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Section 1: 10-Q (10-Q)

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UNITED STATES 

SECURITIES AND EXCHANGE COMMISSION 

WASHINGTON, D.C. 20549 

 

FORM 10-Q 

 

☒    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 

 

For the quarterly period ended January 31, 2018

 

OR

 

☐    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 

 

For the transition period from _______________ to _______________.

  

COMMISSION FILE NUMBER: 001-37784

__________________________________________

 

GMS INC.

(Exact name of registrant as specified in its charter)

__________________________________________

 

 

Delaware

46-2931287

(State or other jurisdiction of incorporation 

or organization)

(IRS Employer Identification No.)

 

 

100 Crescent Centre Parkway, Suite 800

Tucker, Georgia

30084

(Address of principal executive offices)

(ZIP Code)

 

(800) 392-4619

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

  

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐  

  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. 

 

 

 

 

 

 

 

 

 

 

 

Large accelerated filer

 

Accelerated filer

Non-accelerated filer

 

Smaller reporting company

(Do not check if a smaller

reporting company)

 

 

Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.                 ☐

  

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒  

  

There were 41,040,800 shares of the registrant’s common stock, par value $0.01 per share, outstanding as of March 6, 2018

 

 

 

 


 

Table of Contents

 

FORM 10-Q

 

TABLE OF CONTENTS

 

 

 

 

 

Page

Cautionary Note Regarding Forward-Looking Statements 

3

 

 

 

PART I 

Financial Information

5

Item 1 

Financial Statements

5

 

Condensed Consolidated Balance Sheets (Unaudited)

5

 

Condensed Consolidated Statements of Operations and Comprehensive Income (Unaudited)

6

 

Condensed Consolidated Statements of Cash Flows (Unaudited)

7

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

8

Item 2 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

26

Item 3 

Quantitative and Qualitative Disclosures About Market Risk

41

Item 4 

Controls and Procedures

41

 

 

 

PART II 

Other Information

43

Item 1 

Legal Proceedings

43

Item 1A 

Risk Factors

43

Item 2 

Unregistered Sales of Equity Securities and Use of Proceeds

43

Item 3 

Defaults Upon Senior Securities

43

Item 4 

Mine Safety Disclosures

43

Item 5 

Other Information

43

Item 6 

Exhibits

44

Signatures 

45

 

 

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Table of Contents

CAUTIONARY NOTE REGARDING FORWARD‑LOOKING STATEMENTS

 

This Quarterly Report on Form 10-Q contains “forward‑looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). You can generally identify forward‑looking statements by our use of forward‑looking terminology such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “might,” “plan,” “potential,” “predict,” “seek,” or “should,” or the negative thereof or other variations thereon or comparable terminology. In particular, statements about the markets in which we operate, including growth of our various markets, and statements about our expectations, beliefs, plans, strategies, objectives, prospects, assumptions or future events or performance contained in Part 1, Item 2 of this Quarterly Report on Form 10-Q under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations” 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, 2017, 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 economic and financial conditions;

·

our dependency upon the commercial and residential construction and residential repair and remodeling, or R&R, markets;

·

competition in our highly fragmented industry and the markets in which we operate;

·

the fluctuations in prices of the products we distribute;

·

the consolidation of our industry;

·

our inability to pursue strategic transactions and open new branches;

·

our inability to expand into new geographic markets;

·

product shortages and potential loss of relationships with key suppliers;

·

the seasonality of the commercial and residential construction markets;

·

the potential loss of any significant customers;

·

exposure to product liability and various other claims and litigation;

·

our inability to attract key employees;

·

rising health care costs;

·

the reduction of the quantity of products our customers purchase;

·

the credit risk from our customers;

·

our inability to renew leases for our facilities;

·

our inability to effectively manage our inventory as our sales volume increases or the prices of the products we distribute fluctuate;

·

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 inability to obtain additional financing on acceptable terms, if at all;

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·

our holding company structure;

·

an impairment of our goodwill;

·

the impact of federal, state and local regulations;

·

the cost of compliance with environmental, health and safety laws and other regulations;

·

significant increases in fuel costs or shortages in the supply of fuel;

·

a disruption or breach in our IT systems;

·

natural or man‑made disruptions to our facilities; and

·

other risks and uncertainties, 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, 2017 filed with the SEC.

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 our actual results of operations, financial condition and liquidity, and the development of the industry in which we operate, may differ materially from the forward‑looking statements contained in this Quarterly Report on Form 10-Q. In addition, even if our results of operations, financial condition and liquidity, and events in the industry in which we operate, are consistent with the forward‑looking statements contained in this Quarterly Report on Form 10-Q, they may not be predictive of results or developments in future periods.

Any forward‑looking statement that we make in this Quarterly Report on Form 10-Q speaks only as of the date of such statement. Except as required by law, we do not undertake any obligation to update or revise, or to publicly announce any update or revision to, any of the forward‑looking statements, whether as a result of new information, future events or otherwise, after the date of this Quarterly Report on Form 10-Q. You should, however, review the factors and risks we describe in the reports we will file from time to time with the SEC after the date of the filing of this Quarterly Report on Form 10-Q.

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PART I – Financial Information

 

Item 1.  Financial Statements

 

GMS Inc.

Condensed Consolidated Balance Sheets (Unaudited)

(in thousands, except per share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

January 31, 

    

April 30, 

 

 

    

2018

    

2017

 

Assets

 

Current assets:

 

 

  

 

 

  

 

Cash and cash equivalents

 

$

28,939

 

$

14,561

 

Trade accounts and notes receivable, net of allowances of $10,665 and $9,851, respectively

 

 

319,025

 

 

328,988

 

Inventories, net

 

 

227,564

 

 

200,234

 

Prepaid expenses and other current assets

 

 

18,104

 

 

11,403

 

Total current assets

 

 

593,632

 

 

555,186

 

Property and equipment, net of accumulated depreciation of $81,648 and $71,409, respectively

 

 

158,013

 

 

154,465

 

Goodwill

 

 

426,810

 

 

423,644

 

Intangible assets, net

 

 

232,214

 

 

252,293

 

Other assets

 

 

7,682

 

 

7,677

 

Total assets

 

$

1,418,351

 

$

1,393,265

 

Liabilities and Stockholders’ Equity

 

Current liabilities:

 

 

  

 

 

  

 

Accounts payable

 

$

98,924

 

$

102,688

 

Accrued compensation and employee benefits

 

 

49,043

 

