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12: R2 Condensed Consolidated Balance Sheets (Unaudited) HTML 133K
13: R3 Condensed Consolidated Balance Sheets (Unaudited) HTML 46K
(Parenthetical)
14: R4 Condensed Consolidated Statements of Operations HTML 111K
and Comprehensive Income (Unaudited)
15: R5 Condensed Consolidated Statements of Stockholders' HTML 83K
Equity (Unaudited)
16: R6 Condensed Consolidated Statements of Cash Flows HTML 118K
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17: R7 Business, Basis of Presentation and Summary of HTML 46K
Significant Accounting Policies
18: R8 Business Combinations HTML 32K
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20: R10 Goodwill and Intangible Assets HTML 78K
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27: R17 Fair Value Measurements HTML 40K
28: R18 Commitments and Contingencies HTML 26K
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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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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.iiYes/
☒ 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).iiYes/
☒ 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 ii☐/No ☒
There
were i42,406,821 shares of the registrant’s common stock, par value $0.01 per share, outstanding as of August 31, 2022.
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 the growth of or other future developments relating to our various markets, and statements about our expectations,
beliefs, plans, strategies, objectives, prospects, assumptions or future events or performance contained in this Quarterly Report on Form 10-Q are forward-looking statements.
We have based these forward-looking statements on our current expectations, assumptions, estimates and projections. While we believe these expectations, assumptions, estimates and projections are reasonable, such forward-looking statements are only predictions and involve known and unknown risks and uncertainties, many of which are beyond our control. These and other important factors, including those discussed under the heading “Risk Factors” in Part 1, Item 1A of our Annual Report on Form 10-K for the fiscal year ended April 30, 2022, filed with the U.S. Securities and Exchange Commission (the “SEC”), may cause our actual results, performance or achievements to differ materially from any
future results, performance or achievements expressed or implied by these forward-looking statements. Some of the factors that could cause actual results to differ materially from those expressed or implied by the forward-looking statements include:
•the ongoing effects of the COVID-19 pandemic and other widespread public health crises on our business, industry and results of operations;
•general business, financial market and economic conditions, including inflation, rising interest rates, supply chain disruptions, labor shortages and capital market volatility;
•our dependency upon commercial and residential construction, both new and repair and remodeling, or R&R, markets;
•competition
in our highly fragmented 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 through making and integrating acquisitions, opening new branches and expanding our product offerings;
•our ability to 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 drive improved productivity and profitability, including managing operating costs and achieving productivity initiatives;
•the potential loss of any significant customers, a reduction of the quantity of products our customers purchase or inability to pay;
•our ability to renew leases for our facilities on favorable terms or identify new facilities;
•our ability to effectively manage our inventory as our sales volume or the prices of the products we distribute fluctuate;
•significant
fluctuations in fuel costs or shortages in the supply of fuel;
3
•natural or man-made disruptions to our facilities;
•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;
•our ability to obtain additional financing on acceptable terms, if at all;
•our ability to attract and retain key employees while controlling costs, including the impact of labor and trucking shortages;
•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 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, after the date of this Quarterly Report on Form 10-Q. You should review the factors and risks we describe in the reports we will file from time to time with the SEC after the date of the filing of this Quarterly Report on Form 10-Q.
Trade
accounts and notes receivable, net of allowances of $i9,583 and $i9,346,
respectively
i820,589
i750,046
Inventories,
net
i577,938
i550,953
Prepaid
expenses and other current assets
i24,856
i20,212
Total
current assets
i1,529,996
i1,423,127
Property
and equipment, net of accumulated depreciation of $i237,746 and $i227,288,
respectively
i359,556
i350,679
Operating
lease right-of-use assets
i158,295
i153,271
Goodwill
i698,631
i695,897
Intangible
assets, net
i438,103
i454,747
Deferred
income taxes
i19,415
i17,883
Other
assets
i8,429
i8,795
Total
assets
$
i3,212,425
$
i3,104,399
Liabilities
and Stockholders’ Equity
Current liabilities:
Accounts payable
$
i363,287
$
i367,315
Accrued
compensation and employee benefits
i62,344
i107,925
Other
accrued expenses and current liabilities
i153,380
i127,938
Current
portion of long-term debt
i47,712
i47,605
Current
portion of operating lease liabilities
i39,904
i38,415
Total
current liabilities
i666,627
i689,198
Non-current
liabilities:
Long-term debt, less current portion
i1,192,101
i1,136,585
Long-term
operating lease liabilities
i116,815
i112,161
Deferred
income taxes, net
i48,114
i46,802
Other
liabilities
i49,544
i55,155
Total
liabilities
i2,073,201
i2,039,901
Commitments
and contingencies
i
i
Stockholders' equity:
Common
stock, par value $ii0.01/ per share, ii500,000/
shares authorized; ii42,298/ and ii42,773/
shares issued and outstanding as of July 31, 2022 and April 30, 2022, respectively
i423
i428
Preferred
stock, par value $ii0.01/ per share,
ii50,000/ shares authorized;
iiii0///
shares issued and outstanding as of July 31, 2022 and April 30, 2022
i—
i—
Additional
paid-in capital
i502,536
i522,136
Retained
earnings
i637,447
i547,977
Accumulated
other comprehensive loss
(i1,182)
(i6,043)
Total
stockholders' equity
i1,139,224
i1,064,498
Total
liabilities and stockholders' equity
$
i3,212,425
$
i3,104,399
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 used in operating activities:
Depreciation and amortization
i32,440
i27,714
Amortization
of debt discount and debt issuance costs
i425
i642
Equity-based
compensation
i5,971
i3,160
Gain
on disposal of assets
(i284)
(i78)
Deferred
income taxes
(i945)
(i140)
