilities or the impairment of customer relationships or certain acquired assets such as inventory and goodwill. We may also incur costs and inefficiencies to the extent an acquisition expands the industries, markets or geographies in which we operate due to our limited exposure to and experience in a given industry, market or region. Significant acquisitions may also require that we incur additional debt to finance the transaction, which could be substantial and limit our flexibility in using our cash flow from operations for other purposes. Acquisitions can also involve post-transaction disputes with the counterparty regarding a number of matters, including a purchase price or other working capital adjustment or liabilities for
25
which we believe we were indemnified under the relevant transaction agreements, such as environmental liabilities or pension or benefit obligations retained by the seller, including certain environmental and benefit obligations in connection with our U.S. Pipe Acquisition and certain pension obligations we assumed pursuant to the Acquisition and our acquisition of Cretex. We are also engaged in other indemnification and other post-closing disputes with certain of our transaction counterparties. Our inability to realize the anticipated benefits of an acquisition as well as other transaction-related issues could have a material adverse effect on our business, financial condition and results of operations.
In July 2012, we entered into a joint venture agreement with Americast, Inc., now known as Eagle Corporation, to form Concrete Pipe & Precast LLC. From time to time, we may enter into additional joint ventures as part of our growth strategy. The nature of a joint venture requires us to share control with unaffiliated third parties. If our joint venture partners do not fulfill their contractual and other obligations, the affected joint venture may be unable to operate according to its business plan, and we may be required to increase our level of commitment. Differences in views among joint venture participants could also result in delays in business decisions or otherwise, failures to agree on major issues, operational inefficiencies and impasses, litigation or other issues. Third parties may also seek to hold us liable for the joint ventures’ liabilities. These issues or any other difficulties that cause a joint venture to deviate from its original business plan could have a material adverse effect on our business, financial condition and results of operations.
Any inability to protect our intellectual property or claims that we infringe on the intellectual property rights of others could have a material adverse effect on us.
We rely on a combination of patents, trademarks, trade names, confidentiality and nondisclosure clauses and agreements, and other unregistered rights to define and protect our rights to our brand and the intellectual property used in certain of our products, including the innovative technologies relating to storm water management acquired in the Bio Clean Acquisition. We also rely on product, industry, manufacturing and market “know-how” that cannot be registered and may not be subject to any confidentiality or nondisclosure clauses or agreements. However, we cannot guarantee that any of our registered or unregistered intellectual property rights or our know-how, or claims thereto, will now or in the future successfully protect our intellectual property , or that our rights will not be circumvented or successfully opposed or otherwise challenged. We also cannot guarantee that applications filed will be approved. To the extent that our intellectual property rights are not sufficient, third parties, including competitors, may be able to commercialize our innovations or products or use our know-how. Additionally, we have faced in the past and may in the future face claims that we are infringing the intellectual property rights of others, including with respect to both existing and new technologies we use. If any of our products are found to infringe the patents or other intellectual property rights of others, our manufacture and sale of such products could be significantly restricted or prohibited and we may be required to pay substantial damages or on-going licensing fees. Any inability to protect our intellectual property rights or any misappropriation of the intellectual property of others could have a material adverse effect on our business, financial condition and results of operations.
Our foreign operations could have a material adverse effect on us.
We operate production facilities in Canada and Mexico and we are therefore subject to a number of risks specific to these countries. These risks include social, political and economic instability, unexpected changes in regulatory requirements, tariffs and other trade barriers, currency exchange fluctuations, acts of war or terrorism and import/export requirements. In addition, we have a limited number of sales to other foreign jurisdictions, primarily concentrated in the Dominican Republic and Bolivia. Our consolidated financial statements are reported in U.S. dollars with international transactions being translated into U.S. dollars. If the U.S. dollar strengthens in relation to the Canadian dollar, our U.S. dollar reported net sales and income will decrease. Additionally, since we incur costs in foreign currencies, fluctuation in those currencies’ value can negatively impact manufacturing and selling costs. See Item 7A, “Quantitative and Qualitative Disclosures about Market Risk.” There can be no assurances that any of these factors will not materially impact our production cost or otherwise have a material adverse effect on our business, financial condition and results of operations.
Changes in tax laws could adversely affect us.
26
We regularly assess our future ability to utilize tax benefits, including those in the form of net operating loss, tax credit and other tax carryforwards, that are recorded as deferred income tax assets on our balance sheets to determine whether a valuation allowance is necessary. A reduction in, or disallowance of, these tax benefits resulting from a legislative change or adverse determination by a taxing jurisdiction could have an adverse impact on our financial results and liquidity.
Changes in corporate tax rates, the realizability of the net deferred tax assets relating to our U.S. operations, the taxation of foreign earnings and the deductibility of expenses contained in the Tax Cuts and Jobs Act of 2017, or the TCJA, or other tax reform legislation, including the Coronavirus Aid, Relief, and Economic Security Act of 2020, (“CARES Act”), could have a material impact on the value of our deferred tax assets, could result in significant one-time charges and could increase our future U.S. tax expense. See Note 20 to our consolidated financial statements.
Significant judgment is required in determining our domestic and international provision for income taxes, deferred tax assets or liabilities and in evaluating our tax positions on a worldwide basis. While we believe our tax positions are consistent with the tax laws in the jurisdictions in which we conduct our business, it is possible these positions may be contested or overturned by jurisdictional tax authorities, which may have a significant impact on our tax provision for income taxes. Tax laws are dynamic and subject to change as new laws are passed and new interpretations of the laws are issued or applied.
Insufficient insurance coverage could have a material adverse effect on us.
We maintain property, business interruption, counterparty and liability insurance coverage that we believe is consistent with industry practice. However, our insurance program does not cover, or may not adequately cover, every potential risk associated with our business and the consequences thereof. In addition, market conditions or any significant claim or a number of claims made by or against us could cause our premiums and deductibles to increase substantially and, in some instances, our coverage may be reduced or become entirely unavailable. In the future, we may not be able to obtain meaningful coverage at reasonable rates for a variety of risks, including certain types of environmental hazards and ongoing regulatory compliance. In addition, we self-insure a portion of our exposure to certain matters, including employee health care claims of up to $500,000 per covered individual per year and wage-payment obligations for short-term disability. If our insurance coverage is insufficient, if we are not able to obtain sufficient coverage in the future, or if we are exposed to significant losses as a result of the risks for which we self-insure, any resulting costs or liabilities could have a material adverse effect on our business, financial condition and results of operations.
Our internal control over financial reporting may not be effective, and our independent registered public accounting firm may not be able to certify as to their effectiveness, which could have a material adverse effect on our business and reputation.
As a public company, we are required to comply with the SEC’s rules implementing Sections 302 and 404 of the Sarbanes-Oxley Act, which require management to certify financial and other information in our quarterly and annual reports and provide an annual management report on the effectiveness of our control over financial reporting. Our independent registered public accounting firm is also required to formally attest to the effectiveness of our internal control over financial reporting pursuant to Section 404.
Although we currently do not have any material weaknesses in our internal control over financial reporting, we have historically experienced such material weaknesses. To remediate our prior material weaknesses, we have needed to undertake various actions, such as implementing additional internal controls and procedures and hiring additional accounting or internal audit staff, and we may need to do so in the future to maintain the effectiveness of our internal control over financial reporting and other controls. Testing and maintaining internal control can divert our management’s attention from other matters that are important to the operation of our business. If we identify material weaknesses in our internal control over financial reporting or are unable to comply with the requirements of Section 404 of the Sarbanes-Oxley Act or assert that our internal control over financial reporting is effective, or if our independent registered public accounting firm is unable to express an opinion as to the
27
effectiveness of our internal control over financial reporting, investors may lose confidence in the accuracy and completeness of our financial reports and the market price of our common stock could be negatively affected, and we could become subject to investigations by the SEC or other regulatory authorities, which could require additional financial and management resources.
We are a holding company and depend on the cash flow of our subsidiaries.
We are a holding company with no material assets other than the equity interests of our subsidiaries. Our subsidiaries conduct substantially all of our operations and own substantially all of our assets and intellectual property. Consequently, our cash flow and our ability to meet our obligations and pay any future dividends to our stockholders depends upon the cash flow of our subsidiaries and their ability to make payments, directly or indirectly, to us in the form of dividends, distributions and other payments. Any inability on the part of our subsidiaries to make payments to us could have a material adverse effect on our business, financial condition and results of operations.
Risks Relating to our Indebtedness and Liquidity
The terms of our debt could have a material adverse effect on us.
We have substantial debt and may incur additional debt. As of December 31, 2021, we had approximately $902.4 million of total debt. Our credit facility contains a number of significant restrictions and covenants that generally restrict our business and limit our ability to, among other things:
•dispose of certain assets;
•incur or guarantee additional indebtedness;
•enter into new lines of business;
•make investments, intercompany loans or certain payments in respect of indebtedness;
•incur or maintain certain liens;
•enter into transactions with affiliates;
•engage in certain sale and leaseback transactions;
•declare or pay dividends and make other restricted payments, including the repurchase or redemption of our stock; and
•engage in mergers, consolidations, liquidations and certain asset sales.
In addition, our ability to borrow under the Revolver is limited by the amount of the borrowing base applicable to U.S. dollar and Canadian dollar borrowings. Any negative impact on the elements of our borrowing base, such as eligible accounts receivable and inventory, will reduce our borrowing capacity under the Revolver. Moreover, the Revolver provides discretion to the agent bank acting on behalf of the lenders to impose additional requirements on what accounts receivable and inventory may be counted toward the borrowing base availability, and to impose other reserves, which could materially impair the amount of borrowings that would otherwise be available to us. The credit facility also requires us to maintain certain financial ratios. See Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for more information regarding the terms of our credit facility and the indenture governing our senior secured notes dues due 2025. We are also party to a U.S. and a Canadian master lease under which we currently pay an aggregate of $17.1 million and $1.2 million (CAD) per annum, respectively, to lease certain properties through June 30, 2043. Each of these master lease agreements contain certain restrictions and covenants that limit, among other things, our use of and ability to sublease or discontinue use of the leased properties, our ability to consider strategic divestitures of properties that are leased and our ability to consolidate operations as may be appropriate in order to minimize operating costs. See Note 15 in our consolidated financial statements.
These and other similar provisions in these and other documents could have adverse consequences on our business and to our investors because they limit our ability to take these actions even if we believe that it would contribute to our future growth or improve our operating results. For example, these restrictions could limit our flexibility in planning for or reacting to changes in our business and our industry, thereby inhibiting our ability to
28
react to markets and potentially making us more vulnerable to downturns. These restrictions could also require that, based on our level of indebtedness, a significant portion of our cash flow from operations be used to make interest payments, thereby reducing the cash flow available for working capital, to fund capital expenditures or other corporate purposes and to generally grow our business. Furthermore, these restrictions could prevent us from pursuing a strategic transaction that we believe would benefit our company.
Our ability to comply with these provisions may be affected by events beyond our control. A breach of any of these provisions or any inability to comply with mandated financial ratios could result in a default, in which case the counterparties may have the right to declare all borrowings or other amounts due thereunder to be immediately due and payable. If we are unable to pay any amounts when due, whether periodic payments, at maturity or if declared due and payable following a default, the counterparties would have the right to proceed against the pledged collateral securing the indebtedness. Therefore, the restrictions under these agreements and any breach of the covenants or failure to otherwise comply with the terms thereof could have a material adverse effect on our business, financial condition and results of operations.
Our current indebtedness and any future indebtedness we may incur could have a material adverse effect on us.
We expect that we will depend primarily on cash generated by our operations to pay our expenses and any amounts due under our credit facility and any other indebtedness we may incur. However, our business may not generate sufficient cash flows from operations in the future and any anticipated growth in revenues and cash flows may not be realized, either or both of which could result in us being unable to repay indebtedness or our inability to fund other liquidity or strategic needs. Our ability to make these payments depends on our future performance, which will be affected by financial, business, economic and other factors, many of which are beyond our control. If we do not have sufficient liquidity, we may be required to refinance all or part of our then existing debt, sell assets or borrow more money.
If we incur additional indebtedness, the risks related to our indebtedness that we currently face could intensify. In addition to the risk of higher interest rates and fees, the non-economic terms of any additional indebtedness may contain covenants and other terms restricting our financial, operating and strategic flexibility to an equal or greater extent as those imposed by our credit facility, the indenture governing our senior secured notes dues due 2025 and the master leases. Additional indebtedness may also include cross-default provisions such that, if we breach a restrictive covenant with respect to any of our indebtedness, or an event of default occurs, lenders may be entitled to accelerate all amounts owing under other outstanding indebtedness.
If we are required to refinance our indebtedness or otherwise incur additional indebtedness to fund strategic transactions or otherwise, any additional financing may not be available on terms favorable to us or at all. If, at such time, market conditions are materially different or our credit profile has deteriorated, the cost of refinancing our debt may be significantly higher than our indebtedness existing at that time, or we may not be able to refinance our debt at all. For example, our senior term loan matures in 2023 and, if interest rates continue to rise in the short- and longer-term, it could be more difficult and more expensive for us to refinance that debt as compared to the options that we would currently have. Any failure to meet any future debt service obligations or any inability to obtain any additional financing on terms acceptable to us or to comply therewith could have a material adverse effect on our business, financial condition and results of operations.
Credit and non-payment risks of our customers could have a material adverse effect on us.
As is customary in our industry, the majority of our sales are to customers on an open credit basis, with standard payment terms of 30 days. While we generally monitor the ability of our customers to pay these open credit arrangements and limit the credit we extend to what we believe is reasonable based on an evaluation of each customer’s financial condition and payment history, we may still experience losses because of a customer’s inability to pay. As a result, while we maintain what we believe to be a reasonable allowance for doubtful receivables for potential credit losses based upon our historical trends and other available information, there is a risk that our estimates may not be accurate, particularly in times of economic uncertainty and tight credit markets.
29
Any inability to collect customer receivables or inadequate provisions for doubtful receivables could have a material adverse effect on our business, financial condition and results of operations.
Our project-based business requires significant liquidity, and any inability to ensure adequate financing or guarantees for large projects in the future could have a material adverse effect on us.
The projects in which we participate, particularly in our pressure pipe business, can be capital-intensive and often require substantial liquidity levels. In line with industry practice, we receive prepayments from our customers as well as milestone payments. However, a change in prepayment patterns or our inability to obtain third-party guarantees in respect of such prepayments could force us to seek alternative financing sources, such as bank debt or in the capital markets, which we may not be able to do on terms acceptable to us or at all, any of which could have a material adverse effect on our business, financial condition and results of operations.
Certain of the contracts in our backlog may be adjusted, canceled or suspended by our customers and, therefore, our backlog is not necessarily indicative of our future revenues or earnings or even if performed, a good indicator of our future margins.margins, even if performed.
As of December 31, 2017,2021, our backlog totaled approximately $430$882.9 million. InIn accordance with industry practice, many of our contracts are subject to cancellation, reduction, termination or suspension at the discretion of the customer in respect of work that has not yet been performed. In the event of a project cancellation, we would generally have no contractual right to the total revenue reflected in our backlog, but instead would collect revenues in respect of all work performed at the time of cancellation as well as all other costs and expenses incurred by us through such date. Projects can remain in backlog for extended periods of time because of the nature of the project, delays in execution of the project and the timing of the particular services required by the project. Additionally, the risk of contracts in backlog being canceled, terminated or suspended generally increases at times, including as a result of periods of widespread macroeconomic and industry slowdown, weather, seasonality and many of the other factors impacting our business. Many of the contracts in our backlog are subject to changes in the scope of services to be provided as well as adjustments to the costs relating to the contracts. The revenue for certain contracts included in backlog are based on estimates. Therefore, the timing of performance on our individual contracts can affect greatly our margins and hence, future profitability. There is no assurance that backlog will actually be realized as revenues in the amounts reported or, if realized, will result in any estimated profits.
As is customary in some of our sub-markets,markets, we provide our customers with performance guarantees and other guarantee instruments, such as surety bonds, that guarantee the timely completion of a project pursuant to defined contractual specifications. We also enter into contractual obligations to pay liquidated damages to our
customers for project delays. We are required to make payments under these contracts, guarantees and instruments if we fail to meet any of the specifications. Some customers require the performance guarantees to be issued by a reputable and credit worthy financial institution in the form of a letter of credit, surety bond or other financial guarantee. Financial institutions consider our credit ratings and financial position in the guarantee approval process. Our credit ratings and financial position could make the process of obtaining guarantees from financial institutions more difficult and expensive. If we cannot obtain such guarantees from reputable and credit-worthy financial institutions on reasonable terms or at all, we could face higher financing costs or even be prevented from bidding on or obtaining new projects, and any of these or other related obstacles could have a material adverse effect on our business, financial condition and results of operations.
Our ability to raise capital in the future may be limited.
Our business and financial performance could be adversely impacted based on disruptions, delays, outagesoperations may consume resources faster than we anticipate. In the future, we may need to raise additional funds through the issuance of new equity securities, debt or a combination of both. However, any sale or perception of a possible sale by Lone Star, and any related decline in the market price of our information technology systems and computer networks.
30
dividends on our abilitycommon stock. If we issue additional equity securities, existing stockholders will experience dilution, and the new equity securities could have rights senior to maintain effective controls. These events could damagethose of our reputation and cause uscommon stock. Because our decision to incur unanticipated liabilities, including financial losses from remedial actions, business interruptions, loss of businessissue securities in any future offering will depend on market conditions and other unanticipated costs which may not be covered by insurance. Despitefactors beyond our control, we cannot predict or estimate the defensive measures we have taken to protectamount, timing or nature of our datafuture offerings. Thus, our stockholders bear the risk of our future securities offerings reducing the market price of our common stock and information technology,diluting their interest.
The phase-out of LIBOR could increase our systems could be vulnerable to disruptioninterest expense and any such disruption and the resulting fallout could have a material adverse effect on us.
LIBOR is the basic rate of interest used in lending between banks on the London interbank market.
Borrowings under our senior term loan and revolver use the London Interbank Offering Rate, or LIBOR, as a benchmark for establishing the applicable interest rate. The Financial Conduct Authority of the United Kingdom has announced that it plans to phase out LIBOR by the end of 2021. It is unclear if LIBOR will cease to exist at that time or if new methods of calculating LIBOR will be established such that it continues to exist after 2021. The U.S. Federal Reserve, in conjunction with the Alternative Reference Rates Committee, a steering committee comprised of large U.S. financial institutions, is considering replacing U.S. dollar LIBOR with a new index, the Secured Overnight Financing Rate, or SOFR, calculated using short-term repurchase agreements backed by Treasury securities. Whether or not SOFR, or another alternative reference rate, attains market traction as a LIBOR replacement tool remains in question. Although our borrowing arrangements provide for alternative base rates, , those alternative base rates historically would often have led to increased interest rates, in some cases significantly higher, than those we paid based on LIBOR, and may similarly be higher in the future. Therefore, if LIBOR ceases to exist, we will likely need to agree upon a replacement index with our lenders, which would require an amendment to our borrowing arrangements, and the interest rate thereunder will likely change.
The consequences of the phase out of LIBOR cannot be entirely predicted at this time. For example, we may not be successful in amending our borrowing arrangements to provide for a replacement rate. If any new or alternative base rate for calculating interest with respect to our outstanding indebtedness may not be as favorable or perform in the same manner as LIBOR and could lead to an increase in our interest expense or could impact our ability to refinance some or all of our existing indebtedness. In addition, the transition process may involve, among other things, increased volatility or illiquidity in financial markets, which could also have an adverse effect on us whether or not any replacement rate applicable to our borrowings is affected. Any such effects of the transition away from LIBOR, as well as other unforeseen impacts, may result in increased interest expense and other expenses, difficulties, complications or delays in connection with future financing efforts or otherwise have a material adverse impact on our business, financial condition, and results of operations.
Risks Related to the Proposed Merger
We may not complete the proposed merger within the time frame we anticipate or at all, which could adversely affect our business.
Completion of the merger is subject to a number of closing conditions, including, among others, the expiration or termination of the waiting period under the Hart-Scot-Rodino Antitrust Improvements Act of 1976, as amended, or the HSR Act, including any agreement with the United States Department of Justice, or the DOJ, to delay the Merger, or the HSR Condition. The DOJ has indicated that it will require conditions on the proposed transaction, including requiring the disposition of certain assets held by us and/or Quikrete. We and Quikrete have each entered into definitive agreements with various third parties to dispose of certain assets in order to secure the DOJ's approval of the merger, or the Divestiture Agreements. There can be no assurances that the dispositions contemplated by the Divestiture Agreements will be acceptable to the DOJ or sufficient to obtain the DOJ's approval of the merger prior to the outside date contained in the merger agreement or by the outside dates contemplated in each of the Divestiture Agreements. Further, while the parties have agreed to use their respective reasonable best efforts to obtain the required regulatory approvals, Quikrete and its affiliates will not be required to take, or agree to take, certain actions with respect to assets, businesses or product lines of Quikrete or any of its subsidiaries, or the Company or any of its subsidiaries, accounting for more than $80 million of EBITDA for the 12 months ended December 31, 2020, as defined in and measured in accordance with the merger
31
agreement. Therefore, Quikrete may not be required to agree to additional divestitures the extent that the DOJ requires divestitures beyond those currently contemplated by the Divestiture Agreements.
Each party’s obligation to consummate the merger is also subject to the absence of any order issued by any court of competent jurisdiction, other legal restraint or prohibition or any law enacted or deemed applicable by a governmental entity that prohibits or makes illegal the consummation of the merger; subject to certain qualifications, the accuracy of representations and warranties of the other party set forth in the merger agreement; and the performance by the other party in all material respects of its obligations under the merger agreement. Quikrete’s obligation to consummate the merger is also conditioned on, among other things, the absence of any material adverse effect, as defined in the merger agreement. In addition, the merger agreement may be terminated under certain specified circumstances, including if the merger has not been consummated on or before March 22, 2022, or the Outside Date. There is currently no assurance that the HSR Condition will be satisfied by the Outside Date. As a result, we cannot assure you that the merger will be completed, or that, if completed, it will be exactly on the terms set forth in the merger agreement or within the expected time frame.
If the merger is not completed within the expected time frame or at all, we may be subject to a number of material risks and our business, financial condition and results of operations will be harmed. The price of our common stock may decline to the extent that current market prices reflect a market assumption that the merger will be completed. We could be required to reimburse certain expenses of Quikrete or pay Quikrete a termination fee of $50.0 million if the merger agreement is terminated under specific circumstances described in the merger agreement. The failure to complete the merger may result in negative publicity and could negatively affect our relationship with our stockholders, employees, customers, suppliers and strategic partners. We may also be required to devote significant time and resources to litigation related to any failure to complete the merger or related to any enforcement proceeding commenced against us to perform our obligations under the merger agreement.
The merger agreement provides us with limited remedies in the event of a breach by Quikrete that results in termination of the merger agreement, including the right to a reverse termination fee payable under certain specified circumstances, as described in the merger agreement. We cannot assure you that a remedy will be available to us in the event of such a breach or that the damages we incur in connection with such breach will not exceed the amount of the reverse termination fee.
Our business is subject to restrictions while the merger is pending.
The merger agreement restricts the conduct of our business prior to the completion of the merger or termination of the merger agreement, generally requiring us to conduct our business in the ordinary course and subjecting us to a variety of specified limitations absent Quikrete’s prior written consent. The restrictions on our business activities include, among other things, restrictions on our ability to acquire other businesses and assets, dispose of our assets, make investments, enter into certain contracts, repurchase or issue securities, pay dividends, make capital expenditures above specified levels, amend our organizational documents and incur indebtedness above specified levels. These restrictions could prevent us from pursuing strategic business opportunities, taking actions with respect to our business that we may consider advantageous and responding in a timely and effective manner to competitive pressures and industry developments, any of which could adversely affect our business, and financial condition and results of operations.
The pendency of the merger may disrupt business relationships, lead to employee departures, or otherwise adversely affect our business.
The pendency of the merger and our efforts to complete the merger could create uncertainty surrounding and significantly disrupt our business. Uncertainty regarding our future could adversely affect our relationship with existing and potential customers, suppliers, vendors, strategic partners or others that deal with us. For example, clients and other counterparties may delay or defer decisions concerning entering into contracts or otherwise working with us, seek to change our existing business relationships or consider doing business with other companies rather than us. Competitors may also target our customers by highlighting potential uncertainties and other risks related to the merger. The pendency of the merger may also divert management’s attention and
32
We have been subjectincurred, and will continue to cybersecurity attacks in the past, including breaches of our information technology systems, and may experience them in the future, potentially with more frequency or sophistication. Based on information known to date, past attacks have not had a material impact on our financial condition or results of operations. However, failures of our information technology systemsincur, significant costs as a result of cybersecurity attacksthe merger.
We have incurred, and will continue to incur, significant direct and indirect costs and expenses in connection with the merger. These costs and expenses include fees for financial, legal and accounting advisors, facilities and systems costs in anticipation of consolidation, severance other potential employment-related costs and other transaction costs. We must pay substantially all of these amounts regardless of whether the merger is completed. There are a number of factors beyond our control that could affect the total amount or the timing of these costs and expenses, including the length of time required to obtain the required regulatory approvals and satisfy the other disruptionsconditions to closing the merger. If the merger is not completed, we will have incurred significant costs for which we will have received little or no benefit, which could result in a breach of critical operational or financial controls and lead to a disruption of our operations, commercial activities or financial processes. Cybersecurity attacks or other disruptions impacting significant customers and/or suppliers could also lead to a disruption of our operations or commercial activities. Despite our attempts to implement safeguard its systems and mitigate potential risks, there is no assurance that such actions will be sufficient to prevent cyber attacks or security breaches that manipulate or improperly use its systems or networks, compromise confidential or otherwise protected information, destroy or corrupt data, or otherwise disrupt its operations. The occurrence of such events could have a material adverse effect onadversely affect our business, financial condition and results of operations.
Litigation by purported stockholder plaintiffs and maintain effective internal control over financial reporting, or the inability of our independent registered public accounting firm to provide an unqualified report thereon, could have a material adverse effect on us.
The merger agreement prohibits us from engaging in any further discussions or solicitations regarding an alternative potential acquisition of the Company. This provision prevents us from affirmatively seeking offers from other possible acquirers that any of our registered or unregistered intellectual property rights or our know-how, or claims thereto, will now or in the future successfully protect what we consider to be the intellectual property underlying our products and business, or that our rights will not be successfully opposed or otherwise challenged. We also cannot guarantee that each application filed will be approved. To the extent that our innovations, products and name are not protected by patents or other intellectual property rights, third parties, including competitors, may be ablesuperior to commercialize our innovations or products or use our know-how. Additionally, we have faced in the past and may inpending merger. Further, under the future face claims that we are infringingterms of the intellectual property rights of others, including with respect to both existing and new technologies we use. If any of our products are found to infringe the patents or other intellectual property rights of others, our manufacture and sale of such products could be significantly restricted or prohibited andmerger agreement, we may be required to pay substantial damagesQuikrete a termination fee of $50.0 million under specified conditions, including in the event Quikrete terminates the merger agreement for specified reasons and, within 12 months thereafter, we have consummated an acquisition proposal, as defined in the merger agreement, or on-going licensing fees. Any inabilityentered into a definitive agreement regarding an acquisition proposal that is ultimately consummated. If the merger agreement is terminated under circumstances where the termination fee is potentially payable by the Company, this payment could affect the structure, pricing and terms proposed by a third party seeking to protect our intellectual property rightsacquire or any misappropriationmerge with us, and could discourage a third party from making a competing acquisition proposal following the termination of the intellectual property of others could have a material adverse effect on our business, financial condition and results of operations.merger agreement.
33
Risks Related to Ownership of Our Common Stock
Some of the factors that could negatively affect the market price of our common stock or result in significant fluctuations in price, regardless of our actual operating performance, include:
•actual or anticipated variations in our quarterly operating results;
•changes in market valuations of similar companies;
•changes in the markets in which we operate;
•additions or departures of key personnel;
•actions by stockholders, including the sale by Lone Star of any of its shares of our common stock;
•speculation in the press or investment community;
•general market, economic and political conditions, including an economic slowdown;
•uncertainty regarding economic events, including in Europe in connection with the United Kingdom’s possible departure from the European Union;
•changes in interest rates;
•our operating performance and the performance of other similar companies;
•our ability to accurately project future results and our ability to achieve those and other industry and analyst forecasts; and
•new legislation or other regulatory developments that adversely affect us, our markets or our industry.industry; and
•the occurrence of any event, change or other circumstances that could give rise to the termination of the Merger agreement or delay in consummating the Merger.
Furthermore, at times, the stock market has experienced significant price and volume fluctuations. This volatility has had a significant impact on the market price of securities issued by many companies, including companies in our industry, and often occurs without regard to the operating performance of the affected companies. Therefore, factors that have little or nothing to do with us could cause the price of our common stock to fluctuate, and these fluctuations or any fluctuations related to our company could cause the market price of our common stock to decline materially.
The coverage of our business or our common stock by securities or industry analysts or the absence thereof could adversely affect our stock price and trading volume.
The trading market for our common stock is influenced in part by the research and other reports that industry or securities analysts may publish about us or our business. We currently have, but may not be able to continue, research coverage by industry or financial analysts. If analysts do not continue coverage of us, the trading price and volume of our stock would likely be negatively impacted. Even if analyst coverage continues, if we fail to meet analyst expectations or one or more of the analysts who cover us downgrade our stock, or if analysts issue other unfavorable commentary or inaccurate research, our stock price would likely decline. If one or more of these analysts cease coverage of our company or fail to regularly publish reports on us, we could lose visibility in the financial markets, which in turn could cause our stock price or trading volume to decline.
Lone Star may have conflicts of interest with other stockholders and may limit your ability to influence corporate matters.
Lone Star beneficially owns approximately 70.2%51.9% of our outstanding common stock. As a result of this concentration of stock ownership, Lone Star acting on its own has sufficient voting power to effectively control all matters submitted to our stockholders for approval, including director elections and proposed amendments to our bylaws or certificate of incorporation. SixFive of the tennine members of our board of directors are employees or affiliates of Lone Star.
34
In addition, this concentration of ownership may delay or prevent a merger, consolidation or other business combination or change in control of our company and make some transactions that might otherwise give youinvestors the opportunity to realize a premium over the then-prevailing market price of our common stock more difficult or impossible without the support of Lone Star. Because we have opted out of Section 203 of the Delaware General Corporation Law, or the DGCL, regulating certain business combinations with interested stockholders, Lone Star may transfer control of us to a third party by transferring its common stock without the approval of our board of directors or other stockholders, which may limit the price that investors are willing to pay in the future for shares of our common stock. The interests of Lone Star may not always coincide with our interests as a company or the interests of other stockholders. Accordingly, Lone Star could cause us to enter into transactions or agreements of which youinvestors would not approve or make decisions with which youinvestors would disagree. This concentration of ownership may also adversely affect our share price.
Lone Star is in the business of making investments in companies and may from time to time acquire and hold interests in businesses that compete directly or indirectly with us, although it does not currently hold any such interests. Lone Star may also pursue acquisition opportunities that may be complementary to our business, and as a result, those acquisition opportunities may not be available to us. In recognition that principals, members, directors, managers, partners, stockholders, officers, employees and other representatives of Lone Star and its affiliates and investment funds may serve as our directors or officers, our amended and restated certificate of incorporation provides, among other things, that none of Lone Star or any principal, member, director, manager, partner, stockholder, officer, employee or other representative of Lone Star has any duty to refrain from engaging directly or indirectly in the same or similar business activities or lines of business that we do. In the event that any of these persons or entities acquires knowledge of a potential transaction or matter which may be a corporate
opportunity for itself and us, we will not have any expectancy in such corporate opportunity, and these persons and entities will not have any duty to communicate or offer such corporate opportunity to us and may pursue or acquire such corporate opportunity for themselves or direct such opportunity to another person. These potential conflicts of interest could have a material adverse effect on our business, financial condition and results of operations if, among other things, attractive corporate opportunities are allocated by Lone Star to themselves or their other affiliates.
Lone Star may also have conflicts of interest with the Company and other stockholders as a result of its status as a party to the tax receivable agreement. For example, the tax receivable agreement entered into with Lone Star at the time of our initial public offering gives us the right to terminate the tax receivable agreement with approval of a majority of our independent directors and with Lone Star’s consent by making a payment equal to the present value of future payments under the tax receivable agreement (based on certain assumptions and deemed events in the agreement, including those relating to our and our subsidiaries’ future taxable income). Lone Star may determine to withhold its consent to terminate the tax receivable agreement at a time when such a termination would be favorable to us and the other stockholders. Furthermore, the tax receivable agreement prohibits us from settling any tax audit without Lone Star’s consent (not to be unreasonably withheld, conditioned or delayed) if the outcome of the audit is reasonably expected to affect Lone Star’s rights under the tax receivable agreement. Therefore, Lone Star may determine to withhold consent to a settlement that reduces the payments Lone Star will receive under the tax receivable agreement, even though the settlement might be favorable to us and our stockholders.
We are a “controlled company” within the meaning of Nasdaq rules and, as a result, qualify for, and are relying on, exemptions from certain corporate governance requirements.
Lone Star controls a majority of the voting power of our outstanding common stock. As a result, we are a “controlled company” within the meaning of the Nasdaq corporate governance standards. Under the relevant Nasdaq rules, a company of which more than 50% of the voting power is held by a person or group is a “controlled company” and need not comply with certain requirements, including the requirement that a majority of the board of directors consist of independent directors and the requirements that the compensation and nominating and corporate governance committees be composed entirely of independent directors. We are utilizing these exemptions and, for so long as Lone Star controls a majority of the voting power of our outstanding common stock, we intend to continue to utilize these exemptions. As a result, among other things, we do not have a majority of independent directors and our compensation and nominating and corporate governance committees
35
do not consist entirely of independent directors. Accordingly, investors will not have the same protections afforded to stockholders of companies that are subject to all of the applicable Nasdaq corporate governance requirements.
Future sales of our common stock in the public market could cause our stock price to fall.
Lone Star beneficially owns approximately 51.9% of our outstanding shares of common stock. The shares held by Lone Star and all shares held by our affiliates are eligible for resale in the public market, subject to applicable securities laws, including the Securities Act of 1933, as amended, or the Securities Act. In December 2019 we registered the shares of common stock beneficially owned by Lone Star pursuant to the terms of a registration rights agreement and these shares are now generally freely tradeable in the public market, subject to applicable securities laws. Unless the shares owned by any of our other affiliates are registered under the Securities Act, these shares may only be resold into the public markets in accordance with the requirements of an exemption from registration or safe harbor, including Rule 144 and the volume limitations, manner of sale requirements and notice requirements thereof. Any sale by Lone Star or other affiliates or any perception in the public markets that such a transaction may occur could cause the market price of our common stock to decline materially.
We have issued, and in the future we expect to issue, options, restricted stock and other forms of stock-based compensation, which have the potential to dilute stockholder value and cause the price of our common stock to decline.
We have issued, and in the future expect to issue, stock-based awards, including stock options, restricted stock and other forms of stock-based compensation to our independent directors, officers and employees. If any options that we have issued or may issue are exercised, or any restricted stock or other awards that we have issued or may issue vests, and the shares of common stock are sold into the public market, the market price of our common stock may decline. In addition, the availability of shares of common stock for award under our equity incentive plan, or the grant of stock options, restricted stock or other forms of stock-based compensation, may adversely affect the market price of our common stock.
We have no present intention to pay dividends on our common stock.
We have no present intention to pay dividends on our common stock. Any determination to pay dividends to holders of our common stock will be at the discretion of our board of directors and will depend upon many factors, including our financial condition, results of operations, projections, liquidity, earnings, legal requirements, restrictions in our credit facility and agreements governing any other indebtedness we may enter into and other factors that our board of directors deems relevant. Accordingly, holders of our common stock may need to sell their shares to realize a return on their investment and may not be able to sell their shares at or above the price they paid.
Provisions of our amended and restated governing documents, Delaware law and other documents could discourage, delay or prevent a merger or acquisition at a premium price.
Provisions in our amended and restated certificate of incorporation and amended and restated bylaws may have the effect of delaying or preventing a change of control or changes in our management. For example, our amended and restated certificate of incorporation and amended and restated bylaws include provisions that:
•permit us to issue, without stockholder approval, preferred stock in one or more series and, with respect to each series, fix the number of shares constituting the series and the designation of the series, the voting powers, if any, of the shares of the series and the preferences and other special rights, if any, and any qualifications, limitations or restrictions, of the shares of the series;
•prevent stockholders from calling special meetings;
•restrict the ability of stockholders to act by written consent after such time as Lone Star owns less than a majority of our common stock;
•limit the ability of stockholders to amend our certificate of incorporation and bylaws;
36
•require advance notice for nominations for election to the board of directors and for stockholder proposals;
•do not permit cumulative voting in the election of our directors, which means that the holders of a majority of our common stock may elect all of the directors standing for election; and
•establish a classified board of directors with staggered three-year terms (which will be phased out over the next 3 annual meetings of stockholders).
These provisions may discourage, delay or prevent a merger or acquisition of our company, including a transaction in which the acquirer may offer a premium price for our common stock.
Our amended and restated certificate of incorporation includes an exclusive forum clause, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us.
Our amended and restated certificate of incorporation provides that, unless we consent in writing to the selection of an alternative forum, the sole and exclusive forum for any stockholder (including any beneficial owner) to bring (i) any derivative action or proceeding brought on our behalf, (ii) any action asserting a claim of breach of a fiduciary duty owed by any of our directors, officers, or employees to us or to our stockholders, (iii) any action asserting a claim arising pursuant to any provision of the DGCL, or our certificate of incorporation or bylaws, or (iv) any action asserting a claim governed by the internal affairs doctrine, will be a state court located within the State of Delaware (or, if no state court located within the State of Delaware has jurisdiction, the federal district court for the District of Delaware); in all cases subject to such court having personal jurisdiction over the indispensable parties named as defendants. Any person or entity purchasing or otherwise acquiring any interest in shares of our capital stock is deemed to have notice of and consented to the foregoing provisions. The exclusive forum clause may limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us. It is also possible that, notwithstanding such exclusive forum clause, a court could rule that such a provision is inapplicable or unenforceable.
Risks Related to Our Tax Receivable Agreement
We will be required to pay Lone Star for certain tax benefits, and these amounts are expected to be material.
We entered into a tax receivable agreement with Lone Star that provides for the payment by us to Lone Star of 85% of the amount of cash savings, if any, in U.S. federal, state, local and non-U.S. income tax that we and our subsidiaries realize (or in some circumstances are deemed to realize) as a result of the utilization of certain tax benefits, together with interest accrued at a rate of LIBOR plus 100 basis points from the date the applicable tax return is due (without extension) until paid. These tax benefits, which we collectively refer to as the Covered Tax Benefits, include: (i) all depreciation and amortization deductions, and any offset to taxable income and gain or increase to taxable loss, resulting from the tax basis that we have in our assets as of the time of the consummation of our initial public offering, (ii) the utilization of our and our subsidiaries’ net operating losses and tax credits, if any, attributable to periods prior to our initial public offering, (iii) deductions in respect of payments made, funded or reimbursed by an initial party to the tax receivable agreement (other than us or one of our subsidiaries) or an affiliate thereof to participants under the LSF9 Concrete Holdings Ltd Long Term Incentive Plan, or the LTIP, (iv) deductions in respect of transaction expenses attributable to the acquisition of U.S. Pipe and (v) certain other tax benefits attributable to payments made under the tax receivable agreement. The tax receivable agreement will remain in effect until all Covered Tax Benefits have been used or expired, unless the agreement is terminated early, as described below.
We expect that the payments we make under the tax receivable agreement could be substantial. For the years ended December 31, 2021 and December 31, 2020, we paid $8.3 million and $13.1 million, respectively, on our tax receivable agreement to Lone Star. Assuming no material changes in the relevant tax law, and that we and our subsidiaries earn sufficient income to realize the full tax benefits subject to the tax receivable agreement, we currently estimate that future payments under the agreement will aggregate to approximately $117.6$55.9 million. This amount excludes any payments that may be made to Lone Star under the tax receivable agreement as a
37
result of tax benefits recognized in connection with payments under the LTIP and, thus, the actual payments we ultimately are required to make under the tax receivable agreement could be greater, potentially materially greater, than these amounts. These payment obligations are our obligations and are not obligations of any of our subsidiaries. Furthermore, these payment obligations are not conditioned upon Lone Star maintaining a continued direct or indirect ownership interest in us. The actual utilization of Covered Tax Benefits as well as the timing of any payments under the tax receivable agreement will vary depending upon a number of factors, including the amount, character and timing of our and our subsidiaries’ taxable income in the future.
We will not be reimbursed for any payments made to Lone Star under the tax receivable agreement in the event that the tax benefits are disallowed.
Lone Star will not reimburse us for any payments previously made under the tax receivable agreement if such benefits are subsequently disallowed upon a successful challenge by the Internal Revenue Service, although future payments under the agreement would be adjusted to the extent possible to reflect the result of such disallowance. As a result, in certain circumstances, payments could be made under the tax receivable agreement in excess of our cash tax savings if any, from the Covered Tax Benefits, and we may not be able to recoup those payments, which could adversely affect our liquidity.
In certain cases, payments made by us under the tax receivable agreement may be accelerated and/or significantly exceed the actual benefits we realize in respect of the Covered Tax Benefits.
The term of the tax receivable agreement will continue until all Covered Tax Benefits have been utilized or expired, unless we exercise our right to terminate the agreement with Lone Star’s consent, we breach any of our material obligations under the agreement or certain credit events occur with respect to us, in any of which cases we will be required to make an accelerated payment to Lone Star equal to the present value of future payments under the tax receivable agreement. Such payment would be based on certain assumptions, including, among others, that we and our subsidiaries would generate sufficient taxable income and tax liability to fully utilize all Covered Tax Benefits. The tax receivable agreement also provides that upon certain mergers, asset sales, other forms of business combinations or other changes of control, our (or our successor’s) payments under the tax receivable agreement for each taxable year after any such event would be based on certain valuation assumptions, including the assumption that we and our subsidiaries have sufficient taxable income to fully utilize the Covered Tax Benefits. Accordingly, payments under the tax receivable agreement may be made years in advance of the actual realization, if any, of the anticipated future tax benefits and may be significantly greater than the benefits we realize in respect of the Covered Tax Benefits.
