10. Segments

The Company applies the provisions of ASC Topic 280, “Segment Reporting.” ASC 280, which is based on a management approach to segment reporting, establishes requirements to report selected segment information quarterly and to report annually entity‑wide disclosures about products, major customers and the geographies in which the entity holds material assets and reports revenue. An operating segment is defined as a component that engages in business activities whose operating results are reviewed by the chief operating decision maker (“CODM”) and for which discrete financial information is available. For purposes of evaluation under these segment reporting principles, the CODM assesses the Company’s ongoing performance based on the periodic review of net sales, Adjusted EBITDA and certain other measures for each of the operating segments.

We report our financial results in accordance with GAAP. However, we present Adjusted EBITDA, which is not a recognized financial measure under GAAP, because we believe it assists investors and analysts in comparing our operating performance across reporting periods on a consistent basis by excluding items that we do not believe are indicative of our core operating performance. Management believes Adjusted EBITDA is helpful in highlighting trends in our operating results, while other measures can differ significantly depending on long‑term strategic decisions regarding capital structure, the tax jurisdictions in which companies operate and capital investments.

In addition, we utilize Adjusted EBITDA in certain calculations under the ABL Facility and the First Lien Facility. The ABL Facility and the First Lien Facility permit us to make certain additional adjustments in calculating Consolidated EBITDA, such as projected net cost savings, which are not reflected in the Adjusted EBITDA data presented in this Quarterly Report on Form 10‑Q.

Based on the provisions of ASC 280, the Company has determined that it has six operating segments based on the Company’s six geographic divisions, which are Central, Midwest, Northeast, Southern, Southeast, and Western. On May 1, 2017 the Company combined the Southern and Southwest into the Southern reporting unit, which resulted in a reduction (from seven to six) in the number of operating segments. Due to similarities between the geographic operating segments, we have aggregated them into one reportable segment in accordance with ASC 280. The accounting policies of the operating segments are the same as those described in the summary of significant policies. In addition to our reportable segment, the Company’s consolidated results include both corporate activities and certain other activities. Corporate includes our corporate office building and support services provided to the subsidiaries. Other includes Tool Source Warehouse, Inc., which functions primarily as an internal distributor of tools. Net sales, Adjusted EBITDA and certain other measures for the reportable segment and total continuing operations for the periods indicated are as follows:


	Three Months Ended July 31, 2017
					Depreciation &		Adjusted
	Net sales		Gross profit		amortization		EBITDA
Geographic divisions	$	636,367	$	203,024	$	16,026	$	52,227
Other		5,790		2,080		64		525
Corporate		—		—		255		—
	$	642,157	$	205,104	$	16,345	$	52,752


	Three Months Ended July 31, 2016
					Depreciation &		Adjusted
	Net sales		Gross profit		amortization		EBITDA
Geographic divisions	$	545,005	$	176,840	$	15,507	$	45,608
Other		4,795		1,745		80		333
Corporate		—		—		208		—
	$	549,800	$	178,585	$	15,795	$	45,941

The following is a reconciliation of our Adjusted EBITDA to “Net income” for the three months ended July 31, 2017 and 2016:


	Three Months Ended
	July 31,
	2017		2016
Adjusted EBITDA	$	52,752	$	45,941
Interest expense		(7,500)		(7,577)
Write-off of debt discount and deferred financing fees		(74)		(5,426)
Interest income		23		43
Income tax expense		(10,060)		(6,159)
Depreciation expense		(5,990)		(6,382)
Amortization expense		(10,355)		(9,413)
Stock appreciation (expense) or income(a)		(590)		92
Redeemable noncontrolling interests(b)		(866)		(292)
Equity-based compensation(c)		(473)		(673)
Severance and other permitted costs(d)		(205)		(140)
Transaction costs (acquisitions and other)(e)		(159)		(654)
Gain on sale of assets		390		198
Management fee to related party(f)		—		(188)
Effects of fair value adjustments to inventory(g)		—		(164)
Interest rate cap mark-to-market(h)		(196)		(43)
Secondary public offering costs(i)		(631)		—
Debt transaction costs(j)		(723)		—
Net income	$	15,343	$	9,163

(a)

Represents non‑cash income or expenses related to stock appreciation rights agreements. For additional details regarding stock appreciation rights, refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies—Subsidiary Equity‑Based Deferred Compensation Arrangements” included in our Annual Report on Form 10-K for the year ended April 30, 2017.

(b)

Represents non‑cash compensation expense related to changes in the redemption values of noncontrolling interests. For additional details regarding redeemable noncontrolling interests of our subsidiaries, refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies—Subsidiary Equity‑Based Deferred Compensation Arrangements” included in our Annual Report on Form 10-K for the year ended April 30, 2017.

(c)

Represents non‑cash equity‑based compensation expense related to the issuance of stock options.

(d)

Represents severance expenses and other costs permitted in calculations under the ABL Facility and the First Lien Facility.

(e)

Represents one‑time costs related to our IPO and acquisitions (other than the Acquisition) paid to third party advisors.

(f)

Represents management fees paid by us to AEA. Following our IPO, AEA no longer receives management fees from us.

(g)

Represents the non‑cash cost of sales impact of purchase accounting adjustments to increase inventory to its estimated fair value.

(h)

Represents the mark‑to‑market adjustments for the interest rate cap.

(i)

Represents one-time costs related to our secondary offering paid to third party advisors.

(j)

Represents expenses paid to third party advisors related to debt refinancing activities.

The Company does not earn revenues or have long‑lived assets located in foreign countries. In accordance with the enterprise‑wide disclosure requirements of ASC 280, the Company’s net sales to external customers by main product lines are as follows for the three months ended July 31, 2017 and 2016, respectively:


	Three Months Ended
	July 31,
	2017		2016

Wallboard	$	284,657	$	251,296
Ceilings		99,710		86,349
Steel framing		104,651		84,343
Other products		153,139		127,812
Total net sales	$	642,157	$	549,800