September 30, 2019 December 31, 2018
2018 Term Loan Facility $ 446,625
$ 450,000
Unamortized deferred financing and issuance costs - term loan (6,650 ) (7,500 )
2018 Revolving Credit Facility 134,306
146,000
Unamortized deferred financing costs - revolving credit facility (3,933 ) (4,673 )
$ 570,348
$ 583,827

Foundation Building Materials, Inc.

Notes to the Condensed Consolidated Financial Statements

2018 Term Loan Facility

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

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

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

2018 Revolving Credit Facility

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

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

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

Foundation Building Materials, Inc.

Notes to the Condensed Consolidated Financial Statements

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

Borrowings under the 2018 Revolving Credit Facility bear interest, at the Company’s option, at either an alternate base rate or Canadian prime rate, as applicable, plus an applicable margin (ranging from 0.25% to 0.75% pursuant to a grid based on average excess availability) or the LIBOR or Canadian CDOR rate (as defined in the 2018 Revolving Credit Facility), as applicable, plus an applicable margin (ranging from 1.25% to 1.75% pursuant to a grid based on average excess availability). In addition to paying interest on outstanding principal under the 2018 Revolving Credit Facility, the ABL Borrowers are required to pay a commitment fee in respect of the unutilized commitments under the 2018 Revolving Credit Facility ranging from 0.250% to 0.375% per annum and determined based on average utilization of the 2018 Revolving Credit Facility (increasing when utilization is low and decreasing when utilization is high).

As long as commitments are outstanding under the 2018 Revolving Credit Facility, the Company is subject to certain restrictions under the facility if the Company’s ~~Pro Forma Adjusted~~Consolidated EBITDA to debt ratio (the “Total Net Leverage Ratio”) exceeds a certain total. The Total Net Leverage Ratio is defined as the ratio of Consolidated Total Debt to the aggregate amount of Consolidated EBITDA for the Relevant Reference Period (as such terms are defined in the 2018 Revolving Credit Facility). Consolidated Total Debt is defined in the 2018 Revolving Credit Facility and is generally calculated as an amount equal to the aggregate outstanding principal amount of all third-party debt for borrowed money, unreimbursed drawings under letters of credit, capital lease obligations and third-party debt obligations evidenced by notes or similar instruments on a consolidated basis and determined in accordance with GAAP, subject to certain exclusions. Consolidated EBITDA is defined in the 2018 Revolving Credit Facility and is calculated in a similar manner to the Company’s calculation of Adjusted EBITDA, except that the 2018 Revolving Credit Facility permits pro forma adjustments in order to give effect to, among other things, the pro forma results of the Company’s acquisitions as if the Company had owned such acquired companies for the entirety of the Relevant Reference Period. These pro forma adjustments give effect to all acquisitions consummated in the four quarters ended ~~September~~June 30, ~~2019,~~2020, as though they had been consummated on the first day of the first quarter for the four quarters ended ~~September~~June 30, ~~2019.~~2020. The 2018 Revolving Credit Facility requires the Company to maintain a Total Net Leverage Ratio no greater than 6.00:1.00 to incur additional junior lien and unsecured indebtedness.

As of ~~September~~June 30, ~~2019,~~2020, the Company had ~~$134.3~~$40.0 million of outstanding borrowings and ~~$240.7~~$325.6 million of available aggregate undrawn borrowing capacity under the 2018 Revolving Credit Facility. The weighted average interest rate for borrowings under the 2018 Revolving Credit Facility for the three and ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 was ~~3.8%~~2.1% and ~~4.0%~~2.4%, respectively.

~~2016 ABL Credit Facility~~

On August 13, 2018, Alpha terminated its revolving commitments under its $300.0 million 2016 asset-backed line of credit facility (the "2016 ABL Credit Facility"). The weighted average interest rate for borrowings under the 2016 ABL Credit Facility up to August 13, 2018 was 3.4%. Upon termination of the 2016 ABL Credit Facility, the Company expensed $0.7 million in deferred financing costsDeferred Financing and ~~carried over $2.6 million of deferred financing costs to the 2018 Revolving Credit Facility.~~

~~Foundation Building Materials, Inc.~~

~~Notes to the Condensed Consolidated Financial Statements~~

~~Senior Secured Notes~~

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

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

Debt Issuance Costs

Unamortized deferred financing and debt issuance costs as of ~~September~~June 30, ~~2019~~2020, were ~~$10.6~~$9.0 million, of which ~~$6.7~~$5.8 million was included in long-term portion of term loan, net, and ~~$3.9~~$3.2 million for the 2018 Revolving Credit Facility was included in other long-term assets in the accompanying condensed consolidated balance sheets. Unamortized deferred financing and debt issuance costs as of December 31, ~~2018~~2019 were ~~$12.2~~$10.0 million, of which ~~$7.5~~$6.4 million was included in long-term portion of term loan, net, and ~~$4.7~~$3.6 million for the 2018 Revolving Credit Facility was included in other long-term assets in the accompanying condensed consolidated balance sheets.

As of ~~September~~June 30, ~~2019,~~2020, the Company was in compliance with all debt covenants under the 2018 Revolving Credit Facility and the 2018 Term Loan Facility.

Foundation Building Materials, Inc.

9.Notes to the Condensed Consolidated Financial Statements

10. Tax Receivable Agreement

In connection with the Company's initial public offering ("IPO"), the Company entered into a tax receivable agreement ("TRA") with Parent 2 that provides for the payment by the Company to Parent 2 of 90% of the amount of cash savings, if any, in U.S. federal, state, local and non-U.S. income tax that the Company realizes (or in some circumstances is deemed to realize) as a result of the utilization of the Company's and the ~~Company’s subsidiaries’~~Company's subsidiaries' (a) depreciation and amortization deductions, (b) net operating losses, (c) tax credits and (d) certain other tax attributes, and any offset to taxable income and gain or increase to taxable loss, resulting from the tax basis the Company ~~has~~had in its assets at the consummation of the ~~IPO, (b) net operating losses, (c) tax credits and (d) certain other tax attributes.~~IPO. At the end of each reporting period, any changes in the Company's estimate of the liability will be recorded in the condensed consolidated ~~statement~~statements of operations as a component of other income (expense). The timing and amount of future tax benefits associated with the TRA are subject to change, and future payments may be required which could be materially different from the current estimated liability. The TRA will remain in effect until all tax benefits have been used or expired, unless the TRA is terminated early.

As of ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018,~~2019, the TRA liability balance was ~~$117.9~~$89.5 million and ~~$134.6~~$117.4 million, respectively. The first TRA payment ~~related to the TRA~~ was made in January 2019 for $16.7 million. The ~~next~~second TRA payment ~~is anticipated to be~~was made in ~~the first quarter of 2020. This payment is estimated to be $27.7~~January 2020 for $27.9 million and iswas reflected as a current liability as of ~~September 30,~~December 31, 2019.

~~10.~~11. Accumulated Other Comprehensive Loss

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

~~Foundation Building Materials, Inc.~~

~~Notes~~ For the year ended December 31, 2019, $0.2 million was reclassified from retained earnings to other comprehensive income as a result of the adoption of ASU No. 2017-12 related to the ~~Condensed Consolidated Financial Statements~~

cumulative ineffective portion of the net investment hedge.

The components of accumulated other comprehensive loss for the ~~nine~~six months ended ~~September~~June 30, ~~2019, were~~2020, are as follows (in thousands):


	Foreign Currency Translation Gains (Losses)		Unrealized Loss on Derivatives, Net of Taxes		Total
Balance at December 31, 2019	$	848	$	(3,312)	$	(2,464)
Other comprehensive loss	(3,909)		(1,525)		(5,434)
Balance at June 30, 2020	$	(3,061)	$	(4,837)	$	(7,898)

Foreign Currency Translation (Losses) Gains Unrealized Gain (Loss) on Derivatives, Net of Taxes Total
Balance at December 31, 2018 $ (3,085 )
$ 2,904

$ (181 )
Other comprehensive income (loss) 2,317

(6,436 )
(4,119 )
Balance at September 30, 2019 $ (768 )
$ (3,532 )
$ (4,300 )

~~11.~~12. Contingencies

The Company is involved in certain legal actions arising in the ordinary course of ~~business.~~business, including contractual disputes, employment matters and product liability claims. The Company regularly assesses such matters to determine the degree of probability that the Company will incur a material loss as a result of such matters as well as the range of possible loss. An estimated loss contingency is accrued in the Company’s financial statements if it is probable the Company will incur a loss and the amount of the loss can be reasonably estimated. The Company reviews all claims, proceedings and investigations at least quarterly and establishes or adjusts any accruals for such matters to reflect the impact of negotiations, settlements, advice of legal counsel and other information and events pertaining to a particular matter. All legal costs associated with such matters are expensed as incurred. Because of uncertainties related to pending actions, the Company is currently unable to predict the ultimate outcome of such legal actions, and, with respect to any legal action where no liability has been accrued, to make a meaningful estimate of the reasonably possible loss or range of loss that could result from an adverse outcome.

Historically, the claims, proceedings and investigations brought against the Company, individually and in the aggregate, have not had a material adverse effect on the consolidated financial position, results of operations, or cash flows ~~or financial position~~ of the Company. In February 2020, the Company received a one-time class action legal settlement of $8.6 million. The Company does not expect to receive any further payments as a result of this settlement. As of ~~September~~June 30, ~~2019,~~2020, there were no proceedings or litigation involving the Company that management believes would have a material adverse impact on its business, financial position, results of operations, or cash flows.

Foundation Building Materials, Inc.

~~12.~~Notes to the Condensed Consolidated Financial Statements

13. Fair Value Measurements

The Company’s financial instruments consist primarily of cash and cash equivalents, trade and other receivables, derivative instruments, accounts payable, long-term debt and accrued liabilities. The carrying value of the Company’s trade receivables, accounts payable, the 2018 Revolving Credit Facility and accrued liabilities approximates fair value due to their short-term maturity. The Company may adjust the carrying amount of certain nonfinancial assets to fair value on a non-recurring basis when they are impaired.

The estimated carrying amount and fair value of the Company’s financial instruments and other assets and liabilities measured and recorded at fair value on a recurring basis as of ~~September~~June 30, ~~2019,~~2020, is as follows (in thousands):

Fair Value Measurements as of 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
Recurring:
Non-current liabilities
Derivative liability (Note 5) $ —

$ (7,781 )
$ —

$ (7,781 )


	Fair Value Measurements as of 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
Recurring:
Non-current assets and liabilities
Derivative assets (Note 6)	$	—	$	1,909	$	—	$	1,909
Derivative liabilities (Note 6)	$	—	$	(11,634)	$	—	$	(11,634)

~~Foundation Building Materials, Inc.~~

~~Notes to the Condensed Consolidated Financial Statements~~

The estimated carrying amount and fair value of the Company’s financial instruments and other assets and liabilities measured and recorded at fair value on a recurring basis as of December 31, ~~2018,~~2019, is as follows (in thousands):

Fair Value Measurements as of December 31, 2018
Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Total Fair Value
Recurring:
Non-current assets
Derivative asset (Note 5) $ —
$ 4,344
$ —
$ 4,344


	Fair Value Measurements as of 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
Recurring:
Non-current liabilities
Derivative liabilities (Note 6)	$	—	$	(7,649)	$	—	$	(7,649)

The fair value of derivative assets and liabilities is determined using quantitative models that utilize multiple market inputs including interest rates and exchange rates to generate continuous yield or pricing curves and volatility factors to value the position. A majority of market inputs is actively quoted and can be validated through external sources, including brokers, market transactions and third-party pricing services. The fair value of derivative assets and liabilities includes adjustments for market liquidity, counterparty credit quality and other instrument-specific factors, where appropriate. In addition, the Company incorporates within its fair value measurements a valuation adjustment to reflect the credit risk associated with the net position. Positions are netted by counterparties, and fair value for net long exposures is adjusted for counterparty credit risk while the fair value for net short exposures is adjusted for the Company’s own credit risk.

~~13.~~14. Income Taxes

Income tax expense for the three and ~~nine~~six months ended ~~September~~June 30, ~~2019,~~2020, was ~~$5.8~~$3.6 million and ~~$13.2~~$8.9 million, respectively, compared to an income tax ~~benefit~~expense of ~~$12.5~~$5.4 million and ~~$13.3~~$7.5 million for the three and ~~nine~~six months ended ~~September~~June 30, ~~2018,~~2019, respectively. For the three and ~~nine~~six months ended ~~September~~June 30, ~~2019,~~2020, the Company's effective tax rates were ~~31.2%~~27.0% and ~~29.1%~~26.9%, respectively. The variance from the statutory federal tax rate of 21.0% for the three and ~~nine~~six months ended ~~September~~June 30, ~~2019,~~2020, was primarily due to state taxes and the impact of the Global Intangible Low Taxed Income ~~provision, non-deductible items and foreign rate differential.~~provisions, partially offset by a benefit recorded under the Foreign Derived Intangible Income provisions.

Foundation Building Materials, Inc.

