The table below highlights net sales from our base business and acquired and combined branches:
|
| | | | | | | | | | | | | | |
| Three Months Ended March 31, |
| Change |
| 2019 |
| 2018 |
| $ |
| % |
(dollars in thousands) |
|
|
|
|
|
|
|
|
|
|
|
Base business (1) | $ | 460,901 |
|
| $ | 431,364 |
|
| $ | 29,537 |
|
| 6.8 | % |
Acquired and combined (2) | 53,971 |
|
| 32,297 |
|
| 21,674 |
|
| 67.1 | % |
Net sales | $ | 514,872 |
|
| $ | 463,661 |
|
| $ | 51,211 |
|
| 11.0 | % |
(1) Represents net sales from branches that were owned by us since January 1, 2018 and branches that were opened by us during such period. |
(2) Represents branches acquired and combined after January 1, 2018, primarily as a result of our strategic combination of branches. |
The table below highlights our changes in base business net sales and net sales from branches acquired and combined by major product line:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, 2019 | | Base Business Net Sales Change | | Acquired and Combined Net Sales Change | | Three Months Ended March 31, 2020 | | Total Net Sales % Change | Base Business Net Sales % Change(1) | | Acquired and Combined Net Sales % Change(2) |
(dollars in thousands) | | | | | | | | | | | | |
Wallboard | $ | 202,914 | | | $ | (2,974) | | | $ | 2,328 | | | $ | 202,268 | | | | (0.3) | % | (1.5) | % | | | 30.4 | % |
Suspended ceiling systems | 88,996 | | | 4,117 | | | 5,393 | | | 98,506 | | | | 10.7 | % | 4.8 | % | | | 210.1 | % |
Metal framing | 99,251 | | | (6,616) | | | 699 | | | 93,334 | | | | (6.0) | % | (6.9) | % | | | 18.0 | % |
Complementary and other products | 123,711 | | | 3,932 | | | 2,507 | | | 130,150 | | | | 5.2 | % | 3.3 | % | | | 42.9 | % |
Net sales | $ | 514,872 | | | $ | (1,541) | | | $ | 10,927 | | | $ | 524,258 | | | | 1.8 | % | (0.3) | % | | | 54.8 | % |
Average daily net sales(3) | $ | 8,173 | | | | $ | (147) | | | | $ | 166 | | | | $ | 8,192 | | | | 0.2 | % | (1.9) | % | | | 52.3 | % |
(1) Represents base business net sales change as a percentage of base business net sales for the three months ended March 31, 2019. | | | | | | | | | | | | |
(2) Represents acquired and combined as a percentage of acquired and combined net sales for the three months ended March 31, 2019. | | | | | | | | | | | | |
(3) The number of business days for the three months ended March 31, 2020 and 2019, were 64 and 63, respectively. | | | | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, 2018 |
| Base Business Net Sales Change |
| Acquired and Combined Net Sales Change |
| Three Months Ended March 31, 2019 |
| Total Net Sales % Change | Base Business Net Sales % Change(1) |
| Acquired and Combined Net Sales % Change(2) |
(dollars in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
Wallboard | $ | 180,653 |
|
| $ | 9,536 |
|
| $ | 12,725 |
|
| $ | 202,914 |
|
| 12.3 | % | 5.5 | % |
| 183.7 | % |
Suspended ceiling systems | 86,179 |
|
| (178 | ) |
| 2,995 |
|
| 88,996 |
|
| 3.3 | % | (0.2 | )% |
| 29.8 | % |
Metal framing | 73,967 |
|
| 17,939 |
|
| 7,345 |
|
| 99,251 |
|
| 34.2 | % | 24.9 | % |
| 403.9 | % |
Complementary and other products | 122,862 |
|
| 2,239 |
|
| (1,390 | ) |
| 123,711 |
|
| 0.7 | % | 2.0 | % |
| (10.3 | )% |
Net sales | $ | 463,661 |
|
| $ | 29,536 |
|
| $ | 21,675 |
|
| $ | 514,872 |
|
| 11.0 | % | 6.8 | % |
| 67.1 | % |
Average daily net sales(3) | $ | 7,245 |
|
| $ | 576 |
|
| $ | 352 |
|
| $ | 8,173 |
|
| 12.8 | % | 8.5 | % |
| 69.8 | % |
(1) Represents base business net sales change as a percentage of base business net sales for the three months ended March 31, 2018. |
(2) Represents acquired and combined net sales as a percentage of acquired and combined net sales for the three months ended March 31, 2018. |
(3) The number of business days for the three months ended March 31, 2019 and 2018, were 63 and 64, respectively. |
Gross Profit and Gross Margin
Gross profit for the three months ended March 31, 2019,2020, was $153.0$162.2 million compared to $134.4$153.0 million for the three months ended March 31, 2018,2019, representing an increase of $18.5$9.2 million, or 13.8%6.0%. Gross profit increased due to an expansion of our gross margin and an increase in line with higher sales volume, contributions from acquisitions and base business growth.acquisitions.