Even if the payments under the tax receivable agreement are not accelerated as described above, such payments may be significantly greater than the benefits we realize in respect of the Covered Tax Benefits, due to the manner in which payments are calculated under the tax receivable agreement. For example, for purposes of calculating the payments to be made to Lone Star:
•it is assumed that we will pay effective state and local taxes at a rate of 5%, even though our actual effective state and local tax rate may be materially lower;
•tax benefits existing at the time of our initial public offering are deemed to be utilized before any post-closing/after-acquired tax benefits and, as a result, we could be required to make payments to Lone Star for a particular tax year even if our tax liability for such year would have been materially reduced or eliminated by reason of our utilization of the post-initial public offering/after-acquired tax benefits;
•a non-taxable transfer of assets by us to a non-consolidated entity is treated under the tax receivable agreement as a taxable sale at fair market value and, as a result, we could be required to make payments to Lone Star even though such non-taxable transfer would not generate any actual tax benefits to us or our non-consolidated entity; and
•a taxable sale or other taxable transfer of subsidiary stock by us (in cases where the subsidiary’s tax basis in its assets exceeds our tax basis in the subsidiary’s stock) is treated under the tax receivable agreement as a taxable sale of the subsidiary’s assets and, as a result, we could be required to make payments to Lone Star that materially exceed the actual tax benefit we realize from such stock sale.
38
Because of the foregoing, our obligations under the tax receivable agreement could have a substantial negative impact on our liquidity and could have the effect of delaying, deferring or preventing certain mergers, asset sales, other forms of business combinations or other changes of control.
Certain provisions of the tax receivable agreement limit our ability to incur additional indebtedness, which could adversely affect our business and growth strategy.
For so long as the tax receivable agreement remains outstanding, without the prior written consent of Lone Star (not to be unreasonably withheld, conditioned or delayed), (a) we will be prohibited from (a) entering into any agreement that would be materially more restrictive with respect to our ability to make payments under the tax receivable agreement than the terms of our credit agreement and (b) we will be prohibited from incurring any indebtedness for borrowed money if, immediately after giving effect to such incurrence and the application of proceeds therefrom, our consolidated net leverage ratio - the ratio of consolidated funded indebtedness for borrowed money less unrestricted cash to consolidated EBITDA - would exceed a certain specified ratio, in each case as calculated pursuant to the tax receivable agreement, unless the incurrence of such indebtedness is permitted by the terms of our credit agreement or any replacement credit agreements to the extent the terms thereof are no less restrictive in this regard than the applicable credit agreement it replaced. These restrictions on the incurrence of debt could adversely affect our business, including by preventing us from pursuing an acquisition or other strategic transaction that we believe is in the best interests of our company and our stockholders, thereby impeding our growth strategy. Lone Star has no fiduciary duties to us when deciding whether to enforce these covenants under the tax receivable agreement. Furthermore, the provision in the tax receivable agreement that requires that we make an accelerated payment to Lone Star equal to the present value of all future payments due under the tax receivable agreement if we breach any of our material obligations under the agreement or certain credit events occur with respect to us might make it harder for us to obtain financing from third party lenders on favorable terms.
We would be required to make tax gross-up payments to Lone Star if we consummate a corporate inversion or similar transaction that causes payments under the tax receivable agreement to be subject to withholding taxes.
If we were to consummate a change of control transaction that causes us (or our successor) to become a non-U.S. person (e.g., a corporate inversion transaction), and such transaction causes payments under the tax receivable agreement to become subject to withholding taxes, we would be required under the tax receivable agreement to make tax gross-up payments to Lone Star in respect of such withholding taxes in amounts that may exceed the tax savings realized by the Company from the Covered Tax Benefits. Any such tax gross-up payments could have a negative impact on our liquidity and our ability to finance our growth.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
We haveoperate a broad network of 7780 active manufacturing facilities in the United States, including 1110 fabrication plants. We also have fivethree manufacturing facilities in Canada and one in Mexico. Our headquarters is located in Irving, Texas.
The following tables set forth certain information regarding our active manufacturing facilities:
| Facility Name | City | State/Province | Ownership | |||||||||||||||||
| Drainage Pipe & Products | ||||||||||||||||||||
| Caldwell | Caldwell | Idaho | Owned | |||||||||||||||||
| Facility Name | City | State/Province | Ownership | |||||||||||||||||
| Salt Lake City | Salt Lake City | Utah | Owned | |||||||||||||||||
| Pelham (2 plants) | Pelham | Alabama | Owned | |||||||||||||||||
| El Mirage | El Mirage | Arizona | Leased | |||||||||||||||||
| West Memphis | West Memphis | Arkansas | Leased | |||||||||||||||||
| Florin Road (2 plants) | Sacramento | California | Leased | |||||||||||||||||
| Deland Precast | Deland | Florida | Leased | |||||||||||||||||
| Green Cove Springs | Green Cove Springs | Florida | Owned | |||||||||||||||||
| Gretna | Gretna | Florida | Leased | |||||||||||||||||
| Marianna | Marianna | Florida | Leased | |||||||||||||||||
| Winter Haven Pipe | Winter Haven | Florida | Leased | |||||||||||||||||
| St. Martinville | St. Martinville | Louisiana | Leased | |||||||||||||||||
| Como | Como | Mississippi | Owned | |||||||||||||||||
| Prentiss (2 plants) | Prentiss | Mississippi | Owned | |||||||||||||||||
| Columbus (2 plants) | Columbus | Ohio | Leased | |||||||||||||||||
| Austin Pipe | Austin | Texas | Leased | |||||||||||||||||
| Cedar Hill Pipe | Cedar Hill | Texas | Leased | |||||||||||||||||
| Grand Prairie (2 plants) | Grand Prairie | Texas | Leased | |||||||||||||||||
| Jersey Village (3 plants) | Houston | Texas | Leased | |||||||||||||||||
| Waco | Hewitt | Texas | Leased | |||||||||||||||||
| Waxahachie (2 plants) | Waxahachie | Texas | Owned | |||||||||||||||||
| Ottawa | Gloucester | Ontario | Leased | |||||||||||||||||
| Cambridge | Cambridge | Ontario | Leased | |||||||||||||||||
| Lexington | Lexington | Kentucky | Leased | |||||||||||||||||
| Louisville | Louisville | Kentucky | Leased | |||||||||||||||||
| Billings | Billings | Montana | Leased | |||||||||||||||||
| Bonner Springs | Bonner Springs | Kansas | Leased | |||||||||||||||||
| Cedar Rapids | Cedar Rapids | Iowa | Owned | |||||||||||||||||
| Des Moines | Des Moines | Iowa | Leased | |||||||||||||||||
| Elk River (4 plants) | Elk River | Minnesota | Leased | |||||||||||||||||
| Hawley | Hawley | Minnesota | Leased | |||||||||||||||||
| Independence | Independence | Missouri | Owned | |||||||||||||||||
| Helena | Helena | Montana | Leased | |||||||||||||||||
| Humboldt | Humboldt | Iowa | Owned | |||||||||||||||||
| Iowa Falls | Iowa Falls | Iowa | Leased | |||||||||||||||||
| Lawrence | Lawrence | Kansas | Owned | |||||||||||||||||
| Marshalltown | Marshalltown | Iowa | Leased | |||||||||||||||||
| West Des Moines | West Des Moines | Iowa | Leased | |||||||||||||||||
| Menoken | Menoken | North Dakota | Leased | |||||||||||||||||
| Mitchell | Mitchell | South Dakota | Owned | |||||||||||||||||
| Plattsmouth | Plattsmouth | Nebraska | Leased | |||||||||||||||||
| Rapid City | Rapid City | South Dakota | Leased | |||||||||||||||||
| Henderson (2 plants) | Henderson | Colorado | Leased | |||||||||||||||||
| Grand Junction | Grand Junction | Colorado | Leased | |||||||||||||||||
40
| Facility Name | City | State/Province | Ownership | |||||||||||||||||
| Lubbock | Lubbock | Texas | Owned | |||||||||||||||||
| Mineral Wells | Mineral Wells | Texas | Owned | |||||||||||||||||
| San Antonio | San Antonio | Texas | Owned | |||||||||||||||||
| Stacy | Stacy | Minnesota | Owned | |||||||||||||||||
| Riverside (2 plants) | Menifee | California | Leased | |||||||||||||||||
| Bio Clean | Oceanside | California | Leased | |||||||||||||||||
| St. Eustache Pressure Pipe | St. Eustache | Quebec | Owned | |||||||||||||||||
| Bar Nunn | Bar Nunn | Wyoming | Owned | |||||||||||||||||
| Water Pipe & Products (15 plants) | ||||||||||||||||||||
| Bessemer (2 plants) | Bessemer | Alabama | Leased | |||||||||||||||||
| Mini Mill | Bessemer | Alabama | Leased | |||||||||||||||||
| Union City | Union City | California | Owned | |||||||||||||||||
| Lynchburg | Lynchburg | Virginia | Owned | |||||||||||||||||
| Monterrey, Mexico | Monterrey | Mexico | Owned | |||||||||||||||||
| Rogers | Rogers | Minnesota | Leased | |||||||||||||||||
| Ottawa | Ottawa | Kansas | Leased | |||||||||||||||||
| Marysville | Marysville | California | Leased | |||||||||||||||||
| Warren | Warren | Oregon | Leased | |||||||||||||||||
| Ephrata | Ephrata | Pennsylvania | Leased | |||||||||||||||||
| Phoenix | Phoenix | Arizona | Leased | |||||||||||||||||
| Orlando | Orlando | Florida | Leased | |||||||||||||||||
| Gainesville | Gainesville | Georgia | Leased | |||||||||||||||||
| San Antonio | San Antonio | Texas | Leased | |||||||||||||||||
Item 3. Legal Proceedings
We have been from time to time, and may in the future become, party to litigation or other legal proceedings that we consider to be part of the ordinary course of our business. We are not currently involved in any legal proceedings that we believe could reasonably be expected to have a material adverse effect on our business, financial condition or our results of operations. We may become involved in material legal proceedings in the future. See Note
Derivative Action
On January 15, to the consolidated financial statements.
41
agreement of the Company's initial pubic offering,parties. Plaintiffs filed an amended complaint in August 2020 and Defendants filed a motion to dismiss the complaint in September 2020, which is now fully briefed and before the court. In light of the pending merger of the Company with an affiliate of Quikrete Holdings, Inc., the parties have agreed to stay the action, and the Court has entered an order staying the action until the later of the date the merger is completed or April 1, 2022, unless the IPO,merger agreement is terminated, in October 2016which case the parties must inform the court. and lasts through a range of dates from May 12, 2017 through August 14, 2017. The Securities Lawsuits generally allege that the Company's registration statement on Form S-1 filed in connection with the IPO, anddecision is expected in the case of certain complaints, statements made bycoming months.
We and other defendants are vigorously defending the Company or the individual defendants in the applicable Securities Lawsuit at times after the IPO, contained false or misleading statements and/or omissions of material facts relating to (1) the lack of growth from organic sales versus sales from acquisitions, and the lack of organic growth related thereto, (2) increased pricing pressure on the Company's products, (3) softness in the concrete and steel pressure pipe business, (4) operational problems at plants, including problems relating to defective products, (5) unpaid invoices for products and services that resulted in understated expenses, (6) an undisclosed material weakness in internal controls related to inventory, and (7) an undisclosed material weakness in internal controls relating to bill and hold transactions.
Merger-Related Litigation
On March 24, 2021, Anand Choudhuri, a purported owner of Forterra common stock brought a lawsuit against the Company and each of the members of its Board of Directors in the U.S. District Court for the Southern District of New York, or the Choudhuri Action. The plaintiff alleges, among other things, that the directors breached their fiduciary duties by entering into the Merger Agreement through an unfair process and for inadequate compensation, and that the Information Statement filed by the Company to explain the Merger to its stockholders, or the Merger Information Statement, omits material information related to the sales process, our financial projections, and Citigroup Global Markets Inc.’s, or Citi's, analysis of the proposed transaction reflected in the Merger Agreement, in violation of the federal securities laws and seeks to enjoin the Merger and/or damages in an unspecified amount.
On March 31, 2021, Christopher Jones, a purported owner of Forterra common stock brought a lawsuit against the Company and each of the members of its Board of Directors in the U.S. District Court for the District of Colorado, or the Jones Action. The plaintiff alleges, among other things, that defendants violated federal securities laws by failing to disclose certain information in the Merger Information Statement, the Company’s financial projections, and Citi's analysis of the proposed transaction reflected in the Merger Agreement and seeks to enjoin the Merger and/or damages in an unspecified amount.
On April 1, 2021, Adam Franchi, a purported owner of Forterra common stock brought a lawsuit against Forterra and individual members of the Board of Directors in the U.S. District Court for the District of Delaware, or the Franchi Action, collectively, the Choudhuri Action, the Jones Action and the Franchi Action are the Merger-Related Litigation. The plaintiff in the Franchi Action alleges, among other things, that defendants violated federal securities laws by failing to disclose certain information in the Merger Information Statement, the Company’s financial projections, and Citi's analysis of the proposed transaction reflected in the Merger Agreement and seeks to enjoin the Merger and/or damages in an unspecified amount.
We filed supplemental disclosures relating to the Merger Information Statement which further explained the proposed transaction that is contemplated by the Merger Agreement. Following the supplemental disclosure filings, in late April 2021 each of the three cases was voluntarily dismissed by the applicable plaintiff, and it is expected that the plaintiffs in these actions may seek compensation for their expenses and attorneys' fees. Given the stage of the proceedings, we cannot reasonably estimate at this time the possible loss or range of loss, if any, that may arise from the Merger-Related Litigation.
In addition, certain stockholders have informed us that they will seek to exercise their appraisal rights under Delaware law with respect to their shares. No further action has been taken by these stockholders to date.
North Birmingham EPA Matter
U.S. Pipe received a General Notice Letter and Invitation to Conduct Removal Action dated September 20, 2013 from the EPA with respect to the 35th Avenue superfundSuperfund site in Birmingham, Alabama. The letter requests that U.S. Pipe participate in an environmental response action in an area proximate to a closed U.S. Pipe facility in North Birmingham, Alabama. The U.S. Pipe North Birmingham facility was closed and, as part of the acquisition of U.S. Pipe by a private equity fund from Mueller Water Products, Inc. and Mueller Group, LLC, or
42
the Sellers, in 2012, the facility was retained by and is currently owned by either the Sellers or one of their affiliates. The notice requested response activities including testing and removing surface soils at area residences alleged to be contaminated by locally-sourced air pollutants. In connection with the disposition, the Sellers agreed to jointly and severally defend and indemnify U.S. Pipe against any losses or environmental liabilities related to sites retained by the Sellers, including the North Birmingham facility. Accordingly, U.S. Pipe tendered the defense of this matter to the Sellers for defense and indemnification. The Sellers accepted the tender and, on behalf of U.S. Pipe, have responded to the EPA’s request to participate in a time-critical removal action by declining, based on the EPA’s failure to establish any nexus between the contamination and any operations at the U.S. Pipe North Birmingham facility. The EPA sent a renewed request addressed to the Sellers, U.S. Pipe and a number of other potentially responsible parties on August 8, 2014 seeking participation in a broader cleanup of soil at approximately 80 homes in North Birmingham. The Sellers again responded on U.S. Pipe’s behalf declining to participate on the same grounds. In September 2014, the EPA proposed that the site be listed on the National Priorities List. The Sellers continue to defend on this matter on behalf of U.S. Pipe. While we cannot provide assurance that such defense will be successful, because of the indemnification described above, we do not believe the ultimate resolution of these matters will have a material adverse effect on our business, financial condition or results of operations.
Item 4. Mine Safety Disclosures
Not applicable.
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Common Stock
As of March 5, 2018, the closing price of the Company's stock as reported on Nasdaq was $7.75. The number of stockholder'sFebruary 25, 2022, there were 3 stockholders of record of theour common stock at the close of business on such date was 3.stock. A substantially greater number of holders of Forterra's common stock are “street name” or beneficial holders, whose shares of record are held by banks, brokers, and other financial institutions.
| High | Low | ||||||||
| Year ended December 31, 2017 | |||||||||
| Fourth Quarter | $ | 11.59 | $ | 4.45 | |||||
| Third Quarter | $ | 9.24 | $ | 3.02 | |||||
| Second Quarter | $ | 20.47 | $ | 6.01 | |||||
| First Quarter | $ | 22.43 | $ | 16.73 | |||||
| Year ended December 31, 2016 | |||||||||
| Fourth Quarter (October 20, 2016 - December 31, 2016) | $ | 22.76 | $ | 16.24 | |||||
Dividend Policy
We have not declared or paid any dividends since our formation and currently do not intend to pay dividends for the foreseeable future. Additional information concerning restrictions on our payment of cash dividends may be found in “Liquidity and Capital Resources” in Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Securities Authorized for Issuance Under Equity Compensation Plans
See Item 12, Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters for information regarding common stock authorized for issuance under equity compensation plans.
The following tables set forth,graph shows a comparison of cumulative total shareholder return, calculated on a dividend-reinvested basis, for the periodsCompany, the Russell 2000 Index and dates indicated, our selected historical financial data. The accompanying historical financial statements are presenteda market-weighted index of Company-selected, publicly traded peer companies (the “Peer Group”) for the “Predecessor,” which are the financial statements of HeidelbergCement’s building products business in the United States and Eastern Canada for the period preceding the Acquisition, and the “Successor,” which are the financial statements of the Company and subsidiaries for the period following the Acquisition. The Predecessor’s combined statement of operations data for the period from January 1, 2015 through March 13, 2015 has been derived from the audited combined financial statements of HeidelbergCement’s building products business in the United States and Eastern Canada and the Successor’s consolidated statements of operations data for the period from March 14, 2015 through December 31, 2015 and thefive years ended December 31, 20162021. The graph assumes $100 was invested in each of the Company’s common stock, the Russell 2000 Index and 2017 and balance sheet datathe Peer Group as of the market close on December 31, 2016 and 2017 have been derived from our audited consolidated financial statements, which are included elsewhere in this Form 10-K.that all dividends were reinvested. The Predecessor's combined statementPeer Group consists of operations data for the years ended December 31, 2013 and 2014 and combined balance sheet data as of December 31, 2013, 2014 and 2015 have been derived from the combined financial statements of HeidelbergCement's building products business in the United States and Eastern Canada, which are not included elsewhere in this Form 10-K.
Summit Materials, Inc., Vulcan Materials Company, Martin Marietta Materials, Inc., Advanced
43
Drainage Systems Inc. and Mueller Water Products, Inc. The stock price performance shown in the graph is not necessarily indicative of future price performance.
| Cumulative Total Return | |||||||||||||||||||||||||||||||||||
| As of December 31, | |||||||||||||||||||||||||||||||||||
| 2016 | 2017 | 2018 | 2019 | 2020 | 2021 | ||||||||||||||||||||||||||||||
| Forterra | $ | 100.00 | $ | 51.25 | $ | 17.36 | $ | 53.37 | $ | 79.36 | $ | 109.79 | |||||||||||||||||||||||
| Peer Group | $ | 100.00 | $ | 104.15 | $ | 79.03 | $ | 121.99 | $ | 131.36 | $ | 194.88 | |||||||||||||||||||||||
| Russell 2000 Index | $ | 100.00 | $ | 113.14 | $ | 99.37 | $ | 122.94 | $ | 145.52 | $ | 165.70 | |||||||||||||||||||||||
The information under the heading “Stock Performance Graph” shall not be deemed to be soliciting material or to be filed with the SEC or incorporated by reference into any SEC filings except to the extent the Company specifically incorporates it by reference into a filing under the Securities Act or the Exchange Act.
Item 6. [Reserved.]
44
| Successor | Predecessor | |||||||||||||||||||
| (in thousands) | Year ended December 31, | Year ended December 31, | For the period March 14 to December 31, | For the period from January 1 to March 13, | Year ended December 31, | Year ended December 31, | ||||||||||||||
| Statement of Operations Data: | 2017 | 2016 | 2015 | 2015 | 2014 | 2013 | ||||||||||||||
| Net sales | $ | 1,580,413 | $ | 1,363,962 | $ | 604,275 | $ | 112,698 | $ | 597,426 | $ | 552,440 | ||||||||
| Cost of goods sold | 1,327,305 | 1,083,508 | 513,723 | 98,339 | 506,688 | 487,604 | ||||||||||||||
| Gross profit | 253,108 | 280,454 | 90,552 | 14,359 | 90,738 | 64,836 | ||||||||||||||
| Selling, general & administrative expenses | (255,034 | ) | (216,099 | ) | (121,554 | ) | (17,106 | ) | (85,859 | ) | (70,410 | ) | ||||||||
| Impairment and exit charges | (13,220 | ) | (2,218 | ) | (1,026 | ) | (542 | ) | (4,261 | ) | (247,448 | ) | ||||||||
| Earnings from equity method investee | 12,360 | 11,947 | 8,429 | 67 | 4,451 | (216 | ) | |||||||||||||
| Gain (loss) on sale of property, plant, and equipment, net | (2,107 | ) | (21,274 | ) | (624 | ) | 122 | 2,030 | 2,435 | |||||||||||
| Other operating income, net | 7,304 | 10,303 | 1,716 | 696 | 5,072 | 5,234 | ||||||||||||||
| (250,697 | ) | (217,341 | ) | (113,059 | ) | (16,763 | ) | (78,567 | ) | (310,405 | ) | |||||||||
| Income (loss) from operations | 2,411 | 63,113 | (22,507 | ) | (2,404 | ) | 12,171 | (245,569 | ) | |||||||||||
| Other income (expenses) | ||||||||||||||||||||
| Interest expense | (59,408 | ) | (125,048 | ) | (45,953 | ) | (82 | ) | — | — | ||||||||||
| Change in tax receivable agreement liability | 46,180 | — | — | — | — | — | ||||||||||||||
| Other income (expense), net | (31,915 | ) | (847 | ) | (326 | ) | (28 | ) | (88 | ) | 1,032 | |||||||||
| Loss before income taxes | (42,732 | ) | (62,782 | ) | (68,786 | ) | (2,514 | ) | 12,083 | (244,537 | ) | |||||||||
| Income tax (expense) benefit | 40,672 | 51,692 | (5,392 | ) | 742 | (2,660 | ) | (379 | ) | |||||||||||
| Loss from continuing operations | (2,060 | ) | (11,090 | ) | (74,178 | ) | (1,772 | ) | 9,423 | (244,916 | ) | |||||||||
| Discontinued operations, net of tax | $ | — | $ | 3,484 | $ | (8,608 | ) | $ | (3,984 | ) | $ | (575 | ) | $ | (2,382 | ) | ||||
| Net loss | $ | (2,060 | ) | $ | (7,606 | ) | $ | (82,786 | ) | $ | (5,756 | ) | $ | 8,848 | $ | (247,298 | ) | |||
| Basic and Diluted Earnings (loss) Per Share: | ||||||||||||||||||||
| Continuing operations | $ | (0.03 | ) | $ | (0.23 | ) | $ | (1.63 | ) | |||||||||||
| Discontinued operations | $ | — | $ | 0.07 | $ | (0.19 | ) | |||||||||||||
| Net loss | $ | (0.03 | ) | $ | (0.16 | ) | $ | (1.82 | ) | |||||||||||
| Statement of Operations Data: | ||||||||||||||||||||
| Net cash provided by (used in) operating activities | $ | 42,334 | $ | 76,925 | $ | 121,417 | $ | (48,224 | ) | $ | 25,918 | $ | 31,686 | |||||||
| Net cash provided by (used in) investing activities | (66,023 | ) | (1,062,447 | ) | (898,039 | ) | (2,762 | ) | (1,901 | ) | (55 | ) | ||||||||
| Net cash provided by (used in) financing activities | 86,250 | 981,728 | 822,580 | 60,907 | (23,990 | ) | (31,636 | ) | ||||||||||||
| Balance Sheet Data: | ||||||||||||||||||||
| Cash and cash equivalents | $ | 104,534 | $ | 40,024 | $ | 26,027 | $ | 41 | $ | 4 | ||||||||||
| Property, plant & equipment, net | 412,572 | 452,914 | 315,859 | 288,433 | 283,821 | |||||||||||||||
| Total assets | 1,811,238 | 1,824,786 | 938,875 | 846,168 | 665,412 | |||||||||||||||
| Total debt | 1,193,787 | 1,096,047 | 705,829 | — | — | |||||||||||||||
| Shareholders equity | 132,491 | 132,917 | 52,315 | 657,473 | 700,938 | |||||||||||||||
The following discussion and analysis should be read in conjunction with our consolidated Successor and combined Predecessor financial statements and the related notes included elsewhere in this Report.Item 8. "Financial Statements and Supplementary Data".
This discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of many factors, including those set forth under the heading Item 1A. "Risk Factors" and elsewhere in this Annual Report on Form 10-K. See the section entitled “Cautionary Statement Concerning Forward-Looking Statements” for a discussion of the risks, uncertainties and assumptions associated with those statements.Statements.”
Overview
Our Company
We are a leading manufacturer of ductile iron pipe and concrete pipe and precast products by sales volume in the United States and Eastern Canada for a variety of essential water-related infrastructure applications, including water transmission, distribution and drainage. Our manufacturing and distribution network allows us to serve most major U.S. and Eastern Canadian markets. We operate 7780 active manufacturing facilities and currently have additional manufacturing capacity available in both of our segments, providing room to increase production to meet short-cycle demand with minimal incremental investment. These facilities which have a significant replacement cost, and our distribution network providesprovide us with a local presence and the necessary proximity to our customers to minimize delivery time and distribution costs.costs to the markets we serve.
Quikrete Merger Agreement and the Related Divestitures
On February 19, 2021, we entered into an Agreement and Plan of Merger, or the Merger Agreement, with Quikrete Holdings, Inc., a Delaware corporation, or Quikrete, and Jordan Merger Sub, Inc., a Delaware corporation and a wholly-owned subsidiary of Quikrete, or Merger Sub. Pursuant to the Merger Agreement, subject to the satisfaction or waiver of specified conditions, Merger Sub will merge with and into the Company, or the Merger, with us surviving the Merger as a wholly-owned subsidiary of Quikrete.
Pursuant to the Merger Agreement, at the effective time of the Merger, or the Effective Time, each issued and outstanding share of common stock of ours (other than (i) any shares held in the treasury of us or owned, directly or indirectly, by Quikrete, Merger Sub or any wholly-owned subsidiary of us immediately prior to the Effective Time, (ii) shares that are subject to any vesting restrictions, or the Company Restricted Shares, granted under our stock incentive plans, or the Company Stock Plans, and (iii) any shares owned by stockholders who have properly exercised and perfected appraisal rights under Delaware law) will be automatically canceled and converted into the right to receive $24.00 in cash, without interest, or Merger Consideration, subject to deductions for any required withholding tax.
Each party’s obligation to consummate the Merger is subject to certain conditions, including, among others: (i) expiration or termination of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended; (ii) the absence of any order issued by any court of competent jurisdiction, other legal restraint or prohibition or any law enacted or deemed applicable by a governmental entity that prohibits or makes illegal the consummation of the Merger; (iii) the passing of twenty (20) days from the date on which we mail to our stockholders the Information Statement (as defined below) in definitive form; (iv) subject to certain qualifications, the accuracy of representations and warranties of the other party set forth in the Merger Agreement; and (v) the performance by the other party in all material respects of its obligations under the Merger Agreement. Quikrete’s obligation to consummate the Merger is also conditioned on, among other things, the absence of any Material Adverse Effect (as defined in the Merger Agreement).
Entry into the Merger Agreement was unanimously approved by our board of directors.
45
The Merger Agreement includes customary representations, warranties and covenants of us, Quikrete and Merger Sub. Among other things, we have agreed to use commercially reasonable efforts to conduct its business in the ordinary course of business consistent with past practice and use commercially reasonable efforts to preserve intact its businesses until the Merger is consummated. We and Quikrete have also agreed to use their respective reasonable best efforts to obtain any approvals from governmental authorities for the Merger, including all required antitrust approvals, on the terms and subject to the conditions set forth in the Merger Agreement, provided that Quikrete and its affiliates will not be required to take, or agree to take, certain actions with respect to assets, businesses or product lines of Quikrete or any of its subsidiaries, or we or any of its subsidiaries, accounting for more than $80 million of EBITDA (as defined in the Merger Agreement) for the 12 months ended December 31, 2020, measured in accordance with the Merger Agreement.
The Merger Agreement contains certain provisions giving each of Quikrete and us rights to terminate the Merger Agreement under certain circumstances, including the right for either Quikrete or us to terminate the Merger Agreement if the Merger has not been consummated on or before November 19, 2021, which date will be automatically extended for up to two additional 60-day periods in specified circumstances as described in the Merger Agreement, or the Outside Date. Upon termination of the Merger Agreement under specified circumstances, we will be required to pay Quikrete a termination fee of $50 million. The Merger Agreement further provides that Quikrete will be required to pay us a reverse termination fee of $85 million under certain circumstances if the Merger Agreement is terminated due to the failure of the parties to obtain required approvals under Antitrust Laws (as defined in the Merger Agreement) prior to the Outside Date or as a result of a Restraint (as defined in the Merger Agreement) arising under applicable Antitrust Laws.
If the Merger is consummated, the shares of Common Stock will be delisted from the Nasdaq Stock Market LLC and deregistered under the Securities Exchange Act of 1934, as amended or the Exchange Act.
In order to address some of the divestitures anticipated to be required by the DOJ to satisfy the HSR Condition, on November 24, 2021, Forterra Pipe & Precast, LLC, a Delaware limited liability company and wholly owned subsidiary of us, or FP&P, entered into a Membership Interest Purchase Agreement, or the Eagle Purchase Agreement, with Eagle Corporation, a Virginia corporation, or Eagle, and Quikrete.
Pursuant to the terms and subject to the conditions set forth in the Eagle Purchase Agreement, contemporaneously with the closing of the Merger and the other transactions contemplated by the Merger Agreement, Eagle will purchase FP&P’s 50% equity interest in Concrete Pipe & Precast, LLC, or CP&P, a joint venture with Eagle, or the CP&P Sale, for a purchase price of $105,000,000 (subject to certain adjustments as described in the Eagle Purchase Agreement). Consummation of the CP&P Sale is subject to customary closing conditions, including, among others, the consummation of the Merger and approval by the DOJ.
The Eagle Purchase Agreement contains certain termination rights for FP&P and Eagle, including, among others, the right to terminate the Eagle Purchase Agreement (i) by either party if the CP&P Sale has not occurred by March 22, 2022, which date may be extended under certain circumstances described in the Eagle Purchase Agreement, (ii) by either party in the event of the issuance of a final and non-appealable governmental order that prohibits the CP&P Sale or if FP&P notifies Eagle that (x) the Merger is not occurring or (y) the Merger Agreement has been terminated and (iii) by FP&P if FP&P determines in good faith in its reasonable discretion that the DOJ is not likely to approve the CP&P Sale and the Merger.
In addition, in order to address some of the divestitures anticipated to be required by the DOJ to satisfy the HSR Condition, on December 13, 2021, FP&P entered into an Asset Purchase Agreement, or the Foley Asset Purchase Agreement, with Hydro Conduit, LLC d/b/a Rinker Materials, a Delaware limited liability company and an affiliate of Quikrete, or Rinker, and Foley Products Company, Inc., a Georgia corporation, or Foley.
Pursuant to the terms and subject to the conditions set forth in the Foley Asset Purchase Agreement, contemporaneously with the closing of the Merger and the other transactions contemplated by the Merger Agreement, FP&P and Rinker will each sell to Foley certain assets and liabilities associated with reinforced concrete pipe and precast plants, or the Asset Sale, for an aggregate purchase price of $95,000,000 (subject to certain adjustments described in the Asset Purchase Agreement). The assets being sold by FP&P include FP&P’s
46
reinforced concrete pipe and precast plant located in St. Martinville, Louisiana. Consummation of the Asset Sale is subject to customary closing conditions, including, among others, the consummation of the Merger and approval by the DOJ.
The Asset Purchase Agreement contains specified termination rights for the FP&P and Rinker, or the Asset Sellers, and Foley, including, among others, the right to terminate the Asset Purchase Agreement (i) by either the Foley or the Asset Sellers if the Asset Sale has not occurred by March 22, 2022, which date may be extended under certain circumstances described in the Asset Purchase Agreement, (ii) by either Foley or the Asset Sellers in the event of the issuance of a final and non-appealable governmental order that prohibits the Asset Sale or if the Asset Sellers notify Foley that (x) the Merger is not occurring or (y) the Merger Agreement has been terminated and (iii) by the Asset Sellers if they determine in good faith in its reasonable discretion that the DOJ is not likely to approve the Asset Sale and the Merger.
Additionally, on February 16, 2022, the Company announced that Rinker had entered into an Asset Purchase Agreement, or the Oldcastle Asset Purchase Agreement, with Oldcastle Infrastructure, Inc., a Washington corporation, or Oldcastle, in order to address some of the divestitures anticipated to be required by the DOJ to satisfy the HSR Condition for the consummation of the Merger and the other transactions contemplated by the Merger Agreement. Pursuant to the terms and subject to the conditions set forth in the Oldcastle Asset Purchase Agreement, contemporaneously with or shortly after the closing of the Merger and the other transactions contemplated by the Merger Agreement, Rinker will sell to Oldcastle certain assets and liabilities associated with three reinforced concrete pipe plants located in the Dallas/Fort Worth, Houston, and San Antonio metropolitan areas, or the Oldcastle Asset Sale. Consummation of the Oldcastle Asset Sale is subject to customary closing conditions, including, among others, the consummation of the Merger and approval by the DOJ.
The Company and Quikrete continue to work with the DOJ to obtain the necessary consent to allow the parties to complete the Merger by the outside date of March 22, 2022, but whether such consent is obtained by the outside date is outside of the Company’s control. If such consent has not been obtained by the outside date, the parties will have the rights set forth in the Merger Agreement. For additional detail regarding the risks associated with the failure to close the Merger prior to the outside date, please refer to the “Risks Related to the Proposed Merger” set forth in “Risk Factors” in Part I, Item 1A of this Form 10-K.
Our Segments
Our operations are organized into the following reportable segments:
•Drainage Pipe & Products - We are a producer of concrete drainage pipe and precast products in the United States and Eastern Canada.concrete pressure pipe products.
•Water Pipe & Products - We are a producer of ductile iron pipe, or DIP, and concrete pressure pipe.DIP.
•Corporate and Other - Consists of corporate overhead locations in the United States,Corporate, general and our roof tile operations which were sold in April 2016.
In the fourth quarter of 2020, we reclassified our pressure pipe business from Water segment to the Acquisition, we were HeidelbergCement’s building products operations in the United States and Eastern Canada. LSF9 was formed on February 6, 2015 for the purpose of consummating the Acquisition and had no operations priorDrainage segment to the date of Acquisition.better align with our organizational structure.
47
COVID-19 Pandemic
Beginning in mid-March 2019, local, state, provincial and federal authorities began issuing stay at home orders in response to our consolidated financial statements for additional information regarding the preparationspread of the Predecessor financial statements.
During 2021, we saw improvements in our business conditions, however, we continued to increasesee supply chain challenges as well as higher raw material, labor, and freight costs. The situation around the sizeCOVID-19 pandemic remains fluid because of the 2016 Senior Term Loan underevolution of COVID-19 variants, and the original provisions. The 2016 Senior Term Loan matures on October 25, 2023 and is subject to quarterly amortization equal to 0.25%extent of the initial principal amount. Interest accruesongoing impact on outstanding borrowings thereunder at a rate equal to LIBOR (with a floor of 1.0%) or an alternate base rate, in each case plus a margin of 3.0% or 2.0%, respectively.
For additional information on risk factors that could impact our results, please refer to “Risk Factors” in which all such related tax benefits remain. The Company accounts for potential payments under the tax receivable agreement as a contingent liability, with amounts accrued when considered probable and reasonably estimable. AsPart I, Item 1A of the IPO date, the Company recorded a $160.8 million liability and a reduction to additional paid-in-capital related to the tax receivable agreement for the undiscounted value of probable future payments. Net of tax effects of $18.5 million, the net reduction to additional paid-in-capital related to the initial liability for the tax receivable agreement issued in connection with the IPO was $142.3 million. The passage of the Tax Cuts and Jobs Act of 2017 significantly reduced the Company's anticipated liability under the tax receivable agreement. The Company's liability recorded for the tax receivable agreement at December 31, 2017 was $117.6 million. The Company anticipates that it will have sufficient taxable income in future periods to realize the full value of the obligation recorded. Future tax receivable agreement payments related to the tax basis of assets at the time of the IPO will be recorded as a reduction to the liability and will be recorded as a financing obligation in the statement of cash flows. At the end of each reporting period, any changes in the Company's estimate of the liability will be recorded in the statement of operations as a component of other income/expense and will be recorded as an operating activity in the statement of cash flows. The timing and amount of future tax benefits associated with the tax receivable agreement are subject to change, and additional payments may be required which could be materially different from the current accrued liability.this Form 10-K.
| Purchase Price | ||||
| Acquisitions: | (in millions) | |||
| 2017 | ||||
| Royal Enterprises America, Inc. | $ | 35.5 | ||
| 2016 | ||||
| Sherman-Dixie Concrete Industries | 66.8 | |||
| USP Holdings, Inc. | 778.7 | |||
| Bio Clean Environmental Services, Inc. and Modular Wetland Systems, Inc. | 31.9 | |||
| J&G Concrete Operations, LLC | 32.4 | |||
| Precast Concepts, LLC | 99.6 | |||
Principal Factors Affecting Our Results of Operations
Our financial performance and results of operations are influenced by a variety of factors, including conditions in the residential, and non-residential and infrastructure construction markets, general economic conditions, changes in cost of goods sold, competitive behavior in the markets we serve, and seasonality and weather conditions. Some of the more important factors are discussed below, as well as in the section entitledItem 1A. “Risk Factors.Factors,” with the exception of the impacts of the COVID-19 pandemic, which are discussed above.
Infrastructure Spending and Residential and Non-Residential Construction Activities
A large proportion of our net sales in our Drainage Pipe & Products segment is generated through public infrastructure projects, which are driven by federal, state and provincial funding programs. In the U.S., federal funds are allocated to the states, which are required to match a portion of the federal funds they receive. According to the Federal Reserve Bank, public investment in the U.S. infrastructure as a share of Gross Domestic Product has fallen by more than 40% since the 1960s. The World Economic Forum ranked the U.S. 13th when it comes to overall quality of infrastructure. In terms of the transportation infrastructure, more than 45,000 U.S.
48
bridges and 1 in 5 miles of roads are in poor condition, according to the American Society of Civil Engineers, or the ASCE.
A large proportion of our net sales in our Water Pipe & Products segments aresegment is generated through publicmunicipal infrastructure projects. ManyThe U.S. potable water infrastructure, especially the underground pipes that deliver drinking water to homes and businesses, is aging and in need of these projectssignificant reinvestment. Like many of the roads, bridges, and other public assets on which the U.S. relies, most of the underground drinking water infrastructure was built 50 or more years ago, in the post-World War II era of rapid demographic change and economic growth. In some older urban areas, many water mains have been in the ground for a century or longer. Given its age, a large proportion of the U.S. water infrastructure is approaching, or has already reached, the end of its useful life. In some locations, improvements to water infrastructure are dependent on government funding, including subsidies and stimulus programs. Government spending on infrastructure projectsneeded to comply with standards for drinking water quality. The ASCE estimates 240,000 water main breaks per year in the U.S. due to aging pipelines, wasting over two trillion gallons of treated drinking water. The underlying demand for municipalities to repair or replace their water systems depends on the status of the water systems and the availability of public funds,funding. With people spending more time at their homes in order to reduce the spread of the COVID-19 virus, it is even more critical to ensure the uninterrupted supply of clean water.
In November 2021, President Biden signed into law the Infrastructure Investment and Jobs Act, a $1.2 trillion investment in U.S. infrastructure, of which more than $100 billion is influenced by various factors, including fiscal budgets,dedicated to upgrading aging bridges, highways and roads. In addition, more than $50 billion of the level of public debt, interest rates, existing and anticipated tax revenues andcontemplated spending is dedicated to upgrading water infrastructure in the political climate. Increases or reductions in governmentalU.S. The law's increased federal funding for highways, roads, bridges, transit and water systems is expected to benefit the state and local governments, which undertake the bulk of public-sector investment in the U.S. The funding will allow these infrastructureentities to maintain aging assets and clear project backlogs especially for projects can have a material effect on our net saleswhich were delayed during the initial outbreak of the COVID-19 pandemic, as well as supporting economic activity and results of operations. In the United States, federal and state government funding for infrastructure projects is usually accomplished through multi-year funding and authorization bills known as highway bills, such as the FAST Act, which authorized $305 billion in spending over the next five years.revenue growth.
Mix of Products
We derive our salesrevenues from both the sale of products manufactured to inventory, such as concrete drainage pipe and bricks,DIP, and highly engineered products which are made to order, such as precast concrete products and concrete pressure pipe and structural precast products for drainage.pipe. These two components of our businessproduct categories differ in their dynamics. ThisThe mix of products our customers order is project driven and varies from period to period. We generally recognize revenue in connection with product shipment;at the time of shipment of our products; however, for some of our highly engineered structural precast products, we recognize revenue on a percentage of completion method, which amounted to $44.6 millionaccounted for 1.7% of our total sales in 2017.2021.
49
commencement of a project and the progress and completion of work under a contract, therefore, can have a significant effect on our results of operations for a particular period.