Notes to the Condensed Consolidated Financial Statements

For the three and ~~nine~~six months ended ~~September~~June 30, ~~2018,~~2019, the ~~Company's~~company's effective tax rates were ~~25.0%~~27.0% and ~~25.8%~~27.7%, respectively. The variance from ~~the~~ statutory federal tax rate of 21.0% for the three and six months ended ~~September~~June 30, ~~2018~~2019, was primarily due to state ~~income~~ taxes, ~~non-deductible items and a~~ foreign rate differential partially offset by a reduction in valuation allowance treated as a discrete item during the quarter. The variance from the statutory federal rate of 21.0% for the nine months ended September 30, 2018 was primarily due to the same items impacting the three-month rate, partially offset by a refinement of the provisional estimate of the one-time repatriation tax under the 2017 Tax Cuts and ~~Jobs Act treated as a discrete item during the first quarter.~~non-deductible items.

~~14.~~

15. Segments

Segment information is presented in accordance with ASC 280, Segment Reporting, which establishes standards for reporting information about operating segments. It also establishes standards for related disclosures about customers, products and geographic areas. Operating segments are defined as components of an enterprise that engage in business activities that earn revenues, incur expenses and prepare separate financial information that is evaluated regularly by the Company’s Chief Operating Decision Maker ("CODM") in order to allocate resources and assess performance. Resources are allocated and performance is assessed by the CODM.

Based on the provisions of ASC 280, the Company has defined its operating segment by considering management structure and product offerings. This evaluation resulted in ~~one~~1 reportable segment.

As discussed in Note 3, Discontinued Operations, the Company closed the sale of the Disposed Business on November 1, 2018, which was previously reported as the Mechanical Insulation segment. The previously reported amounts for the Mechanical Insulation segment have been reclassified to discontinued operations for all periods presented. The Company’s continuing operations now consist of what was previously reported as the Specialty Building Products segment for the three and nine months ended September 30, 2018.

~~Foundation Building Materials, Inc.~~

~~Notes to the Condensed Consolidated Financial Statements~~

Revenues are attributed to each country based on the location in which sales originate and in which assets are located. The Company generates the majority of its revenue in the United States with the remainder being generated in Canada. For the three months ended ~~September~~June 30, ~~2019, 90.1%~~2020, 91.0% and ~~9.9%~~9.0% of the Company's revenue was generated in the United States and Canada, respectively. For the ~~nine~~six months ended ~~September~~June 30, 2020, 90.7% and 9.3% of the Company's revenue was generated in the United States and Canada, respectively. For the three months ended June 30, 2019, 90.4% and 9.6% of the Company's revenue was generated in the United States and Canada, respectively. For the ~~three~~six months ended ~~September~~June 30, ~~2018, 90.0%~~2019, 90.5% and ~~10.0% of the Company's revenue was generated in the United States and Canada, respectively. For the nine months ended September 30, 2018, 88.6% and 11.4%~~9.5% of the Company's revenue was generated in the United States and Canada, respectively.

The following table sets forth property, plant and equipment, ~~right-of-use~~ROU assets, goodwill and intangibles by geographic area (in thousands):


	June 30, 2020		December 31, 2019
Property, plant and equipment, net
United States	$	135,895	$	135,907
Canada	13,300		14,281
Total property, plant and equipment, net	$	149,195	$	150,188
ROU assets, net
United States	$	111,634	$	104,938
Canada	14,656		15,624
Total ROU assets, net	$	126,290	$	120,562
Goodwill
United States	$	463,169	$	463,208
Canada	30,990		32,516
Total goodwill	$	494,159	$	495,724
Intangibles, net
United States	$	80,452	$	102,563
Canada	9,324		11,298
Total intangibles, net	$	89,776	$	113,861

Foundation Building Materials, Inc.

Notes to the Condensed Consolidated Financial Statements

September 30, 2019 December 31, 2018
Property, plant and equipment, net
United States $ 138,738
$ 137,252
Canada 14,556
14,389
Total property, plant and equipment, net $ 153,294
$ 151,641
Right-of-use assets, net
United States $ 102,841
$ —
Canada 14,296
—
Total right-of-use assets, net $ 117,137

$ —
Goodwill
United States $ 459,978
$ 460,384
Canada 30,337
24,557
Total goodwill $ 490,315
$ 484,941
Intangibles, net

United States $ 105,959
$ 141,186
Canada 11,935
4,690
Total intangibles, net $ 117,894
$ 145,876

The Company’s net sales by major product line are as follows (dollars in thousands):

Three Months Ended September 30, Change
2019 2018 $ %

Wallboard $ 207,326
36.7 % $ 203,991
37.6 % $ 3,335
1.6 %
Suspended ceiling systems 118,873
21.0 % 104,422
19.3 % 14,451
13.8 %
Metal framing 98,817
17.5 % 98,576
18.2 % 241
0.2 %
Complementary and other products 139,890
24.8 % 135,284
24.9 % 4,606
3.4 %
Total net sales $ 564,906
100.0 % $ 542,273
100.0 % $ 22,633
4.2 %


	Three Months Ended June 30,												Change
	2020						2019				$		%

Wallboard	$	188,588	38.8	%	$	214,059	38.2	%	$	(25,471)	(11.9)	%
Suspended ceiling systems	91,508		18.8	%	106,176		19.0	%	(14,668)		(13.8)	%
Metal framing	82,188		16.9	%	102,425		18.3	%	(20,237)		(19.8)	%
Complementary and other products	123,806		25.5	%	137,251		24.5	%	(13,445)		(9.8)	%
Total net sales	$	486,090	100.0	%	$	559,911	100.0	%	$	(73,821)	(13.2)	%

~~Foundation Building Materials, Inc.~~

~~Notes to the Condensed Consolidated Financial Statements~~


	Six Months Ended June 30,												Change
	2020						2019				$		%

Wallboard	$	390,856	38.7	%	$	416,973	38.8	%	$	(26,117)	(6.3)	%
Suspended ceiling systems	190,014		18.8	%	195,172		18.2	%	(5,158)		(2.6)	%
Metal framing	175,522		17.4	%	201,676		18.8	%	(26,154)		(13.0)	%
Complementary and other products	253,956		25.1	%	260,962		24.2	%	(7,006)		(2.7)	%
Total net sales	$	1,010,348	100.0	%	$	1,074,783	100.0	%	$	(64,435)	(6.0)	%

Nine Months Ended September 30, Change
2019 2018 $ %

Wallboard $ 624,299
38.1 %
$ 583,242
38.2 % $ 41,057

7.0 %
Suspended ceiling systems 314,045
19.2 %
288,356
18.9 % $ 25,689

8.9 %
Metal framing 300,493
18.3 %
264,019
17.3 % $ 36,474

13.8 %
Complementary and other products 400,852
24.4 %
392,536
25.7 % 8,316

2.1 %
Total net sales $ 1,639,689
100.0 %
$ 1,528,153
100.0 % $ 111,536

7.3 %

~~15.~~16. Other Current Liabilities

The balance ofin other current liabilities ~~consisted~~consists of the following (in thousands):


	June 30, 2020		December 31, 2019
Accrued expenses	$	4,098	$	5,652
Accrued interest	30		74
Accrued other	15,208		12,831
Total other current liabilities	$	19,336	$	18,557

September 30, 2019 December 31, 2018
Accrued expenses $ 5,496
$ 5,080
Accrued interest 152
1,315
Accrued other 18,002
13,584
Total other current liabilities $ 23,650
$ 19,979

~~16.~~17. Earnings (Loss) Per Share

Basic earnings (loss) per share represents net income (loss) for the period divided by the weighted average number of shares of common stock outstanding for the period.

The following are the number of shares of common stock used to compute the basic and diluted earnings (loss) per share for each period:


	Three Months Ended June 30,			Six Months Ended June 30,
	2020	2019	2020	2019
Weighted average shares used in basic computations	43,203,894	42,987,915	43,124,793	42,960,124
Dilutive effect of stock options and restricted stock units	128,331	257,438	315,930	104,372
Weighted average shares used in diluted computations	43,332,225	43,245,353	43,440,723	43,064,496

Three Months Ended September 30, Nine Months Ended September 30,
2019 2018 2019 2018
Weighted average shares used in basic computations 42,988,829
42,894,474
42,969,797
42,889,430
Dilutive effect of stock options and restricted stock units 519,849
22,756
204,554
15,843
Weighted average shares used in diluted computations 43,508,678
42,917,230
43,174,351
42,905,273

Foundation Building Materials, Inc.

Notes to the Condensed Consolidated Financial Statements

For the three and ~~nine~~six months ended ~~September~~June 30, ~~2019,~~2020, there were ~~324,495~~1,251,140 and ~~525,012~~1,134,917 shares, respectively, not included in the computation of diluted weighted average shares because their effect would have been antidilutive. For the three and ~~nine~~six months ended ~~September~~June 30, ~~2018,~~2019, there were ~~66,619~~38,806 and ~~135,780~~85,918 shares, respectively, not ~~included~~include in the computation of diluted weighted average shares because their effect would have been antidilutive.

~~Foundation Building Materials, Inc.~~

~~Notes to the Condensed Consolidated Financial Statements~~

~~17. Subsequent Events~~

On October 1, 2019, the Company acquired the operations and substantially all of the assets of Joe's Wallboard Supply Co. of Colorado Springs, Inc. (“Wallboard Supply”). Wallboard Supply was a distributor of drywall and accessories, steel framing, insulation, tools and fasteners. Wallboard Supply operated one branch in Colorado Springs, Colorado.

On October 1, 2019, the Company acquired the operations and substantially all of the assets of The Supply Guy, Inc. (“TSG”). TSG was a distributor of tools, fasteners, and other related products. TSG operated one branch in Lakewood, Washington.

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

The following is a discussion and analysis of our financial condition and results of operations as of and for the periods presented below. The following discussion and analysis should be read in conjunction with the "Condensed Consolidated Financial Statements" and notes thereto included elsewhere in this Quarterly Report on Form 10-Q. This section and other parts of this Quarterly Report on Form 10-Q contain forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially from the results expressed or implied by the forward-looking statement. We have made these statements in reliance on the safe harbor created by the Private Securities Litigation Reform Act of 1995 (set forth in Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act). In some cases, forward-looking statements can be identified by words such as "anticipates," "believes," "could," "estimates," "expects," "intends," "may," "plans," "potential," "predicts," "projects," "should," "will," "would" or the negative or similar expressions. ~~Such~~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 recent outbreak of the novel coronavirus COVID-19, which was declared a pandemic by the World Health Organization on March 11, 2020, or the COVID-19 Pandemic;

•the length and severity of the recent COVID-19 Pandemic and its impact on the global economy, our business, operations and financial results;

•the impact of cost-saving initiatives on our financial and liquidity position;

•federal, state and local government initiatives to mitigate the impact of the COVID-19 Pandemic, including additional restrictions on business activities, "shelter-in-place" orders, guidelines and other restrictions;

•our ability to qualify as an essential business or service under state, county or local orders and guidelines;

•the timing, amount and availability of economic stimulus or other initiatives by federal, state or provincial governments;

•our ability to effectively manage any downturns in the new commercial construction market, the commercial repair and remodel market and the new residential construction market;

•our ability to effectively manage any changes in economic, political and social conditions;

•fluctuating demand for the products and services we offer;

•our ability to effectively compete in a highly competitive industry;

•our ability to realize the anticipated financial and strategic goals of future acquisitions or investments, including the identification of acquisition targets and the integration and performance of acquired stores and businesses, including integration of financial systems;

•our ability to achieve the intended benefits of our recent acquisitions, including the realization of synergies;

•a diversion of management’s attention from ongoing business concerns to matters related to acquisitions we may make in the future or the integration of previous acquisitions;

•our ability to maintain our existing contractual and business relationships;

•the change in any exclusive rights or relationships we have with suppliers that provide us access to leading brands;

•a material disruption at our suppliers’ facilities due to weather, environmental incidents, transportation disruption, natural disasters or public health emergencies such as the COVID-19 Pandemic and other operational problems;

•the effect of any social unrest upon our branches or our customers' businesses;

•the effects of any changes in environmental, health and safety laws and regulations on our operations and liquidity;

•our ability to attract and retain key management personnel and other talent required for our business;

•our exposure to legal claims and proceedings related to our business;

•our ability to manage the impact of debt and equity financing transactions;

•our ability to generate a sufficient amount of cash to service our indebtedness and fund our operations;

•our ability to operate our business under agreements governing our indebtedness containing financial covenants and other restrictions;

•the effects of and ability to continue incurring a substantial amount of indebtedness under our asset-based lending credit facility and our term loan facility;

•the volatility of the trading price of our common stock;

•our relationship, and actual and potential conflicts of interest, with our majority shareholder; and

•additional factors discussed under the sections entitled "Risk Factors," and "Management’s Discussion and Analysis of Financial Condition and Results of Operations" as well as in the other reports we file with the Securities and Exchange Commission, or SEC.

The forward-looking statements contained in this Quarterly Report on Form 10-Q are based on historical performance and management’s current ~~expectations,~~plans, estimates and ~~projections about our industry,~~expectations in light of information currently available to us and ~~our management’s beliefs~~are subject to uncertainty and ~~assumptions. Forward-looking statements are not guarantees of~~changes in circumstances. There can be no assurance that future ~~performance and our actual~~developments affecting us will be those that we have anticipated. Actual results may differ ~~significantly~~materially from these expectations due to changes in global, regional or local political, economic, business, competitive, market, regulatory, public health and other factors, many of which are beyond our control, as well as the ~~results discussed in the forward-looking statements. Factors that might cause such differences include, but are not limited to, those discussed~~other factors described in Item ~~1A, "Risk Factors"~~1A. Risk Factors in this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K for the year ended December 31, ~~2018,~~2019, filed with ~~the Securities and Exchange Commission, or~~ the SEC on February ~~26, 2019,~~25, 2020, or the ~~2018~~2019 10-K, as updated by our subsequent filings with the SEC.

