FORTERRA, INC. The following discussion and analysis should be read in conjunction with our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2020 filed with theSEC onFebruary 25, 2021 , or the 2020 10-K. This discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. See the section entitled "Cautionary Statement Concerning Forward-Looking Statements" for a discussion of the risks, uncertainties and assumptions associated with those statements.
Unless otherwise specified or where the context otherwise requires, references
in this Report to "our," "we," "us," "Forterra", the "Company" and "our
business" refer to
Overview
Our Company
We are a manufacturer of ductile iron pipe and concrete pipe and precast
products in the United States and Eastern Canada for a variety of essential
water-related infrastructure applications. We provide critical infrastructure
components for a broad spectrum of construction projects across infrastructure,
residential and non-residential markets. Our suite of products ranges 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.
Our Segments
Our operations are organized into the following reportable segments:
•Drainage Pipe & Products - We are a producer of concrete drainage pipe and precast products.
•Water Pipe & Products - We are a producer of ductile iron pipe, or DIP.
•Corporate and Other - Corporate, general and administrative expenses not allocated to our revenue-generating segments such as certain shared services, executive and other administrative functions.
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--------------------------------------------------------------------------------COVID-19 Pandemic
DuringMarch 2020 , a global pandemic was declared by theWorld Health Organization and a National Emergency was declared by the President ofthe United States related to the rapidly growing outbreak of COVID-19. The pandemic has significantly impacted economic conditions inthe United States , as federal, state, and local governments reacted to the public health crisis, creating significant uncertainties inthe United States , as well as the global economy. In the interest of public health and safety,U.S. jurisdictions (national, state, and local) where our primary operations and those of many of our customers are located required mandatory business closures, capacity limitations, or other restrictions for those permitted to continue to operate or allowed to reopen since the initial shut-downs inMarch 2020 . Despite these events and the related uncertainty, we continued to operate as an essential business under the government orders, and the COVID-19 pandemic has not materially and adversely affected our liquidity, financial results or business operations thus far. We did, however, utilize the option under the CARES Act to defer the employer portion of the social security taxes that would otherwise have been due in 2020, which was delayed with 50%, or approximately$5.5 million , paid inSeptember 2021 and the remaining 50% due byDecember 31, 2022 . Although our revenues have increased for the three and nine months endedSeptember 30, 2021 , as compared to the prior year periods, the situation is still rapidly changing and additional impacts to the business may arise that we are not aware of or may not anticipate currently, which could have an adverse impact on revenues, results of operations, and cash flows for the fourth quarter and full 2021 fiscal year and into 2022. We cannot predict whether, when, or the manner in which the conditions surrounding COVID-19 will change, including the ultimate duration and scope of the pandemic; the severity of the virus, including the emergence and spread of new variants; the impact of the COVID-19 vaccines, including the speed at which they are disseminated, the rate at which individuals choose to receive the vaccine (including our team members) and their continued effectiveness against the disease or new variants; the actions taken by governments to contain the virus or treat its impact; and how quickly and to what extent normal economic and operating conditions can resume. Due to the evolving situation, our business and future results of our operations could be impacted in ways that we are not able to predict currently. In addition, there is still considerable uncertainty in theU.S. economy, as well as the industry we are in, in particular due to the uncertainty of future funding of and demand in our infrastructure and municipal end-markets, as well as challenges to the availability of raw materials used in our products due to strains on global supply chains and significantly increased costs of raw materials we purchase and the labor we employ. Quikrete Merger Agreement OnFebruary 19, 2021 , we entered into an Agreement and Plan of Merger, or the Merger Agreement, withQuikrete Holdings, Inc. and one of its wholly-owned subsidiaries. Pursuant to the Merger Agreement, subject to the satisfaction or waiver of specified conditions, Quikrete's subsidiary will merge with and into the Company, with the Company surviving the Merger as a wholly-owned subsidiary of Quikrete. At the effective time of the Merger, subject to limited exceptions, each issued and outstanding share ofForterra common stock will be automatically canceled and converted into the right to receive$24.00 in cash, without interest, subject to deduction for any required withholding tax.Outstanding Company equity awards will be converted into Merger consideration as provided for in the Merger Agreement. We incurred transaction costs of approximately$4.1 million and$8.0 million for the three and nine months endedSeptember 30, 2021 , respectively, in connection with the Merger. See Note 3, Mergers and dispositions, to the condensed consolidated financial statements and Item 7, Management's Discussion and Analysis in the 2020 10-K for a more fulsome description of the Merger, the Merger Agreement and its terms and expected impact on our business.
