SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
For the quarterly period ended July 31, 2024
OR
For the transition period from _______________ to _______________.
COMMISSION FILE NUMBER: 001-37784
______________________________________________________________
(Exact name of registrant as specified in its charter)
______________________________________________________________
| (State or other jurisdiction of incorporation | (IRS Employer Identification No.) | |||||||
| or organization) | ||||||||
| (Address of principal executive offices) | (ZIP Code) | |||||||
(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 exchange on which registered | |||||||||||||||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ◻
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ◻
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| ☒ | 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 39,285,251 shares of the registrant’s common stock, par value $0.01 per share, outstanding as of August 26, 2024.
FORM 10-Q
TABLE OF CONTENTS
| Page | ||||||||
| PART I | ||||||||
| Item 1 | ||||||||
| Item 2 | ||||||||
| Item 3 | ||||||||
| Item 4 | ||||||||
| PART II | ||||||||
| Item 1 | ||||||||
| Item 1A | ||||||||
| Item 2 | ||||||||
| Item 3 | ||||||||
| Item 4 | ||||||||
| Item 5 | ||||||||
| Item 6 | ||||||||
2
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). You can generally identify forward-looking statements by our use of forward-looking terminology such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “might,” “plan,” “potential,” “predict,” “seek,” or “should,” or the negative thereof or other variations thereon or comparable terminology. Statements about our future financial performance, growth or future developments relating to economic conditions, our markets or the commercial and residential construction industries and statements about our expectations, beliefs, plans, strategies, objectives, prospects, assumptions or future events 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, 2024, 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:
•general business, financial market and economic conditions, including inflation and deflation, rising interest rates, supply chain disruptions, labor shortages and increased labor costs, geopolitical conflicts, an economic downturn or recession and capital market volatility;
•our dependency upon the cyclical commercial and residential construction markets, both new and repair and remodeling (“R&R”) including any impact from a decline or delay in residential or commercial construction activity, including from disruptions caused by the inability of commercial borrowers to repay their debt obligations, and from the availability or cost of financing;
•competition in our industry and the markets in which we operate;
•consolidation in our industry;
•the fluctuations in prices and mix of the products we distribute and our ability to pass on price increases to our customers and effectively manage inventories and margins in both inflationary and deflationary pricing environments;
•our ability to successfully implement our growth strategy, including identifying, successfully consummating and integrating acquisitions, opening new branches and expanding our product offerings;
•our ability to successfully expand into new geographic markets;
•product shortages, other disruptions in our supply chain or distribution network and potential loss of relationships with key suppliers, including increased shipping costs and delays and heightened risks relating to sourcing products from international suppliers;
•our ability to manage operating costs and achieve the anticipated benefits from our cost reduction and productivity initiatives;
•the potential loss of any significant customers or reduction in volume of purchases by our significant customers;
•our ability to renew leases for our facilities on acceptable terms or secure new facilities on acceptable terms;
•our ability to effectively manage our inventory as our sales volume or the prices of the products we distribute fluctuate;
•significant fluctuations in fuel costs or shortages in the supply of fuel;
3
•natural or man-made disruptions to our facilities or equipment;
•the risk related to our Canadian operations, including currency rate fluctuations;
•our ability to continue to anticipate and address evolving consumer demands;
•exposure to product liability and various other claims and litigation, and the adequacy and costs of insurance related thereto;
•operating hazards that may cause personal injury or property damage;
•the impact of federal, state, provincial and local regulations and the regulatory environment in which we operate;
•our inability to engage in activities that may be in our best long-term interests because of restrictions in our debt agreements;
•our current level of indebtedness and our ability to incur additional indebtedness, including to fund acquisitions;
•our ability to obtain additional financing on acceptable terms, if at all;
•the effects of widespread public health crises on our business, industry and results of operations;
•our ability to attract and retain key employees while controlling costs, including the impact of labor and trucking shortages;
•a cybersecurity breach, including misappropriation of our customers’, employees’ or suppliers’ confidential information, and the potential costs related thereto;
•a disruption in our IT systems and costs necessary to maintain and update our IT systems; and
•the imposition of tariffs and other trade barriers, and the effect of any retaliatory trade measures.
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. You should review the factors and risks we describe in the reports we will file from time to time with the SEC after the date of the filing of this Quarterly Report on Form 10-Q.
4
PART I – Financial Information
Item 1. Financial Statements
GMS Inc.
Condensed Consolidated Balance Sheets (Unaudited)
(in thousands, except per share data)
| July 31, 2024 | April 30, 2024 | ||||||||||
| Assets | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
Trade accounts and notes receivable, net of allowances of $ | |||||||||||
| Inventories, net | |||||||||||
| Prepaid expenses and other current assets | |||||||||||
| Total current assets | |||||||||||
Property and equipment, net of accumulated depreciation of $ | |||||||||||
| Operating lease right-of-use assets | |||||||||||
| Goodwill | |||||||||||
| Intangible assets, net | |||||||||||
| Deferred income taxes | |||||||||||
| Other assets | |||||||||||
| Total assets | $ | $ | |||||||||
| Liabilities and Stockholders’ Equity | |||||||||||
| Current liabilities: | |||||||||||
| Accounts payable | $ | $ | |||||||||
| Accrued compensation and employee benefits | |||||||||||
| Other accrued expenses and current liabilities | |||||||||||
| Current portion of long-term debt | |||||||||||
| Current portion of operating lease liabilities | |||||||||||
| Total current liabilities | |||||||||||
| Non-current liabilities: | |||||||||||
| Long-term debt | |||||||||||
| Long-term operating lease liabilities | |||||||||||
| Deferred income taxes, net | |||||||||||
| Other liabilities | |||||||||||
| Total liabilities | |||||||||||
| Commitments and contingencies | |||||||||||
| Stockholders’ equity: | |||||||||||
Common stock, par value $ | |||||||||||
Preferred stock, par value $ | |||||||||||
| Additional paid-in capital | |||||||||||
| Retained earnings | |||||||||||
| Accumulated other comprehensive loss | ( | ( | |||||||||
| Total stockholders’ equity | |||||||||||
| Total liabilities and stockholders’ equity | $ | $ | |||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
GMS Inc.
Condensed Consolidated Statements of Operations and Comprehensive Income (Unaudited)
(in thousands, except per share data)
| Three Months Ended July 31, | |||||||||||
| 2024 | 2023 | ||||||||||
| Net sales | $ | $ | |||||||||
| Cost of sales (exclusive of depreciation and amortization shown separately below) | |||||||||||
| Gross profit | |||||||||||
| Operating expenses: | |||||||||||
| Selling, general and administrative | |||||||||||
| Depreciation and amortization | |||||||||||
| Total operating expenses | |||||||||||
| Operating income | |||||||||||
| Other (expense) income: | |||||||||||
| Interest expense | ( | ( | |||||||||
| Write-off of debt discount and deferred financing fees | ( | ||||||||||
| Other income, net | |||||||||||
| Total other expense, net | ( | ( | |||||||||
| Income before taxes | |||||||||||
| Provision for income taxes | |||||||||||
| Net income | $ | $ | |||||||||
| Weighted average common shares outstanding: | |||||||||||
| Basic | |||||||||||
| Diluted | |||||||||||
Net income per common share: | |||||||||||
| Basic | $ | $ | |||||||||
| Diluted | $ | $ | |||||||||
| Comprehensive income | |||||||||||
| Net income | $ | $ | |||||||||
| Foreign currency translation adjustments | ( | ||||||||||
| Changes in other comprehensive income, net of tax | ( | ||||||||||
| Comprehensive income | $ | $ | |||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
6
GMS Inc.
Condensed Consolidated Statements of Stockholders’ Equity (Unaudited)
(in thousands)
| Common Stock | Additional Paid-in Capital | Retained Earnings | Accumulated Other Comprehensive Loss | Total Stockholders’ Equity | |||||||||||||||||||||||||||||||
| Shares | Amount | ||||||||||||||||||||||||||||||||||
| Balances as of April 30, 2024 | $ | $ | $ | $ | ( | $ | |||||||||||||||||||||||||||||
| Net income | — | — | — | — | |||||||||||||||||||||||||||||||
| Foreign currency translation adjustments | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||
| Other comprehensive loss, net of tax | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||
| Repurchase and retirement of common stock | ( | ( | ( | — | — | ( | |||||||||||||||||||||||||||||
| Equity-based compensation | — | — | — | — | |||||||||||||||||||||||||||||||
| Exercise of stock options | — | — | — | ||||||||||||||||||||||||||||||||
| Issuance of common stock pursuant to employee stock purchase plan | — | — | |||||||||||||||||||||||||||||||||
| Balances as of July 31, 2024 | $ | $ | $ | $ | ( | $ | |||||||||||||||||||||||||||||
| Common Stock | Additional Paid-in Capital | Retained Earnings | Accumulated Other Comprehensive Loss | Total Stockholders’ Equity | |||||||||||||||||||||||||||||||
| Shares | Amount | ||||||||||||||||||||||||||||||||||
| Balances as of April 30, 2023 | $ | $ | $ | $ | ( | $ | |||||||||||||||||||||||||||||
| Net income | — | — | — | — | |||||||||||||||||||||||||||||||
| Foreign currency translation adjustments | — | — | — | — | |||||||||||||||||||||||||||||||
| Other comprehensive income, net of tax | — | — | — | — | |||||||||||||||||||||||||||||||
| Repurchase and retirement of common stock | ( | ( | ( | — | — | ( | |||||||||||||||||||||||||||||
| Equity-based compensation | — | — | — | — | |||||||||||||||||||||||||||||||
| Exercise of stock options | — | — | — | ||||||||||||||||||||||||||||||||
| Issuance of common stock pursuant to employee stock purchase plan | — | — | |||||||||||||||||||||||||||||||||
| Balances as of July 31, 2023 | $ | $ | $ | $ | ( | $ | |||||||||||||||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
7
GMS Inc.