~~Unless required~~ 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. Comparisons of results for current and any prior periods are not intended to express any future trends or indications of future performance, unless expressed as such, and should only be viewed as historical data. 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 ~~law, we expressly~~these forward-looking statements. You should not place undue reliance on any of our forward-looking statements. Any forward-looking statement made by us in this Quarterly Report on Form 10-Q speaks only as of the date hereof. We undertake no obligation to publicly update any forward-looking ~~statements,~~statement, whether as a result of new information, future ~~events~~developments or ~~otherwise.~~otherwise, except as may be required by applicable securities laws. We qualify all of our forward-looking statements by these disclaimers.

Overview

We are one of the largest specialty building products distributors of wallboard and suspended ceiling systems in the ~~U.S.~~United States and Canada. Since 2013, we have completed more than ~~30 acquisitions. We~~35 acquisitions and have over ~~175~~ 170branches ~~3,400 employees~~ and 30,000 SKUs.

We have a national operating model supported by local market expertise and an entrepreneurial, customer-centric culture. Our strong national brand and acquisition expertise have established us as the distributor of choice for leading suppliers, and we have over ~~22,000~~25,000 customers across construction-related end markets. We believe ~~that~~ we are able to maintain our local market excellence due to our longstanding customer relationships, dependable service and market-specific product offerings that cater to local market trends and preferences.

On November 1, 2018, we completed the sale of our Mechanical Insulation segment, or the Disposed Business, to SPI LLC, an unrelated third party controlled by Dunes Point Capital and its associated funds, for approximately $122.5 million (subject to certain adjustments). As a result of this sale, we operate in one segment. For the three and nine months ended September 30, 2018, the Disposed Business is presented as discontinued operations. See Note 3, Discontinued Operations, to the condensed consolidated financial statements.

~~Third Quarter Update~~

~~Financial Results~~

We reported net sales of $564.9 million for the three months ended September 30, 2019, an increase of $22.6 million, or 4.2%, compared to the three months ended September 30, 2018, including base business net sales growth of 1.1%. Our gross margin for the three months ended September 30, 2019 was 30.4% compared to 28.4% for the three months ended September 30, 2018, due to improved profitability across our product lines driven by continued development of our pricing and purchasing initiatives.

~~2019 Acquisitions~~

We supplement our organic growth strategy with selective acquisitions. Since January 2019 through the date of this filing, we have completed four acquisitions totaling six branches. See Note 6, Acquisitions, and Note 17, Subsequent Events, to the condensed consolidated financial statements. We are typically evaluating several acquisition opportunities at any given time and maintain an extensive and active acquisition pipeline. We believe expansion of our geographic footprint and product offerings by executing additional strategic acquisitions presents a significant opportunity for our business. In executing our acquisition strategy and integrating acquired companies, we focus on the cost savings we can achieve through combined procurement and pricing programs and brand consolidation. The 2019 acquisitions completed contributed $6.6 million to net sales for the three months ended September 30, 2019, and $15.8 million for the nine months ended September 30, 2019.



~~Acquisitions~~	~~Effective Date of Acquisition~~	~~Branch Locations~~	~~# of Branches Acquired~~
~~Joe's Wallboard Supply Co. of Colorado Springs, Inc.~~	~~October 1, 2019~~	~~Colorado~~	1
~~The Supply Guy, Inc.~~	~~October 1, 2019~~	~~Washington~~	1
~~Select Acoustic Supply Inc.~~	~~May 1, 2019~~	~~Ontario, Canada~~	1
~~Builders' Supplies Limited II~~	~~February 1, 2019~~	~~Ontario, Canada~~	3
~~Total~~			6

Factors and Trends Affecting Our Business and Results of Operations

See Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, in the ~~2018~~2019 10-K for a discussion of the general and specific factors and trends affecting our business and results of operations, which include general economic conditions, new non-residential construction, new residential construction, non-residential repair and remodel construction, volume, costs and pricing programs. ~~There~~

The COVID-19 Pandemic's Impact on our Business

The uncertain macroeconomic environment created by the COVID-19 Pandemic has had and will continue to have a significant, adverse impact on our business. As of the date of this filing, significant uncertainty exists concerning the magnitude of the impact and duration of the disruption, and we are unable to determine or predict the overall impact the COVID-19 Pandemic will have on our financial position, results of operations, or cash flows. The following events related to the COVID-19 Pandemic have resulted and will result in lost or delayed revenue to our company:

•limitations on the ability of manufacturers to produce the products we sell;

•limitations on the ability of our suppliers to meet delivery requirements and commitments;

•limitations on the ability of our employees to perform their work;

•limitations imposed by local, state or federal orders and guidelines affecting our ability to operate, including additional restrictions after the recent escalation in COVID-19 diagnoses;

•limitations on the ability of freight carriers to deliver our products to us and our customers;

•limitations on the ability of our customers to conduct their business and purchase our products and services;

•delays in starting construction jobs, temporary closure of job sites or cancellation of jobs;

•disruptions to our customers’ supply chains or purchasing; and

•limitations on the ability of our customers to pay us on a timely basis.

Although the effects of the COVID-19 Pandemic have impacted our financial position and results of operations as noted above, we have maintained our profitability, including gross margin and adjusted EBITDA margin, during the three months ended June 30, 2020. In addition, we continue to evaluate and pursue our strategic initiatives. We are resuming our focus on acquisitions during the second half of the year. We also expect to begin a pilot launch of our e-commerce platform during the third quarter of 2020, which we believe will allow us to enhance our existing sales channels, increase our product offerings and improve purchasing and logistics. In spite of the challenging market conditions resulting from the COVID-19 Pandemic, we continue to seek opportunities for organic growth and to enhance our financial flexibility. We have taken proactive measures to right-size our business, and we are positioned to withstand changes to market and economic environments.

Additionally, all of our branches are currently open for business throughout the United States and Canada. We have taken safety precautions based on recommendations from federal, state and local authorities as we continue to operate as part of an “Essential Critical Infrastructure Sector” in many states. In a select number of states where stronger restrictions are or have been noin place, including Washington, California, Michigan, New Jersey, and the Commonwealth of Pennsylvania, we have experienced more significant year-over-year headwinds, and thus, have not seen the seasonal improvements in our financial results as we would typically expect. Certain states, such as California, have re-implemented restrictions and guidelines due to the recent escalation of local COVID-19 cases. While these restrictions do not currently affect our ability to operate, they could affect projects where we deliver our products. During the second quarter, our branches in several states, including in Minnesota and Illinois, have also been impacted by social unrest. While we continue to operate our branches, such social unrest may negatively impact our business in the future.

We continue to safeguard our employees and customers and will continue to actively monitor the disruption caused by the COVID-19 Pandemic. We may take further actions that alter our business operations as may be required by federal, state or local authorities or that we determine are in the best interests of our employees, customers, suppliers and stockholders. From March through June 2020, we furloughed approximately 450 employees in response to the COVID-19 Pandemic, but as of July 31, 2020, substantially all of our employees have returned to work. Other than these furloughs, there have not been any further material changes to ~~those factors~~our workforce due to the COVID-19 Pandemic. We may take further actions in the future as the situation develops. We restored temporary salary reductions for all employees and ~~trends~~compensation for independent board members during the ~~nine~~second quarter of 2020.

We entered the COVID-19 Pandemic with a strong balance sheet and have taken steps to enhance our financial flexibility. In March 2020, in response to the COVID-19 Pandemic, we drew $120.0 million from our 2018 Revolving Credit Facility to provide financial flexibility and liquidity to respond to volatile financial market conditions. We repaid the first quarter draw under our 2018 Revolving Credit Facility in June 2020 and decreased our net debt leverage ratio. See "—Liquidity and Capital Resources—Summary" for additional information. The additional steps we have taken to maintain cash flow include:

•delaying or reducing capital expenditures that are not anticipated to impact near-term business;

•deferring or limiting non-essential operating expenses;

•optimizing all areas of working capital; and

•restricted hiring, deferred wage increases and reduced other employer-related costs.

We do not anticipate any issues in servicing our debt and do not expect to need additional borrowings in the second half of 2020 other than for ordinary course operations.

The Company qualifies for and has deferred certain corporate income tax payments and employer payroll tax payments pursuant to certain provisions of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). We deferred United States corporate income tax payments which would otherwise have been paid during the three months ended March 31, 2020 to the three months ended September 30, ~~2019.~~2020. We also deferred employer payroll taxes, of which 50% are required to be deposited by December 2021 and the remaining 50% by December 2022 under the CARES Act.

We did not record any asset impairments, inventory charges or provision for expected credit losses related to the COVID-19 Pandemic during the second quarter of 2020, but future events may require such charges, which could have a material adverse effect on our financial condition, results of operations, cash flows or liquidity.

Second Quarter Update

Financial Results

We reported net sales of $486.1 million for the three months ended June 30, 2020, a decrease of $73.8 million, or 13.2%, compared to the three months ended June 30, 2019. Our gross margin for the three months ended June 30, 2020, was 30.0% compared to 30.6% for the three months ended June 30, 2019. The decrease in net sales and gross margin was primarily due to COVID-19 Pandemic related market disruptions.

2020 Acquisitions

We supplement our organic growth strategy with selective acquisitions. We temporarily suspended our acquisition activity in response to the COVID-19 Pandemic but will resume focusing on acquisitions in the second half of 2020. In the first quarter, we completed one acquisition, which resulted in the addition of two branches. See Note 7, Acquisitions, to the condensed consolidated financial statements. In executing our acquisition strategy and integrating acquired companies, we focus on the cost savings we can achieve through combined procurement and pricing programs and brand consolidation. This acquisition contributed $5.0 million to net sales for the three months ended June 30, 2020 and $8.9 million for the six months ended June 30, 2020.

Acquisitions

Effective Date of Acquisition

Branch Locations

# of Branches Acquired

Insulation Distributors, Inc.

February 3, 2020

Maryland

Results of Operations

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

The following table summarizes certain consolidated financial information related to our operating results for the periods indicated:


	Three Months Ended June 30,
	2020						2019
(dollars in thousands)
Statements of operations data
Net sales	$	486,090	100.0	%	$	559,911	100.0	%
Cost of goods sold	340,435		70.0	%	388,374		69.4	%
Gross profit	145,655		30.0	%	171,537		30.6	%
Operating expenses:
Selling, general and administrative expenses	106,257		21.9	%	122,735		21.9	%
Depreciation and amortization	19,288		4.0	%	20,351		3.6	%
Total operating expenses	125,545		25.9	%	143,086		25.5	%
Income from operations	20,110		4.1	%	28,451		5.1	%
Interest expense	(7,153)		(1.4)	%	(8,341)		(1.5)	%
Other income, net	547		0.1	%	44		—	%
Income before income taxes	13,504		2.8	%	20,154		3.6	%
Income tax expense	3,647		0.8	%	5,433		1.0	%
Income from continuing operations	9,857		2.0	%	14,721		2.6	%
Loss on sale of discontinued operations, net of tax	—		—	%	(44)		—	%
Net income	$	9,857	2.0	%	$	14,677	2.6	%

Three Months Ended September 30,
2019 2018
(dollars in thousands)
Statements of operations data
Net sales $ 564,906
100.0 % $ 542,273
100.0 %
Cost of goods sold 393,111
69.6 % 388,236
71.6 %
Gross profit 171,795
30.4 % 154,037
28.4 %
Operating expenses:

Selling, general and administrative expenses 123,907
21.9 % 113,279
20.9 %
Depreciation and amortization 20,218
3.6 % 19,771
12.8 %
Total operating expenses 144,125
25.5 % 133,050
24.5 %
Income from operations 27,670
4.9 % 20,987
3.9 %
Loss on extinguishment debt —
— % (58,475 ) (10.8 )%
Interest expense (9,118 ) (1.6 )% (12,576 ) (2.3 )%
Other expense, net (89 ) — % (8 ) — %
Income (loss) before income taxes 18,463
3.3 % (50,072 ) 1.3 %
Income tax expense (benefit) 5,754
1.0 % (12,519 ) (8.1 )%
Income (loss) from continuing operations 12,709
2.3 % (37,553 ) (6.9 )%
Income from discontinued operations, net of tax —
— % 2,772
0.5 %
Loss on sale of discontinued operations, net of tax (11 ) — % —
— %
Net income (loss) $ 12,698
2.3 % $ (34,781 ) (6.4 )%

