UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

or

For the transition period from __________ to __________.

Commission File Number: 001-36293

PART I - FINANCIAL INFORMATION

Continental Building Products, Inc.

Consolidated Statements of Operations

Continental Building Products, Inc.

Consolidated Statements of Comprehensive Income

Continental Building Products, Inc.

Consolidated Balance Sheets

Continental Building Products, Inc.

Consolidated Statements of Cash Flows

Continental Building Products, Inc.

Notes to the Unaudited Consolidated Financial Statements

1. BACKGROUND AND NATURE OF OPERATIONS

Description of Business

Continental Building Products, Inc. (the "Company") is a Delaware corporation. Prior to the acquisition of the gypsum division of Lafarge North America Inc. ("Lafarge N.A.") described below, the Company had no operating activity. The Company manufactures gypsum wallboard related products for commercial and residential buildings and houses. The Company operates a network of three highly efficient wallboard facilities, all located in the eastern United States, and produces joint compound at one plant in the United States and at another plant in Canada.

The Acquisition

On June 24, 2013, Lone Star Fund VIII (U.S.), L.P., (along with its affiliates and associates, but excluding the companies that it owns as a result of its investment activity, "Lone Star"),Company's former controlling stockholder, entered into a definitive agreement with Lafarge N.A. to purchase the assets of its North American gypsum division for an aggregate purchase price of approximately $703 million (the "Acquisition") in cash. The closing of the Acquisition occurred on August 30, 2013.

2. SIGNIFICANT ACCOUNTING POLICIES

The accompanying consolidated financial statements for the Company have been prepared in accordance with accounting principles generally accepted in the United States ("U.S. GAAP"). The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany transactions have been eliminated.

Accounting Standards Recently Adopted During the Period

Accounting Standards Not Yet Adopted

business entities and in 2020 for all other calendar-year companies. Early adoption of the standard is permitted. The Company is currently evaluating when it will adopt the ASU and the expected impact tothat this guidance may have on its Consolidated Financial Statements.

Certain reclassifications of prior year information were made to conform to the 2018 presentation. These reclassifications had no material impact on the Company's Consolidated Financial Statements.

3. TRADE RECEIVABLES, NET

Trade receivables are recorded net of credit memos issued during the normal course of business.

4. INVENTORIES, NET

5. PROPERTY, PLANT AND EQUIPMENT, NET

Depreciation expense was $8.1$8.3 million and $16.3 million for both the three and six months ended March 31,June 30, 2018, respectively, compared to $9.4 million and 2017.$17.5 million for the three and six months ended June 30, 2017, respectively.

6. CUSTOMER RELATIONSHIPS AND OTHER INTANGIBLES, NET

Amortization expense was $2.5 million and $3.2$5.1 million for the three and six months ended March 31,June 30, 2018, respectively, compared to $3.1 million and $6.3 million for the three and six months ended June 30, 2017, respectively.

7. INVESTMENT IN SEVEN HILLS

8. ACCRUED AND OTHER LIABILITIES

9. DEBT 

On August 18, 2016, the Company, Continental Building Products Operating Company, LLC ("OpCo") and Continental Building Products Canada Inc. and the lenders party thereto and Credit Suisse, as Administrative Agent, entered into an Amended and Restated Credit Agreement amending and restating the Company's First Lien Credit Agreement (the "Amended and Restated Credit Agreement"). The Amended and Restated Credit Agreement provides for a $275 million senior secured first lien term loan facility and a $75 million senior secured revolving credit facility (the "Revolver"), which mature on August 18, 2023 and August 18, 2021, respectively. Related to this debt refinancing, the Company incurred $4.7 million of discount and debt issuance costs, of which $2.5 million was recorded in Other expense, net on the Consolidated Statements of Operations in 2016, and $2.2 million will be amortized over the term of the Amended and Restated Credit Agreement. Upon completion of this debt refinancing, the Company recognized an additional expense of $3.3 million related to losses resulting from debt extinguishment which was also reported in Other expense, net on the Consolidated Statements of Operations in 2016. The interest rate under the Amended and Restated Credit Agreement remained floating but was reduced to a spread over LIBOR of 2.75% and floor of 0.75%.

