Forterra Announces Favorable Decision in Earnout Arbitration

Rhea-AI Summary

Forterra, Inc. (NASDAQ: FRTA), a key player in water infrastructure products, announced a favorable arbitration decision regarding a $100 million earnout claim from HeidelbergCement related to a previous acquisition. The arbitrator ruled no payment was due, allowing Forterra to focus on its operational goals. CEO Karl Watson, Jr. highlighted substantial improvements in their financials, boasting a 7% sales increase and a shift from a $34 million net loss to a $28 million net income compared to the same period last year. Additionally, the company plans to prepay $125 to $175 million of long-term debt in 2020.

Positive

• Arbitration ruling eliminates $100 million earnout obligation.
• Sales increased by 7% year-over-year.
• Net income improved from a $34 million loss to $28 million profit.
• Adjusted EBITDA increased by 37%, with margin rising to 15.3%.
• Increased confidence leads to a projected $125 to $175 million in long-term debt prepayments.

Negative

• None.

IRVING, Texas, Sept. 10, 2020 (GLOBE NEWSWIRE) -- Forterra, Inc. (“Forterra” or “the Company”) (NASDAQ: FRTA), a leading manufacturer of water and drainage infrastructure pipe and products in the United States and Eastern Canada, today announced that a decision favorable to the Company has been rendered in the arbitration proceeding involving the earnout provision in the purchase agreement relating to the 2015 acquisition of certain businesses now owned by the Company from HeidelbergCement, A.G. (“Heidelberg”).  A neutral accounting arbitrator engaged by the parties rendered a written decision on September 10, 2020 in which he determined that no earnout payment was due under the terms of the purchase agreement. In the proceeding, Heidelberg had sought an earnout payment of the maximum amount of $100 million from the parties that had entered into the purchase agreement with Heidelberg.

Forterra’s CEO Karl Watson, Jr. commented, “We are pleased with the ruling from the arbitrator, as we have consistently held the view that no earnout payment was owed in this matter.  We look forward to moving on from this and continuing to execute on our five improvement pillars which have created significant momentum over the past several quarters. Comparing our recent second quarter 2020 results to the second quarter of 2019, in each case on a last twelve-month basis, we have increased our sales by 7%, gross profit by 26%, improved from a net loss of $34 million to net income of $28 million, and improved Adjusted EBITDA¹ by 37%, with Adjusted EBITDA margin¹ increasing from 12.0% to 15.3%.”

“Before suspending our 2020 guidance, we stated that we intended to voluntarily prepay an additional $50 to $100 million of our long-term debt by year’s end. Due to our strong momentum, and the increased confidence this decision provides us, we now expect to voluntarily prepay between $125 and $175 million of our long-term debt in 2020.”

About Forterra
Forterra is a leading manufacturer of water and drainage pipe and products in the U.S. and Eastern Canada for a variety of water-related infrastructure applications, including water transmission, distribution, drainage and stormwater systems.  Based in Irving, Texas, Forterra’s product breadth and scale help make it a preferred supplier for water-related pipe and products, serving a wide variety of customers, including contractors, distributors and municipalities.  For more information on Forterra, visit http://forterrabp.com.

¹ A reconciliation of non-GAAP financial measures, including Adjusted EBITDA and Adjusted EBITDA margin, to comparable GAAP financial measures is provided in the reconciliation of Non-GAAP measures section of this press release.

Forward-Looking Statements
This press release contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements may be identified by the use of words such as "anticipate", "believe", "expect", "estimate", "plan", "outlook", and "project" and other similar expressions that predict or indicate future events or trends or that are not statements of historical matters. Forward-looking statements should not be read as a guarantee of future performance or results and will not necessarily be accurate indications of the times at, or by, which such performance or results will be achieved. Forward-looking statements are based on historical information available at the time the statements are made and are based on management's reasonable belief or expectations with respect to future events, and are subject to risks and uncertainties, many of which are beyond the Company's control, that could cause actual performance or results to differ materially from the belief or expectations expressed in or suggested by the forward-looking statements.

