UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended ~~June~~September 30, 2020

☐ 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.)
2520 Red Hill Avenue	Santa Ana,	California	92705
(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 ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically 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 ☒ 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:

Large accelerated filer ☐

Accelerated filer

☒

Non-accelerated filer ☐

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 ☒

Title of each class

Trading Symbol

Name of each exchange on which registered

Common Stock

FBM

New York Stock Exchange

As of ~~July~~October 3130, 2020, the number of shares outstanding of the registrant’s common stock, $0.001 par value, was 43,~~205~~207,~~916~~120.

FOUNDATION BUILDING MATERIALS, INC.

Table of Contents

		Page
PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements
	Condensed Consolidated Statements of Operations and Comprehensive Income	1
	Condensed Consolidated Balance Sheets	2
	Condensed Consolidated Statements of Cash Flows	32
	Condensed Consolidated Statements of Changes in Stockholders' Equity	5
	Notes to Condensed Consolidated Financial Statements	7
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	24
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	3839
Item 4.	Control and Procedures	3839
PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	3940
Item 1A.	Risk Factors	3940
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	3941
Item 3.	Defaults Upon Senior Securities	3941
Item 4.	Mine Safety Disclosures	3941
Item 5.	Other Information	3941
Item 6.	Exhibits	3941
Signatures

Part I. Financial Information

Item 1. Financial Statements

FOUNDATION BUILDING MATERIALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (UNAUDITED)

(in thousands, except share and per share data)

	Three Months Ended June 30,						Six Months Ended June 30,
	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
Net sales	$	~~486~~521,~~090~~261	$	~~559~~564,~~911~~906	$	1,~~010~~531,~~348~~609	$	1,~~074~~639,~~783~~689
Cost of goods sold	~~340~~366,~~435~~846		~~388~~393,~~374~~111		~~702~~1,~~535~~069,381		~~750~~1,~~286~~143,397
Gross profit	~~145~~154,~~655~~415		171,~~537~~795		~~307~~462,~~813~~228		~~324~~496,~~497~~292
Operating expenses:
Selling, general and administrative expenses	~~106~~115,~~257~~125		~~122~~123,~~735~~907		~~229~~344,~~354~~479		~~239~~363,~~965~~872
Depreciation and amortization	19,~~288~~413		20,~~351~~218		3857,~~507~~920		4060,~~693~~911
Total operating expenses	~~125~~134,~~545~~538		~~143~~144,~~086~~125		~~267~~402,~~861~~399		~~280~~424,~~658~~783
Income from operations	2019,~~110~~877		2827,~~451~~670		3959,~~952~~829		4371,~~839~~509
Interest expense	(76,~~153~~463)		(89,~~341~~118)		(1421,~~886~~349)		(1626,~~897~~015)
Gain on legal settlement	—		—		8,556		—
Other income (expense), net	~~547~~436		44(89)		(~~475~~39)		85(4)
Income before income taxes	13,~~504~~850		2018,~~154~~463		3346,~~147~~997		2745,~~027~~490
Income tax expense	32,~~647~~049		5,~~433~~754		810,~~914~~963		713,~~478~~232
Income from continuing operations	911,~~857~~801		1412,~~721~~709		2436,~~233~~034		1932,~~549~~258
Loss on sale of discontinued operations, net of tax	—		(4411)		—		(1,~~390~~401)
Net income	$	911,~~857~~801	$	1412,~~677~~698	$	2436,~~233~~034	$	1830,~~159~~857
Earnings per share data:
Earnings from continuing operations per share - basic	$	0.2327	$	0.3430	$	0.5683	$	0.4575
Earnings from continuing operations per share - diluted	$	0.2327	$	0.3430	$	0.5683	$	0.4575
Loss from discontinued operations per share - basic	$	—	$	—	$	—	$	(0.03)
Loss from discontinued operations per share - diluted	$	—	$	—	$	—	$	(0.03)
Earnings per share - basic	$	0.2327	$	0.3430	$	0.5683	$	0.4272
Earnings per share - diluted	$	0.2327	$	0.3430	$	0.5683	$	0.4272
Weighted average shares outstanding:
Basic	43,~~203~~206,~~894~~505		42,~~987~~988,~~915~~829		43,~~124~~152,~~793~~229		42,~~960~~969,~~124~~797
Diluted	43,~~332~~565,~~225~~493		43,~~245~~508,~~353~~678		43,~~440~~478,~~723~~442		43,~~064~~174,~~496~~351
Comprehensive income:
Net income	$	911,~~857~~801	$	1412,~~677~~698	$	2436,~~233~~034	$	1830,~~159~~857
Foreign currency translation adjustment	31,~~134~~731		~~1,731~~(984)		(32,~~909~~178)		32,~~301~~317
Unrealized loss on derivatives, net of taxes of $0.4 million and $1.0 million, respectively and $0.5 million and $2.3 million, respectively	(1,026)		(3,284)		(1,525)		(6,780)
Unrealized (loss) gain on derivatives, net of taxes of $0 million and $0.1 million, respectively and $0.6 million and $2.2 million, respectively	(7)		344		(1,532)		(6,436)
Total other comprehensive income (loss)	21,~~108~~724		(~~1,553~~640)		(53,~~434~~710)		(34,~~479~~119)
Total comprehensive income	$	1113,~~965~~525	$	1312,~~124~~058	$	1832,~~799~~324	$	1426,~~680~~738

See accompanying notes to the condensed consolidated financial statements.

FOUNDATION BUILDING MATERIALS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(in thousands, except share data)

	June 30, 2020		December 31, 2019
	September 30, 2020		December 31, 2019
Current assets:
Cash and cash equivalents	$	3118,~~122~~675	$	17,766
Accounts receivable—net of allowance for expected credit losses of $2,896 and $3,169, respectively	263,340		262,757
Accounts receivable—net of allowance for expected credit losses of $2,864 and $3,169, respectively	265,352		262,757
Other receivables	3538,~~003~~928		59,104
Inventories	~~159~~153,~~615~~650		178,624
Prepaid expenses and other current assets	911,~~386~~297		7,965
Total current assets	~~498~~487,~~466~~902		526,216
Property and equipment, net	~~149~~150,~~195~~801		150,188
Right-of-use assets, net	~~126~~123,~~290~~821		120,562
Intangible assets, net	8980,~~776~~101		113,861
Goodwill	494,~~159~~825		495,724
Other assets	64,~~607~~663		5,206
Total assets	$	1,~~364~~342,~~493~~113	$	1,411,757
Liabilities and stockholders' equity:
Current liabilities:
Accounts payable	$	~~145~~142,~~267~~972	$	145,226
Accrued payroll and employee benefits	2528,~~458~~099		31,410
Accrued taxes	910,~~594~~269		8,780
Current portion of tax receivable agreement	8,537		27,850
Current portion of term loan	4,500		4,500
Current portion of lease liabilities	3132,~~508~~162		30,307
Other current liabilities	1913,~~336~~694		18,557
Total current liabilities	~~244~~240,~~200~~233		266,630
Asset-based revolving credit facility	409,~~000~~500		89,000
Long-term portion of term loan, net	432,~~950~~108		434,633
Tax receivable agreement	80,996		89,533
Deferred income taxes, net	2122,~~670~~114		18,972
Long-term portion of lease liabilities	~~100~~97,~~867~~290		97,145
Other liabilities	1415,~~388~~446		7,679
Total liabilities	~~935~~897,~~071~~687		1,003,592
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; 43,205,678 and 42,991,016 shares issued, respectively	13		13
Common stock, $0.001 par value, authorized 190,000,000 shares; 43,207,120 and 42,991,016 shares issued, respectively	13		13
Additional paid-in capital	~~338~~340,~~820~~299		336,362
Retained earnings	98110,~~487~~288		74,254
Accumulated other comprehensive loss	(76,~~898~~174)		(2,464)
Total stockholders' equity	~~429~~444,~~422~~426		408,165
Total liabilities and stockholders' equity	$	1,~~364~~342,~~493~~113	$	1,411,757

See accompanying notes to the condensed consolidated financial statements.

FOUNDATION BUILDING MATERIALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(in thousands)

Six Months Ended June 30,

Nine Months Ended September 30,

2020

2019

Cash flows from operating activities:

Net income

2436,~~233~~034

1830,~~159~~857

Less: loss on sale of discontinued operations

—

(1,~~390~~401)

Net income from continuing operations

2436,~~233~~034

1932,~~549~~258

Adjustments to reconcile net income to net cash provided by operating activities from continuing operations:

Depreciation

1422,~~598~~044

1726,~~558~~173

Amortization of intangible assets

2335,~~909~~876

2334,~~135~~738

Amortization of debt issuance costs and debt discount

1,~~080~~620

~~992~~1,617

Inventory fair value purchase accounting adjustment

—

234

Provision for expected credit losses

12,~~366~~102

12,~~525~~017

Stock-based compensation

24,~~828~~319

13,~~939~~056

Loss (gain) on disposal or sale of assets

~~708~~807

(6754)

Right-of-use assets non-cash expense

1522,~~057~~716

1320,~~601~~586

Deferred income taxes

3,~~334~~737

~~271~~63

Change in assets and liabilities, net of effects of acquisitions:

Accounts receivable

~~208~~(715)

(4332,~~441~~949)

Other receivables

2319,~~435~~744

1310,~~581~~520

Inventories

2026,~~053~~828

(15,~~291)~~623

Prepaid expenses and other current assets

(13,~~472~~361)

(34,~~123~~198)

Other assets

~~(6)~~8

(~~121~~187)

Accounts payable

(1,~~333~~720)

232,~~429~~417

Accrued payroll and employee benefits

(53,~~802~~219)

~~(3,057)~~214

Accrued taxes

~~827~~1,495

(~~2,291~~860)

Operating lease liabilities

(1422,~~752~~336)

(1320,~~345~~034)

Other liabilities

41,~~365~~205

46,~~126~~019

Net cash provided by operating activities from continuing operations

~~115~~147,~~302~~184

5387,~~204~~253

Cash flows from investing activities from continuing operations:

Purchases of property and equipment

(1322,~~263~~015)

(1529,~~052~~369)

Proceeds from termination of net investment hedge

—

3,313

Net (payments of) proceeds from net working capital adjustments related to acquisitions

(3444)

~~470~~461

Proceeds from disposal or sale of assets

~~980~~1,194

2,~~376~~719

Acquisitions, net of cash acquired

(812,~~638~~163)

(21,~~923~~882)

Net cash used in investing activities from continuing operations

(2033,~~955~~028)

(3044,~~816~~758)

Cash flows from financing activities from continuing operations:

Proceeds from asset-based revolving credit facility

~~322~~403,~~500~~000

~~281~~403,~~620~~454

Repayments of asset-based revolving credit facility

(~~371~~482,500)

(~~291~~415,~~371~~178)

Principal payments for term loan

(23,~~250~~375)

Payment related to tax receivable agreement

(27,850)

(16,667)

Tax withholding payment related to net settlement of equity awards

(~~370~~382)

(~~138~~155)

Principal repayment of finance lease liabilities	(12,~~355~~066)		(12,~~319~~002)
Net cash used in financing activities from continuing operations	(80113,~~825~~173)		(3033,~~125~~923)
Net cash used in investing activities from discontinued operations	—		(1,~~390~~401)
Net cash used in discontinued operations	—		(1,~~390~~401)
Effect of exchange rate changes on cash	(~~166~~74)		~~282~~198
Net increase (decrease) in cash	13,356		(8,845)
Net increase in cash	909		7,369
Cash and cash equivalents at beginning of period	17,766		15,299
Cash and cash equivalents at end of period	$	3118,~~122~~675	$	622,~~454~~668
Supplemental disclosures of cash flow information:
Cash paid for income taxes	$	~~190~~8,109	$	510,~~091~~401
Cash paid for interest	$	1419,~~186~~736	$	1624,~~477~~150
Supplemental disclosures of non-cash investing and financing activities:
Decrease in fair value of derivatives, net of tax	$	1,~~525~~532	$	65,~~012~~663
Net goodwill increase for purchase price allocation	$	4733	$	57

See accompanying notes to the condensed consolidated financial statements.

