10. Segments

General

The Company has six operating segments based on geographic operations that it aggregates into one reportable segment. The Company defines operating segments as components of the organization for which discrete financial information is available and operating results are evaluated on a regular basis by the Chief Operating Decision Maker (“CODM”) in order to assess performance and allocate resources. The Company’s CODM is its Chief Executive Officer. The Company determined 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 operating segment, which resulted in a reduction (from seven to six) in the number of operating segments. The Company aggregates its operating segments into a single reportable segment based on similarities between the operating segments’ economic characteristics, nature of products sold, production process, type of customer and methods of distribution. The accounting policies of the operating segments are the same as those described in the summary of significant policies. In addition to the Company’s reportable segment, the Company’s consolidated results include both corporate activities and certain other activities. Corporate includes the Company’s corporate office building and support services provided to its subsidiaries. Other includes Tool Source Warehouse, Inc., which functions primarily as an internal distributor of tools. The Company does not earn revenues or have long‑lived assets located in foreign countries.

Segment Results

The CODM assesses the Company’s performance based on the periodic review of net sales, Adjusted EBITDA and certain other measures for each of the operating segments. Adjusted EBITDA is not a recognized financial measure under GAAP. However, 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.

The following tables present segment results for the three and nine months ended January 31, 2018 and 2017:


	Three Months Ended January 31, 2018
					Depreciation and		Adjusted
	Net Sales		Gross Profit		Amortization		EBITDA
	(in thousands)
Geographic divisions	$	579,974	$	193,329	$	16,252	$	41,658
Other		5,534		2,091		59		549
Corporate		—		—		179		—
	$	585,508	$	195,420	$	16,490	$	42,207


	Three Months Ended January 31, 2017
					Depreciation and		Adjusted
	Net Sales		Gross Profit		Amortization		EBITDA
	(in thousands)
Geographic divisions	$	557,774	$	183,503	$	18,018	$	39,910
Other		4,749		2,224		77		768
Corporate		—		—		221		—
	$	562,523	$	185,727	$	18,316	$	40,678



	Nine Months Ended January 31, 2018
					Depreciation and		Adjusted
	Net Sales		Gross Profit		Amortization		EBITDA
	(in thousands)
Geographic divisions	$	1,858,259	$	606,388	$	48,744	$	147,534
Other		17,410		6,396		183		1,667
Corporate		—		—		621		—
	$	1,875,669	$	612,784	$	49,548	$	149,201


	Nine Months Ended January 31, 2017
					Depreciation and		Adjusted
	Net Sales		Gross Profit		Amortization		EBITDA
	(in thousands)
Geographic divisions	$	1,689,407	$	551,788	$	50,597	$	134,706
Other		14,762		5,748		236		1,432
Corporate		—		—		646		—
	$	1,704,169	$	557,536	$	51,479	$	136,138

The following table presents a reconciliation of Adjusted EBITDA to net income for the three and nine months ended January 31, 2018 and 2017:


	Three Months Ended				Nine Months Ended
	January 31,				January 31,
	2018		2017		2018		2017
	(in thousands)
Adjusted EBITDA	$	42,207	$	40,678	$	149,201	$	136,138
Interest expense		(7,871)		(7,431)		(23,288)		(22,162)
Write-off of debt discount and deferred financing fees		—		(211)		(74)		(7,103)
Interest income		44		23		93		101
Income tax benefit (expense)		4,488		(5,363)		(15,555)		(12,232)
Depreciation expense		(6,009)		(6,465)		(18,021)		(19,395)
Amortization expense		(10,481)		(11,851)		(31,527)		(32,084)
Stock appreciation (expense) or income(a)		(631)		498		(1,863)		734
Redeemable noncontrolling interests(b)		(340)		(256)		(1,370)		(3,079)
Equity-based compensation(c)		(430)		(622)		(1,277)		(1,981)
Severance and other permitted costs(d)		(8)		(57)		(325)		(315)
Transaction costs (acquisitions and other)(e)		(75)		(305)		(321)		(2,783)
Gain on sale of assets		51		114		648		244
Management fee to related party(f)		—		—		—		(188)
Effects of fair value adjustments to inventory(g)		(89)		(155)		(276)		(776)
Interest rate cap mark-to-market(h)		(276)		(109)		(710)		(241)
Secondary public offering costs(i)		(894)		—		(1,525)		—
Debt transaction costs(j)		—		(261)		(758)		(264)
Net income	$	19,686	$	8,227	$	53,052	$	34,614

(a)

Represents non‑cash income or expenses related to stock appreciation rights agreements.

(b)

Represents non‑cash compensation expense related to changes in the redemption values of noncontrolling interests.

(c)

Represents non‑cash equity‑based compensation expense related to the issuance of share-based awards.

(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 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.

Revenues by Product

The following table presents Company’s net sales to external customers by main product lines for the three and nine months ended January 31, 2018 and 2017:


	Three Months Ended				Nine Months Ended
	January 31,				January 31,
	2018		2017		2018		2017
		(in thousands)
Wallboard	$	256,413	$	254,979	$	829,568	$	776,250
Ceilings		90,360		81,768		291,716		253,518
Steel framing		96,744		93,514		304,598		273,931
Other products		141,991		132,262		449,787		400,470
Total net sales	$	585,508	$	562,523	$	1,875,669	$	1,704,169