Barbour Concrete Acquisition
OnJuly 1, 2021 , we acquired the business ofBarbour Concrete Company & Barbour Building Systems ("Barbour"), a manufacturer of precast concrete products used in drainage, stormwater, utility and other infrastructure applications. Based inIndependence, Missouri , Barbour primarily serves the greaterKansas City metropolitan area. We expect to continue operating the business asBarbour Concrete & Barbour Building 30 --------------------------------------------------------------------------------
Systems for the foreseeable future and believe this acquisition will gain access
to new opportunities for growth in the strong and expanding
Principal Factors Affecting Our Results of Operations
Our financial performance and results of operations are influenced by a variety of factors, including conditions in the residential, non-residential and infrastructure construction markets, general economic conditions, availability of and significant inflation in the cost of raw materials and transportation, availability and cost of labor, seasonality and weather conditions. In addition to the Merger and the items discussed below, some of these other more important factors are discussed in the 2020 10-K, to which there were no material changes during the period covered by this report, except as discussed below. During 2021, prices for certain of our raw material costs, including costs for scrap metal, steel, cement, as well as other key materials needed in smaller amounts to produce and sell our products, such as coke, nitrogen gas, rubber gaskets, and magnesium ferrosilicon, which have historically fluctuated depending on, among other things, overall market supply and demand and general business conditions, were negatively impacted by both global and industry-wide supply chain disruptions, resulting in increases to our costs of goods sold and disruption in supply for some materials in certain of our areas. We have also experienced rising costs in transportation, which is included as part of our delivered pricing to customers. In addition, we have experienced rising costs and difficulty in obtaining labor across many of our facilities. In response, we have implemented a combination of price increases and productivity initiatives aimed at mitigating the impact of these events and other inflationary pressures. We expect these macroeconomic inflationary pressures and supply chain disruptions will continue to impact our cost of goods sold for the remainder of fiscal 2021 and that the combination of our price increases and productivity initiatives will mitigate these costs later in the year. See Item 1A. Risk Factors in the 2020 10-K regarding specific risks on supply chain and labor disruptions.
Principal Components of Results of Operations
Net sales consist of the consideration which we expect to be entitled to for the sale of products in the ordinary course of business and include the billable costs of delivery of our products to customers. Net sales include any outbound freight charged to the end user. Revenue for certain contracts related to our structural precast products that are designed and engineered specifically for the customer is recognized over time using an acceptable input method which utilizes our cost incurred to date relative to total estimated costs at completion to measure progress.
Cost of Goods Sold
Cost of goods sold includes raw materials (cement, aggregates, scrap, steel and clay) and supplies, labor (including contract labor), freight (including outbound freight for delivery of products to end users and other charges such as inbound freight), energy, depreciation and amortization, repairs and maintenance and other cost of goods sold.
Selling, General and Administrative Expenses
Selling, general and administrative expenses include expenses for sales, marketing, legal, accounting and finance services, human resources, customer support, treasury and other general corporate services. Selling, general and administrative expenses also include transaction costs directly related to the Merger and any other business combinations or disposition and other costs incurred with respect to cost savings initiatives.
Impairment and Exit Charges
Impairment and exit charges are primarily comprised of severance and other charges incurred to consolidate certain plants in an effort to optimize our portfolio, as well as asset impairment charges.
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--------------------------------------------------------------------------------Other Operating Income, Net
The remaining categories of operating income and expenses consist of scrap income (associated with scrap from the manufacturing process or remaining scrap after plants are closed), insurance gains, rental income and the gain or loss generated on the sale of assets including property, plant and equipment.
Interest Expense
Interest expense represents interest on indebtedness, including finance lease obligations, the amortization of deferred financing costs, as well as the gain and loss associated with our interest rate swaps.
Earnings from Equity Method Investee
Earnings from equity method investee represents our share of the income of the CP&P joint venture. CP&P is engaged primarily in the manufacture, marketing, sale and distribution of concrete pipe and precast products inVirginia ,West Virginia ,Maryland ,North Carolina ,Pennsylvania andSouth Carolina with sales to contiguous states. See Note 6, Investment in Equity Method Investee, to the condensed consolidated financial statements for additional information on CP&P.