Average Selling Prices
The average selling prices we are able to obtain for our products affect our results of operations and our margins. Our average selling price can vary by market location, particularly in our Drainage Pipe and Products segment, product mix, factors relating to supply and demand, and the actions of our customers and competitors. The average selling prices for our products increased in 2021 over the average selling prices we received in 2020 in both our Water and Drainage segments. For a discussion of changes to average selling price see the discussion by segment in “Results of Operations” below.
Cost of Goods Sold
Costs of raw material and other inputs, supplies, labor (including contract labor), freight and energy constitute a large portion of our cost of goods sold, and fluctuations in the prices of these materials and inputs affect our results of operations.operations and, in particular, our margins. Our primary raw materials in our Drainage Pipe and Products segment are cement, aggregates, and steel. We typically negotiate contracts with suppliers of these materials for one to three years, with prices subject to annual revisions. The primary input in our Water business is scrap steel, which we purchase on the spot market, and clay.its costs can vary significantly from period to period. We do not generally hedge our raw material purchases except that we may increasebut rather utilize our inventory of certain materials in the short term in anticipation of future price increases.
Seasonality and Weather Conditions
The construction industry, and therefore demand for our products, is typically seasonal and highly dependent on weather conditions, with periods of snow or heavy rain negatively affecting construction activity. LowerBecause the majority of our products are buried underground, we experience lower demand for our products tends to occur in periods of cold weather, particularly during winter, and periods of excessive rain and suchor flooding. These types of conditions or other unfavorable weather conditions generally lead to seasonal fluctuations in our quarterly financial results. Historically, our net sales in the second and third quarters have been higher than in the other quarters of the year, particularly the first quarter.
In addition, unfavorable weather conditions, such as hurricanes or severe storms, or public holidays during peak construction periods can result in temporary cessation of projects and a material reduction in demand for our products and consequently have an adverse effect on our net sales. Results of a fiscal quarter may therefore not be a reliable basis for the expectations of a full fiscal year and may not be comparable with the results in the other fiscal quarters in the same year or prior years.
Our Business Strategy
Our strategy is focused on continued execution of our five improvement pillars: health and safety of our team members, plant-level operational discipline, enhanced commercial capabilities, working capital efficiency, and general and administrative effectiveness. See Item 1 "Business" These pillars are designed to expand our product margin so that we can earn a full and fair return on the products we produce and the capital we deploy. We are also committed to strengthening our capital structure through a combination of working capital improvement, debt repayment and prudent investment in the business. Prudent investment in the business includes growth capital expenditures in projects and smaller acquisitions. Our near-term goal is to reduce our net leverage ratio to 3x-3.5x. After achieving that, we will cautiously evaluate our capital allocation plans going forward to maximize values to our stakeholders.
50
Principal Components of Results of Operations
Net Sales
Net sales consist of the consideration received or receivable for the sale of products in the ordinary course of business and include the billable costs of delivery of our products to customers, net of discounts given to the customer. Net sales include any outbound freight charged to the customer. Revenue on certain long-term engineering and construction contracts for our structural precast and products that are designed and engineered specifically for the customer is recognized under the percentage-of completion method. Certain of our businesses, primarily our concrete pressure pipe businesses, also enter into agreements to provide inventory to customers for long-term construction projects. With respect to these agreements, we recognize revenue upon shipment of the respective goods, whereas billings are based on contract terms and may or may not coincide with shipments, which gives rise to either unbilled or deferred revenue. See Note 2 to our consolidated financial statements.
Cost of Goods Sold
Cost of goods sold includes raw materials and other inputs (cement, aggregates, scrap, steel and clay)steel) and supplies, labor (including contract labor), freight (including outbound freight for delivery of products to end users and other charges such as inbound freight), energy, depreciation and amortization, repairs and maintenance and other cost of goods sold.
Selling, General and Administrative Expenses
Selling, general and administrative expenses include expenses for sales, marketing, legal, accounting and finance services, human resources, customer support, treasury and other general corporate services. See Note 2 to our consolidated financial statements included elsewhere in this Form 10-K for a description of the expense allocation for certain corporate and other functions historically provided to us by HeidelbergCement during the Predecessor periods. Selling, general and administrative expenses also include transaction costs directly related to the business combinations and other carve-out costs surrounding the separation from HeidelbergCement.combinations.
Earnings from Equity Method Investee
Earnings from equity method investee represents our share of the income of the Concrete Pipe & Precast LLC, or CP&P joint venture we entered into in July 2012 with Americast, Inc. We contributed plant assets and related inventory from nine plants as part of the agreement to form CP&P in exchange for a 50% ownership interest in the joint venture. CP&P is engaged primarily in the manufacture, marketing, sale and distribution of concrete pipe and precast products in Virginia, West Virginia, Maryland, North Carolina, Pennsylvania and South Carolina and Georgia with sales to contiguous states. See Note 6 to the consolidated financial statements for additional information on CP&P.
Other Operating Income
The remaining categories of operating income and expenses consist of scrap income (associated with scrap from the manufacturing process or remaining scrap after plants are closed), insurance gains, rental income, as well as net gain or loss on the sale of assets including property, plant and rental income.equipment.
Interest Expense
Interest expense represents interest on the indebtedness. Prior to the Acquisition, we incurred an insignificant amount of interest expense in connection with our capital leases.
Income Tax Expense
Income tax expense consists of federal, state, provincial, local and foreign taxes based on income in the jurisdictions in which we operate. Historically, our U.S. subsidiaries were included in HeidelbergCement’s U.S. consolidated federal and state income tax returns. In the combined Predecessor financial statements, income tax benefit (expense) was calculated as if our U.S. subsidiaries filed separate tax returns.
51
Results of Operations
Year Ended December 31, 20172021 as Compared to the Year Ended December 31, 20162020
Total Company
The following table summarizes certain financial information relating to our operating results that have been derived from our consolidated financial statements of Forterra for the years ended December 31, 20172021 and December 31, 2016. Also included is certain information relating to the operating results as a percentage2020 (in thousands).
| Statements of Income Data: | Year ended December 31, 2021 | Year ended December 31, 2020 | % Change | |||||||||||||||||
Net sales | $ | 1,858,270 | $ | 1,594,506 | 16.5% | |||||||||||||||
Cost of goods sold | 1,437,872 | 1,217,833 | 18.1% | |||||||||||||||||
Gross profit | 420,398 | 376,673 | 11.6% | |||||||||||||||||
| Selling, general and administrative expenses | (216,146) | (221,770) | (2.5)% | |||||||||||||||||
| Impairment and exit charges | (645) | (2,511) | (74.3)% | |||||||||||||||||
| Other operating income, net | 13,763 | 1,409 | 876.8% | |||||||||||||||||
| (203,028) | (222,872) | (8.9)% | ||||||||||||||||||
Income from operations | 217,370 | 153,801 | 41.3% | |||||||||||||||||
Other income (expenses) | ||||||||||||||||||||
| Interest expense | (74,976) | (79,890) | (6.2)% | |||||||||||||||||
| Gain (loss) on extinguishment of debt | — | (12,256) | * | |||||||||||||||||
| Earnings from equity method investee | 12,592 | 11,291 | 11.5% | |||||||||||||||||
| Income before income taxes | 154,986 | 72,946 | * | |||||||||||||||||
| Income tax expense | (38,669) | (8,460) | * | |||||||||||||||||
Net income | $ | 116,317 | $ | 64,486 | 80.4% | |||||||||||||||
* Represents positive or negative change in excess of net sales.100%
| Statements of Income Data: | Year ended December 31, 2017 | % of Net Sales | Year ended December 31, 2016 | % of Net Sales | |||||||||
Net sales | $ | 1,580,413 | 100.0 | % | $ | 1,363,962 | 100.0 | % | |||||
Cost of goods sold | 1,327,305 | 84.0 | % | 1,083,508 | 79.4 | % | |||||||
Gross profit | 253,108 | 16.0 | % | 280,454 | 20.6 | % | |||||||
| Selling, general and administrative expenses | (255,034 | ) | (16.1 | )% | (216,099 | ) | (15.8 | )% | |||||
| Impairment and exit charges | (13,220 | ) | (0.8 | )% | (2,218 | ) | (0.2 | )% | |||||
| Earnings from equity method investee | 12,360 | 0.8 | % | 11,947 | 0.9 | % | |||||||
| Loss on sale of property, plant and equipment, net | (2,107 | ) | (0.1 | )% | (21,274 | ) | (1.6 | )% | |||||
| Other operating income | 7,304 | 0.5 | % | 10,303 | 0.8 | % | |||||||
| (250,697 | ) | (15.9 | )% | (217,341 | ) | (15.9 | )% | ||||||
Income from operations | 2,411 | 0.2 | % | 63,113 | 4.6 | % | |||||||
Other income (expenses) | |||||||||||||
| Interest expense | (59,408 | ) | (3.8 | )% | (125,048 | ) | (9.2 | )% | |||||
| Change in tax receivable agreement liability | 46,180 | 2.9 | % | — | — | % | |||||||
| Other expense, net | (31,915 | ) | (2.0 | )% | (847 | ) | (0.1 | )% | |||||
| Loss before income taxes | (42,732 | ) | (2.7 | )% | (62,782 | ) | (4.6 | )% | |||||
| Income tax benefit | 40,672 | 2.6 | % | 51,692 | 3.8 | % | |||||||
| Loss from continuing operations | (2,060 | ) | (0.1 | )% | $ | (11,090 | ) | (0.8 | )% | ||||
| Discontinued operations, net of tax | — | — | % | $ | 3,484 | 0.3 | % | ||||||
Net loss | $ | (2,060 | ) | (0.1 | )% | $ | (7,606 | ) | (0.6 | )% | |||
Net Sales
Net sales for the year ended December 31, 20172021 were $1,580.4$1,858.3 million, an increase of $216.4$263.8 million or 15.9%16.5% from $1,364.0$1,594.5 million for the year ended December 31, 2016. Net sales increased by approximately $253.52020. The increase was the combination of a $157.7 million increase in our in our Water Pipe & Products segment due to our acquisitions made throughout 2016both higher average selling prices and early 2017, offset byhigher shipment volumes, and a decrease due to the divestiture of our U.S. concrete and steel pressure pipe business of $38.7 million. Our legacy businesses have experienced growth in certain markets due to favorable weather driving up volumes contributing an additional $26.0$106.1 million of net sales, partially offset by a decrease of $24.4 millionincrease in our Canadian concrete and steel pressure pipe business.Drainage Pipe & Products segment mostly driven by higher shipment volumes.
Cost of Goods Sold
Cost of goods sold for the year ended December 31, 2021 were $1,327.3$1,437.9 million, an increase of $220.1 million or 18.1% from $1,217.8 million for the year ended December 31, 2017,2020. The increase in cost of goods sold was the combination of a $156.4 million increase in our Water Pipe & Products segment due to both higher raw material, labor, and freight costs and higher shipment volumes, and a $63.5 million increase in our Drainage Pipe & Products segment primarily due to higher shipment volumes. Specifically, for our Water Pipe & Products segment, the industry average cost of scrap metal increased by more than 50% year-over-year. In addition, unit freight and labor costs increased by more than 25% and 5% year-over-year, respectively.
52
Gross Profit
Gross profit in the year ended December 31, 2021 was $420.4 million, an increase of $243.8$43.7 million, or 22.5%11.6%, from $1,083.5$376.7 million in the year ended December 31, 2016. The2020. Most of the increase in cost of goods sold duegross profit came from our Drainage Pipe and Products segment primarily driven by higher shipment volumes
Selling, General and Administrative Expenses
Selling, general and administrative expenses in the year ended December 31, 2021 were $216.1 million, a slight decrease compared to our acquisitions totaled $199.2 million, offset by a decrease of $39.0 million due to the divestiture of our U.S. concrete and steel pressure pipe business. Costs of goods sold in our existing businesses increased by $94.8 million due in part to higher volumes, but also due to the higher cost of labor, freight, and raw materials, offset by a decline $11.2 million in our Canadian concrete and steel pressure pipe business related to decreased volumes.
Impairment and Exit Charges
Impairment and exit charges in the year ended December 31, 2021 were $0.6 million, compared to $2.5 million in the year ended December 31, 2016. Gross profit decreased due2020. These charges in both years primarily related to higher costplant closings undertaken for purposes of goods sold including labor, freight and raw materials.achieving operating efficiencies.
Interest Expense
Interest expense in the year ended December 31, 2017. See Note 8, Goodwill and other intangible assets and Note 21, Discontinued operations and divestitures to the consolidated financial statements. In addition, we recognized $2.72021 was $75.0 million, for the year ended December 31, 2017 for severance and contract termination charges that primarily related to the closurea decrease of certain locations compared to $2.2 million in the prior year.
Gain (loss) on extinguishment of debt
Loss on extinguishment of debt in the year ended December 31, 2020 was $12.3 million. There was no loss on extinguishment of debt in the year ended December 31, 2021. The loss in 2020 was primarily driven by the write-off of the deferred debt issuance cost of $13.1 million associated with our $612.5 million term loan prepayment at par with the proceeds from $125.0the offering of our Senior Notes and cash on hand, slightly offset by a gain from our $83.5 million open-market term loan repurchases at small discounts.
Income Tax Expense
Income tax expense in the year ended December 31, 2021 was $38.7 million, an increase of $30.2 million from an income tax expense of $8.5 million in the year ended December 31, 2016. This decrease was2020. The change is primarily due to the repaymentimprovement of our operating income in 2021 to $155.0 million, compared to $72.9 million in 2020. In addition, the Junior Term Loan in connection with the IPO, the write-offprior year income tax expense was offset by an $11.5 million reversal of the related debt issuance costs ofvaluation allowance.
53
Segment Results of Operations
| (in thousands) | For the year ended December 31, | |||||||||||||||||||
| 2021 | 2020(2) | % Change | ||||||||||||||||||
| Net sales: | ||||||||||||||||||||
| Drainage Pipe & Products | $ | 993,464 | $ | 887,420 | 11.9 | % | ||||||||||||||
| Water Pipe & Products | 864,806 | 707,086 | 22.3 | % | ||||||||||||||||
| Corporate and Other | — | — | ||||||||||||||||||
| Total | $ | 1,858,270 | $ | 1,594,506 | 16.5 | % | ||||||||||||||
| Gross profit (loss): | ||||||||||||||||||||
| Drainage Pipe & Products | 254,076 | 211,568 | 20.2 | % | ||||||||||||||||
| Water Pipe & Products | 166,378 | 165,078 | 0.8 | % | ||||||||||||||||
| Corporate and Other | (56) | 27 | * | |||||||||||||||||
| Total | $ | 420,398 | $ | 376,673 | 11.6 | % | ||||||||||||||
Segment EBITDA(1): | ||||||||||||||||||||
| Drainage Pipe & Products | 239,860 | 187,547 | 27.9 | % | ||||||||||||||||
| Water Pipe & Products | 150,412 | 145,451 | 3.4 | % | ||||||||||||||||
| Corporate and Other | (77,754) | (90,666) | (14.2) | % | ||||||||||||||||
| For the year ended December 31, 2017: | |||||||||||||||
| Drainage Pipe & Products | Water Pipe & Products | Corporate and Other | Total | ||||||||||||
| Net sales | $ | 834,810 | $ | 745,555 | $ | 48 | $ | 1,580,413 | |||||||
| Gross profit (loss) | 147,741 | 108,320 | (2,953 | ) | 253,108 | ||||||||||
| EBITDA | 129,618 | 47,587 | (44,870 | ) | 132,335 | ||||||||||
| Key Operational Statistics | % Change | ||||
Drainage Pipe & Products(2) | |||||
| Shipment Volumes | +11% | ||||
| Average Selling Prices | +2% | ||||
Water Pipe & Products(3) | |||||
| Shipment Volumes | +12% | ||||
| Average Selling Prices | +10% | ||||
For the year ended December 31, 2016: | |||||||||||||||
| Drainage Pipe & Products | Water Pipe & Products | Corporate and Other | Total | ||||||||||||
| Net sales | $ | 728,872 | $ | 632,573 | $ | 2,517 | $ | 1,363,962 | |||||||
| Gross profit (loss) | 162,442 | 120,564 | (2,552 | ) | 280,454 | ||||||||||
| EBITDA | 138,274 | 98,641 | (81,146 | ) | 155,769 | ||||||||||
(1) For the purposes of evaluating segment performance, the Company’sCompany's chief operating decision maker reviews earnings before interest, taxes, depreciation and amortization, or EBITDA, as a basis for making the decisions to allocate resources and assess performance. Our discussion below includes the primary drivers of EBITDA. See Note 21, Segment Reporting, to the condensed consolidated financial statements for segment EBITDA reconciliation to income (loss) before income taxes.
(2)Operational statistics only pertain to pipe and precast products and do not include other services, non-volume-based products, or non-core products. Pipe and precast products revenue accounted for more than 87% of Drainage segment revenue.
(3) Operational statistics only pertain to ductile iron pipe products and do not include other services, non-volume-based products, or non-core products. Ductile iron pipe products revenue accounted for more than 88% of Water segment revenue.
* Represents positive or negative change in excess of 100%.
54
Drainage Pipe & Products
Net Sales
Net sales increased by $105.9in the year ended December 31, 2021 were $993.5 million, an increase of $106.0 million, or 14.5%12.0%, to $834.8from $887.4 million in the year ended December 31, 20172020. The increase was primarily driven by higher shipment volumes in our pipe and precast products as the economy continued to recover from $728.9the COVID-19 pandemic. Pipe and precast products revenues accounted for more than 85% of the net sales in this segment.
Gross Profit
Gross profit in the year ended December 31, 2021 was $254.1 million, an increase of $42.5 million or 20.1% from $211.6 million in the year ended December 31, 2016.2020. The increase is due in part to net sales of approximately $86.6 million provided by our acquisitions. The remaining increase in net sales of $19.3 million was primarily due to higher netshipment volumes of our pipe and precast products.
Water Pipe & Products
Net Sales
Net sales in certain regions benefitingthe year ended December 31, 2021 were $864.8 million, an increase of $157.7 million or 22.3% from favorable weather, driving increased volumes and average sales price.
Gross Profit
Gross profit in the year ended December 31, 2021 was $166.4 million, a decreaseslight increase of $14.7$1.3 million or 9.1%0.8% from $162.4$165.1 million in the year ended December 31, 2016. The decrease was primarily due to higher cost of goods sold including labor, freight, and raw materials. The 2017 gross profit included the impact of non-recurring inventory adjustments of $2.4 million as a result of the Royal Acquisition.
55
Total Company
The following table summarizes certain financial information relating to our operating results that have been derived from our consolidated Successor financial statements for the period from March 14, 2015 toyears ended December 31, 2015. Also included is certain information relating to the operating results as a percentage2020 and December 31, 2019 (in thousands).
| Statements of Income Data: | Year ended December 31, 2020 | Year ended December 31, 2019 | % Change | |||||||||||||||||
Net sales | $ | 1,594,506 | $ | 1,529,752 | 4.2 | % | ||||||||||||||
Cost of goods sold | 1,217,833 | 1,233,370 | (1.3) | % | ||||||||||||||||
Gross profit | 376,673 | 296,382 | 27.1 | % | ||||||||||||||||
| Selling, general and administrative expenses | (221,770) | (221,770) | — | % | ||||||||||||||||
| Impairment and exit charges | (2,511) | (3,520) | (28.7) | % | ||||||||||||||||
| Other operating income, net | 1,409 | 1,094 | 28.8 | % | ||||||||||||||||
| (222,872) | (224,196) | (0.6) | % | |||||||||||||||||
Income from operations | 153,801 | 72,186 | * | |||||||||||||||||
Other income (expenses) | ||||||||||||||||||||
| Interest expense | (79,890) | (94,970) | (15.9) | % | ||||||||||||||||
| Gain (loss) on extinguishment of debt | (12,256) | 1,708 | * | |||||||||||||||||
| Earnings from equity method investee | 11,291 | 10,466 | 7.9 | % | ||||||||||||||||
| Income (loss) before income taxes | 72,946 | (10,610) | * | |||||||||||||||||
| Income tax (expense) benefit | (8,460) | 3,279 | * | |||||||||||||||||
Net income (loss) | $ | 64,486 | $ | (7,331) | * | |||||||||||||||
* Represents positive or negative change in excess of net sales.100%
Net Sales
| Successor | ||||||||
| Statements of Income Data: | For the period from March 14 to December 31, 2015 | % of Net Sales | ||||||
| Net sales | $ | 604,275 | 100.0 | % | ||||
| Cost of goods sold | 513,723 | 85.0 | % | |||||
| Gross profit | 90,552 | 15.0 | % | |||||
| Selling, general and administrative expenses | (121,554 | ) | (20.1 | )% | ||||
| Impairment and exit charges | (1,026 | ) | (0.2 | )% | ||||
| Earnings from equity method investee | 8,429 | 1.4 | % | |||||
| Loss on sale of property, plant and equipment, net | (624 | ) | (0.1 | )% | ||||
| Other operating income | 1,716 | 0.3 | % | |||||
| (113,059 | ) | (18.7 | )% | |||||
| Loss from operations | (22,507 | ) | (3.7 | )% | ||||
| Other income (expenses) | ||||||||
| Interest expense | (45,953 | ) | (7.6 | )% | ||||
| Other expense, net | (326 | ) | (0.1 | )% | ||||
| Loss before income taxes | (68,786 | ) | (11.4 | )% | ||||
| Income tax expense | (5,392 | ) | (0.9 | )% | ||||
| Loss from continuing operations | (74,178 | ) | (12.3 | )% | ||||
| Discontinued operations, net of tax | (8,608 | ) | (1.4 | )% | ||||
| Net loss | $ | (82,786 | ) | (13.7 | )% | |||
Net sales for the periodyear ended December 31, 2020 were $604.3$1,594.5 million, which includedan increase of $64.7 million or 4.2% from $1,529.8 million for the year ended December 31, 2019. The increase was the net effect of $39.1a $90.3 million increase in our in our Water Pipe & Products segment mostly due to higher average selling prices; partially offset by a decrease of sales from Cretex.$25.6 million in our Drainage Pipe & Products segment primarily driven by lower shipment volumes, partially offset by higher average selling prices.
Cost of Goods Sold
Cost of goods sold for the year ended December 31, 2020 were $1,217.8 million, a decrease of $15.6 million or 1.3% from $1,233.4 million in the year ended December 31, 2019. The small decrease in cost of goods sold was $513.7the net effect of a $36.2 million which resulteddecrease in gross profitour Drainage Pipe & Products segment primarily driven by lower shipment volumes, partially offset by an increase of $90.6 million. Selling, general and administrative
$20.8 million in our Water Pipe & Products segment primarily due to a slight year-over-year increase in shipment volumes while unit cost of sales remained relatively flat.
56
Gross Profit
Gross profit in the year ended December 31, 2020 was $376.7 million, an increase of $80.3 million, or 27.1%, from $296.4 million in the year ended December 31, 2019. Gross profit in both our Water Pipe & Products segment and our Drainage Pipe & Products segment increased by $69.5 million and $10.6 million, respectively, primarily due to higher average selling prices in both businesses, partially offset by the volume decline in our Drainage Pipe & Products segment.
Selling, General and Administrative Expenses
Selling, general and administrative expenses in the year ended December 31, 2020 were $221.8 million, the same as $221.8 million in the year ended December 31, 2019. Higher incentive compensation expenses of $6.1 million driven by better results were partially offset by lower travel expenses of $3.1 million, and lower executive severance expenses of $2.5 million in 2020 compared to 2019.
Impairment and Exit Charges
Impairment and exit charges in the year ended December 31, 2020 were $2.5 million, compared to $3.5 million in the year ended December 31, 2019. The exit charges in both years primarily related to plant closings undertaken for the purpose of achieving operating efficiencies.
Interest Expense
Interest expense in the year ended December 31, 2020 was $79.9 million, a decrease of $15.1 million, or 15.9%, from $95.0 million in the year ended December 31, 2019. The decrease in interest expense was primarily driven by both the impact of lower LIBOR of $12.3 million and the impact of lower average outstanding debt balance of $4.0 million as we continued voluntarily prepaying our term loan, partially offset by $6.3 million impact of higher interest rate on the $500 million senior secured notes that were issued in July 2020. In addition, $5.4 million of the change was related to the decrease of mark-to-market loss on the interest rate swaps year over year.
Gain (loss) on extinguishment of debt
Loss on extinguishment of debt in the year ended December 31, 2020 was $12.3 million, compared to a gain of $1.7 million in the year ended December 31, 2019. The loss in 2020 was primarily driven by the write-off of the deferred debt issuance cost of $13.1 million associated with our $612.5 million term loan prepayment at par with the proceeds from the offering of our Senior Notes and cash on hand, slightly offset by a gain from our $83.5 million open-market term loan repurchases at small discounts. The gain in 2019 primarily related to our open-market purchases of term loan at discounts.
Income Tax (Expense) Benefit
Income tax expense in the year ended December 31, 2020 was $8.5 million, a change of $11.8 million from an income tax benefit of $3.3 million in the year ended December 31, 2019. The change is primarily due to the improvement of our operating income in 2020 to $72.9 million, compared to an operating loss of $10.6 million in 2019. The increase in income tax expense was partially offset by an $11.8 million reversal of valuation allowance in 2020 as our operating income improved over the prior year.
57
Segment Results of Operations
| (in thousands) | For the year ended December 31, | |||||||||||||||||||
| 2020 | 2019(2) | % Change | ||||||||||||||||||
| Net sales: | ||||||||||||||||||||
| Drainage Pipe & Products | $ | 887,420 | $ | 913,033 | (2.8) | % | ||||||||||||||
| Water Pipe & Products | 707,086 | 616,719 | 14.7 | % | ||||||||||||||||
| Corporate and Other | — | — | ||||||||||||||||||
| Total | $ | 1,594,506 | $ | 1,529,752 | 4.2 | % | ||||||||||||||
| Gross profit (loss): | ||||||||||||||||||||
| Drainage Pipe & Products | 211,568 | 201,015 | 5.2 | % | ||||||||||||||||
| Water Pipe & Products | 165,078 | 95,581 | 72.7 | % | ||||||||||||||||
| Corporate and Other | 27 | (214) | * | |||||||||||||||||
| Total | $ | 376,673 | $ | 296,382 | 27.1 | % | ||||||||||||||
Segment EBITDA(1): | ||||||||||||||||||||
| Drainage Pipe & Products | 187,547 | 173,006 | 8.4 | % | ||||||||||||||||
Water Pipe & Products(2) | 145,451 | 82,831 | 75.6 | % | ||||||||||||||||
| Corporate and Other | (90,666) | (74,219) | 22.2 | % | ||||||||||||||||
| For the period from March 14, 2015 to December 31, 2015: | |||||||||||||||
| Drainage Pipe & Products | Water Pipe & Products | Corporate and Other | Total | ||||||||||||
| Net sales | $ | 431,723 | $ | 167,417 | $ | 5,135 | $ | 604,275 | |||||||
| Gross profit (loss) | 69,601 | 23,000 | (2,049 | ) | 90,552 | ||||||||||
| EBITDA | 65,003 | 14,768 | (77,356 | ) | 2,415 | ||||||||||
| Key Operational Statistics | % Change | ||||
Drainage Pipe & Products(3) | |||||
| Shipment Volumes | -11% | ||||
| Average Selling Prices | +8% | ||||
Water Pipe & Products(4) | |||||
| Shipment Volumes | +3% | ||||
| Average Selling Prices | +14% | ||||
(1) For the purposes of evaluating segment performance, the Company’sCompany's chief operating decision maker reviews earnings before interest, taxes, depreciation and amortization, or EBITDA, as a basis for making the decisions to allocate resources and assess performance. Our discussion below includes the primary drivers of earningsEBITDA. See Note 21, Segment Reporting, to the condensed consolidated financial statements for segment EBITDA reconciliation to income (loss) before interest, taxes, depreciationincome taxes.
(2)During the fourth quarter of 2020, we reclassified the pressure pipe business from Water segment to Drainage segment to better align with our organizational structure. The US and amortization.
(3) Operational statistics only pertain to pipe and precast products and do not include other services, non-volume-based products, or non-core products. Pipe and precast products revenue accounted for more than 85% of the Cretex Acquisition. Gross profit was $69.6 million, which included a $30.0 million impactDrainage segment revenue.
(4) Operational statistics only pertain to costductile iron pipe products and do not include other services, non-volume-based products, or non-core products. Ductile iron pipe products revenue accounted for more than 85% of goods sold related to inventory step-up adjustments due to purchase accounting.Water segment revenue.
100%.
58
| Predecessor | ||||||
| Statements of Income Data: | For the period from January 1 to March 13, 2015 | % of Net Sales | ||||
| Net sales | $ | 112,698 | 100.0 | % | ||
| Cost of goods sold | 98,339 | 87.3 | % | |||
| Gross profit | 14,359 | 12.7 | % | |||
| Selling, general and administrative expenses | (17,106 | ) | (15.2 | )% | ||
| Impairment and exit charges | (542 | ) | (0.5 | )% | ||
| Earnings from equity method investee | 67 | 0.1 | % | |||
| Gain on sale of property, plant and equipment, net | 122 | 0.1 | % | |||
| Other operating income | 696 | 0.6 | % | |||
| (16,763 | ) | (14.9 | )% | |||
| Loss from operations | (2,404 | ) | (2.1 | )% | ||
| Other income (expenses) | ||||||
| Interest expense | (82 | ) | NM | |||
| Other expense, net | (28 | ) | NM | |||
| Loss before income taxes | (2,514 | ) | (2.2 | )% | ||
| Income tax benefit | 742 | 0.7 | % | |||
| Loss from continuing operations | (1,772 | ) | (1.6 | )% | ||
| Discontinued operations, net of tax | (3,984 | ) | (3.5 | )% | ||
| Net loss | $ | (5,756 | ) | (5.1 | )% | |
For the period from January 1, 2015 to March 13, 2015: | |||||||||||||||
| Predecessor | |||||||||||||||
| Drainage Pipe & Products | Water Pipe & Products | Corporate and Other | Total | ||||||||||||
| Net sales | $ | 79,341 | $ | 30,464 | $ | 2,893 | $ | 112,698 | |||||||
| Gross profit | 13,567 | 413 | 379 | 14,359 | |||||||||||
| EBITDA | 12,070 | (2,162 | ) | (7,951 | ) | 1,957 | |||||||||
Drainage Pipe & Products
Net sales were $79.3 million during the period which resulted in gross profit of $13.6 million.Sales
Net sales in the year ended December 31, 2020 was $887.4 million, a decrease of $25.6 million, or 2.8%, from $913.0 million in the year ended December 31, 2019. The decrease was primarily the net effect of a $91.3 million decrease due to lower shipment volumes in our pipe and precast products driven by less favorable weather in 2020 compared to 2019, temporary project delays related to the COVID-19 pandemic, as well as our margin-enhancing "value before volume" commercial strategy; partially offset by a $53.7 million increase driven by higher average selling price in our pipe and precast products. Pipe and precast products revenues accounted for more than 85% of the net sales in this segment. The remaining increase in net sales was primarily related to our structural precast business and was driven by higher shipment volumes.
Gross Profit
Gross profit in the year ended December 31, 2020 was $211.6 million, an increase of $10.6 million or 5.3%, from $201.0 million in the year ended December 31, 2019. The increase was primarily due to higher average selling prices, partially offset by lower shipment volumes of our pipe and precast products.
Water Pipe & Products
Net Sales
Net sales in the year ended December 31, 2020 were $30.5$707.1 million, duringan increase of $90.4 million or 14.7% from $616.7 million in the period which resultedyear ended December 31, 2019. The increase was primarily the combination of $76.2 million driven by higher average selling prices and $13.9 million driven by higher shipment volumes of our ductile iron pipe products. Ductile-iron pipe sales accounted for more than 85% of the net sales in grossthis segment.
Gross Profit
Gross profit in the year ended December 31, 2020 was $165.1 million, an increase of $0.4 million.$69.5 million or 72.7% from $95.6 million in the year ended December 31, 2019. The increase was primarily due to both higher average selling prices and higher shipment volumes.
Liquidity and Capital Resources
Our primaryavailable cash and cash equivalents, borrowing availability under our $350.0 million Revolver, and funds generated from operations are our most significant sources of liquidity are cash on hand, cash from operations and borrowings under our credit agreements. Weliquidity. While we believe these sources will be sufficient to fundfinance our working capital requirements, planned operations and capital expenditures inthat are essential, debt service obligations, lease payment obligations and other cash requirements for at least the next 24 months.
As of December 31, 20172021 and 2016,2020, we had approximately $104.5$56.8 million and $40.0$25.7 million of cash and cash equivalents, respectively, of which $19.1$19.0 million and $33.7$12.5 million, respectively, were held by foreign subsidiaries. All of the cash and cash equivalents as of December 31, 20172021 and 20162020 were readily convertible as of such dates into currencies used in the Company’s operations, including the U.S. dollar. As a result of the TCJA, the Companyrecent tax reform legislation, we can repatriate the cumulative undistributed foreign earnings back to the U.S. when needed with minimal additional taxes other than state income and foreign withholding tax.
59
In connection with the IPO, we entered into a tax receivable agreement with Lone Star that provides for the payment by us to Lone Star of specified amounts in respect of any cash savings as a result of the utilization of certain tax benefits. The actual utilization of the relevant tax benefits as well as the timing of any payments under the tax receivable agreement will vary depending upon a number of factors, including the amount, character and timing of our and our subsidiaries’ taxable income in the future. However, we expect that the payments we make under the tax receivable agreement could be substantial. The tax receivable agreement also includes provisions whichthat restrict the incurrence of debt and that require that we make an accelerated payment to Lone Star equal to the present value of all future payments due under the tax receivable agreement, in each case under certain circumstances. Because of the foregoing, our obligations under the tax receivable agreement could have a substantial negative impact on our liquidity and could have the effect of delaying, deferring or preventing certain mergers, asset sales, other forms of business combinations or other changes of control. The passage of the TCJA significantly reduced the Company's anticipated liability under the tax receivable agreement. Our liability recorded for the tax receivable agreement at December 31, 2021 and December 31, 2020 was $55.9 million and $64.2 million, respectively, with $7.7 million and $8.3 million, respectively, being classified as short-term. For the years ended December 31, 2021 and December 31, 2020, we paid $8.3 million and $13.1 million, respectively, to Lone Star under the tax receivable agreement.
Our forecast for payments under the tax receivable agreement in 2022 is expected to be in the range of $7 million to $9 million. We expect that future annual payments under the tax receivable agreement will decline each year in accordance with our tax basis depreciation and amortization schedule unless future transactions result in an acceleration of our tax benefits under the agreement. See Item 1A, Risk Factors and Note 15, Commitments and contingencies16 to the consolidated financial statements.
The 2016 Revolver provides for an aggregate principal amount of up to $300.0$350.0 million, with up to $280.0$330.0 million to be made available to the U.S. borrowers and up to $20.0 million to be made available to the Canadian borrowers. Subject to the conditions set forth in the new revolving credit agreement, the 2016 Revolver may be increased by up to the greater of (i) $100.0 million and (ii) such amount as would not cause the aggregate borrowing base to be exceeded by more than $50.0 million. Borrowings under the 2016 Revolver may not exceed a borrowing base equal to the sum of (i) 100% of eligible cash, (ii) 85% of eligible accounts receivable and (iii) the lesser of (a) 75% of eligible inventory and (b) 85% of the orderly liquidation value of eligible inventory, with the U.S. and Canadian borrowings being subject to separate borrowing base limitations. The 2016Revolver bears interest at a rate equal to LIBOR or CDOR plus a margin ranging from 1.75% to 2.25% per annum, or an alternate base rate, Canadian prime rate or Canadian base rate plus a margin ranging from 0.75% to 1.25% per annum, in each case, based upon the average excess availability under the Revolver for the most recently completed calendar quarter and our total leverage ratio as of the end of the most recent fiscal quarter for which financial statements have been delivered. The Revolver matures on October 25, 2021.
The Term Loan, as amended, provides for a $1.05$1.25 billion senior secured term loan that was made available to a newly formed direct subsidiary of Forterra, Inc. and used to repay the 2015 Senior Term Loan of Forterra Building Products.loan. Subject to the conditions set forth in the term loan agreement, the 2016 Senior Term Loan may be increased by (i) up to the greater of $285.0 million and 1.0x consolidated EBITDA of Forterra, Inc. and its restricted subsidiaries for the four quarters most recently ended prior to such incurrence plus (ii) the aggregate amount of any voluntary prepayments, plus (iii) an additional amount, provided certain financial tests are met. See Note 11 to our consolidated financial statements. The 2016 Senior Term Loan matures on October 25, 2023 and is subject to quarterly amortization equal to 0.25% of the initial principal amount. On May 1, 2017, the Company amended the 2016 Senior Term Loan to increase the principal outstanding by an additional $200.0 million and to reduce the margin interest margins applicable to the full balance of the 2016 Senior Term Loan by 50 basis points such that applicable margin is based on LIBOR has been reduced from 3.50% to 3.00%. Interest will accrue on outstanding borrowings thereunder at a rate equal to LIBOR (with
60
(with a floor of 1.0%) or an alternate base rate, in each case plus a margin of 3.00% or 2.00%, respectively. Our credit agreement does not provide a mechanism to facilitate the adoption of an alternative benchmark rate for use in place of LIBOR. We plan to monitor the expected phase-out of LIBOR and may seek to renegotiate the benchmark rate with our lenders in the future. See Item 1A. "Risk Factors."
The 2016 Revolver and the 2016 Senior Term Loan contain customary representations and warranties, and affirmative and negative covenants, that, among other things, restrict our ability to incur additional debt, incur or permit liens on assets, make investments and acquisitions, consolidate or merge with any other company, engage in asset sales and pay dividends and make distributions. The 2016 Revolver contains a financial covenant restricting Forterra from allowing its fixed charge coverage ratio to drop below 1.00:1.00 during a compliance period, which is triggered when the availability under the 2016 Revolver falls below a threshold. The fixed charge coverage ratio is the ratio of consolidated earnings before interest, depreciation, and amortization, less cash payments for capital expenditures and income taxes to consolidated fixed charges (interest expense plus scheduled payments of principal on indebtedness). The 2016 Senior Term Loan does not contain any financial covenants. Obligations under the 2016 Revolver and the 2016 Senior Term Loan may be accelerated upon certain customary events of default (subject to grace periods, as appropriate). As of December 31, 2021, we were in compliance with all applicable covenants under the Revolver and the Term Loan.
On July 16, 2020, two of our subsidiaries, Forterra Finance, LLC and FRTA Finance Corp., completed the issuance of $500 million senior secured notes, or the Notes, that are due July 15, 2025. The Notes have a fixed annual interest rate of 6.50%. Obligations under the Notes are guaranteed by us and our existing and future subsidiaries (other than the issuers) that guarantee the Term Loan and the obligations of the U.S. borrowers under the Revolver. The Notes and the related guarantees are secured by first-priority liens on the collateral that secures the Term Loan on a first-priority basis (which is generally all assets other than those that secure the Revolver on a first-priority basis as set forth below) and second-priority liens on the collateral that secures the Revolver on a first-priority basis (which is generally inventory, accounts receivable, deposit accounts, securities accounts, certain intercompany loans and related assets), which second-priority liens is ratable with the liens on such assets securing the obligations under the Term Loan and junior to the liens on such assets securing the Revolver. Upon closing on July 16, 2020, we used the net proceeds from this offering to repay $492.5 million of the principal amount of the Term Loan at par, plus accrued interest.
Parent Issuer and Subsidiary Guarantor Summarized Financial Information
The following information contains the summarized financial information for the parent (Forterra, Inc.) and subsidiary guarantors.
This consolidated summarized financial information has been prepared from the Company's financial information on the same basis of accounting as the Company's consolidated financial statements. Transactions between the parent and subsidiary guarantors presented on a combined basis have been eliminated. The principal elimination entries relate to investments in subsidiaries and intercompany balances and transactions. Certain costs have been partially allocated to all of the subsidiaries of the Company.
The subsidiary guarantors are 100% owned by the Company. All guarantees are full and unconditional and are joint and several. There are no significant restrictions on the ability of the Company to obtain funds from its U.S. subsidiaries, including the guarantors.
Summarized financial information for the two most recent annual periods was as follows (in thousands):
61
| Parent - Forterra, Inc. and Subsidiary Guarantors | ||||||||
| December 31, 2021 | December 31, 2020 | |||||||
| Current assets | $ | 566,907 | $ | 443,839 | ||||
| Intercompany payable to non-guarantor subsidiaries | 7,334 | 8,384 | ||||||
| Non-current assets | 1,085,017 | 1,115,191 | ||||||
| Current liabilities | 277,093 | 267,672 | ||||||
| Non-current liabilities | 1,153,624 | 1,176,492 | ||||||
| Parent - Forterra, Inc. and Subsidiary Guarantors | ||||||||
| Year ended December 31, 2021 | Year ended December 31, 2020 | |||||||
| Net sales | $ | 1,752,627 | $ | 1,514,556 | ||||
| Gross profit | 374,792 | 347,854 | ||||||
| Income before taxes | 123,513 | 58,880 | ||||||
| Net income | 91,277 | 52,273 | ||||||
Cash Flows
The following table sets forth a summary of the net cash provided by (used in) operating, investing and financing activities for the periods presented (in thousands).
| Year ended December 31, 2021 | Year ended December 31, 2020 | Year ended December 31, 2019 | |||||||||||||||
Statement of Cash Flows data: | |||||||||||||||||
| Net cash provided by operating activities | $ | 100,514 | $ | 243,197 | $ | 146,786 | |||||||||||
| Net cash used in investing activities | (48,008) | (18,373) | (42,295) | ||||||||||||||
| Net cash used in financing activities | (21,236) | (234,272) | (106,181) | ||||||||||||||
| Successor | Predecessor | |||||||||||||||
| Year ended December 31, 2017 | Year ended December 31, 2016 | March 14, 2015 to December 31, 2015 | January 1, 2015 to March 13, 2015 | |||||||||||||
Statement of Cash Flows data: | ||||||||||||||||
| Net cash provided by (used in) operating activities | $ | 42,334 | $ | 76,925 | $ | 121,417 | $ | (48,224 | ) | |||||||
| Net cash used in investing activities | (66,023 | ) | (1,062,447 | ) | (898,039 | ) | (2,762 | ) | ||||||||
| Net cash provided by financing activities | 86,250 | 981,728 | 822,580 | 60,907 | ||||||||||||
Net Cash Provided by (Used in) Operating Activities
Changes in operating cash flows between the periods are primarily due to the change in income from operations, timing of collections and payments, as well as the change in our inventory as compared to the prior year periods.