FOUNDATION BUILDING MATERIALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)

(in thousands, except share data)

Six Months Ended June 30, 2020
Nine Months Ended September 30, 2020
	Common Stock
	Shares	Amount		Additional Paid-in Capital		Retained Earnings		Other Comprehensive (Loss) Income		Total Stockholders' Equity
Balance at December 31, 2019	42,991,016	$	13	$	336,362	$	74,254	$	(2,464)	$	408,165
Stock-based compensation	—	—		1,393		—		—		1,393
Vesting of restricted stock units	237,988	—		—		—		—		—
Tax withholding payment related to net share settlement of equity awards	(27,948)	—		(362)		—		—		(362)
Other comprehensive loss	—	—		—		—		(7,542)		(7,542)
Net income	—	—		—		14,376				14,376
Balance at March 31, 2020	43,201,056	$	13	$	337,393	$	88,630	$	(10,006)	$	416,030
Stock-based compensation	—	$—	—	$1,435	~~1,435~~	$—	—	$—	—	$1,435	~~1,435~~
Vesting of restricted stock units and exercise of stock options	6,456	$—	—	$—	—	$—	—	$—	—	$—	—
Tax withholding payment related to net share settlement of equity awards	(1,834)	$—	—	$(8)	~~(8)~~	$—	—	$—	—	$(8)	~~(8)~~
Other comprehensive income	—	$—	—	$—	—	—		$2,108	~~2,108~~	$2,108	~~2,108~~
Net income	—	$—	—	$—	—	$9,857	~~9,857~~			$9,857	~~9,857~~
Balance at June 30, 2020	43,205,678	$	13	$	338,820	$	98,487	$	(7,898)	$	429,422
Stock-based compensation	—	—		1,491		—		—		1,491
Vesting of restricted stock units and exercise of stock options	2,197	—		—		—		—		—
Tax withholding payment related to net share settlement of equity awards	(755)	—		(12)		—		—		(12)
Other comprehensive income	—	—		—		—		1,724		1,724
Net income		—		—		11,801		—		11,801
Balance at September 30, 2020	43,207,120	$	13	$	340,299	$	110,288	$	(6,174)	$	444,426

Six Months Ended June 30, 2019
Nine Months Ended September 30, 2019
	Common Stock
	Shares	Amount		Additional Paid-in Capital		Retained Earnings		Other Comprehensive Loss		Total Stockholders' Equity
Balance at December 31, 2018	42,907,326	$	13	$	332,330	$	34,187	$	(181)	$	366,349
Adoption of derivative guidance	—	—		—		(172)		172		—
Stock-based compensation	—	—		829		—		—		829
Vesting of restricted stock units	93,014	—		—		—		—		—
Shares withheld related to net settlement of equity awards	(13,657)	—		(130)		—		—		(130)
Other comprehensive loss	—	—		—		—		(2,098)		(2,098)
Net income	—	—		—		3,482				3,482
Balance at March 31, 2019	42,986,683	$	13	$	333,029	$	37,497	$	(2,107)	$	368,432
Stock-based compensation	—	—		1,110		—		—		1,110
Vesting of restricted stock unit	2,149	—		—		—		—		—
Shares withheld related to net settlement of equity awards	(722)	—		(8)		—		—		(8)
Other comprehensive loss	—	—		—		—		(1,553)		(1,553)
Net income	—	—		—		14,677		—		14,677
Balance at June 30, 2019	42,988,110	$	13	$	334,131	$	52,174	$	(3,660)	$	382,658
Stock-based compensation	—	—		1,117		—		—		1,117
Vesting of restricted stock unit	2,135	—		—		—		—		—
Shares withheld related to net settlement of equity awards	(405)	—		(11)		—		—		(11)
Other comprehensive loss	—	—		—		—		(640)		(640)
Net income	—	—		—		12,698		—		12,698
Balance at September 30, 2019	42,989,840	$	13	$	335,237	$	64,872	$	(4,300)	$	395,822

See accompanying notes to the condensed consolidated financial statements.

Foundation Building Materials, Inc.

Notes to the Condensed Consolidated Financial Statements

1. Business and Basis of Presentation

Business

Foundation Building Materials, Inc. (the "Company") is a specialty building products distributor of wallboard, suspended ceiling systems, metal framing, and complementary and other products throughout the U.S. and Canada. The Company is based in Santa Ana, California.

Organization

The Company was formed on October 27, 2016 (inception). The initial stockholder of the Company was LSF9 Cypress Parent 2 LLC ("Parent 2"), an affiliate of Lone Star Fund IX (U.S.) L.P., which we refer to with certain of its affiliates and associates (excluding us and other companies it owns as a result of its investment activities), as Lone Star. At the Company's inception, Lone Star held all of the Company's authorized, issued and outstanding shares of common stock.

Principles of Consolidation

The accompanying condensed consolidated financial statements include the accounts of the Company and its consolidated subsidiaries. All intercompany balances and transactions have been eliminated.

Reorganization

On February 8, 2017, FBM Alpha LLC (formerly known as LSF9 Cypress Parent, LLC) ("Alpha"), transferred its wholly owned direct subsidiary, Foundation Building Materials Holding Company LLC (formerly known as FBM Beta LLC and LSF9 Cypress Holdings, LLC) ("Holdco"), and indirectly held subsidiary FBM Finance, Inc., to the Company, thereby transferring the business to be indirectly held by the Company.

The Company holds no other operations, cash flows, material assets or liabilities other than the equity interests in Alpha. Alpha holds no other operations, cash flows, material assets or liabilities other than the equity interests in Holdco. Holdco holds no other material assets or liabilities other than the equity interests in FBM Finance, Inc. and Foundation Building Materials, LLC.

Basis of Presentation

The accompanying ~~unaudited~~ condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles 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~~additional information, ~~refer~~see to the consolidated financial statements and footnotes thereto for the year ended December 31, 2019, included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 25, 2020 (the "2019 10-K").

Reclassification to the Condensed Consolidated Statements of Cash Flows

For the six months ended June 30, 2019, the Company reclassified the presentation of operating lease payments of $13.3 million which were previously included in the change in other liabilities in the condensed consolidated statements of cash flows and are now being presented in a separate line item as a change in operating lease liabilities to conform to the current period presentation. There is no impact on the net cash provided by operating activities from continuing operations in the condensed consolidated statements of cash flows.

Foundation Building Materials, Inc.

Notes to the Condensed Consolidated Financial Statements

2. Recently Adopted and Issued Accounting Standards

Recently Adopted Accounting Standards

In August 2018, the Financial Accounting Standards Board (the "FASB") issued Accounting Standards Update ("ASU") No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework — Changes to the Disclosure Requirements for Fair Value Measurement, which modifies the disclosure requirements on fair value measurements in Topic 820 based on the consideration of costs and benefits to promote the appropriate exercise and discretion by entities when considering fair value measurement disclosures and to clarify that materiality is an appropriate consideration of entities and their auditors when evaluating disclosure requirements. The amendments in this update are effective for reporting periods beginning after December 15, 2019, with early adoption permitted. The Company adopted this guidance on January 1, 2020, and the adoption did not have a material impact on the Company’s consolidated financial statements.

In January 2017, the FASB issued ASU No. 2017-04, Intangibles — Goodwill 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, with early adoption permitted. The Company adopted this guidance on January 1, 2020, and the adoption did not have a material impact on the Company’s consolidated financial statements.

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. This ASU changes the impairment model for most financial assets, requiring the use of an expected loss model that requires entities to estimate the lifetime expected credit loss on financial assets measured at amortized cost. Such credit losses will be recorded as an allowance to offset the amortized cost of the financial asset, resulting in a net presentation of the amount expected to be collected on the financial asset. In addition, credit losses relating to available-for-sale debt securities will now be recorded through an allowance for expected credit losses rather than as a direct write-down to the security. The amendments in this update are effective for reporting periods beginning after December 15, 2019, with early adoption permitted for reporting periods beginning after December 15, 2018. The Company adopted this guidance on January 1, 2020. The adoption did not have a material impact on the Company’s consolidated financial statements and did not result in a cumulative-effect adjustment to beginning retained earnings.

Recently Issued Accounting Standards Not Yet Adopted

In March 2020, the FASB issued ASU No. 2020-04 — Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides optional guidance for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting. The amendments in this update are elective and provide optional expedients and exceptions to GAAP for contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendments in this update apply only to contracts, hedging relationships, and other transactions that reference the London Interbank Offered Rate ("LIBOR") or another reference rate expected to be discontinued because of reference rate reform. This guidance isbecame effective ~~beginning~~ on March 12, 2020, and the Company may elect to apply the amendments prospectively through December 31, 2022. The Company is currently evaluating the impact this guidance may have on its consolidated financial statements and related disclosures.

In December 2019, the FASB issued ASU No. 2019-12 — Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which eliminates certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. It also clarifies and simplifies other aspects of the accounting for income taxes. This guidance is effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years, with early adoption permitted. The Company does not expect the adoption of this guidance will have a material impact on its consolidated financial statements.

Foundation Building Materials, Inc.

Notes to the Condensed Consolidated Financial Statements

3. Discontinued Operations

On November 1, 2018, the Company completed the sale of its mechanical insulation business (the "Disposed Business") to SPI LLC, an unrelated third party controlled by Dunes Point Capital, for total cash consideration of approximately $122.5 million, and recorded a gain on the sale of $13.7 million, net of taxes. For the three and ~~six~~nine months ended ~~June~~September 30, 2019, the Company recorded a loss on sale of discontinued operations, net of tax of $0 and $1.4 million, respectively, related to customary purchase price adjustments.

4. Current Expected Credit Losses

The Company has identified accounts receivable and vendor rebates receivable as portfolio segments in accordance with Topic 326.

Accounts Receivable

The allowance for expected credit losses reflects the Company's estimate of credit exposure. This estimate is based on an assessment of historical write-off experience, aging of receivables, significant individual account credit risk, current economic conditions, and the Company’s expectation of future economic conditions.

The Company’s accounts receivable are primarily from customers in the construction industry located in the United States and Canada. Concentration of credit risk with respect to accounts receivable is limited due to the large number of customers comprising the Company’s customer base. The Company performs credit evaluations of its customers; however, the Company’s policy is generally not to require collateral. As of ~~June~~September 30, 2020, the Company had no significant concentrations of credit risk.

Vendor Rebates Receivable

The Company receives rebates from certain vendors based primarily on the volume of inventory purchases. Throughout the year, the amount of vendor rebates receivable for the periodic programs are recorded when the related inventory is received, and in certain circumstances are estimated based upon the expected annual level of purchases. The Company continually revises these estimates to reflect actual rebates earned. Historically, actual vendor rebates have not been materially different from management’s original estimates and have been unrelated to the Company’s inability to collect payment from a vendor.

The change in the allowance for expected credit losses from December 31, 2019 to ~~June~~September 30, 2020, consists of the following (in thousands):

	Allowance for Expected Credit Losses
Balance at December 31, 2019	$	(3,169)
Provision for expected credit losses	(12,~~366~~102)
Write-offs	12,~~731~~672
Recoveries	(92265)
Balance at June 30, 2020	$	(2,896)
Balance at September 30, 2020	$	(2,864)

Foundation Building Materials, Inc.

Notes to the Condensed Consolidated Financial Statements

5. Right-of-Use ("ROU") Assets and Lease Liabilities

The Company leases the majority of its branch locations and office space and also leases vehicles and equipment for use in its operations. At inception, the Company determines whether an agreement represents a lease and, at commencement, evaluates each lease agreement to determine whether the lease is an operating or a finance lease.

These leases do not have significant rent escalations, holidays, concessions, leasehold improvement incentives, or other build-out clauses. The Company elected to adopt the practical expedient to account for both lease and non-lease components as a single lease component.