Income Tax Expense
Income tax expense consists of federal, state, provincial, local and foreign taxes based on income in the jurisdictions in which we operate.
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--------------------------------------------------------------------------------Results of Operations
Three Months Ended
The following table summarizes certain financial information relating to our
operating results for the three months ended
Three months ended Three months ended
Statements of Income Data: September 30, 2021 September 30, 2020 % Change
Net sales $ 526,640 $ 457,557 15.1 %
Cost of goods sold 410,072 331,284 23.8 %
Gross profit 116,568 126,273 (7.7) %
Selling, general and administrative expenses (51,830) (57,050) (9.1) %
Impairment and exit charges (19) (1,389) (98.6) %
Other operating income, net 414 224 84.8 %
(51,435) (58,215) (11.6) %
Income from operations 65,133 68,058 (4.3) %
Other income (expenses)
Interest expense (19,001) (20,055) (5.3) %
Loss on extinguishment of debt - (11,547) *
Earnings from equity method investee 3,337 2,295 45.4 %
Income before income taxes 49,469 38,751 27.7 %
Income tax expense (13,701) (9,924) 38.1 %
Net income $ 35,768 $ 28,827 24.1 %
* Represents positive or negative change in excess of 100%
Net sales for the three months endedSeptember 30, 2021 were$526.6 million , an increase of$69.0 million , or 15.1%, from$457.6 million in the three months endedSeptember 30, 2020 . The increase in sales was the combination of$38.3 million increase in the Drainage Pipe & Products segment compared to prior year primarily due to higher shipment volumes, and a$30.8 million increase in the Water Pipe & Products segment driven by both higher average selling prices and higher shipment volumes. Cost of Goods Sold Cost of goods sold were$410.1 million for the three months endedSeptember 30, 2021 , an increase of$78.8 million , or 23.8%, from$331.3 million in the three months endedSeptember 30, 2020 . The increase in cost of goods sold was the combination of a$48.4 million increase in the Water Pipe & Products segment and a$30.4 million increase in the Drainage Pipe & Products segment compared to prior year. These increases were primarily driven by higher shipment volumes, coupled with higher raw material costs in both segments. 33 --------------------------------------------------------------------------------
Gross Profit
Gross profit was$116.6 million for the three months endedSeptember 30, 2021 , a decrease of$9.7 million , or 7.7%, from$126.3 million in the three months endedSeptember 30, 2020 . The decrease was the net effect of a$17.6 million decrease in the Water Pipe & Products segment primarily due to higher raw material costs, offset by a$7.9 million increase in the Drainage Pipe & Products segment primarily due to higher shipment volumes.
Selling, General and Administrative Expenses
Selling, general and administrative expenses were$51.8 million for the three months endedSeptember 30, 2021 , a decrease of$5.3 million , or 9.1%, from$57.1 million in the three months endedSeptember 30, 2020 . During the third quarter of 2020, we recorded a non-recurring legal accrual which caused most of the higher selling, general and administrative expenses in the prior year period. Interest Expense Interest expense for the three months endedSeptember 30, 2021 was$19.0 million , a decrease of$1.1 million or 5.3% from$20.1 million in the three months endedSeptember 30, 2020 . The decrease in interest expense was primarily due to lower outstanding debt balances in the three months endedSeptember 30, 2021 compared to prior year.
