Table of Contents
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, 2020
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 and post such files). Yes ⌧ No ◻
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ⌧
Accelerated filer ☐
Non-accelerated filer ☐
Smaller reporting company ☐
Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ◻
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ⌧
There were 42,320,668 shares of the registrant’s common stock, par value $0.01 per share, outstanding as of February 28, 2020.
TABLE OF CONTENTS
Page
Cautionary Note Regarding Forward-Looking Statements
3
PART I
Financial Information
5
Item 1
Financial Statements
Condensed Consolidated Balance Sheets (Unaudited)
Condensed Consolidated Statements of Operations and Comprehensive Income (Unaudited)
6
Condensed Consolidated Statements of Stockholders’ Equity (Unaudited)
7
Condensed Consolidated Statements of Cash Flows (Unaudited)
9
Notes to Condensed Consolidated Financial Statements (Unaudited)
10
Item 2
Management’s Discussion and Analysis of Financial Condition and Results of Operations
30
Item 3
Quantitative and Qualitative Disclosures About Market Risk
42
Item 4
Controls and Procedures
PART II
Other Information
43
Legal Proceedings
Item 1A
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
Defaults Upon Senior Securities
Mine Safety Disclosures
Item 5
Item 6
Exhibits
44
Signatures
45
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 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, 2019, 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:
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, however, 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.
(in thousands, except per share data)
January 31,
April 30,
2020
2019
Assets
Current assets:
Cash and cash equivalents
$
40,949
47,338
Trade accounts and notes receivable, net of allowances of $5,600 and $6,432, respectively
434,801
445,771
Inventories, net
296,117
290,829
Prepaid expenses and other current assets
17,142
18,368
Total current assets
789,009
802,306
Property and equipment, net of accumulated depreciation of $149,924 and $123,583, respectively
306,472
282,349
Operating lease right-of-use assets
118,092
—
Goodwill
624,070
617,327
Intangible assets, net
386,346
429,313
Deferred income taxes
8,014
4,676
Other assets
13,274
13,583
Total assets
2,245,277
2,149,554
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable
143,689
173,751
Accrued compensation and employee benefits
51,256
62,858
Other accrued expenses and current liabilities
73,759
79,848
Current portion of long-term debt
48,688
42,118
Current portion of operating lease liabilities
33,131
Total current liabilities
350,523
358,575
Non-current liabilities:
Long-term debt, less current portion
1,020,306
1,099,077
Long-term operating lease liabilities
90,336
Deferred income taxes, net
12,977
10,226
Other liabilities
63,809
52,500
Total liabilities
1,537,951
1,520,378
Commitments and contingencies
Stockholders' equity:
Common stock, par value $0.01 per share, 500,000 shares authorized; 42,310 and 40,375 shares issued and outstanding as of January 31, 2020 and April 30, 2019, respectively
423
404
Preferred stock, par value $0.01 per share, 50,000 shares authorized; 0 shares issued and outstanding as of January 31, 2020 and April 30, 2019
Exchangeable shares
29,639
Additional paid-in capital
524,313
480,113
Retained earnings
210,431
145,594
Accumulated other comprehensive loss
(27,841)
(26,574)
Total stockholders' equity
707,326
629,176
Total liabilities and stockholders' equity
The accompanying notes are an integral part of these condensed consolidated financial statements.
Three Months Ended
Nine Months Ended
Net sales
761,352
723,902
2,470,457
2,335,883
Cost of sales (exclusive of depreciation and amortization shown separately below)
507,879
489,676
1,658,837
1,588,691
Gross profit
253,473
234,226
811,620
747,192
Operating expenses:
Selling, general and administrative
193,384
178,180
588,472
548,883
Depreciation and amortization
29,422
30,220
88,215
87,329
Total operating expenses
222,806
208,400
676,687
636,212
Operating income
30,667
25,826
134,933
110,980
Other (expense) income:
Interest expense
(16,474)
(19,526)
(52,310)
(54,896)
Change in fair value of financial instruments
(6,395)
Write-off of debt discount and deferred financing fees
(707)
Other (expense) income, net
(498)
957
1,254
2,025
Total other expense, net
(16,972)
(18,569)
(51,763)
(59,266)
Income before taxes
13,695
7,257
83,170
51,714
Provision for income taxes
2,816
1,442
18,333
12,337
Net income
10,879
5,815
64,837
39,377
Weighted average common shares outstanding:
Basic
42,223
40,912
41,663
41,053
Diluted
42,949
41,371
42,401
41,789
Net income per common share(1):
0.26
0.14
1.55
0.94
0.25
1.52
0.92
Comprehensive income
Foreign currency translation income (loss)
(2,504)
(128)
8,947
(8,821)
Changes in other comprehensive income, net of tax
(547)
(10,214)
491
7,828
5,687
63,570
31,047
(in thousands)
Accumulated
Additional
Other
Total
Common Stock
Exchangeable
Paid-in
Retained
Comprehensive
Stockholders'
Shares
Amount
Capital
Earnings
Loss
Equity
Balances as of April 30, 2019
40,375
24,820
Exercise of Exchangeable Shares
1,129
11
(29,639)
29,628
-
Foreign currency translation adjustments
11,860
Change in other comprehensive loss, net of tax
(6,065)
Equity-based compensation
1,349
Exercise of stock options
133
Issuance of common stock pursuant to employee stock purchase plan
76
1
1,021
1,022
Balances as of July 31, 2019
41,589
416
512,244
170,414
(20,779)
662,295
29,138
(409)
(3,602)
2,271
525
6,623
6,628
Vesting of restricted stock units
55
(1)
Tax withholding related to net share settlements of equity awards
(282)
Balances as of October 31, 2019
42,169
422
520,855
199,552
(24,790)
696,039
1,419
85
1,518
1,519
17
(250)
39
771
Balances as of January 31, 2020
42,310
Income (Loss)
Balances as of April 30, 2018
41,069
411
489,007
89,592
441
579,451
8,650
Issuance of Exchangeable Shares
33,194
(3,791)
Change in other comprehensive income (loss), net of tax
113
358
(7)
35
431
881
Balances as of July 31, 2018
41,139
490,670
98,242
(3,237)
619,280
24,912
(4,902)
378
1,049
18
541
542
Balances as of October 31, 2018
41,157
412
492,260
123,154
(7,761)
641,259
(3,555)
Repurchase and retirement of common stock
(691)
(11,507)
(11,514)
1,095
(44)
50
308
40
523
524
Balances as of January 31, 2019
40,561
406
482,635
128,969
(7,889)
633,760
8
Cash flows from operating activities:
Adjustments to reconcile net income to net cash provided by operating activities:
Write-off and amortization of debt discount and debt issuance costs
2,964
2,505
Provision for losses on accounts and notes receivable
104
240
Provision for obsolescence of inventory
221
Effects of fair value adjustments to inventory
461
4,129
Increase in fair value of contingent consideration
1,601
535
6,345
4,706
Gain on sale and disposal of assets
(872)
(412)
6,395
174
(18,470)
Changes in assets and liabilities net of effects of acquisitions:
Trade accounts and notes receivable
16,561
23,243
Inventories
317
(11,576)
Prepaid expenses and other assets
4,210
(968)
(30,420)
(17,856)
(11,729)
(3,824)
Derivative liability
(10,778)
Other accrued expenses and liabilities
(7,622)
446
Cash provided by operating activities
135,367
105,437
Cash flows from investing activities:
Purchases of property and equipment
(20,884)
(13,385)
Proceeds from sale of assets
1,299
910
Acquisition of businesses, net of cash acquired
(20,803)
(579,731)
Cash used in investing activities
(40,388)
(592,206)
Cash flows from financing activities:
Repayments on the revolving credit facility
(794,623)
(748,999)
Borrowings from the revolving credit facility
760,444
886,896
Payments of principal on long-term debt
(57,476)
(7,476)
Payments of principal on finance lease obligations
(17,971)
(13,923)
Borrowings from term loan amendment
996,840
Repayments from term loan amendment
(571,840)
Repurchases of common stock
Debt issuance costs
(1,286)
(7,933)
Proceeds from exercises of stock options
8,280
1,280
Other financing activities
1,261
1,355
Cash (used in) provided by financing activities
(101,371)
524,686
Effect of exchange rates on cash and cash equivalents
(Decrease) increase in cash and cash equivalents
(6,389)
37,910
Cash and cash equivalents, beginning of period
36,437
Cash and cash equivalents, end of period
74,347
Supplemental cash flow disclosures:
Cash paid for income taxes
30,199
16,121
Cash paid for interest
49,224
45,724
1. Business, Basis of Presentation and Summary of Significant Accounting Policies
Business
Founded in 1971, GMS Inc. (“we,” “our,” “us,” or the “Company”), through its wholly-owned operating subsidiaries, is a distributor of specialty building products including wallboard, suspended ceilings systems, or ceilings, steel framing and other complementary building products. We purchase products from a large number of manufacturers and then distribute these goods to a customer base consisting of wallboard and ceilings contractors and homebuilders and, to a lesser extent, general contractors and individuals. We operate a network of more than 260 distribution centers across the United States and Canada.
