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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
 
[] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the Quarterly Period Ended June 30, 2021
 
[] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to _________.

Commission File Number: 001-37921
FORTERRA, INC.

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

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

Securities Registered Pursuant to Section 12(b) of the Act:
Title of each class Trading SymbolName of each exchange on which registered
Common Stock, $0.001 par value per share FRTANasdaq Stock Market LLC

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

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [] No [X]
 
There were 66,920,808 shares of common stock, par value $0.001 per share, of the registrant outstanding as of July 26, 2021.





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




PART I. FINANCIAL INFORMATION

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

Three months ended
Six months ended
June 30,June 30,
2021202020212020
(unaudited)(unaudited)
Net sales$492,800 $426,186 $860,914 $757,062 
Cost of goods sold373,228 320,607 659,078 592,741 
Gross profit119,572 105,579 201,836 164,321 
Selling, general & administrative expenses
(56,257)(53,283)(111,301)(107,523)
Impairment and exit charges
(65)(265)(474)(1,089)
Other operating income (expense), net384 (1,001)12,503 (671)
(55,938)(54,549)(99,272)(109,283)
Income from operations
63,634 51,030 102,564 55,038 
Other income (expense)
Interest expense
(19,074)(19,702)(37,420)(40,447)
Gain on extinguishment of debt 116  66 
Earnings from equity method investee
3,570 3,126 6,161 5,925 
Income before income taxes48,130 34,570 71,305 20,582 
Income tax expense(12,065)(7,455)(16,564)(7,533)
Net income $36,065 $27,115 $54,741 $13,049 
Earnings per share:
Basic
$0.54 $0.42 $0.82 $0.20 
Diluted$0.52 $0.40 $0.79 $0.19 
Weighted average common shares outstanding:
Basic66,687 65,093 66,463 64,948 
Diluted69,511 67,191 69,475 67,458 

See accompanying notes to unaudited condensed consolidated financial statements

1



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

Three months endedSix months ended
June 30,June 30,
2021202020212020
(unaudited)(unaudited)
Net income$36,065 $27,115 $54,741 $13,049 
Change in other postretirement benefit plans, net of tax   (681)
Foreign currency translation adjustment944 2,437 1,603 (3,262)
Comprehensive income$37,009 $29,552 $56,344 $9,106 

See accompanying notes to unaudited condensed consolidated financial statements

2



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

June 30,
2021
December 31,
2020
ASSETS(unaudited)
Current assets
Cash and cash equivalents
$34,171 $25,678 
Receivables, net
309,055 227,948 
Inventories
266,308 222,928 
Prepaid expenses
9,937 7,967 
Other current assets
3,152 2,022 
Total current assets
622,623 486,543 
Non-current assets
Property, plant and equipment, net
444,051 451,082 
Operating lease right-of-use assets
54,003 54,379 
Goodwill
509,528 509,127 
Intangible assets, net
84,818 101,409 
Investment in equity method investee
49,946 48,285 
Other long-term assets
1,844 4,987 
Total assets
$1,766,813 $1,655,812 
LIABILITIES AND EQUITY
Current liabilities
Trade payables
$174,955 $134,144 
Accrued liabilities
115,647 115,693 
Deferred revenue
7,581 8,220 
Current portion of long-term debt
12,510 12,510 
Current portion of tax receivable agreement
8,333 8,333 
Total current liabilities
319,026 278,900 
Non-current liabilities
Long-term debt900,699 887,511 
Long-term finance lease liabilities
142,303 142,195 
Long-term operating lease liabilities
51,017 50,943 
Deferred tax liabilities
10,688 9,671 
Other long-term liabilities
31,788 36,918 
Long-term tax receivable agreement
55,907 55,907 
Total liabilities
1,511,428 1,462,045 
Commitments and Contingencies (Note 14)
Equity
Common stock, $0.001 par value, 190,000 shares authorized; 66,921 and 65,981 shares issued and outstanding
19 19 
Additional paid-in-capital
257,853 252,579 
Accumulated other comprehensive loss
(5,353)(6,956)
Retained earnings (deficit)2,866 (51,875)
Total shareholders' equity
255,385 193,767 
Total liabilities and shareholders' equity
$1,766,813 $1,655,812 

See accompanying notes to unaudited condensed consolidated financial statements

3



FORTERRA, INC.
Condensed Consolidated Statements of Shareholders' Equity
(in thousands, except share data)
(unaudited)

