Notes to Condensed Consolidated Financial Statements (Unaudited)
1. Business, Basis of Presentation and Summary of Significant Accounting Policies
Business
Founded in 1971, GMS Inc. (together with its consolidated subsidiaries, “we,” “our,” “us,” or the “Company”), through its wholly owned operating subsidiaries, operates a network of approximately 300 distribution centers with extensive product offerings of wallboard, ceilings, steel framing and complementary construction products. The Company also operates approximately 100 tool sales, rental and service centers. Through these operations, the Company 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 the Company 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, 2022.
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 if probable and estimable. 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.
GMS Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)
The following table presents the Company’s aggregate liabilities for medical self-insurance, general liability, automobile and workers’ compensation and the expected recoveries for medical self-insurance, general liability, automobile and workers’ compensation. Liabilities for medical self-insurance are included in other accrued expenses and current liabilities. Reserves for general liability, automobile and workers’ compensation are included in other accrued expenses and current liabilities and other liabilities. Expected recoveries for insurance liabilities are included in prepaid expenses and other current assets and other assets in the Condensed Consolidated Balance Sheets.
| | | | | | | | | | | |
| October 31,
2022 | | April 30,
2022 |
| (in thousands) |
| Medical self‑insurance | $ | 4,128 | | | $ | 3,371 | |
| General liability, automobile and workers’ compensation | 28,197 | | | 21,707 | |
| Expected recoveries for insurance liabilities | (9,099) | | | (4,973) | |
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 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
GMS Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)
applying the treasury stock method for stock-based compensation arrangements, the assumed proceeds are computed as the sum of the amount the employee must pay upon exercise and the amount of compensation cost attributed to future services and not yet recognized. Diluted earnings per share is computed by increasing the weighted-average number of outstanding shares of common stock computed in basic earnings per share to include the dilutive effect of Common Stock Equivalents for the period. In periods of net loss, the number of shares used to calculate diluted loss per share is the same as basic net loss per share.
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 is adopting this guidance when its relevant contracts are modified to alternative reference rates. The Company does not expect the adoption to have a material impact on its consolidated financial statements.
Business Combinations – In October 2021, the FASB issued new guidance which requires the recognition and measurement of contract assets and contract liabilities acquired in a business combination in accordance with Accounting Standards Code 606, "Revenue from Contracts with Customers." This creates an exception to the general recognition and measurement principles in existing business combination guidance. The new guidance is effective for fiscal years beginning after December 15, 2022, with early adoption permitted. The amendments in this new guidance should be applied prospectively to business combinations occurring on or after the effective date of the amendments. The Company does not expect the adoption of this guidance 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.
Westside Acquisition
During the six months ended October 31, 2022, the Company settled its $13.5 million holdback liability related to the acquisition of Westside Building Material (“Westside”) in accordance with the terms of the purchase agreement. The holdback liability was for general representations and warranties of the sellers and was settled 15 months after the acquisition date.
Fiscal 2023 Acquisition
On June 1, 2022, the Company acquired certain assets of Construction Supply of Southwest Florida, Inc. (“CSSWF”). CSSWF is a distributor of various stucco, building and waterproofing supplies serving markets in the southwest Florida area. The impact of this acquisition is not material to the Company’s Consolidated Financial Statements.
GMS Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)
Pro Forma Financial Information
The following table presents the unaudited pro forma consolidated net sales and net income for the Company for the period indicated:
| | | | | | | | | | | | | | | |
| Three Months | | Six Months | | | | |
| Ended | | Ended | | | | |
| October 31, 2021 | | October 31, 2021 | | |
| | | | | | | |
| (in thousands) |
| Net sales | $ | 1,170,557 | | | $ | 2,269,667 | | | | | |
| Net income | 75,369 | | | 142,425 | | | | | |
On July 1, 2021, the Company acquired substantially all the assets of Westside. On December 1, 2021, the Company acquired Ames Taping Tools Holding LLC (“Ames”). 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, 2021, 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. 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. See Note 2, "Business Combinations," in the Company's Annual Report on Form 10-K for the year ended April 30, 2022 for more information regarding these acquisitions.