Basis of Presentation
The condensed consolidated financial statements included in this Quarterly Report on Form 10-Q have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) that permit reduced disclosure for interim periods. In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all normal and recurring adjustments necessary for a fair presentation of the results of operations, financial position and cash flows. All adjustments are of a normal recurring nature unless otherwise disclosed. The results of operations for interim periods are not necessarily indicative of results for any other interim period or the entire fiscal year. As a result, the unaudited condensed consolidated financial statements should be read in conjunction with our audited consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year ended April 30, 2019.
Principles of Consolidation
The condensed consolidated financial statements present the results of operations, financial position, stockholders’ equity and cash flows of the Company and its subsidiaries. All material intercompany balances and transactions have been eliminated in consolidation. The results of operations of businesses acquired are included from their respective dates of acquisition.
Use of Estimates
The preparation of financial statements in conformity with Generally Accepted Accounting Principles (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Foreign Currency Translation
Assets and liabilities of the Company’s Canadian subsidiaries are translated at the exchange rate prevailing at the balance sheet date, while income and expenses are translated at average rates for the period. Translation gains and losses are reported as a separate component of stockholders’ equity and other comprehensive income. Gains and losses on foreign currency transactions are recognized in the Condensed Consolidated Statements of Operations and Comprehensive Income within other (expense) income, net.
Insurance Liabilities
The Company is self-insured for certain losses related to medical claims. The Company has stop-loss coverage to limit the exposure arising from medical claims. In addition, the Company has deductible-based insurance policies for certain losses related to general liability, automobile and workers’ compensation. The deductible amount per incident is $0.3 million, $0.5 million and $1.0 million for general liability, workers’ compensation and automobile, respectively. The coverage consists of a primary layer and an excess layer. The primary layer of coverage is from $0.5 million to $2.0 million and the excess layer cover claims from $2.0 million to $100.0 million. The expected ultimate cost for claims incurred as of the balance sheet date is not discounted and is recognized as a liability. Insurance losses for claims filed
Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)
and claims incurred but not reported are accrued based upon estimates of the aggregate liability for uninsured claims using loss development factors, actuarial assumptions and historical loss development experience.
As of January 31, 2020 and April 30, 2019, the aggregate liabilities for medical self-insurance were $4.0 million and $3.4 million, respectively, and are included in other accrued expenses and current liabilities in the Condensed Consolidated Balance Sheets. As of January 31, 2020 and April 30, 2019, reserves for general liability, automobile and workers’ compensation totaled approximately $19.1 million and $17.7 million, respectively, and are included in other accrued expenses and current liabilities and other liabilities in the Condensed Consolidated Balance Sheets. As of January 31, 2020 and April 30, 2019, expected recoveries for medical self-insurance, general liability, automobile and workers’ compensation totaled approximately $6.1 million and $6.0 million, respectively, and are included in prepaid expenses and other current assets and other assets in the Condensed Consolidated Balance Sheets.
Income Taxes
The Company considers each interim period an integral part of the annual period and measures tax expense (benefit) using an estimated annual effective income tax rate. Estimates of the annual effective income tax rate at the end of interim periods are, out of necessity, based on evaluation of possible future events and transactions and may be subject to subsequent refinement or revision. The Company forecasts its estimated annual effective income tax rate and then applies that rate to its year-to-date pre-tax ordinary income (loss), subject to certain loss limitation provisions. In addition, certain specific transactions are excluded from the Company’s estimated annual effective tax rate computation, but are discretely recognized within income tax expense (benefit) in their respective interim period. Future changes in the forecasted annual income (loss) projections, tax rate changes, or discrete tax items could result in significant adjustments to quarterly income tax expense (benefit) in future periods.
The Company evaluates its deferred tax assets quarterly to determine if valuation allowances are required. In this evaluation, the Company considers both positive and negative evidence in determining whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The primary negative evidence considered includes the cumulative operating losses generated in prior periods. The primary positive evidence considered includes the reversal of deferred tax liabilities primarily related to depreciation and amortization that would occur within the same jurisdiction and during the carryforward period necessary to absorb the federal and state net operating losses and other deferred tax assets.
Deferred tax assets and liabilities are computed by applying the federal, provincial and state income tax rates in effect to the gross amounts of temporary differences and other tax attributes, such as net operating loss carry-forwards. In assessing if the deferred tax assets will be realized, the Company considers whether it is more likely than not that some or all of these deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the period in which these deductible temporary differences reverse.
Fair Value of Financial Instruments
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Authoritative guidance for fair value measurements establishes a three-level hierarchy that prioritizes the inputs to valuation models based upon the degree to which they are observable. The three levels of the fair value measurement hierarchy are as follows:
Level 1
Inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity can access at the measurement date.
Level 2
Inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.
Level 3
Inputs are unobservable inputs for which little or no market data exists, therefore requiring an entity to develop its own assumptions.
The carrying values of the Company’s cash, cash equivalents, trade receivables and trade payables approximate their fair values because of their short-term nature. Based on borrowing rates available to the Company for loans with similar terms, the carrying values of the Company’s debt instruments approximate fair value. See Note 11, “Fair Value Measurements,” for additional information with respect to the Company’s fair value measurements.
Earnings Per Share
Basic earnings per share is computed by dividing net income available to common stockholders by the weighted average number of outstanding shares of common stock for the period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock, including stock options and restricted stock units (collectively “Common Stock Equivalents”), were exercised or converted into common stock. The dilutive effect of outstanding stock options and restricted stock units is reflected in diluted earnings per share by application of the treasury stock method. In applying the treasury stock method for stock-based compensation arrangements, the assumed proceeds are computed as the sum of the amount the employee must pay upon exercise and the amount of compensation cost attributed to future services and not yet recognized. Diluted earnings per share is computed by increasing the weighted-average number of outstanding shares of common stock computed in basic earnings per share to include the dilutive effect of Common Stock Equivalents for the period. In periods of net loss, the number of shares used to calculate diluted loss per share is the same as basic net loss per share.
The holders of the Company’s Exchangeable Shares (as defined in Note 8, “Stockholders’ Equity”) were entitled to receive dividends or distributions that are equal to any dividends or distributions on the Company’s common stock. As a result, when the Exchangeable Shares were outstanding, they were classified as a participating security and thereby required the allocation of income that would have otherwise been available to common stockholders when calculating earnings per share. Diluted earnings per share is calculated by utilizing the most dilutive result of the if-converted and two-class methods. In both methods, net income attributable to common stockholders and the weighted-average common shares outstanding are adjusted to account for the impact of the assumed issuance of potential common shares that are dilutive, subject to dilution sequencing rules.
Recently Adopted Accounting Pronouncements
Leases – In February 2016, the Financial Accounting Standards Board (“FASB”) issued authoritative guidance on accounting for leases. The new standard establishes a right-of-use (“ROU”) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than twelve months. Leases will be classified as either finance or operating, with such classification affecting the pattern of expense recognition in the statement of operations. The new standard is effective for the Company’s fiscal year beginning May 1, 2019 (the first day of fiscal 2020), including interim reporting periods within that fiscal year. A modified transition approach is required for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available.
On July 30, 2018, the FASB issued new guidance that provided entities with an additional (and optional) transition method to adopt the new lease standard. Under this new transition method, an entity initially applies the new lease standard at the adoption date and recognizes a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption.
The Company adopted the new lease standard on May 1, 2019 using the optional transition method. The Company elected the package of practical expedients permitted in the guidance, which among other things, allows the Company to carry forward the historical accounting relating to lease identification and classification for existing leases upon adoption. The Company also elected to use the practical expedient to not separate lease and nonlease components. The Company did not elect the hindsight practical expedient. The Company made an accounting policy election to not recognize an ROU asset and lease liability for leases with an initial term of twelve months or less.
The adoption of the standard resulted in the recording of operating lease ROU assets and operating lease liabilities of $118.8 million on the Condensed Consolidated Balance Sheet as of the adoption date. The Company also
12
reclassified deferred rent of $4.8 million from liabilities into its operating lease ROU assets. The adoption did not have a material impact on the Company’s Statement of Operations or Statement of Cash Flows. See Note 6, “Leases,” for information and disclosures regarding leases.
Recently Issued Accounting Pronouncements
Credit Losses – In June 2016, the FASB issued new guidance on credit losses on financial instruments. This guidance introduces a revised approach to the recognition and measurement of credit losses of certain financial instruments, including trade receivables, emphasizing an updated model based on expected losses rather than incurred losses. This new guidance is effective for annual reporting periods, and interim reporting periods contained therein, beginning after December 15, 2019. Early adoption is permitted. The Company is currently evaluating the impact of this guidance on its financial statements and related disclosures.
Goodwill – In January 2017, the FASB issued authoritative guidance that simplifies the accounting for goodwill impairments by eliminating Step 2 from the goodwill impairment test. Under the new guidance, goodwill impairment will be the amount by which a reporting unit’s carrying value exceeds its fair value. The new standard is effective for annual and any interim impairment tests for periods beginning after December 15, 2019. Early adoption is permitted. The Company does not expect the adoption of this standard to have a material impact on its financial statements.