Condensed Consolidated Statements of Cash Flows (Unaudited)
(in thousands)
| Three Months Ended July 31, | |||||||||||
| 2024 | 2023 | ||||||||||
| Cash flows from operating activities: | |||||||||||
| Net income | $ | $ | |||||||||
| Adjustments to reconcile net income to net cash (used in) provided by operating activities: | |||||||||||
| Depreciation and amortization | |||||||||||
| Write-off and amortization of debt discount and debt issuance costs | |||||||||||
| Equity-based compensation | |||||||||||
| Loss (gain) on disposal of assets | ( | ||||||||||
| Deferred income taxes | ( | ( | |||||||||
| Other items, net | |||||||||||
| Changes in assets and liabilities net of effects of acquisitions: | |||||||||||
| Trade accounts and notes receivable | ( | ( | |||||||||
| Inventories | ( | ( | |||||||||
| Prepaid expenses and other assets | ( | ( | |||||||||
| Accounts payable | ( | ( | |||||||||
| Accrued compensation and employee benefits | ( | ( | |||||||||
| Other accrued expenses and liabilities | |||||||||||
| Cash (used in) provided by operating activities | ( | ||||||||||
| Cash flows from investing activities: | |||||||||||
| Purchases of property and equipment | ( | ( | |||||||||
| Proceeds from sale of assets | |||||||||||
| Acquisition of businesses, net of cash acquired | ( | ( | |||||||||
| Cash used in investing activities | ( | ( | |||||||||
| Cash flows from financing activities: | |||||||||||
| Repayments on revolving credit facility | ( | ( | |||||||||
| Borrowings from revolving credit facility | |||||||||||
| Payments of principal on long-term debt | ( | ||||||||||
| Borrowings from term loan amendment | |||||||||||
| Repayments from term loan amendment | ( | ||||||||||
| Payments of principal on finance lease obligations | ( | ( | |||||||||
| Repurchases of common stock | ( | ( | |||||||||
| Payment for debt issuance costs | ( | ||||||||||
| Proceeds from exercises of stock options | |||||||||||
| Proceeds from issuance of stock pursuant to employee stock purchase plan | |||||||||||
| Cash provided by (used in) financing activities | ( | ||||||||||
| Effect of exchange rates on cash and cash equivalents | |||||||||||
| Decrease in cash and cash equivalents | ( | ( | |||||||||
| Cash and cash equivalents, beginning of period | |||||||||||
| Cash and cash equivalents, end of period | $ | $ | |||||||||
| Supplemental cash flow disclosures: | |||||||||||
| Cash paid for income taxes | $ | $ | |||||||||
| Cash paid for interest | |||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
8
GMS Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
1. Business, Basis of Presentation and Summary of Significant Accounting Policies
Business
Founded in 1971, GMS Inc. (together with its consolidated subsidiaries, “we,” “our,” “us,” or the “Company”), through its operating subsidiaries, operates a network of more than 300 distribution centers with extensive product offerings of wallboard, ceilings, steel framing and complementary construction products. The Company also operates approximately 100 tool sales, rental and service centers. Through these operations, the Company provides a comprehensive selection of building products and solutions for its residential and commercial contractor customer base across the United States and Canada. The Company’s operating model combines the benefits of a national platform and strategy with a local go-to-market focus, enabling the Company to generate significant economies of scale while maintaining high levels of customer service.
Basis of Presentation
The condensed consolidated financial statements included in this Quarterly Report on Form 10-Q have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) that permit reduced disclosure for interim periods. In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all normal and recurring adjustments necessary for a fair presentation of the results of operations, financial position and cash flows. All adjustments are of a normal recurring nature unless otherwise disclosed. The results of operations for interim periods are not necessarily indicative of results for any other interim period or the entire fiscal year. The unaudited condensed consolidated financial statements should be read in conjunction with our audited consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year ended April 30, 2024.
Insurance Liabilities
The following table presents the Company’s aggregate liabilities for medical self-insurance, general liability, automobile and workers’ compensation and the expected recoveries for medical self-insurance, general liability, automobile and workers’ compensation. Liabilities for medical self-insurance are included in other accrued expenses and current liabilities. Reserves for general liability, automobile and workers’ compensation are included in other accrued expenses and current liabilities and other liabilities in the Condensed Consolidated Balance Sheets. Expected recoveries for insurance liabilities are included in prepaid expenses and other current assets and other assets in the Condensed Consolidated Balance Sheets.
| July 31, 2024 | April 30, 2024 | ||||||||||
| (in thousands) | |||||||||||
| Medical self‑insurance | $ | $ | |||||||||
| General liability, automobile and workers’ compensation | |||||||||||
| Expected recoveries for insurance liabilities | ( | ( | |||||||||
Revenue Recognition
Revenue is recognized upon transfer of control of contracted goods to customers at an amount that reflects the consideration the Company expects to receive in exchange for those goods. Revenue is recognized net of any taxes collected from customers, which are subsequently remitted to governmental authorities. The Company includes shipping and handling costs billed to customers in net sales. These costs are recognized as a component of selling, general and administrative expenses.
See Note 13, “Segments,” for information regarding disaggregation of revenue, including revenue by product and by geographic area.
9
GMS Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)
Recently Issued Accounting Pronouncements
Segment Reporting. In November 2023, the Financial Accounting Standards Board (“FASB”) issued new guidance to improve reportable segment disclosure requirements, primarily through enhanced disclosures about significant segment expenses regularly provided to the chief operating decision maker (“CODM”). The new guidance is effective for fiscal years beginning after December 15, 2023 and interim periods within fiscal years beginning after December 15, 2024. The new guidance will apply retrospectively to all periods presented. The Company is currently evaluating the impact of the new guidance on its consolidated financial statements.
Income Taxes. In December 2023, the FASB issued new guidance to enhance income tax disclosures, primarily through changes in the rate reconciliation and income taxes paid disclosures. The new guidance is effective for fiscal years beginning after December 15, 2024. The new guidance will apply on a prospective basis to annual financial statements for periods beginning after the effective date. However, retrospective application in all prior periods presented is permitted. The Company is currently evaluating the impact of the new guidance on its consolidated financial statements.
2. Business Combinations
The Company accounts for business combinations by recognizing the assets acquired and liabilities assumed at the acquisition date fair value. In valuing certain acquired assets and liabilities, fair value estimates use Level 3 inputs, including future expected cash flows and discount rates. Goodwill is measured as the excess of consideration transferred over the fair values of the assets acquired and the liabilities assumed. While the Company uses its best estimates and assumptions to value assets acquired and liabilities assumed at the acquisition date, the Company’s estimates are inherently uncertain and subject to refinement. As a result, during the measurement period, which may be up to one year from the acquisition date, the Company records adjustments to the assets acquired and liabilities assumed, with the corresponding offset to goodwill. Upon the conclusion of the measurement period, any subsequent adjustments arising from new facts and circumstances are recorded to the Consolidated Statements of Operations and Comprehensive Income. The results of operations of acquisitions are reflected in the Company’s Consolidated Financial Statements from the date of acquisition.
On May 1, 2024, the Company acquired Howard & Sons Building Materials, Inc., a distributor of wallboard, steel framing and complementary products from a single location in Pomona, California.
On July 2, 2024, the Company acquired Yvon Building Supply, Inc., Yvon Insulation Corporation, Yvon Insulation Windsor, Laminated Glass Technologies, Inc., and Right Fit Foam Insulation Ltd. (collectively, “Yvon”). Yvon provides drywall, insulation, steel, ceilings and other complementary products and related services, including installed insulation. Yvon operates through seven locations across Greater Toronto and Ontario, Canada. The Company funded this transaction with cash on hand and borrowings under its asset based revolving credit facility (the “ABL Facility”). The Company also entered into contingent consideration arrangements, based on purchase volumes of certain customers, that are payable in cash to the sellers over five years , up to a maximum amount of $46.0 million Canadian dollars.
The primary purpose of these transactions was to expand the geographical coverage of the Company and grow the business. The Company’s Condensed Consolidated Statement of Operations and Comprehensive Income for the three months ended July 31, 2024 included $13.2 million of net sales and $0.6 million of net loss from acquisitions made in fiscal 2025. The Company recorded transaction costs of $1.3 million and $1.4 million during the three months ended July 31, 2024 and 2023, respectively. Unaudited pro forma financial information is not provided because the impact of these acquisitions was not material to the Company’s Consolidated Financial Statements.
10
GMS Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)
The following table summarizes the preliminary consideration transferred for the Company’s fiscal 2025 acquisitions:
| (in thousands) | |||||
| Cash | $ | ||||
| Contingent consideration | |||||
| Fair value of consideration transferred | $ | ||||
The preliminary estimated fair value of the contingent consideration payments was determined using a Monte Carlo simulation which accounts for the probabilities of various outcomes. As of July 31, 2024, $5.3 million of the contingent consideration liability was classified within other accrued expenses and current liabilities in the Condensed Consolidated Balance Sheet and $21.3 million was classified within other liabilities. The contingent consideration will be remeasured to fair value each reporting period with changes in fair value recorded in the Consolidated Statements of Operations and Comprehensive Income.
The assets acquired and liabilities assumed were recognized at their acquisition date fair values. The acquisition accounting is subject to change as the Company obtains additional information during the measurement period about the facts and circumstances that existed as of the acquisition date. The primary areas of the preliminary acquisition accounting that are not yet finalized relate to preliminary fair value estimates (including contingent consideration), working capital adjustments and residual goodwill.
The following table summarizes the preliminary acquisition accounting for the Company’s fiscal 2025 acquisitions based on currently available information:
| Preliminary Acquisition Accounting | |||||
| (in thousands) | |||||
| Cash | $ | ||||
| Trade accounts and notes receivable | |||||
| Inventories | |||||
| Property and equipment | |||||
| Other assets | |||||
| Intangible assets | |||||
| Goodwill | |||||
| Accounts payable and other liabilities | ( | ||||
| Deferred income taxes | ( | ||||
| Fair value of consideration transferred | $ | ||||
Goodwill recognized is attributable to synergies achieved through the streamlining of operations combined with improved margins attainable through increased market presence and is assigned to the Company’s geographic divisions reportable segment. Goodwill of $38.3 million is not expected to be deductible for income tax purposes and goodwill of $0.9 million is expected to be deductible for income tax purposes.
