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13: R3 Condensed Consolidated Balance Sheets (Unaudited) HTML 49K
(Parenthetical)
14: R4 Condensed Consolidated Statements of Operations HTML 115K
and Comprehensive Income (Unaudited)
15: R5 Condensed Consolidated Statements of Stockholders' HTML 126K
Equity (Unaudited)
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17: R7 Business, Basis of Presentation and Summary of HTML 46K
Significant Accounting Policies
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27: R17 Fair Value Measurements HTML 41K
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30: R20 Earnings Per Common Share HTML 46K
31: R21 Subsequent Event HTML 27K
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Significant Accounting Policies (Policies)
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Significant Accounting Policies (Tables)
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Significant Accounting Policies - Insurance
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Liabilities Assumed (Details)
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Receivable (Details)
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Intangible Assets (Details)
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Aggregate Amortization Expense (Details)
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(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
iCommon Stock, par value $0.01 per share
iGMS
iNew
York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.iYes ☒ 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).iYes ☒ 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.
iLarge
accelerated filer
☒
Accelerated filer
☐
Non-accelerated filer
☐
Smaller reporting company
i☐
Emerging
growth company
i☐
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 i☐No ☒
There were i39,833,628 shares of the registrant’s
common stock, par value $0.01 per share, outstanding as of February 27, 2024.
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, 2023, 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, fuel 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, or R&R, including any impact from a decline in residential or commercial construction
activity, including from disruptions caused by the inability of commercial borrowers to repay their debt obligations;
•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 in purchases by our significant customers of products our customers purchase;
•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 of 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, including potential changes in our effective tax rate;
•our inability to engage in activities that may be in our best long-term interests because of restrictions in our debt agreements;
•our current level of indebtedness and our potential to incur additional indebtedness, including through consummating 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.
Trade
accounts and notes receivable, net of allowances of $i15,548 and $i13,636, respectively
i794,721
i792,232
Inventories,
net
i582,613
i575,495
Prepaid expenses and other current assets
i35,239
i17,051
Total
current assets
i1,500,914
i1,549,523
Property and equipment, net of accumulated depreciation
of $i295,789 and $i264,650,
respectively
i437,386
i396,419
Operating
lease right-of-use assets
i192,358
i189,351
Goodwill
i723,025
i700,813
Intangible
assets, net
i382,614
i399,660
Deferred
income taxes
i23,103
i19,839
Other
assets
i12,153
i11,403
Total assets
$
i3,271,553
$
i3,267,008
Liabilities
and Stockholders’ Equity
Current liabilities:
Accounts payable
$
i323,263
$
i377,003
Accrued
compensation and employee benefits
i98,447
i119,887
Other
accrued expenses and current liabilities
i106,643
i107,675
Current
portion of long-term debt
i48,094
i54,035
Current
portion of operating lease liabilities
i47,915
i47,681
Total
current liabilities
i624,362
i706,281
Non-current liabilities:
Long-term
debt
i982,667
i1,044,642
Long-term operating lease
liabilities
i146,128
i141,786
Deferred
income taxes, net
i55,261
i51,223
Other
liabilities
i44,191
i48,319
Total liabilities
i1,852,609
i1,992,251
Commitments
and contingencies
i
i
Stockholders' equity:
Common stock, par value $ii0.01/
per share, ii500,000/ shares authorized; ii39,881/
and ii40,971/ shares issued and outstanding as of January 31, 2024 and April 30,
2023, respectively
i398
i410
Preferred stock, par value $ii0.01/
per share, ii50,000/ shares authorized; iiii0///
shares issued and outstanding as of January 31, 2024 and April 30, 2023
i—
i—
Additional
paid-in capital
i345,818
i428,508
Retained
earnings
i1,100,660
i880,968
Accumulated
other comprehensive loss
(i27,932)
(i35,129)
Total
stockholders' equity
i1,418,944
i1,274,757
Total liabilities and stockholders'
equity
$
i3,271,553
$
i3,267,008
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)
Adjustments
to reconcile net income to net cash provided by operating activities:
Depreciation and amortization
i97,759
i96,085
Write-off
and amortization of debt discount and debt issuance costs
i3,374
i1,176
Equity-based
compensation
i16,507
i17,289
Gain on disposal of assets
(i663)
(i614)
Deferred
income taxes
(i6,410)
(i1,951)
Other
items, net
i3,876
i5,891
Changes
in assets and liabilities net of effects of acquisitions:
Trade accounts and notes receivable
i2,691
(i28,148)
Inventories
i7
(i34,717)
Prepaid
expenses and other assets
(i19,184)
(i907)
Accounts
payable
(i56,803)
(i51,491)
Accrued
compensation and employee benefits
(i21,505)
(i16,469)
Other
accrued expenses and liabilities
(i10,315)
(i6,615)
Cash
provided by operating activities
i229,026
i236,927
Cash
flows from investing activities:
Purchases of property and equipment
(i39,728)
(i33,250)
Proceeds
from sale of assets
i1,948
i1,661
Acquisition
of businesses, net of cash acquired
(i55,402)
(i20,415)
Cash
used in investing activities
(i93,182)
(i52,004)
Cash
flows from financing activities:
Repayments on revolving credit facilities
(i525,009)
(i361,247)
Borrowings
from revolving credit facilities
i443,973
i390,113
Payments
of principal on long-term debt
(i1,250)
(i3,832)
Borrowings
from term loan amendment
i288,266
i—
Repayments
from term loan amendment
(i287,769)
i—
Payments
of principal on finance lease obligations
(i30,381)
(i26,167)
Repurchases
of common stock
(i100,292)
(i82,767)
Payment
of acquisition holdback liability
i—
(i13,500)
Payment
for debt issuance costs
(i5,825)
(i3,157)
Proceeds
from exercises of stock options
i5,053
i2,430
Payments
for taxes related to net share settlement of equity awards
(i4,023)
(i4,005)
Proceeds
from issuance of stock pursuant to employee stock purchase plan
i4,586
i3,203
Cash
used in financing activities
(i212,671)
(i98,929)
Effect
of exchange rates on cash and cash equivalents
i423
(i1,247)
(Decrease)
increase in cash and cash equivalents
(i76,404)
i84,747
Cash
and cash equivalents, beginning of period
i164,745
i101,916
Cash
and cash equivalents, end of period
$
i88,341
$
i186,663
Supplemental
cash flow disclosures:
Cash paid for income taxes
$
i93,661
$
i85,642
Cash
paid for interest
i57,300
i49,193
The accompanying
notes are an integral part of these condensed consolidated financial statements.