Fair Value Measurement Disclosures – In August 2018, the FASB issued new guidance that changes certain fair value measurement disclosure requirements. This guidance is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. An entity is permitted to early adopt all of the disclosure changes or early adopt only the removed disclosure requirements and delay adoption of the additional disclosures until the effective date of this amendment. Except for changes to certain disclosures related to fair value measurements, the Company does not expect the adoption of this standard to have a material impact on its financial statements.
2. Revenue
Revenue Recognition
Revenue is recognized upon transfer of control of promised goods to customers at an amount that reflects the consideration the Company expects to receive in exchange for those goods. Revenue is recognized net of any taxes collected from customers, which are subsequently remitted to governmental authorities. The Company includes shipping and handling costs billed to customers in net sales. These costs are recognized as a component of selling, general and administrative expenses when the Company does not bill the customer.
See Note 14, “Segments,” for information regarding disaggregation of revenue, including revenue by product and by geographic area.
Performance Obligations
The Company satisfies its performance obligations at a point in time, which is upon delivery of products. The Company’s payment terms vary by the type and location of its customers. The amount of time between point of sale and when payment is due is not significant and the Company has determined its contracts do not include a significant financing component.
Our contracts with customers involve performance obligations that are one year or less. Therefore, we applied the standard’s optional exemption that permits the omission of information about our unfulfilled performance obligations as of the balance sheet dates.
13
Significant Judgements
The Company’s contracts may include terms that could cause variability in the transaction price, including customer rebates, returns and cash discounts for early payment. Variable consideration is estimated and included in the transaction price based on the expected value method. These estimates are based on historical experience, anticipated performance and other factors known at the time. The Company only includes estimated amounts in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is resolved.
Contract Balances
Receivables from contracts with customers were $408.2 million and $431.4 million as of January 31, 2020 and April 30, 2019, respectively. The Company did not have material amounts of contract assets or liabilities as of January 31, 2020 or April 30, 2019.
3. Business Acquisitions
The Company accounts for business combinations by recognizing the assets acquired and liabilities assumed at the acquisition date fair value. In valuing 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 accurately 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 Condensed Consolidated Statements of Operations and Comprehensive Income. The results of operations of acquisitions are reflected in the Company’s Condensed Consolidated Financial Statements from the date of acquisition.
On June 3, 2019, the Company acquired the acoustical and drywall operations of J.P. Hart Lumber Company (“Hart Acoustical and Drywall Supply”). Hart Acoustical and Drywall Supply distributes drywall, metal studs, insulation and ceiling tiles through two locations in San Antonio, TX and one location in La Feria, TX. The impact of this acquisition is not material to the Company’s Consolidated Financial Statements.
On November 1, 2019, the Company acquired Rigney Building Supplies Ltd. (“Rigney”). Rigney distributes interior building products, as well as masonry and landscaping products, through a single location in Kingston, Ontario. The impact of this acquisition is not material to the Company’s Consolidated Financial Statements.
14
4. Goodwill and Intangible Assets
The following table presents changes in the carrying amount of goodwill during the nine months ended January 31, 2020:
Carrying
Balance as of April 30, 2019
Goodwill acquired
3,821
Translation adjustment
2,922
Balance as of January 31, 2020
Intangible Assets
The following tables present the components of the Company’s definite-lived intangible assets as of January 31, 2020 and April 30, 2019:
Estimated
Weighted
January 31, 2020
Useful
Average
Gross
Net
Lives
Amortization
(years)
Period
Value
(dollars in thousands)
Customer relationships
5 - 16
12.8
528,081
259,727
268,354
Definite-lived tradenames
5 - 20
16.3
56,797
9,741
47,056
Vendor agreements
8 - 10
8.3
6,644
4,365
2,279
Developed technology
4.9
5,293
1,794
3,499
Leasehold interests
1 - 15
7.6
3,720
2,026
1,694
3 - 5
3.3
4,292
2,195
2,097
Totals
604,827
279,848
324,979
April 30, 2019
520,703
214,044
306,659
56,018
6,993
49,025
3,761
2,883
5,209
971
4,238
3,707
1,502
2,205
3.4
4,118
1,182
2,936
596,399
228,453
367,946
Definite-lived intangible assets are amortized over their estimated useful lives. The Company amortizes its customer relationships using an accelerated method to match the estimated cash flows generated by such assets, and amortizes its other definite-lived intangibles using the straight-line method because a pattern to which the expected benefits will be consumed or otherwise used up could not be reliably determined. Amortization expense related to definite-lived intangible assets was $16.5 million and $18.3 million for the three months ended January 31, 2020 and 2019, respectively, and $50.3 million and $53.3 million for the nine months ended January 31, 2020 and 2019, respectively. Amortization expense is recorded in depreciation and amortization expense in the Condensed Consolidated Statements of Operations and Comprehensive Income.
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Based on the current amount of definite-lived intangible assets, the Company expects to record amortization expense of approximately $15.3 million during the remaining three months in the fiscal year ending April 30, 2020 and $56.3 million, $47.0 million, $39.2 million, $31.9 million and $135.3 million during the fiscal years ending April 30, 2021, 2022, 2023, 2024 and thereafter, respectively. Actual amortization expense to be reported in future periods could differ materially from these estimates as a result of acquisitions, changes in useful lives, foreign currency exchange rate fluctuations and other relevant factors.
The Company’s indefinite-lived intangible assets consist of tradenames that had a carrying amount of $61.4 million as of January 31, 2020 and April 30, 2019.
5. Long-Term Debt
The Company’s long-term debt consisted of the following as of January 31, 2020 and April 30, 2019:
First Lien Facility (1) (2)
917,637
972,650
ABL Facility
9,806
43,972
Finance lease obligations
125,827
109,286
Installment notes at fixed rates up to 5.0%, due in monthly and annual installments through 2024 (3)
15,724
15,287
Carrying value of debt
1,068,994
1,141,195
Less current portion
Long-term debt
First Lien Facility
The Company has a senior secured first lien term loan facility (the "First Lien Facility") with aggregate principal amount of $929.4 million outstanding as of January 31, 2020. The First Lien Facility is due in June 2025 and the Company is required to make quarterly principal payments of 0.25% of the aggregate principal amount. The First Lien Facility bears interest at a floating rate based on LIBOR plus 2.75%, with a 0% floor. As of January 31, 2020, the applicable rate of interest was 4.40%.
On September 30, 2019, the Company made a $50.0 million prepayment of outstanding principal amount of its First Lien Facility. The Company recorded a write-off of debt discount and deferred financing fees of $0.7 million, which is included in write-off of discount and deferred financing fees in the Condensed Consolidated Statements of Operations and Comprehensive Income.
Asset Based Lending Facility
The Company has an asset based revolving credit facility (the “ABL Facility”) that provides for aggregate revolving commitments of $445.0 million (including same day swing line borrowings of $44.5 million). Extensions of credit under the ABL Facility are limited by a borrowing base calculated periodically based on specified percentages of the value of eligible inventory and eligible accounts receivable, subject to certain reserves and other adjustments.
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On September 30, 2019, the Company amended its ABL Facility to increase the revolving commitments from $345.0 million to $445.0 million, extend the maturity date to September 30, 2024 and remove the highest pricing level applicable to borrowings under the ABL Facility. The other terms of the ABL Facility remain unchanged.
At the Company’s option, the interest rates applicable to the loans under the ABL Facility are based at LIBOR or base rate plus, in each case, an applicable margin. The margins applicable for each elected interest rate are subject to a pricing grid, as defined in the ABL Facility agreement, based on average daily availability for the most recent fiscal quarter. As of January 31, 2020, the applicable rate of interest was 5.00%. The ABL Facility also contains an unused commitment fee subject to utilization, as included in the ABL Facility agreement.
During the nine months ended January 31, 2020, the Company made net repayments under the ABL Facility of $34.2 million. As of January 31, 2020, the Company had available borrowing capacity of approximately $402.2 million under the ABL Facility. The ABL Facility will mature on September 30, 2024 unless the individual affected lenders agree to extend the maturity of their respective loans under the ABL Facility upon the Company’s request and without the consent of any other lender. The ABL Facility contains a cross default provision with the First Lien Facility.
Covenants under the First Lien Facility and ABL Facility
The First Lien Facility contains a number of covenants that limit our ability and the ability of our restricted subsidiaries, as described in the First Lien Credit Agreement, to: incur more indebtedness; pay dividends, redeem or repurchase stock or make other distributions; make investments; create restrictions on the ability of our restricted subsidiaries to pay dividends to us or make other intercompany transfers; create liens securing indebtedness; transfer or sell assets; merge or consolidate; enter into certain transactions with our affiliates; and prepay or amend the terms of certain indebtedness. The Company was in compliance with all restrictive covenants as of January 31, 2020.
The ABL Facility contains certain affirmative covenants, including financial and other reporting requirements. The Company was in compliance with all such covenants as of January 31, 2020.
Titan Revolving Credit Facility
Through its WSB Titan (“Titan”) subsidiary, the Company has a revolving credit facility (the “Titan Facility”) that provides for aggregate revolving commitments of $22.7 million ($30.0 million Canadian dollars). The Titan 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, 2020, the Company had available borrowing capacity of approximately $22.7 million under the Titan Facility. The Titan Facility matures on June 28, 2022.
