GMS Inc. - Quarter Report: 2021 July (Form 10-Q)
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 31, 2021
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________.
COMMISSION FILE NUMBER: 001-37784
______________________________________________________________
GMS INC.
(Exact name of registrant as specified in its charter)
______________________________________________________________
| Delaware | 46-2931287 | |||||||
| (State or other jurisdiction of incorporation | (IRS Employer Identification No.) | |||||||
| or organization) | ||||||||
100 Crescent Centre Parkway, Suite 800 | ||||||||
Tucker, | Georgia | 30084 | ||||||
| (Address of principal executive offices) | (ZIP Code) | |||||||
(800) 392-4619
(Registrant’s telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
| Title of each class | Trading Symbol(s) | Name of each exchanged on which registered | |||||||||||||||
| Common Stock, par value $0.01 per share | GMS | New York Stock Exchange | |||||||||||||||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ◻
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ◻
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ☒ | Accelerated filer | ☐ | |||||||||||
| Non-accelerated filer | ☐ | Smaller reporting company | ☐ | |||||||||||
| Emerging growth company | ☐ | |||||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ◻
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
There were 43,148,444 shares of the registrant’s common stock, par value $0.01 per share, outstanding as of August 31, 2021.
FORM 10-Q
TABLE OF CONTENTS
| Page | ||||||||
| PART I | ||||||||
| Item 1 | ||||||||
| Item 2 | ||||||||
| Item 3 | ||||||||
| Item 4 | ||||||||
| PART II | ||||||||
| Item 1 | ||||||||
| Item 1A | ||||||||
| Item 2 | ||||||||
| Item 3 | ||||||||
| Item 4 | ||||||||
| Item 5 | ||||||||
| Item 6 | ||||||||
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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). You can generally identify forward-looking statements by our use of forward-looking terminology such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “might,” “plan,” “potential,” “predict,” “seek,” or “should,” or the negative thereof or other variations thereon or comparable terminology. In particular, statements about the growth of our various markets, and statements about our expectations, beliefs, plans, strategies, objectives, prospects, assumptions or future events or performance contained in this Quarterly Report on Form 10-Q are forward-looking statements.
We have based these forward-looking statements on our current expectations, assumptions, estimates and projections. While we believe these expectations, assumptions, estimates and projections are reasonable, such forward-looking statements are only predictions and involve known and unknown risks and uncertainties, many of which are beyond our control. These and other important factors, including those discussed under the heading “Risk Factors” in Part 1, Item 1A of our Annual Report on Form 10-K for the fiscal year ended April 30, 2021, filed with the U.S. Securities and Exchange Commission (the “SEC”), may cause our actual results, performance or achievements to differ materially from any future results, performance or achievements expressed or implied by these forward-looking statements. Some of the factors that could cause actual results to differ materially from those expressed or implied by the forward-looking statements include:
•the negative impact of the COVID-19 pandemic (which, among other things, may exacerbate each of the risks listed below);
•general economic and financial conditions;
•our dependency upon the commercial and residential construction and residential repair and remodeling, or R&R, markets;
•competition in our highly fragmented industry and the markets in which we operate;
•the fluctuations in prices and mix of the products we distribute and our ability to pass on price increases to our customers, including as a result of inflationary and deflationary pressures;
•the consolidation of our industry;
•our ability to successfully implement our strategic initiatives, which include pursuing growth through acquisitions and greenfield branch expansion, as well as cost reduction and productivity initiatives;
•our ability to expand into new geographic markets;
•product shortages, other disruptions in our supply chain or distribution network and potential loss of relationships with key suppliers;
•the seasonality of the commercial and residential construction markets;
•the potential loss of any significant customers and the reduction of the quantity of products our customers purchase;
•exposure to product liability and various other claims and litigation, and the adequacy of insurance related thereto;
•operating hazards that may cause personal injury or property damage;
•our ability to attract and retain key employees;
•rising health care and labor costs and the impact of labor and trucking shortages;
•the credit risk from our customers;
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•our ability to renew leases for our facilities on favorable terms or identify new facilities;
•our ability to effectively manage our inventory as our sales volume or the prices of the products we distribute fluctuate;
•the impact of federal, state, provincial and local regulations, including potential changes in our effective tax rate;
•the cost of compliance with environmental, health and safety laws and other regulations;
•significant fluctuations in fuel costs or shortages in the supply of fuel;
•a cybersecurity breach, including misappropriation of our customers’, employees’ or suppliers’ confidential information, and the potential costs related thereto;
•a disruption in our IT systems and costs necessary to maintain and update our IT systems;
•natural or man-made disruptions to our facilities;
•the risk of our Canadian operations, including currency rate fluctuations;
•the imposition of tariffs and other trade barriers, and the effect of retaliatory trade measures;
•our inability to engage in activities that may be in our best long-term interests because of restrictions in our debt agreements;
•our current level of indebtedness and our potential to incur additional indebtedness; and
•our ability to obtain additional financing on acceptable terms, if at all.
Given these risks and uncertainties, you are cautioned not to place undue reliance on such forward-looking statements. The forward-looking statements contained in this Quarterly Report on Form 10-Q are not guarantees of future performance and actual results and events may differ materially from the forward-looking statements contained in this Quarterly Report on Form 10-Q.
Any forward-looking statement that we make in this Quarterly Report on Form 10-Q speaks only as of the date of such statement. Except as required by law, we do not undertake any obligation to update or revise, or to publicly announce any update or revision to, any of the forward-looking statements, whether as a result of new information, future events or otherwise, after the date of this Quarterly Report on Form 10-Q. You should review the factors and risks we describe in the reports we will file from time to time with the SEC after the date of the filing of this Quarterly Report on Form 10-Q.
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PART I – Financial Information
Item 1. Financial Statements
GMS Inc.
Condensed Consolidated Balance Sheets (Unaudited)
(in thousands, except per share data)
| July 31, 2021 | April 30, 2021 | ||||||||||
| Assets | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | 43,590 | $ | 167,012 | |||||||
Trade accounts and notes receivable, net of allowances of $6,989 and $6,282, respectively | 656,878 | 558,661 | |||||||||
| Inventories, net | 470,249 | 357,054 | |||||||||
| Prepaid expenses and other current assets | 21,812 | 19,525 | |||||||||
| Total current assets | 1,192,529 | 1,102,252 | |||||||||
Property and equipment, net of accumulated depreciation of $201,441 and $193,364, respectively | 323,967 | 311,326 | |||||||||
| Operating lease right-of-use assets | 138,279 | 118,413 | |||||||||
| Goodwill | 587,331 | 576,330 | |||||||||
| Intangible assets, net | 395,647 | 350,869 | |||||||||
| Deferred income taxes | 17,584 | 15,715 | |||||||||
| Other assets | 8,744 | 8,993 | |||||||||
| Total assets | $ | 2,664,081 | $ | 2,483,898 | |||||||
| Liabilities and Stockholders’ Equity | |||||||||||
| Current liabilities: | |||||||||||
| Accounts payable | $ | 329,452 | $ | 322,965 | |||||||
| Accrued compensation and employee benefits | 48,589 | 72,906 | |||||||||
| Other accrued expenses and current liabilities | 117,107 | 87,138 | |||||||||
| Current portion of long-term debt | 46,687 | 46,018 | |||||||||
| Current portion of operating lease liabilities | 36,437 | 33,474 | |||||||||
| Total current liabilities | 578,272 | 562,501 | |||||||||
| Non-current liabilities: | |||||||||||
| Long-term debt, less current portion | 1,016,036 | 932,409 | |||||||||
| Long-term operating lease liabilities | 102,196 | 90,290 | |||||||||
| Deferred income taxes, net | 15,055 | 12,728 | |||||||||
| Other liabilities | 75,279 | 63,508 | |||||||||
| Total liabilities | 1,786,838 | 1,661,436 | |||||||||
| Commitments and contingencies | |||||||||||
| Stockholders' equity: | |||||||||||
Common stock, par value $0.01 per share, 500,000 shares authorized; 43,083 and 43,073 shares issued and outstanding as of July 31, 2021 and April 30, 2021, respectively | 431 | 431 | |||||||||
Preferred stock, par value $0.01 per share, 50,000 shares authorized; 0 shares issued and outstanding as of July 31, 2021 and April 30, 2021 | — | — | |||||||||
| Additional paid-in capital | 542,587 | 542,737 | |||||||||
| Retained earnings | 335,737 | 274,535 | |||||||||
| Accumulated other comprehensive (loss) income | (1,512) | 4,759 | |||||||||
| Total stockholders' equity | 877,243 | 822,462 | |||||||||
| Total liabilities and stockholders' equity | $ | 2,664,081 | $ | 2,483,898 | |||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
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GMS Inc.
Condensed Consolidated Statements of Operations and Comprehensive Income (Unaudited)
(in thousands, except per share data)
| Three Months Ended July 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| Net sales | $ | 1,042,076 | $ | 802,573 | |||||||
| Cost of sales (exclusive of depreciation and amortization shown separately below) | 706,243 | 542,115 | |||||||||
| Gross profit | 335,833 | 260,458 | |||||||||
| Operating expenses: | |||||||||||
| Selling, general and administrative | 214,081 | 183,112 | |||||||||
| Depreciation and amortization | 27,714 | 27,097 | |||||||||
| Total operating expenses | 241,795 | 210,209 | |||||||||
| Operating income | 94,038 | 50,249 | |||||||||
| Other (expense) income: | |||||||||||
| Interest expense | (13,657) | (14,081) | |||||||||
| Other income, net | 792 | 655 | |||||||||
| Total other expense, net | (12,865) | (13,426) | |||||||||
| Income before taxes | 81,173 | 36,823 | |||||||||
| Provision for income taxes | 19,971 | 9,604 | |||||||||
| Net income | $ | 61,202 | $ | 27,219 | |||||||
| Weighted average common shares outstanding: | |||||||||||
| Basic | 43,089 | 42,624 | |||||||||
| Diluted | 43,972 | 43,017 | |||||||||
Net income per common share: | |||||||||||
| Basic | $ | 1.42 | $ | 0.64 | |||||||
| Diluted | $ | 1.39 | $ | 0.63 | |||||||
| Comprehensive income | |||||||||||
| Net income | $ | 61,202 | $ | 27,219 | |||||||
| Foreign currency translation (loss) income | (8,233) | 16,281 | |||||||||
| Changes in other comprehensive income, net of tax | 1,962 | 959 | |||||||||
| Comprehensive income | $ | 54,931 | $ | 44,459 | |||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
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GMS Inc.