Income Tax Expense
Income tax expense in the three months endedSeptember 30, 2021 was$13.7 million , an increase of$3.8 million from$9.9 million in the three months endedSeptember 30, 2020 . The change is primarily due to the higher federal tax expense based on the greater pretax income during the three months endedSeptember 30, 2021 and releases to the federal and state valuation allowance during the period endedSeptember 30, 2020 that did not reoccur in 2021. 34 --------------------------------------------------------------------------------
Segments
For the three months ended September 30,
(in thousands) 2021 2020(2) % Change
Net sales:
Drainage Pipe & Products $ 299,423 $ 261,139 14.7 %
Water Pipe & Products 227,217 196,418 15.7 %
Corporate and Other - - *
Total $ 526,640 $ 457,557 15.1 %
Gross profit (loss):
Drainage Pipe & Products 81,597 73,698 10.7 %
Water Pipe & Products 35,014 52,580 (33.4) %
Corporate and Other (43) (5) *
Total $ 116,568 $ 126,273 (7.7) %
Segment EBITDA(1):
Drainage Pipe & Products 75,609 66,797 13.2 %
Water Pipe & Products 31,958 44,978 (28.9) %
Corporate and Other (18,290) (30,606) (40.2) %
Key Operational Statistics % Change
Drainage Pipe & Products(3)
Shipment Volumes +16%
Average Selling Prices +2%
Water Pipe & Products(4)
Shipment Volumes +5%
Average Selling Prices +10%
(1) For the purposes of evaluating segment performance, the Company's chief
operating decision maker reviews earnings before interest, taxes, depreciation
and amortization ("EBITDA") as a basis for making the decisions to allocate
resources and assess performance. Our discussion below includes the primary
drivers of EBITDA. See Note 17, Segment Reporting, to the condensed consolidated
financial statements for segment EBITDA reconciliation to income (loss) before
income taxes.
(2) During the fourth quarter of 2020, we reclassified the pressure pipe
business from Water segment to Drainage segment to better align with our
organizational structure. The US and Canadian Pressure Pipe businesses were
formerly managed by the Water segment management team, however Forterra changed
its internal management structure to include the remaining Canadian Pressure
Pipe plant under the same management team that oversees the Canadian Pipe &
Precast operations. As a result, historical segment data were updated to reflect
the current segment compositions.
(3) Operational statistics only pertain to pipe and precast products and do
not include other services, non-volume-based products, or non-core products.
Pipe and precast products revenue accounted for more than 85% of Drainage
segment revenue.
(4) Operational statistics only pertain to ductile iron pipe products and do
not include other services, non-volume-based products, or non-core products.
Ductile iron pipe products revenue accounted for more than 85% of Water segment
revenue.
* Represents positive or negative change in excess of 100%.
35
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Drainage Pipe & Products
Net sales in the three months endedSeptember 30, 2021 were$299.4 million , an increase of$38.3 million , or 14.7%, compared to$261.1 million in the three months endedSeptember 30, 2020 . The increase was primarily due to higher shipment volumes of our pipe and precast products while average selling prices remain relatively flat. Pipe and precast products sales accounted for about 90% of Drainage Pipe & Products segment net sales.
Gross Profit
Gross profit in the three months ended
Water Pipe & ProductsNet Sales Net sales in the three months endedSeptember 30, 2021 was$227.2 million , an increase of$30.8 million or 15.7% from$196.4 million in the three months endedSeptember 30, 2020 . The increase was primarily the combination of a$17.3 million increase driven by higher shipment volumes of our ductile iron pipe products and a$8.2 million increase related to higher average selling prices of our ductile iron pipe products. Ductile iron pipe sales accounted for more than 85% of Water Pipe & Products segment net sales.
Gross Profit
Gross profit in the three months endedSeptember 30, 2021 was$35.0 million , a decrease of$17.6 million , or 33.4% from$52.6 million in the three months endedSeptember 30, 2020 . The decrease was primarily due to higher raw material costs, partially offset by higher shipment volumes and higher average selling prices. 36 --------------------------------------------------------------------------------
Nine Months Ended
Total Company The following table summarizes certain financial information relating to our operating results for the nine months endedSeptember 30, 2021 andSeptember 30, 2020 (in thousands). Nine months ended Nine months ended September 30, September 30, Statements of Income Data: 2021 2020 % Change Net sales$ 1,387,554 $ 1,214,619 14.2 % Cost of goods sold 1,069,150 924,025 15.7 % Gross profit 318,404 290,594 9.6 % Selling, general and administrative expenses (163,131) (164,573) (0.9) % Impairment and exit charges (493) (2,478) (80.1) % Other operating income, net 12,917 (447) * (150,707) (167,498) (10.0) % Income from operations 167,697 123,096 36.2 % Other income (expenses) Interest expense (56,421) (60,502) (6.7) % Loss on extinguishment of debt - (11,481) * Earnings from equity method investee 9,498 8,220 15.5 % Income before income taxes 120,774 59,333 * Income tax expense (30,265) (17,457) 73.4 % Net income$ 90,509 $ 41,876 *
* Represents positive or negative change in excess of 100%
Net sales for the nine months endedSeptember 30, 2021 were$1,387.6 million , an increase of$173.0 million , or 14.2%, from$1,214.6 million in the nine months endedSeptember 30, 2020 . The increase in sales was the combination of a$99.6 million increase in the Water Pipe & Products segment primarily driven by both higher shipment volumes and higher average selling prices, and a$73.3 million increase in the Drainage Pipe & Products segment compared to prior year, primarily due to higher shipment volumes.