3. Accounts Receivable
The Company’s trade accounts and notes receivable consisted of the following:
| | | | | | | | | | | |
| October 31,
2022 | | April 30,
2022 |
| (in thousands) |
| Trade receivables | $ | 743,227 | | | $ | 675,724 | |
| Other receivables | 140,406 | | | 83,668 | |
| Allowance for expected credit losses | (5,750) | | | (5,087) | |
| Other allowances | (5,001) | | | (4,259) | |
| Trade accounts and notes receivable | $ | 872,882 | | | $ | 750,046 | |
The following table presents the change in the allowance for expected credit losses during the six months ended October 31, 2022:
| | | | | |
| (in thousands) |
| Balance as of April 30, 2022 | $ | 5,087 | |
| Provision | 1,588 | |
| Other | (925) | |
| Balance as of October 31, 2022 | $ | 5,750 | |
Receivables from contracts with customers, net of allowances, were $732.5 million and $666.4 million as of October 31, 2022 and April 30, 2022, respectively. The Company did not have material amounts of contract assets or liabilities as of October 31, 2022 or April 30, 2022.
GMS Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)
4. Goodwill and Intangible Assets
Goodwill
The following table presents changes in the carrying amount of goodwill:
| | | | | | | | | | | | | | | | | |
| Gross | | Accumulated | | Net |
| Carrying Amount | | Impairment Loss | | Carrying Amount |
| (in thousands) |
| Balance as of April 30, 2022 | $ | 762,424 | | | $ | (66,527) | | | $ | 695,897 | |
| Goodwill recognized from acquisitions | 685 | | | — | | | 685 | |
| Acquisition accounting adjustments from prior period | 701 | | | — | | | 701 | |
| Translation adjustment | (9,934) | | | 2,939 | | | (6,995) | |
| Balance as of October 31, 2022 | $ | 753,876 | | | $ | (63,588) | | | $ | 690,288 | |
During the six months ended October 31, 2022, the Company recorded measurement period adjustments related to its Westside and Ames acquisitions.
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 | | October 31, 2022 |
| | | Gross
Carrying
Amount | | Accumulated
Amortization | | Net
Carrying
Value |
| (dollars in thousands) |
| Customer relationships | 5-16 | | 12.5 | | $ | 653,601 | | | $ | (404,362) | | | $ | 249,239 | |
| Definite-lived tradenames | 5-20 | | 15.6 | | 95,527 | | | (22,153) | | | 73,374 | |
| Vendor agreements | 8-10 | | 10.0 | | 1,000 | | | (525) | | | 475 | |
| Developed technology | 5-10 | | 6.9 | | 8,183 | | | (4,890) | | | 3,293 | |
| Other | 3-5 | | 3.5 | | 1,821 | | | (1,369) | | | 452 | |
| Definite-lived intangible assets | | | | | $ | 760,132 | | | $ | (433,299) | | | $ | 326,833 | |
| Indefinite-lived intangible assets | | | | | | | | | 84,367 | |
| Total intangible assets, net | | | | | | | | | $ | 411,200 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Estimated
Useful
Lives
(years) | | Weighted
Average
Amortization
Period | | April 30, 2022 |
| | | Gross
Carrying
Amount | | Accumulated
Amortization | | Net
Carrying
Value |
| (dollars in thousands) |
| Customer relationships | 5-16 | | 12.5 | | $ | 669,018 | | | $ | (381,650) | | | $ | 287,368 | |
| Definite-lived tradenames | 5-20 | | 15.6 | | 97,453 | | | (19,496) | | | 77,957 | |
| Vendor agreements | 8-10 | | 10.0 | | 1,000 | | | (475) | | | 525 | |
| Developed technology | 5-10 | | 6.8 | | 8,471 | | | (4,462) | | | 4,009 | |
| Other | 3-5 | | 3.6 | | 1,761 | | | (1,240) | | | 521 | |
| Definite-lived intangible assets | | | | | $ | 777,703 | | | $ | (407,323) | | | $ | 370,380 | |
| Indefinite-lived intangible assets | | | | | | | | | 84,367 | |
| Total intangible assets, net | | | | | | | | | $ | 454,747 | |
Amortization expense related to definite-lived intangible assets was $17.2 million and $15.7 million for the three months ended October 31, 2022 and 2021, respectively, and $34.6 million and $30.5 million for the six months ended October 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) |
| 2023 (remaining six months) | $ | 31,093 | |
| 2024 | 54,530 | |
| 2025 | 45,657 | |
| 2026 | 38,541 | |
| 2027 | 33,480 | |
| Thereafter | 123,532 | |
| Total | $ | 326,833 | |
The Company’s indefinite-lived intangible assets as of October 31, 2022 and April 30, 2022 consisted of indefinite-lived tradenames.