Other
items, net
i2,958
i1,573
Changes
in assets and liabilities net of effects of acquisitions:
Trade accounts and notes receivable
(i69,635)
(i73,479)
Inventories
(i28,712)
(i87,313)
Prepaid
expenses and other assets
(i3,709)
(i1,491)
Accounts
payable
(i4,405)
(i4,265)
Accrued
compensation and employee benefits
(i46,065)
(i24,219)
Other
accrued expenses and liabilities
i18,088
i21,617
Cash
used in operating activities
(i4,403)
(i75,077)
Cash
flows from investing activities:
Purchases of property and equipment
(i10,943)
(i6,814)
Proceeds
from sale of assets
i272
i287
Acquisition
of businesses, net of cash acquired
(i2,606)
(i123,049)
Cash
used in investing activities
(i13,277)
(i129,576)
Cash
flows from financing activities:
Repayments on revolving credit facilities
(i141,247)
(i102,872)
Borrowings
from revolving credit facilities
i195,113
i195,049
Payments
of principal on long-term debt
(i1,278)
(i1,278)
Payments
of principal on finance lease obligations
(i7,639)
(i7,397)
Repurchases
of common stock
(i23,795)
(i3,855)
Proceeds
from exercises of stock options
i29
i863
Payments
for taxes related to net share settlement of equity awards
(i300)
(i256)
Other
financing activities
i1,329
i1,140
Cash
provided by financing activities
i22,212
i81,394
Effect
of exchange rates on cash and cash equivalents
i165
(i163)
Increase
(decrease) in cash and cash equivalents
i4,697
(i123,422)
Cash
and cash equivalents, beginning of period
i101,916
i167,012
Cash
and cash equivalents, end of period
$
i106,613
$
i43,590
Supplemental
cash flow disclosures:
Cash paid for income taxes
$
i3,232
$
i1,007
Cash
paid for interest
i17,834
i8,616
The
accompanying notes are an integral part of these condensed consolidated financial statements.
8
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 wholly owned operating subsidiaries, operates a network of approximately i300 distribution centers with extensive
product offerings of wallboard, ceilings, steel framing and complementary construction products. The Company also operates approximately 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, 2022.
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 (loss). 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. 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.
9
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. 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
i21,180
i21,707
Expected
recoveries for insurance liabilities
(i4,792)
(i4,973)
/
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 primarily related to depreciation and amortization that would occur within the same jurisdiction and during the carryforward period necessary to absorb the federal and state net operating losses and other deferred tax assets.
Deferred tax assets and liabilities are computed by applying the federal, provincial and state income tax rates in effect to the gross amounts of temporary differences and other tax attributes, such as net operating loss carry-forwards. In assessing if the deferred tax assets will be realized, the Company considers whether it is more likely than not that some or all of these deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the period in which
these deductible temporary differences reverse.
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
10
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
Reference Rate Reform – In March 2020, the Financial Accounting Standards Board (“FASB”) issued new guidance to temporarily ease the potential
burden in accounting for reference rate reform. The guidance provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships and other transactions affected by reference rates that are expected to be discontinued, such as the London Interbank Offered Rate (“LIBOR”). The guidance was effective upon issuance and generally can be applied through December 31, 2022. However, the new guidance is not applicable to contract modifications made, and hedging relationships entered into or evaluated after, December 31, 2022. The Company is adopting this guidance when its relevant
contracts are modified to alternative reference rates. The Company does not expect the adoption to have a material impact on its consolidated financial statements.
Business Combinations – In October 2021, the FASB issued new guidance which requires the recognition and measurement of contract assets and contract liabilities acquired in a business combination in accordance with Accounting Standards Code 606, "Revenue from Contracts with Customers." This
creates an exception to the general recognition and measurement principles in existing business combination guidance. The new guidance is effective for fiscal years beginning after December 15, 2022, with early adoption permitted. The amendments in this new guidance should be applied prospectively to business combinations occurring on or after the effective date of the amendments. The Company does not expect the adoption of this guidance to have a material impact on its consolidated financial statements.
2. 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.
Fiscal 2023 Acquisition
On June 1, 2022, the Company
acquired certain assets of Construction Supply of Southwest Florida, Inc. (“CSSWF”). CSSWF is a distributor of various stucco, building and waterproofing supplies serving markets in the southwest Florida area. The impact of this acquisition is not material to the Company’s Consolidated Financial Statements.
Pro Forma Financial Information
i
The following table presents the unaudited pro forma consolidated net sales and net income
for the Company for the period indicated:
On
July 1, 2021, the Company acquired substantially all the assets of Westside Building Material (“Westside”). On December 1, 2021, the Company acquired Ames Taping Tools Holding LLC (“Ames”). The above pro forma results have been calculated by combining the historical results of the Company, Westside and Ames as if the acquisitions of Westside and Ames
11
GMS Inc.
Notes to Condensed Consolidated Financial
Statements (Unaudited) (Continued)
had occurred on May 1, 2021, the first day of the comparable prior reporting period presented. The pro forma results include estimates for intangible asset amortization, depreciation, interest expense and income taxes, and are subject to change once final asset values have been determined. The pro forma information is not necessarily indicative of the results that would have been achieved had the transactions occurred on the first day of each of the periods presented or that may be achieved in the future. See Note 2, "Business Combinations," in the Company's Annual Report on Form 10-K for the year ended April 30, 2022 for more information regarding these
acquisitions.