9
GMS Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
1. iBusiness,
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 i300 distribution centers with extensive product offerings of wallboard, ceilings, steel framing and
complementary construction products. The Company also operates more than i100 tool sales, rental and service centers. Through these operations, the Company provides a comprehensive selection of building products and solutions for its residential and commercial contractor customer base across the United States and Canada. The Company’s unique operating model combines the benefits of a national platform and strategy
with a local go-to-market focus, enabling the Company to generate significant economies of scale while maintaining high levels of customer service.
i
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, 2023.
i
Principles
of Consolidation
The condensed consolidated financial statements present the results of operations, financial position, stockholders’ equity and cash flows of the Company and its subsidiaries. All material intercompany balances and transactions have been eliminated in consolidation. The results of operations of businesses acquired are included from their respective dates of acquisition.
i
Use of Estimates
The preparation
of financial statements in conformity with Generally Accepted Accounting Principles (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
i
Foreign Currency Translation
Assets and liabilities of the
Company’s Canadian subsidiaries are translated at the exchange rate prevailing at the balance sheet date, while income and expenses are translated at average rates for the period. Translation gains and losses are reported as a separate component of stockholders’ equity and other comprehensive income. Gains and losses on foreign currency transactions are recognized in the Condensed Consolidated Statements of Operations and Comprehensive Income within other income, net.
i
Insurance
Liabilities
The Company is self-insured for certain losses related to medical claims. The Company has stop-loss coverage to limit the exposure arising from medical claims. In addition, the Company has deductible-based insurance policies for certain losses related to general liability, automobile and workers’ compensation. The expected ultimate cost for claims incurred as of the balance sheet date is not discounted and is recognized as a liability if probable and estimable. Insurance losses for claims filed and claims incurred but not reported are accrued based upon estimates of the aggregate liability for uninsured claims using historical loss development factors and
actuarial assumptions followed in the insurance industry.
10
GMS Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)
i
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.
General
liability, automobile and workers’ compensation
i23,745
i20,502
Expected
recoveries for insurance liabilities
(i5,477)
(i3,531)
/
i
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.
i
Income
Taxes
The Company considers each interim period an integral part of the annual period and measures tax expense (benefit) using an estimated annual effective income tax rate. Estimates of the annual effective income tax rate at the end of interim periods are, out of necessity, based on evaluation of possible future events and transactions and may be subject to subsequent refinement or revision. The Company forecasts its estimated annual effective income tax rate and then applies that rate to its year-to-date pre-tax ordinary income (loss), subject to certain loss limitation provisions. In addition, certain specific transactions are excluded from the Company’s estimated
annual effective tax rate computation but are discretely recognized within income tax expense (benefit) in their respective interim period. Future changes in annual income (loss) projections, tax rate changes, or discrete tax items could result in significant adjustments to quarterly income tax expense (benefit) in future periods.
The Company evaluates its deferred tax assets quarterly to determine if valuation allowances are required. In this evaluation, the Company considers both positive and negative evidence in determining whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The primary negative evidence considered includes the cumulative operating losses generated in prior periods. The primary
positive evidence considered includes the reversal of deferred tax liabilities related to depreciation and amortization that would occur within the same jurisdiction and during the carryforward period necessary to absorb the federal and state net operating losses and other deferred tax assets.
Deferred tax assets and liabilities are computed by applying the federal, provincial and state income tax rates in effect to the gross amounts of temporary differences and other tax attributes, such as net operating loss carry-forwards. In assessing if the deferred tax assets will be realized, the Company considers whether it is more likely than not that some or all of these deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the period in which these
deductible temporary differences reverse.
i
Earnings Per Share
Basic earnings per share is computed by dividing net income available to common stockholders by the weighted average number of outstanding shares of common stock for the period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock, including stock options and restricted stock units (collectively “Common Stock Equivalents”), were exercised
or converted into common stock. The dilutive effect of outstanding stock options and restricted stock units is reflected in diluted earnings per share by application of the treasury stock method. In
11
GMS Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)
applying the treasury stock method for stock-based compensation arrangements, the assumed proceeds are computed as the sum of the amount the employee must pay upon exercise and the amount of compensation cost attributed to future services and not yet recognized. Diluted earnings per share is computed by increasing the weighted-average number of outstanding shares of common stock computed
in basic earnings per share to include the dilutive effect of Common Stock Equivalents for the period. In periods of net loss, the number of shares used to calculate diluted loss per share is the same as basic net loss per share.
i
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. iBusiness 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.
Pending Acquisition
On December 18, 2023, the Company entered into a definitive agreement to acquire Kamco Supply Corporation and affiliates ("Kamco") for a purchase price of $i321.5 million,
inclusive of additional consideration in connection with the exit of a legacy pension fund. The Company expects to fund this transaction with cash on hand and borrowings under the Company’s revolving credit facility. Kamco is a leading regional supplier of ceilings, wallboard, steel, lumber, and other related construction products. Kamco operates five distribution facilities in the greater New York City area and services the New York metro and tri-state area. The transaction is expected to close during the fourth quarter of fiscal 2024, subject to the satisfaction of customary closing conditions.
