Notes to the Unaudited Consolidated Financial Statements
1. BACKGROUND AND NATURE OF OPERATIONS
Description of Business
Continental Building Products, Inc. (the "Company") is a Delaware corporation. Prior to the acquisition of the gypsum division of Lafarge North America Inc. ("Lafarge N.A.") described below, the Company had no operating activity. The Company manufactures gypsum wallboard related products for commercial and residential buildings and houses. The Company operates a network of
three
highly efficient wallboard facilities, all located in the eastern United States, and produces joint compound at
one
plant in the United States and at another plant in Canada.
The Acquisition
On
June 24, 2013
, Lone Star Fund VIII (U.S.), L.P., (along with its affiliates and associates, but excluding the companies that it owns as a result of its investment activity, “Lone Star”), entered into a definitive agreement with Lafarge N.A. to purchase the assets of its North American gypsum division for an aggregate purchase price of approximately
$703 million
(the "Acquisition") in cash. The closing of the Acquisition occurred on
August 30, 2013
.
Secondary Public Offerings
On March 18, 2016, following a series of secondary offerings, LSF8 Gypsum Holdings, L.P. ("LSF8") sold its remaining
5,106,803
shares of the Company’s common stock at a price per share of
$16.10
. Following the March 18, 2016 transaction and the concurrent repurchase by the Company of
900,000
shares of Company’s common stock from LSF8, to the best of the Company's knowledge, neither LSF8 nor any other affiliate of Lone Star held any shares of Company common stock. (See Note 11, Treasury Stock).
2. SIGNIFICANT ACCOUNTING POLICIES
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(a)
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Basis of Presentation
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The accompanying consolidated financial statements for the Company have been prepared in accordance with accounting principles generally accepted in the United States ("U.S. GAAP"). The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany transactions have been eliminated.
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(b)
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Basis of Presentation for Interim Periods
|
Certain information and footnote disclosures normally included for the annual financial statements prepared in accordance with
U.S. GAAP have been condensed or omitted for the interim periods presented. Management believes that the unaudited interim
financial statements include all adjustments (which are normal and recurring in nature) necessary to present fairly the financial
position of the Company and the results of operations and cash flows for the periods presented.
The results of operations for the periods presented are not necessarily indicative of the results that may be expected for the year
ending December 31, 2017. Seasonal changes and other conditions can affect the sales volumes of the Company’s products.
Therefore, the financial results for any interim period do not necessarily indicate the expected results for the year.
The financial statements should be read in conjunction with Company’s audited consolidated financial statements and the notes
thereto for the year ended December 31, 2016 included in the Company’s Annual Report on Form 10-K for the fiscal year then
ended (the "2016 10-K"). The Company has continued to follow the accounting policies set forth in those financial statements.
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(c)
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Supplemental Cash Flow Disclosure
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Table 2.1: Certain Cash and Non-Cash Transactions
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For the Six Months Ended
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June 30, 2017
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|
June 30, 2016
|
|
(in thousands)
|
Cash paid during the period for:
|
|
|
|
Interest paid on term loan
|
$
|
4,973
|
|
|
$
|
5,876
|
|
Income taxes paid, net
|
10,259
|
|
|
12,160
|
|
Non-cash activity:
|
|
|
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Amounts in accounts payable for capital expenditures
|
1,899
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|
|
547
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(d)
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Recent Accounting Pronouncements
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Accounting Standards Adopted During the Period
In July 2015, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2015-11,
"Inventory:
Simplifying the Measurement of Inventory."
This guidance applies to inventory valued at first-in, first-out (FIFO) or average cost and requires inventory to be measured at the lower of cost and net realizable value, rather than at the lower of cost or market. ASU 2015-11 is effective on a prospective basis for annual periods, including interim reporting periods within those periods, beginning after December 15, 2016. The Company values its inventory under the average cost method and thus will be required to adopt the standard. The Company adopted the new standard in the first quarter of 2017. The adoption of this standard did not have a material impact on the Company's Consolidated Financial Statements.
In March 2016, the FASB issued ASU 2016-09,
"Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting,"
which introduces targeted amendments intended to simplify the accounting for stock compensation. Specifically, the ASU requires all excess tax benefits and tax deficiencies (including tax benefits of dividends on share-based payment awards) to be recognized as income tax expense or benefit in the income statement. The tax effects of exercised or vested awards should be treated as discrete items in the reporting period in which they occur. An entity also should recognize excess tax benefits, and assess the need for a valuation allowance, regardless of whether the benefit reduces taxes payable in the current period. That is, off-balance sheet accounting for net operating losses stemming from excess tax benefits would no longer be required and instead such net operating losses would be recognized when they arise. Existing net operating losses that are currently tracked off-balance sheet would be recognized, net of a valuation allowance if required, through an adjustment to opening retained earnings in the period of adoption. Entities will no longer need to maintain and track an "APIC pool." The ASU also requires excess tax benefits to be classified along with other income tax cash flows as an operating activity in the statement of cash flows. The amendments were effective for annual periods beginning after December 15, 2016. The Company adopted the new standard in the first quarter of 2017, which resulted in a favorable adjustment to income tax provision of
$0.2 million
.
