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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 January 31, 2022
OR
☐    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________.
COMMISSION FILE NUMBER: 001-37784
______________________________________________________________

GMS INC.
(Exact name of registrant as specified in its charter)
______________________________________________________________
Delaware 46-2931287
(State or other jurisdiction of incorporation (IRS Employer Identification No.)
or organization)
100 Crescent Centre Parkway, Suite 800
Tucker,
Georgia 30084
(Address of principal executive offices) (ZIP Code)
(800) 392-4619
(Registrant’s telephone number, including area code)

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Title of each class Trading Symbol(s) Name of each exchanged on which registered
Common Stock, par value $0.01 per share GMS New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No ◻
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
     Accelerated filer
Non-accelerated filer Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ◻
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No
There were 43,040,983 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
3
PART I
5
Item 1
5
5
6
7
9
Item 2
Item 3
Item 4
PART II
Item 1
Item 1A
Item 2
Item 3
Item 4
Item 5
Item 6

2


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;
3


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.
4


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.
5


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.
6


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  862  —  —  863 
Vesting of restricted stock units —  —  —  —  — 
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  976  —  —  977 
Vesting of restricted stock units 112  (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  2,183  —  —  2,184 
Vesting of restricted stock units —  —  —  —  — 
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.
7


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 —  —  —  —  — 
Tax withholding related to net share settlements of equity awards —  —  (105) —  —  (105)
Issuance of common stock pursuant to employee stock purchase plan 58  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 —  172  —  —  172 
Vesting of restricted stock units 62  (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  2,792  —  —  2,793 
Vesting of restricted stock units —  —  —  —  — 
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.

8


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.
9


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,
10

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
11

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.
12

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.

13

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
14

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 

15

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.
16

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.
17

GMS Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)

Debt Covenants
The Term Loan Facility and the indenture governing the Senior Notes contain a number of covenants that limit our ability and the ability of our restricted subsidiaries, as described in the respective credit agreement and the indenture, 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. Such covenants are subject to several important exceptions and qualifications set forth in the Term Loan Facility and the indenture governing the Senior Notes. The Company was in compliance with all covenants contained in the Term Loan Facility and the indenture governing the Senior Notes as of January 31, 2022.
The ABL Facility contains certain affirmative covenants, including financial and other reporting requirements. The Company was in compliance with all such covenants as of January 31, 2022.
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 $23.6 million ($30.0 million Canadian dollars). The Canadian Facility bears interest at the Canadian prime rate plus a marginal rate based on the level determined by Titan’s total debt to EBITDA ratio at the end of the most recently completed fiscal quarter or year. As of January 31, 2022, the Company had available borrowing capacity of approximately $23.6 million under the Canadian Facility. The Canadian Facility matures on January 12, 2026.
Debt Maturities
As of January 31, 2022, the maturities of long-term debt were as follows
Term Loan
Facility
Senior Notes ABL Facility Finance
Leases
Installment
Notes
Total
Year Ending April 30, (in thousands)
2022 (remaining three months) $ 1,278  $ —  $ —  $ 9,107  $ 493  $ 10,878 
2023 5,110  —  —  35,585  4,505  45,200 
2024 5,110  —  —  28,819  1,881  35,810 
2025 5,110  —  359,000  19,082  921  384,113 
2026 489,282  —  —  11,867  12  501,161 
Thereafter —  350,000  —  8,507  —  358,507 
$ 505,890  $ 350,000  $ 359,000  $ 112,967  $ 7,812  $ 1,335,669 

6. Leases
The components of lease expense were as follows:
Three Months Ended
January 31,
Nine Months Ended
January 31,
2022 2021 2022 2021
(in thousands)
Finance lease cost:
Amortization of right-of-use assets $ 5,557  $ 5,898  $ 16,713  $ 17,997 
Interest on lease liabilities 1,954  2,748  6,378  8,673 
Operating lease cost 12,628  10,601  34,955  31,930 
Variable lease cost 4,440  3,197  12,992  9,329 
Total lease cost $ 24,579  $ 22,444  $ 71,038  $ 67,929 

18

GMS Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)

Supplemental cash flow information related to leases was as follows:
Nine Months Ended
January 31,
2022 2021
(in thousands)
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from operating leases $ 35,385  $ 32,208 
Operating cash flows from finance leases 6,378  8,673 
Financing cash flows from finance leases 23,154  22,662 
Right-of-use assets obtained in exchange for lease obligations
Operating leases(a) 53,549  27,918 
Finance leases 24,887  22,408 
__________________________________________

(a) Includes operating lease right-of-use assets obtained in acquisitions. See Note 2, “Business Combinations” for more information on business combinations.

