Form S-1
Table of Contents

As filed with the Securities and Exchange Commission on July 8, 2016

Registration No. 333-            

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

Forterra, Inc.

 

 

 

Delaware   3272   37-1830464

(State or other jurisdiction of

incorporation or organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification Number)

511 East John Carpenter Freeway, 6th Floor

Irving, TX 75062

(469) 458-7973

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

 

 

Jeff Bradley

Chief Executive Officer

Forterra, Inc.

511 East John Carpenter Freeway, 6th Floor

Irving, TX 75062

tel: (469) 458-7973

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

 

Copies to:

 

Jeffrey A. Chapman

Peter W. Wardle

Gibson, Dunn & Crutcher LLP

2100 McKinney Ave., Suite 1100

Dallas, TX 75201

tel: (214) 698-3100

fax: (214) 571-2900

 

Joshua Davidson

Samantha H. Crispin

Baker Botts L.L.P.

One Shell Plaza

910 Louisiana Street

Houston, TX 77002

tel: (713) 229-1234

fax: (713) 229-1522

 

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after this registration statement is declared effective.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.  ¨

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   ¨    Accelerated filer   ¨
Non-accelerated filer   x (Do not check if a smaller reporting company)    Smaller reporting company   ¨

 

 

CALCULATION OF REGISTRATION FEE

 

 

Title of Each Class of

Securities to be Registered

   Proposed Maximum
Aggregate Offering Price(1)(2)
  

Amount of

Registration Fee

Common Stock, $0.001 par value per share

   $100,000,000    $10,070

 

 

(1) Includes shares that the underwriters have the option to purchase. See “Underwriting.”
(2) Estimated solely for the purpose of calculating the registration fee under Rule 457(o) of the Securities Act of 1933, as amended.

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


Table of Contents

The information in this preliminary prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell nor does it seek an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

SUBJECT TO COMPLETION, DATED JULY 8, 2016

             Shares

 

LOGO

Forterra, Inc.

Common Stock

$         per share

 

 

This is the initial public offering of our common stock. We are offering              shares of our common stock and the selling stockholder identified in this prospectus is offering              shares of our common stock. We will not receive any proceeds from the sale of shares by the selling stockholder. Prior to this offering, there has been no public market for our common stock. It is currently estimated that the initial public offering price per share will be between $         and $        .

                     has granted to the underwriters an option to purchase up to              additional shares of common stock.

We intend to apply to list our common stock on              under the symbol “          .”

 

 

Investing in our common stock involves risks. See “Risk Factors” beginning on page 22 to read about factors you should consider before buying shares of our common stock.

 

 

Neither the Securities and Exchange Commission nor any other regulatory body has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.

 

 

 

     Per Share      Total  

Initial public offering price

   $                    $                

Underwriting discount(1)

   $         $     

Proceeds to us (before expenses)

   $         $     

Proceeds to selling stockholder (before expenses)

   $         $     

 

(1) See “Underwriting” for a description of all underwriting compensation payable in connection with this offering.

The underwriters expect to deliver the shares to purchasers on or about                     , 2016 through the book-entry facilities of The Depository Trust Company.

 

Goldman, Sachs & Co.   Citigroup   Credit Suisse

 

 

Prospectus dated                     , 2016


Table of Contents

TABLE OF CONTENTS

 

 

 

     Page  

Prospectus Summary

     1   

Risk Factors

     22   

Forward-Looking Statements

     48   

Use of Proceeds

     50   

Dividend Policy

     51   

Capitalization

     52   

Dilution

     53   

Selected Historical Financial Data

     55   

Unaudited Pro Forma Condensed Combined Financial Information

     57   

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     80   

Non-GAAP Financial Information

     112   

Business

     118   

Management

     143   

Executive Compensation

     152   

Principal and Selling Stockholders

     169   

Certain Relationships and Related Party Transactions

     171   

Description of Capital Stock

     174   

Description of Certain Indebtedness

     180   

Shares Eligible for Future Sale

     185   

U.S. Federal Tax Considerations for Non-U.S. Holders

     187   

Underwriting (Conflicts of Interest)

     192   

Legal Matters

     198   

Experts

     198   

Where You Can Find Additional Information

     198   

Index to Financial Statements

     F-1   

 

 

We are responsible for the information contained in this prospectus, in any amendment or supplement to this prospectus and in any free-writing prospectus we prepare or authorize. We have not authorized anyone to provide you with different information, and we take no responsibility for and cannot provide any assurance as to the reliability of any other information others may give you. We are not, the selling stockholder is not and the underwriters are not, making an offer to sell shares of our common stock in any jurisdiction where the offer or sale is not permitted. You should not assume that the information contained in this prospectus is accurate as of any date other than its date.

 

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GENERAL INFORMATION

Industry and Market Data

We use market data and industry forecasts throughout this prospectus and, in particular, in the sections entitled “Prospectus Summary” and “Business.” Unless otherwise indicated, statements in this prospectus concerning our industries and the markets in which we operate, including our general expectations, competitive position, business opportunity and market size, growth and share, are based on publicly available information, periodic industry publications and surveys, government surveys and reports, including from the U.S. Census Bureau and the U.S. Environmental Protection Agency, or EPA, and reports by market research firms.

In this prospectus, when we refer to:

 

    AWWA, we are referring to a publication prepared by the American Water Works Association, Buried No Longer: Confronting America’s Water Infrastructure Challenge (February 2012);

 

    CMD Group, we are referring to a publication prepared by Construction Market Data Group LLC, Canadian Put-in-Place Construction Forecasts: Spring 2016 Edition (March 2016);

 

    CMHC, we are referring to a publication prepared by the Canada Mortgage and Housing Corporation, Housing Market Outlook: Canada Edition (Second Quarter 2016);

 

    Dodge, we are referring to a publication prepared by Dodge Data & Analytics, Construction Market Forecasting Service: The Next Five Years (March 2016);

 

    Fannie Mae, we are referring to a publication prepared by the Federal National Mortgage Association, Housing Forecast (June 2016); and

 

    Freedonia, we are referring to various studies prepared by Freedonia Custom Research, Inc. and/or Freedonia Group, Inc., including Construction Materials in the U.S., Eastern Canada and the UK Final Report (July 2014), Precast Concrete Products (January 2015) and Total Pipe by Application (May 2016).

We have not independently verified market data and industry forecasts provided by any of these or any other third-party sources referred to in this prospectus, although we believe such market data and industry forecasts included in this prospectus are reliable. This information cannot always be verified with complete certainty due to the limits on the availability and reliability of raw data, the voluntary nature of the data gathering process and other limitations and uncertainties inherent in surveys of market size.

Management estimates are derived from the information and data referred to above, as well as our internal research, calculations and assumptions made by us based on our analysis of such information and data and our knowledge of our industries and markets, which we believe to be reasonable, although they have not been independently verified. While we believe that the market position information included in this prospectus is generally reliable, such information is inherently imprecise. Assumptions, expectations and estimates of our future performance and the future performance of the industries and markets in which we operate are necessarily subject to a high degree of uncertainty and risk due to a variety of factors, including those described in the sections entitled “Risk Factors” and “Forward-Looking Statements.” These and other factors could cause results to differ materially from those expressed in the estimates made by the independent parties and by us.

 

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Pro Forma Financial Information

In addition to our results presented under U.S. GAAP, or GAAP, in this prospectus we also present certain pro forma financial information that gives effect to the acquisition of our business from HeidelbergCement AG, certain acquisition transactions we have completed following the acquisition of our business from HeidelbergCement AG and certain other transactions, as discussed in greater detail in the section entitled “Unaudited Pro Forma Condensed Combined Financial Information.” As a result of these transactions, our historical financial results do not reflect any impact or the full impact, as applicable, of these transactions, and our management believes it is important to discuss our pro forma financial information because it provides investors with additional context regarding our business. However, our pro forma financial information should not be considered independent of our audited and unaudited combined financial statements and the related notes included elsewhere in this prospectus and the pro forma financial statements included in the section entitled “Unaudited Pro Forma Condensed Combined Financial Information.”

 

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PROSPECTUS SUMMARY

The following is a summary of material information discussed in this prospectus. The summary is not complete and does not contain all of the information that you should consider before investing in our common stock. You should read this entire prospectus carefully, including the risks discussed in the section entitled “Risk Factors” and our audited and unaudited combined Predecessor and Successor financial statements and the related notes, and our unaudited pro forma condensed combined financial information and the related notes, each included elsewhere in this prospectus, before making an investment decision to purchase shares of our common stock. Some of the statements in this summary constitute forward-looking statements. See “Forward-Looking Statements.”

On March 13, 2015, through an indirect wholly owned subsidiary, Lone Star Fund IX (U.S.), L.P. acquired the building products business of HeidelbergCement AG in the United States and Eastern Canada. Unless otherwise specified or where the context otherwise requires, references in this prospectus to “our,” “we,” “us,” the “Company” and “our business” (i) for periods prior to the completion of the acquisition described above, refer to the building products business of HeidelbergCement AG in the United States and Eastern Canada, (ii) for periods after completion of the acquisition described above, but prior to the internal reorganization transaction described below, the building products business of LSF9 Concrete Holdings Ltd in the United States and Eastern Canada and (iii) for periods after completion of the internal reorganization transaction in which LSF9 Concrete Holdings Ltd will transfer its building products business in the United States and Eastern Canada to Forterra, Inc., the operations of Forterra, Inc., in each case together with its consolidated subsidiaries. We are a holding company controlled and indirectly owned by Lone Star Fund IX (U.S.), L.P. and have a relatively short operating history as a stand-alone company.

All amounts in this prospectus are expressed in U.S. dollars unless specifically noted otherwise and the financial statements have been prepared in accordance with GAAP.

Our Company

We are a leading manufacturer of pipe and precast products by sales volume in the United States and Eastern Canada for a variety of water-related infrastructure applications, including water transmission, distribution and drainage. We provide critical infrastructure components for a broad spectrum of construction projects across residential, non-residential and infrastructure markets. Our extensive suite of end-to-end products covers “the First Mile to the Last Mile” of the water infrastructure grid, ranging from large diameter pipe that transports water to and from treatment centers and manages drainage along major transportation corridors, to smaller diameter pipe that delivers potable water to, and removes wastewater from, end users in residential and commercial settings. We employ a specialized technical salesforce, including engineers and field service representatives, which enables us to deliver a high degree of customer service, create tailored solutions and ensure our products meet project specifications to maximize applications in the field. We believe that our product breadth, footprint in the United States and Eastern Canada and significant scale help make us a one-stop shop for water-related pipe and products, and a preferred supplier to a wide variety of customers, including contractors, distributors and municipalities.

We are a market leader within each of our three business segments: Drainage Pipe & Products, Water Pipe & Products and Bricks. In 2015, approximately 75% of our pro forma net sales was generated from our concrete drainage pipe and precast products, ductile iron pipe, or DIP, and concrete pressure pipe products, product categories in which we hold a leading market share position by sales volume in

 



 

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the United States and Eastern Canada. We are also one of the top manufacturers of bricks in the United States and operate the only commercial brick manufacturing plant in Eastern Canada.

Our manufacturing and distribution network is one of the most extensive in the industry, allowing us to serve most major U.S. and Eastern Canadian markets. We operate 113 manufacturing facilities and currently have significant additional manufacturing capacity available in each of our segments, providing substantial room to increase production to meet short-cycle demand with minimal incremental investment. These strategically located facilities and our broad distribution network provide us with a local presence and the necessary proximity to our customers to minimize delivery time and distribution costs.

As one of the only companies of scale in our industry that manufactures both water drainage pipe and precast structures (used primarily for stormwater and drainage applications) and water transmission and distribution pipe (used primarily to transport potable water and as a component of wastewater systems), our complementary product portfolio is well positioned to serve both the projected $10.4 billion stormwater and wastewater infrastructure market and the projected $7.9 billion potable water transmission and distribution market, each based on Freedonia projections of 2018 total U.S. market demand. AWWA estimates that nearly $1 trillion will need to be spent from 2010 to 2035 to repair and upgrade aging water infrastructure in the United States. In December 2015, the Fixing America’s Surface Transportation Act, or the FAST Act, was enacted by the U.S. federal government authorizing $305.0 billion of funding over the following five years to upgrade transportation-related infrastructure, more than 70% of which relates to highway spending, which supports a key end market for our Drainage Pipe & Products business due to the stormwater, drainage and related needs associated with highway construction and improvement projects. As “Buy America” provisions become increasingly prevalent under federal law, we believe our domestic manufacturing footprint will be a competitive advantage. Additionally, within the water transmission and distribution markets, Dodge market forecasts suggest that new residential and non-residential construction starts, which remain well below long-term historical averages, are expected to grow from 2015 levels. We believe that our exposure to each of the residential, non-residential and infrastructure end markets will allow us to benefit from both secular and cyclical growth across each of these end markets. The residential, non-residential and infrastructure end markets in the United States and Eastern Canada have different growth drivers and operating dynamics, and the cyclical performance of these markets has historically been staggered during different stages of the broader economic cycle.

In 2015, we generated pro forma net sales of $1,733.4 million, pro forma net loss of $139.9 million and pro forma Adjusted EBITDA of $202.5 million. Pro forma Adjusted EBITDA is a non-GAAP measure. See the section entitled “Non-GAAP Financial Information” for a description of how we define and calculate pro forma Adjusted EBITDA, a reconciliation thereof to pro forma net income (loss) and a description of why we believe this measure is important.

 



 

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The following charts represent the pro forma net sales contribution by business segment for the 12 months ended December 31, 2015 and an estimated breakdown by end market for the same period.

 

Pro Forma Net Sales by Segment* and Estimated End Market

 

LOGO

* Excludes Corporate and Other business segment.

Since being acquired from HeidelbergCement AG in 2015, we have undergone a significant transformation to become a leading water infrastructure company throughout the United States and Eastern Canada. As part of this transformation, we have:

 

    Upgraded our senior leadership team, including a new CEO and CFO, both of whom have relevant public company leadership experience and manufacturing industry expertise

 

    Rebranded our business to “Forterra” to strengthen and unify our corporate identity

 

    Strengthened corporate functions to operate as a fully autonomous, standalone company

 

    Implemented incentive compensation arrangements at the sales level to drive profitable growth and instill a strong performance culture

 

    Launched numerous operational, commercial and cost savings initiatives throughout our businesses, targeting efficiency and profitability improvements from which we believe we have realized more than $8.0 million of year to date savings as of May 31, 2016 and will realize further substantial efficiencies

 

    Executed our strategic acquisition strategy to build geographic scale and significantly enhance our extensive product offering with the acquisitions of Cretex Concrete Products, Inc., or Cretex, Sherman-Dixie Concrete Industries, Inc., or Sherman-Dixie, and USP Holdings Inc., or U.S. Pipe, an industry leader in DIP manufacturing and sales

 

    Streamlined our product portfolio and refocused our efforts and resources on water infrastructure with strategic transactions, including the divestiture of our roof tile business

Our organic growth strategy is focused on leveraging our low-cost operations, high level of customer service and product innovation capabilities, as well as our product breadth and industry-leading scale, to cross-sell our products to existing customers to increase penetration and project wins and to gain market share through new customers. Operationally, we continue to focus on efficiency and productivity improvements to reduce costs and drive margin improvements.

We have built a strong operating platform and continuously evaluate acquisition opportunities to complement our organic growth and improve our market positions within the markets we serve. Over the past three years, six strategic acquisitions (including three acquisitions completed by U.S. Pipe)

 



 

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have provided meaningful, ongoing synergy benefits. We believe that our success in acquiring businesses has been the result of our highly disciplined approach, continuous monitoring of potential targets (with a focus on culture and people, among other things), and a market view that Forterra is a strong partner given our scale, culture and recent growth. We believe significant acquisition opportunities at attractive prices are still available given the relatively fragmented landscape in several of the sub-markets in which we operate.

Our Segments

Drainage Pipe & Products.     We are the largest producer of concrete drainage pipe and precast products by sales volume in the United States and Eastern Canada. We have 68 manufacturing facilities across 30 states and two Canadian provinces. We believe our extensive product offering creates a compelling value proposition for our customers as it eliminates the need to engage multiple suppliers of stormwater and wastewater-related products for a single project, thereby maximizing efficiency and allowing our customers to meet more aggressive timetables. We also have the ability to custom-build products to complex specifications and regulations, further enhancing our ability to address customer needs. Our top ten Drainage Pipe & Products customers have an average tenure with us of approximately 17 years. Recently, we acquired concrete pipe and precast and related product manufacturers Cretex and Sherman-Dixie to further enhance our scale, geographic footprint and product portfolio.

Water Pipe & Products.     We are the largest producer of DIP and concrete pressure pipe by sales volume in the United States and Eastern Canada. We offer significant product breadth and depth and technical service, addressing our customers’ full range of water transmission and distribution needs. Our 28 manufacturing facilities are strategically located across the United States and Eastern Canada, with ample swing capacity available to support increased production levels as demand in the construction industry continues to improve. Furthermore, we believe our expansive distribution network allows us to achieve lead times among the shortest in the industry. Our top ten Water Pipe & Products customers have an average tenure with us of approximately 24 years. Recently, we acquired U.S. Pipe, a market leader within DIP, to diversify our product portfolio and enhance our service offering. U.S. Pipe’s recent acquisition history includes the acquisitions of Griffin Pipe Products Co., LLC, or Griffin Pipe, a manufacturer of DIP, the operations of Metalfit S.A de C.V and Metalfit, Inc., collectively Metalfit, a manufacturer of waterworks fittings and industrial castings, and Custom Fab, Inc., or Custom Fab, a fabricator of pipe primarily for the waterworks industry.

Bricks.     We are one of the largest manufacturers of bricks by capacity in the United States and Eastern Canada. We operate 17 manufacturing facilities, strategically located near large population centers or major census Metropolitan Statistical Areas, or MSAs, and raw material reserves. We offer more than 300 core styles of bricks to both residential and non-residential end markets. Our facilities are located in Ontario, Quebec, Kentucky, Michigan, North Carolina, South Carolina and Texas.

 



 

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Key Segments1  

Drainage Pipe & Products

 

Water Pipe & Products

Products   LOGO LOGO LOGO   LOGO LOGO LOGO
Product Applications  

Stormwater and wastewater infrastructure

 

Potable and wastewater

transmission and distribution

2018 Estimated U.S. Demand2  

$10.4bn

 

$7.9bn

2015 Pro Forma Net Sales (% of Total)   $715.2mm / (41.3%)   $871.9mm / (50.3%)
2015 Pro Forma Net Income and Operating Margin3  

$47.9mm / 8.7%

 

$17.9mm / 4.0%

2015 Pro Forma Adjusted EBITDA and Adjusted EBITDA Margin4  

$123.3mm / 17.2%

 

$122.7mm / 14.1%

2015 Pro Forma Net Sales By Estimated End Market   LOGO   LOGO
  LOGO

 

1  This table does not reflect information for our Bricks or Corporate and Other business segments. See “Business” and “Non-GAAP Financial Information” for more information.
2  Freedonia—Projected 2018 total market demand.
3 2015 pro forma operating margin is calculated by dividing 2015 pro forma income from operations by 2015 pro forma net sales. See the section entitled “Unaudited Pro Forma Condensed Combined Financial Information.”
4  Pro forma Adjusted EBITDA and pro forma Adjusted EBITDA margin are non-GAAP financial measures. See the section entitled “Non-GAAP Financial Information” for a description of how we define and calculate pro forma Adjusted EBITDA and pro forma Adjusted EBITDA margin and a reconciliation thereof to net income and operating margin, respectively, and why we believe these measures are important.

 



 

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Drainage Pipe & Products

  

Water Pipe & Products

2015 Pro Forma Net Sales by Product      LOGO    LOGO
Primary Market Channels     

• Direct to Contractors

• Distributors

  

•  Distributors

•  Direct to Contractors, Municipalities and Utilities Waterworks

# of Manufacturing Facilities     

68

   28

Our Competitive Strengths

Leading Market Positions with Unmatched Scale and Footprint.     We believe we are the largest manufacturer in the over $17.0 billion U.S. drainage and water transmission pipe market, as estimated by Freedonia. We believe we are a leader in the following major product categories: concrete drainage pipe and precast products, DIP and concrete pressure pipe. Our industry is relatively fragmented and local in nature due to the transportation costs associated with our products, particularly in the Drainage Pipe & Products business. Our industry has few participants of scale, and we are one of the only sizeable players with significant presence in both the Drainage Pipe & Products and Water Pipe & Products segments, with an extensive portfolio covering “the First Mile to the Last Mile” and a broad geographic footprint. Further, we believe we have one of the most extensive manufacturing and distribution networks in the water transmission and infrastructure industry. We believe our geographic footprint enables us to win more large business projects than our local or regional competitors, as we can provide services to contractors and distributors across geographies and product categories. Additionally, due to our scale, we have purchasing power with suppliers, which reduces our operating costs and enhances our ability to win business in competitive bidding processes.

Well-positioned to Benefit from Attractive Industry Fundamentals.     Our exposure to each of the residential, non-residential and infrastructure end markets enables us to capitalize on the growth in demand and recovery in each of these end markets and diversifies our customer base. The construction industry is recovering, fueled by the continuing rebound in infrastructure, residential and non-residential activity. According to AWWA, water infrastructure in the United States will require nearly $1 trillion of investment for repairs and upgrades from 2010 to 2035. The U.S. and Canadian governments are committed to upgrading their aging infrastructure. The FAST Act allocates $305.0 billion to improving surface transportation infrastructure, and in its budget for 2016, the Canadian federal government proposed $11.9 billion (CAD) in infrastructure spending over the next

 



 

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five years, with $2.0 billion (CAD) in a clean water and wastewater fund and $2.2 billion (CAD) towards water, wastewater and waste management infrastructure. Additional secular industry trends support further infrastructure construction growth, including the growing demand for precast structure products, environmental regulations supporting on-site water management and continued urbanization. Furthermore, Dodge market forecasts suggest that both residential and non-residential construction starts will grow from 2015 levels, which remain well below the average of the most recent cyclical troughs, and significantly below the average annual starts since 1970. Lastly, we have a presence in each of the 40 most populous MSAs and ten most populous states, enabling us to benefit from the recovery in residential construction.

Complete Suite of Products to Serve Customers from “the First Mile to the Last Mile.”     We believe we offer unmatched product breadth and depth compared to our competitors in the United States and Eastern Canada. In our Water Pipe & Products segment, our complementary product portfolio of concrete and steel pressure pipe and DIP addresses the broad range of our customers’ water transmission and distribution needs. Our comprehensive suite of products incorporates large diameter pipe that transports water to treatment plants as well as smaller diameter pipe for distribution to residential users. In our Drainage Pipe & Products segment, our diversified product offering creates a one-stop shop for water-related pipe and products. Our drainage offering creates a compelling value proposition for customers by eliminating the need to seek multiple bids for a single project, helping maximize efficiency for time sensitive orders. Finally, our extensive product offering also creates cross-selling opportunities for our segments due to our broad and diversified customer base.

Attractive and Expanding Margins and Strong Cash Flow Profile.     Due to our increasing scale, cost cutting initiatives and our work toward integrating acquisitions, we have generated attractive and increasing margins, capitalizing on our low-cost operations and operating leverage. Our regional and local sales force, strategically located manufacturing facilities and broad distribution network allow us to serve our customers across the United States and Eastern Canada at a competitive cost with efficient procurement and operations. We expect to further increase our scale through acquisitions and, as a result, we expect to continue to generate purchasing power, operating leverage and cost saving opportunities. Furthermore, we have an ongoing strategy of implementing cost-cutting initiatives at our production plants. In the Water Pipe & Products segment, service, procurement and operational initiatives have reduced year to date operating costs by more than $1.5 million in DIP and $1.5 million in large diameter concrete and steel pipe, each as of May 31, 2016. In the Drainage Pipe & Products segment, we have recognized year to date savings of more than $5.0 million as of May 31, 2016 across three major plants due to purchasing initiatives. We continue to roll out cost and productivity improvements at new sites and have identified new cost reduction opportunities in resale items, transportation, logistics and energy. Additionally, we have increased our margins and cash flow through operational improvement of acquired businesses. Our acquisition of Sherman-Dixie and U.S. Pipe’s acquisition of Griffin Pipe, specifically, provided consolidation opportunities with our existing plant network and improved the respective cost positions by reducing personnel and rationalizing older facilities.

Proven Ability to Identify, Close and Improve the Performance of Strategic Acquisitions.     Over the last three years, we have acquired two businesses in our Drainage Pipe & Products segment and four businesses in our Water Pipe & Products segment (including three acquisitions by U.S. Pipe). Our acquisition strategy has been focused on three main pillars: reinforce our position in existing markets, expand our product offering and expand our geographic footprint. Acquisitions enable us to improve our product mix and expand our geographic scope, helping us to win business from new customers, cross-sell additional products to existing customers and optimize pricing through the enhanced value created by our differentiated product offering. We believe that our success in acquiring

 



 

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businesses has been the result of our highly disciplined acquisition strategy, continuous monitoring of potential targets in an opportunity-rich landscape and focus on culture and people, among other things. We have effectively sourced and closed both smaller strategic transactions, and larger transformative deals. In both instances, we have successfully achieved meaningful cost and revenue synergies through the implementation of best practices and operational improvement initiatives in the acquired businesses. In the instance of U.S. Pipe’s acquisition of Griffin Pipe, we have realized in excess of $40 million of synergies through cost savings.

Experienced Management Team with Proven Ability to Grow Businesses and Integrate Acquisitions.    Our management team, led by Jeff Bradley, our Chief Executive Officer, has a proven track record of increasing shareholder value and generating profitable growth, attractive margins and cash flow. Mr. Bradley and other key executives, including Matt Brown, the Chief Financial Officer, have relevant history managing public companies, as well as extensive experience in the manufacturing industry. Our management team has proven their ability to execute on our acquisition strategy, leading us in growth from $816.2 million of 2015 net sales by us and our Predecessor on a combined basis (excluding net sales from Cretex) to $1,733.4 million in 2015 pro forma net sales through three substantial acquisitions. Further, Mr. Bradley and his team are continuing to execute a comprehensive program to drive commercial, operational and procurement excellence, as well as managing working capital to increase free cash flow.