Debt Maturities
As of January 31, 2020, the maturities of long-term debt were as follows
First Lien
ABL
Finance
Installment
Facility(1)
Facility
Leases
Notes(2)
Years ending April 30,
2020 (remaining three months)
2,492
7,899
593
10,984
2021
9,968
33,633
4,874
48,475
2022
30,585
4,438
44,991
2023
25,025
4,404
39,397
2024
17,921
1,781
29,670
Thereafter
887,031
10,764
821
908,422
929,395
16,911
1,081,939
6. Leases
The Company leases office and warehouse facilities, distribution equipment and its fleet of vehicles. The Company’s leases have lease terms ranging from one to eleven years. The Company’s facility leases generally contain renewal options for periods ranging from one to five years. The exercise of lease renewal options is typically at the Company’s sole discretion. The Company does not recognize ROU assets or lease liabilities for renewal options unless it is determined that the Company is reasonably certain of exercising renewal options at lease inception. Certain of the Company’s equipment leases include options to purchase the leased property and certain of the Company’s equipment leases contain residual value guarantees. Any residual value payment deemed probable is included in the Company’s lease liability. The Company’s lease agreements do not contain any material restrictive covenants.
The Company determines if an arrangement is a lease at inception and evaluates whether the lease meets the classification criteria of a finance or operating lease. Operating leases are included in operating lease right-of-use assets, current portion of operating lease liabilities and long-term operating lease liabilities in the Condensed Consolidated Balance Sheet. Finance leases are included in property and equipment, current portion of long-term debt and long-term debt in the Condensed Consolidated Balance Sheet.
Lease ROU assets and lease liabilities are recognized at the commencement date based on the present value of the future lease payments over the lease term. For leases that do not provide an implicit rate, the Company uses its incremental borrowing rate in determining the present value of future payments. The Company determines its incremental borrowing rate based on the applicable lease terms and the current economic environment. Lease ROU assets also include any lease payments made in advance and excludes lease incentives and initial direct costs incurred. Some of the Company’s lease agreements contain rent escalation clauses (including index-based escalations), rent holidays, capital improvements funding or other lease concessions. Lease expense is recognized on a straight-line basis based on the fixed component over the lease term. Variable lease costs consist primarily of taxes, insurance and common area or other maintenance costs for leased facilities and vehicles and equipment, which are paid based on actual costs incurred.
The components of lease expense were as follows:
Three Months
Nine Months
Ended
Finance lease cost:
Amortization of right-of-use assets
6,007
18,120
Interest on lease liabilities
3,300
10,089
Operating lease cost
10,646
31,555
Variable lease cost
3,311
9,924
Total lease cost
23,264
69,688
Operating lease cost, including variable lease cost, is included in selling, general and administrative expenses; amortization of finance ROU assets is included in depreciation and amortization; and interest on finance lease liabilities is included in interest expense in the Condensed Consolidated Statements of Operations and Comprehensive Income.
Supplemental cash flow information related to leases was as follows:
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from operating leases
30,976
Operating cash flows from finance leases
Financing cash flows from finance leases
17,971
Right-of-use assets obtained in exchange for lease obligations
Operating leases
32,042
Finance leases
39,379
Other information related to leases was as follows:
Finance leases included in property and equipment
Property and equipment
160,634
Accumulated depreciation
(37,746)
Property and equipment, net
122,888
Weighted-average remaining lease term (years)
Weighted-average discount rate
5.5
%
5.4
Future minimum lease payments under non-cancellable leases as of January 31, 2020 were as follows:
Operating
Year Ended April 30,
11,056
10,578
43,879
37,389
37,126
28,697
28,257
22,284
19,028
17,652
11,064
25,960
Total lease payments
150,410
142,560
Less imputed interest
24,583
19,093
123,467
7. Income Taxes
General. The Company’s effective income tax rate on continuing operations was 22.0% and 23.9% for the nine months ended January 31, 2020 and 2019, respectively. The increase in the effective income tax rate over the U.S. federal statutory rate of 21.0% is primarily due to the impact of equity based compensation, as well as foreign tax rates and state taxes and other tax effects associated with the acquisition of Titan.
The Company is subject to provisions of the Tax Cuts and Jobs Act of 2017 related to current tax on global intangible low-taxed income (“GILTI”) earned by certain foreign subsidiaries. The FASB Staff Q&A, Topic 740 No. 5,
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Accounting for Global Intangible Low-Taxed Income, states that an entity can make an accounting policy election to either recognize deferred taxes for temporary differences expected to reverse as GILTI in future years or provide for the tax expense related to GILTI in the year the tax is incurred. We have elected to recognize the tax on GILTI as a period expense in the period the tax is incurred.
Valuation allowance. The Company had a valuation allowance of $1.4 million and $1.1 million against its deferred tax assets related to certain U.S. tax jurisdictions as of January 31, 2020 and April 30, 2019, 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, 2020 or April 30, 2019.
8. Stockholders’ Equity
Exchangeable Shares
In connection with the acquisition of Titan on June 1, 2018, the Company issued 1.1 million shares of equity that were exchangeable for the Company’s common stock on a one-for-one basis (“Exchangeable Shares”). The Exchangeable Shares were issued by an indirect wholly-owned subsidiary of the Company. The Exchangeable Shares ranked senior to the Company’s common stock with respect to dividend rights and rights on liquidation, dissolution and winding-up. The holders of the Exchangeable Shares were entitled to receive dividends or distributions that were equal to any dividends or distributions on the Company’s common stock. The holders of the Exchangeable Shares did not have voting rights.
The Exchangeable Shares contained rights that allowed the holders to exchange their Exchangeable Shares for GMS common stock at any time on a one-for-one basis. If converted, the holders were prevented from transferring such GMS common stock for one year from the Titan acquisition date. On June 13, 2019, the holders of the Exchangeable Shares exchanged all of the Exchangeable Shares for 1.1 million shares of the Company’s common stock. Following such exchange, the Exchangeable Shares ceased to be outstanding.
Share Repurchase Program
On November 30, 2018, the Company’s Board of Directors authorized a common stock repurchase program to repurchase up to $75.0 million outstanding common stock. The Company may conduct repurchases under the share repurchase program through open market transactions, under trading plans in accordance with SEC Rule 10b5-1 and/or in privately negotiated transactions, in compliance with Rule 10b-18 under the Exchange Act of 1934, as amended, subject to a variety of factors, including, but not limited to, our liquidity, credit availability, general business and market conditions, our debt covenant restrictions and the availability of alternative investment opportunities. The share repurchase program does not obligate us to acquire any particular amount of common stock, and it may be suspended or terminated at any time at the Company’s discretion.
The Company did not repurchase any shares of its common stock during the nine months ended January 31, 2020. As of January 31, 2020, the Company had $58.5 million of remaining authorization under its repurchase program.
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Secondary Public Offering
On September 9, 2019, AEA Investors LP and its affiliates (“AEA”) completed a secondary public offering of 6.8 million shares of the Company’s common stock at a price to the public of $27.20 per share, representing all of AEA’s remaining ownership in the Company. The Company did not receive any proceeds from the sale of its common stock in the offering by AEA. As a result of the offering, AEA no longer has the right to nominate any directors to the Company’s board of directors pursuant to the Company stockholders’ agreement.
Accumulated Other Comprehensive Loss
The following table sets forth the changes to accumulated other comprehensive loss, net of tax, by component for the nine months ended January 31, 2020:
Accumulated other comprehensive loss as of April 30, 2019
Other comprehensive loss on derivative instruments
Accumulated other comprehensive loss as of January 31, 2020
Other comprehensive loss on derivative instruments for the nine months ended January 31, 2020 is net of $3.2 million of tax.
9. Equity-Based Compensation
General
The Company measures compensation cost for all share-based awards at fair value on the grant date (or measurement date if different) and recognizes compensation expense, net of estimated forfeitures, over the requisite service period for awards expected to vest. The Company estimates the fair value of stock options using the Black-Scholes valuation model, and determines the fair value of restricted stock units based on the quoted price of GMS’s common stock on the date of grant. The Company estimates forfeitures based on historical analysis of actual forfeitures and employee turnover. Actual forfeitures are recorded when incurred and estimated forfeitures are reviewed and adjusted at least annually.
Equity-based compensation expense related to stock options and restricted stock units was $4.8 million and $2.4 million during the nine months ended January 31, 2020 and 2019, respectively, and is included in selling, general and administrative expenses in the Condensed Consolidated Statements of Operations and Comprehensive Income.
