Foundation Building Materials, Inc. - FORM 10-Q

Attached files

file	filename
EX-32.1 - EXHIBIT 32.1 - Foundation Building Materials, Inc.	fbm-93017xex321.htm
EX-31.2 - EXHIBIT 31.2 - Foundation Building Materials, Inc.	fbm-93017xex312.htm
EX-31.1 - EXHIBIT 31.1 - Foundation Building Materials, Inc.	fbm-93017xex311.htm



Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

ý QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the quarterly period ended September 30, 2017

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 001-38009

FOUNDATION BUILDING MATERIALS, INC.

(Exact name of registrant as specified in its charter)



Delaware		81-4259606
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

2741 Walnut Avenue, Suite 200
Tustin, CA		92780
(Address of principal executive offices)		(Zip Code)
	(714) 380-3127
	(Registrant’s telephone number, including area code)

N/A

(Former name, former address and former fiscal year, if changed since last report)

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No ¨

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



Large accelerated filer ☐		Accelerated filer ☐

Non-accelerated filer ý		Smaller reporting company ☐

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

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

As of November 3, 2017, the number of shares outstanding of the registrant’s common stock, $0.001 par value, was 42,865,407.



Table of Contents

FOUNDATION BUILDING MATERIALS, INC.

Table of Contents



		Page
PART I. FINANCIAL INFORMATION

Item 1.	Financial Statements
	Condensed Consolidated Balance Sheets	1
	Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)	2
	Condensed Consolidated Statements of Cash Flows	3
	Notes to Condensed Consolidated Financial Statements	5
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	19
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	33
Item 4.	Control and Procedures	33

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	34
Item 1A.	Risk Factors	34
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	34
Item 3.	Defaults Upon Senior Securities	34
Item 4.	Mine Safety Disclosures	34
Item 5.	Other Information	34
Item 6.	Exhibits	34
Signatures



Table of Contents

Part I. Financial Information

Item 1. Financial Statements

FOUNDATION BUILDING MATERIALS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)

SEPTEMBER 30, 2017 AND DECEMBER 31, 2016

(in thousands, except share data)



	September 30, 2017			December 31, 2016
Assets
Current assets:
Cash and cash equivalents	$	6,312		$	28,552
Accounts receivable—net of allowance for doubtful accounts of $5,723 and $5,685, respectively	308,955			261,686
Other receivables	48,609			52,845
Inventories	167,601			157,991
Prepaid expenses and other current assets	13,847			12,516
Total current assets	545,324			513,590
Property and equipment, net	157,536			144,387
Intangible assets, net	198,998			215,381
Goodwill	458,472			437,935
Other assets	5,952			9,692
Total assets	$	1,366,282		$	1,320,985
Liabilities and stockholders' equity
Current liabilities:
Accounts payable	$	147,407		$	119,788
Accrued payroll and employee benefits	22,381			26,956
Accrued taxes	8,660			9,151
Other current liabilities	28,553			49,613
Total current liabilities	207,001			205,508
Asset-based revolving credit facility	79,500			208,469
Long-term portion of notes payable, net	532,076			525,487
Tax receivable agreement	203,837			—
Deferred income taxes, net	26,441			26,867
Other liabilities	14,585			26,138
Total liabilities	1,063,440			992,469
Commitments and contingencies

Stockholders' equity:
Preferred stock, $0.001 par value, authorized 10,000,000 shares; 0 shares issued	—			—
Common stock, $0.001 par value, authorized 190,000,000 shares; 42,865,407 and 29,974,239 shares issued, respectively	13			—
Additional paid-in capital	329,892			364,815
Accumulated deficit	(29,708		)	(36,296		)
Accumulated other comprehensive income (loss)	2,645			(3		)
Total stockholders' equity	302,842			328,516
Total liabilities and stockholders' equity	$	1,366,282		$	1,320,985

See accompanying notes to condensed consolidated financial statements (unaudited).



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FOUNDATION BUILDING MATERIALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS) (Unaudited)

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2017 AND 2016

(in thousands, except share and per share data)



	Three Months Ended September 30,						Nine Months Ended September 30,
	2017			2016			2017			2016
Net sales	$	535,446		$	415,563		$	1,544,133		$	930,315
Cost of goods sold (exclusive of amortization and depreciation)	380,663			302,595			1,099,907			665,767
Gross profit	154,783			112,968			444,226			264,548
Operating expenses:
Selling, general and administrative	117,410			95,962			344,074			218,758
Depreciation and amortization	19,729			13,711			57,152			33,605
Total operating expenses	137,139			109,673			401,226			252,363
Income from operations	17,644			3,295			43,000			12,185
Interest expense	(15,069		)	(20,688		)	(45,194		)	(37,202		)
Other income, net	35			79			13,419			93
Income (loss) before income taxes	2,610			(17,314		)	11,225			(24,924		)
Income tax expense (benefit)	1,211			(1,969		)	4,637			(5,358		)
Net income (loss)	$	1,399		$	(15,345	)	$	6,588		$	(19,566	)

Earnings (loss) per share data:
Basic	$	0.03		$	(0.51	)	$	0.16		$	(0.65	)
Diluted	$	0.03		$	(0.51	)	$	0.16		$	(0.65	)
Weighted average shares outstanding:
Basic	42,865,407			29,974,239			41,021,808			29,974,239
Diluted	42,870,391			29,974,239			41,023,935			29,974,239

Comprehensive income (loss):
Net income (loss)	$	1,399		$	(15,345	)	$	6,588		$	(19,566	)
Foreign currency translation adjustment	3,037			153			5,695			153
Unrealized (loss) gain on derivative, net of taxes of $1.0 million and $0.3 million, respectively and $1.9 million and $0.3 million, respectively	(1,647		)	722			(3,047		)	722
Total other comprehensive income	1,390			875			2,648			875
Total comprehensive income (loss)	$	2,789		$	(14,470	)	$	9,236		$	(18,691	)

See accompanying notes to condensed consolidated financial statements (unaudited).



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FOUNDATION BUILDING MATERIALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2017 AND 2016

(in thousands)



	Nine Months Ended September 30,
	2017			2016
Cash flows from operating activities:
Net income (loss)	$	6,588		$	(19,566	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation	22,675			9,620
Amortization of intangible assets	34,477			23,985
Amortization of debt issuance costs and debt discount	7,352			3,599
Inventory fair value purchase accounting adjustment	942			6,372
Unrealized gain on foreign currency, net	(169		)	(17		)
Loss on extinguishment of debt	—			5,355
Provision for doubtful accounts	2,182			1,923
Stock-based compensation	1,978			—
Unrealized gain on derivative instruments, net	(13,045		)	(148		)
Loss on disposal of property and equipment	202			243
Deferred income taxes	2,710			(5,160		)
Change in assets and liabilities, net of effects of acquisitions:
Accounts receivable	(29,837		)	(21,179		)
Other receivables	6,429			2,177
Inventories	20			(6,782		)
Prepaid expenses and other current assets	(945		)	(696		)
Other assets	(2,180		)	(110		)
Accounts payable	18,414			(2,949		)
Accrued payroll and employee benefits	(4,797		)	2,647
Accrued taxes	(521		)	1,187
Other liabilities	(19,920		)	7,421
Net cash provided by operating activities	32,555			7,922
Cash flows from investing activities:
Purchases of property and equipment	(26,268		)	(22,780		)
Payment of net working capital adjustments	(405		)	—
Proceeds from net working capital adjustments	8,590			—
Proceeds from the disposal of fixed assets	528			—
Acquisitions, net of cash acquired	(73,348		)	(372,116		)
Net cash used in investing activities	(90,903		)	(394,896		)
Cash flows from financing activities:
Proceeds from asset-based revolving credit facility	395,688			215,000
Repayments of asset-based revolving credit facility	(524,782		)	(95,000		)
Principal borrowings on long-term debt	—			713,600
Principal payments on long-term debt	—			(463,606		)
Debt issuance costs	—			(34,359		)
Principal repayment of capital lease obligations	(2,110		)	(2,000		)
Issuance of common stock	163,952			—
Capital contributions	2,997			66,205



Table of Contents



Capital distributions	—			(67		)
Net cash provided by financing activities	35,745			399,773
Effect of exchange rate changes on cash	363			(68		)
Net (decrease) increase in cash	(22,240		)	12,731
Cash and cash equivalents at beginning of period	28,552			10,662
Cash and cash equivalents at end of period	$	6,312		$	23,393

Supplemental disclosures of cash flow information:
Cash paid for income taxes	$	3,236		$	2,228
Cash paid for interest	$	49,937		$	18,717
Cash paid during the period for early debt repayment penalty	$	—		$	1,600
Supplemental disclosures of non-cash investing and financing activities:
Change in fair value of derivatives, net of tax	$	3,047		$	722
Assets acquired under capital lease	$	667		$	804
Goodwill adjustment for purchase price allocation	$	518		$	—
Tax receivable agreement	$	203,837		$	—
Property and equipment included in accounts payable	$	—		$	133
Embedded derivative in issued notes	$	—		$	6,200

See accompanying notes to condensed consolidated financial statements (unaudited).



Table of Contents	Foundation Building Materials, Inc.
	Notes to Condensed Consolidated Financial Statements

1. Business and Basis of Presentation

Business

Foundation Building Materials (the "Company") is a specialty distributor of wallboard, suspended ceiling systems, and mechanical insulation throughout the U.S. and Canada. Based in Tustin, California, the Company employs more than 3,500 people and operates more than 220 branches across the U.S. and Canada.

Organization

The Company was formed on October 27, 2016 (inception). The initial stockholder of the Company was LSF9 Cypress Parent 2 LLC ("Parent 2") which held all of the Company's authorized, issued and outstanding shares of common stock.

Reorganization

On February 8, 2017, FBM Alpha LLC, (formerly known as LSF9 Cypress Parent, LLC) ("Alpha"), transferred its wholly owned direct subsidiary, FBM Beta LLC, (formerly known as LSF9 Cypress Holdings, LLC), and indirectly FBM Finance, Inc. to the Company, thereby transferring the business for which historical financial information is included in these results of operations, to be indirectly held by the Company (the "Reorganization").