Certain leases include one or more options to renew. The exercise of lease renewal options is typically at the Company's discretion. The Company regularly evaluates the renewal options and, when the options are reasonably certain of being exercised, they are included in the lease term.

Variable lease costs consist primarily of taxes, insurance, and common area or other maintenance costs for leased facilities and vehicles and equipment, which are paid based on actual costs incurred.

Generally, leases do not provide an implicit rate; therefore, the Company uses its incremental borrowing rate based on the information available at the lease commencement date in determining the present value of the lease payments. The Company uses a portfolio approach for determining the incremental borrowing rate based on the applicable lease terms and the current economic environment.

The following table summarizes the Company's operating and finance leases by country as of ~~June~~September 30, 2020 (in thousands):

June 30, 2020

September 30, 2020

United States

Canada

Total

Operating leases:

Real estate ROU assets, gross

~~129~~130,~~390~~597

1718,~~373~~768

~~146~~149,~~763~~365

Accumulated amortization

(3236,~~063~~719)

(45,~~847~~419)

(3642,~~910~~138)

Real estate ROU assets, net

9793,~~327~~878

1213,~~526~~349

~~109~~107,~~853~~227

Real estate lease liabilities

9793,~~251~~995

1213,~~683~~531

~~109~~107,~~934~~526

Vehicle and equipment ROU assets, gross

1819,~~561~~630

2,~~594~~650

2122,~~155~~280

Accumulated amortization

(45,~~254~~090)

(~~464~~596)

(45,~~718~~686)

Vehicle and equipment ROU assets, net

14,~~307~~540

2,~~130~~054

16,~~437~~594

Vehicle and equipment lease liabilities

14,~~235~~456

2,~~117~~041

16,~~352~~497

Total operating ROU assets, net

~~111~~108,~~634~~418

1415,~~656~~403

~~126~~123,~~290~~821

Total operating lease liabilities

~~111~~108,~~486~~451

1415,~~800~~572

~~126~~124,~~286~~023

Finance leases included in property and equipment, net:

Vehicle and equipment ROU assets, gross

65,~~471~~962

2,~~748~~793

98,~~219~~755

Accumulated depreciation

(23,~~951~~020)

(~~939~~1,097)

(34,~~890~~117)

Total finance ROU assets, net

32,~~520~~942

1,~~809~~696

54,~~329~~638

Total finance lease liabilities

3,~~882~~335

2,~~207~~094

65,~~089~~429

Foundation Building Materials, Inc.

Notes to the Condensed Consolidated Financial Statements

The following table summarizes the Company's operating and finance leases by country as of December 31, 2019 (in thousands):


	December 31, 2019
	United States		Canada		Total
Operating leases:
Real estate ROU assets, gross	$	114,202	$	16,544	$	130,746
Accumulated amortization	(21,337)		(3,406)		(24,743)
Real estate ROU assets, net	$	92,865	$	13,138	$	106,003
Real estate lease liabilities	$	92,319	$	13,240	$	105,559

Vehicle and equipment ROU assets, gross	$	14,665	$	2,751	$	17,416
Accumulated amortization	(2,592)		(265)		(2,857)
Vehicle and equipment ROU assets, net	$	12,073	$	2,486	$	14,559
Vehicle and equipment lease liabilities	$	12,037	$	2,472	$	14,509

Total operating ROU assets, net	$	104,938	$	15,624	$	120,562
Total operating lease liabilities	$	104,356	$	15,712	$	120,068

Finance leases included in property and equipment, net:
Vehicle and equipment ROU assets, gross	$	6,341	$	2,863	$	9,204
Accumulated depreciation	(1,892)		(670)		(2,562)
Total finance ROU assets, net	$	4,449	$	2,193	$	6,642
Total finance lease liabilities	$	4,777	$	2,607	$	7,384

The components of lease cost are as follows (in thousands):

Three Months Ended June 30,

Six Months Ended June 30,

Three Months Ended September 30,

Nine Months Ended September 30,

2020

2019

2020

2019

Income Statement Classification

Operating leases:

Lease cost

89,~~125~~700

8,~~082~~335

1626,~~915~~615

1624,~~134~~469

Selling, general and administrative expenses

Variable lease cost

~~1,585~~283

~~1,272~~527

23,~~845~~128

2,~~325~~852

Selling, general and administrative expenses

Operating lease cost

9,~~710~~983

98,~~354~~862

1929,~~760~~743

1827,~~459~~321

Finance leases:

Amortization of ROU assets

~~801~~734

~~761~~615

12,~~402~~136

12,~~429~~044

Depreciation and amortization

Interest on lease liabilities

8273

~~117~~106

~~173~~246

~~241~~347

Interest expense

Finance lease cost

~~883~~807

~~878~~721

12,~~575~~382

12,~~670~~391

Total lease cost

10,~~593~~790

109,~~232~~583

2132,~~335~~125

2029,~~129~~712

Foundation Building Materials, Inc.

Notes to the Condensed Consolidated Financial Statements

Supplemental cash flow information for leases is as follows (in thousands):

	Six Months Ended June 30,
	Nine Months Ended September 30,
	2020		2019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	1422,~~752~~336	$	1320,~~345~~035
Financing cash flows from finance leases	$	12,~~355~~066	$	12,~~319~~002
Right-of-use-assets obtained in exchange for lease obligations:
ROU assets obtained in exchange for lease obligations:
Finance leases	$	~~169~~205	$	203
Operating leases	$	2229,~~022~~513	$	~~126~~136,~~565~~204

The weighted-average remaining lease term and weighted-average discount rate for operating and finance leases are as follows:

	June 30, 2020			December 31, 2019
	September 30, 2020		December 31, 2019
	Operating Leases	Finance Leases	Operating Leases	Finance Leases
Weighted average remaining lease term (years)	5.3118	2.7249	5.32	3.26
Weighted average discount rate	4.10%	5.2%	4.4%	5.2%

The following table reconciles the undiscounted future lease payments for operating and finance leases to operating and finance lease liabilities recorded on the balance sheet as of ~~June~~September 30, 2020 (in thousands):

	Operating Leases		Finance Leases		Total
2020 (excluding the six months ended June 30, 2020)	$	17,084	$	1,474	$	18,558
2020 (excluding the nine months ended September 30, 2020)	$	8,700	$	706	$	9,406
2021	3133,~~955~~454		2,~~436~~447		3435,~~391~~901
2022	2829,~~145~~184		1,~~527~~537		2930,~~672~~721
2023	2223,~~889~~548		~~950~~965		2324,~~839~~513
2024	16,~~118~~594		9294		16,~~210~~688
2025 and thereafter	2425,~~428~~919		5758		2425,~~485~~977
Total lease payments	~~140~~137,~~619~~399		65,~~536~~807		~~147~~143,~~155~~206
Less: amount representing interest	(1413,~~333~~376)		(~~447~~378)		(1413,~~780~~754)
Total	$	~~126~~124,~~286~~023	$	65,~~089~~429	$	~~132~~129,~~375~~452
Current portion of lease liabilities	$	2829,~~976~~767	$	2,~~532~~395	$	3132,~~508~~162
Long-term portion of lease liabilities	$	9794,~~310~~256	$	3,~~557~~034	$	~~100~~97,~~867~~290

Foundation Building Materials, Inc.

Notes to the Condensed Consolidated Financial Statements


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

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

Foundation Building Materials, Inc.

Notes to the Condensed Consolidated Financial Statements

6. Derivatives and Hedging Activities

The Company uses derivatives to manage selected foreign currency exchange rate risk for its investments in foreign subsidiaries and interest rate risk related to its variable rate debt. The Company documents its risk management strategy and hedge effectiveness at the inception of and during the term of each hedge. ~~Our~~The Company's derivative instruments are measured at fair value within the accompanying condensed consolidated balance sheets either as an asset or a liability.

Interest Rate Swap

On January 31, 2019, the Company executed two interest rate swaps for a total notional amount of $310.0 million to fix the LIBOR portion of its interest rate on its variable rate debt at 2.52% through January 31, 2022. There is no significant credit risk associated with the potential failure of any counterparty to perform under the terms of the interest rate swaps.

Net Investment Hedge

On May 15, 2019, the Company terminated its foreign currency exchange rate contracts with total notional amounts of approximately $88.0 million. The Company recognized a gain of $2.5 million, net of taxes of $0.8 million, upon termination of the contracts, which was recorded in comprehensive income. On May 15, 2019, the Company entered into new foreign currency exchange rate contracts with total notional amounts of $81.3 million. As of ~~June~~September 30, 2020, the amount of notional foreign currency exchange rate contracts outstanding was approximately $81.3 million. There is no significant credit risk associated with the potential failure of any counterparty to perform under the terms of the foreign currency exchange rate contracts.

The tables below represent the fair value of ~~our~~the Company's derivative instruments (in millions):

		June 30, 2020						December 31, 2019
		September 30, 2020				December 31, 2019
Derivative Type	Balance Sheet Location	Assets		Liabilities		Assets		Liabilities
Interest Rate Swap	Other ~~non-current~~ liabilities	$	—	$	1110.60	$	—	$	6.2
Net Investment Hedge	Other ~~non-current~~ assets/liabilities	$	10.92	$	—	$	—	$	1.4

		Three Months Ended June 30,									Six Months Ended June 30,
		Three Months Ended September 30,						Nine Months Ended September 30,
Derivative Type	Income Statement Location	2020			2019			2020			2019
Interest Rate Swap	Comprehensive income (loss)	$	01.92	1	$	(20.96)	1	$	(42.08)	1	$	(5.17)	1
Net Investment Hedge	Comprehensive (loss) income	$	(1.92)	2	$	(01.4)0	2	$	21.52	2	$	(10.7)	2

(1) Amounts presented are net of taxes of $0.34 million and $0.92 million for the three months ended ~~June~~September 30, 2020 and 2019, respectively and $1.40 million and $12.70 million for the ~~six~~nine months ended ~~June~~September 30, 2020 and 2019, respectively.

(2) Amounts presented are net of taxes of $0.74 million and $0.13 million for the three months ended ~~June~~September 30, 2020 and 2019, respectively and $0.94 million and $0.63 million for the ~~six~~nine months ended ~~June~~September 30, 2020 and 2019, respectively.

On January 1, 2019, the Company adopted ASU No. 2017-12, Targeted Improvements to Accounting for Hedging Activities ("ASU No. 2017-12"), and reclassified $0.2 million from retained earnings to other comprehensive income related to the cumulative ineffective portion of the net investment hedge. See Note 13, Fair Value Measurements, for additional information on ~~our~~the Company's derivative asset and liabilities.

Foundation Building Materials, Inc.

Notes to the Condensed Consolidated Financial Statements

7. 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. Acquisition related costs are expensed as incurred. The purchase price is allocated to the assets acquired and liabilities assumed 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 ~~June~~September 30, 2020. 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 ~~allocation~~allocations for the ~~acquisition~~acquisitions set forth below isare preliminary and subject to adjustment as additional information is obtained about facts and circumstances that existed as of the acquisition ~~date~~dates.

During the ~~six~~nine months ended ~~June~~September 30, 2020, the Company completed the following ~~acquisition~~acquisitions:

Marriott Drywall Materials, Inc.

On September 1, 2020, the Company acquired the operations and substantially all of the assets of Marriott Drywall Materials, Inc. (“Marriott”). Marriott was an independent distributor of wallboard, metal framing, and complementary and other products and operated one branch in the greater Milwaukee, Wisconsin area.

Insulation Distributors, Inc.