Common Stock
SharesAmountAdditional Paid-in-CapitalAccumulated Other Comprehensive Income (Loss)Retained Earnings (Deficit)Total Shareholders' Equity
Balance at December 31, 202065,980,787 $19 $252,579 $(6,956)$(51,875)$193,767 
Share-based compensation expense— — 2,784 — — 2,784 
Stock-based plan activity674,896 — (856)— — (856)
Comprehensive income:
Net income— — — — 18,676 18,676 
Foreign currency translation adjustment— — — 659 — 659 
Balance at March 31, 202166,655,683 19 254,507 (6,297)(33,199)215,030 
Share-based compensation expense— — 2,054 — — 2,054 
Stock-based plan activity265,125 — 1,292 — — 1,292 
Comprehensive income:
Net income— — — — 36,065 36,065 
Foreign currency translation adjustment— — — 944 — 944 
Balance at June 30, 202166,920,808 $19 $257,853 $(5,353)$2,866 $255,385 


Common Stock
SharesAmountAdditional Paid-in-CapitalAccumulated Other Comprehensive Income (Loss)Retained Earnings (Deficit)Total Shareholders' Equity
Balance at December 31, 201964,740,667 $19 $244,372 $(7,063)$(116,361)$120,967 
Share-based compensation expense— — 2,864 — — 2,864 
Stock-based plan activity336,752 — (194)— — (194)
Comprehensive loss:
Net loss— — — — (14,066)(14,066)
Change in other postretirement benefit plans, net of tax— — — (681)— (681)
Foreign currency translation adjustment— — — (5,699)— (5,699)
Balance at March 31, 202065,077,419 19 247,042 (13,443)(130,427)103,191 
Share-based compensation expense— — 2,607 — — 2,607 
Stock-based plan activity133,488 — 46 — — 46 
Comprehensive income:
Net income— — — — 27,115 27,115 
Foreign currency translation adjustment— — — 2,437 — 2,437 
Balance at June 30, 202065,210,907 $19 $249,695 $(11,006)$(103,312)$135,396 

See accompanying notes to unaudited condensed consolidated financial statements

4



FORTERRA, INC.
Condensed Consolidated Statements of Cash Flows
(in thousands)
Six months ended
June 30,
20212020
CASH FLOWS FROM OPERATING ACTIVITIES
(unaudited)
Net income$54,741 $13,049 
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation & amortization expense
41,015 44,907 
(Gain) loss on disposal of property, plant and equipment(10,905)1,353 
Gain on extinguishment of debt (66)
Amortization of debt discount and issuance costs
2,462 3,730 
Stock-based compensation expense
4,838 5,471 
Impairment charges
382  
Write-off of debt discount and issuance costs
 376 
Earnings from equity method investee
(6,161)(5,925)
Distributions from equity method investee
4,500 4,500 
Unrealized (gain) loss on derivative instruments, net(204)921 
Unrealized foreign currency (gain) loss, net(46)212 
Provision for doubtful accounts770 80 
Deferred taxes
1,017 1,816 
Other non-cash items
1,135 2,088 
Change in assets and liabilities:
Receivables, net
(81,490)(66,160)
Inventories
(43,080)(945)
Other current assets
(3,063)2,435 
Accounts payable and accrued liabilities
37,615 27,950 
Other assets and liabilities(5,481)4,447 
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES(1,955)40,239 
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property, plant and equipment, and intangible assets
(24,037)(9,054)
Proceeds from sale of fixed assets
20,371 10,590 
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES(3,666)1,536 
CASH FLOWS FROM FINANCING ACTIVITIES
Payment of debt issuance costs
 (1,734)
Repayments of term loans(6,254)(21,368)
Proceeds from revolver
40,000 180,000 
Repayments of revolver(20,000)(180,000)
Proceeds from issuance of common stock3,063  
Other financing activities
(3,087)(454)
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES13,722 (23,556)
Effect of exchange rate changes on cash
392 (513)
Net change in cash and cash equivalents
8,493 17,706 
Cash and cash equivalents, beginning of period
25,678 34,800 
Cash and cash equivalents, end of period
$34,171 $52,506 
SUPPLEMENTAL DISCLOSURES:
Cash interest paid
$33,455 $33,134 
Income taxes paid (refunds received), net 13,278 (241)
See accompanying notes to unaudited condensed consolidated financial statements
5


FORTERRA, INC.
Notes to Unaudited Condensed Consolidated Financial Statements



1. Description of the business

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

2. Summary of significant accounting policies

General

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

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

    The results of operations for the periods presented are not necessarily indicative of the results that may be expected for the year ending December 31, 2021. Seasonal changes and other conditions can affect the sales volumes of the Company's products. The financial results for any interim period do not necessarily indicate the expected results for the year.