Fiscal 2024 Acquisitions
On May 1, 2023,
the Company acquired Jawl Lumber Corporation ("Jawl"), which provides service to the Vancouver Island market in Canada under the Home Lumber and Building Supplies ("Home Lumber") brand name. Home Lumber is a leading supplier of lumber, engineered wood, doors, framing packages and siding as well as other key complementary building materials. Home Lumber operates from a single location in Victoria, Canada. The primary purpose of the transaction was to expand the geographical coverage of the Company and grow the business. The impact of this acquisition is not material to the Company’s Consolidated Financial Statements.
On October
1, 2023, the Company acquired AMW Construction Supply, LLC ("AMW"), a tools and fasteners and other complementary products distributor servicing the Phoenix, Arizona metro area. AMW operates from a single location in Phoenix, Arizona. The primary purpose of the transaction was to expand the Company's complementary product offerings and grow the business. The impact of this acquisition is not material to the Company’s Consolidated Financial Statements.
12
GMS Inc.
Notes to Condensed Consolidated Financial
Statements (Unaudited) (Continued)
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, working capital adjustments and residual goodwill.
i
The
following table summarizes the preliminary acquisition accounting for the Company's fiscal 2024 acquisitions of Jawl and AMW based on currently available information:
Preliminary Acquisition Accounting
Adjustments
Preliminary Acquisition Accounting
(in
thousands)
Cash
$
i3,027
$
—
$
i3,027
Trade
accounts and notes receivable
i4,602
(i176)
i4,426
Inventories
i8,181
—
i8,181
Other
assets
i2,945
—
i2,945
Customer
relationships
i27,554
(i4,353)
i23,201
Tradenames
i6,064
(i664)
i5,400
Goodwill
i17,443
i3,487
i20,930
Accounts
payable and other liabilities
(i3,622)
i24
(i3,598)
Deferred
income taxes
(i6,586)
i1,181
(i5,405)
Fair
value of consideration transferred
$
i59,608
$
(i501)
$
i59,107
/
Goodwill
recognized is attributable to synergies achieved through the streamlining of operations combined with improved margins attainable through increased market presence and is attributable to the Company's geographic divisions reportable segment. Goodwill of $i17.0 million is not expected to be deductible for U.S. federal income tax purposes and goodwill of $i3.9
million is expected to be deductible for U.S. federal income tax purposes. The estimated useful life for the customer relationships is i10 years and the estimated useful life for the tradenames is i15 years.
3.
iAccounts Receivable
i
The Company’s trade accounts and notes receivable consisted of the following:
As
of January 31, 2024, $i615.2 million of goodwill was assigned to the Company's geographic divisions reportable segment and $i107.8 million was assigned to the Company's other segment. During the nine
months ended January 31, 2024, the Company recorded measurement period adjustments related to its Engler, Meier and Justus, Inc. and Blair Building Materials, Inc. acquisitions.
Intangible Assets
ii
The
following tables present the components of the Company’s intangible assets:
Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)
Amortization expense related to definite-lived intangible assets was $i15.5 million and $i16.3
million for the three months ended January 31, 2024 and 2023, respectively, and $i47.2 million and $i50.9 million for the nine months ended January 31, 2024 and 2023,
respectively.
i
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.
Unamortized
discount and deferred financing costs on Term Loan Facility
(i6,106)
(i2,442)
Senior
Notes
i350,000
i350,000
Unamortized
discount and deferred financing costs on Senior Notes
(i3,596)
(i4,113)
ABL
Facility
i29,000
i110,000
Finance
lease obligations
i158,437
i137,303
Installment
notes at fixed rates up to i5.0%, due in monthly and annual installments through 2028
i4,293
i8,529
Unamortized
discount on installment notes
(i17)
(i103)
Carrying value of debt
i1,030,761
i1,098,677
Less
current portion
i48,094
i54,035
Long-term
debt
$
i982,667
$
i1,044,642
/
Term
Loan Facility
The Company has a senior secured first lien term loan facility (the “Term Loan Facility”) with $i498.8 million outstanding as of January 31, 2024. The Company is required to make scheduled quarterly payments of $i1.3
million, or i0.25% of the aggregate principal amount of the Term Loan Facility, beginning January 1, 2024 with the remaining balance due May 12, 2030. As of January 31, 2024, the applicable rate of interest under the Term Loan Facility was i8.33%.
As discussed in Note 15, “Subsequent Event”, the Term Loan Facility was amended on February 2, 2024, to reduce the interest rate applicable to the outstanding borrowings under the Term Loan Facility. Following such amendment, borrowings under the Term Loan Facility bear interest at a floating rate per annum based on the Secured Overnight Financing Rate ("SOFR") plus i2.25%. The Company
15
GMS
Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)
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 $i500.0 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 $i499.5 million and pay related fees. The net $i0.5 million
increase in aggregate principal amount consisted of a $i211.7 million cashless roll by existing lenders, $i288.3 million of proceeds received from new lenders and $i287.8 million
of payments to lenders who did not participate in the refinancing. During the six months ended October 31, 2023, the Company corrected the presentation of the cash flows associated with the refinancing from a net presentation as shown in the cash flow statement for the three-month 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. 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 iseven
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 $i1.4 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 nine months
ended January 31, 2024.
Senior Notes
The Company has senior unsecured notes due May 2029 (the "Senior Notes") in the aggregate principal amount of $i350.0 million. The Senior Notes bear interest at i4.625%
per annum and mature on May 1, 2029. Interest is payable semi-annually in arrears on May 1 and November 1.
Asset Based Lending Facility
The Company has an asset based revolving credit facility (the “ABL Facility”) that provides for aggregate revolving commitments of $i950.0 million as of January 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.
As of January 31, 2024, at the Company’s option, the interest rates applicable to the loans under the ABL Facility were based on SOFR or base rate plus, in each case, an applicable margin. The margins applicable for each elected interest rate are subject to a pricing grid, as defined in the ABL Facility agreement, based on average daily availability for the most recent fiscal quarter. The ABL Facility also contains an unused commitment fee. As of January 31, 2024, the weighted average interest rate on borrowings was i8.75%.