Some of the risks and uncertainties that could cause actual results to differ materially from those expressed in any forward-looking statements include risks and uncertainties relating to the impacts of the COVID-19 pandemic; 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; the availability and price of the raw materials we use in our business; the 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; energy costs; disruption at one or more of our manufacturing facilities or in our supply chain; construction project delays and our inventory management; our ability to successfully integrate 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 earnout; compliance with environmental laws and regulations; compliance with health and safety laws and regulations and other laws and regulations to which we and our products are subject to; our dependence on key executives and key management personnel; our ability, or that of the customers with which we work, to retain and attract additional skilled and non-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 adverse weather; our contract backlog; our ability to maintain sufficient liquidity and ensure adequate financing or guarantees for large projects; delays or outages in our information technology systems and computer networks; security breaches in our information technology systems and other cybersecurity incidents and additional factors discussed in our filings with the Securities and Exchange Commission, including our Annual Report on Form 10-K and Quarterly Reports on Form 10-Q, for additional information regarding the risks and uncertainties that may cause actual results to differ materially from those expressed in any forward-looking statement.

Non-GAAP Measures
In addition to our results calculated under generally accepted accounting principles in the United States ("GAAP"), in this press release we also present Adjusted EBITDA and Adjusted EBITDA margin. Adjusted EBITDA and Adjusted EBITDA margin are non-GAAP measures and have been presented in this press release as supplemental measures of financial performance that are not required by, or presented in accordance with GAAP. We calculate Adjusted EBITDA as the sum of net income (loss), before interest expense (including (gains) losses from extinguishment of debt), depreciation and amortization, income tax benefit (expense) and before (gains) losses on the sale of property, plant and equipment, impairment and exit charges and certain other non-recurring income and expenses, such as transaction costs, inventory step-up impacting margin, non-cash compensation expense and pro-rata share of Adjusted EBITDA from equity method investee, minus earnings from equity method investee.  Adjusted EBITDA margin represents Adjusted EBITDA as a percentage of net sales.

Adjusted EBITDA and Adjusted EBITDA margin are presented in this press release because they are important metrics used by management as one of the means by which it assesses our financial performance. Adjusted EBITDA and Adjusted EBITDA margin are also frequently used by analysts, investors and other interested parties to evaluate companies in our industry. We use Adjusted EBITDA and Adjusted EBITDA margin as supplements to GAAP measures of performance to evaluate the effectiveness of our business strategies, to make budgeting decisions, to allocate resources and to compare our performance relative to our peers.  Adjusted EBITDA and Adjusted EBITDA margin are also important measures for assessing our operating results and evaluating each operating segment’s performance on a consistent basis, by excluding the impacts of depreciation, amortization, income tax expense, interest expense and other items not indicative of ongoing operating performance. Additionally, these measures, when used in conjunction with related GAAP financial measures, provide investors with additional financial analytical framework which management uses, in addition to historical operating results, as the basis for financial, operational and planning decisions and present measurements that third parties have indicated are useful in assessing the Company and its results of operations.

Adjusted EBITDA and Adjusted EBITDA margin have certain limitations. Adjusted EBITDA should not be considered as an alternative to consolidated net income (loss).  Similarly, Adjusted EBITDA margin should not be considered as an alternative to gross margin or any other margin calculated in accordance with GAAP.  These measures also should not be construed as an inference that our future results will be unaffected by unusual or nonrecurring items for which these non-GAAP measures make adjustments. Additionally, Adjusted EBITDA and Adjusted EBITDA margin are not intended to be liquidity measures because of certain limitations such as: (i) they do not reflect our cash outlays for capital expenditures or future contractual commitments; (ii) they do not reflect changes in, or cash requirements for, working capital; (iii) they do not reflect interest expense, or the cash requirements necessary to service interest, or principal payments, on indebtedness; (iv) they do not reflect income tax expense or the cash necessary to pay income taxes; and (v) although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and these non-GAAP measures do not reflect cash requirements for such replacements.

