EFiled: Aug 31 2022 05:NEPMERTS
`Transaction ID 68009187
`isi?|
`Case No. 2022-0466-JTLWe
`EXHIBIT 36
`EXHIBIT 36
`=
`
`EFiled: Aug 31 2022 05:16PM EDT
`Transaction ID 68009187
`Case No. 2022-0466-JTL
`
`

`

`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 September 30, 2020
`OR
`☐ 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
`
`(State or other jurisdiction of
`incorporation or organization)
`2520 Red Hill Avenue
`(Address of principal executive
`offices)
`
`Santa Ana, California
`
`81-4259606
`(I.R.S. Employer Identification No.)
`
`92705
`
`(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 October 30, 2020, the number of shares outstanding of the registrant’s common stock, $0.001 par value, was 43,207,120.
`
`

`

`FOUNDATION BUILDING MATERIALS, INC.
`
`Table of Contents
`
`PART I. FINANCIAL INFORMATION
`
`Item 1.
`
`Item 2.
`Item 3.
`Item 4.
`
`Financial Statements
`Condensed Consolidated Statements of Operations and Comprehensive Income
`Condensed Consolidated Balance Sheets
`Condensed Consolidated Statements of Cash Flows
`Condensed Consolidated Statements of Changes in Stockholders' Equity
`Notes to Condensed Consolidated Financial Statements
`Management's Discussion and Analysis of Financial Condition and Results of Operations
`Quantitative and Qualitative Disclosures About Market Risk
`Control and Procedures
`
`PART II. OTHER INFORMATION
`
`Item 1.
`Item 1A.
`Item 2.
`Item 3.
`Item 4.
`Item 5.
`Item 6.
`Signatures
`
`Legal Proceedings
`Risk Factors
`Unregistered Sales of Equity Securities and Use of Proceeds
`Defaults Upon Senior Securities
`Mine Safety Disclosures
`Other Information
`Exhibits
`
`Page
`
`1
`2
`2
`5
`7
`24
`39
`39
`
`40
`40
`41
`41
`41
`41
`41
`
`

`

`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
`September 30,
`
`Nine Months Ended
`September 30,
`
`Net sales
`Cost of goods sold
`Gross profit
`Operating expenses:
`Selling, general and administrative expenses
`Depreciation and amortization
`Total operating expenses
`Income from operations
`Interest expense
`Gain on legal settlement
`Other income (expense), net
`Income before income taxes
`Income tax expense
`Income from continuing operations
`Loss on sale of discontinued operations, net of tax
`Net income
`
`Earnings per share data:
`
`Earnings from continuing operations per share - basic
`Earnings from continuing operations per share - diluted
`
`Loss from discontinued operations per share - basic
`Loss from discontinued operations per share - diluted
`
`Earnings per share - basic
`Earnings per share - diluted
`
`Weighted average shares outstanding:
`Basic
`Diluted
`
`Comprehensive income:
`Net income
`Foreign currency translation adjustment
`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
`Total other comprehensive income (loss)
`Total comprehensive income
`
`2020
`521,261 $
`366,846
`154,415
`
`2019
`564,906 $
`393,111
`171,795
`
`2020
`1,531,609 $
`1,069,381
`462,228
`
`2019
`1,639,689
`1,143,397
`496,292
`
`115,125
`19,413
`134,538
`19,877
`(6,463)
`-
`436
`13,850
`
`2,049
`11,801
`-
`11,801 $
`
`0.27 $
`0.27 $
`
`- $
`- $
`
`0.27 $
`0.27 $
`
`123,907
`20,218
`144,125
`27,670
`(9,118)
`-
`(89)
`18,463
`5,754
`
`344,479
`57,920
`402,399
`59,829
`(21,349)
`8,556
`(39)
`46,997
`10,963
`
`12,709
`(11)
`12,698 $
`
`36,034
`-
`36,034 $
`
`0.30 $
`0.30 $
`
`- $
`- $
`
`0.30 $
`0.30 $
`
`0.83 $
`0.83 $
`
`- $
`- $
`
`0.83 $
`0.83 $
`
`363,872
`60,911
`424,783
`71,509
`(26,015)
`-
`(4)
`45,490
`13,232
`
`32,258
`(1,401)
`30,857
`
`0.75
`0.75
`
`(0.03)
`(0.03)
`
`0.72
`0.72
`
`43,206,505
`43,565,493
`
`42,988,829
`43,508,678
`
`43,152,229
`43,478,442
`
`42,969,797
`43,174,351
`
`11,801 $
`1,731
`
`(7)
`1,724
`13,525 $
`
`12,698 $
`(984)
`
`344
`(640)
`12,058 $
`
`36,034 $
`(2,178)
`
`(1,532)
`(3,710)
`32,324 $
`
`30,857
`2,317
`
`(6,436)
`(4,119)
`26,738
`
`$
`
`$
`
`$
`$
`
`$
`$
`
`$
`$
`
`$
`
`$
`
`See accompanying notes to the condensed consolidated financial statements.
`
`1
`
`