As
of January 31, 2024, the Company had available borrowing capacity of approximately $i813.4 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.
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 January 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 January 31, 2024.
16
GMS
Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)
Debt Maturities
i
As of January 31, 2024, the maturities of long-term debt were as follows:
Future
minimum lease payments under non-cancellable leases as of January 31, 2024 were as follows:
Finance
Operating
Year Ending April 30,
(in thousands)
2024 (remaining three months)
$
i13,149
$
i12,390
2025
i48,416
i57,863
2026
i40,708
i45,063
2027
i33,504
i33,420
2028
i25,196
i23,704
Thereafter
i17,140
i54,334
Total
lease payments
i178,113
i226,774
Less
imputed interest
i19,676
i32,731
Total
$
i158,437
$
i194,043
//
7.
iIncome Taxes
General.The Company’s effective income tax rate on continuing operations was i24.5% and i26.3%
for the nine months ended January 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 nine months ended January 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 $i11.8
million and $i11.7 million against its deferred tax assets as of January 31, 2024 and April 30, 2023, 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.
Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)
8. iStockholders’
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 $i250.0 million of its outstanding common stock. This expanded program replaced the
Company’s previous share repurchase authorization of $i200.0 million. The Company may conduct repurchases under the share repurchase program through open market transactions, under trading plans in accordance with SEC Rule 10b5-1 and/or in privately negotiated transactions, in each case in compliance with Rule 10b-18 under the Securities Exchange Act of 1934, as amended. The timing and amount of any purchases of the
Company's common stock are subject to a variety of factors, including, but not limited to, the Company’s liquidity, credit availability, general business and market conditions, debt covenants and the availability of alternative investment opportunities. The share repurchase program does not obligate the Company to acquire any amount of common stock, and it may be suspended or terminated at any time at the Company’s discretion. As of January 31, 2024, the Company had $i216.5
million of remaining repurchase authorization under its stock repurchase program.
Beginning January 1, 2023, 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.
i
The following table presents share
repurchase activity for the nine months ended January 31, 2024:
The following table sets forth the changes to accumulated other comprehensive loss, net of tax, by component for the nine months ended January 31, 2024:
Other
comprehensive income before reclassification on derivative instruments for the nine months ended January 31, 2024 is net of $i1.5 million of tax. Reclassification to earnings from accumulated other comprehensive loss for the nine months ended January 31, 2024 is net of tax of $i0.7 million.
Gains on intra-entity transactions that are of a long-term investment nature for the nine months ended January 31, 2024 are net of tax of $i1.2 million.
19
GMS
Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)
9. iEquity-Based Compensation
General
Equity-based compensation expense related to stock options and restricted stock units was $i11.0
million and $i9.4 million during the nine months ended January 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
i
The
following table presents stock option activity for the nine months ended January 31, 2024:
Number of Options
Weighted Average Exercise Price
Weighted Average Remaining Contractual Life (years)
The
aggregate intrinsic value represents the excess of the Company’s closing stock price on the last trading day of the period over the weighted average exercise price, multiplied by the number of options outstanding, exercisable or expected to vest. Options expected to vest are unvested shares, net of expected forfeitures. The total intrinsic value of options exercised during the nine months ended January 31, 2024 and 2023 was $i12.4
million and $i6.5 million, respectively. As of January 31, 2024, there was $i6.7
million of total unrecognized compensation cost related to stock options. That cost is expected to be recognized over a weighted-average period of i1.8 years.
i
The
fair value of stock options granted during the nine months ended January 31, 2024 and 2023 was estimated using the Black-Scholes option-pricing model with the following assumptions and resulting weighted average grant date fair value:
The
total fair value of awards vested during the nine months ended January 31, 2024 and 2023 was $i13.0 million and $i8.8
million, respectively. As of January 31, 2024, there was $i9.5 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 i1.5
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 i90%
of the lower of the closing price at the beginning or end of the purchase period, which is a isix-month period ending on December 31 and June 30 of each year. The Company recognized $i1.0 million and $i0.8
million of stock-based compensation expense related to the ESPP during the nine months ended January 31, 2024 and 2023, respectively.
i
The following table presents the number of shares of the Company’s common stock purchased under the ESPP and average price per share:
Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)
10. iStock Appreciation Rights, Deferred Compensation and Redeemable Noncontrolling Interests
i
The
following table presents a summary of changes to the liabilities for stock appreciation rights, deferred compensation and redeemable noncontrolling interests:
Total
expense related to these instruments was $i4.5 million and $i7.1
million during the nine months ended January 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, 2023 for more information regarding stock appreciation rights,
deferred compensation and redeemable noncontrolling interests.
11. iFair Value Measurements
Assets and Liabilities Measured at Fair Value on a Recurring Basis
i
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:
In
connection with the amendment to the Term Loan Facility in May 2023, the Company entered into (a) interest rate swap agreements for itwo years with notional amounts totaling $i300.0 million to convert the variable interest rate on a portion of the term
loans outstanding to a fixed 1-month SOFR interest rate of i3.899% and (b) forward interest rate collars with notional amounts totaling $i300.0 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 January 31, 2024, $i2.2
million of the interest rate swap assets were classified in prepaid expenses and other current assets in the Condensed Consolidated Balance Sheet and $i1.2 million were classified in other assets. The Company recognized gains, net of tax, of $i0.8
million and $i2.1 million during the three and nine months ended January 31, 2024, 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 January 31, 2024, the Company
expects that approximately $i2.2 million of pre-
22
GMS Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)
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 nine months ended January 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. iThe following table presents the carrying amount and fair value of the Company’s Senior Notes:
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.
23
GMS Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)
13. iSegments
There
have been no changes to the Company's reportable segments during the nine months ended January 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, 2023.
