GMS Inc. [GMS] Filings

10-Q 1 gms-20220131.htm 10-Q gms-20220131

UNITED STATES

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 January 31, 2022

☐ 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 43,040,983 shares of the registrant’s common stock, par value $0.01 per share, outstanding as of February 28, 2022.

FORM 10-Q

TABLE OF CONTENTS



		Page
Cautionary Note Regarding Forward-Looking Statements		3

PART I	Financial Information	5
Item 1	Financial Statements	5
	Condensed Consolidated Balance Sheets (Unaudited)	5
	Condensed Consolidated Statements of Operations and Comprehensive Income (Unaudited)	6
	Condensed Consolidated Statements of Stockholders’ Equity (Unaudited)	7
	Condensed Consolidated Statements of Cash Flows (Unaudited)	9
	Notes to Condensed Consolidated Financial Statements (Unaudited)	10
Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	28
Item 3	Quantitative and Qualitative Disclosures About Market Risk	40
Item 4	Controls and Procedures	40

PART II	Other Information	41
Item 1	Legal Proceedings	41
Item 1A	Risk Factors	41
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	41
Item 3	Defaults Upon Senior Securities	42
Item 4	Mine Safety Disclosures	42
Item 5	Other Information	42
Item 6	Exhibits	43
Signatures		44

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 or other future developments relating to 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 new construction and repair and remodeling, or R&R, markets;

•competition in our industry and the markets in which we operate;

•the fluctuations in prices and mix of the products we distribute, including as a result of inflationary and deflationary pressures, and our ability to pass on price increases to our customers and effectively manage inventories and margins in both inflationary and deflationary pricing environments;

•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 successfully identify acquisition candidates, complete and integrate acquisitions and achieve synergies;

•our ability to expand into new geographic markets;

•our ability to continue to anticipate and address evolving consumer demands, particularly in the automatic taping and finishing (“ATF”) market;

•product shortages, other disruptions in our supply chain or distribution network and potential loss of relationships with key suppliers, including heightened risks relating to sourcing products from international 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;

•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 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.

PART I – Financial Information

Item 1. Financial Statements

GMS Inc.

Condensed Consolidated Balance Sheets (Unaudited)

(in thousands, except per share data)


	January 31, 2022		April 30, 2021
Assets
Current assets:
Cash and cash equivalents	$	86,975	$	167,012
Trade accounts and notes receivable, net of allowances of $9,683 and $6,282, respectively	700,255		558,661
Inventories, net	585,351		357,054
Prepaid expenses and other current assets	19,055		19,525
Total current assets	1,391,636		1,102,252
Property and equipment, net of accumulated depreciation of $216,541 and $193,364, respectively	342,995		311,326
Operating lease right-of-use assets	146,762		118,413
Goodwill	693,942		576,330
Intangible assets, net	480,312		350,869
Deferred income taxes	20,536		15,715
Other assets	9,997		8,993
Total assets	$	3,086,180	$	2,483,898
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	293,485	$	322,965
Accrued compensation and employee benefits	79,031		72,906
Other accrued expenses and current liabilities	129,927		87,138
Current portion of long-term debt	44,624		46,018
Current portion of operating lease liabilities	40,413		33,474
Total current liabilities	587,480		562,501
Non-current liabilities:
Long-term debt, less current portion	1,281,737		932,409
Long-term operating lease liabilities	107,002		90,290
Deferred income taxes, net	47,174		12,728
Other liabilities	59,511		63,508
Total liabilities	2,082,904		1,661,436
Commitments and contingencies
Stockholders' equity:
Common stock, par value $0.01 per share, 500,000 shares authorized; 43,095 and 43,073 shares issued and outstanding as of January 31, 2022 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 January 31, 2022 and April 30, 2021	—		—
Additional paid-in capital	536,635		542,737
Retained earnings	471,481		274,535
Accumulated other comprehensive income (loss)	(5,271)		4,759
Total stockholders' equity	1,003,276		822,462
Total liabilities and stockholders' equity	$	3,086,180	$	2,483,898

The accompanying notes are an integral part of these condensed consolidated financial statements.

GMS Inc.