`

`FOUNDATION BUILDING MATERIALS, INC.
`CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
`(in thousands, except share data)
`
`September 30, 2020
`
`December 31, 2019
`
`Current assets:
`
`Cash and cash equivalents
`Accounts receivable-net of allowance for expected credit losses of $2,864 and $3,169, respectively
`Other receivables
`Inventories
`Prepaid expenses and other current assets
`Total current assets
`Property and equipment, net
`Right-of-use assets, net
`Intangible assets, net
`Goodwill
`Other assets
`Total assets
`Liabilities and stockholders' equity:
`
`Current liabilities:
`
`Accounts payable
`Accrued payroll and employee benefits
`Accrued taxes
`Current portion of tax receivable agreement
`Current portion of term loan
`Current portion of lease liabilities
`Other current liabilities
`Total current liabilities
`Asset-based revolving credit facility
`Long-term portion of term loan, net
`Tax receivable agreement
`Deferred income taxes, net
`Long-term portion of lease liabilities
`Other liabilities
`Total liabilities
`Commitments and contingencies
`
`Stockholders' equity:
`Preferred stock, $0.001 par value, authorized 10,000,000 shares; 0 shares issued
`Common stock, $0.001 par value, authorized 190,000,000 shares; 43,207,120 and 42,991,016 shares issued,
`respectively
`Additional paid-in capital
`Retained earnings
`Accumulated other comprehensive loss
`Total stockholders' equity
`Total liabilities and stockholders' equity
`
`$
`
`$
`
`$
`
`$
`
`18,675 $
`265,352
`38,928
`153,650
`11,297
`487,902
`150,801
`123,821
`80,101
`494,825
`4,663
`1,342,113 $
`
`142,972 $
`28,099
`10,269
`8,537
`4,500
`32,162
`13,694
`240,233
`9,500
`432,108
`80,996
`22,114
`97,290
`15,446
`897,687
`
`-
`
`13
`340,299
`110,288
`(6,174)
`444,426
`1,342,113 $
`
`17,766
`262,757
`59,104
`178,624
`7,965
`526,216
`150,188
`120,562
`113,861
`495,724
`5,206
`1,411,757
`
`145,226
`31,410
`8,780
`27,850
`4,500
`30,307
`18,557
`266,630
`89,000
`434,633
`89,533
`18,972
`97,145
`7,679
`1,003,592
`
`-
`
`13
`336,362
`74,254
`(2,464)
`408,165
`1,411,757
`
`See accompanying notes to the condensed consolidated financial statements.
`
`2
`
`