GMS Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)
5. Long-Term Debt
The Company’s long-term debt consisted of the following:
| | | | | | | | | | | |
| October 31,
2022 | | April 30,
2022 |
| (in thousands) |
| Term Loan Facility | $ | 502,058 | | | $ | 504,613 | |
| Unamortized discount and deferred financing costs on Term Loan Facility | (3,003) | | | (3,581) | |
| Senior Notes | 350,000 | | | 350,000 | |
| Unamortized discount and deferred financing costs on Senior Notes | (4,514) | | | (4,836) | |
| ABL Facility | 240,000 | | | 211,134 | |
| Finance lease obligations | 126,480 | | | 120,138 | |
Installment notes at fixed rates up to 5.0%, due in monthly and annual installments through 2025 | 3,347 | | | 7,086 | |
| Unamortized discount on installment notes | (206) | | | (364) | |
| | | |
| Carrying value of debt | 1,214,162 | | | 1,184,190 | |
| Less current portion | 47,618 | | | 47,605 | |
| Long-term debt | $ | 1,166,544 | | | $ | 1,136,585 | |
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 October 31, 2022, the applicable rate of interest was 5.62%. The Company has interest rate swap agreements to convert the variable interest rate on a portion of its Term Loan Facility to a fixed rate. For more information, see Note 11, "Fair Value Measurements."
Senior Notes
The Company has senior unsecured notes due May 2029 (the "Senior Notes"). The Senior Notes bear interest at 4.625% per annum and mature on May 1, 2029. Interest is payable semi-annually in arrears on May 1 and November 1.
Asset Based Lending Facility
The Company has an asset based revolving credit facility (the “ABL Facility”) that provides for aggregate revolving commitments of $545.0 million as of October 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 accounts receivable, subject to certain reserves and other adjustments.
As of October 31, 2022, at the Company’s option, the interest rates applicable to the loans under the ABL Facility were based on the Secured Overnight Financing Rate ("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 October 31, 2022, the weighted average interest rate on borrowings was 5.01%.
As of October 31, 2022, the Company had available borrowing capacity of approximately $271.8 million under the ABL Facility. The ABL Facility matures on September 30, 2024 unless the individual affected lenders agree to extend the maturity of their respective loans under the ABL Facility upon the Company’s request and without the consent of any other lender. The ABL Facility contains a cross default provision with the Term Loan Facility.
GMS Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)
Debt Covenants
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. As of October 31, 2022, the Company was in compliance with all covenants contained in the Term Loan Facility and the indenture governing the Senior Notes.
The ABL Facility contains certain affirmative covenants, including financial and other reporting requirements. The Company was in compliance with all such covenants as of October 31, 2022.