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


	Three Months Ended September 30,										Change						Three Months Ended June 30,															Change
	2019					2018					$			%			2020								2019					$		%
(dollars in thousands)																(dollars in thousands)
Wallboard	$	207,326		36.7	%	$	203,991		37.6	%	$	3,335		1.6	%	Wallboard	$	188,588		38.8	%	$	214,059		38.2	%	$	(25,471)		(11.9)	%
Suspended ceiling systems	118,873			21.0	%	104,422			19.3	%	14,451			13.8	%	Suspended ceiling systems	91,508			18.8	%	106,176			19.0	%	(14,668)			(13.8)	%
Metal framing	98,817			17.5	%	98,576			18.2	%	241			0.2	%	Metal framing	82,188			16.9	%	102,425			18.3	%	(20,237)			(19.8)	%
Complementary and other products	139,890			24.8	%	135,284			24.9	%	4,606			3.4	%	Complementary and other products	123,806			25.5	%	137,251			24.5	%	(13,445)			(9.8)	%
Total net sales	$	564,906		100.0	%	$	542,273		100.0	%	$	22,633		4.2	%	Total net sales	$	486,090		100.0	%	$	559,911		100.0	%	$	(73,821)		(13.2)	%
Total gross profit	$	171,795				$	154,037				$	17,758		11.5	%	Total gross profit	$	145,655				$	171,537				$	(25,882)		(15.1)	%
Total gross margin	30.4		%			28.4		%			2.0		%			Total gross margin	30.0		%			30.6		%			(0.6)		%

Net Sales

Net sales for the three months ended ~~September~~June 30, ~~2019~~2020, were ~~$564.9~~$486.1 million compared to ~~$542.3~~$559.9 million for the three months ended ~~September~~June 30, ~~2018,~~2019, representing ~~an increase~~a decrease of ~~$22.6~~$73.8 million, or ~~4.2%~~13.2%.Net sales from base business ~~branches contributed $5.2~~decreased $77.4 million compared to the prior period. There was the same number of business days in the ~~net sales increase. The base business increase was primarily due~~current period as compared to ~~strong commercial activity and product expansion into new geographic markets.~~the prior period. Net sales from acquired branches and existing branches that were strategically combined ~~contributed $17.4 million of the~~increased by $3.6 million. Our base business net sales ~~increase.We continue~~across all of our major product lines decreased during the three months ended June 30, 2020, compared to ~~experience some softness in~~ the ~~Canadian market, and adverse weather in~~three months ended June 30, 2019, primarily as a result of reduced business activity due to the ~~quarter impacted deliveries to our customers.~~

COVID-19 Pandemic. The ~~change~~decreases in our base business net sales ~~was primarily driven by~~across our product lines amounted to the ~~following factors:~~following:

~~a decrease in~~ •wallboard net sales ~~of $3.9~~decreased $27.4 million, or ~~2.0%~~13.3%, ~~primarily due to a decrease~~comprised of decreases in average selling price and product mix of ~~0.9%~~3.3%, and ~~a decrease in~~wallboard unit volume of ~~1.1%~~10.0%;

~~an increase in~~ •suspended ceiling systems net sales ~~of $9.7~~decreased $15.1 million, or ~~11.0%, primarily due an increase in selling price and increased sales initiatives;~~15.0%;

~~a decrease in~~ •metal framing net sales ~~of $3.0~~decreased $20.3 million, or ~~3.3%, primarily due to normalization in product costs~~20.6% as ~~compared to the tariff-driven price increases in the previous period;~~a result of lower unit volume and lower selling prices; and

~~an increase in~~ •complementary and other ~~product~~products net sales ~~of $2.5~~decreased $14.6 million, or ~~2.0%, primarily due to our continued initiatives to increase complementary product sales partially offset by weaker sales in Canada.~~11.2%.

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


	Three Months Ended June 30,						Change
	2020		2019		$		%
(dollars in thousands)
Base business ⁽¹⁾	$	457,811	$	535,185	$	(77,374)	(14.5)	%
Acquired and combined⁽²⁾	28,279		24,726		3,553		14.4	%
Net sales	$	486,090	$	559,911	$	(73,821)	(13.2)	%
⁽¹⁾Represents net sales from branches that were owned by us since January 1, 2019, and branches that were opened by us during such period.
⁽²⁾ Represents branches acquired and combined after January 1, 2019, primarily as a result of our strategic combination of branches.

Three Months Ended September 30,
Change

2019
2018
$
%
(dollars in thousands)

Base business ⁽¹⁾
$ 500,834

$ 495,613

$ 5,221

1.1 %
Acquired and combined⁽²⁾
64,072

46,660

17,412

37.3 %
Net sales $ 564,906

$ 542,273

$ 22,633

4.2 %
⁽¹⁾Represents net sales from branches that were owned by us since January 1, 2018 and branches that were opened by us during such period.
⁽²⁾ Represents branches acquired and combined after January 1, 2018, primarily as a result of our strategic combination of branches.

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


	Three Months Ended June 30, 2019		Base Business Net Sales Change		Acquired and Combined Net Sales Change		Three Months Ended June 30, 2020		Total Net Sales % Change		Base Business Net Sales % Change⁽¹⁾		Acquired and Combined Net Sales % Change⁽²⁾
(dollars in thousands)
Wallboard	$	214,059	$	(27,410)	$	1,939	$	188,588	(11.9)	%	(13.3)	%	23.4	%
Suspended ceiling systems	106,176		(15,112)		444		91,508		(13.8)	%	(15.0)	%	8.2	%
Metal framing	102,425		(20,272)		35		82,188		(19.8)	%	(20.6)	%	0.9	%
Complementary and other products	137,251		(14,580)		1,135		123,806		(9.8)	%	(11.2)	%	16.1	%
Net sales	$	559,911	$	(77,374)	$	3,553	$	486,090	(13.2)	%	(14.5)	%	14.4	%
Average daily net sales⁽³⁾	$	8,749	$	(1,209)	$	55	$	7,595	(13.2)	%	(14.5)	%	14.4	%
⁽¹⁾Represents base business net sales change as a percentage of base business net sales for the three months ended June 30, 2019.
⁽²⁾Represents acquired and combined as a percentage of acquired and combined net sales for the three months ended June 30, 2019.
⁽³⁾The number of business days for the three months ended June 30, 2020 and 2019 was 64 for both periods.

Three Months Ended September 30, 2018
Base Business Net Sales Change
Acquired and Combined Net Sales Change
Three Months Ended September 30, 2019
Total Net Sales % Change
Base Business Net Sales % Change⁽¹⁾

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

Wallboard $ 203,991

$ (3,872 )
$ 7,207

$ 207,326

1.6 % (2.0 )%
57.1 %
Suspended ceiling systems 104,422

9,654

4,797

118,873

13.8 % 11.0 %
28.6 %
Metal framing 98,576

(3,032 )
3,273

98,817

0.2 % (3.3 )%
51.2 %
Complementary and other products 135,284

2,471

2,135

139,890

3.4 % 2.0 %
19.6 %
Net sales $ 542,273

$ 5,221

$ 17,412

$ 564,906

4.2 % 1.1 %
37.3 %
Average daily net sales⁽³⁾
$ 8,608

$ 83

$ 276

$ 8,967

4.2 % 1.1 %
37.3 %
⁽¹⁾Represents base business net sales change as a percentage of base business net sales for the three months ended September 30, 2018.
⁽²⁾Represents acquired and combined net sales as a percentage of acquired and combined net sales for the three months ended September 30, 2018.
⁽³⁾The number of business days for the three months ended September 30, 2019 and 2018, were 63 and 63, respectively.

Gross Profit and Gross Margin

Gross profit for the three months ended ~~September~~June 30, ~~2019,~~2020, was ~~$171.8~~$145.7 million compared to ~~$154.0~~$171.5 million for the three months ended ~~September~~June 30, ~~2018,~~2019, representing ~~an increase~~a decrease of ~~$17.8~~$25.9 million, or ~~11.5%~~15.1%. ~~Gross~~The decrease in gross profit ~~increased~~was primarily due to ~~an expansion of our gross margin and an increase in sales from acquisitions.~~lower net sales.

Gross margin for the three months ended ~~September~~June 30, ~~2019,~~2020, was ~~30.4%~~30.0% compared to ~~28.4%~~30.6% for the three months ended ~~September~~June 30, ~~2018.~~2019. The ~~increase~~decrease in gross margin was primarily due to ~~improved profitability across our product lines driven by our ongoing pricing and purchasing initiatives and continued stabilization of our product costs.~~COVID-19 Pandemic related market disruptions.

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

SG&A expenses for the three months ended ~~September~~June 30, ~~2019~~2020, were ~~$123.9~~$106.3 million compared to ~~$113.3~~$122.7 million for the three months ended ~~September~~June 30, ~~2018,~~2019, representing ~~an increase~~a decrease of ~~$10.6~~$16.5 million, or ~~9.4%~~13.4%. As a percentage of net sales, SG&A expenses were 21.9% for the three months ended ~~September~~June 30, ~~2019,~~2020, compared to ~~20.9%~~21.9% for the three months ended ~~September~~June 30, ~~2018. The increase in~~2019. SG&A expenses remained flat as a percentage of net sales ~~was~~ primarily due to proactive actions taken to right-size our ~~continued investment~~cost structure in ~~various company-wide initiatives.~~response to a decline in net sales resulting from the COVID-19 Pandemic.

Depreciation and Amortization

Depreciation and amortization for the three months ended ~~September~~June 30, ~~2019~~2020, was ~~$20.2~~$19.3 million compared to ~~$19.8~~$20.4 million for the three months ended ~~September~~June 30, ~~2018,~~2019, representing ~~an increase~~a decrease of ~~$0.4~~$1.1 million, or ~~2.3%~~5.2%. The increase in depreciation and amortization was primarily due to acquisitions subsequent to September 30, 2018, which increased the value of property and equipment and intangible assets subject to amortization.

Interest Expense

Interest expense for the three months ended ~~September~~June 30, ~~2019,~~2020, was ~~$9.1~~$7.2 million compared to ~~$12.6~~$8.3 million for the three months ended ~~September~~June 30, ~~2018,~~2019, representing a decrease of ~~$3.5~~$1.2 million, or ~~27.5%~~14.2%. The decrease is primarily due to repayment of amounts drawn on our 2018 Revolving Credit Facility and a decrease in interest rates.

Other Income, Net

Other income, net for the ~~refinancing~~three months ended June 30, 2020, was income of ~~our senior secured notes in August 2018. See Note 8, Long-Term Debt,~~$0.5 million, compared to income of $0.0 million for the ~~condensed consolidated financial statements.~~

~~Loss on Extinguishment of Debt~~

~~In August 2018, we completed the refinancing of our $575.0 million Senior Secured Notes, or the Notes, to reduce our interest rate. The refinancing resulted in a loss of $58.5 million consisting~~three months ended June 30, 2019. Other income, net consists primarily of ~~deferred financing costs~~foreign currency transaction gains and ~~original issuance discounts, which were written off, and a prepayment premium.~~losses.

Income Taxes

Income tax expense for the three months ended ~~September~~June 30, ~~2019~~2020, was ~~$5.8~~$3.6 million compared to an income tax ~~benefit~~expense of ~~$12.5~~$5.4 million for the three months ended ~~September~~June 30, ~~2018.~~2019. The effective tax rate for both the three months ended ~~September~~June 30, 2020 and June 30, 2019, was ~~31.2% compared to 25.0% for the three months ended September 30, 2018. The~~27.0%. There was no material difference in the effective tax rates between periods is due primarily to the impact the Global Intangible Low Taxed Income, or GILTI, provisions had on reported earnings in 2019 and a reduction in valuation allowance treated as a discrete item during the third quarter of 2018.periods.