Our Business Strategy

Our goal is to be our customers’ preferred provider of drainage pipe, water transmission pipe and related products. We intend to drive profitable growth in excess of the growth rates of the end markets in which we operate through the following key strategies:

Capitalize on Favorable, Multi-pronged Industry Growth Dynamics.     The multi-pronged cyclical recovery in our construction-related end markets is well underway. We expect to benefit from increased demand generated by growth in both residential and non-residential construction activity. Further, there is a significant need to improve North America’s aging water and highway infrastructure. Operationally, we believe we are well positioned in the water transmission and distribution industry to capitalize on the increased funding allocated to water infrastructure improvement. The FAST Act will be a key underlying driver for our business as it dedicates more than 70% of its total budget to highway spending, supporting our key infrastructure end market. Secular industry trends, including the continued shift in product preference to rigid and zinc-coated pipe, environmental regulations in support of on-site water management and continued urbanization, support further incremental growth. Our reputation, extensive product offering and coast-to-coast distribution network provide us with competitive advantages that we expect will fuel growth in excess of that offered by already attractive market dynamics underlying our businesses.

Increase Market Share by Leveraging Our Scale, “the First Mile to the Last Mile” Suite of Products and Go-to-Market Strategy.     Our scale enables us to be among the industry’s lowest cost producers, while our strategically located manufacturing facilities and broad distribution network allow us to meet the particular needs of our customers. Our existing swing capacity enables us to meet customer demand and well positions us to win small and large projects. Moreover, our large and scalable installed asset base will allow us to respond swiftly to growing demand without having to increase capacity.

Our “First Mile to the Last Mile” product portfolio enables us to be a complete solutions provider and to serve as a one-stop shop for water-related pipe and products, increasing our customers’ overall

 



 

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spend on our products. Our ability to offer both pipe and precast products helps us better serve our infrastructure-related markets and differentiates us from our competitors.

Our go-to-market strategy is based on three main pillars. First, we incentivize our highly specialized technical salesforce to focus on profitable growth while offering our products and value-added services. Second, we target our key customers with a robust cross-selling sales organization, marketing the benefits of ordering from one supplier. Lastly, we focus on the implementation of systematic pricing strategies across all of our product categories.

Leverage Our Commitment to Product Innovation and Technical Expertise to Optimize Product Mix and Capitalize on Market Opportunities.     We continuously explore new applications for our existing product portfolio and develop new products and solutions that allow us to stay at the forefront of the needs of the drainage and water pipe and products markets. Our technical salesforce also proactively reaches out to our customers on a regular basis to ensure that our customers are satisfied and our products adhere to project specifications. We have a long history of developing and seeking out innovative products to bring to market across both water-related segments, which include the recent introductions of Oystercrete, duct bank and metallic zinc coating. We will continue our innovation efforts, optimizing our portfolio through research and development and strategic acquisitions to expand our positions in attractive products and markets. Along with these initiatives, our specialized technical salesforce will continue to promote and support our existing specialty products to drive differentiation and growth.

Enhance Margins, Free Cash Flow and Returns Through Operational and Commercial Excellence.     We have successfully launched multiple operational initiatives focused on increasing plant efficiency and productivity. We expect to continue growing our margins through ongoing operational, commercial and cultural initiatives. We are working to leverage our information technology and financial systems to lower costs and implement systematic pricing across our business. We will continue to manage working capital and seek scale-driven procurement efficiency improvements through centralized purchasing and fixed overhead control and reduction. We intend to prioritize opportunities that generate attractive returns on invested capital. Further, our management team has emphasized a strong pay-for-performance culture that cultivates, challenges and compensates employees based on profitability and cash flow generation.

Accelerate Profitable Growth Through Strategic Acquisitions.     We believe that the relative fragmentation of some of our sub-markets creates an environment in which we can continue to acquire companies at attractive valuations to increase our scale, product breadth and geographic diversity. Over the past three years, we have acquired six businesses—both tuck-in and transformative in nature—within the water drainage and transmission industry (including three acquisitions by U.S. Pipe). We continuously monitor potential targets to develop and maintain a diversified and actionable acquisition pipeline. Additional acquisitions would enable us to add adjacent products to our portfolio that could help us further penetrate our existing markets and expand our geographic footprint. By integrating these businesses and implementing our culture and operational best practices, we believe we can achieve significant further growth. We are focused on driving synergies, including those achievable as a result of our recent acquisitions, to reduce costs and increase our margins. We are in the process of executing a plan associated with our acquisitions of Cretex, Sherman-Dixie and U.S. Pipe. We believe that we can achieve significant synergies associated with these acquisitions. We expect cost savings synergies to come from procurement, eliminating redundant selling, general and administrative functions, and optimizing our plant network through consolidations to achieve operational efficiencies and freight cost reductions. In addition, we believe the U.S. Pipe Acquisition creates opportunity to increase market share in large diameter DIP by leveraging our geographic scope, cross-selling capabilities and existing contractor relationships.

 



 

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Our Industry

In the United States and Eastern Canada, we are a market leader in each of the following core product categories: concrete drainage pipe and precast, ductile iron pipe and concrete pressure pipe.

Core Products

Drainage Pipe & Products

Drainage pipe has residential, non-residential and infrastructure applications. It is primarily used for storm water applications such as storm drains for roads and highways and for residential and non-residential site developments. In addition, drainage pipe and concrete precast structures are used for sanitary sewers, low-pressure sewer force mains, tunneled systems, treatment plant piping and utility tunnels. Freedonia estimates U.S. total market demand for sewer and drainage pipe and wastewater concrete precast structures to grow at a compound annual growth rate, or CAGR, of 7.4% from $7.2 billion in 2013 to $10.4 billion in 2018. We serve these markets primarily through our diverse portfolio of concrete drainage pipe, U.S. demand for which is expected to increase at a CAGR of 5.9% from 2013 to 2018, according to Freedonia estimates. Further, we serve the aforementioned markets with various precast structures, the demand for which Freedonia estimates to grow at a CAGR of 6.4% from 2013 to 2018. Rebounding levels of construction activity, replacement of aging stormwater and highway infrastructure and committed government funding programs are expected to support this growth. We typically sell our drainage pipe and precast concrete products to contractors that perform construction work for governments, residential and non-residential building owners and developers in markets across the United States and Eastern Canada.

Water Pipe & Products

Water pipe and products are primarily used for potable and wastewater transmission. Water transmission pipe demand comes from water supply construction, especially within municipalities and residential construction. Among these applications, potable water is expected to maintain the largest portion of U.S. demand, with projected growth at a CAGR of 8.2% from $5.3 billion in 2013 to $7.9 billion in 2018, according to Freedonia estimates. We serve these markets primarily through our diverse offering of DIP, prestressed concrete cylinder pipe and bar-wrapped pipe, as well as fittings and fabricated products.

Ductile iron inhibits corrosion, retains strength and prevents fractures better than cast iron and most other materials. Ductile iron also improves water flow compared to other materials, particularly plastic. U.S. market volume for DIP shipments (less than 24” diameter pipe) is expected to increase at a CAGR of 6.1% from 2013 to 2018, based on the key drivers of housing starts and waterline infrastructure spend, according to Freedonia estimates.

In larger diameters (greater than 24” diameter pipe), steel and concrete pipe are sturdier and more cost effective. Plastic pipe structural integrity is more dependent on firm soil bedding than concrete or steel, which can make engineers reluctant to use plastic in large diameters due to the increased installation cost. U.S. market demand for large diameter steel and concrete pipe is expected to increase at a CAGR of 4.6% from 2013 to 2018, based on increasing government spending on water infrastructure, according to Freedonia estimates.

 



 

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Bricks

Our Bricks operations primarily serve the residential markets. Recovery in single family housing construction represents the largest driver of overall brick demand growth. The estimated demand for bricks in the United States and Eastern Canada is expected to grow at a CAGR of 11% from $1.3 billion in 2013 to $2.1 billion in 2018, according to Freedonia estimates. We are well-positioned to benefit from expected increases in residential housing starts and attractive market dynamics due to our competitive positioning and broad geographic footprint.

Core End Markets

North American water infrastructure, aging and strained by a growing population, requires substantial, prolonged capital investment totaling nearly $1 trillion across the U.S. according to the AWWA. According to the EPA, the U.S. potable water and waste and storm water infrastructures require a cumulative $682 billion investment in repairs and expansions over the next 20 years, with pipe representing a substantial proportion of the total capital need. In Canada, per the Canadian Infrastructure Report Card, or CIRC, the replacement value for water infrastructure in “fair” to “very poor” condition areas totals $173.0 billion (CAD), where “fair” assets are defined as those with indicated deterioration and deficiencies and require attention and “very poor” assets are defined as near or beyond expected service life and unfit for sustained service, indicating that infrastructure reinvestment lags behind targeted levels.

We serve a range of infrastructure-related end markets. Based on the source of funding, we classify these construction markets into infrastructure, residential and non-residential.

Infrastructure

We estimate that sales to the infrastructure market represented 31% of our pro forma net sales in fiscal year 2015. Our main sales drivers in this market include the construction of streets, highways and storm and sanitary sewers. We expect to benefit from several drivers in this market, as U.S. and Canadian federal funding dynamics and public infrastructure requirements support continued growth. At the U.S. federal level, the FAST Act demonstrates the U.S. government’s commitment to improving the country’s transportation infrastructure. More than 70% of the law’s budget is dedicated to highway spending, providing multi-year visibility on federal highway funding. As a U.S.-based company, we are well-positioned to benefit from this new spending, as the legislation steps up federal “Buy America” requirements from 60% in 2015 to 70% in 2020. In its budget for 2016, the Canadian federal government proposed $11.9 billion (CAD) in infrastructure spending over the next five years, with $2.0 billion (CAD) in a clean water and wastewater fund and $2.2 billion (CAD) towards water, wastewater and waste management infrastructure.

 



 

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Residential Construction

We estimate that sales to the residential construction market represented 51% of our pro forma net sales in 2015. These revenues were largely driven by new U.S. residential construction, which is recovering from historic lows reached during the financial crisis. Though new housing starts grew at a CAGR of 14% from 2010 to 2015, according to the U.S. Census Bureau, current levels remain substantially below long-term averages, as outlined in the graph below.

U.S. Residential Housing Starts

 

LOGO

Source:    U.S. Census Bureau.

The new residential construction market is expected to continue to grow at a robust pace over the next few years, with Fannie Mae and CMHC forecasting a CAGR of 8% from 2015 to 2017 across the United States and Canada.

 



 

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Non-residential Construction

We estimate that sales to the non-residential construction market represented 18% of our pro forma net sales in 2015. These revenues were driven largely by new U.S. non-residential construction, and we believe we will continue to benefit from this market’s ongoing recovery from historical lows reached during the financial crisis. Though new non-residential construction starts grew, according to Dodge, at a CAGR of 7% from 2010 to 2015, current levels remain substantially below long-term average levels, as outlined in the graph below.

U.S. Non-Residential Starts

 

LOGO

Source: Dodge and CMD Group

The non-residential construction market is expected to continue to grow at a CAGR of 8% from 2015 to 2017 across the United States and Canada, according to data from Dodge and CMD Group.

 



 

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Our History

The Acquisition

On March 13, 2015, through an indirect wholly owned subsidiary, Lone Star Fund IX (U.S.), L.P. acquired the building products business of HeidelbergCement AG, or HeidelbergCement in the United States and Eastern Canada, or the Acquisition, along with HeidelbergCement’s building products business in the United Kingdom for aggregate consideration of $1.33 billion. The aggregate purchase price is subject to a potential earn out capped at $100.0 million, which is subject to a dispute with HeidelbergCement as discussed in greater detail in the section entitled “Business—Legal Proceedings.” Following the Acquisition, the acquired businesses were operated by LSF9 Concrete Holdings Ltd, or Concrete Holdings, an indirect wholly owned subsidiary of Lone Star Fund IX (U.S.), L.P.

Recent Transactions

A number of strategic transactions have been completed since the Acquisition. These transactions include:

 

    Cretex Acquisition—On October 1, 2015, the Company acquired Cretex, a manufacturer of concrete pipe, box culverts, concrete precast drainage structures, pre-stressed bridge components and ancillary precast products in the Upper Midwestern United States, for aggregate consideration of $245.1 million, or the Cretex Acquisition. Cretex operates as part of our Drainage Pipe & Products segment.

 

    Sherman-Dixie Acquisition—On January 29, 2016, the Company acquired Sherman-Dixie, a manufacturer of concrete pipe, box culverts, precast concrete utility products, storm and sanitary civil engineered systems and specialty engineered retainage systems in Kentucky, Tennessee, Alabama and Indiana, for aggregate consideration of $66.8 million, or the Sherman-Dixie Acquisition. Sherman-Dixie operates as part of our Drainage Pipe & Products segment.

 

    Forterra UK IPO—On April 26, 2016, Concrete Holdings completed an initial public offering of the ordinary shares of Forterra, plc, the operator of HeidelbergCement’s former building products business in the United Kingdom, or Forterra UK. Though we and Forterra UK are both controlled by Lone Star Fund IX (U.S.), L.P., we have no relation to or affiliation with Forterra UK other than certain contractual arrangements regarding third-party IT services and the use of the “Forterra” name.

 

    U.S. Pipe Acquisition—On April 15, 2016, the Company acquired U.S. Pipe, which manufactures ductile iron pipe products for water distribution and water management applications and distributes its products throughout the United States, for aggregate consideration of $775.1 million, subject to customary working capital adjustments, or the U.S. Pipe Acquisition. U.S. Pipe operates as part of our Water Pipe & Products segment.

Each of the Company’s recent acquisition and disposition transactions is discussed in greater detail in the section entitled “Business—Our Recent Strategic Transactions.”

Reorganization

Forterra, Inc., the registrant whose name appears on the cover page of this prospectus, does not currently have any operations and was formed in 2016 for the purpose of an internal reorganization transaction. Prior to or concurrent with the consummation of this offering, Concrete Holdings will transfer its building products operations in the United States and Eastern Canada, the business which

 



 

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is described in this prospectus and the business for which historical and pro forma financial information is included elsewhere in this prospectus, in an internal reorganization transaction, or the Reorganization, to Forterra, Inc. Following the Reorganization, Forterra, Inc. will be a wholly owned subsidiary of LSF9 Concrete Mid-Holdings Ltd, or Mid Holdings, which is wholly owned by Concrete Holdings. Each of Concrete Holdings, Mid Holdings and Forterra, Inc. are affiliates of Lone Star Fund IX (U.S.), L.P. Shares of common stock of Forterra, Inc. are being offered by the prospectus.

Our Sponsor

Lone Star Fund IX (U.S.), L.P., which we refer to in this prospectus, along with its affiliates and associates (including Concrete Holdings and Mid Holdings, but excluding us and other companies that it owns as a result of its investment activity), as Lone Star or our sponsor, is part of a leading private equity firm that, since the establishment of its first fund in 1995, has organized 16 private equity funds with aggregate capital commitments totaling over $65.0 billion. The funds are structured as closed-end, private-equity limited partnerships, the limited partners of which include corporate and public pension funds, sovereign wealth funds, university endowments, foundations, funds of funds and high net worth individuals. Immediately prior to this offering, Lone Star owned all of our outstanding common stock, and will own approximately     % of our common stock immediately following consummation of this offering (or     % if the underwriters exercise in full their option to purchase additional shares). Therefore, we expect to be a “controlled company” under the applicable stock exchange corporate governance standards and will take advantage of the related corporate governance exceptions for controlled companies.

Risks Affecting Our Business

Our business is subject to numerous risks and uncertainties, including, but not limited to, those arising from:

 

    the level of construction activity, particularly in the residential construction and non-residential construction markets;

 

    government funding of infrastructure and related construction activities;

 

    the highly competitive nature of our industry and our ability to effectively compete;

 

    energy costs;

 

    the availability and price of the raw materials we use in our business;

 

    our ability to implement our growth strategy;

 

    our dependence on key customers and the absence of long-term agreements with these customers;

 

    the level of construction activity in Texas;

 

    disruption at one of our manufacturing facilities or in our supply chain;

 

    construction project delays and our inventory management; and

 

    our ability to successfully integrate our recent acquisitions.

We are also subject to numerous risks relating to:

 

    the terms of our existing and any future indebtedness; and

 

    our relationship with Lone Star and its significant ownership of our common stock.

 



 

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You should carefully consider all of the information set forth in this prospectus and, in particular, the information in the section entitled “Risk Factors” beginning on page 22 of this prospectus prior to making an investment in our common stock. These risks could, among other things, prevent us from successfully executing our strategies and could have a material adverse effect on our business, financial condition and results of operations.

Principal Executive Offices

Our principal executive offices are located at 511 East John Carpenter Freeway, 6th Floor, Irving, TX 75062 and our telephone number is (469) 458-7973. Our website address is forterrabp.com. Information contained on our website or linked therein or otherwise connected thereto does not constitute part of nor is it incorporated by reference into this prospectus or the registration statement of which this prospectus forms a part. Forterra, U.S. Pipe and other trademarks or service marks of ours appearing in this prospectus are our property. Other trademarks and service marks appearing in this prospectus are the property of their respective holders.

 



 

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THE OFFERING

 

Common stock offered by us

                shares

Common stock offered by the selling stockholder

  


             shares

Common stock to be outstanding immediately after this offering

  


             shares (or              shares if the underwriters exercise in full their option to purchase additional shares)

Use of proceeds

   We estimate our proceeds from this offering will be approximately $         million, after deducting underwriting discounts and commissions and estimated offering expenses payable by us, based on the midpoint of the estimated initial public offering price range set forth on the cover page of this prospectus. We intend to use $         million of the net proceeds from this offering to repay outstanding indebtedness and the remainder for working capital and other general corporate purposes.
  

 

We will not receive any of the proceeds from the sale of shares of common stock by the selling stockholder. See “Use of Proceeds,” “Principal and Selling Stockholders” and “Underwriting.”

Dividend policy

   We have no present intention to pay cash dividends on our common stock. Any determination to pay dividends to holders of our common stock will be at the discretion of our board of directors and will depend upon many factors, including our financial condition, results of operations, projections, liquidity, earnings, legal requirements, restrictions in our debt agreements and other factors that our board of directors deems relevant. See “Dividend Policy.”

Risk factors

   You should carefully read and consider the information set forth in the section entitled “Risk Factors” beginning on page 22, together with all of the other information set forth in this prospectus, before deciding whether to invest in our common stock.

         symbol

   “          .”

 

 

 

 



 

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The number of shares of our common stock to be outstanding immediately after this offering as set forth above is based on the number of shares outstanding as of                     , 2016 and excludes              shares reserved for issuance under our equity incentive plan (under which no equity awards have been granted as of such date). We intend to grant equity awards representing an aggregate of approximately          shares of common stock to our executive officers and certain director nominees under our equity incentive plan at the time of the pricing of this offering.

Unless otherwise indicated, this prospectus:

 

    assumes the completion of the Reorganization;

 

    gives effect to a              for one stock split, which will occur shortly before consummation of this offering;

 

    assumes an initial public offering price of $         per share, the midpoint of the estimated initial public offering price range set forth on the cover page of this prospectus; and

 

    assumes no exercise of the underwriters’ option to purchase up to an additional              shares of our common stock.

 



 

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SUMMARY HISTORICAL AND UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL AND OTHER INFORMATION

The following tables set forth, for the periods and dates indicated certain summary historical and unaudited pro forma condensed combined financial information. The accompanying historical audited financial statements are presented for the “Predecessor,” which are the combined financial statements of HeidelbergCement’s building products business in the United States and Eastern Canada for the period preceding the Acquisition, and the “Successor,” which are the combined audited and unaudited financial statements of the Company and subsidiaries for the period following the Acquisition. The Predecessor’s combined statements of operations data for the years ended December 31, 2013 and 2014 and the period from January 1, 2015 through March 13, 2015 and the Predecessor’s combined balance sheet data as of December 31, 2014 have been derived from the audited combined financial statements of HeidelbergCement’s building products business in the United States and Eastern Canada, which are included elsewhere in this prospectus. The Successor’s combined statements of operations data for the period from March 14, 2015 through December 31, 2015 and balance sheet data as of December 31, 2015 have been derived from our audited financial statements, which are included elsewhere in this prospectus. The Successor’s combined balance sheet data as of March 31, 2016 and condensed combined statements of operations data for the period from March 14, 2015 through March 31, 2015 and the three months ended March 31, 2016 are derived from our unaudited condensed combined financial statements, which are included elsewhere in this prospectus.

The Predecessor’s financial statements may not necessarily be indicative of the cost structure or results of operations that would have existed if HeidelbergCement’s building products business in the United States and Eastern Canada operated as a stand-alone, independent business. Accordingly, these historical results should not be relied upon as an indicator of our future performance. The Acquisition was accounted for as a business combination, which resulted in a new basis of accounting. The Predecessor’s and the Successor’s historical financial statements are not comparable as a result of applying a new basis of accounting. See the notes to the audited financial statements for additional information regarding the accounting treatment of the Acquisition. In the opinion of management, the unaudited interim financial statements include all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of our financial position and operating results for these periods and as of such date. Results from interim periods are not necessarily indicative of results that may be expected for the entire year and historical results are not indicative of the results to be expected in the future. The summary financial and operating data presented below represent portions of our financial statements and are not complete.

The unaudited pro forma condensed combined financial information set forth below presents certain unaudited pro forma condensed combined statements of operations data for the three months ended March 31, 2016 and 2015 and for the year ended December 31, 2015, and certain unaudited pro forma condensed combined balance sheet data as of March 31, 2016. The unaudited pro forma condensed combined financial information has been derived by aggregating our audited and unaudited historical combined financial statements, and the historical financial statements of U.S. Pipe, each included elsewhere in this prospectus, and making certain pro forma adjustments to such aggregated financial information to give effect to the transactions discussed in greater detail in the section entitled “Unaudited Pro Forma Condensed Combined Financial Information.”

 



 

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The information presented below should be read in conjunction with the sections entitled “Capitalization,” “Selected Historical Financial Data,” “Unaudited Pro Forma Condensed Combined Financial Information,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our audited and unaudited combined financial statements and related notes included elsewhere in this prospectus.

 

    (in thousands)                        
    Pro forma
Three
months
ended
March 31,
2016
    Pro forma
Three
months
ended
March 31,
2015
    Pro forma
Year ended
December 31,
2015
    Successor          Predecessor  

(in thousands)

        Three
months
ended
March 31,
2016
    For the
period
from
March 14,
2015 to
March 31,
2015
    For the
period

from
March 14,
2015 to
December 31,
2015
         For the
period
from
January 1,
2015 to
March 13,
2015
    Year ended
December 31,
2014
    Year ended
December 31,
2013
 

Statement of Operations Data:

                     

Net sales

  $ 362,083      $ 340,654      $ 1,733,373      $ 217,334      $ 38,014      $ 722,664          $ 132,620      $ 736,963      $ 697,948   

Cost of goods sold

    (295,772     (308,288     (1,474,743     (179,403     (35,324     (626,498         (117,831     (631,454     (611,660
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

   

 

 

   

 

 

 

Gross profit

  $ 66,311      $ 32,366      $ 258,630      $ 37,931      $ 2,690      $ 96,166          $ 14,789      $ 105,509      $ 86,288   

Selling, general and administrative expenses

    (60,415     (69,102     (271,253     (37,945     (18,722     (134,971         (21,683     (102,107     (87,393

Impairment and restructuring charges

    —          —          —          —          8        (1,185         (542     (4,219     (250,577

Earnings from equity method investee

    —          —          —          1,303        115        8,429            67        4,451        (216

Other operating income

    3,081        1,455        12,200        1,778        813        832            994        6,965        9,232   

Interest expense

    (30,557     (30,562     (122,891     (17,290     (2,474     (45,953         (84     —          —     

Other income (expense), net

    23        (21     981        (81     —          (326         (39     (594     947   

Net income (loss) before taxes

    (21,557     (65,864     (122,333     (14,304     (17,570     (77,008         (6,498     10,005        (241,719

Income tax (expense) benefit

    8,142        1,269        (17,518     10,368        —          (5,778         742        (2,417     (2,561

Income (loss) from continuing operations

    (13,415     (64,595     (139,851     (3,936     (17,570     (82,786         (5,756     7,588        (244,280

Discontinued operations

    —          —          —          —          —          —              —          1,260        (3,018

Net income (loss)

  $ (13,415   $ (64,595   $ (139,851   $ (3,936   $ (17,570   $ (82,786       $ (5,756   $ 8,848      $ (247,298
 

Statements of Cash Flow Data:

                     

Net cash provided by (used in):

                     

Operating activities

        $ (35,834   $ 19,891      $ 121,417          $ (48,224   $ 25,918      $ 31,686   

Investing activities

          (73,501     (640,428     (898,039         (2,762     (1,901     (55

Financing activities

          77,809        660,410        822,580            60,907        (23,990     (31,636
 

Balance Sheet Data (as of period end):

                     

Cash and cash equivalents

  $ 66,060          $ 11,803        $ 43,590            $ 42      $ 5   

Property, plant & equipment, net

    664,740            418,499          388,924              414,073        423,826   

Total assets

    2,071,305            1,002,883          938,875              846,168        864,842   

Total debt

    1,477,224            724,315          705,829              —          —     

Total parent company net investment

    —              —            —                657,473        700,938   

Shareholder’s equity

    161,591            104,531          52,315              —          —     
 

Other financial data:

                     

Adjusted EBITDA(a)

  $ 47,808      $ 21,208      $ 202,470      $ 23,997      $ 8,947      $ 71,954          $ 3,278      $ 65,812      $ 48,193   

Adjusted EBITDA margin(a)

    13.2     6.2     11.7     11.0     23.5     10.0         2.5     8.9     6.9

 

(a) EBITDA, Adjusted EBITDA and Adjusted EBITDA margin are non-GAAP financial measures and have been presented in this prospectus as supplemental measures of financial performance that are not required by, or presented in accordance with, GAAP. We calculate EBITDA as income (loss) from continuing operations before interest expense, income tax (benefit) expense, depreciation and amortization. We calculate Adjusted EBITDA as EBITDA before impairment and restructuring charges, (gains)/losses on the sale of property, plant and equipment and certain other income and expenses, such as transaction costs, carve-out costs related to our separation from HeidelbergCement and costs associated with disposed sites. Adjusted EBITDA margin represents Adjusted EBITDA as a percentage of net sales. We present these measures for the same historical periods covered by our audited combined financial statements and the related notes, and the historical financial statements of U.S. Pipe and the historical financial statements of Cretex, as well as on a pro forma basis for the periods reflected in and the transactions accounted for in the section entitled “Unaudited Pro Forma Condensed Combined Financial Information.” See the section entitled “Non-GAAP Financial Information” for a description of why we believe these measures are important.