The following table summarizes the preliminary components of intangible assets acquired in connection with the Company’s fiscal 2025 acquisitions (dollars in thousands):
| Fair Value | Weighted Average Amortization Period (Years) | ||||||||||
| Customer relationships | $ | ||||||||||
| Trade names | |||||||||||
| Other | |||||||||||
| Total intangible assets | $ | ||||||||||
Trade accounts and notes receivable had an estimated fair value of $44.3 million and a gross contractual value of $44.5 million. The difference represents the Company’s best estimate of the contractual cash flows that will not be collected.
11
GMS Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)
3. Accounts Receivable
The Company’s trade accounts and notes receivable consisted of the following:
| July 31, 2024 | April 30, 2024 | ||||||||||
| (in thousands) | |||||||||||
| Trade receivables | $ | $ | |||||||||
| Other receivables | |||||||||||
| Allowance for expected credit losses | ( | ( | |||||||||
| Other allowances | ( | ( | |||||||||
| Trade accounts and notes receivable | $ | $ | |||||||||
The following table presents the change in the allowance for expected credit losses during the three months ended July 31, 2024:
| (in thousands) | |||||
| Balance as of April 30, 2024 | $ | ||||
| Provision | |||||
| Other, net | ( | ||||
| Balance as of July 31, 2024 | $ | ||||
Receivables from contracts with customers, net of allowances, were $776.2 million and $729.0 million as of July 31, 2024 and April 30, 2024, respectively. The Company did not have material amounts of contract assets or liabilities as of July 31, 2024 or April 30, 2024.
4. Goodwill and Intangible Assets
Goodwill
The following table presents changes in the carrying amount of goodwill:
| Gross | Accumulated | Net | |||||||||||||||
| Carrying Amount | Impairment Loss | Carrying Amount | |||||||||||||||
| (in thousands) | |||||||||||||||||
| Balance as of April 30, 2024 | $ | $ | ( | $ | |||||||||||||
| Goodwill recognized from acquisitions | — | ||||||||||||||||
| Acquisition accounting adjustments from prior period | ( | — | ( | ||||||||||||||
| Translation adjustment | ( | ( | |||||||||||||||
| Balance as of July 31, 2024 | $ | $ | ( | $ | |||||||||||||
As of July 31, 2024, $782.9 million of goodwill was assigned to the Company’s geographic divisions reportable segment and $107.8 million was assigned to the Company’s other segment. During the three months ended July 31, 2024, the Company recorded measurement period adjustments related to its acquisition of Kamco Supply Corporation and affiliates.
12
GMS Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)
Intangible Assets
The following tables present the components of the Company’s intangible assets:
| Estimated Useful Lives (years) | Weighted Average Amortization Period | July 31, 2024 | |||||||||||||||||||||||||||
| Gross Carrying Amount | Accumulated Amortization | Net Carrying Value | |||||||||||||||||||||||||||
| (dollars in thousands) | |||||||||||||||||||||||||||||
| Customer relationships | $ | $ | ( | $ | |||||||||||||||||||||||||
| Definite-lived trade names | ( | ||||||||||||||||||||||||||||
| Developed technology | ( | ||||||||||||||||||||||||||||
| Other | ( | ||||||||||||||||||||||||||||
| Definite-lived intangible assets | $ | $ | ( | $ | |||||||||||||||||||||||||
| Indefinite-lived intangible assets | |||||||||||||||||||||||||||||
| Total intangible assets, net | $ | ||||||||||||||||||||||||||||
| Estimated Useful Lives (years) | Weighted Average Amortization Period | April 30, 2024 | |||||||||||||||||||||||||||
| Gross Carrying Amount | Accumulated Amortization | Net Carrying Value | |||||||||||||||||||||||||||
| (dollars in thousands) | |||||||||||||||||||||||||||||
| Customer relationships | $ | $ | ( | $ | |||||||||||||||||||||||||
| Definite-lived trade names | ( | ||||||||||||||||||||||||||||
| Developed technology | ( | ||||||||||||||||||||||||||||
| Other | ( | ||||||||||||||||||||||||||||
| Definite-lived intangible assets | $ | $ | ( | $ | |||||||||||||||||||||||||
| Indefinite-lived intangible assets | |||||||||||||||||||||||||||||
| Total intangible assets, net | $ | ||||||||||||||||||||||||||||
Amortization expense related to definite-lived intangible assets was $18.8 million and $15.7 million for the three months ended July 31, 2024 and 2023, respectively.
The following table summarizes the estimated future amortization expense for definite-lived intangible assets. Actual amortization expense to be reported in future periods could differ materially from these estimates as a result of acquisitions, changes in useful lives, foreign currency exchange rate fluctuations and other relevant factors.
| Year Ending April 30, | (in thousands) | ||||
| 2025 (remaining nine months) | $ | ||||
| 2026 | |||||
| 2027 | |||||
| 2028 | |||||
| 2029 | |||||
| Thereafter | |||||
| Total | $ | ||||
The Company’s indefinite-lived intangible assets as of July 31, 2024 and April 30, 2024 consisted of indefinite-lived trade names.
13
GMS Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)
5. Long-Term Debt
The Company’s long-term debt consisted of the following:
| July 31, 2024 | April 30, 2024 | ||||||||||
| (in thousands) | |||||||||||
| Term Loan Facility | $ | $ | |||||||||
| Unamortized discount and deferred financing costs on Term Loan Facility | ( | ( | |||||||||
| Senior Notes | |||||||||||
| Unamortized discount and deferred financing costs on Senior Notes | ( | ( | |||||||||
| ABL Facility | |||||||||||
| Finance lease obligations | |||||||||||
Installment notes at fixed rates up to | |||||||||||
| Unamortized discount on installment notes | ( | ( | |||||||||
| Carrying value of debt | |||||||||||
| Less current portion | |||||||||||
| Long-term debt | $ | $ | |||||||||
Term Loan Facility
The Company has a senior secured first lien term loan facility (the “Term Loan Facility”) with $496.3 million outstanding as of July 31, 2024. The Company is required to make scheduled quarterly payments of $1.3 million, or 0.25 % of the aggregate principal amount of the Term Loan Facility, which began January 1, 2024 with the remaining balance due May 12, 2030. As of July 31, 2024, the applicable rate of interest under the Term Loan Facility was 7.59 %. Borrowings under the Term Loan Facility bear interest at a floating rate per annum based on the Secured Overnight Financing Rate (“SOFR”) plus 2.25 %. The Company has interest rate swap and collar agreements to convert the variable interest rate on a portion of its Term Loan Facility to a fixed rate. For more information, see Note 11, “Fair Value Measurements.”
On May 12, 2023, the Company amended the Term Loan Facility to provide refinancing term loans in the aggregate principal amount of $500.0 million, the net proceeds of which were used, together with cash on hand, to refinance the then outstanding borrowings under the Term Loan Facility in the principal amount of $499.5 million and pay related fees. The net $0.5 million increase in aggregate principal amount consisted of a $211.7 million cashless roll by existing lenders, $288.3 million of proceeds received from new lenders and $287.8 million of payments to lenders who did not participate in the refinancing. The Company corrected the presentation of the cash flows associated with the refinancing from a net presentation as shown in the Condensed Consolidated Statement of Cash Flows included in the Quarterly Report on Form 10-Q for the period ended July 31, 2023 to a presentation reporting the gross cash inflows and outflows within financing activities in the Condensed Consolidated Statement of Cash Flows included in this Quarterly Report on Form 10-Q. There was no impact to any of the cash flow subtotals (operating, investing, or financing) as a result of this correction of an immaterial cash flow misstatement. The amendment also amended the Term Loan Facility to, among other things, (i) replace the administrative and collateral agent, (ii) extend the maturity date by seven years from the date of the amendment to May 12, 2030 and (iii) modify certain thresholds, baskets and amounts referenced therein. The Company recorded a write-off of debt discount and deferred financing fees of $1.4 million, which is included in write-off of debt discount and deferred financing fees in the Consolidated Statement of Operations and Comprehensive Income for the three months ended July 31, 2023.
Senior Notes
The Company has senior unsecured notes due May 2029 (the “Senior Notes”) in the aggregate principal amount of $350.0 million. The Senior Notes bear interest at 4.625 % per annum and mature on May 1, 2029. Interest is payable semi-annually in arrears on May 1 and November 1.
14
GMS Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)
Asset Based Lending Facility
The Company has an ABL Facility that provides for aggregate revolving commitments of $950.0 million as of July 31, 2024. Extensions of credit under the ABL Facility are limited by a borrowing base calculated periodically based on specified percentages of the value of eligible inventory and accounts receivable, subject to certain reserves and other adjustments.
At the Company’s option, the interest rates applicable to the loans under the ABL Facility are based on SOFR or base rate plus, in each case, an applicable margin. The margins applicable for each elected interest rate are subject to a pricing grid, as defined in the ABL Facility agreement, based on average daily availability for the most recent fiscal quarter. The ABL Facility also contains an unused commitment fee. As of July 31, 2024, the weighted average interest rate on borrowings was 6.78 %.
As of July 31, 2024, the Company had available borrowing capacity of approximately $565.3 million under the ABL Facility. The ABL Facility matures on December 22, 2027. The ABL Facility contains a cross default provision with the Term Loan Facility.
On May 23, 2024, the Company amended its ABL Facility to replace the Canadian Dollar Offered Rate (CDOR) with the Canadian Overnight Repo Rate Average (CORRA) as the benchmark rate for borrowings under the Canadian revolving credit subfacility.