`

`FOUNDATION BUILDING MATERIALS, INC.
`CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
`(in thousands)
`
`Nine Months Ended
`September 30,
`
`2020
`
`2019
`
`Cash flows from operating activities:
`Net income
`Less: loss on sale of discontinued operations
`Net income from continuing operations
`Adjustments to reconcile net income to net cash provided by operating activities from continuing
`operations:
`Depreciation
`Amortization of intangible assets
`Amortization of debt issuance costs and debt discount
`Inventory fair value purchase accounting adjustment
`Provision for expected credit losses
`Stock-based compensation
`Loss (gain) on disposal or sale of assets
`Right-of-use assets non-cash expense
`Deferred income taxes
`Change in assets and liabilities, net of effects of acquisitions:
`Accounts receivable
`Other receivables
`Inventories
`Prepaid expenses and other current assets
`Other assets
`Accounts payable
`Accrued payroll and employee benefits
`Accrued taxes
`Operating lease liabilities
`Other liabilities
`
`Net cash provided by operating activities from continuing operations
`Cash flows from investing activities from continuing operations:
`Purchases of property and equipment
`Proceeds from termination of net investment hedge
`Net (payments of) proceeds from net working capital adjustments related to acquisitions
`Proceeds from disposal or sale of assets
`Acquisitions, net of cash acquired
`
`Net cash used in investing activities from continuing operations
`Cash flows from financing activities from continuing operations:
`Proceeds from asset-based revolving credit facility
`Repayments of asset-based revolving credit facility
`Principal payments for term loan
`Payment related to tax receivable agreement
`Tax withholding payment related to net settlement of equity awards
`
`3
`
`$
`
`36,034 $
`-
`36,034
`
`22,044
`35,876
`1,620
`-
`2,102
`4,319
`807
`22,716
`3,737
`
`(715)
`19,744
`26,828
`(3,361)
`8
`(1,720)
`(3,219)
`1,495
`(22,336)
`1,205
`
`147,184
`
`(22,015)
`-
`(44)
`1,194
`(12,163)
`
`(33,028)
`
`403,000
`(482,500)
`(3,375)
`(27,850)
`(382)
`
`30,857
`(1,401)
`32,258
`
`26,173
`34,738
`1,617
`234
`2,017
`3,056
`(54)
`20,586
`63
`
`(32,949)
`10,520
`5,623
`(4,198)
`(187)
`2,417
`214
`(860)
`(20,034)
`6,019
`87,253
`
`(29,369)
`3,313
`461
`2,719
`(21,882)
`(44,758)
`
`403,454
`(415,178)
`(3,375)
`(16,667)
`(155)
`
`

`

`Principal repayment of finance lease liabilities
`
`Net cash used in financing activities from continuing operations
`Net cash used in investing activities from discontinued operations
`Net cash used in discontinued operations
`Effect of exchange rate changes on cash
`Net increase in cash
`Cash and cash equivalents at beginning of period
`Cash and cash equivalents at end of period
`
`Supplemental disclosures of cash flow information:
`Cash paid for income taxes
`Cash paid for interest
`Supplemental disclosures of non-cash investing and financing activities:
`Decrease in fair value of derivatives, net of tax
`Net goodwill increase for purchase price allocation
`
`(2,066)
`
`(113,173)
`-
`-
`(74)
`909
`17,766
`18,675 $
`
`8,109 $
`19,736 $
`
`1,532 $
`33 $
`
`$
`
`$
`$
`
`$
`$
`
`(2,002)
`(33,923)
`(1,401)
`(1,401)
`198
`7,369
`15,299
`22,668
`
`10,401
`24,150
`
`5,663
`57
`
`See accompanying notes to the condensed consolidated financial statements.
`
`4
`
`

