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Section 1: 10-Q (10-Q)

gms Current Folio 10Q

Table of Contents

 

UNITED STATES 

SECURITIES AND EXCHANGE COMMISSION 

WASHINGTON, D.C. 20549 

 

FORM 10-Q 

 

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

 

For the quarterly period ended July 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 41,138,634 shares of the registrant’s common stock, par value $0.01 per share, outstanding as of July 31, 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

28

Item 3 

Quantitative and Qualitative Disclosures About Market Risk

39

Item 4 

Controls and Procedures

39

 

 

 

PART II 

Other Information

41

Item 1 

Legal Proceedings

41

Item 1A 

Risk Factors

41

Item 2 

Unregistered Sales of Equity Securities and Use of Proceeds

41

Item 3 

Defaults Upon Senior Securities

41

Item 4 

Mine Safety Disclosures

41

Item 5 

Other Information

41

Item 6 

Exhibits

42

Signatures 

43

 

 

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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 growth of our various market, 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, 2018, 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;

·

our ability to successfully identify acquisition candidates, complete and integrate acquisitions and achieve synergies;

·

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 and retain key employees;

·

rising health care costs and labor costs, including the impact of labor and trucking shortages;

·

the reduction of the quantity of products our customers purchase;

·

the credit risk from our customers;

·

our inability to renew leases for our facilities;

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·

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

·

an impairment of our goodwill or intangible assets;

·

the impact of federal, state, provincial 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 cybersecurity breach in our IT systems;

·

natural or man‑made disruptions to our facilities;

·

our exposure to greater than anticipated tax liabilities;

·

the risk of our foreign operations, including currency rate fluctuations;

·

the imposition of tariffs and other trade barriers, and the effect of retaliatory trade measures;

·

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;

·

our holding company structure;

·

AEA’s influence on us; 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, 2018 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 actual results and events may differ materially from the forward‑looking statements contained in this Quarterly Report on Form 10-Q.

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

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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)

 

 

 

 

 

 

 

 

 

    

July 31, 

    

April 30, 

 

    

2018

    

2018

Assets

Current assets:

 

 

  

 

 

  

Cash and cash equivalents

 

$

36,865

 

$

36,437

Trade accounts and notes receivable, net of allowances of $7,982 and $9,633, respectively

 

 

474,394

 

 

346,450

Inventories, net

 

 

315,968

 

 

239,223

Prepaid expenses and other current assets

 

 

17,135

 

 

11,726

Total current assets

 

 

844,362

 

 

633,836

Property and equipment, net of accumulated depreciation of $94,015 and $85,761, respectively

 

 

272,806

 

 

163,582

Goodwill

 

 

623,200

 

 

427,645

Intangible assets, net

 

 

494,586

 

 

222,682

Other assets

 

 

10,916

 

 

6,766

Total assets

 

$

2,245,870

 

$

1,454,511

Liabilities and Stockholders’ Equity

Current liabilities:

 

 

  

 

 

  

Accounts payable

 

$

145,865

 

$

116,168

Accrued compensation and employee benefits

 

 

33,077

 

 

56,323

Other accrued expenses and current liabilities

 

 

60,640

 

 

45,146

Current portion of long-term debt

 

 

34,317

 

 

16,284

Total current liabilities

 

 

273,899

 

 

233,921

Non-current liabilities:

 

 

 

 

 

 

Long-term debt, less current portion

 

 

1,269,323

 

 

579,602

Deferred income taxes, net

 

 

24,508

 

 

10,742

Other liabilities

 

 

46,087

 

 

35,088

Liabilities to noncontrolling interest holders, less current portion

 

 

12,773

 

 

15,707

Total liabilities

 

 

1,626,590

 

 

875,060

Commitments and contingencies

 

 

  

 

 

  

Stockholders' equity:

 

 

  

 

 

  

Stockholders' equity

 

 

 

 

 

 

Common stock, par value $0.01 per share, 500,000 shares authorized; 41,139 and 41,069 shares issued and outstanding as of July 31, 2018 and April 30, 2018, respectively

 

 

411

 

 

411

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

 

 

 —

 

 

 —

Exchangeable shares

 

 

33,194

 

 

 —

Additional paid-in capital

 

 

490,670

 

 

489,007

Retained earnings

 

 

98,242

 

 

89,592

Accumulated other comprehensive income (loss)

 

 

(3,237)

 

 

441

Total stockholders' equity

 

 

619,280

 

 

579,451

Total liabilities and stockholders' equity

 

$

2,245,870

 

$

1,454,511

 

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

 

 

July 31, 

 

 

2018

 

2017

Net sales

 

$

778,144

 

$

642,157

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

 

 

533,328

 

 

437,053

Gross profit

 

 

244,816

 

 

205,104

Operating expenses:

 

 

  

 

 

  

Selling, general and administrative

 

 

185,435

 

 

156,072

Depreciation and amortization

 

 

26,322

 

 

16,345

Total operating expenses

 

 

211,757

 

 

172,417

Operating income

 

 

33,059

 

 

32,687

Other (expense) income:

 

 

  

 

 

  

Interest expense

 

 

(16,188)

 

 

(7,500)

Change in fair value of financial instruments

 

 

(6,019)

 

 

(196)

Write-off of debt discount and deferred financing fees

 

 

 —

 

 

(74)

Other income, net

 

 

634

 

 

486

Total other expense, net

 

 

(21,573)

 

 

(7,284)

Income before taxes

 

 

11,486

 

 

25,403

Provision for income taxes

 

 

2,836

 

 

10,060

Net income

 

$

8,650

 

$

15,343

Weighted average common shares outstanding:

 

 

  

 

 

  

Basic

 

 

41,094

 

 

40,971

Diluted

 

 

42,074

 

 

42,128

Net income per common share:

 

 

  

 

 

  

Basic

 

$

0.21

 

$

0.37

Diluted

 

$

0.20

 

$

0.36

Comprehensive income

 

 

  

 

 

 

Net income

 

$

8,650

 

$

15,343

Foreign currency translation loss

 

 

(3,791)

 

 

 —

Changes in other comprehensive income, net of tax

 

 

113

 

 

153

Comprehensive income

 

$

4,972

 

$

15,496

 

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)

 

 

 

 

 

 

 

 

 

    

Three Months Ended

 

 

July 31,

 

    

2018

    

2017

Cash flows from operating activities:

 

 

  

 

 

 

Net income

 

$

8,650

 

$

15,343

Adjustments to reconcile net income to net cash (used in) provided by operating activities:

 

 

 

 

 

 

Depreciation and amortization

 

 

26,322

 

 

16,345

Write-off and amortization of debt discount and debt issuance costs

 

 

825

 

 

734

Provision for losses on accounts and notes receivable

 

 

148

 

 

849

Provision for obsolescence of inventory

 

 

(22)

 

 

371

Effects of fair value adjustments to inventory

 

 

4,129

 

 

 —

Increase in fair value of contingent consideration

 

 

229

 

 

 —

Equity-based compensation

 

 

1,269

 

 

1,178

Gain on sale and disposal of assets

 

 

(121)

 

 

(390)

Change in fair value of financial instruments

 

 

6,019

 

 

196

Changes in assets and liabilities net of effects of acquisitions:

 

 

 

 

 

 

Trade accounts and notes receivable

 

 

(40,974)

 

 

(12,913)

Inventories

 

 

(20,943)

 

 

(3,318)

Prepaid expenses and other assets

 

 

416

 

 

(2,996)

Accounts payable

 

 

(1,696)

 

 

9,506

Accrued compensation and employee benefits

 

 

(22,945)

 

 

(27,694)

Derivative liability

 

 

(10,778)

 

 

 —

Other accrued expenses and current liabilities

 

 

2,219

 

 

14,026

Deferred income taxes

 

 

(571)

 

 

(2,712)

Cash (used in) provided by operating activities

 

 

(47,824)

 

 

8,525

Cash flows from investing activities:

 

 

  

 

 

  

Purchases of property and equipment

 

 

(3,793)

 

 

(5,511)

Proceeds from sale of assets

 

 

266

 

 

1,424

Acquisition of businesses, net of cash acquired

 

 

(575,499)

 

 

(3,124)

Cash used in investing activities

 

 

(579,026)

 

 

(7,211)

Cash flows from financing activities:

 

 

  

 

 

  

Repayments on the revolving credit facility

 

 

(176,769)

 

 

(257,382)

Borrowings from the revolving credit facility

 

 

392,170

 

 

167,429

Payments of principal on long-term debt

 

 

(2,492)

 

 

(1,444)

Payments of principal on capital lease obligations

 

 

(3,998)

 

 

(1,434)

Borrowings from term loan

 

 

996,840

 

 

577,616

Repayments of term loan

 

 

(571,840)

 

 

(477,616)

Debt issuance costs

 

 

(7,933)

 

 

(3,308)

Proceeds from exercises of stock options

 

 

431

 

 

 —

Other financing activities

 

 

873

 

 

 —

Cash provided by financing activities

 

 

627,282

 

 

3,861

Effect of exchange rates on cash and cash equivalents

 

 

(4)

 

 

 —

Increase in cash and cash equivalents

 

 

428

 

 

5,175

Cash and cash equivalents, beginning of period

 

 

36,437

 

 

14,561

Cash and cash equivalents, end of period

 

$

36,865

 

$

19,736

Supplemental cash flow disclosures:

 

 

  

 

 

  

Cash paid for income taxes

 

$

958

 

$

1,787

Cash paid for interest

 

 

10,980

 

 

6,792

Supplemental schedule of noncash activities:

 

 

  

 

 

  

Assets acquired under capital lease

 

$

79,139

 

$

2,957

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

 

 

2,645

 

 

 —

Increase in insurance claims payable and insurance recoverable

 

 

2,231

 

 

1,590

 

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 operate a network of more than 245 distribution centers across the United States and Canada.

Basis of Presentation

The condensed consolidated financial statements included in this Quarterly Report on Form 10-Q have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission that permit reduced disclosure for interim periods. In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all normal and recurring adjustments necessary for a fair presentation of the results of operations, financial position and cash flows. All adjustments are of a normal recurring nature unless otherwise disclosed. The results of operations for interim periods are not necessarily indicative of results for any other interim period or the entire fiscal year. As a result, the unaudited condensed consolidated financial statements should be read in conjunction with our audited consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year ended April 30, 2018.

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.

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 equity and other comprehensive income (loss). Gains and losses on foreign currency transactions are recognized in the Condensed Consolidated Statement of Operations and Comprehensive Income within other income, net.

 

Insurance Liabilities

The Company is self‑insured for certain losses related to medical claims. The Company has stop‑loss coverage to limit the exposure arising from medical claims. 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

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GMS Inc.

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

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 loss development factors and actuarial assumptions followed in the insurance industry and historical loss development experience.