Debt Covenants
The Term Loan Facility and the indenture governing the Senior Notes contain a number of covenants that limit our ability and the ability of our restricted subsidiaries, as described in the respective credit agreement and the indenture, to incur more indebtedness; pay dividends, redeem or repurchase stock or make other distributions; make investments; create restrictions on the ability of our restricted subsidiaries to pay dividends to us or make other intercompany transfers; create liens securing indebtedness; transfer or sell assets; merge or consolidate; enter into certain transactions with our affiliates; and prepay or amend the terms of certain indebtedness. Such covenants are subject to several important exceptions and qualifications set forth in the Term Loan Facility and the indenture governing the Senior Notes. As of July 31, 2024, the Company was in compliance with all covenants contained in the Term Loan Facility and the indenture governing the Senior Notes.
The ABL Facility contains certain covenants, including financial and other reporting requirements. The Company was in compliance with all such covenants as of July 31, 2024.
Debt Maturities
As of July 31, 2024, the maturities of long-term debt were as follows:
| Term Loan Facility | Senior Notes | ABL Facility | Finance Leases | Installment Notes | Total | ||||||||||||||||||||||||||||||
| Year Ending April 30, | (in thousands) | ||||||||||||||||||||||||||||||||||
| 2025 (remaining nine months) | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
| 2026 | |||||||||||||||||||||||||||||||||||
| 2027 | |||||||||||||||||||||||||||||||||||
| 2028 | |||||||||||||||||||||||||||||||||||
| 2029 | |||||||||||||||||||||||||||||||||||
| Thereafter | |||||||||||||||||||||||||||||||||||
| $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||
15
GMS Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)
6. Leases
The components of lease expense were as follows:
| Three Months Ended July 31, | |||||||||||
| 2024 | 2023 | ||||||||||
| (in thousands) | |||||||||||
| Finance lease cost: | |||||||||||
| Amortization of right-of-use assets | $ | $ | |||||||||
| Interest on lease liabilities | |||||||||||
| Operating lease cost | |||||||||||
| Variable lease cost | |||||||||||
| Total lease cost | $ | $ | |||||||||
Supplemental cash flow information related to leases was as follows:
| Three Months Ended July 31, | |||||||||||
| 2024 | 2023 | ||||||||||
| (in thousands) | |||||||||||
| Cash paid for amounts included in the measurement of lease liabilities | |||||||||||
| Operating cash flows from operating leases | $ | $ | |||||||||
| Operating cash flows from finance leases | |||||||||||
| Financing cash flows from finance leases | |||||||||||
| Right-of-use assets obtained in exchange for lease obligations | |||||||||||
| Operating leases | |||||||||||
| Finance leases | |||||||||||
16
GMS Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)
Other information related to leases was as follows:
| July 31, 2024 | April 30, 2024 | ||||||||||
| (in thousands) | |||||||||||
| Finance leases included in property and equipment | |||||||||||
| Property and equipment | $ | $ | |||||||||
| Accumulated depreciation | ( | ( | |||||||||
| $ | $ | ||||||||||
| Weighted-average remaining lease term (years) | |||||||||||
| Operating leases | |||||||||||
| Finance leases | |||||||||||
| Weighted-average discount rate | |||||||||||
| Operating leases | % | % | |||||||||
| Finance leases | % | % | |||||||||
Future minimum lease payments under non-cancellable leases as of July 31, 2024 were as follows:
| Finance | Operating | ||||||||||
| Year Ending April 30, | (in thousands) | ||||||||||
| 2025 (remaining nine months) | $ | $ | |||||||||
| 2026 | |||||||||||
| 2027 | |||||||||||
| 2028 | |||||||||||
| 2029 | |||||||||||
| Thereafter | |||||||||||
| Total lease payments | |||||||||||
| Less imputed interest | |||||||||||
| Total | $ | $ | |||||||||
7. Income Taxes
General. The Company’s effective income tax rate on continuing operations was 26.8 % and 23.5 % for the three months ended July 31, 2024 and 2023, respectively. The difference in the effective income tax rate over the U.S. federal statutory rate of 21.0% for the three months ended July 31, 2024 and 2023 was primarily due to the impact of foreign taxes, state taxes and equity compensation.
Valuation allowance. The Company had a valuation allowance of $12.7 million and $12.5 million against its deferred tax assets as of July 31, 2024 and April 30, 2024, 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
17
GMS Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)
8. Stockholders’ Equity
Share Repurchases
On October 18, 2023, the Company’s Board of Directors approved an expanded share repurchase program under which the Company is authorized to repurchase up to $250.0 million of its outstanding common stock. The Company may conduct repurchases under the share repurchase program through open market transactions, under trading plans in accordance with SEC Rule 10b5-1 and/or in privately negotiated transactions, in each case in compliance with Rule 10b-18 under the Securities Exchange Act of 1934, as amended. The timing and amount of any purchases of the Company’s common stock are subject to a variety of factors, including, but not limited to, the Company’s liquidity, credit availability, general business and market conditions, debt covenants and the availability of alternative investment opportunities. The share repurchase program does not obligate the Company to acquire any amount of common stock, and it may be suspended or terminated at any time at the Company’s discretion. As of July 31, 2024, the Company had $154.3 million of remaining repurchase authorization under its stock repurchase program.
Share repurchases in excess of issuances are subject to a 1% excise tax. The Company includes the applicable excise tax as part of the cost basis of the shares acquired and records the taxes as a corresponding liability in accrued expenses and other liabilities in the Consolidated Balance Sheet.
Shares repurchased pursuant to the Company’s share repurchase program are retired. The Company’s accounting policy related to its share repurchases is to reduce its common stock based on the par value of the shares and charge any excess of cost over par value to additional paid-in capital. The following table presents share repurchase activity for the three months ended July 31, 2024:
| Three Months Ended July 31, | |||||||||||
| 2024 | 2023 | ||||||||||
| (in thousands) | |||||||||||
| Amount repurchased pursuant to repurchase program | $ | $ | |||||||||
| Excise tax on repurchases | |||||||||||
| Repurchases of common stock | $ | $ | |||||||||
Number of shares repurchased | |||||||||||
Accumulated Other Comprehensive Loss
The following table sets forth the changes to accumulated other comprehensive loss, net of tax, by component for the three months ended July 31, 2024:
| Foreign Currency Translation | Derivative Financial Instruments | Accumulated Other Comprehensive Loss | |||||||||||||||
| (in thousands) | |||||||||||||||||
| Balance as of April 30, 2024 | $ | ( | $ | $ | ( | ||||||||||||
| Other comprehensive loss before reclassification | ( | ( | ( | ||||||||||||||
| Losses on intra-entity transactions that are of a long-term investment nature | ( | ( | |||||||||||||||
| Reclassification to earnings from accumulated other comprehensive loss | ( | ( | |||||||||||||||
| Balance as of July 31, 2024 | $ | ( | $ | $ | ( | ||||||||||||
Other comprehensive income before reclassification on derivative instruments for the three months ended July 31, 2024 is net of $1.5 million of tax. Reclassification to earnings from accumulated other comprehensive loss for the three months ended July 31, 2024 is net of tax of $0.3 million. Losses on intra-entity transactions that are of a long-term investment nature for the three months ended July 31, 2024 are net of tax of $0.6 million.
18
GMS Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)
9. Equity-Based Compensation
General
Equity-based compensation expense related to stock options and restricted stock units was $3.1 million and $2.8 million during the three months ended July 31, 2024 and 2023, respectively, and is included in selling, general and administrative expenses in the Condensed Consolidated Statements of Operations and Comprehensive Income.
Stock Option Awards
The following table presents stock option activity for the three months ended July 31, 2024:
| Number of Options | Weighted Average Exercise Price | Weighted Average Remaining Contractual Life (years) | Aggregate Intrinsic Value | ||||||||||||||||||||
| (shares and dollars in thousands) | |||||||||||||||||||||||
| Outstanding as of April 30, 2024 | $ | $ | |||||||||||||||||||||
| Options exercised | ( | ||||||||||||||||||||||
| Options forfeited | ( | ||||||||||||||||||||||
| Outstanding as of July 31, 2024 | $ | $ | |||||||||||||||||||||
| Exercisable as of July 31, 2024 | $ | $ | |||||||||||||||||||||
| Vested and Expected to vest as of July 31, 2024 | $ | $ | |||||||||||||||||||||
The aggregate intrinsic value represents the excess of the Company’s closing stock price on the last trading day of the period over the weighted average exercise price, multiplied by the number of options outstanding, exercisable or expected to vest. Options expected to vest are unvested shares, net of expected forfeitures. The total intrinsic value of options exercised during the three months ended July 31, 2024 and 2023 was $1.5 million and $2.1 million, respectively. As of July 31, 2024, there was $4.5 million of total unrecognized compensation cost related to stock options. That cost is expected to be recognized over a weighted-average period of 1.5 years.
Restricted Stock Units
The following table presents restricted stock unit activity for the three months ended July 31, 2024:
| Number of Restricted Stock Units | Weighted Average Grant Date Fair Value | ||||||||||
| (shares in thousands) | |||||||||||
| Outstanding as of April 30, 2024 | $ | ||||||||||
| Forfeited | ( | ||||||||||
| Outstanding as of July 31, 2024 | $ | ||||||||||
As of July 31, 2024, there was $5.9 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 1.5 years.
Employee Stock Purchase Plan
The Company has an employee stock purchase plan (“ESPP”), the terms of which allow for qualified employees to participate in the purchase of shares of the Company’s common stock at a price equal to 90 % of the lower of the closing price at the beginning or end of the purchase period, which is a six-month period ending on December 31 and June 30 of each year. The
19
GMS Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)
Company recognized $0.6 million and $0.5 million of stock-based compensation expense related to the ESPP during the three months ended July 31, 2024 and 2023, respectively.