Canadian Revolving Credit Facility
Through one of its Canadian subsidiaries, the Company has a revolving credit facility (the “Canadian Facility”) that provides for aggregate revolving commitments of $22.0 million ($30.0 million Canadian dollars). The Canadian Facility bears interest at the Canadian prime rate plus a marginal rate based on the level determined by WSB Titan’s total debt to EBITDA ratio at the end of the most recently completed fiscal quarter or year. As of October 31, 2022, the Company had available borrowing capacity of approximately $22.0 million under the Canadian Facility. The Canadian Facility matures on January 12, 2026.
Debt Maturities
As of October 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) |
| 2023 (remaining six months) | $ | 2,555 | | | $ | — | | | $ | — | | | $ | 20,396 | | | $ | 529 | | | | | $ | 23,480 | |
| 2024 | 5,110 | | | — | | | — | | | 36,092 | | | 1,881 | | | | | 43,083 | |
| 2025 | 5,110 | | | — | | | 240,000 | | | 26,697 | | | 937 | | | | | 272,744 | |
| 2026 | 489,283 | | | — | | | — | | | 19,948 | | | — | | | | | 509,231 | |
| 2027 | — | | | — | | | — | | | 13,682 | | | — | | | | | 13,682 | |
| Thereafter | — | | | 350,000 | | | — | | | 9,665 | | | — | | | | | 359,665 | |
| $ | 502,058 | | | $ | 350,000 | | | $ | 240,000 | | | $ | 126,480 | | | $ | 3,347 | | | | | $ | 1,221,885 | |
6. Leases
The components of lease expense were as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended
October 31, | | Six Months Ended
October 31, |
| 2022 | | 2021 | | 2022 | | 2021 |
| (in thousands) |
| Finance lease cost: | | | | | | | |
| Amortization of right-of-use assets | $ | 5,979 | | | $ | 5,564 | | | $ | 11,797 | | | $ | 11,156 | |
| Interest on lease liabilities | 1,739 | | | 2,123 | | | 3,561 | | | 4,424 | |
| Operating lease cost | 13,008 | | | 11,314 | | | 25,979 | | | 22,327 | |
| Variable lease cost | 5,677 | | | 4,629 | | | 11,580 | | | 8,552 | |
| Total lease cost | $ | 26,403 | | | $ | 23,630 | | | $ | 52,917 | | | $ | 46,459 | |
GMS Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)
Supplemental cash flow information related to leases was as follows:
| | | | | | | | | | | |
| Six Months Ended
October 31, |
| 2022 | | 2021 |
| (in thousands) |
| Cash paid for amounts included in the measurement of lease liabilities | | | |
| Operating cash flows from operating leases | $ | 29,905 | | | $ | 22,727 | |
| Operating cash flows from finance leases | 3,561 | | | 4,424 | |
| Financing cash flows from finance leases | 16,450 | | | 15,154 | |
| Right-of-use assets obtained in exchange for lease obligations | | | |
| Operating leases | 19,268 | | | 29,145 | |
| Finance leases | 26,638 | | | 13,034 | |
Other information related to leases was as follows:
| | | | | | | | | | | |
| October 31,
2022 | | April 30,
2022 |
| (in thousands) |
| Finance leases included in property and equipment | | | |
| Property and equipment | $ | 209,777 | | | $ | 193,380 | |
| Accumulated depreciation | (61,775) | | | (57,363) | |
| Property and equipment, net | $ | 148,002 | | | $ | 136,017 | |
| Weighted-average remaining lease term (years) | | | |
| Operating leases | 4.6 | | 4.6 |
| Finance leases | 3.5 | | 3.7 |
| Weighted-average discount rate | | | |
| Operating leases | 4.6 | % | | 4.7 | % |
| Finance leases | 4.9 | % | | 4.2 | % |
Future minimum lease payments under non-cancellable leases as of October 31, 2022 were as follows:
| | | | | | | | | | | |
| Finance | | Operating |
| Year Ending April 30, | (in thousands) |
| 2023 (remaining six months) | $ | 23,487 | | | $ | 21,572 | |
| 2024 | 40,194 | | | 45,439 | |
| 2025 | 29,203 | | | 34,919 | |
| 2026 | 21,451 | | | 23,260 | |
| 2027 | 14,463 | | | 13,988 | |
| Thereafter | 9,972 | | | 26,275 | |
| Total lease payments | 138,770 | | | 165,453 | |
| Less imputed interest | 12,290 | | | 17,342 | |
| Total | $ | 126,480 | | | $ | 148,111 | |
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 26.1% and 24.4% for the six months ended October 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 six months ended October 31, 2022 was primarily due to the impact of foreign and state taxes. The difference in the effective income tax rate over the U.S. federal statutory rate for the six months ended October 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 $11.5 million and $11.7 million against its deferred tax assets related to certain U.S. tax jurisdictions as of October 31, 2022 and April 30, 2022, 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 uncertain tax positions as of October 31, 2022 or April 30, 2022.