Other information related to leases was as follows:
January 31,
2022
April 30,
2021
(in thousands)
Finance leases included in property and equipment
Property and equipment $ 180,401  $ 176,591 
Accumulated depreciation (54,954) (51,869)
Property and equipment, net $ 125,447  $ 124,722 
Weighted-average remaining lease term (years)
Operating leases 4.5 4.7
Finance leases 3.2 3.5
Weighted-average discount rate
Operating leases 4.9  % 5.5  %
Finance leases 4.5  % 4.6  %
Future minimum lease payments under non-cancellable leases as of January 31, 2022 were as follows:
Finance Operating
Year Ending April 30, (in thousands)
2022 (remaining three months) $ 10,797  $ 12,214 
2023 40,327  45,206 
2024 31,056  39,144 
2025 20,118  28,353 
2026 12,316  17,146 
Thereafter 8,678  22,890 
Total lease payments 123,292  164,953 
Less imputed interest 10,325  17,538 
Total $ 112,967  $ 147,415 

19

GMS Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)

7. Income Taxes

General. The Company’s effective income tax rate on continuing operations was 24.8% and 24.7% for the nine months ended January 31, 2022 and 2021, respectively. The difference in the effective income tax rate over the U.S. federal statutory rate of 21.0% for the nine months ended January 31, 2022 was primarily due to the impact of state and foreign taxes, as well as equity compensation. The difference in the effective income tax rate over the U.S. federal statutory rate for the nine months ended January 31, 2021 was primarily due to the impact of state taxes, foreign tax rates and a change in the valuation allowance.
Valuation allowance. The Company had a valuation allowance of $11.9 million and $11.8 million against its deferred tax assets related to certain U.S. tax jurisdictions as of January 31, 2022 and April 30, 2021, respectively. To the extent the Company generates sufficient taxable income in the future to utilize the tax benefits of the net deferred tax assets on which a valuation allowance is recorded, the effective tax rate may decrease as the valuation allowance is reversed.
Uncertain tax positions. The Company had no reserve for uncertain tax positions as of January 31, 2022 or April 30, 2021.

8. Stockholders’ Equity
Share Repurchases
The Company's Board of Directors has authorized a common stock repurchase program to repurchase up to $75.0 million of outstanding common stock. The Company may conduct repurchases under the share repurchase program through open market transactions, under trading plans in accordance with SEC Rule 10b5-1 and/or in privately negotiated transactions, in each case in compliance with Rule 10b-18 under the Exchange Act of 1934, as amended. These repurchases are subject to a variety of factors, including, but not limited to, our liquidity, credit availability, general business and market conditions, our debt covenant restrictions and the availability of alternative investment opportunities. The share repurchase program does not obligate the Company to acquire any particular amount of common stock, and it may be suspended or terminated at any time at the Company’s discretion.
The Company repurchased approximately 367,000 shares of its common stock for $17.9 million during the nine months ended January 31, 2022. The Company repurchased approximately 80,000 shares of its common stock for $2.0 million during the nine months ended January 31, 2021. As of January 31, 2022, the Company had $36.5 million of remaining repurchase authorization under the stock repurchase program. 
Accumulated Other Comprehensive Income (Loss)
The following table sets forth the changes to accumulated other comprehensive income (loss), net of tax, by component for the nine months ended January 31, 2022:
Foreign
Currency
Translation
Derivative
Financial
Instruments
Accumulated
Other
Comprehensive
Income (Loss)
(in thousands)
Balance as of April 30, 2021 $ 20,764  $ (16,005) $ 4,759 
Other comprehensive income (loss) before reclassification (19,304) 2,430  (16,874)
Reclassification to earnings from accumulated other comprehensive income (loss) 6,844  6,844 
Balance as of January 31, 2022 $ 1,460  $ (6,731) $ (5,271)
Other comprehensive income (loss) before reclassification on derivative instruments for the nine months ended January 31, 2022 is net of $0.8 million of tax. Reclassification to earnings from accumulated other comprehensive income is net of $2.2 million of tax.

20

GMS Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)