On February 3, 2020, the Company acquired the operations and certain assets of Insulation Distributors, Inc. (“IDI”) with respect to IDI’'s two specialty building products branches in Maryland~~, for a total purchase price of $8~~.~~6 million. This acquisition is not considered material.~~

During the nine months ended September 30, 2020, the Company completed the Marriott and IDI acquisitions ("2020 Acquisitions") to expand the Company's geographic footprint and product offerings in Wisconsin and Maryland, respectively. These acquisitions amounted to a total of $12.2 million and are not considered material. The following table summarizes the estimated fair value of the assets acquired and liabilities assumed as of the acquisition ~~date~~dates (in thousands):

	Six Months Ended June 30, 2020
	Nine Months Ended September 30, 2020
Assets acquired:
Accounts receivable	$	45,~~210~~230
Inventories	2,~~228~~690
Property and equipment	12,~~810~~140
Other assets	18
Intangible assets	~~372~~2,362
Total assets acquired	$12,440	~~8,638~~
Liabilities assumed:
Accounts payable	(277)
Total liabilities assumed	(277)
Total net assets acquired	$	12,163

Goodwill and intangible assets recognized from asset acquisitions are expected to be tax deductible. 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. Any adjustments to the purchase price allocation of ~~this~~these ~~acquisition~~acquisitions will be made as soon as practicable but no later than one year from the acquisition date. The pro forma impact of the ~~acquisition~~acquisitions was not presented as the ~~acquisition~~acquisitions ~~was~~were not considered material into the accompanying consolidated financial statements.

Foundation Building Materials, Inc.

Notes to the Condensed Consolidated Financial Statements

8. Goodwill and Intangible Assets

The change in goodwill from December 31, 2019 to ~~June~~September 30, 2020, consists of the following (in thousands):

	Carrying Value
Balance at December 31, 2019	$	495,724
Goodwill acquired	—
Derecognition of Goodwill(1)	(~~121~~123)
Purchase price allocation adjustments from prior periods	8177
Impact of foreign currency exchange rates	(~~1,525~~853)
Balance at June 30, 2020	$	494,159
Balance at September 30, 2020	$	494,825

(1) Activity associated with the derecognition of goodwill from the sale and disposition of a non-core branch in Texas.

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 ~~June~~September 30, 2020 and December 31, 2019 (in thousands):

	June 30, 2020										December 31, 2019
	September 30, 2020						December 31, 2019
	Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount
Tradenames	$	15,980	$	(15,~~133~~918)	$	~~847~~62	$	15,980	$	(13,563)	$	2,417
Customer relationships	~~266~~269,~~805~~181		(~~177~~189,~~876~~142)		8880,~~929~~039		267,781		(156,337)		111,444
	$	~~282~~285,~~785~~161	$	(~~193~~205,~~009~~060)	$	8980,~~776~~101	$	283,761	$	(169,900)	$	113,861

On January 1, 2019, the Company reclassified certain other intangible assets related to real estate leases to right-of-use assets in accordance with the applicable transition guidance in Accounting Standard Codification ("ASC") 840, Leases, the predecessor to ASU No. 2016-02, — Leases (Topic 842).

The weighted average amortization period of these intangible assets in the aggregate is 3.79 years.

9. Long-Term Debt

Debt consists of the following as of ~~June~~September 30, 2020 and December 31, 2019 (in thousands):

	June 30, 2020		December 31, 2019
	September 30, 2020		December 31, 2019
2018 Term Loan Facility	$	~~443~~442,~~250~~125	$	445,500
Unamortized deferred financing and issuance costs - term loan	(5,~~800~~517)		(6,367)
2018 Revolving Credit Facility	409,~~000~~500		89,000
Unamortized deferred financing costs - revolving credit facility	(32,~~164~~907)		(3,677)
	$	~~474~~443,~~286~~201	$	524,456

Foundation Building Materials, Inc.

Notes to the Condensed Consolidated Financial Statements

2018 Term Loan Facility

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

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

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

2018 Revolving Credit Facility

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

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

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

Foundation Building Materials, Inc.

Notes to the Condensed Consolidated Financial Statements

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

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

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

As of ~~June~~September 30, 2020, the Company had $409.05 million of outstanding borrowings and $~~325~~356.61 million of available aggregate undrawn borrowing capacity under the 2018 Revolving Credit Facility. The weighted average interest rate for borrowings under the 2018 Revolving Credit Facility for the three and ~~six~~nine months ended ~~June~~September 30, 2020 was 2.1.7% and 2.43%, respectively.

Deferred Financing and Debt Issuance Costs

Unamortized deferred financing and debt issuance costs as of ~~June~~September 30, 2020, were $98.04 million, of which $5.85 million was included in long-term portion of term loan, net, and $3.2.9 million for the 2018 Revolving Credit Facility was included in other long-term assets in the accompanying condensed consolidated balance sheets. Unamortized deferred financing and debt issuance costs as of December 31, 2019 were $10.0 million, of which $6.4 million was included in the long-term portion of term loan, net, and $3.6 million for the 2018 Revolving Credit Facility was included in other long-term assets in the accompanying condensed consolidated balance sheets.

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

Foundation Building Materials, Inc.

Notes to the Condensed Consolidated Financial Statements

10. Tax Receivable Agreement

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

As of ~~June~~September 30, 2020 and December 31, 2019, the TRA liability balance was $89.5 million and $117.4 million, respectively. The first TRA payment was made in January 2019 for $16.7 million. The second TRA payment was made in January 2020 for $27.9 million and was reflected as a current liability as of December 31, 2019.

11. Accumulated Other Comprehensive Loss

Accumulated other comprehensive loss consists of cumulative unrealized foreign currency translation adjustments and unrealized changes in fair value on certain derivative instruments. For the year ended December 31, 2019, $0.2 million was reclassified from retained earnings to other comprehensive income as a result of the adoption of ASU No. 2017-12 related to the cumulative ineffective portion of the net investment hedge.

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

	Foreign Currency Translation Gains (Losses)		Unrealized Loss on Derivatives, Net of Taxes		Total
Balance at December 31, 2019	$	848	$	(3,312)	$	(2,464)
Other comprehensive loss	(32,~~909~~178)		(1,~~525~~532)		(53,~~434~~710)
Balance at June 30, 2020	$	(3,061)	$	(4,837)	$	(7,898)
Balance at September 30, 2020	$	(1,330)	$	(4,844)	$	(6,174)

12. Contingencies

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

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

Foundation Building Materials, Inc.

Notes to the Condensed Consolidated Financial Statements

13. Fair Value Measurements

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

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

Fair Value Measurements as of June 30, 2020

Fair Value Measurements as of September 30, 2020

Quoted Prices in Active Markets for Identical Assets (Level 1)

Significant Other Observable Inputs (Level 2)

Significant Unobservable Inputs (Level 3)

Total Fair Value

Recurring:

Non-current assets and liabilities

Derivative assets (Note 6)

—

~~1,909~~229

—

~~1,909~~229

Derivative liabilities (Note 6)

—

(119,~~634~~964)

—

(119,~~634~~964)


	Fair Value Measurements as of December 31, 2019
	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total Fair Value
Recurring:
Non-current liabilities
Derivative liabilities (Note 6)	$	—	$	(7,649)	$	—	$	(7,649)

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

14. Income Taxes

Income tax expense for the three and six months ended June 30, 2020, was $3.6 million and $8.9 million, respectively, compared to income tax expense of $5.4 million and $7.5 million for the three and six months ended June 30, 2019, respectively. For the three and six months ended June 30, 2020, the Company's effective tax rates were 27.0% and 26.9%, respectively. The variance from the statutory federal tax rate of 21.0% for the three and six months ended June 30, 2020, was primarily due to state taxes and the impact of the Global Intangible Low Taxed Income provisions, partially offset by a benefit recorded under the Foreign Derived Intangible Income provisions.

Foundation Building Materials, Inc.

Notes to the Condensed Consolidated Financial Statements

~~For the three and six months ended June 30, 2019, the company's effective tax rates were 27~~14.0% Income ~~and~~Taxes 27.7%, respectively. The variance from statutory federal tax rate of 21.0% for the three and six months ended June 30, 2019, was primarily due to state taxes, foreign rate differential and non-deductible items.

Income tax expense for the three and nine months ended September 30, 2020, was $2.0 million and $11.0 million, respectively, compared to income tax expense of $5.8 million and $13.2 million for the three and nine months ended September 30, 2019, respectively. For the three and nine months ended September 30, 2020, the Company's effective tax rates were 14.8% and 23.3%, respectively. The variance from the statutory federal tax rate of 21.0% for the three months ended September 30, 2020, was primarily due to booking as a discrete benefit the election to apply the Global Intangible Low-Taxed Income ("GILTI") high-tax exclusion, as outlined in the final Treasury Regulations issued on July 20, 2020, retroactively to years beginning after December 31, 2017. The variance from the statutory federal tax rate of 21.0% for the nine months ended September 30, 2020 was primarily due to state taxes and booking, as a discrete benefit, the election to apply the GILTI high-tax exclusion, as outlined in the final Treasury Regulations issued on July 20, 2020, retroactively to years beginning after December 31, 2017.

For the three and nine months ended September 30, 2019, the company's effective tax rates were 31.2% and 29.1%, respectively. The variance from statutory federal tax rate of 21.0% for the three and nine months ended September 30, 2019, was primarily due to state taxes, the GILTI provision, non-deductible items and foreign rate differential.

15. Segments

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

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

Revenues are attributed to each country based on the location in which sales originate and in which assets are located. The Company generates the majority of its revenue in the United States with the remainder being generated in Canada. For the three months ended ~~June~~September 30, 2020, 9189.09% and 910.01% of the Company's revenue was generated in the United States and Canada, respectively. For the ~~six~~nine months ended ~~June~~September 30, 2020, 90.75% and 9.35% of the Company's revenue was generated in the United States and Canada, respectively. For the three months ended ~~June~~September 30, 2019, 90.41% and 9.69% of the Company's revenue was generated in the United States and Canada, respectively. For the ~~six~~nine months ended ~~June~~September 30, 2019, 90.54% and 9.56% of the Company's revenue was generated in the United States and Canada, respectively.

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

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

Foundation Building Materials, Inc.

Notes to the Condensed Consolidated Financial Statements

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


	September 30, 2020		December 31, 2019
Property, plant and equipment, net
United States	$	137,252	$	135,907
Canada	13,549		14,281
Total property, plant and equipment, net	$	150,801	$	150,188
ROU assets, net
United States	$	108,418	$	104,938
Canada	15,403		15,624
Total ROU assets, net	$	123,821	$	120,562
Goodwill
United States	$	463,163	$	463,208
Canada	31,662		32,516
Total goodwill	$	494,825	$	495,724
Intangibles, net
United States	$	71,312	$	102,563
Canada	8,789		11,298
Total intangibles, net	$	80,101	$	113,861

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

	Three Months Ended June 30,												Change
	Three Months Ended September 30,								Change
	2020				2019		~~2019~~		$		$%		%
Wallboard	$	~~188~~199,~~588~~448	38.83	%	$	~~214~~207,~~059~~326	3836.27	%	$	(257,~~471~~878)	(113.98)	%
Suspended ceiling systems	9197,~~508~~323		18.87	%	~~106~~118,~~176~~873		1921.0	%	(1421,~~668~~550)		(1318.81)	%
Metal framing	8290,~~188~~333		1617.93	%	~~102~~98,~~425~~817		1817.35	%	(208,~~237~~484)		(~~19.~~8.6)	%
Complementary and other products	~~123~~134,~~806~~157		25.57	%	~~137~~139,~~251~~890		24.58	%	(135,~~445~~733)		(94.81)	%
Total net sales	$	~~486~~521,~~090~~261	100.0	%	$	~~559~~564,~~911~~906	100.0	%	$	(7343,~~821~~645)	(137.27)	%

	Six Months Ended June 30,												Change
	Nine Months Ended September 30,								Change
	2020				2019		~~2019~~		$		$%		%
Wallboard	$	~~390~~590,~~856~~304	38.75	%	$	~~416~~624,~~973~~299	38.81	%	$	(2633,~~117~~995)	(65.34)	%
Suspended ceiling systems	~~190~~287,~~014~~337		18.8	%	~~195~~314,~~172~~045		1819.2	%	(526,~~158~~708)		(28.65)	%
Metal framing	~~175~~265,~~522~~855		17.4	%	~~201~~300,~~676~~493		18.83	%	(2634,~~154~~638)		(1311.05)	%
Complementary and other products	~~253~~388,~~956~~113		25.13	%	~~260~~400,~~962~~852		24.24	%	(712,~~006~~739)		(23.72)	%
Total net sales	$	1,~~010~~531,~~348~~609	100.0	%	$	1,~~074~~639,~~783~~689	100.0	%	$	(64108,~~435~~080)	(6.06)	%

Foundation Building Materials, Inc.