As of July 31, 2018 and April 30, 2018, the aggregate liabilities for medical self‑insurance were $3.8 million and $4.1 million, respectively, and are included in other accrued expenses and current liabilities in the Condensed Consolidated Balance Sheets. As of July 31, 2018 and April 30, 2018, reserves for general liability, workers’ compensation and automobile totaled approximately $16.4 million and $14.7 million, respectively, and are included in other accrued expenses and current liabilities and other liabilities in the Condensed Consolidated Balance Sheets. As of July 31, 2018 and April 30, 2018, expected recoveries for medical self‑insurance, general liability, automobile and workers’ compensation totaled approximately $6.6 million and $4.8 million, respectively, and are included in prepaid expenses and other current assets and other assets in the Condensed Consolidated Balance Sheets.

Restructuring

The Company recognizes a liability for costs associated with an exit or disposal activity when the liability is incurred. After the appropriate level of management, having the authority, approves the detailed restructuring plan and the appropriate criteria for recognition are met, the Company establishes accruals for employee termination and other costs, as applicable. During the three months ended July 31, 2018, the Company initiated a reduction in workforce as part of a strategic cost reduction plan to improve operational efficiency. The Company recorded $4.8 million of restructuring costs during the three months ended July 31, 2018 in connection with the reduction in workforce, consisting primarily of severance and other employee costs. Such costs are classified within selling, general and administrative expenses in the Condensed Consolidated Statements of Operations and Comprehensive Income. The Company made payments of $1.7 million during the three months ended July 31, 2018. As of July 31, 2018, the Company had a remaining liability of $3.1 million, which was classified within other accrued expenses and current liabilities in the Condensed Consolidated Balance Sheet. The Company expects to make cash payments to settle the remaining liability within the next twelve months.

 

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.

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GMS Inc.

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

Fair Value of Financial Instruments

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Authoritative guidance for fair value measurements establishes a three‑level hierarchy that prioritizes the inputs to valuation models based upon the degree to which they are observable. The three levels of the fair value measurement hierarchy are as follows:

Level 1

Inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity can access at the measurement date. 

Level 2

Inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.

Level 3

Inputs are unobservable inputs for which little or no market data exists, therefore requiring an entity to develop its own assumptions.

 

The carrying values of the Company’s cash, cash equivalents, trade receivables and trade payables approximate their fair values because of their short‑term nature. Based on borrowing rates available to the Company for loans with similar terms, the carrying values of the Company’s debt instruments approximate fair value. See Note 10, “Fair Value Measurements,” for additional information with respect to the Company’s fair value measurements.

Earnings Per Share

Basic earnings per share is computed by dividing net income available to common stockholders by the weighted average number of outstanding shares of common stock for the period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock, including stock options and restricted stock units (collectively “Common Stock Equivalents”), were exercised or converted into common stock.  The dilutive effect of outstanding stock options and restricted stock units is reflected in diluted earnings per share by application of the treasury stock method. In applying the treasury stock method for stock-based compensation arrangements, the assumed proceeds are computed as the sum of the amount the employee must pay upon exercise and the amount of compensation cost attributed to future services and not yet recognized. Diluted earnings per share is computed by increasing the weighted‑average number of outstanding shares of common stock computed in basic earnings per share to include the dilutive effect of Common Stock Equivalents for the period. In periods of net loss, the number of shares used to calculate diluted loss per share is the same as basic net loss per share.

 

The holders of the Company’s Exchangeable Shares (as defined in Note 3, “Business Acquisitions” and further described in Note 7, “Stockholders’ Equity”)  are entitled to receive dividends or distributions that are equal to any dividends or distributions on the Company’s common stock. As a result, the Exchangeable Shares are classified as a participating security and thereby require the allocation of income that would have otherwise been available to common stockholders when calculating earnings per share. Diluted earnings per share is calculated by utilizing the most dilutive result of the if-converted and two-class methods. In both methods, net income attributable to common shareholders and the weighted-average common shares outstanding are adjusted to account for the impact of the assumed issuance of potential common shares that are dilutive, subject to dilution sequencing rules.  

 

Recently Adopted Accounting Pronouncements

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 required to be adopted by public business entities in annual periods beginning on or after December 15, 2017, and interim periods within those annual

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Table of Contents

GMS Inc.

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

periods, and may be applied on a full retrospective or modified retrospective approach. Early adoption at the original effective date is permitted.

The Company adopted this guidance on May 1, 2018 (the first day of fiscal 2019) using the modified retrospective approach. The adoption of the new guidance, using the modified retrospective approach, did not have a material impact on the Company’s financial statements. The adoption of the new guidance resulted in a $3.6 million reclassification in the Condensed Consolidated Balance Sheet from trade accounts and notes receivable to other accrued expenses and current liabilities for estimated sales returns. The adoption of the new revenue guidance also resulted in additional disclosures regarding the Company’s revenue recognition. The additional disclosures required by this new standard are contained in Note 2, “Revenue.”

Statement of Cash Flows – In August 2016, the FASB issued new guidance to reduce diversity in practice related to certain cash receipts and payment in the statement of cash flows by adding or clarifying guidance on eight specific cash flow issues. The new guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. Early adoption is permitted. The Company adopted this guidance on May 1, 2018 (the first day of fiscal 2019). As a result of the adoption, the Company now classifies cash payments for debt prepayment or debt extinguishment costs, including third-party costs and other fees paid to lenders that are directly related to the debt prepayment or debt extinguishment, as cash outflows for financing activities. This resulted in a $2.7 million reclass from cash (used in) provided by operating activities (specifically the line item changes in other accrued expenses and current liabilities)  to cash provided by financing activities (specifically the line item debt issuance costs) in the Condensed Consolidated Statement of Cash Flows for the three months ended July 31, 2017. The adoption did not have any other material impact on the Company’s financial statements.