    These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto for the year ended December 31, 2020 as provided in Forterra, Inc.'s Annual Report on Form 10-K for the year ended December 31, 2020 filed with the SEC on February 25, 2021 (the “2020 10-K”). The Company has continued to follow the accounting policies set forth in those financial statements, except as supplemented and documented below. Certain prior year numbers were reclassified to conform with current year presentation. Such reclassification had no impact on the previously reported results of operations. See Note 17, Segment reporting, for further detail.

Use of estimates

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

    Certain accounting matters that generally require consideration of forecasted financial information were assessed in light of the impact from the coronavirus disease ("COVID-19") pandemic. The accounting matters assessed included, but were not limited to, the Company’s allowance for doubtful accounts, inventory reserves, goodwill impairment, impairment of property and equipment and valuation allowances for tax assets. While the
6


FORTERRA, INC.
Notes to Unaudited Condensed Consolidated Financial Statements


assessments resulted in no material impacts to the Company’s condensed consolidated financial statements as of and for the six months ended June 30, 2021, the Company believes the full impact of the COVID-19 outbreak remains uncertain and will continue to assess if ongoing developments related to the outbreak may cause future material impacts to its consolidated financial statements.

Concentration of Credit Risk

    The Company had an individual customer within its Water Pipe & Products segment that accounted for approximately 20% and 15% of the Company's total net sales for the six months ended June 30, 2021 and 2020, respectively, and receivables at June 30, 2021 and December 31, 2020 representing 20% and 16% of the Company's total receivables, net, respectively.

Credit Losses

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

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

Recent Accounting Guidance Adopted

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

    In December 2019, the FASB issued ASU No. 2019-12, Simplifying the Accounting for Income Taxes (Topic 740). The new guidance simplifies the accounting for income taxes by eliminating certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period, hybrid taxes, and the recognition of deferred tax liabilities for outside basis differences.  It also clarifies and simplifies other aspects of the accounting for income taxes. The Company adopted this ASU on January 1, 2021 on a prospective basis, which did not have a material impact on the Company's condensed consolidated financial statements.


3. Mergers and dispositions

Quikrete Merger Agreement

On February 19, 2021, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Quikrete Holdings, Inc., a Delaware corporation (“Parent”), and Jordan Merger Sub, Inc., a Delaware corporation and a wholly-owned subsidiary of Parent (“Merger Sub”). Pursuant to the Merger
7


FORTERRA, INC.
Notes to Unaudited Condensed Consolidated Financial Statements


Agreement, subject to the satisfaction or waiver of specified conditions, Merger Sub will merge with and into the Company (the “Merger”), with the Company surviving the Merger as a wholly-owned subsidiary of Parent.

Pursuant to the Merger Agreement, at the effective time of the Merger (the “Effective Time”), each issued and outstanding share of common stock (the “Common Stock”) of the Company (other than (i) any shares held in the treasury of the Company or owned, directly or indirectly, by Parent, Merger Sub or any wholly-owned subsidiary of the Company immediately prior to the Effective Time, (ii) shares that are subject to any vesting restrictions (“Company Restricted Shares”) granted under the Company’s stock incentive plans (the “Company Stock Plans”) and (iii) any shares owned by stockholders who have properly exercised and perfected appraisal rights under Delaware law) will be automatically canceled and converted into the right to receive $24.00 in cash, without interest (the “Merger Consideration”), subject to deduction for any required withholding tax.

At the Effective Time:

(1)
each restricted stock unit that is solely subject to time-based vesting requirements granted under the Company Stock Plans that is outstanding immediately prior to the Effective Time shall fully vest and be converted into the right to receive an amount in cash (without interest and subject to applicable tax withholdings) equal to the product of (i) the Merger Consideration multiplied by (ii) the number of shares of Common Stock subject to such vested restricted stock unit;
(2)
each restricted stock unit that is subject to performance-based vesting requirements granted under the Company Stock Plans that is outstanding immediately prior to the Effective Time shall immediately vest and be converted into the right to receive an amount in cash (without interest and subject to applicable tax withholdings) equal to the product of (i) the Merger Consideration multiplied by (ii) the number of shares subject to such vested restricted stock unit immediately prior to the Effective Time as determined in accordance with the Merger Agreement;
(3)
each option to purchase shares of Common Stock granted under the Company Stock Plans that is outstanding immediately prior to the Effective Time shall fully vest, to the extent not vested previously, and be converted into the right to receive an amount in cash (without interest and subject to applicable tax withholdings) equal to the product of (i) the remainder, if positive, of (A) the Merger Consideration minus (B) the exercise price per share of Common Stock of such option multiplied by (ii) the number of shares of Common Stock subject to such vested option; and
(4)
each Company Restricted Share that is outstanding immediately prior to the Effective Time shall immediately vest in full and be converted into the right to receive an amount in cash (without interest and subject to applicable tax withholdings) equal to the Merger Consideration.


