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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 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: 001-37921
 
FORTERRA, INC.
 

(Exact name of registrant as specified in its charter)
Delaware
 
37-1830464
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification Number)

511 East John Carpenter Freeway, 6th Floor, Irving, TX 75062
(Address of principal executive offices, including zip code)
(469) 458-7973
(Registrant’s telephone number, including area code)

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

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

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]
 
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes [X] No [ ]
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer
 
Accelerated filer
 
Non-accelerated filer
 
Smaller reporting company
 
Emerging growth company
 o
 
x
 
 o
 
 

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [] No [X]
 
There were 65,233,632 shares of common stock, par value $0.001 per share, of the registrant outstanding as of July 24, 2020.
 





TABLE OF CONTENTS

  
 
Page
Part I
Financial Information
 
Item 1.
Financial Statements
 
Condensed Consolidated Statements of Operations
 
Condensed Consolidated Statements of Comprehensive Income (Loss)
 
Condensed Consolidated Balance Sheets
 
Condensed Consolidated Statements of Shareholders' Equity
 
Condensed Consolidated Statements of Cash Flows
 
Notes to the Unaudited Condensed Consolidated Financial Statements
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
Item 4.
Controls and Procedures
 
 
 
Part II
Other Information
 
Item 1.
Legal Proceedings
Item 1A.
Risk Factors
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
Item 3.
Defaults Upon Senior Securities
Item 4.
Mine Safety Disclosures
Item 5.
Other Information
Item 6.
Exhibits
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 




PART I. FINANCIAL INFORMATION

Item 1. Financial Statements
 
FORTERRA, INC.
Condensed Consolidated Statements of Operations
(in thousands, except per share data)

 
Three months ended
 
Six months ended
 
June 30,
 
June 30,
 
2020
 
2019
 
2020
 
2019
 
(unaudited)
 
(unaudited)
Net sales
$
426,186

 
$
410,219

 
$
757,062

 
$
702,077

Cost of goods sold
320,607

 
324,405

 
592,741

 
574,458

Gross profit
105,579

 
85,814

 
164,321

 
127,619

Selling, general & administrative expenses
(53,283
)
 
(58,640
)
 
(107,523
)
 
(110,031
)
Impairment and exit charges
(265
)
 
(582
)
 
(1,089
)
 
(813
)
Other operating (loss) income, net
(1,001
)
 
(376
)
 
(671
)
 
203

 
(54,549
)
 
(59,598
)
 
(109,283
)
 
(110,641
)
Income from operations
51,030

 
26,216

 
55,038

 
16,978

 
 
 
 
 
 
 
 
Other income (expense)
 
 
 
 
 
 
 
Interest expense
(19,702
)
 
(25,783
)
 
(40,447
)
 
(50,448
)
Gain on extinguishment of debt
116

 

 
66

 

Earnings from equity method investee
3,126

 
3,402

 
5,925

 
4,969

Income (loss) before income taxes
34,570

 
3,835

 
20,582

 
(28,501
)
Income tax (expense) benefit
(7,455
)
 
(881
)
 
(7,533
)
 
6,416

Net income (loss)
$
27,115

 
$
2,954

 
$
13,049

 
$
(22,085
)
 
 
 
 
 
 
 
 
Earnings (loss) per share:
 
 
 
 
 
 
 
Basic
$
0.42

 
$
0.05

 
$
0.20

 
$
(0.34
)
Diluted
$
0.40

 
$
0.05

 
$
0.19

 
$
(0.34
)
Weighted average common shares outstanding:
 
 
 
 
 
 
 
Basic
65,093

 
64,142

 
64,948

 
64,073

Diluted
67,191

 
64,464

 
67,458

 
64,073


See accompanying notes to unaudited condensed consolidated financial statements


1



FORTERRA, INC.
Condensed Consolidated Statements of Comprehensive Income (Loss)
(in thousands)

 
Three months ended
 
Six months ended
 
June 30,
 
June 30,
 
2020
2019
 
2020
 
2019
 
(unaudited)
 
(unaudited)
Net income (loss)
$
27,115

$
2,954

 
$
13,049

 
$
(22,085
)
Change in other postretirement benefit plans, net of tax


 
(681
)
 
373

Foreign currency translation adjustment
2,437

1,320

 
(3,262
)
 
2,828

Comprehensive income (loss)
$
29,552

$
4,274

 
$
9,106

 
$
(18,884
)

See accompanying notes to unaudited condensed consolidated financial statements


2



FORTERRA, INC.
Condensed Consolidated Balance Sheets
(in thousands)