The following table reconciles income (loss) from continuing operations to EBITDA and Adjusted EBITDA and Adjusted EBITDA margin to operating margin for the Company for the periods presented. See our audited and unaudited combined financial statements and the related notes included elsewhere in this prospectus.

 



 

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    (in thousands)                        
    Pro
forma
Three
months
ended
March 31,
2016
    Pro
forma
Three
months
ended
March 31,
2015
    Pro forma
Year ended
December 31,
2015
    Successor          Predecessor  

(in thousands)

        Three
months
ended
March 31,
2016
    For the
period
from
March 14,
2015 to
March 31,
2015
    For the
period

from
March 14,
2015 to
December 31,
2015
         For the
period
from
January 1,
2015 to
March 13,
2015
    Year ended
December 31,
2014
    Year ended
December 31,
2013
 

Net Income (loss)

  $ (13,415   $ (64,595   $ (139,851   $ (3,936   $ (17,570   $ (82,786       $ (5,756   $ 8,848      $ (247,298

Less: Gain (loss) on discontinued operations, net of income tax

    —          —          —          —          —          —              —          (1,260     3,018   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

       

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations

    (13,415     (64,595     (139,851     (3,936     (17,570     (82,786         (5,756     7,588        (244,280

Depreciation and amortization

    30,042        30,824        126,993        13,759        1,796        32,930            6,894        36,605        38,560   

Interest expense

    30,557        30,562        122,891        17,290        2,474        45,953            84        —          —     

Income tax (benefit) expense

    (8,142     (1,269     17,518        (10,368     -        5,778            (742     2,417        2,561   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

       

 

 

   

 

 

   

 

 

 

EBITDA

    39,042        (4,478     127,551        16,745        (13,300     1,875            480        46,610        (203,159
 

Impairment and restructuring(1)

    —          534        1,727        —          (8     12,941            542        4,219        250,577   

Gain) loss on sale of property, plant & equipment, net(2)

    369        (106     1,767        (2     (3     618            (122     (2,329     (3,999

Transaction costs(3)

    6,702        19,635        45,242        5,562        17,530        25,590            2,079        17,674        —     

Inventory step-up impacting margin(4)

    1,031        4,688        29,969        1,031        4,688        29,969            —          —          —     

Costs associated with disposed sites(5)

    661        340        2,673        661        41        2,632            299        (362     4,774   

Other (gains) expenses(6)

    3        595        (6,459     —          —          (1,671         —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

       

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

  $ 47,808      $ 21,208      $ 202,470      $ 23,997      $ 8,947      $ 71,954          $ 3,278      $ 65,812      $ 48,193   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

       

 

 

   

 

 

   

 

 

 

Operating Margin

    2.5     (10.4 %)      (0.0 %)      1.4     (39.7 %)      (4.3 %)          (4.8 %)      1.4     (34.8 %) 

Adjusted EBITDA Margin

    13.2     6.2     11.7     11.0     23.5     10.0         2.5     8.9     6.9

 

(1) Adjusts for impairment of intangible assets and the following charges related to plant closures: (i) impairment charges in respect of abandoned fixed assets that had remaining book value and (ii) restructuring charges in respect of severance and lease and other contract termination costs.
(2) Adjusts for the (gain) loss on sale of property, plant and equipment, primarily related to the disposition of two manufacturing facilities.
(3) Adjusts for Successor and Predecessor legal, valuation, accounting, advisory and other costs related to the Acquisition and Predecessor expenses related to preparation for a public offering that was not ultimately consummated.
(4) Adjusts for the effect of the purchase accounting step-up in the value of inventory to fair value recognized in cost of goods sold as a result of the Acquisition, the Cretex Acquisition and the Sherman-Dixie Acquisition.
(5) Adjusts for the results of operations of our disposed roof tile business and other disposed sites for the periods presented, net of specific items for which adjustments are separately made elsewhere in the calculation of Adjusted EBITDA presented herein.
(6) Adjusts for other (gains) losses, such as gain on insurance proceeds related to the destruction of property.

 



 

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RISK FACTORS

Investing in our common stock involves a high degree of risk. You should carefully consider the risks and uncertainties described below, together with all of the other information in this prospectus, including the combined financial statements and the related notes appearing elsewhere in this prospectus, before making an investment decision. If any of the following risks actually occurs, our business, financial condition and results of operations could be materially and adversely affected and the trading price of our common stock could decline, causing you to lose all or part of your investment in our common stock.

Risks Relating to Our Business and Industry

Residential and non-residential construction activity is cyclical and influenced by many factors, and any reduction in the activity in one or both of these markets could have a material adverse effect on us.

Our results of operations can vary materially in response to market conditions and changes in the demand for our products. Historically, demand for our products has been closely tied to residential construction and non-residential construction activity in the United States and Eastern Canada. In 2015, approximately 52% and 14% of our pro forma net sales were generated from residential construction and non-residential construction activity, respectively. See “Unaudited Pro Forma Condensed Combined Financial Information.” Our success and future growth prospects depend, to a significant extent, on conditions in these two end markets and the degree to which these markets are strong in the future.

The construction industry and related markets are cyclical and have in the past been, and may in the future be, materially and adversely affected by general economic and global financial market conditions. These factors impact not only our business, but those of our customers and suppliers as well. This influence is true with respect to macroeconomic factors within North America, particularly within our geographic footprint in the United States and Eastern Canada. For example, in 2008, residential construction and non-residential construction activity in the United States dipped to historically low levels during the financial crisis. As a result, demand for many of our products in the United States dropped significantly. The residential and non-residential construction markets in Canada also suffered during this time.

The markets in the construction industry in which we operate are also subject to other more specific factors. Residential construction activity levels are influenced by and sensitive to a number of factors, including mortgage availability, the cost of financing a home (in particular, mortgage terms and interest rates), unemployment levels, household formation rates, gross domestic product, residential vacancy and foreclosure rates, demand for second homes, existing housing prices, rental prices, housing inventory levels, building mix between single- and multi-family homes, consumer confidence, seasonal weather factors, the available labor pool and government policy and incentives. Non-residential construction activity is primarily driven by levels of business investment, availability of credit and interest rates, as well as many of the factors that impact residential construction activity levels.

We cannot control the foregoing factors and, although construction activity and related spending levels have increased in recent years, there is still uncertainty regarding the timing and extent of the recovery and whether it will be sustained, and there can be no assurances that there will not be any future downturns. There can be no assurances regarding whether more recent growth in our markets can be sustained or if demand will ever return to pre-2008 levels or historical averages. If construction activity in our markets and more generally does not continue to recover, or if there are future downturns, whether locally, regionally or nationally, our business, financial condition and results of operations could be materially and adversely affected.

 

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Our business is based in significant part on government-funded infrastructure projects and building activities, and any reductions or re-allocation of spending or related subsidies in these areas could have a material adverse effect on us.

Our business, particularly our Drainage Pipe & Products and Water Pipe & Products segments, depends heavily on government spending for infrastructure and other similar building activities. In 2015, we estimate 34% of our pro forma net sales were generated by government-funded infrastructure projects. See “Unaudited Pro Forma Condensed Combined Financial Information.” As a result, demand for many of our products is heavily influenced by U.S. federal government fiscal policies and tax incentives and other subsidies, including those incorporated into the economic stimulus plans implemented in connection with the financial crisis and the FAST Act. Projects in which we participate are funded directly by governments and privately-funded, but are otherwise tied to or impacted by government policies and spending measures. Government infrastructure spending and governmental policies with respect thereto depend primarily on the availability of public funds, which is influenced by many factors, including governmental budgets, public debt levels, interest rates, existing and anticipated and actual federal, state, provincial and local tax revenues, government leadership and the general political climate, as well as other general macroeconomic and political factors. In addition, U.S. federal government funds may only be available based on states’ willingness to provide matching funding. Government spending is often approved only on a short-term basis and some of the projects in which our products are used require longer-term funding commitments. If government funding is not approved, or funding is lowered as a result of poor economic conditions, lower than expected revenues, competing spending priorities or other factors, it could limit infrastructure projects available, increase competition for projects, result in excess inventory and decrease sales, all of which could adversely affect the profitability of our business. Additionally, certain regions or states may require or possess the means to finance only a limited number of large infrastructure projects and periods of high demand may be followed by years of little to no activity. There can be no assurances that governments will sustain or increase current infrastructure spending and tax incentive and other subsidy levels, and any reductions thereto or delays therein could have a material adverse effect on our business, financial condition and results of operations.

We engage in a highly competitive business and any failure to effectively compete could have a material adverse effect on us.

The markets in which we sell our products are highly competitive. We face significant competition from, depending on the segment or product, domestic and imported products produced by local, regional, national and international building product manufacturers, as well as privately owned single-site enterprises. Due in part to the costs associated with transporting our products to our customers, many of our sub-markets are relatively fragmented and include a number of regional competitors. Our primary competitors include Rinker Materials (a unit of CEMEX, S.A.B. de C.V.) and Oldcastle, Inc. (a unit of CRH plc) in our Drainage Pipe & Products segment, McWane, Inc. and American Cast Iron Pipe Company in our Water Pipe & Products segment, particularly with respect to DIP, and Boral USA (a unit of Boral Limited), General Shale, Inc. (a unit of Wienerberger AG), Acme Brick Company (a unit of Berkshire Hathaway Inc.), and Glen-Gery Corporation (a unit of Ibstock Building Products) in our Bricks segment.

Competition among manufacturers in our markets is based on many factors, but we primarily compete on price. Our competitors may sell their products at lower prices because, among other things, they possess the ability to manufacture or supply similar products and services more efficiently or at a lower cost or have built a superior sales or distribution network. Some of our competitors may have access to greater financial or other resources than we do, which may afford them greater purchasing power, greater production efficiency, increased financial flexibility or more capital resources for expansion and improvement. In addition, some of our competitors are vertically integrated with suppliers or distributors and can leverage this structure to their advantage to offer better pricing to customers. Furthermore, our competitors’ actions, including restoring idled or expanding manufacturing

 

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capacity, competition from newly-designed or imported products or the entry of new competitors into one or more of our markets could cause us to lower prices in an effort to maintain our customer base. Certain of our products, including gravity pipe and bricks, are volume manufacturing products that are widely available from other manufacturers or distributors, with prices and volumes determined frequently based on participants’ perceptions of short-term supply and demand. Competitive factors, including industry overcapacity, could also lead to pricing pressures. For example, competitors may choose to pursue a volume policy to continue utilizing their manufacturing facilities to the detriment of maintaining prices. Excess product supply can result in significant declines in the market prices for these products, often within a short period of time. As a result, at times, to remain competitive, we may lower the price for any one or more of our products to or below our production costs, requiring us to sacrifice margins or incur losses. Alternatively, we may choose to pass on product sales or cease production at one or more of our manufacturing facilities.

In addition to pricing, we also compete based on service, quality, range of products and product availability. Competition in certain of our product segments, such as the Bricks segment, is also based in part on styles and trends. Our competitors may be positioned to provide better service and thereby establish stronger relationships with customers and suppliers. Our competitors may also sell preferred products, improve the design and performance of their products, develop a more comprehensive product portfolio, be better positioned to influence end-user product specifications or introduce new products with competitive prices and performance characteristics. While the majority of our products are not subject to frequent or rapid stylistic changes, trends do evolve over time, and our competitors may do a better job of predicting market developments or adapt more quickly to new technologies or evolving customer requirements.

We also face competition from substitute building products. For example, storm water pipe can be manufactured from concrete, steel, high-density polyethylene (HDPE), polypropylene (PP) or polyvinyl chloride (PVC) and potable water transmission infrastructure can be manufactured using HDPE or PVC. The market share of HDPE and PP pipe, which compete with gravity pipe and pressure pipe for certain applications, and HDPE and PVC pipe, which compete with DIP for certain applications, have increased in recent years. Additionally, our bricks compete with other materials that can be used for the exterior of a house or non-residential building such as wood, vinyl, fiber cement, stucco and manufactured stone. Governments in the past have, and may continue in the future, to provide incentives that support or encourage, or in certain instances pass regulations that require, the consideration of use of substitute products with which we compete. Additionally, new construction techniques and materials will likely be developed in the future. Increases in customer or market preferences for any of these products could lead to a reduction in demand for our products.

Any failure by us to compete on price, to develop successful products and strategies or to generally maintain and improve our competitive position could have a material adverse effect on our business, financial condition and results of operations.

Increases in energy and related costs could have a material adverse effect on us.

We use significant amounts of energy, including electricity and natural gas, in the manufacturing, distribution and sale of our products, and the related expense is significant. See “Unaudited Pro Forma Condensed Combined Financial Information.” While we have benefited from the relatively low cost of electricity and natural gas in recent years, energy prices have been and may continue to be volatile and these reduced prices may not continue. Proposed or existing government policies, including those to address climate change by reducing greenhouse gas emissions or the effects of hydraulic fracturing, a method of exploring for oil and natural gas, could result in increased energy costs. In addition, factors such as international political and military instability, adverse weather conditions and other natural disasters may disrupt fuel supplies and increase prices in the future. Although we have hedged energy

 

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positions in the past and we currently hedge a portion of our exposure to electricity and natural gas prices, we may not continue our current strategy or hedge any positions in the future and therefore remain susceptible to energy price increases. Additionally, because we and other manufacturers in our industry are often responsible for delivering products to the customer, we are further exposed to increased energy prices as a component of our transportation costs. While we generally attempt to pass increased costs, including higher energy costs, on to our customers, pricing pressure from our competitors, the market power of our customers or other pricing factors may limit our ability to do so, and any increases in energy prices could have a material adverse effect on our business, financial condition and results of operations.

Decreased availability of or increases in the cost of raw materials could have a material adverse effect on us.

Our ability to offer our products to our customers is dependent upon our ability to obtain adequate supplies of raw materials at reasonable costs, such as cement, aggregate, steel and iron. Raw material prices and availability, including the forms in which they are purchased, such as scrap metal, have been volatile in recent years. Many suppliers decreased capacity during the financial crisis. This decreased capacity, along with strong global demand for certain raw materials, has at times caused and may continue to cause tighter supply and significant price increases. Factors such as adverse weather conditions and other natural disasters, as well as political and other social instability, have and will continue to disrupt raw material supplies and impact prices. Suppliers are also subject to their own viability concerns from economic, market and other pressures.

Although we have agreements with our raw material suppliers, these agreements are generally terminable by either party on limited notice or contain prices that are based upon the volume of our total purchases. For example, we have historically purchased a substantial portion of our cement requirements from a subsidiary of HeidelbergCement and have an existing supply agreement with HeidelbergCement to purchase cement for certain of our facilities as discussed in greater detail in the section entitled “Business—Raw Materials and Inputs.” Though the term of the supply agreement extends to March 2020, beginning on January 1, 2017, HeidelbergCement may, for any reason and upon 180 days’ notice, reduce the amount of cement it supplies thereunder or terminate the supply agreement altogether. To the extent the agreement with HeidelbergCement or any of our other raw material suppliers is terminated or we need to purchase additional cement or other raw materials in the open market, there can be no assurance that we could timely find alternative sources in reasonable quantities or at reasonable prices. In addition, sudden or unanticipated changes in sources for certain raw materials, such as cement, may require us to engage in testing of our products for quality assurance, which may cause delays in our ability to meet production schedule for our customers and timely deliver our products. The inability to obtain any raw materials or unanticipated changes with respect to our suppliers could negatively impact our ability to manufacture or deliver our products and to meet customer demands.

We are susceptible to raw material price fluctuations. Prices of the raw materials we use have at times fluctuated in recent years and may be susceptible to significant price fluctuations in the future. We have hedged our positions with respect to certain raw materials in the past and may do so in the future, but we currently have no hedging in place and are therefore more susceptible to any short-term price fluctuations. We generally attempt to pass increased costs, including higher raw material prices, on to our customers, but pricing pressure from our competitors, the market power of our customers or other pricing factors may limit our ability to pass on such price increases. If we cannot fully-offset increases in the cost of raw materials through other cost reductions, or recover these costs through price increases or otherwise, we could experience lower margins and profitability, which could have a material adverse effect on our business, financial condition and results of operations.

 

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Any inability to successfully implement our growth strategy could have a material adverse effect on us.

Our business plan provides for continued growth through acquisitions and joint ventures. We have grown in large part as a result of our recent acquisitions, including our acquisitions of Cretex, Sherman-Dixie and U.S. Pipe, and we anticipate continuing to grow in this manner. Shortly before it was acquired by us, U.S. Pipe had also completed several acquisition transactions of its own. Although we expect to regularly consider additional strategic transactions in the future, there can be no assurances that we will identify suitable acquisition, joint venture or other investment opportunities or, if we do, that any transaction can be consummated on acceptable terms. Antitrust or other competition laws may also limit our ability to acquire or work collaboratively with certain businesses or to fully realize the benefits of a prospective acquisition. Furthermore, a significant change in our business or the economy, an unexpected decrease in our cash flows or any restrictions imposed by our debt may limit our ability to obtain the necessary capital or otherwise impede our ability to complete a transaction. Regularly considering strategic transactions can also divert management’s attention and lead to significant due diligence and other expenses regardless of whether we pursue or consummate any transaction. Failure to identify suitable transaction partners and to consummate transactions on acceptable terms, as well as the commitment of time and resources in connection with such transactions, could have a material adverse effect on our business, financial condition and results of operations.

The consummation of an acquisition also exposes us to significant risks and additional costs. We may not accurately assess the value, strengths, weaknesses or potential profitability of an acquisition target. Furthermore, we may not be able to fully or successfully integrate an acquired business or realize the expected benefits and synergies following an acquisition. Business and operational overlaps may lead to hidden costs. These costs can include unforeseen pre-acquisition liabilities or the impairment of customer relationships or certain acquired assets such as inventory and goodwill. We may also incur costs and inefficiencies to the extent an acquisition expands the industries, markets or geographies in which we operate due to our limited exposure to and experience in a given industry, market or region. Significant acquisitions may also require that we incur additional debt to finance the transaction, which could be substantial and limit our flexibility in using our cash flow from operations for other purposes. Acquisitions can also involve post-transaction disputes with the counter party regarding a number of matters, including a purchase price or other working capital adjustment or liabilities for which we believe we were indemnified under the relevant transaction agreements such as environmental liabilities or pension obligations retained by the seller, including certain environmental obligations in connection with our U.S. Pipe Acquisition. For example, as discussed in greater detail in the section entitled “Business—Legal Proceedings,” we are currently engaged in a dispute with HeidelbergCement regarding the earn-out provision in the purchase agreement entered into in connection with the Acquisition. We are also engaged in other indemnification and other post-closing disputes with certain of our transaction counterparties. Our inability to realize the anticipated benefits of an acquisition as well as other transaction-related issues could have a material adverse effect on our business, financial condition and results of operations.

In July 2012, we entered into a joint venture agreement with Americast, Inc. to form Concrete Pipe & Precast LLC. From time to time, we may enter into additional joint ventures as part of our growth strategy. The nature of a joint venture requires us to share control with unaffiliated third parties. If our joint venture partners do not fulfill their contractual and other obligations, the affected joint venture may be unable to operate according to its business plan, and we may be required to increase our level of commitment. Differences in views among joint venture participants could also result in delays in business decisions or otherwise, failures to agree on major issues, operational inefficiencies and impasses, litigation or other issues. Third parties may also seek to hold us liable for the joint ventures’ liabilities. These issues or any other difficulties that cause a joint venture to deviate from its

 

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original business plan could have a material adverse effect on our business, financial condition and results of operations.

Our dependence on key customers with whom we do not have long-term contracts and consolidation within our customers’ industries could have a material adverse effect on us.

Our business is dependent on certain key customers. Our largest customer accounted for 9.5% of our pro forma net sales in 2015. See the section entitled “Unaudited Condensed Combined Financial Information.” As is customary in our industry, we do not enter into long-term contracts with many of our customers. As a result, our customers could stop purchasing our products, reduce their purchase levels or request reduced pricing structures at any time. We may therefore need to adapt our manufacturing, pricing and marketing strategies in response to a customer who may seek concessions in return for its continued or increased business. In addition, following the financial crisis, there was significant consolidation in the U.S. homebuilding industry, with many smaller builders going out of business or being acquired by larger builders, significantly increasing the market share and bargaining power of a limited number of builders. Any further consolidation in the U.S. homebuilding industry or among any of our other customers could give them significant additional leverage to negotiate more favorable terms and place greater demands on us. A loss of one or more customers or a meaningful reduction in their purchases from us or further consolidation within our end markets could have a material adverse effect on our business, financial condition and results of operations.

Changes in construction activity levels in Texas could have a material adverse effect on us.

We currently conduct a significant portion of our business in Texas, which represented approximately 19.7% of our 2015 pro forma net sales. Residential and non-residential construction activity, as well as government-funded infrastructure spending in Texas has declined from time to time, particularly as a result of slow economic growth, whether in the energy industry or otherwise. Local economic conditions depend on a variety of factors, including national economic conditions, local and state budgets, infrastructure spending and the impact of federal cutbacks. Texas is also an area of the country that is susceptible to severe weather and flooding, which can interrupt, delay or otherwise impact the timing of projects. Any decrease in construction activity in Texas could have a material adverse effect on our business, financial condition and results of operations.

A material disruption at one or more of our manufacturing facilities or in our supply chain could have a material adverse effect on us.

We own and operate manufacturing facilities of various ages and levels of automated control and rely on a number of third parties as part of our supply chain, including for the efficient distribution of products to our customers. Any disruption at one of our manufacturing facilities or within our supply chain could prevent us from meeting demand or require us to incur unplanned capital expenditures. Older facilities are generally less energy-efficient and are at an increased risk of breakdown or equipment failure, resulting in unplanned downtime. Any unplanned downtime at our facilities may cause delays in meeting customer timelines, result in liquidated damages claims or cause us to lose or harm customer relationships. Additionally, we require specialized equipment to manufacture certain of our products, and if any of our manufacturing equipment fails, the time required to repair or replace this equipment could be lengthy, which could result in extended downtime at the affected facility. Any unplanned repair or replacement work can also be very expensive. Moreover, manufacturing facilities can unexpectedly stop operating because of events unrelated to us or beyond our control, including fires and other industrial accidents, floods and other severe weather events, natural disasters, environmental incidents or other catastrophes, utility and transportation infrastructure disruptions, shortages of raw materials, and acts of war or terrorism. Work stoppages, whether union-organized or not, can also disrupt operations at manufacturing facilities. Furthermore, while we are generally

 

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responsible for delivering products to the customer, we do not maintain our own fleet of delivery vehicles and outsource this function to third parties. Any shortages in trucking capacity, any increase in the cost thereof or any other disruption to the highway systems could limit our ability to deliver our products in a timely manner or at all. Any material disruption at one or more of our facilities or those of our customers or suppliers or otherwise within our supply chain, whether as a result of downtime, facility damage, an inability to deliver our products or otherwise, could prevent us from meeting demand, require us to incur unplanned capital expenditures or cause other material disruption to our operations, any of which could have a material adverse effect on our business, financial condition and results of operations.

Delays in construction projects and any failure to manage our inventory could have a material adverse effect on us.

Many of our products are used in water transmission and distribution projects and other large-scale construction projects which generally require a significant amount of planning and preparation before construction commences. However, construction projects can be delayed and rescheduled for a number of reasons, including unanticipated soil conditions, adverse weather or flooding, changes in project priorities, financing issues, difficulties in complying with environmental and other government regulations or obtaining permits and additional time required to acquire rights-of-way or property rights. These delays or rescheduling may occur with too little notice to allow us to replace those projects in our manufacturing schedules or to adjust production capacity accordingly, creating unplanned downtime, increasing costs and inefficiencies in our operations and increased levels of obsolete inventory. Additionally, we maintain an inventory of brick products that meet standard specifications and are ultimately purchased by a variety of end users. We forecast demand for these brick products to ensure that we keep high inventory levels of certain products that we expect to be in high demand and limit our inventory for which we do not expect much interest. However, our forecasts are not always accurate and unexpected changes in demand for these brick products, whether because of a change in preferences or otherwise, can lead to increased levels of obsolete inventory. Any delays in construction projects and our customers’ orders or any inability to manage our inventory could have a material adverse effect on our business, financial condition and results of operations.

Any inability to successfully integrate our recent acquisitions could have a material adverse effect on us.

