13. Segments

General

The Company has seven 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 seven operating segments based on the Company’s seven geographic divisions, which are Central, Midwest, Northeast, Southern, Southeast, Western and Canada. On June 1, 2018, the Company acquired Titan, which resulted in the addition of a new operating segment. 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.

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 six months ended October 31, 2018 and 2017:


	Three Months Ended October 31, 2018
					Depreciation and		Adjusted
	Net Sales		Gross Profit		Amortization		EBITDA
	(in thousands)
Geographic divisions	$	827,198	$	265,815	$	30,062	$	86,450
Other		6,639		2,335		55		695
Corporate		—		—		670		—
	$	833,837	$	268,150	$	30,787	$	87,145


	Three Months Ended October 31, 2017
					Depreciation and		Adjusted
	Net Sales		Gross Profit		Amortization		EBITDA
	(in thousands)
Geographic divisions	$	641,918	$	210,034	$	16,466	$	53,651
Other		6,086		2,226		60		594
Corporate		—		—		187		—
	$	648,004	$	212,260	$	16,713	$	54,245


	Six Months Ended October 31, 2018
					Depreciation and		Adjusted
	Net Sales		Gross Profit		Amortization		EBITDA
	(in thousands)
Geographic divisions	$	1,598,748	$	508,390	$	55,916	$	161,044
Other		13,233		4,576		113		1,373
Corporate		—		—		1,080		—
	$	1,611,981	$	512,966	$	57,109	$	162,417


	Six Months Ended October 31, 2017
					Depreciation and		Adjusted
	Net Sales		Gross Profit		Amortization		EBITDA
	(in thousands)
Geographic divisions	$	1,278,285	$	413,059	$	32,492	$	105,877
Other		11,876		4,305		124		1,117
Corporate		—		—		442		—
	$	1,290,161	$	417,364	$	33,058	$	106,994

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


	Three Months Ended				Six Months Ended
	October 31,				October 31,
	2018		2017		2018		2017
	(in thousands)
Net income	$	24,912	$	18,023	$	33,562	$	33,366
Interest expense		19,182		7,917		35,370		15,417
Write-off of debt discount and deferred financing fees		—		—		—		74
Interest income		203		(26)		(33)		(49)
Income tax expense		8,059		9,983		10,895		20,043
Depreciation expense		11,538		6,023		22,148		12,013
Amortization expense		19,249		10,690		34,961		21,045
Stock appreciation expense(a)		649		642		983		1,232
Redeemable noncontrolling interests(b)		282		164		813		1,030
Equity-based compensation(c)		1,094		375		1,498		847
Severance and other permitted costs(d)		882		113		5,718		317
Transaction costs (acquisitions and other)(e)		841		88		5,594		246
Gain on sale of assets		(173)		(207)		(294)		(597)
Effects of fair value adjustments to inventory(f)		—		187		4,129		187
Change in fair value of financial instruments(g)		376		238		6,395		434
Secondary public offering costs(h)		—		—		—		631
Debt transaction costs(i)		51		35		678		758
Adjusted EBITDA	$	87,145	$	54,245	$	162,417	$	106,994

(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 acquisitions paid to third parties.

(f)

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

(g)

Represents the mark‑to‑market adjustments for derivative financial instruments.

(h)

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

(i)

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

Revenues by Product

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


	Three Months Ended				Six Months Ended
	October 31,				October 31,
	2018		2017		2018		2017
	(in thousands)
Wallboard	$	334,688	$	288,498	$	652,423	$	573,155
Ceilings		118,376		101,646		234,231		201,356
Steel framing		135,760		103,203		264,872		207,854
Other products		245,013		154,657		460,455		307,796
Total net sales	$	833,837	$	648,004	$	1,611,981	$	1,290,161

Geographic Information

The following table presents the Company’s net sales by major geographic area for the three and six months ended October 31, 2018 and 2017:


	Three Months Ended				Six Months Ended
	October 31,				October 31,
	2018		2017		2018		2017
	(in thousands)
United States	$	706,347	$	648,004	$	1,397,078	$	1,290,161
Canada		127,490		—		214,903		—
Total net sales	$	833,837	$	648,004	$	1,611,981	$	1,290,161

The average exchange rates for translating Canada net sales from Canadian dollars to U.S. dollars were 0.7697 and 0.7679 for the three and six months ended October 31, 2018, respectively. The average exchange rates were 0.7965 and 0.7862 for the three and six months ended October 31, 2017, respectively.

The following table presents the Company’s long-lived assets by major geographic area as of October 31, 2018 and April 30, 2018:


	October 31,		April 30,
	2018		2018
	(in thousands)
United States	$	876,224	$	813,909
Canada		497,820		—
Total long-lived assets	$	1,374,044	$	813,909