Condensed Consolidated Statements of Operations and Comprehensive Income (Unaudited)

(in thousands, except per share data)


	Three Months Ended January 31,				Nine Months Ended January 31,
	2022		2021		2022		2021
Net sales	$	1,153,595	$	751,191	$	3,346,222	$	2,366,620
Cost of sales (exclusive of depreciation and amortization shown separately below)	785,823		507,867		2,270,747		1,597,767
Gross profit	367,772		243,324		1,075,475		768,853
Operating expenses:
Selling, general and administrative	241,040		184,844		685,652		556,308
Depreciation and amortization	29,750		25,562		86,867		79,904
Total operating expenses	270,790		210,406		772,519		636,212
Operating income	96,982		32,918		302,956		132,641
Other (expense) income:
Interest expense	(15,429)		(13,454)		(43,830)		(41,060)
Gain on legal settlement	—		1,382		—		1,382

Other income, net	1,041		989		2,771		2,441
Total other expense, net	(14,388)		(11,083)		(41,059)		(37,237)
Income before taxes	82,594		21,835		261,897		95,404
Provision for income taxes	21,211		5,709		64,951		23,590
Net income	$	61,383	$	16,126	$	196,946	$	71,814
Weighted average common shares outstanding:
Basic	43,094		42,726		43,106		42,691
Diluted	43,945		43,361		43,937		43,184
Net income per common share:
Basic	$	1.42	$	0.38	$	4.57	$	1.68
Diluted	$	1.40	$	0.37	$	4.48	$	1.66
Comprehensive income
Net income	$	61,383	$	16,126	$	196,946	$	71,814
Foreign currency translation income (loss)	(15,185)		20,373		(19,304)		39,813
Changes in other comprehensive income, net of tax	4,023		1,974		9,274		5,777
Comprehensive income	$	50,221	$	38,473	$	186,916	$	117,404

The accompanying notes are an integral part of these condensed consolidated financial statements.

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
Foreign currency translation adjustments	—	—		—		—		(8,233)		(8,233)
Other comprehensive income, net of tax	—	—		—		—		1,962		1,962
Repurchase and retirement of common stock	(85)	(1)		(3,854)		—		—		(3,855)
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
Net income	—	—		—		74,361		—		74,361
Foreign currency translation adjustments	—	—		—		—		4,114		4,114
Other comprehensive income, net of tax	—	—		—		—		3,289		3,289
Repurchase and retirement of common stock	(195)	(2)		(9,267)		—		—		(9,269)
Equity-based compensation	—	—		3,215		—		—		3,215
Exercise of stock options	52	1		976		—		—		977
Vesting of restricted stock units	112	1		(1)		—		—		—
Tax withholding related to net share settlements of equity awards	—	—		(2,579)		—		—		(2,579)
Balances as of October 31, 2021	43,052	431		534,931		410,098		5,891		951,351
Net income	—	—		—		61,383		—		61,383
Foreign currency translation adjustments	—	—		—		—		(15,185)		(15,185)
Other comprehensive income, net of tax	—	—		—		—		4,023		4,023
Repurchase and retirement of common stock	(87)	(1)		(4,733)		—		—		(4,734)
Equity-based compensation	—	—		3,077		—		—		3,077
Exercise of stock options	101	1		2,183		—		—		2,184
Vesting of restricted stock units	2	—		—		—		—		—
Tax withholding related to net share settlements of equity awards	—	—		(15)		—		—		(15)
Issuance of common stock pursuant to employee stock purchase plan	27	—		1,192		—		—		1,192
Balances as of January 31, 2022	43,095	$	431	$	536,635	$	471,481	$	(5,271)	$	1,003,276

The accompanying notes are an integral part of these condensed consolidated financial statements.

GMS Inc.

Condensed Consolidated Statements of Stockholders’ Equity (Unaudited)

(in thousands)


	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
Net income	—	—		—		28,469		—		28,469
Foreign currency translation adjustments	—	—		—		—		3,159		3,159
Other comprehensive income, net of tax	—	—		—		—		2,844		2,844
Repurchase and retirement of common stock	(50)	(1)		(1,221)		—		—		(1,222)
Equity-based compensation	—	—		3,253		—		—		3,253
Exercise of stock options	5	—		172		—		—		172
Vesting of restricted stock units	62	1		(1)		—		—		—
Tax withholding related to net share settlements of equity awards	—	—		(649)		—		—		(649)
Balances as of October 31, 2020	42,690	427		534,646		224,663		(41,839)		717,897
Net income	—	—		—		16,126		—		16,126
Foreign currency translation adjustments	—	—		—		—		20,373		20,373
Other comprehensive income, net of tax	—	—		—		—		1,974		1,974
Repurchase and retirement of common stock	(30)	—		(778)		—		—		(778)
Equity-based compensation	—	—		1,876		—		—		1,876
Exercise of stock options	152	1		2,792		—		—		2,793
Vesting of restricted stock units	4	—		—		—		—		—
Tax withholding related to net share settlements of equity awards	—	—		(53)		—		—		(53)
Issuance of common stock pursuant to employee stock purchase plan	38	—		806		—		—		806
Balances as of January 31, 2021	42,854	$	428	$	539,289	$	240,789	$	(19,492)	$	761,014

The accompanying notes are an integral part of these condensed consolidated financial statements.