Diluted
weighted average common shares outstanding
i40,512
i42,232
i41,026
i42,812
Diluted
earnings per common share
$
i1.28
$
i1.53
$
i5.35
$
i6.01
/
During
the three and nine months ended January 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 iiiinot///
material. Anti-dilutive securities could be dilutive in future periods.
Note 15. iSubsequent Event
On February 2, 2024, the Company amended its Term Loan Facility to reduce the interest rate applicable to the outstanding borrowings under the Term Loan Facility. The applicable
rate for term SOFR loans under the Term Loan Facility was reduced from a floating rate per annum of Term SOFR (as defined in the Term Loan Facility) plus i3.00% to a floating rate per annum of Term SOFR plus i2.25% and the applicable rate for base rate
loans under the Term Loan Facility was reduced from a floating rate per annum of the Base Rate (as defined in the Term Loan Facility) plus i2.00% to a floating rate per annum of the Base Rate plus i1.25%. The other material terms of the Term Loan Facility
remain unchanged.
27
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, 2023.
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 more than 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 unique 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 we serve has been improving, resulting in seven consecutive quarters of U.S. commercial wallboard volume growth and a more recent uptick in demand for ceilings and steel framing. Specifically, construction activity to support medical, education, data center and governmental projects has been solid while larger office projects, both new and for repair and remodeling (“R&R”) remain tempered, particularly in more mature urban markets.
As with residential contractors, both we and our commercial contractor customers face inflationary pressures and availability constraints for fuel, labor, certain building products and other miscellaneous expenses.
Residential – Single-Family
Following a period of strong levels of new single-family home purchases resulting from favorable demographics
and low interest rates, 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. After mortgage rates peaked in October 2023, they have since moderated slightly and sentiment from many of our homebuilder customers has improved. In addition, the sequential improvements in single-family demand that we reported for the second quarter of fiscal 2024 have continued. As such, given our current run rates along with recent permit and starts data, there are encouraging signs for continued recovery in the single-family market.
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 calendar 2023 and into our fiscal fourth quarter. Even as we’ve seen reduced permits and starts activity for multi-family, the backlog of projects, as completions have lagged starts, is expected to drive continued growth in this end market for GMS for the remainder of our fiscal year and into early fiscal 2025.
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 markets in the longer term.
28
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 EIFS and stucco, to better serve our customers, and to diversify and expand our product offerings while driving higher sales and margins.
•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 markets adjacent to our operations. For adjacent markets, typically, we have pre-existing customer relationships in these markets but need a new location to fully capitalize on those relationships.
◦Acquisitions. We have a proven history of consummating complementary acquisitions in new and contiguous markets. Due to the large, highly 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 and drive earnings accretion from our acquisition strategy.
•Drive Improved Productivity and Profitability. Our business strategy entails a focus on enhanced productivity and profitability across the organization, seeking to leverage our scale and employ both technology and other best practices to deliver further margin expansion and earnings growth. 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 nine months ended January 31, 2024 are described below:
•Generated net sales of $4,088.9 million during the nine months ended January 31, 2024, a 1.6% increase from the prior year period, primarily due to contributions from recent acquisitions, strong levels of multi-family residential construction activity, continuing commercial construction demand and resilient pricing in wallboard, ceilings and complementary products. In addition, there was one additional selling day during the nine months ended January 31, 2024 compared to the prior
year period. These factors helped to offset declines in single-family construction demand and a challenging pricing environment in steel framing.
•Generated net income of $219.7 million during the nine months ended January 31, 2024, a 14.6% decrease compared to the prior year, primarily due to increased selling, general and administrative expenses driven by a shift in mix from single-family to commercial and multi-family end markets, which require a higher operational cost to serve, and incremental selling, general and administrative expenses from acquisitions and newly-opened greenfield locations, an increase in interest expense due to higher interest rates, and a write-off of debt discount and deferred financing fees in connection with our term loan refinancing. Net income as a percentage of sales was 5.4%
and 6.4% during the nine months ended January 31, 2024 and 2023, respectively.
•Generated Adjusted EBITDA (a non-GAAP measure, see “Non-GAAP Financial Measures” in this Item 2) of $468.9 million during the nine months ended January 31, 2024, a 8.3% decrease compared to the prior year. Adjusted EBITDA, as a percentage of net sales, decreased to 11.5% for the nine months ended January 31, 2024 compared to 12.7% for the nine months ended January 31, 2023, primarily due to deflationary dynamics in steel pricing and increased selling, general and administrative expenses discussed above.
•Completed
two acquisitions, opened five greenfield locations and opened two tool sales, rental and service centers.
29
Recent Developments
Acquisitions
On May 1, 2023, the Company acquired Jawl Lumber Corporation, which provides service to the Vancouver Island market in Canada under the Home Lumber and Building Supplies ("Home Lumber") brand name. Home Lumber is a leading supplier of lumber, engineered wood, doors, framing packages and siding as well as other key complementary building materials. Home Lumber operates from a
single location in Victoria, Canada.
On October 1, 2023, the Company acquired AMW Construction Supply, LLC ("AMW"), a tools and fasteners and other complementary products distributor servicing the Phoenix, Arizona metro area. AMW operates from a single location in Phoenix, Arizona.
On December 18, 2023, the Company entered into a definitive agreement to acquire Kamco Supply Corporation and affiliates ("Kamco") for a purchase price of $321.5 million, inclusive of additional consideration in connection with the exit of a legacy pension fund. The
Company expects to fund this transaction with cash on hand and borrowings under the Company’s revolving credit facility. Kamco is a leading regional supplier of ceilings, wallboard, steel, lumber, and other related construction products. Kamco operates five distribution facilities in the greater New York City area and services the New York metro and tri-state area. The transaction is expected to close during the fourth quarter of fiscal 2024, subject to the satisfaction of customary closing conditions.
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.