 
June 30,
2020
 
December 31,
2019
ASSETS
(unaudited)
 
 
Current assets
 
 
 
Cash and cash equivalents
$
52,506

 
$
34,800

Receivables, net
271,601

 
205,801

Inventories
238,835

 
238,483

Prepaid expenses
12,334

 
11,021

Other current assets
4,794

 
8,890

Total current assets
580,070

 
498,995

Non-current assets
 
 
 
Property, plant and equipment, net
446,974

 
475,575

Operating lease right-of-use assets
57,444

 
60,253

Goodwill
508,182

 
508,826

Intangible assets, net
121,978

 
142,674

Investment in equity method investee
51,459

 
50,034

Other long-term assets
5,390

 
3,701

Total assets
$
1,771,497

 
$
1,740,058

 
 
 
 
LIABILITIES AND EQUITY
 
 
 
Current liabilities
 
 
 
Trade payables
$
122,715

 
$
102,426

Accrued liabilities
97,434

 
88,839

Deferred revenue
10,558

 
9,527

Current portion of long-term debt
12,510

 
12,510

Current portion of tax receivable agreement
13,145

 
13,145

Total current liabilities
256,362

 
226,447

Non-current liabilities
 
 
 
Long-term debt
1,067,682

 
1,085,793

Long-term finance lease liabilities
138,449

 
137,365

Long-term operating lease liabilities
52,518

 
54,411

Deferred tax liabilities
30,745

 
28,929

Other long-term liabilities
26,105

 
21,906

Long-term tax receivable agreement
64,240

 
64,240

Total liabilities
1,636,101

 
1,619,091

Commitments and Contingencies (Note 14)


 


Equity
 
 
 
Common stock, $0.001 par value, 190,000 shares authorized; 65,211 and 64,741 shares issued and outstanding
19

 
19

Additional paid-in-capital
249,695

 
244,372

Accumulated other comprehensive loss
(11,006
)
 
(7,063
)
Retained deficit
(103,312
)
 
(116,361
)
Total shareholders' equity
135,396

 
120,967

Total liabilities and shareholders' equity
$
1,771,497

 
$
1,740,058


See accompanying notes to unaudited condensed consolidated financial statements


3



FORTERRA, INC.
Condensed Consolidated Statements of Shareholders' Equity
(in thousands, except share data)
(unaudited)
 
 
Common Stock
 
 
 
 
 
 
 
 
 
 
Shares
 
Amount
 
Additional Paid-in-Capital
 
Accumulated Other Comprehensive Income (Loss)
 
Retained Deficit
 
Total Shareholders' Equity
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2019
 
64,740,667

 
$
19

 
$
244,372

 
$
(7,063
)
 
$
(116,361
)
 
$
120,967

Share-based compensation expense
 

 

 
2,864

 

 

 
2,864

Stock-based plan activity
 
336,752

 

 
(194
)
 

 

 
(194
)
Comprehensive loss:
 
 
 
 
 
 
 
 
 
 
 
 
Net loss
 

 

 

 

 
(14,066
)
 
(14,066
)
Change in other postretirement benefit plans, net of tax
 

 

 

 
(681
)
 

 
(681
)
Foreign currency translation adjustment
 

 

 

 
(5,699
)
 

 
(5,699
)
Balance at March 31, 2020
 
65,077,419

 
19

 
247,042

 
(13,443
)
 
(130,427
)
 
103,191

Share-based compensation expense
 

 

 
2,607

 

 

 
2,607

Stock-based plan activity
 
133,488

 

 
46

 

 

 
46

Comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
 
Net income
 

 

 

 

 
27,115

 
27,115

Change in other postretirement benefit plans, net of tax
 

 

 

 

 

 

Foreign currency translation adjustment
 

 

 

 
2,437

 

 
2,437

Balance at June 30, 2020
 
65,210,907

 
$
19

 
$
249,695

 
$
(11,006
)
 
$
(103,312
)
 
$
135,396



 
 
Common Stock
 
 
 
 
 
 
 
 
 
 
Shares
 
Amount
 
Additional Paid-in-Capital
 
Accumulated Other Comprehensive Income (Loss)
 
Retained Deficit
 
Total Shareholders' Equity
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2018
 
64,205,604

 
$
18

 
$
234,931

 
$
(10,740
)
 
$
(115,987
)
 
$
108,222

Cumulative effect of accounting changes, net of tax
 

 

 

 

 
6,957

 
6,957

Share-based compensation expense
 

 

 
1,529

 

 

 
1,529

Stock-based plan activity
 
57,106

 