Gross margin for the three months ended March 31, 2019,2020, was 29.7%30.9% compared to 29.0%29.7% for the three months ended March 31, 2018.2019. The increase in gross margin was primarily due to the continued stabilization ofimproved profitability across our product costswallboard, metal framing, and a shift in product mix.complementary and other products lines driven by our ongoing pricing and purchasing initiatives.
Selling, General & Administrative ("SG&A") Expenses
SG&A expenses for the three months ended March 31, 2019,2020, were $117.2$123.1 million compared to $104.7$117.2 million for the three months ended March 31, 2018,2019, representing an increase of $12.6$5.9 million, or 12.0%5.0%. As a percentage of net sales, SG&A expenses were 23.5% for the three months ended March 31, 2020, compared to 22.8% for the three months ended March 31, 2019, compared to 22.6% for the three months ended March 31, 2018.2019. The increase in SG&A expenses as a percentage of net sales was primarily due to loss of sales leverage resulting from the COVID-19 Pandemic, our continued investment in various company-wide initiatives and higher operating costs as a result of adverse weather conditions.labor costs.
Depreciation and Amortization
Depreciation and amortization for the three months ended March 31, 2019,2020, was $20.3$19.2 million compared to $18.4$20.3 million for the three months ended March 31, 2018,2019, representing an increasea decrease of $1.9$1.1 million, or 10.6%5.5%. The increase in depreciation and amortization was primarily due to acquisitions subsequent to March 31, 2018, which increased the value of property and equipment and intangible assets subject to depreciation and amortization.
Interest Expense
Interest expense for the three months ended March 31, 2019,2020, was $8.6$7.7 million compared to $15.1$8.6 million for the three months ended March 31, 2018,2019, representing a decrease of $6.6$0.8 million, or 43.4%9.6%. The decrease is primarily due to lower variable interest rates on outstanding debt.
Gain on Legal Settlement
In February 2020, the refinancingCompany received a one-time class action legal settlement of our senior secured notes in August 2018.$8.6 million. The Company does not expect to receive any further payments as a result of this settlement.
Other (Expense) Income, Net
Other (expense) income, net for the three months ended March 31, 2020, was an expense of $1.0 million, compared to income of $0.0 million for the three months ended March 31, 2019. Other (expense) income, net consists primarily of foreign currency transaction gains and losses.
Income Taxes
Income tax expense for the three months ended March 31, 2020 and 2019, was $5.3 million and $2.0 million, compared to an incomerespectively. For the three months ended March 31, 2020 and 2019, the Company's effective tax benefitrates were 26.8% and 29.8%, respectively. The variance from the statutory federal tax rate of $1.4 million21.0% for the three months ended March 31, 2018.2020, was primarily due to state taxes and non-deductible items, partially offset by a benefit recorded under the Foreign Derived Intangible Income provisions. The effectivevariance from the statutory federal tax rate of 21.0% for the three months ended March 31, 2019, was 29.8% comparedprimarily due to 38.2% for the three months ended March 31, 2018. state taxes, an unfavorable tax charge associated with stock-based compensation recorded as a discrete item, and foreign rate differential.
The difference in the effective tax rates between periods is due primarily to recording as a discrete item a refinement of the provisional estimate of the one-time repatriation taxbenefit under the 2017 Tax Cuts and Jobs ActForeign Derived Intangible Income provisions during the three months ended March 31, 2018.2020, and an unfavorable tax charge associated with stock-based compensation recorded during the three months ended March 31, 2019.
Liquidity and Capital Resources
Summary
We depend on cash flow from operations, cash on hand and funds available under our 2018 Revolving Credit Facility, and, in the future, we may depend on other debt financings allowedpermitted under the terms of the 2018 Term Loan Facility and the 2018 Revolving Credit Facility, and equity financings to finance our acquisition strategy, working capital needs and capital expenditures, which generally range between 1.0% and 1.5% of net sales.expenditures. We believe that these sources of funds will be adequate to meet our debt service requirements and provide cash, as required, to support our strategy, ongoing operations, capital expenditures, lease obligations and working capital for at least the next 12 months. However,We believe our financial resources, along with managing discretionary expenses, will allow us to manage the anticipated impact of the COVID-19 Pandemic on our business operations for the foreseeable future, which will include reduced sales and net income levels for the Company. We are reducing spending more broadly across the Company, only proceeding with operating and capital spending that is critical. We have restricted hiring and reduced discretionary spending. The challenges posed by the COVID-19 Pandemic on our business are evolving rapidly. Consequently, we will continue to evaluate our financial position in light of future developments, particularly those relating to the COVID-19 Pandemic.