9. Equity-Based Compensation
General
Equity-based compensation expense related to stock options and restricted stock units was $7.7 million and $6.3 million during the nine months ended January 31, 2022 and 2021, respectively, and is included in selling, general and administrative expenses in the Condensed Consolidated Statements of Operations and Comprehensive Income.
Stock Option Awards
The following table presents stock option activity for the nine months ended January 31, 2022:
Number of
Options
Weighted
Average
Exercise
Price
Weighted
Average
Remaining
Contractual
Life (years)
Aggregate
Intrinsic
Value
(shares and dollars in thousands)
Outstanding as of April 30, 2021 1,289  $ 20.86  6.8 $ 29,465 
Options granted 208  49.77 
Options exercised (197) 20.58 
Options forfeited (15) 23.06 
Outstanding as of January 31, 2022 1,285  $ 25.56  6.6 $ 33,023 
Exercisable as of January 31, 2022 758  $ 20.09  5.1 $ 23,558 
Vested and Expected to vest as of January 31, 2022 1,281  $ 25.51  6.6 $ 32,960 
The aggregate intrinsic value represents the excess of the Company’s closing stock price on the last trading day of the period over the weighted average exercise price multiplied by the number of options outstanding, exercisable or expected to vest. Options expected to vest are unvested shares net of expected forfeitures. The total intrinsic value of options exercised during the nine months ended January 31, 2022 and 2021 was $6.6 million and $2.5 million, respectively. As of January 31, 2022, there was $5.5 million of total unrecognized compensation cost related to stock options. That cost is expected to be recognized over a weighted-average period of 2.1 years.
The fair value of stock options granted during the nine months ended January 31, 2022 and 2021 was estimated using the Black-Scholes option-pricing model with the following assumptions and resulting weighted average grant date fair value:
Nine Months Ended
January 31,
2022 2021
Volatility 43.13  % 51.28  %
Expected life (years) 6.0 6.0
Risk-free interest rate 0.89  % 0.30  %
Dividend yield —  % —  %
Grant date fair value $ 20.86  $ 11.13 
The expected volatility was based on historical and implied volatility. The expected life of stock options was based on previous history of exercises. The risk-free rate was based on the U.S. Treasury yield curve in effect at the time of grant for the expected term of the stock option. The expected dividend yield was 0% as we have not declared any common stock dividends to date and do not expect to declare common stock dividends in the near future. The fair value of the underlying common stock at the date of grant was determined based on the value of the Company’s closing stock price on the date of the grant.

21

GMS Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)

Restricted Stock Units
The following table presents restricted stock unit activity for the nine months ended January 31, 2022:
Number of
Restricted
Stock Units
Weighted
Average
Grant Date
Fair Value
(shares in thousands)
Outstanding as of April 30, 2021 361  $ 22.92 
Granted 165  49.51 
Vested (182) 23.14 
Forfeited (7) 23.03 
Outstanding as of January 31, 2022 337  $ 35.79 
As of January 31, 2022, there was $7.8 million of total unrecognized compensation cost related to nonvested restricted stock units. That cost is expected to be recognized over a weighted-average period of 2.0 years.
Employee Stock Purchase Plan
The Company has an employee stock purchase plan (“ESPP”), the terms of which allow for qualified employees to participate in the purchase of shares of the Company’s common stock at a price equal to 90% of the lower of the closing price at the beginning or end of the purchase period, which is a six-month period ending on December 31 and June 30 of each year. During the nine months ended January 31, 2022, 70,000 shares of the Company’s common stock were purchased under the ESPP at a price of $33.19 per share. During the nine months ended January 31, 2021, 96,000 shares of the Company’s common stock were purchased under the ESPP at a price of $21.78 per share. The Company recognized $0.5 million and $0.4 million of stock-based compensation expense during the nine months ended January 31, 2022 and 2021, respectively, related to the ESPP.
10. Stock Appreciation Rights, Deferred Compensation and Redeemable Noncontrolling Interests
The following table presents a summary of changes to the liabilities for stock appreciation rights, deferred compensation and redeemable noncontrolling interests:
Stock
Appreciation
Rights
Deferred
Compensation
Redeemable
Noncontrolling
Interests
(in thousands)
Balance as of April 30, 2021 $ 26,795  $ 1,875  $ 9,373 
Amounts redeemed (320)
Change in fair value 3,126  181  904 
Balance as of January 31, 2022 $ 29,601  $ 2,056  $ 10,277 
Classified as current as of April 30, 2021 $ 1,305  $ —  $ — 
Classified as long-term as of April 30, 2021 25,490  1,875  9,373 
Classified as current as of January 31, 2022 $ 1,310  $ —  $ — 
Classified as long-term as of January 31, 2022 28,291  2,056  10,277 
Total expense related to these instruments was $4.2 million and $3.6 million during the nine months ended January 31, 2022 and 2021, respectively, and was included in selling, general and administrative expenses in the Condensed Consolidated Statements of Operations and Comprehensive Income. Current and long-term liabilities for stock appreciation rights, deferred compensation and redeemable noncontrolling interests are included in other accrued expenses and liabilities and other liabilities, respectively, in the Condensed Consolidated Balance Sheets. See Note 13, "Stock Appreciation Rights, Deferred Compensation and Redeemable Noncontrolling Interests," in the Company's Annual Report on Form 10-K for the year ended
22

GMS Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)