8. Stockholders’ Equity
Share Repurchases
On June 20, 2022, the Company's Board of Directors approved an expanded share repurchase program under which the Company is authorized to repurchase up to $200.0 million of its outstanding common stock. This expanded program replaced the Company’s previous share repurchase authorization of $75.0 million. 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 Securities Exchange Act of 1934, as amended. The timing and amount of any purchases of the Company's common stock are subject to a variety of factors, including, but not limited to, the Company’s liquidity, credit availability, general business and market conditions, debt covenants and the availability of alternative investment opportunities. The share repurchase program does not obligate the Company to acquire any amount of common stock, and it may be suspended or terminated at any time at the Company’s discretion.
The Company repurchased approximately 1.1 million shares of its common stock for $49.6 million during the six months ended October 31, 2022, of which $10.8 million was repurchased under the previous authorization and $38.8 million was repurchased under the new authorization. The Company repurchased approximately 0.3 million shares of its common stock for $13.1 million during the six months ended October 31, 2021. As of October 31, 2022, the Company had $161.2 million of remaining repurchase authorization under its stock repurchase program.
Accumulated Other Comprehensive Loss
The following table sets forth the changes to accumulated other comprehensive loss, net of tax, by component for the six months ended October 31, 2022:
| | | | | | | | | | | | | | | | | |
| Foreign
Currency
Translation | | Derivative
Financial
Instruments | | Accumulated
Other
Comprehensive
Loss |
| (in thousands) |
| Balance as of April 30, 2022 | $ | (5,041) | | | $ | (1,002) | | | $ | (6,043) | |
| Other comprehensive income (loss) before reclassification | (31,943) | | | 4,450 | | | (27,493) | |
| Reclassification to earnings from accumulated other comprehensive loss | — | | (1,101) | | | (1,101) | |
| Balance as of October 31, 2022 | $ | (36,984) | | | $ | 2,347 | | | $ | (34,637) | |
Other comprehensive income (loss) before reclassification on derivative instruments for the six months ended October 31, 2022 is net of $1.4 million of tax. Reclassification to earnings from accumulated other comprehensive loss is net of $0.4 million of tax.
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 $6.5 million and $4.8 million during the six months ended October 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 six months ended October 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, 2022 | 1,245 | | | $ | 25.65 | | | 6.4 | | $ | 28,121 | |
| Options granted | 184 | | | 53.60 | | | | | |
| Options exercised | (91) | | | 15.92 | | | | | |
| Options forfeited | (2) | | | 31.34 | | | | | |
| Outstanding as of October 31, 2022 | 1,336 | | | $ | 30.16 | | | 6.6 | | $ | 24,482 | |
| Exercisable as of October 31, 2022 | 913 | | | $ | 23.08 | | | 5.5 | | $ | 22,128 | |
| Vested and Expected to vest as of October 31, 2022 | 1,334 | | | $ | 30.14 | | | 6.6 | | $ | 24,467 | |
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 six months ended October 31, 2022 and 2021 was $2.6 million and $2.8 million, respectively. As of October 31, 2022, there was $7.1 million of total unrecognized compensation cost related to stock options. That cost is expected to be recognized over a weighted-average period of 2.2 years.