~~Nine~~

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

The following table summarizes certain consolidated financial information related to our operating results for the periods indicated:


	Six Months Ended June 30,
	2020						2019
(dollars in thousands)
Statements of operations data
Net sales	$	1,010,348	100.0	%	$	1,074,783	100.0	%
Cost of goods sold	702,535		69.5	%	750,286		69.8	%
Gross profit	307,813		30.5	%	324,497		30.2	%
Operating expenses:
Selling, general and administrative expenses	229,354		22.7	%	239,965		22.3	%
Depreciation and amortization	38,507		3.8	%	40,693		3.8	%
Total operating expenses	267,861		26.5	%	280,658		26.1	%
Income from operations	39,952		4.0	%	43,839		4.1	%
Interest expense	(14,886)		(1.5)	%	(16,897)		(1.6)	%
Gain on legal settlement	8,556		0.8	%	—		—
Other (expense) income, net	(475)		—	%	85		—	%
Income before income taxes	33,147		3.3	%	27,027		2.5	%
Income tax expense	8,914		0.9	%	7,478		0.7	%
Income from continuing operations	24,233		2.4	%	19,549		1.8	%
Loss on sale of discontinued operations, net of tax	—		—	%	(1,390)		(0.1)	%
Net income	$	24,233	2.4	%	$	18,159	1.7	%

Nine Months Ended September 30,
2019 2018
(dollars in thousands)
Statements of operations data
Net sales $ 1,639,689
100.0 % $ 1,528,153
100.0 %
Cost of goods sold 1,143,397
69.7 % 1,093,412
71.6 %
Gross profit 496,292
30.3 % 434,741
28.4 %
Operating expenses:

Selling, general and administrative expenses 363,872
22.2 % 328,088
21.5 %
Depreciation and amortization 60,911
3.7 % 56,922
13.1 %
Total operating expenses 424,783
25.9 % 385,010
25.2 %
Income from operations 71,509
4.4 % 49,731
3.3 %
Loss on extinguishment of debt —
— % (58,475 ) (3.8 )%
Interest expense (26,015 ) (1.6 )% (43,028 ) (2.8 )%
Other (expense) income, net (4 ) — % 126
— %
Income (loss) before income taxes 45,490
2.8 % (51,646 ) 1.3 %
Income tax expense (benefit) 13,232
0.8 % (13,299 ) (3.1 )%
Income (loss) from continuing operations 32,258
2.0 % (38,347 ) (2.5 )%
Income from discontinued operations, net of tax —
— % 7,913
0.5 %
Loss on sale of discontinued operations, net of tax (1,401 ) (0.1 )% —
— %
Net income (loss) $ 30,857
1.9 % $ (30,434 ) (2.0 )%

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


	Six Months Ended June 30,															Change
	2020								2019					$		%
(dollars in thousands)
Wallboard	$	390,856		38.7	%	$	416,973		38.8	%	$	(26,117)		(6.3)	%
Suspended ceiling systems	190,014			18.8	%	195,172			18.2	%	(5,158)			(2.6)	%
Metal framing	175,522			17.4	%	201,676			18.8	%	(26,154)			(13.0)	%
Complementary and other products	253,956			25.1	%	260,962			24.2	%	(7,006)			(2.7)	%
Total net sales	$	1,010,348		100.0	%	$	1,074,783		100.0	%	$	(64,435)		(6.0)	%
Total gross profit	$	307,813				$	324,497				$	(16,684)		(5.1)	%
Total gross margin	30.5		%			30.2		%			0.3		%

Nine Months Ended September 30, Change
2019 2018 $ %
(dollars in thousands)
Wallboard $ 624,299
38.1 %
$ 583,242
38.2 % $ 41,057

7.0 %
Suspended ceiling systems 314,045
19.2 %
288,356
18.9 % 25,689

8.9 %
Metal framing 300,493
18.3 %
264,019
17.3 % 36,474

13.8 %
Complementary and other products 400,852
24.4 %
392,536
25.7 % 8,316

2.1 %
Total net sales $ 1,639,689
100.0 %
$ 1,528,153
100.0 % $ 111,536

7.3 %
Total gross profit $ 496,292

$ 434,741

$ 61,551

14.2 %
Total gross margin 30.3 %

28.4 %
1.9 %

Net Sales

Net sales for the ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020, were ~~$1,639.7~~$1,010.3 million compared to ~~$1,528.2~~$1,074.8 million for the ~~nine~~six months ended ~~September~~June 30, ~~2018,~~2019, representing ~~an increase~~a decrease of ~~$111.5~~$64.4 million, or ~~7.3%~~6.0%. ~~There was one less day in the current period as compared to the prior period.~~ Average daily net sales ~~increased 7.9%~~decreased 6.7% over the prior period. Net sales from base business ~~branches contributed $51.1~~decreased $78.9 million ofcompared to the ~~net sales increase,~~prior period, and average daily base business net sales ~~increased~~decreased by ~~4.2%~~8.4% over the prior period. There was one more business day in the current period as compared to the prior period. Net sales from acquired branches and existing branches that were strategically combined ~~contributed $60.4 million of the net sales increase. The~~increased by $14.5 million. Our base business net sales ~~increase was~~across all of our major product lines decreased during the six months ended June 30, 2020, compared to the six months ended June 30, 2019, primarily as a result of reduced business activity due to ~~strong commercial activity and product expansion into new geographic markets.~~impacts of the COVID-19 Pandemic. The ~~change~~decreases in our base business net sales ~~was also driven by the following factors:~~across our product lines amounted to following:

~~an increase in~~ •wallboard net sales ~~of $9.3~~decreased $30.4 million, or ~~1.7%~~7.6%, ~~primarily due to an increase~~comprised of decreases in average selling price ~~of 0.9%,~~and product mix of 2.4%, and ~~an increase in~~ wallboard unit volume of ~~0.8%~~5.2%. On an average daily net sales basis, wallboard ~~increased~~decreased by ~~2.2%~~8.3%, driven by an average daily unit volume ~~growth~~decrease of ~~1.3%~~5.9%;

~~an increase in~~ •suspended ceiling systems net sales ~~of $12.1~~decreased $11.0 million, or ~~4.9%~~5.9%. On an average daily net sales basis, suspended ceiling systems ~~increased~~decreased by ~~5.4%, which was primarily due to an increase in average selling price and product mix;~~6.6%;

~~an increase in~~ •metal framing net sales ~~of $19.6~~decreased $26.9 million, or ~~7.7%.~~13.9% as a result of lower average selling prices and unit volumes. On an average daily net sales basis, metal framing ~~increased~~decreased by ~~8.3%. The increase in metal framing net sales was primarily due to an increase in volume primarily due to commercial construction activity;~~14.5%; and

~~an increase in~~ •complementary and other ~~product~~products net sales ~~of $10.1~~decreased $10.6 million, or ~~2.9%~~4.3%. On an average daily net sales basis, complementary and other products ~~increased~~decreased by ~~3.4%, primarily due to our continued initiatives to increase complementary product sales.~~5.0%.

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


	Six Months Ended June 30,						Change
	2020		2019		$		%
(dollars in thousands)
Base business⁽¹⁾	$	951,189	$	1,030,103	$	(78,914)	(7.7)	%
Acquired and combined ⁽²⁾	59,159		44,680		14,479		32.4	%
Net sales	$	1,010,348	$	1,074,783	$	(64,435)	(6.0)	%
⁽¹⁾ Represents net sales from branches that were owned by us since January 1, 2019, and branches that were opened by us during such period.
⁽²⁾Represents branches acquired and combined after January 1, 2019, primarily as a result of our strategic combination of branches.

Nine Months Ended September 30, Change
2019 2018 $ %
(dollars in thousands)
Base business ⁽¹⁾
$ 1,460,741

$ 1,409,632

$ 51,109

3.6 %
Acquired and combined ⁽²⁾
178,948

118,521

60,427

51.0 %
Net sales $ 1,639,689

$ 1,528,153

$ 111,536

7.3 %
⁽¹⁾ Represents net sales from branches that were owned by us since January 1, 2018 and branches that were opened by us during such period.
⁽²⁾ Represents branches acquired and combined after January 1, 2018, primarily as a result of our strategic combination of branches.

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


	Nine Months Ended September 30, 2018		Base Business Net Sales Change		Acquired and Combined Net Sales Change			Nine Months Ended September 30, 2019		Total Net Sales % Change		Base Business Net Sales % Change⁽¹⁾		Acquired and Combined Net Sales % Change⁽²⁾			Six Months Ended June 30, 2019		Base Business Net Sales Change		Acquired and Combined Net Sales Change		Six Months Ended June 30, 2020		Total Net Sales % Change		Base Business Net Sales % Change⁽¹⁾		Acquired and Combined Net Sales % Change⁽²⁾
(dollars in thousands)																(dollars in thousands)
Wallboard	$	583,242	$	9,257	$	31,800		$	624,299	7.0	%	1.7	%	112.0	%	Wallboard	$	416,973	$	(30,383)	$	4,266	$	390,856	(6.3)	%	(7.6)	%	26.7	%
Suspended ceiling systems	288,356		12,113		13,576			314,045		8.9	%	4.9	%	34.9	%	Suspended ceiling systems	195,172		(10,995)		5,837		190,014		(2.6)	%	(5.9)	%	73.1	%
Metal framing	264,019		19,590		16,884			300,493		13.8	%	7.7	%	151.3	%	Metal framing	201,676		(26,888)		734		175,522		(13.0)	%	(13.9)	%	9.4	%
Complementary and other products	392,536		10,149		(1,833		)	400,852		2.1	%	2.9	%	(4.6	)%	Complementary and other products	260,962		(10,648)		3,642		253,956		(2.7)	%	(4.3)	%	28.2	%
Net sales	$	1,528,153	$	51,109	$	60,427		$	1,639,689	7.3	%	3.6	%	51.0	%	Net sales	$	1,074,783	$	(78,914)	$	14,479	$	1,010,348	(6.0)	%	(7.7)	%	32.4	%
Average daily net sales⁽³⁾	$	8,001	$	308	$	321		$	8,630	7.9	%	4.2	%	51.8	%	Average daily net sales⁽³⁾	$	8,463	$	(680)	$	110	$	7,893	(6.7)	%	(8.4)	%	31.4	%
⁽¹⁾ Represents base business net sales change as a percentage of base business net sales for the nine months ended September 30, 2018.
⁽²⁾ Represents acquired and combined net sales as a percentage of acquired and combined net sales for the nine months ended September 30, 2018.
⁽³⁾The number of business days for the nine months ended September 30, 2019 and 2018, were 190 and 191, respectively.
⁽¹⁾ Represents base business net sales change as a percentage of base business net sales for the six months ended June 30, 2019.																⁽¹⁾ Represents base business net sales change as a percentage of base business net sales for the six months ended June 30, 2019.
⁽²⁾ Represents acquired and combined as a percentage of acquired and combined net sales for the six months ended June 30, 2019.																⁽²⁾ Represents acquired and combined as a percentage of acquired and combined net sales for the six months ended June 30, 2019.
⁽³⁾The numbers of business days for the six months ended June 30, 2020 and 2019, were 128 and 127, respectively.																⁽³⁾The numbers of business days for the six months ended June 30, 2020 and 2019, were 128 and 127, respectively.

Gross Profit and Gross Margin

Gross profit for the ~~nine~~six months ended ~~September~~June 30, ~~2019,~~2020, was ~~$496.3~~$307.8 million compared to ~~$434.7~~$324.5 million for the ~~nine~~six months ended ~~September~~June 30, ~~2018,~~2019, representing ~~an increase~~a decrease of ~~$61.6~~$16.7 million, or ~~14.2%~~5.1%. ~~Gross~~The decrease in gross profit ~~increased~~was primarily due to ~~an expansion of our gross margin, an increase in sales from acquisitions and base business growth.~~lower net sales.

Gross margin for the ~~nine~~six months ended ~~September~~June 30, ~~2019,~~2020, was ~~30.3%~~30.5% compared to ~~28.4%~~30.2% for the ~~nine~~six months ended ~~September~~June 30, ~~2018.~~ 2019.The increase in gross margin was primarily due to improved profitability ~~across our product lines~~ driven by our ongoing pricing and purchasing initiatives ~~and continued stabilization of our product costs.~~that was partially offset by COVID-19 Pandemic related market disruptions.

Selling, General & Administrative Expenses

SG&A expenses for the ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020, were ~~$363.9~~$229.4 million compared to ~~$328.1~~$240.0 million for the ~~nine~~six months ended ~~September~~June 30, ~~2018,~~2019, representing ~~an increase~~a decrease of ~~$35.8~~$10.6 million, or ~~10.9%~~4.4%. As a percentage of net sales, SG&A expenses were ~~22.2%~~22.7% for the ~~nine~~six months ended ~~September~~June 30, ~~2019,~~2020, compared to ~~21.5%~~22.3% for the ~~nine~~six months ended ~~September~~June 30, ~~2018.~~2019. The increase in SG&A expenses as a percentage of net sales was primarily due to loss of sales leverage resulting from the COVID-19 Pandemic and our continued investment in various company-wide initiatives, ~~and higher operating costs as~~partially offset by actions taken to right-size our cost structure in the second quarter in response to a ~~result of adverse weather conditions.~~decline in net sales.

Depreciation and Amortization

Depreciation and amortization for the ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020, was ~~$60.9~~$38.5 million compared to ~~$57.0~~$40.7 million for the ~~nine~~six months ended ~~September~~June 30, ~~2018,~~2019, representing ~~an increase~~a decrease of ~~$4.0~~$2.2 million, or ~~7.0%~~5.4%. The increase in depreciation and amortization was primarily due to acquisitions subsequent to September 30, 2018, which increased the value of property and equipment and intangible assets subject to amortization.

Interest Expense

Interest expense for the ~~nine~~six months ended ~~September~~June 30, ~~2019,~~2020, was ~~$26.0~~$14.9 million compared to ~~$43.0~~$16.9 million for the ~~nine~~six months ended ~~September~~June 30, ~~2018,~~2019, representing a decrease of ~~$17.0~~$2.0 million, or ~~39.5%~~11.9%. The decrease is primarily due to ~~the refinancing of our Notes in August 2018. See Note 8, Long-Term Debt, to the condensed consolidated financial statements.~~lower variable interest rates on outstanding debt.

Gain on Legal Settlement

~~Loss on Extinguishment of Debt~~

In ~~August 2018, we completed~~February 2020, the ~~refinancing~~Company received a one-time class action legal settlement of $8.6 million. The Company does not expect to receive any further payments as a result of this settlement.

Other (Expense) Income, Net

Other (expense) income, net for the ~~Notes~~six months ended June 30, 2020, was an expense of $0.5 million, compared to ~~reduce our interest rate. The refinancing resulted in a loss~~income of ~~$58.5~~$0.1 million ~~consisting~~for the six months ended June 30, 2019. Other (expense) income, net consists primarily of ~~deferred financing costs~~foreign currency transaction gains and ~~original issuance discounts, which were written off, and a prepayment premium.~~losses.