Condensed Consolidated Statements of Stockholders’ Equity (Unaudited)
(in thousands)
| Common Stock | Additional Paid-in Capital | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Total Stockholders' Equity | |||||||||||||||||||||||||||||||
| Shares | Amount | ||||||||||||||||||||||||||||||||||
| Balances as of April 30, 2021 | 43,073 | $ | 431 | $ | 542,737 | $ | 274,535 | $ | 4,759 | $ | 822,462 | ||||||||||||||||||||||||
| Net income | — | — | — | 61,202 | — | 61,202 | |||||||||||||||||||||||||||||
| Repurchase and retirement of common stock | (85) | (1) | (3,854) | — | — | (3,855) | |||||||||||||||||||||||||||||
| Foreign currency translation adjustments | — | — | — | — | (8,233) | (8,233) | |||||||||||||||||||||||||||||
| Other comprehensive income, net of tax | — | — | — | — | 1,962 | 1,962 | |||||||||||||||||||||||||||||
| Equity-based compensation | — | — | 1,958 | — | — | 1,958 | |||||||||||||||||||||||||||||
| Exercise of stock options | 44 | 1 | 862 | — | — | 863 | |||||||||||||||||||||||||||||
| Vesting of restricted stock units | 8 | — | — | — | — | — | |||||||||||||||||||||||||||||
| Tax withholding related to net share settlements of equity awards | — | — | (256) | — | — | (256) | |||||||||||||||||||||||||||||
| Issuance of common stock pursuant to employee stock purchase plan | 43 | — | 1,140 | — | — | 1,140 | |||||||||||||||||||||||||||||
| Balances as of July 31, 2021 | 43,083 | $ | 431 | $ | 542,587 | $ | 335,737 | $ | (1,512) | $ | 877,243 | ||||||||||||||||||||||||
| Common Stock | Additional Paid-in Capital | Retained Earnings | Accumulated Other Comprehensive Loss | Total Stockholders' Equity | |||||||||||||||||||||||||||||||
| Shares | Amount | ||||||||||||||||||||||||||||||||||
| Balances as of April 30, 2020 | 42,554 | $ | 426 | $ | 529,662 | $ | 168,975 | $ | (65,082) | $ | 633,981 | ||||||||||||||||||||||||
| Net income | — | — | — | 27,219 | — | 27,219 | |||||||||||||||||||||||||||||
| Foreign currency translation adjustments | — | — | — | — | 16,281 | 16,281 | |||||||||||||||||||||||||||||
| Other comprehensive income, net of tax | — | — | — | — | 959 | 959 | |||||||||||||||||||||||||||||
| Equity-based compensation | — | — | 1,575 | — | — | 1,575 | |||||||||||||||||||||||||||||
| Exercise of stock options | 54 | — | 691 | — | — | 691 | |||||||||||||||||||||||||||||
| Vesting of restricted stock units | 7 | — | — | — | — | — | |||||||||||||||||||||||||||||
| Tax withholding related to net share settlements of equity awards | — | — | (105) | — | — | (105) | |||||||||||||||||||||||||||||
| Issuance of common stock pursuant to employee stock purchase plan | 58 | 1 | 1,269 | — | — | 1,270 | |||||||||||||||||||||||||||||
| Balances as of July 31, 2020 | 42,673 | $ | 427 | $ | 533,092 | $ | 196,194 | $ | (47,842) | $ | 681,871 | ||||||||||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
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GMS Inc.
Condensed Consolidated Statements of Cash Flows (Unaudited)
(in thousands)
| Three Months Ended July 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| Cash flows from operating activities: | |||||||||||
| Net income | $ | 61,202 | $ | 27,219 | |||||||
| Adjustments to reconcile net income to net cash used in operating activities: | |||||||||||
| Depreciation and amortization | 27,714 | 27,097 | |||||||||
| Amortization of debt discount and debt issuance costs | 642 | 753 | |||||||||
| Equity-based compensation | 3,160 | 2,619 | |||||||||
| (Gain) loss on disposal and impairment of assets | (78) | 394 | |||||||||
| Deferred income taxes | (140) | (5,241) | |||||||||
| Other items, net | 1,573 | 247 | |||||||||
| Changes in assets and liabilities net of effects of acquisitions: | |||||||||||
| Trade accounts and notes receivable | (73,479) | (23,013) | |||||||||
| Inventories | (87,313) | 14,008 | |||||||||
| Prepaid expenses and other assets | (1,491) | (3,782) | |||||||||
| Accounts payable | (4,265) | (33,887) | |||||||||
| Accrued compensation and employee benefits | (24,219) | (36,062) | |||||||||
| Other accrued expenses and liabilities | 21,617 | 13,937 | |||||||||
| Cash used in operating activities | (75,077) | (15,711) | |||||||||
| Cash flows from investing activities: | |||||||||||
| Purchases of property and equipment | (6,814) | (4,745) | |||||||||
| Proceeds from sale of assets | 287 | 342 | |||||||||
| Acquisition of businesses, net of cash acquired | (123,049) | (210) | |||||||||
| Cash used in investing activities | (129,576) | (4,613) | |||||||||
| Cash flows from financing activities: | |||||||||||
| Repayments on revolving credit facilities | (102,872) | (58,083) | |||||||||
| Borrowings from revolving credit facilities | 195,049 | 14,421 | |||||||||
| Payments of principal on long-term debt | (1,278) | (2,492) | |||||||||
| Payments of principal on finance lease obligations | (7,397) | (7,521) | |||||||||
| Repurchases of common stock | (3,855) | — | |||||||||
| Proceeds from exercises of stock options | 863 | 691 | |||||||||
| Payments for taxes related to net share settlement of equity awards | (256) | (105) | |||||||||
| Other financing activities | 1,140 | 1,270 | |||||||||
| Cash provided by (used in) financing activities | 81,394 | (51,819) | |||||||||
| Effect of exchange rates on cash and cash equivalents | (163) | 943 | |||||||||
| Decrease in cash and cash equivalents | (123,422) | (71,200) | |||||||||
| Cash and cash equivalents, beginning of period | 167,012 | 210,909 | |||||||||
| Cash and cash equivalents, end of period | $ | 43,590 | $ | 139,709 | |||||||
| Supplemental cash flow disclosures: | |||||||||||
| Cash paid for income taxes | $ | 1,007 | $ | 3,478 | |||||||
| Cash paid for interest | 8,616 | 13,115 | |||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
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GMS Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
1. Business, Basis of Presentation and Summary of Significant Accounting Policies
Business
Founded in 1971, GMS Inc. (“we,” “our,” “us,” or the “Company”), through its wholly-owned operating subsidiaries, is a distributor of specialty building products including wallboard, suspended ceilings systems, or ceilings, steel framing and other complementary building products. We purchase products from many manufacturers and then distribute these goods to a customer base consisting of wallboard and ceilings contractors and homebuilders and, to a lesser extent, general contractors and individuals. We operate a network of more than 280 distribution centers across the United States and Canada.
Basis of Presentation
The condensed consolidated financial statements included in this Quarterly Report on Form 10-Q have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) that permit reduced disclosure for interim periods. In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all normal and recurring adjustments necessary for a fair presentation of the results of operations, financial position and cash flows. All adjustments are of a normal recurring nature unless otherwise disclosed. The results of operations for interim periods are not necessarily indicative of results for any other interim period or the entire fiscal year. As a result, the unaudited condensed consolidated financial statements should be read in conjunction with our audited consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year ended April 30, 2021.
Principles of Consolidation
The condensed consolidated financial statements present the results of operations, financial position, stockholders’ equity and cash flows of the Company and its subsidiaries. All material intercompany balances and transactions have been eliminated in consolidation. The results of operations of businesses acquired are included from their respective dates of acquisition.
Use of Estimates
The preparation of financial statements in conformity with Generally Accepted Accounting Principles (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Foreign Currency Translation
Assets and liabilities of the Company’s Canadian subsidiaries are translated at the exchange rate prevailing at the balance sheet date, while income and expenses are translated at average rates for the period. Translation gains and losses are reported as a separate component of stockholders’ equity and other comprehensive income (loss). Gains and losses on foreign currency transactions are recognized in the Condensed Consolidated Statements of Operations and Comprehensive Income within other (expense) income, net.
Insurance Liabilities
The Company is self-insured for certain losses related to medical claims. The Company has stop-loss coverage to limit the exposure arising from medical claims. In addition, the Company has deductible-based insurance policies for certain losses related to general liability, workers’ compensation and automobile. The coverage consists of a deductible layer, a primary layer, a self-insured buffer layer, a lead umbrella layer and excess layers. The deductible amount per incident is $0.5 million, $1.0 million and $2.5 million for general liability, workers’ compensation and automobile, respectively. The primary layer of coverage is from $0.3 million, $0.5 million and $1.0 million for general liability, workers’ compensation, and automobile liability, respectively, to $5.0 million. The Company self-insures a buffer layer from $5.0 million to $10.0 million. The umbrella and excess layers cover claims from $10.0 million to $100.0 million. The expected ultimate cost for claims incurred as of the balance sheet date is not discounted and is recognized as a liability. Insurance losses for claims filed and claims incurred but not reported are accrued based upon estimates of the aggregate liability for uninsured claims using historical loss development factors and actuarial assumptions followed in the insurance industry.
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GMS Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)
The following table presents the Company’s aggregate liabilities for medical self-insurance, reserves for general liability, automobile and workers’ compensation and the expected recoveries for medical self-insurance, general liability, automobile and workers’ compensation. Liabilities for medical self-insurance are included in other accrued expenses and current liabilities. Reserves for general liability, automobile and workers’ compensation are included in other accrued expenses and current liabilities and other liabilities. Expected recoveries for insurance liabilities are included in prepaid expenses and other current assets and other assets in the Condensed Consolidated Balance Sheets.
| July 31, 2021 | April 30, 2021 | ||||||||||
| (in thousands) | |||||||||||
| Medical self‑insurance | $ | 3,736 | $ | 3,852 | |||||||
| General liability, automobile and workers’ compensation | 18,146 | 19,807 | |||||||||
| Expected recoveries for insurance liabilities | (3,208) | (3,209) | |||||||||
Revenue Recognition
Revenue is recognized upon transfer of control of promised goods to customers at an amount that reflects the consideration the Company expects to receive in exchange for those goods. Revenue is recognized net of any taxes collected from customers, which are subsequently remitted to governmental authorities. The Company includes shipping and handling costs billed to customers in net sales. These costs are recognized as a component of selling, general and administrative expenses.
See Note 13, “Segments,” for information regarding disaggregation of revenue, including revenue by product and by geographic area.
Income Taxes
The Company considers each interim period an integral part of the annual period and measures tax expense (benefit) using an estimated annual effective income tax rate. Estimates of the annual effective income tax rate at the end of interim periods are, out of necessity, based on evaluation of possible future events and transactions and may be subject to subsequent refinement or revision. The Company forecasts its estimated annual effective income tax rate and then applies that rate to its year-to-date pre-tax ordinary income (loss), subject to certain loss limitation provisions. In addition, certain specific transactions are excluded from the Company’s estimated annual effective tax rate computation, but are discretely recognized within income tax expense (benefit) in their respective interim period. Future changes in the forecasted annual income (loss) projections, tax rate changes, or discrete tax items could result in significant adjustments to quarterly income tax expense (benefit) in future periods.
The Company evaluates its deferred tax assets quarterly to determine if valuation allowances are required. In this evaluation, the Company considers both positive and negative evidence in determining whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The primary negative evidence considered includes the cumulative operating losses generated in prior periods. The primary positive evidence considered includes the reversal of deferred tax liabilities primarily related to depreciation and amortization that would occur within the same jurisdiction and during the carryforward period necessary to absorb the federal and state net operating losses and other deferred tax assets.
