GMS Earnings 2020-07-31

Balance Sheet	Income Statement	Cash Flow
Assets, Equity	Rev, G Profit, Net Income	Ops, Inv, Fin

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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 July 31, 2020

☐ 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 and post 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” and “smaller reporting 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 42,735,602 shares of the registrant’s common stock, par value $0.01 per share, outstanding as of August 31, 2020.

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FORM 10-Q

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		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)	8
	Notes to Condensed Consolidated Financial Statements (Unaudited)	9
Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	29
Item 3	Quantitative and Qualitative Disclosures About Market Risk	37
Item 4	Controls and Procedures	37

PART II	Other Information	38
Item 1	Legal Proceedings	38
Item 1A	Risk Factors	38
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	38
Item 3	Defaults Upon Senior Securities	38
Item 4	Mine Safety Disclosures	38
Item 5	Other Information	38
Item 6	Exhibits	39
Signatures		40

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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, 2020, 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 of the products we distribute;

●

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;

●

operating hazards that may cause personal injury or property damage;

●

our ability to attract and retain key employees and risks related our executive management transitions;

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●

rising health care costs and labor costs, including 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;

●

an impairment of our goodwill or intangible assets;

●

the impact of federal, state, provincial and local regulations;

●

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,		April 30,
	2020		2020
Assets
Current assets:
Cash and cash equivalents	$	139,709	$	210,909
Trade accounts and notes receivable, net of allowances of $5,289 and $5,141, respectively		430,931		405,254
Inventories, net		287,266		299,815
Prepaid expenses and other current assets		20,957		14,972
Total current assets		878,863		930,950
Property and equipment, net of accumulated depreciation of $167,414 and $158,554, respectively		299,661		305,467
Operating lease right-of-use assets		112,764		115,257
Goodwill		557,247		553,073
Intangible assets, net		354,542		361,884
Deferred income taxes		11,056		8,904
Other assets		11,697		13,247
Total assets	$	2,225,830	$	2,288,782
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	180,558	$	213,230
Accrued compensation and employee benefits		31,655		67,590
Other accrued expenses and current liabilities		73,648		63,812
Current portion of long-term debt		49,133		50,201
Current portion of operating lease liabilities		32,781		33,040
Total current liabilities		367,775		427,873
Non-current liabilities:
Long-term debt, less current portion		995,390		1,047,279
Long-term operating lease liabilities		87,607		89,605
Deferred income taxes, net		9,373		12,018
Other liabilities		83,814		78,026
Total liabilities		1,543,959		1,654,801
Commitments and contingencies
Stockholders' equity:
Common stock, par value $0.01 per share, 500,000 shares authorized; 42,673 and 42,554 shares issued and outstanding as of July 31, 2020 and April 30, 2020, respectively		427		426
Preferred stock, par value $0.01 per share, 50,000 shares authorized; 0 shares issued and outstanding as of July 31, 2020 and April 30, 2020		—		—
Additional paid-in capital		533,092		529,662
Retained earnings		196,194		168,975
Accumulated other comprehensive loss		(47,842)		(65,082)
Total stockholders' equity		681,871		633,981
Total liabilities and stockholders' equity	$	2,225,830	$	2,288,782

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,
	2020		2019
Net sales	$	802,573	$	847,176
Cost of sales (exclusive of depreciation and amortization shown separately below)		542,115		573,522
Gross profit		260,458		273,654
Operating expenses:
Selling, general and administrative		183,112		194,631
Depreciation and amortization		27,097		29,275
Total operating expenses		210,209		223,906
Operating income		50,249		49,748
Other (expense) income:
Interest expense		(14,081)		(18,277)
Other income, net		655		939
Total other expense, net		(13,426)		(17,338)
Income before taxes		36,823		32,410
Provision for income taxes		9,604		7,590
Net income	$	27,219	$	24,820
Weighted average common shares outstanding:
Basic		42,624		41,001
Diluted		43,017		41,615
Net income per common share⁽¹⁾:
Basic	$	0.64	$	0.60
Diluted	$	0.63	$	0.59
Comprehensive income
Net income	$	27,219	$	24,820
Foreign currency translation income		16,281		11,860
Changes in other comprehensive income (loss), net of tax		959		(6,065)
Comprehensive income	$	44,459	$	30,615

(1)

See Note 15 for detailed calculations.