April 30, 2021 for more information regarding stock appreciation rights, deferred compensation and redeemable noncontrolling interests.
11. Fair Value Measurements
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The following table presents the estimated carrying amount and fair value of the Company’s liabilities measured at fair value on a recurring basis:
January 31,
2022
April 30,
2021
(in thousands)
Interest rate swaps (Level 2) $ 8,720  $ 21,004 
The Company has interest rate swap agreements with a notional amount of $500.0 million to convert the variable interest rate on a portion of its Term Loan Facility to a fixed 1-month LIBOR interest rate of 2.46%. The contracts were effective on February 28, 2019 and terminate on February 28, 2023. The objective of the interest rate swap agreements is to eliminate the variability of interest payment cash flows associated with variable interest rates. The Company believes there have been no material changes in the creditworthiness of the counterparty to this interest rate swap and believes the risk of nonperformance by such party is minimal. The Company designated the interest rate swaps as cash flow hedges.
As of January 31, 2022, $8.1 million of the interest rate swap liability was classified in other accrued expenses and current liabilities and $0.6 million was classified in other liabilities in the Condensed Consolidated Balance Sheet. The Company recognized losses, net of tax, of $2.3 million and $2.2 million in earnings during the three months ended January 31, 2022 and 2021, respectively, related to its interest rate swaps, and $6.8 million and $6.5 million during the nine months ended January 31, 2022 and 2021, respectively. These losses are included in interest expense in the Condensed Consolidated Statements of Operations and Comprehensive Income and within cash flows from operating activities within the Condensed Consolidated Statements of Cash Flows. As of January 31, 2022, the Company expects that approximately $8.1 million of pre-tax net losses will be reclassified from accumulated other comprehensive income (loss) into earnings during the next twelve months.
The fair value of interest rate swaps is determined using Level 2 inputs. Generally, the Company obtains the Level 2 inputs from its counterparties. Substantially all of the inputs throughout the full term of the instruments can be derived from observable data or are supported by observable levels at which transactions are executed in the marketplace. The fair value of the Company’s interest rate swap was determined using widely accepted valuation techniques including a discounted cash flow analysis on the expected cash flows of the derivative. This analysis reflected the contractual terms of the derivatives, including the period to maturity, and used observable market-based inputs, including interest rate curves and implied volatilities.
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
Disclosures are required for certain assets and liabilities that are measured at fair value on a nonrecurring basis in periods subsequent to initial recognition. Such measurements of fair value relate primarily to assets and liabilities measured at fair value in connection with business combinations and long-lived asset impairments. For more information on business combinations, see Note 2, “Business Combinations.” There were no material long-lived asset impairments during the nine months ended January 31, 2022 or 2021.
23

GMS Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)

Fair Value of Debt
The estimated fair value of the Company’s Senior Notes was determined based on Level 2 input using observable market prices in less active markets. The carrying amount of the Company’s Term Loan Facility and ABL Facility approximates its fair value as the interest rates are variable and reflective of market rates. The following table presents the carrying value and fair value of the Company’s Senior Notes:
January 31, 2022 April 30, 2021
Carrying Amount Fair Value Carrying Amount Fair Value
(in thousands)
Senior Notes $ 350,000  $ 338,625  $ 350,000  $ 350,000 

12. Commitments and Contingencies
The Company is a defendant in various lawsuits and administrative actions associated with personal injuries, property damage, product liability claims, claims of former employees and other events arising in the normal course of business. As discussed in Note 1 “—Insurance Liabilities”, the Company records liabilities for these claims, and assets for amounts recoverable from the insurer, for claims covered by insurance.

13. Segments
There have been no changes to the Company's reportable segments during the nine months ended January 31, 2022. Westside is included in Geographic divisions and Ames is included in Other. For more information regarding the Company's reportable segments, see Note 17, "Segments," in the Company's Annual Report on Form 10-K for the year ended April 30, 2021.
Segment Results
The following tables present segment results:
Three Months Ended January 31, 2022
Net Sales Gross Profit Depreciation and
Amortization
Adjusted
EBITDA
(in thousands)
Geographic divisions $ 1,130,130  $ 356,811  $ 28,154  $ 129,725 
Other 23,465  10,961  1,102  5,330 
Corporate 494 
$ 1,153,595  $ 367,772  $ 29,750  $ 135,055 
Three Months Ended January 31, 2021
Net Sales Gross Profit Depreciation and
Amortization
Adjusted
EBITDA
(in thousands)
Geographic divisions $ 741,885  $ 240,536  $ 24,942  $ 61,916 
Other 9,306  2,788  92  671 
Corporate 528 
$ 751,191  $ 243,324  $ 25,562  $ 62,587 

24

GMS Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)

Nine Months Ended January 31, 2022
Net Sales Gross Profit Depreciation and
Amortization
Adjusted
EBITDA
(in thousands)
Geographic divisions $ 3,303,170  $ 1,057,417  $ 84,572  $ 404,665 
Other 43,052  18,058  1,278  8,008 
Corporate 1,017 
$ 3,346,222  $ 1,075,475  $ 86,867  $ 412,673 