Cost of Goods Sold
Cost of goods sold were$1,069.2 million for the nine months endedSeptember 30, 2021 , an increase of$145.2 million , or 15.7%, from$924.0 million in the nine months endedSeptember 30, 2020 . The increase in cost of goods sold was the combination of a$100.4 million increase in the Water Pipe & Products segment primarily 37 -------------------------------------------------------------------------------- driven by both higher shipment volumes and higher production and delivery costs, and a$44.8 million increase in the Drainage Pipe & Products segment compared to prior year, primarily due to higher shipment volumes.
Gross Profit
Gross profit was$318.4 million for the nine months endedSeptember 30, 2021 , an increase of$27.8 million , or 9.6%, from$290.6 million in the nine months endedSeptember 30, 2020 . The increase was the net impact of a$28.5 million increase in the Drainage Pipe & Products segment primarily due to higher shipment volumes, partially offset by a$0.7 million decrease in the Water Pipe & Products segment due to higher production and delivery costs, partially offset by higher average selling prices.
Selling, General and Administrative Expenses
Selling, general and administrative expenses were$163.1 million for the nine months endedSeptember 30, 2021 , a slight decrease of$1.5 million , or 0.9%, from$164.6 million in the nine months endedSeptember 30, 2020 . The slight decrease was primarily due to a non-recurring legal accrual recorded in the prior year, partially offset by higher staff costs.
Other Operating Income, Net
Other operating income in the nine months endedSeptember 30, 2021 was$12.9 million , an increase of$13.4 million , from an other operating loss of$0.4 million in the nine months endedSeptember 30, 2020 . The increase in 2021 was primarily driven by$10.3 million net gains on asset sales as we continue optimizing our asset portfolio and disposing of idle properties.
Interest Expense
Interest expense for the nine months endedSeptember 30, 2021 was$56.4 million , a decrease of$4.1 million or 6.7% from$60.5 million in the nine months endedSeptember 30, 2020 . The decrease in interest expenses was the net effect of a$9.0 million decrease primarily due to both lower LIBOR and lower outstanding debt balances in the nine months endedSeptember 30, 2021 compared to prior year; a$0.8 million decrease in loss on derivatives related to our interest rate hedge; the absence of a$0.7 million write-off of deferred debt issuance cost that was recorded in last year but did not recur in current year; partially offset by$6.7 million incremental interest expense from the$500 million senior secured notes at a higher rate as compared to the debt it was used to retire inJuly 2020 . Income Tax Expense Income tax expense in the nine months endedSeptember 30, 2021 was$30.3 million , an increase of$12.8 million from$17.5 million in the nine months endedSeptember 30, 2020 . The change is primarily due to the higher federal and state tax expense based on the greater pretax income during the nine months endedSeptember 30, 2021 , partially offset by the valuation allowance movement in 2020 that did not reoccur in 2021 and the current period benefit related to equity compensation. 38
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Segments
For the nine months ended September 30,
(in thousands) 2021 2020(2) % Change
Net sales:
Drainage Pipe & Products $ 749,774 $ 676,471 10.8 %
Water Pipe & Products 637,780 538,148 18.5 %
Corporate and Other - - *
Total $ 1,387,554 $ 1,214,619 14.2 %
Gross profit (loss):
Drainage Pipe & Products 194,907 166,354 17.2 %
Water Pipe & Products 123,550 124,217 (0.5) %
Corporate and Other (53) 23 *
Total $ 318,404 $ 290,594 9.6 %
Segment EBITDA(1):
Drainage Pipe & Products 186,066 147,859 25.8 %
Water Pipe & Products 112,352 109,973 2.2 %
Corporate and Other (59,401) (70,727) (16.0) %
Key Operational Statistics % Change
Drainage Pipe & Products (3)
Shipment Volumes +13%
Average Selling Prices +1%
Water Pipe & Products (4)
Shipment Volumes +10%
Average Selling Prices +9%
(1) For the purposes of evaluating segment performance, the Company's chief
operating decision maker reviews earnings before interest, taxes, depreciation
and amortization ("EBITDA") as a basis for making the decisions to allocate
resources and assess performance. Our discussion below includes the primary
drivers of EBITDA. See Note 17, Segment Reporting, to the condensed consolidated
financial statements for segment EBITDA reconciliation to income (loss) before
income taxes.