`

`FOUNDATION BUILDING MATERIALS, INC.
`CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)
`(in thousands, except share data)
`
`Balance at December 31, 2019
`Stock-based compensation
`Vesting of restricted stock units
`Tax withholding payment related to
`net share settlement of equity
`awards
`Other comprehensive loss
`Net income
`Balance at March 31, 2020
`Stock-based compensation
`Vesting of restricted stock units
`and exercise of stock options
`Tax withholding payment related to
`net share settlement of equity
`awards
`Other comprehensive income
`Net income
`Balance at June 30, 2020
`Stock-based compensation
`Vesting of restricted stock units
`and exercise of stock options
`Tax withholding payment related to
`net share settlement of equity
`awards
`Other comprehensive income
`Net income
`Balance at September 30, 2020
`
`Nine Months Ended September 30, 2020
`Common Stock
`
`Shares
`42,991,016 $
`-
`237,988
`
`Amount
`13 $
`-
`-
`
`Additional
`Paid-in
`Capital
`336,362 $
`1,393
`-
`
`Retained
`Earnings
`74,254 $
`-
`-
`
`Other
`Comprehensive
`(Loss) Income
`(2,464) $
`-
`-
`
`Total
`Stockholders'
`Equity
`408,165
`1,393
`-
`
`-
`-
`14,376
`88,630 $
`-
`
`-
`
`-
`-
`9,857
`98,487 $
`-
`
`-
`
`-
`-
`11,801
`110,288 $
`
`-
`(7,542)
`
`(10,006) $
`-
`
`-
`
`-
`2,108
`
`(7,898) $
`-
`
`-
`
`-
`1,724
`-
`(6,174) $
`
`(362)
`(7,542)
`14,376
`416,030
`1,435
`
`-
`
`(8)
`2,108
`9,857
`429,422
`1,491
`
`-
`
`(12)
`1,724
`11,801
`444,426
`
`(27,948)
`-
`-
`43,201,056 $
`-
`
`6,456
`
`(1,834)
`-
`-
`43,205,678 $
`-
`
`2,197
`
`(755)
`-
`
`43,207,120 $
`
`-
`-
`-
`13 $
`-
`
`-
`
`-
`-
`-
`13 $
`-
`
`-
`
`-
`-
`-
`13 $
`
`(362)
`-
`-
`337,393 $
`1,435
`
`-
`
`(8)
`-
`-
`338,820 $
`1,491
`
`-
`
`(12)
`-
`-
`340,299 $
`
`5
`
`

`

`Nine Months Ended September 30, 2019
`Common Stock
`
`Shares
`42,907,326 $
`-
`-
`93,014
`
`Additional
`Paid-in Capital
`Amount
`13 $
`332,330 $
`-
`-
`-
`829
`-
`-
`
`Retained
`Earnings
`34,187 $
`(172)
`-
`-
`
`(13,657)
`-
`-
`42,986,683 $
`-
`2,149
`
`(722)
`-
`-
`42,988,110 $
`-
`2,135
`
`(405)
`-
`-
`42,989,840 $
`
`-
`-
`-
`13 $
`-
`-
`
`-
`-
`-
`13 $
`-
`-
`
`-
`-
`-
`13 $
`
`(130)
`-
`-
`333,029 $
`1,110
`-
`
`(8)
`-
`-
`334,131 $
`1,117
`-
`
`(11)
`-
`-
`335,237 $
`
`-
`-
`3,482
`37,497 $
`-
`-
`
`-
`-
`14,677
`52,174 $
`-
`-
`
`-
`-
`12,698
`64,872 $
`
`Other
`Comprehensive
`Loss
`
`(181) $
`172
`-
`-
`
`-
`(2,098)
`
`(2,107) $
`-
`-
`
`-
`(1,553)
`-
`(3,660) $
`-
`-
`
`-
`(640)
`-
`(4,300) $
`
`Total
`Stockholders'
`Equity
`366,349
`-
`829
`-
`
`(130)
`(2,098)
`3,482
`368,432
`1,110
`-
`
`(8)
`(1,553)
`14,677
`382,658
`1,117
`-
`
`(11)
`(640)
`12,698
`395,822
`
`Balance at December 31, 2018
`Adoption of derivative guidance
`Stock-based compensation
`Vesting of restricted stock units
`Shares withheld related to net
`settlement of equity awards
`
`Other comprehensive loss
`Net income
`Balance at March 31, 2019
`Stock-based compensation
`Vesting of restricted stock unit
`Shares withheld related to net
`settlement of equity awards
`Other comprehensive loss
`Net income
`Balance at June 30, 2019
`Stock-based compensation
`Vesting of restricted stock unit
`Shares withheld related to net
`settlement of equity awards
`Other comprehensive loss
`Net income
`Balance at September 30, 2019
`
`See accompanying notes to the condensed consolidated financial statements.
`
`6
`
`