Income Taxes

Income tax expense for the ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020, was ~~$13.2~~$8.9 million compared to ~~an income tax benefit of $13.3~~$7.5 million for the ~~nine~~six months ended ~~September~~June 30, ~~2018.~~2019. The effective tax rate for the ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020, was ~~29.1%~~26.9% compared to ~~25.8%~~27.7% for the ~~nine~~six months ended ~~September~~June 30, ~~2018.~~2019. The difference in the effective tax rates between periods is due primarily to the ~~impact the GILTI provisions had on reported earnings in 2019,~~recording of a ~~reduction in valuation allowance treated as a discrete item~~greater foreign rate differential during the ~~third quarter of 2018 and a refinement of the provisional estimate of the one-time repatriation tax under the 2017 Tax Cuts and Jobs Act during the first quarter of 2018.~~six months ended June 30, 2019.

Liquidity and Capital Resources

Summary

We depend on cash flow from operations, cash on hand and funds available under our 2018 Revolving Credit Facility, and, in the future, we may depend on other debt financings ~~allowed~~permitted under the terms of the 2018 Term Loan Facility and ~~the~~our 2018 Revolving Credit Facility, and equity financings to finance our acquisition strategy, working capital needs and capital expenditures. We believe ~~that~~ these sources of funds will be adequate to meet our debt service requirements and provide cash, as required, to support our strategy, ongoing operations, capital expenditures, lease obligations and working capital for at least the next 12 months. ~~However,~~

We believe our financial resources, along with managing discretionary expenses, will allow us to manage the anticipated impact of the COVID-19 Pandemic on our business operations for the foreseeable future, which will include reduced net sales and net income levels for our business. We are reducing spending more broadly across our operations, only proceeding with operating and capital spending that is critical. We have restricted hiring and reduced discretionary spending. We restored temporary salary reductions for all employees and compensation for independent board members during the second quarter. In addition, we recorded a credit of approximately $1.6 million as an offset to SG&A expenses as a result of the employee retention credits made available under the Canada Emergency Wage Subsidy for Canadian employees during the three months ended June 30, 2020. The challenges posed by the COVID-19 Pandemic on our business are evolving rapidly. Consequently, we will continue to evaluate our financial position in light of future developments, particularly those relating to the COVID-19 Pandemic.

We cannot ensure that we will be able to obtain future debt or equity financings adequate for our future cash requirements on commercially reasonable terms or at all. The tax receivable agreement, or TRA, we are a party to may also have a negative impact on our liquidity if, among other things, payments we make under the TRA exceed the actual cash savings we and our subsidiaries realize in respect of the tax benefits covered by the TRA after we have paid our taxes and other obligations. In addition, as a result of either an early termination of the TRA or a change of control, we could be required to make payments under the TRA that exceed our actual cash savings under the TRA. In these situations, our obligations under the TRA could have a substantial, negative impact on our liquidity and could have the effect of delaying, deferring or preventing, among other things, our capital expenditures and acquisitions.

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

In March 2020, in response to the COVID-19 Pandemic, we drew $120.0 million from our 2018 Revolving Credit Facility to provide financial flexibility and liquidity due to volatile financial market conditions. We repaid the first quarter draw under our 2018 Revolving Credit Facility in June 2020 and lowered our net debt leverage ratio. As of ~~September~~June 30, ~~2019,~~2020, we had ~~$134.3~~$40.0 million of outstanding borrowings, ~~and $240.7~~$325.6 million of available aggregate undrawn borrowing capacity under ~~the~~our 2018 Revolving Credit ~~Facility.~~Facility, and $31.1 million in cash and cash equivalents.

See Note 8,9, Long-Term Debt, to the condensed consolidated financial statements for more information about ~~the~~our 2018 Revolving Credit Facility and 2018 Term Loan Facility.

As long as commitments are outstanding under ~~the~~our 2018 Revolving Credit Facility, we are subject to certain restrictions under the facility if our Pro Forma Adjusted EBITDA (called "Consolidated EBITDA" under our 2018 Revolving Credit Facility) to debt ratio, or the Total Net Leverage Ratio, exceeds a certain ratio. The Total Net Leverage Ratio is defined as the ratio of Consolidated Total Debt to the aggregate amount of Consolidated EBITDA for the Relevant Reference Period (as such terms are defined in ~~the~~our 2018 Revolving Credit Facility). Consolidated Total Debt is defined in ~~the~~our 2018 Revolving Credit Facility and is generally calculated as an amount equal to the aggregate outstanding principal amount of all third-party debt for borrowed money, unreimbursed drawings under letters of credit, ~~capital~~finance lease ~~obligations,~~liabilities, and third-party debt obligations evidenced by notes or similar instruments on a consolidated basis and determined in accordance with GAAP, subject to certain exclusions. Consolidated EBITDA is defined in ~~the~~our 2018 Revolving Credit Facility and is calculated in a similar manner to our calculation of Adjusted EBITDA, except that ~~the~~our 2018 Revolving Credit Facility permits pro forma adjustments in order to give effect to, among other things, the pro forma results of our acquisitions as if we had owned such acquired companies for the entirety of the Relevant Reference Period. These pro forma adjustments give effect to all acquisitions consummated in the four quarters ended ~~September~~June 30, ~~2019,~~2020, as though they had been consummated on the first day of the first quarter for the four quarters ended ~~September~~June 30, ~~2019. The~~2020. Our 2018 Revolving Credit Facility requires us to maintain a Total Net Leverage Ratio no greater than 6.00:1.00 to incur additional junior lien and unsecured indebtedness.

As of ~~September~~June 30, ~~2019,~~2020, we were in compliance with all covenant restrictions under the 2018 Term Loan Facility and 2018 Revolving Credit Facility. The following tables present the Total Net Leverage Ratio and Net Debt Leverage Ratio as of ~~September~~June 30, ~~2019:~~2020:

(dollars in thousands)

Four Quarters Ended June 30, 2020

Pro Forma Adjusted EBITDA ⁽¹⁾

173,458

Consolidated Total Debt ⁽²⁾

489,339

Total Net Leverage Ratio

2.82x

Cash

31,122

Consolidated Total Debt ⁽²⁾less Cash, or Net Debt

458,217

Net Debt Leverage Ratio

2.64x

⁽¹⁾"Pro Forma Adjusted EBITDA" is used herein instead of "Consolidated EBITDA" to avoid confusion but is calculated in the same manner as Consolidated EBITDA under our 2018 Revolving Credit Facility. The following table presents a reconciliation of Adjusted EBITDA to Pro Forma Adjusted EBITDA for the four quarters ended June 30, 2020:

(dollars in thousands) Four Quarters Ended September 30, 2019
Pro Forma Adjusted EBITDA ⁽¹⁾
$ 181,942
Consolidated Total Debt ⁽²⁾
$ 588,936
Total Net Leverage Ratio 3.24x
Cash $ 22,668
Consolidated Total Debt ⁽²⁾less Cash ("Net Debt")
$ 566,268
Net Debt Leverage Ratio 3.11x
⁽¹⁾"Pro Forma Adjusted EBITDA" is used herein instead of "Consolidated EBITDA" to avoid confusion but is calculated in the same manner as Consolidated EBITDA under the 2018 Revolving Credit Facility. The following table presents a reconciliation of Adjusted EBITDA to Pro Forma Adjusted EBITDA for the four quarters ended September 30, 2019:

Four Quarters Ended September 30, 2019
(in thousands)
Adjusted EBITDA ^(a)
$ 179,048
Pro forma adjustment ^(b)
2,894
Pro Forma Adjusted EBITDA $ 181,942
^(a) See the section titled "Non-GAAP Financial Information" for a reconciliation of net income (loss) from continuing operations to Adjusted EBITDA.
^(b)The pro forma adjustment gives effect to all acquisitions consummated in the four quarters ended September 30, 2019, as though they had been consummated on the first day of the first quarter for the four quarters ended September 30, 2019. Other adjustments are also made to conform to the terms of the 2018 Revolving Credit Facility.

⁽²⁾The reconciliation of total debt on the balance sheet to Consolidated Total Debt is as follows:


	Four Quarters Ended June 30, 2020
(in thousands)
Adjusted EBITDA ^(a)	$	171,568
Pro forma adjustment ^(b)	1,890
Pro Forma Adjusted EBITDA	$	173,458
^(a) See the section titled "Non-GAAP Financial Information" for a reconciliation of net income from continuing operations to Adjusted EBITDA. ^(b)The pro forma adjustment gives effect to all acquisitions consummated in the four quarters ended June 30, 2020, as though they had been consummated on the first day of the first quarter for the four quarters ended June 30, 2020. Other adjustments are also made to conform to the terms of our 2018 Revolving Credit Facility. ⁽²⁾The reconciliation of total debt on the balance sheet to Consolidated Total Debt is as follows:


	As of June 30, 2020
(in thousands)
Total gross debt	$	483,250
Finance lease liabilities	6,089
Consolidated Total Debt	$	489,339

As of September 30, 2019
(in thousands)
Total gross debt $ 580,931
Finance leases 8,005
Consolidated Total Debt $ 588,936

Cash Flows

A summary of net cash provided by, or used in, operating, investing and financing activities by continuing operations is shown in the following table:


	Six Months Ended June 30,
	2020		2019
(in thousands)
Net cash provided by operating activities	$	115,302	$	53,204
Net cash used in investing activities	$	(20,955)	$	(30,816)
Net cash used in financing activities	$	(80,825)	$	(30,125)

Nine Months Ended September 30,
2019 2018
(in thousands)
Net cash provided by (used in) operating activities $ 87,253

$ (873 )
Net cash used in investing activities $ (44,758 )
$ (96,771 )
Net cash (used in) provided by financing activities $ (33,923 )
$ 99,372

Operating Activities

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

Net cash provided by operating activities increased by ~~$88.1~~$62.1 million to ~~$87.3~~$115.3 million for the ~~nine~~six months ended ~~September~~June 30, ~~2019,~~2020, as compared to ~~net cash used of $0.9~~$53.2 million in the same period in ~~2018.~~2019. The increase was primarily due to higher net income from continuing operations including ~~adjustments~~adjustment for ~~higher~~ non-cash items of ~~$45.7~~$8.4 million and lower working capital requirements of ~~$42.4~~$53.7 million.

Investing Activities

Net cash used in investing activities consists primarily of acquisitions and capital expenditures, including purchases of land, buildings, leasehold improvements, fleet assets, information technology and other equipment. Capital expenditures vary depending on prevailing business factors, including current and anticipated market conditions. We are currently delaying or reducing capital expenditures that are not anticipated to impact near-term business in light of the COVID-19 Pandemic.

Net cash used in investing activities decreased by ~~$52.0~~$9.9 million to ~~$44.8~~$21.0 million for the ~~nine~~six months ended ~~September~~June 30, ~~2019,~~2020, as compared to ~~$96.8~~$30.8 million in the same period in ~~2018.~~2019. The decrease was primarily due to a lower aggregate purchase price for acquisitions of ~~$48.5 and~~$13.3 million, partially offset by $3.3 million in proceeds from the termination of the net investment hedge ~~of $3.3 million.~~for the three months ended June 30, 2019.

Financing Activities

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

Net cash used in financing activities increased by ~~$133.3~~$50.7 million to ~~$33.9~~$80.8 million ~~for~~in the ~~nine~~six months ended ~~September~~June 30, ~~2019,~~2020, as compared to ~~net cash provided by financing activities of $99.4~~$30.1 million in the same period in ~~2018.~~2019. The increase was primarily due to ~~lower~~higher repayments of borrowings of ~~$116.6~~$39.2 million and ~~the first~~a higher TRA payment ~~under the TRA of $16.7 million~~ in ~~2019.~~January 2020.

Secondary Public Offering

On September 24, 2019, LSF9 Cypress Parent 2 LLC ~~(the~~or the “Selling ~~Stockholder”)~~Stockholder,” an affiliate of Lone Star, sold 4,750,000 shares of our common stock at a price of $17.00 per share. The Selling Stockholder also granted the underwriters an option for a period of 30 days to purchase up to an additional 712,500 shares of our common stock. On October 11, 2019, the underwriters exercised their option to purchase the additional 712,500 shares of our common stock. As a result of the sale, the aggregate beneficial ownership of Lone Star decreased from 65.3% to 52.6% of our outstanding shares of common stock as of October 11, 2019, and we remain a “Controlled Company” under the corporate governance standards of the New York Stock Exchange. We did not receive any proceeds from the sale of the common stock by the Selling Stockholder.

Critical Accounting Policies

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

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

There have been no material changes made to the critical accounting estimates during the periods presented in the condensed consolidated financial statements from those disclosed in the ~~2018~~2019 10-K.

Off-Balance Sheet Arrangements

As of ~~September~~June 30, ~~2019,~~2020, we had no material off-balance sheet arrangements or similar obligations, such as financing or unconsolidated variable interest entities.

Non-GAAP Financial Information

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

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

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

It• it does not reflect our cash outlays for capital expenditures or future contractual commitments;

It• it does not reflect changes in, or cash requirements for, working capital;

It• it does not reflect interest expense or the cash requirements necessary to service interest or principal payments on indebtedness;

It• it does not reflect income tax expense or the cash necessary to pay income taxes; and

~~Although~~• although depreciation and amortization are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future, and this non-GAAP measure does not reflect cash requirements for such replacements.