The following table presents the number of shares of the Company’s common stock purchased under the ESPP and average price per share:
| Three Months Ended July 31, | |||||||||||
| 2024 | 2023 | ||||||||||
| (shares in thousands) | |||||||||||
Number of shares purchased under the ESPP | |||||||||||
| Average purchase price | $ | $ | |||||||||
10. Stock Appreciation Rights, Deferred Compensation and Redeemable Noncontrolling Interests
The following table presents a summary of changes to the liabilities for stock appreciation rights, deferred compensation and redeemable noncontrolling interests:
| Stock Appreciation Rights | Deferred Compensation | Redeemable Noncontrolling Interests | |||||||||||||||
| (in thousands) | |||||||||||||||||
| Balance as of April 30, 2024 | $ | $ | $ | ||||||||||||||
| Amounts redeemed | ( | ( | ( | ||||||||||||||
| Change in fair value | |||||||||||||||||
| Balance as of July 31, 2024 | $ | $ | $ | ||||||||||||||
| Classified as current as of April 30, 2024 | $ | $ | $ | ||||||||||||||
| Classified as long-term as of April 30, 2024 | |||||||||||||||||
| Classified as current as of July 31, 2024 | $ | $ | $ | ||||||||||||||
| Classified as long-term as of July 31, 2024 | |||||||||||||||||
Total expense related to these instruments was $0.7 million and $1.7 million during the three months ended July 31, 2024 and 2023, respectively, and was included in selling, general and administrative expenses in the Condensed Consolidated Statements of Operations and Comprehensive Income. Current and long-term liabilities for stock appreciation rights, deferred compensation and redeemable noncontrolling interests are included in other accrued expenses and current liabilities and other liabilities, respectively, in the Condensed Consolidated Balance Sheets. See Note 13, “Stock Appreciation Rights, Deferred Compensation and Redeemable Noncontrolling Interests,” in the Company’s Annual Report on Form 10-K for the year ended April 30, 2024 for more information regarding stock appreciation rights, deferred compensation and redeemable noncontrolling interests.
11. Fair Value Measurements
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The following table presents the estimated carrying amount and fair value of the Company’s assets and liabilities measured at fair value on a recurring basis:
| July 31, 2024 | April 30, 2024 | ||||||||||
| (in thousands) | |||||||||||
| Interest rate swaps and collars (Level 2) | $ | $ | |||||||||
The Company has (a) interest rate swap agreements for two years with notional amounts totaling $300.0 million to convert the variable interest rate on a portion of the term loans outstanding to a fixed 1-month SOFR interest rate of 3.899 %
20
GMS Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)
and (b) forward interest rate collars with notional amounts totaling $300.0 million for years 2025 through 2029. The objective of such hedging instruments is to reduce the variability of interest payment cash flows associated with the variable interest rates under the Term Loan Facility and otherwise hedge exposure to future interest rate fluctuations. The Company believes there have been no material changes in the creditworthiness of the counterparties to these interest rate swaps and believes the risk of nonperformance by each party is minimal. The Company designated the interest rate swaps and collars as cash flow hedges.
As of July 31, 2024, $2.3 million of the interest rate swap and collar assets were classified in prepaid expenses and other current assets in the Condensed Consolidated Balance Sheet and $1.9 million were classified in other assets. The Company recognized gains of $1.1 million and $0.6 million during the three months ended July 31, 2024 and 2023, respectively, related to its interest rate swaps. This amount is included in interest expense in the Condensed Consolidated Statements of Operations and Comprehensive Income and within cash flows from operating activities within the Condensed Consolidated Statements of Cash Flows. As of July 31, 2024, the Company expects that approximately $2.3 million of pre-tax earnings will be reclassified from accumulated other comprehensive income (loss) into earnings during the next twelve months.
The fair value of interest rate swap and collar agreements is determined using Level 2 inputs. Generally, the Company obtains the Level 2 inputs from its counterparties. Substantially all the inputs throughout the full term of the instruments can be derived from observable data or are supported by observable levels at which transactions are executed in the marketplace. The fair value of the Company’s interest rate swap and collar agreements was determined using widely accepted valuation techniques, including a discounted cash flow analysis on the expected cash flows of the derivative. This analysis reflected the contractual terms of the derivatives, including the period to maturity, and used observable market-based inputs, including interest rate curves and implied volatilities.
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
Disclosures are required for certain assets and liabilities that are measured at fair value on a nonrecurring basis in periods after initial recognition. Such measurements of fair value relate primarily to assets and liabilities measured at fair value in connection with business combinations and long-lived asset impairments. For more information on business combinations, see Note 2, “Business Combinations.” There were no material long-lived asset impairments during the three months ended July 31, 2024 or 2023.
Fair Value of Debt
The estimated fair value of the Company’s Senior Notes was determined based on Level 2 input using observable market prices in less active markets. The carrying amounts of the Company’s Term Loan Facility and ABL Facility approximate their fair value, as the interest rates are variable and reflective of market rates. The following table presents the carrying amount and fair value of the Company’s Senior Notes:
| July 31, 2024 | April 30, 2024 | ||||||||||||||||||||||
| Carrying Amount | Fair Value | Carrying Amount | Fair Value | ||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||
| Senior Notes | $ | $ | $ | $ | |||||||||||||||||||
12. Commitments and Contingencies
The Company is a defendant in various lawsuits and administrative actions associated with personal injuries, property damage, environmental matters, product liability claims, claims of former employees and other events arising in the normal course of business. As discussed in Note 1 “—Insurance Liabilities”, the Company records liabilities for these claims, and assets for amounts recoverable from the insurer, for claims covered by insurance.
21
GMS Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)
13. Segments
There have been no changes to the Company’s reportable segments during the three months ended July 31, 2024. For more information regarding the Company’s reportable segments, see Note 16, “Segments,” in the Company’s Annual Report on Form 10-K for the year ended April 30, 2024.
Segment Results
The following tables present segment results:
| Three Months Ended July 31, 2024 | |||||||||||||||||||||||
| Net Sales | Gross Profit | Depreciation and Amortization | Adjusted EBITDA | ||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||
| Geographic divisions | $ | $ | $ | $ | |||||||||||||||||||
| Other | |||||||||||||||||||||||
| Corporate | |||||||||||||||||||||||
| $ | $ | $ | $ | ||||||||||||||||||||
| Three Months Ended July 31, 2023 | |||||||||||||||||||||||
| Net Sales | Gross Profit | Depreciation and Amortization | Adjusted EBITDA | ||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||
| Geographic divisions | $ | $ | $ | $ | |||||||||||||||||||
| Other | |||||||||||||||||||||||
| Corporate | |||||||||||||||||||||||
| $ | $ | $ | $ | ||||||||||||||||||||
The following table presents a reconciliation of Adjusted EBITDA to net income:
| Three Months Ended July 31, | |||||||||||
| 2024 | 2023 | ||||||||||
| (in thousands) | |||||||||||
| Net income | $ | $ | |||||||||
| Interest expense | |||||||||||
| Write-off of debt discount and deferred financing fees | |||||||||||
| Interest income | ( | ( | |||||||||
| Provision for income taxes | |||||||||||
| Depreciation expense | |||||||||||
| Amortization expense | |||||||||||
| Stock appreciation rights(a) | |||||||||||
| Redeemable noncontrolling interests and deferred compensation(b) | |||||||||||
| Equity-based compensation(c) | |||||||||||
| Severance and other permitted costs(d) | |||||||||||
| Transaction costs (acquisitions and other)(e) | |||||||||||
| Loss (gain) on disposal of assets(f) | ( | ||||||||||
| Effects of fair value adjustments to inventory(g) | |||||||||||
| Debt transaction costs(h) | |||||||||||
| Adjusted EBITDA(i) | $ | $ | |||||||||
__________________________________________
22
GMS Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)
(a)Represents changes in the fair value of stock appreciation rights.
(b)Represents changes in the fair values of noncontrolling interests and deferred compensation agreements.
(c)Represents non-cash equity-based compensation expense related to the issuance of share-based awards.
(d)Represents severance expenses and certain other cost adjustments as permitted under the ABL Facility and the Term Loan Facility.
(e)Represents costs related to acquisitions paid to third parties.
(f)Includes gains and losses from the sale and disposal of assets.
(g)Represents the non-cash cost of sales impact of acquisition accounting adjustments to increase inventory to its estimated fair value.
(h)Represents costs paid to third-party advisors related to debt refinancing activities.
(i)For a detailed discussion of the Company’s use of non-GAAP financial measures, see “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operation – Non-GAAP Financial Measures” in this Quarterly Report on Form 10-Q.
Revenues by Product
The following table presents the Company’s net sales to external customers by main product lines:
| Three Months Ended July 31, | |||||||||||
| 2024 | 2023 | ||||||||||
| (in thousands) | |||||||||||
| Wallboard | $ | $ | |||||||||
| Complementary products | |||||||||||
| Steel framing | |||||||||||
| Ceilings | |||||||||||
| Total net sales | $ | $ | |||||||||
23
GMS Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)
The following table presents additional detail on the Company’s net sales of complementary products:
| Three Months Ended July 31, | |||||||||||
| 2024 | 2023 | ||||||||||
| (in thousands) | |||||||||||
| Tools and fasteners | $ | $ | |||||||||
| Insulation | |||||||||||
| Joint treatment | |||||||||||
| Lumber | |||||||||||
| EIFS/stucco | |||||||||||
| Other | |||||||||||
| Complementary products | $ | $ | |||||||||
Geographic Information
The following table presents the Company’s net sales by major geographic area:
| Three Months Ended July 31, | |||||||||||
| 2024 | 2023 | ||||||||||
| (in thousands) | |||||||||||
| United States | $ | $ | |||||||||
| Canada | |||||||||||
| Total net sales | $ | $ | |||||||||
The following table presents the Company’s property and equipment, net, by major geographic area:
| July 31, 2024 | April 30, 2024 | ||||||||||
| (in thousands) | |||||||||||
| United States | $ | $ | |||||||||
| Canada | |||||||||||
| Total property and equipment, net | $ | $ | |||||||||
24
GMS Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)
14. Earnings Per Common Share
The following table sets forth the computation of basic and diluted earnings per share of common stock:
| Three Months Ended July 31, | |||||||||||
| 2024 | 2023 | ||||||||||
| (in thousands, except per share data) | |||||||||||
| Net income | $ | $ | |||||||||
| Basic earnings per common share: | |||||||||||
| Basic weighted average common shares outstanding | |||||||||||
| Basic earnings per common share | $ | $ | |||||||||
| Diluted earnings per common share: | |||||||||||
| Basic weighted average common shares outstanding | |||||||||||
| Add: Common Stock Equivalents | |||||||||||
| Diluted weighted average common shares outstanding | |||||||||||
| Diluted earnings per common share | $ | $ | |||||||||
During the three months ended July 31, 2024 and 2023, the number of Common Stock Equivalents excluded from the calculation of diluted earnings per share because their effect would have been anti-dilutive was not
Note 15. Subsequent Event
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following information should be read in conjunction with the unaudited condensed consolidated financial statements and related notes included in this Quarterly Report on Form 10-Q. The following discussion may contain forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to these differences include those factors discussed below and elsewhere in this Quarterly Report on Form 10-Q, particularly in “Cautionary Note Regarding Forward-Looking Statements,” and discussed in the section entitled “Risk Factors” included in our Annual Report on Form 10-K for the year ended April 30, 2024.