 

58,393

 

Other accrued expenses and current liabilities

 

 

40,020

 

 

37,891

 

Current portion of long-term debt

 

 

15,949

 

 

11,530

 

Total current liabilities

 

 

203,936

 

 

210,502

 

Non-current liabilities:

 

 

 

 

 

 

 

Long-term debt, less current portion

 

 

581,535

 

 

583,390

 

Deferred income taxes, net

 

 

14,256

 

 

26,820

 

Other liabilities

 

 

34,958

 

 

35,371

 

Liabilities to noncontrolling interest holders, less current portion

 

 

15,381

 

 

22,576

 

Total liabilities

 

 

850,066

 

 

878,659

 

Commitments and contingencies

 

 

  

 

 

  

 

Stockholders’ equity:

 

 

  

 

 

  

 

Common stock, par value $0.01 per share, 500,000 shares authorized; 41,041 and 40,971 shares issued as of January 31, 2018 and April 30, 2017, respectively

 

 

410

 

 

410

 

Preferred stock, par value $0.01 per share, 50,000 shares authorized; 0 shares issued as of January 31, 2018 and April 30, 2017

 

 

 —

 

 

 —

 

Additional paid-in capital

 

 

488,289

 

 

488,459

 

Retained earnings

 

 

79,673

 

 

26,621

 

Accumulated other comprehensive loss

 

 

(87)

 

 

(884)

 

Total stockholders’ equity

 

 

568,285

 

 

514,606

 

Total liabilities and stockholders’ equity

 

$

1,418,351

 

$

1,393,265

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

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GMS Inc.

Condensed Consolidated Statements of Operations and Comprehensive Income (Unaudited)

(in thousands, except per share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

January 31, 

 

January 31, 

 

 

 

2018

 

2017

    

 

2018

 

2017

    

Net sales

 

$

585,508

 

$

562,523

 

$

1,875,669

 

$

1,704,169

 

Cost of sales (exclusive of depreciation and amortization shown separately below)

 

 

390,088

 

 

376,796

 

 

1,262,885

 

 

1,146,633

 

Gross profit

 

 

195,420

 

 

185,727

 

 

612,784

 

 

557,536

 

Operating expenses:

 

 

  

 

 

  

 

 

  

 

 

  

 

Selling, general and administrative

 

 

156,262

 

 

147,260

 

 

472,232

 

 

432,116

 

Depreciation and amortization

 

 

16,490

 

 

18,316

 

 

49,548

 

 

51,479

 

Total operating expenses

 

 

172,752

 

 

165,576

 

 

521,780

 

 

483,595

 

Operating income

 

 

22,668

 

 

20,151

 

 

91,004

 

 

73,941

 

Other (expense) income:

 

 

  

 

 

  

 

 

  

 

 

  

 

Interest expense

 

 

(7,871)

 

 

(7,431)

 

 

(23,288)

 

 

(22,162)

 

Write-off of debt discount and deferred financing fees

 

 

 —

 

 

(211)

 

 

(74)

 

 

(7,103)

 

Other income, net

 

 

401

 

 

1,081

 

 

965

 

 

2,170

 

Total other (expense), net

 

 

(7,470)

 

 

(6,561)

 

 

(22,397)

 

 

(27,095)

 

Income before taxes

 

 

15,198

 

 

13,590

 

 

68,607

 

 

46,846

 

Provision (benefit) for income taxes

 

 

(4,488)

 

 

5,363

 

 

15,555

 

 

12,232

 

Net income

 

$

19,686

 

$

8,227

 

$

53,052

 

$

34,614

 

Weighted average common shares outstanding:

 

 

  

 

 

  

 

 

  

 

 

  

 

Basic

 

 

41,036

 

 

40,943

 

 

41,004

 

 

40,035

 

Diluted

 

 

42,228

 

 

41,578

 

 

42,167

 

 

40,670

 

Net income per share:

 

 

  

 

 

  

 

 

  

 

 

  

 

Basic

 

$

0.48

 

$

0.20

 

$

1.29

 

$

0.86

 

Diluted

 

$

0.47

 

$

0.20

 

$

1.26

 

$

0.85

 

Comprehensive income

 

 

  

 

 

 

 

 

  

 

 

 

 

Net income

 

$

19,686

 

$

8,227

 

$

53,052

 

$

34,614

 

Changes in other comprehensive income, net of tax

 

 

401

 

 

226

 

 

797

 

 

238

 

Comprehensive income

 

$

20,087

 

$

8,453

 

$

53,849

 

$

34,852

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

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GMS Inc.

Condensed Consolidated Statements of Cash Flows (Unaudited)

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

    

January 31, 

 

 

    

2018

    

2017

 

Cash flows from operating activities:

 

 

  

 

 

 

 

Net income

 

$

53,052

 

$

34,614

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

 

Depreciation and amortization of property and equipment

 

 

18,021

 

 

19,395

 

Write-off, accretion and amortization of debt discount and deferred financing fees

 

 

2,141

 

 

9,142

 

Amortization of intangible assets

 

 

31,527

 

 

32,084

 

Provision for losses on accounts and notes receivable

 

 

133

 

 

(434)

 

Provision for obsolescence of inventory

 

 

113

 

 

427

 

Increase (decrease) in fair value of contingent consideration

 

 

195

 

 

(388)

 

Equity-based compensation

 

 

1,473

 

 

1,669

 

Gain on sale of assets

 

 

(648)

 

 

(242)

 

Changes in assets and liabilities net of effects of acquisitions:

 

 

 

 

 

 

 

Trade accounts and notes receivable

 

 

14,545

 

 

(3,179)

 

Inventories

 

 

(23,617)

 

 

(25,708)

 

Accounts payable

 

 

(5,723)

 

 

318

 

Deferred income taxes

 

 

(12,860)

 

 

(14,773)

 

Prepaid expenses and other assets

 

 

(1,719)

 

 

(1,425)

 

Accrued compensation and employee benefits

 

 

(7,140)

 

 

(3,057)

 

Accrued expenses and liabilities

 

 

1,289

 

 

(321)

 

Liabilities to noncontrolling interest holders

 

 

(2,000)

 

 

908

 

Income tax receivable / payable

 

 

(5,049)

 

 

(12,690)

 

Cash provided by operating activities

 

 

63,733

 

 

36,340

 

Cash flows from investing activities:

 

 

  

 

 

  

 

Purchases of property and equipment

 

 

(13,408)

 

 