We have recently acquired Cretex, Sherman-Dixie and U.S. Pipe. In addition, U.S. Pipe completed three acquisitions shortly before being acquired by us. The integration of acquired businesses can take significant amount of time and also exposes us to significant risks and additional costs. Integrating these and other acquisitions may strain our resources. Further, we may have difficulty integrating the operations, systems, controls, procedures or products of acquired businesses and may not be able to do so in a timely, efficient and cost-effective manner. These difficulties could include:

 

    diversion of the attention of our management and that of the acquired business;

 

    combining management teams, strategies and philosophies;

 

    merging or linking different accounting and financial reporting systems and systems of internal controls;

 

    assimilation of personnel, human resources and other administrative departments and potentially contrasting corporate cultures;

 

    merging computer, technology and other information networks and systems;

 

    incurring or guaranteeing additional indebtedness;

 

 

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    disruption of our relationship with or loss of key customers, suppliers or personnel;

 

    interference with, or loss of momentum in, our ongoing business or that of the acquired company; and

 

    delays or cost-overruns in the integration process.

We have not fully-integrated Cretex, Sherman-Dixie or U.S. Pipe and may encounter one or more of the issues discussed above, or others of which we are not yet aware. In particular, we have not yet integrated the accounting and financial reporting systems of these businesses and are currently evaluating whether and to what extent we will do so in the future. Additionally, U.S. Pipe had recently acquired other businesses prior to their being acquired by us, and the integration of some of those businesses remains on-going. Any of these acquisition or other integration-related issues could divert management’s attention and resources from our day-to-day operations, cause significant disruption to our business and lead to substantial additional costs. Our inability to realize the anticipated benefits of an acquisition or to successfully integrate acquired companies as well as other transaction-related issues could have a material adverse effect on our business, financial condition and results of operations.

Labor disruptions and other union activity could have a material adverse effect us.

Approximately 35% of our workforce is covered by collective bargaining agreements, and approximately 26% of these employees are included in collective bargaining agreements that expire within one year. If negotiations to renew expiring collective bargaining agreements are not successful or become unproductive, the union could take actions such as strikes, work slowdowns or work stoppages. Such actions at any one of our facilities could lead to a plant shut down or a substantial modification to employment terms, thereby causing us to lose net sales or to incur increased costs. Additionally, we have experienced one union organizing effort directed at our non-union employees in the past ten years. There can be no assurances there will not be additional union organizing efforts, strikes, work slowdowns or work stoppages in the future. Any such disruption, or other issue related to union activity, could have a material adverse effect on our business, financial condition and results of operations.

A tightening of mortgage lending or mortgage financing requirements or other reductions in the availability of consumer credit or increases in its cost could have a material adverse effect on us.

We estimate that approximately 52% of our 2015 pro forma net sales were generated from residential construction activity. Most home sales in the United States and Eastern Canada are financed through mortgage loans, and a significant percentage of renovation and other home repair activity is financed either through mortgage loans or other available credit. The financial crisis affected the financial position of many consumers and caused financial institutions to tighten their lending criteria, each of which contributed to a significant reduction in the availability of consumer credit. The mortgage lending and mortgage finance industries experienced significant instability because of, among other factors, a decline in property values and an increase in delinquencies, defaults and foreclosures. These developments resulted in a significant reduction in total new housing starts in the United States and consequently, a reduction in demand for our products in the residential sector. Similarly, the rate of interest payable on any mortgage or other form of credit will have an impact on the cost of borrowing. While base rates have remained low in recent years, they may rise in the future. Any increase in interest rates will increase the cost of borrowing and may make the purchase of a home less attractive. Any future tightening of mortgage lending or other reductions in the availability of consumer credit or increases in its cost could have a material adverse effect on our business, financial condition and results of operations.

 

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We are in a dispute with HeidelbergCement related to the payment of an earn out in connection with the Acquisition and any significant earn out payment we are required to make could have a material adverse effect on us.

We are currently engaged in a dispute with HeidelbergCement regarding the earn out provision in the purchase agreement entered into in connection with the Acquisition. As discussed in greater detail in “Business—Legal Proceedings,” we believe that no earn out payment is owed, but HeidelbergCement has asserted that a payment should be made in the amount of $100.0 million. Absent agreement of the parties, resolution of the matter will likely be determined by a neutral accountant. If it is determined that we are required to make a significant payment to HeidelbergCement, we may not have sufficient cash to make such payment and may be required to incur additional indebtedness. We cannot be certain that we will be able to borrow any funds for this purpose under the terms of our existing indebtedness or on other terms acceptable to us, if at all. If incurred, additional indebtedness will subject us to additional interest expense, negatively impact our cash flow, increase the risk of a downgrade in our credit rating and could limit our ability to incur other indebtedness or make further acquisitions.

We are subject to increasingly stringent environmental laws and regulations, and any failure to comply with any current or future laws or regulations could have a material adverse effect on us.

We are subject to federal, state, provincial, local and foreign laws and regulations governing the protection of the environment and natural resources, including those governing air emissions, wastewater discharges and the use, storage, discharge, handling, disposal, transport and clean-up of solid and hazardous materials and wastes. We are required to obtain permits from governmental authorities for certain operations, and if we expand or modify our facilities or if environmental laws change, we could be required to obtain new or modified permits. One example of these laws, the National Emission Standards for Hazardous Air Pollutants: Brick and Structural Clay Products Manufacturing; and Clay Ceramics Manufacturing, was finalized in September 2015. This rule requires the installation of “maximum achievable control technology” or “MACT” at affected facilities. Of our brick facilities covered by this rule, six are required to install new MACT-compliant pollution control equipment no later than December 2018. We have budgeted an aggregate of $10.4 million for capital expenditures through 2018 to achieve full compliance with this rule, but we cannot assure you that the work will be completed on time or that our aggregate compliance costs will not be higher. Also, as the owner and operator of surface mines from which we excavate clay for our brick manufacturing, we have certain reclamation obligations under applicable law, which may lead to cash outflows upon complete or partial closure of a pit. As of December 31, 2015, the provision for such measures amounted to a total of $1.8 million. However, the estimated provisions resulting from reclamation obligations may change and the proportion of costs not covered by provisions could increase if the assumptions underlying our estimates are inaccurate or the underlying facts or legal requirements change.

Environmental laws and regulations, including those related to energy use and climate change, tend to become more stringent over time, and any future laws and regulations could have a material impact on our operations or require us to incur material additional expenses to comply with any such future laws and regulations. Future environmental laws and regulations may cause us to modify how we manufacture and price our products or require that we make significant capital investments to comply. For example, our manufacturing processes use a significant amount of energy, and increased regulation of energy use to address the possible emission of greenhouse gases could materially increase our manufacturing costs or require us to install emissions control or other equipment at some or all of our manufacturing facilities.

If we fail to comply with any existing or future environmental laws, regulations or permits, we could incur fines, penalties or other sanctions and suffer reputational harm. In addition, we could be

 

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held responsible for costs and damages arising from claims or liabilities under environmental laws and regulations, including with respect to any exposure to hazardous materials or contamination at our facilities or at third-party waste disposal sites. We could also be subject to third party claims from individuals if any releases from our property were to cause contamination of the air, soil or groundwater of areas near our facilities. These laws and regulations may also require us to investigate and, in certain instances, remediate contamination. Some of our sites have a history of industrial use, and while we apply strict environmental operating standards and undertake extensive environmental due diligence in relation to our facilities and acquisitions, some soil and groundwater contamination has occurred in the past at a limited number of sites. As of December 31, 2015, we had accrued approximately $1.3 million for environmental obligations. Additionally, we cannot completely eliminate the risk of future contamination. Any costs or other damage related to existing or future environmental laws, regulations or permits or any violations thereof could expose us to significant financial losses as well as civil and criminal liabilities, any of which could have a material adverse effect on our business, financial condition and results of operations.

We are subject to health and safety laws and regulations and any failure to comply with any current or future laws or regulations could have a material adverse effect on us.

Manufacturing and mining sites are inherently dangerous workplaces. Our sites often put our employees and others in close proximity with large pieces of mechanized equipment, moving vehicles, chemical and manufacturing processes, heavy products and items and highly regulated materials. As a result, we are subject to a variety of health and safety laws and regulations dealing with occupational health and safety. Unsafe work sites have the potential to increase employee turnover and raise our operating costs. Our safety record can also impact our reputation. We maintain functional groups whose primary purpose is to ensure we implement effective work procedures throughout our organization and take other steps to ensure the health and safety of our work force, but there can be no assurances these measures will be successful in preventing injuries or violations of health and safety laws and regulations. Any failure to maintain safe work sites or violations of applicable law could expose us to significant financial losses and reputational harm, as well as civil and criminal liabilities, any of which could have a material adverse effect on our business, financial condition and results of operations.

The use of our products is often affected by various laws and regulations in the markets in which we operate, any of which may have a material adverse effect on us.

The use of many of our products is subject to approvals by municipalities, state departments of transportation, engineers and developers. These approvals and specifications, including building codes, may affect the products our customers or their customers (the end users) are allowed or choose to use, and, consequently, failure to obtain or maintain such approvals or changes in building codes may affect the saleability of our products. Changes in applicable regulations governing the sale of some of our products or the failure of any of our products to comply with such requirements could increase our costs of doing business, reduce sales or otherwise have a material adverse effect on our business, financial condition and results of operations.

We depend on the services of key executives and any inability to attract and retain key management personnel could have a material adverse effect on us.

Our key management personnel, including our Chief Executive Officer and Chief Financial Officer, are important to our success because they are instrumental in setting our strategic direction, operating our business and identifying expansion opportunities. Additionally, as our business grows, we may need to attract and hire additional management personnel. We have employment agreements with some members of senior management; however, we cannot prevent our executives from terminating their employment with us, and any replacements we hire may not be as effective. Our

 

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ability to retain our key management personnel or to attract additional management personnel or suitable replacements should any members of our management team leave is dependent on a number of factors, including the competitive nature of the employment market. Any failure to retain key management personnel or to attract additional or suitable replacement personnel could have a material adverse effect on our business, financial condition and results of operations.

Any failure to retain and attract additional skilled technical or sales personnel could have a material adverse effect on us

Our success depends in part on our ability to retain and attract additional skilled employees, particularly engineering and technical personnel. Without a sufficient number of skilled employees, our operations and manufacturing quality could suffer. The reduction in demand for products in our industry that occurred during the financial crisis led to a number of skilled workers leaving our industry permanently, reducing an already limited pool of available and qualified personnel. Our experienced sales team has also developed a number of meaningful customer relationships that would be difficult to replace. Therefore, competition for qualified technical personnel and operators as well as sales personnel with established customer relationships is intense, both in retaining our existing employees and when replacing or finding additional suitable employees. There can be no assurances the labor pool from which we hire our this personnel will increase or remain stable and any failure to retain our existing technical and sales personnel and other employees or attract additional skilled personnel could have a material adverse effect our business, financial condition and results of operations.

Credit and non-payment risks of our customers, especially during times of economic uncertainty and tight credit markets, could have a material adverse effect on us.

As is customary in our industry, the majority of our sales are to customers on an open credit basis, with standard payment terms of 30 days. While we generally monitor the ability of our customers to pay these open credit arrangements and limit the credit we extend to what we believe is reasonable based on an evaluation of each customer’s financial condition and payment history, we may still experience losses because of a customer’s inability to pay. As a result, while we maintain what we believe to be a reasonable allowance for doubtful receivables for potential credit losses based upon our historical trends and other available information, there is a risk that our estimates may not be accurate, particularly in times of economic uncertainty and tight credit markets. Any inability to collect customer receivables or inadequate provisions for doubtful receivables could have a material adverse effect on our business, financial condition and results of operations.

Warranty and related claims could have a material adverse effect on us.

We generally provide warranties on our products against defects in materials and workmanship, the costs of which could be significant. Many of our products such as gravity pipe are buried underground and incorporated into a larger infrastructure system, such as a city’s or municipality’s water transmission system, or built into the fabric of a building or dwelling. In most cases, it is difficult to access, repair, recall or replace these products. Additionally, some of our products, such as our pressure pipe, which is used in nuclear and coal-fired power generation factories, are used in applications where a product failure or construction defect could result in significant project delay, property damage, personal injury or death or could require significant remediation expenses. Because our products, including discontinued products, are long lasting, claims can also arise many years after their manufacture and sale. Additionally, product failures may also arise due to the quality of the raw materials we purchase from third-party suppliers or the quality of the work performed by our customers, including installation work, matters for which we have little to no control, but which may still subject us to a warranty claim. We may also assume product warranty or other similar obligations in acquisition transactions regarding the products sold by the acquired businesses prior to the transaction date for

 

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which we are not indemnified pursuant to the terms of the relevant transaction documentation. Our quality control systems and procedures and those of our suppliers and customers cannot test for all possible conditions of use or identify all defects in the design, engineering or specifications of one of our products or the raw materials we use before they are put to their intended purpose. Therefore, there can be no assurances that we will not supply defective or inferior products that cause product or system failure, which could give rise to potentially extensive warranty and other claims for damages, as well as negatively impact our reputation and the perception of our product quality and reliability. While we have established reserves for warranty and related claims that we believe to be reasonable, these claims may exceed our reserves and any such excess and any negative publicity and other issues related to such claims could have a material adverse effect on our business, financial condition and results of operations.

Legal and regulatory claims and proceedings could have a material adverse effect on us.

We are subject to claims, litigation and regulatory proceedings in the normal course of business and could become subject to additional claims in the future, some of which could be material. For example, we have been, and may in the future be, subject to claims for product liability, construction defects, project delay, personal injury and property and other damages. We have also been subject to allegations regarding compliance with mandated product specifications. Claims and proceedings, whether or not they have merit and regardless of the outcome, are typically expensive and can divert the attention of management and other personnel for significant periods of time. Additionally, claims and proceedings can impact customer confidence and the general public’s perception of our company and products, even if the underlying assertions are proven to be false. While we have established reserves we believe to be reasonable under the facts known, the outcomes of litigation and similar disputes are often difficult to reliably predict and may result in decisions or settlements that are contrary to or in excess of our expectations and losses may exceed our reserves. In addition, various factors and developments could lead us to make changes in our current estimates of liabilities and related insurance receivables or make new or modified estimates as a result of a judicial ruling or judgment, a settlement, regulatory developments or changes in applicable law. Any claims or proceedings, particularly those in which we are unsuccessful or for which we did not establish adequate reserves, could have a material adverse effect on our business, financial condition and results of operations.

The seasonality of our business and its susceptibility to severe and prolonged periods of adverse weather and other conditions could have a material adverse effect on us.

Demand for our products in some markets is typically seasonal, with periods of snow or heavy rain negatively affecting construction activity. For example, sales of our products in Canada and the Northeast and Midwest regions of the United States are somewhat higher from spring through autumn when construction activity is greatest. Construction activity declines in these markets during the winter months in particular due to inclement weather, frozen ground and fewer hours of daylight. Construction activity can also be affected in any period by adverse weather conditions such as hurricanes, severe storms, torrential rains and floods, natural disasters such as fires and earthquakes and similar events, any of which could reduce demand for our products, push back existing orders to later dates or lead to cancellations. Furthermore, our ability to deliver products on time or at all to our customers can be significantly impeded by such conditions and events, such as these described above. Public holidays and vacation periods constitute an additional factor that may exacerbate certain seasonality effects, as building projects or industrial manufacturing processes may temporarily cease. These conditions, particularly when unanticipated, can leave both equipment and personnel underutilized. Additionally, the seasonal nature of our business has led to variation in our quarterly results in the past and may continue to do so in the future. This general seasonality of our business and any severe or prolonged adverse weather conditions or other similar events could have a material adverse effect on our business, financial condition and results of operations.

 

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Certain of the contracts in our backlog may be adjusted, cancelled or suspended by our customers and, therefore, our backlog is not necessarily indicative of our future revenues or earnings or, even if performed, a good indicator of our future margins.

As of May 31, 2016, our backlog totaled approximately $435.8 million. In accordance with industry practice, many of our contracts are subject to cancellation, reduction, termination or suspension at the discretion of the customer. In the event of a project cancellation, we would generally have no contractual right to the total revenue reflected in our backlog. Projects can remain in backlog for extended periods of time because of the nature of the project, delays in execution of the project and the timing of the particular services required by the project. Additionally, the risk of contracts in backlog being cancelled, terminated or suspended generally increases at times, including as a result of periods of wide-spread macroeconomic and industry slowdown, weather, seasonality and many of the other factors impacting our business. Many of the contracts in our backlog are subject to changes in the scope of services to be provided as well as adjustments to the costs relating to the contracts. The revenue for certain contracts included in backlog are based on estimates. Therefore, the timing of performance on our individual contracts can affect greatly our margins and hence, future profitability. There is no assurance that backlog will actually be realized as revenues in the amounts reported or, if realized, will result in any estimated profits.

Our project-based business requires significant liquidity, and any inability to ensure adequate financing or guarantees for large projects in the future could have a material adverse effect on us.

The projects in which we participate, particularly in our pressure pipe business, can be capital-intensive and often require substantial liquidity levels. In line with industry practice, we receive prepayments from our customers as well as milestone payments. However, a change in prepayment patterns or our inability to obtain third-party guarantees in respect of such prepayments could force us to seek alternative financing sources, such as bank debt or in the capital markets, which we may not be able to do on terms acceptable to us or at all, any of which could have a material adverse effect on our business, financial condition and results of operations.

As is customary in some of our sub-markets, we provide our customers with performance guarantees and other guarantee instruments, such as surety bonds, that guarantee the timely completion of a project pursuant to defined contractual specifications. We also enter into contractual obligations to pay liquidated damages to our customers for project delays. We are required to make payments under these contracts, guarantees and instruments if we fail to meet any of the specifications. Some customers require the performance guarantees to be issued by a reputable and creditworthy financial institution in the form of a letter of credit, surety bond or other financial guarantee. Financial institutions consider our credit ratings and financial position in the guarantee approval process. Our credit ratings and financial position could make the process of obtaining guarantees from financial institutions more difficult and expensive. If we cannot obtain such guarantees from reputable and creditworthy financial institutions on reasonable terms or at all, we could face higher financing costs or even be prevented from bidding on or obtaining new projects, and any of these or other related obstacles could have a material adverse effect on our business, financial condition and results of operations.

Delays or outages in our information technology systems and computer networks could have a material adverse effect on us.

Our manufacturing facilities as well as our sales and service activities depend on the efficient and uninterrupted operation of complex and sophisticated information technology systems and computer networks which are subject to failure and disruption. These and other problems may be caused by

 

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system updates, natural disasters, malicious attacks, accidents, power disruptions, telecommunications failures, acts of terrorism or war, computer viruses, physical or electronic break-ins or other similar events. Additionally, because we have grown through various acquisitions, we have integrated and are integrating a number of disparate information technology systems across our organization, certain of which may be outdated and due for replacement, further increasing the likelihood of problems. We may in the future replace and integrate systems, but these updates may not be successful, they may create new issues we currently do not face or they may significantly exceed our cost estimates.

Furthermore, prior to the Acquisition, we were dependent on HeidelbergCement for a number of corporate and shared services, including its information technology systems and services. Following the Acquisition through February 2016, HeidelbergCement continued to provide us with certain of these services under the terms of a transition services agreement. These information technology systems and services that were previously provided by HeidelbergCement under the transition services agreement are now established internally and, in part, provided by a third-party service provider. Such systems and services may not however be comparable to those provided under the transition services agreement, may be insufficient for our needs and may create new issues that we do not currently face.

Any disruption in our information technology systems could interrupt or damage our operations and our ability to meet customer needs as well as our ability to maintain effective controls. In addition, we could be subject to reputational harm or liability if confidential customer information is misappropriated from our systems. Despite our security measures and business continuity plans, our systems could be vulnerable to disruption and any such disruption and the resulting fall-out could have a material adverse effect on our business, financial condition and results of operations.

We have material weaknesses in our internal control over financial reporting and our inability to remediate these weaknesses or otherwise implement and maintain effective internal control over financial reporting, or the inability of our independent registered public accounting firm to provide an unqualified report thereon, could have a material adverse effect on us.

We are not currently required to comply with rules of the SEC implementing Section 404 of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, regarding internal control over financial reporting and are therefore not required to make a formal assessment of the effectiveness of our internal control over financial reporting for that purpose. However, our independent registered public accounting firm identified two material weaknesses, one regarding inventory and one regarding systems, processes and people, as of December 31, 2015. These material weaknesses could, among other things, adversely impact our ability to provide timely and accurate financial information or result in a misstatement of the account balances or disclosures that would result in a material misstatement to our annual or interim financial statements that would not be prevented or detected. The material weaknesses are described in greater detail in the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Material Weaknesses in Internal Control Over Financial Reporting.”

Extensive work still remains to fully-implement and complete our remediation plan with respect to the existing material weaknesses. These matters have required, and will continue to require, a significant amount of management time and resources and a significant commitment of external resources, both of which may lead to substantial costs. Further, starting with our second annual report on Form 10-K that we file with the SEC, our management will be required to report on, and our independent registered public accounting firm will be required to attest to, the effectiveness of our internal control over financial reporting. To comply with these requirements, we may need to undertake various additional actions, such as implementing new controls and procedures and hiring additional accounting or internal audit staff, and incur substantial costs. If we are unsuccessful in implementing or

 

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following our remediation plan, or fail to update our internal controls as our business evolves, we may not be able to, among other things, accurately report our financial condition, results of operations, or cash flows or maintain effective disclosure controls and procedures.

We may not be able to successfully remediate our existing material weaknesses and we may identify additional material weaknesses that we may not be able to remediate, in each case, in time to meet the Section 404 compliance deadline. If we are unable to comply with the requirements of Section 404 in a timely manner or are unable to assert that our internal control over financial reporting is effective as and when required, whether as a result of any failure to remediate our existing material weaknesses, identification of additional material weaknesses in our internal control over financial reporting or otherwise, or if our independent registered public accounting firm is unable to express an opinion as to the effectiveness of our internal control over financial reporting or issues an adverse opinion, investors may lose confidence in the accuracy and completeness of our financial reports and the market price of our common stock could decline materially.

Our rebranding efforts could have a material adverse effect on us.

Prior to the Acquisition, we operated as a wholly owned business of HeidelbergCement known as Hanson Building Products and the majority of our products were marketed using the “Hanson” brand name and logo. Following completion of the Acquisition, we were required to discontinue the use of “Hanson” and related names. On October 16, 2015, we announced that we were rebranding our business under the “Forterra” name and began using the “Forterra” name and logo.

This rebranding effort requires time and expense, and may impact our future results of operations. We may lose customers if they do not respond favorably to the new brand or fail to recognize the new brand as a continuation of our prior business. This is particularly the case for customers that purchase our products through distributors and have no direct relationship with us. Furthermore, we believe that our association with the “Hanson” name and with HeidelbergCement at times provided us with preferred status with customers, suppliers and other parties due to its recognized brand, perceived high quality products and services and financial strength. We may therefore lose potential new customers who choose not to consider our product offerings since we are no longer branded with the more familiar “Hanson” name. The rebranding may also affect our ability to recruit qualified personnel. Any unforeseen costs, lack of success or loss of current or potential new customers related to the rebranding could have a material adverse effect on our business, financial condition and results of operations.

We also share the “Forterra” brand with Forterra UK, a public company listed on the London FTSE. Forterra UK is currently majority-owned by Lone Star and operates solely in the United Kingdom. We have no control over Forterra UK’s use of the “Forterra” name and logo, and any actions or negative publicity related to it and its products could have a material adverse effect on our business, financial condition and results of operations.

Any inability to protect our intellectual property or claims that we infringe on the intellectual property rights of others could have a material adverse effect on us.

We rely on a combination of patents, trademarks, trade names, confidentiality and nondisclosure clauses and agreements, and other unregistered rights to define and protect our rights to our brand and the intellectual property used in certain of our products. We also rely on product, industry, manufacturing and market “know-how” that cannot be registered and may not be subject to any confidentiality or nondisclosure clauses or agreements. Furthermore, while we have submitted the appropriate applications, we have not yet completed the registration process of the Forterra brand in all relevant jurisdictions and our rights to the intellectual property could be challenged by a third party. We

 

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cannot guarantee that any of our registered or unregistered intellectual property rights or our know-how, or claims thereto, will now or in the future successfully protect what we consider to be the intellectual property underlying our products and business, or that our rights will not be successfully opposed or otherwise challenged. We also cannot guarantee that each application filed with respect to the Forterra name will be approved. To the extent that our innovations, products and name are not protected by patents or other intellectual property rights, third parties, including competitors, may be able to commercialize our innovations or products or use our know-how. Additionally, we have faced in the past and may in the future face claims that we are infringing the intellectual property rights of others. If any of our products are found to infringe the patents or other intellectual property rights of others, our manufacture and sale of such products could be significantly restricted or prohibited and we may be required to pay substantial damages or on-going licensing fees. Any inability to protect our intellectual property rights or any misappropriation of the intellectual property of others could have a material adverse effect on our business, financial condition and results of operations.

Our foreign operations could have a material adverse effect on us.

We operate production facilities in Canada and Mexico and we are therefore subject to a number of risks specific to these countries. These risks include social, political and economic instability, unexpected changes in regulatory requirements, tariffs and other trade barriers, currency exchange fluctuations, acts of war or terrorism and import/export requirements. Our financial statements are reported in U.S. dollars with international transactions being translated into U.S. dollars. If the U.S. dollar strengthens in relation to the Canadian dollar, our U.S. dollar reported net sales and income will decrease. Additionally, since we incur costs in foreign currencies, fluctuation in those currencies’ value can negatively impact manufacturing and selling costs. See the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Quantitative and Qualitative Disclosures about Market Risk.” There can be no assurances that any of these factors will not materially impact our production cost or otherwise have a material adverse effect on our business, financial condition and results of operations.

Insufficient insurance coverage could have a material adverse effect on us.