 
(26
)
 

 

 
(26
)
Comprehensive loss:
 
 
 
 
 
 
 
 
 
 
 
 
Net loss
 

 

 

 

 
(25,039
)
 
(25,039
)
Change in other postretirement benefit plans, net of tax
 

 

 

 
373

 

 
373

Foreign currency translation adjustment
 

 

 

 
1,508

 

 
1,508

Balance at March 31, 2019
 
64,262,710

 
18

 
236,434

 
(8,859
)
 
(134,069
)
 
93,524

Share-based compensation expense
 

 

 
1,132

 

 

 
1,132

Stock-based plan activity
 
35,447

 

 
(88
)
 

 

 
(88
)
Comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
 
Net income
 

 

 

 

 
2,954

 
2,954

Foreign currency translation adjustment
 

 

 

 
1,320

 

 
1,320

Balance at June 30, 2019
 
64,298,157

 
$
18

 
$
237,478

 
$
(7,539
)
 
$
(131,115
)
 
$
98,842



4



See accompanying notes to unaudited condensed consolidated financial statements


5



FORTERRA, INC.
Condensed Consolidated Statements of Cash Flows
(in thousands)
 
 
Six months ended
 
 
June 30,
 
 
2020
 
2019
CASH FLOWS FROM OPERATING ACTIVITIES
 
(unaudited)
Net income (loss)
 
$
13,049

 
$
(22,085
)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation & amortization expense
 
44,907

 
48,782

Loss on disposal of property, plant and equipment
 
1,353

 
1,033

Gain on extinguishment of debt
 
(66
)
 

Amortization of debt discount and issuance costs
 
3,730

 
4,013

Stock-based compensation expense
 
5,471

 
2,661

Write-off of debt discount and issuance costs
 
376

 

Earnings from equity method investee
 
(5,925
)
 
(4,969
)
Distributions from equity method investee
 
4,500

 
1,500

Unrealized loss on derivative instruments, net
 
921

 
5,024

Unrealized foreign currency loss / (gain), net
 
212

 
(93
)
Provision (recoveries) for doubtful accounts
 
80

 
(194
)
Deferred taxes
 
1,816

 
(9,566
)
Other non-cash items
 
2,088

 
919

Change in assets and liabilities:
 
 
 
 
Receivables, net
 
(66,160
)
 
(67,813
)
Inventories
 
(945
)
 
(5,734
)
Other current assets
 
2,435

 
(641
)
Accounts payable and accrued liabilities
 
27,950

 
13,066

Other assets & liabilities
 
4,447

 
6,775

NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES
 
40,239

 
(27,322
)
 
 
 
 
 
CASH FLOWS FROM INVESTING ACTIVITIES
 
 
 
 
Purchase of property, plant and equipment, and intangible assets
 
(9,054
)
 
(34,051
)
Proceeds from sale of fixed assets
 
10,590

 
9,509

NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES
 
1,536

 
(24,542
)
 
 
 
 
 
CASH FLOWS FROM FINANCING ACTIVITIES
 
 
 
 
Payment of debt issuance costs
 
(1,734
)
 

Payments on term loans
 
(21,368
)
 
(6,255
)
Proceeds from revolver
 
180,000

 
54,000

Payments on revolver
 
(180,000
)
 
(15,000
)
Other financing activities
 
(454
)
 
(395
)
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES
 
(23,556
)
 
32,350

Effect of exchange rate changes on cash
 
(513
)
 
512

Net change in cash and cash equivalents
 
17,706

 
(19,002
)
Cash and cash equivalents, beginning of period
 
34,800

 
35,793

Cash and cash equivalents, end of period
 
$
52,506

 
$
16,791

 
 
 
 
 
SUPPLEMENTAL DISCLOSURES:
Cash interest paid
 
$
33,134

 
$
38,835

Income taxes paid (refunds received), net
 
(241
)
 
3,911

See accompanying notes to unaudited condensed consolidated financial statements

6


FORTERRA, INC.
Notes to Unaudited Condensed Consolidated Financial Statements




1. Description of the business

Forterra, Inc. (“Forterra” or the ‘‘Company’’) is involved in the manufacturing, sale and distribution of building products in the United States (“U.S.”) and Eastern Canada. Forterra’s primary products are concrete drainage pipe, precast concrete structures, and water transmission pipe used in drinking and wastewater systems. These products are used in the infrastructure, residential and non-residential sectors of the construction industry.