3. iAccounts Receivable
i
The
Company’s trade accounts and notes receivable consisted of the following:
Amortization
expense related to definite-lived intangible assets was $i17.4 million and $i14.8 million for the three months ended July 31, 2022 and 2021,
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
(i3,291)
(i3,581)
Senior
Notes
i350,000
i350,000
Unamortized
discount and deferred financing costs on Senior Notes
(i4,677)
(i4,836)
ABL
Facility
i265,000
i211,134
Finance
lease obligations
i124,511
i120,138
Installment
notes at fixed rates up to i5.0%, due in monthly and annual installments through 2025
i5,203
i7,086
Unamortized
discount on installment notes
(i268)
(i364)
Carrying
value of debt
i1,239,813
i1,184,190
Less
current portion
i47,712
i47,605
Long-term
debt
$
i1,192,101
$
i1,136,585
/
Term
Loan Facility
The Company has a senior secured first lien term loan facility (the “Term Loan Facility”). The Company is required to make scheduled quarterly payments of $i1.3 million, or i0.25%
of the aggregate principal amount of the Term Loan Facility, with the remaining balance due in June 2025. The Term Loan Facility bears interest at a floating rate based on LIBOR plus i2.50%, with a i0%
floor. As of July 31, 2022, the applicable rate of interest was i4.87%.
Senior Notes
The Company has senior unsecured notes due May 2029 (the "Senior Notes"). 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 provided for aggregate revolving commitments of $i545.0 million as of July 31, 2022.
Extensions of credit under the ABL Facility are limited by a borrowing base calculated periodically based on specified percentages of the value of eligible inventory and eligible accounts receivable, subject to certain reserves and other adjustments.
As of July 31, 2022, at the Company’s option, the interest rates applicable to the loans under the ABL Facility were based on Secured Overnight Financing Rate ("SOFR") or base rate plus, in each case, an applicable margin. The margins applicable for each elected interest rate are subject to a pricing grid, as defined in the ABL Facility agreement, based on average daily availability for the most recent fiscal quarter. The ABL Facility also contains an unused commitment fee. As of July 31, 2022,
the weighted average interest rate on borrowings was i3.53%.
As of July 31, 2022, the Company had available borrowing capacity of approximately $i246.8
million under the ABL Facility. The ABL Facility matures on September 30, 2024 unless the individual affected lenders agree to extend the maturity of their respective loans under the ABL Facility upon the Company’s request and without the consent of any other lender. The ABL Facility contains a cross default provision with the Term Loan Facility.
14
GMS Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)
Debt Covenants
The Term Loan Facility and the indenture
governing the Senior Notes contain a number of covenants that limit our ability and the ability of our restricted subsidiaries, as described in the respective credit agreement and the indenture, to incur more indebtedness; pay dividends, redeem or repurchase stock or make other distributions; make investments; create restrictions on the ability of our restricted subsidiaries to pay dividends to us or make other intercompany transfers; create liens securing indebtedness; transfer or sell assets; merge or consolidate; enter into certain transactions with our affiliates; and prepay or amend the terms of certain indebtedness. Such covenants are subject to several important exceptions and qualifications
set forth in the Term Loan Facility and the indenture governing the Senior Notes. As of July 31, 2022, the Company was in compliance with all covenants contained in the Term Loan Facility and the indenture governing the Senior Notes.
The ABL Facility contains certain affirmative covenants, including financial and other reporting requirements. The Company was in compliance with all such covenants as of July 31, 2022.
Canadian Revolving
Credit Facility
Through one of its Canadian subsidiaries, the Company has a revolving credit facility (the “Canadian Facility”) that provides for aggregate revolving commitments of $i23.4 million ($i30.0
million Canadian dollars). The Canadian Facility bears interest at the Canadian prime rate plus a marginal rate based on the level determined by Titan’s total debt to EBITDA ratio at the end of the most recently completed fiscal quarter or year. As of July 31, 2022, the Company had available borrowing capacity of approximately $i23.4 million under the Canadian Facility. The Canadian Facility matures on January
12, 2026.
Debt Maturities
i
As of July 31, 2022, the maturities of long-term debt were as follows:
Future
minimum lease payments under non-cancellable leases as of July 31, 2022 were as follows:
Finance
Operating
Year Ending April 30,
(in thousands)
2023 (remaining nine months)
$
i33,892
$
i34,301
2024
i37,675
i44,950
2025
i26,668
i34,286
2026
i18,894
i22,526
2027
i12,137
i13,268
Thereafter
i7,202
i26,151
Total
lease payments
i136,468
i175,482
Less
imputed interest
i11,957
i18,763
Total
$
i124,511
$
i156,719
//
16
GMS
Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)
7. iIncome Taxes
General.The Company’s effective income tax rate on continuing operations was i26.4%
and i24.6% for the three months ended July 31, 2022 and 2021, respectively. The difference in the effective income tax rate over the U.S. federal statutory rate of 21.0% for the three months ended July 31, 2022 was primarily due to the impact of foreign taxes, state taxes and equity compensation. The difference in the effective income tax rate over the U.S. federal statutory rate for the three months ended July 31,
2021 was primarily due to the impact of state taxes, foreign tax rates and a change in the valuation allowance.
Valuation allowance. The Company had a valuation allowance of $i11.8 million and $i11.7
million against its deferred tax assets related to certain U.S. tax jurisdictions as of July 31, 2022 and April 30, 2022, respectively. To the extent the Company generates sufficient taxable income in the future to utilize the tax benefits of the net deferred tax assets on which a valuation allowance is recorded, the effective tax rate may decrease as the valuation allowance is reversed.