We maintain property, business interruption, counterparty and liability insurance coverage that we believe is consistent with industry practice. However, our insurance program does not cover, or may not adequately cover, every potential risk associated with our business and the consequences thereof. In addition, market conditions or any significant claim or a number of claims made by or against us could cause our premiums and deductibles to increase substantially and, in some instances, our coverage may be reduced or become entirely unavailable. In the future, we may not be able to obtain meaningful coverage at reasonable rates for a variety of risks, including certain types of environmental hazards and ongoing regulatory compliance. In addition, we self-insure a portion of our exposure to certain employee benefit matters, including employee health care claims of up to $500,000 per covered individual per year and wage-payment obligations for short-term disability. If our insurance coverage is insufficient, if we are not able to obtain sufficient coverage in the future, or if we are exposed to significant losses as a result of the risks for which we self-insure, any resulting costs or liabilities could have a material adverse effect on our business, financial condition and results of operations.

Our historical financial information as a business of HeidelbergCement and following the Acquisition, after which we have consummated a number of strategic transactions, may not be representative of our results as an independent company.

Certain of the historical financial information included in this prospectus has been derived from the historical financial statements of HeidelbergCement through March 2015 and does not necessarily reflect what our financial position, results of operations or cash flows would have been had we been an

 

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independent entity prior to that date. The historical costs and expenses reflected in our combined predecessor financial statements include an allocation for certain centralized corporate functions historically provided by HeidelbergCement, including executive senior management, financial reporting, financial planning and analysis, accounting, information technology, tax, risk management, treasury, legal and human resources. While we believe that the historical allocations for these functions are reasonable reflections of historical utilization levels in support of our business, such allocations may not be reflective of our cost structure, funding and operations following the Acquisition, including changes in our employee base, changes in our legal structure, potential increased costs associated with reduced economies of scale, migration of our informational technology systems and increased costs associated with being a stand-alone company. Nor do these historical results indicate the levels of expense necessary to operate as a publicly traded company. Furthermore, we have a very limited history of functioning as a stand-alone company and we have acquired a number of businesses since the Acquisition and we do not present any historical financial information in this prospectus for a full fiscal year reflecting our operations as a stand-alone company and inclusive of each of these acquisitions and the other transactions addressed in the section entitled “Unaudited Pro Forma Condensed Combined Financial Information.” As a result of these factors, the historical financial information included in this prospectus is not necessarily representative of what would have been reflected in our financial statements had we been a stand-alone company inclusive of the recent transactions or indicative of our future results of operations, financial position, cash flows or costs and expenses. For additional information, see the sections entitled “Selected Historical Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Unaudited Pro Forma Condensed Combined Financial Information” and our audited combined financial statements and notes thereto included elsewhere in this prospectus.

Risks Relating to our Indebtedness

The terms of our debt could have a material adverse effect on us.

We have substantial debt and may incur additional debt. As of March 31, 2016, we had approximately $724.3 million of long-term debt outstanding under the Revolver, Senior Term Loan and Junior Term Loan, net of debt issuance costs and original issue discount. Our credit facilities contain a number of significant restrictions and covenants that generally restrict our business and limit our ability to, among other things:

 

    dispose of certain assets;

 

    incur or guarantee additional indebtedness;

 

    enter into new lines of business;

 

    make investments, intercompany loans or certain payments in respect of indebtedness;

 

    incur or maintain certain liens;

 

    enter into transactions with affiliates;

 

    engage in certain sale and leaseback transactions;

 

    declare or pay dividends and make other restricted payments, including the repurchase or redemption of our stock; and

 

    engage in mergers, consolidations, liquidations and certain asset sales.

The credit facilities also require us to maintain certain financial ratios. See the section entitled “Description of Certain Indebtedness” for additional information regarding the covenants and other terms of the Revolver, Senior Term Loan and Junior Term Loan.

 

 

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These and other similar provisions in these and other documents could have adverse consequences on our business and to our investors because they limit our ability to take these actions even if we believe that a specific transaction would contribute to our future growth or improve our operating results. For example, these restrictions could limit our flexibility in planning for or reacting to changes in our business and our industry, thereby inhibiting our ability to react to markets and potentially making us more vulnerable to downturns. These restrictions could also require that, based on our level of indebtedness, a significant portion of our cash flow from operations be used to make interest payments, thereby reducing the cash flow available for working capital, to fund capital expenditures or other corporate purposes and to generally grow our business. Furthermore, these restrictions could prevent us from pursuing a strategic transaction that we believe is in the best interests of our company and our stockholders.

Under the terms of a U.S. master lease, we have leased certain U.S. properties through April 4, 2036 at a cost of approximately $13.4 million per annum, payable monthly, subject to an annual 2.0% increase. Under the terms of a Canadian master lease, we have leased certain Canadian properties through April 4, 2036 at a cost of $3.5 million (CAD) per annum. Each of these master lease agreements contain certain restrictions and covenants that limit, among other things, our use of and ability to sub-lease or discontinue use of the leased properties. See “Description of Certain Indebtedness—Sale Leaseback.”

Our ability to comply with these provisions may be affected by events beyond our control. A breach of any of these provisions or any inability to comply with mandated financial ratios could result in a default, in which case the lenders may have the right to declare all borrowings to be immediately due and payable. If we are unable to repay any borrowings when due, whether at maturity or if declared due and payable following a default, the lenders would have the right to proceed against the pledged collateral securing the indebtedness. Therefore, the restrictions under our credit facilities and any breach of the covenants or failure to otherwise comply with the terms of the credit facilities could have a material adverse effect on our business, financial condition and results of operations.

Our current indebtedness and any future indebtedness we may incur could have a material adverse effect on us.

We expect that we will depend primarily on cash generated by our operations to pay our expenses and any amounts due under our credit facilities and any other indebtedness we may incur. However, our business may not generate sufficient cash flows from operations in the future and our currently anticipated growth in revenues and cash flows may not be realized, either or both of which could result in us being unable to repay indebtedness or our inability to fund other liquidity or strategic needs. Our ability to make these payments depends on our future performance, which will be affected by financial, business, economic and other factors, many of which are beyond our control. If we do not have sufficient liquidity, we may be required to refinance all or part of our then existing debt, sell assets or borrow more money.

If we incur additional indebtedness, the risks related to our indebtedness that we currently face could intensify. In addition to the risk of higher interest rates and fees, the non-economic terms of any additional indebtedness may contain covenants and other terms restricting our financial, operating and strategic flexibility to an equal or greater extent as those imposed by our current credit facilities. Additional indebtedness may also include cross-default provisions such that, if we breach a restrictive covenant with respect to any of our indebtedness, or an event of default occurs, lenders may be entitled to accelerate all amounts owing under other outstanding indebtedness.

If we are required to refinance our indebtedness or otherwise incur additional indebtedness to fund strategic transactions or otherwise, any additional financing may not be available on terms

 

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favorable to us or at all. If, at such time, market conditions are materially different or our credit profile has deteriorated, the cost of refinancing our debt may be significantly higher than our indebtedness existing at that time, or we may not be able to refinance our debt at all. Any failure to meet any future debt service obligations or any inability to obtain any additional financing on terms acceptable to us or to comply therewith could have a material adverse effect on our business, financial condition and results of operations.

Risks Related to this Offering and Ownership of Our Common Stock

There is currently no public market for shares of our common stock and an active trading market for our common stock may never develop following this offering.

Prior to this offering, there has been no market for shares of our common stock. Although we intend to apply to list our common stock on              under the symbol “        ,” an active trading market for our common stock may never develop or, if one develops, it may not be sustained following this offering. Accordingly, no assurance can be given as to the following:

 

    the likelihood that an active trading market for our common stock will develop or be sustained;

 

    the liquidity of any such market;

 

    the ability of our stockholders to sell their shares of common stock; or

 

    the price that our stockholders may obtain for their common stock.

If an active market for our common stock with meaningful trading volume does not develop or is not maintained, the market price of our common stock may decline materially below the offering price and you may not be able to sell your shares.

The trading price of our common stock may be volatile and could decline substantially following this offering.

The market price of our common stock following this offering may be highly volatile and subject to wide fluctuations. Some of the factors that could negatively affect the market price of our common stock or result in significant fluctuations in price, regardless of our actual operating performance, include:

 

    actual or anticipated variations in our quarterly operating results;

 

    changes in market valuations of similar companies;

 

    changes in the markets in which we operate;

 

    additions or departures of key personnel;

 

    actions by stockholders, including the sale by Lone Star of any of its shares of our common stock;

 

    speculation in the press or investment community;

 

    general market, economic and political conditions, including an economic slowdown;

 

    uncertainty regarding economic events, including in Europe in connection with the United Kingdom’s possible departure from the European Union;

 

    changes in interest rates;

 

    our operating performance and the performance of other similar companies;

 

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    our ability to accurately project future results and our ability to achieve those and other industry and analyst forecasts; and

 

    new legislation or other regulatory developments that adversely affect us, our markets or our industry.

Furthermore, in recent years, the stock market has experienced significant price and volume fluctuations. This volatility has had a significant impact on the market price of securities issued by many companies, including companies in our industry, and often occurs without regard to the operating performance of the affected companies. Therefore, factors that have little or nothing to do with us could cause the price of our common stock to fluctuate, and these fluctuations or any fluctuations related to our company could cause the market price of our common stock to decline materially below the public offering price.

The offering price per share of our common stock offered under this prospectus may not accurately reflect the value of your investment.

Prior to this offering, there has been no market for our common stock. The offering price per share of our common stock offered by this prospectus was negotiated among Lone Star, the underwriters and us. Factors considered in determining the price of our common stock include:

 

    the history and prospects of companies whose principal business is the manufacturing and sale of similar products;

 

    market valuations of those companies;

 

    our capital structure;

 

    general conditions of the securities markets at the time of this offering; and

 

    other factors that we and they deemed relevant.

The offering price may not accurately reflect the value of our common stock and may not be realized upon any subsequent disposition of the shares.

The coverage of our business or our common stock by securities or industry analysts or the absence thereof could adversely affect our stock price and trading volume.

The trading market for our common stock will be influenced in part by the research and other reports that industry or securities analysts may publish about us or our business or industry. We do not currently have, and may never obtain, research coverage by industry or financial analysts. If no or few analysts commence coverage of us, the trading price and volume of our stock would likely be negatively impacted. If analysts do cover us and one or more of them downgrade our stock, or if they issue other unfavorable commentary about us or our industry or inaccurate research, our stock price would likely decline. Furthermore, if one or more of these analysts cease coverage or fail to regularly publish reports on us, we could lose visibility in the financial markets. Any of the foregoing would likely cause our stock price and trading volume to decline.

Lone Star may have conflicts of interest with other stockholders and may limit your ability to influence corporate matters.

Immediately after this offering, Lone Star will beneficially own approximately     % (or     % if the underwriters’ option to purchase additional shares is exercised in full) of our outstanding common stock. See “Principal and Selling Stockholders” for more information on the beneficial ownership of our common stock. As a result of this concentration of stock ownership, Lone Star acting on its own has

 

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sufficient voting power to effectively control all matters submitted to our stockholders for approval, including director elections and proposed amendments to our bylaws or certificate of incorporation. We currently expect that, as discussed in “Management,”              of the              members of our board of directors following this offering will be employees or affiliates of Lone Star.

In addition, this concentration of ownership may delay or prevent a merger, consolidation or other business combination or change in control of our company and make some transactions that might otherwise give you the opportunity to realize a premium over the then-prevailing market price of our common stock more difficult or impossible without the support of Lone Star. Because we have opted out of Section 203 of the Delaware General Corporation Law regulating certain business combinations with interested stockholders, Lone Star may transfer control of us to a third party, which may limit the price that investors are willing to pay in the future for shares of our common stock. After the lock-up period discussed in “Underwriting” expires, Lone Star will be able to transfer control of us to a third-party by transferring its common stock, which would not require the approval of our board of directors or other stockholders. The interests of Lone Star may not always coincide with our interests as a company or the interests of other stockholders. Accordingly, Lone Star could cause us to enter into transactions or agreements of which you would not approve or make decisions with which you would disagree. This concentration of ownership may also adversely affect our share price.

Lone Star is in the business of making investments in companies and may from time to time acquire and hold interests in businesses that compete directly or indirectly with us. Lone Star may also pursue acquisition opportunities that may be complementary to our business, and as a result, those acquisition opportunities may not be available to us. In recognition that principals, members, directors, managers, partners, stockholders, officers, employees and other representatives of Lone Star and its affiliates and investment funds may serve as our directors or officers, our amended and restated certificate of incorporation will provide, among other things, that none of Lone Star or any principal, member, director, manager, partner, stockholder, officer, employee or other representative of Lone Star has any duty to refrain from engaging directly or indirectly in the same or similar business activities or lines of business that we do. In the event that any of these persons or entities acquires knowledge of a potential transaction or matter which may be a corporate opportunity for itself and us, we will not have any expectancy in such corporate opportunity, and these persons and entities will not have any duty to communicate or offer such corporate opportunity to us and may pursue or acquire such corporate opportunity for themselves or direct such opportunity to another person. These potential conflicts of interest could have a material adverse effect on our business, financial condition and results of operations if, among other things, attractive corporate opportunities are allocated by Lone Star to themselves or their other affiliates. The terms of our amended and restated certificate of incorporation are described in full under “Description of Capital Stock—Corporate Opportunities and Transactions with Lone Star.”

Lone Star may also have conflicts of interest with the Company and other stockholders as a result of its status as a party to the tax receivable agreement. For example, the tax receivable agreement gives us the right to terminate the tax receivable agreement with Lone Star’s consent by making a payment equal to the present value of future payments under the tax receivable agreement (based on certain assumptions and deemed events in the agreement, including those relating to our and our subsidiaries’ future taxable income). Lone Star may determine to withhold its consent to terminate the tax receivable agreement at a time when such a termination would be favorable to us and the other stockholders. Furthermore, the tax receivable agreement prohibits us from settling any tax audit without Lone Star’s consent if the outcome of the audit is reasonably expected to affect Lone Star’s rights under the tax receivable agreement. Therefore, Lone Star may determine to withhold consent to a settlement that reduces the payments Lone Star will receive under the tax receivable agreement, even though the settlement might be favorable to us and our stockholders. See “Certain Relationships and Related Party Transactions—Tax Receivable Agreement.”

 

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We will be required to pay Lone Star for certain tax benefits, and these amounts are expected to be material.

In connection with this offering, we will enter into a tax receivable agreement with Lone Star that will provide for the payment by us to Lone Star of         % of the amount of cash savings, if any, in U.S. federal, state, local and non-U.S. income tax that we and our subsidiaries realize (or in some circumstances are deemed to realize) as a result of the utilization of certain pre-offering tax benefits, together with interest accrued at a rate of LIBOR plus          basis points from the date the applicable tax return is due (without extension) until paid. See “Certain Relationships and Related Party Transactions—Tax Receivable Agreement.” These pre-offering tax benefits, which we collectively refer to as the Pre-IPO Tax Benefits, include: (i) tax attributes that resulted from certain transactions undertaken by us prior to this offering and that are attributable to the existing tax basis of our and our subsidiaries’ assets, (ii) the utilization of our and our subsidiaries’ net operating losses and tax credits, if any, attributable to periods prior to this offering and (iii) certain other tax attributes attributable to periods prior to this offering.

We expect that the payments we make under the tax receivable agreement could be substantial. Assuming no material changes in the relevant tax law, and that we and our subsidiaries earn sufficient income to realize the full tax benefits subject to the tax receivable agreement, we currently estimate that future payments under the agreement will aggregate to between $         million and $         million. These payment obligations are our obligations and are not obligations of any of our subsidiaries. Furthermore, these payment obligations are not conditioned upon Lone Star maintaining a continued direct or indirect ownership interest in us. The actual utilization of Pre-IPO Tax Benefits as well as the timing of any payments under the tax receivable agreement will vary depending upon a number of factors, including the amount, character and timing of our and our subsidiaries’ taxable income in the future.

We will not be reimbursed for any payments made to Lone Star under the tax receivable agreement in the event that the tax benefits are disallowed.

Lone Star will not reimburse us for any payments previously made under the tax receivable agreement if such benefits are subsequently disallowed upon a successful challenge by the Internal Revenue Service, although future payments under the agreement would be adjusted to the extent possible to reflect the result of such disallowance. As a result, in certain circumstances, payments could be made under the tax receivable agreement in excess of our cash tax savings if any, from the Pre-IPO Tax Benefits, and we may not be able to recoup those payments, which could adversely affect our liquidity.

In certain cases, payments made by us under the tax receivable agreement may be accelerated and/or significantly exceed the actual benefits we realize in respect of the Pre-IPO Tax Benefits.

The term of the tax receivable agreement will continue until all Pre-IPO Tax Benefits have been utilized or expired, unless we exercise our right to terminate the agreement with Lone Star’s consent, we breach any of our material obligations under the agreement or certain credit events occur with respect to us, in any of which cases we will be required to make a payment to Lone Star equal to the present value of future payments under the tax receivable agreement. Such payment would be based on certain assumptions, including those relating to our and our subsidiaries’ future taxable income. The tax receivable agreement also provides that upon certain mergers, asset sales, other forms of business combinations or other changes of control, our (or our successor’s) payments under the tax receivable agreement for each taxable year after any such event would be based on certain valuation assumptions, including the assumption that we and our subsidiaries have sufficient taxable income to fully utilize the Pre-IPO Tax Benefits. Accordingly, payments under the tax receivable agreement may be made years in advance of the actual realization, if any, of the anticipated future tax benefits and may be significantly greater than the benefits we realize in respect of the Pre-IPO Tax Benefits.

 

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Even if the payments under the tax receivable agreement are not accelerated as described above, such payments may be significantly greater than the benefits we realize in respect of the Pre-IPO Tax Benefits, due to the manner in which payments are calculated under the tax receivable agreement. For example, for purposes of calculating the payments to be made to Lone Star, tax benefits existing at the time of the offering are deemed to be utilized before any post-closing/after-acquired tax benefits. Our obligations under the tax receivable agreement could have a substantial negative impact on our liquidity and could have the effect of delaying, deferring or preventing certain mergers, asset sales, other forms of business combinations or other changes of control.

Because of Lone Star’s significant ownership and control of us, we could become liable for obligations of Lone Star or its affiliates, including other companies Lone Star owns or controls.

As a result of Lone Star’s current beneficial ownership of 100% of our common stock, a court, applying tests based on common control or otherwise, could determine that Lone Star and its affiliates, including us and other companies Lone Star now or in the future may own or control, constitute a “partnership-in-fact,” a “controlled group” or other similar collective. Such a finding could be used to impose on us and other members of the group joint and several liability for the obligations of any Lone Star affiliate that is part of the group, including in respect of pension liabilities under the Employee Retirement Income Security Act of 1974, as amended, or ERISA, and related laws. These pension liabilities could include an obligation to make ongoing contributions to fund a pension plan for another group member and for any unfunded liabilities that may exist at the time a group member terminates or withdraws from an underfunded single employer or multiemployer pension plan, as well as result in the creation of liens against our assets and the assets of other members of the group. Under this theory, we could incur significant liabilities for events beyond our control that are not related to or known by us. Additionally, to the extent a group member maintains an underfunded pension plan, ERISA imposes reporting obligations on group members regarding certain events, including if a member ceases to be a member of the controlled group or if it makes certain dividends, distributions or stock repurchases. These reporting obligations could cause us or Lone Star to seek to delay or reconsider pursuing one or more strategic actions with respect to our company or our common stock.

Following this offering, we will be a “controlled company” within the meaning of the applicable stock exchange rules and, as a result, will qualify for, and intend to rely on, exemptions from certain corporate governance requirements.

Upon completion of this offering, Lone Star will continue to control a majority of the voting power of our outstanding common stock. As a result, we will be a “controlled company” within the meaning of the applicable stock exchange corporate governance standards. Under the relevant stock exchange rules, a company of which more than 50% of the voting power is held by a person or group is a “controlled company” and need not comply with certain requirements, including the requirement that a majority of the board of directors consist of independent directors and the requirements that the compensation and nominating and corporate governance committees be composed entirely of independent directors. Following this offering, we intend to utilize these exemptions. As a result, among other things, we may not have a majority of independent directors and our compensation and nominating and corporate governance committees may not consist entirely of independent directors. Accordingly, you will not have the same protections afforded to stockholders of companies that are subject to all of the applicable stock exchange corporate governance requirements.

Future sales of our common stock in the public market could cause our stock price to fall.

Following completion of this offering, Lone Star will beneficially own approximately              shares or     % of our outstanding shares of common stock (or              shares and     % if the underwriters exercise their option to purchase additional shares in full). We, Lone Star, and our officers and

 

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directors have signed lock-up agreements with the underwriters that will, subject to certain exceptions, restrict the sale of shares of our common stock held by them for 180 days following the date of this prospectus. The underwriters may, without notice except in certain limited circumstances, release all or any portion of the shares of common stock subject to lock-up agreements. See “Underwriting” for a description of these lock-up agreements. The market price of our common stock may decline materially when these restrictions on resale by Lone Star and our other affiliates lapse or if they are waived.

Upon the expiration of the lock-up agreements, all shares held by our affiliates will be eligible for resale in the public market, subject to applicable securities laws, including the Securities Act of 1933, as amended, or the Securities Act. Therefore, unless shares owned by any of our affiliates are registered under the Securities Act, these shares may only be resold into the public markets in accordance with the requirements of an exemption from registration or safe harbor, including Rule 144 and the volume limitations, manner of sale requirements and notice requirements thereof. See “Shares Eligible for Future Sale.” Lone Star will be considered an affiliate of ours after this offering based on their expected share ownership and representation of our board of directors. However, after completion of this offering, pursuant to the terms of a registration rights agreement between Lone Star and us, Lone Star will have the right to demand that we register its shares under the Securities Act as well as the right to include its shares in any registration statement that we file with the Securities and Exchange Commission, or the SEC, subject to certain exceptions. See “Shares Eligible for Future Sale.” Any registration of Lone Star’s shares would enable those shares to be sold in the public market, subject to certain restrictions in the registration rights agreement and the restrictions under the lock-up agreements referred to above. Any sale by Lone Star or other affiliates or any perception in the public markets that such a transaction may occur could cause the market price of our common stock to decline materially.

Following this offering, we intend to file a registration statement on Form S-8 under the Securities Act registering shares under our stock incentive plan. Subject to the terms of the awards pursuant to which these shares may be granted and except for shares held by affiliates who will be subject to the resale restrictions described above, the shares issuable pursuant to our stock incentive plan will be available for sale in the public market immediately after the registration statement is filed. See “Shares Eligible for Future Sale.”

If you purchase shares of common stock sold in this offering, you will experience immediate and substantial dilution and you may suffer additional dilution in the future.

If you purchase shares our common stock in this offering, the value of your shares based on our actual book value will immediately be less than the price you paid. This reduction in the value of your equity is known as dilution. This dilution occurs in large part because Lone Star paid substantially less than the then-equivalent of the initial public offering price when it purchased the Company in the Acquisition. If you purchase shares in this offering, you will suffer, as of                     , 2016, immediate dilution of $         per share in the net tangible book value after giving effect to the sale of common stock in this offering at an assumed initial public offering price of $         per share, which is the midpoint of the estimated price range appearing on the cover of this prospectus, less underwriting discounts and commissions and the estimated expenses payable by us, and the application of the net proceeds as described in “Use of Proceeds.” We also expect to grant stock options, restricted stock and other forms of stock-based compensation to our directors, officers and employees and you will experience additional dilution in the future when these equity awards are exercised or vest, as applicable. If we raise funds in the future by issuing additional securities, any newly issued shares or shares issued upon conversion or exercise of such securities will further dilute your ownership.

 

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We have no present intention to pay dividends on our common stock.

We have no present intention to pay dividends on our common stock. Any determination to pay dividends to holders of our common stock will be at the discretion of our board of directors and will depend upon many factors, including our financial condition, results of operations, projections, liquidity, earnings, legal requirements, restrictions in our credit facilities and agreements governing any other indebtedness we may enter into and other factors that our board of directors deems relevant. See “Dividend Policy.” Accordingly, you may need to sell your shares of our common stock to realize a return on your investment, and you may not be able to sell your shares at or above the price you paid for them.

Our ability to raise capital in the future may be limited.

Our business and operations may consume resources faster than we anticipate. In the future, we may need to raise additional funds through the issuance of new equity securities, debt or a combination of both. However, the lapse or waiver of the lock up restrictions discussed above or any sale or perception of a possible sale by Lone Star, and any related decline in the market price of our common stock, could impair our ability to raise capital. Separately, additional financing may not be available on favorable terms, or at all. If adequate funds are not available on acceptable terms, we may be unable to fund our capital requirements. If we issue new debt securities, the debt holders would have rights senior to common stockholders to make claims on our assets, and the terms of any debt could restrict our operations, including our ability to pay dividends on our common stock. If we issue additional equity securities, existing stockholders will experience dilution, and the new equity securities could have rights senior to those of our common stock. Because our decision to issue securities in any future offering will depend on market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing or nature of our future offerings. Thus, our stockholders bear the risk of our future securities offerings reducing the market price of our common stock and diluting their interest.

We are a holding company and depend on the cash flow of our subsidiaries.

We are a holding company with no material assets other than the equity interests of our subsidiaries. Our subsidiaries conduct substantially all of our operations and own substantially all of our assets and intellectual property. Consequently, our cash flow and our ability to meet our obligations and pay any future dividends to our stockholders depends upon the cash flow of our subsidiaries and their ability to make payments, directly or indirectly, to us in the form of dividends, distributions and other payments. Any inability on the part of our subsidiaries to make payments to us could have a material adverse effect on our business, financial condition and results of operations.

Provisions of our amended and restated governing documents, Delaware law and other documents could discourage, delay or prevent a merger or acquisition at a premium price.