Nine Months Ended January 31, 2021
Net Sales Gross Profit Depreciation and
Amortization
Adjusted
EBITDA
(in thousands)
Geographic divisions $ 2,341,430  $ 760,908  $ 78,507  $ 226,588 
Other 25,190  7,945  274  1,575 
Corporate 1,123 
$ 2,366,620  $ 768,853  $ 79,904  $ 228,163 
The following table presents a reconciliation of Adjusted EBITDA to net income:
Three Months Ended
January 31,
Nine Months Ended
January 31,
2022 2021 2022 2021
(in thousands)
Net income $ 61,383  $ 16,126  $ 196,946  $ 71,814 
Interest expense 15,429  13,454  43,830  41,060 
Interest income (40) (6) (67) (57)
Provision for income taxes 21,211  5,709  64,951  23,590 
Depreciation expense 13,816  11,371  40,444  36,908 
Amortization expense 15,934  14,191  46,423  42,996 
Stock appreciation rights(a) 1,251  1,446  3,126  2,552 
Redeemable noncontrolling interests(b) 182  624  1,085  1,062 
Equity-based compensation(c) 3,077  1,877  8,250  6,734 
Severance and other permitted costs(d) 273  (83) 669  2,626 
Transaction costs (acquisitions and other)(e) 921  664  3,889  789 
Gain on disposal of assets(f) (252) (1,404) (474) (529)
Effects of fair value adjustments to inventory(g) 1,870  —  3,601  — 
Gain on legal settlement —  (1,382) —  (1,382)
Adjusted EBITDA $ 135,055  $ 62,587  $ 412,673  $ 228,163 
__________________________________________

(a)Represents changes in the fair value of stock appreciation rights.
(b)Represents changes in the fair values of noncontrolling interests.
(c)Represents non-cash equity-based compensation expense related to the issuance of share-based awards.
(d)Represents severance expenses and other costs permitted in the calculation of Adjusted EBITDA under the ABL Facility and the Term Loan Facility, including certain unusual, nonrecurring costs and credits due to COVID-19.
(e)Represents costs related to acquisitions paid to third parties.
(f)Includes gains from the sale of assets.
25

GMS Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)

(g)Represents the non-cash cost of sales impact of acquisition accounting adjustments to increase inventory to its estimated fair value.

Revenues by Product
The following table presents the Company’s net sales to external customers by main product lines:
Three Months Ended
January 31,
Nine Months Ended
January 31,
2022 2021 2022 2021
(in thousands)
Wallboard $ 415,132  $ 311,122  $ 1,219,789  $ 969,722 
Ceilings 139,894  103,711  418,831  330,480 
Steel framing 282,764  103,957  751,040  325,782 
Complementary products 315,805  232,401  956,562  740,636 
Total net sales $ 1,153,595  $ 751,191  $ 3,346,222  $ 2,366,620 
Geographic Information
The following table presents the Company’s net sales by major geographic area:
Three Months Ended
January 31,
Nine Months Ended
January 31,
2022 2021 2022 2021
(in thousands)
United States $ 1,016,425  $ 637,568  $ 2,867,318  $ 2,001,020 
Canada 137,170  113,623  478,904  365,600 
Total net sales $ 1,153,595  $ 751,191  $ 3,346,222  $ 2,366,620 
The following table presents the Company’s property and equipment, net, by major geographic area:
January 31,
2022
April 30,
2021
(in thousands)
United States $ 302,420  $ 271,346 
Canada 40,575  39,980 
Total property and equipment, net $ 342,995  $ 311,326 
26

GMS Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)

14. Earnings Per Common Share
The following table sets forth the computation of basic and diluted earnings per share of common stock:
Three Months Ended
January 31,
Nine Months Ended
January 31,
2022 2021 2022 2021
(in thousands, except per share data)
Net income $ 61,383  $ 16,126  $ 196,946  $ 71,814 
Basic earnings per common share:
Basic weighted average common shares outstanding 43,094  42,726  43,106  42,691 
Basic earnings per common share $ 1.42  $ 0.38  $ 4.57  $ 1.68 
Diluted earnings per common share:
Basic weighted average common shares outstanding 43,094  42,726  43,106  42,691 
Add: Common Stock Equivalents 851  635  831  493 
Diluted weighted average common shares outstanding 43,945  43,361  43,937  43,184 
Diluted earnings per common share $ 1.40  $ 0.37  $ 4.48  $ 1.66 
During the three and nine months ended January 31, 2022, the number of Common Stock Equivalents excluded from the calculation of diluted earnings per share was not material. During the three and nine months ended January 31, 2021, approximately 0.3 million and 0.4 million, respectively, Common Stock Equivalents were excluded from the calculation of diluted earnings per share because their effect would have been anti-dilutive. Anti-dilutive securities could be dilutive in future periods.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following information should be read in conjunction with the unaudited condensed consolidated financial statements and related notes included in this Quarterly Report on Form 10-Q. The following discussion may contain forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to these differences include those factors discussed below and elsewhere in this Quarterly Report on Form 10-Q, particularly in “Cautionary Note Regarding Forward-Looking Statements,” and discussed in the section entitled “Risk Factors” included in our Annual Report on Form 10-K for the year ended April 30, 2021.
Overview
Founded in 1971, GMS Inc. (“we,” “our,” “us,” or the “Company”), 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.