2. Summary of significant accounting policies

General

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

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

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

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

Use of estimates

The preparation of the condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities as of the reporting date, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. These estimates are based on management’s best knowledge of current events and actions that the Company may undertake in the future. The more significant estimates made by management relate to fair value estimates for assets and liabilities acquired in business combinations; estimates for accrued liabilities for environmental cleanup, bodily injury and insurance claims; estimates for commitments and contingencies; and estimates for the realizability of deferred tax assets, the tax receivable agreement obligation, inventory reserves, allowance for doubtful accounts and impairment of goodwill and long-lived assets.

Certain accounting matters that generally require consideration of forecasted financial information were assessed in light of the impact from the COVID-19 pandemic. The accounting matters assessed included, but were not limited to, the Company’s allowance for doubtful accounts, inventory reserves, goodwill impairment, impairment of property and equipment and valuation allowances for tax assets. While the assessments resulted in no material impacts to the Company’s condensed consolidated financial statements as of and for the three and six months ended June 30, 2020, the Company believes the full impact of the COVID-19 outbreak remains uncertain

7


FORTERRA, INC.
Notes to Unaudited Condensed Consolidated Financial Statements



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

Concentration of Credit Risk

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

Credit Losses

Trade accounts receivable. The allowance for doubtful accounts is based on the Company’s assessment of the collectability of customer accounts. The Company regularly reviews the allowance by considering factors such as historical experience, credit quality, the age of the accounts receivable balances, and current economic conditions that may affect a customer’s ability to pay.

The Company's exposure to credit losses may increase if one or more of its customers are adversely affected by changes in laws or other government recommendations or mandates, economic pressures or uncertainty associated with local or global economic recessions, disruption or other impacts associated with the coronavirus disease 2019 ("COVID-19") pandemic, or other customer-specific factors. Although the Company has historically not experienced significant credit losses, it is possible that there could be a material adverse impact from potential adjustments of the carrying amount of trade receivables as customers are impacted by the COVID-19 pandemic.

Recent Accounting Guidance Adopted

In June 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2016-13, Financial Instruments–Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The standard replaces the incurred loss impairment methodology under current U.S. GAAP with a methodology that reflects expected credit losses and requires the use of a forward-looking expected credit loss model for accounts receivables, loans, and other financial instruments. The Company adopted this ASU on January 1, 2020 using a modified retrospective approach, which did not have a material impact on the Company's condensed consolidated financial statements.

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

Recent Accounting Guidance Not Yet Adopted

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

8


FORTERRA, INC.
Notes to Unaudited Condensed Consolidated Financial Statements



amendments in the same period.  Amendments are to be applied prospectively, except for certain amendments that are to be applied either retrospectively or with a modified retrospective approach through a cumulative effect adjustment recorded to retained earnings.  The effects of this standard on the Company's condensed consolidated financial statements are not expected to be material.


3. Acquisitions

On March 1, 2019, the Company acquired certain assets of Texas limited liability companies Houston Buckner Precast, LLC, Buckner Precast, LLC, Montgomery 18905 E. Industrial, LLC, and 1763 Old Denton Road, LLC (altogether "Buckner") for consideration of $11.8 million in cash, inclusive of a working capital adjustment.  The acquired Buckner assets did not meet the definition of a business and, as such, the transaction was accounted for as an asset acquisition pursuant to the guidance in subsection 805-50 of Accounting Standards Codification ("ASC") 805, Business Combinations. The assets operate as part of the Company’s Drainage Pipe & Products segment.     


4. Receivables, net
    
Receivables consist of the following (in thousands):

 
June 30,
 
December 31,
 
2020
 
2019
Trade receivables
$
237,250

 
$
178,698

Amounts billed but not yet paid under retainage provisions
3,644

 
3,093

Other receivables
32,500

 
26,078

Total receivables
273,394

 
207,869

Less: Allowance for doubtful accounts
(1,793
)
 
(2,068
)
Receivables, net
$
271,601

 
$
205,801




5. Inventories

Inventories consist of the following (in thousands):

 
June 30,
 
December 31,
 
2020
 
2019
Finished goods
$
155,569

 
$
161,440

Raw materials
82,696

 
76,237

Work in process
570

 
806

Total inventories
$
238,835

 
$
238,483




6. Investment in equity method investee

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

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

9


FORTERRA, INC.
Notes to Unaudited Condensed Consolidated Financial Statements



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

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

 
Three months ended
 
Six months ended
 
June 30,
 
June 30,
 
2020
2019
 
2020
2019
Distribution received from CP&P
$
(2,900
)
$

 
$
(4,500
)
$
(1,500
)
Share of earnings in CP&P
3,146

3,420

 
5,961

5,005

Amortization of excess fair value of investment
(18
)
(18
)
 