Greenfields and Ames Stores
During the nine months ended
January 31, 2024, we opened greenfield locations in Bonita Springs, Florida; Elizabeth, New Jersey; Indianapolis, Indiana; Jessup, Maryland; and North Orlando, Florida. We also opened two new sales, rental and service centers in San Antonio, Texas and Palm Desert, California.
30
Results of Operations
The following table summarizes key components of our results of operations for the three and nine months ended January 31, 2024 and 2023:
Cost of sales (exclusive of depreciation and amortization shown separately below)
843,628
832,370
2,764,975
2,723,681
Gross
profit
414,720
402,248
1,323,903
1,301,469
Operating expenses:
Selling, general and administrative expenses
295,691
267,380
883,381
814,063
Depreciation
and amortization
32,804
31,419
97,759
96,085
Total operating expenses
328,495
298,799
981,140
910,148
Operating income
86,225
103,449
342,763
391,321
Other
(expense) income:
Interest expense
(18,784)
(16,943)
(56,440)
(47,659)
Write-off of debt discount and deferred financing fees
—
—
(1,401)
—
Other
income, net
1,932
1,966
6,177
5,458
Total other expense, net
(16,852)
(14,977)
(51,664)
(42,201)
Income before taxes
69,373
88,472
291,099
349,120
Provision
for income taxes
17,468
23,697
71,407
91,722
Net income
$
51,905
$
64,775
$
219,692
$
257,398
Non-GAAP
measures:
Adjusted EBITDA(1)
$
128,020
$
140,828
$
468,876
$
511,355
Adjusted
EBITDA margin(1)(2)
10.2
%
11.4
%
11.5
%
12.7
%
___________________________________
(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.
The increase in net sales during the three months ended January 31, 2024 compared to the prior year period was primarily due to contributions from recent acquisitions and continued demand in commercial and multi-family construction
31
activity.
These increases were partially offset by price deflation in steel framing, declines in single-family construction demand and weather-related project delays in January. 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 multi-family volume, partially offset by lower single-family volume and a slight decrease in price/product mix;
•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, along with an increase in pricing in certain product categories and the execution of growth initiatives to increase product
sales;
•an increase in ceilings sales, which are principally impacted by commercial construction activity, primarily due to higher volume and positive contributions from acquisitions, partially offset by a slight decrease in price/product mix; 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, partially offset by higher volume.
The following table breaks out our net sales into organic, or base business, net sales and recently acquired net sales for the three months ended January 31, 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 January 31,
Change
2024
2023
Dollar
Percent
(dollars
in thousands)
Net sales
$
1,258,348
Recently acquired net sales (1)
(27,213)
Impact of foreign currency (2)
628
Base
business net sales (3)
$
1,231,763
$
1,234,618
$
(2,855)
(0.2)
%
___________________________________
(1)Represents net sales of branches acquired by us until the first anniversary of the acquisition date. For the three months ended January 31, 2024, net sales includes sales from the following acquisitions: Tanner Bolt and Nut,
Inc. acquired on December 30, 2022, Engler, Meir and Justus, Inc., acquired on April 3, 2023, Blair Building Materials, Inc. acquired on April 3, 2023, Home Lumber acquired on May 1, 2023 and AMW acquired on October 1, 2023.
(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, declines in single-family construction demand and weather-related
project delays in January, partially offset by continued demand in commercial and multi-family construction activity.
Gross Profit and Gross Margin
Three Months Ended January 31,
Change
2024
2023
Dollar
Percent
(dollars in thousands)
Gross
profit
$
414,720
$
402,248
$
12,472
3.1
%
Gross margin
33.0
%
32.6
%
The
increase in gross profit during the three months ended January 31, 2024 compared to the prior year period was primarily due to incremental gross profit from acquisitions, higher commercial and multi-family sales volumes and the associated attainment of calendar year-end volume incentive targets, partially offset by lower steel pricing. Gross margin on net
32
sales for the three months ended January 31, 2024 increased compared to the prior year period, primarily due to the attainment of calendar year-end volume incentive targets.
Selling, General and Administrative Expenses
Three
Months Ended January 31,
Change
2024
2023
Dollar
Percent
(dollars in thousands)
Selling, general and administrative expenses
$
295,691
$
267,380
$
28,311
10.6
%
%
of net sales
23.5
%
21.7
%
Selling, general and administrative expenses consist of warehouse, delivery and general and administrative expenses. Selling, general and administrative expenses increased during the three months ended January 31, 2024 compared to the prior year period, primarily due to increases in payroll and payroll-related costs, maintenance costs and facilities costs. Also contributing were incremental selling, general and administrative expenses from acquisitions and newly-opened greenfield locations. The increase in selling,
general and administrative expenses as a percentage of our net sales during the three months ended January 31, 2024 compared to the prior year period was primarily due to deflationary dynamics in steel pricing and a shift in mix from single-family to commercial and multi-family end markets, which require a higher operational cost to serve.
Depreciation and Amortization Expense
Three
Months Ended January 31,
Change
2024
2023
Dollar
Percent
(dollars in thousands)
Depreciation
$
17,276
$
15,162
$
2,114
13.9
%
Amortization
15,528
16,257
(729)
(4.5)
%
Depreciation
and amortization
$
32,804
$
31,419
$
1,385
4.4
%
Depreciation and amortization expense includes depreciation of property and equipment and amortization of definite-lived intangible assets acquired in purchases of businesses. The increase in depreciation expense during the three months ended January 31, 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 decrease in amortization expense during the three months ended January 31, 2024 was primarily due to the time-based progression of our use of the accelerated method of amortization for acquired customer relationships, partially offset by incremental expense resulting from definite-lived intangible assets obtained in acquisitions over the past year.
Interest Expense
Three
Months Ended January 31,
Change
2024
2023
Dollar
Percent
(dollars in thousands)
Interest expense
$
18,784
$
16,943
$
1,841
10.9
%
Interest
expense consists primarily of interest expense incurred on our debt and finance leases and amortization of deferred financing fees and debt discounts. The increase in interest expense during the three months ended January 31, 2024 compared to the prior year period was primarily due to increases in interest rates.