Deferred tax assets and liabilities are computed by applying the federal, provincial and state income tax rates in effect to the gross amounts of temporary differences and other tax attributes, such as net operating loss carry-forwards. In assessing if the deferred tax assets will be realized, the Company considers whether it is more likely than not that some or all of these deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the period in which these deductible temporary differences reverse.
Earnings Per Share
Basic earnings per share is computed by dividing net income available to common stockholders by the weighted average number of outstanding shares of common stock for the period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock, including stock options and restricted stock units (collectively “Common Stock Equivalents”), were exercised or converted into common stock. The dilutive effect of outstanding stock options and restricted stock units is reflected in diluted earnings per share by application of the treasury stock method. In
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GMS Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)
applying the treasury stock method for stock-based compensation arrangements, the assumed proceeds are computed as the sum of the amount the employee must pay upon exercise and the amount of compensation cost attributed to future services and not yet recognized. Diluted earnings per share is computed by increasing the weighted-average number of outstanding shares of common stock computed in basic earnings per share to include the dilutive effect of Common Stock Equivalents for the period. In periods of net loss, the number of shares used to calculate diluted loss per share is the same as basic net loss per share.
Reclassifications
Certain amounts in the prior period financial statements have been reclassified to conform to the current year presentation.
Recently Issued Accounting Pronouncements
Reference Rate Reform – In March 2020, the Financial Accounting Standards Board ("FASB") issued new guidance to temporarily ease the potential burden in accounting for reference rate reform. The guidance provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships and other transactions affected by reference rates that are expected to be discontinued, such as the London Interbank Offered Rate ("LIBOR"). The guidance was effective upon issuance and generally can be applied through December 31, 2022. The Company expects to elect optional expedients and exceptions provided by the guidance, as needed, related to its debt instruments, which include interest rates based on a LIBOR rate. The Company will evaluate and disclose the impact of this guidance in the period of election, as well as the nature and reason for doing so.
2. Business Combinations
The Company accounts for business combinations by recognizing the assets acquired and liabilities assumed at the acquisition date fair value. In valuing certain acquired assets and liabilities, fair value estimates use Level 3 inputs, including future expected cash flows and discount rates. Goodwill is measured as the excess of consideration transferred over the fair values of the assets acquired and the liabilities assumed. While the Company uses its best estimates and assumptions to value assets acquired and liabilities assumed at the acquisition date, the Company’s estimates are inherently uncertain and subject to refinement. As a result, during the measurement period, which may be up to one year from the acquisition date, the Company records adjustments to the assets acquired and liabilities assumed, with the corresponding offset to goodwill. Upon the conclusion of the measurement period, any subsequent adjustments arising from new facts and circumstances are recorded to the Consolidated Statements of Operations and Comprehensive Income. The results of operations of acquisitions are reflected in the Company’s Consolidated Financial Statements from the date of acquisition.
Westside Acquisition
On July 1, 2021, the Company acquired substantially all the assets of Westside Building Material ("Westside"), one of the largest independent distributors of interior building products in the U.S., for preliminary consideration of $139.6 million. Westside is a leading supplier of steel framing, wallboard, acoustical ceilings, insulation and related building products serving commercial and residential markets. Westside’s distribution network comprises ten locations, including nine across California (Anaheim, Hesperia, Oakland, Chatsworth, Fresno, Lancaster, Santa Maria, San Diego and National City) and one in Las Vegas, Nevada. The primary purpose of the transaction was to expand the geographical coverage of the Company and grow the business.
The assets acquired and liabilities assumed were recognized at their acquisition date fair values. Due to the limited amount of time since the acquisition of Westside, the acquisition accounting is subject to change as the Company obtains additional information during the measurement period about the facts and circumstances that existed as of the acquisition date. The primary areas of the preliminary acquisition accounting that are not yet finalized relate to working capital adjustments, the finalization of preliminary fair value estimates and residual goodwill.
11
GMS Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)
The following table summarizes the components of the preliminary consideration:
| (in thousands) | |||||
| Cash consideration | $ | 122,635 | |||
| Holdback liability | 17,000 | ||||
| Total preliminary consideration transferred | $ | 139,635 | |||
Included in the total preliminary consideration is a $17.0 million holdback liability, of which $3.5 million is for working capital adjustments that will be settled 150 days after the acquisition date and $13.5 million is for general representations and warranties of the sellers that will be settled 15 months after the acquisition date.
The following table summarizes the preliminary acquisition accounting for this acquisition based on currently available information:
| Preliminary Acquisition Accounting | |||||
| (in thousands) | |||||
| Trade accounts and notes receivable | $ | 27,081 | |||
| Inventories | 28,900 | ||||
| Prepaid and other current assets | 228 | ||||
| Property and equipment | 17,136 | ||||
| Operating lease right-of-use assets | 20,782 | ||||
| Customer relationships | 51,500 | ||||
| Tradenames | 11,300 | ||||
| Goodwill | 12,902 | ||||
| Accounts payable and accrued expenses | (14,375) | ||||
| Operating lease liabilities | (15,819) | ||||
| Fair value of consideration transferred | $ | 139,635 | |||
Goodwill recognized is attributable to synergies achieved through the streamlining of operations combined with improved margins attainable through increased market presence and is all attributable to the Company's geographic divisions reportable segment. Goodwill is expected to be deductible for U.S. federal income tax purposes. The estimated useful life for the customer relationships is 12 years and the estimated useful life for the tradenames is 15 years. The pro forma impact of this acquisition is not presented as it is not considered material to the Company's Consolidated Financial Statements.
Other Acquisition
On June 3, 2021, the Company acquired the assets of Architectural Coatings Distributors, Inc. (“Architectural Coating”). Architectural Coating is an interior building products distributor in Cleveland, Ohio. The impact of this acquisition is not material to the Company’s Consolidated Financial Statements.
3. Accounts Receivable
The Company’s trade accounts and notes receivable consisted of the following:
| July 31, 2021 | April 30, 2021 | ||||||||||
| (in thousands) | |||||||||||
| Trade receivables | $ | 563,604 | $ | 488,002 | |||||||
| Other receivables | 100,263 | 76,941 | |||||||||
| Allowance for expected credit losses | (3,345) | (3,254) | |||||||||
| Other allowances | (3,644) | (3,028) | |||||||||
| Trade accounts and notes receivable | $ | 656,878 | $ | 558,661 | |||||||
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GMS Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)
The following table presents the change in the allowance for expected credit losses during the three months ended July 31, 2021:
| (in thousands) | |||||
| Balance as of April 30, 2021 | $ | 3,254 | |||
| Provision | 53 | ||||
| Other | 38 | ||||
| Balance as of July 31, 2021 | $ | 3,345 | |||
Receivables from contracts with customers, net of allowances, were $556.6 million and $481.7 million as of July 31, 2021 and April 30, 2021, respectively. The Company did not have material amounts of contract assets or liabilities as of July 31, 2021 or April 30, 2021.
4. Goodwill and Intangible Assets
Goodwill
The following table presents changes in the carrying amount of goodwill:
| Gross | Accumulated | Net | |||||||||||||||
| Carrying Amount | Impairment Loss | Carrying Amount | |||||||||||||||
| (in thousands) | |||||||||||||||||
| Balance as of April 30, 2021 | $ | 645,377 | $ | (69,047) | $ | 576,330 | |||||||||||
| Goodwill recognized from acquisitions | 13,057 | — | 13,057 | ||||||||||||||
| Translation adjustment | (2,949) | 893 | (2,056) | ||||||||||||||
| Balance as of July 31, 2021 | $ | 655,485 | $ | (68,154) | $ | 587,331 | |||||||||||
Intangible Assets
The following tables present the components of the Company’s definite-lived intangible assets:
| Estimated Useful Lives (years) | Weighted Average Amortization Period | July 31, 2021 | |||||||||||||||||||||||||||
| Gross Carrying Amount | Accumulated Amortization | Net Carrying Value | |||||||||||||||||||||||||||
| (dollars in thousands) | |||||||||||||||||||||||||||||
| Customer relationships | 5 - 16 | 12.7 | $ | 616,241 | $ | (342,161) | $ | 274,080 | |||||||||||||||||||||
| Definite-lived tradenames | 5 - 20 | 15.8 | 72,820 | (15,803) | 57,017 | ||||||||||||||||||||||||
| Vendor agreements | 8 - 10 | 8.3 | 6,644 | (5,574) | 1,070 | ||||||||||||||||||||||||
| Developed technology | 5 | 4.9 | 5,608 | (3,612) | 1,996 | ||||||||||||||||||||||||
| Other | 3 - 5 | 3.2 | 4,243 | (4,126) | 117 | ||||||||||||||||||||||||
| Totals | $ | 705,556 | $ | (371,276) | $ | 334,280 | |||||||||||||||||||||||
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GMS Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)
| Estimated Useful Lives (years) | Weighted Average Amortization Period | April 30, 2021 | |||||||||||||||||||||||||||
| Gross Carrying Amount | Accumulated Amortization | Net Carrying Value | |||||||||||||||||||||||||||
| (dollars in thousands) | |||||||||||||||||||||||||||||
| Customer relationships | 5 - 16 | 13.3 | $ | 569,255 | $ | (330,880) | $ | 238,375 | |||||||||||||||||||||
| Definite-lived tradenames | 5 - 20 | 16.8 | 62,084 | (14,842) | 47,242 | ||||||||||||||||||||||||
| Vendor agreements | 8 - 10 | 8.3 | 6,644 | (5,372) | 1,272 | ||||||||||||||||||||||||
| Developed technology | 5 | 4.9 | 5,699 | (3,381) | 2,318 | ||||||||||||||||||||||||
| Other | 3 - 5 | 3.3 | 4,291 | (3,996) | 295 | ||||||||||||||||||||||||
| Totals | $ | 647,973 | $ | (358,471) | $ | 289,502 | |||||||||||||||||||||||
Amortization expense related to definite-lived intangible assets was $14.8 million and $14.3 million for the three months ended July 31, 2021 and 2020, respectively.
The following table summarizes the estimated future amortization expense for definite-lived intangible assets. Actual amortization expense to be reported in future periods could differ materially from these estimates as a result of acquisitions, changes in useful lives, foreign currency exchange rate fluctuations and other relevant factors.
| Year Ending April 30, | (in thousands) | ||||
| 2022 (remaining nine months) | $ | 45,822 | |||
| 2023 | 54,035 | ||||
| 2024 | 44,582 | ||||
| 2025 | 36,900 | ||||
| 2026 | 31,037 | ||||
| Thereafter | 121,904 | ||||
| Total | $ | 334,280 | |||
The Company’s indefinite-lived intangible assets consist of tradenames that had a carrying amount of $61.4 million as of July 31, 2021 and April 30, 2021.