Accounting Standards Not Yet Adopted
In May 2014, the FASB issued ASU No. 2014-9,
"Revenue from Contracts with Customers (Topic 606),"
which provides accounting guidance for all revenue arising from contracts with customers and affects all entities that enter into contracts to provide goods or services to their customers. In August 2015, the FASB issued ASU No. 2015-14,
"Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date,"
which defers the effective date of ASU No. 2014-9 for all entities by one year to annual reporting periods beginning after December 15, 2017. The ASU requires retroactive application on either a full or modified basis. The Company will adopt the standard on January 1, 2018. The Company has identified a project implementation team and has identified its revenue streams. The Company is in the process of evaluating the various aspects of the standard and how the standard may impact how the Company recognizes revenue. The Company is also evaluating the potential impact that the new guidance will have on its Consolidated Financial Statements. While the Company has not completed its analysis, the Company does not anticipate that the new guidance will have a material impact on its Consolidated Financial Statements.
In February 2016, the FASB issued ASU 2016-02,
"Leases."
ASU 2016-02 requires lessees to recognize a lease liability and a right-of-use asset on the balance sheet. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company is in the process of evaluating the impact of adoption, which is not expected to have a material impact on the Company's Consolidated Financial Statements.
In June 2016, the FASB issued ASU 2016-13,
"Financial Instruments – Credit Losses: Measurement of Credit Losses on Financial Instruments."
This ASU is intended to introduce a revised approach to the recognition and measurement of credit losses, emphasizing an updated model based on expected losses rather than incurred losses. The provisions of this standard are effective for reporting periods beginning after December 15, 2019 and early adoption is permitted. The Company is currently evaluating the impact that this guidance may have on its Consolidated Financial Statements.
In August 2016, the FASB issued ASU 2016-15, "
Classification of Certain Cash Receipts and Cash Payments."
This ASU intends to add or clarify guidance on the classification of certain cash receipts and payments in the statement of cash flows. The provisions of this standard are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company is currently evaluating when it will adopt the ASU and the expected impact to its Consolidated Financial Statements.
In October 2016, the FASB issued ASU 2016-16,
"Intra-Entity Transfers of Assets Other Than Inventory."
The new standard requires companies to recognize the income tax effects of intercompany sales or transfers of assets, other than inventory, in the income statement as income tax expense (or benefit) in the period the sales or transfer occurs. The standard requires companies to apply a modified retrospective approach with a cumulative catch-up adjustment to opening retained earnings in the period of adoption. The provisions of this standard are effective for fiscal years beginning after December 15, 2017, and early adoption is permitted. The Company is currently evaluating when it will adopt the ASU and the expected impact to its Consolidated Financial Statements.
In January 2017, the FASB issued ASU 2017- 04,
"Intangibles - Goodwill and Other."
This ASU simplifies the goodwill impairment calculation by eliminating the requirement to calculate the implied fair value of goodwill (i.e., Step 2 of today’s goodwill impairment test) to measure a goodwill impairment charge. Instead, entities will record an impairment charge based on the excess of a reporting unit’s carrying amount over its fair value (i.e., Step 1 of today’s goodwill impairment test). The standard will be applied prospectively and is effective for annual and interim impairment tests performed in periods beginning after December 15, 2019. Early adoption is permitted for annual and interim goodwill impairment testing dates after January 1, 2017. The Company is currently evaluating when it will adopt the ASU and the expected impact to its Consolidated Financial Statements.
3. RECEIVABLES, NET
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Table 3: Details of Receivables, Net
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June 30, 2017
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December 31, 2016
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(in thousands)
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Trade receivables, gross
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$
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38,169
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|
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$
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33,199
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Allowance for cash discounts and doubtful accounts
|
(758
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)
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|
(726
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)
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Receivables, net
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$
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37,411
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$
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32,473
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Trade receivables are recorded net of credit memos issued during the normal course of business.
4. INVENTORIES, NET
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Table 4: Details of Inventories, Net
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June 30, 2017
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December 31, 2016
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(in thousands)
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Finished products
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$
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7,474
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$
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7,246
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Raw materials
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12,625
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10,910
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Supplies and other
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7,012
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7,083
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Inventories, net
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$
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27,111
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$
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25,239
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5. PROPERTY, PLANT AND EQUIPMENT, NET
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Table 5: Details of Property, Plant and Equipment, Net
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June 30, 2017
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December 31, 2016
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(in thousands)
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Land
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$
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13,186
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$
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12,925
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Buildings
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112,971
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112,583
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Plant machinery
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281,516
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275,010
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Mobile equipment
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10,552
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6,721
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Construction in progress
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10,136
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15,016
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Property, plant and equipment, at cost
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428,361
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422,255
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Accumulated depreciation
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(130,430
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)
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(114,417
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)
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Property, plant and equipment, net
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$
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297,931
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$
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307,838
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Depreciation expense was
$9.4 million
and
$17.5 million
for the three and six months ended
June 30, 2017
, respectively, compared to
$8.3 million
and
$16.7 million
for the three and six months ended
June 30, 2016
, respectively.
6. CUSTOMER RELATIONSHIPS AND OTHER INTANGIBLES, NET
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Table 6.1: Details of Customer Relationships and Other Intangibles, Net
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June 30, 2017
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December 31, 2016
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Gross
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Accumulated Amortization
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Net
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Gross
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Accumulated Amortization
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Net
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(in thousands)
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Customer relationships
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$
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116,488
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$
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(53,226
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)
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$
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63,262
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$
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116,267
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$
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(48,243
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)
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$
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68,024
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Purchased and internally developed software
|
5,453
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|
|
(4,219
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)
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1,234
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|
|
5,322
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|
|
(3,289
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)
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2,033
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Trademarks
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14,811
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|
|
(3,785
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)
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11,026
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|
|
14,783
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(3,285
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)
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11,498
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Total
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$
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136,752
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|
|
$
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(61,230
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)
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$
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75,522
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|
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$
|
136,372
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$
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(54,817
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)
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$
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81,555
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Amortization expense was
$3.1 million
and
$6.3 million
for the three and six months ended
June 30, 2017
, respectively, compared to
$3.5 million
and
$7.1 million
for the three and six months ended
June 30, 2016
, respectively.