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)


										Accumulated
						Additional				Other		Total
	Common Stock			Exchangeable		Paid-in		Retained		Comprehensive		Stockholders'
	Shares	Amount		Shares		Capital		Earnings		Loss		Equity
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
Change in other comprehensive income (loss), 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


										Accumulated
						Additional				Other		Total
	Common Stock			Exchangeable		Paid-in		Retained		Comprehensive		Stockholders'
	Shares	Amount		Shares		Capital		Earnings		Loss		Equity
Balances as of April 30, 2019	40,375	$	404	$	29,639	$	480,113	$	145,594	$	(26,574)	$	629,176
Net income	—		—		—		—		24,820		—		24,820
Exercise of Exchangeable Shares	1,129		11		(29,639)		29,628		—		—		—
Foreign currency translation adjustments	—		—		—		—		—		11,860		11,860
Change in other comprehensive income (loss), net of tax	—		—		—		—		—		(6,065)		(6,065)
Equity-based compensation	—		—		—		1,349		—		—		1,349
Exercise of stock options	9		—		—		133		—		—		133
Issuance of common stock pursuant to employee stock purchase plan	76		1		—		1,021		—		—		1,022
Balances as of July 31, 2019	41,589	$	416	$	—	$	512,244	$	170,414	$	(20,779)	$	662,295

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,
	2020		2019
Cash flows from operating activities:
Net income	$	27,219	$	24,820
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization		27,097		29,275
Amortization of debt discount and debt issuance costs		753		835
Provision for expected credit losses		138		657
Provision for obsolescence of inventory		109		119
Effects of fair value adjustments to inventory		—		151
Increase in fair value of contingent consideration		—		228
Equity-based compensation		2,619		2,071
Loss (gain) on disposal and impairment of assets		394		(156)
Deferred income taxes		(5,241)		(1,440)
Changes in assets and liabilities net of effects of acquisitions:
Trade accounts and notes receivable		(23,013)		(23,230)
Inventories		14,008		18
Prepaid expenses and other assets		(3,782)		(1,359)
Accounts payable		(33,887)		(9,526)
Accrued compensation and employee benefits		(36,062)		(26,347)
Other accrued expenses and liabilities		13,937		(8,556)
Cash used in operating activities		(15,711)		(12,440)
Cash flows from investing activities:
Purchases of property and equipment		(4,745)		(5,891)
Proceeds from sale of assets		342		232
Acquisition of businesses, net of cash acquired		(210)		(10,633)
Cash used in investing activities		(4,613)		(16,292)
Cash flows from financing activities:
Repayments on revolving credit facilities		(58,083)		(262,107)
Borrowings from revolving credit facilities		14,421		274,810
Payments of principal on long-term debt		(2,492)		(2,492)
Payments of principal on finance lease obligations		(7,521)		(6,021)
Proceeds from exercises of stock options		691		133
Payments for taxes related to net share settlement of equity awards		(105)		—
Other financing activities		1,270		1,022
Cash (used in) provided by financing activities		(51,819)		5,345
Effect of exchange rates on cash and cash equivalents		943		172
Decrease in cash and cash equivalents		(71,200)		(23,215)
Cash and cash equivalents, beginning of period		210,909		47,338
Cash and cash equivalents, end of period	$	139,709	$	24,123
Supplemental cash flow disclosures:
Cash paid for income taxes	$	3,478	$	18,776
Cash paid for interest		13,115		17,011

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 approximately 260 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, 2020.

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. 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 deductible amount per incident is $0.3 million, $0.5 million and $1.0 million for general liability, workers’ compensation and automobile, respectively. The coverage consists of a deductible layer, a primary layer, a self-insured buffer layer, a lead umbrella layer and excess layers. The primary layer of coverage is from $0.3 million, $0.5 million and $1.0 million for deductibles for general liability, workers’ compensation, and automobile liability, respectively, to $5.0 million. The Company self-insures a

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GMS Inc.

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

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 loss development factors and actuarial assumptions followed in the insurance industry and historical loss development experience.

As of July 31, 2020 and April 30, 2020, the aggregate liabilities for medical self-insurance were $4.1 million and $3.8 million, respectively, and are included in other accrued expenses and current liabilities in the Condensed Consolidated Balance Sheets. As of July 31, 2020 and April 30, 2020, reserves for general liability, automobile and workers’ compensation totaled approximately $18.1 million and $19.4 million, respectively, and are included in other accrued expenses and current liabilities and other liabilities in the Condensed Consolidated Balance Sheets. As of July 31, 2020 and April 30, 2020, expected recoveries for medical self-insurance, general liability, automobile and workers’ compensation totaled approximately $6.4 million and $6.0 million, respectively, and are included in prepaid expenses and other current assets and other assets in the Condensed Consolidated Balance Sheets.

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.

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GMS Inc.