The fair value of stock options granted during the six months ended October 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:
| | | | | | | | | | | |
| Six Months Ended
October 31, |
| 2022 | | 2021 |
| Volatility | 45.80 | % | | 42.42 | % |
| Expected life (years) | 6.0 | | 6.0 |
| Risk-free interest rate | 2.67 | % | | 0.85 | % |
| Dividend yield | — | % | | — | % |
| Grant date fair value | $ | 25.26 | | | $ | 20.24 | |
GMS Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)
Restricted Stock Units
The following table presents restricted stock unit activity for the six months ended October 31, 2022:
| | | | | | | | | | | |
| Number of
Restricted
Stock Units | | Weighted
Average
Grant Date
Fair Value |
| (shares in thousands) |
| Outstanding as of April 30, 2022 | 330 | | | $ | 35.83 | |
| Granted | 201 | | | 53.72 | |
| Vested | (164) | | | 32.83 | |
| Forfeited | (2) | | | 44.04 | |
| Outstanding as of October 31, 2022 | 365 | | | $ | 46.96 | |
As of October 31, 2022, there was $10.4 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 2.1 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. The Company recognized $0.4 million and $0.4 million of stock-based compensation expense related to the ESPP during the six months ended October 31, 2022 and 2021, respectively.
The following table presents the number of shares of the Company’s common stock purchased under the ESPP and average price per share:
| | | | | | | | | | | |
| Six Months Ended
October 31, |
| 2022 | | 2021 |
| (in thousands) |
Number of shares purchased under the ESPP | 33 | | | 43 | |
| Average purchase price | $ | 40.05 | | | $ | 26.36 | |
GMS Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)
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, 2022 | $ | 30,878 | | | $ | 2,205 | | | $ | 11,026 | |
| Amounts redeemed | (297) | | | — | | — |
| Change in fair value | 5,574 | | | 122 | | | 713 | |
| Balance as of October 31, 2022 | $ | 36,155 | | | $ | 2,327 | | | $ | 11,739 | |
| | | | | |
| Classified as current as of April 30, 2022 | $ | 1,532 | | | $ | — | | | $ | — | |
| Classified as long-term as of April 30, 2022 | 29,346 | | | 2,205 | | | 11,026 | |
| | | | | |
| Classified as current as of October 31, 2022 | $ | 7,706 | | | $ | 520 | | | $ | 2,602 | |
| Classified as long-term as of October 31, 2022 | 28,449 | | | 1,807 | | | 9,137 | |
Total expense related to these instruments was $6.4 million and $2.8 million during the six months ended October 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 April 30, 2022 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 assets and liabilities measured at fair value on a recurring basis:
| | | | | | | | | | | |
| October 31,
2022 | | April 30,
2022 |
| (in thousands) |
| Interest rate swaps (Level 2) | $ | 3,300 | | | $ | (1,136) | |
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 counterparties to these interest rate swaps and believes the risk of nonperformance by each party is minimal. The Company designated the interest rate swaps as cash flow hedges.
As of October 31, 2022, the interest rate swap assets were classified in prepaid expenses and other current assets in the Condensed Consolidated Balance Sheet. As of April 30, 2022, the interest rate swap liabilities were classified in other accrued expenses and current liabilities in the Condensed Consolidated Balance Sheet. The Company recognized gains, net of tax, of $0.1 million and losses, net of tax, of $2.3 million during the three months ended October 31, 2022 and 2021, respectively, related to its interest rate swaps. The Company recognized losses, net of tax, of $1.1 million and $4.5 million during the six months ended October 31, 2022 and 2021, respectively. These amounts 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 October 31, 2022, the Company expects that approximately $3.3
GMS Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)
million of pre-tax earnings 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 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 after 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 six months ended October 31, 2022 or 2021.