Customer relationship assets are amortized over a
15
year period using an accelerated method that reflects the expected future cash flows from the acquired customer list intangible asset. Trademarks are amortized on a straight-line basis over the estimated useful life of
15
years. Software development costs are amortized over a
3
year life with the expense recorded in selling and administrative expense.
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Table 6.2: Future Amortization Expense of Customer Relationships and Other Intangibles
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As of June 30, 2017
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(in thousands)
|
July 1, 2017 through December 31, 2017
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$
|
5,765
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|
2018
|
9,468
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2019
|
8,398
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2020
|
7,655
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2021
|
7,042
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Thereafter
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37,194
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Total
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$
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75,522
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7. INVESTMENT IN SEVEN HILLS
The Company is a party with an unaffiliated third party to a paperboard liner venture named Seven Hills Paperboard, LLC ("Seven Hills") that provides the Company with a continuous supply of high-quality recycled paperboard liner to meet its ongoing production requirements.
The Company has evaluated the characteristics of its investment and determined that Seven Hills would be deemed a variable interest entity, but that it does not have the power to direct the principal activities most impacting the economic performance of Seven Hills, and is thus not the primary beneficiary. As such, the Company accounts for this investment in Seven Hills under the equity method of accounting.
Paperboard liner purchased from Seven Hills was
$14.8 million
and
$26.8 million
for the three and six months ended
June 30, 2017
, respectively, compared to
$11.1 million
and
$22.9 million
for the three and six months ended
June 30, 2016
, respectively. As of
June 30, 2017
, the Company had certain purchase commitments for paper totaling
$35.6 million
through
2020
.
8. ACCRUED AND OTHER LIABILITIES
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Table 8: Details of Accrued and Other Liabilities
|
|
June 30, 2017
|
|
December 31, 2016
|
|
(in thousands)
|
Employee-related costs
|
$
|
4,830
|
|
|
$
|
9,595
|
|
Income taxes
|
1,568
|
|
|
—
|
|
Other taxes
|
3,013
|
|
|
2,088
|
|
Other
|
917
|
|
|
638
|
|
Accrued and other liabilities
|
$
|
10,328
|
|
|
$
|
12,321
|
|
9. DEBT
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Table 9.1: Details of Debt
|
|
June 30, 2017
|
|
December 31, 2016
|
|
(in thousands)
|
First Lien Credit Agreement (a)
|
$
|
272,257
|
|
|
$
|
273,625
|
|
Less: Original issue discount (net of amortization)
|
(1,810
|
)
|
|
(1,946
|
)
|
Less: Debt issuance costs
|
(4,951
|
)
|
|
(5,317
|
)
|
Total debt
|
265,496
|
|
|
266,362
|
|
Less: Current portion of long-term debt
|
(1,720
|
)
|
|
(1,742
|
)
|
Long-term debt
|
$
|
263,776
|
|
|
$
|
264,620
|
|
|
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(a)
|
As of June 30, 2017, the Amended and Restated Credit Agreement, as amended, had a maturity date of August 18, 2023 and an interest rate of LIBOR (with a
0.75%
floor) plus
2.50%
, compared to as of December 31, 2016, at which time the First Lien Credit Agreement had the same maturity date and an interest rate of LIBOR (with a
0.75%
floor) plus
2.75%
.
|
In connection with the Acquisition, the Company purchased certain assets from Lafarge N.A. with cash. In order to finance a portion of the consideration payable to Lafarge N.A., the Company and its subsidiary Continental Building Products Operating Company, LLC ("OpCo") entered into a first lien credit agreement with Credit Suisse AG, as administrative agent, Credit Suisse Securities (USA) LLC and RBC Capital Markets, as joint lead arrangers and joint bookrunners, and Royal Bank of Canada, as syndication agent (as amended on December 2, 2013, the "First Lien Credit Agreement") and a second lien credit agreement with Credit Suisse AG, as administrative agent, Credit Suisse Securities (USA) LLC and RBC Capital Markets, as joint lead arrangers and joint bookrunners, and Royal Bank of Canada, as syndication agent for term loan borrowings of
$320 million
and
$120 million
, respectively, and drew
$25 million
under a
$50 million
revolving credit facility under the First Lien Credit Agreement. The available amount under the First Lien Credit Agreement term loan was subsequently increased to
$415 million
. In conjunction with the initial issuance of this debt, the Company incurred
$15.3 million
of debt issuance costs which were being amortized using the effective interest rate method or the straight-line method which approximates the effective interest rate method, over the estimated life of the related debt. Interest under the First Lien Credit Agreement was floating. The margin applicable to the borrowing was reduced in the third quarter 2014 to
3.00%
after the Company achieved a B2 rating with a stable outlook by Moody’s.