During both the threesix months ended March 31,June 30, 2018 and 2017, the Company made $0.7$1.4 million of ordinary scheduled mandatory principal payments. As of March 31,June 30, 2018, the annual effective interest rate, including original issue discount and amortization of debt issuance costs, was 4.6%4.8%.

There were no amounts outstanding under the Revolver as of March 31,June 30, 2018 or 2017. During the threesix months ended March 31,June 30, 2018 and 2017 the Company did not have any draws under the Revolver. Interest under the Revolver is floating,

Under the terms of the Amended and Restated Credit Agreement, the Company is required to comply with certain covenants, including among others, the limitation of indebtedness, limitation on liens, and limitations on certain cash distributions. One single financial covenant governs all of the Company's debt and only applies if the outstanding borrowings of the Revolver plus outstanding letters of credit are greater than $22.5 million as of the end of the quarter. The financial covenant is a total leverage ratio calculation, in which total debt less outstanding cash is divided by adjusted earnings before interest, taxes, depreciation and amortization. As the sum of outstanding borrowings under the Revolver and outstanding letters of credit were less than $22.5 million at March 31,June 30, 2018, the total leverage ratio of no greater than 5.0 under the financial covenant was not applicable at March 31,June 30, 2018. The Company was in compliance with all applicable covenants under the Amended and Restated Credit Agreement as of March 31,June 30, 2018.

10. DERIVATIVE INSTRUMENTS

Commodity Derivative Instruments

Interest Rate Derivative Instrument

In September 2016, the Company entered into interest rate swap agreements for a combined notional amount of $100.0 million with a term of four years, which hedged the floating LIBOR on a portion of the term loan under the Amended and Restated Credit Agreement to an average fixed rate of 1.323% and LIBOR floor of 0.75%. The Company elected to designate these interest rate swaps as cash flow hedges for accounting purposes. No ineffectiveness was recorded on these contracts during the three months ended March 31, 2018 and 2017.

Counterparty Risk

The Company is exposed to credit losses in the event of nonperformance by the counterparties to the Company's derivative instruments. As of March 31,June 30, 2018, the Company's derivatives were in a $0.4$0.5 million net liabilityasset position and recorded in Other current liabilities.assets. All of the Company's counterparties have investment grade credit ratings; accordingly, the Company anticipates that the counterparties will be able to fully satisfy their obligations under the contracts. The Company's agreements outline the conditions upon which it or the counterparties are required to post collateral. As of March 31,June 30, 2018, the Company had no collateral posted with its counterparties related to the derivatives.

11. TREASURY STOCK

On November 4, 2015, the Company announced that the Board of Directors approved a new stock repurchase program authorizing the Company to repurchase up to $50 million of its common stock, at such times and prices as determined by management as market conditions warrant, through December 31, 2016. Pursuant to this authorization, the Company has repurchased shares of its common stock in the open market and in the March 2016 private transaction with LSF8 described above.transactions.

During 2016, 2017 and 2018, the Company announced threetwo expansions and extensions of its stock repurchase program. The most recent authorization on February 21, 2018 expanded the program to a total of $300 million and also extended the expiration date to December 31, 2019.

All repurchased shares are held in treasury, reducing the number of shares of common stock outstanding and used in the Company's earnings per share calculation.