GMS Inc.

Condensed Consolidated Statements of Cash Flows (Unaudited)

(in thousands)


	Nine Months Ended January 31,
	2022		2021
Cash flows from operating activities:
Net income	$	196,946	$	71,814
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Depreciation and amortization	86,867		79,904
Amortization of debt discount and debt issuance costs	2,037		2,257
Equity-based compensation	12,461		10,318
Gain on disposal of assets	(474)		(529)
Deferred income taxes	(1,740)		(9,645)
Other items, net	5,357		105
Changes in assets and liabilities net of effects of acquisitions:
Trade accounts and notes receivable	(109,948)		(15,381)
Inventories	(191,103)		(24,391)
Prepaid expenses and other assets	2,215		1,040
Accounts payable	(46,310)		(41,371)
Accrued compensation and employee benefits	3,618		(11,932)
Other accrued expenses and liabilities	20,187		6,307
Cash (used in) provided by operating activities	(19,887)		68,496
Cash flows from investing activities:
Purchases of property and equipment	(33,161)		(17,857)
Proceeds from sale of assets	1,124		1,233
Acquisition of businesses, net of cash acquired	(345,376)		(51)
Cash used in investing activities	(377,413)		(16,675)
Cash flows from financing activities:
Repayments on revolving credit facilities	(823,583)		(102,189)
Borrowings from revolving credit facilities	1,182,774		14,750
Payments of principal on long-term debt	(3,832)		(7,476)
Payments of principal on finance lease obligations	(23,154)		(22,662)
Repurchases of common stock	(17,858)		(2,000)
Proceeds from exercises of stock options	4,024		3,656
Payments for taxes related to net share settlement of equity awards	(2,850)		(807)
Other financing activities	2,332		2,076
Cash provided by (used in) financing activities	317,853		(114,652)
Effect of exchange rates on cash and cash equivalents	(590)		2,495
Decrease in cash and cash equivalents	(80,037)		(60,336)
Cash and cash equivalents, beginning of period	167,012		210,909
Cash and cash equivalents, end of period	$	86,975	$	150,573
Supplemental cash flow disclosures:
Cash paid for income taxes	$	61,066	$	31,942
Cash paid for interest	35,721		38,114

The accompanying notes are an integral part of these condensed consolidated financial statements.

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, operates a network of nearly 300 distribution centers with extensive product offerings of wallboard, ceilings, steel framing and complementary construction products. GMS also operates more than 90 tool sales, rental and service centers. Through these operations, GMS provides a comprehensive selection of building products and solutions for its residential and commercial contractor customer base across the United States and Canada. The Company’s unique operating model combines the benefits of a national platform and strategy with a local go-to-market focus, enabling GMS to generate significant economies of scale while maintaining high levels of customer service.

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. 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 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, automobile and workers’ compensation. 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.

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,

GMS Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)

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.


	January 31, 2022		April 30, 2021
	(in thousands)
Medical self‑insurance	$	3,738	$	3,852
General liability, automobile and workers’ compensation	18,140		19,807
Expected recoveries for insurance liabilities	(3,256)		(3,209)

Revenue Recognition

Revenue is recognized upon transfer of control of contracted 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 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 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

GMS Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)

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. However, the new guidance is not applicable to contract modifications made, and hedging relationships entered into or evaluated after, December 31, 2022. The Company will adopt this guidance when its relevant contracts are modified upon transition to alternative reference rates. The Company does not expect the adoption to have a material impact on its consolidated financial statements.

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. The Company's Condensed Consolidated Statement of Operations and Comprehensive Income for the nine months ended January 31, 2022 included $150.1 million of net sales and $3.5 million of net income from acquisitions made in fiscal 2022.

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 $140.1 million. Westside is a leading supplier of steel framing, wallboard, ceilings, insulation and complementary 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. 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 settlement of the holdback liability.

GMS Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)

The following table summarizes the components of the preliminary consideration:


	(in thousands)
Cash consideration	$	126,609
Holdback liability	13,500
Total preliminary consideration transferred	$	140,109

Included in the total preliminary consideration as of January 31, 2022 is a $13.5 million holdback liability for general representations and warranties of the sellers that is scheduled to be settled 15 months after the acquisition date.