We cannot ensure that we will be able to obtain future debt or equity financings adequate for our future cash requirements on commercially reasonable terms or at all. The tax receivable agreement, or TRA, we are a party to or TRA, may also have a negative impact on our liquidity if, among other things, payments we make under the TRA exceed the actual cash savings we and our subsidiaries realize in respect of the tax benefits covered by the TRA after we have paid our taxes and other obligations. In addition, as a result of either an early termination of the TRA or a change of control, we could be required to make payments under the TRA that exceed our actual cash savings under the TRA. In these situations, our obligations under the TRA could have a substantial, negative impact on our liquidity and could have the effect of delaying, deferring or preventing, among other things, our capital expenditures and acquisitions.
If our cash flows and capital resources are insufficient to fund our debt service obligations, we may be forced to reduce or delay additional acquisitions, future investments and capital expenditures, seek additional capital, restructure or refinance our indebtedness, or sell our assets. Significant delays in our ability to finance planned acquisitions or capital expenditures may materially and adversely affect our future sales prospects. In addition, we cannot ensure that we will be able to refinance any of our indebtedness, including the 2018 Revolving Credit Facility and 2018 Term Loan Facility, on commercially reasonable terms or at all. Our ability to restructure or refinance our debtindebtedness will depend on the condition of the capital markets, which are currently volatile, and our financial condition at such time. Our TRA requires that after Lone Star Fund IX (U.S.) L.P., or Lone Star, no longer controls us, any future senior debt document that refinances or replaces our existing indebtedness permitsmust permit our subsidiaries to make dividends to us, without any conditions, to the extent required for us to make payments under the TRA, unless Lone Star otherwise consents. At the time of any such potential refinancing, it may not be possible to include this term in such senior debt documents, and, as a result, we may needrequire Lone Star’s consent to complete such a refinancing. TheIn addition, the 2018 Revolving Credit Facility and 2018 Term Loan Facility restrict our ability to enter into certain asset sales transactions. We may not be able to consummate those asset sales to raise capital or sell assets at prices that we believe are fair, and proceeds that we do receive may not be adequate to meet any debt service obligations then due.
In March 2020, in response to the COVID-19 Pandemic, we drew $120.0 million from our 2018 Revolving Credit Facility to provide financial flexibility and liquidity due to volatile financial market conditions. As of March 31, 2019,2020, we had $153.5$235.0 million of outstanding borrowings and $221.5$140.0 million of available aggregate undrawn borrowing capacity under the 2018 Revolving Credit Facility.
Refer toSee Note 8, 9, Long-Term Debt, of our Condensed Consolidated Financial Statements to the condensed consolidated financial statements for more information about the 2018 Revolving Credit Facility and 2018 Term Loan Facility.
As long as commitments are outstanding under the 2018 Revolving Credit Facility, we are subject to certain restrictions under the facility if our pro forma adjustedPro Forma Adjusted EBITDA to debt ratio, or the Total Net Leverage Ratio, exceeds a certain total.ratio. The Total Net Leverage Ratio is defined as the ratio of Consolidated Total Debt to the aggregate amount of Consolidated EBITDA for the Relevant Reference Period (as such terms are defined in the 2018 Revolving Credit Facility). Consolidated Total Debt is defined in the 2018 Revolving Credit Facility and is generally calculated as an amount equal to the aggregate outstanding principal amount of all third-party debt for borrowed money, unreimbursed drawings under letters of credit, capitalfinance lease obligations,liabilities, and third-party debt obligations evidenced by notes or similar instruments on a consolidated basis and determined in accordance with GAAP, subject to certain exclusions. Consolidated EBITDA is defined in the 2018 Revolving Credit Facility and is calculated in a similar manner to our calculation of Adjusted EBITDA, except that the 2018 Revolving Credit Facility permits pro forma adjustments in order to give effect to, among other things, the pro forma results of our acquisitions as if we had owned such acquired companies for the entirety of the Relevant Reference Period. These pro forma adjustments give effect to all acquisitions consummated in the four quarters ended March 31, 2019,2020, as though they had been consummated on the first day of the secondfirst quarter of 2018.for the four quarters ended March 31, 2020. The 2018 Revolving Credit Facility requires us to maintain a Total Net Leverage Ratio no greater than 6.00:1.00 to incur additional junior lien and unsecured indebtedness.