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

Fair Value of Financial Instruments

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Authoritative guidance for fair value measurements establishes a three-level hierarchy that prioritizes the inputs to valuation models based upon the degree to which they are observable. The three levels of the fair value measurement hierarchy are as follows:



Level 1	Inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity can access at the measurement date.
Level 2	Inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.
Level 3	Inputs are unobservable inputs for which little or no market data exists, therefore requiring an entity to develop its own assumptions.

The carrying values of the Company’s cash, cash equivalents, trade receivables and trade payables approximate their fair values because of their short-term nature. Based on borrowing rates available to the Company for loans with similar terms, the carrying values of the Company’s debt instruments approximate fair value. See Note 11, “Fair Value Measurements,” for additional information with respect to the Company’s fair value measurements.

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 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.

The holders of the Company’s Exchangeable Shares (as defined in Note 8, “Stockholders’ Equity”) were entitled to receive dividends or distributions that are equal to any dividends or distributions on the Company’s common stock. As a result, when the Exchangeable Shares were outstanding, they were classified as a participating security and thereby required the allocation of income that would have otherwise been available to common stockholders when calculating earnings per share. Diluted earnings per share is calculated by utilizing the most dilutive result of the if-converted and two-class methods. In both methods, net income attributable to common stockholders and the weighted-average common shares outstanding are adjusted to account for the impact of the assumed issuance of potential common shares that are dilutive, subject to dilution sequencing rules.

Recently Adopted Accounting Pronouncements

Credit Losses – In June 2016, the Financial Accounting Standards Board (“FASB”) issued new guidance on credit losses on financial instruments. This guidance introduces a revised approach to the recognition and measurement of credit losses of certain financial instruments, including trade and other receivables, emphasizing an updated model based on expected losses rather than incurred losses. This new guidance is effective for annual reporting periods, and interim reporting periods contained therein, beginning after December 15, 2019. Early adoption is permitted. The Company adopted this guidance on May 1, 2020 with no material impact to its financial statements. See Note 3, “Accounts Receivable,” for additional information with respect to the Company’s allowance for expected credit losses.

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GMS Inc.

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

Fair Value Measurement Disclosures – In August 2018, the FASB issued new guidance that changes certain fair value measurement disclosure requirements. This guidance is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. An entity is permitted to early adopt all of the disclosure changes or early adopt only the removed disclosure requirements and delay adoption of the additional disclosures until the effective date of this amendment. The Company adopted this guidance on May 1, 2020 with no material impact to its financial statements.

Recently Issued Accounting Pronouncements

Reference Rate Reform – In March 2020, the 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. Revenue

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 when the Company does not bill the customer.

See Note 14, “Segments,” for information regarding disaggregation of revenue, including revenue by product and by geographic area.

Performance Obligations

The Company satisfies its performance obligations at a point in time, which is upon delivery of products. The Company’s payment terms vary by the type and location of its customers. The amount of time between point of sale and when payment is due is not significant and the Company has determined its contracts do not include a significant financing component.

The Company’s contracts with customers involve performance obligations that are one year or less. Therefore, the Company applied the standard’s optional exemption that permits the omission of information about its unfulfilled performance obligations as of the balance sheet dates.

Significant Judgments

The Company’s contracts may include terms that could cause variability in the transaction price, including customer rebates, returns and cash discounts for early payment. Variable consideration is estimated and included in the transaction price based on the expected value method. These estimates are based on historical experience, anticipated performance and other factors known at the time. The Company only includes estimated amounts in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is resolved.

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GMS Inc.

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

Contract Balances

Receivables from contracts with customers, net of allowances, were $417.2 million and $393.6 million as of July 31, 2020 and April 30, 2020, respectively. The Company did not have material amounts of contract assets or liabilities as of July 31, 2020 or April 30, 2020.

3. Accounts Receivable

The Company’s trade accounts and notes receivable consisted of the following as of July 31, 2020 and April 30, 2020:


	July 31,		April 30,
	2020		2020

	(in thousands)
Trade receivables	$	422,477	$	398,739
Other receivables		13,743		11,656
Allowance for expected credit losses		(2,878)		(2,861)
Other allowances		(2,411)		(2,280)
Trade accounts and notes receivable	$	430,931	$	405,254

The Company records accounts and notes receivable net of allowances, including the allowance for expected credit losses. The Company maintains an allowance for estimated losses due to the failure of customers to make required payments, as well as allowances for cash discounts. The Company’s estimate of the allowance for expected credit losses is based on an assessment of individual past due accounts, historical loss information, accounts receivable aging and current economic factors and the Company’s expectation of future economic conditions. Account balances are written off when the potential for recovery is considered remote.