(2) During the fourth quarter of 2020, we reclassified the pressure pipe
business from Water segment to Drainage segment to better align with our
organizational structure. The US and Canadian Pressure Pipe businesses were
formerly managed by the Water segment management team, however Forterra changed
its internal management structure to include the remaining Canadian Pressure
Pipe plant under the same management team that oversees the Canadian Pipe &
Precast operations. As a result, historical segment data were updated to reflect
the current segment compositions.
(3) Operational statistics only pertain to pipe and precast products and do
not include other services, non-volume-based products, or non-core products.
Pipe and precast products revenue accounted for more than 85% of Drainage
segment revenue.
(4) Operational statistics only pertain to ductile iron pipe products and do
not include other services, non-volume-based products, or non-core products.
Ductile iron pipe products revenue accounted for more than 85% of Water segment
revenue.
* Represents positive or negative change in excess of 100%.
39
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Drainage Pipe & Products
Net sales in the nine months ended
Gross Profit
Gross profit in the nine months endedSeptember 30, 2021 was$194.9 million , an increase of$28.5 million or 17.2% from$166.4 million in the nine months endedSeptember 30, 2020 . The increase was primarily due to higher shipment volumes. Water Pipe & ProductsNet Sales Net sales in the nine months endedSeptember 30, 2021 was$637.8 million , an increase of$99.7 million or 18.5% from$538.1 million in the nine months endedSeptember 30, 2020 . The increase was primarily the combination of a$46.1 million increase related to higher average selling prices of our ductile iron pipe products and a$43.1 million increase driven by higher shipment volumes of our ductile iron pipe products. Ductile iron pipe sales accounted for more than 85% of Water Pipe & Products segment net sales.
Gross Profit
Gross profit in the nine months endedSeptember 30, 2021 was$123.5 million , a decrease of$0.7 million , or 0.5% from$124.2 million in the nine months endedSeptember 30, 2020 . The decrease was primarily due to higher production and delivery costs, partially offset by higher shipment volumes and higher average selling prices.
Liquidity and Capital Resources
Our available cash and cash equivalents, borrowing availability under our$350.0 million Revolver, and funds generated from operations are our most significant sources of liquidity. While we believe these sources will be sufficient to finance our working capital requirements, planned capital expenditures that are essential, debt service obligations and other cash requirements for at least the next 12 months, our future liquidity will depend in part upon our operating performance, which will be affected by prevailing economic conditions, including those related to the COVID-19 pandemic, and financial, business and other factors, some of which are beyond our control. See Item 1A, Risk Factors, in the 2020 10-K. As ofSeptember 30, 2021 andDecember 31, 2020 , we had approximately$24.0 million and$25.7 million of cash and cash equivalents, respectively, of which$10.1 million and$12.5 million , respectively, were held by foreign subsidiaries. All of the cash and cash equivalents as ofSeptember 30, 2021 andDecember 31, 2020 were readily convertible as of such dates into currencies used in the Company's operations, including theU.S. dollar. We have a tax receivable agreement withLone Star that provides for the payment by us toLone Star of specified amounts in respect of any cash savings as a result of the utilization of certain tax benefits. The actual utilization of the relevant 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. However, we expect that the payments we make under the tax receivable agreement could be substantial. The tax receivable agreement also includes provisions which restrict the incurrence of debt and that require that we make an accelerated payment toLone Star equal to the present 40 -------------------------------------------------------------------------------- value of all future payments due under the tax receivable agreement, in each case under certain circumstances. Because of the foregoing, 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. See Note 14, Commitments and contingencies, to the condensed consolidated financial statements for additional information regarding the tax receivable agreement. Our forecasted payments under the tax receivable agreement in 2021, pertaining to the 2020 tax year, are expected to be in the range of$7 million to$9 million . We expect that future annual payments under the tax receivable agreement will decline each year in accordance with our tax basis depreciation and amortization schedule unless future unplanned transactions result in an acceleration of our tax benefits under the agreement. It is expected that if the Quikrete Merger is completed under the terms of the Merger Agreement, payments