12. SHARE-BASED COMPENSATION

13. ACCUMULATED OTHER COMPREHENSIVE LOSS

14. INCOME TAXES

The Company’s estimated annual effective tax rate is approximately 22.9%.22.2% before discrete items. For the six months ended June 30, 2018, discrete items result in a tax benefit of $0.6 million, consisting of a stock compensation windfall of $0.1 million and a non-recurring benefit of $0.5 million related to re-measurement of deferred taxes resulting from Kentucky tax law change. Due to the timing of the enactment and the complexity involved in applying the provisions of the Tax Cuts and Jobs Act of 2017 (the "Act"), the Company calculated its best estimate of the impact of the Act in its 2017 year end income tax provision in accordance with its understanding of the Act and guidance available as of the date of its Annual Report on Form 10-K for fiscal year 2017 and as a result had recorded a provisional $9.2 million reduction in income tax expense in the fourth quarter of 2017. No adjustment was made to the provisional amount as a result of additional information obtained for the threesix months ended March 31,June 30, 2018. The accounting is expected to be complete when the 2017 U.S. federal and state corporate income tax returns are filed in late 2018.

15. EARNINGS PER SHARE

16. COMMITMENTS AND CONTINGENCIES

The Company leases certain buildings and equipment. The Company's facility and equipment leases may provide for escalations of rent or rent abatements and payment of pro rata portions of building operating expenses. Minimum lease payments are recognized on a straight-line basis over the minimum lease term. The total expenses under operating leases for both the three and six months ended March 31,June 30, 2018 were $0.8 million and $1.6 million, respectively, compared to $0.9 million and $1.7 million for the same periods in 2017, was $0.8 million.respectively. The Company also has non-capital purchase commitments that primarily relate to gas, gypsum, paper and other raw materials. The total amounts purchased under such commitments were $22.4$23.3 million and $17.6$43.5 million for the three and six months ended March 31,June 30, 2018, respectively, compared to $21.7 million and $42.8 million for the three and six months ended June 30, 2017, respectively.

Under certain circumstances, the Company provides letters of credit related to its natural gas and other supply purchases. As of March 31,June 30, 2018 and December 31, 2017, the Company had outstanding letters of credit of approximately $1.6 million.

In the ordinary course of business, the Company executes contracts involving indemnifications standard in the industry. These indemnifications might include claims relating to any of the following: environmental and tax matters; intellectual property rights; governmental regulations and employment-related matters; customer, supplier, and other commercial contractual relationships; and financial matters. While the maximum amount to which the Company may be exposed under such agreements cannot be estimated, it is the opinion of management that these guarantees and indemnifications are not expected to have a material adverse effect on the Company's financial condition, results of operations or liquidity.

In the ordinary course of business, the Company is involved in certain legal actions and claims, including proceedings under laws and regulations relating to environmental and other matters. Because such matters are subject to many uncertainties and the outcomes are not predictable with assurance, the total liability for these legal actions and claims cannot be determined with certainty. When the Company determines that it is probable that a liability for environmental matters, legal actions or other contingencies has been incurred and the amount of the loss is reasonably estimable, an estimate of the costs to be incurred is recorded as a liability in the financial statements. As of March 31,June 30, 2018 and December 31, 2017, such liabilities were not expected to have a material adverse effect on the Company's financial condition, results of operations or liquidity. While management believes its accruals for such liabilities are adequate, the Company may incur costs in excess of the amounts provided. Although the ultimate amount of liability that may result from these matters or actions is not ascertainable, any amounts exceeding the recorded accruals are not expected to have a material adverse effect on the Company's financial condition, results of operations or liquidity.

17. SEGMENT REPORTING

commercial and residential construction sectors. The Company also manufactures finishing products, which complement the Company's full range of wallboard products.

Revenues from the major products sold to external customers include gypsum wallboard and finishing products.

The Company's two geographic areas consist of the United States and Canada for which it reports net sales, fixed assets and total assets.

The Company evaluates operating performance based on profit or loss from operations before certain adjustments as shown below. Revenues are attributed to geographic areas based on the location of the customer generating the revenue. The Company did not provide asset information by segment as its Chief Operating Decision Maker does not use such information for purposes of allocating resources and assessing segment performance.