5. Long-Term Debt
The Company’s long-term debt consisted of the following:
| July 31, 2021 | April 30, 2021 | ||||||||||
| (in thousands) | |||||||||||
| Term Loan Facility | $ | 508,445 | $ | 509,722 | |||||||
| Unamortized discount and deferred financing costs on Term Loan Facility | (4,444) | (4,735) | |||||||||
| Senior Notes | 350,000 | 350,000 | |||||||||
| Unamortized discount and deferred financing costs on Senior Notes | (5,324) | (5,485) | |||||||||
| ABL Facility | 87,100 | — | |||||||||
| Finance lease obligations | 112,906 | 117,948 | |||||||||
Installment notes at fixed rates up to 5.0%, due in monthly and annual installments through 2025 | 9,723 | 11,716 | |||||||||
| Unamortized discount on installment notes | (647) | (739) | |||||||||
| Canadian Facility | 4,964 | — | |||||||||
| Carrying value of debt | 1,062,723 | 978,427 | |||||||||
| Less current portion | 46,687 | 46,018 | |||||||||
| Long-term debt | $ | 1,016,036 | $ | 932,409 | |||||||
14
GMS Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)
Term Loan Facility
The Company has a senior secured first lien term loan facility (the “Term Loan Facility”). The Company is required to make scheduled quarterly payments of $1.3 million, or 0.25% of the aggregate principal amount of the Term Loan Facility, with the balance due in June 2025. The Term Loan Facility bears interest at a floating rate based on LIBOR plus 2.50%, with a 0% floor. As of July 31, 2021, the applicable rate of interest was 2.59%.
Senior Notes
The Company has senior unsecured notes due May 2029 (the "Senior Notes"). The Senior Notes bear interest at 4.625% per annum and mature on May 1, 2029. Interest is payable semi-annually in arrears on May 1 and November 1.
Asset Based Lending Facility
The Company has an asset based revolving credit facility (the “ABL Facility”) that provides for aggregate revolving commitments of $445.0 million (including same day swing line borrowings of $44.5 million). Extensions of credit under the ABL Facility are limited by a borrowing base calculated periodically based on specified percentages of the value of eligible inventory and eligible accounts receivable, subject to certain reserves and other adjustments.
At the Company’s option, the interest rates applicable to the loans under the ABL Facility are based on LIBOR or base rate plus, in each case, an applicable margin. The margins applicable for each elected interest rate are subject to a pricing grid, as defined in the ABL Facility agreement, based on average daily availability for the most recent fiscal quarter. The ABL Facility also contains an unused commitment fee. As of July 31, 2021, the applicable rate of interest was 3.50%.
As of July 31, 2021, the Company had available borrowing capacity of approximately $335.5 million under the ABL Facility. The ABL Facility matures on September 30, 2024 unless the individual affected lenders agree to extend the maturity of their respective loans under the ABL Facility upon the Company’s request and without the consent of any other lender. The ABL Facility contains a cross default provision with the Term Loan Facility.
Debt Covenants
The Term Loan Facility contains a number of covenants that limit our ability and the ability of our restricted subsidiaries, as described in the respective credit agreement, to: incur more indebtedness; pay dividends, redeem or repurchase stock or make other distributions; make investments; create restrictions on the ability of our restricted subsidiaries to pay dividends to us or make other intercompany transfers; create liens securing indebtedness; transfer or sell assets; merge or consolidate; enter into certain transactions with our affiliates; and prepay or amend the terms of certain indebtedness. The Company was in compliance with all covenants contained in the Term Loan Facility as of July 31, 2021.
The Senior Notes contains certain covenants that, among other things, limit the Company’s ability and the ability of its restricted subsidiaries to incur additional indebtedness, make certain dividends, repurchase Company stock or make other distributions, make certain investments, create liens, transfer or sell assets, merge or consolidate, and enter into transactions with the Company’s affiliates. Such covenants are subject to a number of important exceptions and qualifications set forth in the related indenture. The Company was in compliance with all covenants contained in the Senior Notes as of July 31, 2021.
The ABL Facility contains certain affirmative covenants, including financial and other reporting requirements. The Company was in compliance with all such covenants as of July 31, 2021.
Canadian Revolving Credit Facility
Through its WSB Titan (“Titan”) subsidiary, the Company has a revolving credit facility (the “Canadian Facility”) that provides for aggregate revolving commitments of $24.0 million ($30.0 million Canadian dollars). The Canadian Facility bears interest at the Canadian prime rate plus a marginal rate based on the level determined by Titan’s total debt to EBITDA ratio at the end of the most recently completed fiscal quarter or year. As of July 31, 2021, the Company had available borrowing capacity of approximately $19.1 million under the Canadian Facility. The Canadian Facility matures on January 12, 2026. As of July 31, 2021, the applicable rate of interest was 2.83%.
15
GMS Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)
Debt Maturities
As of July 31, 2021, the maturities of long-term debt were as follows
| Term Loan Facility | Senior Notes | ABL Facility | Finance Leases | Installment Notes | Canadian Facility | Total | |||||||||||||||||||||||||||||||||||
| Year Ending April 30, | (in thousands) | ||||||||||||||||||||||||||||||||||||||||
| 2022 (remaining nine months) | $ | 3,833 | $ | — | $ | — | $ | 28,263 | $ | 2,464 | $ | — | $ | 34,560 | |||||||||||||||||||||||||||
| 2023 | 5,110 | — | — | 32,050 | 4,505 | — | 41,665 | ||||||||||||||||||||||||||||||||||
| 2024 | 5,110 | — | — | 25,234 | 1,881 | — | 32,225 | ||||||||||||||||||||||||||||||||||
| 2025 | 5,110 | — | 87,100 | 15,397 | 873 | — | 108,480 | ||||||||||||||||||||||||||||||||||
| 2026 | 489,282 | — | — | 8,207 | — | 4,964 | 502,453 | ||||||||||||||||||||||||||||||||||
| Thereafter | — | 350,000 | — | 3,755 | — | — | 353,755 | ||||||||||||||||||||||||||||||||||
| $ | 508,445 | $ | 350,000 | $ | 87,100 | $ | 112,906 | $ | 9,723 | $ | 4,964 | $ | 1,073,138 | ||||||||||||||||||||||||||||
6. Leases
The components of lease expense were as follows:
| Three Months Ended July 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| (in thousands) | |||||||||||
| Finance lease cost: | |||||||||||
| Amortization of right-of-use assets | $ | 5,592 | $ | 6,139 | |||||||
| Interest on lease liabilities | 2,301 | 3,062 | |||||||||
| Operating lease cost | 11,012 | 10,620 | |||||||||
| Variable lease cost | 3,861 | 2,999 | |||||||||
| Total lease cost | $ | 22,766 | $ | 22,820 | |||||||
Supplemental cash flow information related to leases was as follows:
| Three Months Ended July 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| (in thousands) | |||||||||||
| Cash paid for amounts included in the measurement of lease liabilities | |||||||||||
| Operating cash flows from operating leases | $ | 11,189 | $ | 10,648 | |||||||
| Operating cash flows from finance leases | 2,301 | 3,062 | |||||||||
| Financing cash flows from finance leases | 7,397 | 7,521 | |||||||||
| Right-of-use assets obtained in exchange for lease obligations | |||||||||||
| Operating leases | 24,210 | 6,843 | |||||||||
| Finance leases | 4,076 | 3,935 | |||||||||
16
GMS Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)
Other information related to leases was as follows:
| July 31, 2021 | April 30, 2021 | ||||||||||
| (in thousands) | |||||||||||
| Finance leases included in property and equipment | |||||||||||
| Property and equipment | $ | 175,852 | $ | 176,591 | |||||||
| Accumulated depreciation | (53,609) | (51,869) | |||||||||
| $ | 122,243 | $ | 124,722 | ||||||||
| Weighted-average remaining lease term (years) | |||||||||||
| Operating leases | 4.7 | 4.7 | |||||||||
| Finance leases | 3.5 | 3.5 | |||||||||
| Weighted-average discount rate | |||||||||||
| Operating leases | 5.2 | % | 5.5 | % | |||||||
| Finance leases | 4.6 | % | 4.6 | % | |||||||
Future minimum lease payments under non-cancellable leases as of July 31, 2021 were as follows:
| Finance | Operating | ||||||||||
| Year Ending April 30, | (in thousands) | ||||||||||
| 2022 (remaining nine months) | $ | 33,640 | $ | 32,773 | |||||||
| 2023 | 36,159 | 38,059 | |||||||||
| 2024 | 26,971 | 32,185 | |||||||||
| 2025 | 16,060 | 22,412 | |||||||||
| 2026 | 8,415 | 12,584 | |||||||||
| Thereafter | 3,792 | 19,161 | |||||||||
| Total lease payments | 125,037 | 157,174 | |||||||||
| Less imputed interest | 12,131 | 18,541 | |||||||||
| Total | $ | 112,906 | $ | 138,633 | |||||||
7. Income Taxes
General. The Company’s effective income tax rate on continuing operations was 24.6% and 26.1% for the three months ended July 31, 2021 and 2020, respectively. The difference in the effective income tax rate over the U.S. federal statutory rate of 21.0% for the three months ended July 31, 2021 was primarily due to the impact of state and foreign taxes. The difference in the effective income tax rate over the U.S. federal statutory rate for the three months ended July 31, 2020 was primarily due to the impact of state taxes, foreign tax rates and a change in the valuation allowance.
Valuation allowance. The Company had a valuation allowance of $11.9 million and $11.8 million against its deferred tax assets related to certain U.S. tax jurisdictions as of July 31, 2021 and April 30, 2021, respectively. To the extent the Company generates sufficient taxable income in the future to utilize the tax benefits of the net deferred tax assets on which a valuation allowance is recorded, the effective tax rate may decrease as the valuation allowance is reversed.
Uncertain tax positions. The Company had no reserve for uncertain tax positions as of July 31, 2021 or April 30, 2021.
8. Stockholders’ Equity
The Company's Board of Directors has authorized a common stock repurchase program to repurchase up to $75.0 million of outstanding common stock. The Company may conduct repurchases under the share repurchase program through open market transactions, under trading plans in accordance with SEC Rule 10b5-1 and/or in privately negotiated transactions, in compliance with Rule 10b-18 under the Exchange Act of 1934, as amended. These repurchases are subject to a variety of factors, including, but not limited to, our liquidity, credit availability, general business and market conditions, our debt covenant
17
GMS Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)
restrictions and the availability of alternative investment opportunities. The share repurchase program does not obligate the Company to acquire any particular amount of common stock, and it may be suspended or terminated at any time at the Company’s discretion.
The Company repurchased approximately 85,000 shares of its common stock for $3.9 million during the three months ended July 31, 2021. The Company did not repurchase any shares of its common stock during the three months ended July 31, 2020. As of July 31, 2021, the Company had $50.5 million of remaining repurchase authorization under the stock repurchase program.
Accumulated Other Comprehensive Income
The following table sets forth the changes to accumulated other comprehensive income (loss), net of tax, by component for the three months ended July 31, 2021:
| Foreign Currency Translation | Derivative Financial Instruments | Accumulated Other Comprehensive Income (Loss) | |||||||||||||||
| (in thousands) | |||||||||||||||||
| Balance as of April 30, 2021 | $ | 20,764 | $ | (16,005) | $ | 4,759 | |||||||||||
| Other comprehensive loss before reclassification | (8,233) | (287) | (8,520) | ||||||||||||||
| Reclassification to earnings from accumulated other comprehensive income (loss) | — | 2,249 | 2,249 | ||||||||||||||
| Balance as of July 31, 2021 | $ | 12,531 | $ | (14,043) | $ | (1,512) | |||||||||||
Other comprehensive loss on derivative instruments for the three months ended July 31, 2021 is net of $0.1 million of tax and reclassification to earnings from accumulated other comprehensive income (loss) is net of $0.7 million of tax.