On June
20, 2022, the Company's Board of Directors approved an expanded share repurchase program under which the Company is authorized to repurchase up to $i200.0 million of its outstanding common stock. This expanded program replaced the Company’s previous share repurchase authorization of $i75.0
million. The Company may conduct repurchases under the share repurchase program through open market transactions, under trading plans in accordance with SEC Rule 10b5-1 and/or in privately negotiated transactions, in each case in compliance with Rule 10b-18 under the Securities Exchange Act of 1934, as amended. The timing and amount of any purchases of the Company's common stock are subject to a variety of factors, including, but not limited to, the Company’s liquidity, credit availability, general business and market conditions, debt covenants and the availability of alternative investment opportunities. The share repurchase program does not obligate the
Company to acquire any amount of common stock, and it may be suspended or terminated at any time at the Company’s discretion.
The Company repurchased approximately i516,000 shares of its common stock for $i23.8
million during the three months ended July 31, 2022, of which $i10.8 million was repurchased under the previous authorization and $i13.0
million was repurchased under the new authorization. The Company repurchased approximately i85,000 shares of its common stock for $i3.9
million during the three months ended July 31, 2021. As of July 31, 2022, the Company had $i187.0 million of remaining repurchase authorization under its stock repurchase program.
Accumulated Other Comprehensive Income (Loss)
i
The
following table sets forth the changes to accumulated other comprehensive income (loss), net of tax, by component for the three months ended July 31, 2022:
Other
comprehensive income before reclassification on derivative instruments for the three months ended July 31, 2022 is net of $i1.1 million of tax. Reclassification to earnings from accumulated other comprehensive income is net of $i0.4
million of tax.
17
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 $i2.8 million and $i1.7
million during the three months ended July 31, 2022 and 2021, respectively, and is included in selling, general and administrative expenses in the Condensed Consolidated Statements of Operations and Comprehensive Income.
Stock Option Awards
i
The following table presents stock option activity for the three months ended July 31, 2022:
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 three months ended July 31, 2022 was not material. The total intrinsic value of options exercised during the three months ended July 31, 2021 was $i1.2
million, respectively. As of July 31, 2022, there was $i3.7 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.
Restricted Stock Units
i
The following table presents restricted stock unit activity for the three months ended July 31, 2022:
As
of July 31, 2022, there was $i4.6 million of total unrecognized compensation cost related to nonvested restricted stock units. That cost is expected to be recognized over a weighted-average period of i1.8
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 $i0.3
million and $i0.2 million of stock-based compensation expense related to the ESPP during the three months ended July 31, 2022 and 2021, respectively.
18
GMS Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)
i
The
following table presents the number of shares of the Company’s common stock purchased under the ESPP and average price per share:
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 $i2.8 million and $i1.2
million during the three months ended July 31, 2022 and 2021, respectively, and was included in selling, general and administrative expenses in the Condensed Consolidated Statements of Operations and Comprehensive Income. Current and long-term liabilities for stock appreciation rights, deferred compensation and redeemable noncontrolling interests are included in other accrued expenses and liabilities and other liabilities, respectively, in the Condensed Consolidated Balance Sheets. See Note 13, "Stock Appreciation Rights, Deferred Compensation and Redeemable Noncontrolling Interests," in the Company's Annual Report on Form 10-K for the year ended April 30, 2022 for more information regarding stock appreciation rights, deferred
compensation and redeemable noncontrolling interests.
11. 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:
The
Company has interest rate swap agreements with a notional amount of $i500.0 million to convert the variable interest rate on a portion of its Term Loan Facility to a fixed 1-month LIBOR interest rate of i2.46%. The contracts
were effective on February 28, 2019 and terminate on February 28, 2023. The objective of the interest rate swap agreements is to eliminate the variability of interest payment cash flows associated with variable interest rates. The Company believes there have been no material changes in the creditworthiness of the counterparty to this interest rate swap and believes the risk of nonperformance by such party is minimal. The Company designated the interest rate swaps as cash flow hedges.
19
GMS Inc.
Notes
to Condensed Consolidated Financial Statements (Unaudited) (Continued)
As of July 31, 2022, the interest rate swap asset was classified in prepaid expenses and other current assets in the Condensed Consolidated Balance Sheet. As of April 30, 2022, the interest rate swap liability was classified in other accrued expenses and current liabilities in the Condensed Consolidated Balance Sheet. The Company recognized losses, net of tax, of $i1.3
million and $i2.2 million in earnings during the three months ended July 31, 2022 and 2021, respectively, related to its interest rate swaps. These amounts are included in interest expense in the Condensed Consolidated Statements of Operations and Comprehensive Income and within cash flows from operating activities within the Condensed Consolidated Statements of Cash Flows. As of July 31,
2022, the Company expects that approximately $i1.8 million of pre-tax earnings will be reclassified from accumulated other comprehensive income (loss) into earnings during the next twelve months.
The fair value of interest rate swaps is determined using Level
2 inputs. Generally, the Company obtains the Level 2 inputs from its counterparties. Substantially all the inputs throughout the full term of the instruments can be derived from observable data or are supported by observable levels at which transactions are executed in the marketplace. The fair value of the Company’s interest rate swap was determined using widely accepted valuation techniques including a discounted cash flow analysis on the expected cash flows of the derivative. This analysis reflected the contractual terms of the derivatives, including the period to maturity, and used observable market-based inputs, including interest rate curves and implied volatilities.
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
Disclosures
are required for certain assets and liabilities that are measured at fair value on a nonrecurring basis in periods after initial recognition. Such measurements of fair value relate primarily to assets and liabilities measured at fair value in connection with business combinations and long-lived asset impairments. For more information on business combinations, see Note 2, “Business Combinations.” There were no material long-lived asset impairments during the three months ended July 31, 2022 or 2021.
Fair Value of Debt
The estimated fair value of the Company’s Senior Notes was determined based on Level 2 input using observable market prices in less active markets. The carrying amounts of the
Company’s Term Loan Facility and ABL Facility approximates their fair value as the interest rates are variable and reflective of market rates. iThe following table presents the carrying value 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.