(6,900)

 

Proceeds from sale of assets

 

 

2,374

 

 

3,245

 

Acquisition of businesses, net of cash acquired

 

 

(23,568)

 

 

(145,976)

 

Cash used in investing activities

 

 

(34,602)

 

 

(149,631)

 

Cash flows from financing activities:

 

 

  

 

 

  

 

Repayments on the revolving credit facility

 

 

(597,092)

 

 

(817,598)

 

Borrowings from the revolving credit facility

 

 

493,739

 

 

836,507

 

Payments of principal on long-term debt

 

 

(4,332)

 

 

(3,381)

 

Principal repayments of capital lease obligations

 

 

(4,530)

 

 

(3,819)

 

Proceeds from issuance of common stock in initial public offering, net of underwriting discounts

 

 

 —

 

 

156,941

 

Repayment of term loan

 

 

 —

 

 

(160,000)

 

Borrowings from term loan amendment

 

 

577,616

 

 

481,225

 

Repayment of term loan amendment

 

 

(477,616)

 

 

(381,225)

 

Debt issuance costs on revolving credit facility amendment

 

 

 —

 

 

(1,342)

 

Debt issuance costs

 

 

(636)

 

 

(2,487)

 

Payments for taxes related to net share settlement of equity awards

 

 

(1,441)

 

 

 —

 

Proceeds from exercises of stock options

 

 

130

 

 

 —

 

Other financing activities

 

 

(591)

 

 

 —

 

Cash (used in) provided by financing activities

 

 

(14,753)

 

 

104,821

 

Increase (decrease) in cash and cash equivalents

 

 

14,378

 

 

(8,470)

 

Cash and cash equivalents, beginning of period

 

 

14,561

 

 

19,072

 

Cash and cash equivalents, end of period

 

$

28,939

 

$

10,602

 

Supplemental cash flow disclosures:

 

 

  

 

 

  

 

Cash paid for income taxes

 

$

35,005

 

$

39,831

 

Cash paid for interest

 

 

21,192

 

 

20,038

 

Supplemental schedule of noncash activities:

 

 

  

 

 

  

 

Assets acquired under capital lease

 

$

7,953

 

$

6,667

 

Issuance of installment notes associated with equity-based compensation liability awards

 

 

11,898

 

 

5,353

 

 

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 

 

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GMS Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

1. Business, Basis of Presentation and Summary of Significant Accounting Policies

Business

Founded in 1971, GMS Inc. (“we,” “our,” “us,” or the “Company”), through its wholly-owned operating subsidiaries, is a distributor of specialty building products including wallboard, suspended ceilings systems, or ceilings, steel framing and other complementary specialty building products. We purchase products from a large number of manufacturers and then distribute these goods to a customer base consisting of wallboard and ceilings contractors and homebuilders and, to a lesser extent, general contractors and individuals. We have created a national footprint with more than 210 branches across 42 states.

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 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 the entire year. As a result, the unaudited condensed consolidated financial statements should be read in conjunction with our audited consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year ended April 30, 2017.

Initial and Secondary Public Offerings

On May 13, 2016, we amended and restated our certificate of incorporation to increase our authorized share count to 550.0 million shares of stock, including 500.0 million shares of common stock and 50.0 million shares of preferred stock, each with a par value $0.01 per share and to split our common stock 10.158 for 1. Unless otherwise noted herein, historic share data has been adjusted to give effect to the stock split.

On June 1, 2016, we completed our initial public offering (“IPO”), of 8.1 million shares of common stock at a price of $21.00 per share, including 1.1 million shares of common stock that were issued as a result of the exercise in full by the underwriters of an option to purchase additional shares to cover over‑allotments. After underwriting discounts and commissions but before expenses, we received net proceeds from the IPO of approximately $156.9 million. We used these proceeds together with cash on hand to repay the $160.0 million principal amount of our term loan debt outstanding under our senior secured second lien term loan facility (“the Second Lien Facility”), which was a payment in full of the entire loan balance due under the Second Lien Facility.

On February 22, 2017, certain of our stockholders completed a secondary public offering of 8.0 million shares of the Company’s common stock at a price to the public of $29.25 per share, including 1.0 million shares of common stock that were sold as a result of the exercise in full by the underwriters of an option to purchase additional shares that was granted by the selling stockholders. We did not receive any proceeds from the sale of our common stock by the selling stockholders.

On June 7, 2017, certain of our stockholders completed an additional secondary public offering of 5.8 million shares of the Company’s common stock at a price to the public of $33.00 per share, including 0.8 million shares of common stock that were sold as a result of the exercise in full by the underwriters of an option to purchase additional shares that was granted by the selling stockholders. As a result of such offering, the control group consisting of certain affiliates of AEA Investors LP (“AEA”) and certain other of our stockholders no longer controls a majority of the voting power of our outstanding common stock. Accordingly, we are no longer a “controlled company” within the meaning of the New York Stock Exchange corporate governance standards. We did not receive any proceeds from the sale of our common stock by the selling stockholders.

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GMS Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)

On December 14, 2017, certain of our stockholders completed an additional secondary public offering of 5.0 million shares of the Company’s common stock at a price to the public of $38.25 per share. We did not receive any proceeds from the sale of our common stock by the selling stockholders.  

Revision of Financial Statements

During the preparation of the Annual Report on Form 10-K for the year ended April 30, 2017, the Company determined that cash flows related to payments of working capital settlements were inappropriately classified as financing activities in the Consolidated Statements of Cash Flows for the year ended April 30, 2016 and the quarters ended July 31, 2016, October 31, 2016 and January 31, 2017. This resulted in understatements of cash used in investing activities (specifically the line item acquisitions of businesses, net of cash acquired) and cash provided by financing activities (specifically the line item cash paid for contingent consideration). The Company concluded that this misstatement was not material to the Company’s previously issued financial statements and that amendments of previously filed reports were therefore not required. However, the Company has elected to revise the previously reported quarterly amount in the Condensed Consolidated Statements of Cash Flows in this Quarterly Report on Form 10-Q.