9. Equity-Based Compensation
General
Equity-based compensation expense related to stock options and restricted stock units was $1.7 million and $1.4 million during the three months ended July 31, 2021 and 2020, respectively, and is included in selling, general and administrative expenses in the Condensed Consolidated Statements of Operations and Comprehensive Income.
Stock Option Awards
The following table presents stock option activity for the three months ended July 31, 2021:
| Number of Options | Weighted Average Exercise Price | Weighted Average Remaining Contractual Life (years) | Aggregate Intrinsic Value | ||||||||||||||||||||
| (shares and dollars in thousands) | |||||||||||||||||||||||
| Outstanding as of April 30, 2021 | 1,289 | $ | 20.86 | 6.8 | $ | 29,465 | |||||||||||||||||
| Options exercised | (44) | 19.75 | |||||||||||||||||||||
| Options forfeited | (3) | 23.31 | |||||||||||||||||||||
| Outstanding as of July 31, 2021 | 1,242 | $ | 20.89 | 6.5 | $ | 35,084 | |||||||||||||||||
| Exercisable as of July 31, 2021 | 661 | $ | 18.90 | 5.0 | $ | 19,981 | |||||||||||||||||
| Vested and Expected to vest as of July 31, 2021 | 1,239 | $ | 20.89 | 6.5 | $ | 34,992 | |||||||||||||||||
The aggregate intrinsic value represents the excess of the Company’s closing stock price on the last trading day of the period over the weighted average exercise price multiplied by the number of options outstanding, exercisable or expected to vest. Options expected to vest are unvested shares net of expected forfeitures. The total intrinsic value of options exercised during the three months ended July 31, 2021 and 2020 was $1.2 million and $0.3 million, respectively. As of July 31, 2021, there was $3.2 million of total unrecognized compensation cost related to stock options. That cost is expected to be recognized
18
GMS Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)
over a weighted-average period of 1.6 years. There were no stock options granted during the three months ended July 31, 2021 or 2020.
Restricted Stock Units
The following table presents restricted stock unit activity for the three months ended July 31, 2021:
| Number of Restricted Stock Units | Weighted Average Grant Date Fair Value | ||||||||||
| (shares in thousands) | |||||||||||
| Outstanding as of April 30, 2021 | 361 | $ | 22.92 | ||||||||
| Vested | (14) | 18.04 | |||||||||
| Forfeited | (2) | 23.21 | |||||||||
| Outstanding as of July 31, 2021 | 345 | $ | 23.11 | ||||||||
As of July 31, 2021, there was $3.2 million of total unrecognized compensation cost related to nonvested restricted stock units. That cost is expected to be recognized over a weighted-average period of 1.6 years.
Employee Stock Purchase Plan
The Company has an employee stock purchase plan (“ESPP”), the terms of which allow for qualified employees to participate in the purchase of shares of the Company’s common stock at a price equal to 90% of the lower of the closing price at the beginning or end of the purchase period, which is a six-month period ending on December 31 and June 30 of each year. During the three months ended July 31, 2021, 43,000 shares of the Company’s common stock were purchased under the ESPP at a price of $26.36 per share. During the three months ended July 31, 2020, 58,000 shares of the Company’s common stock were purchased under the ESPP at a price of $22.13 per share. The Company recognized $0.2 million and $0.2 million of stock-based compensation expense during the three months ended July 31, 2021 and 2020, respectively, related to the ESPP.
10. Stock Appreciation Rights, Deferred Compensation and Redeemable Noncontrolling Interests
The following table presents a summary of changes to the liabilities for stock appreciation rights, deferred compensation and redeemable noncontrolling interests:
| Stock Appreciation Rights | Deferred Compensation | Redeemable Noncontrolling Interests | |||||||||||||||
| (in thousands) | |||||||||||||||||
| Balance as of April 30, 2021 | $ | 26,795 | $ | 1,875 | $ | 9,373 | |||||||||||
| Amounts redeemed | — | — | — | ||||||||||||||
| Change in fair value | 892 | 51 | 259 | ||||||||||||||
| Balance as of July 31, 2021 | $ | 27,687 | $ | 1,926 | $ | 9,632 | |||||||||||
| Classified as current as of April 30, 2021 | $ | 1,305 | $ | — | $ | — | |||||||||||
| Classified as long-term as of April 30, 2021 | 25,490 | 1,875 | 9,373 | ||||||||||||||
| Classified as current as of July 31, 2021 | $ | 1,521 | $ | — | $ | — | |||||||||||
| Classified as long-term as of July 31, 2021 | 26,166 | 1,926 | 9,632 | ||||||||||||||
Total expense related to these instruments was $1.2 million and $1.0 million during the three months ended July 31, 2021 and 2020, respectively, and was included in selling, general and administrative expenses in the Condensed Consolidated Statements of Operations and Comprehensive Income. Current and long-term liabilities for stock appreciation rights, deferred compensation and redeemable noncontrolling interests are included in other accrued expenses and liabilities and other liabilities, respectively, in the Condensed Consolidated Balance Sheets. See Note 13, "Stock Appreciation Rights, Deferred Compensation and Redeemable Noncontrolling Interests," in the Company's Annual Report on Form 10-K for the year ended
19
GMS Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)
April 30, 2021 for more information regarding stock appreciation rights, deferred compensation and redeemable noncontrolling interests.
11. Fair Value Measurements
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The following table presents the estimated carrying amount and fair value of the Company’s liabilities measured at fair value on a recurring basis:
| July 31, 2021 | April 30, 2021 | ||||||||||
| (in thousands) | |||||||||||
| Interest rate swaps (Level 2) | $ | 18,405 | $ | 21,004 | |||||||
The Company has interest rate swap agreements with a notional amount of $500.0 million to convert the variable interest rate on a portion of its Term Loan Facility to a fixed 1-month LIBOR interest rate of 2.46%. The contracts were effective on February 28, 2019 and terminate on February 28, 2023. The objective of the interest rate swap agreements is to eliminate the variability of interest payment cash flows associated with variable interest rates. The Company believes there have been no material changes in the creditworthiness of the counterparty to this interest rate swap and believes the risk of nonperformance by such party is minimal. The Company designated the interest rate swaps as a cash flow hedges.
As of July 31, 2021, $11.9 million of the interest rate swap liability was classified in other accrued expenses and current liabilities and $6.5 million was classified in other liabilities in the Condensed Consolidated Balance Sheet. The Company recognized losses, net of tax, of $2.2 million and $2.1 million in earnings during the three months ended July 31, 2021 and 2020, respectively, related to its interest rate swaps. These losses are included in interest expense in the Condensed Consolidated Statements of Operations and Comprehensive Income and within cash flows from operating activities within the Condensed Consolidated Statements of Cash Flows. As of July 31, 2021, the Company expects that approximately $11.9 million of pre-tax net losses will be reclassified from accumulated other comprehensive income (loss) into earnings during the next twelve months.
The fair value of interest rate swaps is determined using Level 2 inputs. Generally, the Company obtains the Level 2 inputs from its counterparties. Substantially all of the inputs throughout the full term of the instruments can be derived from observable data or are supported by observable levels at which transactions are executed in the marketplace. The fair value of the Company’s interest rate swap was determined using widely accepted valuation techniques including a discounted cash flow analysis on the expected cash flows of the derivative. This analysis reflected the contractual terms of the derivatives, including the period to maturity, and used observable market-based inputs, including interest rate curves and implied volatilities.
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
Disclosures are required for certain assets and liabilities that are measured at fair value on a nonrecurring basis in periods subsequent to initial recognition. Such measurements of fair value relate primarily to assets and liabilities measured at fair value in connection with business combinations and long-lived asset impairments. For more information on business combinations, see Note 2, “Business Combinations.” There were no material long-lived asset impairments during the three months ended July 31, 2021 or 2020.
20
GMS Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)
Fair Value of Debt
The estimated fair value of the Company’s Senior Notes was determined based on Level 2 input using observable market prices in less active markets. The carrying amount of the Company’s Term Loan Facility and ABL Facility approximates its fair value as the interest rates are variable and reflective of market rates. The following table presents the carrying value and fair value of the Company’s Senior Notes:
| July 31, 2021 | April 30, 2021 | ||||||||||||||||||||||
| Carrying Amount | Fair Value | Carrying Amount | Fair Value | ||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||
| Senior Notes | $ | 350,000 | $ | 355,250 | $ | 350,000 | $ | 350,000 | |||||||||||||||
12. Commitments and Contingencies
General
The Company is a defendant in various lawsuits and administrative actions associated with personal injuries, property damage, product liability claims, claims of former employees and other events arising in the normal course of business. As discussed in Note 1 “—Insurance Liabilities”, the Company records liabilities for these claims, and assets for amounts recoverable from the insurer, for claims covered by insurance.
13. Segments
There have been no changes to the Company's reportable segments during the three months ended July 31, 2021. For more information regarding the Company's reportable segments, see Note 17, "Segments," in the Company's Annual Report on Form 10-K for the year ended April 30, 2021.
Segment Results
The following tables present segment results:
| Three Months Ended July 31, 2021 | |||||||||||||||||||||||
| Net Sales | Gross Profit | Depreciation and Amortization | Adjusted EBITDA | ||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||
| Geographic divisions | $ | 1,032,388 | $ | 332,685 | $ | 27,428 | $ | 127,017 | |||||||||||||||
| Other | 9,688 | 3,148 | 88 | 1,062 | |||||||||||||||||||
| Corporate | — | — | 198 | — | |||||||||||||||||||
| $ | 1,042,076 | $ | 335,833 | $ | 27,714 | $ | 128,079 | ||||||||||||||||
| Three Months Ended July 31, 2020 | |||||||||||||||||||||||
| Net Sales | Gross Profit | Depreciation and Amortization | Adjusted EBITDA | ||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||
| Geographic divisions | $ | 794,472 | $ | 257,838 | $ | 26,782 | $ | 82,503 | |||||||||||||||
| Other | 8,101 | 2,620 | 91 | 551 | |||||||||||||||||||
| Corporate | — | — | 224 | — | |||||||||||||||||||
| $ | 802,573 | $ | 260,458 | $ | 27,097 | $ | 83,054 | ||||||||||||||||
21
GMS Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)
The following table presents a reconciliation of Adjusted EBITDA to net income:
| Three Months Ended July 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| (in thousands) | |||||||||||
| Net income | $ | 61,202 | $ | 27,219 | |||||||
| Interest expense | 13,657 | 14,081 | |||||||||
| Interest income | — | (37) | |||||||||
| Provision for income taxes | 19,971 | 9,604 | |||||||||
| Depreciation expense | 12,925 | 12,827 | |||||||||
| Amortization expense | 14,789 | 14,270 | |||||||||
| Stock appreciation rights(a) | 892 | 792 | |||||||||
| Redeemable noncontrolling interests(b) | 310 | 252 | |||||||||
| Equity-based compensation(c) | 1,958 | 1,605 | |||||||||
| Severance and other permitted costs(d) | 147 | 1,947 | |||||||||
| Transaction costs (acquisitions and other)(e) | 575 | 100 | |||||||||
| (Gain) loss on disposal and impairment of assets(f) | (78) | 394 | |||||||||
| Effects of fair value adjustments to inventory(g) | 1,731 | — | |||||||||
| Adjusted EBITDA | $ | 128,079 | $ | 83,054 | |||||||
__________________________________________
(a)Represents changes in the fair value of stock appreciation rights.