Each party’s obligation to consummate the Merger is subject to certain conditions, including, among others: (i) expiration or termination of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended; (ii) the absence of any order issued by any court of competent jurisdiction, other legal restraint or prohibition or any law enacted or deemed applicable by a governmental entity that prohibits or makes illegal the consummation of the Merger; (iii) the passing of twenty (20) days from the date on which the Company mails to the Company’s stockholders the definitive information statement regarding the stockholder approval of the Merger by written consent; (iv) subject to certain qualifications, the accuracy of representations and warranties of the other party set forth in the Merger Agreement; and (v) the performance by the other party in all material respects of its obligations under the Merger Agreement. Parent’s obligation to consummate the Merger is also conditioned on, among other things, the absence of any Material Adverse Effect (as defined in the Merger Agreement).

Entry into the Merger Agreement has been unanimously approved by the board of directors of the Company.
8


FORTERRA, INC.
Notes to Unaudited Condensed Consolidated Financial Statements



The Merger Agreement includes customary representations, warranties and covenants of the Company, Parent and Merger Sub. Among other things, the Company has agreed to use commercially reasonable efforts to conduct its business in the ordinary course of business consistent with past practice and use commercially reasonable efforts to preserve intact its businesses until the Merger is consummated. The Company and Parent have also agreed to use their respective reasonable best efforts to obtain any approvals from governmental authorities for the Merger, including all required antitrust approvals, on the terms and subject to the conditions set forth in the Merger Agreement, provided that Parent and its affiliates will not be required to take, or agree to take, certain actions with respect to assets, businesses or product lines of Parent or any of its subsidiaries, or the Company or any of its subsidiaries, accounting for more than $80 million of EBITDA (as defined in the Merger Agreement) for the 12 months ended December 31, 2020, measured in accordance with the Merger Agreement.

The Merger Agreement contains certain provisions giving each of Parent and the Company rights to terminate the Merger Agreement under certain circumstances, including the right for either Parent or the Company to terminate the Merger Agreement if the Merger has not been consummated on or before November 19, 2021, which date will be automatically extended for up to two additional 60-day periods in specified circumstances as described in the Merger Agreement (such date, as may be so extended pursuant to the Merger Agreement, the “Outside Date”). Upon termination of the Merger Agreement under specified circumstances, the Company will be required to pay Parent a termination fee of $50 million. The Merger Agreement further provides that Parent will be required to pay the Company a reverse termination fee of $85 million under certain circumstances if the Merger Agreement is terminated due to the failure of the parties to obtain required approvals under Antitrust Laws (as defined in the Merger Agreement) prior to the Outside Date or as a result of a Restraint (as defined in the Merger Agreement) arising under applicable Antitrust Laws.

If the Merger is consummated, the shares of Common Stock will be delisted from the Nasdaq Stock Market LLC and deregistered under the Securities Exchange Act of 1934, as amended (the “Exchange Act”).

Transaction costs

    For the three and six months ended June 30, 2021, the Company recognized aggregate transaction costs, including legal, accounting, valuation, and advisory fees, specific to the Merger of $1.9 million and $4.9 million, respectively. These costs are recorded in the condensed consolidated statements of operations within selling, general & administrative expenses.


4. Receivables, net
    
    Receivables consist of the following (in thousands):
June 30,December 31,
20212020
Trade receivables$292,685 $195,997 
Amounts billed but not yet paid under retainage provisions2,690 4,022 
Other receivables15,418 29,026 
Total receivables310,793 229,045 
Less: Allowance for doubtful accounts(1,738)(1,097)
Receivables, net$309,055 $227,948 


9


FORTERRA, INC.
Notes to Unaudited Condensed Consolidated Financial Statements


5. Inventories

    Inventories consist of the following (in thousands):
June 30,
December 31,
20212020
Finished goods$170,243 $145,872 
Raw materials95,293 76,322 
Work in process772 734 
Total inventories$266,308 $222,928 


6. Investment in equity method investee

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

    The Company's investment in the joint venture was $49.9 million at June 30, 2021, which is included within the Drainage Pipe & Products segment. At June 30, 2021, the difference between the amount at which the Company's investment is carried and the amount of the Company's share of the underlying equity in net assets of CP&P was approximately $12.9 million. The basis difference is primarily attributed to the value of land and equity method goodwill associated with the investment.