The Company routinely assesses the financial strength of its customers and generally does not require collateral. Concentrations of credit risk with respect to trade accounts receivable are limited due to the large number of geographically diverse customers comprising the Company’s customer base.

The following table presents the change in the allowance for expected credit losses during the three months ended July 31, 2020:


	(in thousands)
Balance as of April 30, 2020	$	2,861
Provision		138
Write-offs		(121)
Balance as of July 31, 2020	$	2,878

Table of Contents

GMS Inc.

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

4. Goodwill and Intangible Assets

Goodwill

The following table presents changes in the carrying amount of goodwill during the three months ended July 31, 2020:


	Carrying
	Amount
	(in thousands)
Balance as of April 30, 2020
Goodwill	$	616,147
Accumulated impairment loss		(63,074)
		553,073

Working capital settlement		349
Translation adjustment		3,825

Balance as of July 31, 2020
Goodwill		620,321
Accumulated impairment loss		(63,074)
	$	557,247

Intangible Assets

The following tables present the components of the Company’s definite-lived intangible assets as of July 31, 2020 and April 30, 2020:


	Estimated	Weighted	July 31, 2020
	Useful	Average	Gross				Net
	Lives	Amortization	Carrying		Accumulated		Carrying
	(years)	Period	Amount		Amortization		Value

	(dollars in thousands)
Customer relationships	5 - 16	12.8	$	525,304	$	285,000	$	240,304
Definite-lived tradenames	5 - 20	16.3		56,704		11,514		45,190
Vendor agreements	8 - 10	8.3		6,644		4,768		1,876
Developed technology	5	4.9		5,218		2,300		2,918
Leasehold interests	1 - 15	7.6		3,708		2,224		1,484
Other	3 - 5	3.4		4,247		2,844		1,403
Totals			$	601,825	$	308,650	$	293,175


	Estimated	Weighted	April 30, 2020
	Useful	Average	Gross				Net
	Lives	Amortization	Carrying		Accumulated		Carrying
	(years)	Period	Amount		Amortization		Value

	(dollars in thousands)
Customer relationships	5 - 16	12.8	$	516,928	$	270,029	$	246,899
Definite-lived tradenames	5 - 20	16.3		55,654		10,474		45,180
Vendor agreements	8 - 10	8.3		6,644		4,567		2,077
Developed technology	5	4.9		5,036		1,963		3,073
Leasehold interests	1 - 15	7.6		3,679		2,101		1,578
Other	3 - 5	3.4		4,157		2,447		1,710
Totals			$	592,098	$	291,581	$	300,517

Table of Contents

GMS Inc.

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

Definite-lived intangible assets are amortized over their estimated useful lives. The Company amortizes its customer relationships using an accelerated method to match the estimated cash flows generated by such assets, and amortizes its other definite-lived intangibles using the straight-line method because a pattern to which the expected benefits will be consumed or otherwise used up could not be reliably determined. Amortization expense related to definite-lived intangible assets was $14.3 million and $16.9 million for the three months ended July 31, 2020 and 2019, respectively. Amortization expense is recorded in depreciation and amortization expense in the Condensed Consolidated Statements of Operations and Comprehensive Income.

Based on the current amount of definite-lived intangible assets, the Company expects to record amortization expense of approximately $40.9 million during the remaining nine months in the fiscal year ending April 30, 2021 and $46.1 million, $38.4 million, $31.3 million, $25.7 million and $110.7 million during the fiscal years ending April 30, 2022, 2023, 2024, 2025 and thereafter, respectively. 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.

The Company’s indefinite-lived intangible assets consist of tradenames that had a carrying amount of $61.4 million as of July 31, 2020 and April 30, 2020.

5. Long-Term Debt

The Company’s long-term debt consisted of the following as of July 31, 2020 and April 30, 2020:


	July 31,		April 30,
	2020		2020

	(in thousands)
Term Loan Facility (1) (2)	$	864,340	$	866,301
ABL Facility		40,000		80,000
Finance lease obligations		123,318		128,767
Installment notes at fixed rates up to 5.0%, due in monthly and annual installments through 2024 (3)		13,138		15,218
Canadian Facility		3,727		7,194
Carrying value of debt		1,044,523		1,097,480
Less current portion		49,133		50,201
Long-term debt	$	995,390	$	1,047,279

(1)	Net of unamortized discount of $1,522 and $1,602 as of July 31, 2020 and April 30, 2020, respectively.

(2)	Net of deferred financing costs of $8,548 and $9,000 as of July 31, 2020 and April 30, 2020, respectively.

(3)	Net of unamortized discount of $1,010 and $1,098 as of July 31, 2020 and April 30, 2020, respectively.