 

Income Taxes – In October 2016, the FASB issued new guidance intended to improve the accounting for intra-entity transfers of assets other than inventory by requiring recognition of income tax consequences of intra-entity transfers of assets other than inventory when the transfer occurs. The new guidance is effective for annual and interim periods beginning after December 15, 2017. Early adoption is permitted. The amendments in this update should be applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. The Company adopted this guidance on May 1, 2018 (the first day of fiscal 2019) with no material impact on its financial statements.

 

Recently Issued Accounting Pronouncements

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 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.

On July 30, 2018, the FASB issued new guidance that provides entities with an additional (and optional) transition method to adopt the new lease standard. Under this new transition method, an entity initially applies the new lease standard at the adoption date and recognizes a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. We have not yet determined whether we will use the newly permitted adoption method.

 Goodwill – In January 2017, the FASB issued authoritative guidance that simplifies the accounting for goodwill impairments by eliminating Step 2 from the goodwill impairment test. Under the new guidance, goodwill impairment will be the amount by which a reporting unit’s carrying value exceeds its fair value. The new standard is effective for annual and any interim impairment tests for periods beginning after December 15, 2019. Early adoption is permitted. The Company does not expect the adoption of this standard to have a material impact on its financial statements.

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Table of Contents

GMS Inc.

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

 

Accumulated Other Comprehensive Income – In February 2018, the FASB issued authoritative guidance which permits entities to reclassify, to retained earnings, the one-time income tax effects stranded in accumulated other comprehensive income arising from the change in the U.S. federal corporate tax rate as a result of the Tax Cuts and Jobs Act of 2017. An entity that elects to make this reclassification must consider all items in accumulated other comprehensive income that have tax effects stranded as a result of the tax rate change, and must disclose the reclassification of these tax effects as well as the entity’s policy for releasing income tax effects from accumulated other comprehensive income. The new guidance may be applied either retrospectively or as of the beginning of the period of adoption. The new guidance is effective for annual and interim periods beginning after December 15, 2018. Early adoption is permitted. The Company plans to adopt this guidance on May 1, 2019 (the first day of fiscal 2020). While this guidance will have no impact on the Company’s results of operations, the Company is currently assessing this standard’s impact on its consolidated financial position. 

 

2. Revenue

 

Revenue Recognition

 

Revenue is recognized upon transfer of control of promised goods to customers at an amount that reflects the consideration the Company expects to receive in exchange for those goods. Revenue is recognized net of any taxes collected from customers, which are subsequently remitted to governmental authorities. The Company includes shipping and handling costs billed to customers in net sales. These costs are recognized as a component of selling, general and administrative expenses when the Company does not bill the customer.

 

See to Note 13, “Segments,” for information regarding disaggregation of revenue, including revenue by product and by geographic area.

 

Performance Obligations

 

The Company primarily satisfies its performance obligations at a point in time, which is upon delivery of products. The Company’s payment terms vary by the type and location of its customers. The amount of time between point of sale and when payment is due is not significant and the Company has determined its contracts do not include a significant financing component. Product warranties do not constitute a performance obligation for the Company, as products are warrantied directly by the manufacturer.

Our contracts with customers involve performance obligations that are one year or less. Therefore, we applied the standard’s optional exemption that permits the omission of information about our unfulfilled performance obligations as of the balance sheet dates.

 

Significant Judgements

 

The Company’s contracts may include terms that could cause variability in the transaction price, including customer rebates, returns and cash discounts for early payment. Variable consideration is estimated and included in total consideration based on the expected value method. These estimates are based on historical experience, anticipated performance and other factors known at the time. The Company only includes estimated amounts in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is resolved. 

 

Contract Balances

 

Receivables from contracts with customers were $445.1 million and $326.6 million as of July 31, 2018 and May 1, 2018, respectively. The Company did not have material amounts of contract assets or liabilities as of July 31, 2018 or May 1, 2018.

 

 

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Table of Contents

GMS Inc.

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

3. Business Acquisitions

 

The Company accounts for business combinations by recognizing the assets acquired and liabilities assumed at the acquisition date fair value. In valuing acquired assets and liabilities, fair value estimates use Level 3 inputs, including future expected cash flows and discount rates. Goodwill is measured as the excess of consideration transferred over the fair values of the assets acquired and the liabilities assumed. While the Company uses its best estimates and assumptions as a part of the purchase price allocation process to accurately value assets acquired and liabilities assumed at the acquisition date, the Company’s estimates are inherently uncertain and subject to refinement. As a result, during the measurement period, which may be up to one year from the acquisition date, the Company records adjustments to the assets acquired and liabilities assumed, with the corresponding offset to goodwill. Upon the conclusion of the measurement period, any subsequent adjustments arising from new facts and circumstances are recorded to the Condensed Consolidated Statements of Operations and Comprehensive Income. The results of operations of acquisitions are reflected in the Company’s Condensed Consolidated Financial Statements from the date of acquisition.

 

Acquisition of Titan

On June 1, 2018, the Company acquired all of the outstanding equity interests of WSB Titan (“Titan”), a distributer of drywall, lumber, commercial and residential building materials. Titan is a gypsum specialty dealer with 30 locations across five provinces in Canada. The stated purchase price was $627.0 million (C$800.0 million), subject to a working capital and certain other adjustments as set forth in the securities purchase agreement. As part of the consideration, certain members of Titan’s management converted a portion of their ownership position into 1.1 million shares of equity that are exchangeable for the Company’s common stock (“Exchangeable Shares”). The purpose of the transaction is to extend the Company’s leadership position in North America with expanded scale and footprint, expand its geographic coverage into the Canadian market and create opportunities for further expansion in Canada.