Notes to the Condensed Consolidated Financial Statements

16. Other Current Liabilities

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

	June 30, 2020		December 31, 2019
	September 30, 2020		December 31, 2019
Accrued expenses	$	43,~~098~~826	$	5,652
Accrued interest	3022		74
Accrued other	159,~~208~~846		12,831
Total other current liabilities	$	1913,~~336~~694	$	18,557

17. Earnings (Loss) Per Share

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

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

Three Months Ended June 30,

Six Months Ended June 30,

Three Months Ended September 30,

Nine Months Ended September 30,

2020

2019

2020

2019

Weighted average shares used in basic computations

43,~~203~~206,~~894~~505

42,~~987~~988,~~915~~829

43,~~124~~152,~~793~~229

42,~~960~~969,~~124~~797

Dilutive effect of stock options and restricted stock units

~~128~~358,~~331~~988

~~257~~519,~~438~~849

~~315~~326,~~930~~213

~~104~~204,~~372~~554

Weighted average shares used in diluted computations

43,~~332~~565,~~225~~493

43,~~245~~508,~~353~~678

43,~~440~~478,~~723~~442

43,~~064~~174,~~496~~351

22For the three and nine months ended September 30, 2020, there were 914,209 and 1,095,469 shares, respectively, not included in the computation of diluted weighted average shares because their effect would have been antidilutive. For the three and nine months ended September 30, 2019, there were 324,495 and 525,012 shares, respectively, not included in the computation of diluted weighted average shares because their effect would have been antidilutive.

Foundation Building Materials, Inc.

Notes to the Condensed Consolidated Financial Statements

For the three and six months ended June 30, 2020, there were 1,251,140 and 1,134,917 shares, respectively, not included in the computation of diluted weighted average shares because their effect would have been antidilutive. For the three and six months ended June 30, 2019, there were 38,806 and 85,918 shares, respectively, not include in the computation of diluted weighted average shares because their effect would have been antidilutive.

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

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

•the ~~recent~~ outbreak of the novel coronavirus COVID-19, ~~which was declared a pandemic by the World Health Organization on March 11, 2020,~~ or the COVID-19 Pandemic;

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

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

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

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

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

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

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

•fluctuating demand for the products and services we offer;

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The forward-looking statements contained in this Quarterly Report on Form 10-Q are based on historical performance and management’s current plans, estimates and expectations in light of information currently available to us and are subject to uncertainty and changes in circumstances. There can be no assurance that future developments affecting us will be those that we have anticipated. Actual results may differ materially from these expectations due to changes in global, regional or local political, economic, business, competitive, market, regulatory, public health and other factors, many of which are beyond our control, as well as the other factors described in Item 1A. Risk Factors in this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K for the year ended December 31, 2019, filed with the SEC on February 25, 2020, or the 2019 10-K, as updated by our subsequent filings with the SEC. Additional factors or events that could cause our actual results to differ may also emerge from time to time, and it is not possible for us to predict all of them. Comparisons of results for current and any prior periods are not intended to express any future trends or indications of future performance, unless expressed as such, and should only be viewed as historical data. Should one or more of these risks or uncertainties materialize, or should any of our assumptions prove to be incorrect, our actual results may vary in material respects from what we may have expressed or implied by these forward-looking statements. You should not place undue reliance on any of our forward-looking statements. Any forward-looking statement made by us in this Quarterly Report on Form 10-Q speaks only as of the date hereof. We undertake no obligation to publicly update any forward-looking statement, whether as a result of new information, future developments or otherwise, except as may be required by applicable securities laws. We qualify all of our forward-looking statements by these disclaimers.

Overview

We are one of the largest specialty building products distributors of wallboard and suspended ceiling systems in the United States and Canada. Since 2013, we have completed ~~more~~40 ~~than 35~~ acquisitions and we currently have over 170 branches and 30,000 SKUs.

We have a national operating model supported by local market expertise and an entrepreneurial, customer-centric culture. Our strong national brand and acquisition expertise have established us as the distributor of choice for leading suppliers, and we have over 25,000 customers across construction-related end markets. We believe 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.

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 2019 10-K for a discussion of the general and specific factors and trends affecting our business and results of operations, which include general economic conditions, new non-residential construction, new residential construction, non-residential repair and remodel construction, volume, costs and pricing programs.

The COVID-19 Pandemic's Impact on ~~our~~Our Business

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

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

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

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

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

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

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

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

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

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

Although the effects of the COVID-19 Pandemic have impacted our financial position and results of operations as noted above, we have ~~maintained~~preserved our ~~profitability,~~liquidity ~~including~~through ~~gross~~the ~~margin~~pandemic and ~~adjusted~~maintained ~~EBITDA~~a ~~margin,~~strong ~~during~~balance ~~the three months ended June 30, 2020~~sheet. In addition, we continue to evaluate and pursue our strategic initiatives. WeFor ~~are~~example, ~~resuming~~we ~~our~~launched ~~focus on acquisitions during the second half of the year. We also expect to begin a pilot launch of~~ our e-commerce platform to certain customers during the third quarter of 2020, which we believe will allow us to enhance our existing sales channels, increase our product offerings and improve purchasing and logistics. We currently expect to onboard all of our customers in the first half of 2021. In spite of the challenging market conditions resulting from the COVID-19 Pandemic, we continue to seek opportunities for organic growth and to enhance our financial flexibility. We have taken proactive measures to right-size our business, and we believe we are positioned to withstand further changes to market and economic environments.

Additionally, all of our branches are ~~currently~~ open for business throughout the United States and Canada as of the date of this filing. We have taken safety precautions based on recommendations from federal, state and local authorities as we continue to operate as part of an “Essential Critical Infrastructure Sector” in many states~~. In a select number of states where stronger restrictions are or have been in place~~, ~~including~~as ~~Washington,~~defined ~~California,~~by ~~Michigan,~~the ~~New~~United ~~Jersey,~~States ~~and~~Department ~~the Commonwealth~~ of ~~Pennsylvania,~~Homeland ~~we have experienced more significant year-over-year headwinds, and thus, have not seen the seasonal improvements in our financial results as we would typically expect~~Security. Certain states, ~~such as California,~~ have re-implemented restrictions and guidelines due to the recent escalation of local COVID-19 cases. While these restrictions do not currently affect our ability to operate, they could affect projects where we deliver our products. During the ~~second~~third quarter of 2020, our branches in several states, including in Minnesota and Illinois, ~~have~~were ~~also been~~ impacted by social unrest. While we continue to operate our branches, such social unrest may negatively impact our business in the future.

We continue to safeguard our employees and customers and will continue to actively monitor the disruption caused by the COVID-19 Pandemic. We may take further actions that alter our business operations as may be required by federal, state or local authorities or that we determine are in the best interests of our employees, customers, suppliers and stockholders. From March through ~~June~~the second quarter of 2020, we furloughed approximately 450 employees in response to the COVID-19 Pandemic, but as of July 31, 2020, substantially all of our employees ~~have~~had returned to work. ~~Other~~In ~~than~~addition to these furloughs, ~~there~~we have ~~not~~decreased ~~been~~our ~~any~~workforce ~~further~~by ~~material~~approximately ~~changes~~6% compared to ~~our~~the ~~workforce~~prior year period, due to impacts of the COVID-19 Pandemic. We may take further actions in the future as the situation develops. We restored temporary salary reductions for all employees and compensation for independent board members during the second quarter of 2020.

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

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

•deferring or limiting non-essential operating expenses;

•optimizing all areas of working capital; and

•~~restricted~~restricting hiring, ~~deferred~~deferring wage increases and ~~reduced~~reducing other employer-related costs.

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

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

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

~~Second~~Third Quarter Update

Financial Results

We reported net sales of $~~486~~521.13 million for the three months ended ~~June~~September 30, 2020, a decrease of $7343.86 million, or 137.27%, compared to the three months ended ~~June~~September 30, 2019. Our gross margin for the three months ended ~~June~~September 30, 2020, was 3029.06% compared to 30.64% for the three months ended ~~June~~September 30, 2019. The decrease in net sales and gross margin was primarily due to COVID-19 Pandemic -related market disruptions.

2020 Acquisitions

We supplement our organic growth strategy with selective acquisitions. WeSince ~~temporarily~~January ~~suspended~~2020 ~~our~~through ~~acquisition activity in response to~~ the ~~COVID-19~~date ~~Pandemic but will resume focusing on acquisitions in the second half~~ of ~~2020.~~this ~~In the first quarter~~filing, we have completed ~~one~~two ~~acquisition~~acquisitions, which resulted in the addition of ~~two~~three branches. See Note 7, Acquisitions, to the condensed consolidated financial statements for additional information on our acquisitions and growth strategy. In executing our acquisition strategy and integrating acquired companies, we focus on the cost savings we can achieve through combined procurement and pricing programs and brand consolidation. ~~This~~These ~~acquisition~~2020 acquisitions contributed $5.0 million to net sales for the three months ended ~~June~~September 30, 2020 and $813.98 million for the ~~six~~nine months ended ~~June~~September 30, 2020.

Acquisitions

Effective Date of Acquisition

Branch Locations

# of Branches Acquired

Marriott Drywall Materials, Inc.

September 1, 2020

Wisconsin

Insulation Distributors, Inc.

February 3, 2020

Maryland

Results of Operations

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

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

	Three Months EndedJune 30,
	Three Months Ended September 30,
	2020				2019		~~2019~~
(dollars in thousands)
Statements of operations data
Net sales	$	~~486~~521,~~090~~261	100.0	%	$	~~559~~564,~~911~~906	100.0	%
Cost of goods sold	~~340~~366,~~435~~846		70.04	%	~~388~~393,~~374~~111		69.46	%
Gross profit	~~145~~154,~~655~~415		3029.06	%	171,~~537~~795		30.64	%
Operating expenses:
Selling, general and administrative expenses	~~106~~115,~~257~~125		2122.91	%	~~122~~123,~~735~~907		21.9	%
Depreciation and amortization	19,~~288~~413		43.07	%	20,~~351~~218		3.6	%
Total operating expenses	~~125~~134,~~545~~538		25.98	%	~~143~~144,~~086~~125		25.5	%
Income from operations	2019,~~110~~877		43.18	%	2827,~~451~~670		54.19	%
Interest expense	(76,~~153~~463)		(1.42)	%	(89,~~341~~118)		(1.56)	%
Other income, net	547		0.1	%	44		—	%
Other income (expense), net	436		0.1	%	(89)		—	%
Income before income taxes	13,~~504~~850		2.87	%	2018,~~154~~463		3.63	%
Income tax expense	32,~~647~~049		0.84	%	5,~~433~~754		1.0	%
Income from continuing operations	911,~~857~~801		2.03	%	1412,~~721~~709		2.63	%
Loss on sale of discontinued operations, net of tax	—		—	%	(4411)		—	%
Net income	$	911,~~857~~801	2.03	%	$	1412,~~677~~698	2.63	%