Market Conditions and Outlook

Residential

There has been strong underlying demand for residential products since mid-calendar year 2020. We believe this strength in residential demand has been driven by a combination of factors including favorable demographics, historically low interest rates, low levels of supply of new and existing homes for sale, strong wages and a solid job market, as well as by changes in workplace habits and preferences resulting from the COVID-19 pandemic (“COVID-19”). Despite an uptick in affordability concerns, including the expectation of higher mortgage interest rates, we expect this strong demand environment to continue throughout calendar year 2022.

Driven in part by the solid level of residential demand, homebuilders and contractors are facing significant inflationary pressures for products and labor plus supply chain constraints, primarily related to products needed during construction phases outside of those serviced by GMS, resulting in significantly increased cycle times and a decreased ability to predict project timing, as compared to historical periods. As a result, and as our sales teams work hard to ensure product availability for our customers, we have experienced an increase in our inventory balances. We expect our inventory levels to return to more normal levels as the supply chain constraints subside in future quarters.

Commercial

Demand for commercial projects was severely impacted by COVID-19 and has been slow to recover in certain sectors. While construction to support medical, educational and governmental projects has generally rebounded, hospitality and larger office projects remain tempered. Leading indicators of commercial activity, such as the Architectural Billings Index, as well as our own quoting activity and discussions with customers make us optimistic that we will begin to see a possible recovery in these commercial projects beginning sometime this calendar year.

As with residential contractors, commercial contractors and GMS face significant inflationary pressures for fuel, labor, building products and other miscellaneous expenses.

Business Strategy

Our business strategy includes an emphasis on organic growth through expanding market share in our core products (wallboard, ceilings and steel framing) and growing our complementary product lines (insulation, lumber, ready-mix joint compound, tools (including automatic taping and finishing tools), fasteners and various other construction products) to diversify our offerings and to provide additional value to our customers. Our growth strategy also includes the pursuit of greenfield branch openings and strategic acquisitions as we seek to further broaden our geographic platform. We expect to continue to capture profitable market share in our existing footprint by delivering industry-leading customer service. Our strategy for opening new branches is to further penetrate markets that are adjacent to our existing operations. Typically, we have pre-existing customer relationships in these markets but need a new location to fully capitalize on those relationships. In addition, we will continue to pursue acquisitions. We believe we have the potential to continue to access a robust acquisition pipeline that will supplement our organic growth. We use a rigorous targeting process to identify acquisition candidates that we believe will fit our culture and business model and we have built an experienced team of professionals to manage the acquisition and
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integration processes. As a result of our scale, purchasing power and ability to improve operations through implementing best practices, we believe we can continue to achieve substantial synergies and drive earnings accretion from our acquisition strategy. Finally, our growth strategy also entails a heightened focus on enhanced productivity and profitability across the organization, seeking to leverage our scale and employ both technology and other best practices to deliver further margin expansion and earnings growth.

COVID-19 Update

We continue to monitor COVID-19 and its impact on macroeconomic and local economic conditions. We will continue to implement, as deemed necessary or advisable, procedures and processes to protect the health and safety of our employees, customers, partners and suppliers.

We may take actions that alter our business operations if required by federal, state, provincial or local authorities or that we determine are in the best interests of our employees, customers, suppliers and stockholders. Furthermore, while COVID-19 had a limited impact on our financial results and operations during the three and nine months ended January 31, 2022, there is no guarantee that COVID-19 will not have a material impact on our future financial results or operations. See Item 1A, “Risk Factors,” and Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in our Annual Report on Form 10-K for the fiscal year ended April 30, 2021 for a discussion of risks which could have a material adverse effect on our operations and financial results and for more information regarding the impact of COVID-19 and our response.


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Fiscal 2022 Highlights

    Key highlights in our business during the nine months ended January 31, 2022 are described below:

Generated net sales of $3,346.2 million during the nine months ended January 31, 2022, a 41.4% increase from the prior year period primarily due to inflationary pricing, healthy residential end markets, growth in complementary products sales, acquisitions over the past year and the negative impacts of COVID-19 in the prior year period.

Generated net income of $196.9 million during the nine months ended January 31, 2022, a 174.2% increase compared to the prior year primarily due to the increase in net sales noted above, partially offset by an increase in the provision for income taxes. Supply chain dynamics have led to high levels of product inflation, which have been the principal driver of both sales growth and incremental profitability.

Generated Adjusted EBITDA (a non-GAAP measure, see “Non-GAAP Financial Measures” in this Item 2) of $412.7 million during the nine months ended January 31, 2022, a 80.9% increase compared to the prior year primarily due to the increase in net sales noted above. Adjusted EBITDA, as a percentage of net sales, increased to 12.3% for the nine months ended January 31, 2022 compared to 9.6% for the nine months ended January 31, 2021 primarily due to better operating leverage, as product price inflation on sales outpaced operating cost inflation.