33
Income Taxes
Three
Months Ended January 31,
Change
2024
2023
Dollar
Percent
(dollars in thousands)
Provision for income taxes
$
17,468
$
23,697
$
(6,229)
(26.3)
%
Effective
tax rate
25.2
%
26.8
%
The change in the effective income tax rate during the three months ended January 31, 2024 compared to the prior year period was primarily due to foreign taxes and equity compensation.
The increase in net sales during the nine months ended January 31, 2024 compared to the prior year period was primarily due to contributions from recent acquisitions, strong levels of multi-family residential construction activity, continuing commercial construction demand and resilient pricing
in wallboard, ceilings and complementary products. In addition, there was one additional selling day during the nine months ended January 31, 2024 compared to the prior year period. These factors helped to offset declines in single-family construction demand, price deflation in steel framing and the negative impact of foreign currency translation on net sales during the nine months ended January 31, 2024. The increase consisted of the following:
•an increase in wallboard sales, which are impacted by both commercial and residential construction activity, primarily due to an increase in price/product mix and higher multi-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, an increase in pricing in certain product categories and the execution of growth initiatives to increase product sales;
•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, partially offset by higher volume.
34
The
following table breaks out our net sales into organic, or base business, net sales and recently acquired net sales for the nine months ended January 31, 2024.
Nine Months Ended January 31,
Change
2024
2023
Dollar
Percent
(dollars
in thousands)
Net sales
$
4,088,878
Recently acquired net sales (1)
(109,639)
Impact of foreign currency (2)
11,706
Base
business net sales (3)
$
3,990,945
$
4,025,150
$
(34,205)
(0.8)
%
___________________________________
(1)Represents net sales of branches acquired by us until the first anniversary of the acquisition date. For the nine months ended January 31, 2024, net sales includes sales from the following acquisitions: Construction Supply
and Southwest Florida acquired on June 1, 2022, Tanner acquired on December 30, 2022, Engler, Meir and Justus, Inc., acquired on April 3, 2023, Blair Building Materials, Inc. acquired on April 3, 2023, Home Lumber acquired on May 1, 2023 and AMW acquired on October 1, 2023.
(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 declines in single-family construction demand, partially offset by strength in multi-family residential construction activity, continuing growth in commercial construction demand and resilient pricing in wallboard, ceilings and complementary products.
Gross Profit and Gross Margin
Nine Months Ended January 31,
Change
2024
2023
Dollar
Percent
(dollars in thousands)
Gross
profit
$
1,323,903
$
1,301,469
$
22,434
1.7
%
Gross margin
32.4
%
32.3
%
The
increase in gross profit during the nine months ended January 31, 2024 compared to the prior year period was primarily due to incremental gross profit from acquisitions, higher commercial and multi-family sales volumes and the associated attainment of calendar year-end volume incentive targets, partially offset by lower steel pricing. Gross margin on net sales for the nine months ended January 31, 2024 increased compared to the prior year period primarily due to an increase in margins for complementary products and wallboard, partially offset by deflationary dynamics in steel pricing.
Selling, General and Administrative Expenses
Nine
Months Ended January 31,
Change
2024
2023
Dollar
Percent
(dollars in thousands)
Selling, general and administrative expenses
$
883,381
$
814,063
$
69,318
8.5
%
%
of net sales
21.6
%
20.2
%
Selling, general and administrative expenses increased during the nine months ended January 31, 2024 compared to the prior year period, primarily due to increases in payroll and payroll-related costs, maintenance costs and facilities costs. Also contributing were incremental selling, general and administrative expenses from acquisitions and newly-opened greenfield locations and an increase in transaction-related costs. The increase in selling, general and administrative expenses as a percentage of our net sales
during the nine months ended January 31, 2024 compared to the prior year period was primarily due
35
to deflationary dynamics in steel pricing and a shift in mix from single-family to commercial and multi-family end markets, which require a higher operational cost to serve.
Depreciation and Amortization Expense
Nine
Months Ended January 31,
Change
2024
2023
Dollar
Percent
(dollars in thousands)
Depreciation
$
50,566
$
45,213
$
5,353
11.8
%
Amortization
47,193
50,872
(3,679)
(7.2)
%
Depreciation
and amortization
$
97,759
$
96,085
$
1,674
1.7
%
The increase in depreciation expense during the nine months ended January 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 decrease in amortization expense during the nine months ended
January 31, 2024 was primarily due to the time-based progression of our use of the accelerated method of amortization for acquired customer relationships, partially offset by incremental expense resulting from definite-lived intangible assets obtained in acquisitions over the past year.
Interest Expense
Nine Months Ended January 31,
Change
2024
2023
Dollar
Percent
(dollars in thousands)
Interest
expense
$
56,440
$
47,659
$
8,781
18.4
%
The increase in interest expense during the nine months ended January 31, 2024 compared to the prior year period was primarily due to increases in interest rates.
Income Taxes
Nine
Months Ended January 31,
Change
2024
2023
Dollar
Percent
(dollars in thousands)
Provision for income taxes
$
71,407
$
91,722
$
(20,315)
(22.1)
%
Effective
tax rate
24.5
%
26.3
%
The change in the effective income tax rate during the nine months ended January 31, 2024 compared to the prior year period was primarily due to the impact of actions taken during the prior year in anticipation of expected changes in Canadian tax regulations, which caused a higher effective rate, as well as equity compensation.
36
Liquidity
and Capital Resources
Summary
We depend on cash flow from operations, cash on hand and funds available under our asset based revolving credit facility (the “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 January 31, 2024, we had available borrowing capacity of approximately $813.4
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 12, 2023, we amended our 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 our existing Term Loan Facility outstanding balance of $499.5 million and pay related fees. We also extended the maturity date by seven years from the date of the amendment to May 12, 2030 and modified certain thresholds, baskets and amounts referenced therein.