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

Three months endedSix months ended
June 30,June 30,
2021202020212020
Distribution received from CP&P$(3,000)$(2,900)$(4,500)$(4,500)
Share of earnings in CP&P3,589 3,146 6,197 5,961 
Amortization of excess fair value of investment(18)(18)(36)(36)
    

    Selected financial data for CP&P on a 100% basis is as follows (in thousands):
Three months endedSix months ended
June 30,June 30,
2021202020212020
Net sales$46,701 $40,427 $83,956 $79,519 
Gross profit12,130 10,933 21,780 21,470 
Income from operations7,181 6,259 12,154 11,879 
Net income7,117 6,209 12,025 11,767 


10


FORTERRA, INC.
Notes to Unaudited Condensed Consolidated Financial Statements


7. Property, plant and equipment, net

    Property, plant and equipment, net, consist of the following (in thousands):
June 30,December 31,
20212020
Machinery and equipment$428,145 $410,436 
Land, buildings and improvements234,476 234,251 
Other equipment13,291 12,633 
Construction-in-progress21,503 26,073 
Total property, plant and equipment697,415 683,393 
Less: accumulated depreciation(253,364)(232,311)
Property, plant and equipment, net$444,051 $451,082 

    Depreciation expense totaled $12.2 million and $24.4 million for the three and six months ended June 30, 2021, respectively, and $12.1 million and $24.3 million for the three and six months ended June 30, 2020, respectively, which is included in cost of goods sold and selling, general and administrative expenses in the condensed consolidated statements of operations.


8. Goodwill and other intangible assets, net

    The Company has recorded goodwill in connection with its acquisition of businesses. The following table summarizes the changes in goodwill by operating segment for the six months ended June 30, 2021 (in thousands):
Drainage Pipe & Products
Water Pipe & Products
Total
Balance at December 31, 2020$190,767 $318,360 $509,127 
Foreign currency and other adjustments401  401 
Balance at June 30, 2021$191,168 $318,360 $509,528 


    Intangible assets other than goodwill at June 30, 2021 and December 31, 2020 included the following (in thousands):
Net carrying value as of June 30, 2021Net carrying value as of December 31, 2020
Customer relationships$58,566 $70,503 
Trade names12,754 14,935 
Patents4,009 5,029 
Non-compete agreements3,736 4,962 
Developed technology5,420 5,606 
Other333 374 
Total intangible assets$84,818 $101,409 

    Amortization expense totaled $8.3 million and $16.6 million for the three and six months ended June 30, 2021, respectively, and $10.3 million and $20.6 million for the three and six months ended June 30, 2020, respectively, which is included in selling, general and administrative expenses in the condensed consolidated statements of operations. All of the Company's intangible assets are amortizable.

11


FORTERRA, INC.
Notes to Unaudited Condensed Consolidated Financial Statements



9. Fair value measurement

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

Fair value measurements at June 30, 2021 using
Quoted Prices in Active Markets for Identical Assets (Level 1)Significant Other Observable Inputs
(Level 2)
Significant Unobservable Inputs
(Level 3)
Total Fair Value June 30, 2021
Liabilities:
Derivative liability$ $367 $ $367 
Fair value measurements at December 31, 2020 using
Quoted Prices in Active Markets for Identical Assets (Level 1)
Significant Other Observable Inputs (Level 2)
Significant Unobservable Inputs (Level 3)
Total Fair Value December 31, 2020
Liabilities:
Derivative liability$ $572 $ $572 

    
Liabilities and assets classified as level 2 which are recorded at fair value are valued using observable market inputs. The fair values of derivative assets and liabilities are determined using quantitative models that utilize multiple market inputs including interest rates and exchange rates to generate continuous yield or pricing curves and volatility factors to value the position. The majority of market inputs are actively quoted and can be validated through external sources, including brokers, market transactions and third-party pricing services. The fair values of derivative assets and liabilities include adjustments for market liquidity, counter-party credit quality, and other instrument-specific factors, where appropriate. In addition, the Company incorporates within its fair value measurements a valuation adjustment to reflect the credit risk associated with the net position. Positions are netted by counterparties, and fair value for net long exposures is adjusted for counter-party credit risk while the fair value for net short exposures is adjusted for the Company’s own credit risk.
12