Provisions in our amended and restated certificate of incorporation and amended and restated bylaws that we intend to adopt prior to the consummation of this offering may have the effect of delaying or preventing a change of control or changes in our management. For example, our amended and restated certificate of incorporation and amended and restated bylaws will include provisions that:

 

    permit us to issue, without stockholder approval, preferred stock in one or more series and, with respect to each series, fix the number of shares constituting the series and the designation of the series, the voting powers, if any, of the shares of the series and the preferences and other special rights, if any, and any qualifications, limitations or restrictions, of the shares of the series;

 

    prevent stockholders from calling special meetings;

 

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    restrict the ability of stockholders to act by written consent after such time as Lone Star owns less than a majority of our common stock;

 

    limit the ability of stockholders to amend our certificate of incorporation and bylaws;

 

    require advance notice for nominations for election to the board of directors and for stockholder proposals;

 

    do not permit cumulative voting in the election of our directors, which means that the holders of a majority of our common stock may elect all of the directors standing for election; and

 

    establish a classified board of directors with staggered three-year terms.

These provisions may discourage, delay or prevent a merger or acquisition of our company, including a transaction in which the acquirer may offer a premium price for our common stock.

Our amended and restated certificate of incorporation will include an exclusive forum clause, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us.

Our amended and restated certificate of incorporation will provide that, unless we consent in writing to the selection of an alternative forum, the sole and exclusive forum for any stockholder (including any beneficial owner) to bring (i) any derivative action or proceeding brought on our behalf, (ii) any action asserting a claim of breach of a fiduciary duty owed by any of our directors, officers, or employees to us or to our stockholders, (iii) any action asserting a claim arising pursuant to any provision of the Delaware General Corporation Law, or the DGCL, or our certificate of incorporation or bylaws, or (iv) any action asserting a claim governed by the internal affairs doctrine, will be a state court located within the State of Delaware (or, if no state court located within the State of Delaware has jurisdiction, the federal district court for the District of Delaware); in all cases subject to such court having personal jurisdiction over the indispensable parties named as defendants. Any person or entity purchasing or otherwise acquiring any interest in shares of our capital stock is deemed to have notice of and consented to the foregoing provisions. The exclusive forum clause may limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us. It is also possible that, notwithstanding such exclusive forum clause, a court could rule that such a provision is inapplicable or unenforceable. See “Description of Capital Stock—Exclusive Forum Clause.”

We will incur increased costs and obligations as a result of being a publicly-traded company.

As a company with publicly-traded securities, we will be subject to the requirements of the Securities Exchange Act of 1934, as amended, or the Exchange Act, the Sarbanes-Oxley Act, the Dodd-Frank Wall Street Reform and Consumer Protection Act, the listing requirements of the applicable stock exchange and other applicable securities rules and regulations. These rules and regulations require that we adopt additional controls and procedures and disclosure, corporate governance and other practices thereby significantly increasing our legal, financial and other compliance costs. These new obligations will also make other aspects of our business more difficult, time-consuming or costly and increase demand on our personnel, systems and other resources. For example, to maintain and improve the effectiveness of our disclosure controls and procedures and internal control over financial reporting, we will need to commit significant resources, hire additional staff and provide additional management oversight. Furthermore, as a result of disclosure of information in this prospectus and in our Exchange Act and other filings required of a public company, our business and financial condition will become more visible, which we believe may give some of our competitors who may not be similarly required to disclose this type of information a competitive advantage. In addition to these added costs and burdens, if we are unable to satisfy our obligations as a public company, we could be subject to delisting of our common stock, fines, sanctions, other regulatory actions and civil litigation, any of which could negatively affect the price of our common stock.

 

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FORWARD-LOOKING STATEMENTS

This prospectus contains “forward-looking statements.” These forward-looking statements are included throughout this prospectus, including in the sections entitled “Prospectus Summary,” “Risk Factors,” “Use of Proceeds,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Business” and “Certain Relationships and Related Party Transactions,” and relate to matters such as our industry, business strategy, goals and expectations concerning our market position, future operations, margins, profitability, capital expenditures, liquidity, capital resources and other financial and operating information. We have used the words “approximately,” “anticipate,” “assume,” “believe,” “contemplate,” “continue,” “could,” “estimate,” “expect,” “future,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “seek,” “should,” “target,” “will” and similar terms and phrases to identify forward-looking statements in this prospectus. 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 level of construction activity, particularly in the residential construction and non-residential construction markets;

 

    government funding of infrastructure and related construction activities;

 

    the highly competitive nature of our industry and our ability to effectively compete;

 

    energy costs;

 

    the availability and price of the raw materials we use in our business;

 

    our ability to implement our growth strategy;

 

    our dependence on key customers and the absence of long-term agreements with these customers;

 

    the level of construction activity in Texas;

 

    disruption at one of our manufacturing facilities or in our supply chain;

 

    construction project delays and our inventory management;

 

    our ability to successfully integrate our recent acquisitions;

 

    labor disruptions and other union activity;

 

    a tightening of mortgage lending or mortgage financing requirements;

 

    our current dispute with HeidelbergCement related to the payment of an earn out;

 

    compliance with environmental laws and regulations;

 

    compliance with health and safety laws and regulations and other laws and regulations to which we are subject;

 

    our dependence on key executives and key management personnel;

 

    our ability to retain and attract additional skilled technical or sales personnel;

 

    credit and non-payment risks of our customers;

 

    warranty and related claims;

 

    legal and regulatory claims;

 

    the seasonality of our business and its susceptibility to severe adverse weather;

 

    our ability to maintain sufficient liquidity and ensure adequate financing or guarantees for large projects;

 

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    delays or outages in our information technology systems and computer networks; and

 

    additional factors discussed under the sections captioned “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business.”

The forward-looking statements contained in this prospectus 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 and other factors, many of which are beyond our control, as well as the other factors described in the section entitled “Risk Factors.” 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. 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. We caution that you should not place undue reliance on any of our forward-looking statements. Any forward-looking statement made by us in this prospectus speaks only as of the date on which we make it. 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.

 

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USE OF PROCEEDS

We estimate that our proceeds from this offering will be approximately $         million, after deducting underwriting discounts and commissions and estimated offering expenses payable by us, based on an assumed offering price of $         per share, the midpoint of the estimated initial public offering price range set forth on the cover of this prospectus. We intend to use the net proceeds from this offering as follows:

 

    $         to repay outstanding indebtedness; and

 

    the remainder for working capital and other general corporate purposes.

Pending use of the net proceeds from this offering described above, we may invest the net proceeds in short- and intermediate-term interest-bearing obligations, investment-grade instruments, certificates of deposit or direct or guaranteed obligations of the United States government.

Each $1.00 increase or decrease in the assumed initial public offering price of $         per share, the midpoint of the estimated initial public offering price range set forth on the cover page of this prospectus, would increase or decrease the net proceeds to us from this offering by approximately $         million, assuming the number of shares offered, as set forth on the cover page of this prospectus, remains the same, and after deducting underwriting discounts and commissions and estimated offering expenses payable by us.

The selling stockholder will receive approximately $         million (or approximately $         million if the underwriters exercise in full their option to purchase additional shares) in gross proceeds from this offering, based on an assumed offering price of $         per share, the midpoint of the estimated initial public offering price range set forth on the cover of this prospectus. We will not receive any proceeds from the sale of shares by the selling stockholder.

 

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DIVIDEND POLICY

On June 16, 2016, we assumed an incremental borrowing of $345.0 million under the Senior Term Loan that was used to pay a dividend of the same amount to Lone Star Fund IX (U.S.), L.P., or the Debt Recapitalization.

We have no present intention to pay cash dividends on our common stock. Any determination to pay dividends to holders of our common stock will be at the discretion of our board of directors and will depend upon many factors, including our financial condition, results of operations, projections, liquidity, earnings, legal requirements, restrictions in the agreements governing our existing indebtedness and any other indebtedness we may enter into and other factors that our board of directors deems relevant.

The agreements governing our existing indebtedness contain, and debt instruments that we enter into in the future may contain, covenants that place limitations on the amount of dividends we may pay. See the section entitled “Description of Certain Indebtedness.” In addition, under Delaware law, our board of directors may declare dividends only to the extent of our surplus, which is defined as total assets at fair market value minus total liabilities, minus statutory capital, or, if there is no surplus, out of our net profits for the then current and immediately preceding year.

 

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CAPITALIZATION

The following table sets forth our cash and cash equivalents and capitalization as of June 30, 2016:

 

    on an actual basis; and

 

    on a pro forma basis to give effect to the following:

 

    the Reorganization;

 

    a              for one stock split, which will occur shortly before consummation of this offering; and

 

    on a pro forma, as adjusted basis to give effect to the foregoing and the issuance and sale of              shares of our common stock offered by us in this offering, based on an assumed offering price of $         per share, the midpoint of the estimated initial public offering price range set forth on the cover of this prospectus, after deducting underwriting discounts and commissions and estimated offering expenses payable by us, and the application of such proceeds as described in “Use of Proceeds.”

You should read this table together with the information in this prospectus under “Use of Proceeds,” “Selected Historical Financial and Operating Data,” “Unaudited Pro Forma Condensed Combined Financial Information,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Description of Capital Stock,” and with the combined financial statements and the related notes to those statements included elsewhere in this prospectus.

 

     As of June 30,
2016
 
     Actual      Pro forma      Pro forma,
as adjusted
 
     (in thousands, except share data)  

Cash and cash equivalents

   $                        $                        $                    
  

 

 

    

 

 

    

 

 

 

Debt:

        

Revolver

   $                        $                        $                    

Junior Term Loan

        

Senior Term Loan

        
  

 

 

    

 

 

    

 

 

 

Total debt

   $                        $                        $                    
  

 

 

    

 

 

    

 

 

 

Stockholders’ equity:

        

Undesignated preferred stock, par value $0.001 per share: no shares authorized, issued or outstanding actual,          shares authorized, no shares issued and outstanding pro forma

        

Common stock, $0.001 par value per share;          shares authorized,          shares issued and outstanding, actual;          shares authorized,          shares issued and outstanding, pro forma

        

Contributed capital

        

Accumulated other comprehensive loss

        

Retained deficit

        
  

 

 

    

 

 

    

 

 

 

Total stockholders’ equity

        
  

 

 

    

 

 

    

 

 

 

Total capitalization

   $                        $                        $                    
  

 

 

    

 

 

    

 

 

 

 

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DILUTION

Dilution represents the difference between the amount per share paid by investors in this offering and the as adjusted net tangible book value per share of our common stock immediately after this offering. The data in this section have been derived from our condensed combined balance sheet as of March 31, 2016. Net tangible book value per share is equal to our total tangible assets less the amount of our total liabilities, divided by the sum of the number of our shares of common stock outstanding. Our net tangible book value as of March 31, 2016 was $         million, or $         per share of common stock.

After giving effect to our receipt of the estimated net proceeds from our sale of common stock in this offering, based on an assumed offering price of $         per share, the midpoint of the estimated initial public offering price range set forth on the cover page of this prospectus, and after deducting the underwriting discounts and commissions and other estimated offering expenses payable by us and the application of such proceeds as described in the section entitled “Use of Proceeds,” our net tangible book value, pro forma, as of March 31, 2016 would have been $         million, or $         per share of common stock. This represents an immediate increase in net tangible book value to our existing stockholders of $         per share and an immediate dilution to new investors in this offering of $         per share. The following table illustrates this per share dilution:

 

Assumed initial public offering price per share

   $     

Net tangible book value per share of common stock as of March 31, 2016

   $     

Pro forma increase in net tangible book value per share attributable to new investors

   $     

Pro forma net tangible book value per share after the offering

   $     
  

 

 

 

Dilution per share to new investors

   $                
  

 

 

 

The following table shows on a pro forma basis at March 31, 2016, after giving effect to the stock split and the Reorganization which will occur prior to the consummation of this offering, the total cash consideration paid to us and the average price per share paid by Lone Star and by new investors in this offering before deducting underwriting discounts and estimated offering expenses payable by us.

 

     Shares purchased     Total consideration     Average
price
per share
 

(in millions, except share and per share data)

       Number            %             Number            %        

LSF9 Concrete Mid-Holdings Ltd

                     $     

New investors

                     $     
  

 

  

 

 

   

 

  

 

 

   

 

 

 

Total

        100        100   $                

The information in the preceding table is based on an assumed offering price of $         per share, the midpoint of the estimated initial public offering price range set forth on the cover page of this prospectus. A $1.00 increase or decrease in the assumed initial public offering price per share would increase or decrease, respectively, the pro forma net tangible book value per share of common stock after this offering by $         million and increase or decrease the dilution per share of common stock to new investors in this offering by $         per share, in each case calculated as described above and assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same.

If the underwriters exercise their option to purchase additional shares in full, Lone Star would own approximately     % and our new investors would own approximately     % of the total number of shares of our common stock outstanding immediately after this offering (or     % and     %, respectively, if the underwriters do not exercise in full their option to purchase additional shares), based on shares outstanding after this offering.

 

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An aggregate of              additional shares of our common stock will initially be available for future awards under the equity incentive plan that we intend to implement in connection with this offering and are not included in the above discussion and table. To the extent that we grant awards in the future with exercise prices below the initial public offering price in this offering, investors purchasing in this offering will incur additional dilution. See “Shares Eligible for Future Sale.”

 

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SELECTED HISTORICAL FINANCIAL DATA

The following selected combined financial data should be read in conjunction with “Capitalization,” “Unaudited Pro Forma Condensed Combined Financial Information,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Certain Relationships and Related Party Transactions” and “Description of Certain Indebtedness,” our audited and unaudited condensed combined financial statements and the related notes and the other financial information included elsewhere in this prospectus.

The following tables set forth, for the periods and dates indicated, our selected historical financial data. The accompanying historical financial statements are presented for the “Predecessor,” which are the combined financial statements of HeidelbergCement’s building products business in the United States and Eastern Canada for the period preceding the Acquisition, and the “Successor,” which are the combined financial statements of the Company and subsidiaries for the period following the Acquisition. The Predecessor’s combined statements of operations data for the years ended December 31, 2011 and 2012 and the Predecessor’s combined balance sheet data as of December 31, 2011 and 2012 have been derived from the audited combined financial statements of HeidelbergCement’s building products business in the United States and Eastern Canada, which are not included elsewhere in this prospectus. The Predecessor’s combined statements of operations data for the years ended December 31, 2013 and 2014 and the period from January 1, 2015 through March 13, 2015 and the Predecessor’s combined balance sheet data as of December 31, 2014 have been derived from the audited combined financial statements of HeidelbergCement’s building products business in the United States and Eastern Canada, which are included elsewhere in this prospectus. The Successor’s combined statements of operations data for the period from March 14, 2015 through December 31, 2015 and balance sheet data as of December 31, 2015 have been derived from our audited combined financial statements, which are included elsewhere in this prospectus. The Successor’s combined balance sheet data as of March 31, 2016 and combined statements of operations data for the period from March 14, 2015 through March 31, 2015 and the three months ended March 31, 2016 are derived from our unaudited condensed combined financial statements, which are included elsewhere in this prospectus.

The Predecessor’s financial statements may not necessarily be indicative of our cost structure, financial position, results of operations or cash flows that would have existed if HeidelbergCement’s building products business in the United States and Eastern Canada operated as a stand-alone, independent business. Accordingly, the historical results should not be relied upon as an indicator of our future performance. The Acquisition was accounted for as a business combination, which resulted in a new basis of accounting. The Predecessor’s and the Successor’s financial statements are not comparable as a result of applying a new basis of accounting. See the notes to our audited combined financial statements for additional information regarding the accounting treatment of the Acquisition. In the opinion of management, the unaudited interim financial statements include all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of our financial position and operating results for these periods and as of such date. Results from interim periods are not necessarily indicative of results that may be expected for the entire year and historical results are not indicative of the results to be expected in the future. The selected financial data presented below represent portions of our financial statements and are not complete.

 

 

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    (in thousands)  
    Successor          Predecessor  

(in thousands)

  Three
months
ended
March 31,
2016
    For the
period
from
March 14,
2015 to
March 31,
2015
    For the
period

from
March 14,
2015 to
December 31,
2015
         For the
period
from
January 1,
2015 to
March 13,
2015
    Year ended
December 31,
2014
    Year ended
December 31,
2013
    Year ended
December 31,
2012
    Year ended
December 31,
2011
 

Statement of Operations Data:

                   

Net sales

  $ 217,334      $ 38,014      $ 722,664          $ 132,620      $ 736,963      $ 697,948      $ 760,208      $ 796,586   

Cost of goods sold

    (179,403     (35,324     (626,498         (117,831     (631,454     (611,660     (688,088     (712,062
 

 

 

   

 

 

   

 

 

       

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross Profit

    37,931        2,690        96,166            14,789        105,509        86,288        72,120        84,524   
 

 

 

   

 

 

   

 

 

       

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Selling, general and administrative expenses

    (37,945     (18,722     (134,971         (21,683     (102,107     (87,393     (99,939     (99,603

Impairment and restructuring charges

    —          8        (1,185         (542     (4,219     (250,577     (15,267     (6,716

Earnings from equity method investee

    1,303        115        8,429            67        4,451        (216     (870     —     

Other operating income

    1,778        813        832            994        6,965        9,232        (803     865   

Interest expense

    (17,290     (2,474     (45,953         (84     —          —          —          —     

Other income (expense), net

    (81     —          (326         (39     (594     947        10,087        6,946   

Net income (loss) before taxes

    (14,304     (17,570     (77,008         (6,498     10,005        (241,719     (34,672     (13,984

Income tax (expense) benefit

    10,368        —          (5,778         742        (2,417     (2,561     (6,843     (14,794

Income (loss) from continuing operations

    (3,936     (17,570     (82,786         (5,756     7,588        (244,280     (41,515     (28,778

Discontinued Operations

    —          —          —              —          1,260        (3,018     (20,150     (8,832

Net income (loss)

  $ (3,936   $ (17,570   $ (82,786       $ (5,756   $ 8,848      $ (247,298   $ (61,665   $ (37,610
 

Statements of Cash Flows Data:

                   

Net cash provided by (used in) operating activities

  $ (35,834   $ 19,891      $ 121,417          $ (48,224   $ 25,918      $ 31,686       

Net cash provided by (used in) investing activities

    (73,501     (640,428     (898,039         (2,762     (1,901     (55    

Net cash provided by (used in) financing activities

  $ 77,809      $ 660,410      $ 822,580          $ 60,907      $ (23,990   $ (31,636    
 

Balance Sheet Data:

                   

Cash and cash equivalents

  $ 11,803        $ 43,590            $ 42      $ 5      $ 10      $ 15   

Property, plant & equipment, net

    418,499          388,924              414,073        423,826        471,161        558,251   

Total assets

    1,002,883          938,875              846,168        864,842        1,187,826        1,295,666   

Total debt

    724,315          705,829              —          —          —          —     

Total parent company net investment

    —            —                657,473        700,938        984,404        1,096,396   

Shareholder’s equity

    104,531          52,315              —          —          —          —     

 

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UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION

The following unaudited pro forma condensed combined financial information and the related notes present our unaudited pro forma condensed combined statements of operations for the three months ended March 31, 2016 and 2015 and for the year ended December 31, 2015, and our unaudited pro forma condensed combined balance sheet data as of March 31, 2016. The unaudited pro forma condensed combined financial information has been derived by aggregating our audited and unaudited historical combined financial statements, and the historical financial statements of U.S. Pipe, each included elsewhere in this prospectus, and making certain pro forma adjustments to such aggregated financial information to give effect to the transactions defined below, collectively the Transactions:

 

    the Acquisition;

 

    the Cretex Acquisition;

 

    the Sherman-Dixie Acquisition;

 

    the U.S. Pipe Acquisition and the reallocation of debt to fund a portion of the purchase price;

 

    our sale of 49 properties in the United States and Eastern Canada and our concurrent agreement to lease back each of those properties from the respective buyers for an initial term of 20 years, or the Sale Leaseback;

 

    Our assumption of an incremental borrowing on the Senior Term Loan in June 2016 that was used to pay a dividend to Lone Star Fund IX (U.S.), L.P., or the Debt Recapitalization; and

 

    the completion of this offering and the anticipated use of proceeds.

The Transactions, along with the assumptions and estimates underlying the adjustments to the unaudited pro forma condensed combined financial information, are described in more detail in the accompanying notes, which should be read together with the unaudited pro forma condensed combined financial information.

 

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The table below provides the date each Transaction closed, the date and/or periods each Transaction has been reflected in our historical financial statements and the date and/or periods each Transaction is shown in the unaudited pro forma condensed combined financial information giving effect to the Transactions as if they had occurred on the dates shown.

 

Transaction

 

Transaction
close date(s)

 

Balance Sheet
reflected in historical
financial statements:

 

Period
reflected in
historical
financial
statements:

 

Balance Sheet
and/or Period
reflected in the
pro forma
financial
statements:

 

Pro forma
information
provided as if
Transaction
occurred:

Acquisition

  March 13, 2015   As of March 31, 2016 and December 31, 2015   March 14, 2015 through March 31, 2016   January 1, 2015 through March 13, 2015   January 1, 2015

Cretex

Acquisition

  October 1, 2015   As of March 31, 2016 and December 31, 2015   October 1, 2015 through March 31, 2016   January 1, 2015 through September 30, 2015   January 1, 2015

Sherman-Dixie

Acquisition

  January 29, 2016   As of March 31, 2016   January 30, 2016 through March 31, 2016   January 1, 2015 through January 29, 2016   January 1, 2015

U.S. Pipe

Acquisition

  April 15, 2016   Not included   Not included   As of March 31, 2016 and for period January 1, 2015 through March 31, 2016   January 1, 2015 (Income Statement) and March 31, 2016 (Balance Sheet)

Sale Leaseback

  April 5, 2016 and April 14, 2016   Not included   Not included   As of March 31, 2016 and for period January 1, 2015 through March 31, 2016   January 1, 2015 (Income Statement) and March 31, 2016 (Balance Sheet)

Debt

Recapitalization

  June 16, 2016   Not included   Not included   As of March 31, 2016 and for period January 1, 2015 through March 31, 2016   January 1, 2015 (Income Statement) and March 31, 2016 (Balance Sheet)

Offering

  Upon the offering closing date   Not included   Not included   As of March 31, 2016 and for period January 1, 2015 through March 31, 2016   January 1, 2015 (Income Statement) and March 31, 2016 (Balance Sheet)

The unaudited pro forma condensed combined balance sheet as of March 31, 2016 and unaudited pro forma condensed combined statements of operations for the three months ended March 31, 2016 and 2015 and for the year ended December 31, 2015 have been prepared in accordance with Article 11 of Regulation S-X, using the assumptions set forth in the notes to the unaudited pro forma condensed combined financial information. The information provided for the three month period ended March 31, 2015 reflects a period for which pro forma information under Article 11 of Regulation S-X is not required to be presented herein. However, the information provided for this period has been included to provide additional information and comparable analysis to our historical and pro forma results of operations for the three months ended March 31, 2016 given the significant impact of these Transactions on our business. Also included in the notes to the unaudited pro forma condensed combined financial information is a note setting forth certain pro forma combined operating results by segment for the comparable periods.

The unaudited pro forma condensed combined financial information has been presented for illustrative purposes only and is based upon available information and reflects estimates and certain assumptions made by our management that we believe are reasonable. Actual adjustments may differ

 

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materially from the information presented herein. The unaudited pro forma condensed combined financial information does not purport to represent what our combined results of operations and financial position would have been had the Transactions occurred on the dates indicated. They are also not intended to project our combined results of operations or financial position for any future period or date.

The unaudited pro forma condensed combined financial information does not reflect any additional costs that may arise from being a public company or the realization of any expected cost savings, operating efficiencies or other synergies that may result from the Transactions as a result of restructuring activities or other planned cost savings initiatives following the completion of the Transactions, unless such costs have been realized in the historical financial statements.

The pro forma financial statements should be read in conjunction with “Capitalization,” “Selected Historical Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Certain Relationships and Related Party Transactions,” “Description of Certain Indebtedness” and our audited and unaudited condensed combined financial statements and the related notes and the other financial information included elsewhere in this prospectus.

We have calculated pro forma earnings per share assuming a total of              shares of common stock outstanding after the consummation of this offering. Since we are a combination of entities under common control and did not have any share capital as of March 31, 2016, we have not calculated earnings per share on a historical basis.

 

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Forterra, Inc.

Unaudited Pro Forma Condensed Combined Statement of Operations

For the Three Months Ended March 31, 2016

(In Thousands, Except Per Share Data)

 

                Pro Forma Adjustments        
    Forterra
Historical
    U.S. Pipe
Historical
    Sherman-
Dixie
Acquisition
(4)
          U.S. Pipe
Acquisition
(5)
          Sale
Leaseback
(6)
    Debt
Recapitalization
(7)
    Offering
(8)
    Pro Forma
Combined1
 

Net sales

  $ 217,334      $ 141,856      $ 2,893        4(a)      $ —          $ —        $ —        $ —        $ 362,083   

Cost of goods sold

    179,403        115,956        2,503        4(a)        (2,181     5(e)        —          —          —          295,772   
        91        4(b)               
 

 

 

   

 

 

   

 

 

     

 

 

     

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

  $ 37,931      $ 25,900      $ 299        $ 2,181        $ —        $ —        $ —        $ 66,311   

Selling, general & administrative expenses

    (37,945     (13,587     (795     4(a)        (7,968     5(f)        —          —          —          (60,415
        (120     4(c)               

Other operating income (expenses)

    3,081        —          —            —            —          —          —          3,081   
 

 

 

   

 

 

   

 

 

     

 

 

     

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from operations

  $ 3,067      $ 12,313      $ (616     $ (5,787     $ —        $ —        $ —        $ 8,977   

Other income (expenses)

                   

Interest expense

    (17,290     (5,649     (125     4(d)        2,673        5(g)        (4,327     (5,839     —          (30,557

Other income (expenses), net

    (81     102        2          —            —          —          —          23   
 

 

 

   

 

 

   

 

 

     

 

 

     

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations before income taxes

    (14,304     6,766        (739       (3,114       (4,327     (5,839     —          (21,557

Income tax (expense) benefit

    10,368        (2,226     —          4(e)        —          5(j)        —          —            —          8,142   

Less: Net income/(loss) from noncontrolling interest

    —          500        —            (500       —            —          —     
 

 

 

   

 

 

   

 

 

     

 

 

     

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

  $ (3,936   $ 4,040      $ (739     $ (2,614     $ (4,327   $ (5,839   $ —        $ (13,415
 

 

 

   

 

 

   

 

 

     

 

 

     

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma net loss per share—basic and diluted

  

      —     

Pro forma common shares outstanding—basic and diluted

  

      —     

See notes to unaudited pro forma condensed combined financial information.