Operating cash flow decreased to $100.5 million in 2021 as compared to $243.2 million in 2020 primarily due to $159.2 million changes in net working capital items as compared to the prior year, partially offset by a $35.9 million increase in cash income from operations. Operating cash flow increased to $243.2 million in 2020 as compared to $146.8 million in 2019 primarily due to higher income from operations and better working capital management.
62
Net Cash Used in Investing Activities
Net cash providedused in investing activities was $48.0 million for the year ended December 31, 2021 primarily due to capital expenditures of $65.6 million and acquisition of Barbour of $7.3 million, partially offset by (used in) operatingproceeds from the sale of fixed assets of $24.9 million. Net cash used in investing activities was $18.4 million for the year ended December 31, 2020 primarily due to capital expenditures of $34.0 million, partially offset by proceeds from the sale of fixed assets of $15.6 million. Net cash used in investing activities was $42.3 million for the year ended December 31, 2017, $76.92019 primarily due to capital expenditures of $42.9 million and the acquisition of Buckner assets of $10.8 million, partially offset by proceeds from the sale of fixed assets of $11.4 million.
Net Cash Used in Financing Activities
Net cash used in financing activities was $21.2 million for the year ended December 31, 2016, $121.4 million for the period from March 14, 2015 to December 31, 2015, and $(48.2) million for the period from January 1, 2015 to March 13, 2015. Changes during the periods are2021 primarily due to $12.5 million repayments of principal on the variability betweenTerm Loan and $8.3 million payment pursuant to the timing of receipt and distribution of cash in our working capital accounts.
tax receivable agreement. Net cash used in investingfinancing activities was $66.0$234.3 million for the year ended December 31, 20172020 due primarily due to capital expenditures$707.6 million repayments of $52.5principal on the Term Loan, $13.1 million $1,062.4payment pursuant to the tax receivable agreement, and $11.4 million payment of debt issuance costs, partially offset by proceeds from senior secured notes of $500.0 million. Net cash used in financing activities was $106.2 million for the year ended December 31, 20162019 due primarily to $95.7 million of repayments of principal on the business acquisitions made of $1,008.2Term Loan and a $11.4 million $898.0 million for the period from March 14, 2015 to December 31, 2015 primarily duepayment pursuant to the Acquisition and Cretex acquisition, and $2.8tax receivable agreement. The $8.3 million forpayment under the period from January 1, 2015tax receivable agreement in 2021 was pertaining to March 13, 2015 duethe 2020 tax year. The $13.1 million payment under the tax receivable agreement in 2020 was pertaining to the 2019 tax year.
Capital Expenditures
Under normal circumstances, our annual sustaining capital expenditures.
Off-Balance Sheet Arrangements
In the ordinary course of our business, we are required to provide surety bonds and standby letters of credit to secure performance commitments. As of December 31, 2017,2021, outstanding stand-by letters of credit amounted to $15.1$18.8 million.
63
Contractual Obligations and Other Long-Term Liabilities
The following table summarizes our significant contractual obligations as of December 31, 2017.2021. Non-cancelable operating leases are presented net of non-cancelable subleases. Some of the amounts included in the table are based on management's estimate and assumptions about these obligations, including their duration, the possibility of renewal, anticipated actions by third parties and other factors. Because these estimates and assumptions are necessarily subjective, our actual payments may vary from those reflected in the table.
| Payment Due by Period | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Payment Due by Period | Total | 2022 | 2023 | 2024 | 2025 | 2026 | Thereafter | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total | 2018 | 2019 | 2020 | 2021 | 2022 | Thereafter | (In thousands) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (In thousands) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Senior term loan | 1,235,367 | 12,510 | 12,510 | 12,510 | 12,510 | 12,510 | 1,172,817 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Term loan | Term loan | $ | 402,357 | $ | 12,510 | $ | 389,847 | $ | — | $ | — | $ | — | $ | — | ||||||||||||||||||||||||||||||||||||||||||||||
| Notes | Notes | 500,000 | — | — | — | 500,000 | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Interest on indebtedness | 323,150 | 56,961 | 56,381 | 55,955 | 55,175 | 54,643 | 44,035 | 28,797 | 16,084 | 12,713 | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||
| Operating leases | 708,136 | 31,509 | 29,060 | 27,531 | 25,213 | 24,941 | 569,882 | Operating leases | 145,167 | 11,381 | 11,887 | 11,144 | 10,320 | 8,808 | 91,627 | ||||||||||||||||||||||||||||||||||||||||||||||
| Finance leases | Finance leases | 709,129 | 18,245 | 18,372 | 18,605 | 18,809 | 18,531 | 616,567 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total Commitments | 2,266,653 | 100,980 | 97,951 | 95,996 | 92,898 | 92,094 | 1,786,734 | Total Commitments | $ | 1,785,450 | $ | 58,220 | $ | 432,819 | $ | 29,749 | $ | 529,129 | $ | 27,339 | $ | 708,194 | |||||||||||||||||||||||||||||||||||||||
(1) The interest rate on the Term loan is 4.0%; the interest rate on the Notes is 6.5%.
Additionally, we have accrued approximately $83.0$48.2 million associated with the tax receivable agreement in long-term liabilities and $34.6$27.3 million of other long-term liabilities as of December 31, 2017.2021. The risks and uncertainties associated with the tax receivable agreement are further explaineddiscussed above and in Note 15, Commitments and contingencies16 to the consolidated financial statements.
Application of Critical Accounting Policies and Estimates
Business Combinations
Assets acquired and liabilities assumed in business combination transactions, as defined by ASC 805, Business Combination, are recorded at fair value using the acquisition method of accounting. We allocate the purchase price of acquisitions based upon the fair value of each component which may be derived from various observable and unobservable inputs and assumptions. Initial purchase price allocations are preliminary and subject to revision within the measurement period, not to exceed one year from the date of the transaction. The fair value of property, plant and equipment and intangible assets may be based upon the discounted cash flow method that involves inputs that are not observable in the market (Level 3). Goodwill assigned represents the amount of consideration transferred in excess of the fair value assigned to identifiable assets acquired and liabilities assumed.
Use of estimates
The preparation of our financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities as of the reporting date, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. These estimates are based on management’s best knowledge of current events and actions that the Company may undertake in the future. The more significant estimates made relate to fair value estimates for assets and liabilities acquired in business combinations; accrued liabilities for environmental cleanup, bodily injury and insurance claims; estimates for commitments and contingencies; and estimates for the realizability of deferred tax assets, the tax receivable agreement obligation, inventory reserves, allowance for doubtful accounts and impairment of goodwill and long-lived assets.
64
Inventories
Inventories are valued at the lower of cost or net realizable value. Our inventories are valued using the average cost and first-in-first-out methods. Inventories include materials, labor and applicable factory overhead costs. The value of inventory is adjusted for damaged, obsolete, excess and slow-moving inventory. Market value
of inventory is estimated considering the impact of market trends, an evaluation of economic conditions, and the value of current orders relating to the future sales of each respective component of inventory.
Goodwill and other intangible assets, net
Goodwill represents the excess of costs over the fair value of identifiable assets acquired and liabilities assumed. We evaluate goodwill and intangible assets in accordance with ASC 350, Goodwill and Other Intangible Assets which requires goodwill to be either qualitatively or quantitatively assessed for impairment annually (or more frequently if impairment indicators arise) for each reporting unit. We perform our annual impairment testing of goodwill as of October 1 of each year and in interim periods if events occur that would indicate that it is more likely than not the fair value of a reporting unit is less than carrying value. We first assessesassess qualitative factors to evaluate whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as the basis for determining whether it is necessary to perform a quantitative goodwill impairment test. We may bypass the qualitative assessment for any reporting unit in any period and proceed directly with the quantitative analysis. The quantitative analysis compares the fair value of the reporting unit with its carrying amount. If the carrying amount of a reporting unit exceeds the fair value, impairment is recognized in an amount equal to that excess, limited to the total amount of goodwill allocated to that reporting unit.
We determine the fair value of our reporting units using a weighted combination of the discounted cash flow method (income approach) and the guideline company method (market approach). Determining the fair value of a reporting unit requires judgment and the use of significant estimates and assumptions. Such estimates and assumptions include future revenue growth rates, gross profit margins, EBITDA margins, future capital expenditures, weighted average costs of capital and future market conditions, among others. We believe the estimates and assumptions used in our impairment assessments are reasonable; however, variations in any of the assumptions could result in materially different calculations of fair value and determinations of whether or not an impairment is indicated. Under the discounted cash flow method, we determine fair value based on estimated future cash flows of each reporting unit including estimates for capital expenditures, discounted to present value using the risk-adjusted industry rate, which reflect the overall level of inherent risk of the reporting unit. Cash flow projections are derived from one year budgeted amounts and five year operating forecasts plus an estimate of later period cash flows, all of which are evaluated by management. Subsequent period cash flows are developed for each reporting unit using growth rates that management believes are reasonably likely to occur. Under the guideline company method, we determine the estimated fair value of each of our reporting units by applying valuation multiples of comparable publicly-traded companies to each reporting unit’s projected EBITDA and then averaging that estimate with similar historical calculations using a three-year average. In addition, we estimate a reasonable control premium representing the incremental value that accrues to the majority owner from the opportunity to dictate the strategic and operational actions of the business.
Key assumptions for the measurement of an impairment include management’s estimate of future cash flows and EBITDA. The estimates of future cash flows and EBITDA are subjective in nature and are subject to impacts from the business risks described in “Item 1A. Risk Factors.” Therefore, the actual results could differ significantly from the amounts used for goodwill impairment testing, and significant changes in fair value estimates could occur, resulting in potential impairments in future periods.
For the years ended December 31, 2021, December 31, 2020 and December 31, 2019, no impairment charge was recorded for goodwill and intangible assets.
Leases Accounting Policy
We determine if an arrangement is a lease at inception. Leases with an initial term of 12 months or less are not recorded on the balance sheet. Operating leases are included in operating lease right-of-use, or ROU,
65
assets, accrued liabilities, and long-term operating lease liabilities in the consolidated balance sheets. Finance leases are included in property, plant and equipment, accrued liabilities, and long-term finance lease liabilities in the consolidated balance sheets.
ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. We use the implicit rate when readily determinable. The lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over the lease term.
We have lease agreements with lease and non-lease components, which are generally accounted for separately. For machinery and equipment leases, such as forklifts, we account for the lease and non-lease components as a single lease component.
Income Taxes
The Company computes the provision for income taxes using the asset/liability method. Deferred tax assets generally represent items that can be used as aand liabilities are recorded for temporary differences between the tax deduction or creditbasis of assets and liabilities and their reported amounts in the Company'sconsolidated financial statements using the statutory tax returnsrates in effect for the year in which the differences are expected to reverse. The Company uses the period cost method for Global Intangible Low-taxed Income (“GILTI”) provisions, and therefore, has not recorded deferred taxes for basis differences expected to reverse in future yearsperiods.
The Company evaluates the recoverability of its deferred tax assets quarterly to determine if valuation allowances are required or should be adjusted. In assessing the need for which a valuation allowance, the Company considers all available evidence for each jurisdiction, including past operating results, future reversal of taxable and deductible temporary differences, estimates of future taxable income, and the feasibility of ongoing tax benefit has already been recorded in our income statement.planning strategies. The measurement of a deferred tax asset is reduced, if necessary, by a valuation allowance if, based on theall available evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax liabilities generally represent tax expense recognized in the financial statements for which payment has been deferred, or expense for which we have already taken a deduction in its tax return but have not yet recognized as expense in the financial statements.
Revenue recognition
Revenues are recognized when the risks and rewards associated with the transaction have been transferred to the purchaser, which is demonstrated when all the following conditions are met: evidence of a binding arrangement exists, products have been delivered or services have been rendered, there is no future performance required, fees are fixed or determinable and amounts are collectible under normal payment terms. Sales represent the net amounts charged or chargeable in respect of services rendered and goods supplied, excluding intercompany sales. Sales are recognized net of any discounts given to the customer.
A portion of our sales revenue is derived from sales to distributors. Distributor revenue is recognized when all of the criteria for revenue recognition are met, which is generally the time of shipment to the distributor. All returns and credits are estimable and recognized as contra-revenue.
66
We bill and incur shipping costs to third parties for the transportation of building products and bill such costs to customers. For the years ended December 31, 20172021, 2020 and December 31, 2016, the period from March 14, 2015 to December 31, 2015, and the period from January 1, 2015 to March 13, 2015,2019, we recorded freight costs of approximately $132.3$153.9 million, $104.6 million, $50.0$122.7 million, and $9.2$131.8 million, respectively, on a gross basis within net sales and cost of goods sold in the accompanying consolidated statements of operations.
We generally provide limited warranties related to our products which cover manufacturing in accordance with the specifications identified on the face of our quotation or order acknowledgment and to be free of defects in workmanship or materials. The warranty periods typically extend for a limited duration of one year. We estimate and accrue for potential warranty exposure related to products which have been delivered.
Recent Accounting Guidance Adopted
In the normal course of business, we are exposed to financial risks such as changes in interest rates, foreign currency exchange rates and commodity price risk associated with our input costs. We utilize derivative instruments to manage selected foreign exchange and interest rate exposures. See Note 13 to our auditedthe consolidated financial statements.
Interest Rate Risk
Our exposure to market risk for changes in interest rates relates primarily to our long-term debt. The interest expense associated with our long-term debt will vary with market rates. Based upon our outstanding principal amountOn March 30, 2020, Forterra entered into an interest rate swap transaction with a notional value of debt$400 million to reduce exposure to interest rate fluctuations associated with a portion of $1,235.4 million atthe Term Loan. Under the terms of the swap transaction, Forterra agreed to pay a fixed rate of interest of 1.08% and receive floating rate of interest indexed to one-month LIBOR, subject to a minimum of 1.00%, with monthly settlement terms with the swap counterparty. The swap has a 30-month term and expires on September 30, 2022. At December 31, 2017, an2021, we estimate that 1% increase in the currentrates relating to the portion of our floating rate levelsdebt that is not hedged would increase annual interest requirements by approximately $5.0 million.
Borrowings under our Term Loan and our Revolver may use LIBOR as a benchmark for establishing the applicable interest rate. LIBOR is the subject of 1% wouldrecent regulatory guidance and proposals for reform, which are expected to ultimately lead to the discontinuation of LIBOR or to cause LIBOR to become unavailable as a benchmark rate. The consequences of these developments with respect to LIBOR cannot be entirely predicted but could result in ana significant increase in the cost of our annual interest expensevariable rate indebtedness causing a negative impact on our financial position, liquidity and results of $12.4 million.
operations. Our credit agreement does not provide a mechanism to facilitate the adoption of an alternative benchmark rate for use in place of LIBOR. We plan to carefully monitor
67
the situation and may seek to renegotiate the benchmark for establishing the applicable interest rate with our lenders in the future. See Item 1A. "Risk Factors."
Foreign Currency Risk
Approximately 6.0%5.7% of our net sales for the year ended December 31, 20172021 were made in countries outside of the U.S. As a result, we are exposed to movements in foreign exchange rates between the U.S. dollar and other currencies. Based upon our net sales for the year ended December 31, 2017,2021, we estimate that a 1% change in the exchange rate between the U.S. dollar and foreign currencies would affect net sales by approximately $0.8$1.1 million. This may differ from actual results depending on the levels of net sales outside of the U.S.
Commodity Price Risk
We are subject to commodity price risks with respect to price changes mainly in the electricity and natural gas markets and other raw material costs, such as cement, aggregates, steelscrap and clay.steel. Price fluctuations on our key inputs have a significant effect on our financial performance. The markets for most of these commodities are cyclical and are affected by factors such as the global economic conditions, changes in or disruptions to industry production capacity, changes in inventory levels and other factors beyond our control.
Credit Risk
Financial instruments that potentially subject us to a concentration of credit risk consist principally of accounts receivable. We provide our products to customers based on an evaluation of the financial condition of our customers, generally without requiring collateral. Exposure to losses on receivables is principally dependent on each customer's financial condition. We monitor the exposure for credit losses and maintain allowances for anticipated losses. Concentrations of credit risk with respect to our accounts receivable are limited due to the large number of customers comprising our customer base and their dispersion among many different geographies.
At December 31, 20172021 and 2016, the Company2020, we had an individual customer within itsour Water Pipe & Products segment that accounted for more than 10% of total net sales for the years ended December 31, 20172021 and 2016.2020. The customer represented approximately 13%18% and 11%16% of the Company'sour total net sales for the years ended December 31, 20172021 and 2016,2020, respectively, and had total receivables at December 31, 20172021 and 20162020 totaling 17% and 13%16% of the Companyour total receivables, net, respectively. No similar large customer existed for the year ended December 31, 2015.
68
Item 8. Financial Statements and Supplementary Data
TABLE OF CONTENTS
| Consolidated Financial Statements | |||||
Report of Independent Registered Public Accounting Firm (PCAOB ID: 42) | |||||
| Consolidated | |||||
| Consolidated | |||||
| Consolidated Balance Sheets | |||||
| Consolidated | |||||
| Consolidated | |||||
| Consolidated | |||||
69
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of Forterra, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Forterra, Inc. (the Successor or the Company) as of December 31, 20172021 and 2016,2020, and the related consolidated statements of operations, comprehensive income (loss), shareholders’ equity and cash flows for the each of the twothree years in the period ended December 31, 2017 and for the period from March 14, 2015 to December 31, 2015, and the related notes. We have also audited the accompanying combined statements of operations, comprehensive loss, parent company net investment, and cash flows of the North American building products operations of HeidelbergCement AG (the Predecessor) for the period from January 1, 2015 to March 13, 2015,2021, and the related notes (collectively referred to as the “financial“consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Company at December 31, 20172021 and 2016,2020, and the consolidated results of its operations and its cash flows for each of the twothree years in the period ended December 31, 2017 and for the period from March 14, 2015 to December 31, 2015, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the financial statements present fairly, in all material respects, the Predecessor’s combined results of operations and cash flows for the period from January 1, 2015 to March 13, 2015,2021, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2017,2021, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated March 7, 20181, 2022 expressed an adverseunqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the
PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the account or disclosure to which it relates.
70
Realizability of deferred tax assets
| Description of the Matter | As more fully described in Note 20 to the consolidated financial statements, at December 31, 2021, the Company had deferred tax assets related to deductible temporary differences of $85.6 million, net of a $1.4 million valuation allowance. Deferred tax assets are reduced by a valuation allowance if, based on the weight of all available evidence, in management’s judgment it is more likely than not that some portion, or all, of the deferred tax assets will not be realized. Auditing management’s assessment of the realizability of its deferred tax assets involved complex auditor judgment because management’s estimate is highly judgmental and based on significant assumptions that may be affected by future market or economic conditions. | |||||||
| How We Addressed the Matter in Our Audit | We obtained an understanding, evaluated the design, and tested the operating effectiveness of controls that address the risks of material misstatement relating to the realizability of deferred tax assets. This included controls over management’s scheduling of the future reversal of existing taxable temporary differences and projections of future taxable income. Among other audit procedures performed, we tested the Company’s scheduling of the reversal of existing temporary taxable differences, including evaluation of the timing of the reversal pattern. We evaluated the assumptions used by the Company to develop projections of future taxable income by jurisdiction and tested the completeness and accuracy of the underlying data used in its projections. For example, we compared the projections of future taxable income with the actual results of prior periods, as well as management’s consideration of current industry and economic trends. We also assessed the historical accuracy of management’s projections and compared the projections of future taxable income with other forecasted financial information prepared by the Company. | |||||||
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 2013.
Dallas, Texas
March 7, 20181, 2022
71
FORTERRA, INC.
Consolidated (Successor) / Combined (Predecessor) Statements of Operations
(in thousands, except per share data)
| Year ended December 31, | |||||||||||||||||
| 2021 | 2020 | 2019 | |||||||||||||||
| Net sales | $ | 1,858,270 | $ | 1,594,506 | $ | 1,529,752 | |||||||||||
| Cost of goods sold | 1,437,872 | 1,217,833 | 1,233,370 | ||||||||||||||
| Gross profit | 420,398 | 376,673 | 296,382 | ||||||||||||||
| Selling, general & administrative expenses | (216,146) | (221,770) | (221,770) | ||||||||||||||
| Impairment and exit charges | (645) | (2,511) | (3,520) | ||||||||||||||
| Other operating income, net | 13,763 | 1,409 | 1,094 | ||||||||||||||
| (203,028) | (222,872) | (224,196) | |||||||||||||||
| Income from operations | 217,370 | 153,801 | 72,186 | ||||||||||||||
| Other income (expenses) | |||||||||||||||||
| Interest expense | (74,976) | (79,890) | (94,970) | ||||||||||||||
| Gain (loss) on extinguishment of debt | — | (12,256) | 1,708 | ||||||||||||||
| Earnings from equity method investee | 12,592 | 11,291 | 10,466 | ||||||||||||||
| Income (loss) before income taxes | 154,986 | 72,946 | (10,610) | ||||||||||||||
| Income tax (expense) benefit | (38,669) | (8,460) | 3,279 | ||||||||||||||
| Net income (loss) | $ | 116,317 | $ | 64,486 | $ | (7,331) | |||||||||||
| Earnings (loss) per share: | |||||||||||||||||
| Basic | $ | 1.74 | $ | 0.99 | $ | (0.11) | |||||||||||
| Diluted | $ | 1.67 | $ | 0.94 | $ | (0.11) | |||||||||||
| Weighted average shares of common stock outstanding: | |||||||||||||||||
| Basic | 66,719 | 65,260 | 64,232 | ||||||||||||||
| Diluted | 69,644 | 68,203 | 64,232 | ||||||||||||||
| Successor | Predecessor | |||||||||||||||
| For the period from | For the period from | |||||||||||||||
Year ended December 31, | Year ended December 31, | March 14 to December 31, | January 1 to March 13, | |||||||||||||
| 2017 | 2016 | 2015 | 2015 | |||||||||||||
| Net sales | $ | 1,580,413 | $ | 1,363,962 | $ | 604,275 | $ | 112,698 | ||||||||
| Cost of goods sold | 1,327,305 | 1,083,508 | 513,723 | 98,339 | ||||||||||||
| Gross profit | 253,108 | 280,454 | 90,552 | 14,359 | ||||||||||||
| Selling, general & administrative expenses | (255,034 | ) | (216,099 | ) | (121,554 | ) | (17,106 | ) | ||||||||
| Impairment and exit charges | (13,220 | ) | (2,218 | ) | (1,026 | ) | (542 | ) | ||||||||
| Earnings from equity method investee | 12,360 | 11,947 | 8,429 | 67 | ||||||||||||
| Gain (loss) on sale of property, plant, and equipment, net | (2,107 | ) | (21,274 | ) | (624 | ) | 122 | |||||||||
| Other operating income, net | 7,304 | 10,303 | 1,716 | 696 | ||||||||||||
| (250,697 | ) | (217,341 | ) | (113,059 | ) | (16,763 | ) | |||||||||
| Income (loss) from operations | 2,411 | 63,113 | (22,507 | ) | (2,404 | ) | ||||||||||
| Other income (expenses) | ||||||||||||||||
| Interest expense | (59,408 | ) | (125,048 | ) | (45,953 | ) | (82 | ) | ||||||||
| Change in tax receivable agreement liability | 46,180 | — | — | — | ||||||||||||
| Other income (expense), net | (31,915 | ) | (847 | ) | (326 | ) | (28 | ) | ||||||||
| Loss before income taxes | (42,732 | ) | (62,782 | ) | (68,786 | ) | (2,514 | ) | ||||||||
| Income tax (expense) benefit | 40,672 | 51,692 | (5,392 | ) | 742 | |||||||||||
| Loss from continuing operations | (2,060 | ) | (11,090 | ) | (74,178 | ) | (1,772 | ) | ||||||||
| Discontinued operations, net of tax | — | 3,484 | (8,608 | ) | (3,984 | ) | ||||||||||
| Net loss | $ | (2,060 | ) | $ | (7,606 | ) | $ | (82,786 | ) | $ | (5,756 | ) | ||||
| Basic and Diluted earnings (loss) per share: | ||||||||||||||||
| Continuing operations | $ | (0.03 | ) | $ | (0.23 | ) | $ | (1.63 | ) | |||||||
| Discontinued operations | $ | — | $ | 0.07 | $ | (0.19 | ) | |||||||||
| Net loss | $ | (0.03 | ) | $ | (0.16 | ) | $ | (1.82 | ) | |||||||
| Weighted average shares of common stock outstanding: | ||||||||||||||||
| Basic and Diluted | 63,801 | 49,053 | 45,369 | |||||||||||||
See accompanying notes to financial statements
72
FORTERRA, INC.
Consolidated (Successor) / Combined (Predecessor) Statements of Comprehensive Income (Loss)
(in thousands)
| Year ended December 31, | |||||||||||||||||
| 2021 | 2020 | 2019 | |||||||||||||||
| Net income (loss) | $ | 116,317 | $ | 64,486 | $ | (7,331) | |||||||||||
| Change in other postretirement benefit plans, net of tax | — | (1,042) | 373 | ||||||||||||||
| Foreign currency translation adjustment | (252) | 1,149 | 3,304 | ||||||||||||||
| Comprehensive income (loss) | $ | 116,065 | $ | 64,593 | $ | (3,654) | |||||||||||
| Successor | Predecessor | |||||||||||||||
| For the period from | For the period from | |||||||||||||||
| Year ended December 31, | Year ended December 31, | March 14 to December 31, | January 1 to March 13, | |||||||||||||
| 2017 | 2016 | 2015 | 2015 | |||||||||||||
| Net loss | $ | (2,060 | ) | $ | (7,606 | ) | $ | (82,786 | ) | $ | (5,756 | ) | ||||
| Actuarial gains on defined benefit plans, net of tax | — | — | — | 2,645 | ||||||||||||
| Unrealized gain (loss) on derivative activities, net of tax | (3,548 | ) | 215 | 1,549 | — | |||||||||||
| Foreign currency translation adjustment | 3,475 | (472 | ) | (6,317 | ) | (19,751 | ) | |||||||||
| Comprehensive loss | $ | (2,133 | ) | $ | (7,863 | ) | $ | (87,554 | ) | $ | (22,862 | ) | ||||
See accompanying notes to financial statements
73
FORTERRA, INC.
Consolidated Balance Sheets
(in thousands, except per share data)
| December 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| ASSETS | |||||||||||
| Current assets | |||||||||||
| Cash and cash equivalents | $ | 56,832 | $ | 25,678 | |||||||
| Receivables, net | 293,856 | 227,948 | |||||||||
| Inventories | 263,684 | 222,928 | |||||||||
| Prepaid expenses | 10,869 | 7,967 | |||||||||
| Other current assets | 3,128 | 2,022 | |||||||||
| Total current assets | 628,369 | 486,543 | |||||||||
| Non-current assets | |||||||||||
| Property, plant and equipment, net | 458,681 | 451,082 | |||||||||
| Operating lease right-of-use assets | 52,808 | 54,379 | |||||||||
| Goodwill | 509,936 | 509,127 | |||||||||
| Intangible assets, net | 69,105 | 101,409 | |||||||||
| Investment in equity method investee | 49,292 | 48,285 | |||||||||
| Deferred tax assets | 1,769 | 2,351 | |||||||||
| Other long-term assets | 4,073 | 4,987 | |||||||||
| Total assets | $ | 1,774,033 | $ | 1,658,163 | |||||||
| LIABILITIES AND EQUITY | |||||||||||
| Current liabilities | |||||||||||
| Trade payables | $ | 144,510 | $ | 134,144 | |||||||
| Accrued liabilities | 116,683 | 115,693 | |||||||||
| Deferred revenue | 10,559 | 8,220 | |||||||||
| Current portion of long-term debt | 12,510 | 12,510 | |||||||||
| Current portion of tax receivable agreement | 7,709 | 8,333 | |||||||||
| Total current liabilities | 291,971 | 278,900 | |||||||||
| Non-current liabilities | |||||||||||
| Long-term debt | 879,272 | 887,511 | |||||||||
| Long-term finance lease liabilities | 142,940 | 142,195 | |||||||||
| Long-term operating lease liabilities | 49,814 | 50,943 | |||||||||
| Deferred tax liabilities | 15,469 | 12,022 | |||||||||
| Other long-term liabilities | 27,301 | 36,918 | |||||||||
| Long-term tax receivable agreement | 48,199 | 55,907 | |||||||||
| Total liabilities | 1,454,966 | 1,464,396 | |||||||||
| Commitments and Contingencies (Note 16) | 0 | 0 | |||||||||
| Equity | |||||||||||
| Common stock, $0.001 par value. 190,000 shares authorized; 67,329 and 65,981 shares issued and outstanding at December 31, 2021 and December 31, 2020, respectively | 19 | 19 | |||||||||
| Additional paid-in-capital | 261,814 | 252,579 | |||||||||
| Accumulated other comprehensive loss | (7,208) | (6,956) | |||||||||
| Retained earnings / (deficit) | 64,442 | (51,875) | |||||||||
| Total shareholders' equity | 319,067 | 193,767 | |||||||||
| Total liabilities and shareholders' equity | $ | 1,774,033 | $ | 1,658,163 | |||||||
| December 31, | |||||||
| 2017 | 2016 | ||||||
| ASSETS | |||||||
| Current assets | |||||||
| Cash and cash equivalents | $ | 104,534 | $ | 40,024 | |||
| Receivables, net | 192,654 | 201,481 | |||||
| Inventories | 236,655 | 279,502 | |||||
| Prepaid expenses | 5,381 | 6,417 | |||||
| Other current assets | 27,059 | 5,179 | |||||
| Current assets held for sale | 12,242 | — | |||||
| Total current assets | 578,525 | 532,603 | |||||
| Non-current assets | |||||||
| Property, plant and equipment, net | 412,572 | 452,914 | |||||
| Goodwill | 496,141 | 491,447 | |||||
| Intangible assets, net | 225,304 | 281,598 | |||||
| Investment in equity method investee | 54,445 | 55,236 | |||||
| Other long-term assets | 18,866 | 10,988 | |||||
| Non-current assets held for sale | 25,385 | — | |||||
| Total assets | $ | 1,811,238 | $ | 1,824,786 | |||
| LIABILITIES AND EQUITY | |||||||
| Current liabilities | |||||||
| Trade payables | $ | 108,560 | $ | 134,059 | |||
| Accrued liabilities | 72,782 | 78,165 | |||||
| Deferred revenue | 9,029 | 20,797 | |||||
| Current portion of long-term debt | 12,510 | 10,500 | |||||
| Current portion of tax receivable agreement | 34,601 | 4,000 | |||||
| Current liabilities held for sale | 4,615 | — | |||||
| Total current liabilities | 242,097 | 247,521 | |||||
| Non-current liabilities | |||||||
| Senior term loan | 1,181,277 | 990,483 | |||||
| Revolving credit facility | — | 95,064 | |||||
| Deferred tax liabilities | 67,481 | 100,550 | |||||
| Deferred gain on sale-leaseback | 75,743 | 78,215 | |||||
| Other long-term liabilities | 29,187 | 23,253 | |||||
| Long-term tax receivable agreement | 82,962 | 156,783 | |||||
| Total liabilities | 1,678,747 | 1,691,869 | |||||
| Commitments and Contingencies (Note 15) | |||||||
| Equity | |||||||
| Common stock, $0.001 par value. 190,000 shares authorized; 64,231 and 63,924 shares issued and outstanding at December 31, 2017 and December 31, 2016, respectively | 18 | 18 | |||||
| Additional paid-in-capital | 230,023 | 228,316 | |||||
| Accumulated other comprehensive loss | (5,098 | ) | (5,025 | ) | |||
| Retained deficit | (92,452 | ) | (90,392 | ) | |||
| Total shareholders' equity | 132,491 | 132,917 | |||||
| Total liabilities and shareholders' equity | $ | 1,811,238 | $ | 1,824,786 | |||
See accompanying notes to financial statements
74
FORTERRA, INC.
Consolidated (Successor) / Combined (Predecessor) Statements of Shareholders' Equity and Parent Company Net Investment
(in thousands, except share data)
| Common Stock | ||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Additional Paid-in-Capital | Accumulated Other Comprehensive Income (Loss) | Retained Earnings / (Deficit) | Total Shareholders' Equity | |||||||||||||||||||||||||||||||||
| Balance at December 31, 2018 | 64,205,604 | $ | 18 | $ | 234,931 | $ | (10,740) | $ | (115,987) | $ | 108,222 | |||||||||||||||||||||||||||
| Cumulative effect of accounting changes, net of tax | — | — | — | — | 6,957 | 6,957 | ||||||||||||||||||||||||||||||||
| Share-based compensation expense | — | — | 7,919 | — | — | 7,919 | ||||||||||||||||||||||||||||||||
| Stock-based plan activity | 535,063 | 1 | 1,522 | — | — | 1,523 | ||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | (7,331) | (7,331) | ||||||||||||||||||||||||||||||||
| Foreign currency translation adjustment | — | — | — | 3,304 | — | 3,304 | ||||||||||||||||||||||||||||||||
| Other | — | — | — | 373 | — | 373 | ||||||||||||||||||||||||||||||||
| Balance at December 31, 2019 | 64,740,667 | $ | 19 | $ | 244,372 | $ | (7,063) | $ | (116,361) | $ | 120,967 | |||||||||||||||||||||||||||
| Share-based compensation expense | — | — | 9,489 | — | — | 9,489 | ||||||||||||||||||||||||||||||||
| Stock-based plan activity | 1,240,120 | — | (1,282) | — | — | (1,282) | ||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | 64,486 | 64,486 | ||||||||||||||||||||||||||||||||
| Foreign currency translation adjustment | — | — | — | 1,149 | — | 1,149 | ||||||||||||||||||||||||||||||||
| Other | — | — | — | (1,042) | — | (1,042) | ||||||||||||||||||||||||||||||||
| Balance at December 31, 2020 | 65,980,787 | $ | 19 | $ | 252,579 | $ | (6,956) | $ | (51,875) | $ | 193,767 | |||||||||||||||||||||||||||
| Share-based compensation expense | — | — | 8,740 | — | — | 8,740 | ||||||||||||||||||||||||||||||||
| Stock-based plan activity | 1,348,253 | — | 495 | — | — | 495 | ||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | 116,317 | 116,317 | ||||||||||||||||||||||||||||||||
| Foreign currency translation adjustment | — | — | — | (252) | — | (252) | ||||||||||||||||||||||||||||||||
| Balance at December 31, 2021 | 67,329,040 | $ | 19 | $ | 261,814 | $ | (7,208) | $ | 64,442 | $ | 319,067 | |||||||||||||||||||||||||||
| Accumulated Net Contributions from Parent | Accumulated Other Comprehensive Income (Loss) | Total Parent Company Net Investment | ||||||||||
| Predecessor | ||||||||||||
| Balance at December 31, 2014 | $ | 678,662 | $ | (21,189 | ) | $ | 657,473 | |||||
| Net loss | (5,756 | ) | — | (5,756 | ) | |||||||
| Actuarial gains on defined benefit plans, net of tax | — | 2,645 | 2,645 | |||||||||
| Foreign currency translation adjustment | — | (19,751 | ) | (19,751 | ) | |||||||
| Net transfers from Parent | 60,910 | — | 60,910 | |||||||||
| Balance at March 13, 2015 | $ | 733,816 | $ | (38,295 | ) | $ | 695,521 | |||||
| Common Stock | |||||||||||||||||||||||
| Shares | Amount | Additional Paid-in-Capital | Accumulated Other Comprehensive Income (Loss) | Retained Deficit | Total Shareholders' Equity | ||||||||||||||||||
| Successor | |||||||||||||||||||||||
| Balance at March 14, 2015 | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||
| Initial capital contribution from parent | — | — | 167,482 | — | — | 167,482 | |||||||||||||||||
| Return of contributed capital, net | — | — | (27,613 | ) | — | — | (27,613 | ) | |||||||||||||||
| Net loss | — | — | — | — | (82,786 | ) | (82,786 | ) | |||||||||||||||
| Gains on derivative transactions, net of tax | — | — | — | 1,549 | — | 1,549 | |||||||||||||||||
| Foreign currency translation adjustment | — | — | — | (6,317 | ) | — | (6,317 | ) | |||||||||||||||
| Balance at December 31, 2015 | — | $ | — | $ | 139,869 | $ | (4,768 | ) | $ | (82,786 | ) | $ | 52,315 | ||||||||||
| Capital contributions from parent | — | — | 402,127 | — | — | 402,127 | |||||||||||||||||
| Return of contributed capital, net | — | — | (325,148 | ) | — | — | (325,148 | ) | |||||||||||||||
| Brick Disposition, net of tax | — | — | (150,222 | ) | — | — | (150,222 | ) | |||||||||||||||
| Issuance of common stock at Reorganization | 45,369,474 | — | — | — | — | — | |||||||||||||||||
| Issuance of common stock at IPO | 18,420,000 | 18 | 303,787 | — | — | 303,805 | |||||||||||||||||
| Issuance of restricted shares | 134,650 | — | — | — | — | — | |||||||||||||||||
| Issuance of tax receivable agreement, net of tax | — | — | (142,349 | ) | — | — | (142,349 | ) | |||||||||||||||
| Share-based compensation expense | — | — | 252 | — | — | 252 | |||||||||||||||||
| Net loss | — | — | — | — | (7,606 | ) | (7,606 | ) | |||||||||||||||
| Gains on derivative transactions, net of tax | — | — | — | 215 | — | 215 | |||||||||||||||||
| Foreign currency translation adjustment | — | — | — | (472 | ) | — | (472 | ) | |||||||||||||||
| Balance at December 31, 2016 | 63,924,124 | $ | 18 | $ | 228,316 | $ | (5,025 | ) | $ | (90,392 | ) | $ | 132,917 | ||||||||||
| Share-based compensation expense | — | 3,696 | — | — | 3,696 | ||||||||||||||||||
| Issuance of restricted shares | 310,618 | — | — | — | — | — | |||||||||||||||||
| Shares withheld for taxes | (3,854 | ) | — | (37 | ) | — | — | (37 | ) | ||||||||||||||
| Net loss | — | — | — | (2,060 | ) | (2,060 | ) | ||||||||||||||||
| Loss on derivative transactions, net of tax | — | — | (3,548 | ) | — | (3,548 | ) | ||||||||||||||||
| Other | — | (1,952 | ) | — | — | (1,952 | ) | ||||||||||||||||
| Foreign currency translation adjustment | — | — | — | 3,475 | — | 3,475 | |||||||||||||||||
| Balance at December 31, 2017 | 64,230,888 | $ | 18 | $ | 230,023 | $ | (5,098 | ) | $ | (92,452 | ) | $ | 132,491 | ||||||||||
See accompanying notes to financial statements
75
FORTERRA, INC.