FORTERRA, INC.
Notes to Unaudited Condensed Consolidated Financial Statements


    The estimated carrying amount and fair value of the Company’s financial instruments and liabilities for which fair value is only disclosed is as follows (in thousands):

Fair value measurements at June 30, 2021 using
Carrying Amount June 30, 2021
Quoted Prices in Active Markets for Identical Assets (Level 1)
Significant Other Observable Inputs
(Level 2)
Significant Unobservable Inputs
(Level 3)
Total Fair Value June 30, 2021
Liabilities:
Term Loan$402,982 $ $409,123 $ $409,123 
Senior Secured Notes492,912  539,680  539,680 
Tax receivable agreement payable64,240   42,237 42,237 

Fair value measurements at December 31, 2020 using
Carrying Amount December 31, 2020
Quoted Prices in Active Markets for Identical Assets (Level 1)
Significant Other Observable Inputs
(Level 2)
Significant Unobservable Inputs
(Level 3)
Total Fair Value December 31, 2020
Liabilities:
Term Loan$407,978 $ $415,386 $ $415,386 
Senior Secured Notes492,043  539,760  539,760 
Tax receivable agreement payable64,240   40,586 40,586 

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

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


13


FORTERRA, INC.
Notes to Unaudited Condensed Consolidated Financial Statements


10.    Accrued liabilities

    Accrued liabilities consist of the following (in thousands):
June 30,December 31,
20212020
Accrued payroll and employee benefits$48,882 $49,434 
Short-term finance leases17,817 17,009 
Short-term operating leases7,885 7,448 
Accrued taxes16,134 13,642 
Warranty3,877 7,069 
Accrued rebates12,810 11,649 
Other miscellaneous accrued liabilities8,242 9,442 
Total accrued liabilities$115,647 $115,693 


11. Debt and deferred financing costs

    The Company’s debt consisted of the following (in thousands):
June 30,
December 31,
20212020
Term Loan, net of debt issuance costs and original issuance discount of $5,630 and $6,889, respectively
$402,982 $407,978 
Senior Secured Notes, net of debt issuance costs and original issuance discount of $7,088 and $7,957, respectively
492,912 492,043 
Revolver, net of debt issuance costs of $2,685
17,315  
Total debt
$913,209 $900,021 
  Less: current portion debt(12,510)(12,510)
Total long-term debt
$900,699 $887,511 

    
As of June 30, 2021, Forterra had $20 million borrowings under its $350 million asset based revolving credit facility under its ABL Credit Agreement dated October 25, 2016 (the “ABL Credit Agreement”) for working capital and general corporate purposes (“Revolver”), $408.6 million outstanding under its senior term loan facility (“Term Loan”) and $500 million senior secured notes due 2025 (the “Notes”).

Senior Secured Notes

On July 16, 2020, Forterra Finance, LLC and FRTA Finance Corp., both wholly-owned subsidiaries of the Company, completed the issuance of $500 million aggregate principal amount of senior secured notes due in 2025. The Notes have a fixed annual interest rate of 6.50% which will be paid semi-annually on January 15 and July 15 of each year. The Notes will mature on July 15, 2025. The Company used the net proceeds from the offering to repay $492.5 million of the principal amount of the Term Loan at par, plus accrued interest. The Company incurred debt issuance costs of $8.8 million and will amortize them over the term of the Notes under the effective interest method.

Obligations under the Notes are guaranteed by the Company and the Company’s existing and future subsidiaries (other than the issuing companies) that guarantee the Term Loan and the obligations of the U.S. borrowers under the Revolver. The Notes and the related guarantees are secured by first-priority liens on the collateral that secures the Term Loan on a first-priority basis (which is generally all assets other than those that secure the Revolver on a first-priority basis as set forth below) and second-priority liens on the collateral that secures the Revolver on a first-priority basis (which is generally inventory, accounts receivable, deposit accounts,
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FORTERRA, INC.
Notes to Unaudited Condensed Consolidated Financial Statements


securities accounts, certain intercompany loans and related assets), which second-priority liens will be ratable with the liens on such assets securing the obligations under the Term Loan and junior to the liens on such assets securing the Revolver.