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Stock Option Awards
The following table presents stock option activity for the nine months ended January 31, 2020:
Remaining
Aggregate
Number of
Exercise
Contractual
Intrinsic
Options
Price
Life (years)
(shares and dollars in thousands)
Outstanding as of April 30, 2019
2,080
16.34
6.15
7,615
Options granted
386
21.63
Options exercised
(619)
13.37
Options forfeited
(103)
25.73
Options expired
Outstanding as of January 31, 2020
1,744
17.98
6.34
15,938
Exercisable as of January 31, 2020
1,184
15.50
5.07
13,698
Vested and expected to vest as of January 31, 2020
1,736
17.96
6.33
15,916
The aggregate intrinsic value represents the value of the Company’s closing stock price on the last trading day of the period in excess of 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, 2020 and 2019 was $9.4 million and $0.8 million, respectively. As of January 31, 2020, there was $4.2 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 nine months ended January 31, 2020 and 2019 was estimated using the Black-Scholes option-pricing model with the following assumptions:
Volatility
49.86
33.71
Expected life (years)
6.0
Risk-free interest rate
1.97
2.87
Dividend yield
The weighted average grant date fair value of options granted during the nine months ended January 31, 2020 and 2019 was $10.59 per share and $9.72 per share, respectively. 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 trading day immediately preceding the date of the grant.
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Restricted Stock Units
The following table presents restricted stock unit activity for the nine months ended January 31, 2020:
Restricted
Stock Units
(shares in thousands)
193
25.48
Granted
233
21.67
Vested
(94)
24.89
Forfeited
(39)
25.29
293
22.62
As of January 31, 2020, there was $4.6 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, 2020, 0.1 million shares of the Company’s common stock were purchased under the ESPP at an average price of $15.62 per share. The Company recognized $0.4 million and $0.2 million of stock-based compensation expense during the nine months ended January 31, 2020 and 2019, 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 for the nine months ended January 31, 2020:
Stock
Redeemable
Appreciation
Deferred
Noncontrolling
Rights
Compensation
Interests
23,458
1,695
12,498
Amounts redeemed
(825)
(108)
(4,644)
Change in fair value
980
41
285
23,613
1,628
8,139
Classified as current as of April 30, 2019
108
1,569
Classified as long-term as of April 30, 2019
22,103
1,587
10,929
Classified as current as of January 31, 2020
604
Classified as long-term as of January 31, 2020
23,009
Total expense related to these instruments was $1.3 million and $2.2 million during the nine months ended January 31, 2020 and 2019, respectively, and was included in selling, general and administrative expenses in the Condensed Consolidated Statements of Operations and Comprehensive Income.
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Stock Appreciation Rights
Certain subsidiaries have granted stock appreciation rights to certain employees under which payments are dependent on the appreciation in the book value per share, adjusted for certain provisions, of the applicable subsidiary. Settlements of the awards can be made in a combination of cash or installment notes, generally paid over five years, upon a triggering event. As of January 31, 2020, all stock appreciation rights were vested.
Deferred Compensation
Subsidiaries’ stockholders have entered into other deferred compensation agreements that granted the stockholders a payment based on a percentage in excess of book value, adjusted for certain provisions, upon an occurrence as defined in the related agreements, which are called “Buy Sell” agreements. These instruments are redeemed in cash or installment notes, generally paid in annual installments over the five years following termination of employment.
Redeemable Noncontrolling Interests
Noncontrolling interests were issued to certain employees of certain of the Company’s subsidiaries. All of the noncontrolling interest awards are subject to mandatory redemption on termination of employment for any reason. These instruments are redeemed in cash or installment notes, generally paid in annual installments over the five years following termination of employment. Liabilities related to these agreements are classified as share-based liability awards and are measured at fair value. Under the terms of the employee agreements, the redemption value is determined based on the book value of the subsidiary, as adjusted for certain items.
Upon the termination of employment or other triggering events including death or disability of the noncontrolling stockholders in the Company’s subsidiaries, we are obligated to purchase, or redeem, the noncontrolling interests at either an agreed upon price or a formula value provided in the stockholder agreements. This formula value is typically based on the book value per share of the subsidiary’s equity, including certain adjustments.
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 as of January 31, 2020 and April 30, 2019:
Interest rate swap (Level 2)
18,982
5,613
Stock appreciation rights (Level 3)
Deferred compensation (Level 3)
Noncontrolling interest holders (Level 3)
Contingent consideration (Level 3)
13,067
12,354
Derivative instruments. The Company has interest rate swap agreements with a notional amount of $500.0 million that convert the variable interest rate on its First Lien Facility to a fixed 1-month LIBOR interest rate of 2.46%. The contracts were effective on February 28, 2019 and terminate on February 28, 2023. The objective of the interest rate swap agreements is to eliminate the variability of interest payment cash flows associated with variable interest rates. The Company believes there have been no material changes in the creditworthiness of the counterparty to this interest rate swap and believes the risk of nonperformance by such party is minimal. The Company designated the interest rate swaps as a cash flow hedges. The derivative instruments are classified in other liabilities in the Condensed Consolidated Balance Sheets as of January 31, 2020 and April 30, 2019.
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The fair value of derivative instruments is determined using Level 2 inputs. Generally, the Company obtains the Level 2 inputs from its counterparties. Substantially all of the inputs are observable in the marketplace throughout the full term of the instruments, which 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.
Stock appreciation rights, deferred compensation and redeemable noncontrolling interests. The fair values of stock appreciation rights, deferred compensation and redeemable noncontrolling interests are determined using Level 3 inputs. These inputs include a volatility rate based on comparable entities, a discount rate, the expected time to redemption of the liabilities, historical values of the book equity of certain subsidiaries and market information for comparable entities. The use of these inputs to derive the fair value of the liabilities at a point in time can result in volatility to the financial statements. See Note 10, “Stock Appreciation Rights, Deferred Compensation and Redeemable Noncontrolling Interests,” for a reconciliation of the beginning and ending balances.
Contingent consideration. In connection with the acquisition of Titan, the Company assumed certain contingent consideration arrangements. The fair value of contingent consideration is determined using Level 3 inputs. These inputs include a discount rate and probability adjusted payments. During the nine months ended January 31, 2020, the Company recorded expense of $1.6 million related to the contingent consideration, which was included in other (expense) income in the Condensed Consolidated Statement of Operations and Comprehensive Income.
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 3, “Business Acquisitions.” There were no material long-lived asset impairments during the nine months ended January 31, 2020 or 2019.
12. Transactions With Related Parties
The Company purchases inventories from Southern Wall Products, Inc. (“SWP”) on a continuing basis. During the three and nine months ended January 31, 2020, certain executive officers and stockholders of the Company were stockholders of SWP, which was spun-off from Gypsum Management and Supply, Inc. on August 31, 2012. The Company purchased inventory from SWP for distribution in the amount of $3.2 million and $3.0 million during the three months ended January 31, 2020 and 2019, respectively, and $10.5 million and $10.0 million during the nine months ended January 31, 2020 and 2019, respectively. Amounts due to SWP for purchases of inventory for distribution were $1.1 million and $1.2 million as of January 31, 2020 and April 30, 2019, respectively, and are included in accounts payable in the Condensed Consolidated Balance Sheets.
13. Commitments and Contingencies
The Company is a defendant in various lawsuits and administrative actions associated with personal injuries, 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 these claims covered by insurance.
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14. Segments
The Company has seven operating segments based on geographic operations that it aggregates into one reportable segment. The Company defines operating segments as components of the organization for which discrete financial information is available and operating results are evaluated on a regular basis by the Chief Operating Decision Maker (“CODM”) in order to assess performance and allocate resources. The Company’s CODM is its Chief Executive Officer. The Company determined it has seven operating segments based on the Company’s seven geographic divisions, which are Central, Midwest, Northeast, Southern, Southeast, Western and Canada. The Company aggregates its operating segments into a single reportable segment based on similarities between the operating segments’ economic characteristics, nature of products sold, production process, type of customer and methods of distribution. The accounting policies of the operating segments are the same as those described in the summary of significant policies. In addition to the Company’s reportable segment, the Company’s consolidated results include both corporate activities and certain other activities. Corporate includes the Company’s corporate office building and support services provided to its subsidiaries. Other includes Tool Source Warehouse, Inc., which functions primarily as an internal distributor of tools.
Segment Results
The CODM assesses the Company’s performance based on the periodic review of net sales, Adjusted EBITDA and certain other measures for each of the operating segments. Adjusted EBITDA is not a recognized financial measure under GAAP. However, we believe it assists investors and analysts in comparing our operating performance across reporting periods on a consistent basis by excluding items that we do not believe are indicative of our core operating performance. Management believes Adjusted EBITDA is helpful in highlighting trends in our operating results, while other measures can differ significantly depending on long-term strategic decisions regarding capital structure, the tax jurisdictions in which companies operate and capital investments.
In addition, we utilize Adjusted EBITDA in certain calculations under the ABL Facility and the First Lien Facility. The ABL Facility and the First Lien Facility permit us to make certain additional adjustments in calculating Consolidated EBITDA, such as projected net cost savings, which are not reflected in the Adjusted EBITDA data presented in this Quarterly Report on Form 10-Q.
See “Management’s Discussion and Analysis of Financial Condition and Results of Operations -- Non-GAAP Financial Measures” for a further discussion of this non-GAAP measure.