To finance this transaction, on June 1, 2018, the Company entered into a Third Amendment to its First Lien Credit Agreement (the “Third Amendment”) that provides for a new first lien term loan facility under the first lien credit agreement in the aggregate principal amount of $996.8 million due in June 2025 that bears interest at a floating rate based on LIBOR, with a 0% floor, plus 2.75%. The Company also drew down $143.0 million under its Asset Backed Lending Facility (“ABL Facility”). The net proceeds from the new first lien term loan facility, ABL Facility and cash on hand were used to repay the Company’s existing first lien term loan facility of $571.8 million under the Credit Agreement and to finance its acquisition of Titan.

The fair value of consideration transferred was $614.2 million, after adjusting for foreign currency changes in the stated purchase price and other fair value changes, which consisted of $581.0 million in cash and $33.2 million for the fair value of the 1.1 million Exchangeable Shares.  See Note 7, “Shareholders’ Equity,” for more information on the Exchangeable Shares. The Company also assumed certain contingent consideration arrangements that relate to previous acquisitions of Titan. The contingent consideration arrangements are based on performance of Titan’s business and are payable in cash in fiscal 2019 and fiscal 2020.

The assets acquired and liabilities assumed of Titan were recognized at their acquisition date fair values. The purchase price allocation is subject to change as the Company obtains additional information during the measurement period about the facts and circumstances that existed as of the acquisition date. The primary areas of the preliminary purchase price allocation that are not yet finalized relate to working capital adjustments, the finalization of preliminary fair value estimates, income taxes and residual goodwill.

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Table of Contents

GMS Inc.

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

The following table summarizes the preliminary allocation of the consideration transferred based on currently available information (in thousands):

 

 

 

 

Cash

 

$

5,573

Trade accounts and notes receivable

 

 

84,039

Inventories

 

 

60,272

Prepaid and other current assets

 

 

8,334

Property and equipment

 

 

37,263

Goodwill

 

 

196,524

Intangible assets

 

 

289,423

Accounts payable and accrued expenses

 

 

(40,833)

Contingent consideration

 

 

(12,039)

Deferred income taxes

 

 

(14,337)

Fair value of consideration transferred

 

$

614,219

 

Goodwill arising from the acquisition is attributable to synergies achieved through the streamlining of operations combined with improved margins attainable through increased market presence. All of the goodwill will be assigned to the Company’s geographic divisions segment. The goodwill is not expected to be deductible for income tax purposes.

 

Trade accounts and notes receivable had a preliminary estimate of fair value of $84.0 million and a gross contractual value of $85.6 million. The difference represents the Company’s best estimate of the contractual cash flows that will not be collected.

 

The following table summarizes the preliminary components of intangible assets acquired in connection with the acquisition of Titan (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted

 

 

 

 

 

 

Average

 

 

 

 

 

 

Amortization

 

 

Fair Value

 

 

Period (Years)

Customer relationships

 

$

250,041

 

 

13

Tradenames

 

 

30,098

 

 

15

Developed technology

 

 

5,402

 

 

 5

Non-compete agreements

 

 

3,010

 

 

 3

Other

 

 

872

 

 

 3

    Total intangible assets

 

$

289,423

 

 

 

 

Net sales related to the Titan business included in the Company’s Condensed Consolidated Statement of Operations and Comprehensive Income for the three months ended July 31, 2018 was $87.4 million. Net income related to the Titan business included in the Company’s Condensed Consolidated Statement of Operations and Comprehensive Income for the three ended July 31, 2018 was $0.4 million. 

 

The following table represents the unaudited pro forma consolidated net sales and net income for the Company for the periods indicated (in thousands):   

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

July 31, 

 

 

2018

 

2017

 

 

 

 

 

 

 

Net sales

 

$

820,813

 

$

767,834

Net income

 

 

8,367

 

 

17,236

 

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Table of Contents

GMS Inc.

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

The above pro forma results have been calculated by combining the historical results of the Company and Titan as if the acquisition of Titan had occurred on May 1, 2017, the first day of the comparable prior reporting period presented. The pro forma results include estimates for intangible asset amortization, depreciation, interest expense and debt issuance costs and are subject to change once final asset values have been determined. No other material pro forma adjustments were deemed necessary to conform to the Company’s accounting policies or for any other situation. 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.

 

4. Goodwill and Intangible Assets

Goodwill

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

 

 

 

 

 

    

Carrying

 

 

Amount

 

 

(in thousands)

Balance as of April 30, 2018

 

$

427,645

Goodwill acquired

 

 

196,524

Purchase price adjustments

 

 

73

Translation adjustment

 

 

(1,042)

Balance as of July 31, 2018

 

$

623,200

 

Intangible Assets

The following tables present the components of the Company’s definite-lived intangible assets as of July 31, 2018 and April 30, 2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Estimated

 

Weighted

 

July 31, 2018

 

 

Useful

 

Average

 

Gross

 

 

 

Net

 

    

Lives

 

Amortization

 

Carrying

 

Accumulated

 

Carrying

 

 

(years)

 

Period

 

Amount

 

Amortization

 

Value

 

 

(dollars in thousands)

Customer relationships

 

5 - 13

 

11.9

 

$

531,165

 

$

164,486

 

$

366,679

Definite-lived tradenames

 

5 - 20

 

16.3

 

 

56,176

 

 

4,314

 

 

51,862

Vendor agreements

 

8 - 10

 

8.3

 

 

6,644

 

 

3,157

 

 

3,487

Developed technology

 

5

 

4.9

 

 

5,371

 

 

182

 

 

5,189

Leasehold interests

 

1 - 15

 

7.6

 

 

3,733

 

 

987

 

 

2,746

Other

 

3 - 5

 

3.3

 

 

3,514

 

 

258

 

 

3,256

Totals

 

 

 

 

 

$

606,603

 

$

173,384

 

$

433,219

 

 

 

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Table of Contents

GMS Inc.