(36
)
(36
)
    
Selected financial data for CP&P on a 100% basis is as follows (in thousands):

 
Three months ended
 
Six months ended
 
June 30,
 
June 30,
 
2020
2019
 
2020
2019
Net sales
$
36,032

$
37,353

 
$
70,790

$
65,602

Gross profit
10,933

11,721

 
21,470

19,675

Income from operations
6,259

6,840

 
11,879

10,020

Net income
6,209

6,776

 
11,767

9,893




7. Property, plant and equipment, net

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

 
June 30,
 
December 31,
 
2020
 
2019
Machinery and equipment
$
410,007

 
$
398,127

Land, buildings and improvements
233,155

 
240,403

Other equipment
11,781

 
8,660

Construction-in-progress
12,204

 
29,157

Total property, plant and equipment
667,147

 
676,347

Less: accumulated depreciation
(220,173
)
 
(200,772
)
Property, plant and equipment, net
$
446,974

 
$
475,575



Depreciation expense totaled $12.1 million and $24.3 million for the three and six months ended June 30, 2020, respectively, and $12.4 million and $25.2 million for the three and six months ended June 30, 2019, respectively, which is included in cost of goods sold and selling, general and administrative expenses in the condensed consolidated statements of operations.


10


FORTERRA, INC.
Notes to Unaudited Condensed Consolidated Financial Statements




8. Goodwill and other intangible assets, net

    The Company has recorded goodwill in connection with its acquisition of businesses. The following table summarizes the changes in goodwill by operating segment for the six months ended June 30, 2020 (in thousands):
 
Drainage Pipe & Products
 
Water Pipe & Products
 
Total
Balance at December 31, 2019
$
190,466

 
$
318,360

 
$
508,826

Foreign currency and other adjustments
(644
)
 

 
(644
)
Balance at June 30, 2020
$
189,822

 
$
318,360

 
$
508,182




Intangible assets other than goodwill at June 30, 2020 and December 31, 2019 included the following (in thousands):
 
Net carrying value as of June 30, 2020
 
Net carrying value as of December 31, 2019
Customer relationships
$
85,686

 
$
100,869

Trade names
17,280

 
19,626

Patents
6,351

 
7,673

Non-compete agreements
6,453

 
8,070

Developed technology
5,793

 
5,980

Other
415

 
456

Total intangible assets
$
121,978

 
$
142,674


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


9. Fair value measurement

The Company's financial instruments consist primarily of cash and cash equivalents, trade and other receivables, derivative instruments, accounts payable, long-term debt, operating and finance lease liabilities, accrued liabilities and the tax receivable agreement obligation. The carrying value of the Company's trade receivables, other receivables, trade payables, the asset-based revolver and accrued liabilities approximates fair value due to their short-term maturity or other terms related to these financial instruments. The Company may adjust the carrying amount of certain non-financial assets to fair value on a non-recurring basis when they are impaired.
 

11


FORTERRA, INC.
Notes to Unaudited Condensed Consolidated Financial Statements



The estimated carrying amount and fair value of the Company’s financial instruments measured and recorded at fair value on a recurring basis are as follows for the dates indicated (in thousands):
 
Fair value measurements at June 30, 2020 using
 
 
Quoted Prices in Active Markets for Identical Assets (Level 1)
Significant Other Observable Inputs
(Level 2)
Significant Unobservable Inputs
(Level 3)
Total Fair Value June 30, 2020
Liabilities:
 
 
 
 
Derivative liability
$

$
663

$

$
663

 
 
 
 
 
 
Fair value measurements at December 31, 2019 using
 
 
Quoted Prices in Active Markets for Identical Assets (Level 1)
Significant Other Observable Inputs (Level 2)
Significant Unobservable Inputs (Level 3)
Total Fair Value December 31, 2019
Assets:
 
 
 
 
Derivative asset
$

$
258

$

$
258



Liabilities and assets classified as level 2 which are recorded at fair value are valued using observable market inputs. The fair values of derivative assets and liabilities are determined using quantitative models that utilize multiple market inputs including interest rates and exchange rates to generate continuous yield or pricing curves and volatility factors to value the position. The majority of market inputs are actively quoted and can be validated through external sources, including brokers, market transactions and third-party pricing services. The fair values of derivative assets and liabilities include adjustments for market liquidity, counter-party credit quality, and other instrument-specific factors, where appropriate. In addition, the Company incorporates within its fair value measurements a valuation adjustment to reflect the credit risk associated with the net position. Positions are netted by counter-parties, and fair value for net long exposures is adjusted for counter-party credit risk while the fair value for net short exposures is adjusted for the Company’s own credit risk.
 