Completed five acquisitions and opened seven greenfield locations, increasing the Company’s geographic footprint and product offerings.

Fiscal 2022 Developments
Acquisitions

Westside. On July 1, 2021, we acquired substantially all the assets of Westside Building Material (“Westside”), one of the largest independent distributors of interior building products in the U.S., for preliminary consideration of $139.6 million. Westside is a leading supplier of steel framing, wallboard, 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. For more information regarding our acquisition of Westside, see Note 2 of the Notes to Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q.
Ames. On December 1, 2021, we 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 of Ames was primarily funded with borrowings under our asset based lending facility ("ABL Facility"). For more information regarding our acquisition of Ames, see Note 2 of the Notes to Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q.
Other. On June 3, 2021, we acquired the assets of Architectural Coatings Distributors, Inc. (“Architectural Coating”). Architectural Coating is an interior building products distributor in Cleveland, Ohio. On August 2, 2021, we 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, we acquired the assets of Kimco Supply Company (“Kimco”). Kimco is an interior building products distributor through two locations in the Tampa, Florida area.

Greenfields

During the nine months ended January 31, 2022, we opened seven new greenfield locations. In May 2021, we opened a greenfield location in Hickory, North Carolina. In June 2021, we opened a greenfield location in Scarborough, Ontario. In July 2021, we opened greenfield locations in Denver, Colorado, Jackson, Mississippi and Wilmington, Delaware. In August 2021, we opened a greenfield location in Johnson City, Tennessee. In January 2022, we opened a greenfield location in Ft. Myers, Florida.

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Results of Operations
The following table summarizes key components of our results of operations for the three and nine months ended January 31, 2022 and 2021:
Three Months Ended
January 31,
Nine Months Ended
January 31,
2022 2021 2022 2021
(dollars in thousands)
Statement of operations data:            
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 expenses 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 
Non-GAAP measures:            
Adjusted EBITDA(1) $ 135,055  $ 62,587  $ 412,673  $ 228,163 
Adjusted EBITDA margin(1)(2) 11.7  % 8.3  % 12.3  % 9.6  %
___________________________________

(1)Adjusted EBITDA and Adjusted EBITDA margin are non-GAAP measures. See “—Non-GAAP Financial Measures—Adjusted EBITDA,” for how we define and calculate Adjusted EBITDA and Adjusted EBITDA margin, reconciliations thereof to net income and a description of why we believe these measures are useful.