Initial Public Offering

Following the Reorganization, on February 15, 2017, the Company completed an initial public offering ("IPO") in which it issued 12,800,000 shares of common stock at a public offering price of $14.00 per share. The common stock began trading on the New York Stock Exchange on February 10, 2017 under the ticker symbol "FBM." After underwriting discounts and commissions and expenses, the net proceeds to the Company from the IPO were approximately $164.0 million. The Company used these net proceeds to repay borrowings outstanding under its asset-based revolving credit facility (the "ABL Credit Facility"). The proceeds of $164.0 million were recorded in equity, with approximately $13,000 recorded for the par value of the common stock and the remaining amount recorded in additional paid-in capital. The underwriters exercised their option to purchase an additional 1,920,000 shares of common stock from Parent 2 and those shares were purchased on February 24, 2017. The Company did not receive any proceeds from the sale of shares by Parent 2.

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States ("GAAP") for interim financial information and Article 10 of Regulation S-X. Accordingly, they do not include all the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments, consisting of normal recurring adjustments necessary for a fair presentation with respect to the interim financial statements, have been included. The results of operations for interim periods are not necessarily indicative of the results for full fiscal years. For further information, refer to the consolidated financial statements and footnotes thereto for the year ended December 31, 2016, included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 28, 2017 (the "2016 10-K").

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and its consolidated subsidiaries. All intercompany balances and transactions have been eliminated. The Company has two reportable segments, Specialty Building Products ("SBP") and Mechanical Insulation ("MI"). Resources are allocated and performance is assessed by the Company's CEO, who is the Chief Operating Decision Maker ("CODM").

2. Recently Issued Accounting Standards

Recently Adopted Accounting Standards

In July 2015, the Financial Accounting Standards Board ("FASB") issued Accounting Standard Update ("ASU") 2015-11, Simplifying the Measurement of Inventory, which applies to inventory valued at first-in, first-out or average cost. ASU 2015-11 requires inventory to be measured at the lower of cost and net realizable value (i.e., selling price less reasonable



Table of Contents	Foundation Building Materials, Inc.
	Notes to Condensed Consolidated Financial Statements

completion and disposal costs), rather than at the lower of cost or market. ASU 2015-11 is effective on a prospective basis for annual periods beginning after December 15, 2016, and interim periods within those fiscal years. The Company adopted this guidance on January 1, 2017 and the adoption thereof did not have a material impact on the Company’s consolidated financial statements.

In March 2016, the FASB issued ASU No. 2016-09, Compensation — Stock Compensation: Improvements to Employee Share-Based Payment Accounting. This ASU is intended to simplify various aspects related to how share-based payments are accounted for and presented in the financial statements, including the income tax effects of share-based payments and accounting for forfeitures. This guidance will require recognizing the Company’s excess tax benefits on share-based compensation arrangements in the tax provision, instead of in equity as under the current guidance. In addition, these amounts will be classified as an operating activity rather than a financing activity in the statement of cash flows. The amendments in this update are effective for reporting periods beginning after December 15, 2016, with early adoption permitted. The Company adopted this guidance on January 1, 2017 and the adoption thereof did not have a material impact on the Company's consolidated financial statements. However, the adoption of this guidance will result in excess tax benefits or deficiencies related to the exercise of share-based compensation awards to employees being included in the determination of the Company’s income tax provision, which could significantly impact the Company’s consolidated net income in future periods.

Recently Issued Accounting Standards

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). ASU No. 2014-09 amends the guidance for revenue recognition to replace numerous, industry-specific requirements. The core principle of the ASU is that an entity should recognize revenue for the transfer of goods or services equal to the amount that it expects to be entitled to receive for those goods or services. The ASU implements a five-step process for customer contract revenue recognition that focuses on transfer of control, as opposed to transfer of risk and rewards. The ASU also requires enhanced disclosures regarding the nature, amount, timing and uncertainty of revenues and cash flows arising from contracts with customers. Additional ASUs have been issued to amend or clarify the guidance in this ASU as follows:


•	ASU No. 2016-12 Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients was issued in May 2016. ASU No. 2016-12 amends the new revenue recognition standard to clarify the guidance on assessing collectability, presenting sales taxes, measuring noncash consideration, and certain transition matters.


•	ASU No. 2016-10 Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing was issued in April 2016. ASU No. 2016-10 addresses implementation issues identified by the FASB-International Accounting Standards Board Joint Transition Resource Group for Revenue Recognition.

•

ASU No. 2016-08 Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net) was issued in March 2016. ASU No. 2016-08 requires an entity to determine whether the nature of its promise to provide goods or services to a customer is performed in a principal or agent capacity and to recognize revenue in a gross or net manner based on its principal/agent designation.

The guidance in these ASUs is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period, and early adoption is permitted for interim and annual periods beginning after December 15, 2016. The Company is continuing its evaluation of the impact of this standard and does not expect the adoption of this guidance to have a material impact on its consolidated financial statements; however, this expectation is subject to change. The adoption of this guidance will likely result in additional disclosures regarding the Company's revenue recognition polices. The Company currently plans to adopt this new guidance using the modified retrospective method.

In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. The updated guidance enhances the reporting model for financial instruments by modifying how entities measure and recognize equity investments and present changes in the fair value of financial liabilities, and by simplifying the disclosure guidance for financial instruments. The amendments in this update are effective for fiscal years beginning after December 15, 2017. The amendments in this update should be applied prospectively. The Company does not expect the adoption of this guidance to have a material impact on its consolidated financial statements.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). ASU No. 2016-02 establishes a right-of-use model that requires a lessee to record a right-of-use asset and a lease liability on the balance sheet for all leases with terms



Table of Contents	Foundation Building Materials, Inc.
	Notes to Condensed Consolidated Financial Statements

longer than twelve months. Leases will be classified as either "finance" or "operating," with classification affecting the pattern of expense recognition in the income statement. This update requires a modified retrospective transition as of the beginning of the earliest comparative period presented in the financial statements. This update is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the impact of this guidance on its consolidated financial statements.

In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. ASU No. 2016-15 amended the existing accounting standards for the statement of cash flows. The amendments provide guidance on eight classification issues related to the statement of cash flows. This update is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted. The Company does not expect the adoption of this guidance will have a material impact on its consolidated financial statements.

In January 2017, the FASB issued ASU No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business, which clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. This amendment is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted. The Company does not expect the adoption of this guidance will have a material impact on its consolidated financial statements.

In January 2017, the FASB issued ASU No. 2017-04, Intangibles and Other (Topic 350): Simplifying the Test for Goodwill Impairment, which eliminates the requirement to calculate the implied fair value of goodwill but rather requires an entity to record an impairment charge based on the excess of a reporting unit’s carrying value over its fair value. This amendment is effective for annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted. The Company does not expect the adoption of this guidance will have a material impact on its consolidated financial statements.

3. Derivatives and Hedging Activities

The Company uses derivatives to manage selected foreign exchange exposures for its investments in foreign subsidiaries. In general, the types of risks hedged are those relating to the variability of future earnings and cash flows caused by movements in foreign currency exchange rates and interest rates. The Company documents its risk management strategy and hedge effectiveness at the inception of and during the term of each hedge.

Net Investment Hedge

As of September 30, 2017, and December 31, 2016, the amount of notional foreign exchange contracts outstanding was approximately $88.0 million. There is no significant credit risk associated with the potential failure of any counterparty to perform under the terms of any derivative financial instrument.

The net investment hedge is measured at fair value within the consolidated balance sheet either as an asset or a liability. At September 30, 2017, the fair value of the derivative instrument was $2.7 million and was recorded in other long-term liabilities. At December 31, 2016, the fair value of the derivative instrument was $2.4 million and was recorded in non-current other assets.

The Company recognized a loss of $1.6 million and $3.0 million, net of taxes of $1.0 million and $1.9 million, respectively, for the three and nine months ended September 30, 2017, respectively, recorded in comprehensive income (loss) related to the net investment hedge. The Company recognized a gain of $0.7 million, net of taxes of $0.3 million, for the three and nine months ended September 30, 2016, recorded in comprehensive income (loss) related to the net investment hedge.

The Company recorded a loss of $111,000 and $205,000 for the three and nine months ended September 30, 2017, respectively, in other income, net, related to the ineffective portion of the net investment hedge. The Company recorded a gain of $48,000 for the three and nine months ended September 30, 2016 in other income, net, related to the ineffective portion of the net investment hedge.



Table of Contents	Foundation Building Materials, Inc.
	Notes to Condensed Consolidated Financial Statements

Embedded Derivative

The Company has the option to prepay its $575.0 million Senior Secured Notes due 2021 (the "Notes") at any time prior to August 15, 2018 at a price equal to 100% of the principal amount, plus the applicable premium and any accrued and unpaid interest.

In addition, prior to August 15, 2018 and in the event of equity offerings, the Company has the option to prepay up to 40% of the Notes using the proceeds from such offering within 180 days from closing of the offering. However, 50% of the principal needs to remain outstanding. The redemption price is determined at 108.25% plus accrued and unpaid interest.

On or after August 15, 2018, the Company may redeem the Notes subject to a redemption price equal to a percentage of the principal amount of the Notes, with such percentage set forth in the indenture governing the Notes, plus accrued and unpaid interest.

The optional prepayment subsequent to an equity offering constitutes an embedded derivative and is bifurcated from the debt host and accounted for separately. The embedded derivative is recorded at fair value at inception and on an ongoing basis, with any changes in fair value from inception recorded in earnings. The fair value of the embedded derivative at September 30, 2017 and December 31, 2016 was $0 and $13.2 million, respectively. The fair value of the embedded derivative at September 30, 2017 was $0 due to a minimal probability of an equity offering occurring where the proceeds are used to pay down the Notes prior to the expiration of the optional prepayment time period on August 15, 2018. At December 31, 2016, the fair value of the embedded derivative was included in the balance sheet as non-current other liabilities.