The estimated carrying amount and fair value of the Company’s financial instruments and liabilities for which fair value is only disclosed is as follows (in thousands):

 
 
Fair value measurements at June 30, 2020 using
 
 
Carrying Amount June 30, 2020
Quoted Prices in Active Markets for Identical Assets (Level 1)
Significant Other Observable Inputs
(Level 2)
Significant Unobservable Inputs
(Level 3)
Total Fair Value June 30, 2020
Liabilities:
 
 
 
 
 
Term Loan
$
1,080,192

$

$
1,049,284

$

$
1,049,284

Tax receivable agreement payable
77,385



49,419

49,419


 
 
Fair value measurements at December 31, 2019 using
 
 
Carrying Amount December 31, 2019
Quoted Prices in Active Markets for Identical Assets (Level 1)
Significant Other Observable Inputs (Level 2)
Significant Unobservable Inputs (Level 3)
Total Fair Value December 31, 2019
Liabilities:
 
 
 
 
 
Term Loan
$
1,098,303

$

$
1,102,295

$

$
1,102,295

Tax receivable agreement payable
77,385



47,625

47,625




12


FORTERRA, INC.
Notes to Unaudited Condensed Consolidated Financial Statements



The fair value of debt is valued using a market approach based on indicative quoted prices for the Company's debt instruments traded in over-the-counter markets and, therefore, is classified as Level 2 within the fair value hierarchy. See Note 11, Debt and deferred financing costs, for a further discussion of Company debt.

The determination of the fair value of the Company's tax receivable agreement payable was determined using a discounted cash flow methodology with level 3 inputs as defined by ASC 820, Fair Value Measurements and Disclosures. The determination of fair value required significant judgment, including estimates of the timing and amounts of various tax attributes. These estimates are based on management’s best knowledge of current events and actions that the Company may undertake in the future. Actual results could differ from these estimates. See Note 14, Commitments and contingencies, for a further discussion of the Company's tax receivable agreement.


10.    Accrued liabilities

Accrued liabilities consist of the following (in thousands):
 
June 30,
 
December 31,
 
2020
 
2019
Accrued payroll and employee benefits
$
33,981

 
$
32,815

Short-term finance leases
16,545

 
16,542

Short-term operating leases
8,479

 
8,784

Accrued taxes
12,009

 
5,354

Warranty
7,419

 
5,536

Accrued rebates
8,382

 
9,895

Short-term derivative liability
331

 

Environmental obligation
83

 
718

Other miscellaneous accrued liabilities
10,205

 
9,195

Total accrued liabilities
$
97,434

 
$
88,839




11. Debt and deferred financing costs

The Company’s debt consisted of the following (in thousands):
 
June 30,
 
December 31,
 
2020
 
2019
Term Loan, net of debt issuance costs and original issuance discount of $21,419 and $25,055, respectively
$
1,080,192

 
$
1,098,303

Total debt
$
1,080,192

 
$
1,098,303

  Less: current portion debt
(12,510
)
 
(12,510
)
Total long-term debt
$
1,067,682

 
$
1,085,793



As of June 30, 2020, Forterra had no borrowings under its $350 million asset based revolving credit facility under its ABL Credit Agreement dated October 25, 2016 (the “ABL Credit Agreement”) for working capital and general corporate purposes (“Revolver”) and $1.1 billion outstanding under its senior term loan facility (“Term Loan”).

The Term Loan provided for a $1.25 billion senior secured term loan. Subject to the conditions set forth in the term loan agreement, the Term Loan may be increased by (i) up to the greater of $285.0 million and 1.0x consolidated EBITDA (defined below) of Forterra and its restricted subsidiaries for the four quarters most recently ended prior to such incurrence plus (ii) the aggregate amount of any voluntary prepayments, plus (iii) an additional

13


FORTERRA, INC.
Notes to Unaudited Condensed Consolidated Financial Statements



unlimited amount, provided (x) in the case of any incremental debt that is secured by a lien that is pari passu with the liens securing the Term Loan, the first lien leverage ratio does not exceed 4.10 to 1.00, (y) in the case of incremental debt that is secured by a lien that is junior to the liens securing the Term Loan, the total leverage ratio does not exceed 5.50 to 1.00 and (z) in the case of incremental debt that is unsecured, the total leverage ratio does not exceed 5.75 to 1.00, in each case, determined on a pro forma basis.