The following table summarizes the preliminary acquisition accounting for this acquisition, and subsequent measurement period adjustments recorded, based on currently available information:


	July 1, 2021		Adjustments		January 31, 2022
	(in thousands)
Trade accounts and notes receivable	$	27,081	$	(799)	$	26,282
Inventories	28,900		(145)		28,755
Prepaid and other current assets	228		—		228
Property and equipment	16,687		—		16,687
Operating lease right-of-use assets	20,782		—		20,782
Customer relationships	51,500		—		51,500
Tradenames	11,300		—		11,300
Goodwill	13,351		1,363		14,714
Accounts payable and accrued expenses	(14,375)		55		(14,320)
Operating lease liabilities	(15,819)		—		(15,819)
Fair value of consideration transferred	$	139,635	$	474	$	140,109

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.

Ames Acquisition

On December 1, 2021, the Company acquired Ames Taping Tools Holding LLC (“Ames”) for preliminary consideration of $224.5 million in cash. Ames is the leading provider of automatic taping and finishing (“ATF”) tools and related products to the professional drywall finishing industry. Ames operates more than 90 retail locations servicing professionals in the interior finishing market. The acquisition was primarily funded with borrowings under the Company's asset based revolving credit facility. The primary purpose of the transaction was to expand the Company's complementary product offerings 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 Ames, 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 the finalization of preliminary fair value estimates, working capital adjustments and residual goodwill.

GMS Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)

The following table summarizes the preliminary acquisition accounting for this acquisition based on currently available information:


	Preliminary Acquisition Accounting
	(in thousands)
Cash and cash equivalents	$	10,692
Trade accounts and notes receivable	9,955
Inventories	15,464
Prepaid and other current assets	1,941
Property and equipment	6,165
Operating lease right-of-use assets	8,238
Customer relationships	63,000
Tradenames	53,000
Patents	3,000
Goodwill	104,557
Accounts payable and accrued expenses	(14,827)
Deferred tax liability	(28,440)
Operating lease liabilities	(8,238)
Fair value of consideration transferred	$	224,507

Goodwill recognized is attributable to expected synergies and the expected value in the potential to expand and enhance the Company's complementary product offerings. Goodwill is not expected to be deductible for U.S. federal income tax purposes. The estimated useful life for the customer relationships is eleven years and the estimated useful life for the patents is ten years. The tradenames are estimated to have an indefinite useful life.

Trade accounts and notes receivable had a preliminary estimate of fair value of $10.0 million and a gross contractual value of $11.6 million. The difference represents the Company’s best estimate of the contractual cash flows that will not be collected.

Pro Forma Financial Information

The following table presents the unaudited pro forma consolidated net sales and net income for the Company for the periods indicated:


	Three Months Ended January 31,				Nine Months Ended January 31,
	2022		2021		2022		2021
	(in thousands)
Net sales	$	1,160,211	$	813,078	$	3,429,878	$	2,571,616
Net income	61,336		15,303		203,721		75,924

The above pro forma results have been calculated by combining the historical results of the Company, Westside and Ames as if the acquisitions of Westside and Ames had occurred on May 1, 2020, the first day of the comparable prior reporting period presented. The pro forma results include estimates for intangible asset amortization, depreciation, interest expense and income taxes, and are subject to change once final asset values have been determined. The pro forma information is not necessarily indicative of the results that would have been achieved had the transactions occurred on the first day of each of the periods presented or that may be achieved in the future.

Other Acquisitions

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. On August 2, 2021, the Company acquired certain assets of DK&B Construction Specialties, Inc. (“DK&B”). DK&B is a distributor of External Insulation and Finishing Systems (“EIFS”) and stucco products through one location in Omaha, Nebraska. On December 1, 2021, the Company acquired the assets of Kimco Supply Company (“Kimco”). Kimco is an interior building products

GMS Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)

distributor through two locations in the Tampa, Florida area. The impact of these acquisitions 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:


	January 31, 2022		April 30, 2021
	(in thousands)
Trade receivables	$	604,321	$	488,002
Other receivables	105,617		76,941
Allowance for expected credit losses	(5,424)		(3,254)
Other allowances	(4,259)		(3,028)
Trade accounts and notes receivable	$	700,255	$	558,661

The following table presents the change in the allowance for expected credit losses during the nine months ended January 31, 2022:


	(in thousands)
Balance as of April 30, 2021	$	3,254
Provision	786
Other	1,384
Balance as of January 31, 2022	$	5,424