Overview
Founded in 1971, GMS Inc. (“we,” “our,” “us,” or the “Company”), through its operating subsidiaries, operates a network of more than 300 distribution centers with extensive product offerings of wallboard, ceilings, steel framing and complementary construction products. We also operate approximately 100 tool sales, rental and service centers. Through these operations, we provide a comprehensive selection of building products and solutions for our residential and commercial contractor customer base across the United States and Canada. Our operating model combines the benefits of a national platform and strategy with a local go-to-market focus, enabling us to generate significant economies of scale while maintaining high levels of customer service.
Market Conditions and Outlook
We believe the Company continues to be well-positioned to meet demand in our end markets and respond to fluctuations therein due to our broad mix of customers, including commercial, single-family and multi-family builders and contractors, our diverse product offerings and our expansive geographic scope.
Commercial
Demand for commercial projects in most of the sectors GMS serves was solid through the end of fiscal 2024, as driven by stimulus and technology related spending and post-COVID population shifts. However, after eight consecutive quarters of U.S. commercial wallboard volume growth, demand for wallboard in this end market was essentially flat for the first quarter of fiscal 2025 as compared with the prior year period, reflective of an uncertain economic climate and a challenging financing environment for commercial projects. While a number of projects have been delayed or cancelled for now, construction to support certain commercial applications, including medical and governmental projects, particularly those associated with reshoring activities and those driven by governmental programs, such as development associated with the CHIPS Act of 2022, continue. Looking forward, financing availability and cost, coupled with labor constraints and other inflationary pressures, appear to be headwinds until interest rates improve.
As with residential contractors, both we and our commercial contractor customers face inflationary pressures for labor, certain building products and other miscellaneous expenses.
Residential – Single-Family
Single-family starts began to pull back in the summer of 2022 amid rising interest rates coupled with broader macroeconomic and other affordability concerns. As a result, a slowdown in demand for single-family construction products followed, and we began to see its impacts in our results during the latter half of fiscal 2023 for most of our geographic regions, which lasted through much of fiscal 2024. After mortgage rates peaked in October 2023, they moderated slightly and sentiment from many of our homebuilder customers improved as the market adjusted to the current rates, particularly with the support of incentives from larger homebuilders. In the fourth quarter of fiscal 2024, year-over-year wallboard volume growth for single-family turned positive for the first time since the fall of 2022 and was again positive in the first quarter of fiscal 2025, evidencing the early recovery of this end market. However, while underlying fundamentals, including a limited supply of both new and existing homes as well as demographics, continue to support strong demand for single-family housing units, elevated mortgage rates and generally the affordability of housing, particularly for younger, lower income buyers, are expected to temper the ability to construct at levels otherwise required.
Residential – Multi-Family
Given the fundamental need for additional residential housing units, coupled with affordability concerns for prospective homebuyers and a lack of existing homes for sale, multi-family construction activity was robust throughout
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calendar 2023 and into the fourth quarter of fiscal 2024. However, given the significant decline in starts last year, this end market has likely peaked for the short term and demand for our products has begun to decline year-over-year as certain geographies have completed the construction of the bulk of their remaining backlog of projects.
More broadly, the solid underlying demand fundamentals of the housing market, including favorable demographics, low levels of supply of new homes, a chronic undersupply of homes in general, and easing regulatory constraints for development are expected to provide support for the residential multi-family markets in the longer term.
Business Strategy
The key elements of our business strategy are as follows:
•Expand Core Products. Our business strategy includes an emphasis on expanding our market share in our core products (wallboard, ceilings and steel framing) both organically and through acquisitions.
•Grow Complementary Products. We are focused on growing our complementary product lines, with a particular emphasis on achieving growth in tools and fasteners, insulation and External Insulation and Finishing Systems (“EIFS”) and stucco, and to diversify and expand our product offerings in order to better serve our customers.
•Expand our Platform. Our growth strategy includes the pursuit of both greenfield openings and strategic acquisitions to further broaden our geographic markets, enhance our service levels and expand our product offerings.
◦Greenfield openings. Our strategy for opening new branches is generally to further penetrate existing markets or enter new markets adjacent to our existing operations. For adjacent markets, we typically have pre-existing customer relationships in those markets but need a new location to fully serve those relationships.
◦Acquisitions. We have a proven history of consummating complementary acquisitions in new and contiguous markets. Due to the large, fragmented nature of our markets and our reputation throughout the industry, we believe we will continue to have access to a robust acquisition pipeline to supplement our organic growth. We use a rigorous targeting process to identify acquisition candidates that we believe will fit our culture and business model and we have built an experienced team of professionals to manage the acquisition and integration processes. As a result of our scale, purchasing power and ability to improve operations through implementing best practices, we believe we can continue to achieve substantial synergies, better serve our customers and drive earnings accretion from our acquisition strategy.
•Drive Improved Productivity and Profitability. Our business strategy entails a focus on reduced complexity, enhanced productivity and improved profitability across the organization, seeking to leverage our scale and employ both technology and other best practices to lower our costs in order to deliver further margin expansion and earnings growth. We also expect to continue to capture profitable market share in our existing footprint by delivering industry-leading customer service.
Highlights
Key highlights in our business during the three months ended July 31, 2024 are described below:
•Generated net sales of $1,448.5 million during the three months ended July 31, 2024, a 2.8% increase from the prior year period, primarily due to contributions from recent acquisitions, resilient pricing in wallboard, ceilings and certain complementary products and single-family volume growth. These factors helped to offset a challenging pricing environment in steel framing and softening market conditions.
•Generated net income of $57.2 million during the three months ended July 31, 2024, a 34.1% decrease compared to the prior year, primarily due to increased selling, general and administrative expenses, primarily driven by incremental expense from recent acquisitions, operating cost inflation and activity-based increases; a decrease in gross margin, primarily due to the mix impacts steel price deflation, price vs cost dynamics in wallboard, and a shift from commercial and multi-family to single-family wallboard deliveries; and an increase in depreciation and amortization, primarily resulting from acquisitions. Net income as a percentage of sales was 4.0% and 6.2% during the three months ended July 31, 2024 and 2023, respectively.
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•Generated Adjusted EBITDA (a non-GAAP measure, see “Non-GAAP Financial Measures” in this Item 2) of $145.9 million during the three months ended July 31, 2024, a 15.8% decrease compared to the prior year. Adjusted EBITDA, as a percentage of net sales, decreased to 10.1% for the three months ended July 31, 2024 compared to 12.2% for the three months ended July 31, 2023, primarily due to deflationary dynamics in steel pricing and increased selling, general and administrative expenses discussed above.
•Completed two acquisitions, as further described below.
Recent Developments
Acquisitions
On May 1, 2024, the Company acquired Howard & Sons Building Materials, Inc. (“Howard & Sons”), a distributor of wallboard, steel framing and complementary products from a single location in Pomona, California.
On July 2, 2024, the Company acquired Yvon Building Supply, Inc., Yvon Insulation Corporation, Yvon Insulation Windsor, Laminated Glass Technologies, Inc., and Right Fit Foam Insulation Ltd. (collectively, “Yvon”). Yvon provides drywall, insulation, steel, ceilings and other complementary products and related services, including installed insulation. Yvon operates through seven locations across Greater Toronto and Ontario, Canada. The Company funded this transaction with cash on hand and borrowings under its asset based revolving credit facility (the “ABL Facility”). The Company also entered into contingent consideration arrangements that are based on purchases of certain customers and are payable in cash over five years.
On August 26, 2024, the Company acquired R.S. Elliott Specialty Supply, a leading regional distributor of stucco, plaster, siding, EIFS and related construction supplies servicing markets across Florida from five locations in Orlando, Wildwood, Tampa, West Palm Beach and Jacksonville.
For more information regarding our acquisitions, see Note 2 of the Notes to Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q.
Cost Reduction Initiative
In August 2024, the Company implemented a strategic cost reduction plan to improve operational efficiency, including a reduction in workforce. The cost reduction plan is expected to result in $25 million of annualized cost savings.