Consolidated (Successor) / Combined (Predecessor) Statements of Cash Flows
(in thousands)
| Successor | Predecessor | ||||||||||||||||||||||||||||||||
| For the period from | For the period from | ||||||||||||||||||||||||||||||||
| Year ended December 31, | Year ended December 31, | March 14 to December 31, | January 1 to March 13, | Year ended December 31, | |||||||||||||||||||||||||||||
| 2017 | 2016 | 2015 | 2015 | 2021 | 2020 | 2019 | |||||||||||||||||||||||||||
| CASH FLOWS FROM OPERATING ACTIVITIES | CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||||||||||||||||||||||||||
| Net loss | $ | (2,060 | ) | $ | (7,606 | ) | $ | (82,786 | ) | $ | (5,756 | ) | |||||||||||||||||||||
| Adjustments to reconcile net loss to net cash provided by (used in) operating activities: | |||||||||||||||||||||||||||||||||
| Net income (loss) | Net income (loss) | $ | 116,317 | $ | 64,486 | $ | (7,331) | ||||||||||||||||||||||||||
| Adjustments to reconcile net income (loss) to net cash provided by operating activities: | Adjustments to reconcile net income (loss) to net cash provided by operating activities: | ||||||||||||||||||||||||||||||||
| Depreciation & amortization expense | 115,659 | 99,873 | 32,930 | 6,894 | Depreciation & amortization expense | 82,556 | 89,496 | 97,258 | |||||||||||||||||||||||||
| Loss on business divestiture | 32,278 | — | — | — | |||||||||||||||||||||||||||||
| Loss (gain) on disposal of property, plant and equipment | 2,107 | 21,267 | 618 | (122 | ) | ||||||||||||||||||||||||||||
| (Gain) / loss on disposal of property, plant and equipment | (Gain) / loss on disposal of property, plant and equipment | (10,295) | 638 | 2,045 | |||||||||||||||||||||||||||||
| (Gain) / loss on extinguishment of debt | (Gain) / loss on extinguishment of debt | — | 12,256 | (1,708) | |||||||||||||||||||||||||||||
| Amortization of debt discount and issuance costs | 8,123 | 8,244 | 5,085 | — | Amortization of debt discount and issuance costs | 4,940 | 6,599 | 7,962 | |||||||||||||||||||||||||
| Stock-based compensation expense | 3,696 | 252 | — | — | Stock-based compensation expense | 8,740 | 9,489 | 7,919 | |||||||||||||||||||||||||
| Impairment on property, plant, and equipment and goodwill | 10,551 | — | 1,088 | 27 | |||||||||||||||||||||||||||||
| Write-off of debt discount and issuance costs | — | 22,385 | — | — | |||||||||||||||||||||||||||||
| Impairment of property, plant, and equipment and goodwill | Impairment of property, plant, and equipment and goodwill | 382 | 1,206 | 128 | |||||||||||||||||||||||||||||
| Earnings from equity method investee | (12,360 | ) | (11,947 | ) | (8,429 | ) | (67 | ) | Earnings from equity method investee | (12,592) | (11,291) | (10,466) | |||||||||||||||||||||
| Distributions from equity method investee | 13,150 | 13,000 | 8,542 | — | Distributions from equity method investee | 11,585 | 13,039 | 11,039 | |||||||||||||||||||||||||
| Unrealized (gain) loss on derivative instruments, net | (5,251 | ) | 2,945 | (8,331 | ) | — | |||||||||||||||||||||||||||
| Unrealized foreign currency gains, net | (615 | ) | (5,485 | ) | 6,940 | (26 | ) | ||||||||||||||||||||||||||
| Unrealized (gain) / loss on derivative instruments, net | Unrealized (gain) / loss on derivative instruments, net | (378) | 830 | 6,401 | |||||||||||||||||||||||||||||
| Unrealized foreign currency (gains) / losses, net | Unrealized foreign currency (gains) / losses, net | (89) | 311 | 45 | |||||||||||||||||||||||||||||
| Provision (recoveries) for doubtful accounts | 2,947 | (1,864 | ) | 1,377 | (31 | ) | Provision (recoveries) for doubtful accounts | 1,049 | (271) | 387 | |||||||||||||||||||||||
| Deferred taxes | (25,496 | ) | (67,619 | ) | (3,138 | ) | 2,749 | ||||||||||||||||||||||||||
| Deferred rent | 2,616 | 1,371 | 1,279 | — | |||||||||||||||||||||||||||||
| Deferred income taxes | Deferred income taxes | 4,029 | (19,258) | (20,067) | |||||||||||||||||||||||||||||
| Other non-cash items | 196 | 1,012 | (13 | ) | (1,736 | ) | Other non-cash items | 2,418 | 5,188 | 1,320 | |||||||||||||||||||||||
| Change in assets and liabilities: | Change in assets and liabilities: | ||||||||||||||||||||||||||||||||
| Receivables, net | (16,831 | ) | 16,852 | 28,900 | (7,520 | ) | Receivables, net | (64,668) | (21,421) | (7,394) | |||||||||||||||||||||||
| Inventories | 1,838 | 14,916 | 59,506 | (20,160 | ) | Inventories | (39,883) | 15,683 | 47,491 | ||||||||||||||||||||||||
| Other current assets | (23,436 | ) | (6,412 | ) | (2,153 | ) | (855 | ) | Other current assets | (3,962) | 9,662 | 514 | |||||||||||||||||||||
| Accounts payable and accrued liabilities | (19,424 | ) | (27,655 | ) | 72,422 | (20,119 | ) | Accounts payable and accrued liabilities | 7,171 | 53,936 | 2,675 | ||||||||||||||||||||||
| Change in tax receivable agreement liability | (46,180 | ) | — | — | — | ||||||||||||||||||||||||||||
| Other assets & liabilities | 826 | 3,396 | 7,580 | (1,502 | ) | Other assets & liabilities | (6,806) | 12,619 | 8,568 | ||||||||||||||||||||||||
| NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES | 42,334 | 76,925 | 121,417 | (48,224 | ) | ||||||||||||||||||||||||||||
| NET CASH PROVIDED BY OPERATING ACTIVITIES | NET CASH PROVIDED BY OPERATING ACTIVITIES | 100,514 | 243,197 | 146,786 | |||||||||||||||||||||||||||||
| CASH FLOWS FROM INVESTING ACTIVITIES | CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||||||||||||||||||||||||||
| Purchase of property, plant and equipment | (52,514 | ) | (54,289 | ) | (14,705 | ) | (2,762 | ) | |||||||||||||||||||||||||
| Proceeds from the sale of long-term assets | 23,200 | — | 2,194 | — | |||||||||||||||||||||||||||||
| Purchase of property, plant and equipment, and intangible assets | Purchase of property, plant and equipment, and intangible assets | (65,642) | (34,019) | (53,709) | |||||||||||||||||||||||||||||
| Proceeds from sale of fixed assets | Proceeds from sale of fixed assets | 24,933 | 15,646 | 11,414 | |||||||||||||||||||||||||||||
| Assets and liabilities acquired, business combinations, net | (36,709 | ) | (1,008,158 | ) | (885,528 | ) | — | Assets and liabilities acquired, business combinations, net | (7,299) | — | — | ||||||||||||||||||||||
| NET CASH USED IN INVESTING ACTIVITIES | (66,023 | ) | (1,062,447 | ) | (898,039 | ) | (2,762 | ) | NET CASH USED IN INVESTING ACTIVITIES | (48,008) | (18,373) | (42,295) | |||||||||||||||||||||
| CASH FLOWS FROM FINANCING ACTIVITIES | CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||||||||||||||||||||||||||
| Proceeds from sale-leaseback | — | 216,280 | — | — | |||||||||||||||||||||||||||||
| Payment of debt issuance costs | (2,498 | ) | (20,036 | ) | (27,410 | ) | — | ||||||||||||||||||||||||||
| Payments of debt issuance costs | Payments of debt issuance costs | — | (11,416) | — | |||||||||||||||||||||||||||||
| Proceeds from issuance of common stock, net | — | 303,805 | — | — | Proceeds from issuance of common stock, net | 5,052 | 2,424 | 1,703 | |||||||||||||||||||||||||
| Payments on senior and junior term loans | (12,008 | ) | (1,300,536 | ) | (5,366 | ) | — | ||||||||||||||||||||||||||
| Proceeds from senior and junior term loans, net | 200,000 | 1,593,150 | 730,404 | — | |||||||||||||||||||||||||||||
| Payments on Term Loan | Payments on Term Loan | (12,508) | (707,624) | (95,741) | |||||||||||||||||||||||||||||
| Proceeds from Senior Secured Notes | Proceeds from Senior Secured Notes | — | 500,000 | — | |||||||||||||||||||||||||||||
| Proceeds from revolver | 194,000 | 398,611 | 45,619 | — | Proceeds from revolver | 40,000 | 180,000 | 54,000 | |||||||||||||||||||||||||
| Payments on revolver | (293,000 | ) | (248,173 | ) | (45,619 | ) | — | Payments on revolver | (40,000) | (180,000) | (54,000) | ||||||||||||||||||||||
| Proceeds from settlement of derivatives | — | 6,546 | — | — | |||||||||||||||||||||||||||||
| Capital contribution from Predecessor Parent, net | — | — | — | 60,910 | |||||||||||||||||||||||||||||
| Capital contribution from parent | — | 402,127 | 167,482 | — | |||||||||||||||||||||||||||||
| Payments for return of contributed capital | — | (363,582 | ) | (42,513 | ) | — | |||||||||||||||||||||||||||
| Payments pursuant to tax receivable agreement | Payments pursuant to tax receivable agreement | (8,333) | (13,145) | (11,390) | |||||||||||||||||||||||||||||
| Other financing activities | (244 | ) | (6,464 | ) | (17 | ) | (3 | ) | Other financing activities | (5,447) | (4,511) | (753) | |||||||||||||||||||||
| NET CASH PROVIDED BY FINANCING ACTIVITIES | 86,250 | 981,728 | 822,580 | 60,907 | |||||||||||||||||||||||||||||
| NET CASH USED IN FINANCING ACTIVITIES | NET CASH USED IN FINANCING ACTIVITIES | (21,236) | (234,272) | (106,181) | |||||||||||||||||||||||||||||
| Effect of exchange rate changes on cash | 1,949 | 228 | (2,368 | ) | (130 | ) | Effect of exchange rate changes on cash | (116) | 326 | 697 | |||||||||||||||||||||||
| Net change in cash and cash equivalents | 64,510 | (3,566 | ) | 43,590 | 9,791 | Net change in cash and cash equivalents | 31,154 | (9,122) | (993) | ||||||||||||||||||||||||
| Cash and cash equivalents, beginning of period | 40,024 | 43,590 | — | 42 | Cash and cash equivalents, beginning of period | 25,678 | 34,800 | 35,793 | |||||||||||||||||||||||||
Cash and cash equivalents, end of period | $ | 104,534 | $ | 40,024 | $ | 43,590 | $ | 9,833 | $ | 56,832 | $ | 25,678 | $ | 34,800 | |||||||||||||||||||
(a) At December 31, 2015, $17,563 of cash and cash equivalents are attributable to current assets held for divestiture. | |||||||||||||||||||||||||||||||||
| SUPPLEMENTAL DISCLOSURES: | SUPPLEMENTAL DISCLOSURES: | ||||||||||||||||||||||||||||||||
| Cash interest paid | Cash interest paid | 66,703 | 53,175 | 77,086 | |||||||||||||||||||||||||||||
| Income taxes paid | Income taxes paid | 39,714 | 16,472 | 12,343 | |||||||||||||||||||||||||||||
See accompanying notes to financial statements
76
FORTERRA, INC.
Consolidated (Successor) / Combined (Predecessor) Notes to Financial Statements
1. Organization and description of the business
General
Forterra, Inc., which we refer to in these financial statements as Forterra, (‘‘Forterra’’ or the Company or Successor,‘‘Company’’) is involved in the manufacturing, sale and distribution of building materialsproducts in the United States (‘‘U.S.’’) and Eastern Canada. Forterra’s primary products are concrete drainage pipe, precast concrete structures, and water transmission pipe used in drinking and wastewater systems. These products are used in the residential, infrastructure and non-residential sectors of the construction industry.
Forterra, a Delaware corporation, was formed on June 21, 2016 to hold the business of Forterra Building Products following the Reorganization (as defined below)an internal reorganization transaction in connection with its initial public offering in 2016 ("IPO").
The business of Forterra Building Products included indirect wholly-owned subsidiaries of LSF9 Concrete Holdings Ltd., or LSF9.("LSF9"). Lone Star Fund IX (U.S.), L.P., which we referis referred to along with its affiliates and associates, but excluding the Company and other companies that it owns as a result of its investment activity, as Lone Star, through its wholly-owned subsidiary LSF9, acquired the business of Forterra Building Products on March 13, 2015, or the Acquisition.(‘‘Acquisition’’). LSF9, which was formed on February 6, 2015 for the purpose of acquiring the business of Forterra Building Products had no operations prior to the date of the Acquisition.
On February 19, 2021, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Quikrete Holdings, Inc., a Delaware corporation (“Quikrete”), and Jordan Merger Sub, Inc., a Delaware corporation and a wholly-owned subsidiary of Quikrete (“Merger Sub”). Pursuant to the Acquisition,Merger Agreement, subject to the entities comprisingsatisfaction or waiver of specified conditions, Merger Sub will merge with and into the businessCompany (the “Merger”), with the Company surviving the Merger as a wholly-owned subsidiary of Forterra Building Products which were acquired by Lone Star were indirect wholly-owned subsidiaries of HeidelbergCement A.G., or HC or Parent, a publicly listed company in Germany, encompassing HC's North American building products operations, which we referQuikrete.
Pursuant to as BP NAM or the Predecessor. LSF9 acquired BP NAM in a business combination which also includedMerger Agreement, at the acquisition of HC’s U.K.-based building products operations for a total initial purchase price of $1.33 billion cash, including customary working capital adjustments and a possible earnout of up to $100.0 million as contingent consideration. The acquisition of BP NAM and HC's UK-based building products business was funded with an equity investment of $432.3 million and third-party debt in the amount of $940.0 million. As HC's U.K.-based building products operations are not part of Forterra, Forterra was allocated a proportioneffective time of the total debtMerger (the “Effective Time”), each issued and equity used in the Acquisition.
| (1) | each restricted stock unit that is solely subject to time-based vesting requirements granted under the Company Stock Plans that is outstanding immediately prior to the Effective Time shall fully vest and be converted into the right to receive an amount in cash (without interest and subject to applicable tax withholdings) equal to the product of (i) the Merger Consideration multiplied by (ii) the number of shares of Common Stock subject to such vested restricted stock unit; | |||||||
77
FORTERRA, INC.
Consolidated (Successor) / Combined (Predecessor) Notes to Financial Statements
| Purchase Price | ||||
| Acquisitions: | (in millions) | |||
| 2015 | ||||
| Cretex Concrete Products, Inc. | $ | 245.1 | ||
| 2016 | ||||
| Sherman-Dixie Concrete Industries | 66.8 | |||
| USP Holdings, Inc. | 778.7 | |||
| Bio Clean Environmental Services, Inc. and Modular Wetland Systems, Inc. | 31.9 | |||
| J&G Concrete Operations, LLC | 32.4 | |||
| Precast Concepts, LLC | 99.6 | |||
| 2017 | ||||
| Royal Enterprises America, Inc. | 35.5 | |||
| (2) | each restricted stock unit that is subject to performance-based vesting requirements granted under the Company Stock Plans that is outstanding immediately prior to the Effective Time shall immediately vest and be converted into the right to receive an amount in cash (without interest and subject to applicable tax withholdings) equal to the product of (i) the Merger Consideration multiplied by (ii) the number of shares subject to such vested restricted stock unit immediately prior to the Effective Time as determined in accordance with the Merger Agreement; | |||||||
| (3) | each option to purchase shares of Common Stock granted under the Company Stock Plans that is outstanding immediately prior to the Effective Time shall fully vest, to the extent not vested previously, and be converted into the right to receive an amount in cash (without interest and subject to applicable tax withholdings) equal to the product of (i) the remainder, if positive, of (A) the Merger Consideration minus (B) the exercise price per share of Common Stock of such option multiplied by (ii) the number of shares of Common Stock subject to such vested option; and | |||||||
| (4) | each Company Restricted Share that is outstanding immediately prior to the Effective Time shall immediately vest in full and be converted into the right to receive an amount in cash (without interest and subject to applicable tax withholdings) equal to the Merger Consideration. | |||||||
Each party’s obligation to consummate the Merger is subject to certain conditions, including, among others: (i) expiration or termination of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended; (ii) the absence of any order issued by any court of competent jurisdiction, other legal restraint or prohibition or any law enacted or deemed applicable by a governmental entity that prohibits or makes illegal the consummation of the Merger; (iii) the passing of twenty (20) days from the date on which the Company mails to the Company’s stockholders the Information Statement (as defined below) in definitive form; (iv) subject to certain qualifications, the accuracy of representations and warranties of the other party set forth in the Merger Agreement; and (v) the performance by the other party in all material respects of its obligations under the Merger Agreement. Quikrete’s obligation to consummate the Merger is also conditioned on, among other things, the absence of any Material Adverse Effect (as defined in the Merger Agreement).
Entry into the Merger Agreement has been unanimously approved by the board of directors of the Company.
The Merger Agreement includes customary representations, warranties and covenants of the Company, Quikrete and Merger Sub. Among other things, the Company has agreed to use commercially reasonable efforts to conduct its business in the ordinary course of business consistent with past practice and use commercially reasonable efforts to preserve intact its businesses until the Merger is consummated. The Company and Quikrete have also agreed to use their respective reasonable best efforts to obtain any approvals from governmental authorities for the Merger, including all required antitrust approvals, on the terms and subject to the conditions set forth in the Merger Agreement, provided that Quikrete and its affiliates will not be required to take, or agree to take, certain actions with respect to assets, businesses or product lines of Quikrete or any of its subsidiaries, or the Company or any of its subsidiaries, accounting for more than $80 million of EBITDA (as defined in the Merger Agreement) for the 12 months ended December 31, 2020, measured in accordance with the Merger Agreement.
The Merger Agreement contains certain provisions giving each of Quikrete and the Company rights to terminate the Merger Agreement under certain circumstances, including the right for either Quikrete or the Company to terminate the Merger Agreement if the Merger has not been consummated on or before November 19, 2021, which date will be automatically extended for up to 2 additional 60-day periods in specified circumstances as described in the Merger Agreement (such date, as may be so extended pursuant to the Merger Agreement, the “Outside Date”). Upon termination of the Merger Agreement under specified circumstances, the Company will be required to pay Quikrete a termination fee of $50 million. The Merger Agreement further provides that Quikrete will be required to pay the Company a reverse termination fee of $85 million under certain circumstances if the Merger Agreement is terminated due to the failure of the parties to obtain required approvals
78
FORTERRA, INC.
Consolidated (Successor) / Combined (Predecessor) Notes to Financial Statements
under Antitrust Laws (as defined in the Merger Agreement) prior to the Outside Date or as a result of a Restraint (as defined in the Merger Agreement) arising under applicable Antitrust Laws.
If the Merger is consummated, the shares of operations. See Note 21, Discontinued operationsCommon Stock will be delisted from the Nasdaq Stock Market LLC and deregistered under the Securities Exchange Act of 1934, as amended (the “Exchange Act”).
In order to address some of the divestitures anticipated to be required by the U.S. Department of Justice (the “DOJ”) to obtain approval under the HSR Act for additional details regarding the transaction.consummation of the Merger and the other transactions contemplated by the Merger Agreement, on November 24, 2021, Forterra Pipe & Precast, LLC, a Delaware limited liability company and wholly owned subsidiary of us (“FP&P”), entered into a Membership Interest Purchase Agreement (the “Purchase Agreement”) with Eagle Corporation, a Virginia corporation (“Eagle”), and Quikrete.
Pursuant to the terms and subject to the conditions set forth in the Purchase Agreement, contemporaneously with the closing of the Merger and the other transactions contemplated by the Merger Agreement, Eagle will purchase FP&P’s 50% equity interest in Concrete Pipe & Precast, LLC (“CP&P”), a joint venture with Eagle (the “CP&P Sale”) for a purchase price of $105,000,000 (subject to certain adjustments as described in the Purchase Agreement). Consummation of the CP&P Sale is subject to customary closing conditions, including, among others, the consummation of the Merger and approval by the DOJ.
The Purchase Agreement contains certain termination rights for FP&P and Eagle, including, among others, the right to terminate the Purchase Agreement (i) by either party if the CP&P Sale has not occurred by March 22, 2022, which date may be extended under certain circumstances described in the Purchase Agreement, (ii) by either party in the event of the issuance of a final and non-appealable governmental order that prohibits the CP&P Sale or if FP&P notifies Eagle that (x) the Merger is not occurring or (y) the Merger Agreement has been terminated and (iii) by FP&P if FP&P determines in good faith in its reasonable discretion that the DOJ is not likely to approve the CP&P Sale and the Merger.
In addition, on December 13, 2021, FP&P entered into an Asset Purchase Agreement (the “Asset Purchase Agreement”) with Hydro Conduit, LLC d/b/a Rinker Materials, a Delaware limited liability company and an affiliate of Quikrete (“Rinker Materials” and, together with FP&P, the “Asset Sellers”), and Foley Products Company, Inc., a Georgia corporation (“Foley”).
Pursuant to the terms and subject to the conditions set forth in the Asset Purchase Agreement, contemporaneously with the closing of the Merger and the other transactions contemplated by the Merger Agreement, FP&P and Rinker will each sell to Foley certain assets and liabilities associated with reinforced concrete pipe and precast plants (the “Asset Sale”) for an aggregate purchase price of $95,000,000 (subject to certain adjustments described in the Asset Purchase Agreement). The assets being sold by FP&P include FP&P’s reinforced concrete pipe and precast plant located in St. Martinville, Louisiana. Consummation of the Asset Sale is subject to customary closing conditions, including, among others, the consummation of the Merger and approval by the DOJ.
The Asset Purchase Agreement contains specified termination rights for the Asset Sellers and Foley, including, among others, the right to terminate the Asset Purchase Agreement (i) by either the Foley or the Asset Sellers if the Asset Sale has not occurred by March 22, 2022, which date may be extended under certain circumstances described in the Asset Purchase Agreement, (ii) by either Foley or the Asset Sellers in the event of the issuance of a final and non-appealable governmental order that prohibits the Asset Sale or if the Asset Sellers notify Foley that (x) the Merger is not occurring or (y) the Merger Agreement has been terminated and (iii) by the Asset Sellers if they determine in good faith in its reasonable discretion that the DOJ is not likely to approve the Asset Sale and the Merger.
79
FORTERRA, INC.
Consolidated Notes to Financial Statements
2. Summary of significant accounting policies
Principles of Consolidation
The consolidated financial statements for the Successor periods include the accounts and results of operations of Forterra, Inc. and its consolidated subsidiaries. Intercompany transactions and balances have been eliminated in consolidation.
Basis of Presentation - Successor
principles (‘‘U.S. GAAP’’). Certain prior year numbers have been reclassified to conform to current year presentations.
Business Combinations
Assets acquired and liabilities assumed in business combination transactions, as defined by the Financial Accounting Standards Board or FASB,("FASB") Accounting Standards Codification or ASC,("ASC") 805, Business Combination, are recorded at fair value using the acquisition method of accounting. The Company allocates the purchase price of acquisitions based upon the fair value of each component which may be derived from various observable and unobservable inputs and assumptions. Initial purchase price allocations are preliminary and subject to revision within the measurement period, not to exceed one year from the date of the transaction. The fair value of property, plant and equipment and intangible assets may be based upon the discounted cash flow method that involves inputs that are not observable in the market (Level 3). Goodwill assigned represents the amount of consideration transferred in excess of the fair value assigned to identifiable assets acquired and liabilities assumed.
Use of estimates
The preparation of the consolidated (successor) / combined (predecessor) financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities as of the reporting date, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. These estimates are based on management’s best knowledge of current events and actions that the Company may undertake in the future. The more significant estimates made by management relate to fair value estimates for assets and liabilities acquired in business combinations; estimates for accrued liabilities for environmental cleanup, bodily injury and insurance claims; estimates for commitments and contingencies; and estimates for the realizability of deferred tax assets, the tax receivable agreement obligation, inventory reserves, allowance for doubtful accounts and impairment of goodwill and long-lived assets.
Certain accounting matters that generally require consideration of forecasted financial information were assessed in light of the impact from the coronavirus disease 2019 ("COVID-19") pandemic. The accounting matters assessed included, but were not limited to, the Company’s allowance for doubtful accounts, inventory reserves, goodwill impairment, impairment of property and equipment and valuation allowances for tax assets. While the assessments resulted in no material impacts to the Company’s consolidated financial statements as of and for the years ended December 31, 2021 and December 31, 2020, the Company believes the full impact of the COVID-19 outbreak remains uncertain and will continue to assess if ongoing developments related to the outbreak may cause future material impacts to its consolidated financial statements.
Cash and cash equivalents
80
FORTERRA, INC.
Consolidated Notes to Financial Statements
Receivables, net
Receivables are recorded at net realizable value, which includes allowances for doubtful accounts. The Company reviews the collectability of trade receivables on an ongoing basis. The Company reserves for trade
receivables determined to be uncollectible. This determination is based on the delinquency of the account, the financial condition of the customer and the Company’s collection experience.
Concentration of credit risk
Financial instruments that potentially subject the Company to concentrations of credit risk are primarily receivables. The Company performs ongoing credit evaluations of its customers’ financial condition and generally requires no collateral from its customers. The allowances for uncollectible receivables are based upon analysis of economic trends in the construction industry, detailed analysis of the expected collectibilitycollectability of accounts receivable that are past due and the expected collectibilitycollectability of overall receivables.
The Company had an individual customer within its Water Pipe & Products segment Core & Main, that accounted for approximately 13%18% and 11%16% of the Company's total net sales for the years ended December 31, 20172021 and 2016,2020, respectively, and total receivables at December 31, 20172021 and 20162020 representing 17% and 13%16% of the CompanyCompany's total receivables, net, respectively.
Credit Losses
Trade accounts receivable. The allowance for doubtful accounts is based on the Company’s assessment of the collectability of customer accounts. The Company regularly reviews the allowance by considering factors such as historical experience, credit quality, the age of the accounts receivable balances, and current economic conditions that may affect a customer’s ability to pay.
The Company's exposure to credit losses may increase if one or more of its customers are adversely affected by changes in laws or other government recommendations or mandates, economic pressures or uncertainty associated with local or global economic recessions, disruption or other impacts associated with the COVID-19 pandemic, or other customer-specific factors. Although the Company has historically not experienced significant credit losses, it is possible that there could be a material adverse impact from potential adjustments of the carrying amount of trade receivables as customers are impacted by the COVID-19 pandemic.
Concentration of Labor
Approximately 33% of the Company’s employees are represented by collective bargaining
agreements, and 27%46% of these employees are included in collective bargaining agreements that expire
within 12 months.
Inventories
Inventories are valued at the lower of cost or net realizable value. The Company’s inventories are valued using the average cost and first-in-first-out methods. Inventories include materials, labor and applicable factory overhead costs. The value of inventory is adjusted for damaged, obsolete, excess and slow-moving inventory. Market value of inventory is estimated considering the impact of market trends, an evaluation of economic conditions, and the value of current orders relating to the future sales of each respective component of inventory.
81
FORTERRA, INC.
Consolidated Notes to Financial Statements
Property, plant and equipment, net
Property, plant and equipment, which includes amounts recorded under capital lease arrangements, is stated at cost less accumulated depreciation. Depreciation of property, plant and equipment is computed using the straight-line method over the estimated useful lives of the assets. These lives range from 20 to 40 years for buildings, 4 to 20 years for machinery and equipment, and 5 to 10 years for other equipment and lower of lease term or useful life on leasehold improvements. Repair and maintenance costs are expensed as incurred. The Company’s depreciation expense is recorded in cost of goods sold and selling, general and administrative expenses in the statements of operations. The Company capitalizes interest during the active construction of major projects. Capitalized interest is added to the cost of the underlying assets and is depreciated over the useful lives of those assets. There was no interest capitalized for any of the periods presented in the financial statements.
Impairment or disposal of long-lived assets
The Company evaluates the recoverability of its long-lived assets in accordance with the provisions of ASC 360, Property, Plant andEquipment (“ASC 360”). ASC 360 requires that long-lived assets and certain identifiable intangibles be reviewed for impairmentwhenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets is measured by comparing the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset. Such evaluations for impairment are significantly impacted by estimates of future prices for the Company’s products, capital needs, economic trends in the construction sector and other factors. If such assets are considered to be impaired, the impairment to be recognized is measured at the amount by which the carrying amount of the assets exceeds their fair value.
Leases
The Company accountshas both capital and finance leases. The Company determines if an arrangement is a lease at inception. Leases with an initial term of 12 months or less are not recorded on the balance sheet. Operating leases are included in operating lease right-of-use (“ROU”) assets, accrued liabilities, and long-term operating lease liabilities in the consolidated balance sheets. Finance leases are included in property, plant and equipment, accrued liabilities, and long-term finance lease liabilities in the consolidated balance sheets.
ROU assets represent the Company’s right to use an underlying asset for long-lived assets held for sale in accordance with ASC 360 which requires assetsthe lease term, and lease liabilities represent the Company's obligation to be classified as held for sale whenmake lease payments arising from the following criteria are met: 1) management, having the authority to approve the action, commits to a plan to sell; 2) the asset or asset group is available for immediate sale in its present condition; 3) an active program to locate a buyer and other actions required to complete the plan to sell have been initiated; 4) actions required to complete the sale indicate that is it unlikely that significant changes to the plan will be made or that the plan will be withdrawn; and 5) the sale is probable to qualify for recognition as a completed sale within one year.
The Company has lease agreements with lease and divestitures.non-lease components, which are generally accounted for separately. For machinery and equipment leases, such as forklifts, the Company accounts for the lease and non-lease components as a single lease component.
Minimum rent payments under operating leases are recognized as an expense on a straight-line basis over the lease term, including any rent-free periods. Operating lease expenses for the years ended December 31, 2021, 2020 and 2019 were approximately $14.0 million, $15.6 million and $16.5 million, respectively.
Goodwill and other intangible assets, net
Goodwill represents the excess of costs over the fair value of identifiable assets acquired and liabilities assumed. The Company evaluates goodwill and intangible assets in accordance with ASC 350, Goodwill and Other Intangible Assets (“ASC 350”). ASC 350 requires goodwill to be either qualitatively or quantitatively
82
FORTERRA, INC.
Consolidated Notes to Financial Statements
assessed for impairment annually (or more frequently if impairment indicators arise) for each reporting unit. The Company performs its annual impairment testing of goodwill as of October 1 of each year and in interim periods if events occur that would indicate that it is more likely than not the fair value of a reporting unit is less than carrying value. The Company first assesses qualitative factors to evaluate whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as the basis for determining whether it is necessary to perform a quantitative goodwill impairment test. The Company may bypass the qualitative assessment for any
reporting unit in any period and proceed directly with the quantitative analysis. The quantitative analysis compares the fair value of the reporting unit with its carrying amount. If the carrying amount of a reporting unit exceeds the fair value, impairment is recognized in an amount equal to that excess, limited to the total amount of goodwill allocated to that reporting unit.
The Company evaluates its intangible assets with finite lives for indications of impairment whenever events or changes in circumstances indicate that the net book value may not be recoverable. Intangible assets with finite lives consist of customer relationships, customer backlogs, and brand names, and are amortized under the consumption method over the estimated useful lives. Factors that could trigger an impairment review include significant under-performance relative to expected historical or projected future operating results, significant changes in the manner of ourthe Company's use of the acquired assets or the strategy for ourthe Company's overall business or significant negative industry or economic trends.
If this evaluation indicates that the value of the intangible asset may be impaired, the Company makes an assessment of the recoverability of the net book value of the asset over its remaining useful life. If this assessment indicates that the intangible asset is not recoverable, based on the estimated undiscounted future cash flows of the asset over the remaining amortization period, the Company reduces the net book value of the related intangible asset to fair value and may adjust the remaining amortization period.
Investment in equity method investee
The Company has an investment in a joint venture accounted for using the equity method. Under the equity method, carrying value is adjusted for the Company's share of the investee's earnings and losses, as well as capital contributions to and distributions from the investee. Distributions in excess of equity method earnings are recognized as a return of investment and recorded as investing cash inflows in the accompanying consolidated (successor) / combined (predecessor) statements of cash flows. The Company classifies its share of income and loss related to its investments in its investee as a component of operating income or loss, as the Company's investments in the investee is an extension of the Company's core business operations.
The Company evaluates its investment in the equity method investee for impairment whenever events or changes in circumstances indicate that the carrying value of its investment may have experienced an "other-than-temporary" decline in value. If such conditions exist, the Company compares the estimated fair value of the investment to its carrying value to determine if an impairment is indicated and determines whether the impairment is "other-than-temporary" based on its assessment of all relevant factors, including consideration of the Company's intent and ability to retain its investment.
Derivatives and Hedge Accounting
The Company haspreviously entered into derivative instruments to mitigate interest rate and foreign exchange rate risk. Certain derivative instruments are designated for hedge accounting under ASC 815-20, Derivatives - Hedging. Instruments that meet hedge criteria are formally designated as hedges at the inception of the instrument.
The Company’s derivative assets and liabilities are measured at fair value. Fair value related to the cash flows occurring within one year are classified as current and the fair value related to the cash flows occurring beyond one year are classified as non-current in the consolidated balance sheets. For those instruments designated as hedges, the Company recognizes the changes in fair value in other comprehensive income (“OCI”), and recognizes any ineffectiveness immediately in earnings.
83
FORTERRA, INC.
Consolidated Notes to Financial Statements
Valuation of derivative assets and liabilities reflect the value of the instrument including counterparty credit risk. These values also take into account the Company’s own credit standing.
Deferred financing costs
In conjunction with its debt, the Company had a totalnet balance of $41.6$10.6 million in debt discounts and debt issuance costs as of December 31, 2017.2021. These costs are amortized over the life of the applicable debt instrument to interest expense utilizing the effective interest method. The Company wrote-off deferred debt issuance cost of $13.1 million in the year ended December 31, 2020 in connection with the repayment of a portion of the term loan at par with the proceeds from the offering of the senior secured notes. See Note 11, Debt and deferred financing costs.
Fair value measurement
The Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible. The Company determines fair value based on assumptions that market participants would use in pricing an asset or liability in the principal or most advantageous market. When considering market participant assumptions in fair value measurements, the following fair value hierarchy distinguishes between observable and unobservable inputs, which are categorized in one of the following levels:
Level 1 Inputs – Unadjusted quoted prices in active markets for identical assets or liabilities accessible to the reporting entity at the measurement date.
Level 2 Inputs – Other than quoted prices included in Level 1 inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset or liability.
Level 3 Inputs – Unobservable inputs for the asset or liability used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at measurement date.
The Company's other financial instruments consist primarily of cash and cash equivalents, trade and other receivables, accounts payable, accrued expenses, derivative financial instruments and long-term debt. The carrying value of the Company’s trade and other receivables, trade payables and accrued expenses approximates fair value due to their highly liquid nature, short-term maturity, or competitive rates assigned to these financial instruments.
The Company adjusts the carrying amount of certain non-financial assets to fair value on a non-recurring basis when they are impaired.
Foreign currency translation
The Company uses the U.S. dollar as its functional currency for operations in the U.S. and Mexico, and the Canadian dollar for operations in Canada. The assets, liabilities, revenues and expenses of the Company’s Canadian operations are translated in accordance with ASC 830, Foreign Currency Matters.
Environmental remediation liabilities
The Company accrues for costs on an undiscounted basis associated with environmental remediation obligations when such costs are probable and reasonably estimable; if an estimated amount is likely to fall within a range and no amount within that range can be determined to be the better estimate, the minimum amount of the range is recorded. Claims for recoveries from insurance carriers and other third parties are not recorded until it is probable that the recoveries will be realized. Such accruals are adjusted as further information develops or circumstances change. Environmental expenditures that relate to current operations or to conditions caused by past operations are expensed. Expenditures that create future benefits are capitalized. At December 31, 2017 2021
84
FORTERRA, INC.
Consolidated Notes to Financial Statements
and 2016,2020, the Company had environmental obligations of $1.6$1.3 million and $1.7$1.6 million, respectively, which are recorded within accrued liabilities and other long-term liabilities in the consolidated balance sheets.
Stock-based plans
The Company applies the provisions of ASC 718, Compensation - Stock Compensation, in its accounting and reporting for stock-based compensation. ASC 718 requires all stock-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. All unvested options outstanding under the Company's option plans have grant prices equal to the market price of the Company's stock on the dates of grant. Compensation cost for restricted stock and restricted stock units is determined based on the fair market value of the Company's stock at the date of grant. Stock-based compensation expense is generally recognized over the required service period, or over a shorter period when employee retirement eligibility is a factor. The Company recognizes forfeitures as they occur. Awards that may be settled in cash or company stock are classified as liabilities and remeasured at fair value at the end of each reporting period until the awards are settled.
Income Taxes
The Company computes the provision for income taxes using the asset/liability method. Deferred tax assets generally represent items that can be used as aand liabilities are recorded for temporary differences between the tax deduction or creditbasis of assets and liabilities and their reported amounts in the Company'sconsolidated financial statements using the statutory tax returnsrates in effect for the year in which the differences are expected to reverse. The Company uses the period cost method for Global Intangible Low-taxed Income (“GILTI”) provisions, and therefore, has not recorded deferred taxes for basis differences expected to reverse in future yearsperiods.
The Company evaluates the recoverability of its deferred tax assets quarterly to determine if valuation allowances are required or should be adjusted. In assessing the need for which a valuation allowance, the Company considers all available evidence for each jurisdiction, including past operating results, future reversal of taxable and deductible temporary differences, estimates of future taxable income, and the feasibility of ongoing tax benefit has already been recorded in the Company's income statement.planning strategies. The measurement of a deferred tax asset is reduced, if necessary, by a valuation allowance if, based on theall available evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax liabilities generally represent tax expense recognized in the financial statements for which payment has been deferred, or expense for which the Company has already taken a deduction in its tax return but have not yet recognized as expense in the financial statements.
The Company recognizes a tax benefit for uncertain tax positions only if the Companyit believes it is more likely than notmore-likely-than-not that the position will be upheld on auditsustained upon examination based solely on the technical merits of the tax position. The Company evaluates uncertainwhether a tax position meets the more-likely-than-not recognition threshold using the assumption that the position will be examined by the appropriate taxing authority. The tax benefits recognized in the financial statements from such positions afterare measured based upon the consideration of all available information.largest amount that is more than 50% likely to be realized upon ultimate settlement. Penalties and interest related to income tax uncertainties, should they occur, would beare included in income tax expense in the period in which they are incurred.
Revenue recognition
All variable consideration that may affect the criteria for revenue recognition are met, which is generally the time of shipment to the distributor. Alltotal transaction price, including contractual discounts, rebates, returns and credits, is included in net sales. Estimates for variable consideration are estimablebased on historical experience, anticipated performance and recognized as contra-revenue.management's judgment. Generally, the Company's contracts do not contain significant financing.
85
FORTERRA, INC.
Consolidated Notes to third parties for the transportation of building products to customers. For the years ended December 31, 2017 and December 31, 2016, the period from March 14, 2015 to December 31, 2015, and the period from January 1, 2015 to March 13, 2015, the Company recorded freight costs of approximately $132.3 million, $104.6 million, $50.0 million, and $9.2 million, respectively, on a gross basis within net sales and cost of goods sold in the accompanying statements of operations.Financial Statements
For certain engineering and construction contracts and building contracting arrangements, the Company recognizes revenueenters into long-term contracts with customers. Revenue is recognized as the identified performance obligations are satisfied over time using an acceptable input method to measure the percentageprogress toward completion of completion method, based on total contract coststhe performance obligation if: the customer receives the benefits as work is performed, the customer controls the asset as it is being produced, or if the product being produced for the customer has no alternative use and the Company has a contractual right to payment. The Company uses its cost incurred to date comparedrelative to total estimated costcosts at completion for each contract. Changes to total estimatedmeasure progress. The Company's contract cost or losses, if any, areliabilities consist of billings to customers in excess of revenue recognized in the period in which they are determined. Pre-contract costs are expensed as incurred. If estimated total costs on a contract indicate a loss, the entire loss is provided for in the financial statements immediately. To the extent the Company has invoiced and collected from its customers more revenue than has been recognized as revenue using the percentage of completion method, the Company records the excess amount invoiced as deferred revenue. Revenue recognized during the years ended December 31, 2021 and December 31, 2020, which was included in contract liabilities at the beginning of each period was not material. Contract assets include revenue recognized in excess of amounts billed, and balances billed but not yet paid by customers under retainage provisions which are classified as a current asset within receivables, net on the Company's consolidated balance sheet. The Company had no material contract assets on the consolidated balance sheets as of December 31, 2021 or December 31, 2020. For the yearyears ended December 31, 2017, the year ended December 31, 2016, the period from March 14, 2015 to December 31, 2015,2021, 2020 and the period from
The companyCompany records net sales including taxes collected on behalf of its customers. Shipping and handling costs are accounted for as contract fulfillments costs and classified as cost of goods sold. See Note 21, Segment reporting, for the Company's disaggregated revenue disclosures.
The Company incurs shipping costs to third parties for the transportation of building products and bills such costs to customers. For the years ended December 31, 2021, 2020 and 2019, the Company recorded freight costs of approximately $153.9 million, $122.7 million and $131.8 million, respectively, on a gross basis within net sales and cost of goods sold in the accompanying consolidated statements of operations.
The Company generally provides limited warranties related to its products which cover manufacturing in accordance with the specifications identified on the face of ourits quotation or order acknowledgment and to be free of defects in workmanship or materials. The warranty periods typically extend for a limited duration of one year. The Company estimates and accrues for potential warranty exposure related to products which have been delivered.
Cost of goods sold and selling, general and administrative expenses
Cost of goods sold includes costs of production, inbound freight charges for raw materials, outbound freight to customers, purchasing and receiving costs, inspection costs and warehousing at plant distribution facilities. Selling, general and administrative costs include expenses for sales, marketing, legal, accounting and finance services, human resources, customer support, treasury and other general corporate services.
86
FORTERRA, INC.
Recent Accounting Guidance Adopted
In January 2017,December 2019, the FASB issued ASU No. 2019-12, Simplifying the Accounting Standards Update (“ASU”) 2017-01 Business Combinationsfor Income Taxes (Topic 805): Clarifying740). The new guidance simplifies the Definition of a Businessaccounting for income taxes by eliminating certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an effort to clarifyinterim period, hybrid taxes, and the definitionrecognition of a business withdeferred tax liabilities for outside basis differences. It also clarifies and simplifies other aspects of the objective of adding guidance to assist entities with evaluating whether transactions should be accountedaccounting for as acquisitions (or disposals) of assets or businesses. This guidance isincome taxes. For public companies, the amendments in this ASU were effective for fiscal years beginning after December 15, 2017,2020 and interim periods within those fiscal years, however early adoption is permitted.years. Amendments are to be applied prospectively, except for certain amendments that are to be applied either retrospectively or with a modified retrospective approach through a cumulative effect adjustment recorded to retained earnings. The Company early adopted the guidance provided in thethis ASU in the second quarter of 2017. The adoption of this guidanceon January 1, 2021 and it did not have a material impact on the Company's consolidated financial statements.
In January 2017,June 2016, the FASBFinancial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2016-13, Financial Instruments–Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The standard replaces the incurred loss impairment methodology under current U.S. GAAP with a methodology that reflects expected credit losses and requires the use of a forward-looking expected credit loss model for accounts receivables, loans, and other financial instruments. The Company adopted this ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment to simplify the accounting for goodwill impairment. The guidance removes the second step of the goodwill impairment test, which requires a hypothetical purchase price allocation. A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. All other goodwill impairment guidance will remain largely unchanged. Entities will continue to have the option to perform a qualitative assessment to determine if a quantitative impairment test is necessary. The same one-step impairment test will be applied to goodwill at all reporting units, even those with zero or negative carrying amounts. Entities will be required to disclose the amount of goodwill at reporting units with zero or negative carrying amounts. This guidance is effective in 2020, but early adoption is permitted for any impairment tests performed afteron January 1, 2017. The Company elected to early adopt the ASU effective in the second quarter of 2017. The adoption of this guidance2020 using a modified retrospective approach, which did not have a material impact on the Company's consolidated financial statements.