(b)Represents changes in the fair 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 the calculation of Adjusted EBITDA under the ABL Facility and the Term Loan Facility, including certain unusual, nonrecurring costs and credits due to COVID-19.
(e)Represents costs related to acquisitions paid to third parties.
(f)Includes gains from the sale of assets and impairment of assets resulting from restructuring plans to close certain facilities.
(g)Represents the non-cash cost of sales impact of acquisition accounting adjustments to increase inventory to its estimated fair value.
Revenues by Product
The following table presents the Company’s net sales to external customers by main product lines:
| Three Months Ended July 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| (in thousands) | |||||||||||
| Wallboard | $ | 390,135 | $ | 328,085 | |||||||
| Ceilings | 138,071 | 114,643 | |||||||||
| Steel framing | 196,276 | 110,532 | |||||||||
| Complementary products | 317,594 | 249,313 | |||||||||
| Total net sales | $ | 1,042,076 | $ | 802,573 | |||||||
22
GMS Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)
Geographic Information
The following table presents the Company’s net sales by major geographic area:
| Three Months Ended July 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| (in thousands) | |||||||||||
| United States | $ | 862,790 | $ | 679,321 | |||||||
| Canada | 179,286 | 123,252 | |||||||||
| Total net sales | $ | 1,042,076 | $ | 802,573 | |||||||
The following table presents the Company’s property and equipment, net, by major geographic area:
| July 31, 2021 | April 30, 2021 | ||||||||||
| (in thousands) | |||||||||||
| United States | $ | 284,177 | $ | 271,346 | |||||||
| Canada | 39,790 | 39,980 | |||||||||
| Total property and equipment, net | $ | 323,967 | $ | 311,326 | |||||||
14. Earnings Per Common Share
The following table sets forth the computation of basic and diluted earnings per share of common stock:
| Three Months Ended July 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| Net income | $ | 61,202 | $ | 27,219 | |||||||
| Basic earnings per common share: | |||||||||||
| Basic weighted average common shares outstanding | 43,089 | 42,624 | |||||||||
| Basic earnings per common share | $ | 1.42 | $ | 0.64 | |||||||
| Diluted earnings per common share: | |||||||||||
| Basic weighted average common shares outstanding | 43,089 | 42,624 | |||||||||
| Add: Common Stock Equivalents | 883 | 393 | |||||||||
| Diluted weighted average common shares outstanding | 43,972 | 43,017 | |||||||||
| Diluted earnings per common share | $ | 1.39 | $ | 0.63 | |||||||
During the three months ended July 31, 2021, no Common Stock Equivalents were excluded from the calculation of diluted earnings per share because their effect would have been anti-dilutive. Anti-dilutive securities could be dilutive in future periods.
15. Subsequent Event
On August 1, 2021, the Company acquired certain assets of DK&B Construction Specialties, Inc., Inc. (“DK&B”). DK&B is a distributor of External Insulation and Finishing Systems (EIFS) and stucco products through one location in Omaha, Nebraska.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following information should be read in conjunction with the unaudited condensed consolidated financial statements and related notes included in this Quarterly Report on Form 10-Q. The following discussion may contain forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to these differences include those factors discussed below and elsewhere in this Quarterly Report on Form 10-Q, particularly in “Cautionary Note Regarding Forward-Looking Statements,” and discussed in the section entitled “Risk Factors” included in our Annual Report on Form 10-K for the year ended April 30, 2021.
Overview
Founded in 1971, GMS Inc. (“we,” “our,” “us” or the “Company”) is a distributor of specialty building products including wallboard, suspended ceilings systems, or ceilings, steel framing and other complementary specialty building products. We purchase products from many manufacturers and then distribute these goods to a customer base consisting of wallboard and ceilings contractors and homebuilders and, to a lesser extent, general contractors and individuals. We operate a network of more than 280 distribution centers across the United States and Canada.
Business Strategy
Our business strategy includes an emphasis on organic growth through expanding market share in our core products (wallboard, ceilings and steel framing) and growing our complementary product lines (insulation, lumber, ready-mix joint compound, tools, fasteners and various other construction products). Our growth strategy also includes the pursuit of greenfield branch openings and strategic acquisitions as we seek to further broaden our geographic platform. We expect to continue to capture profitable market share in our existing footprint by delivering industry-leading customer service. Our strategy for opening new branches is to further penetrate markets that are adjacent to our existing operations. Typically, we have pre-existing customer relationships in these markets but need a new location to fully capitalize on those relationships. In addition, we will continue to pursue acquisitions. Due to the large, highly-fragmented nature of our markets and our reputation throughout the industry, we believe we have the potential to access a robust acquisition pipeline that will continue to supplement our organic growth. We use a rigorous targeting process to identify acquisition candidates that we believe will fit our culture and business model and we have built an experienced team of professionals to manage the acquisition and integration processes. As a result of our scale, purchasing power and ability to improve operations through implementing best practices, we believe we can continue to achieve substantial synergies and drive earnings accretion from our acquisition strategy. Finally, our growth strategy also entails a heightened focus on enhanced productivity and profitability across the organization, seeking to leverage our scale and employ both technology and other best practices to deliver further margin expansion and earnings growth.
COVID-19 Update
We continue to monitor the COVID-19 pandemic ("COVID-19") and its impact on macroeconomic and local economic conditions. We will continue to implement, as deemed necessary or advisable, procedures and processes to protect the health and safety of our employees, customers, partners and suppliers.
We may take further actions that alter our business operations if required by federal, state, provincial or local authorities or that we determine are in the best interests of our employees, customers, suppliers and stockholders. Furthermore, while COVID-19 had a limited impact on our financial results and operations during the three months ended July 31, 2021, there is no guarantee that COVID-19 will not have a material impact on our future financial results or operations. See Item 1A, “Risk Factors,” and Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in our Annual Report on Form 10-K for the fiscal year ended April 30, 2021 for a discussion of risks which could have a material adverse effect on our operations and financial results and for more information regarding the impact of COVID-19 and our response.
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Highlights
Key highlights in our business during the three months ended July 31, 2021 are described below:
•Generated net sales of $1,042.1 million during the three months ended July 31, 2021, a 29.8% increase from the prior year period primarily due to continued strength in the residential market, price inflation in the current year period and the negative impacts of COVID-19 in the prior year period.
•Generated net income of $61.2 million during the three months ended July 31, 2021, a 124.9% increase compared to the prior year primarily due to the increase in net sales as noted above, partially offset by an increase in the provision for income taxes.
•Generated Adjusted EBITDA (a non-GAAP measure, see “Non-GAAP Financial Measures” in this Item 2) of $128.1 million during the three months ended July 31, 2021, a 54.2% increase compared to the prior year primarily due to the increase in net sales noted above. Adjusted EBITDA as a percentage of net sales increased to 12.3% for the three months ended July 31, 2021 compared to 10.3% for the three months ended July 31, 2020 primarily due to better operating leverage, as product price inflation on sales outpaced operating cost inflation.
Recent Developments
Acquisitions
On July 1, 2021, we acquired substantially all the assets of Westside Building Material ("Westside"), one of the largest independent distributors of interior building products in the U.S., for preliminary consideration of $139.6 million. Westside is a leading supplier of steel framing, wallboard, acoustical ceilings, insulation and related building products serving commercial and residential markets. Westside’s distribution network comprises ten locations, including nine across California (Anaheim, Hesperia, Oakland, Chatsworth, Fresno, Lancaster, Santa Maria, San Diego and National City) and one in Las Vegas, Nevada. For more information regarding our acquisition of Westside, see Note 2 of the Notes to Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q.
On June 3, 2021, we acquired the assets of Architectural Coatings Distributors, Inc. (“Architectural Coating”). Architectural Coating is an interior building products distributor in Cleveland, Ohio.
On August 1, 2021, we acquired certain assets of DK&B Construction Specialties, Inc., Inc. (“DK&B”). DK&B is a distributor of External Insulation and Finishing Systems (EIFS) and stucco products through one location in Omaha, Nebraska.
Greenfields
During the three months ended July 31, 2021, we opened five new greenfield locations. In May 2021, we opened a new greenfield location in Hickory, North Carolina. In June 2021, we opened a new greenfield location in Scarborough, Ontario. In July 2021, we opened greenfield locations in Denver, Colorado, Jackson, Mississippi and Wilmington, Delaware.
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Results of Operations
The following table summarizes key components of our results of operations for the three months ended July 31, 2021 and 2020:
| Three Months Ended July 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| (dollars in thousands) | |||||||||||
| Statement of operations data: | |||||||||||
| Net sales | $ | 1,042,076 | $ | 802,573 | |||||||
| Cost of sales (exclusive of depreciation and amortization shown separately below) | 706,243 | 542,115 | |||||||||
| Gross profit | 335,833 | 260,458 | |||||||||
| Operating expenses: | |||||||||||
| Selling, general and administrative expenses | 214,081 | 183,112 | |||||||||
| Depreciation and amortization | 27,714 | 27,097 | |||||||||
| Total operating expenses | 241,795 | 210,209 | |||||||||
| Operating income | 94,038 | 50,249 | |||||||||
| Other (expense) income: | |||||||||||
| Interest expense | (13,657) | (14,081) | |||||||||
| Other income, net | 792 | 655 | |||||||||
| Total other expense, net | (12,865) | (13,426) | |||||||||
| Income before taxes | 81,173 | 36,823 | |||||||||
| Provision for income taxes | 19,971 | 9,604 | |||||||||
| Net income | $ | 61,202 | $ | 27,219 | |||||||
| Non-GAAP measures: | |||||||||||
| Adjusted EBITDA(1) | $ | 128,079 | $ | 83,054 | |||||||
| Adjusted EBITDA margin(1)(2) | 12.3 | % | 10.3 | % | |||||||
___________________________________
(1)Adjusted EBITDA and Adjusted EBITDA margin are non-GAAP measures. See “—Non-GAAP Financial Measures—Adjusted EBITDA,” for how we define and calculate Adjusted EBITDA and Adjusted EBITDA margin, reconciliations thereof to net income and a description of why we believe these measures are useful.
(2)Adjusted EBITDA margin is Adjusted EBITDA as a percentage of net sales.