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Results of Operations
The following table summarizes key components of our results of operations for the three months ended July 31, 2024 and 2023:
| Three Months Ended July 31, | |||||||||||
| 2024 | 2023 | ||||||||||
| (dollars in thousands) | |||||||||||
| Statement of operations data: | |||||||||||
| Net sales | $ | 1,448,456 | $ | 1,409,600 | |||||||
| Cost of sales (exclusive of depreciation and amortization shown separately below) | 996,893 | 959,046 | |||||||||
| Gross profit | 451,563 | 450,554 | |||||||||
| Operating expenses: | |||||||||||
| Selling, general and administrative expenses | 315,152 | 286,796 | |||||||||
| Depreciation and amortization | 38,032 | 32,018 | |||||||||
| Total operating expenses | 353,184 | 318,814 | |||||||||
| Operating income | 98,379 | 131,740 | |||||||||
| Other (expense) income: | |||||||||||
| Interest expense | (22,213) | (18,914) | |||||||||
| Write-off of debt discount and deferred financing fees | — | (1,401) | |||||||||
| Other income, net | 2,028 | 2,139 | |||||||||
| Total other expense, net | (20,185) | (18,176) | |||||||||
| Income before taxes | 78,194 | 113,564 | |||||||||
| Provision for income taxes | 20,946 | 26,734 | |||||||||
| Net income | $ | 57,248 | $ | 86,830 | |||||||
| Non-GAAP measures: | |||||||||||
| Adjusted EBITDA(1) | $ | 145,881 | $ | 173,298 | |||||||
| Adjusted EBITDA margin(1)(2) | 10.1 | % | 12.3 | % | |||||||
___________________________________
(1)Adjusted EBITDA and Adjusted EBITDA margin are non-GAAP measures. See “—Non-GAAP Financial Measures—Adjusted EBITDA” for how we define and calculate Adjusted EBITDA and Adjusted EBITDA margin, reconciliations thereof to net income and a description of why we believe these measures are useful.
(2)Adjusted EBITDA margin is Adjusted EBITDA as a percentage of net sales.
Three Months Ended July 31, 2024 and 2023
Net Sales
| Three Months Ended July 31, | Change | ||||||||||||||||||||||
| 2024 | 2023 | Dollar | Percent | ||||||||||||||||||||
| (dollars in thousands) | |||||||||||||||||||||||
| Wallboard | $ | 587,929 | $ | 571,425 | $ | 16,504 | 2.9 | % | |||||||||||||||
| Complementary products | 443,513 | 426,210 | 17,303 | 4.1 | % | ||||||||||||||||||
| Steel framing | 209,858 | 236,760 | (26,902) | (11.4) | % | ||||||||||||||||||
| Ceilings | 207,156 | 175,205 | 31,951 | 18.2 | % | ||||||||||||||||||
| Total net sales | $ | 1,448,456 | $ | 1,409,600 | $ | 38,856 | 2.8 | % | |||||||||||||||
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The following table presents the impact of changes in volume and pricing on net sales of wallboard, steel framing and ceilings products on a per day basis during the three months ended July 31, 2024 compared to the prior year period:
| Volume | Price/Mix | ||||||||||
| Wallboard | 2.9 | % | — | % | |||||||
| Ceilings | 8.9 | % | 9.3 | % | |||||||
| Steel framing | 5.5 | % | (16.8) | % | |||||||
The increase in net sales during the three months ended July 31, 2024 compared to the prior year period was primarily due to contributions from recent acquisitions and resilient pricing in wallboard, ceilings and certain complementary products. These factors helped to partially offset price deflation in steel framing and the negative impact of foreign currency translation on net sales during the three months ended July 31, 2024 compared to the prior year period. The increase in net sales consisted of the following:
•an increase in wallboard sales, which are impacted by both commercial and residential construction activity, primarily due to higher single-family volume;
•an increase in complementary products sales, which include insulation, joint treatment, tools (including automatic taping and finishing tools), lumber and various other specialty building products, primarily due to positive contributions from acquisitions and an increase in pricing in certain product categories;
•an increase in ceilings sales, which are principally impacted by commercial construction activity, primarily due to an increase in price/product mix, higher volume and positive contributions from acquisitions; and
•partially offset by a decrease in steel framing sales, which are principally impacted by commercial construction activity, primarily due to a decrease in price/product mix.
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 July 31, 2024. When calculating organic sales growth, we exclude the net sales of acquired businesses until the first anniversary of the acquisition date. In addition, we exclude the impact of foreign currency translation in our calculation of organic net sales growth.
| Three Months Ended July 31, | Change | ||||||||||||||||||||||
| 2024 | 2023 | Dollar | Percent | ||||||||||||||||||||
| (dollars in thousands) | |||||||||||||||||||||||
| Net sales | $ | 1,448,456 | |||||||||||||||||||||
| Recently acquired net sales (1) | (75,525) | ||||||||||||||||||||||
| Impact of foreign currency (2) | 5,081 | ||||||||||||||||||||||
| Base business net sales (3) | $ | 1,378,012 | $ | 1,409,600 | $ | (31,588) | (2.2) | % | |||||||||||||||
___________________________________
(1)Represents net sales of branches acquired by us until the first anniversary of the acquisition date. For the three months ended July 31, 2024, net sales includes sales from the following acquisitions: AMW Construction Supply, LLC acquired on October 1, 2023; Kamco Supply Corporation and affiliates acquired on March 1, 2024; Howard & Sons acquired on May 1, 2024; and Yvon acquired on July 2, 2024.
(2)Represents the impact of foreign currency translation on net sales.
(3)Represents net sales of existing branches and branches that were opened by us during the period presented.
The decrease in organic net sales was primarily driven by price deflation in steel framing and lower Canadian single-family residential activity, which resulted in a year-over-year decline in complementary product sales, particularly in roofing and lumber. These decreases were partially offset by resilient pricing in wallboard, ceilings and complementary products.
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Gross Profit and Gross Margin
| Three Months Ended July 31, | Change | ||||||||||||||||||||||
| 2024 | 2023 | Dollar | Percent | ||||||||||||||||||||
| (dollars in thousands) | |||||||||||||||||||||||
| Gross profit | $ | 451,563 | $ | 450,554 | $ | 1,009 | 0.2 | % | |||||||||||||||
| Gross margin | 31.2 | % | 32.0 | % | |||||||||||||||||||
The increase in gross profit during the three months ended July 31, 2024 compared to the prior year period was primarily due to contributions from recent acquisitions, partially offset by lower steel pricing. Gross margin on net sales for the three months ended July 31, 2024 decreased compared to the prior year period, primarily due to the mix impacts steel price deflation, price vs cost dynamics in wallboard, and a shift from commercial and multi-family to single-family wallboard deliveries.
Selling, General and Administrative Expenses
| Three Months Ended July 31, | Change | ||||||||||||||||||||||
| 2024 | 2023 | Dollar | Percent | ||||||||||||||||||||
| (dollars in thousands) | |||||||||||||||||||||||
| Selling, general and administrative expenses | $ | 315,152 | $ | 286,796 | $ | 28,356 | 9.9 | % | |||||||||||||||
| % of net sales | 21.8 | % | 20.3 | % | |||||||||||||||||||
Selling, general and administrative expenses consist of warehouse, delivery and general and administrative expenses. Approximately $16.2 million of the increase in selling, general and administrative expenses during the three months ended July 31, 2024 compared to the prior year was due to incremental selling, general and administrative expenses from acquisitions. The remaining increase was due to increases in payroll and payroll-related costs, facilities costs and maintenance costs. The increase in selling, general and administrative expenses as a percentage of our net sales during the three months ended July 31, 2024 compared to the prior year period was primarily due to operating cost inflation and activity-based increases, steel price deflation and costs associated with recent acquisitions and greenfield openings negatively impacting leverage.
Depreciation and Amortization Expense
| Three Months Ended July 31, | Change | ||||||||||||||||||||||
| 2024 | 2023 | Dollar | Percent | ||||||||||||||||||||
| (dollars in thousands) | |||||||||||||||||||||||
| Depreciation | $ | 19,228 | $ | 16,327 | $ | 2,901 | 17.8 | % | |||||||||||||||
| Amortization | 18,804 | 15,691 | 3,113 | 19.8 | % | ||||||||||||||||||
| Depreciation and amortization | $ | 38,032 | $ | 32,018 | $ | 6,014 | 18.8 | % | |||||||||||||||
Depreciation and amortization expense includes depreciation of property and equipment and amortization of definite-lived intangible assets acquired in purchases of businesses. The increase in depreciation expense during the three months ended July 31, 2024 compared to the prior year period was primarily due to incremental expense resulting from property and equipment obtained in acquisitions and capital expenditures over the past year. The increase in amortization expense during the three months ended July 31, 2024 was primarily due to incremental expense resulting from definite-lived intangible assets obtained in acquisitions over the past year, partially offset by the time-based progression of our use of the accelerated method of amortization for acquired customer relationships.
Interest Expense
| Three Months Ended July 31, | Change | ||||||||||||||||||||||
| 2024 | 2023 | Dollar | Percent | ||||||||||||||||||||
| (dollars in thousands) | |||||||||||||||||||||||
| Interest expense | $ | 22,213 | $ | 18,914 | $ | 3,299 | 17.4 | % | |||||||||||||||
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Interest expense consists primarily of interest expense incurred on our debt and finance leases and amortization of deferred financing fees and debt discounts. The increase in interest expense during the three months ended July 31, 2024 compared to the prior year period was primarily due to an increase in outstanding debt and finance leases.
Income Taxes
| Three Months Ended July 31, | Change | ||||||||||||||||||||||
| 2024 | 2023 | Dollar | Percent | ||||||||||||||||||||
| (dollars in thousands) | |||||||||||||||||||||||
| Provision for income taxes | $ | 20,946 | $ | 26,734 | $ | (5,788) | (21.7) | % | |||||||||||||||
| Effective tax rate | 26.8 | % | 23.5 | % | |||||||||||||||||||
The change in the effective income tax rate during the three months ended July 31, 2024 compared to the prior year period was primarily due to foreign taxes and state taxes.
Liquidity and Capital Resources
Summary
We depend on cash flow from operations, cash on hand and funds available under our ABL Facility 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 and in the long term. We also believe we would be able to take measures to preserve liquidity should there be an economic downturn, recession or other disruption to our business in the future.
As of July 31, 2024, we had available borrowing capacity of approximately $565.3 million under our ABL Facility. The ABL Facility is scheduled to mature on December 22, 2027. The ABL Facility contains a cross default provision with the senior secured first lien term loan facility (the “Term Loan Facility”).