The effect of this revision on the line items within the Company’s Condensed Consolidated Statement of Cash Flows for the nine months ended January 31, 2017 was as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended January 31, 2017

 

 

    

As Previously

    

 

 

    

 

 

 

 

 

Reported

 

Adjustment

 

As Revised

 

 

 

(in thousands)

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

 

 

Acquisition of business, net of cash acquired

 

$

(141,650)

 

$

(4,326)

 

$

(145,976)

 

Cash used in investing activities

 

$

(145,305)

 

$

(4,326)

 

$

(149,631)

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

 

 

Cash paid for contingent consideration

 

$

(4,326)

 

$

4,326

 

$

 —

 

Cash provided by financing activities

 

$

100,495

 

$

4,326

 

$

104,821

 

 

Principles of Consolidation

The condensed consolidated financial statements present the results of operations, financial position and cash flows of the Company and its subsidiaries. All material intercompany balances and transactions have been eliminated in consolidation. The results of operations of businesses acquired are included from their respective dates of acquisition.

Use of Estimates

The preparation of financial statements in conformity with Generally Accepted Accounting Principles (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

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. The Company has deductible‑based insurance policies for certain losses related to general liability, automobile and workers’ compensation. The deductible amount per incident is $0.3 million, $0.5 million and $1.0 million for general liability, workers’ compensation and automobile, respectively. The coverage consists of a primary layer and an excess layer. The primary layer of coverage is from $0.5 million to $2.0 million and the excess layers cover claims from $2.0 million to $100.0 million. The expected ultimate cost for claims incurred as of the balance sheet date is not discounted and is recognized as a liability. Insurance losses for claims filed

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GMS Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)

and claims incurred but not reported are accrued based upon estimates of the aggregate liability for uninsured claims using loss development factors and actuarial assumptions followed in the insurance industry and historical loss development experience.

As of January 31, 2018 and April 30, 2017, the aggregate liabilities for medical self‑insurance were $4.3 million and $3.4 million, respectively, and are included in other accrued expenses and current liabilities in the Condensed Consolidated Balance Sheets. As of January 31, 2018 and April 30, 2017, reserves for general liability, automobile and workers’ compensation totaled approximately $15.8 million and $15.9 million, respectively, and are included in other accrued expenses and current liabilities and other liabilities in the Condensed Consolidated Balance Sheets. As of January 31, 2018 and April 30, 2017, amounts recoverable for medical, general liability, automobile and workers’ compensation totaled approximately $6.2 million and $6.7 million, respectively, and are included in prepaid expenses and other current assets and other assets in the Condensed Consolidated Balance Sheets.

Income Taxes

The Company considers each interim period an integral part of the annual period and measures tax expense (benefit) using an estimated annual effective income tax rate. Estimates of the annual effective income tax rate at the end of interim periods are, out of necessity, based on evaluation of possible future events and transactions and may be subject to subsequent refinement or revision. The Company forecasts its estimated annual effective income tax rate and then applies that rate to its year‑to‑date pre‑tax ordinary income (loss), subject to certain loss limitation provisions. In addition, certain specific transactions are excluded from the Company’s estimated annual effective tax rate computation, but are discretely recognized within income tax expense (benefit) in their respective interim period. Future changes in the forecasted annual income (loss) projections, tax rate changes, or discrete tax items could result in significant adjustments to quarterly income tax expense (benefit) in future periods.

The Company evaluates its deferred tax assets quarterly to determine if valuation allowances are required. In this evaluation, the Company considers both positive and negative evidence in determining whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The primary negative evidence considered includes the cumulative operating losses generated in prior periods. The primary positive evidence considered includes the reversal of deferred tax liabilities primarily related to depreciation and amortization that would occur within the same jurisdiction and during the carryforward period necessary to absorb the federal and state net operating losses and other deferred tax assets.

Deferred tax assets and liabilities are computed by applying the federal and state income tax rates in effect to the gross amounts of temporary differences and other tax attributes, such as net operating loss carry‑forwards. In assessing if the deferred tax assets will be realized, the Company considers whether it is more likely than not that some or all of these deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the period in which these deductible temporary differences reverse.

Fair Value of Financial Instruments

Fair value is the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market in an orderly transaction between market participants on the measurement date. The carrying value of cash and cash equivalents, receivables, accounts payable, other current liabilities and accrued interest approximates fair value due to their short‑term natures. Based on borrowing rates available to the Company for loans with similar terms, the carrying values of the Company’s debt approximate fair value.

Accounting guidance establishes a three‑level hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The valuation hierarchy is

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GMS Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)

based upon the transparency of inputs to the valuation of an asset or liability on the measurement date. The three levels are defined as follows:

 

 

 

Level 1

    

Inputs to the valuation methodology are quoted prices (unadjusted) for an identical asset or liability in an active market.

Level 2

 

Inputs to the valuation methodology include quoted prices for a similar asset or liability in an active market or model‑derived valuations in which all significant inputs are observable for substantially the full term of the asset or liability.

Level 3

 

Inputs to the valuation methodology are unobservable and significant to the fair value measurement of the asset or liability.

 

As discussed in Note 7, we have recorded stock appreciation rights, deferred compensation and redeemable noncontrolling interests at their expected fair values. The determination of these fair values is based on Level 3 inputs. These inputs include a volatility rate based on comparable entities, a discount rate, the expected time to redemption of the liabilities, historical values of the book equity of certain subsidiaries, and market information for comparable entities. The use of these inputs to derive the fair value of the liabilities at a point in time can result in volatility to the financial statements. We also use Level 3 inputs to measure fair value on a non-recurring basis for acquisitions and impairment testing.

Earnings Per Share

Basic earnings per share is computed by dividing net income by the weighted average number of outstanding shares of common stock for the period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock, including stock options and restricted stock units (collectively "Common Stock Equivalents"), were exercised or converted into common stock.  The dilutive effect of outstanding stock options and restricted stock units is reflected in diluted earnings per share by application of the treasury stock method. In applying the treasury stock method for stock-based compensation arrangements, the assumed proceeds are computed as the sum of the amount the employee must pay upon exercise, the amount of compensation cost attributed to future services and not yet recognized and the amount of excess tax benefits, if any, that would be credited to additional paid-in capital assuming exercise of the awards. 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.

 

Recent Accounting Pronouncements

Revenue recognitionIn May 2014, the Financial Accounting Standards Board (the "FASB") issued authoritative guidance on revenue from contracts with customers. The new guidance supersedes most existing revenue recognition guidance and outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers. The core principle of the revenue model is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The new standard also requires disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. In August 2015, the FASB issued guidance that deferred the effective date by one year. The standard is now required to be adopted by public business entities in annual periods beginning on or after December 15, 2017, and interim periods within those annual periods, and may be applied on a full retrospective or modified retrospective approach. Early adoption at the original effective date is permitted.