In
connection with the Term Loan Facility amendment, we entered into (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% 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.
On February 2, 2024, we amended our Term Loan Facility to reduce the interest rate applicable to the outstanding borrowings under the Term Loan Facility. The applicable rate for term SOFR loans under the
Term Loan Facility was reduced from a floating rate per annum of Term SOFR (as defined in the Term Loan Facility) plus 3.00% to a floating rate per annum of Term SOFR plus 2.25% and the applicable rate for base rate loans under the Term Loan Facility was reduced from a floating rate per annum of the Base Rate (as defined in the Term Loan Facility) plus 2.00% to a floating rate per annum of the Base Rate plus 1.25%. The other material terms of the Term Loan Facility remain unchanged.
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, 2023.
We
regularly evaluate opportunities to optimize our capital structure, including through consideration of the issuance or incurrence of additional debt, to refinance existing debt and to fund ongoing cash needs such as general corporate purposes, growth initiatives, acquisitions and our stock repurchase program.
Cash Flows
A summary of our operating, investing and financing activities is shown in the following table:
Effect of exchange rates on cash and cash equivalents
423
(1,247)
(Decrease)
increase in cash and cash equivalents
$
(76,404)
$
84,747
37
Operating Activities
The decrease in cash provided by operating activities during the nine months ended January 31, 2024 compared to the prior year period was primarily due to an increase in cash used for accounts payable and other accruals, partially offset by larger increases in inventory and accounts receivablein the prior
year period related to ensuring product availability and managing price inflation amid an environment of tight and less reliable supply.
Investing Activities
The increase in cash used in investing activities during the nine months ended January 31, 2024 compared to the prior year period was primarily due to a $35.0 million increase in cash used for acquisitions and a $6.5 million increase in capital expenditures.
Capital expenditures during the nine months ended January 31, 2024 primarily consisted of the purchase of delivery and warehouse equipment, land and buildings, 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 increase in cash used in financing activities during the nine months ended January 31, 2024 compared to the prior year period was primarily due to net repayments of $81.0 million under our revolving credit facilities during the nine months ended January 31, 2024, compared to net borrowings of $28.9 million during the prior year period. Also contributing to the change was a $17.5 million increase in repurchases of common stock during the nine months ended January 31, 2024 compared to the prior year period and a $4.2 million increase in finance lease payments. Partially offsetting these increases was a $13.5 million holdback liability payment during the prior year period.
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. This expanded program replaced our previous share repurchase authorization of $200.0 million. 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 10b-5 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 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 1.5 million shares of our common stock for $99.6 million pursuant to our share repurchase program during the nine months ended January 31, 2024, plus $0.7 million of excise taxes. As of January 31, 2024, we had $216.5 million of remaining purchase authorization.
Debt Covenants
The ABL Facility, 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 ABL Facility, Term Loan Facility and the indenture governing the Senior Notes. We were in compliance with all such
covenants as of January 31, 2024.
Contractual Obligations
There have been no material changes to the contractual obligations as disclosed in our Annual Report on Form 10-K for the fiscal year ended April 30, 2023, other than those made in the ordinary course of business.
38
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, 2023.
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.
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, which are not recognized financial measures under GAAP, because we believe they assist investors and analysts in comparing our operating performance across reporting periods on a consistent basis by excluding items that we do not believe are indicative of our core operating performance.
Management believes Adjusted EBITDA and Adjusted EBITDA margin are helpful in highlighting trends in our operating results, while other measures can differ significantly depending on long-term strategic decisions regarding capital structure 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.
39
The
following is a reconciliation of our net income to Adjusted EBITDA and Adjusted EBITDA margin:
Write-off
of debt discount and deferred financing fees
—
—
1,401
—
Interest income
(378)
(180)
(1,144)
(390)
Provision for income taxes
17,468
23,697
71,407
91,722
Depreciation
expense
17,276
15,162
50,566
45,213
Amortization expense
15,528
16,257
47,193
50,872
Stock appreciation rights(a)
1,789
314
3,408
5,888
Redeemable
noncontrolling interests and deferred compensation(b)
461
368
1,125
1,203
Equity-based compensation(c)
3,559
3,285
11,974
10,198
Severance
and other permitted costs(d)
1,033
(315)
2,321
416
Transaction costs (acquisitions and other)(e)
765
476
3,373
1,154
Gain on disposal
of assets(f)
(222)
(411)
(663)
(614)
Effects of fair value adjustments to inventory(g)
8
457
450
636
Debt transaction fees(h)
44
—
1,333
—
Adjusted
EBITDA
$
128,020
$
140,828
$
468,876
$
511,355
Net sales
$
1,258,348
$
1,234,618
$
4,088,878
$
4,025,150
Adjusted
EBITDA Margin
10.2
%
11.4
%
11.5
%
12.7
%
___________________________________
(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.
40
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, 2023.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
As of January 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 January 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 January 31, 2024 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
41
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. Since 2002 and as of January 31, 2024, approximately 1,065 asbestos-related
personal injury lawsuits have been filed, and we vigorously defend against them. Of these, 1,011 have been dismissed without any payment by us, 40 are pending and only 14 have been settled, which settlements have not materially impacted our financial condition or operating results. See “Risk Factors—Risks Relating to Our Business and Industry—We are exposed to product liability, warranty, casualty, construction defect, contract, tort, 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, 2023.
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, 2023.
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 January 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)
November 1 through November 30
237,487
$
62.93
237,487
$
226,397
December
1 through December 31
83,681
70.52
83,681
220,496
January 1 through January 31
49,064
81.42
49,064
216,501
Total
370,232
370,232
___________________________________
(1)Beginning
January 1, 2023, 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. This expanded program replaced our previous share repurchase authorization of $200.0 million. 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 10b-5 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 covenants and the
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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
None.
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Item 6. Exhibits
(a)Exhibits. The following exhibits are filed as part of this report:
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.
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.