On May 23, 2024, we amended our ABL Facility to replace the Canadian Dollar Offered Rate (CDOR) with the Canadian Overnight Repo Rate Average (CORRA) as the benchmark rate for borrowings under the Canadian revolving credit subfacility.
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, 2024.
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.
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Cash Flows
A summary of our operating, investing and financing activities is shown in the following table:
| Three Months Ended July 31, | |||||||||||
| 2024 | 2023 | ||||||||||
| (in thousands) | |||||||||||
| Cash (used in) provided by operating activities | $ | (22,939) | $ | 6,647 | |||||||
| Cash used in investing activities | (126,219) | (51,532) | |||||||||
| Cash provided by (used in) financing activities | 35,290 | (39,103) | |||||||||
| Effect of exchange rates on cash and cash equivalents | 892 | 692 | |||||||||
| Decrease in cash and cash equivalents | $ | (112,976) | $ | (83,296) | |||||||
Operating Activities
The change in cash used in operating activities during the three months ended July 31, 2024 compared to the prior year period was primarily due to a decrease in net income and an increase in cash paid for interest expense, partially offset by lower working capital.
Investing Activities
The increase in cash used in investing activities during the three months ended July 31, 2024 compared to the prior year period was primarily due to a $79.5 million increase in cash used for acquisitions, partially offset by a $4.6 million decrease in capital expenditures.
Capital expenditures during the three months ended July 31, 2024 primarily consisted of the purchase of delivery and warehouse equipment, building and leasehold improvements, and IT-related spending. Capital expenditures vary depending on prevailing business factors, including current and anticipated market conditions.
Financing Activities
The change in cash for financing activities during the three months ended July 31, 2024 compared to the prior year period was primarily due to net borrowings of $90.2 million under our ABL Facility during the three months ended July 31, 2024, compared to net borrowings of $2.9 million during the prior year period. Also contributing to the change was a $15.8 million increase in repurchases of common stock during the three months ended July 31, 2024 compared to the prior year period and a $1.0 million increase in finance lease payments.
Share Repurchase Program
On October 18, 2023, our Board of Directors approved an expanded share repurchase program under which we are authorized to repurchase up to $250.0 million of our outstanding common stock. We may conduct share repurchases under the program through a variety of methods, which may include open market purchases, block trades, accelerated share repurchases, trading plans in accordance with Rule 10b5-1 or Rule 10b-18 under the Exchange Act, or any combination of such methods. The timing and amount of any purchases of our common stock are subject to a variety of factors, including, but not limited to, our liquidity, credit availability, general business and market conditions, stock price, our debt covenants and the availability of alternative investment opportunities. The share repurchase program does not obligate us to acquire any amount of common stock, and it may be suspended or terminated at any time at our discretion.
We repurchased approximately 0.5 million shares of our common stock for $46.2 million pursuant to our share repurchase program during the three months ended July 31, 2024, plus $0.4 million of excise taxes. As of July 31, 2024, we had $154.3 million of remaining purchase authorization.
Debt Covenants
The ABL Facility, the Term Loan Facility and the indenture governing the senior unsecured notes due May 2029 (the “Senior Notes”) contain a number of covenants that limit our ability and the ability of our restricted subsidiaries, as described in the respective credit agreement and the indenture, to incur more indebtedness; pay dividends, redeem or repurchase stock or
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make other distributions; make investments; create restrictions on the ability of our restricted subsidiaries to pay dividends to us or make other intercompany transfers; create liens securing indebtedness; transfer or sell assets; merge or consolidate; enter into certain transactions with our affiliates; and prepay or amend the terms of certain indebtedness. Such covenants are subject to several important exceptions and qualifications set forth in the ABL Facility, the Term Loan Facility and the indenture governing the Senior Notes. We were in compliance with all such covenants as of July 31, 2024.
Contractual Obligations
Other than those made in the ordinary course of business, 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, 2024, 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, 2024.
Newly Issued Accounting Pronouncements
See Note 1 of the Notes to Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q for information regarding recently issued accounting pronouncements.
Critical Accounting Estimates
During the three months ended July 31, 2024, there were no material changes to our critical accounting estimates or our significant accounting policies as disclosed in our Annual Report on Form 10-K for the fiscal year ended April 30, 2024.
Non-GAAP Financial Measures
Adjusted EBITDA
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 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 and allocation, the tax jurisdictions in which companies operate and capital investments and acquisitions.
In addition, we utilize Adjusted EBITDA in certain calculations under our debt agreements. Our debt agreements 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 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.
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The following is a reconciliation of our net income to Adjusted EBITDA and Adjusted EBITDA margin:
| Three Months Ended July 31, | |||||||||||
| 2024 | 2023 | ||||||||||
| (in thousands) | |||||||||||
| Net income | $ | 57,248 | $ | 86,830 | |||||||
| Interest expense | 22,213 | 18,914 | |||||||||
| Write-off of debt discount and deferred financing fees | — | 1,401 | |||||||||
| Interest income | (370) | (474) | |||||||||
| Provision for income taxes | 20,946 | 26,734 | |||||||||
| Depreciation expense | 19,228 | 16,327 | |||||||||
| Amortization expense | 18,804 | 15,691 | |||||||||
| Stock appreciation rights(a) | 243 | 1,218 | |||||||||
| Redeemable noncontrolling interests and deferred compensation(b) | 422 | 480 | |||||||||
| Equity-based compensation(c) | 3,678 | 3,304 | |||||||||
| Severance and other permitted costs(d) | 956 | 406 | |||||||||
| Transaction costs (acquisitions and other)(e) | 1,280 | 1,385 | |||||||||
| Loss (gain) on disposal of assets(f) | 858 | (131) | |||||||||
| Effects of fair value adjustments to inventory(g) | 375 | 302 | |||||||||
| Debt transaction fees(h) | — | 911 | |||||||||
| Adjusted EBITDA | $ | 145,881 | $ | 173,298 | |||||||
| Net sales | $ | 1,448,456 | $ | 1,409,600 | |||||||
| Adjusted EBITDA Margin | 10.1 | % | 12.3 | % | |||||||
___________________________________
(a)Represents changes in the fair value of stock appreciation rights.
(b)Represents changes in the fair values of noncontrolling interests and deferred compensation agreements.
(c)Represents non-cash equity-based compensation expense related to the issuance of share-based awards.
(d)Represents severance expenses and certain other cost adjustments as permitted under the ABL Facility and the Term Loan Facility.
(e)Represents costs related to acquisitions paid to third parties.
(f)Includes gains and losses from the sale and disposal of assets.
(g)Represents the non-cash cost of sales impact of acquisition accounting adjustments to increase inventory to its estimated fair value.
(h)Represents costs paid to third-party advisors related to debt refinancing activities.
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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, 2024.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
As of July 31, 2024, 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) and 15d-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, as of July 31, 2024, our disclosure controls and procedures were 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 July 31, 2024 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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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 in management's opinion 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 12 of the Notes to Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q.
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 if 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 to have 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. Certain of our subsidiaries have been the subject of claims related to alleged exposure to asbestos-containing products they distributed prior to 1979. The vast majority of these suits that have been filed against us have been dismissed; however, we continue to have a number of active asbestos-related personal injury lawsuits against which we continue to vigorously defend ourselves. We do not expect the ultimate outcome of any of these lawsuits to have a material impact on our financial condition or operating results; however, claims and legal proceedings are subject to inherent uncertainties and rulings unfavorable to the Company could occur which could have a material impact on 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, personal injury, 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, 2024.
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, 2024.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The number of shares repurchased and the average price paid per share for each month in the three months ended July 31, 2024 were as follows:
| Total Number of Shares Purchased | Average Price Paid per Share (1) | Total Number of Shares Purchased as Part of Publicly Announced Program (2) | Approximate Dollar Value of Shares that May Yet be Purchased Under the Program (1) | ||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||
| May 1 through May 31 | 102,936 | $ | 94.28 | 102,936 | $ | 190,762 | |||||||||||||||||
| June 1 through June 30 | 202,512 | 84.36 | 202,512 | 173,677 | |||||||||||||||||||
| July 1 through July 31 | 232,630 | 83.30 | 232,630 | 154,299 | |||||||||||||||||||
| Total | 538,078 | 538,078 | |||||||||||||||||||||
___________________________________
(1)Share repurchases in excess of issuances are subject to a 1% excise tax. All dollar amounts presented above exclude such excise taxes.
(2)On October 18, 2023, our Board of Directors approved an expanded share repurchase program under which we are authorized to repurchase up to $250.0 million of our outstanding common stock. We may conduct share repurchases under the program through a variety of methods, which may include open market purchases, block trades, accelerated share repurchases, trading plans in accordance with Rule 10b5-1 or Rule 10b-18 under the Exchange Act, or any combination of such methods. The timing and amount of any purchases of our common stock are subject to a variety of factors, including, but not limited to, our liquidity, credit availability, general business and market conditions, our debt
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covenants and the availability of alternative investment opportunities. The share repurchase program does not obligate us to acquire any amount of common stock, and it may be suspended or terminated at any time at our discretion.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not Applicable.
Item 5. Other Information
During the three months ended July 31, 2024, none of our directors or officers adopted terminated
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Item 6. Exhibits
(a)Exhibits. The following exhibits are filed as part of this report:
| Exhibit No. | Exhibit Description | |||||||
| 3.1 | ||||||||
| 3.2 | ||||||||
| 10.1 | * | |||||||
| 31.1 | * | |||||||
| 31.2 | * | |||||||
| 32.1 | * | |||||||
| 32.2 | * | |||||||
| 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. | ||||||
| 104 | Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101). | |||||||
* Filed herewith.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Quarterly Report to be signed on its behalf by the undersigned, thereunto duly authorized.
| GMS INC. | ||||||||
| Date: August 29, 2024 | By: | /s/ Scott M. Deakin | ||||||
| Scott M. Deakin | ||||||||
| Chief Financial Officer | ||||||||
| (Principal Financial Officer) | ||||||||
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