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 nine months ended January 31, 2019 and 2018:


	Three Months Ended January 31, 2019
					Depreciation and		Adjusted
	Net Sales		Gross Profit		Amortization		EBITDA
	(in thousands)
Geographic divisions	$	717,984	$	232,201	$	29,368	$	59,321
Other		5,918		2,025		55		396
Corporate		—		—		797		—
	$	723,902	$	234,226	$	30,220	$	59,717


	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


	Nine Months Ended January 31, 2019
					Depreciation and		Adjusted
	Net Sales		Gross Profit		Amortization		EBITDA
	(in thousands)
Geographic divisions	$	2,316,732	$	740,591	$	85,284	$	220,365
Other		19,151		6,601		168		1,769
Corporate		—		—		1,877		—
	$	2,335,883	$	747,192	$	87,329	$	222,134


	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

The following table presents a reconciliation of Adjusted EBITDA to net income for the three and nine months ended January 31, 2019 and 2018:


	Three Months Ended				Nine Months Ended
	January 31,				January 31,
	2019		2018		2019		2018
	(in thousands)
Net income	$	5,815	$	19,686	$	39,377	$	53,052
Interest expense		19,526		7,871		54,896		23,288
Write-off of debt discount and deferred financing fees		—		—		—		74
Interest income		(10)		(44)		(43)		(93)
Provision (benefit) for income taxes		1,442		(4,488)		12,337		15,555
Depreciation expense		11,919		6,009		34,067		18,021
Amortization expense		18,301		10,481		53,262		31,527
Stock appreciation expense(a)		442		631		1,425		1,863
Redeemable noncontrolling interests(b)		(35)		340		778		1,370
Equity-based compensation(c)		1,140		430		2,638		1,277
Severance and other permitted costs(d)		229		8		5,947		325
Transaction costs (acquisitions and other)(e)		1,066		75		6,660		321
Gain on sale of assets		(118)		(51)		(412)		(648)
Effects of fair value adjustments to inventory(f)		—		89		4,129		276
Change in fair value of financial instruments(g)		—		276		6,395		710
Secondary public offering costs(h)		—		894		—		1,525
Debt transaction costs(i)		—		—		678		758
Adjusted EBITDA	$	59,717	$	42,207	$	222,134	$	149,201

(a)

Represents non‑cash expense 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 nine months ended January 31, 2019 and 2018:


	Three Months Ended				Nine Months Ended
	January 31,				January 31,
	2019		2018		2019		2018
	(in thousands)
Wallboard	$	297,358	$	256,413	$	949,781	$	829,568
Ceilings		105,219		90,360		339,450		291,716
Steel framing		117,432		96,744		382,304		304,598
Other products		203,893		141,991		664,348		449,787
Total net sales	$	723,902	$	585,508	$	2,335,883	$	1,875,669

Geographic Information

The following table presents the Company’s net sales by major geographic area for the three and nine months ended January 31, 2019 and 2018:


	Three Months Ended				Nine Months Ended
	January 31,				January 31,
	2019		2018		2019		2018
	(in thousands)
United States	$	624,672	$	585,508	$	2,021,750	$	1,875,669
Canada		99,230		—		314,133		—
Total net sales	$	723,902	$	585,508	$	2,335,883	$	1,875,669

The average exchange rates for translating Canada net sales from Canadian dollars to U.S. dollars were 0.7491 and 0.7609 for the three and nine months ended January 31, 2019, respectively. The average exchange rates were 0.7895 and 0.7875 for the three and nine months ended January 31, 2018, respectively.

The following table presents the Company’s long-lived assets by major geographic area as of January 31, 2019 and April 30, 2018:


	January 31,		April 30,
	2019		2018
	(in thousands)
United States	$	871,596	$	813,909
Canada		480,994		—
Total long-lived assets	$	1,352,590	$	813,909