The following tables present segment results for the three and nine months ended January 31, 2020 and 2019:
Three Months Ended January 31, 2020
Depreciation and
Adjusted
Net Sales
Gross Profit
EBITDA
Geographic divisions
754,916
251,086
28,791
62,169
6,436
2,387
56
528
Corporate
575
62,697
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Three Months Ended January 31, 2019
717,984
232,201
29,368
59,321
5,918
396
797
59,717
Nine Months Ended January 31, 2020
2,449,926
804,340
86,747
234,422
20,531
7,280
164
1,768
1,304
236,190
Nine Months Ended January 31, 2019
2,316,732
740,591
85,284
220,365
19,151
6,601
168
1,769
1,877
222,134
The following table presents a reconciliation of Adjusted EBITDA to net income for the three and nine months ended January 31, 2020 and 2019:
16,474
19,526
52,310
54,896
707
Interest income
(8)
(10)
(26)
(43)
Depreciation expense
12,930
11,919
37,944
34,067
Amortization expense
16,492
18,301
50,271
53,262
Stock appreciation expense(a)
(347)
442
1,425
Redeemable noncontrolling interests(b)
(318)
(35)
326
778
Equity-based compensation(c)
1,465
1,140
5,175
2,638
Severance and other permitted costs(d)
1,700
229
3,648
5,947
Transaction costs (acquisitions and other)(e)
434
1,066
1,733
6,660
Gain on sale of assets
(130)
(118)
Effects of fair value adjustments to inventory(f)
310
Change in fair value of financial instruments(g)
Secondary public offering costs(h)
363
Debt transaction costs(i)
678
Adjusted EBITDA
27
During the nine months ended January 31, 2020, the Company recorded operating lease ROU assets as a result of the adoption of the new lease guidance. The Company’s geographic divisions, other and corporate segments, recorded $113.3 million, $0.3 million and $5.2 million, respectively, of operating lease ROU assets as of the transition date.
Revenues by Product
The following table presents the Company’s net sales to external customers by main product lines for the three and nine months ended January 31, 2020 and 2019:
Wallboard
314,391
297,358
1,006,604
949,781
Ceilings
112,768
105,219
364,685
339,450
Steel framing
118,823
117,432
386,811
382,304
Other products
215,370
203,893
712,357
664,348
Total net sales
Geographic Information
The following table presents the Company’s net sales by major geographic area for the three and nine months ended January 31, 2020 and 2019:
United States
661,491
624,672
2,136,968
2,021,750
Canada
99,861
99,230
333,489
314,133
28
Net sales for Canada for the nine months ended January 31, 2020 includes nine months of net sales compared to eight months for the prior year period due to the Company’s acquisition of Titan on June 1, 2018. The average exchange rates for translating Canada net sales from Canadian dollars to U.S. dollars were 0.7600 and 0.7555 for the three and nine months ended January 31, 2020, respectively. The average exchange rates were and 0.7491 and 0.7609 for the three and eight months ended January 31, 2019, respectively.
The following table presents the Company’s property and equipment, net, by major geographic area as of January 31, 2020 and April 30, 2019:
268,599
249,857
37,873
32,492
Total property and equipment, net
15. Earnings Per Common Share
The following table sets forth the computation of basic and diluted earnings per share of common stock for the three and nine months ended January 31, 2020 and 2019:
Less: Net income allocated to participating securities
156
273
940
Net income attributable to common stockholders
5,659
64,564
38,437
Basic earnings per common share:
Basic weighted average common shares outstanding
Basic earnings per common share
Diluted earnings per common share:
Add: Common Stock Equivalents
726
459
738
736
Diluted weighted average common shares outstanding
Diluted earnings per common share
16. Subsequent Events
Acquisition
On February 1, 2020, the Company acquired Trowel Trades Supply, Inc. (“Trowel Trades”). Trowel Trades distributes interior building materials, as well as masonry and hardscape products, through a single location in Colchester, Vermont.
Favorable Class Action Settlement
In February 2020, the Company received proceeds as part of a class action legal settlement. The Company expects to record other income related to the settlement of approximately $12.0 million during the three months ending April 30, 2020. The settlement had no impact on the results of operations for the three and nine months ended January 31, 2020.
29
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, 2019.
Overview
Founded in 1971, GMS Inc. (“we,” “our,” “us,” or the “Company”) is a distributor of specialty building products including wallboard, suspended ceilings systems, or ceilings, steel framing and other complementary specialty building products. We purchase products from a large number of manufacturers and then distribute these goods to a customer base consisting of wallboard and ceilings contractors and homebuilders and, to a lesser extent, general contractors and individuals. We operate a network of more than 260 distribution centers across the United States and Canada.
Business Strategy
Our growth strategy includes increasing our market share within our existing footprint, expanding into new markets by opening new branches, acquiring competitors and growing our product offerings. 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 selectively pursue acquisitions. Due to the large, highly fragmented nature of our market and our reputation throughout the industry, we believe we have the potential to access a robust acquisition pipeline that will continue to supplement our organic growth. We use a rigorous targeting process to identify acquisition candidates that will fit our culture and business model and have an experienced team of professionals to manage the acquisition and integration processes. As a result of our scale, purchasing power and ability to improve operations through implementing best practices, we believe we can achieve substantial synergies and drive earnings accretion from our acquisition strategy.
Acquisition of Titan
On June 1, 2018, we acquired all of the outstanding equity interests of WSB Titan (“Titan”), a distributer of drywall, lumber, commercial and residential building materials. Titan is Canada’s largest gypsum specialty dealer with 30 locations across five provinces in Canada. The stated purchase price was $627.0 million ($800.0 million Canadian dollars). As part of the consideration, certain members of Titan’s management converted a portion of their ownership position into 1.1 million shares of equity that were exchanged for 1.1 million shares of the Company’s common stock in June 2019. The transaction extended our leadership position in North America with expanded scale and footprint, expanded our geographic coverage into the Canadian market and has created opportunities for further expansion in Canada.
Fiscal 2020 Acquisitions
On June 3, 2019, we acquired the acoustical and drywall operations of J.P. Hart Lumber Company (“Hart Acoustical and Drywall Supply”). Hart Acoustical and Drywall Supply distributes drywall, metal studs, insulation and ceiling tiles through two locations in San Antonio, Texas and one location in La Feria, Texas.
On November 1, 2019, we acquired Rigney Building Supplies Ltd. (“Rigney”). Rigney distributes interior building products, as well as masonry and landscaping products, through a single location in Kingston, Ontario.
On February 1, 2020, we acquired Trowel Trades Supply, Inc. (“Trowel Trades”). Trowel Trades distributes interior building materials, as well as masonry and hardscape products, through a single location in Colchester, Vermont.
ABL Amendment and Debt Prepayment
On September 30, 2019, we amended our asset based revolving credit facility (the “ABL Facility”) to increase the revolving commitments from $345.0 million to $445.0 million, extend the maturity date to September 30, 2024 and remove the highest pricing level applicable to borrowings under the ABL Facility. The other terms of the ABL Facility remain unchanged.
Also on September 30, 2019, we made a $50.0 million prepayment of outstanding principal of our senior secured first lien term loan facility (the "First Lien Facility"). We recorded a write-off of debt discount and deferred financing fees of $0.7 million, which is included in write-off of discount and deferred financing fees in the Condensed Consolidated Statements of Operations and Comprehensive Income.
Our Products
The following is a summary of our net sales by product group for the three and nine months ended January 31, 2020 and 2019:
% of
41.3
41.1
40.7
14.8
14.5
15.6
16.2
15.7
16.4
28.3
28.2
28.8
28.4
31
Results of Operations
Three Months Ended January 31, 2020 and 2019
The following table summarizes key components of our results of operations for the three months ended January 31, 2020 and 2019:
Statement of operations data:
Selling, general and administrative expenses
Non-GAAP measures:
Adjusted EBITDA(1)
Adjusted EBITDA margin(1)(2)
8.2
Net sales of $761.4 million increased $37.5 million, or 5.2%, during the three months ended January 31, 2020 compared to the three months ended January 31, 2019. The increase in net sales was due to the following:
32
Organic net sales increased $27.7 million, or 3.8%, during the three months ending January 31, 2020 compared to the prior year period. The increase was primarily driven by an increase in sales in the United States as a result of the improvement in new housing starts, R&R activity and commercial construction, partially offset by a decline in sales in Canada, which was primarily related to softness in the Canadian single-family housing market.
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, 2020:
Recently acquired net sales (1)
(8,358)
Impact of foreign currency (2)
(1,344)
Base business net sales (3)
751,650
Beginning in fiscal 2020, we modified our calculation of organic sales growth. When calculating organic sales growth for the current period, we now 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. Previously, we excluded net sales of businesses acquired in the current fiscal year, the prior fiscal year and three months prior to the start of the prior fiscal year.
Gross Profit and Gross Margin
Gross profit of $253.5 million for the three months ended January 31, 2020 increased $19.2 million, or 8.2%, compared to the three months ended January 31, 2019 as a result of higher net sales, both organically and including the positive impact of acquisitions. Gross margin on net sales increased to 33.3% for the three months ended January 31, 2020 compared to 32.4% for the three months ended January 31, 2019 primarily due to favorable price-cost dynamics resulting from both higher volume purchases in multiple product groups and other purchasing initiatives. Acquisition-related purchasing synergies and product mix also contributed to the increase in gross margin.