The Company plans to adopt the standard in the first quarter of its fiscal year ending April 30, 2019 and expects to use the modified retrospective approach. The Company has substantially completed its assessment of the new revenue recognition guidance.  Based upon current interpretations, we do not anticipate the adoption of this standard to have a material impact on our financial statements; aside from adding expanded disclosures, which are currently under consideration, as are further considerations of potential additional or expanded internal controls over financial reporting.

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GMS Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)

Leases—In February 2016, the FASB issued authoritative guidance on accounting for leases. The new standard establishes a right-of-use (ROU) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with such classification affecting the pattern of expense recognition in the statement of operations. The new standard is effective for the Company's fiscal year beginning May 1, 2019 (the first day of fiscal 2020), including interim reporting periods within that fiscal year. A modified transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. While the Company is still evaluating the impact of its pending adoption of the new standard on its financial statements, the Company expects that upon adoption it will recognize material ROU assets and liabilities.

Stock Compensation—In March 2016, the FASB issued authoritative guidance that simplifies many key aspects of the accounting for and cash flow presentation of employee share-based compensation transactions, including accounting for income taxes, forfeitures and statutory withholding requirements. The Company adopted this guidance on May 1, 2017 (the first day of fiscal 2018) on a prospective basis. Effective May 1, 2017, the Company now records all excess tax benefits or tax deficiencies as a component of its provision for income taxes in the statement of operations. The Company recorded excess tax benefits of $1.2 million during the nine months ended January 31, 2018. Additionally, the Company now presents excess tax benefits or deficiencies as operating cash flows versus reclassifying the amount out of operating cash flows and presenting it in financing activities in the statement of cash flows. 

Additional amendments from this guidance related to forfeitures and minimum statutory withholding tax requirements had no impact to our financial position, results of operations or cash flows. As permitted, we continue to estimate forfeitures to determine the amount of compensation cost to be recognized each period rather than electing to account for forfeitures as they occur, and we continue to present the value of shares withheld for minimum statutory tax withholding requirements on the statements of cash flows as a financing activity. Another impact of the adoption is that the calculation of the effect of dilutive securities now excludes any derived excess tax benefits or deficiencies from assumed future proceeds.

Inventory — In July 2015, the FASB issued authoritative guidance on accounting for inventory. The new guidance requires that inventory be measured at the lower of cost and net realizable value. The new guidance is limited to inventory measured using the first-in, first-out (“FIFO”) or average cost methods and excludes inventory measured using last-in, first-out (“LIFO”) or retail inventory methods. The new standard is effective for fiscal years, and interim periods, beginning after December 15, 2016. The Company adopted this guidance on May 1, 2017 (the first day of fiscal 2018) with no material impact on the Company’s financial position, results of operations or cash flows.

 

2. Business Acquisitions

The Company operates in a highly fragmented industry. A key component of the Company’s strategy is growth through acquisition that expands its geographic coverage, provides complementary lines of business and increases its market share.

The Company has accounted for all business combinations using the acquisition method. The assets acquired and liabilities assumed were recognized at their acquisition date fair values based on valuation analyses. In valuing acquired assets and liabilities, fair value estimates used Level 3 inputs, including future expected cash flows and discount rates. Goodwill was measured as the excess of consideration transferred over the net of the acquisition date fair values of the assets acquired and the liabilities assumed. Goodwill recognized is attributable to synergies achieved through the streamlining of operations combined with improved margins attainable through increased market presence and is all attributable to our one operating reportable segment. The results of operations of acquisitions are reflected in the Company’s Condensed Consolidated Financial Statements from the date of acquisition.

Fiscal 2018 Acquisitions

During the nine months ended January 31, 2018, the Company completed the following acquisitions, with an aggregate purchase price of $21.9 million of cash consideration, subject to finalization of working capital settlement

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GMS Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)

amounts. The pro forma impact of these acquisitions is not presented as the effects were not material to the Company’s Condensed Consolidated Financial Statements.

 

 

 

 

 

Company Name

    

Form of Acquisition

    

Date of Acquisition

ASI Building Products, LLC

 

Purchase of net assets

 

August 1, 2017

Washington Builders Supply, Inc.

 

Purchase of net assets

 

October 2, 2017

Southwest Building Materials, Ltd.

 

Purchase of net assets

 

December 4, 2017

 

The preliminary allocation of purchase consideration for these acquisitions is summarized as follows:

 

 

 

 

 

 

 

Preliminary

 

 

 

Purchase Price

 

 

 

Allocation

 

 

 

January 31, 2018

 

 

 

 

(in thousands)

 

Trade accounts and notes receivable

 

$

4,525

 

Inventories

 

 

3,824

 

Property and equipment

 

 

909

 

Tradenames

 

 

1,000

 

Vendor agreement

 

 

1,000

 

Below market leases

 

 

350

 

Intangible assets

 

 

8,920

 

Goodwill

 

 

3,310

 

Liabilities assumed

 

 

(1,945)

 

Purchase price

 

$

21,893

 

The goodwill and intangible assets related to these acquisitions are expected to be deductible for U.S. federal income tax purposes. The Company believes that the information gathered to date provides a reasonable basis for estimating the fair values of assets acquired and liabilities assumed but, the Company is waiting for additional information (related to the finalization of working capital settlements) necessary to finalize those fair values. Thus, the provisional measurements of fair value set forth above are preliminary. Such changes are not expected to be significant. The Company expects to complete the purchase price allocation as soon as practicable, but no later than one year from the applicable acquisition date.

Fiscal 2017 Acquisitions

In fiscal 2017, the Company completed the following acquisitions, with an estimated aggregate purchase price of $154.0 million, comprised of $148.7 million of cash consideration and $5.3 million of consideration related to working capital settlements and contingent consideration. The pro forma impact of acquisitions is not presented as the effects were not material to the Company’s Condensed Consolidated Financial Statements.

 

 

 

 

 

Company Name

    

Form of Acquisition

    

Date of Acquisition

Wall & Ceiling Supply Co., Inc.

 

Purchase of net assets

 

May 2, 2016 

Rockwise, LLC

 

Purchase of net assets

 

July 5, 2016 

Steven F. Kempf Building Materials, Inc.

 

Purchase of net assets

 

August 29, 2016

Olympia Building Supplies, LLC/Redmill, Inc.

 

Purchase of 100% of outstanding common stock

 

September 1, 2016

United Building Materials, Inc.