`

`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 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 additional information, see 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").
`
`7
`
`

`

`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 became effective 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.
`
`8
`
`

`

`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 nine months ended 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
`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 September 30, 2020, consists of the following (in thousands):
`Allowance for Expected
`Credit Losses
`
`Balance at December 31, 2019
`Provision for expected credit losses
`Write-offs
`Recoveries
`Balance at September 30, 2020
`
`$
`
`$
`
`(3,169)
`(2,102)
`2,672
`(265)
`(2,864)
`
`9
`
`

`

`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 September 30, 2020 (in thousands):
`September 30, 2020
`Canada
`
`United States
`
`Total
`
`Operating leases:
`Real estate ROU assets, gross
`Accumulated amortization
`Real estate ROU assets, net
`Real estate lease liabilities
`
`Vehicle and equipment ROU assets, gross
`Accumulated amortization
`Vehicle and equipment ROU assets, net
`Vehicle and equipment lease liabilities
`
`Total operating ROU assets, net
`Total operating lease liabilities
`
`Finance leases included in property and equipment, net:
`Vehicle and equipment ROU assets, gross
`Accumulated depreciation
`Total finance ROU assets, net
`Total finance lease liabilities
`
`130,597 $
`(36,719)
`93,878 $
`93,995 $
`
`19,630 $
`(5,090)
`14,540 $
`14,456 $
`
`108,418 $
`108,451 $
`
`5,962 $
`(3,020)
`2,942 $
`3,335 $
`
`18,768 $
`(5,419)
`13,349 $
`13,531 $
`
`2,650 $
`(596)
`2,054 $
`2,041 $
`
`15,403 $
`15,572 $
`
`2,793 $
`(1,097)
`1,696 $
`2,094 $
`
`149,365
`(42,138)
`107,227
`107,526
`
`22,280
`(5,686)
`16,594
`16,497
`
`123,821
`124,023
`
`8,755
`(4,117)
`4,638
`5,429
`
`$
`
`$
`$
`
`$
`
`$
`$
`
`$
`$
`
`$
`
`$
`$
`
`10
`
`

`

`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
`Canada
`
`United States
`
`Total
`
`Operating leases:
`Real estate ROU assets, gross
`Accumulated amortization
`Real estate ROU assets, net
`Real estate lease liabilities
`
`Vehicle and equipment ROU assets, gross
`Accumulated amortization
`Vehicle and equipment ROU assets, net
`Vehicle and equipment lease liabilities
`
`Total operating ROU assets, net
`Total operating lease liabilities
`
`Finance leases included in property and equipment, net:
`Vehicle and equipment ROU assets, gross
`Accumulated depreciation
`Total finance ROU assets, net
`Total finance lease liabilities
`
`The components of lease cost are as follows (in thousands):
`
`$
`
`$
`$
`
`$
`
`$
`$
`
`$
`$
`
`$
`
`$
`$
`
`114,202 $
`(21,337)
`92,865 $
`92,319 $
`
`14,665 $
`(2,592)
`12,073 $
`12,037 $
`
`104,938 $
`104,356 $
`
`6,341 $
`(1,892)
`4,449 $
`4,777 $
`
`16,544
`(3,406)
`13,138
`13,240
`
`2,751
`(265)
`2,486
`2,472
`
`15,624
`15,712
`
`2,863
`(670)
`2,193
`2,607
`
`$
`
`$
`$
`
`$
`
`$
`$
`
`$
`$
`
`$
`
`$
`$
`
`130,746
`(24,743)
`106,003
`105,559
`
`17,416
`(2,857)
`14,559
`14,509
`
`120,562
`120,068
`
`9,204
`(2,562)
`6,642
`7,384
`
`Operating leases:
`Lease cost
`Variable lease cost
`Operating lease cost
`Finance leases:
`Amortization of ROU assets
`Interest on lease liabilities
`Finance lease cost
`Total lease cost
`
`Three Months Ended
`September 30,
`2020
`2019
`
`Nine Months Ended
`September 30,
`2020
`2019
`
`Income Statement Classification
`
`$
`
`$
`
`9,700 $
`283
`9,983
`
`734
`73
`807
`10,790 $
`
`8,335 $
`527
`8,862
`
`615
`106
`721
`9,583 $
`
`26,615 $
`3,128
`29,743
`
`2,136
`246
`2,382
`32,125 $
`
`24,469 Selling, general and administrative expenses
`2,852 Selling, general and administrative expenses
`27,321
`
`2,044 Depreciation and amortization
`347 Interest expense
`2,391
`29,712
`
`11
`
`