20
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 three months ended July 31, 2022. For more information regarding the Company's reportable segments, see Note 17, "Segments," in the Company's Annual Report on Form 10-K for the year ended April 30, 2022.
Redeemable
noncontrolling interests and deferred compensation(b)
i495
i310
Equity-based
compensation(c)
i3,132
i1,958
Severance
and other permitted costs(d)
i352
i147
Transaction
costs (acquisitions and other)(e)
i386
i575
Gain
on disposal of assets(f)
(i284)
(i78)
Effects
of fair value adjustments to inventory(g)
i44
i1,731
Adjusted
EBITDA
$
i175,014
$
i128,079
__________________________________________
(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.
/
21
GMS Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)
(c)Represents non-cash equity-based compensation expense related to the issuance of share-based awards.
(d)Represents
severance expenses and other costs permitted in the calculation of Adjusted EBITDA under the ABL Facility and the Term Loan Facility, including certain unusual, nonrecurring costs and credits due to COVID-19.
(e)Represents costs related to acquisitions paid to third parties.
(f)Includes gains from the sale of assets.
(g)Represents the non-cash cost of sales impact of acquisition accounting adjustments to increase inventory to its estimated fair value.
Revenues by Product
i
The
following table presents the Company’s net sales to external customers by main product lines:
Diluted
weighted average common shares outstanding
i43,317
i43,972
Diluted
earnings per common share
$
i2.07
$
i1.39
/
During
the three months ended July 31, 2022 and 2021, the number of Common Stock Equivalents excluded from the calculation of diluted earnings per share because their effect would have been anti-dilutive was iinot/
material. Anti-dilutive securities could be dilutive in future periods.
23
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, 2022.
Overview
Founded in 1971, GMS Inc. (“we,”“our,”“us,” or the “Company”), through its wholly owned operating subsidiaries, operates a network of approximately 300 distribution centers with extensive product offerings of wallboard, ceilings, steel framing and complementary construction products.
GMS also operates approximately 100 tool sales, rental and service centers. Through these operations, GMS provides a comprehensive selection of building products and solutions for its residential and commercial contractor customer base across the United States and Canada. The Company’s unique operating model combines the benefits of a national platform and strategy with a local go-to-market focus, enabling GMS to generate significant economies of scale while maintaining high levels of customer service.
Market Conditions and Outlook
Residential
There has been strong underlying demand for residential products since mid-calendar year 2020. We believe this strength in residential demand has been driven by a combination of factors including
favorable demographics, historically low interest rates, low levels of supply of new and existing homes for sale, a strong job market, and changes in workplace habits and preferences resulting from COVID-19. While the recent uptick in affordability concerns, including higher mortgage rates along with broader macroeconomic and geopolitical concerns, creates some level of uncertainty in the medium term, we expect the current favorable demand environment for our products to continue through at least the remainder of calendar year 2022. Additionally, we expect the solid underlying demand fundamentals, including favorable demographics and low levels of supply of new homes, to provide support in the longer term.
Homebuilders and contractors are facing significant inflationary pressures for products and labor, as well as supply chain constraints, primarily related to products needed during construction phases outside of those serviced
by us. These pressures and constraints create significantly increased cycle times and a decreased ability to predict project timing, as compared to historical periods. As a result, and given product inflation, we have experienced an increase in our inventory balances. We expect our inventory levels on a unit basis to return to more normal levels as the supply chain constraints further subside in future quarters.
Commercial
Demand for commercial projects was severely impacted by COVID-19 and has been slow to recover in certain sectors. However, we are starting to see some improvement, including stronger year-over-year commercial wallboard sales. Construction to support medical, educational and governmental projects has started to rebound, and we are beginning to quote and fulfill a number of hospitality projects, particularly where commercial development has followed residential expansion.
Larger office projects, both new and for repair and remodeling (“R&R”), however, remain tempered, particularly in more mature urban markets. Leading indicators of commercial activity, such as the Architectural Billings Index, as well as our own quoting activity and discussions with customers, make us optimistic that, although still in its early stages, the improvement we are seeing will continue.
As with residential contractors, both we and commercial contractors face significant inflationary pressures and availability constraints for fuel, labor, building products and other miscellaneous expenses.
24
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).
•Grow Complementary Products. We are focused on growing our complementary product lines (insulation, lumber, ready-mix joint compound, tools, fasteners and various other construction products) to better serve our customers and diversify and expand our product offerings while driving higher sales and margins.
•Platform Expansion. 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 distribution centers is to further penetrate markets that are adjacent to our existing operations. Typically, we have pre-existing customer relationships in these markets but need a new location to fully capitalize on those relationships.
◦Acquisitions. We also have a proven history of consummating acquisitions in new and contiguous markets and intend to continue to pursue acquisitions. 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 expect to continue to capture profitable market share in our existing footprint by delivering industry-leading customer service.
COVID-19 Update
We
continue to actively monitor the ongoing impacts of COVID-19 and its contributory effects on the economy on our business. We will continue to implement, as deemed necessary or advisable, procedures and processes to protect the health and safety of our employees, customers, partners and suppliers.
We may take actions that alter our business operations if required by federal, state, provincial or local authorities or that we determine are in the best interests of our employees, customers, suppliers and stockholders. Furthermore, while COVID-19 had a limited impact on our financial results and operations during the three months ended July 31, 2022, there is no guarantee that COVID-19 or its contributory effects on the economy will not have a material impact on our future financial results or operations. See Item 1A, “Risk Factors,”
and Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in our Annual Report on Form 10-K for the fiscal year ended April 30, 2022 for a discussion of risks which could have a material adverse effect on our operations and financial results and for more information regarding the impact of COVID-19 and our response.