(2)Adjusted EBITDA margin is Adjusted EBITDA as a percentage of net sales.
Three Months January 31, 2022 and 2021
Net Sales
Three Months Ended
January 31,
Change
2022 2021 Dollar Percent
(dollars in thousands)
Wallboard $ 415,132  $ 311,122  $ 104,010  33.4  %
Ceilings 139,894  103,711  36,183  34.9  %
Steel framing 282,764  103,957  178,807  172.0  %
Complementary products 315,805  232,401  83,404  35.9  %
Total net sales $ 1,153,595  $ 751,191  $ 402,404  53.6  %
We generate net sales by providing a comprehensive product offering of wallboard, ceilings, steel framing and complementary construction products. The increase in net sales during the three months ended January 31, 2022 compared to the prior year period was primarily due to inflationary pricing and healthy residential end markets. Also contributing to the
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increase were acquisitions over the past year and one more selling day during the three months ended January 31, 2022 compared to the prior year period. The increase consisted of the following:
an increase in wallboard sales, which are impacted by both commercial and residential construction activity, primarily due to an increase in price/product mix and higher volume driven by acquisitions;
an increase in ceilings sales, which is principally impacted by commercial construction activity, primarily due to an increase in price/product mix and higher volume driven by acquisitions;
an increase in steel framing sales, which is principally impacted by commercial construction activity, primarily due to an increase in price/product mix and higher volume; and
an increase in complementary products sales, which include insulation, joint treatment, tools (including ATF tools), lumber and various other specialty building products, primarily due to an increase in pricing in certain product categories, positive contributions from acquisitions and the execution of growth initiatives to increase other products sales.
The following table breaks out our net sales into organic, or base business, net sales and recently acquired net sales for the three months ended January 31, 2022 and 2021. When calculating organic sales growth, we exclude the net sales of acquired businesses until the first anniversary of the acquisition date. In addition, we exclude the impact of foreign currency translation in our calculation of organic net sales growth.
Three Months Ended
January 31,
Change
2022 2021 Dollar Percent
(dollars in thousands)
Net sales $ 1,153,595  $ 751,191 
Recently acquired net sales (1) (87,670) — 
Impact of foreign currency (2) (2,894) — 
Base business net sales (3) $ 1,063,031  $ 751,191  $ 311,840  41.5  %
___________________________________
(1)Represents net sales of branches acquired by us until the first anniversary of the acquisition date. For the three months ended January 31, 2022, net sales includes sales from the following acquisitions: D.L. Building Materials Inc. ("D.L. Building Materials") acquired on February 1, 2021, Westside acquired on July 1, 2021, Ames acquired on December 1, 2021 and Kimco acquired on December 1, 2021. Our acquisitions of Architectural Coatings and DK&B have been treated as new greenfield branches and are included in base business net sales.
(2)Represents the impact of foreign currency translation on net sales.
(3)Represents net sales of existing branches and branches that were opened by us during the period presented.
The increase in organic net sales was primarily driven by inflationary pricing, healthy residential end markets and one more selling day during the three months ended January 31, 2022 compared to the prior year period.
Gross Profit and Gross Margin
Three Months Ended
January 31,
Change
2022 2021 Dollar Percent
(dollars in thousands)
Gross profit $ 367,772  $ 243,324  $ 124,448  51.1  %
Gross margin 31.9  % 32.4  %
The increase in gross profit during the three months ended January 31, 2022 compared to the prior year period was primarily due to the successful pass through of product inflation, strength in residential market demand and incremental gross profit from acquisitions. The decrease in gross margin on net sales for the three months ended January 31, 2022 compared to the prior year period was primarily due to the timing and elasticity of inflationary price-cost dynamics in the market. On a
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product line basis, wallboard and steel margins were unfavorably impacted by these dynamics and complementary products and ceilings benefited. Included in cost of sales for three months ended January 31, 2022 was a $1.9 million non-cash charge to increase acquired inventory to its estimated fair value. This adjustment had a negative effect on both gross profit and gross margin as the related inventory was sold.
Selling, General and Administrative Expenses
Three Months Ended
January 31,
Change
2022 2021 Dollar Percent
(dollars in thousands)
Selling, general and administrative expenses $ 241,040  $ 184,844  $ 56,196  30.4  %
% of net sales 20.9  % 24.6  %
Selling, general and administrative expenses consist of warehouse, delivery and general and administrative expenses. Selling, general and administrative expenses increased during the three months ended January 31, 2022 compared to the prior year period primarily due to increases in payroll and payroll related costs, fuel costs, travel costs and facilities costs, which were driven by increased sales volume, inflationary pressures and incremental selling, general and administrative expenses from acquisitions. Selling, general and administrative expenses as a percentage of our net sales decreased during the three months ended January 31, 2022 compared to the prior year period primarily due to the impact of inflationary market pricing on sales.
Depreciation and Amortization Expense
Three Months Ended
January 31,
Change
2022 2021 Dollar Percent
(dollars in thousands)
Depreciation $ 13,816  $ 11,371  $ 2,445  21.5  %
Amortization 15,934  14,191  1,743  12.3  %
Depreciation and amortization $ 29,750  $ 25,562  $ 4,188  16.4  %
Depreciation and amortization expense includes depreciation of property and equipment and amortization of definite-lived intangible assets acquired in purchases of businesses. The increase in depreciation expense during the three months ended January 31, 2022 compared to the prior year period was primarily due to incremental expense resulting from property and equipment obtained in the acquisitions of Westside and Ames. The increase in amortization expense during the three months ended January 31, 2022 was primarily due to incremental expense resulting from definite-lived intangible assets obtained in the acquisitions of Westside, Ames and D.L. Building Materials, partially offset by time-based progression of our use of the accelerated method of amortization for acquired customer relationships.
Interest Expense
Three Months Ended
January 31,
Change
2022 2021 Dollar Percent
(dollars in thousands)
Interest expense $ (15,429) $ (13,454) $ 1,975  14.7  %
Interest expense consists primarily of interest expense incurred on our debt and finance leases and amortization of deferred financing fees and debt discounts. The increase in interest expense during the three months ended January 31, 2022 compared to the prior year period was primarily due to an increase in average debt outstanding during the comparable periods.
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Income Taxes
Three Months Ended
January 31,
Change
2022 2021 Dollar Percent
(dollars in thousands)
Provision for income taxes $ 21,211  $ 5,709  $ 15,502  271.5  %
Effective tax rate 25.7  % 26.1  %
The change in the effective income tax rate during the three months ended January 31, 2022 compared to the prior year period was primarily due to the impact of foreign taxes and stock-based compensation.
Nine Months Ended January 31, 2022 and 2021
Net Sales
Nine Months Ended
January 31,
Change
2022 2021 Dollar Percent
(dollars in thousands)
Wallboard $ 1,219,789  $ 969,722  $ 250,067  25.8  %
Ceilings 418,831  330,480  88,351  26.7  %
Steel framing 751,040  325,782  425,258  130.5  %
Complementary products 956,562  740,636  215,926