`

`Foundation Building Materials, Inc.
`Notes to the Condensed Consolidated Financial Statements
`
`Supplemental cash flow information for leases is as follows (in thousands):
`
`Cash paid for amounts included in the measurement of lease liabilities:
`Operating cash flows from operating leases
`Financing cash flows from finance leases
`
`ROU assets obtained in exchange for lease obligations:
`Finance leases
`Operating leases
`
`Nine Months Ended
`September 30,
`
`2020
`
`2019
`
`$
`$
`
`$
`$
`
`22,336 $
`2,066 $
`
`205 $
`29,513 $
`
`20,035
`2,002
`
`203
`136,204
`
`The weighted-average remaining lease term and weighted-average discount rate for operating and finance leases are as follows:
`September 30, 2020
`December 31, 2019
`Operating Leases
`Finance Leases
`Operating Leases
`Finance Leases
`5.18
`2.49
`5.32
`3.26
`4.0%
`5.2%
`4.4%
`5.2%
`
`Weighted average remaining lease term (years)
`Weighted average discount rate
`
`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 September 30, 2020 (in thousands):
`
`2020 (excluding the nine months ended September 30, 2020)
`2021
`2022
`2023
`2024
`2025 and thereafter
`Total lease payments
`Less: amount representing interest
`Total
`
`Current portion of lease liabilities
`Long-term portion of lease liabilities
`
`Finance Leases
`
`Total
`
`706 $
`2,447
`1,537
`965
`94
`58
`5,807
`(378)
`5,429 $
`
`2,395 $
`3,034 $
`
`9,406
`35,901
`30,721
`24,513
`16,688
`25,977
`143,206
`(13,754)
`129,452
`
`32,162
`97,290
`
`Operating Leases
`8,700 $
`33,454
`29,184
`23,548
`16,594
`25,919
`137,399
`(13,376)
`124,023 $
`
`29,767 $
`94,256 $
`
`$
`
`$
`
`$
`$
`
`12
`
`

`

`Foundation Building Materials, Inc.
`Notes to the Condensed Consolidated Financial Statements
`
`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 December 31, 2019 (in thousands):
`
`2020
`2021
`2022
`2023
`2024
`2025 and thereafter
`Total lease payments
`Less: amount representing interest
`Total
`
`Current portion of lease liabilities
`Long-term portion of lease liabilities
`
`Operating Leases
`32,257 $
`29,816
`24,429
`18,704
`11,882
`17,730
`134,818
`(14,750)
`120,068 $
`
`Finance Leases
`2,908 $
`2,445
`1,496
`976
`95
`87
`8,007
`(623)
`7,384 $
`
`27,689 $
`92,379 $
`
`2,618 $
`4,766 $
`
`Total
`
`35,165
`32,261
`25,925
`19,680
`11,977
`17,817
`142,825
`(15,373)
`127,452
`
`30,307
`97,145
`
`$
`
`$
`
`$
`$
`
`13
`
`

`

`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. 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 exc