This release also presents both GAAP and non-GAAP financial measures on a last twelve-month (“LTM”) basis. LTM information corresponding to fiscal years (i.e., the periods ended Q4 2018) reflects our audited historical results for such fiscal years presented in accordance with GAAP. Information presented for other LTM periods (i.e., the periods ended Q1 2019 and Q2 2020) reflect unaudited trailing four quarter financial information calculated by starting with the results from the most recent audited fiscal year included in such LTM period and then (x) adding quarterly information for subsequent fiscal quarters and (y) subtracting quarterly information for the corresponding prior year period. For example, LTM Q2 2020 has been calculated by starting with the data from the twelve months ended Q4 2019 and then adding data for the six months ended Q2 2020, followed by subtracting data for the six months ended Q2 2019. This release is not in accordance with GAAP. However, we believe this information is useful to investors as we use it to evaluate our financial performance for ongoing planning purposes, including a continuous assessment of our financial performance in comparison to budgets and internal projections. We also use such LTM financial data to test compliance with covenants under our debt facilities. This presentation has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our results as reported under GAAP. Please see our Annual Reports on Form 10-K and Quarterly Reports on Form 10-Q for the relevant periods for the historical amounts used to calculate the LTM information presented.

Other companies, including other companies in our industry, may not use such measures or may calculate one or more of the measures differently than as presented in this press release, limiting their usefulness as a comparative measure. In evaluating these non-GAAP measures, you should be aware that in the future we will incur expenses that are the same as or similar to some of the adjustments made in the calculations below and the presentation of Adjusted EBITDA and Adjusted EBITDA margin should not be construed to mean that our future results will be unaffected by such adjustments. Management compensates for these limitations by using non-GAAP measures as supplemental financial metrics and in conjunction with results prepared in accordance with GAAP.

Reconciliation of Adjusted EBITDA for trailing 12 months
(in millions)

	Twelve months ended
	June 30, 2019				June 30, 2020
Net income (loss)	$	(33.5	)		$	27.8
Interest expense	97.7				84.9
Depreciation and amortization	100.8				93.4
Income tax (benefit) expense	(6.9		)		10.7
EBITDA1	158.1				216.8
(Gain) loss on sale of property, plant & equipment, net	(0.7		)		2.4
Gain on extinguishment of debt	—				(1.8		)
Impairment and exit charges2	3.4				4.9
Transaction costs3	2.2				6.2
Inventory step-up impacting margin4	0.3				—
Non-cash compensation5	5.8				10.7
Other6	3.6				(0.3		)
Earnings from equity method investee7	(9.6		)		(11.4		)
Pro-rata share of Adjusted EBITDA from equity method investee 8	13.7				15.4
Adjusted EBITDA	$	176.8			$	242.9
Adjusted EBITDA margin	12.0		%		15.3		%

¹ For purposes of evaluating segment profit, the Company's chief operating decision maker reviews EBITDA as a basis for making the decisions to allocate resources and assess performance.
² Impairment or abandonment of long-lived assets and other exit charges.
³ Legal, valuation, accounting, advisory and other costs related to business combinations and other transactions.
⁴ 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 business combinations.
⁵ Non-cash equity compensation expense.
⁶ Other includes one-time charges such as executive severance costs and gains on insurance proceeds related to the destruction of property.
⁷ Net income from Forterra's 50% ownership in the Concrete Pipe & Precast LLC ("CP&P") joint venture accounted for under the equity method of accounting.
⁸ Adjusted EBITDA from Forterra's 50% ownership in the CP&P joint venture. Calculated as CP&P net income adjusted primarily to add back Forterra's pro-rata portion of CP&P's depreciation and amortization and interest expense.

Source: Forterra, Inc.

Company Contact Information:
Charlie Brown
Executive Vice President and Chief Financial Officer
469-299-9113
IR@forterrabp.com

FAQ

What was the outcome of the arbitration for Forterra on September 10, 2020?

Forterra won the arbitration, with the arbitrator ruling no earnout payment of $100 million was due to HeidelbergCement.

How did Forterra's financial performance change compared to last year?

Forterra reported a 7% increase in sales and shifted from a $34 million net loss to a $28 million net income.

What are Forterra's debt repayment plans for 2020?

Forterra plans to prepay between $125 and $175 million of long-term debt by the end of 2020.

How much did Forterra's adjusted EBITDA increase?

Forterra's adjusted EBITDA increased by 37%, with the margin rising to 15.3%.