In the second quarter of 2017, the Company recognized impairment of goodwill associated with one of its reporting units. See Note 8, Goodwill and other intangible assets for a discussion of the Company's interim goodwill assessment and the related impairment charge.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which establishes the principles that lessees and lessors shall apply to report information about the amount, timing, and uncertainty of cash flows arising from a lease. Under the new guidance, lessees are required to recognize a right-of-use asset and a lease liability, measured on a discounted basis, at the commencement date for all leases with terms or conditionsgreater than twelve months. Additionally, this guidance required disclosures to help investors and other financial statement users better understand the amount, timing and uncertainty of cash flows arising from leases, including qualitative and quantitative requirements. The Company adopted Topic 842 during the first quarter of 2019, using the transition approach that permits application of the new standard at the adoption date instead of the earliest comparative period presented in the financial statements.
To adopt Topic 842, the Company elected the package of practical expedients permitted under the transition guidance within the new standard, which among other things, allowed the Company to carry forward its historical assessments of (1) whether the existing contracts contained a share-basedlease, (2) the lease classification for existing leases, and (3) initial direct cost for existing leases. In addition to the package of practical expedients, the Company has elected the adoption expedients of (1) the exclusion of leases with terms less than 12 months, and (2) the election not to separate non-lease components from lease components for certain classes of underlying leased assets.
87
FORTERRA, INC.
Consolidated (Successor) / Combined (Predecessor) Notes to Financial Statements
Recent Accounting Guidance Not Yet Adopted
In May 2014,October 2021, the FASB issued ASU 2014-09, 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers, which requires contract assets and contract liabilities acquired in a business combination to be recognized and measured by the acquirer on the acquisition date in accordance with ASC 606, Revenue from Contracts with Customers(Topic 606) and issued subsequent amendments. Prior to the initial guidance. ASC Topic 606supersedesissuance of this guidance, contract assets and contract liabilities were recognized by the revenue recognition requirements in ASC Topic 605, Revenue Recognition.acquirer at fair value on the acquisition date. The new guidance outlines a single comprehensive model for accounting for revenue arising from contracts with customers. This guidance requires an entity to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services and also requires certain additional disclosures. The guidance is effective for interim and annual reporting periods for public companies beginning after December 15, 2017. The standard may be applied retrospectively to each prior period presented (full retrospective method) or retrospectively with the cumulative effect recognized as of the date of initial application (modified retrospective method). The Company will adopt the new revenue guidance effective January 1, 2018 using the modified retrospective method. The Company is substantially complete with its evaluation of the effect that the adoption will have on its financial statements. Due to the nature of our business, we expect the timing of our revenue recognition to generally remain the same under the new standard as compared to the guidance under ASC Topic 605, and we currently do not anticipate the adoption will have a material effect on our financial statements.
In February 2018,November 2021, the FASB issued ASU 2018-02, 2021-10, Government Assistance (Topic 832): Disclosures by Business Entities about Government Assistance, which requires business entities to disclose information about transactions with a government that are accounted for by applying a grant or contribution model by analogy to other accounting guidance due to the lack of specific authoritative guidance in GAAP, (for example, a grant model within International Accounting Standard 20, Accounting for Government Grants and Disclosure of Government Assistance, or Subtopic 958-605, Not-For-Profit Entities - Revenue Recognition). This guidance excludes transactions in the scope of specific GAAP, such as tax incentives accounted for under ASC 740, Income Statement - Reporting Comprehensive Income (Topic 220): ReclassificationTaxes. This new ASU is effective for annual periods beginning after December 15, 2021, with early adoption and retrospective or prospective application permitted. This ASU will be effective for the Company in its Form 10-K for fiscal 2022. The effects of Certain Tax Effects from Accumulated Other Comprehensive Income this standard on the Company's consolidated financial statements are not expected to allow abe material.
88
FORTERRA, INC.
Consolidated (Successor) / Combined (Predecessor) Notes to Financial Statements
3.Acquisitions and divestitures
The acquisitions described below have been/arebeen accounted for as a business combinations (except as discussed below) as defined by ASC 805. The Company allocated the purchase price to the individually identifiable assets acquired and liabilities assumed based on their estimated fair value on the date of acquisition. The excess purchase price over those fair values was recorded as goodwill. The determination of fair values of the acquired assets and assumed liabilities required significant judgment, including estimates impacting the determination of estimated lives of tangible and intangible assets, calculation of the fair value of property, plant and equipment, inventory, and various intangibles. The fair values of assets and liabilities were determined using level 3 inputs as defined by ASC 820.
| Fair Value | |||
| Net working capital | $ | 257,368 | |
| Property, plant and equipment, net | 311,191 | ||
| Investment in equity method investee | 56,400 | ||
| Customer backlog intangible | 4,500 | ||
| Other assets and other liabilities | (6,495 | ) | |
| Net identifiable assets acquired | $ | 622,964 | |
| Goodwill | 17,464 | ||
| Consideration transferred, net of cash acquired | $ | 640,428 | |
2019 transactions
On March 1, 2019, the purchase agreement,Company acquired certain assets of Texas limited liability companies Houston Buckner Precast, LLC, Buckner Precast, LLC, Montgomery 18905 E. Industrial, LLC, and 1763 Old Denton Road, LLC (altogether "Buckner") for consideration of $11.8 million in cash, inclusive of a working capital adjustment. The acquired Buckner assets did not meet the calendar year ended December 31, 2015. The Company determined that achievingdefinition of a business and, as such, the required threshold to trigger a payouttransaction was accounted for as an asset acquisition pursuant to the Seller was not probable and, therefore, the Company did not record a contingent liability related to the Earnout asguidance in subsection 805-50 of ASC 805, Business Combinations. The assets of the Acquisition date. Based on 2015 actual results, the Company concluded the Earnout was not earned and, accordingly, did not record a liability as of December 31, 2015. See further discussion of the Earnout contingency in Note 15, noting that HC is disputing the Earnout and if the Company is unsuccessful in resolving the dispute, Forterra could recognize a material charge to its earnings.
| 2015 | 2016 | 2017 | |||||||||||||||||||||
| Cretex | Sherman-Dixie | U.S. Pipe | Bio Clean | J&G | Precast Concepts | Royal | |||||||||||||||||
| Net working capital | $ | 69,745 | $ | 14,279 | $ | 145,650 | $ | 2,546 | $ | 2,657 | $ | 14,993 | $ | 2,994 | |||||||||
| Property, plant and equipment, net | 97,282 | 29,163 | 246,241 | 162 | 9,346 | 15,895 | 12,335 | ||||||||||||||||
| Customer relationship intangible | 24,700 | 5,073 | 179,491 | 3,470 | 4,156 | 15,707 | 1,676 | ||||||||||||||||
| Non-compete agreement intangible | — | 2,459 | — | 105 | 1,015 | 2,562 | 866 | ||||||||||||||||
| Trade names | 600 | 138 | 37,388 | 1,065 | — | 29 | 308 | ||||||||||||||||
| Customer backlog intangible | 800 | 843 | — | — | 780 | 2,213 | 63 | ||||||||||||||||
| Patents | — | — | 13,093 | 10,464 | — | — | 72 | ||||||||||||||||
| In process R&D | — | — | — | 6,692 | — | — | — | ||||||||||||||||
| Other intangibles | — | — | 7,659 | — | — | — | — | ||||||||||||||||
| Other assets and liabilities | (7,582 | ) | — | (9,803 | ) | — | — | — | (726 | ) | |||||||||||||
| Deferred tax liabilities | — | (11,524 | ) | (157,365 | ) | — | — | — | — | ||||||||||||||
| Net identifiable assets acquired | 185,545 | 40,431 | 462,354 | 24,504 | 17,954 | 51,399 | 17,588 | ||||||||||||||||
| Goodwill | 59,555 | 26,319 | 316,356 | 7,434 | 14,494 | 48,204 | 17,903 | ||||||||||||||||
| Cash consideration transferred | $ | 245,100 | $ | 66,750 | $ | 778,710 | $ | 31,938 | $ | 32,448 | $ | 99,603 | $ | 35,491 | |||||||||
Transaction costs
For the years ended December 31, 20172021, 2020 and 2016, the period from March 14, 2015 to December 31, 2015, and the period from January 1, 2015 to March 13, 2015,2019, the Company recognized aggregate transaction costs, including legal, accounting, valuation, and advisory fees, specific to the acquisitionstransactions identified above of $0.4$0.1 million, $12.7 million, $13.7$0.0 million and $2.1$0.2 million, respectively. In addition, for the year ended December 31, 2021 the Company incurred transaction costs related to the Merger of $9.2 million. These transaction costs are recorded in the consolidated statements of operations within selling, general & administrative expenses.
4. Receivables, net
Receivables consist of the following at December 31, 20172021 and 2016 2020 (in thousands):
| December 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| Trade receivables | $ | 274,602 | $ | 195,997 | |||||||
| Amounts billed, but not yet paid under retainage provisions | 2,616 | 4,022 | |||||||||
| Other receivables | 18,512 | 29,026 | |||||||||
| Total receivables | $ | 295,730 | $ | 229,045 | |||||||
| Less: Allowance for doubtful accounts | (1,874) | (1,097) | |||||||||
| Receivables, net | $ | 293,856 | $ | 227,948 | |||||||
| December 31, | |||||||
| 2017 | 2016 | ||||||
| Trade receivables | $ | 190,143 | $ | 178,012 | |||
| Amounts billed, but not yet paid under retainage provisions | 1,091 | 1,959 | |||||
| Other receivables | 5,453 | 22,408 | |||||
| Total receivables | $ | 196,687 | $ | 202,379 | |||
| Less: Allowance for doubtful accounts | (4,033 | ) | (898 | ) | |||
| Receivables, net | $ | 192,654 | $ | 201,481 | |||
The Company records provisions for doubtful accounts in selling, general and administrative expenses in the consolidated statements of operations. The table below summarizes the Company's allowance for doubtful accounts for the periods presented (in thousands):
| Allowance for doubtful accounts | ||||||||
| Balance at December 31, 2019 | $ | (2,068) | ||||||
| Recovery on doubtful accounts | 451 | |||||||
| Write-offs and adjustments | 520 | |||||||
| Balance at December 31, 2020 | $ | (1,097) | ||||||
| Provision for doubtful accounts | (1,049) | |||||||
| Write-offs and adjustments | 272 | |||||||
| Balance at December 31, 2021 | $ | (1,874) | ||||||
| Allowance for doubtful accounts | ||||
| Balance at December 31, 2015 | $ | (3,283 | ) | |
| Provisions for doubtful accounts | 1,495 | |||
| Write-offs and adjustments | 890 | |||
| Balance at December 31, 2016 | $ | (898 | ) | |
| Provisions for doubtful accounts | (2,947 | ) | ||
| Write-offs and adjustments | (188 | ) | ||
| Balance at December 31, 2017 | $ | (4,033 | ) | |
5. Inventories
Inventories consist of the following at December 31, 20172021 and December 31, 2016 2020 (in thousands):
| December 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| Finished goods | $ | 152,036 | $ | 145,872 | |||||||
| Raw materials | 110,548 | 76,322 | |||||||||
| Work in process | 1,100 | 734 | |||||||||
| Total inventories | $ | 263,684 | $ | 222,928 | |||||||
| December 31, | |||||||
| 2017 | 2016 | ||||||
| Finished goods | $ | 156,207 | $ | 185,507 | |||
| Raw materials | 79,905 | 90,647 | |||||
| Work in process | 543 | 3,348 | |||||
| Total inventories | $ | 236,655 | $ | 279,502 | |||
6.Investment in equity method investee
FORTERRA, INC.
Consolidated Notes to Financial Statements
The following reflects the Company's distribution and earnings in the equity investment (in thousands):
| Year ended December 31, | |||||||||||||||||
| 2021 | 2020 | 2019 | |||||||||||||||
| Distribution received from CP&P | $ | (11,585) | $ | (13,039) | (11,039) | ||||||||||||
| Share of earnings in CP&P | 12,664 | 11,363 | 10,538 | ||||||||||||||
| Amortization of excess fair value of investment | (72) | (72) | (72) | ||||||||||||||
Selected financial data for CP&P on a 100% basis is as follows (in thousands):
| Year ended December 31, | |||||||||||||||||
| 2021 | 2020 | 2019 | |||||||||||||||
| Net sales | $ | 173,926 | $ | 157,499 | $ | 152,740 | |||||||||||
| Gross profit | 44,352 | 41,245 | 40,369 | ||||||||||||||
| Income from operations | 25,060 | 23,172 | 21,720 | ||||||||||||||
| Net income | 24,737 | 22,642 | 20,844 | ||||||||||||||
The Company has entered into an agreement to sell its 50% interest in CP&P to the joint venture partner with such transaction conditioned upon, among other things, the closing of the Merger. See Note 1.
7. Property, plant and equipment, net
Property, plant and equipment, net consist of the following at December 31, 20172021 and 2016 2020 (in thousands):
| December 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| Machinery and equipment | $ | 426,097 | $ | 410,436 | |||||||
| Land, buildings and improvements | 237,613 | 234,251 | |||||||||
| Other equipment | 16,209 | 12,633 | |||||||||
| Construction-in-progress | 43,276 | 26,073 | |||||||||
| Total property, plant and equipment | 723,195 | 683,393 | |||||||||
| Less: accumulated depreciation | (264,514) | (232,311) | |||||||||
| Property, plant and equipment, net | $ | 458,681 | $ | 451,082 | |||||||
| December 31, | |||||||
| 2017 | 2016 | ||||||
| Machinery and equipment | $ | 343,827 | $ | 329,871 | |||
| Land, buildings and improvements | 144,273 | 142,105 | |||||
| Other equipment | 5,141 | 2,592 | |||||
| Construction-in-progress | 30,295 | 43,855 | |||||
| Total property, plant and equipment | 523,536 | 518,423 | |||||
| Less: accumulated depreciation | (110,964 | ) | (65,509 | ) | |||
| Property, plant and equipment, net | $ | 412,572 | $ | 452,914 | |||
Depreciation expense totaled $60.2$49.2 million, $54.1 million, $20.7$48.2 million and $4.4$49.8 million for the years ended December 31, 20172021, 2020 and 2016, for the period from March 14, 2015 to December 31, 2015, and for the period from January 1, 2015 to March 13, 2015,2019, respectively, which is included in cost of goods sold and selling, general and administrative expenses in the consolidated statements of operations.
As of December 31, 2021 and 2020, gross assets recorded under finance leases, consisting primarily of land and buildings, were $54.5 million and $55.6 million, respectively, and accumulated depreciation was $6.7 million and $5.9 million, respectively.
Impairments
91
FORTERRA, INC.
Consolidated Notes to assets heldFinancial Statements
the Company recorded asset impairment charges of $0.1 million for sale in conjunction with the sale of its U.S. concreteproperty, plant and steel pressure pipe business. See Note 21, Discontinued operations and divestitures for additional details.equipment. Asset impairments are included in impairment and exit charges on the consolidated statements of operations.
8. Goodwill and other intangible assets, net
The Company has goodwill which has been recorded in connection with its acquisition of businesses. The following table summarizes the changes in goodwill by operating segment for the years ended December 31, 20172021 and December 31, 20162020 (in thousands):
| Drainage Pipe & Products | Water Pipe & Products | Total | |||||||||
| Balance at December 31, 2016 | 168,866 | 322,581 | 491,447 | ||||||||
| Acquisitions | 17,903 | — | 17,903 | ||||||||
| Assets held for sale | (8,736 | ) | — | (8,736 | ) | ||||||
| Impairment | — | (3,003 | ) | (3,003 | ) | ||||||
| Foreign currency and other adjustments | 1,690 | (3,160 | ) | (1,470 | ) | ||||||
| Balance at December 31, 2017 | $ | 179,723 | $ | 316,418 | $ | 496,141 | |||||
| Drainage Pipe & Products | Water Pipe & Products | Total | |||||||||||||||
| Balance at December 31, 2019 | $ | 190,466 | $ | 318,360 | $ | 508,826 | |||||||||||
| Foreign currency and other adjustments | 301 | — | 301 | ||||||||||||||
| Balance at December 31, 2020 | 190,767 | 318,360 | 509,127 | ||||||||||||||
| Acquisitions | 759 | — | 759 | ||||||||||||||
| Foreign currency and other adjustments | 50 | — | 50 | ||||||||||||||
| Balance at December 31, 2021 | $ | 191,576 | $ | 318,360 | $ | 509,936 | |||||||||||
Goodwill is required to be tested for impairment at the reporting unit level. The Company has three3 reporting units which have goodwill. We perform our annual impairment assessment of goodwill in the fourth quarter of each year, or more frequently if indicators of potential impairment exist. The analysis may include both qualitative and quantitative factors to assess the likelihood of an impairment. In accordance with ASC 350, Intangibles – Goodwill & Other, we first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the quantitative goodwill impairment test. The more likely than not threshold is defined as having a likelihood of more than 50 percent. If, after assessing the totality and events or circumstances, we determine that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the quantitative impairment test is unnecessary and our goodwill is considered to be unimpaired. However, if based on our qualitative assessment we conclude that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, we will proceed with performing the quantitative impairment test.
Qualitative factors include industry and market considerations, overall financial performance, and other relevant events and factors affecting the reporting unit. Additionally, as part of the qualitative assessment, we may perform a quantitative analysis to support the qualitative factors above by applying sensitivities to assumptions and inputs used in measuring a reporting unit's fair value.
For quantitative impairment test, the Company uses a combination of an income approach and a market approach to determine the fair value of the reporting unit. The income approach uses a reporting unit's estimated future cash flows, discounted at the weighted average cost of capital of a hypothetical third-party buyer. The market approach estimates fair value by applying cash flow multiples to the reporting unit's operating performance. The multiples are derived from comparable publicly traded companies with similar operating and investment characteristics to the reporting unit. The calculation of business enterprise value is based on significant unobservable inputs, such as price trends, customer demand, material costs and discount rates, and are classified as Level 3 in the fair value hierarchy. The Company's impairment determinations involve significant assumptions and judgments, as discussed above. DifferingDifferent assumptions regarding any of these inputs could have a significant effect on the various valuations.
The Company performed its annual goodwill impairment test as of October 1, 20171st of each year. In 2021 and 2016 by conducting a quantitative analysis2020, the fair value for all of the Company’sour reporting units. As a result ofunits substantially exceeded their carrying value, and our annual testing for 2017qualitative assessment did not indicate that a more detailed quantitative test was necessary. In 2019, we performed the quantitative impairment test and 2016, noneconcluded that the calculated fair value of the reporting units with goodwill as of our testing date had carrying valuesexceeded book value in excess of their fair values. Therefore, the Company determined thatall circumstances; therefore, no impairments were required.annual impairment charge was recorded.
92
FORTERRA, INC.
Consolidated (Successor) / Combined (Predecessor) Notes to Financial Statements
Intangible assets other than goodwill at December 31, 20172021 included the following (in thousands):
| Weighted average amortization period (in years) | Gross carrying amount as of December 31, 2017 | Accumulated amortization | Net carrying value as of December 31, 2017 | Weighted average amortization period (in years) | Gross carrying amount as of December 31, 2021 | Accumulated amortization | Net carrying value as of December 31, 2021 | |||||||||||||||||||||||||||||
| Customer relationships | 10 | $ | 229,294 | $ | (61,294 | ) | $ | 168,000 | Customer relationships | 10 | $ | 236,669 | $ | (189,318) | $ | 47,351 | ||||||||||||||||||||
| Trade names | 10 | 39,528 | (9,896 | ) | 29,632 | Trade names | 10 | 39,657 | (28,885) | 10,772 | ||||||||||||||||||||||||||
| Patents | 11 | 23,629 | (7,900 | ) | 15,729 | Patents | 11 | 23,629 | (20,639) | 2,990 | ||||||||||||||||||||||||||
| Customer backlog | 0.8 | 13,726 | (13,322 | ) | 404 | Customer backlog | 0.8 | 13,211 | (13,211) | — | ||||||||||||||||||||||||||
| Non-compete agreements | 5 | 8,325 | (3,782 | ) | 4,543 | Non-compete agreements | 5 | 17,178 | (14,711) | 2,467 | ||||||||||||||||||||||||||
| In-Process R&D | Indefinite-lived | 6,354 | — | 6,354 | ||||||||||||||||||||||||||||||||
| Developed technology | Developed technology | 17 | 6,354 | (1,121) | 5,233 | |||||||||||||||||||||||||||||||
| Other | 10 | 867 | (225 | ) | 642 | Other | 10 | 867 | (575) | 292 | ||||||||||||||||||||||||||
| Total intangible assets | $ | 321,723 | $ | (96,419 | ) | $ | 225,304 | Total intangible assets | $ | 337,565 | $ | (268,460) | $ | 69,105 | ||||||||||||||||||||||
Intangible assets other than goodwill at December 31, 20162020 included the following (in thousands):
| Weighted average amortization period (in years) | Gross carrying amount as of December 31, 2016 | Accumulated amortization | Net carrying value as of December 31, 2016 | Weighted average amortization period (in years) | Gross carrying amount as of December 31, 2020 | Accumulated amortization | Net carrying value as of December 31, 2020 | |||||||||||||||||||||||||||||||||||
| Customer relationships | 10 | $ | 232,590 | $ | (22,653 | ) | $ | 209,937 | Customer relationships | 10 | $ | 235,907 | $ | (165,404) | $ | 70,503 | ||||||||||||||||||||||||||
| Trade names | 10 | 39,220 | (4,449 | ) | 34,771 | Trade names | 10 | 39,390 | (24,455) | 14,935 | ||||||||||||||||||||||||||||||||
| Patents | 10 | 23,557 | (2,884 | ) | 20,673 | Patents | 11 | 23,629 | (18,600) | 5,029 | ||||||||||||||||||||||||||||||||
| Customer backlog | 0.5 | 12,900 | (11,272 | ) | 1,628 | Customer backlog | 0.8 | 13,211 | (13,211) | — | ||||||||||||||||||||||||||||||||
| Non-compete agreements | 5 | 9,918 | (2,508 | ) | 7,410 | Non-compete agreements | 5 | 17,172 | (12,210) | 4,962 | ||||||||||||||||||||||||||||||||
| In-Process R&D | Indefinite-lived | 6,692 | — | 6,692 | ||||||||||||||||||||||||||||||||||||||
| Developed technology | Developed technology | 17 | $ | 6,354 | $ | (748) | 5,606 | |||||||||||||||||||||||||||||||||||
| Other | 11 | 529 | (42 | ) | 487 | Other | 10 | 867 | (493) | 374 | ||||||||||||||||||||||||||||||||
| Total intangible assets | $ | 325,406 | $ | (43,808 | ) | $ | 281,598 | Total intangible assets | $ | 336,530 | $ | (235,121) | $ | 101,409 | ||||||||||||||||||||||||||||
Amortization expense totaled $55.4$33.3 million, $39.4 million, $4.4$41.3 million and $0.0$47.4 million for the years ended December 31, 20172021, December 31, 2020 and December 31, 2016, for the period March 14, 2015 to December 31, 2015 and for the period from January 1, 2015 to March 13, 2015,2019, respectively, which is included in selling, general and administrative expenses in the consolidated statements of operations.
The estimated amortization expense relating to amortizable intangible assets for the next five years is as follows (in thousands):
| Year ended | Intangible assets subject to amortization | |||||||
| 2022 | $ | 24,203 | ||||||
| 2023 | 17,801 | |||||||
| 2024 | 12,818 | |||||||
| 2025 | 9,549 | |||||||
| 2026 | 670 | |||||||
| Total | $ | 65,041 | ||||||
93
| Year ended | Intangible assets subject to amortization | |||
| 2018 | $ | 50,265 | ||
| 2019 | 43,602 | |||
| 2020 | 37,583 | |||
| 2021 | 29,743 | |||
| 2022 | 20,793 | |||
| Total | $ | 181,986 | ||
FORTERRA, INC.
Consolidated (Successor) / Combined (Predecessor) Notes to Financial Statements
9. Fair value measurement
The Company's financial instruments consist primarily of cash and cash equivalents, trade and other receivables, derivative instruments, accounts payable, long-term debt, operating and finance lease liabilities, accrued liabilities and the tax receivable agreement obligation. The carrying value of the Company's trade receivables, other receivables, trade payables, the asset basedasset-based revolver and accrued liabilities approximates fair value due to their short-term maturity or other terms related to these financial instruments. The Company may adjust the carrying amount of certain non-financial assets to fair value on a non-recurring basis when they are impaired.
The estimated carrying amount and fair value of the Company’s financial instruments and other assets and liabilities measured and recorded at fair value on a recurring basis are as follows for the dates indicated (in thousands):
| Fair value measurements at December 31, 2021 using | ||||||||||||||
| Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total Fair Value December 31, 2021 | |||||||||||
| Liabilities: | ||||||||||||||
| Derivative liability | $ | — | $ | 194 | $ | — | $ | 194 | ||||||
| Fair value measurements at December 31, 2017 using | ||||||||||
| Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total Fair Value December 31, 2017 | |||||||
| Recurring: | ||||||||||
| Non-current assets | ||||||||||
| Derivative asset | — | $ | 5,251 | — | $ | 5,251 | ||||
| Current liabilities | ||||||||||
| Derivative liability | — | 6,286 | — | 6,286 | ||||||
| Fair value measurements at December 31, 2016 using | ||||||||||
| Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total Fair Value December 31, 2016 | |||||||
| Recurring: | ||||||||||
| Non-current liabilities | ||||||||||
| Derivative liability | — | $ | 372 | — | $ | 372 | ||||
| Fair value measurements at December 31, 2020 using | ||||||||||||||
| Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total Fair Value December 31, 2020 | |||||||||||
| Liabilities: | ||||||||||||||
| Derivative liability | $ | — | $ | 572 | $ | — | $ | 572 | ||||||
Liabilities and assets classified as level 2 which are recorded at fair value are valued using observable market inputs. 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, counter-party 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 counter-parties, and fair value for net long exposures is adjusted for counter-party credit risk while the fair value for net short exposures is adjusted for the Company’s own credit risk.
The estimated carrying amount and fair value of the Company’s financial instruments and liabilities for which fair value is only disclosed is as follows (in thousands):
| Fair value measurements at December 31, 2021 using | |||||||||||||||||
| Carrying Amount December 31, 2021 | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total Fair Value December 31, 2021 | |||||||||||||
| Non-current liabilities | |||||||||||||||||
| Term Loan | $397,986 | — | $402,357 | — | $402,357 | ||||||||||||
| Senior Secured Notes | 493,796 | — | $530,690 | — | 530,690 | ||||||||||||
| Tax receivable agreement payable | 55,908 | — | — | 34,697 | 34,697 | ||||||||||||
94
FORTERRA, INC.
Consolidated Notes to Financial Statements
| Fair value measurements at December 31, 2017 using | Fair value measurements at December 31, 2020 using | ||||||||||||||||||||||||||
| Carrying Amount December 31, 2017 | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total Fair Value December 31, 2017 | Carrying Amount December 31, 2020 | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total Fair Value December 31, 2020 | ||||||||||||||||||
| Non-current liabilities | Non-current liabilities | Non-current liabilities | |||||||||||||||||||||||||
| 2016 Senior Term Loan | $1,193,787 | — | $1,151,981 | — | $1,151,981 | ||||||||||||||||||||||
| Term Loan | Term Loan | $407,978 | — | $415,386 | — | $415,386 | |||||||||||||||||||||
| Senior Secured Notes | Senior Secured Notes | 492,043 | 0 | 539,760 | 0 | 539,760 | |||||||||||||||||||||
| Tax receivable agreement payable | 117,563 | — | — | 75,865 | 75,865 | Tax receivable agreement payable | 64,240 | — | — | 40,586 | 40,586 | ||||||||||||||||
| Fair value measurements at December 31, 2016 using | ||||||||||
| Carrying Amount December 31, 2016 | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total Fair Value December 31, 2016 | ||||||
| Non-current liabilities | ||||||||||
| 2016 Senior Term Loan | $1,000,983 | — | $1,064,395 | — | $1,064,395 | |||||
| Tax receivable agreement payable | 160,783 | — | — | 125,614 | 125,614 | |||||
The fair value of debt is valued using a market approach based on the estimated amountindicative quoted prices for the Company's debt instruments traded in over-the-counter markets and, therefore, is classified as Level 2 within the fair value hierarchy. See Note 11, Debt and deferred financing costs, for a further discussion of Company would have to pay to transfer its debt, including any premium or discount attributable to the difference between the stated interest rate and market rate of interest at the balance sheet date. Fair values are supported by observable market transactions when available.debt.
The determination of the fair value of the tax receivable agreement payable was determined using a discounted cash flow methodology using level 3 inputs as defined by ASC 820.820, Fair Value Measurements and Disclosures. The determination of fair value required significant judgment, including estimates of the timing and amounts of various tax attributes. These estimates are based on management’s best knowledge of current events and actions that the Company may undertake in the future. Actual results could differ from these estimates. See Note 16, Commitments and contingencies, for a further discussion of the Company's tax receivable agreement.
10.Accrued liabilities
Accrued liabilities consist of the following at December 31, 20172021 and December 31, 2016 2020 (in thousands):
| December 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| Accrued payroll and employee benefits | $ | 53,517 | $ | 49,434 | |||||||
| Short-term capital leases | 17,767 | 17,009 | |||||||||
| Short-term operating leases | 8,325 | 7,448 | |||||||||
| Accrued taxes | 9,645 | 13,642 | |||||||||
| Accrued rebates | 15,484 | 11,649 | |||||||||
| Warranty | 3,987 | 7,069 | |||||||||
| Other miscellaneous accrued liabilities | 7,958 | 9,442 | |||||||||
| Total accrued liabilities | $ | 116,683 | $ | 115,693 | |||||||
95
| December 31, | |||||||
| 2017 | 2016 | ||||||
| Accrued payroll and employee benefits | $ | 26,597 | $ | 29,945 | |||
| Accrued taxes | 10,294 | 32,746 | |||||
| Accrued rebates | 8,428 | 7,509 | |||||
| Short-term derivative liability | 6,286 | — | |||||
| Warranty | 5,038 | 3,509 | |||||
| Environmental obligation | 446 | 775 | |||||
| Other miscellaneous accrued liabilities | 15,693 | 3,681 | |||||
| Total accrued liabilities | $ | 72,782 | $ | 78,165 | |||
FORTERRA, INC.
Consolidated (Successor) / Combined (Predecessor) Notes to Financial Statements
11. Debt and deferred financing costs
The Company’s debt consisted of the following (in thousands):
| December 31, | December 31, | ||||||||||
| 2021 | 2020 | ||||||||||
| Term Loan, net of debt issuance costs and original issuance discount of $4,371 and $6,889, respectively | $ | 397,986 | $ | 407,978 | |||||||
| Senior Secured Notes, net of debt issuance costs and original issuance discount of $6,204 and $7,957, respectively | 493,796 | 492,043 | |||||||||
| Total debt | $ | 891,782 | $ | 900,021 | |||||||
| Less: current portion debt | (12,510) | (12,510) | |||||||||
| Total long-term debt | $ | 879,272 | $ | 887,511 | |||||||
| Successor | |||||||
| December 31, | December 31, | ||||||
| 2017 | 2016 | ||||||
| 2016 Senior Term Loan, net of debt issue costs and original issuance discount of | |||||||
| $41,580 and $46,392, respectively | $ | 1,193,787 | $ | 1,000,983 | |||
| 2016 Revolver, net of debt issue costs of $3,936 | — | 95,064 | |||||
| Total debt | $ | 1,193,787 | $ | 1,096,047 | |||
| Less: current portion debt | (12,510 | ) | (10,500 | ) | |||
| Total long-term debt | $ | 1,181,277 | $ | 1,085,547 | |||
As of December 31, 2017, scheduled maturities of long-term debt are as follows (in thousands):
| 2016 Senior Term Loan | ||||
| 2018 | $ | 12,510 | ||
| 2019 | 12,510 | |||
| 2020 | 12,510 | |||
| 2021 | 12,510 | |||
| 2022 | 12,510 | |||
| Thereafter: | 1,172,817 | |||
| $ | 1,235,367 | |||
Senior Secured Notes
On July 16, 2020, Forterra Finance, LLC and FRTA Finance Corp., both wholly-owned subsidiaries of the 2016 Senior Term Loan,Company, completed the proceedsissuance of $500 million aggregate principal amount of senior secured notes due in 2025. The Notes have a fixed annual interest rate of 6.50% which together withwill be paid semi-annually on January 15 and July 15 of each year. The Notes will mature on July 15, 2025. The Company used the net proceeds from the IPO, were usedoffering to repay in full$492.5 million of the Juniorprincipal amount of the Term Loan of $260.0 million, the 2015 Senior Term Loan of $1.04 billion, and the existing balance under the 2015 Revolver, in addition to related expenses associated with the IPO and Refinancing. Immediately subsequent to the completion of the IPO, Forterra had $125.0 million outstanding on its 2016 Revolver and $1.05 billion on its 2016 Senior Term Loan.at par, plus accrued interest. The $260.0 million repayment toward the Junior Term Loan represented a full repayment of the outstanding principal on that loan, resulting in a related write-off of issue discounts and capitalizedCompany incurred debt issuance costs of approximately $22.4 million.$8.8 million and will amortize them over the term of the Notes under the effective interest method.
Obligations under the Notes are guaranteed by the Company and the Company’s existing and future subsidiaries (other than the issuing companies) that guarantee the Term Loan and the obligations of the U.S. borrowers under the Revolver. The repayment also triggeredNotes and the related guarantees are secured by first-priority liens on the collateral that secures the Term Loan on a prepayment penalty of approximately $7.8 million,first-priority basis (which is generally all assets other than those that secure the Revolver on a first-priority basis as set forth below) and second-priority liens on the collateral that secures the Revolver on a first-priority basis (which is generally inventory, accounts receivable, deposit accounts, securities accounts, certain intercompany loans and related assets), which combinedsecond-priority liens will be ratable with the write-offliens on such assets securing the obligations under the Term Loan and junior to the liens on such assets securing the Revolver.
At any time prior to July 15, 2022, the Company may on any one or more occasions redeem all or part of issue discountsthe Notes at a redemption price equal to 100% of the principal amount of the Notes redeemed, plus a “make whole premium” as of, and capitalized issuance costs are included inaccrued and unpaid interest expenseto the date of redemption, subject to the right of holders of Notes on the 2016 statementrelevant record date to receive interest due on an interest payment date occurring on or prior to the redemption date. In addition, at any time prior to July 15, 2022, the Company may on any one or more occasions redeem up to 40% of operations.
the aggregate principal amount of the Notes (calculated after giving effect to the issuance of any additional notes) issued under the Indenture at a redemption price equal to 106.500% of the principal amount of Notes redeemed, plus accrued and unpaid interest to the date of redemption (subject to the right of holders of Notes on the relevant record date to receive interest due on an interest payment date occurring on or prior to the redemption date), with the net cash proceeds of an equity offering. Furthermore, at any time on or after July 15, 2022, the Company may on any one or more occasions redeem all or part of the Notes at the redemption prices (expressed as percentages of principal amount) set forth below, plus accrued and unpaid interest on the Notes redeemed, to the applicable date of redemption, if redeemed during the 12-month period beginning on July 15 of the years indicated below, subject to the rights of holders of Notes on a relevant record date to receive interest on an interest payment date occurring on or prior to the redemption date:
96
FORTERRA, INC.
Consolidated (Successor) / Combined (Predecessor) Notes to Financial Statements
| Percentage | |||||
| 2022 | 103.250 | % | |||
| 2023 | 101.625 | % | |||
| 2024 and thereafter | 100.000 | % | |||
The 2016 Notes contain customary negative covenants, including, among other things, limitations or prohibitions on restricted payments, incurrence of additional indebtedness, liens, mergers, asset sales and transactions with affiliates. In addition, the Indenture contains customary events of default.
Senior Term Loan
The Term Loan provides for a $1.05$1.25 billion senior secured term loan that was made available to a newly formed direct subsidiary of Forterra.loan. Subject to the conditions set forth in the term loan agreement, the 2016 Senior Term Loan may be increased by (i) up to the greater of $285.0 million and 1.0x consolidated EBITDA (defined below) of Forterra and its restricted subsidiaries for the four quarters most recently ended prior to such incurrence plus (ii) the aggregate amount of any voluntary prepayments, plus (iii) an additional unlimited amount, provided certain financial tests are met.
The net proceeds from the incremental term loan of $196.8 million were used to pay down a portion of the outstanding balance on the 2016 Revolver. This amendment had no effect on the Company's ability to increase the size of the 2016 Senior Term Loan under the original provisions. The 2016 Senior Term Loan matures on October 25, 2023 and is subject to quarterly amortization equal to 0.25% of the initial principal amount. Interest accrues on outstanding borrowings thereunder at a rate equal to adjusted LIBOR (with a floor of 1.0%) or an alternate base rate (the base rate, which is the highest of the then current federal funds rate plus 0.50%, the prime rate most recently announced by the administrative agent under the Term Loan, and the one-month adjusted LIBOR plus 1.00%), in each case plus a margin of 3.00% or 2.00%, respectively. The weighted average interest rates for the Term Loan were 4.0% and 4.1% for the years ended December 31, 2021 and December 31, 2020, respectively.
Outstanding borrowings under the 2016 Senior Term Loan are guaranteed by Forterra and each of its direct and indirect material wholly-owned domestic subsidiaries other than any of Forterra's Canadian subsidiaries andexcept certain other excluded subsidiaries or the Guarantors.(the "Guarantors"). The 2016 Senior Term Loan is secured by substantially all of the assets of Forterra, the borrower and the Guarantors; provided that the obligations under the 2016 Senior Term Loan are not secured by any liens on more than 65% of the voting stock of the Canadianforeign subsidiaries or assets of the Canadianforeign subsidiaries. The 2016 Senior Term Loan contains customary representations and warranties, and affirmative and negative covenants, that, among other things, restrict the ability of Forterra and its restricted subsidiaries to incur additional debt, incur or permit liens on assets, make investments and acquisitions, consolidate or merge with any other company, engage in asset sales and pay dividends and make distributions. The 2016 Senior Term Loan does not contain any financial covenants. Obligations under the 2016 Senior Term Loan may be accelerated upon certain customary events of default (subject to grace periods, as appropriate).
Asset Based Revolving Facility
On June 17, 2020, the Company entered into a First Amendment (the “Amendment”) to the ABL Credit Agreement. The 2016Amendment, among other things, (i) increased the size of the Revolver provides for anfrom $300 million to $350 million of aggregate principal amount of up to $300.0 million,commitments, with up to $280.0$330 million to be made available to the U.S. borrowersBorrowers and up to $20.0
97
FORTERRA, INC.
Consolidated Notes to Financial Statements
$20 million to be made available to the Canadian borrowersBorrowers (the allocation may be modified periodically at the Company's request). , (ii) extended the maturity date of the Revolver to June 17, 2025, subject to earlier maturity if greater than $75.0 million of the Company’s Term Loan remains outstanding 91 days prior to the scheduled maturity of the term loan credit facility or any refinancing thereof, and (iii) modified the interest rates on outstanding borrowings under the Revolver to a rate equal to LIBOR or CDOR plus a margin ranging from 1.75% to 2.25% per annum, or an alternate base rate, Canadian prime rate or Canadian base rate plus a margin ranging from 0.75% to 1.25% per annum, in each case, based upon the average excess availability under the Revolver for the most recently completed calendar quarter and the Company’s total leverage ratio as of the end of the most recent fiscal quarter for which financial statements have been delivered. The Company incurred $2.6 million of fees and expenses in connection with this Amendment and recorded it to “Other Long-term Assets” in its consolidated balance sheet. In addition, for the year ended December 31, 2020, the Company wrote off $0.4 million of previously deferred issuance cost related to the banks that are no longer part of the ABL Credit Facility.
Subject to the conditions set forth in the revolving credit agreement related to the 2016 Revolver, or the 2016ABL Credit Agreement, as amended, the 2016 Revolver may be increased by up to the greater of (i)$100.0 $100.0 million and (ii) such amount as would not cause the aggregate borrowing base to be exceeded by more than $50.0 million. Borrowings under the 2016 Revolver may not exceed a borrowing base equal to the sum of (i) 100% of eligible cash, (ii) 85% of eligible accounts receivable and (iii) the lesser of (a) 75% of eligible inventory and (b) 85% of the orderly liquidation value of eligible inventory, with the U.S. and Canadian borrowings being subject to separate borrowing base limitations.
The advance rates for accounts receivable and inventory are subject to increase by 2.5% during certain periods. As of December 31, 2021 and December 31, 2020, the Revolver had no outstanding borrowings. The 2016weighted average interest rates for the borrowings under the Revolver matures on October 25, 2021.were 2.75% and 2.00% for the years ended December 31, 2021 and December 31, 2020, respectively.
The facility willRevolver also provideprovides for the issuance of letters of credit of up to an agreed sublimit. Interest will accrue on outstanding borrowings at a rate equal to LIBOR or CDOR plus a margin ranging from 1.25% to 1.75% per annum, or at an alternate base rate, Canadian prime rate or Canadian base rate plus a margin ranging from 0.25% to 0.75% per annum, in each case, based upon the average excess availability under the 2016 Revolver for the most recently completed calendar quarter. The obligations of the borrowers under the 2016 Revolver isare guaranteed by Forterra and its direct and indirect wholly-owned restricted subsidiaries other than certain excluded subsidiaries; provided that the obligations of the U.S. borrowers isare not guaranteed by the Canadian subsidiaries. The 2016 Revolver is secured by substantially all of the assets of the borrowers; provided that the obligations of the U.S. borrowers are not secured by any liens on more than 65% of the voting stock of the Canadianforeign subsidiaries or assets of the Canadianforeign subsidiaries.
In addition, Forterra pays a facility fee of between 20.0 and 32.5 basis points per annum based upon the utilization of the total Revolver. Availability under the Revolver, based on draws, outstanding letters of credit of $18.8 million, as well as allowable borrowing base as of December 31, 2021, was $317.9 million.