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Estimated

 

Weighted

 

April 30, 2018

 

 

Useful

 

Average

 

Gross

 

 

 

Net

 

    

Lives

     

Amortization

     

Carrying

     

Accumulated

     

Carrying

 

 

(years)

 

Period

 

Amount

 

Amortization

 

Value

 

 

(dollars in thousands)

Customer relationships

 

5 - 13

 

10.9

 

$

282,547

 

$

150,081

 

$

132,466

Definite-lived tradenames

 

5 - 20

 

18.0

 

 

26,250

 

 

3,578

 

 

22,672

Vendor agreement

 

8 - 10

 

8.3

 

 

6,644

 

 

2,956

 

 

3,688

Leasehold interests

 

7 - 15

 

9.0

 

 

2,866

 

 

832

 

 

2,034

Other

 

5

 

5.0

 

 

521

 

 

66

 

 

455

Totals

 

 

 

 

 

$

318,828

 

$

157,513

 

$

161,315

 

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 $15.7 million and $10.4 million for the three months ended July 31, 2018 and 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 $56.7 million during the remaining nine months in the year ending April 30, 2019 and $67.5 million, $58.4 million, $49.2 million, $41.2 million and $160.2 million during the years ending April 30, 2020, 2021, 2022, 2023 and thereafter, respectively. Actual amortization expense to be reported in future periods could differ materially from these estimates as a result of acquisitions, changes in useful lives, foreign currency exchange rate fluctuations and other relevant factors.

 

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

 

5. Long-Term Debt

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

 

 

 

 

 

 

 

 

    

July 31, 

 

April 30, 

 

 

2018

 

2018

 

 

(in thousands)

First Lien Term Loan (1) (2)

 

$

978,334

 

$

563,179

ABL Facility

 

 

215,401

 

 

 —

Capital lease obligations, at an annual rate of 5.50%, due in monthly installments through 2025

 

 

93,686

 

 

18,564

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

 

 

16,219

 

 

14,143

 Carrying value of debt

 

 

1,303,640

 

 

595,886

Less current portion

 

 

34,317

 

 

16,284

 Long-term debt

 

$

1,269,323

 

$

579,602


(1)

Net of unamortized discount of $2,420 and $2,536 as of July 31, 2018 and April 30, 2018, respectively.

(2)

Net of deferred financing costs of $13,594 and $6,125 as of July 31, 2018 and April 30, 2018, respectively.

(3)

Net of unamortized discount of $1,462 and $1,534 as of July 31, 2018 and April 30, 2018, respectively.

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Table of Contents

GMS Inc.

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

First Lien Term Loan

The Company has a senior secured first lien term loan facility (the "First Lien Facility") that consists of a First Lien Term Loan (the "First Term Loan").

On June 7, 2017, the Company entered into the Second Amendment to First Lien Credit Agreement, dated April 1, 2014 (the “First Lien Credit Agreement”) (the “Second Amendment”), which amended the First Lien Credit Agreement (as previously amended and as supplemented from time to time). The Second Amendment provided 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 plus 3.00%, with a 1.00% floor. Net proceeds were used to repay the outstanding balance of approximately $477.6 million under the existing First Lien Loan and approximately $94.0 million of loans under the Company’s 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 three months ended July 31, 2017.

On June 1, 2018, the Company entered into the Third Amendment that provided for a new first lien term loan facility under the First Lien Credit Agreement in the aggregate principal amount of $996.8 million due in June 2025 that bears interest at a floating rate based on LIBOR plus 2.75%,  with a 0% floor. The net proceeds from the new first lien term loan facility were used to repay the Company’s existing First Lien Loan outstanding balance of approximately $571.8 million and to finance the acquisition of Titan. As of July 31, 2018, the applicable rate of interest was 4.83%.

Asset Based Lending Facility

The Company has an asset based revolving 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. 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 July 31, 2018, the applicable rate of interest was 4.09%. The ABL Facility also contains an unused commitment fee subject to utilization, as included in the ABL Facility agreement.

        During the three months ended July 31, 2018, the Company made net borrowings under the ABL facility of $215.4 million. As of July 31, 2018, the Company had available borrowing capacity of approximately $119.8 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 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 July 31, 2018.

 

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, 2018.

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Table of Contents

GMS Inc.

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

Titan Revolving Credit Facility

In connection with the acquisition of Titan on June 1, 2018, the Company assumed Titan’s revolving credit facility (the “Titan Facility”) that provides for aggregate revolving commitments of C$105.0 million. The Titan Facility bears interest at the Canadian prime rate plus a marginal rate based on the level determined by Titan’s total debt to EBITDA ratio at the end of the most recently completed fiscal quarter or year. As of July 31, 2018, no amounts were outstanding under the Titan Facility and the Company had available borrowing capacity of approximately C$105.0 million under the Titan Facility. The Titan Facility matures on June 28, 2022.

Capital Leases

During the three months ended July 31, 2018, the Company amended certain terms of its operating lease agreements for equipment. The amendments would have resulted in capital lease classification of the leases under lease classification criteria had the changed terms been in effect at lease inception. As such, the amended agreements were considered new agreements. The new lease agreements were classified as capital leases as of the date of the modifications based on the application of lease classification criteria. As a result, the Company recorded $70.0 million of capital lease assets and capital lease liabilities in its Condensed Consolidated Balance Sheet during the three months ended July 31, 2018. 