Term Loan Facility

The Company has a senior secured first lien term loan facility (the “Term Loan Facility”) with aggregate principal amount of $874.4 million outstanding as of July 31, 2020. The Term Loan Facility amortized in nominal quarterly installments of $2.5 million, or 0.25% of the aggregate principal amount of the Term Loan Facility, and is due in June 2025. The Term Loan Facility bears interest at a floating rate based on LIBOR plus 2.75%, with a 0% floor. As of July 31, 2020, the applicable rate of interest was 2.91%.

Table of Contents

GMS Inc.

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

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 at 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. As of July 31, 2020, the applicable rate of interest was 1.43%. The ABL Facility also contains an unused commitment fee subject to utilization, as included in the ABL Facility agreement.

During the three months ended July 31, 2020, the Company made net repayments under the ABL Facility of $40.0 million. As of July 31, 2020, the Company had available borrowing capacity of approximately $353.9 million under the ABL Facility. The ABL Facility will mature 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.

Covenants under the Term Loan Facility and ABL 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. The Company was in compliance with all restrictive covenants as of July 31, 2020.

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, 2020.

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 $22.4 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. During the three months ended July 31, 2020, the Company made net repayments under the Canadian Facility of $3.7 million. As of July 31, 2020, the Company had available borrowing capacity of approximately $18.6 million under the Canadian Facility. The Canadian Facility matures on June 28, 2022.

Table of Contents

GMS Inc.

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

Debt Maturities

As of July 31, 2020, the maturities of long-term debt were as follows


	Term Loan			ABL	Finance		Installment		Canadian
	Facility(1)			Facility	Leases		Notes(2)		Facility		Total

Year ending April 30,	(in thousands)
2021 (remaining nine months)	$	7,476	$	—	$	26,825	$	2,791	$	—	$	37,092
2022		9,968		—		33,108		4,438		—		47,514
2023		9,968		—		27,769		4,404		3,727		45,868
2024		9,968		—		20,708		1,781		—		32,457
2025		9,968		40,000		10,819		734		—		61,521
Thereafter		827,062		—		4,089		—		—		831,151

Price	28.67	EPS	2
Shares	43	P/E	16
MCap	1,222	P/FCF	8
Net Debt	1,077	EBIT	182
TEV	2,300	TEV/EBIT	13
TTM 2019-10-31, in MM, except price, ratios

10-Q	2020-07-31	Filed 2020-09-03
10-K	2020-04-30	Filed 2020-06-25
10-Q	2020-01-31	Filed 2020-03-05
10-Q	2019-10-31	Filed 2019-12-05
10-Q	2019-07-31	Filed 2019-08-29
10-K	2019-04-30	Filed 2019-06-27
10-Q	2019-01-31	Filed 2019-03-05
10-Q	2018-10-31	Filed 2018-12-04
10-Q	2018-07-31	Filed 2018-08-30
10-K	2018-04-30	Filed 2018-06-28
10-Q	2018-01-31	Filed 2018-03-06
10-Q	2017-10-31	Filed 2017-12-07
10-Q	2017-07-31	Filed 2017-09-06
10-K	2017-04-30	Filed 2017-06-30
10-Q	2017-01-31	Filed 2017-03-09
10-Q	2016-10-31	Filed 2016-12-13
10-Q	2016-07-31	Filed 2016-09-13
10-K	2016-04-30	Filed 2016-07-12

8-K	2020-09-03	Earnings, Regulation FD, Exhibits
8-K	2020-08-24	Officers
8-K	2020-07-24	Officers
8-K	2020-06-25
8-K	2020-06-15
8-K	2020-05-27
8-K	2020-03-05
8-K	2020-01-27
8-K	2019-12-05
8-K	2019-10-30
8-K	2019-10-03
8-K	2019-09-30
8-K	2019-09-27
8-K	2019-09-04
8-K	2019-08-29
8-K	2019-08-02
8-K	2019-07-23
8-K	2019-06-27
8-K	2019-04-23
8-K	2019-03-29
8-K	2019-03-05
8-K	2019-01-09
8-K	2018-12-04
8-K	2018-10-30
8-K	2018-10-01
8-K	2018-09-06
8-K	2018-08-30
8-K	2018-08-08
8-K	2018-07-24
8-K	2018-06-28
8-K	2018-06-06
8-K	2018-06-01
8-K	2018-04-04
8-K	2018-03-06

EX-31.1	gms-20200731xex31d1.htm
EX-31.2	gms-20200731xex31d2.htm
EX-32.1	gms-20200731xex32d1.htm
EX-32.2	gms-20200731xex32d2.htm

GMS 10Q Quarterly Report

GMS Earnings 2020-07-31