25
First Quarter Fiscal 2023 Highlights
Key highlights in our business during the three months ended July 31, 2022 are described below:
•Generated
net sales of $1,359.6 million during the three months ended July 31, 2022, a 30.5% increase from the prior year period, primarily due to inflationary pricing, active residential construction, volume growth in wallboard, ceilings and complementary products, an improving commercial landscape, and acquisitions over the past year.
•Generated net income of $89.5 million during the three months ended July 31, 2022, a 46.2% increase compared to the prior year, primarily due to the increase in net sales noted above, partially offset by an increase in the provision for income taxes. Supply chain dynamics have led to high levels of product inflation, which have been the principal driver of both sales growth and incremental profitability.
•Generated
Adjusted EBITDA (a non-GAAP measure, see “Non-GAAP Financial Measures” in this Item 2) of $175.0 million during the three months ended July 31, 2022, a 36.6% increase compared to the prior year, primarily due to the increase in net sales noted above. Adjusted EBITDA, as a percentage of net sales, increased to 12.9% for the three months ended July 31, 2022 compared to 12.3% for the three months ended July 31, 2021, primarily due to better operating leverage, as product price inflation on sales outpaced operating cost inflation.
•Completed one acquisition and opened two greenfield locations.
First Quarter Fiscal 2023 Developments
Acquisitions
On
June 1, 2022, we acquired certain assets of Construction Supply of Southwest Florida, Inc. (“CSSWF”). CSSWF is a distributor of various stucco, building and waterproofing supplies serving markets in the southwest Florida area. 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
In May 2022, we opened greenfield locations in Wildwood, Florida and Cleveland, Ohio. During the three months ended July 31, 2022, we also opened six new Ames Taping Tools Holding LLC ("Ames") stores.
26
Results
of Operations
The following table summarizes key components of our results of operations for the three months ended July 31, 2022 and 2021:
Cost of sales (exclusive of depreciation and amortization shown separately below)
924,832
706,243
Gross
profit
434,721
335,833
Operating expenses:
Selling, general and administrative expenses
267,689
214,081
Depreciation
and amortization
32,440
27,714
Total operating expenses
300,129
241,795
Operating income
134,592
94,038
Other
(expense) income:
Interest expense
(14,661)
(13,657)
Other income,
net
1,569
792
Total other expense, net
(13,092)
(12,865)
Income before taxes
121,500
81,173
Provision
for income taxes
32,030
19,971
Net income
$
89,470
$
61,202
Non-GAAP measures:
Adjusted
EBITDA(1)
$
175,014
$
128,079
Adjusted EBITDA margin(1)(2)
12.9
%
12.3
%
___________________________________
(1)Adjusted
EBITDA and Adjusted EBITDA margin are non-GAAP measures. See “—Non-GAAP Financial Measures—Adjusted EBITDA,” for how we define and calculate Adjusted EBITDA and Adjusted EBITDA margin, reconciliations thereof to net income and a description of why we believe these measures are useful.
(2)Adjusted EBITDA margin is Adjusted EBITDA as a percentage of net sales.
We generate net sales by providing a comprehensive product offering of wallboard, ceilings, steel framing and complementary construction products. The increase in net sales during the three months ended July 31, 2022 compared to the prior year period was primarily due to inflationary pricing, active residential
construction, volume growth in wallboard, ceilings and complementary products, an improving commercial landscape and acquisitions over the past year. The increase consisted of the following:
27
•an increase in wallboard sales, which are impacted by both commercial and residential construction activity, primarily due to an increase in price/product mix and higher volume;
•an increase in ceilings sales, which are principally impacted by commercial construction activity, primarily due to an increase in price/product mix and higher volume;
•an increase in steel framing sales, which are principally impacted by commercial
construction activity, primarily due to an increase in price/product mix, partially offset by lower volume; and
•an increase in complementary products sales, which include insulation, joint treatment, tools (including ATF tools), lumber and various other specialty building products, primarily due to an increase in pricing in certain product categories, positive contributions from acquisitions and the execution of growth initiatives to increase other product sales.
The following table breaks out our net sales into organic, or base business, net sales and recently acquired net sales for the three months ended July 31, 2022 and 2021. When calculating organic sales growth, we exclude the net sales of acquired businesses until the first anniversary of the acquisition
date. In addition, we exclude the impact of foreign currency translation in our calculation of organic net sales growth.
Three Months Ended July 31,
Change
2022
2021
Dollar
Percent
(dollars
in thousands)
Net sales
$
1,359,553
Recently acquired net sales (1)
(73,922)
Impact of foreign currency (2)
8,022
Base
business net sales (3)
$
1,293,653
$
1,042,076
$
251,577
24.1
%
___________________________________
(1)Represents net sales of branches acquired by us until the first anniversary of the acquisition date. For the three months ended July 31, 2022, net sales includes sales from the following acquisitions: Westside
Building Material ("Westside") acquired on July 1, 2021, Ames acquired on December 1, 2021, Kimco Supply Company acquired on December 1, 2021 and CSSWF acquired on June 1, 2022.
(2)Represents the impact of foreign currency translation on net sales.
(3)Represents net sales of existing branches and branches that were opened by us during the period presented.
The increase in organic net sales was primarily driven by inflationary pricing, active residential construction, volume growth in wallboard, ceilings and complementary products and an improving commercial landscape.