The change in fair value in the amount of $0 and $13.2 million for the three and nine months ended September 30, 2017, respectively, was included in the statements of operations in other income, net. The change in fair value in the amount of $100,000 for the three and nine months ended September 30, 2016 was included in the statement of operations in other income, net.

4. Acquisitions

The Company accounts for its acquisitions under the acquisition method, and accordingly, the results of operations of acquired entities are included in the Company’s consolidated financial statements from the acquisition date. The purchase price is allocated to the assets acquired based on estimated fair values at the acquisition date, with the excess of purchase price over the estimated fair value of the net assets acquired recorded as goodwill. Purchase accounting adjustments associated with the intangible asset valuations have been recorded as of September 30, 2017. The fair value of acquired intangible assets, primarily related to customer relationships, was estimated by applying a discounted cash flow model. That measure is based on significant Level 3 inputs not observable in the market. Key assumptions were developed based on the Company’s historical experience, future projections and comparable market data including future cash flows, long-term growth rates, implied royalty rates, attrition rates and discount rates. The purchase price allocations for the acquisitions set forth below are preliminary and subject to adjustment as additional information is obtained about facts and circumstances that existed as of the applicable acquisition date.

Dominion Interior Supply

On January 1, 2017, the Company acquired the operations and certain assets of Dominion Interior Supply Corporation and Dominion Interior Supply of Roanoke LLC (collectively "Dominion Interior Supply"). Dominion Interior Supply was a supplier of suspended ceiling systems to commercial and residential developers in Virginia and North Carolina.

Irwin Builders Supply Corporation

On April 3, 2017, the Company acquired the operations and certain assets of the specialty building products division of Irwin Builders Supply Corporation ("Irwin") located in Irwin, Pennsylvania. Irwin was a provider of a broad range of building products including wallboard, metal framing, ceiling and wall systems, insulation and other complementary products to the Pennsylvania market.



Table of Contents	Foundation Building Materials, Inc.
	Notes to Condensed Consolidated Financial Statements

Trident Distribution

On April 30, 2017, the Company acquired the operations and certain assets of the Atlanta branch of Trident Distribution, a division of Performance Contracting, Inc. ("Trident"). Trident was a distributor of mechanical insulation and related products. Trident offered insulation fabrication services in addition to a full line of commercial and industrial insulation products and accessories supplying mechanical insulation contractors across the Georgia market.

Wallboard, Inc

On May 1, 2017, the Company acquired all of the stock of Wallboard, Inc. ("Wallboard") with two branch locations in the Minneapolis-St. Paul metropolitan area. Wallboard was an independent distributor of specialty building products, including wallboard, metal framing, insulation and finishing products primarily servicing the commercial market as well as the multi-family residential market.

Gypsum Wallboard Supply, Inc.

On May 1, 2017, the Company acquired the operations and certain assets of Gypsum Wallboard Supply, Inc. ("GWSI") in Tacoma, Washington. GWSI was an independent distributor of specialty building products including wallboard, metal framing, suspended ceiling systems and other complementary products. GWSI primarily serviced the commercial market as well as the multi-family residential market in the Seattle metropolitan area.

Ceiling and Wall Supply, Inc.

On July 1, 2017, the Company acquired the operations and certain assets of Ceiling and Wall Supply, Inc. ("CWS"). CWS was an independent distributor of specialty building products including Armstrong suspended ceiling systems, wallboard, metal framing, insulation, and Dryvit products. CWS primarily serviced the commercial market and operated five branches in Illinois, Kentucky and Missouri.

Virginia Builders' Supply, Inc.

On July 1, 2017, the Company acquired the operations and certain assets of Virginia Builders' Supply, Inc. ("VBS"). VBS was an independent distributor of specialty building products including wallboard, metal framing, insulation, fasteners, tools and other accessory products used by interior contractors in the commercial and residential markets in Virginia.

American Wal-Board

On August 1, 2017, the Company acquired the operations and substantially all of the assets of American Wal-Board, LLC, American Materials, LLC, American Drywall & Roofing, LLC and JLS Equipment Leasing, LLC (collectively, "AWB"). AWB was an independent distributor of specialty building products including wallboard, metal framing, insulation, roofing and fireplace products to the commercial and residential markets in Tennessee and Mississippi.



Table of Contents	Foundation Building Materials, Inc.
	Notes to Condensed Consolidated Financial Statements

During the nine months ended September 30, 2017, the Company completed eight acquisitions for an aggregate purchase price of $74.9 million. The purchase price of the acquisitions ranged from $0.8 million to $20.9 million. These acquisitions are not considered material, individually or in aggregate. The following table summarizes the estimated fair values of the assets acquired and liabilities assumed as of the acquisition date for the acquisitions summarized above ("2017 acquisitions") (in thousands):



	Nine Months Ended September 30, 2017
Assets acquired:
Cash	$	1,511
Accounts receivable	17,354
Other receivables	1,223
Inventories	10,594
Prepaid and other current assets	292
Property and equipment	8,497
Goodwill	26,279
Intangible assets	17,567
Other assets	23
Total assets acquired:	83,340
Liabilities assumed:
Accounts payable	(7,405		)
Accrued expenses and other current liabilities	(1,067		)
Total liabilities assumed	(8,472		)
Total net assets acquired	$	74,868

The excess of purchase price over the fair value amounts assigned to the assets acquired and liabilities assumed represents the goodwill amount resulting from the acquisitions. Goodwill attributable to the acquisitions has been recorded as a non-current asset and is not amortized, but is subject to review at least on an annual basis for impairment. Goodwill recognized was primarily attributable to expected operating efficiencies and expansion opportunities in the businesses acquired. Goodwill and intangible assets recognized from the acquisition are expected to be tax deductible, and each of the 2017 acquisitions was treated as an asset purchase for tax purposes. Generally, the most significant intangible asset acquired is customer relationships. The Company's acquisitions are generally subject to working capital adjustments, however, the Company does not expect any such adjustments to have a material impact on its consolidated financial statements. The pro forma impact of the 2017 acquisitions is not presented as the 2017 acquisitions are not considered material to the Company's consolidated financial statements.



Table of Contents	Foundation Building Materials, Inc.
	Notes to Condensed Consolidated Financial Statements

5. Goodwill and Intangible Assets

The change in goodwill from December 31, 2016 to September 30, 2017 consisted of the following (in thousands):



	Carrying Value
Balance at December 31, 2016	$	437,935
Goodwill acquired	26,279
Purchase price allocation adjustments	(7,668		)
Impact of foreign exchange rates	1,926
Balance at September 30, 2017	$	458,472

As of September 30, 2017, goodwill allocated to the SBP and MI segments was $450.9 million and $7.6 million, respectively. As of December 31, 2016, goodwill allocated to the SBP and Ml segments was $432.6 million and $5.3 million, respectively. Changes to initial purchase price allocations related to acquisitions may arise from changes in estimates from conditions that existed at the applicable acquisition date and as a result of net working capital adjustments.

Identifiable intangible assets that are separable and have determinable useful lives are valued separately and amortized over their benefit period. The following is the gross carrying value and accumulated amortization of the Company’s identifiable intangible assets as of September 30, 2017 and December 31, 2016 (in thousands):



	September 30, 2017							December 31, 2016
	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount
Trade names	$	15,980	$	(6,492	)	$	9,488	$	15,980	$	(4,097	)	$	11,883
Customer relationships	254,093		(67,442		)	186,651		235,690		(35,550		)	200,140
Other intangible assets	3,638		(779		)	2,859		3,852		(494		)	3,358
	$	273,711	$	(74,713	)	$	198,998	$	255,522	$	(40,141	)	$	215,381

The weighted average amortization period of these intangible assets in the aggregate is 4.5 years.

6. Long-Term Debt



(in thousands)	September 30, 2017			December 31, 2016
Senior secured notes	$	575,000		$	575,000
Unamortized debt issuance costs - senior secured notes	(42,924		)	(49,513		)
Asset-based revolving credit facility	79,500			208,469
Unamortized debt issuance costs - asset-based revolving credit facility	(3,418		)	(4,182		)
	$	608,158		$	729,774

Senior Secured Notes Due 2021

On August 9, 2016, the Company, together with FBM Finance, its wholly owned subsidiary which was created for the purpose of issuing the Notes (together, the "Issuers"), issued $575 million in aggregate principal amount of 8.25% senior secured notes due 2021 at an issue price of 100% of the principal amount of the Notes in a private placement.

The Notes are fully and unconditionally guaranteed on a senior secured basis, jointly and severally, by Alpha and each of Alpha's domestic wholly owned restricted subsidiaries (other than certain excluded subsidiaries) (the "Guarantors"). The Notes are senior secured obligations that have priority over certain collateral of the Issuers and the Guarantors of the Notes and are effectively subordinated to the obligations under the ABL Credit Facility in respect of certain other collateral of the Issuers and the Guarantors of the Notes.



Table of Contents	Foundation Building Materials, Inc.
	Notes to Condensed Consolidated Financial Statements

The Notes will mature on August 15, 2021 and bear interest at an annual rate of 8.25%. Interest on the Notes is payable semi-annually in arrears in February and August of each year. The Notes are governed by an indenture, dated August 9, 2016, among the Issuers, the Guarantors and Wilmington Trust, National Association, as trustee (the "Indenture").

Before August 15, 2018, the Issuers may redeem all or a portion of the Notes, at a redemption price equal to 100% of the principal amount thereof, plus an applicable premium and accrued and unpaid interest, if any, to, but excluding, the applicable redemption date. In addition, prior to August 15, 2018 and in the event of equity offerings, the Issuers are entitled to redeem up to 40% of the aggregate principal amount of the Notes at a redemption price equal to 108.25% of the principal amount of the Notes, plus accrued and unpaid interest, if any, to, but excluding, the applicable redemption date. The Issuers may, at their option, redeem all or a portion of the Notes at any time on or after August 15, 2018 at the applicable redemption prices specified in the Indenture, plus any accrued and unpaid interest to, but excluding, the applicable redemption date.