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

	Three Months Ended June 30,															Change
	Three Months Ended September 30,										Change
	2020					2019			~~2019~~		$			$%		%
(dollars in thousands)
Wallboard	$	~~188~~199,~~588~~448		38.83	%	$	~~214~~207,~~059~~326		3836.27	%	$	(257,~~471~~878)		(113.98)	%
Suspended ceiling systems	9197,~~508~~323			18.87	%	~~106~~118,~~176~~873			1921.0	%	(1421,~~668~~550)			(1318.81)	%
Metal framing	8290,~~188~~333			1617.93	%	~~102~~98,~~425~~817			1817.35	%	(208,~~237~~484)			(~~19.~~8.6)	%
Complementary and other products	~~123~~134,~~806~~157			25.57	%	~~137~~139,~~251~~890			24.58	%	(135,~~445~~733)			(94.81)	%
Total net sales	$	~~486~~521,~~090~~261		100.0	%	$	~~559~~564,~~911~~906		100.0	%	$	(7343,~~821~~645)		(137.27)	%
Total gross profit	$	~~145~~154,~~655~~415				$	171,~~537~~795				$	(2517,~~882~~380)		(1510.1)	%
Total gross margin	3029.06		%			30.64		%			(0.68)		%

Net Sales

Net sales for the three months ended ~~June~~September 30, 2020, were $~~486~~521.1 3 million, compared to $~~559~~564.9 million for the three months ended ~~June~~September 30, 2019, representing a decrease of $7343.86 million, or 137.7%. Average daily net sales decreased 9.2% over the prior period. Net sales from base business decreased $7751.48 million compared to the prior period., ~~There~~and ~~was~~average daily base business net sales decreased by 11.0% over the ~~same~~prior ~~number~~period. ofThere was one additional business ~~days~~day in the current period as compared to the prior period. Net sales from acquired branches and existing branches that were strategically combined increased by $38.61 million, compared to $17.4 million during the three months ended September 30, 2019. Our base business net sales across all of our major product lines decreased during the three months ended ~~June~~September 30, 2020, compared to the three months ended ~~June~~September 30, 2019, primarily as a result of reduced business activity due to the COVID-19 Pandemic. The COVID-19 Pandemic has had a greater impact on commercial construction activity compared to the residential market, and as a result, net sales from our suspended ceiling systems and metal framing product lines have decreased more than our net sales from other product lines. Additionally, our base business in the prior year benefited from a strong commercial construction end market and product expansion into new geographic areas, with less comparable activity in the current year. The decreases in our base business net sales across our product lines amounted to the following:

•wallboard net sales decreased $2712.42 million, or 136.31%, comprised of decreases in average selling price and product mix of 31.38%, and wallboard unit volume of 104.03%; on an average daily net sales basis, wallboard decreased by 7.6%, driven by an average daily unit volume decrease of 5.8%;

•suspended ceiling systems net sales decreased $1522.12 million, or 1519.09% primarily as a result of declines in commercial construction activity, average selling price and product mix; on an average daily net sales basis, suspended ceiling systems decreased by 21.1%;

•metal framing net sales decreased $208.37 million, or 209.62% as a result of declines in commercial construction activity, lower unit volume and lower selling prices; on an average daily net sales basis, metal framing decreased by 10.6%; and

•complementary and other products net sales decreased $148.67 million, or 116.25%.; on an average daily net sales basis, complementary and other products decreased by 8.0%.

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

	Three Months Ended June 30,						Change
	Three Months Ended September 30,				Change
	2020		2019		$		%
(dollars in thousands)
Base business (1)	$	~~457~~487,~~811~~167	$	~~535~~538,~~185~~936	$	(7751,~~374~~769)	(149.56)	%
Acquired and combined (2)	2834,~~279~~094		2425,~~726~~970		38,~~553~~124		1431.43	%
Net sales	$	~~486~~521,~~090~~261	$	~~559~~564,~~911~~906	$	(7343,~~821~~645)	(137.27)	%
(1) Represents net sales from branches that were owned by us since January 1, 2019, and branches that were opened by us during such period.
(2) Represents branches acquired and combined after January 1, 2019, primarily as a result of our strategic combination of branches.

2829

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

	Three Months Ended June 30, 2019		Base Business Net Sales Change		Acquired and Combined Net Sales Change		Three Months Ended June 30, 2020		Total Net Sales % Change		Base Business Net Sales % Change(1)		Acquired and Combined Net Sales % Change(2)
	Three Months Ended September 30, 2019		Base Business Net Sales Change		Acquired and Combined Net Sales Change		Three Months Ended September 30, 2020		Total Net Sales % Change		Base Business Net Sales % Change(1)		Acquired and Combined Net Sales % Change(2)
(dollars in thousands)
Wallboard	$	~~214~~207,~~059~~326	$	(2712,~~410~~156)	$	14,~~939~~278	$	~~188~~199,~~588~~448	(113.98)	%	(136.31)	%	2355.47	%
Suspended ceiling systems	~~106~~118,~~176~~873		(1522,~~112~~239)		~~444~~689		9197,~~508~~323		(1318.81)	%	(1519.09)	%	89.29	%
Metal framing	~~102~~98,~~425~~817		(208,~~272~~709)		35225		8290,~~188~~333		(~~19.~~8.6)	%	(209.62)	%	05.92	%
Complementary and other products	~~137~~139,~~251~~890		(148,~~580~~665)		12,~~135~~932		~~123~~134,~~806~~157		(94.81)	%	(116.25)	%	1641.18	%
Net sales	$	~~559~~564,~~911~~906	$	(7751,~~374~~769)	$	38,~~553~~124	$	~~486~~521,~~090~~261	(137.27)	%	(149.56)	%	1431.43	%
Average daily net sales(3)	$	8,~~749~~967	$	(~~1,209~~943)	$	55121	$	78,~~595~~145	(139.2)	%	(1411.50)	%	1429.42	%
(1) Represents base business net sales change as a percentage of base business net sales for the three months ended June 30, 2019.
(1) Represents base business net sales change as a percentage of base business net sales for the three months ended September 30, 2019.
(2) Represents acquired and combined as a percentage of acquired and combined net sales for the three months ended June 30, 2019.
(2) Represents acquired and combined net sales change as a percentage of acquired and combined net sales for the three months ended September 30, 2019.
(3) The number of business days for the three months ended June 30, 2020 and 2019 was 64 for both periods.
(3) The numbers of business days for the three months ended September 30, 2020 and 2019 were 64 and 63, respectively.

Gross Profit and Gross Margin

Gross profit for the three months ended ~~June~~September 30, 2020, was $~~145~~154.74 million, compared to $171.58 million for the three months ended ~~June~~September 30, 2019, representing a decrease of $2517.94 million, or 1510.1%. The decrease in gross profit was primarily due to lower net sales.

Gross margin for the three months ended ~~June~~September 30, 2020, was 3029.06%, compared to 30.64% for the three months ended ~~June~~September 30, 2019. The decrease in gross margin was primarily due to COVID-19 Pandemic -related market disruptions.

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

SG&A expenses for the three months ended ~~June~~September 30, 2020, were $~~106~~115.31 million, compared to $~~122~~123.79 million for the three months ended ~~June~~September 30, 2019, representing a decrease of $168.58 million, or 137.41%. As a percentage of net sales, SG&A expenses were 2122.91% for the three months ended ~~June~~September 30, 2020, compared to 21.9% for the three months ended ~~June~~September 30, 2019. SG&A expenses remained relatively flat as a percentage of net sales primarily due to proactive actions taken to right-size our cost structure in response to a decline in net sales resulting from the COVID-19 Pandemic.

Depreciation and Amortization

Depreciation and amortization for the three months ended ~~June~~September 30, 2020, was $19.34 million compared to $20.42 million for the three months ended ~~June~~September 30, 2019, representing a decrease of $10.18 million, or 54.20%.

Interest Expense

Interest expense for the three months ended ~~June~~September 30, 2020, was $76.25 million compared to $89.31 million for the three months ended ~~June~~September 30, 2019, representing a decrease of $1.2.7 million, or 1429.21%. The decrease iswas primarily due to ~~repayment~~a oflower ~~amounts~~average ~~drawn~~daily ondebt ~~our~~balance ~~2018~~with ~~Revolving~~lower ~~Credit~~average ~~Facility and a decrease in~~ interest rates.

~~Other Income, Net~~30

Other ~~income,~~Income ~~net for the three months ended June 30~~(Expense), ~~2020, was income of $0.5 million, compared to income of $0.0 million for the three months ended June 30, 2019. Other income, net consists primarily of foreign currency transaction gains and losses.~~ Net

29Other income (expense), net for the three months ended September 30, 2020, was income of $0.4 million, compared to expense of $0.1 million for the three months ended September 30, 2019. Other income (expense), net consists primarily of foreign currency transaction gains and losses.

Income Taxes

Income tax expense for the three months ended ~~June~~September 30, 2020, was $32.60 million compared to income tax expense of $5.4 8 million for the three months ended ~~June~~September 30, 2019. The effective tax rate for ~~both~~ the three months ended ~~June~~September 30, 2020 ~~and~~was ~~June~~14.8% ~~30,~~compared ~~2019,~~to ~~was 27~~31.02%~~. There~~ ~~was~~for nothe ~~material~~three months ended September 30, 2019. The difference in the effective tax rates between periods was due primarily to booking, as a discrete benefit, the election to apply the Global Intangible Low Taxed Income, or GILTI, high-tax exclusion, as outlined in the final Treasury Regulations issued on July 20, 2020, retroactively to years beginning after December 31, 2017, and recording a favorable return to provision adjustment associated with foreign tax credits during the three months ended September 30, 2020.

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

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

	Six Months Ended June 30,
	Nine Months Ended September 30,
	2020				2019		~~2019~~
(dollars in thousands)
Statements of operations data
Net sales	$	1,~~010~~531,~~348~~609	100.0	%	$	1,~~074~~639,~~783~~689	100.0	%
Cost of goods sold	~~702~~1,~~535~~069,381		69.58	%	~~750~~1,~~286~~143,397		69.87	%
Gross profit	~~307~~462,~~813~~228		30.52	%	~~324~~496,~~497~~292		30.23	%
Operating expenses:
Selling, general and administrative expenses	~~229~~344,~~354~~479		22.75	%	~~239~~363,~~965~~872		22.32	%
Depreciation and amortization	3857,~~507~~920		3.8	%	4060,~~693~~911		3.87	%
Total operating expenses	~~267~~402,~~861~~399		26.53	%	~~280~~424,~~658~~783		2625.19	%
Income from operations	3959,~~952~~829		43.09	%	4371,~~839~~509		4.14	%
Interest expense	(1421,~~886~~349)		(1.54)	%	(1626,~~897~~015)		(1.6)	%
Gain on legal settlement	8,556		0.85	%	—		—
Other (expense) income, net	(475)		—	%	85		—	%
Other expense, net	(39)		—	%	(4)		—	%
Income before income taxes	3346,~~147~~997		3.30	%	2745,~~027~~490		2.58	%
Income tax expense	810,~~914~~963		0.97	%	713,~~478~~232		0.78	%
Income from continuing operations	2436,~~233~~034		2.43	%	1932,~~549~~258		12.80	%
Loss on sale of discontinued operations, net of tax	—		—	%	(1,~~390~~401)		(0.1)	%
Net income	$	2436,~~233~~034	2.43	%	$	1830,~~159~~857	1.79	%

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

	Six Months Ended June 30,															Change
	Nine Months Ended September 30,										Change
	2020					2019			~~2019~~		$			$%		%
(dollars in thousands)
Wallboard	$	~~390~~590,~~856~~304		38.75	%	$	~~416~~624,~~973~~299		38.81	%	$	(2633,~~117~~995)		(65.34)	%
Suspended ceiling systems	~~190~~287,~~014~~337			18.8	%	~~195~~314,~~172~~045			1819.2	%	(526,~~158~~708)			(28.65)	%
Metal framing	~~175~~265,~~522~~855			17.4	%	~~201~~300,~~676~~493			18.83	%	(2634,~~154~~638)			(1311.05)	%
Complementary and other products	~~253~~388,~~956~~113			25.13	%	~~260~~400,~~962~~852			24.24	%	(712,~~006~~739)			(23.72)	%
Total net sales	$	1,~~010~~531,~~348~~609		100.0	%	$	1,~~074~~639,~~783~~689		100.0	%	$	(64108,~~435~~080)		(6.06)	%
Total gross profit	$	~~307~~462,~~813~~228				$	~~324~~496,~~497~~292				$	(1634,~~684~~064)		(56.19)	%
Total gross margin	30.52		%			30.23		%			(0.31)		%