 

Purchase of net assets

 

October 3, 2016

Ryan Building Materials, Inc.

 

Purchase of net assets

 

October 31, 2016

Interior Products Supply

 

Purchase of net assets

 

December 5, 2016

Hawaii-based distribution business of Grabber Construction Products

 

Purchase of net assets

 

February 1, 2017

 

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GMS Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)

The preliminary allocation of purchase consideration for these acquisitions is summarized as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Preliminary

    

 

 

    

Preliminary

 

 

 

Purchase Price

 

 

 

 

Purchase Price

 

 

 

Allocation

 

Adjustments/

 

Allocation

 

 

 

April 30, 2017

 

Reclassifications

 

January 31, 2018

 

 

 

(in thousands)

 

Cash and cash equivalents

 

$

1,558

 

$

 —

 

$

1,558

 

Trade accounts and notes receivable

 

 

37,691

 

 

(63)

 

 

37,628

 

Inventories

 

 

16,504

 

 

 —

 

 

16,504

 

Other current assets

 

 

657

 

 

14

 

 

671

 

Property and equipment

 

 

8,357

 

 

 —

 

 

8,357

 

Tradenames

 

 

9,490

 

 

 —

 

 

9,490

 

Customer relationships

 

 

64,660

 

 

 —

 

 

64,660

 

Goodwill

 

 

37,728

 

 

(144)

 

 

37,584

 

Deferred tax liability

 

 

(6,011)

 

 

 —

 

 

(6,011)

 

Liabilities assumed

 

 

(16,958)

 

 

560

 

 

(16,398)

 

Purchase price

 

$

153,676

 

$

367

 

$

154,043

 

During the nine months ended January 31, 2018, the Company recorded adjustments to working capital for fiscal 2017 acquisitions resulting in an increase in total consideration paid of $0.4 million. As of January 31, 2018, goodwill of $25.4 million and other intangible assets of $53.6 million related to these acquisitions are expected to be deductible for U.S. federal income tax purposes. Also as of January 31, 2018, goodwill of $12.2 million and other intangible assets of $20.6 million related to these acquisitions are expected to be nondeductible for U.S. federal income tax purposes. The Company believes that the information gathered to date provides a reasonable basis for estimating the fair values of assets acquired and liabilities assumed, but the Company is waiting for additional information necessary to finalize the fair values of certain acquisitions for which final working capital settlements have not been determined. The additional information necessary is that which will result from these settlements. Such changes are not expected to be significant. The Company expects to complete the purchase price allocation for certain of these acquisitions as soon as practicable but no later than one year from the applicable acquisition date. 

3. Goodwill and Intangible Assets

Goodwill

The following table presents changes in the carrying amount of goodwill during the nine months ended January 31, 2018:

 

 

 

 

 

 

    

Carrying

 

 

 

Amount

 

 

 

(in thousands)

 

Balance as of May 1, 2017

 

$

423,644

 

Goodwill acquired

 

 

3,310

 

Purchase price adjustments

 

 

(144)

 

Balance as of January 31, 2018

 

$

426,810

 

 

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GMS Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)

Intangible Assets

The following table presents the components of the Company’s definite-lived intangible assets as of January 31, 2018 and April 30, 2017:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Estimated

 

Weighted

 

January 31, 2018

 

 

 

Useful

 

Average

 

Gross

 

 

 

Net

 

 

    

Lives

 

Amortization

 

Carrying

 

Accumulated

 

Carrying

 

 

 

(years)

 

Period

 

Amount

 

Amortization

 

Value

 

 

 

(dollars in thousands)

 

Customer relationships

 

5 - 13

 

10.9

 

$

281,839

 

$

140,825

 

$

141,014

 

Definite-lived tradenames

 

5 - 20

 

18.0

 

 

26,250

 

 

2,901

 

 

23,349

 

Vendor agreements

 

8 - 10

 

8.3

 

 

6,644

 

 

2,754

 

 

3,890

 

Leasehold interests

 

7 - 15

 

9.0

 

 

2,866

 

 

746

 

 

2,120

 

Other

 

5

 

5.0

 

 

521

 

 

47

 

 

474

 

Totals

 

 

 

 

 

$

318,120

 

$

147,273

 

$

170,847

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Estimated

 

Weighted

 

April 30, 2017

 

 

 

Useful

 

Average

 

Gross

 

 

 

Net

 

 

    

Lives

     

Amortization

     

Carrying

     

Accumulated

     

Carrying

 

 

 

(years)

 

Period

 

Amount

 

Amortization

 

Value

 

 

 

(dollars in thousands)

 

Customer relationships

 

5 - 13

 

10.9

 

$

273,196

 

$

111,291

 

$

161,905

 

Definite-lived tradenames

 

5 - 20

 

18.3

 

 

25,250

 

 

1,718

 

 

23,532

 

Vendor agreement

 

8

 

8.0

 

 

5,644

 

 

2,176

 

 

3,468

 

Leasehold interests

 

7 - 13

 

8.2

 

 

2,516

 

 

496

 

 

2,020

 

Totals

 

 

 

 

 

$

306,606

 

$

115,681

 

$

190,925

 

 

Definite-lived intangible assets are amortized over their estimated useful lives. The Company amortizes its customer relationships using an accelerated method to match the estimated cash flow generated by such assets, and amortizes its other definite-lived intangibles using the straight-line method because a pattern to which the expected benefits will be consumed or otherwise used up could not be reliably determined. Amortization expense related to definite-lived intangible assets was $10.5 million and $31.5 million for the three and nine months ended January 31, 2018, respectively, and $11.9 million and $32.1 million for the three and nine months ended January 31, 2017, respectively. Amortization expense is recorded in depreciation and amortization expense in the Condensed Consolidated Statements of Operations and Comprehensive Income.

 

Based on the current amount of definite-lived intangible assets, the Company expects to record amortization expense of approximately $10.0 million during the remaining three months in the year ending April 30, 2018 and $34.8 million, $27.9 million, $22.6 million, $18.3 million and $57.2 million during the years ending April 30, 2019, 2020, 2021, 2022 and thereafter, respectively. Actual amortization expense to be reported in future periods could differ materially from these estimates as a result of acquisitions, changes in useful lives and other relevant factors.

 

The Company’s indefinite-lived intangible assets consist of tradenames that had a carrying amount of $61.4 million as of January 31, 2018 and April 30, 2017.