Selling, General and Administrative Expenses
Selling, general and administrative expenses consist of warehouse, delivery and general and administrative expenses. Selling, general and administrative expenses of $193.4 million for the three months ended January 31, 2020 increased $15.2 million, or 8.5%, compared to the three months ended January 31, 2019. Selling, general and administrative expenses was 25.4% of our net sales during the three months ended January 31, 2020 compared to 24.6% of our net sales during the three months ended January 31, 2019. The increase was primarily driven by year-over-year
33
declines in the selling prices of certain of our products and continuing inflationary cost pressures. In addition, we continued to make ongoing investments in greenfield locations and business initiatives intended to grow sales, leverage scale and drive profitability.
Depreciation and Amortization Expense
Depreciation and amortization expense includes depreciation of property and equipment and amortization of definite-lived intangible assets acquired in purchases of businesses and purchases of assets from other companies. Depreciation and amortization expense was $29.4 million for the three months ended January 31, 2020 compared to $30.2 million for the three months ended January 31, 2019. The decrease was due to a $1.8 million decrease in amortization of definite-lived intangible assets, partially offset by a $1.0 million increase in depreciation expense. The decrease in amortization expense was primarily due to use of the accelerated method of amortization for acquired customer relationships. The increase in depreciation expense was primarily due to an increase in capital expenditures over the past year.
Interest Expense
Interest expense consists primarily of interest expense incurred on our debt and finance leases and amortization of deferred financing fees and debt discounts. Interest expense was $16.5 million during the three months ended January 31, 2020 compared to $19.5 million for the three months ended January 31, 2019. The decrease was primarily due to an decrease in the outstanding amount of debt and a decrease in interest rates.
We recognized income tax expense of $2.8 million during the three months ended January 31, 2020 compared to $1.4 million during the three months ended January 31, 2019. Our effective tax rate was 20.6% and 19.9% for the three months ended January 31, 2020 and 2019, respectively. The change in the effective income tax rate from the three months ended January 31, 2019 to the three months ended January 31, 2020 was primarily due to the impact of equity-based compensation.
Net Income
Net income was $10.9 million during the three months ended January 31, 2020 compared to $5.8 million for the three months ended January 31, 2019. The increase in net income was primarily due to an increase in operating income and a decrease in interest expense, partially offset by an increase in income taxes.
Adjusted EBITDA of $62.7 million for the three months ended January 31, 2020 increased $3.0 million, or 5.0%, from our Adjusted EBITDA of $59.7 million for the three months ended January 31, 2019. The increase in Adjusted EBITDA was primarily due to growth in our base business and the improvement in gross margin on sales, partially offset by softness in the Canadian single-family housing market. See “—Non-GAAP Financial Measures—Adjusted EBITDA,” below for how we define and calculate Adjusted EBITDA, reconciliations to net income and a description of why we believe these measures are useful.
34
Nine Months Ended January 31, 2020 and 2019
The following table summarizes key components of our results of operations for the nine months ended January 31, 2020 and 2019:
Statement of operations data(1):
Write-off of discount and deferred financing fees
Other income, net
Income before tax
Adjusted EBITDA(2)
Adjusted EBITDA margin(2)(3)
9.6
9.5
Net sales of $2,470.5 million increased $134.6 million, or 5.8%, during the nine months ended January 31, 2020 compared to the nine months ended January 31, 2019. The increase in net sales was due to the following:
Organic net sales increased $76.0 million, or 3.3%, during the nine months ending January 31, 2020 compared to the prior year period primarily driven by an increase in demand for our products as a result of the improvement in new housing starts, R&R activity and commercial construction.
The following table breaks out our net sales into organic, or base business, net sales and recently acquired net sales for the nine months ended January 31, 2020:
(60,451)
1,836
2,411,842
Gross profit of $811.6 million for the nine months ended January 31, 2020 increased $64.4 million, or 8.6%, compared to the nine months ended January 31, 2019 as a result of higher net sales, both organically and including the positive impact of acquisitions, as well as $4.1 million of non-cash purchase accounting adjustments recorded in the prior year related to the Titan acquisition. Gross margin on net sales increased to 32.9% for the nine months ended January 31, 2020 compared to 32.0% for the nine months ended January 31, 2019 primarily due to net favorable price-cost dynamics, Titan purchasing synergies, product mix and the prior year purchase accounting adjustments. During the prior year period, we recognized a $4.1 million non-cash cost of sales impact of purchase accounting adjustments to increase inventory to its estimated fair value, compared to $0.5 million in the current year period. As part of our accounting for business combinations, we are required to value inventory acquired in the business combination at its net realizable value. The inventory adjustment is typically fully recognized in cost of sales within the first month after completion of an acquisition. This step-up in basis and related expense has a negative effect on gross margins as the related inventory is sold.
Selling, general and administrative expenses of $588.5 million for the nine months ended January 31, 2020 increased $39.6 million, or 7.2%, compared to the nine months ended January 31, 2019. The increase was primarily due to growth in our base business, inflationary cost pressures, ongoing investments in business initiatives and an increase in stock-based compensation expense. This was partially offset by a $4.6 million decrease in transaction costs, a $3.2 million decrease in severance costs and a $0.6 million decrease in debt transaction costs. Selling, general and
36
administrative expenses was 23.8% of our net sales during the nine months ended January 31, 2020 compared to 23.5% of our net sales during the nine months ended January 31, 2019.
Depreciation and amortization expense was $88.2 million for the nine months ended January 31, 2020 compared to $87.3 million for the nine months ended January 31, 2019. The increase was due to a $3.9 million increase in depreciation expense, partially offset by a $3.0 million decrease in amortization of definite-lived intangible assets. The increase in depreciation expense was primarily attributable to an increase in capital expenditures over the past year and expense resulting from property and equipment obtained in the acquisition of Titan. The nine months ended January 31, 2020 includes nine months of depreciation expense for property and equipment from the acquisition of Titan compared to eight months during the nine months ended January 31, 2019. The decrease in amortization expense was primarily due to use of the accelerated method of amortization for acquired customer relationships.
Interest expense was $52.3 million during the nine months ended January 31, 2020 compared to $54.9 million for the nine months ended January 31, 2019. The decrease was primarily due to a decrease in the outstanding amount of debt and a decrease in interest rates. This was partially offset by debt related to the financing of the acquisition of Titan. The nine months ended January 31, 2020 includes nine months of interest expense for the new debt financing compared to eight months during the prior year period.
We recognized income tax expense of $18.3 million during the nine months ended January 31, 2020 compared to $12.3 million during the nine months ended January 31, 2019. Our effective tax rate was 22.0% and 23.9% for the nine months ended January 31, 2020 and 2019, respectively. The change in the effective income tax rate from the nine months ended January 31, 2019 to the nine months ended January 31, 2020 was primarily due to the impact of equity-based compensation, as well as foreign tax rates and other tax effects associated with the acquisition of Titan.
Net income was $64.8 million during the nine months ended January 31, 2020 compared to $39.4 million for the nine months ended January 31, 2019. The increase in net income was primarily due to growth in our base business, a loss on financial instruments incurred in the prior year period related to the acquisition of Titan, transaction costs incurred in the prior year period related to the acquisition of Titan and a decrease in severance primarily due to a reduction in workforce implemented during the prior year period. These increases were partially offset by an increase in depreciation and amortization expense, an increase in interest expense and an increase in income tax expense.
Adjusted EBITDA of $236.2 million for the nine months ended January 31, 2020 increased $14.1 million, or 6.3%, from our Adjusted EBITDA of $222.1 million for the nine months ended January 31, 2019. The increase in Adjusted EBITDA was primarily due to growth in our base business and the improvement in gross margin on sales. See “—Non-GAAP Financial Measures—Adjusted EBITDA,” below for how we define and calculate Adjusted EBITDA, reconciliations to net income and a description of why we believe these measures are useful.
37
Liquidity and Capital Resources
Summary
We depend on cash flow from operations, cash on hand and funds available under our revolving credit facilities to finance working capital needs, capital expenditures and acquisitions. We believe that these sources of funds will be adequate to fund debt service requirements and provide cash, as required, to support our growth strategies, ongoing operations, capital expenditures, lease obligations and working capital for at least the next twelve months.
As of January 31, 2020, we had available borrowing capacity of approximately $402.2 million under our $445.0 million ABL Facility. The ABL Facility will mature on September 30, 2024 unless the individual affected lenders agree to extend the maturity of their respective loans under the ABL Facility upon the Company’s request and without the consent of any other lender.
As of January 31, 2020, we had available borrowing capacity of approximately $22.7 million under our Titan revolving credit facility (the “Titan Facility”) that provides for aggregate revolving commitments of $22.7 million ($30.0 million Canadian dollars). The Titan Facility matures on June 28, 2022.
For more information regarding our ABL Facility and other indebtedness, see Note 5 of the Notes to Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q and Note 7 of the Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended April 30, 2019.