Net Sales
| Three Months Ended July 31, | Change | ||||||||||||||||||||||
| 2021 | 2020 | Dollar | Percent | ||||||||||||||||||||
| (dollars in thousands) | |||||||||||||||||||||||
| Wallboard | $ | 390,135 | $ | 328,085 | $ | 62,050 | 18.9 | % | |||||||||||||||
| Ceilings | 138,071 | 114,643 | 23,428 | 20.4 | % | ||||||||||||||||||
| Steel framing | 196,276 | 110,532 | 85,744 | 77.6 | % | ||||||||||||||||||
| Complementary products | 317,594 | 249,313 | 68,281 | 27.4 | % | ||||||||||||||||||
| Total net sales | $ | 1,042,076 | $ | 802,573 | $ | 239,503 | 29.8 | % | |||||||||||||||
We generate net sales by providing a comprehensive product offering of wallboard, ceilings, steel framing and complementary construction products. The increase in net sales during the three months ended July 31, 2021 compared to the prior year period was primarily due to continued strength in the residential market, price inflation in the current year period, growth in complementary products sales and the negative impacts of COVID-19 in the prior year period. Also contributing to the increase were acquisitions and new greenfield openings over the past year. These increases were partially offset by one less
26
selling day during the three months ended July 31, 2021 compared to the prior year period. The increase consisted of the following:
•an increase in wallboard sales, which are impacted by both commercial and residential construction activity, primarily due to an increase in price/product mix and higher volume;
•an increase in ceilings sales, which is principally impacted by commercial construction activity, primarily due to an increase in price/product mix and higher volume;
•an increase in steel framing sales, which is principally impacted by commercial construction activity, primarily due to an increase in price/product mix and higher volume; and
•an increase in complementary products sales, which include insulation, joint treatment, tools, lumber and various other specialty building products, primarily due to an increase in pricing in certain product categories, the execution of growth initiatives to increase other products sales and positive contributions from acquisitions.
The following table breaks out our net sales into organic, or base business, net sales and recently acquired net sales for the three months ended July 31, 2021 and 2020. When calculating organic sales growth, we exclude the net sales of acquired businesses until the first anniversary of the acquisition date. In addition, we exclude the impact of foreign currency translation in our calculation of organic net sales growth.
| Three Months Ended July 31, | Change | ||||||||||||||||||||||
| 2021 | 2020 | Dollar | Percent | ||||||||||||||||||||
| (dollars in thousands) | |||||||||||||||||||||||
| Net sales | $ | 1,042,076 | $ | 802,573 | |||||||||||||||||||
| Recently acquired net sales (1) | (34,893) | — | |||||||||||||||||||||
| Impact of foreign currency (2) | (18,437) | — | |||||||||||||||||||||
| Base business net sales (3) | $ | 988,746 | $ | 802,573 | $ | 186,173 | 23.2 | % | |||||||||||||||
___________________________________
(1)Represents net sales of branches acquired by us until the first anniversary of the acquisition date. For the three months ended July 31, 2021, this includes net sales of D. L. Building Materials, which was acquired on February 1, 2021, net sales of Architectural Coating, which was acquired on June 3, 2021, and net sales of Westside, which was acquired on July 1, 2021.
(2)Represents the impact of foreign currency translation on net sales.
(3)Represents net sales of existing branches and branches that were opened by us during the period presented.
The increase in organic net sales was primarily driven by continued strength in the residential market, price inflation in the current year period, growth in complementary products sales and the negative impacts of COVID-19 in the prior year period, partially offset by one less selling day during the current year period compared to the prior year period.
Gross Profit and Gross Margin
| Three Months Ended July 31, | Change | ||||||||||||||||||||||
| 2021 | 2020 | Dollar | Percent | ||||||||||||||||||||
| (dollars in thousands) | |||||||||||||||||||||||
| Gross profit | $ | 335,833 | $ | 260,458 | $ | 75,375 | 28.9 | % | |||||||||||||||
| Gross margin | 32.2 | % | 32.5 | % | |||||||||||||||||||
The increase in gross profit during the three months ended July 31, 2021 compared to the prior year period was primarily due to continued strength in the residential market and the negative impacts of COVID-19 in the prior year period. The decrease in gross margin on net sales for the three months ended July 31, 2021 compared to the prior year period was primarily due to challenging price-cost dynamics for certain product categories. Included in cost of sales for the three months ended July 31, 2021 was a $1.7 million non-cash cost of sales charge to increase inventory acquired in the Westside acquisition to its estimated fair value. This adjustment had a negative effect on gross margin as the related inventory was sold.
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Selling, General and Administrative Expenses
| Three Months Ended July 31, | Change | ||||||||||||||||||||||
| 2021 | 2020 | Dollar | Percent | ||||||||||||||||||||
| (dollars in thousands) | |||||||||||||||||||||||
| Selling, general and administrative expenses | $ | 214,081 | $ | 183,112 | $ | 30,969 | 16.9 | % | |||||||||||||||
| % of net sales | 20.5 | % | 22.8 | % | |||||||||||||||||||
Selling, general and administrative expenses consist of warehouse, delivery and general and administrative expenses. Selling, general and administrative expenses increased during the three months ended July 31, 2021 compared to the prior year period primarily due to increases in payroll and payroll related costs, fuel costs, travel costs and facilities costs, which were driven by increased sales volume and organic growth. Selling, general and administrative expenses as a percent of our net sales decreased during the three months ended July 31, 2021 compared to the prior year period primarily due to the impact of inflationary market pricing on sales.
Depreciation and Amortization Expense
| Three Months Ended July 31, | Change | ||||||||||||||||||||||
| 2021 | 2020 | Dollar | Percent | ||||||||||||||||||||
| (dollars in thousands) | |||||||||||||||||||||||
| Depreciation | $ | 12,925 | $ | 12,827 | $ | 98 | 0.8 | % | |||||||||||||||
| Amortization | 14,789 | 14,270 | 519 | 3.6 | % | ||||||||||||||||||
| Depreciation and amortization | $ | 27,714 | $ | 27,097 | $ | 617 | 2.3 | % | |||||||||||||||
Depreciation and amortization expense includes depreciation of property and equipment and amortization of definite-lived intangible assets acquired in purchases of businesses. The increase in depreciation expense during the three months ended July 31, 2021 compared to the prior year period was primarily due to incremental expense resulting from property and equipment obtained in the acquisition of Westside, partially offset by assets becoming fully depreciated during the period. The increase in amortization expense during the three months ended July 31, 2021 was primarily due to incremental expense resulting from definite-lived intangible assets obtained in the acquisition of Westside and D.L. Building Materials, partially offset by time-based progression of our use of the accelerated method of amortization for acquired customer relationships.
Interest Expense
| Three Months Ended July 31, | Change | ||||||||||||||||||||||
| 2021 | 2020 | Dollar | Percent | ||||||||||||||||||||
| (dollars in thousands) | |||||||||||||||||||||||
| Interest expense | $ | (13,657) | $ | (14,081) | $ | (424) | (3.0) | % | |||||||||||||||
Interest expense consists primarily of interest expense incurred on our debt and finance leases and amortization of deferred financing fees and debt discounts. The decrease in interest expense during the three months ended July 31, 2021 compared to the prior year period was primarily due to a decrease in average debt outstanding during the comparable periods and a decrease in interest rates.
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Income Taxes
| Three Months Ended July 31, | Change | ||||||||||||||||||||||
| 2021 | 2020 | Dollar | Percent | ||||||||||||||||||||
| (dollars in thousands) | |||||||||||||||||||||||
| Provision for income taxes | $ | 19,971 | $ | 9,604 | $ | 10,367 | 107.9 | % | |||||||||||||||
| Effective tax rate | 24.6 | % | 26.1 | % | |||||||||||||||||||
The change in the effective income tax rate during the three months ended July 31, 2021 compared to the prior year period was primarily due to the impact of state taxes, foreign taxes and a change in the valuation allowance in the prior year period.
Liquidity and Capital Resources
Summary
We depend on cash flow from operations, cash on hand and funds available under our asset based revolving credit facility (the “ABL Facility”) to finance working capital needs, capital expenditures and acquisitions. We believe that these sources of funds will be adequate to fund debt service requirements and provide cash, as required, to support our growth strategies, ongoing operations, capital expenditures, lease obligations and working capital for at least the next twelve months and in the long term. During fiscal 2021, we took several measures to preserve liquidity in response to COVID-19. We believe we would be able to take similar measures in the future should there be an economic downturn or disruption to our business as a result of the continuing COVID-19 pandemic or other factors.
As of July 31, 2021, we had available borrowing capacity of approximately $335.5 million under our $445.0 million ABL Facility. The ABL Facility is scheduled to mature on September 30, 2024.
As of July 31, 2021, we had available borrowing capacity of approximately $19.1 million under our Canadian revolving credit facility (the “Canadian Facility”) that provides for aggregate revolving commitments of $24.0 million ($30.0 million Canadian dollars). The Canadian Facility matures on January 12, 2026.
For more information regarding our ABL Facility and other indebtedness, see Note 5 of the Notes to Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q and Note 7 of the Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended April 30, 2021.
We have a common stock repurchase program authorized by our Board of Directors to repurchase up to $75.0 million of our outstanding common stock. The share repurchase program does not obligate us to acquire any particular amount of common stock, and it may be suspended or terminated at any time at our discretion. The timing and amount of any purchases of our common stock will be subject to a variety of factors, including, but not limited to, our liquidity, credit availability, general business and market conditions, our debt covenant restrictions and the availability of alternative investment opportunities. We repurchased approximately 85,000 shares of our common stock for $3.9 million during the three months ended July 31, 2021. As of July 31, 2021, we had $50.5 million of remaining purchase authorization.
We regularly evaluate opportunities to optimize our capital structure, including through consideration of the issuance or incurrence of additional debt to refinance existing debt and to fund ongoing cash needs such as general corporate purposes, growth initiatives, acquisitions and our stock repurchase program.
29
Cash Flows
A summary of our operating, investing and financing activities is shown in the following table:
| Three Months Ended July 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| (in thousands) | |||||||||||
| Cash used in operating activities | $ | (75,077) | $ | (15,711) | |||||||
| Cash used in investing activities | (129,576) | (4,613) | |||||||||
| Cash provided by (used in) financing activities | 81,394 | (51,819) | |||||||||
| Effect of exchange rates on cash and cash equivalents | (163) | 943 | |||||||||
| Decrease in cash and cash equivalents | $ | (123,422) | $ | (71,200) | |||||||
Operating Activities
The increase in cash used in operating activities during the three months ended July 31, 2021 compared to the prior year period was primarily due to a $100.4 million decrease in cash resulting from changes in our net working capital, partially offset by a $41.0 million increase in net income after adjustments for non-cash items. The decrease in cash from net working capital was primarily due to an increase in inventory, as well as an increase in accounts receivable due to higher sales activity. In addition, in the prior year period we were still conserving cash in response to COVID-19.
Investing Activities
The increase in cash used in investing activities during the three months ended July 31, 2021 compared to the prior year period was primarily due to a $122.8 million increase in cash used for acquisitions and a $2.1 million increase in capital expenditures.
Capital expenditures during the three months ended July 31, 2021 primarily consisted of building and leasehold improvements, vehicles and IT-related spending. Capital expenditures vary depending on prevailing business factors, including current and anticipated market conditions. Historically, capital expenditures have remained at relatively low levels in comparison to the operating cash flows generated during the corresponding periods.