toLone Star will continue to be made by the surviving entity under the Merger Agreement according to the terms of the TRA. During the nine months endedSeptember 30, 2021 , we borrowed and repaid$40 million under our$350 million Revolver to fund seasonal working capital needs. As ofSeptember 30, 2021 , we had$405.5 million outstanding balance under our senior term loan as amended, or the Term Loan, and no borrowings outstanding under the Revolver. Availability under the Revolver, based on draws, outstanding letters of credit of$18.8 million , as well as allowable borrowing base as ofSeptember 30, 2021 , was$320.0 million . Our$350 million Revolver will expire onJune 17, 2025 , subject to earlier maturity if greater than$75.0 million of our Term Loan remains outstanding 91 days prior to the scheduled maturity of the term loan credit facility or any refinancing thereof. Outstanding borrowings under the Revolver have interest rates 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 our total leverage ratio as of the end of the most recent fiscal quarter for which financial statements have been delivered. Subject to the conditions set forth in the revolving 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 theU.S. and Canadian borrowings being subject to separate borrowing base limitations. Our 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 ofForterra, Inc. 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 onOctober 25, 2023 and is subject to quarterly amortization equal to 0.25% of the initial principal amount. Interest will accrue on outstanding borrowings thereunder at a rate equal to adjusted LIBOR (with a floor of 1.0%) or an alternate base rate, in each case plus a margin of 3.00% or 2.00%, respectively. The Revolver and the Term Loan contain customary representations and warranties, and affirmative and negative covenants, that, among other things, restrict our ability 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 us from allowing our 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. The fixed charge coverage ratio is the ratio of consolidated earnings before interest, depreciation, and amortization, less cash payments for capital expenditures and income taxes to consolidated fixed charges (interest expense plus scheduled payments of principal on indebtedness). 41 -------------------------------------------------------------------------------- The Term Loan does not contain any financial covenants. Obligations under the Revolver and the Term Loan may be accelerated upon certain customary events of default (subject to grace periods, as appropriate). As ofSeptember 30, 2021 , we were in compliance with all applicable covenants under the Revolver and the Term Loan. Our$500 million senior secured notes issued inJuly 2020 , or the Notes, will mature onJuly 15, 2025 and have a fixed annual interest rate of 6.50%. Obligations under the Notes are guaranteed by us and our existing and future subsidiaries (other than the issuers) that guarantee the Term Loan and the obligations of theU.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, securities accounts, certain intercompany loans and related assets), which second-priority liens is 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. Upon closing, we used the net proceeds from this offering to repay$492.5 million of the principal amount of the Term Loan at par, plus accrued interest.
Parent Issuer and Subsidiary Guarantor Summarized Financial Information
The following information contains the summarized financial information for the
parent (
This consolidated summarized financial information has been prepared from the Company's financial information on the same basis of accounting as the Company's consolidated financial statements. Transactions between the parent and subsidiary guarantors presented on a combined basis have been eliminated. The principal elimination entries relate to investments in subsidiaries and intercompany balances and transactions. Certain costs have been partially allocated to all of the subsidiaries of the Company.
The subsidiary guarantors are 100% owned by the Company. All guarantees are full
and unconditional and are joint and several. There are no significant
restrictions on the ability of the Company to obtain funds from its
Summarized financial information for the year-to-date interim period and the most recent annual period was as follows (in thousands):
Parent - Forterra, Inc. and Subsidiary
Guarantors
September 30, 2021 December 31, 2020
Current assets $ 581,782 $ 443,839
Intercompany payable to non-guarantor subsidiaries 8,533 8,384
Non-current assets 1,087,580 1,115,191
Current liabilities 301,189 267,672
Non-current liabilities 1,164,977 1,176,492
42
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Parent - Forterra, Inc. and Subsidiary
Guarantors
Nine months ended Year ended December
September 30, 2021 31, 2020
Net sales $ 1,308,312 $ 1,514,556
Gross profit 284,309 347,854
Income before taxes 97,071 58,880
Net income 71,677 52,273
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