 

 

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GMS Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)

4. Long-Term Debt

The Company’s long‑term debt consisted of the following as of January 31, 2018 and April 30, 2017:

 

 

 

 

 

 

 

 

 

    

January 31, 

 

April 30, 

 

 

2018

 

2017

 

 

 

(in thousands)

 

First Lien Term Loan due 2023 (1) (2)

 

$

564,141

 

$

470,245

 

ABL Facility

 

 

 —

 

 

103,353

 

Capital lease obligations, at an annual rate of 5.50%, due in monthly installments through 2023

 

 

19,034

 

 

15,611

 

Installment notes at fixed rates up to 5.0%, due in monthly and annual installments through 2023 (3)

 

 

14,309

 

 

5,711

 

 Carrying value of debt

 

 

597,484

 

 

594,920

 

Less current portion

 

 

15,949

 

 

11,530

 

 Long-term debt

 

$

581,535

 

$

583,390

 


(1)

Net of unamortized discount of $2,677 and $1,658 as of January 31, 2018 and April 30, 2017, respectively.

(2)

Net of deferred financing costs of $6,466 and $5,712 as of January 31, 2018 and April 30, 2017, respectively.

(3)

Net of unamortized discount of $1,599 and $751 as of January 31, 2018 and April 30, 2017, respectively.

Acquisition Debt

On April 1, 2014, the Company's wholly-owned subsidiaries, GYP Holdings II Corp., as parent guarantor (in such capacity, "Holdings"), and GYP Holdings III Corp., as borrower (in such capacity, the "Borrower" and, together with Holdings and the Subsidiary Guarantors (as defined therein), the "Loan Parties"), entered into a senior secured first lien term loan facility (the "First Lien Facility") and a senior secured second lien term loan facility (the "Second Lien Facility" and, together with the First Lien Facility, the "Term Loan Facilities") in the aggregate amount of $550.0 million to acquire Gypsum Management and Supply, Inc.

The Term Loan Facilities originally consisted of a First Lien Term Loan and a Second Lien Term Loan (respectively, the "First Term Loan" and "Second Term Loan"). The First Term Loan was issued in an original aggregate principal amount of $388.1 million (net of $2.0 million of original issue discount). The Second Term Loan was issued in an original aggregate principal amount of $158.4 million (net of $1.6 million of original issue discount) and is no longer outstanding.

On June 1, 2016, the Company used the IPO proceeds together with cash on hand to repay the $160.0 million principal amount of our term loan debt outstanding under our Second Lien Facility, which was a payment in full of the entire loan balance due under the Second Lien Facility. In addition, the Company recorded a write-off of debt discount and deferred financing fees of $5.4 million, which is included in write-off of discount and deferred financing fees in the Condensed Consolidated Statements of Operations and Comprehensive Income for the nine months ended January 31, 2017.

On September 27, 2016, the Company entered into an Incremental First Lien Term Commitments Amendment (the “First Amendment”), among the Borrower, Holdings, the other Loan Parties party thereto, Credit Suisse AG, as administrative agent and as new incremental first lien lender, which amended the First Lien Credit Agreement, dated April 1, 2014 (the “First Lien Credit Agreement”), among the Borrower, Holdings, the financial institutions from time to time party thereto, as lenders, and Credit Suisse AG, as administrative agent and collateral agent. The First Amendment amended the First Lien Credit Agreement to, among other things, provide for a new first lien term loan facility of approximately $481.2 million with an interest at floating rate based on LIBOR, with a 1.00% floor, plus 3.50%, representing a twenty-five basis point improvement compared to the interest rate of the existing First Lien Facility immediately prior to giving effect to the First Amendment. Net proceeds from the new First Lien Facility were used to repay the Company’s existing First Lien Facility of $381.2 million and a portion of the loans under the ABL Facility as well as to pay related expenses. The Company recorded a write-off of debt discount and deferred financing fees of $1.5 

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GMS Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)

million, which is included in write-off of discount and deferred financing fees in the Condensed Consolidated Statements of Operations and Comprehensive Income for the nine months ended January 31, 2017.

On June 7, 2017, the Company entered into the Second Amendment to First Lien Credit Agreement (the “Second Amendment”), among the Borrower, Holdings, the other Loan Parties party thereto, Credit Suisse AG, as administrative agent and as 2017 incremental first lien lender, which amended the First Lien Credit Agreement (as amended by the First Amendment and as supplemented from time to time). The Second Amendment provides for a new first lien term loan facility under the First Lien Credit Agreement in the aggregate principal amount of approximately $577.6 million due on April 1, 2023 that bears interest at a floating rate based on LIBOR, with a 1.00% floor, plus 3.00%, representing a fifty basis point improvement compared to the interest rate of the existing First Lien Facility immediately prior to giving effect to the Second Amendment. As of January 31, 2018, the applicable rate of interest was 4.77%.  Net proceeds were used to repay the existing First Lien Loan outstanding balance of approximately $477.6 million and approximately $94.0 million of loans under its asset based revolving credit facility as well as to pay related expenses. The Company recorded a write-off of debt discount and deferred financing fees of $0.1 million, which is included in write-off of discount and deferred financing fees in the Condensed Consolidated Statements of Operations and Comprehensive Income for the nine months ended January 31, 2018.

Asset Based Lending Facility

The Company has an Asset Based Lending Credit Facility (the “ABL Facility”) that provides for aggregate revolving commitments of $345.0 million (including same day swing line borrowings of $34.5 million). GYP Holdings III Corp. is the lead borrower (in such capacity, the “Lead Borrower”). 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.

At the Company’s option, the interest rates applicable to the loans under the ABL Facility are based at LIBOR or base rate plus, in each case, an applicable margin. The margins applicable for each elected interest rate are subject to a pricing grid, as defined in the ABL Facility agreement, based on average daily availability for the most recent fiscal quarter. As of January 31, 2018, the applicable rate of interest was 4.75%. The ABL Facility also contains an unused commitment fee subject to utilization, as included in the ABL Facility agreement.

        As of January 31, 2018, the Company had available borrowing capacity of approximately $333.6 million under the ABL Facility. The ABL Facility will mature on November 18, 2021 unless the individual affected lenders agree to extend the maturity of their respective loans under the ABL Facility upon the Company's request and without the consent of any other lender. The ABL Facility contains a cross default provision with the First Lien Facility.

Covenants under the ABL Facility and First Lien Facility

The ABL Facility contains certain affirmative covenants, including financial and other reporting requirements. The Company was in compliance with all such covenants as of January 31, 2018.