Net Sales

Net sales for the ~~six~~nine months ended ~~June~~September 30, 2020, were $1,~~010~~531.36 million, compared to $1,~~074~~639.87 million for the ~~six~~nine months ended ~~June~~September 30, 2019, representing a decrease of $64108.41 million, or 6.06%. Average daily net sales decreased 6.7.6% over the prior period. Net sales from base business decreased $78130.97 million compared to the prior period, and average daily base business net sales decreased by 89.43% over the prior period. There ~~was~~were ~~one~~two more business ~~day~~days in the current period as compared to the prior period. Net sales from acquired branches and existing branches that were strategically combined increased by $1422.56 million, compared to $60.4 million during the nine months ended September 30, 2019. Our base business net sales across all of our major product lines decreased during the ~~six~~nine months ended ~~June~~September 30, 2020, compared to the ~~six~~nine months ended ~~June~~September 30, 2019, primarily as a result of reduced business activity due to impacts of the COVID-19 Pandemic. The decreases in our base business net sales across our product lines amounted to the following:

•wallboard net sales decreased $3042.45 million, or 7.61%, comprised of decreases in average selling price and product mix of 2.42%, and wallboard unit volume of 54.29%.; Onon an average daily net sales basis, wallboard decreased by 8.31%, driven by an average daily unit volume decrease of 5.98%;

•suspended ceiling systems net sales decreased $1133.02 million, or 511.91%.; Onon an average daily net sales basis, suspended ceiling systems decreased by 612.60%;

•metal framing net sales decreased $2635.96 million, or 1312.93% as a result of lower average selling prices and unit volumes.; Onon an average daily net sales basis, metal framing decreased by 1413.53%; and

•complementary and other products net sales decreased $1019.63 million, or 45.31%.; Onon an average daily net sales basis, complementary and other products decreased by 56.01%.

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

	Six Months Ended June 30,						Change
	Nine Months Ended September 30,				Change
	2020		2019		$		%
(dollars in thousands)
Base business (1)	$	~~951~~1,~~189~~438,355	$	1,~~030~~569,~~103~~039	$	(78130,~~914~~684)	(78.73)	%
Acquired and combined (2)	5993,~~159~~254		4470,~~680~~650		1422,~~479~~604		32.40	%
Net sales	$	1,~~010~~531,~~348~~609	$	1,~~074~~639,~~783~~689	$	(64108,~~435~~080)	(6.06)	%
(1) Represents net sales from branches that were owned by us since January 1, 2019, and branches that were opened by us during such period.
(2) Represents branches acquired and combined after January 1, 2019, primarily as a result of our strategic combination of branches.

3132

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

	Six Months Ended June 30, 2019		Base Business Net Sales Change		Acquired and Combined Net Sales Change		Six Months Ended June 30, 2020		Total Net Sales % Change		Base Business Net Sales % Change(1)		Acquired and Combined Net Sales % Change(2)
	Nine Months Ended September 30, 2019		Base Business Net Sales Change		Acquired and Combined Net Sales Change		Nine Months Ended September 30, 2020		Total Net Sales % Change		Base Business Net Sales % Change(1)		Acquired and Combined Net Sales % Change(2)
(dollars in thousands)
Wallboard	$	~~416~~624,~~973~~299	$	(3042,~~383~~540)	$	48,~~266~~545	$	~~390~~590,~~856~~304	(65.34)	%	(7.61)	%	2636.71	%
Suspended ceiling systems	~~195~~314,~~172~~045		(1033,~~995~~233)		56,~~837~~525		~~190~~287,~~014~~337		(28.65)	%	(511.91)	%	7343.16	%
Metal framing	~~201~~300,~~676~~493		(2635,~~888~~597)		~~734~~959		~~175~~265,~~522~~855		(1311.05)	%	(1312.93)	%	97.49	%
Complementary and other products	~~260~~400,~~962~~852		(1019,~~648~~314)		36,~~642~~575		~~253~~388,~~956~~113		(23.72)	%	(45.31)	%	2833.20	%
Net sales	$	1,~~074~~639,~~783~~689	$	(78130,~~914~~684)	$	1422,~~479~~604	$	1,~~010~~531,~~348~~609	(6.06)	%	(78.73)	%	32.40	%
Average daily net sales(3)	$	8,~~463~~630	$	(~~680~~767)	$	~~110~~114	$	7,~~893~~977	(6.7.6)	%	(89.43)	%	3130.46	%
(1) Represents base business net sales change as a percentage of base business net sales for the six months ended June 30, 2019.
(1) Represents base business net sales change as a percentage of base business net sales for the nine months ended September 30, 2019.
(2) Represents acquired and combined as a percentage of acquired and combined net sales for the six months ended June 30, 2019.
(2) Represents acquired and combined net sales change as a percentage of acquired and combined net sales for the nine months ended September 30, 2019.
(3) The numbers of business days for the six months ended June 30, 2020 and 2019, were 128 and 127, respectively.
(3) The numbers of business days for the nine months ended September 30, 2020 and 2019, were 192 and 190, respectively.

Gross Profit and Gross Margin

Gross profit for the ~~six~~nine months ended ~~June~~September 30, 2020, was $~~307~~462.82 million, compared to $~~324~~496.53 million for the ~~six~~nine months ended ~~June~~September 30, 2019, representing a decrease of $1634.71 million, or 56.19%. The decrease in gross profit was primarily due to lower net sales.

Gross margin for the ~~six~~nine months ended ~~June~~September 30, 2020, was 30.52% compared to 30.23% for the ~~six~~nine months ended ~~June~~September 30, 2019. The ~~increase~~slight decrease in gross margin was primarily due to ~~improved profitability driven by our ongoing pricing and purchasing initiatives that was partially offset by~~ COVID-19 Pandemic -related market disruptions.

Selling, General & Administrative Expenses

SG&A expenses for the ~~six~~nine months ended ~~June~~September 30, 2020, were $~~229~~344.45 million, compared to $~~240~~363.09 million for the ~~six~~nine months ended ~~June~~September 30, 2019, representing a decrease of $1019.64 million, or 45.43%. As a percentage of net sales, SG&A expenses were 22.75% for the ~~six~~nine months ended ~~June~~September 30, 2020, compared to 22.32% for the ~~six~~nine months ended ~~June~~September 30, 2019. The increase in SG&A expenses as a percentage of net sales was primarily due to the loss of sales leverage resulting from the COVID-19 Pandemic and our continued investment in various company-wide initiatives, partially offset by actions taken to right-size our cost structure in ~~the second quarter in~~ response to athe decline in net sales.

Depreciation and Amortization

Depreciation and amortization for the ~~six~~nine months ended ~~June~~September 30, 2020, was $3857.59 million compared to $4060.79 million for the ~~six~~nine months ended ~~June~~September 30, 2019, representing a decrease of $23.20 million, or 5.4.9%.

Interest Expense

Interest expense for the ~~six~~nine months ended ~~June~~September 30, 2020, was $1421.93 million compared to $1626.90 million for the ~~six~~nine months ended ~~June~~September 30, 2019, representing a decrease of $24.07 million, or 1117.9%. The decrease iswas primarily due to a lower ~~variable~~average ~~interest~~daily ~~rates~~debt onbalance ~~outstanding~~with ~~debt~~lower average interest rates.

3233

Gain on Legal Settlement

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

Other (Expense~~) Income~~, Net

Other (expense~~) income~~, net was nominal for both the ~~six~~nine months ended ~~June~~September 30, 2020, ~~was~~and anSeptember ~~expense of $0.5 million, compared to income of $0.1 million for the six months ended June~~ 30, 2019. Other (expense~~) income~~, net consists primarily of foreign currency transaction gains and losses.

Income Taxes

Income tax expense for the ~~six~~nine months ended ~~June~~September 30, 2020, was $811.90 million compared to $713.5 2 million for the ~~six~~nine months ended ~~June~~September 30, 2019. The effective tax rate for the ~~six~~nine months ended ~~June~~September 30, 2020, was 2623.93% compared to 2729.71% for the ~~six~~nine months ended ~~June~~September 30, 2019. The difference in the effective tax rates between periods iswas due primarily to booking, as a discrete benefit, the ~~recording~~election ofto aapply ~~greater~~the ~~foreign~~GILTI ~~rate~~high-tax ~~differential~~exclusion, as outlined in the final Treasury Regulations issued on July 20, 2020, retroactively to years beginning after December 31, 2017 during the ~~six~~nine months ended ~~June~~September 30, ~~2019~~2020.

Liquidity and Capital Resources

Summary

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

We believe our financial resources, along with managing discretionary expenses, will allow us to manage the ~~anticipated~~ impact of the COVID-19 Pandemic on our business operations for the foreseeable future, which ~~will~~has ~~include~~included reduced net sales and net income levels for our business. We ~~are~~have ~~reducing~~reduced spending ~~more~~ broadly across our operations, only proceeding with operating and capital spending that is critical. We have restricted hiring and reduced discretionary spending. ~~We restored temporary salary reductions for all employees and compensation for independent board members during the second quarter.~~ In addition, we recorded a credit of approximately $1.69 million as an offset to SG&A expenses as a result of the employee retention credits made available under the Canada Emergency Wage Subsidy for Canadian employees during the ~~three~~nine months ended ~~June~~September 30, 2020. ~~The~~We ~~challenges~~believe ~~posed~~we byare ~~the~~able ~~COVID-19~~to ~~Pandemic~~meet on our ~~business~~liquidity ~~are~~needs ~~evolving~~for ~~rapidly.~~the ~~Consequently~~foreseeable future, as we ~~will~~have ~~continue~~maintained toa ~~evaluate~~strong ~~our~~balance ~~financial~~sheet ~~position~~and inlowered ~~light~~our ofnet ~~future~~debt ~~developments,~~leverage ~~particularly those relating to the COVID-19 Pandemic~~ratio.

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

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

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

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

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

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

(dollars in thousands)

Four Quarters Ended June 30, 2020

Pro Forma Adjusted EBITDA (1)

173,458

Consolidated Total Debt (2)

489,339

Total Net Leverage Ratio

2.82x

Cash

31,122

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

458,217

Net Debt Leverage Ratio

2.64x

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

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

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

In March 2020, in response to the COVID-19 Pandemic, we drew $120.0 million from our 2018 Revolving Credit Facility to provide financial flexibility and liquidity due to volatile financial market conditions. We repaid the first quarter draw under our 2018 Revolving Credit Facility in June 2020 and lowered our net debt leverage ratio. As of September 30, 2020, we had $9.5 million of outstanding borrowings, $356.1 million of available aggregate undrawn borrowing capacity under our 2018 Revolving Credit Facility, and $18.7 million in cash and cash equivalents.