Gross
Profit and Gross Margin
Three Months Ended July 31,
Change
2022
2021
Dollar
Percent
(dollars in thousands)
Gross
profit
$
434,721
$
335,833
$
98,888
29.4
%
Gross margin
32.0
%
32.2
%
The
increase in gross profit during the three months ended July 31, 2022 compared to the prior year period was primarily due to the successful pass through of product inflation, active residential construction and incremental gross profit from acquisitions. The decrease in gross margin on net sales for the three months ended July 31, 2022 compared to the prior year period was primarily due to the timing and elasticity of inflationary price-cost dynamics in the market. On a product line basis, wallboard and steel margins were unfavorably impacted by these dynamics and complementary products and ceilings benefited.
28
Selling, General and Administrative Expenses
Three
Months Ended July 31,
Change
2022
2021
Dollar
Percent
(dollars in thousands)
Selling, general and administrative expenses
$
267,689
$
214,081
$
53,608
25.0
%
%
of net sales
19.7
%
20.5
%
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 July 31, 2022 compared to the prior year period, primarily due to increases in payroll and payroll related costs, fuel costs, travel costs and facilities costs, which were driven by increased sales volume, inflationary pressures and incremental selling, general and administrative expenses from acquisitions.
Selling, general and administrative expenses as a percentage of our net sales decreased during the three months ended July 31, 2022 compared to the prior year period, primarily due to the impact of inflationary market pricing on sales.
Depreciation and Amortization Expense
Three Months Ended July
31,
Change
2022
2021
Dollar
Percent
(dollars in thousands)
Depreciation
$
14,993
$
12,925
$
2,068
16.0
%
Amortization
17,447
14,789
2,658
18.0
%
Depreciation
and amortization
$
32,440
$
27,714
$
4,726
17.1
%
Depreciation and amortization expense includes depreciation of property and equipment and amortization of definite-lived intangible assets acquired in purchases of businesses. The increase in depreciation expense during the three months ended July 31, 2022 compared to the prior year period was primarily due to
incremental expense resulting from property and equipment obtained in the acquisitions of Westside and Ames. The increase in amortization expense during the three months ended July 31, 2022 was primarily due to incremental expense resulting from definite-lived intangible assets obtained in the acquisitions of Westside and Ames, partially offset by time-based progression of our use of the accelerated method of amortization for acquired customer relationships.
Interest Expense
Three
Months Ended July 31,
Change
2022
2021
Dollar
Percent
(dollars in thousands)
Interest expense
$
14,661
$
13,657
$
1,004
7.4
%
Interest
expense consists primarily of interest expense incurred on our debt and finance leases and amortization of deferred financing fees and debt discounts. The increase in interest expense during the three months ended July 31, 2022 compared to the prior year period was primarily due to increases in interest rates and average debt outstanding.
29
Income Taxes
Three
Months Ended July 31,
Change
2022
2021
Dollar
Percent
(dollars in thousands)
Provision for income taxes
$
32,030
$
19,971
$
12,059
60.4
%
Effective
tax rate
26.4
%
24.6
%
The change in the effective income tax rate during the three months ended July 31, 2022 compared to the prior year period was primarily due to the impact of actions taken during the quarter in anticipation of expected changes in Canadian tax regulations, as well as stock-based compensation.
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 July 31, 2022, we had available borrowing capacity of approximately $246.8 million
under our ABL Facility. The ABL Facility is scheduled to mature on September 30, 2024.
As of July 31, 2022, we had available borrowing capacity of approximately $23.4 million under our Canadian revolving credit facility (the “Canadian Facility”) that provides for aggregate revolving commitments of $23.4 million ($30.0 million Canadian dollars). The Canadian Facility matures on January 12, 2026.
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,
2022.
On June 20, 2022, our Board of Directors approved an expanded share repurchase program under which we are authorized to repurchase up to $200.0 million of our outstanding common stock. This expanded program replaces our previous share repurchase authorization of $75.0 million. We 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 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 516,000 shares of our common stock for $23.8 million during the three months ended July 31, 2022, of which $10.8 million was repurchased under the previous authorization and $13.0 million was repurchased under the new authorization. As of July 31, 2022, we had $187.0 million of remaining purchase authorization.
We regularly evaluate opportunities to optimize our capital structure, including through consideration of the issuance or incurrence of additional debt, to refinance or repay existing debt and to fund ongoing cash needs such as general corporate purposes, growth initiatives, acquisitions and our stock repurchase program.
30
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
165
(163)
Increase (decrease) in cash and cash equivalents
$
4,697
$
(123,422)
Operating
Activities
The decrease in cash used in operating activities during the three months ended July 31, 2022 compared to the prior year period was primarily due to an increase in inventory in the prior year period related to ensuring product availability and managing price inflation amid an environment of tight and less reliable supply. This was partially offset by an increase in cash used for our annual bonuses, which are paid in the first fiscal quarter.
Investing Activities
The decrease in cash used in investing activities during the three months ended July 31, 2022 compared to the prior year period was primarily due to a $120.4 million decrease in cash used for acquisitions, partially offset by a $4.1 million increase in capital expenditures.
Capital
expenditures during the three months ended July 31, 2022 primarily consisted of building and leasehold improvements, vehicles and IT-related spending. Capital expenditures vary depending on prevailing business factors, including current and anticipated market conditions.
Financing Activities
The decrease in cash provided by financing activities during the three months ended July 31, 2022 compared to the prior year period was primarily due to net borrowings of $53.9 million under our revolving credit facilities during the three months ended July 31, 2022, compared to net borrowings of $92.2 million during the prior year period. During the three months ended July 31, 2021, we used our
revolving credit facilities to help fund the Westside acquisition and for general working capital needs. Also contributing to the change was a $19.9 million increase in repurchases of common stock during the three months ended July 31, 2022 compared to the prior year period.