 

1  The Pro Forma Combined amounts do not currently reflect the receipt of or any anticipated application of the proceeds from this offering.

 

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Forterra, Inc.

Unaudited Pro Forma Condensed Combined Statement of Operations

For the Three Months Ended March 31, 2015

(In Thousands, Except Per Share Data)

 

    Predecessor     Successor           Pro forma adjustments        
    January 1 to
March 13,
2015
    March 14 to
March 31,
2015
    U.S. Pipe
Historical
    Acquisition
(2)
          Cretex
Acquisition
(3)
          Sherman-
Dixie
Acquisition
(4)
          U.S. Pipe
Acquisition
(5)
          Sale
Leaseback
(6)
    Debt
Recapitalization
(7)
    Offering
(8)
    Pro Forma
Combined1
 

Net sales

  $ 132,620      $ 38,014      $ 126,195      $ —          $ 18,794        3(a)      $ 9,096        4(a)        15,935        5(k)      $ —        $ —        $ —        $ 340,654   

Cost of goods sold

    117,831        35,324        112,334        (303     2(a)        21,610        3(a)        8,595        4(a)        (1,572     5(e)        —          —          —          308,288   
                708        3(b)        199        4(b)        13,562        5(k)           
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

     

 

 

     

 

 

     

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit (loss)

  $ 14,789      $ 2,690      $ 13,861      $ 303        $ (3,524     $ 302        $ 3,945        $ —        $ —        $ —        $ 32,366   

Selling, general & administrative expenses

    (21,683     (18,722     (12,735     (1,084     2(b)        (1,589     3(a)        (1,539     4(a)        (8,731     5(f)        —          —          —          (69,102
                (749     3(c)        (752     4(c)        (1,518     5(k)           

Other operating income (expense), net

  $ 519      $ 936                              —          1,455   
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

     

 

 

     

 

 

     

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

  $ (6,375   $ (15,096   $ 1,126      $ (781     $ (5,862     $ (1,989     $ (6,304     $ —        $ —        $ —        $ (35,281

Other income (expenses)

                               

Interest expense

    (84     (2,474     (4,618     (10,212     2(c)        (4,240     3(d)        (388     4(d)        1,535        5(g)        (4,242     (5,839     —          (30,562

Other income (expense), net

    (39     —          22        —            —            12          (16     5(k)        —          —          —          (21
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

     

 

 

     

 

 

     

 

 

   

 

 

   

 

 

   

 

 

 

Loss from continuing operations before income taxes

    (6,498     (17,570     (3,470     (10,993       (10,102       (2,365       (4,785       (4,242     (5,839     —          (65,864

Income tax (expense) benefit

    742        —          527        —          2(d)        —          3(e)        —          4(e)        —          5(j)        —          —          —          1,269   

Less: Net income/(loss) from noncontrolling interest

          380        —            —            —            (380       —          —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

     

 

 

     

 

 

     

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

  $ (5,756   $ (17,570   $ (3,323   $ (10,993     $ (10,102     $ (2,365     $ (4,405     $ (4,242   $ (5,839   $ —        $ (64,595
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

     

 

 

     

 

 

     

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma net loss per share—basic and diluted

  

      —     

Pro forma common shares outstanding—basic and diluted

  

      —     

See notes to unaudited pro forma condensed combined financial information.

 

1  The Pro Forma Combined amounts do not currently reflect the receipt of or any anticipated application of the proceeds from this offering.

 

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Forterra, Inc.

Unaudited Pro Forma Condensed Combined Statement of Operations

For the Year Ended December 31, 2015

(In Thousands, Except Per Share Data)

 

    Predecessor     Successor           Pro forma adjustments        
    January 1 to
March 13,
2015
    March 14 to
December 31,
2015
    U.S. Pipe
Historical
    Acquisition
(2)
          Cretex
Acquisition
(3)
          Sherman-
Dixie
Acquisition
(4)
          U.S. Pipe
Acquisition
(5)
          Sale
Leaseback
(6)
    Debt
Recapitalization
(7)
    Offering
(8)
    Pro
Forma
Combined1
 

Net sales

  $ 132,620      $ 722,664      $ 618,119      $ —            150,168        3(a)      $ 53,920        4(a)      $ 55,882        5(k)      $ —        $ —        $ —        $ 1,733,373   

Cost of goods sold

    117,831        626,498        516,561        (303     2(a)        127,391        3(a)        44,147        4(a)        (7,838     5(e)        —          —          —          1,474,743   
                2,263        3(b)        811        4(b)        47,382        5(k)           
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

     

 

 

     

 

 

     

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

  $ 14,789      $ 96,166      $ 101,558      $ 303        $ 20,514        $ 8,962        $ 16,338        $ —        $ —        $ —        $ 258,630   

Selling, general & administrative expenses

    (21,683     (134,971     (47,573     (1,084     2(b)        (5,854     3(a)        (11,033     4(a)        (36,196     5(f)        —          —          —          (271,253
                (5,122     3(c)        (2,408     4(c)        (5,329     5(k)           

Other operating income (expense), net

    519        8,076        3,605                            —          12,200   
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

     

 

 

     

 

 

     

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from operations

  $ (6,375   $ (30,729   $ 57,590      $ (781     $ 9,538        $ (4,479     $ (25,187     $ —        $ —        $ —        $ (423

Other income (expenses)

                               

Interest expense

    (84     (45,953     (20,175     (10,212     2(c)        (12,720     3(d)        (1,552     4(d)        8,130        5(g)        (16,969     (23,356     —          (122,891

Other income (expenses), net

    (39     (326     1,177        —            —            125          44        5(k)        —          —          —          981   
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

     

 

 

     

 

 

     

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations before income taxes

    (6,498     (77,008     38,592        (10,993       (3,182       (5,906       (17,013       (16,969     (23,356     —          (122,333

Income tax (expense) benefit

    742        (5,778     (13,358     —          2(d)        —          3(e)        876        4(e)        —          5(j)        —          —          —          (17,518

Less: Net income/(loss) from noncontrolling interest

          3,457        —            —            —            (3,457       —          —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

     

 

 

     

 

 

     

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

  $ (5,756   $ (82,786   $ 21,777      $ (10,993     $ (3,182     $ (5,030     $ (13,556     $ (16,969   $ (23,356   $ —        $ (139,851
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

     

 

 

     

 

 

     

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma net loss per share—basic and diluted

  

      —     

Pro forma common shares outstanding—basic and diluted

  

      —     

See notes to unaudited pro forma condensed combined financial information.

 

1  The Pro Forma Combined amounts do not currently reflect the receipt of or any anticipated application of the proceeds from this offering.

 

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Forterra, Inc.

Unaudited Pro Forma Condensed Combined Balance Sheet

As of March 31, 2016

(In Thousands)

 

                Pro forma adjustments        
    Forterra
Historical
    U.S. Pipe
Historical
    U.S. Pipe
Acquisition
(5)
          Sale
Leaseback
(6)
    Debt
Recapitalization
(7)
    Offering
(8)
    Pro Forma
Combined1
 

ASSETS

               

Current assets

               

Cash and cash equivalents

  $ 11,803      $ 2,182      $ (154,284     5(a)      $ 209,673      $ (3,314   $ —        $ 66,060   

Receivables, net

    143,699        85,574        13,454        5(b)        —          —          —          242,727   

Inventories

    231,401        95,321        7,677        5(c)        —          —          —          334,399   

Other current assets

    6,053        10,388        (5,742     5(b)        —          —          —          10,699   

Deferred income taxes

    —          2,446        (2,446     5(d)        —          —          —          —     
 

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

   

 

 

 

Total current assets

    392,956        195,911        (141,341       209,673        (3,314     —          653,885   
 

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

   

 

 

 

Non-current assets

               

Property, plant and equipment, net

    418,499        152,629        93,612        5(e)        —          —          —          664,740   

Goodwill and other intangible assets, net

    134,595        63,683        483,851        5(f)        —          —          —          682,129   

Investment in equity method investees

    56,091        —          —            —          —          —          56,091   

Deferred tax asset

    742        —          —            —          —          —          742   

Other long term assets

    —          3,031        (3,031     5(d)        —          —          —          —     
 

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

  $ 1,002,883      $ 415,254      $ 433,091        $ 209,673      $ (3,314   $ —        $ 2,057,587   
 

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

   

 

 

 

LIABILITIES AND EQUITY

               

Current liabilities

               

Trade payables

  $ 101,709      $ 37,061      $ 19,812        5(b)        —          —          —        $ 158,582   

Accrued liabilities

    45,546        17,659        1,183        5(b)        —          —          —          64,388   

Note Payable current portion

    —          82,337        (82,337     5(g)        —          —          —          —     

Deferred revenue

    16,443        —          —            —          —          —          16,443   

Other current liabilities

    —          —          —            —          —          —          —     
 

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

   

 

 

 

Total current liabilities

    163,698        137,057        (61,342       —          —          —          239,413   
 

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

   

 

 

 

Non-current liabilities

               

Deferred tax liability

    —          36,151        122,246        5(h)        —          —          —          158,397   

Senior Term Loan

    468,027        169,273        34,127        5(g)        —          338,236        —          1,009,663   

Junior Term Loan

    237,261        —          —            —          —          —          237,261   

Revolving credit facility

    19,027        —          1,600        5(g)        —          —          —          20,627   

Other long term liabilities

    10,339        9,048        1,575        5(b)        209,673        —          —          230,635   
 

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities

  $ 898,352      $ 351,529      $ 98,206        $ 209,673      $ 338,236        —        $ 1,895,996   
 

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

   

 

 

 

Equity

               

Contributed capital

    195,383        68,153        333,974        5(i)        —          (341,550     —          255,960   

Accumulated other comprehensive income (loss)

    (4,130     652        (652     5(i)        —          —          —          (4,130

Retained earnings (deficit)

    (86,722     (45,080     41,563        5(i)        —          —          —          (90,239

Non-controlling interest

    —          40,000        (40,000     5(i)        —          —          —          —     
 

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

   

 

 

 

Total equity

    104,531        63,725        334,885          —          (341,550     —          161,591   
 

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities and equity

  $ 1,002,883      $ 415,254      $ 433,091        $ 209,673      $ (3,314   $ —        $ 2,057,587   
 

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

   

 

 

 

 

1  The Pro Forma Combined amounts do not currently reflect the receipt of or any anticipated application of the proceeds from this offering.

See notes to unaudited pro forma condensed combined financial information.

 

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Table of Contents

Forterra, Inc.

Notes To Unaudited Pro Forma Condensed Combined Financial Information

(USD in thousands, unless stated otherwise)

 

1. Basis of presentation

The unaudited pro forma condensed combined financial information is based upon the historical combined financial statements of the Predecessor, the historical financial statements of the Successor and the historical financial statements of U.S. Pipe, as adjusted for the impact of the Transactions on ours and U.S. Pipe’s historical results of operations and financial position, as if the Transactions occurred on the dates reflected in the table in the introductory section above. The historical financial statements have been adjusted to give pro forma effect to events that are (i) directly attributable to the Transactions, (ii) factually supportable and (iii) with respect to the unaudited pro forma condensed combined statements of operations, expected to have a continuing impact on the combined results following the Transactions.

Each of the business combinations were accounted for under the acquisition method of accounting in accordance with Financial Accounting Standards Board Accounting Standards Codification, or ASC, Topic 805, Business Combinations. As the acquirer for accounting purposes, we have estimated the fair value of the Predecessor’s, Cretex’s, Sherman-Dixie’s and U.S. Pipe’s assets acquired and liabilities assumed and conformed the accounting policies of each acquisition to our own accounting policies. The estimated values of the assets acquired and liabilities assumed for Sherman-Dixie and U.S. Pipe presented herein are preliminary and reflect our expectations based on the information currently available. The acquisitions of Sherman-Dixie and U.S. Pipe are still in their respective measurement periods as defined by ASC 805 and purchase price allocations may be subject to change upon completion of the determination of the fair values of all acquired assets and liabilities. The Sale Leaseback was accounted for under the guidance set forth in ASC 360, Property, Plant and Equipment, and ASC 840, Leases, for similar transactions.

The unaudited pro forma condensed combined financial statements do not necessarily reflect what the combined company’s financial condition or results of operations would have been had the Transactions occurred on the dates indicated. They also may not be useful in predicting our future financial condition and results of operations. Our actual financial position and results of operations may differ significantly from the pro forma amounts reflected herein due to a variety of factors.

2. Pro Forma Adjustments for Acquisition

The Acquisition was completed on March 13, 2015 and therefore, the fair value of the assets acquired and liabilities assumed is already reflected in our historical condensed combined balance sheet as of March 31, 2016. Lone Star acquired our business, along with the business of Forterra UK, from HeidelbergCement for aggregate cash consideration of $1.33 billion, subject to a potential earn out of up to $100.0 million that is currently the subject of dispute. The portion of the total purchase apportioned by Lone Star to the Acquisition is $640.4 million. Lone Star funded the transactions with an equity investment of $432.3 million and third-party debt in the amount of $940.0 million. The portion of Lone Star’s equity investment apportioned to the Acquisition is $167.5 million and the portion of third party debt allocated to the Acquisition is $515.5 million, inclusive of $20.5 million in debt issuance costs and $22.1 million in original issue discount. Our operating subsidiaries are guarantors of this debt, and therefore, jointly and severally liable obligors. The unaudited pro forma condensed combined financial information reflects the impact of our portion of the Acquisition on our historical operating activity for the period from January 1, 2015 through March 13, 2015, including increased debt financed interest expense and the impact on historical depreciation and amortization expense, as if the Acquisition had occurred on January 1, 2015.

 

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Table of Contents

Forterra, Inc.

Notes To Unaudited Pro Forma Condensed Combined Financial Information

(USD in thousands, unless stated otherwise)

 

We performed a valuation analysis of the fair market value of the Predecessor’s assets and liabilities, which has been completed as of the date of this prospectus. The following table summarizes the fair values of the assets acquired and liabilities assumed by us as of the Acquisition date:

 

     Fair Value  

Net working capital

   $ 257,368   

Property, plant and equipment

     311,191   

Investment in equity method investee

     56,400   

Customer backlog intangible

     4,500   

Other assets and other liabilities

     (6,495
  

 

 

 

Net identifiable assets acquired

   $ 622,964   

Goodwill

     17,464   
  

 

 

 

Consideration transferred, net of cash acquired

   $ 640,428   
  

 

 

 

The goodwill recognized was attributable primarily to expected operating efficiencies and expansion opportunities in the business acquired.

The following adjustments have been included in the unaudited pro forma condensed combined statements of operations for the three months ended March 31, 2015 and the year ended December 31, 2015 covering the pro forma adjustment period from January 1, 2015 through March 13, 2015 as if the Acquisition had occurred as of January 1, 2015:

 

  (a) Cost of goods sold.    Reflects the adjustments to eliminate the Predecessor’s historical depreciation expense and record depreciation expense for the assets acquired:

 

     Three Months
ended

March 31, 2015
    Year ended
December 31,
2015
 

Depreciation expense for assets acquired

   $ 6,579      $ 6,579   

Elimination of Predecessor’s historical depreciation expense

     (6,882     (6,882
  

 

 

   

 

 

 

Pro forma adjustment to decrease cost of goods sold

   $ (303   $ (303
  

 

 

   

 

 

 

 

  (b) Selling, general and administrative expenses.    The net pro forma adjustments to selling, general and administrative expenses are comprised of the following items:

 

     Three Months
ended

March 31, 2015
    Year ended
December 31,
2015
 

Amortization expense for intangible assets acquired

   $ 1,096      $ 1,096   

Elimination of Predecessor’s historical amortization expense

     (12     (12
  

 

 

   

 

 

 

Pro forma adjustment to increase selling, general and administrative expenses

   $ 1,084      $ 1,084   
  

 

 

   

 

 

 

 

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Forterra, Inc.

Notes To Unaudited Pro Forma Condensed Combined Financial Information

(USD in thousands, unless stated otherwise)

 

The pro forma adjustments to intangible amortization expense are based on the fair value of the Predecessor’s identifiable intangible assets as if the Acquisition had occurred as of January 1, 2015.

 

  (c) Interest expense.    Reflects an adjustment for interest expense and the amortization of deferred financing costs and debt discounts on our borrowings of approximately $515.5 million, assuming the Acquisition occurred on January 1, 2015. The financing transactions included $254.9 million under the Senior Term Loan ($241.7 million net of $13.2 million of original issue discount and debt issuance costs), $260.0 million under the Junior Term Loan ($233.8 million, net of $26.2 million of original issue discount and debt issuance costs) and a $0.6 million draw on the Revolver. The terms of these financing arrangements are described in greater detail in the section entitled “Description of Certain Indebtedness.” The interest rate for both the Senior Term Loan and Junior Term Loan is set at LIBOR (with a 1% floor) plus a margin of 5.5% and 9.5%, respectively. A rise of current interest rate levels to above the 1% floor would be required to increase our interest expense and a reduction in interest rates would have no impact. As of March 31, 2016, we had elected to use three month LIBOR with a rate of 0.63%. A hypothetical 1/8 percent change in the rates applicable to our variable rate debt would have increased interest expense by $0.2 million for the three months ended March 31, 2015 and the year ended December 31, 2015.

 

     Three Months
ended

March 31, 2015
     Year ended
December 31,
2015
 

Interest expense on new debt used to fund the Acquisition

   $ 9,044       $ 9,044   

Amortization of new debt issuance costs and discount

     1,168         1,168   
  

 

 

    

 

 

 

Proforma adjustment to increase Interest expense

   $ 10,212       $ 10,212   
  

 

 

    

 

 

 

 

  (d) Income tax (expense) benefit.    Due to our limited history and the history of pre-tax losses generated by the Predecessor, deferred tax benefits were not recorded on the pro forma adjustments.

3. Pro Forma Adjustments for Cretex Acquisition

We acquired Cretex on October 1, 2015 for total cash consideration of approximately $245.1 million including customary working capital adjustments. The Cretex Acquisition was partially funded with new indebtedness under the Senior Term Loan totaling $240.0 million, net of $8.9 million in debt issuance costs and debt discounts.

 

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Notes To Unaudited Pro Forma Condensed Combined Financial Information

(USD in thousands, unless stated otherwise)

 

The fair value of Cretex assets acquired and liabilities assumed is reflected in our historical condensed combined balance sheet as of March 31, 2016. The following table summarizes the fair values of the assets acquired and liabilities assumed by us in the Cretex Acquisition as of the acquisition date:

 

     Fair Value  

Net working capital

   $ 69,745   

Property, plant and equipment

     97,282   

Customer relationship intangible

     24,700   

Trade name

     600   

Customer backlog intangible

     800   

Other assets and other liabilities

     (7,500
  

 

 

 

Net identifiable assets acquired

     185,627   

Goodwill

     59,473   
  

 

 

 

Consideration transferred, net of cash acquired

   $ 245,100   
  

 

 

 

The goodwill recognized was attributable primarily to expected operating efficiencies and expansion opportunities in the business acquired.

The following adjustments have been included in the unaudited pro forma condensed combined statements of operations for the three months ended March 31, 2015 and the year ended December 31, 2015 covering the pro forma adjustment period from January 1, 2015 through September 30, 2015 as if the Cretex Acquisition had occurred as of January 1, 2015:

 

  (a) The Cretex Acquisition was completed on October 1, 2015 and the pro forma adjustments reflect the inclusion of Cretex’s historical results of operations as if Cretex had been acquired on January 1, 2015. The pro forma adjustments reflect:

Three months ended March 31, 2015:

 

  (i) an increase in net sales of $18.8 million and the related increase in cost of goods sold of $21.6 million; and

 

  (ii) an increase in selling, general and administrative expenses of $1.6 million.

Year ended December 31, 2015:

 

  (i) an increase in net sales of $150.2 million and the related increase in cost of goods sold of $127.4 million; and

 

  (ii) an increase in selling, general and administrative expenses of $5.9 million.

 

  (b) Cost of goods sold.    Reflects the adjustments to eliminate Cretex’s historical depreciation expense and to record depreciation expense based on the fair value of the assets acquired in the Cretex Acquisition:

 

     Three Months
ended
March 31, 2015
    Year ended
December 31,
2015
 

Depreciation expense for assets acquired

   $ 2,404      $ 7,264   

Elimination of Cretex’s historical depreciation expense

     (1,696     (5,001
  

 

 

   

 

 

 

Pro forma adjustment to increase cost of goods sold

   $ 708      $ 2,263   
  

 

 

   

 

 

 

 

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Notes To Unaudited Pro Forma Condensed Combined Financial Information

(USD in thousands, unless stated otherwise)

 

  (c) Selling, general and administrative expenses.    Reflects the adjustments to eliminate Cretex’s historical amortization expense and to record amortization expense based on the fair value of Cretex’s identifiable intangible assets as if the Cretex Acquisition had occurred as of January 1, 2015:

 

     Three Months
ended
March 31, 2015
    Year ended
December 31,
2015
 

Amortization expense for intangible assets acquired

   $ 849      $ 6,115   

Elimination of Cretex’s historical amortization expense

     (100     (993
  

 

 

   

 

 

 

Pro forma adjustment to increase selling, general and administrative expenses

   $ 749      $ 5,122   
  

 

 

   

 

 

 

 

  (d) Interest expense.    Reflects an adjustment for interest expense and the amortization of deferred financing costs and debt discounts related to the incremental $240.0 million borrowing under the Senior Term Loan, assuming the incremental borrowing occurred on January 1, 2015. The interest rate for the add-on to the Senior Term Loan is set at LIBOR (with a 1% floor) plus a margin of 5.5%. As with the original issuance, a rise of current interest rate levels to above the 1% floor would be required to increase our interest expense and a reduction in interest rates would have no impact. A hypothetical 1/8 percent change in the rates applicable to our variable rate debt would not have a material impact on our unaudited pro forma condensed combined statements of operations for the three months ended March 31, 2015 and the year ended December 31, 2015.

 

     Three Months
ended
March 31, 2015
     Year ended
December 31,
2015
 

Interest expense on new debt used to acquire Cretex

   $ 3,900       $ 11,700   

Amortization of new debt issuance costs and discount

     340         1,020   
  

 

 

    

 

 

 

Proforma adjustment to increase interest expense

   $ 4,240       $ 12,720   
  

 

 

    

 

 

 

 

  (e) Income tax (expense) benefit.    Due to our limited history and the history of pre-tax losses generated by the Predecessor, deferred tax benefits were not recorded on the pro forma adjustments.

4. Pro Forma Adjustments for Sherman-Dixie Acquisition

On January 29, 2016, we acquired Sherman-Dixie for cash consideration of $66.8 million. The Sherman-Dixie Acquisition was fully financed through a draw on the Revolver.

 

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Notes To Unaudited Pro Forma Condensed Combined Financial Information

(USD in thousands, unless stated otherwise)

 

We have performed a preliminary valuation analysis of the fair market value of Sherman-Dixie’s assets and liabilities and the preliminary fair value of these assets acquired and liabilities assumed are reflected in our historical condensed combined balance sheet as of March 31, 2016. The following table summarizes the preliminary allocation of the purchase price as of the date of the Sherman-Dixie Acquisition:

 

     Fair Value  

Net working capital

   $ 14,293   

Property, plant and equipment

     29,163   

Customer relationships intangible

     5,100   

Non-compete agreement intangible

     2,500   

Other identifiable intangibles

     900   

Deferred tax liabilities

     (11,189
  

 

 

 

Net identifiable assets acquired

     40,767   

Goodwill

     25,984   
  

 

 

 

Consideration transferred, net of cash acquired

   $ 66,751   
  

 

 

 

These preliminary purchase price allocations have been used to prepare pro forma adjustments in the unaudited pro forma condensed combined financial statements. The final purchase price allocations will be determined when we have completed the detailed valuations and necessary calculations. The final allocation could differ materially from the preliminary allocation used in these pro forma adjustments. The final allocation may include (1) changes in fair values of property, plant and equipment, (2) changes in allocations to intangible assets such as trade names, non-compete agreements and customer relationships as well as goodwill and (3) other changes to assets and liabilities.

The following adjustments have been included in the unaudited pro forma condensed combined statements of operations for the three months ended March 31, 2015, the year ended December 31, 2015, and the three months ended March 31, 2016 covering the applicable pro forma adjustment period for the year ended December 31, 2015 and the period from January 1 through January 29, 2016 as if the Sherman-Dixie Acquisition had occurred as of January 1, 2015:

 

  (a) The Sherman-Dixie Acquisition closed on January 29, 2016 and the pro forma adjustments reflect the inclusion of Sherman-Dixie’s historical results of operations as if Sherman-Dixie had been acquired on January 1, 2015. The pro forma adjustments reflect:

Three months ended March 31, 2016:

 

  (i) an increase in net sales of $2.9 million and the related increase in cost of goods sold of $2.5 million; and

 

  (ii) an increase in selling, general and administrative expenses of $0.8 million.

Three months ended March 31, 2015:

 

  (i) an increase in net sales of $9.1 million and the related increase in cost of goods sold of $8.6 million; and

 

  (ii) an increase in selling, general and administrative expenses of $1.5 million.