The Term Loan matures on October 25, 2023 and is subject to quarterly amortization equal to 0.25% of the initial principal amount. Interest accrues on outstanding borrowings thereunder at a rate equal to adjusted LIBOR (with a floor of 1.0%) or an alternate base rate (the base rate, which is the highest of the then current federal funds rate plus 0.50%, the prime rate most recently announced by the administrative agent under the Term Loan, and the one-month adjusted LIBOR plus 1.00%), in each case plus a margin of 3.00% or 2.00%, respectively. The weighted average interest rates for the Term Loan were 4.0%, 4.3%, 5.5% and 5.5% for the three and six months ended June 30, 2020 and June 30, 2019, respectively.

During the six months ended June 30, 2020, the Company repurchased $15.5 million of the Term Loan before its maturity at a market value of $15.1 million. Consequently, the Company wrote off a proportionate share of debt issuance costs of $0.3 million and recognized a net gain of $0.1 million on the early extinguishment of debt which was included in the condensed consolidated statements of operations. In addition, please see Note 19, Subsequent events for the issuance of the senior secured notes as well as the repayment of a portion of the Term Loan.

Outstanding borrowings under the Term Loan are guaranteed by Forterra and each of its direct and indirect material wholly-owned domestic subsidiaries except certain excluded subsidiaries (the "Guarantors"). The Term Loan is secured by substantially all of the assets of Forterra, the borrower and the Guarantors; provided that the obligations under the Term Loan are not secured by any liens on more than 65% of the voting stock of foreign subsidiaries or assets of foreign subsidiaries. The Term Loan contains customary representations and warranties, and affirmative and negative covenants, that, among other things, restrict the ability of Forterra and its restricted subsidiaries to incur additional debt, incur or permit liens on assets, make investments and acquisitions, consolidate or merge with any other company, engage in asset sales and pay dividends and make distributions. The Term Loan does not contain any financial covenants. Obligations under the Term Loan may be accelerated upon certain customary events of default (subject to grace periods, as appropriate).
    
On June 17, 2020, the Company entered into a First Amendment (the “Amendment”) to the ABL Credit Agreement. The Amendment, among other things, (i) increased the size of the Revolver from $300.0 million to $350.0 million of aggregate commitments, with up to $330.0 million to be made available to the U.S. Borrowers and up to $20.0 million to be made available to the Canadian Borrowers (the allocation may be modified periodically at the Company's request), (ii) extended the maturity date of the Revolver to June 17, 2025, subject to earlier maturity if greater than $75.0 million of the Company’s Term Loan remains outstanding 91 days prior to the scheduled maturity of the term loan credit facility or any refinancing thereof, and (iii) modified the interest rates on outstanding borrowings under the Revolver to a rate equal to LIBOR or CDOR plus a margin ranging from 1.75% to 2.25% per annum, or an alternate base rate, Canadian prime rate or Canadian base rate plus a margin ranging from 0.75% to 1.25% per annum, in each case, based upon the average excess availability under the Revolver for the most recently completed calendar quarter and the Company’s total leverage ratio as of the end of the most recent fiscal quarter for which financial statements have been delivered. The Company incurred $2.6 million of fees and expenses in connection with this Amendment and recorded it to “Other Long-term Assets” in its condensed consolidated balance sheet. In addition, the Company wrote off $0.4 million of previously deferred issuance cost related to the banks that are no longer part of the ABL Credit Facility.

Subject to the conditions set forth in the ABL Credit Agreement, as amended, the Revolver may be increased by up to the greater of (i) $100.0 million and (ii) such amount as would not cause the aggregate borrowing base to be exceeded by more than $50.0 million. Borrowings under the Revolver may not exceed a borrowing base equal to the sum of (i) 100% of eligible cash, (ii) 85% of eligible accounts receivable and (iii) the lesser of (a) 75% of eligible inventory and (b) 85% of the orderly liquidation value of eligible inventory, with the U.S. and Canadian borrowings being subject to separate borrowing base limitations. The advance rates for accounts receivable and inventory are subject to increase by 2.5% during certain periods. As of June 30, 2020 and

14


FORTERRA, INC.
Notes to Unaudited Condensed Consolidated Financial Statements



December 31, 2019, the Revolver had no outstanding borrowings. The weighted average interest rates for the borrowings under the Revolver were 1.98%, 2.00%, 3.75% and 3.75% for the three and six months ended June 30, 2020 and June 30, 2019, respectively.