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 amounts of the Company’s Term Loan Facility and ABL Facility approximates their 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:
| | | | | | | | | | | | | | | | | | | | | | | |
| October 31, 2022 | | April 30, 2022 |
| Carrying Amount | | Fair Value | | Carrying Amount | | Fair Value |
| (in thousands) |
| Senior Notes | $ | 350,000 | | | $ | 274,750 | | | $ | 350,000 | | | $ | 310,625 | |
12. Commitments and Contingencies
The Company is a defendant in various lawsuits and administrative actions associated with personal injuries, property damage, environmental matters, 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.
GMS Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)
13. Segments
There have been no changes to the Company's reportable segments during the six months ended October 31, 2022. 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, 2022.
Segment Results
The following tables present segment results:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended October 31, 2022 |
| Net Sales | | Gross Profit | | Depreciation and
Amortization | | Adjusted
EBITDA |
| (in thousands) |
| Geographic divisions | $ | 1,398,540 | | | $ | 443,868 | | | $ | 27,750 | | | $ | 185,807 | |
| Other | 32,439 | | | 20,632 | | | 4,352 | | | 9,706 | |
| Corporate | — | | — | | 124 | | | — |
| $ | 1,430,979 | | | $ | 464,500 | | | $ | 32,226 | | | $ | 195,513 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended October 31, 2021 |
| Net Sales | | Gross Profit | | Depreciation and
Amortization | | Adjusted
EBITDA |
| (in thousands) |
| Geographic divisions | $ | 1,140,652 | | | $ | 367,920 | | | $ | 28,990 | | | $ | 147,923 | |
| Other | 9,899 | | | 3,950 | | | 88 | | | 1,616 | |
| Corporate | — | | — | | 325 | | | — |
| $ | 1,150,551 | | | $ | 371,870 | | | $ | 29,403 | | | $ | 149,539 | |
GMS Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)
| | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended October 31, 2022 |
| Net Sales | | Gross Profit | | Depreciation and
Amortization | | Adjusted
EBITDA |
| (in thousands) |
| Geographic divisions | $ | 2,726,988 | | | $ | 860,006 | | | $ | 55,728 | | | $ | 353,176 | |
| Other | 63,544 | | | 39,215 | | | 8,687 | | | 17,351 | |
| Corporate | — | | — | | 251 | | | — |
| $ | 2,790,532 | | | $ | 899,221 | | | $ | 64,666 | | | $ | 370,527 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended October 31, 2021 |
| Net Sales | | Gross Profit | | Depreciation and
Amortization | | Adjusted
EBITDA |
| (in thousands) |
| Geographic divisions | $ | 2,173,040 | | | $ | 700,605 | | | $ | 56,418 | | | $ | 274,940 | |
| Other | 19,587 | | | 7,098 | | | 176 | | | 2,678 | |
| Corporate | — | | — | | 523 | | | — |
| $ | 2,192,627 | | | $ | 707,703 | | | $ | 57,117 | | | $ | 277,618 | |
The following table presents a reconciliation of Adjusted EBITDA to net income:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended
October 31, | | Six Months Ended
October 31, |
| 2022 | | 2021 | | 2022 | | 2021 |
| (in thousands) |
| Net income | $ | 103,153 | | | $ | 74,361 | | | $ | 192,623 | | | $ | 135,563 | |
| Interest expense | 16,055 | | | 14,744 | | | 30,716 | | | 28,401 | |
| Interest income | (154) | | | (27) | | | (210) | | | (27) | |
| Provision for income taxes | 35,995 | | | 23,769 | | | 68,025 | | | 43,740 | |
| Depreciation expense | 15,058 | | | 13,703 | | | 30,051 | | | 26,628 | |
| Amortization expense | 17,168 | | | 15,700 | | | 34,615 | | | 30,489 | |
| Stock appreciation rights(a) | 3,230 | | | 983 | | | 5,574 | | | 1,875 | |
| Redeemable noncontrolling interests and deferred compensation(b) | 340 | | | 593 | | | 835 | | | 903 | |
| Equity-based compensation(c) | 3,781 | | | 3,215 | | | 6,913 | | | 5,173 | |
| Severance and other permitted costs(d) | 379 | | | 249 | | | 731 | | | 396 | |
| Transaction costs (acquisitions and other)(e) | 292 | | | 2,393 | | | 678 | | | 2,968 | |
| Loss (gain) on disposal of assets(f) | 81 | | | (144) | | | (203) | | | (222) | |
| Effects of fair value adjustments to inventory(g) | 135 | | | — | | | 179 | | | 1,731 | |
| | | | | | | |
| Adjusted EBITDA | $ | 195,513 | | | $ | 149,539 | | | $ | 370,527 | | | $ | 277,618 | |
__________________________________________
(a)Represents changes in the fair value of stock appreciation rights.