98
FORTERRA, INC.
Consolidated (Successor) / Combined (Predecessor) Notes to Financial Statements
| Total | Term Loan | Notes | |||||||||||||||||||||
| 2022 | $ | 12,510 | $ | 12,510 | $ | — | |||||||||||||||||
| 2023 | 389,847 | 389,847 | — | ||||||||||||||||||||
| 2024 | — | — | — | ||||||||||||||||||||
| 2025 | 500,000 | — | 500,000 | ||||||||||||||||||||
| 2026 | — | — | — | ||||||||||||||||||||
| $ | 902,357 | $ | 402,357 | $ | 500,000 | ||||||||||||||||||
12. Other long-term liabilities
Other long-term liabilities consist of the following for the years ended December 31, 20172021 and 2016 2020 (in thousands):
| December 31, | December 31, | |||||||||||||||||
| 2017 | 2016 | 2021 | 2020 | |||||||||||||||
| Workers' compensation | $ | 9,455 | $ | 9,864 | Workers' compensation | $ | 13,687 | $ | 12,417 | |||||||||
| Deferred rent | 8,242 | 2,776 | ||||||||||||||||
| Capital lease obligation | 4,155 | 3,710 | ||||||||||||||||
| Legal | Legal | 6,758 | 6,758 | |||||||||||||||
| Social Security deferral | Social Security deferral | — | 5,521 | |||||||||||||||
| Long term bonus incentive plan | Long term bonus incentive plan | — | 5,110 | |||||||||||||||
| Employee benefits | 2,227 | 2,524 | Employee benefits | 3,322 | 3,322 | |||||||||||||
| Insurance | 1,335 | 951 | ||||||||||||||||
| Environmental remediation liability | 1,162 | 901 | Environmental remediation liability | 1,223 | 1,535 | |||||||||||||
| Other miscellaneous long-term liabilities | 2,611 | 2,527 | Other miscellaneous long-term liabilities | 2,311 | 2,255 | |||||||||||||
| $ | 29,187 | $ | 23,253 | $ | 27,301 | $ | 36,918 | |||||||||||
13. Derivatives and hedging
The Company uses derivatives to manage selected foreign exchange and interest rate exposures. The Company does not use derivative instruments for speculative trading purposes, and, except as discussed below, cash flows from derivative instruments are included in net cash provided by (used in) operating activities in the consolidated statements of cash flows.
On February 9, 2017, Forterra entered into interest rate swap transactions with a combined notional value of $525 million. Under the terms of the swap transactions, Forterra agreed to pay a fixed rate of interest of 1.52% and receive floating rate interest indexed to one-month LIBOR with monthly settlement terms with the swap counterparties. The swaps havehad a three-year term and expireexpired on March 31, 2020. The interest rate swaps arewere not designated as cash flow hedges, therefore all changes in the fair value of these instruments arewere captured as a component of interest expense in the statements of operations.
Accordingly, cash flows from the
99
FORTERRA, INC.
Consolidated (Successor) / Combined (Predecessor) Notes to Financial Statements
monthly interest rate swap settlements were included in net cash provided by (used in) operating activities in the consolidated statements of cash flows.
The following table presents the fair values of derivative assets and liabilities in the balance sheets (in thousands):
| December 31, 2021 | |||||||||||||||||||||||
| Derivative Assets | Derivative Liabilities | ||||||||||||||||||||||
| Notional Amount | Fair Value | Notional Amount | Fair Value | ||||||||||||||||||||
| Interest rate swaps | $ | — | $ | — | $ | 400,000 | $ | 194 | |||||||||||||||
| Total derivatives, gross | — | 194 | |||||||||||||||||||||
| Less: Legally enforceable master netting agreements | — | — | |||||||||||||||||||||
| Total derivatives, net | $ | — | $ | 194 | |||||||||||||||||||
| December 31, 2017 | |||||||||||||||
| Derivative Assets | Derivative Liabilities | ||||||||||||||
| Notional Amount | Fair Value | Notional Amount | Fair Value | ||||||||||||
| Foreign exchange forward contracts | $ | — | $ | — | $ | 92,961 | $ | 6,286 | |||||||
| Interest rate swaps | 525,000 | 5,251 | — | — | |||||||||||
| Total derivatives, gross | 5,251 | 6,286 | |||||||||||||
| Less: Legally enforceable master netting agreements | — | — | |||||||||||||
| Total derivatives, net | $ | 5,251 | $ | 6,286 | |||||||||||
| December 31, 2020 | |||||||||||||||||||||||
| Derivative Assets | Derivative Liabilities | ||||||||||||||||||||||
| Notional Amount | Fair Value | Notional Amount | Fair Value | ||||||||||||||||||||
| Interest rate swaps | $ | — | $ | — | $ | 400,000 | $ | 572 | |||||||||||||||
| Total derivatives, gross | — | 572 | |||||||||||||||||||||
| Less: Legally enforceable master netting agreements | — | — | |||||||||||||||||||||
| Total derivatives, net | $ | — | $ | 572 | |||||||||||||||||||
| December 31, 2016 | |||||||||||||||
| Derivative Assets | Derivative Liabilities | ||||||||||||||
| Notional Amount | Fair Value | Notional Amount | Fair Value | ||||||||||||
| Foreign exchange forward contracts | $ | — | $ | — | $ | 92,961 | $ | 372 | |||||||
| Total derivatives, gross | — | 372 | |||||||||||||
| Less: Legally enforceable master netting agreements | — | — | |||||||||||||
| Total derivatives, net | $ | — | $ | 372 | |||||||||||
The following table presents the effect of derivative instruments on the consolidated statements of operations (in thousands):
| Year ended December 31, | Year ended December 31, | ||||||||||
| 2021 | 2020 | ||||||||||
| Derivatives not designated as hedges | |||||||||||
| Interest rate swaps | |||||||||||
| Gain / (loss) on derivatives not designated as hedges included in interest expense | 378 | (830) | |||||||||
14.Leases
The Company leases land and buildings, office spaces, vehicles, machinery and equipment under various lease agreements. A large portion of the Company’s leases were the result of the sale and leaseback of land and buildings related to certain production facilities. These leases have an initial term of 25 years, followed by 1 optional renewal term of approximately ten years that may be exercised at the Company’s discretion. See Note 15, Sale-Leaseback transaction. These leases, with the exception of certain land leases, were classified as finance leases. The Company’s operating leases are mainly comprised of land and buildings, office spaces, vehicles, machinery and equipment leases, and have remaining terms of one to 25 years, some of which include options to extend the leases for up to ten years.
100
FORTERRA, INC.
Consolidated Notes to Financial Statements
| Year ended December 31, | Year ended December 31, | |||||
| 2017 | 2016 | |||||
| Net investment hedges | ||||||
Foreign exchange forward contracts | ||||||
| Gain (loss) on derivatives recognized in Accumulated other comprehensive loss | $ | (3,548 | ) | $ | 215 | |
| Derivatives not designated as hedges | ||||||
Foreign exchange forward contracts | ||||||
| Gain (loss) on derivatives not designated as hedges in other operating income (expense) | — | (3,067 | ) | |||
| Interest rate swaps | ||||||
| Gain on derivatives not designated as hedges included in interest expense | 5,251 | — | ||||
| Gain reclassified from Accumulated other comprehensive income into income: | ||||||
| Other income (expense), net | $ | — | $ | 177 | ||
The components of lease expense were as follows (in thousands):
| Lease cost | Classification | Year ended December 31, 2021 | Year ended December 31, 2020 | Year ended December 31, 2019 | |||||||||||||||||||
| Operating lease cost | Lease expense | $ | 13,780 | $ | 15,613 | $ | 16,464 | ||||||||||||||||
| Finance lease cost | |||||||||||||||||||||||
| Amortization of leased assets | Depreciation, amortization, and accretion | 2,266 | 2,259 | 2,276 | |||||||||||||||||||
| Interest on lease liabilities | Interest expense | 19,504 | 18,954 | 18,528 | |||||||||||||||||||
| Lease term and discount rate | December 31, 2021 | December 31, 2020 | December 31, 2019 | |||||||||||||||||
| Weighted-average remaining lease term (years) | ||||||||||||||||||||
| Operating leases | 14.9 years | 15.7 years | 15.5 years | |||||||||||||||||
| Finance leases | 30.8 years | 31.7 years | 33.1 years | |||||||||||||||||
| Weighted-average discount rate (%) | ||||||||||||||||||||
| Operating leases | 12.4 | % | 12.6 | % | 12.6 | % | ||||||||||||||
| Finance leases | 12.3 | % | 12.3 | % | 12.3 | % | ||||||||||||||
Supplemental cash flow information related to leases was as follows (in thousands):
| Year ended December 31, 2021 | Year ended December 31, 2020 | Year ended December 31, 2019 | ||||||||||||||||||
| Cash paid for amounts included in lease liabilities | ||||||||||||||||||||
| Operating cash flows related to operating leases | $ | 12,783 | $ | 14,515 | $ | 14,945 | ||||||||||||||
| Operating cash flows related to finance leases | 17,149 | 16,621 | 16,090 | |||||||||||||||||
| Financing cash flows related to finance leases | 852 | 805 | 583 | |||||||||||||||||
| Leased assets obtained in exchange for new finance lease liabilities | 11 | 3,456 | 180 | |||||||||||||||||
| Leased assets obtained in exchange for new operating lease liabilities | 5,450 | 2,032 | 4,925 | |||||||||||||||||
Supplemental balance sheet information related to leases was as follows (in thousands):
| Classification | December 31, 2021 | December 31, 2020 | ||||||||||||||||||
| Operating leases | ||||||||||||||||||||
| Right of use assets | Operating lease right-of-use assets | $ | 52,808 | $ | 54,379 | |||||||||||||||
| Operating lease liabilities - current portion | Accrued liabilities | (8,325) | (7,448) | |||||||||||||||||
| Operating lease liabilities - long term portion | Long-term operating lease liabilities | (49,814) | (50,943) | |||||||||||||||||
| Finance leases | ||||||||||||||||||||
| Finance lease assets | Property, plant and equipment, net | 49,222 | 51,360 | |||||||||||||||||
| Finance lease liabilities - current portion | Accrued liabilities | (17,767) | (17,009) | |||||||||||||||||
| Finance lease liabilities - long term portion | Long-term finance lease liabilities | (142,940) | (142,195) | |||||||||||||||||
101
FORTERRA, INC.
Consolidated Notes to Financial Statements
As of December 31, 2021, maturities of lease liabilities were as follows (in thousands):
| Operating leases | Finance leases | Total | |||||||||||||||
| 2022 | $ | 12,501 | $ | 18,245 | $ | 30,746 | |||||||||||
| 2023 | 12,007 | 18,372 | 30,379 | ||||||||||||||
| 2024 | 11,144 | 18,605 | 29,749 | ||||||||||||||
| 2025 | 10,320 | 18,809 | 29,129 | ||||||||||||||
| 2026 | 8,808 | 18,531 | 27,339 | ||||||||||||||
| Thereafter | 91,628 | 616,567 | 708,195 | ||||||||||||||
| Total lease payments | 146,408 | 709,129 | 855,537 | ||||||||||||||
| Less: imputed interest | (88,269) | (548,422) | (636,691) | ||||||||||||||
| Present value of lease liabilities | $ | 58,139 | $ | 160,707 | $ | 218,846 | |||||||||||
15.Sale-leaseback transaction
On June 5, 2018, the Company recognizedentered into exchange agreements and Amended and Restated Master Leases with each of the U.S Buyer and the Canadian Buyer (collectively, the “Exchange Transaction”). Under the exchange agreement between the Company and the U.S. Buyer, the Company exchanged ownership of a lossductile iron pipe facility located in Bessemer, Alabama used in its Water Pipe & Products segment (the “Bessemer Facility”) for 21 facilities used in its Drainage Pipe & Products segment and the U.S. concrete and steel pressure pipe facilities previously part of the Water Pipe & Products segment, including a portion of 1 property used in both segments, all of which were previously included in the sale-leaseback transaction. Under the exchange agreement between the Company and the Canadian Buyer, the Company exchanged ownership of a smaller diameter ductile iron pipe facility located in Bessemer, Alabama used in its Water Pipe & Products segment (the “Mini Mill Facility”) for ownership of 3 Canadian concrete pressure pipe facilities that were previously included in the sale-leaseback transaction. No cash changed hands in the Exchange Transaction.
Under the Amended and Restated Master Leases, the Company leases 26 properties from the U.S. Buyer and 2 properties from an affiliate of the Canadian Buyer, each for an initial term of 25 years, through June 30, 2043, followed by 1 optional renewal term of nine years, eleven months that may be exercised at the Company’s option. The initial base rent under the U.S. Amended and Restated Master Lease is $17.1 million per annum, payable monthly, and is subject to a 2% annual increase during the initial term. If the Company elects to extend the term of the U.S. Amended and Restated Master Lease, the base rent for the first year of the extension will be the greater of 95% of the fair market rental value of the properties and an amount equal to 102% of the prior year’s base rent, subject to an annual increase based on changes in the statementConsumer Price Index, but capped at 4%. The U.S. Amended and Restated Master Lease restricts the Company’s use of operations of $19.6 millionthe U.S. properties to heavy manufacturing, industrial, and a deferred gain of $81.5 million.other related uses. The Company is amortizingcannot sublease or assign the deferred gain overproperties covered by the lifeU.S. Amended and Restated Master Lease without the prior written consent of the lease. As of December 31, 2017, the non-current portionU.S. Landlord and subject to certain other restrictions. The terms of the deferred gain
Canadian Amended and Restated Master Lease are
102
FORTERRA, INC.
Consolidated (Successor) / Combined (Predecessor) Notes to Financial Statements
similar to those of the U.S. Amended and Restated Master Lease described above, except that the initial base rent is $1.2 million (CAD) per annum. The Company’s aggregate liability in connection with its representations, warranties, covenants and indemnification and other obligations is $5.0 million under the U.S. Exchange Agreement and $6.4 million (CAD) under the Canadian Exchange Agreement, subject to limited exceptions.
The Company accounted for the Exchange Transaction in accordance with the sale-leaseback accounting guidance under ASC 840, Leases. The fair value of the 24 facilities exchanged back was $75.7$86.1 million and was accounted for as the proceeds from the sale of the Bessemer and Mini Mill Facilities after adjusting for the transaction cost of $2.7 million. Consequently, a deferred gain of $67.3 million was recorded at June 5, 2018. The carrying value of the deferred gains of $35.0 million, the deferred rent of $3.1 million, and the current portiondeferred transaction costs of $2.4 million from the original sale-leaseback transaction were reclassified to reduce the carrying value of the 24 facilities exchanged back.
The Amended and Restated Master Leases extended the lease terms for all facilities, which caused the majority of the leases to be classified as capital leases instead of operating leases. Consequently, the Company recognized capital lease obligations as well as the gross value of the capital lease assets of $149.0 million, calculated by discounting minimum future lease payments using its incremental borrowing rate of 12.33%. The carrying value of the deferred gain was $2.8gains of $100.0 million, in other current liabilities in the consolidated balance sheet. As of December 31, 2016, the non-current portion of the deferred gain was $78.2rent of $3.8 million, and the current portiondeferred transaction cost of $5.7 million were reclassified to reduce the deferred gain was $2.8 million in other current liabilities in the consolidated balance sheet.carrying value of capital lease assets.
The Company is involved in legal proceedings and litigation in the ordinary course of business. In the opinion of management, the outcome of such matters will not have a material adverse effect on the Company’s consolidated financial position, results of operations, or liquidity. Other than routine litigation incidental to the Company's business and those matters described below, there are no material legal proceedings to which the Company is a party or to which any of the Company’s properties are subject.
On January 15, 2019, a specified Adjusted EBITDA target for fiscal year 2015, as calculated pursuant to the terms of the purchase agreement. If such Adjusted EBITDA calculation exceeds the specified target, LSF9, and therefore, Forterra would be required to pay HC an amount equal to a multiple of such excess Adjusted EBITDA, with any payment capped at $100.0 million. In April 2016, the Company provided an earnout statement to HC demonstrating that no paymentputative shareholder derivative complaint captioned Lee v. Bradley, et al., was required. On June 13, 2016, HC provided notification that it is disputing, among other things, the Company’s calculation of Adjusted EBITDA under the purchase agreement and asserting that a payment should be made in the amount of $100.0 million. The Company does not believe HeidelbergCement’s position has merit and intends to vigorously oppose HeidelbergCement's assertions. On October 5, 2016, affiliates of HeidelbergCement filed a lawsuit in the Delaware Court of Chancery seeking specific performance and claiming access to the Company's books, records, and personnel; seeking a declaratory judgment concerning the scope of the neutral accounting expert’s authority; and in the alternative, claiming a breach of contract and seeking the $100.0 million and other damages or the Delaware Action. In November 2016, the defendants filed a motion to dismiss the Delaware Action, and on January 6, 2017, the plaintiffs filed a First Amended Complaint. The defendants filed a motion to dismiss the First Amended Complaint on February 22, 2017, requesting that the Court dismiss all claims in the Delaware Action. On December 8, 2017, the court granted the defendants' Motion to Dismiss the First Amended Complaint in the Delaware Action, finding that the earnout dispute should be heard before a neutral accounting arbitrator as set forth in the purchase agreement. The court further found that any claims that required to be brought as indemnification claims under the purchase agreement were time-barred by the contractual limitations period. The plaintiffs in the Delaware Action filed a Motion for Clarification and Reargument of the Court's December 8, 2017 Memorandum Opinion, which the court denied on February 7, 2018. The plaintiffs in Delaware Action may appeal the court's ruling. In addition, an arbitration proceeding before a neutral accountant to calculate adjusted EBITDA under the purchase agreement may commence in the future. As a result of the Reorganization, the defendants in the Delaware Action are no longer part of the Company and its consolidated subsidiaries, however the Company remains the liable party in this matter. As of December 31, 2017, no liability for this contingency has been accrued as payment of any earnout is not considered probable. However, the outcome of this matter is uncertain, and no assurance can be given to the ultimate outcome of the resulting proceedings. If the Company is unsuccessful in resolving the dispute, it could recognize a material charge to its earnings.
103
FORTERRA, INC.
Consolidated (Successor) / Combined (Predecessor) Notes to Financial Statements
The Company intends to defendand other defendants are vigorously defending the Securities Lawsuits vigorously.Consolidated Lee Action. Given the stage of the proceedings, the Company cannot reasonably estimate at this time the possible loss or range of loss, if any, that may arise from the Securities Lawsuits.Consolidated Lee Action.
Merger-Related Litigation
On March 24, 2021, Anand Choudhuri, a purported owner of Forterra common stock brought a lawsuit against the Company and each of the members of its Board of Directors in the U.S. District Court for the Southern District of New York (the "Choudhuri Action"). The plaintiff alleges, among other things, that the directors breached their fiduciary duties by entering into the Merger Agreement through an unfair process and for inadequate compensation, and that the Information Statement filed by the Company to explain the Merger to its stockholders (the "Merger Information Statement") omits material information related to the sales process, the Company’s financial projections, and Citigroup Global Markets Inc.’s (“Citi”) analysis of the proposed transaction reflected in the Merger Agreement, in violation of the federal securities laws and seeks to enjoin the Merger and/or damages in an unspecified amount.
On March 31, 2021, Christopher Jones, a purported owner of Forterra common stock brought a lawsuit against the Company and each of the members of its Board of Directors in the U.S. District Court for the District of Colorado (the "Jones Action"). The plaintiff alleges, among other things, that defendants violated federal securities laws by failing to disclose certain information in the Merger Information Statement, the Company’s financial projections, and Citi's analysis of the proposed transaction reflected in the Merger Agreement and seeks to enjoin the Merger and/or damages in an unspecified amount.
On April 1, 2021, Adam Franchi, a purported owner of Forterra common stock brought a lawsuit against Forterra and individual members of the Board of Directors in the U.S. District Court for the District of Delaware (the "Franchi Action") (collectively, the Choudhuri Action, the Jones Action and the Franchi Action are the “Merger-Related Litigation”). The plaintiff in the Franchi Action alleges, among other things, that defendants violated federal securities laws by failing to disclose certain information in the Merger Information Statement, the Company’s financial projections, and Citi's analysis of the proposed transaction reflected in the Merger Agreement and seeks to enjoin the Merger and/or damages in an unspecified amount.
The Company filed supplemental disclosures relating to the Merger Information Statement which further explained the proposed transaction that is contemplated by the Merger Agreement. Following the supplemental disclosure filings, in late April 2021 each of the 3 cases was voluntarily dismissed by the applicable plaintiff, and it is expected that the plaintiffs in these actions may seek compensation for their expenses and attorneys' fees. Given the stage of the proceedings, the Company cannot reasonably estimate at this time the possible loss or range of loss, if any, that may arise from the Merger-Related Litigation.
In addition, certain stockholders have informed the Company that they will seek to exercise their appraisal rights under Delaware law with respect to their shares. No further action has been taken by these stockholders to date.
Long-term incentive plan
Following the Acquisition, Lone Star implemented a cash-based long term incentive plan (the “LTIP”), which entitles the participants in the LTIP a potential cash payout upon a liquiditymonetization event as defined by the LTIP. Potential liquiditymonetization events include the sale, transfer or otherwise disposition of all or a portion of the Company or successor entities of LSF9, an initial public offering where Lone Star sells all or a portion of their direct and interestssells/reduces its ownership in the Company or successor entities of LSF9, or through certain cash distribution as defined in the LTIP. Before the payout of any cash the LTIP requires Lone Star realize in cash the full return of their investment plus a specified internal rate of return, which is calculated by comparing the return to Lone Star over the timeline of its investment in the Company and certain successor entities of LSF9. As of December 31, 2017,2021, no such liquiditymonetization events that meet the required return for an LTIP payment have occurred, and therefore no amounts were accrued in the accompanying consolidated balance sheet. While no payments have occurred thus far, payments under the LTIP could be significant depending upon future liquiditymonetization events. The timing and
104
FORTERRA, INC.
Consolidated Notes to Financial Statements
amount of such payments are unknown and is dependent upon future liquiditymonetization events and market conditions that are outside of the control of the Company or the participants of the plan. Subsequent to the IPO, Forterra became directly liable for any payment obligations triggered under the LTIP, but LSF9 or one of its affiliates will remain obligated to make payments to the
Company in amounts equal to any payment obligations triggered under the LTIP as and when such payment obligations are triggered. It is expected that if the Merger is completed under the terms of the Merger Agreement, the Merger will constitute a Liquidity Event that will trigger certain payments under the terms of the LTIP.
The Company leases certain property and equipment for various periods under non-cancelable operating and finance leases. FutureSee Note 14 for future minimum lease payments under such agreements as of December 31, 2017, net of non-cancelable subleaeses, were approximately:agreements.
| 2018 | $ | 31,509 | |
| 2019 | 29,060 | ||
| 2020 | 27,531 | ||
| 2021 | 25,213 | ||
| 2022 | 24,941 | ||
| Thereafter | 569,882 | ||
| $ | 708,136 | ||
Tax receivable agreement
For purposes of the tax receivable agreement,TRA, the aggregate reduction in income tax payable by the Company will be computed by comparing the Company's actual income tax liability with its hypothetical liability had it not been able to utilize the related tax benefits. The agreement will remain in effect for the period of time in which all such related tax benefits remain. The Company accounts for potential payments under the tax receivable agreement as a contingent liability, with amounts accrued when considered probable and reasonably estimable. As ofThe liabilities recorded by the IPO date, the Company recorded a $160.8 million liability and a reduction to additional paid-in-capital related to the tax receivable agreement for the undiscounted value of probable future payments. Net of tax effects of $18.5 million, the net reduction to additional paid-in-capital related to the initial liability for the tax receivable agreement issued in connection with the IPO was $142.3 million. The passage of the TCJA described in Note 19 significantly reduced the Company's anticipated liability under the TRA. The current period reduction in the TRA liability resulted in $46.2 million of non-operating income recognized in the Company's statement of operations for the year ended December 31, 2017 due primarily to the decrease in the federal corporate tax rate. Net of other adjustments, the Company's TRA liability at December 31, 2017 is $117.6 million.2021 and December 31, 2020 were $55.9 million and $64.2 million, respectively. The timing and amount of future tax benefits associated with the tax receivable agreementTRA are subject to change, and additional payments may be required which could be materially different from the current accrued liability. The Company anticipates that it will have sufficient taxable income in future periods to realize the full value of the obligation recorded. Future tax receivable agreement payments related to the tax basis of assets at the time of the IPO will be recorded as a reduction to the liability and will be recorded as a financing activity in the statementconsolidated statements of cash flows. No payments have been made as ofFor the years ended December 31, 2017.2021 and December 31, 2020, the Company paid $8.3 million and $13.1 million, respectively on the TRA to Lone Star. It is expected that if the Merger is completed under the terms of the Merger Agreement, payments to Lone Star will continue to be made by the surviving entity under the Merger Agreement according to the terms of the TRA.
Basic earnings per share (“EPS”) is calculated by dividing net earnings by the weighted average number of common shares outstanding during the period. Potentially dilutive securities include employee stock options and shares of restricted stock. Diluted EPS reflects the assumed exercise or conversion of all dilutive securities. The restricted shares are considered participating securities for the purposes of ourthe Company's EPS calculation.
105
FORTERRA, INC.
Consolidated Notes to Forterra, Inc. in an internal reorganization under common control. Contemporaneously with this transaction, 3.75 million shares were issued by Forterra, Inc. to affiliate entities. For purposes of calculating earnings (loss) per share, weighted average shares prior to the Reorganization have been retroactively adjusted to give effect to the Reorganization for all historical periods presented in the Successor financial statements. The computations of earnings (loss) per share for periods prior to our IPO do not include the shares issued in connection with the IPO.Financial Statements
The calculations of the basic and diluted EPS for the years ended December 31, 20172021, 2020 and 2016 and the period from March 14, to December 31, 2015 2019
are presented below (in thousands, except per share data):
| Year ended December 31, | ||||||||||||||||||||
| 2021 | 2020 | 2019 | ||||||||||||||||||
| Net income (loss) | $ | 116,317 | $ | 64,486 | $ | (7,331) | ||||||||||||||
| Earnings allocated to unvested restricted stock | — | 40 | — | |||||||||||||||||
| Earnings (loss) allocated to common shareholders | $ | 116,317 | $ | 64,446 | $ | (7,331) | ||||||||||||||
| Common stock: | ||||||||||||||||||||
| Weighted average basic shares outstanding | 66,719 | 65,260 | 64,232 | |||||||||||||||||
| Effect of dilutive securities | 2,925 | 2,943 | — | |||||||||||||||||
| Weighted average diluted shares outstanding | 69,644 | 68,203 | 64,232 | |||||||||||||||||
| Basic earnings (loss) per share: | ||||||||||||||||||||
| Net income | $ | 1.74 | $ | 0.99 | $ | (0.11) | ||||||||||||||
| Diluted earnings per share: | ||||||||||||||||||||
| Net income | $ | 1.67 | $ | 0.94 | $ | (0.11) | ||||||||||||||
| Year ended December 31, | Year ended December 31, | March 14, to December 31, | ||||||||||
| 2017 | 2016 | 2015 | ||||||||||
| Loss from continuing operations | $ | (2,060 | ) | $ | (11,090 | ) | $ | (74,178 | ) | |||
| Discontinued operations, net of tax | — | 3,484 | (8,608 | ) | ||||||||
| Net loss | $ | (2,060 | ) | $ | (7,606 | ) | $ | (82,786 | ) | |||
| Common stock: | ||||||||||||
| Weighted average basic shares outstanding | 63,801 | 49,053 | 45,369 | |||||||||
| Effect of dilutive securities - stock options | — | — | — | |||||||||
| Weighted average diluted shares outstanding | 63,801 | 49,053 | 45,369 | |||||||||
| Basic earnings (loss) per share: | ||||||||||||
| Income (loss) from continuing operations | $ | (0.03 | ) | $ | (0.23 | ) | $ | (1.63 | ) | |||
| Income (loss) from discontinued operations, net of taxes | $ | — | $ | 0.07 | $ | (0.19 | ) | |||||
| Net earnings (loss) | $ | (0.03 | ) | $ | (0.16 | ) | $ | (1.82 | ) | |||
| Diluted earnings (loss) per share: | ||||||||||||
| Income (loss) from continuing operations | $ | (0.03 | ) | $ | (0.23 | ) | $ | (1.63 | ) | |||
| Income (loss) from discontinued operations, net of taxes | $ | — | $ | 0.07 | $ | (0.19 | ) | |||||
| Net income (loss) | $ | (0.03 | ) | $ | (0.16 | ) | $ | (1.82 | ) | |||
Potential dilutive common shares were anti-dilutive as a result of the Company's net loss for the yearsyear ended December 31, 2017 and December 31, 2016.2019. As a result, basic weighted average shares were used in the calculations of basic earnings per share and diluted earnings per share for those periods.
The number of stock options and restricted shares that were excluded from the computation of diluted earnings per share because their inclusion would result in an anti-dilutive effect on per share amounts for the years ended December 31, 20172021, 2020 and December 31, 20162019 was 206,254none , 213,413 and 71,372, respectively. The number of restricted shares that were excluded from the computation of diluted earnings per share because their inclusion would result in an anti-dilutive effect on per share amounts was 3,353 and none for the years ended December 31, 2017 and December 31, 2016,2,192,048, respectively.
Defined Contribution Plans - Successor
The Company’s employees are able to participate in a 401K defined contribution plan. The Company contributes funds into this plan subject to certain limits. For the years ended December 31, 20172021, December 31, 2020, and December 31, 2016, and the period March 14, 2015 through December 31, 2015,2019, the Company recorded an expense of $11.3$10.8 million, $10.5$13.0 million and $6.4$7.0 million, respectively. For the period from January 1 through March 13, 2015, the Company recorded an expense of $1.4 million for the Predecessor’s participation in a similar plan sponsored by HC.
is 5,000,000 shares plus any shares subject to
106
FORTERRA, INC.
Consolidated (Successor) / Combined (Predecessor) Notes to Financial Statements
In accordance with ASC 718, Compensation-Stock Compensation, the Company recognizes stock-based compensation expense over the requisite service period for the entire award, which is generally the maximum vesting period of the award or over a shorter period when employee retirement eligibility is a factor, in an amount equal to the fair value of share-based payments, which include stock options granted and restricted stock awards to employees and non-employees members of Forterra's Board of Directors. The Company records stock-based compensation expense in cost of goods sold and selling, general, and administrative expenses. Stock-based compensation expense was approximately $3.7$8.7 million, $9.5 million and $0.3$7.9 million for the years ended December 31, 20172021, 2020 and December 31, 2016,2019, respectively.
Stock Option Grants
The value of the options is determined by using a Black-Scholes pricing model that includes the following variables: 1) exercise price of the instrument, 2) fair market value of the underlying stock on date of grant, 3) expected life, 4) estimated volatility and 5) the risk-free interest rate. There were no stock option grants in the year ended December 31, 2021. The Company utilized the following weighted-average assumptions in estimating the fair value of the option grants in the years ended December 31, 20172020 and December 31, 2016:2019:
| 2020 | 2019 | |||||||||||||||||||
| Expected dividends | — | % | — | % | ||||||||||||||||
| Expected volatility | 67.00 | % | 32.08 | % | ||||||||||||||||
| Risk-free interest rate | 1.63 | % | 2.43 | % | ||||||||||||||||
| Expected lives in years | 6 | 6 | ||||||||||||||||||
| Weighted-average fair value of options: | ||||||||||||||||||||
| Granted at fair value | $ | 8.90 | $ | 1.54 | ||||||||||||||||
| Weighted-average exercise price of options: | ||||||||||||||||||||
| Granted at fair value | $ | 14.63 | $ | 4.29 | ||||||||||||||||
| 2017 | 2016 | |||||||
| Expected dividends | — | % | — | % | ||||
| Expected volatility | 39.60 | % | 39.60 | % | ||||
| Risk-free interest rate | 0.86 | % | 0.35 | % | ||||
| Expected lives in years | 6 | 6.25 | ||||||
| Weighted-average fair value of options: | ||||||||
| Granted at fair value | $ | 4.16 | $ | 6.95 | ||||
| Weighted-average exercise price of options: | ||||||||
| Granted at fair value | $ | 10.76 | $ | 18.00 | ||||
The Black-Scholes model requires the use of subjective assumptionassumptions including expectations of future dividends and stock price volatility. Expected volatility iswas calculated using a weighted average of Forterra and a set of Forterra's peer companies based on an analysis of historical and implied volatility measures for a set of Forterra's peer companies.measures. The average expected life is based on the contractual term of the option and expected employee exercise and post-vesting employment termination behavior. Such assumptions are only used for making the required fair value estimate and should not be considered as indicators of future dividend policy or stock price appreciation. Because changes in the subjective assumptions can materially affect the fair value estimate, and because employee stock optionoptions have characteristics significantly different from those of traded options, the use of the Black-Scholes option pricing model may not provide a reliable estimate of the fair value of employee stock options.
107
FORTERRA, INC.
Consolidated (Successor) / Combined (Predecessor) Notes to Financial Statements
A summary of the status of the Company's stock options is presented below:
| Shares | Weighted Average Exercise Price | ||||||||||
| (in thousands) | |||||||||||
| Outstanding, December 31, 2019 | 3,673,096 | $6.50 | |||||||||
| Granted | 2,248 | $14.63 | |||||||||
| Exercised | (366,814) | $6.61 | |||||||||
| Forfeited | (231,360) | $7.82 | |||||||||
| Outstanding, December 31, 2020 | 3,077,170 | $6.39 | |||||||||
| Exercised | (653,624) | $7.73 | |||||||||
| Outstanding, December 31, 2021 | 2,423,546 | $6.03 | |||||||||
| Options vested or expected to vest at year end | 2,423,546 | $6.03 | |||||||||
| Options exercisable at year end | 1,992,254 | $6.41 | |||||||||
| Shares | Weighted Average Exercise Price | |||
| (in thousands) | ||||
| Outstanding, December 31, 2015 | — | n/a | ||
| Granted | 361,590 | $18.00 | ||
| Exercised | — | n/a | ||
| Forfeited | (3,750 | ) | $18.00 | |
| Outstanding, December 31, 2016 | 357,840 | $18.00 | ||
| Granted | 1,258,155 | $10.76 | ||
| Exercised | — | n/a | ||
| Forfeited | (361,566 | ) | $12.56 | |
| Outstanding, December 31, 2017 | 1,254,429 | $12.31 | ||
| Options vested or expected to vest at year end | 108,613 | $18.02 | ||
| Options exercisable at year end | 108,613 | $18.02 | ||
As of December 31, 2017,2021, the Company has approximately $4.2$0.1 million of unrecognized stock option compensation cost related to unvested share-based compensation arrangements,stock options, which is expected to be recognized over a weighted average period of approximately 2.50.2 years.
Restricted Stock and Restricted Stock Unit Awards
During 2021, the Company granted 0.5 million restricted stock units which were time-vested restricted stock units. During 2020, the Company granted 0.8 million restricted stock units consisting of 0.6 million time-vested restricted stock units and 0.2 million performance-based restricted stock units. During the first quarter of 2022, in connection with the Merger Agreement, the Company certified actual performance achieved of the performance-based restricted stock units granted in 2020. Such performance-based restricted stock units remain subject to time-based vesting requirements. During 2019, the Company granted 2.6 million restricted stock units consisting of 1.2 million time-vested restricted stock units and 1.4 million performance-based restricted stock units. The performance-based restricted stock units granted in 2019 vest in tranches based on the 20-day volume weighted average price of FRTA common stock based on a grant date market condition. If the performance condition is achieved, one-fourth of the tranche will vest immediately and the remainder of the tranche will be time-vested over one year from the date the performance condition was met. The Company accounts for the time-vested and performance-based restricted stock units as equity awards.
108
FORTERRA, INC.
Consolidated (Successor) / Combined (Predecessor) Notes to Financial Statements
The following table summarizes the activity for restricted stock and restricted stock units:
| Shares | Weighted Average Grant Date Fair Value | ||||||||||
| (in thousands) | |||||||||||
| Unvested balance at December 31, 2019 | 2,157,642 | $5.11 | |||||||||
| Grants | 792,090 | $8.87 | |||||||||
| Vested shares | (1,201,617) | $8.91 | |||||||||
| Forfeitures | (156,237) | $7.06 | |||||||||
| Unvested balance at December 31, 2020 | 1,591,878 | $6.60 | |||||||||
| Grants | 498,239 | $23.45 | |||||||||
| Vested shares | (887,579) | $5.63 | |||||||||
| Forfeitures | (4,650) | $15.74 | |||||||||
| Unvested balance at December 31, 2021 | 1,197,888 | $14.28 | |||||||||
| Shares | Weighted Average Grant Date Fair Value | |||
| (in thousands) | ||||
| Unvested balance at December 31, 2015 | — | n/a | ||
| Grants | 136,900 | $18.00 | ||
| Forfeitures | (2,250 | ) | $18.00 | |
| Unvested balance at December 31, 2016 | 134,650 | $18.00 | ||
| Grants | 478,539 | $12.93 | ||
| Vested shares | (44,628 | ) | $18.03 | |
| Forfeitures | (127,211 | ) | $14.16 | |
| Unvested balance at December 31, 2017 | 441,350 | $13.60 | ||
At December 31, 2017,2021, there was $4.7$9.7 million of total unrecognized compensation cost related to unvested restricted stock and restricted stock units and that cost is expected to be recognized over a weighted average period of 2.31.4 years.
The Company’s income (loss) from continuing operations before income taxes was as follows (in thousands):
| Year ended December 31, | Year ended December 31, | Year ended December 31, | |||||||||
| 2021 | 2020 | 2019 | |||||||||
| U.S. companies | $ | 129,276 | $ | 61,146 | $ | (21,557) | |||||
| Foreign companies | 25,710 | 11,800 | 10,947 | ||||||||
| Income (loss) from continuing operations before income taxes | $ | 154,986 | $ | 72,946 | $ | (10,610) | |||||
109
| Successor | Predecessor | |||||||||||||
| Year ended December 31, | Year ended December 31, | For the period from March 14 to December 31, | For the period from January 1 to March 13, | |||||||||||
| 2017 | 2016 | 2015 | 2015 | |||||||||||
| U.S. companies | $ | (54,690 | ) | $ | (80,425 | ) | $ | (85,674 | ) | $ | (2,424 | ) | ||
| Foreign companies | 11,958 | 17,643 | 16,888 | (90 | ) | |||||||||
| Income (loss) from continuing operations before income taxes | $ | (42,732 | ) | $ | (62,782 | ) | $ | (68,786 | ) | $ | (2,514 | ) | ||
FORTERRA, INC.
Consolidated (Successor) / Combined (Predecessor) Notes to Financial Statements
The income tax benefit (expense) from continuing operationsbenefit was as follows (in thousands):
| Successor | Predecessor | ||||||||||||||||||||||||
| Year ended December 31, | For the period from March 14 to December 31, | For the period from January 1 to March 13, | Year ended December 31, | ||||||||||||||||||||||
| 2017 | 2016 | 2015 | 2015 | 2021 | 2020 | 2019 | |||||||||||||||||||
| Current income tax | Current income tax | ||||||||||||||||||||||||
| U.S. companies | $ | 21,539 | $ | (5,265 | ) | $ | — | — | U.S. companies | $ | (21,495) | $ | (16,203) | $ | (9,510) | ||||||||||
| State | (1,479 | ) | (6,370 | ) | (765 | ) | — | State | (7,389) | (6,802) | (4,260) | ||||||||||||||
| Foreign companies | (4,884 | ) | (7,599 | ) | (6,633 | ) | 3,491 | Foreign companies | (5,716) | (4,694) | (3,018) | ||||||||||||||
| Total current tax (expense) benefit | 15,176 | (19,234 | ) | (7,398 | ) | 3,491 | |||||||||||||||||||
| Total current tax expense | Total current tax expense | (34,600) | (27,699) | (16,788) | |||||||||||||||||||||
| Deferred income tax | Deferred income tax | ||||||||||||||||||||||||
| U.S. companies | 26,866 | 59,084 | — | — | U.S. companies | (3,616) | 922 | 16,180 | |||||||||||||||||
| State | (1,658 | ) | 9,326 | 470 | — | State | 376 | 15,506 | 4,232 | ||||||||||||||||
| Foreign companies | 288 | 2,516 | 1,536 | (2,749 | ) | Foreign companies | (829) | 2,811 | (345) | ||||||||||||||||
| Total deferred tax (expense) benefit | 25,496 | 70,926 | 2,006 | (2,749 | ) | Total deferred tax (expense) benefit | (4,069) | 19,239 | 20,067 | ||||||||||||||||
| Income tax (expense) benefit - continuing operations | $ | 40,672 | $ | 51,692 | $ | (5,392 | ) | $ | 742 | ||||||||||||||||
| Income tax (expense) benefit | Income tax (expense) benefit | $ | (38,669) | $ | (8,460) | $ | 3,279 | ||||||||||||||||||
The rate reconciliation for continuing operations presented below is based on the U.S. federal statutory tax rate of 35%21% for the years ended December 31, 2021, December 31, 2020 and periods prior to 2017December 31, 2019 because the predominant business activity is in the U.S. (in thousands):
| Year ended December 31, | |||||||||||
| 2021 | 2020 | 2019 | |||||||||
| Income (loss) from continuing operations | $ | 154,986 | $ | 72,946 | $ | (10,610) | |||||
| Income tax (expense) benefit at statutory rate of 21% | $ | (32,547) | $ | (15,319) | $ | 2,228 | |||||
| State income taxes, net of federal (expense) benefit | (6,026) | (3,449) | 113 | ||||||||
| Tax effect of equity and non-deductible executive compensation | 721 | (1,682) | (1,507) | ||||||||
| Meals and entertainment and other non-deductible expenses | (370) | (516) | (763) | ||||||||
| Change in valuation allowance | 316 | 11,839 | 1,927 | ||||||||
| Other prior year adjustments | (310) | 968 | 1,311 | ||||||||
| Other | (453) | (301) | (30) | ||||||||
| Total income tax (expense) benefit | $ | (38,669) | $ | (8,460) | $ | 3,279 | |||||
| Successor | Predecessor | |||||||||||||
| Year ended December 31, | Year ended December 31, | For the period from March 14 to December 31, | For the period from January 1 to March 13, | |||||||||||
| 2017 | 2016 | 2015 | 2015 | |||||||||||
| Loss from continuing operations | $ | (42,732 | ) | $ | (62,782 | ) | $ | (68,786 | ) | $ | (2,514 | ) | ||
| Income tax benefit at statutory rate of 35% | $ | 14,956 | $ | 21,974 | $ | 24,075 | $ | 880 | ||||||
| State income taxes, net of federal benefit | 1,470 | 2,725 | 1,726 | — | ||||||||||
| Foreign rate differential | 1,586 | 1,746 | 1,635 | (226 | ) | |||||||||
| Non-deductible expenses | (1,233 | ) | (3,428 | ) | (949 | ) | — | |||||||
| Change in valuation allowance | (4,141 | ) | 28,597 | (31,418 | ) | (2,223 | ) | |||||||
| Goodwill impairment | (1,147 | ) | — | — | — | |||||||||
| Effect of TCJA | 26,932 | — | — | — | ||||||||||
| Tax credits | 497 | — | — | — | ||||||||||
| Other | 1,752 | 78 | (461 | ) | 2,311 | |||||||||
| Total income tax benefit (expense) | $ | 40,672 | $ | 51,692 | $ | (5,392 | ) | $ | 742 | |||||
The income tax expense for the year ended December 31, 2021 is primarily attributable to statutory federal, state and international income tax expense on continuing operations.