18. FAIR VALUE DISCLOSURES

The Company estimates the fair value of its debt by discounting the future cash flows of each instrument using estimated market rates of debt instruments with similar maturities and credit profiles. These inputs are classified as Level 3 within the fair value hierarchy. As of March 31,June 30, 2018 and December 31, 2017, the carrying value reported in the consolidated balance sheet for the Company's notes payable approximated its fair value. The only assets or liabilities the Company had at March 31,June 30, 2018 that are recorded at fair value on a recurring basis are the natural gas hedges and interest rate swaps. Generally, the Company obtains its Level 2 pricing inputs from its counterparties. Substantially all of these assumptions are observable in the marketplace throughout the full term of the instrument, can be derived from observable data or are supported by observable levels at which transactions are executed in the marketplace.

Assets and liabilities that are measured at fair value on a non-recurring basis include intangible assets and goodwill. These items are recognized at fair value when they are considered to be impaired.

There were no fair value adjustments for assets and liabilities measured on a non-recurring basis. The Company discloses fair value information about financial instruments for which it is practicable to estimate that value.

We are a leading manufacturer of gypsum wallboard and complementary finishing products in the eastern United States and eastern Canada. We operate highly efficient and automated manufacturing facilities that produce a full range of gypsum wallboard products for our diversified customer base. We sell our products in the new residential, repair and remodel, or R&R, and commercial construction markets.

Three Months Ended March 31,June 30, 2018 Compared to Three Months Ended March 31,June 30, 2017

Net Sales. Net sales decreasedincreased by $3.8$18.7 million, down 3.2%up 15.5% from $120.6 million for the three months ended March 31,June 30, 2017, to $116.8$139.3 million for the three months ended March 31,June 30, 2018. The decreaseincrease was primarily attributable to a $6.3$13.6 million unfavorablefavorable impact of lowerhigher wallboard volumes as a result of inclement weatherdriven by higher demand in the United States and our customers stocking up inventory in anticipation of the January 1, 2018 price increase. In addition, there was an unfavorable impact of $0.4 million related to non-wallboard products. The decrease was partially offset by a favorable impact of $2.6$4.6 million due to an increase in the average net selling price for gypsum wallboard at constant exchange ratesrates. The remaining increase was driven by favorable impacts of non-wallboard products and a favorable impact of $0.3 million related tochanges in foreign currency exchange rates.

Other Expense, Net.  Other expense, net, was $0.1 million for theboth three months ended March 31,June 30, 2018 compared to other expense, net, of $0.6 million for the three months ended March 31,and 2017. The change mainly reflects the impact of non-recurring costs of $0.7 million related to the debt refinancing in the first quarter 2017. See Note 9 to the Consolidated Financial Statements for further details on the refinancing.

Our primary sources of liquidity are cash on hand, cash from operations, and borrowings under our debt financing arrangements. As of March 31,June 30, 2018, we had $63.8$84.4 million in cash and cash equivalents. We believe that our current cash position, access to the long-term debt capital markets and cash flow generated from operations should be sufficient not only for our operating requirements but also to enable us to complete our capital expenditure programs, fund share repurchases and any required long-term debt payments through the next several fiscal years. In addition, we have funds available from our revolving credit facilities and the ability to obtain alternative sources of financing. See Note 9 to the Consolidated Financial Statements for a more detailed discussion of our debt financing arrangements.

Net Cash Provided By Operating Activities

Net cash provided by operating activities for the threesix months ended March 31,June 30, 2018 and 2017 was $13.7$52.8 million and $18.5$42.5 million, respectively. The decreaseincrease of $4.8$10.3 million in 2018 compared to 2017 was primarily driven by a decreasean increase in operating income, primarily from higher revenues, and an increase in cash from changes in working capital related to an increase in inventory and timing of receipts and payments.