Upon certain kinds of changes of control, holders of the Notes have the right to require the Issuers to repurchase all or any portion of such holder’s Notes at 101% of the principal amount of the Notes being repurchased, plus any accrued and unpaid interest to, but excluding, the date of repurchase.

ABL Credit Facility

On August 9, 2016, Beta as the Initial Borrower (as defined in the ABL Credit Facility) along with Alpha and additional U.S. and Canadian borrowers entered into the ABL Credit Facility with Goldman Sachs Bank USA as administrative agent, which matures on February 9, 2021. The ABL Credit Facility bears interest, at the applicable borrower's option, at either a Eurodollar rate or an alternate base rate plus an applicable margin. Based on the historical excess availability under the ABL Credit Facility, the margin can range from 1.25% to 1.75% per annum in the case of Eurodollar rate loans and 0.25% to 0.75% per annum in the case of alternate base rate loans. The available borrowing capacity, or borrowing base, is derived from a percentage of the borrowers' eligible receivables and inventory in both the United States and Canada, as defined in the ABL Credit Facility, subject to certain reserves, with a $75 million sub-limit on the Canadian borrowing base. As of the closing of the ABL Credit Facility, the available borrowing capacity was $250 million. A variable commitment fee, ranging from 0.25% to 0.375% and currently 0.25% per annum, is charged on the unused amount of the ABL Credit Facility based on quarterly average loan utilization. Letters of credit under the ABL Credit Facility are assessed at a rate equal to the applicable Eurodollar margin currently 1.50% as well as a fronting fee at a rate of 0.125% per annum.

These fees are payable quarterly in arrears at the end of March, June, September, and December. In addition, an administrative agent fee of $75,000 for the ABL Credit Facility is due and payable each year in quarterly installments on the last day of each quarter. The ABL Credit Facility is a senior secured obligation of Alpha, Beta, and the borrowers, with priority over certain collateral of the Company and its subsidiaries. There are no prepayment premiums associated with the ABL Credit Facility.

On September 23, 2016, Beta, Alpha and the additional U.S. and Canadian borrowers entered into an Incremental Facility Amendment to the ABL Credit Facility which extended borrowing commitments under the ABL Credit Facility by an additional $50 million, resulting in total borrowing capacity of $300 million.

7. Tax Receivable Agreement Liability

In connection with the 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 are deemed to realize) as a result of the utilization of the Company and the Company’s subsidiaries’ (i) depreciation and amortization deductions, and any offset to taxable income and gain or increase to taxable loss, resulting from the tax basis the Company has in its assets at the consummation of the IPO, (ii) net operating losses, (iii) tax credits and (iv) certain other tax attributes. In the first quarter of 2017, the Company recorded a liability of $203.8 million, with a corresponding offset to additional paid-in capital for the TRA. At the end of each reporting period, any changes in the Company's estimate of the liability will be recorded in the consolidated statement of operations as a component of other income (expense). The timing and amount of future tax benefits associated with the TRA are subject to change, and future payments may be required which could be materially different from the current estimated liability. The TRA will remain in effect until all tax benefits have been used or expired, unless the agreement is terminated early. During the three and nine months ended September 30, 2017, there was no change in the TRA liability that was recorded in the statements of operations. As of September 30, 2017, the TRA liability was $203.8 million. There have been no payments related to the TRA from inception to September 30, 2017.



Table of Contents	Foundation Building Materials, Inc.
	Notes to Condensed Consolidated Financial Statements

8. Accumulated Other Comprehensive Income (Loss)

Accumulated other comprehensive income (loss) consists of cumulative unrealized foreign currency translation adjustments and unrealized gain (loss) on certain derivative instruments. During the nine months ended September 30, 2017, there were no reclassifications out of accumulated other comprehensive income (loss).

The components of accumulated other comprehensive income (loss) for the nine months ended September 30, 2017 were as follows (in thousands):



	Cumulative unrealized foreign currency translation (losses) gains			Unrealized gain (loss) on derivative, net of tax			Total
Balance at December 31, 2016	$	(1,464	)	$	1,461		$	(3	)
Other comprehensive income (loss)	5,695			(3,047		)	2,648
Balance at September 30, 2017	$	4,231		$	(1,586	)	$	2,645

9. Contingencies

The Company is involved in certain legal actions arising in the ordinary course of business. Management believes that such litigation and claims will be resolved without material effect on the Company’s consolidated financial position.

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.

Historically, the claims, proceedings and investigations brought against the Company, individually and in the aggregate, have not had a material adverse effect on the consolidated results of operations, cash flows or financial position of the Company. As of September 30, 2017, 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.

10. 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 accounts receivable, trade payables and accrued liabilities approximates fair value due to their short-term maturity. The Company may adjust the carrying amount of certain non-financial assets to fair value on a non-recurring basis when they are impaired.

The estimated carrying amount and fair value of the Company’s financial instruments and other assets and liabilities measured and recorded at fair value on a recurring basis at September 30, 2017 is as follows (in thousands):



	Fair Value Measurements at September 30, 2017
	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)		Total Fair Value
Recurring:
Non-current liabilities
Derivative liability (Note 3)	$	—	$	(2,722	)	$	—	$	(2,722	)



Table of Contents	Foundation Building Materials, Inc.
	Notes to 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 at December 31, 2016 is as follows (in thousands):



	Fair Value Measurements at December 31, 2016
	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)		Total Fair Value
Recurring:
Non-current assets (liabilities)
Derivative asset (Note 3)	$	—	$	2,475		$	—	$	2,475
Derivative liability (Note 3)	$	—	$	(13,250	)	$	—	$	(13,250	)

The fair values of derivative assets and liabilities are determined using quantitative models that utilize multiple market inputs including interest rates and exchange rates to generate continuous yield or pricing curves and volatility factors to value the position. The majority of market inputs are actively quoted and can be validated through external sources, including brokers, market transactions and third-party pricing services. The fair values of derivative assets and liabilities include adjustments for market liquidity, 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.

The estimated carrying amount and fair value of the Company’s financial instruments and liabilities for which fair value is only disclosed is as follows (in thousands):



	Fair Value Measurements at September 30, 2017
	Carrying Amount		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total Fair Value
Senior secured notes	$	532,076	$	—	$	613,813	$	—	$	613,813

11. Income Taxes

For the three and nine months ended September 30, 2017, the Company's effective tax rates were 46.4% and 41.3%, respectively. The variance from the statutory federal tax rate was primarily due to state income taxes and non-deductible items. For the three and nine months ended September 30, 2016, the Company's effective tax rates were 11.4% and 21.5%, respectively. The variance from the statutory federal tax rate was primarily due to state income taxes and non-deductible items.

12. Segments

Segment information is presented in accordance with Accounting Standards Codification ("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 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 segments by considering management structure and product offerings. This evaluation resulted in the following reportable segments:

•

Specialty Building Products—SBP distributes wallboard, metal framing, suspended ceiling systems and other products. Other products include stucco and exterior insulation and finish systems, as well as complementary offerings, such as tools, safety accessories and fasteners. The primary end markets served are new non-residential, new residential and non-residential repair and remodel construction markets.



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	Notes to Condensed Consolidated Financial Statements


•	Mechanical Insulation—MI distributes and fabricates commercial and industrial insulation for pipes and mechanical systems and the primary end markets served are new non-residential construction, non-residential repair and remodel construction and industrial markets.

In addition to the two reportable segments, the Company’s consolidated results include corporate activities and depreciation and amortization.

For purposes of evaluation under these segment reporting principles, the CODM assesses the Company’s ongoing performance based on the periodic review of net sales and gross profit. The Company has not disclosed asset information by segment as its CODM does not use such information for purposes of allocating resources and assessing performance.

The following tables present net sales and gross profit for each reportable segment (in thousands):



	Three Months Ended September 30,
	2017					2016
	Net Sales			Gross Profit		Net Sales			Gross Profit
SBP	$	467,891		$	135,883	$	378,280		$	105,154
MI	67,555			18,900		37,283			7,814
Consolidated	$	535,446		$	154,783	$	415,563		$	112,968
Total gross profit	$	154,783				$	112,968
Total operating expenses	(137,139		)			(109,673		)
Interest expense	(15,069		)			(20,688		)
Other income, net	35					79
Income (loss) before income taxes	$	2,610				$	(17,314	)



	Nine Months Ended September 30,
	2017					2016
	Net Sales			Gross Profit		Net Sales			Gross Profit
SBP	$	1,346,441		$	389,037	$	893,032		$	256,734
MI	197,692			55,189		37,283			7,814
Consolidated	$	1,544,133		$	444,226	$	930,315		$	264,548
Total gross profit	$	444,226				$	264,548
Total operating expenses	(401,226		)			(252,363		)
Interest expense	(45,194		)			(37,202		)
Other income, net	13,419					93
Income (loss) before income taxes	$	11,225				$	(24,924	)

Revenues are attributed to each country based on the location in which sales originate and in which assets are located. The following table provides information about the Company by geographic areas (in thousands):



	Three Months Ended September 30,				Nine Months Ended September 30,
	2017		2016		2017		2016
United States	$	473,282	$	380,095	$	1,370,301	$	894,847
Canada	62,164		35,468		173,832		35,468
Total	$	535,446	$	415,563	$	1,544,133	$	930,315



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	Notes to Condensed Consolidated Financial Statements

The Company’s net sales by segment and major product line, and segment gross profit and gross margin, are as follows (in thousands):



	Three Months Ended September 30,										Change
	2017					2016					$			%
SBP Segment
Wallboard	$	179,362		38.3	%	$	145,193		38.4	%	$	34,169		23.5	%
Suspended ceiling systems	91,933			19.6	%	62,488			16.5	%	29,445			47.1	%
Metal framing	71,420			15.3	%	64,950			17.2	%	6,470			10.0	%
Other	125,176			26.8	%	105,649			27.9	%	19,527			18.5	%
Total SBP net sales	$	467,891		100.0	%	$	378,280		100.0	%	$	89,611		23.7	%

MI Segment
Commercial and industrial insulation	$	53,447		79.1	%	$	28,128		75.4	%	$	25,319		90.0	%
Non-insulation products	14,108			20.9	%	9,155			24.6	%	4,953			54.1	%
Total MI net sales	$	67,555		100.0	%	$	37,283		100.0	%	$	30,272		81.2	%
Total net sales	$	535,446				$	415,563				$	119,883		28.8	%

Gross profit - SBP	$	135,883				$	105,154				$	30,729		29.2	%
Gross profit - MI	18,900					7,814					11,086			141.9	%
Total gross profit	$	154,783				$	112,968				$	41,815		37.0	%

Gross margin - SBP	29.0		%			27.8		%			1.2		%
Gross margin - MI	28.0		%			21.0		%			7.0		%
Total gross margin	28.9		%			27.2		%			1.7		%



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	Notes to Condensed Consolidated Financial Statements



	Nine Months Ended September 30,										Change
	2017					2016					$			%
SBP Segment
Wallboard	528,937			39.3	%	$	371,634		41.6	%	$	157,303		42.3	%
Suspended ceiling systems	247,921			18.4	%	118,323			13.2	%	129,598			109.5	%
Metal framing	212,486			15.8	%	156,415			17.5	%	56,071			35.8	%
Other	357,097			26.5	%	246,660			27.7	%	110,437			44.8	%
Total SBP net sales	$1,346,441			100.0	%	$	893,032		100.0	%	$	453,409		50.8	%

MI Segment
Commercial and industrial insulation	$	148,488		75.1	%	$	28,128		75.4	%	$	120,360		427.9	%
Non-insulation products	49,204			24.9	%	9,155			24.6	%	40,049			437.5	%
Total MI net sales	$	197,692		100.0	%	$	37,283		100	%	$	160,409		430.2	%
Total net sales	$1,544,133					$	930,315				$	613,818		66.0	%

Gross profit - SBP	$	389,037				$	256,734				$	132,303		51.5	%
Gross profit - MI	55,189					7,814					47,375			606.3	%
Total gross profit	$	444,226				$	264,548				$	179,678		67.9	%

Gross margin - SBP	28.9		%			28.7		%			0.2		%
Gross margin - MI	27.9		%			21.0		%			6.9		%
Total gross margin	28.8		%			28.4		%			0.4		%

13. Other Current Liabilities

The balance of other current liabilities consisted of the following at September 30, 2017 and December 31, 2016 (in thousands):



	September 30, 2017		December 31, 2016
Accrued expenses	$	6,992	$	14,572
Accrued interest	6,180		18,915
Accrued other	15,381		16,126
Total other current liabilities	$	28,553	$	49,613

14. 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 September 30,		Nine Months Ended September 30,
	2017	2016	2017	2016
Weighted average shares used in basic computations	42,865,407	29,974,239	41,021,808	29,974,239
Dilutive effect of stock options and restricted stock units	4,984	—	2,127	—
Weighted average shares used in diluted computations	42,870,391	29,974,239	41,023,935	29,974,239



Table of Contents	Foundation Building Materials, Inc.
	Notes to Condensed Consolidated Financial Statements

For the three and nine months ended September 30, 2016, there were no stock options or restricted stock units outstanding, therefore, the basic and diluted share count were the same. For the three and nine months ended September 30, 2017, there were approximately 9,232 and 110,165 shares, respectively, not included in the computation of diluted weighted average shares because their effect would have been antidilutive.

15. Subsequent Events

On October 1, 2017, the Company acquired the operations and substantially all of the assets of MCS Door & Hardware (“MCS"). MCS was an independent distributor of specialty building products including doors, frames, hardware and toilet partitions in connection with new construction and repair and remodel projects in the commercial market in Texas. MCS operated one branch in Texas.

On November 1, 2017, the Company acquired all of the shares of Del-Pro Building Supplies, Inc. ("DPSI"). DPSI was an independent distributor of specialty building products including wallboard, metal framing, insulation, basement blanket and spray foam products in the commercial and residential markets. Del-Pro operated one branch in Ontario, Canada.

The Company expects to record the purchase price allocations during the fourth quarter of 2017.



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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 the results of operations as of and for the periods presented below. The following discussion and analysis should be read in conjunction with the "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. In some cases, forward-looking statements can be identified by words such as "anticipates," "believes," "could," "estimates," "expects," "intends," "may," "plans," "potential," "predicts," "projects," "should," "will," "would" or similar expressions. Such forward-looking statements are based on current expectations, estimates and projections about our industry, and our management’s beliefs and assumptions. Forward-looking statements are not guarantees of future performance and our actual results may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such differences include, but are not limited to, those discussed in Item 1A, "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2016, filed with the Securities and Exchange Commission on March 28, 2017, or the 2016 10-K, as updated by our subsequent filings under the Securities and Exchange Act of 1934, as amended, or the Exchange Act.

Unless required by law, we expressly undertake no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise.

Overview

We are the largest specialty distributor of suspended ceiling systems and the second largest specialty distributor of wallboard in the United States and Canada. We are also the second largest specialty distributor and one of the largest fabricators of commercial and industrial mechanical insulation in the United States. Since our founding in 2011, we are the fastest growing publicly-traded specialty building products distributor by revenue and branch count, with over 220 branches and more than 35,000 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 30,000 customers across a balanced mix of construction-related end markets. We believe that we are able to maintain our local market excellence due to our longstanding customer relationships, dependable service and market-specific product offerings that cater to local market trends and preferences.

Third Quarter Update

Financial Results

We reported net sales of $535.4 million for the three months ended September 30, 2017, an increase of $119.9 million, or 28.8%, over the three months ended September 30, 2016. We believe net sales for the three months ended September 30, 2017 were adversely impacted by approximately $17.0 million to $20.0 million due to two fewer business days in the 2017 period as compared to the same period in 2016, and by the loss of approximately $6.0 million to $8.0 million of net sales due to the impact of the hurricanes resulting in 27 branches being closed at least one day. However, our average daily base business net sales for the three months ended September 30, 2017 were up 2.0% over the prior year period. We reported net income of $1.4 million and Adjusted EBITDA⁽¹⁾ of $40.3 million for the three months ended September 30, 2017. We also continued to execute our acquisition strategy by completing three acquisitions during the quarter.

Acquisitions

We supplement our organic growth strategy with selective acquisitions, and since January 2017 through the date of this filing, we have completed 10 acquisitions totaling 19 branches. See Note 4, Acquisitions and Note 15, Subsequent Events, to the condensed consolidated financial statements. We believe that significant opportunities exist to continue to expand our geographic footprint and product offerings by executing additional strategic acquisitions, and we maintain an extensive and active acquisition pipeline. We are typically evaluating several acquisition opportunities at any given time. In executing our acquisition strategy and integrating acquired companies, we focus on the cost savings we can achieve through integrated procurement and pricing programs and brand consolidation. The eight acquisitions completed prior to September 30, 2017 contributed approximately $30.7 million of net sales to our 2017 third quarter and $49.3 million for the nine months ended September 30, 2017. We expect the full year 2017 net sales contribution from all acquisitions to be in the range of $70 million to $80 million. As of November 1, 2017, all but one of the acquisitions made through September 30, 2017 have been integrated from an accounting and information technology perspective.

(1) Adjusted EBITDA is a non-GAAP measure. See the Non-GAAP Financial Information at the end of the Management's Discussion and Analysis of Financial Condition and Results of Operations section for a discussion of how we define and calculate this measure, why we believe it is important and a reconciliation thereof to the most directly comparable GAAP measure.



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Acquisitions	Effective Date of Acquisition	Branch Locations	# of Branches Acquired
Del-Pro Building Supplies, Inc.	November 1, 2017	Ontario, Canada	1
MCS Door & Hardware	October 1, 2017	TX	1
American Wal-Board, LLC, American Materials, LLC, American Drywall & Roofing, LLC and JLS Equipment Leasing, LLC	August 1, 2017	TN, MS	2
Ceiling and Wall Supply, Inc.	July 1, 2017	MO, IL, KY	5
Virginia Builders' Supply, Inc.	July 1, 2017	VA	1
Wallboard, Inc.	May 1, 2017	MN	2
Gypsum Wallboard Supply, Inc.	May 1, 2017	WA	1
Trident Distribution	April 28, 2017	GA	1
Irwin Builders Supply Corporation	April 3, 2017	PA	1
Dominion Interior Supply Corporation and Dominion Interior Supply of Roanoke LLC	January 3, 2017	VA	4
Total			19

Description of Segments

We have two reportable segments. Resources are allocated and performance is assessed by our CEO, whom we have determined to be our Chief Operating Decision Maker, or CODM. Management evaluates performance for each segment based on gross profit. The reportable segments are:

Specialty Building Products - Specialty building products, or SBP, distributes wallboard, metal framing, suspended ceiling systems and other products. Other products include stucco and exterior insulation and finish systems, or EIFS, as well as complementary offerings, such as tools, safety accessories and fasteners. The primary end markets served are new non-residential, new residential and non-residential repair and remodel construction markets.

Mechanical Insulation - Mechanical insulation, or MI, includes insulation solutions for pipes and mechanical systems and the primary end markets served are new non-residential construction, non-residential repair and remodel construction and industrial markets.

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 2016 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, industrial end markets, volume, costs and pricing programs. There were no material changes to those matters during the three months ended September 30, 2017. We believe each of our end markets is currently in an extended period of recovery following a deep and prolonged recession.

Initial Public Offering

On February 15, 2017, we completed our initial public offering, or IPO, in which we issued 12,800,000 shares of our common stock at a public offering price of $14.00 per share. Our common stock began trading on the New York Stock Exchange on February 10, 2017 under the ticker symbol "FBM." After underwriting discounts and commissions and expenses payable by us, net proceeds from the IPO were approximately $164.0 million. We used these proceeds to repay borrowings outstanding under our 2016 Asset-Based Revolving Credit Facility, or the ABL Credit Facility.



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Results of Operations

Three Months Ended September 30, 2017 Compared to the Three Months Ended September 30, 2016

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



	Three Months Ended September 30,
	2017					2016
(in thousands)
Statements of operations data
Net sales	$	535,446		100.0	%	$	415,563		100.0	%
Cost of goods sold (exclusive of depreciation and amortization)	380,663			71.1	%	302,595			72.8	%
Gross profit	154,783			28.9	%	112,968			27.2	%
Operating expenses:
Selling, general and administrative	117,410			21.9	%	95,962			23.1	%
Depreciation and amortization	19,729			3.7	%	13,711			3.3	%
Total operating expenses	137,139			25.6	%	109,673			26.4	%
Income from operations	17,644			3.3	%	3,295			0.8	%
Interest expense	(15,069		)	(2.8	)%	(20,688		)	(5.0	)%
Other income, net	35			—	%	79			—	%
Income (loss) before income taxes	2,610			0.5	%	(17,314		)	(4.2	)%
Income tax expense (benefit)	1,211			0.2	%	(1,969		)	(0.5	)%
Net income (loss)	$	1,399		0.3	%	$	(15,345	)	(3.7	)%



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The Company’s net sales by segment and major product line, and segment gross profit and gross margin, are as follows:



	Three Months Ended September 30,										Change
	2017					2016					$			%
(in thousands)
SBP Segment
Wallboard	$	179,362		38.3	%	$	145,193		38.4	%	$	34,169		23.5	%
Suspended ceiling systems	91,933			19.6	%	62,488			16.5	%	29,445			47.1	%
Metal framing	71,420			15.3	%	64,950			17.2	%	6,470			10.0	%
Other	125,176			26.8	%	105,649			27.9	%	19,527			18.5	%
Total SBP net sales	$	467,891		100.0	%	$	378,280		100.0	%	$	89,611		23.7	%

MI Segment
Commercial and industrial insulation	$	53,447		79.1	%	$	28,128		75.4	%	$	25,319		90.0	%
Non-insulation products	14,108			20.9	%	9,155			24.6	%	4,953			54.1	%
Total MI net sales	$	67,555		100.0	%	$	37,283		100.0	%	$	30,272		81.2	%
Total net sales	$	535,446				$	415,563				$	119,883		28.8	%

Gross profit - SBP	$	135,883				$	105,154				$	30,729		29.2	%
Gross profit - MI	18,900					7,814					11,086			141.9	%
Total gross profit	$	154,783				$	112,968				$	41,815		37.0	%

Gross margin - SBP	29.0		%			27.8		%			1.2		%
Gross margin - MI	28.0		%			21.0		%			7.0		%
Total gross margin	28.9		%			27.2		%			1.7		%

Net Sales

Consolidated net sales for the three months ended September 30, 2017 were $535.4 million compared to $415.6 million for the three months ended September 30, 2016, representing an increase of $119.9 million, or 28.8%. We believe net sales for the three months ended September 30, 2017 were adversely impacted by approximately $17.0 million to $20.0 million due to two fewer business days in the 2017 period as compared to the same period in 2016, and by the loss of approximately $6.0 million to $8.0 million of net sales due to the impact of the hurricanes. Base business net sales decreased $2.7 million, or 1.2% to $227.0 million, for the three months ended September 30, 2017 compared to the three months ended September 30, 2016; however, our average base business daily net sales increased 2.0% over the same period. Net sales from acquired branches and existing branches that were strategically combined contributed $122.6 million of the increase.

The decrease in our base business net sales was primarily driven by the following factors:


•	a decrease in wallboard sales of $0.8 million, or 0.9%, primarily due to a decrease of wallboard unit volume of approximately 4.1% driven by two fewer business days in the current quarter and the impact of the hurricanes in Florida and Texas, partially offset by an increase in average selling price of 3.3%;


•	an increase in suspended ceiling systems sales of approximately $1.5 million, or 5.1%, primarily due to increased market share gains in the Great Lakes region;


•	a decrease in metal framing sales of $4.0 million, or 9.2%, primarily due to the impact of the hurricanes in Florida and Texas, and slower commercial activity in several states; and


•	an increase in other product sales of $0.6 million, or 0.9%, primarily due to continued complementary product sales growth.



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



	Three Months Ended September 30,				Change
	2017		2016		$			%
(in thousands)
Base business ⁽¹⁾	$	226,960	$	229,693	$	(2,733	)	(1.2	)%
Acquired and combined⁽²⁾	308,486		185,870		122,616			66.0	%
Net sales	$	535,446	$	415,563	$	119,883		28.8	%
⁽¹⁾Represents net sales from branches that were owned by us since January 1, 2016 and branches that were opened by us during such period.
⁽²⁾Represents branches acquired and existing branches combined with acquired branches after January 1, 2016.

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



	Three Months Ended September 30, 2016		Base Business Net Sales Increase (Decrease)			Acquired and Combined Net Sales Increase		Three Months Ended September 30, 2017		Total Net Sales % Increase		Base Business Net Sales % Increase (Decrease)⁽¹⁾		Acquired and Combined Net Sales % Increase⁽²⁾
(in thousands)
Wallboard	$	145,193	$	(838	)	$	35,007	$	179,362	23.5	%	(0.9	)%	68.3	%
Metal framing	64,950		(3,979		)	10,449		71,420		10.0	%	(9.2	)%	48.0	%
Suspended ceiling systems	62,488		1,487			27,958		91,933		47.1	%	5.1	%	84.5	%
Other products	105,649		597			18,930		125,176		18.5	%	0.9	%	44.6	%
SBP net sales	378,280		(2,733		)	92,344		467,891		23.7	%	(1.2	)%	62.1	%
MI net sales	37,283		—			30,272		67,555		81.2	%	—	%	81.2	%
Total net sales	$	415,563	$	(2,733	)	$	122,616	$	535,446	28.8	%	(1.2	)%	66.0	%
⁽¹⁾Represents base business net sales increase (decrease) as a percentage of base business net sales for the three months ended September 30, 2016.
⁽²⁾Represents acquired and combined net sales increase as a percentage of acquired and combined net sales for the three months ended September 30, 2016.

Specialty Building Products. SBP net sales for the three months ended September 30, 2017 were $467.9 million compared to $378.3 million for the three months ended September 30, 2016, representing an increase of $89.6 million, or 23.7%. Net sales from acquired branches and existing branches that were strategically combined with acquired branches contributed $92.3 million of the increase, primarily due to the acquisition of Winroc-SPI in August 2016.

Mechanical Insulation. MI net sales for the three months ended September 30, 2017 were $67.6 million compared to $37.3 million for the three months ended September 30, 2016. We entered the mechanical insulation market as a result of the Winroc-SPI acquisition on August 9, 2016, therefore, there were less than three months of sales in this segment for the three months ended September 30, 2016.

Gross Profit and Gross Margin

Consolidated gross profit for the three months ended September 30, 2017 was $154.8 million compared to $113.0 million for the three months ended September 30, 2016, representing an increase of $41.8 million, or 37.0%. The increase in gross profit was primarily due to the increase in sales volume and contributions from acquisitions. Consolidated gross margin for the three months ended September 30, 2017 was 28.9% compared to 27.2% for the three months ended September 30, 2016. Gross profit for the three months ended September 30, 2017 included a $0.3 million charge for inventory fair value purchase accounting adjustments, as compared to $4.7 million in the three months ended September 30, 2016. Excluding the effect of these adjustments, gross margin for the three months ended September 30, 2017 was 29.0% as compared to 28.3% for the three



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months ended September 30, 2016. Excluding the effect of the inventory fair value purchase accounting adjustments, the increase in gross margin was primarily due to an increase in margins from wallboard, suspended ceiling systems, and mechanical insulation sales.

Specialty Building Products. SBP gross profit for the three months ended September 30, 2017 was $135.9 million compared to $105.2 million for the three months ended September 30, 2016, representing an increase of $30.7 million, or 29.2%. SBP gross profit increased with higher sales volume and contribution from acquisitions. SBP gross margin for the three months ended September 30, 2017 was 29.0% compared to 27.8% for the three months ended September 30, 2016. SBP gross profit for the three months ended September 30, 2017 included a $0.2 million charge for inventory fair value purchase accounting adjustments as compared to $2.4 million in the three months ended September 30, 2016. Excluding the effect of these adjustments, SBP gross margin for the three months ended September 30, 2017 was 29.1% as compared to 28.4% for the three months ended September 30, 2016. Excluding the effect of the inventory fair value purchase accounting adjustments, the increase in SBP gross margin was primarily due to an increase in margins from wallboard and suspended ceiling systems sales.

Mechanical Insulation. MI gross profit for the three months ended September 30, 2017 was $18.9 million compared to $7.8 million for the three months ended September 30, 2016, representing an increase of $11.1 million, or 141.9%. MI gross profit increased for the three months ended September 30, 2017 as compared to the three months ended September 30, 2016 primarily due to the timing of the Winroc-SPI acquisition in August 2016 and not realizing a full quarter of results. MI gross margin for the three months ended September 30, 2017 was 28.0% compared to 21.0% for the three months ended September 30, 2016. MI gross profit for the three months ended September 30, 2017 included a $0.1 million charge for inventory fair value purchase accounting adjustments as compared to $2.3 million in the three months ended September 30, 2016. Excluding the effect of these adjustments, MI gross margin for the three months ended September 30, 2017 was 28.1% as compared to 27.1% for the three months ended September 30, 2016. Excluding the effect of the inventory fair value purchase accounting adjustments, the increase in MI gross margin was primarily due to operational efficiencies.

Selling, General & Administrative

Selling, general and administrative, or SG&A, expenses consist of warehouse, delivery and general and administrative expenses. SG&A expenses for the three months ended September 30, 2017 were $117.4 million compared to $96.0 million for the three months ended September 30, 2016, representing an increase of $21.4 million, or 22.3%. As a percentage of net sales, SG&A expenses were 21.9% for the three months ended September 30, 2017 compared to 23.1% for the three months ended September 30, 2016. The decrease in SG&A expenses as a percentage of net sales was primarily due to lower transaction costs.

Depreciation and Amortization

Depreciation and amortization for the three months ended September 30, 2017 was $19.7 million compared to $13.7 million for the three months ended September 30, 2016, representing an increase of $6.0 million, or 43.8%. The increase in depreciation and amortization was primarily due to the Winroc-SPI acquisition in August 2016 and other acquisitions subsequent to September 30, 2016, which significantly increased the value of property and equipment and intangible assets subject to depreciation and amortization.

Interest Expense

Interest expense for the three months ended September 30, 2017 was $15.1 million compared to $20.7 million for the three months ended September 30, 2016, representing a decrease of $5.6 million, or 27.1%. The decrease in interest expense was primarily due to a loss on debt extinguishment charge of $7.0 million in the third quarter of 2016, partially offset by an increase in interest expense due to higher levels of debt incurred for acquisitions.

Income Taxes

Income tax expense for the three months ended September 30, 2017 was $1.2 million compared to an income tax benefit of $2.0 million for the three months ended September 30, 2016, for a variance of $3.2 million. The effective tax rate for the three months ended September 30, 2017 was 46.4% compared to 11.4% for the three months ended September 30, 2016. The difference in the effective tax rates between periods is due mainly to pre-tax income in 2017 compared to a pre-tax loss in 2016, impacted in the opposite direction by permanent items resulting from acquisitions and IPO expenses.



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Nine Months Ended September 30, 2017 Compared to the Nine Months Ended September 30, 2016

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



	Nine Months Ended September 30,
	2017					2016
(in thousands)
Statements of operations data
Net sales	$	1,544,133		100.0	%	$	930,315		100.0	%
Cost of goods sold (exclusive of depreciation and amortization)	1,099,907			71.2	%	665,767			71.6	%
Gross profit	444,226			28.8	%	264,548			28.4	%
Operating expenses:
Selling, general and administrative	344,074			22.3	%	218,758			23.5	%
Depreciation and amortization	57,152			3.7	%	33,605			3.6	%
Total operating expenses	401,226			26.0	%	252,363			27.1	%
Income from operations	43,000			2.8	%	12,185			1.3	%
Interest expense	(45,194		)	(2.9	)%	(37,202		)	(4.0	)%
Other income, net	13,419			0.9	%	93			—	%
Income (loss) before income taxes	11,225			0.8	%	(24,924		)	(2.7	)%
Income tax expense (benefit)	4,637			0.3	%	(5,358		)	(0.6	)%
Net income (loss)	$	6,588		0.5	%	$	(19,566	)	(2.1	)%



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The Company’s net sales by segment and major product line, and segment gross profit and gross margin, are as follows:



	Nine Months Ended September 30,										Change
	2017					2016					$			%
(in thousands)
SBP Segment
Wallboard	$	528,937		39.3	%	$	371,634		41.6	%	$	157,303		42.3	%
Suspended ceiling systems	247,921			18.4	%	118,323			13.2	%	129,598			109.5	%
Metal framing	212,486			15.8	%	156,415			17.5	%	56,071			35.8	%
Other	357,097			26.5	%	246,660			27.7	%	110,437			44.8	%
Total SBP net sales	$	1,346,441		100.0	%	$	893,032		100.0	%	$	453,409		50.8	%

MI Segment
Commercial and industrial insulation	$	148,488		75.1	%	$	28,128		75.4	%	$	120,360		427.9	%
Non-insulation products	49,204			24.9	%	9,155			24.6	%	40,049			437.5	%
Total MI net sales	$	197,692		100.0	%	$	37,283		100.0	%	$	160,409		430.2	%
Total net sales	$	1,544,133				$	930,315				$	613,818		66.0	%

Gross profit - SBP	$	389,037				$	256,734				$	132,303		51.5	%
Gross profit - MI	55,189					7,814					47,375			606.3	%
Total gross profit	$	444,226				$	264,548				$	179,678		67.9	%

Gross margin - SBP	28.9		%			28.7		%			0.2		%
Gross margin - MI	27.9		%			21.0		%			6.9		%
Total gross margin	28.8		%			28.4		%			0.4		%

Net Sales

Consolidated net sales for the nine months ended September 30, 2017 were $1,544.1 million compared to $930.3 million for the nine months ended September 30, 2016, representing an increase of $613.8 million, or 66.0%. Net sales from acquired branches and existing branches that were strategically combined contributed $574.1 million of the increase. Base business net sales increased $39.8 million, or 6.2% to $685.0 million, for the nine months ended September 30, 2017 as compared to the nine months ended September 30, 2016.

The increase in our base business was primarily driven by the following factors:


•	an increase in wallboard sales of $12.6 million, or 4.5%, primarily due to a wallboard unit volume increase of approximately 2.4% driven by an increase in the commercial and residential end markets and an increase in average selling price of 2.1%;


•	an increase in suspended ceiling systems sales of approximately $11.9 million, or 15.4%, primarily due to increased market share gains in several states; and


•	an increase in other product sales of $11.1 million, or 6.3%, primarily due to continued complementary product sales growth.



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



	Nine Months Ended September 30,				Change
	2017		2016		$		%
(in thousands)
Base business ⁽¹⁾	$	685,047	$	645,296	$	39,751	6.2	%
Acquired and combined ⁽²⁾	859,086		285,019		574,067		201.4	%
Net sales	$	1,544,133	$	930,315	$	613,818	66.0	%
⁽¹⁾Represents net sales from branches that were owned by us since January 1, 2016 and branches that were opened by us during such period.
⁽²⁾Represents branches acquired and existing branches combined with acquired branches after January 1, 2016.

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



	Nine Months Ended September 30, 2016		Base Business Net Sales Increase		Acquired and Combined Net Sales Increase		Nine Months Ended September 30, 2017		Total Net Sales % Increase		Base Business Net Sales % Increase⁽¹⁾		Acquired and Combined Net Sales % Increase⁽²⁾
(in thousands)
Wallboard	$	371,634	$	12,554	$	144,749	$	528,937	42.3	%	4.5	%	152.3	%
Metal framing	156,415		4,194		51,877		212,486		35.8	%	3.6	%	129.0	%
Suspended ceiling systems	118,323		11,860		117,738		247,921		109.5	%	15.4	%	283.3	%
Other products	246,660		11,143		99,294		357,097		44.8	%	6.3	%	139.9	%
SBP net sales	893,032		39,751		413,658		1,346,441		50.8	%	6.2	%	167.0	%
MI net sales	37,283		—		160,409		197,692		430.2	%	—	%	430.3	%
Total net sales	$	930,315	$	39,751	$	574,067	$	1,544,133	66.0	%	6.2	%	201.4	%
⁽¹⁾Represents base business net sales increase as a percentage of base business net sales for the nine months ended September 30, 2016.
⁽²⁾Represents acquired and combined net sales increase as a percentage of acquired and combined net sales for the nine months ended September 30, 2016.

Specialty Building Products. SBP net sales for the nine months ended September 30, 2017 were $1,346.4 million compared to $893.0 million for the nine months ended September 30, 2016, representing an increase of $453.4 million, or 50.8%. Net sales from acquired branches and existing branches that were strategically combined with acquired branches contributed $413.7 million of the increase, primarily due to the acquisition of Winroc-SPI in August 2016. SBP base business net sales also increased by $39.8 million due to product expansion into new markets and the overall market growth in both the commercial and residential construction markets.

Mechanical Insulation. MI net sales for the nine months ended September 30, 2017 were $197.7 million compared to $37.3 million for the nine months ended September 30, 2016. We entered the mechanical insulation market as a result of the Winroc-SPI acquisition on August 9, 2016; therefore, there was a shorter period of sales in this segment during the prior year period.

Gross Profit and Gross Margin

Consolidated gross profit for the nine months ended September 30, 2017 was $444.2 million compared to $264.5 million for the nine months ended September 30, 2016, representing an increase of $179.7 million, or 67.9%. The increase in gross profit was primarily due to the increase in sales volume and contributions from acquisitions. Consolidated gross margin for the nine months ended September 30, 2017 was 28.8% compared to 28.4% for the nine months ended September 30, 2016. Gross profit for the nine months ended September 30, 2017 included a $0.9 million charge for inventory fair value purchase accounting adjustments as compared to $6.4 million for the nine months ended September 30, 2016. Excluding the effect of these adjustments, gross margin for the nine months ended September 30, 2017 was 28.8% as compared to 29.1% for the nine



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months ended September 30, 2016. Excluding the effect of the inventory fair value purchase accounting adjustments, the decrease in gross margin was primarily due to a change in product mix with a higher contribution from suspended ceilings systems.

Specialty Building Products. SBP gross profit for the nine months ended September 30, 2017 was $389.0 million compared to $256.7 million for the nine months ended September 30, 2016, representing an increase of $132.3 million, or 51.5%. SBP gross profit increased with higher sales volume from both acquisitions and base business growth. SBP gross margin for the nine months ended September 30, 2017 was 28.9% compared to 28.7% for the nine months ended September 30, 2016. SBP gross profit for the nine months ended September 30, 2017 included a $0.8 million charge for inventory fair value purchase accounting adjustments as compared to $4.1 million in the nine months ended September 30, 2016. Excluding the effect of these adjustments, SBP gross margin for the nine months ended September 30, 2017 was 29.0% as compared to 29.2% for the nine months ended September 30, 2016. Excluding the effect of the inventory fair value purchase accounting adjustments, the decrease in SBP gross margin was primarily due to a change in product mix with a higher contribution from suspended ceilings systems.

Mechanical Insulation. MI gross profit for the nine months ended September 30, 2017 was $55.2 million compared to $7.8 million for the nine months ended September 30, 2016, representing an increase of $47.4 million, or 606.3%. MI gross profit increased for the nine months ended September 30, 2017 as compared to the nine months ended September 30, 2016 primarily due to the timing of the Winroc-SPI acquisition in August 2016 and not realizing a full nine months of results. MI gross margin for the nine months ended September 30, 2017 was 27.9% compared to 21.0% for the nine months ended September 30, 2016. MI gross profit for the nine months ended September 30, 2017 included a $0.1 million charge for inventory fair value purchase accounting adjustments as compared to $2.3 million in the nine months ended September 30, 2016. Excluding the effect of these adjustments, MI gross margin for the nine months ended September 30, 2017 was 28.0% as compared to 27.1% for the nine months ended September 30, 2016. The increase in MI gross margin, excluding the effect of the inventory fair value purchase accounting adjustments, was primarily due to operational efficiencies.

Selling, General & Administrative

Selling, general and administrative, or SG&A, expenses consist of warehouse, delivery and general and administrative expenses. SG&A expenses for the nine months ended September 30, 2017 were $344.1 million compared to $218.8 million for the nine months ended September 30, 2016, representing an increase of $125.3 million, or 57.3%. As a percentage of net sales, SG&A expenses were 22.3% for the nine months ended September 30, 2017 compared to 23.5% for the nine months ended September 30, 2016. The decrease in SG&A expenses as a percentage of net sales was primarily due to lower transaction costs.

Depreciation and Amortization

Depreciation and amortization for the nine months ended September 30, 2017 was $57.2 million compared to $33.6 million for the nine months ended September 30, 2016, representing an increase of $23.6 million, or 70.2%. The increase in depreciation and amortization was primarily due to the Winroc-SPI acquisition in August 2016, which significantly increased the value of property and equipment and intangible assets subject to depreciation and amortization.

Interest Expense

Interest expense for the nine months ended September 30, 2017 was $45.2 million compared to $37.2 million for the nine months ended September 30, 2016, representing an increase of $8.0 million, or 21.5%. The increase in interest expense is due to higher levels of debt incurred for acquisitions.

Other Income, net

Other income, net for the nine months ended September 30, 2017 was $13.4 million compared to $0.1 million for the nine months ended September 30, 2016. The increase was primarily due to the change in fair value of an embedded derivative, which represents an early prepayment option of our senior secured notes due 2021, or the Notes. See Note 3, Derivatives and Hedging Activities, of the notes to the condensed consolidated financial statements.

Income Taxes

Income tax expense for the nine months ended September 30, 2017 was $4.6 million compared to an income tax benefit of $5.4 million for the nine months ended September 30, 2016, for a variance of $10.0 million. The effective tax rate for the nine months ended September 30, 2017 was 41.3% compared to 21.5% for the nine months ended September 30, 2016. The



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difference in the effective tax rates between periods is due mainly to pre-tax income in 2017 compared to a pre-tax loss in 2016, impacted in the opposite direction by permanent items resulting from acquisitions and IPO expenses.

Liquidity and Capital Resources

Summary

We depend on cash flow from operations, cash on hand and funds available under our ABL Credit Facility, and in the future, may depend on other debt financings allowed under the terms of the Notes, ABL 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 fund debt service requirements and provide cash, as required, to support our strategy, ongoing operations, capital expenditures, which approximate 1.0% of annual net sales, lease obligations and working capital for at least the next twelve months. However, 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.

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, including the Notes, or sell assets. Significant delays in our ability to finance planned acquisitions or capital expenditures may materially and adversely affect our future revenue prospects. In addition, we cannot assure that we will be able to refinance any of our indebtedness, including the Notes and our ABL Credit Facility, on commercially reasonable terms or at all. Our ability to restructure or refinance our debt will depend on the condition of the capital markets and our financial condition at such time.

As of September 30, 2017, we had $79.5 million of outstanding borrowings and $220.5 million of available aggregate undrawn borrowing capacity under the ABL Credit Facility. Total liquidity was $226.8 million inclusive of $6.3 million in cash and cash equivalents as of September 30, 2017.

Cash Flows

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



	Nine Months Ended September 30,
	2017			2016
(in thousands)
Net cash provided by operating activities	$	32,555		$	7,922
Net cash used in investing activities	$	(90,903	)	$	(394,896	)
Net cash provided by financing activities	$	35,745		$	399,773

Operating Activities

Net cash provided by operating activities increased by $24.6 million to $32.6 million in the nine months ended September 30, 2017 as compared to $7.9 million in the same period in 2016. The increase was primarily due to an increase in net income of $26.2 million, higher depreciation and amortization of $23.6 million due to an increase in fixed assets and intangibles as a result of acquisitions, higher amortization of debt issuance costs of $3.8 million related to higher levels of debt as a result of acquisitions and higher deferred income taxes of $7.9 million, partially offset by higher working capital needs of $15.1 million, unrealized gains related to the change in fair value of our derivatives of $12.9 million, lower inventory fair value adjustments of $5.4 million due to the lower value of acquisitions and lower losses on the extinguishment of debt of $5.4 million.

Investing Activities

Net cash used in investing activities decreased by $304.0 million to $90.9 million in the nine months ended September 30, 2017 as compared to $394.9 million in the same period in 2016. The decrease was primarily due to lower purchase prices of acquisitions of $298.8 million, net proceeds related to net working capital adjustments from acquisitions of $8.2 million, partially offset by higher capital expenditures of $3.5 million to support the growth of our business.



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Financing Activities

Net cash provided by financing activities decreased by $364.0 million to $35.8 million in the nine months ended September 30, 2017 as compared to $399.8 million in the same period in 2016. During the nine months ended September 30, 2017, IPO proceeds of $164.0 million were used primarily for net debt repayments of $129.1 million, compared to net debt borrowings of $370.0 million during the nine months ended September 30, 2016.

Tax Receivable Agreement

In connection with the IPO, we entered into a tax receivable agreement, or the TRA, with our controlling stockholder, an affiliate of Lone Star. The TRA may 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 this situation, our obligations under the TRA could have the effect of delaying, deferring or preventing, among other things, capital expenditures and acquisitions.

The TRA requires that, after Lone Star no longer has a controlling interest, any senior debt document that refinances or replaces our existing indebtedness permits 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 refinancing, it may not be possible to include this term in such senior debt documents, and as a result, we may need Lone Star's consent to complete such refinancing. The ABL Credit Facility and the Notes 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. We expect the first payments under the TRA to be made in the fourth quarter of 2018 based on the Company's 2017 tax returns. The discounted present value of the TRA at September 30, 2017, was estimated to be between $125.0 million to $150.0 million.

See Item 13, "Certain Relationships and Related Transactions, and Director Independence" in the 2016 10-K for a detailed description of the TRA.

Critical Accounting Policies

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

On an ongoing basis, management evaluates its estimates, including those related to revenue recognition, allowance for doubtful accounts, 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 consolidated financial statements from those disclosed in the 2016 10-K, as supplemented by our Quarterly Report on Form 10-Q for the quarter ended March 31, 2017.

Off-Balance Sheet Arrangements

As of September 30, 2017, we had no material off-balance sheet arrangements or similar obligations, such as financing or unconsolidated variable interest entities.

New Accounting Standards

Please refer to Note 2, Recently Issued Accounting Standards to the notes to our condensed consolidated financial statements for a discussion of new accounting pronouncements and accounting pronouncements adopted during the nine months ended September 30, 2017.



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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) before interest expense, income tax benefit (expense), depreciation and amortization and before certain non-recurring adjustments such as purchase accounting adjustments, public company readiness expenses, stock-based compensation, non-cash (gains) losses on the sale of property and equipment, non-recurring hurricane related costs, transaction costs and unrealized (gains) losses on derivative financial instruments.

Adjusted EBITDA is presented because it is an important metric used by management as one of the means by which it assesses our financial performance. Adjusted EBITDA is also 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 results of operations.

Adjusted EBITDA has certain limitations. Adjusted EBITDA should not be considered as an alternative to net income (loss), or as any other measures of financial performance derived in accordance with GAAP. Adjusted EBITDA also should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items for which it makes adjustments. Additionally, Adjusted EBITDA is not intended to be a liquidity measure because of certain limitations such as:


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


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


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


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


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

Other companies, including other companies in our industry, may not use such measures or may calculate one or more of the measures 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 consolidated financial statements and the related notes.



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The following is a reconciliation of Adjusted EBITDA to the nearest GAAP measure, net income:



	Three Months Ended September 30, 2017
(in thousands)
Net income	$	1,399
Interest expense, net	15,043
Income tax expense	1,211
Depreciation and amortization	19,729
Unrealized non-cash loss on derivative financial instrument	111
Public company readiness expenses	519
Stock-based compensation	213
Non-cash purchase accounting effects^(a)	278
Loss on disposal of property and equipment	30
Hurricane related costs^(b)	430
Transaction costs^(c)	1,316
Adjusted EBITDA	$	40,279
Adjusted EBITDA margin^(d)	7.5		%


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


(b)	Represents costs related to payroll and inventory resulting from Hurricanes Harvey and Irma.


(c)	Represents one-time, third-party advisor costs related to our acquisitions in the period, including fees to financial advisors, accountants, attorneys and other professionals.


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



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Item 3. Quantitative and Qualitative Disclosures about Market Risk

There were no material changes to the Company’s market risk disclosures set forth in Item 7A, "Quantitative and Qualitative Disclosures About Market Risk" of the 2016 10-K during the nine months ended September 30, 2017.

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 30, 2017, 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 30, 2017, 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 30, 2017 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.



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Part II. Other Information

Item 1. Legal Proceedings

We are not currently a party to any material legal proceedings. We are, however, subject to lawsuits, government investigations, audits and other legal proceedings from time to time in the ordinary course of our business. It is not possible to predict the outcome of any legal proceeding with any certainty. The outcome or costs we incur in connection with a legal proceeding could adversely impact our operating results and financial position.

Item 1A. Risk Factors

There have been no material changes to the risk factors disclosed under Item 1A, "Risk Factors," in the 2016 10-K.

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
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.
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.



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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: November 6, 2017	BY:	/s/ John Gorey
		John Gorey
		Chief Financial Officer
		(Principal Financial Officer)

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

Foundation Building Materials, Inc. - FORM 10-Q - November 6, 2017

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Foundation Building Materials, Inc. Reports