The income tax benefit for the year ended December 31, 2017 is primarily attributable to provisional amounts recognized related to the enactment of the TCJA and losses from operations. The income tax benefit for the year ended December 31, 20162019 is primarily attributable to the releaseunfavorable impact of the Company’s U.S.non-deductible expenses, partially offset with the favorable effect of the partial reversal of the federal and unitary state valuation allowance. Inallowances and the year ended December 31, 2016,effect of the return to provision adjustments.
110
FORTERRA, INC.
Consolidated Notes to Financial Statements
The Company recorded deferred income tax liabilitiesevaluates the recoverability of $173.0 million through acquisition accounting for the acquisition of Sherman-Dixie Concrete Industries, Inc. and USP Holdings, Inc. These deferred tax liabilities are a source of future taxable income that makes realization of certainits deferred tax assets more likely than not.quarterly to determine if valuation allowances are required or should be adjusted. The Company continues to maintainassesses whether valuation allowance for certain separate company net state'sallowances should be established against deferred tax assets as well as for certain foreign jurisdictions.based on consideration of all available evidence, both positive and negative, using a “more likely than not” criteria. The income tax expense foranalysis used in determining the period from March 14, 2015 to December 31, 2015 is primarily attributable to the profitability of foreign operations.valuation allowance involves considerable judgment and assumptions.
Deferred income taxes are provided for the effects of temporary differences between the tax basis of an asset or liability and its reported amount in the accompanying consolidated balance sheets. These temporary differences result in taxable or deductible amounts in future years. The net deferred tax asset (liability) balances were comprised of the following components as of December 31, 20172021 and 2016 2020 (in thousands):
| December 31, 2021 | December 31, 2020 | |||||||
| Deferred tax assets: | ||||||||
| Inventory | $ | 6,874 | $ | 6,670 | ||||
| Reserves | 6,018 | 7,419 | ||||||
| Accrued liabilities | 5,966 | 8,034 | ||||||
| Net operating losses | 2,868 | 3,909 | ||||||
| Capitalized transaction costs | 5,580 | 3,513 | ||||||
| Finance leases | 54,564 | 53,794 | ||||||
| Tax receivable agreement | 1,616 | 1,618 | ||||||
| Other assets | 3,496 | 3,769 | ||||||
| Total deferred tax assets | 86,982 | 88,726 | ||||||
| Valuation allowance | (1,359) | (1,675) | ||||||
| Total deferred tax assets, net | $ | 85,623 | $ | 87,051 | ||||
| Deferred tax liabilities: | ||||||||
| Fixed assets | $ | (60,616) | $ | (53,386) | ||||
| Lease assets | (23,053) | (23,742) | ||||||
| Intangible assets | (10,116) | (13,931) | ||||||
| Other liabilities | (5,538) | (5,663) | ||||||
| Total deferred tax liabilities | $ | (99,323) | $ | (96,722) | ||||
| Net deferred tax asset (liability) | $ | (13,700) | $ | (9,671) | ||||
| December 31, 2017 | December 31, 2016 | |||||
| Deferred tax assets: | ||||||
| Inventory | $ | 5,833 | $ | 10,785 | ||
| Reserves | 3,326 | 3,498 | ||||
| Accrued liabilities | 4,316 | 6,560 | ||||
| Net operating losses | 4,580 | 1,874 | ||||
| Capitalized transaction costs | 3,292 | 5,018 | ||||
| Deferred gain on sale leaseback | 19,593 | 28,058 | ||||
| Derivatives | 1,402 | — | ||||
| Tax receivable agreement | 1,220 | 18,431 | ||||
| Other assets | 3,871 | 484 | ||||
| Total deferred tax assets | 47,433 | 74,708 | ||||
| Valuation allowance | (8,818 | ) | (3,751 | ) | ||
| Total deferred tax assets, net | $ | 38,615 | $ | 70,957 | ||
| Deferred tax liabilities: | ||||||
| Fixed assets | $ | (58,300 | ) | $ | (87,704 | ) |
| Deferred financing costs | (10,440 | ) | (13,837 | ) | ||
| Intangible assets | (37,356 | ) | (67,822 | ) | ||
| Other liabilities | — | (2,144 | ) | |||
| Total deferred tax liabilities | $ | (106,096 | ) | $ | (171,507 | ) |
| Net deferred tax asset (liability) | $ | (67,481 | ) | $ | (100,550 | ) |
As of December 31, 2017,2021, the Company hashad tax loss carryforwards as follows (in thousands):
| Amount | Expiration Date | |||||||
| Federal net operating losses | $ | — | — | |||||
| State net operating losses | $ | 29,784 | 2022-2040 | |||||
| Foreign net operating losses | $ | 4,873 | 2031-2040 | |||||
111
| Amount | Expiration Date | |||
| Federal net operating losses | $ | — | — | |
| State net operating losses | $ | 66,526 | 2031-2037 | |
| Foreign net operating losses | $ | 4,065 | 2035-2037 | |
FORTERRA, INC.
Consolidated (Successor) / Combined (Predecessor) Notes to Financial Statements
Uncertain tax positions
The Company is subject to audit examinations at federal, state, local, and foreign levels by tax authorities in those jurisdictions who may challenge the treatment or reporting of any tax return item. The tax matters challenged by the tax authorities are typically complex; therefore, the ultimate outcomes of these challenges are subject to uncertainty. Taxable years after 2014 are still open for examinationThe Company’s U.S. federal income tax audit for the U.S. Federal jurisdictionyears ended December 31, 2016 and 2017 was finalized in 2020 with no changes identified for tax years after 2013 for Canada.either period, respectively. State income tax returnreturns are generally subject to examination for a period of 3three to 5five years after filing of the respective return.
Each period the Company assesses uncertain tax positions for recognition, measurement and effective settlement. Based on ourthe Company's assessment, weit determined that no liabilities for uncertain tax positions should be recorded as of December 31, 20172021 and 2016.2020.
Segment information is presented in accordance with ASC 280, Segment Reporting (“ASC 280”), which establishes standards for reporting information about operating segments. It also establishes standards for related disclosures about 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. The Company's Chief Executive Officer is its CODM. The Corporate and Other segment includes expenses related to certain executive salaries, interest costs related to the Company's credit agreements, acquisition related costs, and other corporate costs that are not directly attributable to the Company's operating segments. The accounting policies the Company's segments follow arethe same accounting policies as the Company. During the year ended December 31, 2020, the Company moved its concrete and steel pressure pipe business from the Water Pipe & Products segment to the Drainage Pipe & Products segment to better align with how the CODM manages the businesses. Information regarding the prior year ended December 31, 2019 has been restated as compared to how it was originally presented in the Company's accounting policies.2019 Form 10-K to conform with the re-segmentation, which resulted in an immaterial impact to the year ended December 31, 2019 segment information. There were no changes to the information as reported in the Company's 2020 Form 10-K.
Net sales from the major products sold to external customers include drainage pipe and precast products, and concrete and steel water transmission pipe.
The Company’s three3 geographic areas consist of the United States, Canada and Mexico for which it reports net sales, fixed assets and total assets. For purposes of evaluating segment profit, the CODM reviews
earnings before interest, taxes, depreciation and amortization (“EBITDA”) as a basis for making the decisions to allocate resources and assess performance.
The following tables set forth the disaggregation of revenue earned from contracts with customers based on the Company's reportable segment information with respect to net sales andsegments as well as other financial information attributable to the Company's reportable segments for the periods presented (in thousands):
112
| Successor | Predecessor | |||||||||||||||
| For the period from | For the period from | |||||||||||||||
Year ended December 31, | Year ended December 31, | March 14 to December 31, | January 1 to March 13, | |||||||||||||
| 2017 | 2016 | 2015 | 2015 | |||||||||||||
| Net sales: | ||||||||||||||||
| Drainage Pipe & Products | $ | 834,810 | $ | 728,872 | $ | 431,723 | $ | 79,341 | ||||||||
| Water Pipe & Products | 745,555 | 632,573 | 167,417 | 30,464 | ||||||||||||
| Corporate and Other | 48 | 2,517 | 5,135 | 2,893 | ||||||||||||
| Total | $ | 1,580,413 | $ | 1,363,962 | $ | 604,275 | $ | 112,698 | ||||||||
| Depreciation and amortization: | ||||||||||||||||
| Drainage Pipe & Products | 45,750 | 41,004 | 16,792 | 3,231 | ||||||||||||
| Water Pipe & Products | 69,089 | 51,799 | 7,944 | 1,030 | ||||||||||||
| Corporate and Other | 820 | 700 | 512 | 128 | ||||||||||||
| Total | $ | 115,659 | $ | 93,503 | $ | 25,248 | $ | 4,389 | ||||||||
| EBITDA: | ||||||||||||||||
| Drainage Pipe & Products | 129,618 | 138,274 | 65,003 | 12,070 | ||||||||||||
| Water Pipe & Products | 47,587 | 98,641 | 14,768 | (2,162 | ) | |||||||||||
| Corporate and Other | (44,870 | ) | (81,146 | ) | (77,356 | ) | (7,951 | ) | ||||||||
| Total | $ | 132,335 | $ | 155,769 | $ | 2,415 | $ | 1,957 | ||||||||
| Consolidated EBITDA | 132,335 | 155,769 | 2,415 | 1,957 | ||||||||||||
| Interest expense | (59,408 | ) | (125,048 | ) | (45,953 | ) | (82 | ) | ||||||||
| Depreciation and amortization | (115,659 | ) | (93,503 | ) | (25,248 | ) | (4,389 | ) | ||||||||
| Loss before income taxes | $ | (42,732 | ) | $ | (62,782 | ) | $ | (68,786 | ) | $ | (2,514 | ) | ||||
| Capital expenditures: | ||||||||||||||||
| Drainage Pipe & Products | 22,386 | 22,570 | ||||||||||||||
| Water Pipe & Products | 20,827 | 25,740 | ||||||||||||||
| Corporate and Other | 1,349 | 2,809 | ||||||||||||||
| Total | $ | 44,562 | $ | 51,119 | ||||||||||||
| Total assets: | ||||||||||||||||
| Drainage Pipe & Products | 744,135 | 719,439 | ||||||||||||||
| Water Pipe & Products | 925,457 | 1,056,572 | ||||||||||||||
| Corporate and Other | 141,646 | 48,775 | ||||||||||||||
| Total | $ | 1,811,238 | $ | 1,824,786 | ||||||||||||
FORTERRA, INC.
Consolidated (Successor) / Combined (Predecessor) Notes to Financial Statements
| Year ended December 31, | Year ended December 31, | Year ended December 31, | |||||||||||||||
| 2021 | 2020 | 2019 | |||||||||||||||
| Net sales: | |||||||||||||||||
| Drainage Pipe & Products | $ | 993,464 | $ | 887,420 | $ | 913,033 | |||||||||||
| Water Pipe & Products | 864,806 | 707,086 | 616,719 | ||||||||||||||
| Corporate and Other | — | — | — | ||||||||||||||
| Total | $ | 1,858,270 | $ | 1,594,506 | $ | 1,529,752 | |||||||||||
| Depreciation and amortization: | |||||||||||||||||
| Drainage Pipe & Products | $ | 31,136 | $ | 33,420 | $ | 38,260 | |||||||||||
| Water Pipe & Products | 48,575 | 53,885 | 57,547 | ||||||||||||||
| Corporate and Other | 2,845 | 2,191 | 1,451 | ||||||||||||||
| Total | $ | 82,556 | $ | 89,496 | $ | 97,258 | |||||||||||
| Segment EBITDA and reconciliation to income (loss) before income taxes: | |||||||||||||||||
| Drainage Pipe & Products | $ | 239,860 | $ | 187,547 | $ | 173,006 | |||||||||||
| Water Pipe & Products | 150,412 | 145,451 | 82,831 | ||||||||||||||
| Corporate and Other | (77,754) | (90,666) | (74,219) | ||||||||||||||
| Less: Interest expense | (74,976) | (79,890) | (94,970) | ||||||||||||||
| Depreciation and amortization | (82,556) | (89,496) | (97,258) | ||||||||||||||
| Income (loss) before income taxes | $ | 154,986 | $ | 72,946 | $ | (10,610) | |||||||||||
| Capital expenditures: | |||||||||||||||||
| Drainage Pipe & Products | $ | 38,287 | $ | 17,066 | |||||||||||||
| Water Pipe & Products | 25,886 | 19,500 | |||||||||||||||
| Corporate and Other | 3,138 | 1,039 | |||||||||||||||
| Total | $ | 67,311 | $ | 37,605 | |||||||||||||
| Total assets: | |||||||||||||||||
| Drainage Pipe & Products | $ | 875,298 | $ | 821,547 | |||||||||||||
| Water Pipe & Products | 836,165 | 795,292 | |||||||||||||||
| Corporate and Other | 62,570 | 41,324 | |||||||||||||||
| Total | $ | 1,774,033 | $ | 1,658,163 | |||||||||||||
In addition, the Company also has an investment in an equity method investee included in the Drainage Pipe & Products segment for which earnings from equity method investee were $12.4$12.6 million, $11.9 million, $8.4$11.3 million and $0.1$10.5 million for the yearyears ended December 31, 20172021, 2020 and 2016, the period from March 14, to December 31, 2015 and the period from January 1, to March 13, 2015,2019, respectively, and with the following balances (in thousands):
| December 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| Investment in equity method investee | $ | 49,292 | $ | 48,285 | |||||||
| December 31, | |||||||
| 2017 | 2016 | ||||||
| Investment in equity method investee | $ | 54,445 | $ | 55,236 | |||
Disaggregated revenue by geographic location is provided in the tables below. The Company has operations in the United States, Canada and Mexico. The economic characteristics of the Company's customers does not significantly vary across geographic locations or product lines. The Company has both revenues and long-lived assets in each country and those assets and revenues are recorded within geographic location as follows (in thousands):
113
| Property, plant, and equipment, net: | December 31, | ||||||
| 2017 | 2016 | ||||||
| United States | $ | 381,754 | $ | 422,853 | |||
| Canada | 20,251 | 19,584 | |||||
| Mexico | 10,567 | 10,477 | |||||
| $ | 412,572 | $ | 452,914 | ||||
| Successor | Predecessor | |||||||||||||||
| Net Sales: | Year ended December 31, | Year ended December 31, | For the period from March 14 to December 31, | For the period from January 1 to March 13, | ||||||||||||
| 2017 | 2016 | 2015 | 2015 | |||||||||||||
| United States | $ | 1,485,092 | $ | 1,244,378 | $ | 508,403 | $ | 96,973 | ||||||||
| Canada | 82,529 | 110,567 | 95,872 | 15,725 | ||||||||||||
| Mexico | 12,792 | 9,017 | — | — | ||||||||||||
| $ | 1,580,413 | $ | 1,363,962 | $ | 604,275 | $ | 112,698 | |||||||||
FORTERRA, INC.
Consolidated (Successor) / Combined (Predecessor) Notes to Financial Statements
| Property, plant, and equipment, net: | December 31, | ||||||||||
| 2021 | 2020 | ||||||||||
| United States | $ | 411,915 | $ | 409,338 | |||||||
| Canada | 38,824 | 33,250 | |||||||||
| Mexico | 7,942 | 8,494 | |||||||||
| $ | 458,681 | $ | 451,082 | ||||||||
| Net Sales: | Year ended December 31, | Year ended December 31, | Year ended December 31, | ||||||||||||||
| 2021 | 2020 | 2019 | |||||||||||||||
| United States | $ | 1,752,627 | $ | 1,513,925 | $ | 1,448,492 | |||||||||||
| Canada | 91,936 | 71,906 | 73,270 | ||||||||||||||
| Mexico | 13,707 | 8,675 | 7,990 | ||||||||||||||
| $ | 1,858,270 | $ | 1,594,506 | $ | 1,529,752 | ||||||||||||
| December 31, | ||||
| 2017 | ||||
| Receivables, net | $ | 4,839 | ||
| Inventories | 7,403 | |||
| Current assets held for sale | 12,242 | |||
| Property, plant and equipment, net | 12,022 | |||
| Goodwill | 8,736 | |||
| Intangible assets, net | 4,627 | |||
| Non-current assets held for sale | 25,385 | |||
| Total assets of disposal group classified as held for sale | $ | 37,627 | ||
| Trade payables | $ | 4,286 | ||
| Accrued liabilities | 153 | |||
| Deferred revenue | 176 | |||
| Current liabilities held for sale | 4,615 | |||
| Total liabilities of disposal group classified as held for sale | $ | 4,615 | ||
| Successor | Predecessor | |||||||||||
| Year ended December 31, | March 14 - December 31, | January 1 - March 13, | ||||||||||
| 2016 | 2015 | 2015 | ||||||||||
| Revenues | $ | 117,206 | $ | 118,389 | $ | 19,922 | ||||||
| Cost of goods sold | 98,043 | 112,775 | 19,493 | |||||||||
| Gross profit | 19,163 | 5,614 | 429 | |||||||||
| Selling, general and administrative | (14,186 | ) | (13,417 | ) | (4,577 | ) | ||||||
| Other income and expense items | (785 | ) | (419 | ) | 164 | |||||||
| Pretax income (loss) on discontinued operations | 4,192 | (8,222 | ) | (3,984 | ) | |||||||
| Income tax expense | (708 | ) | (386 | ) | — | |||||||
| Discontinued operations, net of tax | $ | 3,484 | $ | (8,608 | ) | $ | (3,984 | ) | ||||
| December 31, 2015 | ||||
| Cash | $ | 17,563 | ||
| Trade receivables, net | 12,333 | |||
| Inventories | 42,044 | |||
| Other current assets | 116 | |||
| Current assets held for divestiture | 72,056 | |||
| Property, plant and equipment, net | 73,065 | |||
| Other long term assets | 5,959 | |||
| Non-current assets held for divestiture | 79,024 | |||
| Total assets of disposal group classified as held for divestiture | $ | 151,080 | ||
| Trade payables | $ | 11,349 | ||
| Accrued liabilities | 7,902 | |||
| Other current liabilities | 78 | |||
| Current liabilities held for divestiture | 19,329 | |||
| Other long-term liabilities | 991 | |||
| Non-current liabilities held for divestiture | 991 | |||
| Total liabilities of disposal group classified as held for divestiture | $ | 20,320 | ||
| Successor | Predecessor | |||||||||||
| Year ended December 31, | Period from March 14 - December 31, | Period from January 1 - March 13, | ||||||||||
| 2016 | 2015 | 2015 | ||||||||||
| Depreciation and amortization | $ | 6,370 | $ | 7,680 | $ | 2,505 | ||||||
| Capital expenditures | $ | 8,251 | $ | 4,677 | $ | 272 | ||||||
22. Related party transactions
CP&P
The Company sold certain goods and services to its joint venture, CP&P, including spare parts for repairs, and property rentals. For the year ended December 31, 2017,2021, Forterra sold $1.2 million of product to CP&P and purchased goods and services from CP&P for an amount of $0.4 million. For the year ended December 31, 2020, the Company sold $1.4 million of product to CP&P and received $0.2$1.0 million in exchange for those salespurchased goods and services providedfrom CP&P. For the year ended December 31, 2019, Forterra sold $0.4 million of product to CP&P and purchased $0.5 million of goods and services from CP&P.
Master Builders Solutions US, LLC
During the year ended December 31, 2021, Forterra purchased goods from Master Builders Solutions US, LLC, an affiliate of Lone Star, for an amount of $0.9 million. During the year ended December 31, 2020, Forterra sold $0.1 million of product to Master Builders Solutions US, LLC, and purchased goods from Master Builders Solutions US, LLC for an amount of $0.9 million.
Tax receivable agreement
In connection with the IPO, the Company entered into a tax receivable agreement with Lone Star that provides for, among other things, the payment by the Company to Lone Star of 85% of the amount of certain covered tax benefits, which may reduce the actual liability for certain taxes that the Company might otherwise be required to pay. See further discussion in Note 15,16, Commitments and contingencies.
114
FORTERRA, INC.
Consolidated (Successor) / Combined (Predecessor) Notes to Financial Statements
23. Quarterly Financial Data (Unaudited)financial data (unaudited)
The following is a summary of the quarterly results of operations:
| Year ended December 31, 2021: | ||||||||||||||||||||||||||
| (in thousands, except per share amounts) | First Quarter | Second Quarter | Third Quarter | Fourth Quarter | ||||||||||||||||||||||
| Net sales | $ | 368,114 | $ | 492,800 | $ | 526,640 | $ | 470,716 | ||||||||||||||||||
| Cost of goods sold | 285,850 | 373,228 | 410,072 | 368,722 | ||||||||||||||||||||||
| Gross profit | 82,264 | 119,572 | 116,568 | 101,994 | ||||||||||||||||||||||
| Income from continuing operations before taxes | 23,175 | 48,130 | 49,469 | 34,212 | ||||||||||||||||||||||
| Net income | 18,676 | 36,065 | 35,768 | 25,808 | ||||||||||||||||||||||
| Basic earnings per share: | ||||||||||||||||||||||||||
| Net income | $ | 0.28 | $ | 0.54 | $ | 0.53 | $ | 0.39 | ||||||||||||||||||
| Diluted earnings per share: | ||||||||||||||||||||||||||
| Net income | $ | 0.27 | $ | 0.52 | $ | 0.51 | $ | 0.37 | ||||||||||||||||||
| Year ended December 31, 2020: | ||||||||||||||||||||||||||
| (in thousands, except per share amounts) | First Quarter | Second Quarter | Third Quarter | Fourth Quarter | ||||||||||||||||||||||
| Net sales | $ | 330,876 | $ | 426,186 | $ | 457,557 | $ | 379,887 | ||||||||||||||||||
| Cost of goods sold | 272,134 | 320,607 | 331,284 | 293,808 | ||||||||||||||||||||||
| Gross profit | 58,742 | 105,579 | 126,273 | 86,079 | ||||||||||||||||||||||
| Income (loss) from continuing operations before taxes | (13,988) | 34,570 | 38,751 | 13,613 | ||||||||||||||||||||||
| Net income (loss) | (14,066) | 27,115 | 28,827 | 22,610 | ||||||||||||||||||||||
| Basic earnings (loss) per share: | ||||||||||||||||||||||||||
| Net income (loss) | $ | (0.22) | $ | 0.42 | $ | 0.44 | $ | 0.34 | ||||||||||||||||||
| Diluted earnings (loss) per share: | ||||||||||||||||||||||||||
| Net income (loss) | $ | (0.22) | $ | 0.40 | $ | 0.42 | $ | 0.33 | ||||||||||||||||||
| Year ended December 31, 2017: | Successor | |||||||||||||||
| (in thousands, except per share amounts) | First Quarter(1) | Second Quarter(2) | Third Quarter(3) | Fourth Quarter(4) | ||||||||||||
| Net sales | $ | 338,302 | $ | 436,685 | $ | 444,257 | $ | 361,169 | ||||||||
| Cost of goods sold | 299,335 | 361,089 | 362,150 | 304,731 | ||||||||||||
| Income (loss) from continuing operations before taxes | (35,907 | ) | (14,803 | ) | (19,956 | ) | 27,934 | |||||||||
| Income (loss) from continuing operations | (22,543 | ) | (11,173 | ) | (11,502 | ) | 43,158 | |||||||||
| Net income (loss) | (22,543 | ) | (11,173 | ) | (11,502 | ) | 43,158 | |||||||||
| Basic earnings (loss) per share: | ||||||||||||||||
| Income (loss) from continuing operations | $ | (0.35 | ) | $ | (0.18 | ) | $ | (0.18 | ) | $ | 0.68 | |||||
| Income (loss) from discontinued operations, net of taxes | $ | — | $ | — | $ | — | $ | — | ||||||||
| Net earnings (loss) | $ | (0.35 | ) | $ | (0.18 | ) | $ | (0.18 | ) | $ | 0.68 | |||||
| Diluted earnings (loss) per share: | ||||||||||||||||
| Income (loss) from continuing operations | $ | (0.35 | ) | $ | (0.18 | ) | $ | (0.18 | ) | $ | 0.67 | |||||
| Income (loss) from discontinued operations, net of taxes | $ | — | $ | — | $ | — | $ | — | ||||||||
| Net income (loss) | $ | (0.35 | ) | $ | (0.18 | ) | $ | (0.18 | ) | $ | 0.67 | |||||
| Year ended December 31, 2016: | Successor | |||||||||||||||
| (in thousands, except per share amounts) | First Quarter | Second Quarter | Third Quarter | Fourth Quarter(5) | ||||||||||||
| Net sales | $ | 186,996 | $ | 381,723 | $ | 441,132 | $ | 354,111 | ||||||||
| Cost of goods sold | 151,305 | 298,632 | 339,819 | 293,752 | ||||||||||||
| Income (loss) from continuing operations before taxes | (12,729 | ) | 5,673 | 12,522 | (68,248 | ) | ||||||||||
| Income (loss) from continuing operations | (2,162 | ) | 31,846 | 4,368 | (45,142 | ) | ||||||||||
| Income (loss) from discontinued operations, net of taxes | (1,774 | ) | 4,843 | 4,000 | (3,585 | ) | ||||||||||
| Net income (loss) | (3,936 | ) | 36,689 | 8,368 | (48,727 | ) | ||||||||||
| Basic earnings (loss) per share: | ||||||||||||||||
| Income (loss) from continuing operations | $ | (0.05 | ) | $ | 0.70 | $ | 0.10 | $ | (0.75 | ) | ||||||
| Income (loss) from discontinued operations, net of taxes | $ | (0.04 | ) | $ | 0.11 | $ | 0.09 | $ | (0.06 | ) | ||||||
| Net income (loss) | $ | (0.09 | ) | $ | 0.81 | $ | 0.19 | $ | (0.81 | ) | ||||||
| Diluted earnings (loss) per share: | ||||||||||||||||
| Income (loss) from continuing operations | $ | (0.05 | ) | $ | 0.70 | $ | 0.10 | $ | (0.75 | ) | ||||||
| Income (loss) from discontinued operations, net of taxes | $ | (0.04 | ) | $ | 0.11 | $ | 0.09 | $ | (0.06 | ) | ||||||
| Net income (loss) | $ | (0.09 | ) | $ | 0.81 | $ | 0.19 | $ | (0.81 | ) | ||||||
| Successor | Predecessor | |||||||||||
| For the period from | For the period from | |||||||||||
| Year ended December 31, | Year ended December 31, | March 14 to December 31, | January 1 to March 13, | |||||||||
| 2017 | 2016 | 2015 | 2015 | |||||||||
| SUPPLEMENTAL DISCLOSURES: | ||||||||||||
| Cash interest paid | 54,676 | 77,437 | 25,379 | — | ||||||||
| Income taxes paid | 28,086 | 66,264 | — | — | ||||||||
| SUPPLEMENTAL NON-CASH INVESTING AND FINANCING DISCLOSURES: | ||||||||||||
| Brick Disposition, net of tax | — | (150,222 | ) | — | — | |||||||
| Issuance of tax receivable agreement, net of tax | — | (142,349 | ) | — | — | |||||||
| Other affiliate transactions affecting Contributed Capital | — | 38,434 | 14,900 | — | ||||||||
| Fair value changes of derivatives recorded in OCI, net of tax | (3,548 | ) | 215 | 1,549 | — | |||||||
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
As required by Rule 13a-15(b) under the Exchange Act, our management, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended, or the Exchange Act) as of December 31, 2017.2021.
Based on the evaluation referenced above, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective at the reasonable assurance level as of December 31, 2017 because2021.
115
Management’s Report on Internal Control over Financial Reporting
Our management, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, is responsible for establishing and maintaining adequate internal control over financial reporting as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act.
Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. GAAP. Internal control over financial reporting includes policies and procedures that: (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. GAAP, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements.
Management assessed the Company's internal control over financial reporting as of December 31, 20172021 using the criteria for effective internal control over financial reporting established in “Internal Control - Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework). Based on this assessment, and the material weaknesses identified below, management concluded that as of December 31, 2017, the Company did not maintain effective2021, our internal control over financial reporting.reporting was effective.
Ernst & Young LLP, our independent registered public accounting firm that audited the consolidated financial statements included in this Annual Report on Form 10-K, also audited the effectiveness of the Company’s
internal control over financial reporting as of December 31, 2017,2021, as stated in their report included in this Annual Report.below.
Changes in Internal Control over Financial Reporting
Inherent Limitations on Effectiveness of Controls
Our management, including our Chief Executive Officerprincipal executive officer and Chief Financial Officer,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.
116
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of Forterra, Inc.
Opinion on Internal Control over Financial Reporting
We have audited Forterra, Inc.’s internal control over financial reporting as of December 31, 2017,2021, based on criteria established in Internal Control-IntegratedControl—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework)2013 framework (the COSO criteria). In our opinion, because of the effect of the material weaknesses described below on the achievement of the objectives of the control criteria, Forterra, Inc. (the Company) has not maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017,2021, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of Forterra, Inc. (the Successor)the Company as of December 31, 20172021 and 2016,2020, and the related consolidated statements of operations, comprehensive income (loss), shareholders’ equity and cash flows for the each of the twothree years in the period ended December 31, 2017 and for the period from March 14, 2015 to December 31, 2015,2021, and the related notes. We have also audited the accompanying combined statements of operations, comprehensive loss, parent company net investment,notes, and cash flows of the North American building products operations of HeidelbergCement AG (the Predecessor) for the period from January 1, 2015 to March 13, 2015, and the related notes. The material weaknesses were considered in determining the nature, timing and extent of audit tests applied in our audit of the 2017 consolidated financial statements, and this report does not affect our report dated March 7, 2018 which1, 2022 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed 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. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Ernst & Young LLP
117
Dallas, Texas
March 7, 20181, 2022
Item 9B. Other Information
None.
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections.
None.
118
PART III
Item 10. Directors, Executive Officers and Corporate Governance
The information required by this Item is herein incorporated by reference to the Company's definitive proxy statement relating to the 20182022 Annual Meeting of Stockholders, which will be filed with the SEC not later than 120 days after December 31, 2017.2021.
Item 11. Executive Compensation
The information required by this Item is herein incorporated by reference to the Company's definitive proxy statement relating to the 20182022 Annual Meeting of Stockholders, which will be filed with the Securities and Exchange CommissionSEC not later than 120 days after December 31, 2017.2021.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Information with Respect to Securities Authorized for Issuance Under Equity Compensation Plans
The following table summarizes, as of December 31, 2017,2021, information with respect to (a) the number of securities to be issued upon exercise of outstanding options, warrants and rights, (b) the weighted average exercise price of outstanding options, warrants and rights and (c) the number of securities remaining available for future issuance, in each case under our 2016 Stock Incentive Plan or 2018 Stock Incentive Plan. We do not have any equity compensation plans not approved by security holders.
| Plan Category | (a) Number of Securities to Be Issued Upon Exercise of Outstanding Options, Warrants and Rights | (b) Weighted Average Exercise Price of Outstanding Options, Warrants and Rights | (c) Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (Excluding Securities Reflected in Column(a)) | |||||||||||||||||
| Equity compensation plans approved by security holders | 2,423,546 | $ | 6.03 | 2,839,000 | ||||||||||||||||
| Plan Category | (a) Number of Securities to Be Issued Upon Exercise of Outstanding Options, Warrants and Rights | (b) Weighted Average Exercise Price of Outstanding Options, Warrants and Rights | (c) Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (Excluding Securities Reflected in Column(a)) | |||||||
| Equity compensation plans approved by security holders | 1,254,429 | $ | 12.31 | 3,263,447 | ||||||
All other information required by this Item is herein incorporated by reference to the Company's definitive proxy statement relating to the 20182022 Annual Meeting of Stockholders, which will be filed with the Securities and Exchange CommissionSEC not later than 120 days after December 31, 2017.2021.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required by this Item is herein incorporated by reference to the Company's definitive proxy statement relating to the 20182022 Annual Meeting of Stockholders, which will be filed with the Securities and Exchange CommissionSEC not later than 120 days after December 31, 2017.2021.
Item 14. Principal AccountantAccounting Fees and Services
The information required by this Item is herein incorporated by reference to the Company's definitive proxy statement relating to the 20182022 Annual Meeting of Stockholders, which will be filed with the Securities and Exchange CommissionSEC not later than 120 days after December 31, 2017.2021.
119
PART IV
Item 15. Exhibits, and Financial Statement Schedules
The following documents are filed as part of this Annual Report on Form 10-K, or incorporated herein by reference:
1. Financial Statements. The Company's financial statements are included in Part II, Item 8, Financial Statements and Supplementary Data.
2. Financial Statement Schedules. All schedules are omitted since they are not applicable, not required, or the information required to be set forth herein is included in the Consolidated Financial Statements.
3. Exhibits. The exhibits listed in the Exhibit Index immediately below are filed as part of this Annual Report on Form 10-K or are incorporated by reference herein.
| Exhibit No. | Description of Exhibit | |||||||||||||
| (r) | ||||||||||||||
| 3.1 | (d) | |||||||||||||
| 3.2 | (b) | |||||||||||||
| 4.1 | (b) | |||||||||||||
| 4.2 | (e) | |||||||||||||
| 4.3 | ||||||||||||||
| (a) | ||||||||||||||
| (e) | ||||||||||||||
120
| 10.5 | (b) | |||||||||||||
| (a) | ||||||||||||||
| (a) | ||||||||||||||
| 10.8# | (h) | |||||||||||||
| (g) | ||||||||||||||
| (c) | ||||||||||||||
| (c) | ||||||||||||||
| (c) | ||||||||||||||
| (c) | ||||||||||||||
| (c) | ||||||||||||||
| (m) | ||||||||||||||
| 10.16 | (f) | |||||||||||||
| (f) | ||||||||||||||
| (i) | ||||||||||||||
| (j) | ||||||||||||||
| (k) | ||||||||||||||
| (n) | ||||||||||||||
| 10.22# | (n) | |||||||||||||
| 10.23# | (o) | |||||||||||||
| 10.24# | (q) | |||||||||||||
| 10.25# | (q) | |||||||||||||
121
| 10.26# | (q) | |||||||||||||
| 10.27# | (q) | |||||||||||||
| 10.28 | (s) | |||||||||||||
| 21.1 | * | |||||||||||||
| 23.1 | * | |||||||||||||
| 23.2 | * | |||||||||||||
| * | ||||||||||||||
| 31.2 | * | |||||||||||||
| 32.1 | ^ | |||||||||||||
| 99.1 | * | |||||||||||||
| XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. | * | |||||||||||||
| 101.SCH | Inline XBRL Taxonomy Extension Schema Document. | * | ||||||||||||
| 101.CAL | Inline XBRL Taxonomy Calculation Linkbase Document. | * | ||||||||||||
| 101.DEF | Inline XBRL Taxonomy Definition Linkbase Document. | * | ||||||||||||
| 101.LAB | Inline XBRL Taxonomy Label Linkbase Document. | * | ||||||||||||
| 101.PRE | Inline XBRL Taxonomy Presentation Linkbase Document. | * | ||||||||||||
| Cover Page Interactive Data File – The cover page from the Company’s Annual Report on Form 10-K for the year ended December 31, 2020 is formatted in Inline XBRL (included as Exhibit 101). | * |
122
| * | Filed herewith | ||||
| # | Denotes management compensatory plan or arrangement | ||||
| Exhibit 32.1 shall not be deemed filed with the SEC, nor shall it be deemed incorporated by reference in any filing with the SEC under the Exchange Act or the Securities Act of 1933, as amended, whether made before or after the date hereof and irrespective of any general incorporation language in any filings. | |||||
| (a) | Previously filed on July 8, 2016 as an exhibit to the Company’s Registration Statement on Form S-1 (File No. 333-212449) and incorporated herein by reference. | ||||
| (b) | Previously filed on August 15, 2016 as an exhibit to Amendment No. 1 to the Company’s Registration Statement on Form S-1 (File No. 333-212449) and incorporated herein by reference. | ||||
| (c) | Previously filed on September 8, 2016 as an exhibit to Amendment No. 2 to the Company’s Registration Statement on Form S-1 (File No. 333-212449) and incorporated herein by reference. | ||||
| (d) | Previously filed on October 7, 2016 as an exhibit to Amendment No. 4 to the Company’s Registration Statement on Form S-1 (File No. 333-212449) and incorporated herein by reference. | ||||
| (e) | Previously filed on October 17, 2016 as an exhibit to Amendment No. 5 to the Company’s Registration Statement on Form S-1 (File No. 333-212449) and incorporated herein by reference. | ||||
| (f) | Previously filed on November 11, 2016 as an exhibit to the Company’s Current Report on Form 8-K/A and incorporated herein by reference. | ||||
| (g) | Previously filed on January 10, 2017 as an exhibit to the Company’s Registration Statement on Form S-8 (File No. 333-215504) and incorporated herein by reference. | ||||
| (h) | Previously filed on March 31, 2017 as an exhibit to the Company Annual Report on Form 10-K for the fiscal year ended December 31, 2017 and incorporated herein by reference. | ||||
| (i) | Previously filed on May 15, 2017 as an exhibit to the Company Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2017 and incorporated herein by reference. | ||||
| (j) | Previously filed on September 7, 2017 as an exhibit to the Company’s Current Report on Form 8-K and incorporated herein by reference. | ||||
| (k) | Previously filed on December 20, 2017 as an exhibit to the Company’s Current Report on Form 8-K and incorporated herein by reference. | ||||
| (l) | Previously filed on June 11, 2018 as an exhibit to the Company’s Current Report on Form 8-K and incorporated herein by reference. | ||||
| (m) | Previously filed on April 20, 2018 as an exhibit to the Company's Definitive Proxy Statement and incorporated herein by reference. | ||||
| (n) | Previously filed on May 23, 2019 as an exhibit to the Company’s Current Report on Form 8-K and incorporated herein by reference. | ||||
| (o) | Previously filed on Jun 24, 2019 as an exhibit to the Company’s Current Report on Form 8-K and incorporated herein by reference. | ||||
| (p) | Previously filed on July 17, 2020 as an exhibit to the Company’s Current Report on Form 8-K and incorporated herein by reference. | ||||
| (q) | Previously filed on February 27, 2020 as an exhibit to the Company Annual Report on Form 10-K for the fiscal year ended December 31, 2019 and incorporated herein by reference. | ||||
| (r) | Previously filed on February 22, 2021 as an exhibit to the Company’s Current Report on Form 8-K and incorporated herein by reference. | ||||
| (s) | Previously filed on July 28, 2020 as an exhibit to the Company Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2020 and incorporated herein by reference. | ||||
123
Item 16. Form 10-K Summary
None.
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.
| FORTERRA, INC. | |||||||||||
| (Registrant) | |||||||||||
| /s/ Karl Watson, Jr. | March 1, 2022 | ||||||||||
| By: | Karl Watson, Jr. | ||||||||||
| Chief Executive Officer | |||||||||||
| (Principal Executive Officer) | |||||||||||
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
| /s/ Karl Watson, Jr. | Chief Executive Officer and Director | March 1, 2022 | ||||||||||||
| (Principal Executive Officer) | ||||||||||||||
| /s/ Charles R. Brown, II | Executive Vice President and Chief Financial Officer | March 1, 2022 | ||||||||||||
| /s/ Chris Meyer | Chairman of the Board, Director | March 1, 2022 | ||||||||||||
| Chris Meyer | ||||||||||||||
| /s/ Richard Cammerer, Jr. | Director | March 1, 2022 | ||||||||||||
| Richard Cammerer, Jr. | ||||||||||||||
| /s/ Rafael Colorado | Director | March 1, 2022 | ||||||||||||
| Rafael Colorado | ||||||||||||||
| /s/ Maureen Harrell | Director | March 1, 2022 | ||||||||||||
| Maureen Harrell | ||||||||||||||
| /s/ Chad Lewis | Director | March 1, 2022 | ||||||||||||
| Chad Lewis | ||||||||||||||
| /s/ Clint McDonnough | Director | March 1, 2022 | ||||||||||||
| Clint McDonnough | ||||||||||||||
| /s/ John McPherson | Director | March 1, 2022 | ||||||||||||
| John McPherson | ||||||||||||||
| /s/ Jacques Sarrazin | Director | March 1, 2022 | ||||||||||||
| Jacques Sarrazin |