Debt Covenants
The Term Loan Facility and the indenture governing the Senior Notes contain a number of covenants that limit our ability and the ability of our restricted subsidiaries, as described in the respective credit agreement and the indenture, to incur more indebtedness; pay dividends,
redeem or repurchase stock or make other distributions; make investments; create restrictions on the ability of our restricted subsidiaries to pay dividends to us or make other intercompany transfers; create liens securing indebtedness; transfer or sell assets; merge or consolidate; enter into certain transactions with our affiliates; and prepay or amend the terms of certain indebtedness. Such covenants are subject to several important exceptions and qualifications set forth in the Term Loan Facility and the indenture governing the Senior Notes. The Company was in compliance with all covenants contained in the Term Loan Facility and the indenture
governing the Senior Notes as of July 31, 2022.
The ABL Facility contains certain affirmative covenants, including financial and other reporting requirements. We were in compliance with all such covenants as of July 31, 2022.
31
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, 2022, other than those made in the ordinary course of business.
Off-Balance Sheet Arrangements
There
have been no material changes to our off-balance sheet arrangements as discussed in our Annual Report on Form 10-K for the fiscal year ended April 30, 2022.
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 may in the future reflect such permitted adjustments in our calculations of Adjusted EBITDA.
We believe that Adjusted EBITDA and Adjusted EBITDA margin are frequently used by analysts, investors and other interested parties
in their evaluation of companies, many of which present an Adjusted EBITDA or Adjusted EBITDA margin measure when reporting their results. Our presentation of Adjusted EBITDA should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items. In addition, Adjusted EBITDA may not be comparable to similarly titled measures used by other companies in our industry or across different industries.
We also include information concerning Adjusted EBITDA margin, which is calculated as Adjusted EBITDA divided by net sales. We present Adjusted EBITDA margin because it is used by management as a performance measure to judge the level of Adjusted EBITDA that is generated from net sales.
Adjusted EBITDA and Adjusted EBITDA margin have their limitations as analytical tools and should not be considered in isolation or as a
substitute for analysis of our results as reported under GAAP.
32
The following is a reconciliation of our net income to Adjusted EBITDA and Adjusted EBITDA margin:
Redeemable noncontrolling interests and deferred compensation(b)
495
310
Equity-based compensation(c)
3,132
1,958
Severance
and other permitted costs(d)
352
147
Transaction costs (acquisitions and other)(e)
386
575
Gain on disposal of assets(f)
(284)
(78)
Effects
of fair value adjustments to inventory(g)
44
1,731
Adjusted EBITDA
$
175,014
$
128,079
Net
sales
$
1,359,553
$
1,042,076
Adjusted EBITDA Margin
12.9
%
12.3
%
___________________________________
(a)Represents
changes in the fair value of stock appreciation rights.
(b)Represents changes in the fair values of noncontrolling interests and deferred compensation agreements.
(c)Represents non-cash equity-based compensation expense related to the issuance of share-based awards.
(d)Represents severance expenses and other costs permitted in the calculation of Adjusted EBITDA under the ABL Facility and the Term Loan Facility, including certain unusual, nonrecurring costs and credits due to COVID-19.
(e)Represents costs related to acquisitions paid to third parties.
(f)Includes gains from the sale of assets.
(g)Represents
the non-cash cost of sales impact of acquisition accounting adjustments to increase inventory to its estimated fair value.
33
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, 2022.
Item 4. Controls and Procedures
Evaluation
of Disclosure Controls and Procedures
As of July 31, 2022, our management, with the participation of our principal executive officer and principal financial officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), which are designed to provide reasonable assurance that the information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include controls and procedures that are designed to provide reasonable assurance that information required to be disclosed in the reports that we file or submit under the Exchange Act is accumulated
and communicated to management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.
Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of July 31, 2022, our disclosure controls and procedures were effective to ensure that information required to be disclosed in the reports that are filed or submitted under the Exchange Act, is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
Changes in
Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting during the three months ended July 31, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
34
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, “Commitments and Contingencies.”
The building materials industry has been subject to personal injury and property damage claims arising from alleged exposure to raw materials contained in building products, as well as claims for incidents of catastrophic loss, such as building fires. As a distributor of building materials, we face an inherent risk of exposure to product liability claims 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 July 31, 2022, approximately 1,037 asbestos-related personal injury lawsuits have been filed, and we vigorously defend against them. Of these, 988 have been dismissed without any payment by us, 38 are pending and only 11 have been settled, which settlements have not materially impacted our financial condition or operating results. See “Risk Factors—Risks Relating to Our Business and Industry—We
are exposed to product liability, warranty, casualty, construction defect, contract, tort, employment and other claims and legal proceedings related to our business, the products we distribute, the services we provide and services provided for us by third parties” listed in Part 1, Item 1A of our Annual Report on Form 10-K for the fiscal year ended April 30, 2022.
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, 2022.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The number of shares repurchased and the average price paid per share for each month in the three months ended July 31, 2022 were as follows:
Total
Number of Shares Purchased
Average Price Paid per Share
Total Number of Shares Purchased as Part of Publicly Announced Program (1)
Approximate Dollar Value of Shares that May Yet be Purchased Under the Program
(in thousands)
May 1 through May 31
134,623
$
47.43
134,623
$
12,446
June
1 through June 30
177,509
45.86
177,509
196,285
July 1 through July 31
204,153
45.40
204,153
187,016
Total
516,285
516,285
___________________________________
(1)On
June 20, 2022, our Board of Directors approved an expanded share repurchase program under which we are authorized to repurchase up to $200.0 million of our outstanding common stock. This expanded program replaced our previous share repurchase authorization of $75.0 million. We 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 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.
35
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not Applicable.
Item 5. Other Information
None.
36
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.