In November 2018, our Board of Directors authorized a common stock repurchase program to repurchase up to $75.0 million of our outstanding common stock. The share repurchase program does not obligate us to acquire any particular amount of common stock, and it may be suspended or terminated at any time at our discretion. The timing and amount of any purchases of our common stock will be subject to a variety of factors, including, but not limited to, our liquidity, credit availability, general business and market conditions, our debt covenant restrictions and the availability of alternative investment opportunities. We did not repurchase any shares of our common stock during the nine months ended January 31, 2020. As of January 31, 2020, we had $58.5 million of remaining authorization under our repurchase program.
We regularly evaluate opportunities to optimize our capital structure, including through consideration of the issuance or incurrence of additional debt, to refinance existing debt and to fund ongoing cash needs such as general corporate purposes, growth initiatives, acquisitions and our stock repurchase program.
Cash Flows
A summary of our operating, investing and financing activities is shown in the following table:
38
Operating Activities
The increase in cash provided by operating activities during the nine months ended January 31, 2020 compared to the prior year period was primarily due to a $37.3 million increase in net income after adjustments for non-cash items, partially offset by a $7.4 million decrease in cash resulting from changes to our net working capital.
Investing Activities
The decrease in cash used in investing activities during the nine months ended January 31, 2020 compared to the prior year period was primarily due to a $558.9 million decrease in cash used for acquisitions, primarily due to cash used for our acquisition of Titan in the prior year period. The decrease was partially offset by a $7.5 million increase in capital expenditures.
Capital expenditures vary depending on prevailing business factors, including current and anticipated market conditions. Historically, capital expenditures have remained at relatively low levels in comparison to the operating cash flows generated during the corresponding periods.
Financing Activities
The change in cash (used in) provided by financing activities during the nine months ended January 31, 2020 compared to the prior year period was primarily due to debt financing entered into in the prior year period in connection with our acquisition of Titan, partially offset by an increase in principal payments on debt and finance leases in the current year period. During the nine months ended January 31, 2020, we made a prepayment of $50.0 million principal amount on our First Lien Facility.
Debt Covenants
The First Lien Facility contains a number of covenants that limit our ability and the ability of our restricted subsidiaries, as described in the First Lien Credit Agreement, to: incur more indebtedness; pay dividends, redeem or repurchase stock or make other distributions; make investments; create restrictions on the ability of our restricted subsidiaries to pay dividends to us or make other intercompany transfers; create liens securing indebtedness; transfer or sell assets; merge or consolidate; enter into certain transactions with our affiliates; and prepay or amend the terms of certain indebtedness. We were in compliance with all restrictive covenants as of January 31, 2020.
The ABL Facility contains certain affirmative covenants, including financial and other reporting requirements. We were in compliance with all such covenants as of January 31, 2020.
Contractual Obligations
There have been no material changes to the contractual obligations as disclosed in our Annual Report on Form 10-K for the fiscal year ended April 30, 2019, other than those made in the ordinary course of business.
Off Balance Sheet Arrangements
There have been no material changes to our off-balance sheet arrangements as discussed in our Annual Report on Form 10-K for the fiscal year ended April 30, 2019.
Non-GAAP Financial Measures
Adjusted EBITDA and Adjusted EBITDA margin are non-GAAP measures. We report our financial results in accordance with GAAP. However, we present Adjusted EBITDA and Adjusted EBITDA margin, which are not recognized financial measures under GAAP, because we believe they assist investors and analysts in comparing our
operating performance across reporting periods on a consistent basis by excluding items that we do not believe are indicative of our core operating performance. Management believes Adjusted EBITDA and Adjusted EBITDA margin are helpful in highlighting trends in our operating results, while other measures can differ significantly depending on long-term strategic decisions regarding capital structure, the tax jurisdictions in which companies operate and capital investments.
In addition, we utilize Adjusted EBITDA in certain calculations under the ABL Facility and the First Lien Facility. The ABL Facility and the First Lien Facility permit us to make certain additional adjustments in calculating Consolidated EBITDA, such as projected net cost savings, which are not reflected in the Adjusted EBITDA data presented in this Quarterly Report on Form 10-Q. We may in the future reflect such permitted adjustments in our calculations of Adjusted EBITDA.
We believe that Adjusted EBITDA and Adjusted EBITDA margin are frequently used by analysts, investors and other interested parties in their evaluation of companies, many of which present an Adjusted EBITDA or Adjusted EBITDA margin measure when reporting their results. Our presentation of Adjusted EBITDA should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items. In addition, Adjusted EBITDA may not be comparable to similarly titled measures used by other companies in our industry or across different industries.
We also include information concerning Adjusted EBITDA margin, which is calculated as Adjusted EBITDA divided by net sales. We present Adjusted EBITDA margin because it is used by management as a performance measure to judge the level of Adjusted EBITDA that is generated from net sales.
Adjusted EBITDA and Adjusted EBITDA margin have their limitations as analytical tools and should not be considered in isolation, or as a substitute for analysis of our results as reported under GAAP.
The following is a reconciliation of our net income to Adjusted EBITDA and Adjusted EBITDA margin for the three and nine months ended January 31, 2020 and 2019:
Adjusted EBITDA Margin
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There have been no material changes to our exposure to market risks from those reported in our Annual Report on Form 10-K for the fiscal year ended April 30, 2019.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
As of January 31, 2020, our management, with the participation of our principal executive officer and principal financial officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), which are designed to provide reasonable assurance that the information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include controls and procedures that are designed to provide reasonable assurance that information required to be disclosed in the reports that we file or submit under the Exchange Act is accumulated and communicated to management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.
Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed in the reports that are filed or submitted under the Exchange Act, is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting during the three months ended January 31, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II – Other Information
Item 1. Legal Proceedings
From time to time, we are involved in lawsuits that are brought against us in the normal course of business. We are not currently a party to any legal proceedings that would be expected, either individually or in the aggregate, to have a material adverse effect on our business or financial condition. For additional information, see Note 13, “Commitments and Contingencies.”
The building materials industry has been subject to personal injury and property damage claims arising from alleged exposure to raw materials contained in building products as well as claims for incidents of catastrophic loss, such as building fires. As a distributor of building materials, we face an inherent risk of exposure to product liability claims in the event that the use of the products we have distributed in the past or may in the future distribute is alleged to have resulted in economic loss, personal injury or property damage or violated environmental, health or safety or other laws. Such product liability claims have included and may in the future include allegations of defects in manufacturing, defects in design, a failure to warn of dangers inherent in the product, negligence, strict liability or a breach of warranties. In particular, certain of our subsidiaries have been the subject of claims related to alleged exposure to asbestos-containing products they distributed prior to 1979. Since 2002 and as of January 31, 2020, approximately 1,007 asbestos-related personal injury lawsuits have been filed and we vigorously defend against them. Of these, 965 have been dismissed without any payment by us, 32 are pending and only 10 have been settled, which settlements have not materially impacted our financial condition or operating results. See “Risk Factors—Risks Relating to Our Business and Industry—We are exposed to product liability, warranty, casualty, construction defect, contract, tort, employment and other claims and legal proceedings related to our business, the products we distribute, the services we provide and services provided for us by third parties” listed in Part 1, Item 1A of our Annual Report on Form 10-K for the fiscal year ended April 30, 2019.
Item 1A. Risk Factors
There have been no material changes in the risks facing the Company as described in the Company’s Annual Report on Form 10-K for the fiscal year ended April 30, 2019.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
Item 4. Mine Safety Disclosures
Not Applicable.
Item 5. Other Information
Item 6. Exhibits
Exhibit No.
Exhibit Description
3.1
Second Amended and Restated Certificate of Incorporation of the Company (incorporated by reference to Exhibit 3.1 to Amendment No. 5 to the Registrant’s Registration Statement on Form S-1 filed on May 16, 2016 (File No. 333-205902)).
3.2
Amended and Restated Bylaws of the Company (incorporated by reference to Exhibit 3.2 to Amendment No. 5 to the Registrant’s Registration Statement on Form S-1 filed on May 16, 2016 (File No. 333-205902)).
4.1
Specimen Common Stock Certificate of the Company (incorporated by reference to Exhibit 4.1 to Amendment No. 5 to the Registrant’s Registration Statement on Form S-1 filed on May 16, 2016 (File No. 333-205902)).
31.1
*
Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) promulgated under the Securities Exchange Act of 1934, as amended.
31.2
Certification of Chief Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) promulgated under the Securities Exchange Act of 1934, as amended.
32.1
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101 INS
Inline XBRL Instance Document – the instance document does not appear in the Interactive Data file because its XBRL tags are embedded within the Inline XBRL document.
101 SCH
Inline XBRL Taxonomy Extension Schema Document.
101 CAL
Inline XBRL Taxonomy Extension Calculation Linkbase Document.
101 DEF
Inline XBRL Taxonomy Extension Definition Linkbase Document.
101 LAB
Inline XBRL Taxonomy Extension Label Linkbase Document.
101 PRE
Inline XBRL Taxonomy Extension Presentation Linkbase Document.
Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101).
* Filed herewith.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Quarterly Report on Form 10-Q to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: March 5, 2020
By:
/s/ Scott M. Deakin
Scott M. Deakin
Chief Financial Officer
(Principal Financial Officer)