On August 18, 2016, the Company, OpCo and Continental Building Products Canada Inc. and the lenders party thereto and Credit Suisse, as Administrative Agent, entered into an Amended and Restated Credit Agreement amending and restating the First Lien Credit Agreement (the "Amended and Restated Credit Agreement"). The Amended and Restated Credit Agreement provides for a
$275 million
senior secured first lien term loan facility and a
$75 million
senior secured revolving credit facility (the "Revolver"), which mature on August 18, 2023 and August 18, 2021, respectively. Related to this debt refinancing, the Company incurred
$4.7 million
of discount and debt issuance costs, of which
$2.5 million
was recorded in Other expense, net on the Consolidated Statements of Operations, and
$2.2 million
will be amortized over the term of the Amended and Restated Credit Agreement. Upon completion of this debt refinancing, the Company recognized an additional expense of
$3.3 million
related to losses resulting from debt extinguishment which is also reported in Other expense, net on the Consolidated Statements of Operations. The interest rate under the Amended and Restated Credit Agreement remained floating but was reduced to a spread over LIBOR of
2.75%
and floor of
0.75%
.
On
February 21, 2017
, the Company repriced its term loan under the Amended and Restated Credit Agreement lowering its interest rate by a further
25
basis points to LIBOR plus
2.50%
thereby reducing its estimated interest expense by approximately
$0.8 million
per annum. All other terms and conditions under the Amended and Restated Credit Agreement remained the same. In connection with the debt repricing, the Company incurred
$0.7 million
of debt issuance costs, which was recorded in Other expense, net on the Consolidated Statements of Operations.
The First Lien Credit Agreement was, and the Amended and Restated Credit Agreement is, secured by the underlying property and equipment of the Company. During the six months ended
June 30, 2017
, the Company made no voluntary prepayment of principal, compared to
$25.0 million
of voluntary prepayments in the same period of
2016
. As of
June 30, 2017
, the annual effective interest rate on the Amended and Restated Credit Agreement, including original issue discount and amortization of debt issuance costs, was
4.1%
.
There were no amounts outstanding under the Revolver as of
June 30, 2017
or
December 31, 2016
. During the six months ended
June 30, 2017
the Company did not have any draws under the Revolver, compared to
$22.0 million
which the Company borrowed and repaid in full during the six months ended
June 30, 2016
under the applicable revolving credit facility. Interest under the Revolver is floating, based on LIBOR plus
225
basis points. In addition, the Company pays a facility fee of
50
basis points per annum on the total capacity under the Revolver. Availability under the Revolver as of
June 30, 2017
, based on draws and outstanding letters of credit and absence of violations of covenants, was
$73.4 million
.
|
|
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|
|
Table 9.2: Future Minimum Principal Payments Due Under the Amended and Restated Credit Agreements
|
|
Amount Due
|
|
(in thousands)
|
July 1, 2017 through December 31, 2017
|
$
|
1,368
|
|
2018
|
2,736
|
|
2019
|
2,736
|
|
2020
|
2,736
|
|
2021
|
2,736
|
|
Thereafter
|
259,945
|
|
Total Payments
|
$
|
272,257
|
|
Under the terms of the Amended and Restated Credit Agreement, the Company is required to comply with certain covenants, including among others, the limitation of indebtedness, limitation on liens, and limitations on certain cash distributions.
One
single financial covenant governs all of the Company’s debt and only applies if the outstanding borrowings of the Revolver plus outstanding letters of credit are greater than
$22.5 million
as of the end of the quarter. The financial covenant is a total leverage ratio calculation, in which total debt less outstanding cash is divided by adjusted earnings before interest, depreciation and amortization. As the sum of outstanding borrowings under the Revolver and outstanding letters of credit were less than
$22.5 million
at
June 30, 2017
, the total leverage ratio of no greater than
5.0
under the financial covenant was not applicable at
June 30, 2017
.
10. DERIVATIVE INSTRUMENTS
The Company uses derivative instruments to manage selected commodity price and interest rate exposures. The Company does not use derivative instruments for speculative trading purposes, and typically does not hedge beyond
one
year for commodity derivative instruments. Cash flows from derivative instruments are included in net cash provided by operating activities in the consolidated statements of cash flows.
Commodity Derivative Instruments
As of
June 30, 2017
, the Company had
2,420 thousand
millions of British Thermal Units ("mmBTUs") in aggregate notional amount outstanding natural gas swap contracts to manage commodity price exposures. All of these contracts mature by
July 31, 2018
. The Company elected to designate these derivative instruments as cash flow hedges in accordance with FASB Accounting Standards Codification ("ASC") 815-20,
Derivatives – Hedging
. For derivative contracts designated as cash flow hedges, the effective portion of changes in the fair value of the derivative is recorded to accumulated other comprehensive income, and is reclassified to earnings when the underlying forecasted transaction affects earnings. The ineffective portion of changes in the fair value of the derivative is recorded in cost of goods sold. The net unrealized loss that remained in accumulated other comprehensive loss as of
June 30, 2017
was
$0.1 million
which is net of a tax amount of
$0.1 million
. The net unrealized gain that remained in accumulated other comprehensive loss as of
December 31, 2016
was
$0.2 million
which is net of a tax amount of
$0.1 million
. No ineffectiveness was recorded on these contracts during the three and six months ended
June 30, 2017
and
2016
. The Company reassesses the probability of the underlying forecasted transactions occurring on a quarterly basis.