Other companies, including other companies in our industry, may not use these measures or may calculate one or both differently than as presented in this Quarterly Report on Form 10-Q, limiting their usefulness as a comparative measure.

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

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

Three Months Ended September 30, Nine Months Ended September 30,

2019
2018 2019 2018
(dollars in thousands)

Net income (loss) from continuing operations $ 12,709

$ (37,553 )
$ 32,258

$ (38,347 )
Loss on extinguishment of debt —

58,475

—

58,475
Interest expense, net 9,012

12,544

25,999

42,957
Income tax expense (benefit) 5,754

(12,519 )
13,232

(13,299 )
Depreciation and amortization 20,218

19,771

60,911

56,922
Unrealized loss (gain) on derivative financial instruments —

78

—

(56 )
Offering and public company readiness expenses^(a)
378

—

378

89
Stock-based compensation 1,117

633

3,056

1,512
Non-cash purchase accounting effects^(b)
—

6

—

413
Loss (gain) on disposal of property and equipment 13

339

(54 )
614
Transaction costs^(c)
819

1,967

2,046

4,670
Adjusted EBITDA $ 50,020

$ 43,741

$ 137,826

$ 113,950
Adjusted EBITDA margin^(d)
8.9 %
8.1 %
8.4 % 7.5 %


	Three Months Ended June 30,									Six Months Ended June 30,
	2020			2019			2020			2019
(dollars in thousands)
Net income from continuing operations	$	9,857		$	14,721		24,233			19,549
Interest expense, net	7,127			8,402			14,818			16,987
Income tax expense	3,647			5,433			8,914			7,478
Depreciation and amortization	19,288			20,351			38,507			40,693
Stock-based compensation	1,435			1,110			2,828			1,939
Loss (gain) on disposal or sale of assets	657			(258)			708			(67)
Gain on legal settlement	—			—			(8,556)			—
Transaction costs^(a)	245			582			1,084			1,227
Adjusted EBITDA	$	42,256		$	50,341		$	82,536		$	87,806
Adjusted EBITDA margin^(b)	8.7		%	9.0		%	8.2		%	8.2		%


~~(a)~~			~~Represents costs related to our initial public offering, secondary offering, and public company readiness expenses.~~


~~(b)~~	~~Adjusts for the effect of the purchase accounting step-up in the value of inventory to fair value recognized as a result of acquisitions.~~


~~(c)~~	~~Represents costs related to our transactions, including fees to financial advisors, accountants, attorneys and other professionals as well as certain internal corporate development costs.~~


~~(d)~~	~~Adjusted EBITDA margin represents Adjusted EBITDA divided by net sales.~~

(a) Represents costs related to our transactions, including fees to financial advisors, accountants, attorneys, and other professionals, as well as certain internal corporate development costs. The costs also include non-cash purchase accounting effects to adjust for the effect of the purchase accounting step-up in the value of inventory to fair value recognized as a result of acquisitions.

(b) Adjusted EBITDA margin represents Adjusted EBITDA divided by net sales.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Other than as disclosed in Note 5,4, Current Expected Credit Losses, and Note 6, Derivatives and Hedging Activities, of the condensed consolidated financial statements, there have been no material changes to the information regarding market risk provided in Item 7A, Quantitative and Qualitative Disclosures about Market Risk, of ~~our 2018~~the 2019 10-K.

Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

As required by Rule 13a-15(b) under the Exchange Act, our management, including our Chief Executive Officer and Chief Financial Officer, carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act), as of ~~September~~June 30, ~~2019,~~2020, the end of the period covered by this Quarterly Report on Form 10-Q.

Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that, as of ~~September~~June 30, ~~2019,~~2020, the end of the period covered by this Quarterly Report on Form 10-Q, our disclosure controls and procedures were effective.

Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that occurred during the quarter ended ~~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.

Part II. Other Information

Item 1. Legal Proceedings

WeIn the ordinary course of our business, we are ~~not currently a party to any material legal proceedings. We are, however,~~ subject to ~~lawsuits,~~certain legal proceedings, regulatory proceedings, government investigations, audits and other ~~legal proceedings~~disputes from time to time, ~~in the ordinary course of our business. It~~including contractual disputes, employment matters and product liability claims. While it is not possible to predict the outcome of any legal ~~proceeding~~or regulatory proceedings or other disputes with certainty, we believe the outcome of any ~~certainty. The outcome~~pending legal or ~~costs we incur~~regulatory proceedings or other disputes in ~~connection with~~the aggregate will not have a ~~legal proceeding could adversely impact~~material adverse effect on our business, operating results, financial condition, or cash flows. However, regardless of the outcome, resolving legal and ~~financial position.~~regulatory proceedings and other disputes can have an adverse impact on us because of legal costs, diversion of management's time and resources, and other factors.

Item 1A. Risk Factors

There have been no material changes ~~to the~~in our risk factors from those disclosed ~~under~~in Item ~~1A, “Risk~~1A. Risk Factors” in the ~~2018 10-K.~~2019

10-K and in the 10-Q filed on May 11, 2020.

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

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosure

Not applicable.

Item 5. Other Information

None.

Item 6. Exhibits

Exhibit Number

Description

10.1#

Demirkaya, Onur - Employment Agreement (incorporated by reference to Exhibit 10.1 on Form 8-K filed with the Securities and Exchange Commission on May 4, 2020).

31.1*

Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended.

31.2*

Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended.

32.1

Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

~~10.25#~~

~~Amendment dated August 5, 2019 to Employment Agreement by and between Foundation Building Materials, LLC and Barbara Bitzer.~~

~~10.26#~~

~~Amendment dated August 5, 2019 to Employment Agreement by and between Foundation Building Materials, LLC and Richard J. Tilley.~~

101 INS

XBRL Instance Document.

101 SCH

XBRL Taxonomy Extension Schema Document.

101 CAL

XBRL Taxonomy Extension Calculation Linkbase Document.

101 DEF

XBRL Taxonomy Extension Definition Linkbase Document.

101 LAB

XBRL Taxonomy Extension Label Linkbase Document

101 PRE

XBRL Taxonomy Extension Presentation Linkbase Document.


#

	~~Denotes management~~
*		Filed herewith.
#		Management contract or compensatory plan, contract or arrangement.

The certifications attached as Exhibit 32.1 accompany this Quarterly Report on Form 10-Q pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, are not be deemed “filed” by the registrant for purposes of Section 18 of the Exchange Act, and are not to be incorporated by reference into any of the registrant’s filings under the Securities Act or the Exchange Act, whether made before or after the date of this Quarterly Report on Form 10-Q, irrespective of any general incorporation language contained in any such filing.

SIGNATURES

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



FOUNDATION BUILDING MATERIALS, INC.


Date: August 4, 2020		BY:	/s/ John Gorey
			John Gorey
			Chief Financial Officer
			(Principal Financial Officer)

~~Date: November 5, 2019~~		~~BY:~~	/s/ ~~John Gorey~~Onur Demirkaya
			~~John Gorey~~Onur Demirkaya
			~~Chief Financial Officer~~
	~~(Principal Financial Officer)~~

	~~/s/ Barbara J. Bitzer~~
	~~Barbara J. Bitzer~~
	Chief Accounting Officer
			(Principal Accounting Officer)


				Page
PART I. FINANCIAL INFORMATION

Item 1.			Financial Statements	~~Page~~
~~PART I. FINANCIAL INFORMATION~~

~~Item 1.~~	~~Financial Statements~~
	Condensed Consolidated Statements of Operations and Comprehensive Income ~~(Loss)~~	1
			Condensed Consolidated Balance Sheets	2
			Condensed Consolidated Statements of Cash Flows	3
			Condensed Consolidated ~~Statement~~Statements of Changes in Stockholders' Equity	5
			Notes to Condensed Consolidated Financial Statements	7
Item 2.			Management's Discussion and Analysis of Financial Condition and Results of Operations	2324
Item 3.			Quantitative and Qualitative Disclosures About Market Risk	3638
Item 4.			Control and Procedures	3638

PART II. OTHER INFORMATION

Item 1.			Legal Proceedings	~~Legal Proceedings~~39	37
Item 1A.			Risk Factors	~~Risk Factors~~39	37
Item 2.			Unregistered Sales of Equity Securities and Use of Proceeds	3739
Item 3.			Defaults Upon Senior Securities	3739
Item 4.			Mine Safety Disclosures	3739
Item 5.			Other Information	~~Other Information~~39	37
Item 6.			Exhibits	~~Exhibits~~39	37
Signatures


	September 30, 2019			December 31, 2018				June 30, 2020		December 31, 2019
Current assets:							Current assets:
Cash and cash equivalents	$	22,668		$	15,299		Cash and cash equivalents	$	31,122	$	17,766
Accounts receivable—net of allowance for doubtful accounts of $3,678 and $3,239, respectively	314,088			276,043
Accounts receivable—net of allowance for expected credit losses of $2,896 and $3,169, respectively							Accounts receivable—net of allowance for expected credit losses of $2,896 and $3,169, respectively	263,340		262,757
Other receivables	49,284			57,472			Other receivables	35,003		59,104
Inventories	163,280			165,989			Inventories	159,615		178,624
Prepaid expenses and other current assets	13,321			9,053			Prepaid expenses and other current assets	9,386		7,965
Total current assets	562,641			523,856			Total current assets	498,466		526,216
Property and equipment, net	153,294			151,641			Property and equipment, net	149,195		150,188
Right-of-use assets, net	117,137			—			Right-of-use assets, net	126,290		120,562
Intangible assets, net	117,894			145,876			Intangible assets, net	89,776		113,861
Goodwill	490,315			484,941			Goodwill	494,159		495,724
Other assets	5,481			10,393			Other assets	6,607		5,206
Total assets	$	1,446,762		$	1,316,707		Total assets	$	1,364,493	$	1,411,757
Liabilities and stockholders' equity:							Liabilities and stockholders' equity:
Current liabilities:							Current liabilities:
Accounts payable	$	143,958		$	137,773		Accounts payable	$	145,267	$	145,226
Accrued payroll and employee benefits	29,113			28,830			Accrued payroll and employee benefits	25,458		31,410
Accrued taxes	11,092			11,867			Accrued taxes	9,594		8,780
Current portion of tax receivable agreement	27,676			16,667			Current portion of tax receivable agreement	8,537		27,850
Current portion of term loan, net	4,500			4,500
Current portion of term loan							Current portion of term loan	4,500		4,500
Current portion of lease liabilities	29,310			—			Current portion of lease liabilities	31,508		30,307
Other current liabilities	23,650			19,979			Other current liabilities	19,336		18,557
Total current liabilities	269,299			219,616			Total current liabilities	244,200		266,630
Asset-based revolving credit facility	134,306			146,000			Asset-based revolving credit facility	40,000		89,000
Long-term portion of term loan, net	435,475			437,999			Long-term portion of term loan, net	432,950		434,633
Tax receivable agreement	90,272			117,948			Tax receivable agreement	80,996		89,533
Deferred income taxes, net	18,586			20,678			Deferred income taxes, net	21,670		18,972
Long-term portion of lease liabilities	95,045			—			Long-term portion of lease liabilities	100,867		97,145
Other liabilities	7,957			8,117			Other liabilities	14,388		7,679
Total liabilities	1,050,940			950,358			Total liabilities	935,071		1,003,592
Commitments and contingencies							Commitments and contingencies

Stockholders' equity:							Stockholders' equity:
Preferred stock, $0.001 par value, authorized 10,000,000 shares; 0 shares issued	—			—			Preferred stock, $0.001 par value, authorized 10,000,000 shares; 0 shares issued	—		—
Common stock, $0.001 par value, authorized 190,000,000 shares; 42,989,840 and 42,907,326 shares issued, respectively	13			13
Common stock, $0.001 par value, authorized 190,000,000 shares; 43,205,678 and 42,991,016 shares issued, respectively							Common stock, $0.001 par value, authorized 190,000,000 shares; 43,205,678 and 42,991,016 shares issued, respectively	13		13
Additional paid-in capital	335,237			332,330			Additional paid-in capital	338,820		336,362
Retained earnings	64,872			34,187			Retained earnings	98,487		74,254
Accumulated other comprehensive loss	(4,300		)	(181		)	Accumulated other comprehensive loss	(7,898)		(2,464)
Total stockholders' equity	395,822			366,349			Total stockholders' equity	429,422		408,165
Total liabilities and stockholders' equity	$	1,446,762		$	1,316,707		Total liabilities and stockholders' equity	$	1,364,493	$	1,411,757