At any time prior to July 15, 2022, the Company may on any one or more occasions redeem all or part of the Notes at a redemption price equal to 100% of the principal amount of the Notes redeemed, plus a “make whole premium” as of, and accrued and unpaid interest to the date of redemption, subject to the right of holders of Notes on the relevant record date to receive interest due on an interest payment date occurring on or prior to the redemption date. In addition, at any time prior to July 15, 2022, the Company may on any one or more occasions redeem up to 40% of the aggregate principal amount of the Notes (calculated after giving effect to the issuance of any additional notes) issued under the Indenture at a redemption price equal to 106.500% of the principal amount of Notes redeemed, plus accrued and unpaid interest to the date of redemption (subject to the right of holders of Notes on the relevant record date to receive interest due on an interest payment date occurring on or prior to the redemption date), with the net cash proceeds of an equity offering. Furthermore, at any time on or after July 15, 2022, the Company may on any one or more occasions redeem all or part of the Notes at the redemption prices (expressed as percentages of principal amount) set forth below, plus accrued and unpaid interest on the Notes redeemed, to the applicable date of redemption, if redeemed during the 12-month period beginning on July 15 of the years indicated below, subject to the rights of holders of Notes on a relevant record date to receive interest on an interest payment date occurring on or prior to the redemption date:
Percentage
2022103.250 %
2023101.625 %
2024 and thereafter100.000 %

The Notes contain customary negative covenants, including, among other things, limitations or prohibitions on restricted payments, incurrence of additional indebtedness, liens, mergers, asset sales and transactions with affiliates. In addition, the Indenture contains customary events of default.        

Term Loan

The Term Loan provides for a $1.25 billion senior secured term loan. Subject to the conditions set forth in the term loan agreement, the Term Loan may be increased by (i) up to the greater of $285.0 million and 1.0x consolidated EBITDA (defined below) of Forterra and its restricted subsidiaries for the four quarters most recently ended prior to such incurrence plus (ii) the aggregate amount of any voluntary prepayments, plus (iii) an additional unlimited amount, provided (x) in the case of any incremental debt that is secured by a lien that is pari passu with the liens securing the Term Loan, the first lien leverage ratio does not exceed 4.10 to 1.00, (y) in the case of incremental debt that is secured by a lien that is junior to the liens securing the Term Loan, the total leverage ratio does not exceed 5.50 to 1.00 and (z) in the case of incremental debt that is unsecured, the total leverage ratio does not exceed 5.75 to 1.00, in each case, determined on a pro forma basis.

    The Term Loan matures on October 25, 2023 and is subject to quarterly amortization equal to 0.25% of the initial principal amount. Interest accrues on outstanding borrowings thereunder at a rate equal to adjusted LIBOR (with a floor of 1.0%) or an alternate base rate (the base rate, which is the highest of the then current federal funds rate plus 0.50%, the prime rate most recently announced by the administrative agent under the Term Loan, and the one-month adjusted LIBOR plus 1.00%), in each case plus a margin of 3.00% or 2.00%, respectively. The weighted average interest rates for the Term Loan were 4.0%, 4.0%, 4.0% and 4.3% for the three and six months ended June 30, 2021 and June 30, 2020, respectively.

    During the six months ended June 30, 2020, the Company repurchased $15.5 million of the Term Loan before its maturity at a market value of $15.1 million. Consequently, the Company wrote off a proportionate share of debt issuance costs of $0.3 million and recognized a net gain of $0.1 million on the early extinguishment of debt which was included in the condensed consolidated statements of operation.
15


FORTERRA, INC.
Notes to Unaudited Condensed Consolidated Financial Statements



    Outstanding borrowings under the Term Loan are guaranteed by Forterra and each of its direct and indirect material wholly-owned domestic subsidiaries except certain excluded subsidiaries (the "Guarantors"). The Term Loan is secured by substantially all of the assets of Forterra, the borrower and the Guarantors; provided that the obligations under the Term Loan are not secured by any liens on more than 65% of the voting stock of foreign subsidiaries or assets of foreign subsidiaries. The Term Loan contains customary representations and warranties, and affirmative and negative covenants, that, among other things, restrict the ability of Forterra and its restricted subsidiaries to incur additional debt, incur or permit liens on assets, make investments and acquisitions, consolidate or merge with any other company, engage in asset sales and pay dividends and make distributions. The Term Loan does not contain any financial covenants. Obligations under the Term Loan may be accelerated upon certain customary events of default (subject to grace periods, as appropriate).