Net Cash Used In Investing Activities

Net cash used in investing activities for the threesix months ended March 31,June 30, 2018 was $6.6$14.2 million, compared to $5.7$8.6 million for the threesix months ended March 31,June 30, 2017. The increase in investing activities for the threesix months ended March 31,June 30, 2018 primarily reflectreflects an aggregate of $6.4$13.8 million in capital expenditures and software purchased or developed, compared to $5.4$8.2 million for 2017. The remaining increase in 2018 and 2017 was driven by distributions and contributions related to our equity investment in Seven Hills.

Net Cash Used In Financing Activities

Net cash used in financing activities for the threesix months ended March 31,June 30, 2018 was $15.6$26.5 million, compared to $6.6$29.9 million for threesix months ended March 31,June 30, 2017. The increasedecrease in financing activities for the threesix months ended March 31,June 30, 2018 primarily reflects an aggregate of $14.6$24.6 million deployed to repurchase common stock, compared to $5.2$27.8 million for 2017. See Note 11 to the Consolidated Financial Statements for more detailed discussion of share repurchase activity. During the threesix months ended March 31,June 30, 2017, we refinanced the First Lien Credit Agreement,our amended and restated credit agreement, resulting in a net outflow of $0.6 million. See Note 9 to the Consolidated Financial Statements for a more detailed discussion of the repricing. We made principal payments on our outstanding debt of $0.7$1.4 million for both the threesix months ended March 31,June 30, 2018 and 2017.

amounts of assets, liabilities, revenues and expenses during the periods presented. OurThe 2017 Annual Report on Form 10-K includes a summary of the critical accounting policies we believe are the most important to aid in understanding our financial results. There have been no changes to those critical accounting policies that have had a material impact on our reported amounts of assets, liabilities, revenues or expenses during the threesix months ended March 31,June 30, 2018.

 

The forward-looking statements contained in this Quarterly Report on Form 10-Q are based on historical performance and management's current plans, estimates and expectations in light of information currently available to us and are subject to uncertainty and changes in circumstances. There can be no assurance that future developments affecting us will be those that we have anticipated. Actual results may differ materially from these expectations due to changes in global, regional or local political, economic, business, competitive, market, regulatory and other factors, many of which are beyond our control. We believe that these factors include those described in Item 1A. Risk Factors in the 2017 Annual Report on Form 10-K. Should one or more of these risks or uncertainties materialize, or should any of our assumptions prove to be incorrect, our actual results may vary in material respects from what we may have expressed or implied by these forward-looking statements. We caution that you should not place undue reliance on any of our forward-looking statements. Any forward-looking statement made by us in this Quarterly Report on Form 10-Q speaks only as of the date on which we make it. Factors or events that could cause our actual results to differ may emerge from time to time, and it is not possible for us to predict all of them. We undertake no obligation to publicly update any forward-looking statement, whether as a result of new information, future developments or otherwise, except as may be required by applicable securities laws.

The Company's market rate risk disclosures set forth in Part II, Item 7A, "Quantitative and Qualitative Disclosures About Market Risk" of itson the 2017 Annual Report on Form 10-K have not changed materially during the threesix month period ended March 31,June 30, 2018.

PART II - OTHER INFORMATION

(c) On November 4, 2015, our Board of Directors approved a new stock repurchase program authorizing us to repurchase up to $50 million of our common stock, at such times and prices as determined by management as market conditions warrant, through December 31, 2016. On August 3, 2016, our Board of Directors increased the aggregate authorization from up to $50 million to up to $100 million and extended the expiration date to December 31, 2017. On February 21, 2017, the Board of Directors further expanded the Company's share repurchase program by an additional $100 million up to a total of $200 million of its common stock and extended the expiration date to December 31, 2018. On February 21, 2018, the Board of Directors further expanded the Company's share repurchase program by an additional $100 million up to a total of $300 million of its common stock and extended the expiration date to December 31, 2019.

(b) None.

Not applicable.

None.