For the three and six months ended
June 30, 2017
, approximately
$0.3 million
of loss, net of
$0.1 million
of tax and
$0.3 million
of loss, net of
$0.2 million
of tax, respectively, were recognized in other comprehensive income for the commodity contracts. For both the three and six months ended
June 30, 2017
, the amount of
gain
reclassified from accumulated other comprehensive loss into income was
$0.1 million
. As of
June 30, 2017
, there was
$0.1 million
recorded in other current assets and
$0.2 million
was recorded in other current liabilities. For the three and six months ended
June 30, 2016
, approximately
$0.3 million
of gain, net of
$0.2 million
of tax expense, and
$0.2 million
of gain, net of
$0.1 million
of tax expense, respectively, were recognized in other comprehensive income for the commodity contracts. For the three and six months ended
June 30, 2016
, the amount of loss reclassified from accumulated other comprehensive loss into income was
$0.2 million
and
$0.4 million
, respectively. As of
December 31, 2016
,
$0.4 million
was recorded in other current assets.
Interest Rate Derivative Instrument
In September 2016, the Company entered into interest rate swap agreements for a combined notional amount of
$100.0 million
with a term of
four years
, which hedged the floating LIBOR on a portion of the term loan under the Amended and Restated Credit Agreement to an average fixed rate of
1.323%
and LIBOR floor of
0.75%
. The Company elected to designate these interest rate swaps as cash flow hedges for accounting purposes. The net unrealized gain that remained in accumulated other comprehensive loss as of
June 30, 2017
was
$1.0 million
which is net of a tax amount of
$0.5 million
. The net unrealized gain that remained in accumulated other comprehensive loss as of
December 31, 2016
was
$1.2 million
which is net of a tax amount of
$0.6 million
. For the three and six months ended
June 30, 2017
, the amount of loss reclassified from accumulated other comprehensive loss into income was
$44,000
and
$0.1 million
, respectively. For the three and six months ended
June 30, 2017
, approximately
$0.3 million
of loss, net of tax expense of
$0.2 million
and
$0.2 million
of loss, net of tax expense of
$0.1 million
, respectively, were recognized in other comprehensive income for the interest rate swaps. As of
June 30, 2017
, there was
$1.5 million
recorded in other current assets. No ineffectiveness was recorded on these contracts during the three and six months ended
June 30, 2017
.
Counterparty Risk
The Company is exposed to credit losses in the event of nonperformance by the counterparties to the Company’s derivative instruments. As of
June 30, 2017
, the Company’s derivatives were in a
$1.3 million
net asset position. All of the Company’s counterparties have investment grade credit ratings; accordingly, the Company anticipates that the counterparties will be able to fully satisfy their obligations under the contracts. The Company’s agreements outline the conditions upon which it or the counterparties are required to post collateral. As of
June 30, 2017
, the Company had
no
collateral posted with its counterparties related to the derivatives.
11. TREASURY STOCK
On
November 4, 2015
, the Company announced that the Board of Directors approved a new stock repurchase program authorizing the Company to repurchase up to
$50 million
of its common stock, at such times and prices as determined by management as market conditions warrant, through
December 31, 2016
. Pursuant to this authorization, on
March 18, 2016
, the Company repurchased
900,000
shares of its common stock from LSF8 in a private transaction at a price per share of
$16.10
, or an aggregate of approximately
$14.5 million
, pursuant to a stock purchase agreement dated
March 14, 2016
. The Company has also repurchased shares of its common stock in the open market under this authorization. On
August 3, 2016
, the Company announced the Board of Directors had approved an expansion of its stock repurchase program by
$50 million
, increasing the aggregate authorization from up to
$50 million
to up to
$100 million
. The program was also extended from the end of
2016
to the end of
2017
.
On
February 21, 2017
, the Board of Directors further expanded the Company's share repurchase program up to a total of
$200 million
of its common stock and extended the expiration date to
December 31, 2018
.
All repurchased shares are held in treasury, reducing the number of shares of common stock outstanding and used in the Company’s earnings per share calculation.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Table 11: Treasury Stock Activity
|
|
June 30, 2017
|
|
June 30, 2016
|
|
Shares
|
|
Amount (a)
|
|
Average Share Price (a)
|
|
Shares
|
|
Amount (a)
|
|
Average Share Price (a)
|
|
(in thousands, except share data)
|
For the Three Months Ended:
|
|
|
|
|
|
|
|
|
|
|
|
Beginning Balance
|
4,716,778
|
|
|
$
|
93,993
|
|
|
$
|
19.93
|
|
|
3,446,208
|
|
|
$
|
65,505
|
|
|
$
|
19.01
|
|
Repurchases on open market
|
932,000
|
|
|
22,599
|
|
|
24.25
|
|
|
231,980
|
|
|
4,984
|
|
|
21.48
|
|
Ending Balance
|
5,648,778
|
|
|
$
|
116,592
|
|
|
$
|
20.64
|
|
|
3,678,188
|
|
|
$
|
70,489
|
|
|
$
|
19.16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended:
|
|
|
|
|
|
|
|
|
|
|
|
Beginning Balance
|
4,499,655
|
|
|
$
|
88,756
|
|
|
$
|
19.73
|
|
|
2,395,049
|
|
|
$
|
48,479
|
|
|
$
|
20.24
|
|
Repurchases on open market
|
1,149,123
|
|
|
27,836
|
|
|
24.22
|
|
|
383,139
|
|
|
7,520
|
|
|
19.63
|
|
Repurchase from LSF8 in private transaction
|
—
|
|
|
—
|
|
|
—
|
|
|
900,000
|
|
|
14,490
|
|
|
16.10
|
|
Ending Balance
|
5,648,778
|
|
|
$
|
116,592
|
|
|
$
|
20.64
|
|
|
3,678,188
|
|
|
$
|
70,489
|
|
|
$
|
19.16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) Includes commissions paid for repurchases on open market.
|
12. SHARE-BASED COMPENSATION
Stock options, Restricted Stock Awards, Restricted Stock Units and Performance Restricted Stock Units
On
May 1, 2017
, the Company granted one employee
1,701
Restricted Share Units ("RSUs") that vest ratably over
four years
from the grant date. The market price on the date of grant was
$24.30
.