 

Debt Maturities

As of July 31, 2018, the maturities of long‑term debt were as follows

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

First Lien

 

 

ABL

 

Capital

 

 

Installment

 

 

 

 

 

Term Loan(1)

 

 

Facility

 

Leases

 

 

Notes(2)

 

Total

Years ending April 30, 

 

(in thousands)

2019 (remaining nine months)

 

$

7,476

 

$

 —

$

13,597

 

$

3,544

 

$

24,617

2020

 

 

9,968

 

 

 —

 

27,589

 

 

3,794

 

 

41,351

2021

 

 

9,968

 

 

 —

 

23,634

 

 

3,490

 

 

37,092

2022

 

 

9,968

 

 

215,401

 

19,186

 

 

3,055

 

 

247,610

2023

 

 

9,968

 

 

 —

 

7,794

 

 

3,023

 

 

20,785

Thereafter

 

 

947,000

 

 

 —

 

1,886

 

 

775

 

 

949,661

 

 

$

994,348

 

$

215,401

$

93,686

 

$

17,681

 

$

1,321,116

 

(1)Gross of unamortized discount of $2,420 and deferred financing costs of $13,594 as of July 31, 2018.

(2)Gross of unamortized discount of $1,462 as of July 31, 2018.

 

 

6. Income Taxes

The Company’s effective income tax rate on continuing operations for the three months ended July 31, 2018 was 24.7% compared to an effective income tax rate of 39.6% for the three months ended July 31, 2017. The decrease in the effective income tax rate was primarily due to the impact of the Tax Cuts and Jobs Act of 2017 (the “Tax Act”), the impact of foreign tax rates and other tax effects associated with the acquisition of Titan. The federal statutory rates for the United States and Canada were 21.0% and 26.8%, respectively. 

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 July 31, 2018, we estimated the dates when such realization or settlement would occur. The actual dates when such realization or settlement occurs may be different from our estimates, pending finalization of our fiscal year 2018 tax return, which could result in the ultimate revaluation of

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GMS Inc.

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

our deferred income taxes to be different from our provisional amounts. As of July 31, 2018, there have been no changes to the provisional estimates previously recorded under the guidance issued by SEC’s Staff Accounting Bulletin No. 118 (“SAB 118”). 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.

Due to the acquisition of Titan, the Company in now subject to provisions of the Tax Act related to current tax on global intangible low-taxed income (“GILTI”) earned by certain foreign subsidiaries. The FASB Staff Q&A, Topic 740 No. 5, Accounting for Global Intangible Low-Taxed Income, states that an entity can make an accounting policy election to either recognize deferred taxes for temporary differences expected to reverse as GILTI in future years or provide for the tax expense related to GILTI in the year the tax is incurred. We have elected to recognize the tax on GILTI as a period expense in the period the tax is incurred.

In general, it is the practice and intention of the Company to reinvest the accumulated earnings of its non-U.S. subsidiaries in those operations. Foreign withholding taxes have not been recognized on the excess of the amount for financial reporting over the tax basis of investments in foreign subsidiaries that is indefinitely reinvested outside the United States.

The Company had valuation allowances of $0.4 million against its deferred tax assets related to certain tax jurisdictions as of July 31, 2018 and April 30, 2018. 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 reserve for uncertain tax positions as of July 31, 2018 and April 30, 2018.

 

7. Stockholders’ Equity

 

Accumulated Other Comprehensive Income (Loss)

 

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, 2018:

 

 

 

 

 

 

 

Accumulated

 

 

Other

 

    

Comprehensive

 

 

Income (Loss)

 

 

(in thousands)

Accumulated other comprehensive income as of April 30, 2018

 

$

441

Foreign currency translation adjustments

 

 

(3,791)

Other comprehensive loss on interest rate cap

 

 

(237)

Reclassification to earnings from accumulated other comprehensive income for interest rate cap

 

 

350

Accumulated other comprehensive loss as of July 31, 2018

 

$

(3,237)

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GMS Inc.

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

 

Exchangeable Shares

 

In connection with the acquisition of Titan on June 1, 2018, the Company issued 1.1 million Exchangeable Shares. The Exchangeable Shares were issued by an indirect wholly-owned subsidiary of the Company. The Exchangeable Shares rank senior to the Company’s common stock with respect to dividend rights and rights on liquidation, dissolution and winding-up. The holders of the Exchangeable Shares are entitled to receive dividends or distributions that are equal to any dividends or distributions on the Company’s common stock. The holders of the Exchangeable Shares do not have voting rights.

 

The Exchangeable Shares contain rights that allow the holders to exchange their Exchangeable Shares for GMS common stock at any time on a one-for-one basis. If converted, the holders are prevented from transferring such GMS common stock for one year from the Titan acquisition date. The Exchangeable Shares also contain rights that allow the Company, through its indirect wholly-owned subsidiary, to convert the Exchangeable Shares into GMS common stock on or after the fifth anniversary of the initial issuance of the Exchangeable Shares or upon certain events, as defined in the agreement.

 

8. 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 stockholders 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 July 31, 2018.  The Company intends to use authorized and unissued shares to satisfy share award exercises.

 

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

Equity-based compensation expense related to stock options and restricted stock units was $0.4 million and $0.5 million during the three months ended July 31, 2018 and 2017, respectively, and is included in selling, general and administrative expenses in the Condensed Consolidated Statements of Operations and Comprehensive Income.

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GMS Inc.