	Six Months Ended June 30,
	2020		2019
Cash flows from operating activities:
Net income	$	24,233	$	18,159
Less: loss on sale of discontinued operations	—		(1,390)
Net income from continuing operations	24,233		19,549
Adjustments to reconcile net income to net cash provided by operating activities from continuing operations:
Depreciation	14,598		17,558
Amortization of intangible assets	23,909		23,135
Amortization of debt issuance costs and debt discount	1,080		992
Inventory fair value purchase accounting adjustment	—		234
Provision for expected credit losses	1,366		1,525
Stock-based compensation	2,828		1,939
Loss (gain) on disposal or sale of assets	708		(67)
Right-of-use assets non-cash expense	15,057		13,601
Deferred income taxes	3,334		271
Change in assets and liabilities, net of effects of acquisitions:
Accounts receivable	208		(43,441)
Other receivables	23,435		13,581
Inventories	20,053		(1,291)
Prepaid expenses and other current assets	(1,472)		(3,123)
Other assets	(6)		(121)
Accounts payable	1,333		23,429
Accrued payroll and employee benefits	(5,802)		(3,057)
Accrued taxes	827		(2,291)
Operating lease liabilities	(14,752)		(13,345)
Other liabilities	4,365		4,126
Net cash provided by operating activities from continuing operations	115,302		53,204
Cash flows from investing activities from continuing operations:
Purchases of property and equipment	(13,263)		(15,052)
Proceeds from termination of net investment hedge	—		3,313
Net (payments of) proceeds from net working capital adjustments related to acquisitions	(34)		470
Proceeds from disposal or sale of assets	980		2,376
Acquisitions, net of cash acquired	(8,638)		(21,923)
Net cash used in investing activities from continuing operations	(20,955)		(30,816)
Cash flows from financing activities from continuing operations:
Proceeds from asset-based revolving credit facility	322,500		281,620
Repayments of asset-based revolving credit facility	(371,500)		(291,371)
Principal payments for term loan	(2,250)		(2,250)
Payment related to tax receivable agreement	(27,850)		(16,667)
Tax withholding payment related to net settlement of equity awards	(370)		(138)



	Nine Months Ended September 30,
	2019			2018
Cash flows from operating activities:
Net income (loss)	$	30,857		$	(30,434	)
Add: loss on sale of discontinued operations	(1,401		)	—
Less: net income from discontinued operations	—			7,913
Net income (loss) from continuing operations	32,258			(38,347		)
Adjustments to reconcile net income (loss) to net cash provided by operating activities from continuing operations:
Depreciation	26,173			24,383
Amortization of intangible assets	34,738			32,539
Amortization of debt issuance costs and debt discount	1,617			6,834
Loss on extinguishment of debt	—			58,475
Inventory fair value purchase accounting adjustment	234			413
Provision for doubtful accounts	2,017			1,654
Stock-based compensation	3,056			1,512
Unrealized gain on derivative instruments, net	—			(56		)
(Gain) loss on disposal of property and equipment	(54		)	614
Right-of-use assets non-cash expense	20,586			—
Deferred income taxes	63			(13,038		)
Change in assets and liabilities, net of effects of acquisitions:
Accounts receivable	(32,949		)	(65,361		)
Other receivables	10,520			5,361
Inventories	5,623			(3,244		)
Prepaid expenses and other current assets	(4,198		)	(496		)
Other assets	(187		)	(1,928		)
Accounts payable	2,417			(8,940		)
Accrued payroll and employee benefits	214			7,929
Accrued taxes	(860		)	4,783
Operating lease liability	(20,034		)	—
Other liabilities	6,019			(13,960		)
Net cash provided by (used in) operating activities from continuing operations	87,253			(873		)
Cash flows from investing activities from continuing operations:
Purchases of property and equipment	(29,369		)	(28,157		)
Proceeds from termination of net investment hedge	3,313			—
Proceeds from net working capital adjustments related to acquisitions	461			115
Proceeds from the disposal of fixed assets	2,719			1,605
Acquisitions, net of cash acquired	(21,882		)	(70,334		)
Net cash used in investing activities from continuing operations	(44,758		)	(96,771		)
Cash flows from financing activities from continuing operations:
Proceeds from asset-based revolving credit facility	403,454			757,298
Repayments of asset-based revolving credit facility	(415,178		)	(498,964		)



Principal payments for term loan	(3,375		)	—
Term loan proceeds	—			450,000
Term loan original issuance discount and deferred finance costs	—			(7,935		)
Repayment of bond principal	—			(575,000		)
Prepayment premium on senior secured notes	—			(23,872		)
Payment related to tax receivable agreement	(16,667		)	—
Tax withholding payment related to net settlement of equity awards	(155		)	(61		)
Principal repayment of finance lease obligations	(2,002		)	(2,094		)
Net cash (used in) provided by financing activities from continuing operations	(33,923		)	99,372
Net cash used in operating activities from discontinued operations	—			(2,063		)
Net cash used in investing activities from discontinued operations	(1,401		)	(928		)
Net cash used in financing activities of discontinued operations	—			(140		)
Net cash used in discontinued operations	(1,401		)	(3,131		)
Effect of exchange rate changes on cash	198			(138		)
Net increase (decrease) in cash	7,369			(1,541		)
Cash and cash equivalents at beginning of period	15,299			12,101
Cash and cash equivalents at end of period	$	22,668		$	10,560

Supplemental disclosures of cash flow information:
Cash paid for income taxes	$	10,401		$	1,504
Cash paid for interest	$	24,150		$	52,288
Supplemental disclosures of non-cash investing and financing activities:
Change in fair value of derivatives, net of tax	$	5,663		$	839
Goodwill adjustment for purchase price allocation	$	57		$	202


Principal repayment of finance lease liabilities	(1,355)		(1,319)
Net cash used in financing activities from continuing operations	(80,825)		(30,125)
Net cash used in investing activities from discontinued operations	—		(1,390)
Net cash used in discontinued operations	—		(1,390)
Effect of exchange rate changes on cash	(166)		282
Net increase (decrease) in cash	13,356		(8,845)
Cash and cash equivalents at beginning of period	17,766		15,299
Cash and cash equivalents at end of period	$	31,122	$	6,454

Supplemental disclosures of cash flow information:
Cash paid for income taxes	$	190	$	5,091
Cash paid for interest	$	14,186	$	16,477
Supplemental disclosures of non-cash investing and financing activities:
Decrease in fair value of derivatives, net of tax	$	1,525	$	6,012
Net goodwill increase for purchase price allocation	$	47	$	57


Six Months Ended June 30, 2020
	Common Stock
	Shares	Amount		Additional Paid-in Capital		Retained Earnings		Other Comprehensive (Loss) Income		Total Stockholders' Equity
Balance at December 31, 2019	42,991,016	$	13	$	336,362	$	74,254	$	(2,464)	$	408,165
Stock-based compensation	—	—		1,393		—		—		1,393
Vesting of restricted stock units	237,988	—		—		—		—		—
Tax withholding payment related to net share settlement of equity awards	(27,948)	—		(362)		—		—		(362)
Other comprehensive loss	—	—		—		—		(7,542)		(7,542)
Net income	—	—		—		14,376				14,376
Balance at March 31, 2020	43,201,056	$	13	$	337,393	$	88,630	$	(10,006)	$	416,030
Stock-based compensation	—	$	—	$	1,435	$	—	$	—	$	1,435
Vesting of restricted stock units and exercise of stock options	6,456	$	—	$	—	$	—	$	—	$	—
Tax withholding payment related to net share settlement of equity awards	(1,834)	$	—	$	(8)	$	—	$	—	$	(8)
Other comprehensive income	—	$	—	$	—			$	2,108	$	2,108
Net income	—	$	—	$	—	$	9,857			$	9,857
Balance at June 30, 2020	43,205,678	$	13	$	338,820	$	98,487	$	(7,898)	$	429,422


	Allowance for Expected Credit Losses
Balance at December 31, 2019	$	(3,169)
Provision for expected credit losses	(1,366)
Write-offs	1,731
Recoveries	(92)
Balance at June 30, 2020	$	(2,896)



	Three Months Ended September 30, 2018			Nine Months Ended September 30, 2018
Net sales	$	82,533		$	237,923
Cost of goods sold	60,125			172,682
Gross profit	22,408			65,241
Operating expenses:
Selling, general and administrative expenses	17,078			49,481
Depreciation and amortization	1,561			4,637
Total operating expenses	18,639			54,118
Income from operations	3,769			11,123
Interest expense	(11		)	(36		)
Other income (expense), net	5			(5		)
Income from discontinued operations before income taxes	3,763			11,082
Income tax expense	991			3,169
Net income from discontinued operations, net of tax	$	2,772		$	7,913



	Three Months Ended September 30, 2019		Nine Months Ended September 30, 2019		Income Statement Classification
Operating leases:
Lease cost	$	8,335	$	24,469	Selling, general and administrative expenses
Variable lease cost	527		2,852		Selling, general and administrative expenses
Operating lease cost	8,862		27,321
Finance leases:
Amortization of ROU assets	615		2,044		Depreciation and amortization
Interest on lease liabilities	106		347		Interest expense
Finance lease cost	721		2,391
Total lease cost	$	9,583	$	29,712



Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	20,035
Financing cash flows from finance leases	$	2,002

Right-of-use-assets obtained in exchange for lease obligations:
Finance leases	$	203
Operating leases	$	136,204



	Operating Leases	Finance Leases
Weighted average remaining lease term (years)	5.30	3.47
Weighted average discount rate	4.6%	5.2%



Years Ending December 31,	Total
2019	$	29,289
2020	26,202
2021	23,796
2022	18,120
2023	12,647
Thereafter	19,856
	$	129,910


		June 30, 2020						December 31, 2019
Derivative Type	Balance Sheet Location	Assets		Liabilities		Assets		Liabilities
Interest Rate Swap	Other non-current liabilities	$	—	$	11.6	$	—	$	6.2
Net Investment Hedge	Other non-current assets/liabilities	$	1.9	$	—	$	—	$	1.4


	Six Months Ended June 30, 2020
Assets acquired:
Accounts receivable	$	4,210
Inventories	2,228
Property and equipment	1,810
Other assets	18
Intangible assets	372
Total assets acquired	$	8,638


	Operating Leases		Finance Leases		Total
2020	$	32,257	$	2,908	$	35,165
2021	29,816		2,445		32,261
2022	24,429		1,496		25,925
2023	18,704		976		19,680
2024	11,882		95		11,977
2025 and thereafter	17,730		87		17,817
Total lease payments	134,818		8,007		142,825
Less: amount representing interest	(14,750)		(623)		(15,373)
Total	$	120,068	$	7,384	$	127,452

Current portion of lease liabilities	$	27,689	$	2,618	$	30,307
Long-term portion of lease liabilities	$	92,379	$	4,766	$	97,145


	Carrying Value
Balance at December 31, 2019	$	495,724
Goodwill acquired	—
Derecognition of Goodwill⁽¹⁾	(121)
Purchase price allocation adjustments from prior periods	81
Impact of foreign currency exchange rates	(1,525)
Balance at June 30, 2020	$	494,159



	Carrying Value
Balance at December 31, 2018	$	484,941
Goodwill acquired	5,019
Purchase price allocation adjustments from prior periods	(403		)
Impact of foreign currency exchange rates	758
Balance at September 30, 2019	$	490,315



	Foreign Currency Translation (Losses) Gains			Unrealized Gain (Loss) on Derivatives, Net of Taxes			Total
Balance at December 31, 2018	$	(3,085	)	$	2,904		$	(181	)
Other comprehensive income (loss)	2,317			(6,436		)	(4,119		)
Balance at September 30, 2019	$	(768	)	$	(3,532	)	$	(4,300	)



	Three Months Ended September 30, 2018		Base Business Net Sales Change			Acquired and Combined Net Sales Change		Three Months Ended September 30, 2019		Total Net Sales % Change		Base Business Net Sales % Change⁽¹⁾		Acquired and Combined Net Sales % Change⁽²⁾
(dollars in thousands)
Wallboard	$	203,991	$	(3,872	)	$	7,207	$	207,326	1.6	%	(2.0	)%	57.1	%
Suspended ceiling systems	104,422		9,654			4,797		118,873		13.8	%	11.0	%	28.6	%
Metal framing	98,576		(3,032		)	3,273		98,817		0.2	%	(3.3	)%	51.2	%
Complementary and other products	135,284		2,471			2,135		139,890		3.4	%	2.0	%	19.6	%
Net sales	$	542,273	$	5,221		$	17,412	$	564,906	4.2	%	1.1	%	37.3	%
Average daily net sales⁽³⁾	$	8,608	$	83		$	276	$	8,967	4.2	%	1.1	%	37.3	%
⁽¹⁾Represents base business net sales change as a percentage of base business net sales for the three months ended September 30, 2018.
⁽²⁾Represents acquired and combined net sales as a percentage of acquired and combined net sales for the three months ended September 30, 2018.
⁽³⁾The number of business days for the three months ended September 30, 2019 and 2018, were 63 and 63, respectively.



(dollars in thousands)	Four Quarters Ended September 30, 2019
Pro Forma Adjusted EBITDA ⁽¹⁾	$	181,942
Consolidated Total Debt ⁽²⁾	$	588,936
Total Net Leverage Ratio	3.24x
Cash	$	22,668
Consolidated Total Debt ⁽²⁾less Cash ("Net Debt")	$	566,268
Net Debt Leverage Ratio	3.11x
⁽¹⁾"Pro Forma Adjusted EBITDA" is used herein instead of "Consolidated EBITDA" to avoid confusion but is calculated in the same manner as Consolidated EBITDA under the 2018 Revolving Credit Facility. The following table presents a reconciliation of Adjusted EBITDA to Pro Forma Adjusted EBITDA for the four quarters ended September 30, 2019:



	As of September 30, 2019
(in thousands)
Total gross debt	$	580,931
Finance leases	8,005
Consolidated Total Debt	$	588,936