The First Lien Facility contains a number of covenants that limit our ability and the ability of our restricted subsidiaries, as described in the First Lien Credit Agreement, to: incur more indebtedness; pay dividends, redeem stock or make other distributions; make investments; create restrictions on the ability of our restricted subsidiaries to pay dividends to us or make other intercompany transfers; create liens securing indebtedness; transfer or sell assets; merge or consolidate; enter into certain transactions with our affiliates; and prepay or amend the terms of certain indebtedness. The Company was in compliance with all restrictive covenants as of January 31, 2018.

 

 

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Table of Contents

GMS Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)

5. Income Taxes

On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the “Tax Act”) was signed into law. The Tax Act includes a number of provisions, including the lowering of the U.S. corporate income tax rate from 35% to 21% effective January 1, 2018. Because the Company’s fiscal 2018 ends April 30, 2018, the Company’s tax provision for the current fiscal year will utilize a blended statutory federal rate of 30.4%, calculated by applying a prorated percentage of the number of days prior to and subsequent to the January 1, 2018 effective date of the Tax Act. In future fiscal years, the Company expects its statutory federal rate to be 21%. During the three months ended January 31, 2018, the Company revised its estimated annual effective tax rate to reflect the change in the federal statutory rate.

 

In connection with the Tax Act, the SEC issued Staff Accounting Bulletin No. 118 (“SAB 118”) to provide guidance to companies that have not completed their accounting for the income tax effects of the Tax Act. Under SAB 118, provisional amounts can be recorded to the extent a reasonable estimate can be made. Additional tax effects and adjustments to previously recorded provisional amounts can be recorded upon obtaining, preparing, or analyzing additional information (including computations) within one year from the enactment date of the Tax Act.

As of January 31, 2018, the Company was still assessing the overall impact of the Tax Act on its financial statements and had not completed its accounting for the tax effects of the Tax Act. The Company has reported provisional amounts reflecting reasonable estimates for the re-measurement of net deferred tax liabilities as of January 31, 2018 due to the reduction in the corporate rate. The Company recorded a provisional income tax benefit of $7.8 million for this re-measurement, which is included in provision (benefit) for income taxes in the Condensed Consolidated Statements of Operations and Comprehensive Income for the three and nine months ended January 31, 2018. 

The estimated impact of the Tax Act was based on a preliminary review of the new law and is subject to revision due to, among other things, changes in interpretations of the Tax Act, any legislative action to address questions that arise because of the Tax Act or any updates or changes to estimates the Company has utilized to calculate the impacts.  Among the factors that could affect the accuracy of our provisional amounts is uncertainty about the statutory tax rate applicable to our deferred income tax assets and liabilities, since the actual rate will be dependent on the timing of realization or settlement of such assets and liabilities. As of January 31, 2018, we estimated the dates when such realization or settlement would occur. The actual dates when such realization or settlement occurs may be significantly different from our estimates, which could result in the ultimate revaluation of our deferred income taxes to be different from our provisional amounts. Additionally, the Company continues to analyze additional information and guidance related to certain aspects of the Tax Act, such as limitations on the deductibility of executive compensation, conformity or changes by state taxing authorities in response to The Act, and the deductibility of other expenses impacted by the Tax Act. The Company will complete its accounting for the Tax Act once the Company has obtained, prepared and analyzed all information needed (including computations) for its analysis, but no later than one year from the enactment date of the Tax Act.

The Company’s effective income tax rate on continuing operations for the nine months ended January 31, 2018 was 22.7% compared to an effective income tax rate of 26.1% for the nine months ended January 31, 2017. The decrease in the effective income tax rate was primarily due to income tax effects of the Tax Act as discussed above, offset by the prior year election under section 338 (h)(10) of the Internal Revenue Code. As a result of this election, the Company decreased its deferred tax liabilities and tax expense in the nine months ended January 31, 2017 by $7.0 million.

 

The Company had valuation allowances of $0.3 million against its deferred tax assets related to certain tax jurisdictions as of January 31, 2018 and April 30, 2017. 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.

 

The Company had no material uncertain tax positions as of January 31, 2018 and April 30, 2017.

 

 

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GMS Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)

6. Equity-Based Compensation

General

The Company has granted options to purchase the Company’s common stock under its 2014 GYP Holdings I Corp. Stock Option Plan. The stock options granted under this plan vest over a four-year period and have a 10‑year term. In October 2017, the shareholders of the Company approved the GMS Inc. Equity Incentive Plan (the “Equity Incentive Plan”). Future grants will be made from the Equity Incentive Plan. The Equity Incentive Plan is administered by a committee of the Board of Directors, which determines the terms of the awards granted. Under the Equity Incentive Plan, the committee may grant various forms of equity-based incentive compensation, including stock options, stock appreciation rights, restricted stock, restricted stock units and performance awards, among others. The Company’s Equity Incentive Plan provides for the issuance of a maximum of 2.5 million shares, of which approximately 2.4  million shares were still available for grant as of January 31, 2018.  The Company intends to use authorized and unissued shares to satisfy share award exercises, unless otherwise noted.

 

The Company measures compensation cost for all share‑based awards at fair value on the grant date (or measurement date if different) and recognizes compensation expense, net of estimated forfeitures, over the requisite service period for awards expected to vest. The Company estimates the fair value of stock options using the Black-Scholes valuation model, and determines the fair value of restricted stock units based on the quoted price of GMS’s common stock on the date of grant.  The Company estimates forfeitures based on historical analysis of actual forfeitures and employee turnover. Actual forfeitures are recorded when incurred and estimated forfeitures are reviewed and adjusted at least annually.

Stock Option Awards

The following table presents stock option activity for the nine months ended January 31, 2018:

 

 

 

 

 

 

 

 

 

 

 

 

    

 

    

 

 

    

Weighted

    

 

 

 

 

 

 

Weighted

 

Average

 

 

 

 

 

 

 

Average

 

Remaining

 

Aggregate

 

 

Number of

 

Exercise

 

Contractual

 

Intrinsic

 

 

Options

 

Price

 

Life (years)

 

Value

 

 

(shares and dollars in thousands)

Outstanding as of May 1, 2017

 

2,088

 

$

13.49

 

  7.23

 

$

  47,336

Options granted

 

63

 

 

37.49

 

  

 

 

  

Options exercised

 

(171)

 

 

12.56

 

  

 

 

  

Options forfeited

 

 —

 

 

 —

 

  

 

 

  

Options expired