Receivables from contracts with customers, net of allowances, were $594.6 million and $481.7 million as of January 31, 2022 and April 30, 2021, respectively. The Company did not have material amounts of contract assets or liabilities as of January 31, 2022 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	122,624		—		122,624
Acquisition accounting adjustments from prior period	(476)		—		(476)
Translation adjustment	(6,504)		1,968		(4,536)
Balance as of January 31, 2022	$	761,021	$	(67,079)	$	693,942

GMS Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)

Intangible Assets

The following tables present the components of the Company’s intangible assets:


	Estimated Useful Lives (years)	Weighted Average Amortization Period	January 31, 2022
			Gross Carrying Amount		Accumulated Amortization		Net Carrying Value
	(dollars in thousands)
Customer relationships	5-16	12.5	$	674,835	$	(368,089)	$	306,746
Definite-lived tradenames	5-20	15.8	72,141		(18,023)		54,118
Vendor agreements	8-10	8.3	6,644		(5,976)		668
Developed technology	5	4.9	8,499		(4,151)		4,348
Other	3-5	3.8	1,278		(1,213)		65
Definite-lived intangible assets			$	763,397	$	(397,452)	$	365,945
Indefinite-lived intangible assets							114,367
Total intangible assets, net							$	480,312


	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
Definite-lived intangible assets			$	647,973	$	(358,471)	$	289,502
Indefinite-lived intangible assets							61,367
Total intangible assets, net							$	350,869

Amortization expense related to definite-lived intangible assets was $15.9 million and $14.2 million for the three months ended January 31, 2022 and 2021, respectively, and $46.4 million and $43.0 million for the nine months ended January 31, 2022 and 2021, 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 three months)	$	17,637
2023	65,218
2024	54,181
2025	45,074
2026	37,786
Thereafter	146,049
Total	$	365,945

The Company’s indefinite-lived intangible assets consist of tradenames that had a carrying amount of $114.4 million and $61.4 million as of January 31, 2022 and April 30, 2021, respectively.

GMS Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)

5. Long-Term Debt

The Company’s long-term debt consisted of the following:


	January 31, 2022		April 30, 2021
	(in thousands)
Term Loan Facility	$	505,890	$	509,722
Unamortized discount and deferred financing costs on Term Loan Facility	(3,861)		(4,735)
Senior Notes	350,000		350,000
Unamortized discount and deferred financing costs on Senior Notes	(4,989)		(5,485)
ABL Facility	359,000		—
Finance lease obligations	112,967		117,948
Installment notes at fixed rates up to 5.0%, due in monthly and annual installments through 2025	7,812		11,716
Unamortized discount on installment notes	(458)		(739)

Carrying value of debt	1,326,361		978,427
Less current portion	44,624		46,018
Long-term debt	$	1,281,737	$	932,409

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 remaining 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 January 31, 2022, the applicable rate of interest was 2.61%.

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 provided for aggregate revolving commitments of $545.0 million as of January 31, 2022. 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.

On November 30, 2021, the Company amended its ABL Facility to, among other things, increase the commitments thereunder by $100.0 million from $445.0 million to $545.0 million and change the interest rate provisions from LIBOR to Secured Overnight Financing Rate ("SOFR").

As of January 31, 2022, at the Company’s option, the interest rates applicable to the loans under the ABL Facility were based on SOFR 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 January 31, 2022, the applicable base rate of interest was 3.50%.

As of January 31, 2022, the Company had available borrowing capacity of approximately $159.6 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.

GMS Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)

Debt Covenants

GMS Inc. [GMS] Filings
10-Q	[2022-03-03]
10-Q	[2021-12-02]
10-Q	[2021-09-02]
10-K	[2021-06-24]
10-Q	[2021-03-04]
10-Q	[2020-12-03]
10-Q	[2020-09-03]
10-K	[2020-06-25]
10-Q	[2020-03-05]
10-Q	[2019-12-05]
10-Q	[2019-08-29]
10-K	[2019-06-27]
10-Q	[2019-03-05]
10-Q	[2018-12-04]
10-Q	[2018-08-30]
10-K	[2018-06-28]
10-Q	[2018-03-06]
10-Q	[2017-12-07]
10-Q	[2017-09-06]
10-K	[2017-06-30]
S-1	[2017-05-08]
10-Q	[2017-03-09]
S-1	[2017-02-03]
10-Q	[2016-12-13]
10-Q	[2016-09-13]
10-K	[2016-07-12]
S-1	[2015-07-28]