Asset Based Revolving Facility
    
    On June 17, 2020, the Company entered into a First Amendment (the “Amendment”) to the ABL Credit Agreement. The Amendment, among other things, (i) increased the size of the Revolver from $300.0 million to $350.0 million of aggregate commitments, with up to $330.0 million to be made available to the U.S. Borrowers and up to $20.0 million to be made available to the Canadian Borrowers (the allocation may be modified periodically at the Company's request), (ii) extended the maturity date of the Revolver to June 17, 2025, subject to earlier maturity if greater than $75.0 million of the Company’s Term Loan remains outstanding 91 days prior to the scheduled maturity of the term loan credit facility or any refinancing thereof, and (iii) modified the interest rates on outstanding borrowings under the Revolver to a rate equal to LIBOR or CDOR plus a margin ranging from 1.75% to 2.25% per annum, or an alternate base rate, Canadian prime rate or Canadian base rate plus a margin ranging from 0.75% to 1.25% per annum, in each case, based upon the average excess availability under the Revolver for the most recently completed calendar quarter and the Company’s total leverage ratio as of the end of the most recent fiscal quarter for which financial statements have been delivered. The Company incurred $2.6 million of fees and expenses in connection with this Amendment and recorded it to “Other Long-term Assets” in its condensed consolidated balance sheet. In addition, the Company wrote off $0.4 million of previously deferred issuance cost related to the banks that are no longer part of the ABL Credit Facility.

Subject to the conditions set forth in the ABL Credit Agreement, as amended, the Revolver may be increased by up to the greater of (i) $100.0 million and (ii) such amount as would not cause the aggregate borrowing base to be exceeded by more than $50.0 million. Borrowings under the Revolver may not exceed a borrowing base equal to the sum of (i) 100% of eligible cash, (ii) 85% of eligible accounts receivable and (iii) the lesser of (a) 75% of eligible inventory and (b) 85% of the orderly liquidation value of eligible inventory, with the U.S. and Canadian borrowings being subject to separate borrowing base limitations. The advance rates for accounts receivable and inventory are subject to increase by 2.5% during certain periods. As of June 30, 2021 and December 31, 2020 the Company had $20.0 million and no outstanding borrowings, respectively, under the Revolver. The weighted average interest rates for the borrowings under the Revolver were 2.75%, 2.75%, 1.98% and 2.00% for the three and six months ended June 30, 2021 and June 30, 2020, respectively.

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

    In addition, Forterra pays a facility fee of between 20.0 and 32.5 basis points per annum based upon the utilization of the total Revolver. Availability under the Revolver, based on draws, outstanding letters of credit of $18.8 million, as well as allowable borrowing base as of June 30, 2021, was $301.4 million.

    The Revolver contains customary representations and warranties, and affirmative and negative covenants, including representations, warranties, and covenants that, among other things, restrict the ability of
16


FORTERRA, INC.
Notes to Unaudited Condensed Consolidated Financial Statements


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

    As of June 30, 2021, the Company was in compliance with all applicable covenants under the Revolver, the Term Loan, and the Notes.

    As of June 30, 2021, scheduled maturities of long-term debt were as follows (in thousands).
TotalTerm LoanNotesRevolver
2021$6,255 $6,255 $ $ 
202212,510 12,510   
2023389,847 389,847   
2024    
2025520,000  500,000 20,000 
$928,612 $408,612 $500,000 $20,000 



12. Derivatives and hedging

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

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

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

    The Company elects to present all derivative assets and derivative liabilities on a net basis on its condensed consolidated balance sheets when a legally enforceable International Swaps and Derivatives Association, Inc. (“ISDA”) Master Agreement exists. An ISDA Master Agreement is an agreement between two counterparties, which may have multiple derivative transactions with each other governed by such agreement, and such ISDA Master Agreement generally provides for the net settlement of all or a specified group of these derivative transactions, through a single payment, in a single currency, in the event of a default on, or affecting
17


FORTERRA, INC.
Notes to Unaudited Condensed Consolidated Financial Statements


any, one derivative transaction or a termination event affecting all, or a specified group of, derivative transactions. At June 30, 2021 and December 31, 2020, the Company’s derivative instruments fall under an ISDA master netting agreement.

    The following table presents the fair values of derivative assets and liabilities in the condensed consolidated balance sheets (in thousands):
June 30, 2021
Derivative Assets
Derivative Liabilities
Notional Amount
Fair Value
Notional Amount
Fair Value
Interest rate swaps
$ $ $400,000 $367 
Total derivatives, gross
 367 
Less: Legally enforceable master netting agreements  
Total derivatives, net$