As of March 31, 2019,2020, we were in compliance with all covenant restrictions under the 2018 Term Loan Facility and 2018 Revolving Credit Facility. The following tables present the Total Net Leverage Ratio and Net Debt Leverage Ratio as of March 31, 2019:2020:
| | | | | | | | |
(dollars in thousands) | | | Four Quarters Ended March 31, 2020 |
Pro Forma Adjusted EBITDA (1) | | $ | 182,645 | |
Consolidated Total Debt (2) | | $ | 685,888 | |
Total Net Leverage Ratio | | | 3.76x | |
Cash | | | 141,235 | |
Consolidated Total Debt (2) less Cash ("Net Debt") | | $ | 544,653 | |
Net Debt Leverage Ratio | | | 2.98x | |
(1) "Pro Forma Adjusted EBITDA" is used herein instead of "Consolidated EBITDA" to avoid confusion but is calculated in the same manner as Consolidated EBITDA under the 2018 Revolving Credit Facility. The following table presents a reconciliation of Adjusted EBITDA to Pro Forma Adjusted EBITDA for the four quarters ended March 31, 2020: | | |
|
| | | | |
(dollars in thousands) | | Four Quarters Ended March 31, 2019 |
Pro Forma Adjusted EBITDA (1) | | $ | 167,929 |
|
Consolidated Total Debt (2) | | $ | 611,683 |
|
Total Net Leverage Ratio | | 3.64x |
|
Cash | | $ | 4,978 |
|
Consolidated Total Debt (2) less Cash ("Net Debt") | | $ | 606,705 |
|
Net Debt Leverage Ratio | | 3.61x |
|
(1) "Pro Forma Adjusted EBITDA" is used herein instead of "Consolidated EBITDA" to avoid confusion but is calculated in the same manner as Consolidated EBITDA under the 2018 Revolving Credit Facility. The following table presents a reconciliation of Adjusted EBITDA to Pro Forma Adjusted EBITDA for the four quarters ended March 31, 2019: |
|
| | | | |
| | Four Quarters Ended March 31, 2019 |
(in thousands) | | |
Adjusted EBITDA (a) | | $ | 161,210 |
|
Pro forma adjustment (b) | | 6,719 |
|
Pro Forma Adjusted EBITDA | | $ | 167,929 |
|
(a) See this section for the definition of Adjusted EBITDA and the section titled "Non-GAAP Financial Information" for a reconciliation of net income (loss) from continuing operations to Adjusted EBITDA. (b) The pro forma adjustment gives effect to all acquisitions consummated in the four quarters ended March 31, 2019, as though they had been consummated on the first day of the first quarter for the four quarters ended March 31, 2019. Other adjustments are also made to conform to the terms of the 2018 Revolving Credit Facility.
(2) The reconciliation of total debt on the balance sheet to Consolidated Total Debt is as follows: |
| | | | | | | | |
| | Four Quarters Ended March 31, 2020 |
(in thousands) | | |
Adjusted EBITDA (a) | | $ | 179,653 | |
Pro forma adjustment (b) | | 2,992 | |
Pro Forma Adjusted EBITDA | | $ | 182,645 | |
(a) See the section titled "Non-GAAP Financial Information" for a reconciliation of net income from continuing operations to Adjusted EBITDA. (b) The pro forma adjustment gives effect to all acquisitions consummated in the four quarters ended March 31, 2020, as though they had been consummated on the first day of the first quarter for the four quarters ended March 31, 2020. Other adjustments are also made to conform to the terms of the 2018 Revolving Credit Facility. (2) The reconciliation of total debt on the balance sheet to Consolidated Total Debt is as follows: | | |
|
| | | | |
| | As of March 31, 2019 |
(in thousands) | | |
Total gross debt | | $ | 602,375 |
|
Finance leases | | 9,308 |
|
Consolidated Total Debt | | $ | 611,683 |
|
| | | | | | | | |
| | As of March 31, 2020 |
(in thousands) | | |
Total gross debt | | $ | 679,375 | |
Finance lease liabilities | | 6,513 | |
Consolidated Total Debt | | $ | 685,888 | |
Cash Flows
A summary of net cash provided by, or used in, operating, investing and financing activities by continuing operations is shown in the following table:
| | | | | | | | | | | |
| Three Months Ended March 31, | | |
| 2020 | | 2019 |
(in thousands) | | | |
Net cash provided by operating activities | $ | 27,716 | | | | $ | 17,709 | |
Net cash used in investing activities | $ | (19,640) | | | | $ | (15,774) | |
Net cash provided by (used in) financing activities | $ | 115,985 | | | | $ | (11,076) | |
|
| | | | | | | |
| Three Months Ended March 31, |
| 2019 | | 2018 |
(in thousands) | | | |
Net cash provided by (used in) operating activities | $ | 17,709 |
|
| $ | (5,112 | ) |
Net cash used in investing activities | $ | (15,774 | ) |
| $ | (28,156 | ) |
Net cash (used in) provided by financing activities | $ | (11,076 | ) |
| $ | 41,775 |
|
Operating Activities
Net cash provided by, or used in, operating activities consists primarily of net income (loss) adjusted for non-cash items, including depreciation and amortization, provision for doubtful accounts,expected credit losses, right-of-use assets, deferred income taxes and the effects of changes in working capital.
Net cash provided by operating activities increased by $22.8$10.0 million to $17.7$27.7 million for the three months ended March 31, 2019,2020, as compared to net cash used in operating activities of $5.1$17.7 million in the same period in 2018.2019. The increase was primarily due to higher net income including adjustments for higher non-cash items of $9.3 million and lower working capital requirements of $6.4 million.income.
Investing Activities
Net cash provided by, or used in, investing activities consists primarily of acquisitions and capital expenditures, including purchases of land, buildings, leasehold improvements, fleet assets, information technology and other equipment. Capital expenditures vary depending on prevailing business factors, including current and anticipated market conditions. Historically,We are currently delaying or reducing capital expenditures generally have been made at relatively low levelsthat are not anticipated to impact near-term business in comparison tolight of the operating cash flows generated during the corresponding periods.COVID-19 Pandemic.
Net cash used in investing activities decreasedincreased by $12.4$3.9 million to $15.8$19.6 million for the three months ended March 31, 2019,2020, as compared to $28.2$15.8 million in the same period in 2018.2019. The decreaseincrease was primarily due to ahigher purchases of property and equipment of $6.2 million, partially offset by lower aggregate purchase price for acquisitions of $10.5 million and lower purchases of property and equipment of $2.0$2.1 million.
Financing Activities
Net cash provided by, or used in, financing activities consists primarily of borrowings and related repayments under our financing agreements.
Net cash used inprovided by financing activities increased by $52.9$127.1 million to $11.1$116.0 million in the three months ended March 31, 2019,2020, as compared to net cash provided byused in financing activities of $41.8$11.1 million in the same period in 2018.2019. The increase was primarily due to lowerhigher borrowings of $36.1$138.5 million, andwhich was driven by the firstMarch 2020 drawdown of $120.0 million from our 2018 Revolving Credit Facility in response to the COVID-19 Pandemic. This was partially offset by $11.2 million related to a higher TRA payment underin January 2020 of $27.9 million compared to the January 2019 TRA payment of $16.7 million.
Secondary Public Offering
On September 24, 2019, LSF9 Cypress Parent 2 LLC (the “Selling Stockholder”) an affiliate of Lone Star, sold 4,750,000 shares of our common stock at a price of $17.00 per share. The Selling Stockholder also granted the underwriters an option for a period of 30 days to purchase up to an additional 712,500 shares of our common stock. On October 11, 2019, the underwriters exercised their option to purchase the additional 712,500 shares of our common stock. As a result of the sale, the aggregate beneficial ownership of Lone Star decreased from 65.3% to 52.6% of our outstanding shares of common stock as of October 11, 2019, and we remain a “Controlled Company” under the corporate governance standards of the New York Stock Exchange. We did not receive any proceeds from the sale of the common stock by the Selling Stockholder.
Critical Accounting Policies
Our management’s discussion and analysis of our financial condition and results of operations is based on our condensed consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States, or GAAP. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reported period.
On an ongoing basis, management evaluates its estimates, including those related to revenue recognition, allowance for doubtful accounts,expected credit losses, inventories, taxes, and goodwill. We base our estimates and judgments on historical experience and on various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may materially differ from these estimates under different assumptions or conditions.
There have been no material changes made to the critical accounting estimates during the periods presented in the condensed consolidated financial statements from those disclosed in the 20182019 10-K.
Off-Balance Sheet Arrangements
As of March 31, 2019,2020, we had no material off-balance sheet arrangements or similar obligations, such as financing or unconsolidated variable interest entities.
Non-GAAP Financial Information
In addition to our results under GAAP, we also present Adjusted EBITDA for historical periods. Adjusted EBITDA is a non-GAAP financial measure and has been presented as a supplemental measure of financial performance that is not required by, or presented in accordance with, GAAP. We calculate Adjusted EBITDA as net income (loss) from continuing operations before interest expense, net, income tax expense, (benefit), depreciation and amortization, unrealized gain on derivative financial instruments, IPO and public company readiness expenses, stock-based compensation, and other non-recurring adjustments such as non-cash purchase accounting effects, loss on the disposal of property and equipment, gain on legal settlement and transaction costs. We calculated Pro Forma Adjusted EBITDA and Net Debt Leverage Ratio as shown in the previous section entitled “Liquidity and Capital Resources,” which isare also a non-GAAP financial measure.measures.
Adjusted EBITDA is presented because it is an important metric used by management to assess our financial performance. We also believe Adjusted EBITDA is frequently used by analysts, investors and other interested parties to evaluate companies in our industry. This measure, when used in conjunction with related GAAP financial measures, provides investors with an additional financial analytical framework that may be useful in assessing our company and its financial condition and results of operations.
Adjusted EBITDA has certain limitations. Adjusted EBITDA should not be considered as an alternative to net income, or any other measure of financial performance derived in accordance with GAAP. Additionally, Adjusted EBITDA is not intended to be a liquidity measure because of certain limitations such as:
It• it does not reflect our cash outlays for capital expenditures or future contractual commitments;
It• it does not reflect changes in, or cash requirements for, working capital;
It• it does not reflect interest expense or the cash requirements necessary to service interest or principal payments on indebtedness;
It• it does not reflect income tax expense or the cash necessary to pay income taxes; and
• although depreciation and amortization are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future, and this non-GAAP measure does not reflect cash requirements for such replacements.
Other companies, including other companies in our industry, may not use these measures or may calculate one or both differently than as presented in this Quarterly Report on Form 10-Q, limiting their usefulness as a comparative measure.
In evaluating Adjusted EBITDA, you should be aware that in the future we will incur expenses that are the same as or similar to some of the adjustments made in our calculations, and our presentation of Adjusted EBITDA should not be construed to mean that our future results will be unaffected by such adjustments. Management compensates for these limitations by using Adjusted EBITDA as a supplemental financial metric and in conjunction with our results prepared in accordance with GAAP. The non-GAAP information should be read in conjunction with our accompanying condensed consolidated financial statements and the related notes.
The following is a reconciliation of Adjusted EBITDA to the most directly comparable GAAP measure, net income (loss)from continuing operations (unaudited):
|
| | | | | | | |
| Three Months Ended March 31, |
| 2019 |
| 2018 |
(dollars in thousands) |
|
|
|
Net income (loss) from continuing operations | $ | 4,828 |
|
| $ | (2,264 | ) |
Interest expense, net | 8,585 |
|
| 15,098 |
|
Income tax expense (benefit) | 2,045 |
|
| (1,398 | ) |
Depreciation and amortization | 20,342 |
|
| 18,397 |
|
Unrealized gain on derivative financial instruments | — |
|
| (74 | ) |
IPO and public company readiness expenses | — |
|
| 89 |
|
Stock-based compensation | 829 |
|
| 242 |
|
Non-cash purchase accounting effects(a) | — |
|
| 407 |
|
Loss on disposal of property and equipment | 191 |
|
| 12 |
|
Transaction costs(b) | 645 |
|
| 917 |
|
Adjusted EBITDA | $ | 37,465 |
|
| $ | 31,426 |
|
Adjusted EBITDA margin(c) | 7.3 | % |
| 6.8 | % |
| | | | | | | | | | | |
| Three Months Ended March 31, | | |
| 2020 | | 2019 |
(dollars in thousands) | | | |
Net income from continuing operations | $ | 14,376 | | | | $ | 4,828 | |
Interest expense, net | 7,691 | | | | 8,585 | |
Income tax expense | 5,267 | | | | 2,045 | |
Depreciation and amortization | 19,219 | | | | 20,342 | |
Stock-based compensation | 1,393 | | | | 829 | |
Loss on disposal of property and equipment | 51 | | | | 191 | |
Gain on legal settlement | (8,556) | | | | — | |
Transaction costs(a) | 839 | | | | 645 | |
Adjusted EBITDA | $ | 40,280 | | | $ | 37,465 | |
Adjusted EBITDA margin(b) | 7.7 | % | | | 7.3 | % |
| | |
(a) | Adjusts for the effect of the purchase accounting step-up in the value of inventory to fair value recognized as a result of acquisitions. |
| |
(b) | Represents costs related to our transactions, including fees to financial advisors, accountants, attorneys and other professionals as well as certain internal corporate development costs. |
| |
(c) | Adjusted EBITDA margin represents Adjusted EBITDA divided by net sales. |
(a) Represents costs related to our transactions, including fees to financial advisors, accountants, attorneys, and other professionals, as well as certain internal corporate development costs. The costs also include non-cash purchase accounting effects to adjust for the effect of the purchase accounting step-up in the value of inventory to fair value recognized as a result of acquisitions.
(b) Adjusted EBITDA margin represents Adjusted EBITDA divided by net sales.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Not applicable.Other than as disclosed in Note 4, Current Expected Credit Losses, and Note 6, Derivatives and Hedging Activities, of the condensed consolidated financial statements, there have been no material changes to the information regarding market risk provided in Item 7A, Quantitative and Qualitative Disclosures about Market Risk, of our 2019 10-K.
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
As required by Rule 13a-15(b) under the Exchange Act, our management, including our Chief Executive Officer and Chief Financial Officer, carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act), as of March 31, 2019,2020, the end of the period covered by this Quarterly Report on Form 10-Q.
Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that, as of March 31, 2019,2020, the end of the period covered by this Quarterly Report on Form 10-Q, our disclosure controls and procedures were effective.
Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that occurred during the quarter ended March 31, 2019,2020, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Limitations on Effectiveness of Controls
Our management, including our principal executive officer and principal financial officer, does not expect that our disclosure controls and procedures or our system of internal control over financial reporting will prevent or detect all errors and all fraud. A control system, no matter how well designed or operated, can provide only reasonable, but not absolute, assurance that the objectives of the system of internal control are met. The design of our control system reflects the fact that there are resource constraints, and that the benefits of such control system must be considered relative to their costs. Further, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control failures and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the intentional acts of individuals, by collusion of two or more people, or by management override of the controls. The design of any system of controls is also based in part on certain assumptions about the likelihood of future events, and there can be no assurance that the design of any particular control will always succeed in achieving its objective under all potential future conditions.
Part II. Other Information
Item 1. Legal Proceedings
We are not currently a party to any material legal proceedings. We are, however, subject to lawsuits, government investigations, audits and other legal proceedings from time to time in the ordinary course of our business. It is not possible to predict the outcome of any legal proceeding with any certainty. The outcome or costs we incur in connection with a legal proceeding could adversely impact our operating results and financial position.
Item 1A. Risk Factors
ThereWe have updated our existing risk factors to include information associated with the current events related to the novel coronavirus pandemic, or the COVID-19 Pandemic, that impacted global markets due to outbreaks occurring worldwide beginning in early calendar year 2020. Except for the updates to the risk factors set forth below, there have been no material changes in our risk factors from those disclosed in Item 1A. Risk Factors in our 2019 10-K.
Our results of operations have been and will in the future be adversely impacted by the COVID-19 Pandemic, and the duration and extent to which it will impact our results of operations remains uncertain.
A significant outbreak of epidemic, pandemic, or contagious diseases in the human population, such as the current COVID-19 Pandemic, could result in a widespread health crisis that could adversely affect the broader economies, financial and capital markets, commodity and energy prices, and overall demand environment for our products. A global health crisis could affect, and has affected, our workforce, customers and vendors, as well as economies and financial markets globally, potentially leading to an economic downturn, which could decrease spending, adversely affecting the demand for our products.
In response to the risk factors disclosed under Item 1A, “Risk Factors,”COVID-19 Pandemic, many state, local, and foreign governments have put in place, and others in the 2018 10-K.future may put in place, travel restrictions, quarantines, “shelter-in-place” orders, and similar government orders and restrictions, in an attempt to control the spread of the disease. Such restrictions or orders have resulted in, and will continue to result in, business closures, work stoppages, slowdowns and delays, among other effects that could negatively impact our operations, as well as the operations of our customers and business partners. Such results have had and will continue to have a material adverse effect on our business, operations, financial condition, results of operations, and cash flows.
We are considered as part of an "Essential Critical Infrastructure Sector," as defined by the United States Department of Homeland Security and are considered an essential business under many state and local governmental orders. Although we have continued to operate most of our branches to date consistent with federal guidelines and state and local orders, the extent to which the COVID-19 Pandemic impacts our business, operations, financial results and financial condition will depend on numerous evolving factors which are uncertain and cannot be predicted, including:
•the duration and scope of the pandemic and associated disruptions;
•a general slowdown in the construction industry;
•governmental, business and individuals’ actions taken in response to the pandemic;
•the effect on our customers and our customers’ demand for our products;
•the effect on our suppliers and disruptions to the global supply chain;
•our ability to sell and provide our products, including disruptions as a result of travel restrictions and people working from home;
•the ability of our customers to pay for our products;
•delays in starting construction jobs, temporary closure of jobsites or cancellation of jobs; and
•any closures of our and our suppliers’ and customers’ facilities and construction projects.
These effects of the COVID-19 Pandemic have resulted and will result in lost or delayed revenue to us, and we have experienced, and continue to experience, disruptions to our business as we implement safety protocols, modifications to travel and limitations on customers entering our branches. We are closely monitoring the impact of the COVID-19 Pandemic, continually assessing its potential effects on our business. We have taken actions to offset the impact of the COVID-19 Pandemic, including reducing salaries for all exempt employees, implementing furloughs, and restricting nonessential travel, but we cannot predict what future actions we may have to take in response to the COVID-19 Pandemic. The extent to which our results are affected by the COVID-19 Pandemic will largely depend on future developments which cannot be accurately predicted and are uncertain, but the COVID-19 Pandemic has had and will continue to have an adverse effect on our business, operations, financial condition, results of operations, and cash flows.
In addition, while we believe we have taken appropriate steps to maintain a safe workplace to protect our employees from contracting and spreading the coronavirus, including following the guidance set out from both the Occupational Safety and Health Administration and Centers for Disease Control and Prevention, we may not be able to completely prevent the spread of the virus among our employees and may face litigation or other proceedings making claims related to unsafe working conditions, inadequate protection of our employees or other claims. Any of these claims, even if without merit, could result in costly litigation or divert management's attention and resources. Furthermore, we may face a sustained disruption to our operations due to one or more of the factors described above.
Even after the COVID-19 Pandemic has subsided, we may continue to experience adverse impacts to our business as a result of any economic instability that has occurred or may occur in the future. Any of these events could amplify the other risks and uncertainties described in Item 1A. Risk Factors in our 2019 10-K and could materially adversely affect our business, operations, financial condition, results of operations, cash flows or stock price.
See Item 2, Management's Discussion and Analysis of Financial Condition and Results of Operations, specifically “The COVID-19 Pandemic's Impact on our Business” and “Liquidity and Capital Resources” sections, for further discussion.
The market price of our common stock has been highly volatile and subject to wide fluctuations, which could cause the value of your investment to decline. The price of our common stock could decline substantially and, as a result, you may not be able to sell shares at or above the price you paid for them.
Some of the factors that could negatively affect or result in fluctuations in the market price of our common stock 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 or speculation that changes may occur;
•additions or departures of key personnel;
•actions by our significant stockholders, including the sale by Lone Star of any of its shares of our common stock;
•speculation in the press or investment community about our business or industry;
•general market, economic and political conditions, including an economic slowdown;
•natural disasters or public health emergencies, such as the COVID-19 Pandemic;
•changes in interest rates or perceptions that changes could occur;
•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.
Furthermore, in recent years, 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.
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
Item 4. Mine Safety Disclosure
Not applicable.
Item 5. Other Information
None.
Item 6. Exhibits
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Exhibit Number | | Description | | | |
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101 INS | | XBRL Instance Document. | | | |
101 SCH | | XBRL Taxonomy Extension Schema Document. | | | |
101 CAL | | XBRL Taxonomy Extension Calculation Linkbase Document. | | | |
101 DEF | | XBRL Taxonomy Extension Definition Linkbase Document. | | | |
101 LAB | | XBRL Taxonomy Extension Label Linkbase Document | | | |
101 PRE | | XBRL Taxonomy Extension Presentation Linkbase Document. | | | |
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.
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FOUNDATION BUILDING MATERIALS, INC. |
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Date: May 11, 2020 | BY: | /s/ John Gorey |
| | John Gorey |
| | Chief Financial Officer |
| | (Principal Financial Officer) |
| | |
Date: May 7, 2019 | BY: | /s/ John Gorey |
| | John Gorey |
| | Chief Financial Officer |
| | (Principal Financial Officer) |
| | |
| | /s/ Barbara J. Bitzer |
| | Barbara J. Bitzer |
| | Chief Accounting Officer |
| | (Principal Accounting Officer) |
| | |