The Revolver also provides for the issuance of letters of credit of up to an agreed sublimit. The obligations of the borrowers under the Revolver are guaranteed by Forterra and its direct and indirect wholly-owned restricted subsidiaries other than certain excluded subsidiaries; provided that the obligations of the U.S. borrowers are not guaranteed by the Canadian subsidiaries. The Revolver is secured by substantially all of the assets of the borrowers; provided that the obligations of the U.S. borrowers are not secured by any liens on more than 65% of the voting stock of foreign subsidiaries or assets of foreign subsidiaries.

In addition, Forterra pays a facility fee of between 20.0 and 32.5 basis points per annum based upon the utilization of the total Revolver. Availability under the Revolver, based on draws, outstanding letters of credit of $25.9 million, as well as allowable borrowing base as of June 30, 2020, was $261.9 million.

The Revolver and the Term Loan contain customary representations and warranties, and affirmative and negative covenants, including representations, warranties, and covenants that, among other things, restrict the ability of Forterra and its restricted subsidiaries to incur additional debt, incur or permit liens on assets, make investments and acquisitions, consolidate or merge with any other company, engage in asset sales and pay dividends and make distributions. The Revolver contains a financial covenant restricting Forterra from allowing its fixed charge coverage ratio to drop below 1.00:1.00 during a compliance period, which is triggered when the availability under the Revolver falls below a threshold set forth in the ABL Credit Agreement, as amended. Obligations under the Revolver and the Term Loan may be accelerated upon certain customary events of default (subject to grace periods, as appropriate). The fixed charge coverage ratio is the ratio of consolidated earnings before interest, depreciation, and amortization (“EBITDA’’) less cash payments for capital expenditures and income taxes to consolidated fixed charges (interest expense plus scheduled payments of principal on indebtedness).

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

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

 
Term Loan
2020
$
6,255

2021
12,510

2022
12,510

2023
1,070,336

 
$
1,101,611





15


FORTERRA, INC.
Notes to Unaudited Condensed Consolidated Financial Statements



12. Derivatives and hedging

The Company uses derivatives to manage selected foreign exchange and interest rate exposures. The Company does not use derivative instruments for speculative trading purposes, and cash flows from derivative instruments are included in net cash provided by (used in) operating activities in the condensed consolidated statements of cash flows.

On March 30, 2020, Forterra entered into an interest rate swap transaction with a notional value of $400 million to reduce exposure to interest rate fluctuations associated with a portion of the Term Loan. Under the terms of the swap transaction, Forterra agreed to pay a fixed rate of interest of 1.08% and receive floating rate of interest indexed to one-month LIBOR, subject to a minimum of 1.00%, with monthly settlement terms with the swap counterparty. The swap has a 30-month term and expires on September 30, 2022. The interest rate swap is not designated as a cash flow hedge, therefore all changes in the fair value of the instrument are captured as a component of interest expense in the statements of operations. Accordingly, cash flows from the monthly interest rate swap settlements are included in net cash provided by (used in) operating activities in the condensed consolidated statements of cash flows.

    On February 9, 2017, Forterra entered into interest rate swap transactions with a combined notional value of $525 million.  Under the terms of the swap transactions, Forterra agreed to pay a fixed rate of interest of 1.52% and receive floating rate interest indexed to one-month LIBOR with monthly settlement terms with the swap counterparties.  The swaps were not designated as cash flow hedges, had a three-year term, and expired on March 31, 2020.

The Company elects to present all derivative assets and derivative liabilities on a net basis on its condensed consolidated balance sheets when a legally enforceable International Swaps and Derivatives Association, Inc. (“ISDA”) Master Agreement exists. An ISDA Master Agreement is an agreement between two counterparties, which may have multiple derivative transactions with each other governed by such agreement, and such ISDA Master Agreement generally provides for the net settlement of all or a specified group of these derivative transactions, through a single payment, in a single currency, in the event of a default on, or affecting any, one derivative transaction or a termination event affecting all, or a specified group of, derivative transactions. At June 30, 2020 and December 31, 2019, the Company’s derivative instruments fall under an ISDA master netting agreement.

The following table presents the fair values of derivative assets and liabilities in the condensed consolidated balance sheets (in thousands):
 
June 30, 2020
 
Derivative Assets
 
Derivative Liabilities
 
Notional Amount
 
Fair Value
 
Notional Amount
 
Fair Value
Interest rate swaps
$

 
$

 
$
400,000

 
$
663

Total derivatives, gross
 
 

 
 
 
663

Less: Legally enforceable master netting agreements
 
 

 
 
 

Total derivatives, net


 
$

 
 
 
$
663


 
December 31, 2019
 
Derivative Assets
 
Derivative Liabilities