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

Stock Option Awards

 

The following table presents stock option activity for the three months ended July 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 April 30, 2018

 

1,952

 

$

14.37

 

6.52

 

$

33,209

Options granted

 

 —

 

 

 —

 

  

 

 

  

Options exercised

 

(35)

 

 

12.31

 

  

 

 

  

Options forfeited

 

(2)

 

 

37.49

 

  

 

 

  

Options expired

 

 —

 

 

 —

 

  

 

 

 

Outstanding as of July 31, 2018

 

1,915

 

$

14.39

 

6.36

 

$

25,046

Exercisable as of July 31, 2018

 

1,701

 

$

13.04

 

6.15

 

$

23,907

Vested and expected to vest as of July 31, 2018

 

1,910

 

$

14.35

 

6.35

 

$

25,030

 

The aggregate intrinsic value represents the value of the Company’s closing stock price on the last trading day of the period in excess of the weighted average exercise price multiplied by the number of options outstanding, exercisable or expected to vest. Options expected to vest are unvested shares net of expected forfeitures. The total intrinsic value of options exercised during the three months ended July 31, 2018 was $0.5 million. There were no stock option exercises during the three months ended July 31, 2017.  As of July 31, 2018, there was $0.9 million of total unrecognized compensation cost related to stock options. That cost is expected to be recognized over a weighted-average period of 2.0 years.

 

There were no stock options granted during the three months ended July 31, 2018 and 2017.

 

Restricted Stock Units

The following table presents restricted stock unit activity for the three months ended July 31, 2018:

 

 

 

 

 

 

 

 

 

 

 

Weighted

 

 

Number of

 

Average

 

 

Restricted

 

Exercise

 

 

Stock Units

 

Price

Outstanding as of April 30, 2018

 

21,766

 

$

37.49

Granted

 

 —

 

 

 —

Vested

 

(655)

 

 

37.49

Forfeited

 

 —

 

 

 —

Outstanding as of July 31, 2018

 

21,111

 

$

37.49

 

As of July 31, 2018, there was $0.6 million of total unrecognized compensation cost related to nonvested restricted stock units. That cost is expected to be recognized over a weighted-average period of 2.4 years.

 

 

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GMS Inc.

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

9. Stock Appreciation Rights, Deferred Compensation and Redeemable Noncontrolling Interests

The following table presents a summary of changes to the liabilities for stock appreciation rights, deferred compensation and redeemable noncontrolling interests for the three months ended July 31, 2018:

 

 

 

 

 

 

 

 

 

 

 

 

Stock

 

 

 

 

Redeemable

 

 

Appreciation

 

Deferred

 

Noncontrolling

 

 

Rights

 

Compensation

 

Interests

 

 

(in thousands)

Balance as of April 30, 2018

 

$

21,944

 

$

2,222

 

$

16,170

Amounts redeemed

 

 

 —

 

 

(689)

 

 

(2,444)

Change in fair value

 

 

334

 

 

66

 

 

465

Balance as of July 31, 2018

 

$

22,278

 

$

1,599

 

$

14,191

 

 

 

 

 

 

 

 

 

 

Classified as current as of April 30, 2018

 

$

308

 

$

133

 

$

463

Classified as long-term as of April 30, 2018

 

 

21,636

 

 

2,089

 

 

15,707

 

 

 

 

 

 

 

 

 

 

Classified as current as of July 31, 2018

 

$

800

 

$

 4

 

$

1,418

Classified as long-term as of July 31, 2018

 

 

21,478

 

 

1,595

 

 

12,773

 

Total expense related to these instruments was $0.9 million and $1.5 million during the three months ended July 31, 2018 and 2017, respectively, and was included in selling, general and administrative expenses in the Condensed Consolidated Statements of Operations and Comprehensive Income.

 

Stock Appreciation Rights

Certain subsidiaries have granted stock appreciation rights to certain employees under which payments are dependent on the appreciation in the book value per share, adjusted for certain provisions, of the applicable subsidiary. Settlements of the awards can be made in a combination of cash or installment notes, generally paid over four years, upon a triggering event. As of July 31, 2018, all stock appreciation rights were vested.

Deferred Compensation

Subsidiaries’ stockholders have entered into other deferred compensation agreements that granted the stockholders a payment based on a percentage in excess of book value, adjusted for certain provisions, upon an occurrence as defined in the related agreements, which are called “Buy Sell” agreements. These instruments are redeemed in cash or installment notes, generally paid in annual installments over the five years following termination of employment.

Redeemable Noncontrolling Interests

Noncontrolling interests were issued to certain employees of the subsidiaries. All of the noncontrolling interest awards are subject to mandatory redemption on termination of employment for any reason. These instruments are redeemed in cash or installment notes, generally paid in annual installments over the five years following termination of employment. Liabilities related to these agreements are classified as share-based liability awards and are measured at intrinsic value. Intrinsic value is determined to be the stated redemption value of the shares. Under the terms of the employee agreements, the redemption value is determined based on the book value of the subsidiary, as adjusted for certain items.

Upon the termination of employment or other triggering events including death or disability of the noncontrolling stockholders in the Company’s subsidiaries, we are obligated to purchase, or redeem, the noncontrolling interests at either an agreed upon price or a formula value provided in the stockholder agreements. This formula value is typically based on the book value per share of the subsidiary’s equity, including certain adjustments.

 

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GMS Inc.

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

 

10. Fair Value Measurements

 

Assets and Liabilities Measured at Fair Value on a Recurring Basis

The following table presents the estimated carrying amount and fair value of the Company’s assets and liabilities measured at fair value on a recurring basis as of July 31, 2018 and April 30, 2018:

 

 

 

 

 

 

 

 

    

July 31, 

 

April 30, 

 

 

2018

 

2018

 

 

(in thousands)

Assets: