UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

[X]☒] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended~~September~~June 30, ~~2019~~2020

[☐] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF1934

For the transition period from _________ to _________.

Commission File Number: 001-37921

FORTERRA, INC.

(Exact name of registrant as specified in its charter)



Delaware		37-1830464
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)

511 East John Carpenter Freeway, 6th Floor, Irving, TX75062

(Address of principal executive offices, including zip code)

~~(469)~~ (469) 458-7973

(Registrant’s telephone number, including area code)

Securities Registered Pursuant to Section 12(b) of the Act:



Title of each class	Trading Symbol	Name of each exchange on which registered
Common Stock, $0.001 par value per share	FRTA	Nasdaq ~~Global Select~~Stock Market LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes [X] No [ ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.



Large accelerated filer	Accelerated filer	Non-accelerated filer	Smaller reporting company	Emerging growth company
o	x	~~Accelerated filer~~ xo	~~Non-accelerated filer~~ o ☒	~~Smaller reporting company~~ x	~~Emerging growth company~~ o ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ [☐] No [X]

There were ~~64,562,085~~65,233,632 shares of common stock, par value $0.001 per share, of the registrant outstanding as of ~~November 1, 2019.~~July 24, 2020.

TABLE OF CONTENTS



		Page
Part I	Financial Information
Item 1.	Financial Statements	1
	Condensed Consolidated Statements of Operations	1
	Condensed Consolidated Statements of Comprehensive Income (Loss)	2
	Condensed Consolidated Balance Sheets	3
	Condensed Consolidated Statements of Shareholders' Equity	4
	Condensed Consolidated Statements of Cash Flows	6
	Notes to the Unaudited Condensed Consolidated Financial Statements	7
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	28
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	3940
Item 4.	Controls and Procedures	4041

Part II	Other Information
Item 1.	Legal Proceedings	4143
Item 1A.	Risk Factors	4143
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	4146
Item 3.	Defaults Upon Senior Securities	4146
Item 4.	Mine Safety Disclosures	4147
Item 5.	Other Information	4147
Item 6.	Exhibits	4248

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

FORTERRA, INC.

Condensed Consolidated Statements of Operations

(in thousands, except per share data)


	Three months ended						Nine months ended						Three months ended						Six months ended
	September 30,						September 30,						June 30,						June 30,
	2019			2018			2019			2018			2020			2019			2020			2019
	(unaudited)						(unaudited)						(unaudited)						(unaudited)
Net sales	$	464,526		$	434,510		$	1,166,603		$	1,140,557		$	426,186		$	410,219		$	757,062		$	702,077
Cost of goods sold	362,362			357,374			936,820			953,743			320,607			324,405			592,741			574,458
Gross profit	102,164			77,136			229,783			186,814			105,579			85,814			164,321			127,619
Selling, general & administrative expenses	(55,234		)	(48,492		)	(165,265		)	(151,617		)	(53,283		)	(58,640		)	(107,523		)	(110,031		)
Impairment and exit charges	(510		)	(2,170		)	(1,323		)	(3,891		)	(265		)	(582		)	(1,089		)	(813		)
Other operating income, net	815			1,538			1,018			6,864
Other operating (loss) income, net													(1,001		)	(376		)	(671		)	203
	(54,929		)	(49,124		)	(165,570		)	(148,644		)	(54,549		)	(59,598		)	(109,283		)	(110,641		)
Income from operations	47,235			28,012			64,213			38,170			51,030			26,216			55,038			16,978

Other income (expense)
Interest expense	(23,272		)	(21,940		)	(73,720		)	(52,993		)	(19,702		)	(25,783		)	(40,447		)	(50,448		)
Gain on extinguishment of debt	374			—			374			—			116			—			66			—
Earnings from equity method investee	3,990			2,224			8,959			7,745			3,126			3,402			5,925			4,969
Other income, net	—			—			—			6,016
Income (loss) before income taxes	28,327			8,296			(174		)	(1,062		)	34,570			3,835			20,582			(28,501		)
Income tax (expense) benefit	(5,897		)	(2,793		)	519			(6,351		)	(7,455		)	(881		)	(7,533		)	6,416
Net income (loss)	$	22,430		$	5,503		$	345		$	(7,413	)	$	27,115		$	2,954		$	13,049		$	(22,085	)

Earnings (loss) per share:
Basic	$	0.35		$	0.09		$	0.01		$	(0.12	)	$	0.42		$	0.05		$	0.20		$	(0.34	)
Diluted	$	0.34		$	0.09		$	0.01		$	(0.12	)	$	0.40		$	0.05		$	0.19		$	(0.34	)
Weighted average common shares outstanding:
Basic	64,210			63,919			64,119			63,883			65,093			64,142			64,948			64,073
Diluted	64,998			64,269			64,528			63,883			67,191			64,464			67,458			64,073

See accompanying notes to unaudited condensed consolidated financial statements

FORTERRA, INC.

Condensed Consolidated Statements of Comprehensive Income (Loss)

(in thousands)


	Three months ended					Nine months ended					Three months ended				Six months ended
	September 30,					September 30,					June 30,				June 30,
	2019			2018		2019		2018			2020		2019		2020			2019
	(unaudited)					(unaudited)					(unaudited)				(unaudited)
Net income (loss)	$	22,430		$	5,503	$	345	$	(7,413	)	$	27,115	$	2,954	$	13,049		$	(22,085	)
Unrealized gain on derivative activities, net of tax	—			—		—		970
Change in other postretirement benefit plans, net of tax	—			—		373		—			—		—		(681		)	373
Foreign currency translation adjustment	(710		)	1,486		2,118		(1,640		)	2,437		1,320		(3,262		)	2,828
Comprehensive income (loss)	$	21,720		$	6,989	$	2,836	$	(8,083	)	$	29,552	$	4,274	$	9,106		$	(18,884	)

See accompanying notes to unaudited condensed consolidated financial statements

FORTERRA, INC.

Condensed Consolidated Balance Sheets

(in thousands)


	September 30, 2019			December 31, 2018			June 30, 2020			December 31, 2019
ASSETS	(unaudited)						(unaudited)
Current assets
Cash and cash equivalents	$	43,852		$	35,793		$	52,506		$	34,800
Receivables, net	286,345			198,468			271,601			205,801
Inventories	256,645			285,030			238,835			238,483
Prepaid expenses							12,334			11,021
Other current assets	19,603			24,798			4,794			8,890
Total current assets	606,445			544,089			580,070			498,995
Non-current assets
Property, plant and equipment, net	477,273			492,167			446,974			475,575
Operating lease right-of-use assets	62,252			—			57,444			60,253
Goodwill	508,588			508,193			508,182			508,826
Intangible assets, net	154,558			183,789			121,978			142,674
Investment in equity method investee	53,065			50,607			51,459			50,034
Other long-term assets	3,965			14,407			5,390			3,701
Total assets	$	1,866,146		$	1,793,252		$	1,771,497		$	1,740,058

LIABILITIES AND EQUITY
Current liabilities
Trade payables	$	138,247		$	114,708		$	122,715		$	102,426
Accrued liabilities	85,422			70,236			97,434			88,839
Deferred revenue	9,221			9,138			10,558			9,527
Current portion of long-term debt	12,510			12,510			12,510			12,510
Current portion of tax receivable agreement	15,457			15,457			13,145			13,145
Total current liabilities	260,857			222,049			256,362			226,447
Non-current liabilities
Long-term debt	1,156,023			1,176,095			1,067,682			1,085,793
Long-term finance lease liabilities	136,556			134,948			138,449			137,365
Long-term operating lease liabilities	55,669			—			52,518			54,411
Deferred tax liabilities	37,324			46,615			30,745			28,929
Deferred gain on sale-leaseback	—			9,338
Other long-term liabilities	22,395			22,667			26,105			21,906
Long-term tax receivable agreement	73,318			73,318			64,240			64,240
Total liabilities	1,742,142			1,685,030			1,636,101			1,619,091
Commitments and Contingencies (Note 14)
Equity
Common stock, $0.001 par value, 190,000 shares authorized; 64,540 and 64,206 shares issued and outstanding	18			18
Common stock, $0.001 par value, 190,000 shares authorized; 65,211 and 64,741 shares issued and outstanding							19			19
Additional paid-in-capital	240,920			234,931			249,695			244,372
Accumulated other comprehensive loss	(8,249		)	(10,740		)	(11,006		)	(7,063		)
Retained deficit	(108,685		)	(115,987		)	(103,312		)	(116,361		)
Total shareholders' equity	124,004			108,222			135,396			120,967
Total liabilities and shareholders' equity	$	1,866,146		$	1,793,252		$	1,771,497		$	1,740,058

See accompanying notes to unaudited condensed consolidated financial statements

FORTERRA, INC.

Condensed Consolidated Statements of Shareholders' Equity

(in thousands, except share data)

(unaudited)


	Common Stock															Common Stock
	Shares	Amount		Additional Paid-in-Capital			Accumulated Other Comprehensive Income (Loss)			Retained Deficit			Total Shareholders' Equity			Shares	Amount		Additional Paid-in-Capital			Accumulated Other Comprehensive Income (Loss)			Retained 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
Balance at December 31, 2019																64,740,667	$	19	$	244,372		$	(7,063	)	$	(116,361	)	$	120,967
Share-based compensation expense	—	—		1,529			—			—			1,529			—	—		2,864			—			—			2,864
Stock-based plan activity	57,106	—		(26		)	—			—			(26		)	336,752	—		(194		)	—			—			(194		)
Comprehensive loss:
Net loss	—	—		—			—			(25,039		)	(25,039		)	—	—		—			—			(14,066		)	(14,066		)
Change in other postretirement benefit plans, net of tax	—	—		—			373			—			373			—	—		—			(681		)	—			(681		)
Foreign currency translation adjustment	—	—		—			1,508			—			1,508			—	—		—			(5,699		)	—			(5,699		)
Balance at March 31, 2019	64,262,710	18		236,434			(8,859		)	(134,069		)	93,524
Balance at March 31, 2020																65,077,419	19		247,042			(13,443		)	(130,427		)	103,191
Share-based compensation expense	—	—		1,132			—			—			1,132			—	—		2,607			—			—			2,607
Stock-based plan activity	35,447	—		(88		)	—			—			(88		)	133,488	—		46			—			—			46
Comprehensive income:
Net income	—	—		—			—			2,954			2,954			—	—		—			—			27,115			27,115
Change in other postretirement benefit plans, net of tax																—	—		—			—			—			—
Foreign currency translation adjustment	—	—		—			1,320			—			1,320			—	—		—			2,437			—			2,437
Balance at June 30, 2019	64,298,157	18		237,478			(7,539		)	(131,115		)	98,842
Share-based compensation expense	—	—		2,172			—			—			2,172
Stock-based plan activity	241,433	—		1,270			—			—			1,270
Comprehensive income:
Net income	—	—		—			—			22,430			22,430
Foreign currency translation adjustment	—	—		—			(710		)	—			(710		)
Balance at September 30, 2019	64,539,590	$	18	$	240,920		$	(8,249	)	$	(108,685	)	$	124,004
Balance at June 30, 2020																65,210,907	$	19	$	249,695		$	(11,006	)	$	(103,312	)	$	135,396



	Common Stock
	Shares	Amount		Additional Paid-in-Capital			Accumulated Other Comprehensive Income (Loss)			Retained 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	—	—		1,529			—			—			1,529
Stock-based plan activity	57,106	—		(26		)	—			—			(26		)
Comprehensive loss:
Net loss	—	—		—			—			(25,039		)	(25,039		)
Change in other postretirement benefit plans, net of tax	—	—		—			373			—			373
Foreign currency translation adjustment	—	—		—			1,508			—			1,508
Balance at March 31, 2019	64,262,710	18		236,434			(8,859		)	(134,069		)	93,524
Share-based compensation expense	—	—		1,132			—			—			1,132
Stock-based plan activity	35,447	—		(88		)	—			—			(88		)
Comprehensive income:
Net income	—	—		—			—			2,954			2,954
Foreign currency translation adjustment	—	—		—			1,320			—			1,320
Balance at June 30, 2019	64,298,157	$	18	$	237,478		$	(7,539	)	$	(131,115	)	$	98,842

Common Stock
Shares Amount Additional Paid-in-Capital Accumulated Other Comprehensive Income (Loss) Retained Deficit Total Shareholders' Equity

Balance at December 31, 2017 64,230,888
$ 18
$ 230,023
$ (5,098 ) $ (92,452 ) $ 132,491
Share-based compensation expense —
—
1,154
—
—
1,154
Stock-based plan activity (3,663 ) —
(57 ) —
—
(57 )
Comprehensive loss:
Net loss —
—
—
—
(19,910 ) (19,910 )
Gain on derivative transactions, net of tax —
—
—
970
—
970
Foreign currency translation adjustment —
—
—
(1,557 ) —
(1,557 )
Reclassification due to the adoption of ASU 2018-02 —
—
—
(830 ) 830
—
Balance at March 31, 2018 64,227,225
18
231,120
(6,515 ) (111,532 ) 113,091
Share-based compensation expense —
—
1,984
—
—
1,984
Stock-based plan activity 868
—
(39 ) —
—
(39 )
Comprehensive income:
Net income —
—
—
—
6,994
6,994
Foreign currency translation adjustment, and other —
—
—
(1,569 ) 2
(1,567 )
Balance at June 30, 2018 64,228,093
18
233,065
(8,084 ) (104,536 ) 120,463
Share-based compensation expense —
—
1,450
—
—
1,450
Stock-based plan activity (25,962 ) —
(28 ) —
—
(28 )
Comprehensive income:
Net income —
—
—
—
5,503
5,503
Foreign currency translation adjustment, and other —
—
—
1,486
(1 ) 1,485
Balance at September 30, 2018 64,202,131
$ 18
$ 234,487
$ (6,598 ) $ (99,034 ) $ 128,873

See accompanying notes to unaudited condensed consolidated financial statements

FORTERRA, INC.

Condensed Consolidated Statements of Cash Flows

(in thousands)


	Nine months ended							Six months ended
	September 30,							June 30,
	2019			2018				2020			2019
CASH FLOWS FROM OPERATING ACTIVITIES	(unaudited)							(unaudited)
Net income (loss)	$	345		$	(7,413	)		$	13,049		$	(22,085	)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:							Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation & amortization expense	72,954			79,373				44,907			48,782
(Gain) / loss on business divestiture	—			(6,016		)
(Gain) / loss on disposal of property, plant and equipment	1,551			(2,447		)
Loss on disposal of property, plant and equipment								1,353			1,033
Gain on extinguishment of debt	(374		)	—				(66		)	—
Amortization of debt discount and issuance costs	6,022			6,099				3,730			4,013
Stock-based compensation expense	4,833			4,588				5,471			2,661
Impairment charges	—			936
Write-off of debt discount and issuance costs								376			—
Earnings from equity method investee	(8,959		)	(7,745		)		(5,925		)	(4,969		)
Distributions from equity method investee	6,500			8,875				4,500			1,500
Unrealized loss / (gain) on derivative instruments, net	5,892			(4,291		)
Unrealized loss on derivative instruments, net								921			5,024
Unrealized foreign currency loss / (gain), net	35			(358		)		212			(93		)
Provision (recoveries) for doubtful accounts	511			(1,905		)		80			(194		)
Deferred taxes	(11,672		)	(24,787		)		1,816			(9,566		)
Deferred rent	—			1,022
Other non-cash items	(188		)	77				2,088			919
Change in assets and liabilities:
Receivables, net	(88,138		)	(83,720		)		(66,160		)	(67,813		)
Inventories	29,109			(25,019		)		(945		)	(5,734		)
Other current assets	1,296			6,910				2,435			(641		)
Accounts payable and accrued liabilities	37,259			25,042				27,950			13,066
Other assets & liabilities	8,746			2,184				4,447			6,775
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES	65,722			(28,595		)		40,239			(27,322		)

CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property, plant and equipment, and intangible assets	(44,321		)	(31,474		)		(9,054		)	(34,051		)
Proceeds from business divestiture	—			618
Proceeds from sale of fixed assets	10,580			4,874				10,590			9,509
Settlement of net investment hedges	—			(4,990		)
Business combinations, net of cash acquired	—			(4,500		)
NET CASH USED IN INVESTING ACTIVITIES	(33,741		)	(35,472		)
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES								1,536			(24,542		)

CASH FLOWS FROM FINANCING ACTIVITIES
Payment of debt issuance costs								(1,734		)	—
Payments on term loans	(25,110		)	(9,383		)		(21,368		)	(6,255		)
Proceeds from revolver	54,000			—				180,000			54,000
Payments on revolver	(54,000		)	—				(180,000		)	(15,000		)
Proceeds from issuance of common stock	1,282			—
Other financing activities	(552		)	(385		)		(454		)	(395		)
NET CASH USED IN FINANCING ACTIVITIES	(24,380		)	(9,768		)
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES								(23,556		)	32,350
Effect of exchange rate changes on cash	458			(351		)		(513		)	512
Net change in cash and cash equivalents	8,059			(74,186		)		17,706			(19,002		)
Cash and cash equivalents, beginning of period	35,793			104,534				34,800			35,793
Cash and cash equivalents, end of period	$	43,852		$	30,348			$	52,506		$	16,791

SUPPLEMENTAL DISCLOSURES:
Cash interest paid	$	59,138		$	50,217			$	33,134		$	38,835
Income taxes paid	5,054			21,508
SUPPLEMENTAL NON-CASH INVESTING AND FINANCING DISCLOSURES:
Assets and liabilities acquired in non-cash exchange	—			18,140
Fair value changes of derivatives recorded in OCI, net of tax	—			970
Capital lease obligation resulting from the sale-leaseback exchange transaction	—			(148,962		)
Income taxes paid (refunds received), net								(241		)	3,911

See accompanying notes to unaudited condensed consolidated financial statements

FORTERRA, INC.

Notes to Unaudited Condensed Consolidated Financial Statements

1. ~~Organization and description~~Description of the business

~~Description of the Business~~

Forterra, Inc. (“Forterra” or the ‘‘Company’’) is involved in the manufacturing, sale and distribution of building products 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 infrastructure, residential ~~infrastructure~~ and non-residential sectors of the construction industry.

~~Organization~~

Forterra, a Delaware corporation, was formed on June 21, 2016 to hold the business of Forterra Building Products. The entities comprising the business of Forterra Building Products were indirect wholly-owned subsidiaries of HeidelbergCement A.G. (together with its affiliates, "HC") prior to its acquisition by LSF9 Concrete Holdings Ltd. ("LSF9") on March 13, 2015 (the "Acquisition"), including certain businesses that were divested between March 2015 and October 2016. In October 2016, in a corporate reorganization transaction (the "Reorganization") ownership of the remaining businesses of Forterra Building Products was transferred to Forterra, a wholly-owned subsidiary of Forterra US Holdings, LLC, which is indirectly wholly-owned by an affiliate of Lone Star Fund IX (U.S.),L.P. (along with its affiliates, related parties and associated, but excluding the Company and other companies that it owns as a result of its investment activity, “Lone Star”). On October 25, 2016, Forterra sold 18,420,000 shares of common stock in its initial public offering (the “IPO”).

2. Summary of significant accounting policies

General

The Company's condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“U.S. GAAP”) and include the accounts and results of operations of the Company and its consolidated subsidiaries. All intercompany transactions have been eliminated in consolidation.

The condensed consolidated balance sheets and the condensed consolidated statements of operations, comprehensive income (loss), cash flows and equity for the periods presented herein reflect all adjustments that are of a normal recurring nature and are necessary for a fair statement of the results of the periods shown. Certain information and note disclosures normally included in annual financial statements have been condensed or omitted pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”).

The results of operations for the periods presented are not necessarily indicative of the results that may be expected for the year ending December 31, ~~2019.~~2020. Seasonal changes and other conditions can affect the sales volumes of the Company's products. The financial results for any interim period do not necessarily indicate the expected results for the year.

These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto for the year ended December 31, ~~2018~~2019 as provided in Forterra, Inc.'s Annual Report on Form 10-K for the year ended December 31, ~~2018~~2019 filed with the SEC on ~~March 12, 2019~~February 27, 2020 (the ~~“2018~~“2019 10-K”). The Company has continued to follow the accounting policies set forth in those financial statements, except as supplemented and documented below. Certain prior year numbers were reclassified to conform with current year presentation. Such reclassification had no impact on the previously reported results of operations.

Use of estimates

The preparation of the condensed consolidated 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

~~FORTERRA, INC.~~

~~Notes to Unaudited Condensed Consolidated Financial Statements~~

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 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 condensed consolidated financial statements as of and for the three and six months ended June 30, 2020, the Company believes the full impact of the COVID-19 outbreak remains uncertain

FORTERRA, INC.

Notes to Unaudited Condensed Consolidated Financial Statements

and will continue to assess if ongoing developments related to the outbreak may cause future material impacts to its consolidated financial statements.

Concentration of Credit Risk

The Company had an individual customer within its Water Pipe & Products segment that accounted for approximately ~~14%~~15% and 14% of the Company's total net sales for the ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 and ~~2018,~~2019, respectively, and receivables at ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018~~2019 representing ~~14%~~17% and ~~16%~~13% of the Company's total receivables, net, respectively.

~~Leases~~Credit Losses

Trade accounts receivable. The ~~Company determines if an arrangement~~allowance for doubtful accounts is a lease at inception. Leases with an initial term of less than 12 months 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 condensed consolidated balance sheets. Finance leases are included in property, plant and equipment, accrued liabilities, and long-term finance lease liabilities in the condensed consolidated balance sheets.

ROU assets represent the Company’s right to use an underlying asset for the lease term, and lease liabilities represent the Company's 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~~Company’s assessment of the ~~Company’s leases do not provide an implicit rate,~~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 coronavirus disease 2019 ("COVID-19") pandemic, or other customer-specific factors. Although the Company uses its incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. The Company uses the implicit rate when readily determinable. The lease terms may include options to extend or terminate the lease whenhas historically not experienced significant credit losses, it is ~~reasonably certain~~possible that there could be a material adverse impact from potential adjustments of the ~~Company will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over~~carrying amount of trade receivables as customers are impacted by the ~~lease term.~~COVID-19 pandemic.

The Company has lease agreements with lease and 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.

Recent Accounting Guidance Adopted

In ~~February~~June 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") ~~2016-02,~~ ~~Leases~~2016-13, Financial Instruments–Credit Losses (Topic ~~842), which establishes~~326): Measurement of Credit Losses on Financial Instruments. The standard replaces the ~~principles~~incurred loss impairment methodology under current U.S. GAAP with a methodology that ~~lessees~~reflects expected credit losses and ~~lessors shall apply to report information about~~requires the ~~amount, timing, and uncertainty~~use 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~~forward-looking expected credit loss model for ~~all leases with terms greater than twelve months. Additionally, this guidance will require disclosures to help investors~~accounts receivables, loans, and other financial ~~statement users better understand the amount, timing and uncertainty of cash flows arising from leases, including qualitative and quantitative requirements.~~instruments. The Company adopted ~~Topic 842 during~~this ASU on January 1, 2020 using a modified retrospective approach, which did not have a material impact on the ~~first quarter of 2019, using~~Company's condensed consolidated financial statements.

In March 2020, the ~~transition approach that permits application~~FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The amendments in the ASU provide optional guidance for a limited time to ease the potential burden in accounting for reference rate reform. The new ~~standard at~~guidance provides optional expedients and exceptions for applying U.S. GAAP to contracts, hedging relationships and other transactions affected by reference rate reform if certain criteria are met. The amendments apply only to contracts and hedging relationships that reference London Interbank Offered Rate ("LIBOR") or another reference rate expected to be discontinued due to reference rate reform. The guidance was effective upon issuance and generally can be applied through December 31, 2022 and has not had any material impact to the ~~adoption date instead~~Company's condensed consolidated financial statements.

Recent Accounting Guidance Not Yet Adopted

In December 2019, the FASB issued ASU No. 2019-12, Simplifying the Accounting for Income Taxes (Topic 740). The new guidance simplifies the accounting for income taxes by eliminating certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period, hybrid taxes, and the recognition of deferred tax liabilities for outside basis differences. It also clarifies and simplifies other aspects of the ~~earliest comparative~~accounting for income taxes. For public companies, the amendments in this ASU are effective for fiscal years beginning after December 15, 2020 and interim periods within those fiscal years. Early adoption is permitted in interim or annual periods with any adjustments reflected as of the beginning of the annual period ~~presented in~~that includes that interim period. Additionally, entities that elect early adoption must adopt all 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 lease, (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

FORTERRA, INC.

Notes to Unaudited Condensed Consolidated Financial Statements

~~(2)~~amendments in the ~~election not~~same period. Amendments are to ~~separate non-lease components from lease components~~be applied prospectively, except for certain ~~classes of underlying leased assets.~~

~~To adopt Topic 842, the Company recognized~~amendments that are to be applied either retrospectively or with a modified retrospective approach through a cumulative ~~catch-up~~effect adjustment recorded to ~~the opening balance sheet presented January 1, 2019.~~retained earnings. The ~~adoption~~effects of ~~the~~this standard ~~had a material impact~~ on the ~~Company’s~~Company's condensed consolidated ~~balance sheet but did~~financial statements are not have an impact on its condensed consolidated statements of operations, comprehensive income (loss) or cash flows. As a result of the adoption, the Company has recorded additional lease assets and lease liabilities of approximately $63.9 million and $65.2 million, respectively, as of January 1, 2019. In addition, the Company recognized the carrying value of deferred gains relatedexpected to ~~certain sale and operating leaseback of land of $9.3 million, net of tax impact of $2.3 million, to beginning retained deficit as of January 1, 2019, in accordance with ASC 842-10-65-1.~~be material.

3. Acquisitions

On March 1, 2019, the 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 definition of a business and, as such, the transaction was accounted for as an asset acquisition pursuant to the guidance in subsection 805-50 of ~~ASC~~Accounting Standards Codification ("ASC") 805, Business Combinations. The assets ~~will~~ operate as part of the Company’s Drainage Pipe & Products segment.

4. Receivables, net

Receivables consist of the following (in thousands):



	June 30,			December 31,
	2020			2019
Trade receivables	$	237,250		$	178,698
Amounts billed but not yet paid under retainage provisions	3,644			3,093
Other receivables	32,500			26,078
Total receivables	273,394			207,869
Less: Allowance for doubtful accounts	(1,793		)	(2,068		)
Receivables, net	$	271,601		$	205,801

September 30, December 31,
2019 2018
Trade receivables $ 262,506
$ 188,999
Amounts billed but not yet paid under retainage provisions 2,856
2,065
Other receivables 23,564
9,545
Total receivables 288,926
200,609
Less: Allowance for doubtful accounts (2,581 ) (2,141 )
Receivables, net $ 286,345
$ 198,468

5. Inventories

Inventories consist of the following (in thousands):



	June 30,		December 31,
	2020		2019
Finished goods	$	155,569	$	161,440
Raw materials	82,696		76,237
Work in process	570		806
Total inventories	$	238,835	$	238,483

September 30, December 31,
2019 2018
Finished goods $ 170,000
$ 193,603
Raw materials 86,025
90,376
Work in process 620
1,051
Total inventories $ 256,645
$ 285,030

~~FORTERRA, INC.~~

~~Notes to Unaudited Condensed Consolidated Financial Statements~~

6.Investment in equity method investee

The Company owns 50% of the Common Unit voting shares of Concrete Pipe & Precast LLC ("CP&P") and consequently, has recorded its investment in the Common Unit voting shares in accordance with ASC 323, Investments–EquityMethod and Joint Ventures,under the equity method of accounting.

The Company's investment in the joint venture was ~~$53.1~~$51.5 million at ~~September~~June 30, ~~2019,~~2020, which is included within the Drainage Pipe & Products segment. At ~~September~~June 30, ~~2019,~~2020, the difference between the amount at which the Company's investment is carried and the amount of the Company's share of the underlying equity in net assets of

FORTERRA, INC.

Notes to Unaudited Condensed Consolidated Financial Statements

CP&P was approximately ~~$13.1~~$13.0 million. The basis difference is primarily attributed to the value of land and equity method goodwill associated with the investment.

The following reflects the Company's distribution and earnings in the equity investment (in thousands):


	Three months ended						Nine months ended						Three months ended						Six months ended
	September 30,						September 30,						June 30,						June 30,
	2019			2018			2019			2018			2020			2019			2020			2019
Distribution received from CP&P	$	(5,000	)	$	(3,875	)	$	(6,500	)	$	(8,875	)	$	(2,900	)	$	—		$	(4,500	)	$	(1,500	)
Share of earnings in CP&P	4,008			2,242			9,013			7,799			3,146			3,420			5,961			5,005
Amortization of excess fair value of investment	(18		)	(18		)	(54		)	(54		)	(18		)	(18		)	(36		)	(36		)

Selected financial data for CP&P on a 100% basis is as follows (in thousands):



	Three months ended				Six months ended
	June 30,				June 30,
	2020		2019		2020		2019
Net sales	$	36,032	$	37,353	$	70,790	$	65,602
Gross profit	10,933		11,721		21,470		19,675
Income from operations	6,259		6,840		11,879		10,020
Net income	6,209		6,776		11,767		9,893

Three months ended Nine months ended
September 30, September 30,
2019 2018 2019 2018
Net sales $ 38,210
$ 31,864
$ 103,812
$ 96,537
Gross profit 12,632
9,042
32,307
28,537
Income from operations 8,021
4,540
18,041
15,235
Net income 7,959
4,479
17,852
15,052

7. Property, plant and equipment, net

Property, plant and equipment, net, consist of the following (in thousands):



	June 30,			December 31,
	2020			2019
Machinery and equipment	$	410,007		$	398,127
Land, buildings and improvements	233,155			240,403
Other equipment	11,781			8,660
Construction-in-progress	12,204			29,157
Total property, plant and equipment	667,147			676,347
Less: accumulated depreciation	(220,173		)	(200,772		)
Property, plant and equipment, net	$	446,974		$	475,575

September 30, December 31,
2019 2018
Machinery and equipment $ 391,957
$ 373,881
Land, buildings and improvements 237,465
235,819
Other equipment 8,005
6,962
Construction-in-progress 28,668
32,448
Total property, plant and equipment 666,095
649,110
Less: accumulated depreciation (188,822 ) (156,943 )
Property, plant and equipment, net $ 477,273
$ 492,167

Depreciation expense totaled ~~$12.3~~$12.1 million and ~~$37.4~~$24.3 million for the three and ~~nine~~six months ended ~~September~~June 30, ~~2019,~~2020, respectively, and ~~$12.9~~$12.4 million and ~~$39.9~~$25.2 million for the three and ~~nine~~six months ended ~~September~~June 30,

~~FORTERRA, INC.~~

~~Notes to Unaudited Condensed Consolidated Financial Statements~~

~~2018,~~ 2019, respectively, which is included in cost of goods sold and selling, general and administrative expenses in the condensed consolidated statements of operations.

FORTERRA, INC.

Notes to Unaudited Condensed Consolidated Financial Statements

8. Goodwill and other intangible assets, net

The Company has recorded goodwill in connection with its acquisition of businesses. The following table summarizes the changes in goodwill by operating segment for the ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 (in thousands):



	Drainage Pipe & Products			Water Pipe & Products		Total
Balance at December 31, 2019	$	190,466		$	318,360	$	508,826
Foreign currency and other adjustments	(644		)	—		(644		)
Balance at June 30, 2020	$	189,822		$	318,360	$	508,182

Drainage Pipe & Products Water Pipe & Products Total
Balance at December 31, 2018 $ 189,833
$ 318,360
$ 508,193
Foreign currency and other adjustments 395
—
395
Balance at September 30, 2019 $ 190,228
$ 318,360
$ 508,588

Intangible assets other than goodwill at ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018~~2019 included the following (in thousands):


	Net carrying value as of September 30, 2019		Net carrying value as of December 31, 2018		Net carrying value as of June 30, 2020		Net carrying value as of December 31, 2019
Customer relationships and contracts	$	109,769	$	131,473
Customer relationships					$	85,686	$	100,869
Trade names	20,850		24,523		17,280		19,626
Patents	8,581		11,304		6,351		7,673
Non-compete agreements	8,801		9,574		6,453		8,070
Developed technology	6,074		—		5,793		5,980
In-Process R&D ⁽¹⁾	—		6,354
Other	483		561		415		456
Total intangible assets	$	154,558	$	183,789	$	121,978	$	142,674

~~(1) Reclassified to developed technology in the first quarter of 2019.~~

Amortization expense totaled ~~$11.9~~$10.3 million and ~~$35.5~~$20.6 million for the three and ~~nine~~six months ended ~~September~~June 30, ~~2019,~~2020, respectively, and ~~$13.1~~$12.0 million and ~~$39.4~~$23.6 million for the three and ~~nine~~six months ended ~~September~~June 30, ~~2018,~~2019, respectively, which is included in selling, general and administrative expenses in the condensed consolidated statements of operations. All of the Company's intangible assets are amortizable.

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-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.

FORTERRA, INC.

Notes to Unaudited Condensed Consolidated Financial Statements

The estimated carrying amount and fair value of the Company’s financial instruments measured and recorded at fair value on a recurring basis are as follows for the dates indicated (in thousands):



	Fair value measurements at June 30, 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 June 30, 2020
Liabilities:
Derivative liability	$	—	$	663	$	—	$	663

	Fair value measurements at December 31, 2019 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, 2019
Assets:
Derivative asset	$	—	$	258	$	—	$	258

Fair value measurements at September 30, 2019 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 September 30, 2019
Assets:
Derivative asset $ —
$ 767
$ —
$ 767

Fair value measurements at December 31, 2018 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, 2018
Assets:
Derivative asset $ —
$ 6,659
$ —
$ 6,659

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 September 30, 2019 using										Fair value measurements at June 30, 2020 using
	Carrying Amount September 30, 2019		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total Fair Value September 30, 2019		Carrying Amount June 30, 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 June 30, 2020
Liabilities:
Term Loan	$	1,168,533	$	—	$	1,129,645	$	—	$	1,129,645	$	1,080,192	$	—	$	1,049,284	$	—	$	1,049,284
Tax receivable agreement payable	88,775		—		—		55,267		55,267		77,385		—		—		49,419		49,419



			Fair value measurements at December 31, 2019 using
	Carrying Amount December 31, 2019		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total Fair Value December 31, 2019
Liabilities:
Term Loan	$	1,098,303	$	—	$	1,102,295	$	—	$	1,102,295
Tax receivable agreement payable	77,385		—		—		47,625		47,625

Fair value measurements at December 31, 2018 using
Carrying Amount December 31, 2018 Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Total Fair Value December 31, 2018
Liabilities:
Term Loan $ 1,188,605
$ —
$ 1,103,628
$ —
$ 1,103,628
Tax receivable agreement payable ⁽¹⁾
88,775
—
—
51,832
51,832

(1) During the first quarter of 2019, the Company identified a mathematical error in the 2018 10-K related to the disclosure of the fair value of the tax receivable agreement payable as of December 31, 2018. The fair value should have been $51.8 million, as opposed to $82.9 million, and is being corrected herein. This disclosure error did not have an impact on the Company's consolidated financial statements.

FORTERRA, INC.

Notes to Unaudited Condensed Consolidated Financial Statements

The fair value of debt is valued using a market approach based on indicative quoted prices for ~~our~~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 debt.

The determination of the fair value of the Company's tax receivable agreement payable was determined using a discounted cash flow methodology with level 3 inputs as defined by ASC 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 14, Commitments and contingencies, for a further discussion of the Company's tax receivable agreement.

10.Accrued liabilities

Accrued liabilities consist of the following (in thousands):



	June 30,		December 31,
	2020		2019
Accrued payroll and employee benefits	$	33,981	$	32,815
Short-term finance leases	16,545		16,542
Short-term operating leases	8,479		8,784
Accrued taxes	12,009		5,354
Warranty	7,419		5,536
Accrued rebates	8,382		9,895
Short-term derivative liability	331		—
Environmental obligation	83		718
Other miscellaneous accrued liabilities	10,205		9,195
Total accrued liabilities	$	97,434	$	88,839

September 30, December 31,
2019 2018
Accrued payroll and employee benefits $ 28,395
$ 31,095
Short-term finance leases 16,578
16,430
Short-term operating leases 9,204
—
Accrued taxes 12,228
11,489
Warranty 4,509
3,251
Accrued rebates 4,090
3,542
Environmental obligation 718
570
Other miscellaneous accrued liabilities 9,700
3,859
Total accrued liabilities $ 85,422
$ 70,236

11. Debt and deferred financing costs

The Company’s debt consisted of the following (in thousands):



	June 30,			December 31,
	2020			2019
Term Loan, net of debt issuance costs and original issuance discount of $21,419 and $25,055, respectively	$	1,080,192		$	1,098,303
Total debt	$	1,080,192		$	1,098,303
Less: current portion debt	(12,510		)	(12,510		)
Total long-term debt	$	1,067,682		$	1,085,793

September 30, December 31,
2019 2018
Term Loan, net of debt issuance costs and original issuance discount of $28,442 and $34,252, respectively $ 1,168,533
$ 1,188,605
Total debt $ 1,168,533
$ 1,188,605
Less: current portion debt (12,510 ) (12,510 )
Total long-term debt $ 1,156,023
$ 1,176,095

~~Concurrent with the completion~~As of ~~the IPO,~~June 30, 2020, Forterra ~~entered into a $300~~had 0 borrowings under its $350 million asset based revolving credit facility under its ABL Credit Agreement dated October 25, 2016 (the “ABL Credit Agreement”) for working capital and general corporate purposes (“Revolver”) and ~~a $1.05~~$1.1 billion outstanding under its senior term loan facility (“Term Loan”).

The Term Loan ~~initially~~ provided for a ~~$1.05~~$1.25 billion senior secured term loan. Subject to the conditions set forth in the term loan agreement, the 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 ~~amount, provided certain financial tests are met.~~

FORTERRA, INC.

Notes to Unaudited Condensed Consolidated Financial Statements

~~Effective May 1, 2017,~~unlimited amount, provided (x) in the ~~Company amended~~case of any incremental debt that is secured by a lien that is pari passu with the liens securing the Term Loan, the first lien leverage ratio does not exceed 4.10 to ~~increase~~1.00, (y) in the ~~principal outstanding~~case of incremental debt that is secured by ~~an additional $200.0 million and to reduce the interest margins applicable~~a lien that is junior to the ~~full balance of~~liens securing the Term Loan, ~~by 50 basis points such~~the total leverage ratio does not exceed 5.50 to 1.00 and (z) in the case of incremental debt that ~~applicable margin based~~is unsecured, the total leverage ratio does not exceed 5.75 to 1.00, in each case, determined on ~~LIBOR was reduced from 3.50% to 3.00%. 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 Revolver. This amendment had no effect on the Company's ability to increase the size of the Term Loan under the original provisions.~~ pro forma basis.

The 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 ~~5.2%~~4.0%, 4.3%, 5.5% and ~~5.4%~~5.5% for the three and ~~nine~~six months ended ~~September~~June 30, 2020 and June 30, 2019, ~~respectively, and 5.1% and 4.9% for~~respectively.

During the ~~three and nine~~six months ended ~~September~~June 30, ~~2018, respectively.~~

~~During September 2019,~~2020, the Company repurchased ~~$16.5~~$15.5 million of the Term Loan before its maturity at a market value of ~~$15.7~~$15.1 million. Consequently, the Company wrote off a proportionate share of debt issuance costs of ~~$0.4~~$0.3 million and recognized a net gain of ~~$0.4~~$0.1 million on the early extinguishment of debt which was included in the condensed consolidated statements of operations. In addition, please see Note 19, Subsequent events for the issuance of the senior secured notes as well as the repayment of a portion of the Term Loan.

Outstanding borrowings under the Term Loan are guaranteed by Forterra and each of its direct and indirect material wholly-owned domestic subsidiaries except certain excluded subsidiaries (the "Guarantors"). The Term Loan is secured by substantially all of the assets of Forterra, the borrower and the Guarantors; provided that the obligations under the Term Loan are not secured by any liens on more than 65% of the voting stock of foreign subsidiaries or assets of foreign subsidiaries. The 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 Term Loan does not contain any financial covenants. Obligations under the Term Loan may be accelerated upon certain customary events of default (subject to grace periods, as appropriate).

On June 17, 2020, the Company entered into a First Amendment (the “Amendment”) to the ABL Credit Agreement. The Amendment, among other things, (i) increased the size of the Revolver ~~provides for an aggregate principal amount of up to~~from $300.0 million to $350.0 million of aggregate commitments, with up to ~~$280.0~~$330.0 million to be made available to the U.S. ~~borrowers~~Borrowers and up to $20.0 million to be made available to the Canadian ~~borrowers~~Borrowers (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 condensed consolidated balance sheet. In addition, 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 Revolver (the "Revolving~~ABL Credit ~~Agreement"),~~Agreement, as amended, the 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 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 ~~September~~June 30, 2020 and

FORTERRA, INC.

Notes to Unaudited Condensed Consolidated Financial Statements

December 31, 2019, the Revolver had no0 outstanding ~~borrowings, and the~~borrowings. The weighted average interest ~~rate was 3.71%~~rates for ~~borrowings during~~ the ~~period. As of December 31, 2018, there were no outstanding~~ borrowings under the ~~Revolver.~~Revolver were 1.98%, 2.00%, 3.75% and 3.75% for the three and six months ended June 30, 2020 and June 30, 2019, respectively.

~~The Revolver matures on October 25, 2021.~~ The Revolver also provides for the issuance of letters of credit of up to an agreed sublimit. Interest accrues 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 Revolver for the most recently completed calendar quarter. The obligations of the borrowers under the Revolver are 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 are not guaranteed by the Canadian subsidiaries. The 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 Canadian~~foreign subsidiaries or assets of ~~the Canadian~~foreign 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, ~~at September 30, 2019~~ based on draws, ~~and~~ outstanding letters of credit of ~~$17.3~~$25.9 million, ~~and~~as well as allowable borrowing base as of June 30, 2020, was ~~$282.7~~$261.9 million.

Outstanding borrowings under the Term Loan are guaranteed by Forterra and each of its direct and indirect material wholly-owned domestic subsidiaries except certain excluded subsidiaries (the "Guarantors"). The Term Loan is secured by substantially all of the assets of Forterra, the borrower and the Guarantors; provided that the obligations under the Term Loan are not secured by any liens on more than 65% of the voting stock of the Canadian subsidiaries or assets of the Canadian subsidiaries. The 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 Term Loan does not contain any financial covenants. Obligations under the

~~FORTERRA, INC.~~

~~Notes to Unaudited Condensed Consolidated Financial Statements~~

~~Term Loan may be accelerated upon certain customary events of default (subject to grace periods, as appropriate).~~

The Revolver and the Term Loan contain customary representations and warranties, and affirmative and negative covenants, including representations, warranties, and 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 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 Revolver falls below a threshold set forth in the ~~Revolving~~ABL Credit ~~Agreement.~~Agreement, as amended. Obligations under the Revolver and the Term Loan may be accelerated upon certain customary events of default (subject to grace periods, as appropriate). The fixed charge coverage ratio is the ratio of consolidated earnings before interest, depreciation, and amortization (“EBITDA’’) less cash payments for capital expenditures and income taxes to consolidated fixed charges (interest expense plus scheduled payments of principal on indebtedness).

As of ~~September~~June 30, ~~2019,~~2020, the Company was in compliance with all applicable covenants under the Revolver and the Term Loan.

As of ~~September~~June 30, ~~2019,~~2020, scheduled maturities of long-term debt were as follows (in thousands):. In addition, see Note 19, Subsequent events for the issuance of the $500.0 million aggregate principal amount senior secured notes due 2025 as well as the repayment of a portion of the Term Loan.



	Term Loan
2020	$	6,255
2021	12,510
2022	12,510
2023	1,070,336
	$	1,101,611

FORTERRA, INC.

Notes to Unaudited Condensed Consolidated Financial Statements

Term Loan
2019 $ 3,128
2020 12,510
2021 12,510
2022 12,510
2023 1,156,317
$ 1,196,975

12. 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 condensed consolidated statements of cash flows.

On March 30, 2020, Forterra entered into an interest rate swap transaction with a notional value of $400 million to reduce exposure to interest rate fluctuations associated with a portion of the 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. The interest rate swap is not designated as a cash flow hedge, therefore all changes in the fair value of the instrument are captured as a component of interest expense in the statements of operations. Accordingly, cash flows from the monthly interest rate swap settlements are included in net cash provided by (used in) operating activities in the condensed 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 ~~have a three-year term and expire on March 31, 2020. The interest rate swaps are~~were not designated as cash flow hedges, ~~therefore all changes in the fair value of these instruments are captured as~~had a component of interest expense in the condensed consolidated statements of operations. Accordingly, cash flows from the monthly interest rate swap settlements are included in net cash provided by (used in) operating activities in the condensed consolidated statements of cash flows.three-year term, and expired on March 31, 2020.

The Company elects to present all derivative assets and derivative liabilities on a net basis on its condensed consolidated balance sheets when a legally enforceable International Swaps and Derivatives Association, Inc. (“ISDA”) Master Agreement exists. An ISDA Master Agreement is an agreement between two counterparties, which may have multiple derivative transactions with each other governed by such agreement, and such ISDA Master Agreement generally provides for the net settlement of all or a specified group of these derivative transactions, through a single payment, in a single currency, in the event of a default on, or affecting any, one derivative transaction or a termination event affecting all, or a specified group of, derivative transactions.

~~FORTERRA, INC.~~

~~Notes to Unaudited Condensed Consolidated Financial Statements~~

At ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018,~~2019, the Company’s derivative instruments fall under an ISDA master netting agreement.

The following table presents the fair values of derivative assets and liabilities in the condensed consolidated balance sheets (in thousands):


	September 30, 2019								June 30, 2020
	Derivative Assets				Derivative Liabilities				Derivative Assets				Derivative Liabilities
	Notional Amount		Fair Value		Notional Amount		Fair Value		Notional Amount		Fair Value		Notional Amount		Fair Value
Interest rate swaps	$	525,000	$	767	$	—	$	—	$	—	$	—	$	400,000	$	663
Total derivatives, gross			767				—				—				663
Less: Legally enforceable master netting agreements			—				—				—				—
Total derivatives, net			$	767			$	—			$	—			$	663



	December 31, 2019
	Derivative Assets				Derivative Liabilities
	Notional Amount		Fair Value		Notional Amount		Fair Value
Interest rate swaps	$	525,000	$	258	$	—	$	—
Total derivatives, gross			258				—
Less: Legally enforceable master netting agreements			—				—
Total derivatives, net			$	258			$	—

FORTERRA, INC.

Notes to Unaudited Condensed Consolidated Financial Statements

December 31, 2018
Derivative Assets Derivative Liabilities
Notional Amount Fair Value Notional Amount Fair Value
Interest rate swaps $ 525,000
$ 6,659
$ —
$ —
Total derivatives, gross 6,659
—
Less: Legally enforceable master netting agreements —
—
Total derivatives, net $ 6,659
$ —

The following table presents the effect of derivative instruments on the condensed consolidated statements of operations (in thousands):



	Three months ended				Six months ended
	June 30,				June 30,
	2020		2019		2020		2019
Derivatives not designated as hedges
Interest rate swaps
Loss on derivatives not designated as hedges included in interest expense	(174	)	(2,932	)	(921	)	(5,024	)

Three months ended Nine months ended
September 30, September 30,
2019 2018 2019 2018
Net investment hedges
Foreign exchange forward contracts
Gain on derivatives recognized in Accumulated other comprehensive loss $ —
$ —
$ —
$ 970
Derivatives not designated as hedges
Interest rate swaps
Gain (loss) on derivatives not designated as hedges included in interest expense (868 ) 71
(5,892 ) 4,291

13.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 2016 sale and leaseback of land and buildings related to certain production facilities. These leases have an initial term of 25 years, followed by ~~one~~1 optional renewal term of approximately ten years that may be exercised at the Company’s discretion. These leases, with the exception of certain land leases, ~~were~~are 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 10 years.

We determine if an arrangement is a lease at inception. Leases with an initial term of less than 12 months

16are not recorded on the balance sheet. Operating leases are included in operating lease right-of-use, or ROU,

~~FORTERRA, INC.~~

~~Notes to Unaudited Condensed Consolidated Financial Statements~~

~~The components of lease expense were as follows (in thousands):~~

Lease cost Classification Three months ended September 30, 2019 Nine months ended September 30, 2019
Operating lease cost Lease expense $ 4,188
$ 12,409
Finance lease cost
Amortization of leased assets Depreciation, amortization, and accretion 656
1,753
Interest on lease liabilities Interest expense 4,679
13,832



~~Lease term and discount rate~~	~~September 30, 2019~~
~~Weighted-average remaining lease term (years)~~
~~Operating leases~~	~~15.4 years~~
~~Finance leases~~	~~33.4 years~~
~~Weighted-average discount rate (%)~~
~~Operating leases~~	~~12.6~~	%
~~Finance leases~~	~~12.3~~	%

~~Supplemental cash flow information related to leases was as follows (in thousands):~~

Nine months ended September 30, 2019
Cash paid for amounts included in lease liabilities
Operating cash flows related to operating leases $ 11,146
Operating cash flows related to finance leases 12,032
Financing cash flows related to finance leases 430
Leased assets obtained in exchange for new finance lease liabilities 42
Leased assets obtained in exchange for new operating lease liabilities 4,711

~~Supplemental balance sheet information related to leases was as follows (in thousands):~~

Classification September 30, 2019
Operating leases
Right of use assets Operating lease right-of-use assets $ 62,252
Operating lease liabilities - current portion Accrued liabilities (9,204 )
Operating lease liabilities - long term portion Long-term operating lease liabilities (55,669 )
Finance leases
Finance lease assets Property, plant and equipment, net 50,265
Finance lease liabilities - current portion Accrued liabilities (16,578 )
Finance lease liabilities - long term portion Long-term finance lease liabilities (136,556 )

~~FORTERRA, INC.~~

~~Notes to Unaudited Condensed Consolidated Financial Statements~~

~~As of September 30, 2019, maturities of~~assets, accrued liabilities, and long-term operating lease liabilities ~~were as follows (in thousands):~~in the condensed consolidated balance sheets. Finance leases are included in property, plant and equipment, accrued liabilities, and long-term finance lease liabilities in the condensed consolidated balance sheets.

Operating leases Finance leases Total
2019 $ 3,784
$ 4,204
$ 7,988
2020 13,702
16,841
30,543
2021 11,330
16,995
28,325
2022 10,463
17,245
27,708
2023 10,215
17,461
27,676
Thereafter 119,300
669,477
788,777
Total lease payments 168,794
742,223
911,017
Less: imputed interest (103,921 ) (589,089 ) (693,010 )
Present value of lease liabilities $ 64,873
$ 153,134
$ 218,007

14. Commitments and contingencies

Legal matters

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 condensed 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.

FORTERRA, INC.

Notes to Unaudited Condensed Consolidated Financial Statements

Earnout Dispute

On March 13, 2015, through an indirect wholly owned subsidiary, Lone Star Fund IX (U.S.), L.P. (which is referred to, along with its affiliates and associates, but excluding Forterra and other companies that it owns as a result of its investment activity, as "Lone Star") acquired the building products business of HeidelbergCement AG, ("Heidelberg"), in the United States and Eastern Canada, (the "Acquisition"). The Acquisition purchase agreement included an earnout, which ~~was~~provided for the payment of contingent consideration of up to $100.0 million, if and to the extent the 2015 financial results of the businesses acquired by Lone Star in the Acquisition, including the Company and ~~HC's~~Heidelberg's former building products business in the United Kingdom, exceeded a specified Adjusted EBITDA target for fiscal year 2015, as calculated pursuant to the terms of the purchase agreement. If such Adjusted EBITDA calculation exceeded the specified target, LSF9 Concrete Holdings Ltd. ("LSF9") and, as a result of the ~~Reorganization,~~internal reorganization transaction effected prior to the Company's initial public offering ("IPO"), the Company would be required to pay the U.S. affiliate of HCHeidelberg 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 affiliates of HCHeidelberg demonstrating that no payment was required. On June 13, 2016, HCHeidelberg provided notification that it ~~disputes,~~disputed, 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 ~~HC’s~~Heidelberg’s position has merit and is vigorously opposing ~~HC's~~Heidelberg's assertions. On October 5, 2016, affiliates of HCHeidelberg 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 (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 and that any claims that were required to be brought as indemnification claims under the purchase agreement were time-barred by the contractual limitations period. Following the dismissal of the Delaware Action, the Company and HCHeidelberg jointly engaged a neutral accounting expert to act as an arbitrator in the dispute as required by the purchase agreement. ~~The parties then briefed~~After briefing certain preliminary matters for the arbitrator and the ~~Company produced~~production of additional documents, ~~to HC.~~the parties began briefing the issues on the merits for the neutral accounting arbitrator, which was completed in April 2020. The ~~parties are currently negotiating a schedule for briefing~~hearing on the merits of ~~their claims to~~ the ~~arbitrator.~~dispute was held June 23-25, 2020 and a written decision is expected from the neutral accounting arbitrator in the latter part of August 2020 or thereafter. As of ~~September~~June 30, ~~2019, no~~2020, 0 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

~~FORTERRA, INC.~~

~~Notes to Unaudited Condensed Consolidated Financial Statements~~

resulting proceedings. If the Company is unsuccessful in resolving the dispute, it could recognize a material charge to its earnings.

Securities ~~Lawsuit~~Action and ~~Shareholder~~ Derivative ~~Action~~Actions

Beginning on August 14, 2017, ~~four~~4 plaintiffs filed putative class action complaints in the United States District Court for the Eastern District of New York against various defendants. On July 27, 2018, an order was entered consolidating the lawsuits into a single action (the "Securities Action"), and transferring the venue of the case from the Eastern District of New York to the Northern District of Texas. ~~On September 17, 2018, an order was entered appointing Wladislaw Maciuga as lead plaintiff and approving his counsel as lead counsel.~~ Pursuant to an agreed scheduling order, plaintiffs in the Securities Action filed their Consolidated Amended Complaint on November 30, 2018.

FORTERRA, INC.

Notes to Unaudited Condensed Consolidated Financial Statements

The Securities Action is brought by ~~two~~2 plaintiffs individually and on behalf of all persons that purchased or otherwise acquired the Company's common stock issued pursuant to and/or traceable to the IPO and is brought against the Company, certain of its current and former officers and directors, Lone Star and certain of its affiliates, and certain banks that acted as underwriters of the IPO (collectively, the “Securities Defendants”). The Securities Action generally alleges that the Company's registration statement on Form S-1 filed in connection with the IPO (the "Registration Statement") contained false or misleading statements and/or omissions of material facts. Specifically, plaintiffs allege the Registration Statement (1) made false and/or misleading statements about the Company's ability to generate organic growth through cross-selling initiatives amongst the Company's various businesses while failing to disclose that the Company had not adequately integrated acquisitions, had not begun rolling out its cross-selling initiative, and that its businesses were submitting competing bids against one another, and (2) made false or misleading statements regarding the existence of certain accounting practices and alleged material weaknesses in the Company's internal controls over financial reporting, including the existence of and accounting for bill and hold transactions, the lack of sufficient accounting personnel, the lack of effective internal controls to ensure costs were properly and accurately accrued, resulting in misstated costs and profits in the Company's 2016 financial statements, and the making of inventory accounting entries without adequate substantiation or documentation. The Securities Action asserts claims under Section 11 and Section 15 of the Securities Act of 1933, as amended, (the "Securities Act") and seeks (1) class certification under the Federal Rules of Civil Procedure, (2) damages suffered by plaintiffs and other class members, (3) prejudgment and post-judgment interest, (4) reasonable counsel fees and expert fees, and other costs and expenses reasonably incurred, and (5) other relief the court deems appropriate.

On February 15, 2019, the Securities Defendants filed a Motion to Dismiss all claims in the case based on plaintiffs' failure to state a claim. Briefing on the motion to dismiss was completed on May 1, 2019, and the court has not yet ruled on the motion. A mediation of the Securities Action occurred in August 2019. On November 4, 2019, the parties to the Securities Action entered into a settlement agreement that is intended to fully and finally resolve all claims in the Securities Action. ~~The parties intend to seek~~On January 4, 2020, the court issued an order granting preliminary approval for the settlement and providing for notice. Approval of the settlement in the Securities Action is set for final hearing on July 28, 2020, but approval cannot be guaranteed. The terms of the settlement are expected to be paid by the Company's insurance.

On July 31, 2018, a putative shareholder derivative complaint captioned Maloney v. Bradley, et al., was filed in the United States District Court for the Northern District of Texas, ~~naming as defendants~~alleging that certain of the Company’s current and former directors and officers ~~(the "Maloney Texas Action"). The complaint alleges the defendants~~had breached their fiduciary duties, committed constructive fraud, ~~and~~ wasted corporate assets, and ~~also asserts unjust enrichment claims against~~that certain ~~defendants. The complaint seeks, on behalf~~ of the Company, unspecified damages, an order directing the return of certain payments to the defendants and imposing a constructive trust thereon, certain injunctive relief, reasonable costs and attorneys' fees, and punitive damages. On November 16, 2018, the defendants filed motions to dismiss the Maloneythem had been unjustly enriched (the "Maloney Texas Action on the grounds that it was brought in the wrong venue in violation of the Company's Amended and Restated Certificate of Incorporation, that plaintiffs failed to make a pre-suit demand as required by applicable law and that plaintiff's complaint fails to state a claim.Action"). On July 30, 2019, the court in the Maloney Texas Action granted the defendants' motion to dismiss on the grounds that the case should have been brought in Delaware according to the Company's Amended and Restated Certificate of Incorporation. On September 23, 2019, the same plaintiff filed a putative shareholder derivative complaint captioned Maloney v. Bradley, et al. in the United States District Court for the District of

~~FORTERRA, INC.~~

~~Notes to Unaudited Condensed Consolidated Financial Statements~~

Delaware, naming as defendants certain of the Company’s current and former directors and officers (the "Maloney Delaware Action"). The complaint alleges the defendants violated Sections 14A and 20(A) of the Securities and Exchange Act ~~of1934,~~of 1934, as amended, breached their fiduciary duties, and wasted corporate assets, and also asserts unjust enrichment claims against certain defendants. The complaint seeks, on behalf of the Company, unspecified damages, an order directing the return of certain payments to the defendants and imposing a constructive trust thereon, certain injunctive relief, reasonable costs and attorneys' fees, and punitive damages.

On January 15, 2019, a putative shareholder derivative complaint captioned Lee v. Bradley, et al., was filed in the United States District Court for the District of Delaware, naming as defendants certain of the Company’s current and former directors and officers (the "Lee Action"). The complaint alleges the defendants violated Section 14A of the Securities and Exchange Act ~~of1934,~~of 1934, as amended, and related rules by failing to make certain disclosures in the Company's proxy solicitation in advance of the 2017 Annual Meeting of Stockholders, and that defendants breached their fiduciary duties, wasted corporate assets, and committed constructive fraud. The complaint also asserts unjust enrichment claims against certain defendants. The complaint seeks, on behalf of the Company, unspecified damages, an order directing the return of certain payments to the defendants, certain injunctive relief, and reasonable costs and attorneys' fees. On April 18, 2019, the court entered an agreed stipulation staying the Lee Action until the court in the Securities Action rules on the motion to dismiss in that case.

FORTERRA, INC.

Notes to Unaudited Condensed Consolidated Financial Statements

On December 11, 2019, the court in the Lee Action entered a Stipulation and Order consolidating the Lee Action and the Maloney Delaware Action into a single case (the "Consolidated Lee Action"), and providing a schedule for filing of an amended complaint and motions to dismiss, which has been further extended by agreement of the parties. A mediation of the dispute was held on June 12, 2020 but was not successful in resolving the dispute. The parties have agreed to a schedule for pleadings to be filed in the event settlement discussions are not successful.

The Company and other defendants are vigorously defending the ~~Maloney Delaware Action and the~~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 ~~Maloney Delaware Action or the~~Consolidated Lee Action.

Long-term ~~incentive plan~~Incentive Plan

Following the Acquisition, Lone Star implemented a cash-based long term incentive plan (the “LTIP”), which entitles the participants in the LTIP to a potential cash payout upon a monetization event as defined by the LTIP. Potential monetization 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 reduces its ownership interest 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 ~~September~~June 30, ~~2019,~~2020, no such monetization events that meet the required return for an LTIP payment have occurred, and therefore no0 amounts were accrued in the accompanying condensed consolidated balance sheets. While no0 payments have occurred thus far, payments under the LTIP could be significant depending upon future monetization events. The timing and amount of such payments are unknown and isare dependent upon future monetization 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.

Leases

The Company leases certain property and equipment for various periods under non-cancelable operating and finance leases.

Tax receivable agreement

The Company has a tax receivable agreement (the "TRA") 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. The tax benefits subject to the TRA 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 the Company had in its assets as of the time of the consummation of the IPO, (ii) the utilization of the Company's and its subsidiaries’ net operating losses and tax credits, if any, attributable to periods prior to the IPO, (iii) deductions in respect of payments made, funded or reimbursed by an initial party to the tax receivable agreement (other than the Company or one of its subsidiaries) or an affiliate thereof to participants under the LTIP, (iv) deductions in respect of transaction expenses attributable to the acquisition of USP Holdings, Inc. and (v) certain other tax benefits attributable to payments made under the tax receivable agreement.

~~FORTERRA, INC.~~

~~Notes to Unaudited Condensed Consolidated Financial Statements~~

For purposes of the 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 any such related tax benefits remain. The Company accounts for potential payments under the TRA as a contingent liability, with amounts accrued when considered probable and reasonably estimable. The liability recorded by the Company for the TRA at ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018~~2019 was ~~$88.8~~$77.4 million and ~~$88.8~~$77.4 million, respectively.

FORTERRA, INC.

Notes to Unaudited Condensed Consolidated Financial Statements

The timing and amount of future tax benefits associated with the TRA 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 consolidated statement of cash flows. During the ~~nine~~six months ended ~~September~~June 30, ~~2019, no~~2020, 0 payments ~~have been~~were made on the TRA to Lone Star.

15. Earnings per share

Basic earnings per share (“EPS”) is calculated by dividing net earnings by the weighted average number of shares of common stock outstanding during the period. Potentially dilutive securities include employee stock options and shares of restricted stock. Diluted EPS reflects the assumed exercise, vesting or conversion of all dilutive securities.

The calculations of the basic and diluted EPS for the three and ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 and ~~2018~~2019 are presented below (in thousands, except per share amounts):


	For the three months ended September 30,				For the nine months ended September 30,					For the three months ended June 30,				For the six months ended June 30,
	2019		2018		2019		2018			2020		2019		2020		2019
Net income (loss)	$	22,430	$	5,503	$	345	$	(7,413	)	$	27,115	$	2,954	$	13,049	$	(22,085	)
Less: Earnings allocated to unvested restricted stock awards	40		25		—		—			22		7		12		—
Earnings (loss) allocated to common shareholders	$	22,390	$	5,478	$	345	$	(7,413	)	$	27,093	$	2,947	$	13,037	$	(22,085	)

Common stock:
Weighted average basic shares outstanding	64,210		63,919		64,119		63,883			65,093		64,142		64,948		64,073
Effect of dilutive securities	788		350		409		—			2,098		322		2,510		—
Weighted average diluted shares outstanding	64,998		64,269		64,528		63,883			67,191		64,464		67,458		64,073

Basic earnings (loss) per share:
Net income (loss)	$	0.35	$	0.09	$	0.01	$	(0.12	)	$	0.42	$	0.05	$	0.20	$	(0.34	)
Diluted earnings (loss) per share:
Net income (loss)	$	0.34	$	0.09	$	0.01	$	(0.12	)	$	0.40	$	0.05	$	0.19	$	(0.34	)

As detailed further below, potential dilutive shares of common stock were anti-dilutive as a result of the Company's net loss for the ~~nine~~six months ended ~~September~~June 30, ~~2018.~~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.~~that period.

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 three months ended ~~September~~June 30, 2020 and June 30, 2019 and ~~September 30, 2018 and~~ the ~~nine~~six months ended ~~September~~June 30, 2020 and June 30, 2019 were 1,031,685, 5,437,403, 758,409 and ~~September 30, 2018 were 2,015,399, 3,032,201, 3,963,041 and 2,559,752,~~4,557,278, respectively.

16. Income taxes

The Company recorded income tax expense of $7.5 million and $7.5 million for the three and six months ended June 30, 2020, respectively, and income tax expense of $0.9 million and an income tax benefit of $6.4 million for the three and six months ended June 30, 2019, respectively.

FORTERRA, INC.

Notes to Unaudited Condensed Consolidated Financial Statements

~~16. Income taxes~~

The Company recorded income tax expense from continuing operations of $5.9 million and income tax benefit of $0.5 million for the three and nine months ended September 30, 2019, respectively, and an income tax expense of $2.8 million and $6.4 million for the three and nine months ended September 30, 2018, respectively.

The income tax expense for the three months ended ~~September~~June 30, 2020 was calculated under the ASC 740-270 principles. The income tax expense for the three months ended June 30, 2020 differs from the expense computed at the federal statutory rate primarily due to the movement of the valuation allowance recorded in the quarter and state income tax expense.

The income tax expense for the six months ended June 30, 2020 differs from the expense computed at the federal statutory rate primarily due to the movement of the valuation allowance recorded in the period and state income tax expense.

The income tax expense for the three months ended June 30, 2019 differs from the expense computed at the federal statutory rate primarily due to the unfavorable ~~foreign rate differential and inclusion~~permanent add-back of the ~~global intangible low-taxed income ("GILTI"),~~non-deductible one-time executive severance payment, offset by ~~the foreign tax credit and~~ the favorable return-to-provision adjustment recorded in the quarter.

The income tax benefit for the ~~nine~~six months ended ~~September~~June 30, 2019 differs from the benefit computed at the federal statutory rate primarily due to the unfavorable permanent add-back of the non-deductible one-time executive severance payment, ~~and GILTI inclusion,~~ offset by the ~~favorable state benefit and~~ favorable return-to-provision adjustment recorded in the ~~period.~~

~~The income tax expense for the three~~six months ended ~~September~~June 30, 2018 differs from the expense computed at the statutory rate primarily due to an increase in the unfavorable inclusion of GILTI, unfavorable return-to-provision adjustment and an increase to the valuation allowance in certain state and foreign jurisdictions.2019.

The income tax expense for the nine months ended September 30, 2018 is higher than the benefit computed at the statutory rate primarily due to changes in the Company's valuation allowance, unfavorable inclusion of GILTI and the unfavorable impact of the disposition of nondeductible goodwill in connection with a divestiture transaction that occurred in the three months ended March 31, 2018. The Company evaluates the recoverability of its deferred tax assets quarterly to determine if valuation allowances are required or should be adjusted. The Company assesses whether valuation allowances should be established against deferred tax assets based on consideration of all available evidence, both positive and negative, using a “more likely than not” ~~standard.~~criterion. The analysis used in determining the valuation allowance involves considerable judgment and assumptions. The Company's history of pretax losses limits its ability to rely on projections of future pretax income, therefore, realization of deferred tax assets is based primarily on reversal of taxable temporary differences.

After consideration of all evidence, including the analysis of the reversal pattern of the taxable and deductible temporary differences in the future, the Company increased the overall valuation allowance position by ~~$3.7~~$1.0 million for the ~~nine~~six months ended ~~September~~June 30, ~~2018.~~2020.

~~The Company's quarterly provision~~On March 27, 2020, the U.S. government enacted the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act"), that, among other things, increased the net interest expense deduction limit from 30% to 50% of adjusted taxable income for ~~income taxes has historically been calculated using~~tax years beginning January 1, 2019 and 2020, and changed the ~~annual effective rate method, which applies an estimated annual effective tax rate to pre-tax income or loss. However, when the result~~depreciable life of the ~~expected annual effective tax rate is not deemed reliable and distorts the income tax provision~~qualified improvement property from 39 years to 15 years, thereby making it eligible for ~~an interim period,~~100% bonus depreciation, which the Company calculates the income tax provision or benefit using the actual year-to-date effective tax rate (the "discrete method"), which results in an income tax provision or benefit based solely on the year-to-date pre-tax income or loss as adjusted for permanent differences on a pro rata basis.intends to claim. The Company has ~~recorded its interim income tax provision using~~taken, and will continue to take advantage of deferral of the ~~discrete method, as allowed under ASC 740-270,~~ ~~Accounting for Income Taxes - Interim Reporting~~ ~~for~~employer portion of the ~~nine months ended September 30, 2019.~~social security taxes that would otherwise be due in 2020, but will be delayed with 50% due by December 31, 2021 and the remaining 50% by December 31, 2022.

17. Segment reporting

Segment information is presented in accordance with ASC 280, Segment Reporting, which establishes standards for reporting information about operating segments. It also establishes standards for related disclosures about 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 Company's segments follow the same accounting policies as the Company.

~~FORTERRA, INC.~~

~~Notes to Unaudited Condensed Consolidated Financial Statements~~

Net sales from the major products sold to external customers include drainage pipe and precast products and concrete and steel water transmission pipe.

FORTERRA, INC.

Notes to Unaudited Condensed Consolidated Financial Statements

The Company’s ~~three~~3 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 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 segments as well as other financial information attributable to the Company's reportable segments for the three and ~~nine~~six months ended ~~September~~June 30, 2020 and 2019 ~~and 2018~~ (in thousands):



	For the three months ended June 30,						For the six months ended June 30,
	2020			2019			2020			2019
Net sales:
Drainage Pipe & Products	$	235,596		$	241,680		$	405,830		$	405,414
Water Pipe & Products	190,590			168,539			351,232			296,663
Corporate and Other	—			—			—			—
Total	$	426,186		$	410,219		$	757,062		$	702,077

Depreciation and amortization:
Drainage Pipe & Products	$	8,300		$	9,456		$	16,545		$	18,658
Water Pipe & Products	13,493			14,595			27,372			29,470
Corporate and Other	613			339			990			654
Total	$	22,406		$	24,390		$	44,907		$	48,782

Segment EBITDA and reconciliation to income (loss) before income taxes:
Drainage Pipe & Products	$	57,414		$	48,997		$	83,466		$	74,063
Water Pipe & Products	39,717			24,973			62,590			33,714
Corporate and Other	(20,453		)	(19,962		)	(40,120		)	(37,048		)
Less: Interest expense	(19,702		)	(25,783		)	(40,447		)	(50,448		)
Depreciation and amortization	(22,406		)	(24,390		)	(44,907		)	(48,782		)
Income (loss) before income taxes	$	34,570		$	3,835		$	20,582		$	(28,501	)

Capital expenditures:
Drainage Pipe & Products	$	2,366		$	7,519		$	5,396		$	15,448
Water Pipe & Products	1,942			2,248			3,123			4,525
Corporate and Other	223			695			362			2,463
Total	$	4,531		$	10,462		$	8,881		$	22,436

							June 30,			December 31,
							2020			2019
Total assets:
Drainage Pipe & Products							$	837,390		$	819,373
Water Pipe & Products							865,237			862,542
Corporate and Other							68,870			58,143
Total							$	1,771,497		$	1,740,058

For the three months ended September 30, For the nine months ended September 30,
2019 2018 2019 2018
Net sales:
Drainage Pipe & Products $ 280,678
$ 242,997
$ 686,092
$ 621,523
Water Pipe & Products 183,848
191,513
480,511
519,031
Corporate and Other —
—
—
3
Total $ 464,526
$ 434,510
$ 1,166,603
$ 1,140,557

Depreciation and amortization:
Drainage Pipe & Products $ 9,317
$ 10,447
$ 27,975
$ 30,898
Water Pipe & Products 14,511
15,218
43,981
47,775
Corporate and Other 344
257
998
697
Total $ 24,172
$ 25,922
$ 72,954
$ 79,370

Segment EBITDA and reconciliation to income (loss) before income taxes:
Drainage Pipe & Products $ 67,361
$ 53,271
$ 141,424
$ 122,841
Water Pipe & Products 25,557
17,818
59,271
48,923
Corporate and Other (17,147 ) (14,931 ) (54,195 ) (40,463 )
Less: Interest expense (23,272 ) (21,940 ) (73,720 ) (52,993 )
Depreciation and amortization (24,172 ) (25,922 ) (72,954 ) (79,370 )
Income (loss) before income taxes $ 28,327
$ 8,296
$ (174 ) $ (1,062 )

Capital expenditures:
Drainage Pipe & Products $ 3,302
$ 9,397
$ 18,750
$ 18,702
Water Pipe & Products 3,232
3,080
7,757
10,732
Corporate and Other 61
728
2,524
992
Total $ 6,595
$ 13,205
$ 29,031
$ 30,426

September 30, December 31,
2019 2018
Total assets:
Drainage Pipe & Products $ 890,239
$ 800,454
Water Pipe & Products 914,884
922,162
Corporate and Other 61,023
70,636
Total

$ 1,866,146
$ 1,793,252

FORTERRA, INC.

Notes to Unaudited Condensed Consolidated Financial Statements

The Company has an investment in an equity method investee included in the Drainage Pipe & Products segment for which earnings from equity method investee were ~~$4.0~~$3.1 million, ~~$9.0~~$5.9 million, ~~$2.2~~$3.4 million and ~~$7.7~~$5.0 million for the three and ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 and ~~September~~June 30, ~~2018,~~2019, respectively, and with the following balances (in thousands):



	June 30,		December 31,
	2020		2019
Investment in equity method investee	$	51,459	$	50,034

September 30, December 31,
2019 2018
Investment in equity method investee $ 53,065
$ 50,607

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~~do 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):



Property, plant, and equipment, net:	June 30,		December 31,
	2020		2019
United States	$	408,159	$	422,486
Canada	29,903		43,754
Mexico	8,912		9,335
	$	446,974	$	475,575

Property, plant, and equipment, net: September 30, December 31,
2019 2018
United States $ 424,595
$ 441,773
Canada 43,126
40,331
Mexico 9,552
10,063
$ 477,273
$ 492,167



Net sales:	For the three months ended June 30,				For the six months ended June 30,
	2020		2019		2020		2019
United States	$	407,764	$	391,721	$	723,144	$	668,458
Canada	16,322		16,555		29,808		29,655
Mexico	2,100		1,943		4,110		3,964
	$	426,186	$	410,219	$	757,062	$	702,077

Net sales: For the three months ended September 30, For the nine months ended September 30,
2019 2018 2019 2018
United States $ 435,706
$ 406,479
$ 1,104,164
$ 1,071,918
Canada 26,458
25,160
56,113
61,046
Mexico 2,362
2,871
6,326
7,593
$ 464,526
$ 434,510
$ 1,166,603
$ 1,140,557

18. Related party transactions

Tax receivable agreement

~~In connection with the IPO, the~~The Company ~~entered into the~~has a TRA 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 Note 14, Commitments and contingencies, for additional information on the tax receivable agreement.

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 ~~nine~~six months ended ~~September~~June 30, ~~2019,~~2020, Forterra sold ~~$0.3~~$0.9 million of product to CP&P and purchased goods and services from CP&P for an amount of ~~$0.2~~$0.6 million. For the ~~nine~~six months ended ~~September~~June 30, ~~2018,~~2019, Forterra sold ~~$0.1 million~~$33 thousand of product to CP&P and purchased ~~$0.1 million~~$176 thousand of goods and services from CP&P.

FORTERRA, INC.

Notes to Unaudited Condensed Consolidated Financial Statements

~~Bricks Joint Venture~~

19. Subsequent events

On July 16, 2020, Forterra Finance, LLC and FRTA Finance Corp., both wholly-owned subsidiaries of the Company, completed the issuance of $500 million senior secured notes due July 16, 2025 (the “Notes”). The Notes have a fixed annual interest rate of 6.50%, which will be paid semi-annually on January 15 and July 15 of each year. Obligations under the Notes are guaranteed by the Company and the Company’s 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 will be 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, the Company 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.

Prior to the IPO, LSF9 distributed its brick operations in the United States and Eastern Canada to a joint venture formed by an affiliate of Lone Star (the "Bricks Disposition"). In connection with the Bricks Disposition, Forterra entered into a transition services agreement with the joint venture, whereby Forterra would continue to provide certain administrative services, including but not limited to information technology, accounting and treasury for a limited period of time. Such transition services ended in February 2018. During the transition period, the Company collected cash from as well as settled invoices and payroll on behalf of the joint venture. As a result, Forterra had a net receivable from affiliates of $4.4 million as of December 31, 2018 included in other current assets. Such amount was subsequently collected during the second quarter of 2019.

CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains “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;

~~government funding of infrastructure and related construction activities;~~

the highly competitive nature of our industry and our ability to effectively compete;

the availability and price of the raw materials 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;

~~energy costs;~~

labor disruptions and other union activity;

compliance with applicable regulations;

a tightening of mortgage lending or mortgage financing requirements;

the ability to implement our growth strategy;

our current dispute with HeidelbergCement related to the payment of an earnout;

compliance with environmental laws and regulations;

energy costs;

changes in tax laws could adversely affect us;

compliance with health and safety laws and ~~regulations and other laws and regulations to which we and our products are subject;~~regulations;

our dependence on key executives and key management personnel;

our ability and that of our 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;

~~the seasonality of our business and its susceptibility to adverse weather;~~

our contract backlog;

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; and

additional factors discussed in our filings with the Securities and Exchange Commission, or the SEC.

The forward-looking statements contained in this Quarterly Report on Form 10-Q 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” in our ~~2018~~2019 10-K filed with the SEC on ~~March 12, 2019.~~February 27, 2020, as supplemented in Item 1A. "Risk Factors" of this Quarterly Report on Form 10-Q. 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 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.

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

The following discussion and analysis should be read in conjunction with our Annual Report on Form 10-K for the fiscal year ended December 31, ~~2018~~2019 filed with the SEC on ~~March 12, 2019,~~February 27, 2020, or the ~~2018~~2019 10-K.

This discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. See the section entitled “Cautionary Statement Concerning Forward-Looking Statements” for a discussion of the risks, uncertainties and assumptions associated with those statements.

Unless otherwise specified or where the context otherwise requires, references in this Report to “our,” “we,” “us,” “Forterra”, the “Company” and “our business” refer to Forterra, Inc., together with its consolidated subsidiaries.

Overview

Our Company

We are a manufacturer of ductile iron pipe and concrete pipe and precast products in the United States and Eastern Canada for a variety of essential water-related infrastructure ~~applications, including water transmission, distribution and drainage.~~applications. We provide critical infrastructure components for a broad spectrum of construction projects across infrastructure, residential ~~non-residential~~ and ~~infrastructure~~non-residential markets. Our suite of products ranges from large diameter pipe that transports water to and from treatment centers and manages drainage along major transportation corridors, to smaller diameter pipe that delivers potable water to, and removes wastewater from, end users in residential and commercial settings.

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.

Water Pipe & Products - We are a producer of ductile iron pipe, or DIP, and concrete pressure pipe.

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.

COVID-19 Pandemic

Beginning in mid-March, local, state, provincial and federal authorities began issuing stay at home orders in response to the spread of the coronavirus disease 2019, or COVID-19, which has quickly spread throughout the United States and worldwide. These government-instituted restrictions, together with the economic volatility and uncertainty the pandemic has created, have had a significant impact on the United States economy in general and certain parts of our end-markets. Despite these events and the related uncertainty, we have continued to operate as an essential business under the government orders, and the COVID-19 pandemic has not materially affected our liquidity, financial results or business operations during the first half of the year. During April and early May, we experienced temporary delays in certain projects primarily related to governmental stay at home orders in place at that time and the reactions of certain customers to those orders, specifically in our residential end-markets. By the end of May, as most states started gradually resuming their normal economic activities, there was some correction in these trends in the residential housing market.

Since the onset of the COVID-19 pandemic, we have focused on protecting the health and safety of our team members while maintaining our operations, which have been deemed essential under relevant pandemic-related government regulations, and continuing to meet our customers’ needs. Although we encountered temporary closures of a small number of our manufacturing facilities in the second quarter due to confirmed cases in our workforce or due to government mandate, these temporary closures did not have a significant impact on our operations or our ability to serve our customer needs. Each facility that was temporarily closed has resumed normal operations. In addition, during the second quarter we repaid in full the $180.0 million of first quarter precautionary borrowings under the Revolver and determined that our other precautionary cost-savings and cash conservation measures initiated in response to the pandemic were no longer necessary.

There is still considerable uncertainty regarding the extent and duration of the impact of the COVID-19 pandemic, and the pandemic and related economic impacts may affect our operations in the second half of 2020 and into 2021, in particular due to the uncertainty of future funding and demand in our infrastructure and municipal end-markets as well as increased case numbers in locations where we have large numbers of employees or significant customer concentration. Based on recent trends in our backlogs, along with other factors, we expect our shipment volumes in the second half of the year to continue to be lower than the prior year level as they were during the first half.

Due to the fluidity and unprecedented and uncertain nature of the pandemic, we cannot predict the full impact of the COVID-19 pandemic on our business or that of our customers and participants in our supply chain, or on economic conditions generally, including the effects on infrastructure and other construction activity. The ultimate scope and extent of the effects of the COVID-19 pandemic is highly uncertain and will depend on future developments, and such effects could exist for an extended period of time, even after the pandemic might end.

For additional information on risk factors that could impact our results, please refer to “Risk Factors” in Part II, Item 1A of this Form 10-Q.

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, non-residential and infrastructure construction markets, general economic conditions, changes in cost of goods sold, and seasonality and weather conditions. Some of the more important factors are discussed in the ~~2018~~2019 10-K, to which there were no material changes during the period covered by this ~~report.~~report, with the exception of the impacts of the COVID-19 pandemic, which are discussed above.

Principal Components of Results of Operations

Net Sales

Net sales consist of the consideration which we expect to be entitled to for the sale of products in the ordinary course of business and include the billable costs of delivery of our products to customers. Net sales include any outbound freight charged to the end user. Revenue for certain contracts related to our structural precast products that are designed and engineered specifically for the customer is recognized over time using an acceptable input method which utilizes our cost incurred to date relative to total estimated costs at completion to measure progress.

Cost of Goods Sold

Cost of goods sold includes raw materials (cement, aggregates, scrap, steel and clay) 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. Selling, general and administrative expenses also include transaction costs directly related to ~~the~~any business combinations and other costs incurred with respect to cost savings initiatives.

Impairment and Exit Charges

Impairment and exit charges are primarily comprised of severance and other charges incurred to consolidate certain plants in an effort to optimize our portfolio, as well as asset impairment charges.

Other Operating Income, Net

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 and the gain or loss generated on the sale of assets including property, plant and equipment.

Interest Expense

Interest expense represents interest on indebtedness, including finance lease obligations, the amortization of deferred financing costs, as well as the gain and loss associated with our interest rate swaps.

Earnings from Equity Method Investee

Earnings from equity method investee represents our share of the income of the CP&P joint venture we entered into with Americast, Inc. 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 with sales to contiguous states. See Note 6, Investment in Equity Method Investee, to the condensed consolidated financial statements for additional information on CP&P.

~~Other Expense, net~~

~~Other expense, net includes miscellaneous non-operating net income or expenses.~~

Income Tax (Expense) Benefit

Income tax (expense) benefit consists of federal, state, provincial, local and foreign taxes based on income in the jurisdictions in which we operate.

2930

Results of Operations

Three Months Ended ~~September~~June 30, ~~2019~~2020 as Compared to Three Months Ended ~~September~~June 30, ~~2018~~2019

Total Company

The following table summarizes certain financial information relating to our operating results for the three months ended ~~September~~June 30, ~~2019~~2020 and ~~September~~June 30, ~~2018~~2019 (in thousands).


Statements of Income Data:	Three months ended September 30, 2019			Three months ended September 30, 2018			% Change		Three months ended June 30, 2020			Three months ended June 30, 2019			% Change

Net sales	$	464,526		$	434,510		6.9	%	$	426,186		$	410,219		3.9	%
Cost of goods sold	362,362			357,374			1.4	%	320,607			324,405			(1.2	)%
Gross profit	102,164			77,136			32.4	%	105,579			85,814			23.0	%
Selling, general and administrative expenses	(55,234		)	(48,492		)	13.9	%	(53,283		)	(58,640		)	(9.1	)%
Impairment and exit charges	(510		)	(2,170		)	(76.5	)%	(265		)	(582		)	(54.5	)%
Other operating income, net	815			1,538			(47.0	)%	(1,001		)	(376		)	*
	(54,929		)	(49,124		)	11.8	%	(54,549		)	(59,598		)	(8.5	)%
Income from operations	47,235			28,012			68.6	%	51,030			26,216			94.7	%
Other income (expenses)
Interest expense	(23,272		)	(21,940		)	6.1	%	(19,702		)	(25,783		)	(23.6	)%
Gain on extinguishment of debt	374			—			*		116			—			*
Earnings from equity method investee	3,990			2,224			79.4	%	3,126			3,402			(8.1	)%
Income before income taxes	28,327			8,296			*		34,570			3,835			*
Income tax expense	(5,897		)	(2,793		)	*		(7,455		)	(881		)	*
Net income	$	22,430		$	5,503		*		$	27,115		$	2,954		*

* Represents positive or negative change in excess of 100%

Net Sales

Net sales infor the three months ended ~~September~~June 30, ~~2019 was $464.5~~2020 were $426.2 million, an increase of ~~$30.0~~$16.0 million, or ~~6.9%~~3.9%, from ~~$434.5~~$410.2 million in the three months ended ~~September~~June 30, ~~2018.~~2019. The increase ~~in net sales was~~ primarily ~~due to~~came from the Water Pipe & Products segment driven by higher average selling prices compared to prior year, partially offset by the decrease in ~~both our~~the Drainage Pipe & Products segment ~~and~~driven by lower shipments compared to prior year, in part due to delays related to COVID-19.

Cost of Goods Sold

Cost of goods sold were $320.6 million for the three months ended June 30, 2020, a slight decrease of $3.8 million, or 1.2%, from $324.4 million in the three months ended June 30, 2019. The decrease was primarily in the Drainage Pipe & Products segment driven by the lower shipment volume.

Gross Profit

Gross profit increased by $19.8 million, or 23.0%, to $105.6 million in the three months ended June 30, 2020 from $85.8 million in the three months ended June 30, 2019. Most of the increase in gross profit related to our Water Pipe & Products segment ~~as well as higher sales volumes in our Drainage Pipe & Products segments.~~

~~Cost of Goods Sold~~

~~Cost of goods sold in the three months ended September 30, 2019~~and was $362.4 million, an increase of $5.0 million or 1.4% from $357.4 million in the three months ended September 30, 2018. The increase was primarily due to higher sales volumes in our Drainage Pipe & Products segment.

~~Gross Profit~~

Gross profit in the three months ended September 30, 2019 was $102.2 million, an increase of $25.1 million, or 32.4%, from $77.1 million in the three months ended September 30, 2018. Gross profit increased primarily due todriven by higher average selling prices in both segments, ~~higher sales volumes~~as well as a slight decline in raw material cost in our Water Pipe & Products segment compared to prior year, partially offset by lower shipments in our Drainage Pipe & Products ~~segment, and stabilized manufacturing costs especially in our Water Pipe & Products~~ segment.

Selling, General and Administrative Expenses

Selling, general and administrative expenses inwere $53.3 million for the three months ended ~~September~~June 30, ~~2019 were $55.2 million, an increase~~2020, a decrease of ~~$6.7~~$5.3 million, or ~~13.9%~~9.1%, from ~~$48.5~~$58.6 million in the three months ended ~~September~~June 30, ~~2018. The increase was due~~2019. During the second quarter of last year, we had a one-time charge of $3.7 million for executive severance primarily related to the change in our CEO, as well as increased ~~reserves~~expenses related to various pending legal disputes and claims in the ordinary course of our ~~business, as well as increased reserves~~business. These charges contributed to the higher selling, general and administrative expenses in 2019.

Interest Expense

Interest expense for ~~credit losses.~~

~~Impairment and Exit Charges~~

~~Impairment and exit charges in~~ the three months ended ~~September~~June 30, ~~2019 were $0.5~~2020 was $19.7 million, ~~compared to $2.2~~a decrease of $6.1 million or 23.6% from $25.8 million in the three months ended ~~September~~June 30, ~~2018.~~2019. The decrease ~~primarily related to certain business initiatives implemented in 2018 that did not recur the three months ended September 30, 2019.~~

~~Interest Expense~~

Interest expense in the three months ended September 30, 2019 was $23.3 million, an increase of $1.4 million or 6.1% from $21.9 million in the three months ended September 30, 2018. The increase in interest expense was primarily due to ~~the impact of higher average interest rates~~both lower LIBOR and lower outstanding term loan balances in the ~~three months ended September 30, 2019~~second quarter of 2020 compared to ~~2018.~~prior year.

Income Tax Expense

Income tax expense in the three months ended ~~September~~June 30, ~~2019~~2020 was ~~$5.9~~$7.5 million, ~~an increase~~a change of ~~$3.1~~$6.6 million from ~~$2.8~~an income tax expense of $0.9 million in the three months ended ~~September~~June 30, ~~2018.~~2019. The change is primarily due to the ~~greater~~higher pretax income ~~before income taxes recorded for~~during the three months ended ~~September~~June 30, ~~2019 versus~~2020, as well as the ~~income~~additional expense related to the federal and state valuation allowance in the same ~~period~~period.

We have taken, and will continue to take advantage of ~~2018, partially offset with~~ the ~~return to~~ provision ~~benefit as well as larger credits recorded~~ in the ~~three months ended September 30, 2019.~~Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") to defer the employer portion of the social security taxes that would otherwise be due in 2020, but will be delayed with 50% due by December 31, 2021 and the remaining 50% by December 31, 2022, which will allow us to defer up to $12 million of cash payments from 2020 to 2021 and 2022.

3132

Segments


	For the three months ended September 30,								For the three months ended June 30,
(in thousands)	2019			2018			% Change		2020			2019			% Change
Net sales:
Drainage Pipe & Products	$	280,678		$	242,997		15.5	%	$	235,596		$	241,680		(2.5	)%
Water Pipe & Products	183,848			191,513			(4.0	)%	190,590			168,539			13.1	%
Corporate and Other	—			—			*		—			—			*
Total	$	464,526		$	434,510		6.9	%	$	426,186		$	410,219		3.9	%

Gross profit (loss):
Drainage Pipe & Products	74,269			57,441			29.3	%	61,393			57,717			6.4	%
Water Pipe & Products	27,864			19,972			39.5	%	44,185			28,147			57.0	%
Corporate and Other	31			(277		)	*		1			(50		)	*
Total	$	102,164		$	77,136		32.4	%	$	105,579		$	85,814		23.0	%

Segment EBITDA⁽¹⁾:
Drainage Pipe & Products	67,361			53,271			26.4	%	57,414			48,997			17.2	%
Water Pipe & Products	25,557			17,818			43.4	%	39,717			24,973			59.0	%
Corporate and Other	(17,147		)	(14,931		)	14.8	%	(20,453		)	(19,962		)	2.5	%

(1)

For the purposes of evaluating segment performance, the Company’s chief operating decision maker reviews earnings before interest, taxes, depreciation and amortization (“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 17, Segment Reporting, to the condensed consolidated financial statements for segment EBITDA reconciliation to income (loss) before income taxes.


*	Represents positive or negative change in excess of 100%.

Drainage Pipe & Products

Net Sales

Net sales in the three months ended ~~September~~June 30, ~~2019 was $280.7~~2020 were $235.6 million, ~~an increase~~a decrease of ~~$37.7~~$6.1 million or ~~15.5%~~2.5% from ~~$243.0~~$241.7 million in the three months ended ~~September~~June 30, ~~2018.~~2019. The ~~increase~~slight decrease was ~~primarily due to higher sales volumes~~ driven by ~~more favorable~~lower shipments due primarily to unfavorable weather ~~conditions in~~as compared to 2019, as well as a sales volume decline due primarily to certain temporary delays in projects caused by COVID-19, partially offset by higher average selling prices.

Gross Profit

Gross profit in the three months ended ~~September~~June 30, ~~2019~~2020 was ~~$74.3~~$61.4 million, an increase of ~~$16.9~~$3.7 million or ~~29.3%~~6.4% from ~~$57.4~~$57.7 million in the three months ended ~~September~~June 30, ~~2018.~~2019. The increase was primarily due to higher average selling prices and ~~higher sales volumes as well as cost controls from operational improvement initiatives.~~manufacturing efficiencies.

Water Pipe & Products

Net Sales

Net sales in the three months ended ~~September~~June 30, ~~2019~~2020 were ~~$183.8~~$190.6 million, ~~a decrease~~an increase of ~~$7.7~~$22.1 million or ~~4.0%~~13.1% from ~~$191.5~~$168.5 million in the three months ended ~~September~~June 30, ~~2018.~~2019. The ~~decrease~~increase was due primarily to ahigher average selling prices.

decline in shipment volumes as a result of our customers building on-hand inventory levels during the second half of last year. The decrease in shipment volumes were partially offset by higher selling prices as we continue to focus on pricing discipline.

Gross Profit

Gross profit in the three months ended ~~September~~June 30, ~~2019~~2020 was ~~$27.9~~$44.2 million, an increase of ~~$7.9~~$16.1 million or ~~39.5%~~57.0% from ~~$20.0~~$28.1 million in the three months ended ~~September~~June 30, ~~2018.~~2019. The increase was primarily due to higher average selling prices, manufacturing efficiencies and lower raw material ~~costs, partially offset by the decline in sales volumes.~~cost.

~~Nine~~Six Months Ended ~~September~~June 30, ~~2019~~2020 as Compared to ~~Nine~~Six Months Ended ~~September~~June 30, ~~2018~~2019

Total Company

The following table summarizes certain financial information relating to our operating results for the ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 and ~~September~~June 30, ~~2018~~2019 (in thousands).


Statements of Income Data:	Nine months ended September 30, 2019			Nine months ended September 30, 2018			% Change		Six months ended June 30, 2020			Six months ended June 30, 2019			% Change

Net sales	$	1,166,603		$	1,140,557		2.3	%	$	757,062		$	702,077		7.8	%
Cost of goods sold	936,820			953,743			(1.8	)%	592,741			574,458			3.2	%
Gross profit	229,783			186,814			23.0	%	164,321			127,619			28.8	%
Selling, general and administrative expenses	(165,265		)	(151,617		)	9.0	%	(107,523		)	(110,031		)	(2.3	)%
Impairment and exit charges	(1,323		)	(3,891		)	(66.0	)%	(1,089		)	(813		)	33.9	%
Other operating income, net	1,018			6,864			(85.2	)%	(671		)	203			*
	(165,570		)	(148,644		)	11.4	%	(109,283		)	(110,641		)	(1.2	)%
Income from operations	64,213			38,170			68.2	%	55,038			16,978			*
Other income (expenses)
Interest expense	(73,720		)	(52,993		)	39.1	%	(40,447		)	(50,448		)	(19.8	)%
Gain on extinguishment of debt	374			—			*		66			—			*
Earnings from equity method investee	8,959			7,745			15.7	%	5,925			4,969			19.2	%
Other income, net	—			6,016			*
Loss before income taxes	(174		)	(1,062		)	(83.6	)%
Income (loss) before income taxes									20,582			(28,501		)	*
Income tax (expense) benefit	519			(6,351		)	*		(7,533		)	6,416			*
Net income (loss)	$	345		$	(7,413	)	*		$	13,049		$	(22,085	)	*

* Represents positive or negative change in excess of 100%

Net Sales

Net sales infor the ~~nine~~six months ended ~~September~~June 30, ~~2019 was $1,166.6~~2020 were $757.1 million, an increase of ~~$26.0~~$55.0 million, or ~~2.3%~~7.8%, from ~~$1,140.6~~$702.1 million in the ~~nine~~six months ended ~~September~~June 30, ~~2018.~~2019. The increase ~~was~~ primarily ~~due to higher average selling prices in both segments, partially offset by lower shipment volumes in our~~came from the Water Pipe & Products ~~segment.~~

~~Cost of Goods Sold~~

~~Cost of goods sold in the nine months ended September 30, 2019~~segment and was ~~$936.8 million, a decrease of $16.9 million or 1.8% from $953.7 million in the nine months ended September 30, 2018. The decrease was~~

~~primarily due to lower input costs in both segments, as well as lower shipments volumes in our Water Pipe & Product segment.~~

~~Gross Profit~~

Gross profit in the nine months ended September 30, 2019 was $229.8 million, an increase of $43.0 million, or 23.0%, from $186.8 million in the nine months ended September 30, 2018. Gross profit increased primarily due todriven by higher average selling prices in both segments and ~~stabilized manufacturing costs especially~~higher shipments in our Water Pipe & Products segment compared to prior ~~year.~~year, partially offset by lower shipments and delays related to COVID-19 in our Drainage Pipe & Products segment.

Cost of Goods Sold

Cost of goods sold were $592.7 million for the six months ended June 30, 2020, an increase of $18.2 million, or 3.2%, from $574.5 million in the six months ended June 30, 2019. The increase was primarily in the Water Pipe & Products segment driven by the higher shipment volume.

Gross Profit

Gross profit was $164.3 million for the six months ended June 30, 2020, an increase of $36.7 million, or 28.8%, from $127.6 million in the six months ended June 30, 2019. Most of the increase in gross profit related to our Water Pipe & Products segment driven by higher average selling prices, higher shipments, as well as a slight decline in raw material cost compared to prior year.

Selling, General and Administrative Expenses

Selling, general and administrative expenses inwere $107.5 million for the ~~nine~~six months ended ~~September~~June 30, ~~2019 were $165.3 million, an increase~~2020, a decrease of ~~$13.7~~$2.5 million, or ~~9.0%~~2.3%, from ~~$151.6~~$110.0 million in the ~~nine~~six months ended ~~September~~June 30, ~~2018. The increase was due to increased expenses related to various disputes and claims in the ordinary course of our business, increased reserves for credit losses, as well as~~2019. In 2019, we incurred a ~~$3.7 million executive severance~~one-time charge ~~primarily~~ related to the change inof CEO ~~being recorded in~~which drove the ~~nine~~higher Selling, general and administrative expenses.

Interest Expense

Interest expense for the six months ended ~~September~~June 30, ~~2019.~~

~~Impairment and Exit Charges~~

~~Impairment and exit charges in the nine months ended September 30, 2019 were $1.3~~2020 was $40.4 million, ~~compared to $3.9~~a decrease of $10.0 million or 19.8% from $50.4 million in the ~~prior year period. The exit charges in the nine~~six months ended ~~September~~June 30, ~~2018 primarily related to the consolidation of certain locations associated with a divestiture transaction which did not recur in~~ 2019.

~~Other Operating Income~~

~~Other operating income in the nine months ended September 30, 2019 was $1.0 million, compared to $6.9 million in the prior year period.~~ The ~~income in the 2018 period primarily related to gains from the disposition of certain property, plant and equipment.~~

~~Interest Expense~~

Interest expense in the nine months ended September 30, 2019 was $73.7 million, an increase of $20.7 million or 39.1% from $53.0 million in the nine months ended September 30, 2018. The interest expense in the 2019 period included $7.8 million resulting from the change in the classification of certain leases from operating lease to finance lease as the result of the amendment and restatement of our sale-leaseback transaction completed in June 2018. The remainder of the interest expense increasedecrease was primarily due to both the ~~impact of higher average interest rates.~~

~~Other Income, net~~

~~Other income, net of $6.0 million~~lower LIBOR and the lower outstanding term loan balances in the ~~nine months ended September 30, 2018 related~~first half of 2020 compared to ~~the gain from a divestiture transaction that was completed in February 2018.~~prior year.

Income Tax (Expense) Benefit

Income tax ~~benefit~~expense in the ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 was ~~$0.5~~$7.5 million, a change of ~~$6.9~~$13.9 million from an income tax ~~expense~~benefit of $6.4 million in the ~~nine~~six months ended ~~September~~June 30, ~~2018.~~2019. The change is primarily due to the ~~benefit of~~higher pretax income during the six months ended June 30, 2020, as well as additional expense related to the federal and state valuation allowance ~~that was set up during~~for the nine months ended September 30, 2018 that did not recur in the nine months ended September 30, 2019, a favorable return to provision adjustment recorded during the nine months ended September 30, 2019 and the reversal of the unfavorable impact of the divestiture transaction that did not reoccur in the nine months ended September 30, 2019.same period.

3435

Segments


	For the nine months ended September 30,								For the six months ended June 30,
(in thousands)	2019			2018			% Change		2020			2019			% Change
Net sales:
Drainage Pipe & Products	$	686,092		$	621,523		10.4	%	$	405,830		$	405,414		0.1	%
Water Pipe & Products	480,511			519,031			(7.4	)%	351,232			296,663			18.4	%
Corporate and Other	—			3			*		—			—			*
Total	$	1,166,603		$	1,140,557		2.3	%	$	757,062		$	702,077		7.8	%

Gross profit (loss):
Drainage Pipe & Products	163,419			133,708			22.2	%	93,948			89,150			5.4	%
Water Pipe & Products	66,746			53,640			24.4	%	70,345			38,882			80.9	%
Corporate and Other	(382		)	(534		)	(28.5	)%	28			(413		)	*
Total	$	229,783		$	186,814		23.0	%	$	164,321		$	127,619		28.8	%

Segment EBITDA⁽¹⁾:
Drainage Pipe & Products	141,424			122,841			15.1	%	83,466			74,063			12.7	%
Water Pipe & Products	59,271			48,923			21.2	%	62,590			33,714			85.6	%
Corporate and Other	(54,195		)	(40,463		)	33.9	%	(40,120		)	(37,048		)	8.3	%

(1)

For the purposes of evaluating segment performance, the Company’s chief operating decision maker reviews ~~earnings before interest, taxes, depreciation and amortization (“EBITDA”)~~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 17, Segment Reporting, to the condensed consolidated financial statements for segment EBITDA reconciliation to income (loss) before income taxes.


*	Represents positive or negative change in excess of 100%.

Drainage Pipe & Products

Net Sales

Net sales in the ~~nine~~six months ended ~~September~~June 30, 2020 were $405.8 million, flat compared to $405.4 million in the six months ended June 30, 2019. Higher average selling prices were offset by lower shipments due primarily to unfavorable weather in 2020 as compared to 2019, as well as a sales volume decline due primarily to certain temporary delays in projects caused by COVID-19.

Gross Profit

Gross profit in the six months ended June 30, 2020 was ~~$686.1~~$93.9 million, an increase of ~~$64.6~~$4.8 million or ~~10.4%~~5.4% from ~~$621.5~~$89.1 million in the ~~nine~~six months ended ~~September~~June 30, ~~2018. The increase was primarily due to higher average selling prices as well as higher sales volumes.~~

~~Gross Profit~~

Gross profit in the nine months ended September 30, 2019 was $163.4 million, an increase of $29.7 million or 22.2% from $133.7 million in the nine months ended September 30, 2018. The increase was primarily due to higher average selling prices, cost controls from operational improvement initiatives and lower rent expense.

~~Water Pipe & Products~~

~~Net Sales~~

Net sales in the nine months ended September 30, 2019 was $480.5 million, a decrease of $38.5 million or 7.4% from $519.0 million in the nine months ended September 30, 2018. The decrease was due primarily to a decline in sales volumes, partially offset by higher average selling prices.

~~Gross Profit~~

~~Gross profit in the nine months ended September 30, 2019 was $66.7 million, an increase of $13.1 million or 24.4% from $53.6 million in the nine months ended September 30, 2018.~~2019. The increase was primarily due to higher average selling prices and manufacturing efficiencies.

Water Pipe & Products

Net Sales

Net sales in the six months ended June 30, 2020 was $351.2 million, an increase of $54.5 million or 18.4% from $296.7 million in the six months ended June 30, 2019. The increase was due primarily to higher average selling prices as well as higher shipment volume.

Gross Profit

Gross profit in the six months ended June 30, 2020 was $70.3 million, an increase of $31.5 million, or 80.9% from $38.8 million in the six months ended June 30, 2019. The increase was primarily due to higher average selling prices, manufacturing efficiencies and lower raw material ~~costs, partially offset by the decline in sales~~cost as well as higher volumes.

Liquidity and Capital Resources

Our ~~primary~~available 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. We~~liquidity. While we believe these sources will be sufficient to ~~fund~~finance our working capital requirements, planned ~~operations and~~ capital expenditures inthat are essential, debt service obligations and other cash requirements for at least the next ~~24 months.~~12 months, our future liquidity will depend in part upon our operating performance, which will be affected by prevailing economic conditions, including those related to the COVID-19 pandemic, and financial, business and other factors, some of which are beyond our control. See “Risk Factors” in Part II, Item 1A of this Form 10-Q.

We are currently engaged in a dispute with affiliates of HeidelbergCement AG, or Heidelberg, regarding the earnout provision in the purchase agreement entered into in connection with the ~~original~~ acquisition of ~~our business. HeidelbergCement~~the building products business of Heidelberg in the United States and Eastern Canada by Lone Star Fund IX (U.S.), L.P. in 2015, or the Acquisition. Heidelberg has asserted that aan earnout payment should be made in the amount of $100.0 ~~million. Resolution~~million, and we have taken the position that no payment is due under the purchase agreement. Following a final hearing in June 2020, resolution is expected to be determined by a neutral ~~accountant pursuant to~~accounting arbitrator through a written decision in the ~~terms~~latter part of ~~the purchase agreement.~~August 2020 or thereafter. If it is determined that an earnout payment of significant size is owed and we are required to make such a ~~significant~~ payment, ~~to HeidelbergCement,~~ we may not have sufficient cash to make such payment and may be required to incur additional indebtedness. This dispute is discussed in greater detail in Note 14, Commitments and contingencies, to the condensed consolidated financial statements.

As of ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018,~~2019, we had approximately ~~$43.9~~$52.5 million and ~~$35.8~~$34.8 million of cash and cash equivalents, respectively, of which ~~$8.4~~$15.8 million and ~~$18.1~~$12.6 million, respectively, were held by foreign subsidiaries. All of the cash and cash equivalents as of ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018~~2019 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 U.S. government enacted comprehensive tax reform legislation commonly known as the TCJA, the Company believes it has the ability to 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.

~~In connection with our initial public offering, we entered into~~We have 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 which 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. See Note 14, Commitments and contingencies, to the condensed consolidated financial statements for additional information regarding the tax receivable agreement. Our forecasted payments under the tax receivable agreement in ~~2019,~~2020, pertaining to the ~~2018~~2019 tax year, are expected to be ~~approximately $11~~in the range of $8 to $10 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 unplanned transactions result in an acceleration of our tax benefits under the agreement.

During the ~~three~~six months ended ~~September~~June 30, ~~2019,~~2020, we voluntarily prepaid ~~$16.5~~$15.5 million of our senior term loan and, asduring the second quarter, we repaid in full the $180.0 million of ~~September~~first quarter precautionary borrowings under the Revolver initially borrowed in response to the pandemic. As of June 30, ~~2019,~~2020, we had ~~$1.2~~$1.1 billion outstanding balance under our senior term loan ~~or,~~ as amended, or the Term Loan, and no borrowings outstanding under the Revolver. Availability under the Revolver, based on draws, outstanding letters of credit of $25.9 million, as well as allowable borrowing base as of June 30, 2020, was $261.9 million.

In June 2020, we entered into a First Amendment to our revolving credit agreement. The Amendment, among other things, (i) increased the size of the Revolver from $300.0 million ~~asset-based revolving credit facility, or the Revolver. The Revolver had available borrowing capacity as~~to $350.0 million of ~~September 30, 2019 of $282.7 million.~~

~~The Revolver provides for an~~ aggregate ~~principal amount of up to $300.0 million,~~commitments, 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.~~ borrowers, (ii) extended the maturity date of the Revolver to June 17, 2025, subject to earlier maturity if greater than $75.0 million of our 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 our total leverage ratio as of the end of the most recent fiscal quarter for which financial statements have been delivered.

Subject to the conditions set forth in the revolving credit agreement, as amended, the 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 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 Revolver matures on October 25, 2021.~~

~~The~~Our Term Loan provides for a ~~$1.2~~$1.25 billion senior secured term loan. Subject to the conditions set forth in the term loan agreement, the 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 unlimited amount, provided ~~certain financial tests are met.~~(x) in the case of any incremental debt that is secured by a lien that is pari passu with the liens securing the Term Loan, the first lien leverage ratio does not exceed 4.10 to 1.00, (y) in the case of incremental debt that is secured by a lien that is junior to the liens securing the Term Loan, the total leverage ratio does not exceed 5.50 to 1.00 and (z) in the case of incremental debt that is unsecured, the total leverage ratio does not exceed 5.75 to 1.00, in each case, determined on a pro forma basis. The Term Loan matures on October 25, 2023 and is subject to quarterly amortization equal to 0.25% of the initial principal amount. Interest will accrue on outstanding borrowings thereunder at a rate equal to adjusted LIBOR (with a floor of 1.0%) or an alternate base rate, in each case plus a margin of 3.00% or 2.00%, respectively.

The Revolver and the 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 Revolver contains a financial covenant restricting us from allowing ~~its~~our fixed charge coverage ratio to drop below 1.00:1.00 during a compliance period, which is triggered when the availability under the 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 Term Loan does not contain any financial covenants. Obligations under the Revolver and the Term Loan may be accelerated upon certain customary events of default (subject to grace periods, as appropriate). As of ~~September~~June 30, ~~2019,~~2020, 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 16, 2025. The Notes have a fixed annual interest rate of 6.50%, which will be paid semi-annually on January 15 and July 15 of each year. Obligations under the Notes will be 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, 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.

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):



	For the nine months ended						For the six months ended
	September 30, 2019			September 30, 2018			June 30, 2020			June 30, 2019
Statement of Cash Flows data:
Net cash provided by (used in) operating activities	$	65,722		$	(28,595	)	$	40,239		$	(27,322	)
Net cash used in investing activities	(33,741		)	(35,472		)
Net cash used in financing activities	(24,380		)	(9,768		)
Net cash provided by (used in) investing activities							1,536			(24,542		)
Net cash provided by (used in) financing activities							(23,556		)	32,350

Net Cash Provided by (Used in) Operating Activities

Net cash provided by operating activities was ~~$65.7~~$40.2 million in the ~~nine~~six months ended ~~September~~June 30, ~~2019,~~2020, compared to net cash used in operating activities of ~~$28.6~~$27.3 million in the ~~nine~~six months ended ~~September~~June 30, ~~2018.~~2019. Changes between the periods are primarily due to ~~higher~~the change in income from operations, as well as the ~~timing of settlements of~~improvements in our ~~receivables and payables.~~working capital.

Net Cash ~~Used in~~Provided by (Used in) Investing Activities

Net cash provided by investing activities was $1.5 million in the six months ended June 30, 2020, due to $10.6 million proceeds from sale of fixed assets, partially offset by $9.1 million of capital expenditures. Net cash used in investing activities was ~~$33.7~~$24.5 million in the ~~nine~~six months ended ~~September~~June 30, 2019, primarily due to capital expenditures of ~~$33.5~~$23.2 million and the acquisition of Buckner assets of $10.8 million, partially offset by $9.5 million proceeds from sale of fixed assets of $10.6 million. Net cash used in investing activities was $35.5 million in the nine months ended September 30, 2018, primarily due to capital expenditures of $29.6 million, final net working capital settlement related to U.S. Pressure Pipe Divestiture of $8.5 million, settlement on derivative contracts of $5.0 million, business acquisitions of $4.5 million and other asset acquisitions of $1.9 million, partially offset by cash received from the Foley Transaction of $9.1 million and proceeds from sale of fixed assets of $4.9 million.assets.

Net Cash ~~Used in~~Provided by (Used in) Financing Activities

Net cash used in financing activities was ~~$24.4~~$23.6 million in the ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 primarily due ~~primarily~~ to ~~$25.1~~$21.3 million repayments of principal on the Term Loan. Net cash ~~used in~~provided by financing activities was ~~$9.8~~$32.4 million for the ~~nine~~six months ended ~~September~~June 30, ~~2018~~2019 due primarily to $39.0 million net proceeds from the Revolver, partially offset by $6.3 million repayments of principal on the Term Loan.

Capital Expenditures

~~Our~~Under normal circumstances, our annual sustaining capital expenditures would average $45.0 million to $55.0 million. However, as a precautionary measure in response to the COVID-19 pandemic and in order to preserve liquidity, we delayed some non-essential capital spending projects during the second quarter. At the end of the second quarter, given the improvements in cash generation and liquidity, we have resumed capital spending projects. Total capital expenditures were ~~$33.5~~$9.1 million and ~~$29.6~~$23.2 million for the ~~nine~~six months ended ~~September~~June 30, 2020 and June 30, 2019, ~~and September 30, 2018,~~ respectively. ~~Capital expenditures primarily~~The majority of our planned capital spending now is related to equipment, such as plant and mobile equipment, upgrade and expansion of existing facilities, and environmental and permit compliance projects.

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 ~~September~~June 30, ~~2019,~~2020, outstanding stand-by letters of credit amounted to ~~$17.3~~$25.9 million.

Application of Critical Accounting Policies and Estimates

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires us to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. The accounting policies that we believe are critical to or require subjective and/or complex judgments that could potentially affect ~~2019~~2020 reported results are discussed in greater detail in Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations in the ~~2018~~2019 10-K. There have been no significant changes to those accounting policies or our assessment of which accounting policies we would consider to be critical accounting policies apart from those identified below, which were applied to reflect the adoption of an updated accounting standard, Topic 842, in our first quarter 2019 condensed consolidated financial statements.policies.

~~Leases Accounting Policy~~

We determine if an arrangement is a lease at inception. Leases with an initial term of less than 12 months are not recorded on the balance sheet. Operating leases are included in operating lease right-of-use, or ROU, assets, accrued liabilities, and long-term operating lease liabilities in the condensed consolidated balance sheets. Finance leases are included in property, plant and equipment, accrued liabilities, and long-term finance lease liabilities in the condensed 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.

Recent Accounting Guidance Adopted

A summary of recent accounting pronouncements and our assessment of any expected impact of these pronouncements, if known, is included in Note 2 to the audited consolidated financial statements included the ~~2018~~2019 10-K and Note 2, Summary of significant accounting policies, to the condensed consolidated financial statements.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

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 12, Derivatives and hedging to the condensed 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. WeDuring March 2020, the Company entered into ~~two~~an interest rate swap ~~transactions~~transaction with a ~~combined~~ notional value of ~~$525~~$400 million to limit our exposure to interest rate increases related to a portion of our floating rate indebtedness. ~~Under~~We 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 ~~terms~~swap counterparty. The swap has a 30-month term and expires on September 30, 2022. Previously, we had two interest rate swap transactions with a combined notional value of ~~both swap transactions,~~$525 million, in which we agreed to pay a fixed rate of interest of 1.52% and ~~receive~~received floating rate interest indexed to one-month LIBOR with monthly settlement terms with the swap counterparties. The swaps ~~have a three-year term and expire~~expired on March 31, 2020. At ~~September~~June 30, ~~2019,~~2020, we estimate that a 1% increase in the rates relating to ~~the portion of~~ our floating rate debt ~~that is not hedged~~ would increase annual interest requirements by approximately ~~$6.7~~$7.0 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 recent 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 a significant increase in the cost of our variable rate indebtedness causing a negative impact on our financial position, liquidity and results of operations. We plan to carefully monitor the situation and may seek to renegotiate the benchmark for establishing the applicable interest rate with our lenders in the future.

Foreign Currency Risk

Approximately ~~5.4%~~4.5% of our net sales for the ~~nine~~six months ended ~~September~~June 30, ~~2019,~~2020, 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 ~~nine~~six months ended ~~September~~June 30, ~~2019,~~2020, we estimate that a 1% change in the exchange rate between the U.S. dollar and foreign currencies would affect net sales by approximately ~~$0.6~~$0.3 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, steel and clay. 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 ~~September~~June 30, ~~2019,~~2020, we had an individual customer within our Water Pipe & Products segment that accounted for more than 10% of total net sales for the ~~nine~~six months ended ~~September~~June 30, ~~2019.~~2020. The customer represented approximately ~~14%~~15% of our total net sales for the ~~nine~~six months ended ~~September~~June 30, ~~2019,~~2020, and amounts receivable from the customer at ~~September~~June 30, ~~2019~~2020 represented approximately ~~14%~~17% of our total receivables, net.

The COVID-19 pandemic may increase our risk of, or exposure to, credit losses. See Note 2, Summary of significant accounting policies, to the condensed consolidated financial statements.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

We, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of ~~September~~June 30, ~~2019.~~2020.

Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of ~~September~~June 30, ~~2019.~~2020.

Changes in Internal Control over Financial Reporting

There have been 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 ~~September~~June 30, ~~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.

4042

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

The information set forth in Note 14, Commitments and contingencies, to the condensed consolidated financial statements is incorporated by reference herein.

Item 1A. Risk Factors

~~There~~Our business faces many risks and uncertainties that we cannot control. The risk factors described in Part I, Item 1A. "Risk Factors" of our 2019 10-K, as supplemented below, should be carefully considered, together with the other information contained or incorporated by reference in this Quarterly Report on Form 10-Q. The potential effects of the COVID-19 pandemic could also impact, or amplify, many of the risk factors included in our 2019 10-K. However, given the unpredictable and unprecedented nature of the pandemic, the potential impact it could have remains uncertain. Additionally, other risks that we do not presently know about, or that we presently believe are not material, could also adversely affect us.

Our business, results of operations, financial condition, cash flows and stock price have been noand 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 have 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. Although we 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 extending 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 ~~changes~~ 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 could 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.

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, a small number of employees tested positive for COVID-19, which required us to

temporarily close a small number of our manufacturing facilities. 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. 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.

The COVID-19 pandemic has also adversely affected economies worldwide and significantly disrupted

financial and other capital markets, causing a significant deceleration of economic activity. This slowdown has

decreased demand for a wide variety of goods and services, diminished trade levels, reduced production and led

to widespread corporate downsizing, causing a sharp increase in unemployment. The impact of this outbreak on

the U.S. and world economies is uncertain and, unless until the outbreak is contained, these adverse impacts

could worsen, impacting all segments of the global economy, and result in a significant 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 ~~September~~these measures and repaid

the amounts borrowed under the ABL Facility, and 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. Conditions in the financial and capital markets have been

extremely volatile and may limit or entirely restrict the availability of funding or increase the cost of funding,

which could adversely affect our business, financial position and results of operations.

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. No fully effective vaccines or treatments have been developed and one may not be discovered early enough to protect against a worsening of the pandemic or to prevent COVID-19 from becoming endemic. While we expect the pandemic and related events will continue to have a negative effect on us, the unpredictable and unprecedented nature and fluidity of current

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 the manner previously or currently expected could be materially and

adversely affected, and any of 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.

A dispute with Heidelberg exists related to the payment of an earnout in connection with the Acquisition and any payment we are required to make could have a material adverse effect on us.

In connection with the earnout provision in the purchase agreement entered into in connection with the Acquisition, Heidelberg has asserted in an arbitration proceeding now pending that a payment should be made in the amount of $100.0 million. A hearing on the merits of the dispute was held June 23-25, 2020 before a neutral arbitrator, and the arbitrator is expected to render a written decision on the matter in the latter part of August 2020 or thereafter. If it is determined that a significant payment to Heidelberg is owed and we are required to make such a payment, we may not have sufficient cash to make such payment 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 terms of our existing indebtedness or on other terms acceptable 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 limit our ability to incur other indebtedness or make further acquisitions. For more information, see Note 14, Commitments and contingencies-Legal matters-Earnout Dispute and Part 1, Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Liquidity and Capital Resources” of this Form 10-Q.

The terms of our debt could have a material adverse effect on us.

We have substantial debt and may incur additional debt. As of June 30, 2020, we had approximately $1,101.6 million of total debt and, following the issuance and sale of our Notes, as of July 16, 2020, we had approximately $1,109.1 million of total debt. Our credit facility and the indenture governing our Senior Notes contain 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.

The Revolver contains a financial covenant restricting us from allowing our fixed charge coverage ratio to drop below 1.00:1.00 during a compliance period, which is triggered when the availability under the Revolver falls below a threshold set forth therein. 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. There can be no assurance that the agent bank will not impose such reserves or, were it to do so, that the resulting impact of this action would not materially and adversely impair our liquidity. See Item 2, “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 Notes.

We are also party to a U.S. and a Canadian master lease under which we pay an aggregate of $17.8 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, Sale-Leaseback transaction in our consolidated financial statements in our 2019 10-K.

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 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 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 ~~factors previously disclosed~~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 the Senior Notes 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. 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.

The phase-out of LIBOR could increase our interest expense and 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 the Term Loan and Revolver, which were an aggregate of approximately $1,101.6 million and $609.1 million as of June 30, 2020 and July 16, 2020 following the issuance and sale of our Senior Notes, respectively, 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 ~~2018 10-K.~~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. 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.

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

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

4147

Item 6. Exhibits and Financial Statement Schedules



Exhibit No.	Description of Exhibit
~~10.1#~~4.1	~~Employment Agreement,~~Indenture, dated as of ~~May 22, 2019 by~~July 16, 2020 among Forterra Finance, LLC, FRTA Finance Corp., the guarantors party thereto and ~~between the~~Deutsche Bank Trust Company ~~and Richard Hunter~~Americas, as trustee.	(a)

~~10.2#~~4.2	~~Employment Agreement, dated~~Form of Global Note for 6.50% Senior Secured Notes due 2025 (included as ~~of May 22, 2019 by and between the Company and Vikrant Bhatia~~Exhibit A to Exhibit 4.1 hereto).	(a)

~~10.3#~~10.1	~~Employment~~First Amendment, dated as of June 17, 2020 to the ABL Credit Agreement dated as of ~~June 21, 2019~~October 25, 2016 by and ~~between~~among Forterra, Inc. and certain of its subsidiaries, as borrowers, the ~~Company~~lenders party thereto and ~~Karl Watson, Jr.~~Bank of America, N.A., as agent.	~~(b)~~*

31.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.	*

31.2	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.	*

32.1	Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.	^

101.INS	XBRL Instance ~~Document.~~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.	*

104.1	Cover page interactive data file - The cover page from the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2020 is formatted in Inline XBRL (included as Exhibit 101).	*



*	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 ~~May 23, 2019 as an exhibit to the Company's Current Report on Form 8-K and incorporated herein by reference.~~
~~(b)~~	~~Previously filed on June 24, 2019~~July 17, 2020 as an exhibit to the Company's Current Report on Form 8-K and incorporated herein by reference.

4248

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.	~~November 5, 2019~~July 28, 2020
By:	Karl Watson, Jr.
	Chief Executive Officer
	(Principal Executive Officer)

	/s/ Charles R. Brown, II	~~November 5, 2019~~July 28, 2020
By:	Charles R. Brown, II
	Executive Vice President and Chief Financial Officer
	(Principal Financial Officer)



			Fair value measurements at December 31, 2018 using
	Carrying Amount December 31, 2018		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total Fair Value December 31, 2018
Liabilities:
Term Loan	$	1,188,605	$	—	$	1,103,628	$	—	$	1,103,628
Tax receivable agreement payable ⁽¹⁾	88,775		—		—		51,832		51,832



	Term Loan
2019	$	3,128
2020	12,510
2021	12,510
2022	12,510
2023	1,156,317
	$	1,196,975



	December 31, 2018
	Derivative Assets				Derivative Liabilities
	Notional Amount		Fair Value		Notional Amount		Fair Value
Interest rate swaps	$	525,000	$	6,659	$	—	$	—
Total derivatives, gross			6,659				—
Less: Legally enforceable master netting agreements			—				—
Total derivatives, net			$	6,659			$	—



Lease cost	Classification	Three months ended September 30, 2019		Nine months ended September 30, 2019
Operating lease cost	Lease expense	$	4,188	$	12,409
Finance lease cost
Amortization of leased assets	Depreciation, amortization, and accretion	656		1,753
Interest on lease liabilities	Interest expense	4,679		13,832



	Nine months ended September 30, 2019
Cash paid for amounts included in lease liabilities
Operating cash flows related to operating leases	$	11,146
Operating cash flows related to finance leases	12,032
Financing cash flows related to finance leases	430
Leased assets obtained in exchange for new finance lease liabilities	42
Leased assets obtained in exchange for new operating lease liabilities	4,711



	Classification	September 30, 2019
Operating leases
Right of use assets	Operating lease right-of-use assets	$	62,252
Operating lease liabilities - current portion	Accrued liabilities	(9,204		)
Operating lease liabilities - long term portion	Long-term operating lease liabilities	(55,669		)
Finance leases
Finance lease assets	Property, plant and equipment, net	50,265
Finance lease liabilities - current portion	Accrued liabilities	(16,578		)
Finance lease liabilities - long term portion	Long-term finance lease liabilities	(136,556		)