Year ended December 31, 2015:

 

  (i) an increase in net sales of $53.9 million and the related increase in cost of goods sold of $44.1 million; and

 

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(USD in thousands, unless stated otherwise)

 

  (ii) an increase in selling, general and administrative expenses of $11.0 million.

 

  (b) Cost of goods sold.    Reflects the adjustments to eliminate Sherman-Dixie’s historical depreciation expense and record depreciation expense based on the preliminary fair value of the assets acquired in the Sherman-Dixie acquisition:

 

     Three Months
ended
March 31, 2015
    Year ended
December 31,
2015
    Three Months
ended
March 31, 2016
 

Depreciation expense for assets acquired

   $ 1,063      $ 4,289      $ 362   

Elimination of Sherman-Dixie’s historical depreciation expense

     (864     (3,478     (271
  

 

 

   

 

 

   

 

 

 

Pro forma adjustment to increase cost of goods sold

   $ 199      $ 811      $ 91   
  

 

 

   

 

 

   

 

 

 

 

  (c) Selling, general and administrative expenses.    Reflects the adjustment to eliminate Sherman-Dixie’s historical intangible amortization expense and to record intangible amortization of the acquired intangible assets based on their preliminary fair value. The preliminary fair value of identifiable intangible assets was determined primarily using the “income approach”, which requires a forecast of all of the expected future cash flows. Customer relationships, customer backlog and brand names are amortized over a 10 year, 0.5 year and 0.5 year period, respectively, using the accelerated method that reflects the expected future cash flows. Acquired non-compete agreement assets are amortized on a straight-line basis over the estimated useful lives of 5 years.

The following table summarizes the pro forma adjustments to amortization expense based on the preliminary fair value of Sherman-Dixie’s identifiable intangible assets as if the Sherman-Dixie Acquisition occurred as of January 1, 2015 (in thousands):

 

     Estimated
Fair Value
     Estimated
Useful Life
(in years)
     Three
Months
ended
March 31,
2015
    Year ended
December 31,
2015
    Three
Months
ended
March 31,
2016
 

Customer relationships

   $ 5,100         10       $ 253      $ 1,010      $ 78   

Non-competes

     2,500         5         125        500        42   

Other intangibles

     900         0.5         375        900        0   
  

 

 

       

 

 

   

 

 

   

 

 

 
   $ 8,500          $ 753      $ 2,410      $ 120   

Elimination of historical amortization expense

  

     (1     (2     —     
  

 

 

   

 

 

   

 

 

 

Pro forma adjustment to increase selling, general and administrative expenses

   

   $ 752      $ 2,408      $ 120   
  

 

 

   

 

 

   

 

 

 

These preliminary estimates of fair value and estimated useful lives will likely differ from final amounts we will calculate after completing a detailed valuation analysis for Sherman-Dixie, and the difference could have a material impact on the accompanying unaudited pro forma condensed combined financial statements. A 10% change in the valuation of intangible assets would cause a corresponding increase or decrease in the balance of goodwill and annual amortization expense of approximately $0.2 million, assuming an overall weighted-average useful life of 7.5 years.

 

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Notes To Unaudited Pro Forma Condensed Combined Financial Information

(USD in thousands, unless stated otherwise)

 

  (d) Interest expense.    Reflects the pro forma increase to interest expense from an additional draw of $80.0 million on the Revolver to fund the Sherman-Dixie Acquisition, as if the draw had occurred on January 1, 2015. Interest is floating, based on a reference rate plus an applicable margin. The weighted average annual interest rate on the Revolver was 2.06% for the three months ended March 31, 2016. A hypothetical 1/8 percent change in the rates applicable to our variable rate debt would not have a material impact on our unaudited pro forma condensed combined statements of operations for the three months ended March 31, 2016 and 2015 and the year ended December 31, 2015.

 

  (e) Income tax (expense) benefit.    Due to our limited history and the history of pre-tax losses generated by the Predecessor, deferred tax benefits were not recorded on the pro forma adjustments. The $0.9 million pro forma adjustment for the year ended December 31, 2015 reflects an acquired state tax benefit.

5. Pro Forma Adjustments for U.S. Pipe Acquisition

We completed the acquisition of U.S. Pipe for approximately $775.1 million in cash, subject to customary working capital adjustments. The U.S. Pipe Acquisition was funded, in part, with a draw of $205.0 million on the Revolver, of which $203.4 million was repaid during April 2016 by an affiliate in connection with the initial public offering of Forterra UK as described in greater detail in the section entitled “Our History—Recent Transactions.” The $203.4 million repayment of the Revolver by an affiliate resulted in an increase of the same amount to our allocated share of the Senior Term Loan balance. A portion of the U.S. Pipe Acquisition was financed by using $171.5 million in proceeds generated from the Sale Leaseback, and the remainder of the U.S. Pipe Acquisition was funded with a cash contribution from Lone Star.

We have performed a preliminary valuation analysis of the fair market value of U.S. Pipe’s assets and liabilities. The following table summarizes the preliminary allocation of the purchase price as of the date of the U.S. Pipe Acquisition:

 

     Fair Value  

Cash and cash equivalents

   $ 19,398   

Receivables, net

     99,028   

Inventories

     102,998   

Other current assets

     4,646   

Property, plant and equipment

     246,241   

Customer backlog intangible

     3,900   

Patents intangible

     13,000   

Trade name intangible

     37,000   

Customer relationship intangible

     179,000   

Non-compete intangible

     3,800   
  

 

 

 

Total identifiable assets

   $ 709,011   

Trade payables

     (56,873

Accrued liabilities

     (18,842

Deferred tax liabilities

     (158,397

Other long term liabilities

     (10,623
  

 

 

 

Total liabilities assumed

   $ (244,735

Net identifiable assets acquired

     464,276   
  

 

 

 

Goodwill

     310,834   
  

 

 

 

Consideration transferred

   $ 775,110   
  

 

 

 

 

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Notes To Unaudited Pro Forma Condensed Combined Financial Information

(USD in thousands, unless stated otherwise)

 

This preliminary purchase price allocation has been used to prepare pro forma adjustments in the unaudited pro forma condensed combined financial statements. The final purchase price allocation will be determined when we have completed the detailed valuations and necessary purchase price adjustment calculations. The final allocation could differ materially from the preliminary allocation used in the pro forma adjustments. The final allocation may include (1) changes in fair values of property, plant and equipment, (2) changes in allocations to intangible assets such as trade names, non-compete agreements and customer relationships as well as goodwill and (3) other changes to assets and liabilities.

The pro forma adjustments are based on our preliminary estimates and assumptions that are subject to change. The following adjustments have been included in the unaudited pro forma condensed combined statements of operations for the three months ended March 31, 2015, the year ended December 31, 2015, and the three months ended March 31, 2016 as if the U.S. Pipe Acquisition had occurred as of January 1, 2015 and in the unaudited pro forma condensed combined balance sheet as if the U.S. Pipe Acquisition had occurred as of March 31, 2016:

 

  (a) The following table summarizes the pro forma adjustments to cash and cash equivalents as if the U.S. Pipe Acquisition had occurred as of March 31, 2016:

 

Increase in cash and cash equivalents as of U.S. Pipe Acquisition date

   $ 17,216   

Contributed capital from LSF9 Concrete Ltd

     402,127   

Cash proceeds from draw on the Revolver to fund U.S. Pipe Acquisition

     205,000   

Less: cash consideration to purchase U.S. Pipe

     (775,110

Less: transaction costs paid in connection with the acquisition

     (3,517
  

 

 

 

Pro forma adjustment to cash and cash equivalents

   $ (154,284
  

 

 

 

 

  (b) Reflects working capital and other adjustments to assets and liabilities based on the purchase price allocation as shown in the table above.

 

  (c) Inventory step-up adjustment.    Reflects the estimated adjustment to step up the finished goods and work in process inventories acquired in the U.S. Pipe Acquisition to a fair value of approximately $103.0 million, an increase of $7.7 million from the carrying value. The fair value calculations for U.S. Pipe are preliminary and subject to change. The fair value was determined based on the estimated selling price of the inventory less the remaining manufacturing and selling costs and a normal profit margin on those manufacturing and selling efforts. After the U.S. Pipe Acquisition, the step up in inventory fair value of $7.7 million will increase cost of sales over approximately two months as the inventory is sold. This decrease is not reflected in the pro forma condensed combined statements of operations because it does not have a continuing impact.

 

  (d) Reflects certain reclassifications made to the historical presentation of U.S. Pipe to conform to our financial statement presentation, as follows:

 

  i. We recognize deferred debt issuance costs as a direct deduction of the carrying amount of our debt, while U.S. Pipe recognizes these costs in other long term assets. Therefore, the $3.0 million reduction from other long term assets was reclassified into Senior Term Loan on the unaudited pro forma condensed combined balance sheet to conform the presentation of deferred debt issuance costs to our presentation. U.S. Pipe’s historical debt issuance costs were eliminated from the Senior Term Loan balance to reflect adjustments to assets and liabilities based on the purchase price allocation as shown in the table above.

 

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(USD in thousands, unless stated otherwise)

 

  ii. We recognize deferred tax assets and deferred tax liabilities as non-current on the balance sheet, while U.S. Pipe recognized deferred tax assets and deferred tax liabilities as current and non-current. Therefore, U.S. Pipe’s historical deferred tax assets totaling $2.4 million and $0.8 million, respectively, were reclassified into Other long term assets on the unaudited pro forma condensed combined balance sheet from Deferred income taxes to conform the presentation of deferred taxes to our presentation. U.S. Pipe’s historical deferred tax assets and deferred tax liabilities were adjusted on a pro forma basis to reflect adjustments to assets and liabilities based on the purchase price allocation as shown in the table above.

 

  (e) Property, plant and equipment and related depreciation adjustment.    Reflects the estimated adjustment of $93.6 million to increase the basis in the acquired property, plant and equipment to an estimated fair value of $246.2 million. The estimated useful lives range from 4 to 35 years for buildings, 2 to 25 years for machinery and equipment, 2 to 10 years for other equipment and lower of lease term or useful life on leasehold improvements. The fair value and useful life calculations are preliminary and subject to change for U.S. Pipe after we finalize our review of the specific types, nature, age, condition and location of U.S. Pipe’s property, plant and equipment. The following table summarizes the changes in the estimated depreciation expense for each of the applicable periods presented as if the transaction occurred on January 1, 2015:

 

    Three Months
ended
March 31,
2015
    Year ended
December 31,
2015
    Three Months
ended
March 31,
2016
 

Depreciation expense for assets acquired

  $ 7,012      $ 28,046      $ 7,064   

Elimination of U.S. Pipe’s historical depreciation expense

    (8,584     (35,884     (9,245
 

 

 

   

 

 

   

 

 

 

Pro forma adjustment to decrease cost of goods sold

  $ (1,572   $ (7,838   $ (2,181
 

 

 

   

 

 

   

 

 

 

 

  (f) Other intangible assets, goodwill and related amortization adjustment; selling, general and administrative expenses.    Reflects adjustment to remove U.S. Pipe’s historical goodwill and intangibles of $44.7 million and $19.0 million, respectively, and recognize the preliminary estimate of new goodwill and intangibles associated with the U.S. Pipe Acquisition of $310.8 million and $236.7 million, respectively. The preliminary fair value of identifiable intangible assets was determined primarily using the “income approach”, which requires a forecast of all of the expected future cash flows. Since all information required to perform a detailed valuation analysis of U.S. Pipe’s assets could not be obtained as of the date of this prospectus, for purposes of these unaudited pro forma condensed combined financial statements, we used certain assumptions based on publicly available transaction data for the industry. Customer relationships, customer backlog, patents and brand names are amortized over the estimated useful lives shown in the table below, using the accelerated method that reflects the expected future cash flows. Acquired non-compete agreement assets are amortized on a straight-line basis over the estimated useful lives of 5 years.

 

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Notes To Unaudited Pro Forma Condensed Combined Financial Information

(USD in thousands, unless stated otherwise)

 

The following table summarizes the preliminary estimated fair values of U.S. Pipe’s identifiable intangible assets, their estimated useful lives and the related amortization changes as if the assets had been acquired as of January 1, 2015:

 

     Estimated
Fair Value
     Estimated
Useful Life
(in years)
     Three
Months
ended
March 31,
2015
    Year ended
December 31,
2015
    Three
Months
ended
March 31,
2016
 

Customer relationships

   $ 179,000         10       $ 4,872      $ 24,080      $ 6,671   

Customer backlog

     3,900         1         1,818        3,900        —     

Non-competes

     3,800         5         190        760        190   

Patents

     13,000         10         595        2,605        590   

Brand names

     37,000         10         1,297        5,677        1,286   
  

 

 

       

 

 

   

 

 

   

 

 

 
   $ 236,700          $ 8,772      $ 37,022      $ 8,737   

Elimination of historical amortization expense

  

     (41     (826     (769
  

 

 

   

 

 

   

 

 

 

Pro forma adjustment to increase selling, general and administrative expenses

   

   $ 8,731      $ 36,196      $ 7,968   
  

 

 

   

 

 

   

 

 

 

These preliminary estimates of fair value and estimated useful lives will likely differ from final amounts we will calculate after completing a detailed valuation analysis for U.S. Pipe, and the difference could have a material impact on the accompanying unaudited pro forma condensed combined financial statements. A 10% change in the valuation of intangible assets would cause a corresponding increase or decrease in the balance of goodwill and annual amortization expense of approximately $3.7 million, assuming an overall weighted-average useful life of 9.8 years.

 

  (g) Debt related adjustments.    Reflects the $205.0 million borrowing on the Revolver incurred to finance the U.S. Pipe Acquisition, minus the effects of extinguishing U.S. Pipe’s outstanding debt upon completion of the U.S. Pipe Acquisition, plus the subsequent reallocation of $203.4 million based on the repayment on the Revolver by an affiliate, as if the U.S. Pipe Acquisition had occurred as of March 31, 2016. The net increase to debt includes:

 

     Removal of
Historical
Debt
    Incurred as
part of the U.S.
Pipe
Acquisition
     Pro forma
adjustment
 

Revolver

   $ —        $ 1,600       $ 1,600   

Notes payable current portion

     (82,337     —           (82,337

Long term debt—non-current/Senior Term Loan

     (169,273     203,400         34,127   
  

 

 

   

 

 

    

 

 

 

Pro forma adjustment to debt

   $ (251,610   $ 205,000       $ (46,610
  

 

 

   

 

 

    

 

 

 

 

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Notes To Unaudited Pro Forma Condensed Combined Financial Information

(USD in thousands, unless stated otherwise)

 

The following table summarizes the pro forma decrease to interest expense resulting from the extinguishment of U.S. Pipe’s historical debt obligations and the added obligation under the Senior Term loan to partially fund the U.S. Pipe Acquisition, as if the extinguishment had been made and the increased debt obligation had existed on January 1, 2015:

 

    Three Months
ended
March 31, 2015
    Year ended
December 31,
2015
    Three Months
ended
March 31, 2016
 

Elimination of historical interest expense

  $ (4,618   $ (20,175   $ (5,649

Elimination of amortization of debt issuance costs

    (222     (1,176     (329

Interest expense on new debt used to acquire U.S. Pipe

    3,305        13,221        3,305   
 

 

 

   

 

 

   

 

 

 

Pro forma adjustment to decrease Interest expense

  $ (1,535   $ (8,130   $ (2,673
 

 

 

   

 

 

   

 

 

 

 

  (h) Deferred tax assets and liabilities.    Adjusts the deferred tax liabilities resulting from the U.S. Pipe Acquisition. The increase in deferred tax liabilities to $158.4 million from the historical amount of $36.2 million stems primarily from the preliminary fair value adjustments to inventory, property, plant and equipment and non-deductible intangible assets based on an estimated tax rate of 38%. This estimate of deferred income tax balances is preliminary and subject to change based on management’s final determination of the fair value of assets acquired and liabilities assumed by jurisdiction.

 

  (i) Elimination of pre-acquisition equity.    Represents the elimination of the historical equity of U.S. Pipe, the contribution of new equity by Concrete Holdings, and $3.5 million of transaction costs paid in connection with the acquisition, as follows:

 

     Removal of
Historical
Equity
    U.S. Pipe
Acquisition
    Pro forma
adjustments
 

Contributed capital from LSF9 Concrete Ltd

   $ (68,153   $ 402,127      $ 333,974   

Accumulated other comprehensive income (loss)

     (652     —          (652

Retained earnings (deficit)

     45,080        (3,517     41,563   

Non-controlling interest

     (40,000     —          (40,000
  

 

 

   

 

 

   

 

 

 

Pro forma adjustment to equity

   $ (63,725   $ 398,610      $ 334,885   
  

 

 

   

 

 

   

 

 

 

 

  (j) Income tax (expense) benefit.    Due to our limited history and the history of pre-tax losses generated by the Predecessor, deferred tax benefits were not recorded on the pro forma adjustments.

 

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(USD in thousands, unless stated otherwise)

 

  (k) Pro forma effect of U.S. Pipe acquisition of Custom Fab.    U.S. Pipe purchased the Custom Fab business in August 2015. This adjusts net sales, cost of goods sold, selling, general & administrative expenses and other income (expense) as if U.S. Pipe had purchased Custom Fab on January 1, 2015. The adjustments for each period are as follows:

 

    March 31,
2015
    Year ended
December 31,
2015
    Three Months
Ended
March 31,
2016
 

Net sales

  $ 15,935      $ 55,882      $ —     

Cost of goods sold

    13,562        47,382        —     
 

 

 

   

 

 

   

 

 

 

Gross profit

    2,373        8,500        —     

Selling, general and administrative expenses

    (1,518     (5,329     —     
 

 

 

   

 

 

   

 

 

 

Income from operations

    855        3,171        —     

Other expense

    (16     44        —     
 

 

 

   

 

 

   

 

 

 

Income from continuing operations before taxes

    839        3,215        —     
 

 

 

   

 

 

   

 

 

 

Income tax expense

    —          —          —     
 

 

 

   

 

 

   

 

 

 

Net income

  $ 839      $ 3,215      $ —     
 

 

 

   

 

 

   

 

 

 

6. Pro Forma Adjustments for Sale Leaseback

In April 2016, we sold and simultaneously leased back 49 properties in the United States and Eastern Canada in a transaction with two unrelated third parties, Pipe Portfolio Owner (Multi) LP, or the U.S. Property Buyer, and FORT-BEN Holdings (ONQC) LTD., or the Canadian Property Buyer, for an aggregate consideration of $216.2 million. We entered into master land and building agreements with the U.S. Property Buyer and the Canadian Property Buyer pursuant to which we agreed to lease back each of the properties for an initial 20 year term. We have options to extend each master lease for an additional nine years and 11 months. The terms of the Sale Leaseback are described in greater detail in the section entitled “Description of Certain Indebtedness—Sale Leaseback.”

The Sale Leaseback was assessed under ASC 360 and ASC 840 to determine the proper accounting treatment and classification of the leases. At lease inception, we (as the seller-lessee) are considered to have a form of prohibited “continuing involvement” with the properties because we provide the U.S. Property Buyer and the Canadian Property Buyer (each as the buyer-lessor) with a guarantee that serves as additional collateral that reduces the buyer-lessor’s risk of loss. As a result, we are precluded from applying sale-leaseback accounting to the Sale Leaseback and the assets subject to the Sale Leaseback remain on the balance sheet and continue to be depreciated over their remaining useful lives as a “failed sale-leaseback.”

The aggregate net proceeds of $209.7 million, after payment of transaction costs, is recorded as a receipt of cash and corresponding financing obligation liability on the unaudited pro forma condensed combined balance sheet. We do not report rent expense for the properties which are owned for accounting purposes. Rather, payments under the master land and building agreements are recognized as a reduction of the financing obligation and as interest expense. The unaudited pro forma condensed combined statement of operations for the three months ended March 31, 2016 and

 

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Notes To Unaudited Pro Forma Condensed Combined Financial Information

(USD in thousands, unless stated otherwise)

 

March 31, 2015 and the year ended December 31, 2015 include pro forma adjustments which give effect to increased interest expense of $4.3 million, $4.2 million and $17.0 million, respectively, related to the financing obligation as if the Sale Leaseback had occurred on January 1, 2015. For greater detail, see section entitled “Description of Certain Indebtedness-Sale Leaseback.”

7. Pro Forma Adjustments for Debt Recapitalization

On June 16, 2016, an incremental $345 million was borrowed on the Senior Term Loan (guaranteed by our operating subsidiaries) and used the proceeds to pay a dividend of the same amount to its shareholders. Concrete Holdings incurred debt issuance fees and discount of $3.2 million and $3.5 million, respectively, in connection with the issuance of the debt. We will recognize the full amount of the incremental borrowing, net of related issuance costs and discount, as a debt obligation during the second quarter of 2016. The debt issuance fees are reflected as a pro forma adjustment to cash as if the transaction occurred as of March 31, 2016. The incremental borrowing incurs interest at the same rate as the Senior Term Loan and matures in March 2022.

The unaudited pro forma condensed combined statement of operations for the three months ended March 31, 2016 and March 31, 2015 and the year ended December 31, 2015 include pro forma adjustments which give effect to increased long term debt obligation, interest expense, original issue discount and debt issuance costs as if the Debt Recapitalization had occurred on January 1, 2015.

As with the original issuance, the interest rate for the new debt under the Senior Term loan is set at LIBOR (with a 1% floor) plus a margin of 5.5%. A rise of current interest rate levels to above the 1% floor would be required to increase our interest expense and a reduction in interest rates would have no impact. A hypothetical 1/8 percent change in the rates applicable to our variable rate debt would have increased interest expense by $0.1 million for the three months ended March 31, 2016 and March 31, 2015 and would have increased interest expense by $0.4 million for the year ended December 31, 2015.

8. Pro Forma Adjustments for Offering

The Pro Forma Combined amounts to not currently reflect the receipt of or any anticipated application of proceeds from this offering. Upon completion of this offering, we will issue and sell              shares of common stock and receive net proceeds, after deducting estimated offering expenses payable by us and underwriting discounts and commissions of approximately $         million, assuming an initial offering price of $         per share (the mid-point of the price range set forth on the cover page of this prospectus) in connection therewith and the use of proceeds as described in greater detail in the section entitled “Use of Proceeds.” We intend to use $         million of the net proceeds received by us from this offering to repay outstanding indebtedness which, for the three months ended March 31, 2016 and March 31, 2015 and the year ended December 31, 2015 would result in pro forma adjustments to eliminate interest expense of $        , $         and $        , respectively. We intend to use the remaining net proceeds for working capital and for general corporate purposes. For more detail, see “Use of Proceeds.”

 

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Notes To Unaudited Pro Forma Condensed Combined Financial Information

(USD in thousands, unless stated otherwise)

 

9. Unaudited Pro Forma Condensed Combined Segment Results

The following tables provide the pro forma combined operating results by segment for each period presented (in thousands):

For the Three Months Ended March 31, 2016

 

     Water Pipe
& Products
    Drainage Pipe
& Products
    Bricks     Corporate and
Other
    Pro Forma
Combined
 

Net sales

   $ 182,327      $ 147,214      $ 30,338      $ 2,204      $ 362,083   

Cost of goods sold

     148,214        116,371        28,097        3,090        295,772   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit (loss)

   $ 34,113      $ 30,843      $ 2,241      $ (886   $ 66,311   

Selling, general & administrative expenses and other

     (24,997     (12,950     (3,815     (15,572     (57,334
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from operations

   $ 9,116      $ 17,893      $ (1,574   $ (16,458   $ 8,977   

Interest expense

     (814     (3,513     —          (26,230     (30,557

Other income (expenses), net

     431        (30     —          (378     23   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations before income taxes

     8,733        14,350        (1,574     (43,066     (21,557

Income tax (expense) benefit

     (2,669     11,011        (200     —          8,142   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ 6,064      $ 25,361      $ (1,774   $ (43,066   $ (13,415
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

For the Three Months Ended March 31, 2015

 

     Water Pipe
& Products
    Drainage Pipe
& Products
    Bricks     Corporate and
Other
    Pro Forma
Combined
 

Net sales

   $ 181,514      $ 129,908      $ 25,856      $ 3,376      $ 340,654   

Cost of goods sold

     161,522        117,973        25,948        2,845        308,288   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit (loss)

   $ 19,992      $ 11,935      $ (92   $ 531      $ 32,366   

Selling, general & administrative expenses and other

     (26,936     (8,655     (3,636     (28,420     (67,647
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from operations

   $ (6,944   $ 3,280      $ (3,728   $ (27,889   $ (35,281

Interest expense

     (798     (3,444     —          (26,320     (30,562

Other income (expenses), net

     228        12        —          (261     (21
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations before income taxes

     (7,514     (152     (3,728     (54,470     (65,864

Income tax (expense) benefit

     898        371        —          —          1,269   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ (6,616   $ 219      $ (3,728   $ (54,470   $ (64,595
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Notes To Unaudited Pro Forma Condensed Combined Financial Information

(USD in thousands, unless stated otherwise)

 

For the Twelve Months Ended December 31, 2015

 

     Water Pipe
& Products
    Drainage Pipe
& Products
    Bricks     Corporate and
Other
    Pro Forma
Combined
 

Net sales

   $ 871,882      $ 715,152      $ 138,310      $ 8,029      $ 1,733,373   

Cost of goods sold

     730,505        601,773        132,099        10,366        1,474,743   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit (loss)

   $ 141,377      $ 113,379      $ 6,211      $ (2,337   $ 258,630   

Selling, general & administrative expenses and other

     (106,358     (51,205     (18,246     (83,244     (259,053
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from operations

   $ 35,019      $ 62,174      $ (12,035   $ (85,581   $ (423

Interest expense

     (3,194     (13,775     —          (105,922     (122,891

Other income (expenses), net

     2,398        (15     —          (1,402     981   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations before income taxes

     34,223        48,384        (12,035     (192,905 )&nb