Financing Activities
The change in cash provided by (used in) financing activities during the three months ended July 31, 2021 compared to the prior year period was primarily due to net borrowings of $92.2 million of our revolving credit facilities during the three months ended July 31, 2021, compared to net repayments of $43.7 million during the prior year period. During the three months ended July 31, 2021, we used our revolvers to help fund the Westside acquisition and general working capital needs. During the prior year period, we repaid a portion of proceeds we proactively borrowed in March 2020 due to COVID-19. Also contributing to the change was $3.9 million of repurchases of common stock during the three months ended July 31, 2021. No shares were repurchased during the prior year period.
Debt Covenants
Our senior secured first lien term loan facility (the “Term Loan Facility”) contains a number of covenants that limit our ability and the ability of our restricted subsidiaries, as described in the respective credit agreement, to: incur more indebtedness; pay dividends, redeem or repurchase stock or make other distributions; make investments; create restrictions on the ability of our restricted subsidiaries to pay dividends to us or make other intercompany transfers; create liens securing indebtedness; transfer or sell assets; merge or consolidate; enter into certain transactions with our affiliates; and prepay or amend the terms of certain indebtedness. We were in compliance with all covenants contained in the Term Loan Facility as of July 31, 2021.
Our senior unsecured notes due May 2029 (the "Senior Notes") contains certain covenants that, among other things, limit the Company’s ability and the ability of its restricted subsidiaries to incur additional indebtedness, make certain dividends, repurchase Company stock or make other distributions, make certain investments, create liens, transfer or sell assets, merge or consolidate, and enter into transactions with the Company’s affiliates. Such covenants are subject to a number of important exceptions and qualifications set forth in the related indenture. We were in compliance with all covenants contained in the Senior Notes as of July 31, 2021
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The ABL Facility contains certain affirmative covenants, including financial and other reporting requirements. We were in compliance with all such covenants as of July 31, 2021.
Contractual Obligations
There have been no material changes to the contractual obligations as disclosed in our Annual Report on Form 10-K for the fiscal year ended April 30, 2021, other than those made in the ordinary course of business.
Off-Balance Sheet Arrangements
There have been no material changes to our off-balance sheet arrangements as discussed in our Annual Report on Form 10-K for the fiscal year ended April 30, 2021.
Non-GAAP Financial Measures
Adjusted EBITDA
Adjusted EBITDA and Adjusted EBITDA margin are non-GAAP measures. We report our financial results in accordance with GAAP. However, we present Adjusted EBITDA and Adjusted EBITDA margin, which are not recognized financial measures under GAAP, because we believe they assist 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 and Adjusted EBITDA margin are helpful in highlighting trends in our operating results, while other measures can differ significantly depending on long-term strategic decisions regarding capital structure and allocation, the tax jurisdictions in which companies operate and capital investments and acquisitions.
In addition, we utilize Adjusted EBITDA in certain calculations under our debt agreements. Our debt agreements 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. We may in the future reflect such permitted adjustments in our calculations of Adjusted EBITDA.
We believe that Adjusted EBITDA and Adjusted EBITDA margin are frequently used by analysts, investors and other interested parties in their evaluation of companies, many of which present an Adjusted EBITDA or Adjusted EBITDA margin measure when reporting their results. Our presentation of Adjusted EBITDA should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items. In addition, Adjusted EBITDA may not be comparable to similarly titled measures used by other companies in our industry or across different industries.
We also include information concerning Adjusted EBITDA margin, which is calculated as Adjusted EBITDA divided by net sales. We present Adjusted EBITDA margin because it is used by management as a performance measure to judge the level of Adjusted EBITDA that is generated from net sales.
Adjusted EBITDA and Adjusted EBITDA margin have their limitations as analytical tools and should not be considered in isolation, or as a substitute for analysis of our results as reported under GAAP.
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The following is a reconciliation of our net income to Adjusted EBITDA and Adjusted EBITDA margin:
| Three Months Ended July 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| (in thousands) | |||||||||||
| Net income | $ | 61,202 | $ | 27,219 | |||||||
| Interest expense | 13,657 | 14,081 | |||||||||
| Interest income | — | (37) | |||||||||
| Provision for income taxes | 19,971 | 9,604 | |||||||||
| Depreciation expense | 12,925 | 12,827 | |||||||||
| Amortization expense | 14,789 | 14,270 | |||||||||
| Stock appreciation rights(a) | 892 | 792 | |||||||||
| Redeemable noncontrolling interests(b) | 310 | 252 | |||||||||
| Equity-based compensation(c) | 1,958 | 1,605 | |||||||||
| Severance and other permitted costs(d) | 147 | 1,947 | |||||||||
| Transaction costs (acquisitions and other)(e) | 575 | 100 | |||||||||
| (Gain) loss on disposal and impairment of assets(f) | (78) | 394 | |||||||||
| Effects of fair value adjustments to inventory(g) | 1,731 | — | |||||||||
| Adjusted EBITDA | $ | 128,079 | $ | 83,054 | |||||||
| Net sales | $ | 1,042,076 | $ | 802,573 | |||||||
| Adjusted EBITDA Margin | 12.3 | % | 10.3 | % | |||||||
___________________________________
(a)Represents changes in the fair value of stock appreciation rights.
(b)Represents changes in the fair 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 the calculation of Adjusted EBITDA under the ABL Facility and the Term Loan Facility, including certain unusual, nonrecurring costs and credits due to COVID-19.
(e)Represents costs related to acquisitions paid to third parties.
(f)Includes gains from the sale of assets and impairment of assets resulting from restructuring plans to close certain facilities.
(g)Represents the non-cash cost of sales impact of acquisition accounting adjustments to increase inventory to its estimated fair value.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
There have been no material changes to our exposure to market risks from those reported in our Annual Report on Form 10-K for the fiscal year ended April 30, 2021.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
As of July 31, 2021, our management, with the participation of our principal executive officer and principal financial officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), which are designed to provide reasonable assurance that the information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include controls and procedures that are designed to provide reasonable assurance that information required to be disclosed in the reports that we file or submit under the Exchange Act is accumulated and communicated to management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.
Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of July 31, 2021, our disclosure controls and procedures were effective to ensure that information required to be disclosed in the reports that are filed or submitted under the Exchange Act, is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting during the three months ended July 31, 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting except that on July 1, 2021 the Company acquired Westside Building Material ("Westside"). As a result, the Company is currently integrating Westside’s operations into its overall system of internal control over financial reporting. Under the guidelines established by the Securities and Exchange Commission, companies are permitted to exclude acquisitions from their assessment of internal control over financial reporting during the first year of acquisition. Accordingly, we expect to exclude Westside from the assessment of internal control over financial reporting for fiscal 2022.
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PART II – Other Information
Item 1. Legal Proceedings
From time to time, we are involved in lawsuits that are brought against us in the normal course of business. We are not currently a party to any legal proceedings that would be expected, either individually or in the aggregate, to have a material adverse effect on our business or financial condition. For additional information, see Note 12, “Commitments and Contingencies.”
The building materials industry has been subject to personal injury and property damage claims arising from alleged exposure to raw materials contained in building products as well as claims for incidents of catastrophic loss, such as building fires. As a distributor of building materials, we face an inherent risk of exposure to product liability claims in the event that the use of the products we have distributed in the past or may in the future distribute is alleged to have resulted in economic loss, personal injury or property damage or violated environmental, health or safety or other laws. Such product liability claims have included and may in the future include allegations of defects in manufacturing, defects in design, a failure to warn of dangers inherent in the product, negligence, strict liability or a breach of warranties. In particular, certain of our subsidiaries have been the subject of claims related to alleged exposure to asbestos-containing products they distributed prior to 1979. Since 2002 and as of July 31, 2021, approximately 1,025 asbestos-related personal injury lawsuits have been filed and we vigorously defend against them. Of these, 980 have been dismissed without any payment by us, 35 are pending and only 10 have been settled, which settlements have not materially impacted our financial condition or operating results. See “Risk Factors—Risks Relating to Our Business and Industry—We are exposed to product liability, warranty, casualty, construction defect, contract, tort, employment and other claims and legal proceedings related to our business, the products we distribute, the services we provide and services provided for us by third parties” listed in Part 1, Item 1A of our Annual Report on Form 10-K for the fiscal year ended April 30, 2021.
Item 1A. Risk Factors
There have been no material changes in the risks facing the Company as described in the Company’s Annual Report on Form 10-K for the fiscal year ended April 30, 2021.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The number of shares repurchased and the average price paid per share for each month in the three months ended July 31, 2021 are as follows:
| Total Number of Shares Repurchased | Average Price Paid Per Share | Total Number of Shares Repurchased as Part of Publicly Announced Program (1) | Approximate Dollar Value that May Yet be Purchased Under the Program | ||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||
| May 1 through May 31 | 8,583 | $ | 44.41 | 8,583 | $ | 53,939 | |||||||||||||||||
| June 1 through June 30 | 20,081 | 42.88 | 20,081 | 53,078 | |||||||||||||||||||
| July 1 through July 31 | 56,371 | 46.36 | 56,371 | 50,465 | |||||||||||||||||||
| Total | 85,035 | 85,035 | |||||||||||||||||||||
___________________________________
(1)On November 30, 2018, our Board of Directors authorized a common stock repurchase program to repurchase up to $75.0 million of our outstanding common stock. We may conduct repurchases under the share repurchase program through open market transactions, under trading plans in accordance with Rule 10b5-1 and/or in privately negotiated transactions, in compliance with Rule 10b-18 under the Exchange Act of 1934, as amended, subject to a variety of factors, including, but not limited to, our liquidity, credit availability, general business and market conditions, our debt covenant restrictions and the availability of alternative investment opportunities. The share repurchase program does not obligate us to acquire any particular amount of common stock, and it may be suspended or terminated at any time at our discretion.
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Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not Applicable.
Item 5. Other Information
None.
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Item 6. Exhibits
(a)Exhibits. The following exhibits are filed as part of this report:
| Exhibit No. | Exhibit Description | |||||||
| 3.1 | ||||||||
| 3.2 | ||||||||
| 4.1 | ||||||||
| 10.1 | * | |||||||
| 10.2 | * | |||||||
| 31.1 | * | |||||||
| 31.2 | * | |||||||
| 32.1 | * | |||||||
| 32.2 | * | |||||||
| 101 INS | * | Inline XBRL Instance Document – the instance document does not appear in the Interactive Data file because its XBRL tags are embedded within the Inline XBRL document. | ||||||
| 101 SCH | * | Inline XBRL Taxonomy Extension Schema Document. | ||||||
| 101 CAL | * | Inline XBRL Taxonomy Extension Calculation Linkbase Document. | ||||||
| 101 DEF | * | Inline XBRL Taxonomy Extension Definition Linkbase Document. | ||||||
| 101 LAB | * | Inline XBRL Taxonomy Extension Label Linkbase Document. | ||||||
| 101 PRE | * | Inline XBRL Taxonomy Extension Presentation Linkbase Document. | ||||||
| 104 | Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101). | |||||||
* Filed herewith.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Quarterly Report on Form 10-Q to be signed on its behalf by the undersigned, thereunto duly authorized.
| GMS INC. | ||||||||
| Date: September 2, 2021 | By: | /s/ Scott M. Deakin | ||||||
| Scott M. Deakin | ||||||||
| Chief Financial Officer | ||||||||
| (Principal Financial Officer) | ||||||||
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