(b)Represents changes in the fair values of noncontrolling interests and deferred compensation agreements.
(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.
(e)Represents costs related to acquisitions paid to third parties.
(f)Includes gains and losses from the sale and disposal of assets.
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
October 31, | | Six Months Ended
October 31, |
| 2022 | | 2021 | | 2022 | | 2021 |
| (in thousands) |
| Wallboard | $ | 584,557 | | | $ | 414,522 | | | $ | 1,106,111 | | | $ | 804,657 | |
| Ceilings | 159,601 | | | 140,866 | | | 326,876 | | | 278,937 | |
| Steel framing | 278,152 | | | 272,000 | | | 553,048 | | | 468,276 | |
| Complementary products | 408,669 | | | 323,163 | | | 804,497 | | | 640,757 | |
| Total net sales | $ | 1,430,979 | | | $ | 1,150,551 | | | $ | 2,790,532 | | | $ | 2,192,627 | |
Geographic Information
The following table presents the Company’s net sales by major geographic area:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended
October 31, | | Six Months Ended
October 31, |
| 2022 | | 2021 | | 2022 | | 2021 |
| (in thousands) |
| United States | $ | 1,252,324 | | | $ | 988,103 | | | $ | 2,440,195 | | | $ | 1,850,893 | |
| Canada | 178,655 | | | 162,448 | | | 350,337 | | | 341,734 | |
| Total net sales | $ | 1,430,979 | | | $ | 1,150,551 | | | $ | 2,790,532 | | | $ | 2,192,627 | |
The following table presents the Company’s property and equipment, net, by major geographic area:
| | | | | | | | | | | |
| October 31,
2022 | | April 30,
2022 |
| (in thousands) |
| United States | $ | 326,930 | | | $ | 311,061 | |
| Canada | 36,053 | | | 39,618 | |
| Total property and equipment, net | $ | 362,983 | | | $ | 350,679 | |
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
October 31, | | Six Months Ended
October 31, |
| 2022 | | 2021 | | 2022 | | 2021 |
| (in thousands, except per share data) |
| Net income | $ | 103,153 | | | $ | 74,361 | | | $ | 192,623 | | | $ | 135,563 | |
| Basic earnings per common share: | | | | | | | |
| Basic weighted average common shares outstanding | 42,232 | | | 43,135 | | | 42,390 | | | 43,112 | |
| Basic earnings per common share | $ | 2.44 | | | $ | 1.72 | | | $ | 4.54 | | | $ | 3.14 | |
| Diluted earnings per common share: | | | | | | | |
| Basic weighted average common shares outstanding | 42,232 | | | 43,135 | | | 42,390 | | | 43,112 | |
| Add: Common Stock Equivalents | 655 | | | 759 | | | 712 | | | 821 | |
| Diluted weighted average common shares outstanding | 42,887 | | | 43,894 | | | 43,102 | | | 43,933 | |
| Diluted earnings per common share | $ | 2.41 | | | $ | 1.69 | | | $ | 4.47 | | | $ | 3.09 | |
During the three and six months ended October 31, 2022 and 2021, the number of Common Stock Equivalents excluded from the calculation of diluted earnings per share because their effect would have been anti-dilutive was not material. Anti-dilutive securities could be dilutive in future periods.