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

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

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


(dollars in thousands)	Four Quarters Ended September 30, 2020
Pro Forma Adjusted EBITDA (1)	$	164,374
Consolidated Total Debt (2)	$	457,054
Total Net Leverage Ratio	2.78x
Cash	$	(18,675)
Consolidated Total Debt (2) less Cash, or Net Debt	$	438,379
Net Debt Leverage Ratio	2.67x
(1) "Pro Forma Adjusted EBITDA" is used herein instead of "Consolidated EBITDA" to avoid confusion but is calculated in the same manner as Consolidated EBITDA under our 2018 Revolving Credit Facility. The following table presents a reconciliation of Adjusted EBITDA to Pro Forma Adjusted EBITDA for the four quarters ended September 30, 2020:


	Four Quarters Ended September 30, 2020
(in thousands)
Adjusted EBITDA (a)	$	163,266
Pro forma adjustment (b)	1,108
Pro Forma Adjusted EBITDA	$	164,374
(a) See the section titled "Non-GAAP Financial Information" for a reconciliation of net income from continuing operations to Adjusted EBITDA. (b) The pro forma adjustment gives effect to all acquisitions consummated in the four quarters ended September 30, 2020, as though they had been consummated on the first day of the first quarter for the four quarters ended September 30, 2020. Other adjustments are also made to conform to the terms of our 2018 Revolving Credit Facility.
(2) The reconciliation of total debt on the balance sheet to Consolidated Total Debt is as follows:


	As of September 30, 2020
(in thousands)
Total gross debt	$	451,625
Finance lease liabilities	5,429
Consolidated Total Debt	$	457,054

Cash Flows

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

	Six Months Ended June 30,
	Nine Months Ended September 30,
	2020		2019
(in thousands)
Net cash provided by operating activities	$	~~115~~147,~~302~~184	$	5387,~~204~~253
Net cash used in investing activities	$	(2033,~~955~~028)	$	(3044,~~816~~758)
Net cash used in financing activities	$	(80113,~~825~~173)	$	(3033,~~125~~923)

Operating Activities

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

Net cash provided by operating activities increased by $6259.19 million to $~~115~~147.32 million for the ~~six~~nine months ended ~~June~~September 30, 2020, as compared to $5387.23 million in the same period in 2019. The increase was primarily due to ~~higher~~lower ~~net~~working ~~income~~capital ~~from~~requirements ~~continuing operations including adjustment for non-cash items~~ of $851.4 million and ~~lower~~higher ~~working~~net ~~capital~~income ~~requirements~~from ofcontinuing ~~$53~~operations.7 ~~million.~~

Investing Activities

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

Net cash used in investing activities decreased by $911.97 million to $2133.0 million for the ~~six~~nine months ended ~~June~~September 30, 2020, as compared to $3044.8 million in the same period in 2019. The decrease was primarily due to lower aggregate purchase price for acquisitions and decreases in capital spending of $139.37 million, ~~partially~~and ~~offset by~~ $37.34 million, inrespectively, partially offset by proceeds from the termination of the net investment hedge ~~for~~in ~~the~~2019 ~~three~~and ~~months~~proceeds ~~ended~~from ~~June~~asset 30disposals, ~~2019~~amounting to $3.3 million and $1.5 million, respectively.

3536

Financing Activities

Net cash used in financing activities consists primarily of borrowings and related repayments under our financing agreements.

Net cash used in financing activities increased by $5079.73 million to $80113.82 million in the ~~six~~nine months ended ~~June~~September 30, 2020, as compared to $3033.19 million in the same period in 2019. The increase was primarily due to higher repayments of borrowings of $39485.29 million, ~~and~~compared ato $418.6 million in the same period in 2019. A higher TRA payment in January 2020 also contributed to the increase.

Secondary Public Offering

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

Critical Accounting Policies

Our management’s discussion and analysis of our financial condition and results of operations is based on our condensed consolidated financial statements, which have been prepared in accordance with 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 expected credit losses, inventories, taxes, and goodwill. We base our estimates and judgments on historical experience and on various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may materially differ from these estimates under different assumptions or conditions.

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

Off-Balance Sheet Arrangements

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

Non-GAAP Financial Information

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

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

3637

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

• it 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 this non-GAAP measure does not reflect cash requirements for such replacements.

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

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

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

	Three Months Ended June 30,									Six Months Ended June 30,
	Three Months Ended September 30,						Nine Months Ended September 30,
	2020			2019			2020			2019
(dollars in thousands)
Net income from continuing operations	$	911,~~857~~801		$	1412,~~721~~709		2436,~~233~~034			1932,~~549~~258
Interest expense, net	76,~~127~~447			89,~~402~~012			1421,~~818~~265			1625,~~987~~999
Income tax expense	32,~~647~~049			5,~~433~~754			810,~~914~~963			713,~~478~~232
Depreciation and amortization	19,~~288~~413			20,~~351~~218			3857,~~507~~920			4060,~~693~~911
Stock-based compensation	1,435			1,110			2,828			1,939
Offering and public company readiness expenses(a)	—			378			—			378
Loss (gain) on disposal or sale of assets	657			(258)			708			(67)
Stock-based compensation	1,491			1,117			4,319			3,056
(Gain) loss on disposal or sale of assets	(294)			13			414			(54)
Gain on legal settlement	—			—			(8,556)			—
Transaction costs(a)	245			582			1,084			1,227
Transaction costs(b)	811			819			1,895			2,046
Adjusted EBITDA	$	4241,~~256~~718		$	50,~~341~~020		$	82124,~~536~~254		$	87137,~~806~~826
Adjusted EBITDA margin(b)	8.7		%	9.0		%	8.2		%	8.2		%
Adjusted EBITDA margin(c)	8.0		%	8.9		%	8.1		%	8.4		%

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

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

37(c) Adjusted EBITDA margin represents Adjusted EBITDA divided by net sales.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

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

Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

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

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

Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that occurred during the quarter ended ~~June~~September 30, 2020, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Limitations on Effectiveness of Controls

Our management, including our principal executive officer and principal financial officer, does not expect that our disclosure controls and procedures or our system of internal control over financial reporting will prevent or detect all errors and all fraud. A control system, no matter how well designed or operated, can provide only reasonable, but not absolute, assurance that the objectives of the system of internal control are met. The design of our control system reflects the fact that there are resource constraints, and that the benefits of such control system must be considered relative to their costs. Further, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control failures and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the intentional acts of individuals, by collusion of two or more people, or by management override of the controls. The design of any system of controls is also based in part on certain assumptions about the likelihood of future events, and there can be no assurance that the design of any particular control will always succeed in achieving its objective under all potential future conditions.

3839

Part II. Other Information

Item 1. Legal Proceedings

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

Item 1A. Risk Factors

~~There~~We have updated our existing risk factors to include information associated with the current events related to the COVID-19 Pandemic, which has continued to impact global markets. Except for the updates to the risk factors set forth below, there have been no material changes in our risk factors from those disclosed in Item 1A. Risk Factors in the 2019 10-K and in the 10-Q filed on May 11, 2020.

10The COVID-K19 Pandemic has had, and other public health crises or epidemics could in the ~~10-Q~~future ~~filed~~have, a material adverse impact on ~~May~~our 11results of operations, ~~2020~~and the duration and extent to which the COVID-19 Pandemic will impact our results of operations remains uncertain.

The COVID-19 Pandemic has resulted in, and other significant outbreaks of epidemic, pandemic, or contagious diseases in the human population could result in, a widespread health crisis that adversely affects the broader economies, financial and capital markets, commodity and energy prices, and overall demand environment for our products. In response to the COVID-19 Pandemic, many state, local, and foreign governments have put in place, and others in the future may put in place, travel restrictions, quarantines, “shelter-in-place” guidelines, and similar government orders and restrictions, in an attempt to control the spread of the disease. Such restrictions, orders, guidelines and consumer behavior, as well as other measures taken in response to the global health crisis, have resulted in, and will continue to result in, business closures, work stoppages, slowdowns and delays, work-from-home policies, and the cancellation or postponement of events, among other effects that have and could continue to negatively impact our operations, as well as the operations of our customers and business partners. Such results have had, and will continue to have, a material adverse effect on our business, operations, financial condition, results of operations, and cash flows.

The impacts of the COVID-19 Pandemic have led to discretionary spending, a rapid rise in unemployment, and a sudden decrease in global economic activity, and many businesses, including our Company, have experienced, and anticipate that they will continue to experience, a significant negative impact on their financial condition, results of operations, and liquidity. We anticipate that measures that have been taken to mitigate the impacts of the COVID-19 Pandemic will continue to affect our workforce, customers and vendors, as well as economies and financial markets globally, leading to an economic downturn in the geographies in which we and our customers operate, and continue to adversely impact the demand for our products. For example, during portions of the six months ended June 30, 2020, certain actions that we took to offset the impact of the COVID-19 Pandemic included reducing salaries for all exempt employees and implementing furloughs. During the three months ended September 30, 2020, we scaled back such measures, but we cannot predict what future actions we may have to take to mitigate the impacts of the COVID-19 Pandemic. Furthermore, we have experienced, and continue to experience, disruptions to our business as we implement safety protocols and limitations on customers entering our branches, and restrict nonessential travel.

In addition to the foregoing, the demand for our products, as well as our business, operations, financial condition, results of operations and cash flows will depend on numerous factors, the extent and duration of which are uncertain and cannot be predicted, including:

•the duration and scope of the COVID-19 Pandemic, measures taken to mitigate the spread and impact of the disease, and associated disruptions;

•a general slowdown in the construction industry;

•governmental, business and individual actions taken in response to the COVID-19 Pandemic, including a deterioration in our ability, or the ability of our customers, to operate in affected geographic regions;

•the effect of the pandemic on discretionary spending and demand for our products;

•the effect of the pandemic on our suppliers and disruptions to the global supply chain;

•our ability to sell and provide our products, including disruptions as a result of travel restrictions and people working from home;

•the ability of our customers to pay for our products;

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

•any closures of our and our suppliers’ and customers’ facilities and construction projects;

•incremental costs resulting from the adoption of preventative measures, including social distancing requirements; and

•our ability to timely service our debt or other obligations, or access traditional funding sources on the same or reasonably similar terms.

In addition, while we believe we have taken appropriate steps to maintain a safe workplace to protect our employees from contracting and spreading the coronavirus, including following the guidance set out by the Occupational Safety and Health Administration and Centers for Disease Control and Prevention, we may not be able to completely prevent the spread of the virus among our employees and may face litigation or other proceedings making claims related to unsafe working conditions, inadequate protection of our employees or otherwise. Any of these claims, even if without merit, could result in costly litigation or divert management's attention and resources. Furthermore, we may face a sustained disruption to our operations due to one or more of the factors described above.

Even after the COVID-19 Pandemic has subsided, we may continue to experience adverse impacts to our business as a result of any economic instability that has occurred or may occur in the future. Any of these events could amplify the risks and uncertainties described in Item 1A. Risk Factors in our 2019 10-K and Quarterly Report on Form 10-Q for fiscal quarter ended March 31, 2020, and could materially adversely affect our business, operations, financial condition, results of operations, cash flows or stock price.

See Item 2, Management's Discussion and Analysis of Financial Condition and Results of Operations, specifically “The COVID-19 Pandemic's Impact on Our Business” and “Liquidity and Capital Resources” sections, for further discussion.

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

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosure

Not applicable.

Item 5. Other Information

None.

Item 6. Exhibits

Exhibit Number

Description

10.1#

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

31.1*

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

31.2*

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

32.1

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

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.

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

Inline XBRL Instance Document.

101 SCH

Inline XBRL Taxonomy Extension Schema Document.

101 CAL

Inline XBRL Taxonomy Extension Calculation Linkbase Document.

101 DEF

Inline XBRL Taxonomy Extension Definition Linkbase Document.

101 LAB

Inline XBRL Taxonomy Extension Label Linkbase Document

101 PRE

Inline XBRL Taxonomy Extension Presentation Linkbase Document.

104

Cover Page Interactive Data File (formatted as inline XBRL document and contained in Exhibit 101).

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

The certifications attached as Exhibit 32.1 accompany this Quarterly Report on Form 10-Q pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, are not be deemed “filed” by the registrant for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and are not to be incorporated by reference into any of the registrant’s filings under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date of this Quarterly Report on Form 10-Q, irrespective of any general incorporation language contained in any such filing, except to the extent that the registrant specifically incorporates it by reference.

4042

SIGNATURES

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


FOUNDATION BUILDING MATERIALS, INC.

Date: August 4, 2020	BY:	/s/ John Gorey
Date: November 3, 2020	BY:	/s/ John Gorey
		John Gorey
		Chief Financial Officer
		(Principal Financial Officer)
		/s/ Onur Demirkaya
		Onur Demirkaya
		Chief Accounting Officer
		(Principal Accounting Officer)

Filing Compare · Foundation Building Materials, Inc.