On
May 1, 2017
, the Company also granted one employee
1,702
Performance Based RSUs ("PRSUs"). The PRSUs vest on
December 31, 2019
, with the exact number of PRSUs vesting subject to the achievement of certain performance conditions through
December 31, 2018
. The number of PRSUs earned will vary from
0%
to
200%
of the number of PRSUs awarded, depending on the Company’s performance relative to a cumulative two year EBITDA target for fiscal years 2017 and 2018. The market price on the date of grant was
$24.30
.
For the three and six months ended
June 30, 2017
, the Company recognized share-based compensation expenses of
$0.8 million
and
$1.5 million
, respectively, compared to
$0.8 million
and
$1.2 million
for the three and six months ended
June 30, 2016
, respectively. The expenses related to share-based compensation awards were recorded in selling and administrative expenses. As of
June 30, 2017
, there was
$5.8 million
of total unrecognized compensation cost related to non-vested stock options, restricted stock awards, RSUs and PRSUs. This cost is expected to be recognized over a weighted-average period of
2.5 years
.
13. ACCUMULATED OTHER COMPREHENSIVE LOSS
|
|
|
|
|
|
|
|
|
|
|
|
|
Table 13: Changes in Accumulated Other Comprehensive Loss by Category
|
|
Foreign currency translation adjustment
|
|
Net unrealized gain on derivatives, net of tax
|
|
Total
|
|
(in thousands)
|
Balance as of December 31, 2016
|
$
|
(4,778
|
)
|
|
$
|
1,369
|
|
|
$
|
(3,409
|
)
|
Other comprehensive income/(loss) before reclassifications
|
564
|
|
|
(793
|
)
|
|
(229
|
)
|
Amounts reclassified from AOCI
|
—
|
|
|
215
|
|
|
215
|
|
Net current period other comprehensive income/(loss)
|
564
|
|
|
(578
|
)
|
|
(14
|
)
|
Balance as of June 30, 2017
|
$
|
(4,214
|
)
|
|
$
|
791
|
|
|
$
|
(3,423
|
)
|
14. INCOME TAXES
The Company’s annual estimated effective tax rate is approximately
33.43%
. The Company is subject to audit examinations at federal, state and local levels by tax authorities in those jurisdictions. In addition, the Canadian operations are subject to audit examinations at federal and provincial levels by tax authorities in those jurisdictions. The tax matters challenged by the tax authorities are typically complex; therefore, the ultimate outcome of any challenges would be subject to uncertainty. The Company has not identified any issues that did not meet the recognition threshold or would be impacted by the measurement provisions of the uncertain tax position guidance.
15. EARNINGS PER SHARE
The following table shows the weighted average number of shares used in computing earnings per share and the effect on the weighted average number of shares of potentially dilutive securities. Potentially dilutive common stock has no effect on income available to common stockholders. For the three and six months ended
June 30, 2017
, approximately,
1,000
and
43,000
share-based compensation awards, respectively, were excluded from the weighted average shares outstanding because their impact would be anti-dilutive in the computation of dilutive earnings per share. Awards excluded for the same periods in
2016
were
165
and
77,000
, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Table 15: Basic and Dilutive Earnings Per Share
|
|
|
|
|
|
|
|
|
For the Three Months Ended
|
|
For the Six Months Ended
|
|
June 30, 2017
|
|
June 30, 2016
|
|
June 30, 2017
|
|
June 30, 2016
|
|
(dollars in thousands, except for per share amounts)
|
Net income
|
$
|
12,398
|
|
|
$
|
12,722
|
|
|
$
|
24,625
|
|
|
$
|
25,223
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares outstanding - basic
|
39,125,571
|
|
|
40,670,650
|
|
|
39,349,674
|
|
|
41,097,472
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
Restricted stock awards
|
5,880
|
|
|
7,449
|
|
|
7,971
|
|
|
7,236
|
|
Restricted stock units
|
39,988
|
|
|
25,095
|
|
|
57,169
|
|
|
15,789
|
|
Performance restricted stock units
|
17,837
|
|
|
—
|
|
|
17,180
|
|
|
—
|
|
Stock options
|
20,943
|
|
|
13,968
|
|
|
22,934
|
|
|
7,969
|
|
Total effect of dilutive securities
|
84,648
|
|
|
46,512
|
|
|
105,254
|
|
|
30,994
|
|
Weighted average number of shares outstanding - diluted
|
39,210,219
|
|
|
40,717,162
|
|
|
39,454,928
|
|
|
41,128,466
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
$
|
0.32
|
|
|
$
|
0.31
|
|
|
$
|
0.63
|
|
|
$
|
0.61
|
|
Diluted earnings per share
|
$
|
0.32
|
|
|
$
|
0.31
|
|
|
$
|
0.62
|
|
|
$
|
0.61
|
|
16. COMMITMENTS AND CONTINGENCIES
Commitments
The Company leases certain buildings and equipment. The Company’s facility and equipment leases may provide for escalations of rent or rent abatements and payment of pro rata portions of building operating expenses. Minimum lease payments are recognized on a straight-line basis over the minimum lease term. The total expenses under operating leases for the three and six months ended
June 30, 2017
was
$0.9 million
and
$1.7 million
, respectively, compared to
$1.1 million
and
$2.1 million
for the same periods in
2016
, respectively. The Company also has non-capital purchase commitments that primarily relate to gas, gypsum, paper and other raw materials. The total amounts purchased under such commitments were
$21.7 million
and
$42.8 million
for the three and six months ended
June 30, 2017
, respectively, compared to
$15.5 million
and
$33.1 million
for the three and six months ended
June 30, 2016
, respectively.
|
|
|
|
|
|
|
|
|
Table 16: Future Minimum Lease Payments Due Under Noncancellable Operating Leases and Purchase Commitments
|
|
Future Minimum Lease Payments
|
|
Purchase Commitments
|
|
(in thousands)
|
July 1, 2017 through December 31, 2017
|
$
|
556
|
|
|
$
|
22,857
|
|
2018
|
616
|
|
|
26,979
|
|
2019
|
1,494
|
|
|
26,718
|
|
2020
|
—
|
|
|
17,442
|
|
2021
|
—
|
|
|
5,237
|
|
Thereafter
|
—
|
|
|
64,256
|
|
Total
|
$
|
2,666
|
|
|
$
|
163,489
|
|
Contingent obligations
Under certain circumstances, the Company provides letters of credit related to its natural gas and other supply purchases. As of
June 30, 2017
and
December 31, 2016
, the Company had outstanding letters of credit of approximately
$1.6 million
and
$2.1 million
, respectively.
Legal Matters
In the ordinary course of business, the Company executes contracts involving indemnifications standard in the industry. These indemnifications might include claims relating to any of the following: environmental and tax matters; intellectual property rights; governmental regulations and employment-related matters; customer, supplier, and other commercial contractual relationships; and financial matters. While the maximum amount to which the Company may be exposed under such agreements cannot be estimated, it is the opinion of management that these guarantees and indemnifications are not expected to have a material adverse effect on the Company’s financial condition, results of operations or liquidity.
In the ordinary course of business, the Company is involved in certain legal actions and claims, including proceedings under laws and regulations relating to environmental and other matters. Because such matters are subject to many uncertainties and the outcomes are not predictable with assurance, the total liability for these legal actions and claims cannot be determined with certainty. When the Company determines that it is probable that a liability for environmental matters, legal actions or other contingencies has been incurred and the amount of the loss is reasonably estimable, an estimate of the costs to be incurred is recorded as a liability in the financial statements. As of
June 30, 2017
and
December 31, 2016
, such liabilities were not expected to have a material adverse effect on the Company’s financial condition, results of operations or liquidity. While management believes its accruals for such liabilities are adequate, the Company may incur costs in excess of the amounts provided. Although the ultimate amount of liability that may result from these matters or actions is not ascertainable, any amounts exceeding the recorded accruals are not expected to have a material adverse effect on the Company’s financial condition, results of operations or liquidity.
17. SEGMENT REPORTING
Segment information is presented in accordance with ASC 280,
Segment Reporting,
which establishes standards for reporting information about operating segments. It also establishes standards for related disclosures about products and geographic areas. The Company’s primary reportable segment is wallboard, which represented approximately
97.2%
and
96.9%
of the Company's revenues for the three and six months ended
June 30, 2017
, respectively, compared to
97.0%
and
96.8%
of the Company's revenues for the three and six months ended
June 30, 2016
, respectively. This segment produces wallboard for the commercial and residential construction sectors. The Company also manufactures finishing products, which complement the Company’s full range of wallboard products.
Revenues from the major products sold to external customers include gypsum wallboard and finishing products.
The Company’s
two
geographic areas consist of the United States and Canada for which it reports net sales, fixed assets and total assets.
The Company evaluates operating performance based on profit or loss from operations before certain adjustments as shown below. Revenues are attributed to geographic areas based on the location of the assets producing the revenues. The Company did not provide asset information by segment as its Chief Operating Decision Maker does not use such information for purposes of allocating resources and assessing segment performance.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Table 17.1: Segment Reporting
|
|
For the Three Months Ended
|
|
For the Six Months Ended
|
|
June 30, 2017
|
|
June 30, 2016
|
|
June 30, 2017
|
|
June 30, 2016
|
|
(in thousands)
|
Net Sales:
|
|
|
|
|
|
|
|
Wallboard
|
$
|
117,194
|
|
|
$
|
113,593
|
|
|
$
|
233,670
|
|
|
$
|
221,192
|
|
Other
|
3,436
|
|
|
3,522
|
|
|
7,575
|
|
|
7,408
|
|
Total net sales
|
$
|
120,630
|
|
|
$
|
117,115
|
|
|
$
|
241,245
|
|
|
$
|
228,600
|
|
Operating income:
|
|
|
|
|
|
|
|
Wallboard
|
$
|
21,819
|
|
|
$
|
23,216
|
|
|
$
|
43,411
|
|
|
$
|
45,620
|
|
Other
|
(199
|
)
|
|
(8
|
)
|
|
(104
|
)
|
|
158
|
|
Total operating income
|
$
|
21,620
|
|
|
$
|
23,208
|
|
|
$
|
43,307
|
|
|
$
|
45,778
|
|
Adjustments:
|
|
|
|
|
|
|
|
Interest expense
|
$
|
(3,062
|
)
|
|
$
|
(3,648
|
)
|
|
$
|
(5,978
|
)
|
|
$
|
(7,346
|
)
|
Income/(losses) from equity investment
|
345
|
|
|
(240
|
)
|
|
175
|
|
|
(435
|
)
|
Other (expense)/income, net
|
(135
|
)
|
|
6
|
|
|
(779
|
)
|
|
160
|
|
Income before provision for income taxes
|
$
|
18,768
|
|
|
$
|
19,326
|
|
|
$
|
36,725
|
|
|
$
|
38,157
|
|
Depreciation and Amortization:
|
|
|
|
|
|
|
|
Wallboard
|
$
|
12,177
|
|
|
$
|
11,566
|
|
|
$
|
23,199
|
|
|
$
|
23,240
|
|
Other
|
297
|
|
|
276
|
|
|
561
|
|
|
548
|
|
Total depreciation and amortization
|
$
|
12,474
|
|
|
$
|
11,842
|
|
|
$
|
23,760
|
|
|
$
|
23,788
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Table 17.2: Net Sales By Geographic Region
|
|
For the Three Months Ended
|
|
For the Six Months Ended
|
|
June 30, 2017
|
|
June 30, 2016
|
|
June 30, 2017
|
|
June 30, 2016
|
|
(in thousands)
|
United States
|
$
|
113,665
|
|
|
$
|
107,694
|
|
|
$
|
224,051
|
|
|
$
|
211,336
|
|
Canada
|
6,965
|
|
|
9,421
|
|
|
17,194
|
|
|
17,264
|
|
Net sales
|
$
|
120,630
|
|
|
$
|
117,115
|
|
|
$
|
241,245
|
|
|
$
|
228,600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Table 17.3: Assets By Geographic Region
|
|
Fixed Assets
|
|
Total Assets
|
|
June 30, 2017
|
|
December 31, 2016
|
|
June 30, 2017
|
|
December 31, 2016
|
|
(in thousands)
|
United States
|
$
|
294,561
|
|
|
$
|
304,807
|
|
|
$
|
610,355
|
|
|
$
|
617,050
|
|
Canada
|
3,370
|
|
|
3,031
|
|
|
18,470
|
|
|
17,699
|
|
Total
|
$
|
297,931
|
|
|
$
|
307,838
|
|
|
$
|
628,825
|
|
|
$
|
634,749
|
|
18. FAIR VALUE DISCLOSURES
U.S. GAAP provides a framework for measuring fair value, establishes a fair value hierarchy of the valuation techniques used to measure the fair value and requires certain disclosures relating to fair value measurements. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in a market with sufficient activity.
The three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value, is as follows:
|
|
•
|
Level 1—Observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities that a Company has the ability to access;
|
|
|
•
|
Level 2—Inputs, other than the quoted market prices included in Level 1, which are observable for the asset or liability, either directly or indirectly; and
|
|
|
•
|
Level 3—Unobservable inputs for the asset or liability which is typically based on an entity’s own assumptions when there is little, if any, related market data available.
|
The Company evaluates assets and liabilities subject to fair value measurements on a recurring and non-recurring basis to determine the appropriate level to classify them for each reporting period. This determination requires significant judgments to be made by the Company. The fair values of receivables, accounts payable, accrued costs and other current liabilities approximate the carrying values as a result of the short-term nature of these instruments.
The Company estimates the fair value of its debt by discounting the future cash flows of each instrument using estimated market rates of debt instruments with similar maturities and credit profiles. These inputs are classified as Level 3 within the fair value hierarchy. As of
June 30, 2017
and
December 31, 2016
, the carrying value reported in the consolidated balance sheet for the Company’s notes payable approximated its fair value.
The only assets or liabilities the Company had at
June 30, 2017
that are recorded at fair value on a recurring basis are the natural gas hedges and interest rate swaps. The natural gas hedges had a negative fair value of
$0.1 million
as of
June 30, 2017
, net of tax amount of
$0.1 million
, compared to a positive fair value of
0.2 million
, net of tax amount of
$0.1
million as of
December 31, 2016
. Interest rate swaps had a positive fair value of
$1.0 million
as of
June 30, 2017
, net of tax amount of
$0.5 million
, compared to a positive fair value of
$1.2 million
as of
December 31, 2016
, net of tax amount of
$0.6 million
. Both the natural gas hedges and interest rate swaps are classified within Level 2 of the fair value hierarchy as they are valued using third party pricing models which contain inputs that are derived from observable market data. Generally, the Company obtains its Level 2 pricing inputs from its counterparties. Substantially all of these assumptions are observable in the marketplace throughout the full term of the instrument, can be derived from observable data or are supported by observable levels at which transactions are executed in the marketplace.
Assets and liabilities that are measured at fair value on a non-recurring basis include intangible assets and goodwill. These items are recognized at fair value when they are considered to be impaired.
There were no fair value adjustments for assets and liabilities measured on a non-recurring basis. The Company discloses fair value information about financial instruments for which it is practicable to estimate that value.