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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 July 31, 2019

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

(IRS Employer Identification No.)

or organization)

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)

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

Title of each class

Trading Symbol(s)

Name of each exchanged on which registered

Common Stock, par value $0.01 per share

GMS

New York Stock Exchange

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit 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         

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 41,639,363 shares of the registrant’s common stock, par value $0.01 per share, outstanding as of August 27, 2019.

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 Stockholders’ Equity (Unaudited)

7

Condensed Consolidated Statements of Cash Flows (Unaudited)

8

Notes to Condensed Consolidated Financial Statements (Unaudited)

9

Item 2

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

29

Item 3

Quantitative and Qualitative Disclosures About Market Risk

37

Item 4

Controls and Procedures

37

PART II

Other Information

38

Item 1

Legal Proceedings

38

Item 1A

Risk Factors

38

Item 2

Unregistered Sales of Equity Securities and Use of Proceeds

38

Item 3

Defaults Upon Senior Securities

38

Item 4

Mine Safety Disclosures

38

Item 5

Other Information

38

Item 6

Exhibits

39

Signatures

40

2

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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 markets, and statements about our expectations, beliefs, plans, strategies, objectives, prospects, assumptions or future events or performance contained in this Quarterly Report on Form 10-Q are forward-looking statements.

We have based these forward-looking statements on our current expectations, assumptions, estimates and projections. While we believe these expectations, assumptions, estimates and projections are reasonable, such forward-looking statements are only predictions and involve known and unknown risks and uncertainties, many of which are beyond our control. These and other important factors, including those discussed under the heading “Risk Factors” in Part 1, Item 1A of our Annual Report on Form 10-K for the fiscal year ended April 30, 2019, 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 ability to successfully implement our strategic initiatives, including our growth strategies and cost reduction initiatives;
our ability to open new branches and expand into new geographic markets;
our ability to successfully identify acquisition candidates, complete and integrate acquisitions and realize anticipated benefits and synergies from completed acquisitions;
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 ability 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;

3

Table of Contents

the credit risk from our customers;
our ability to renew leases for our facilities on favorable terms or identify new facilities;
our ability to effectively manage our inventory as our sales volume 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 cybersecurity breach, including misappropriation of our customers’, employees’ or suppliers’ confidential information, and the potential costs related thereto;
a disruption in our IT systems and costs necessary to maintain and update our IT systems;
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 ability to obtain additional financing on acceptable terms, if at all;
our holding company structure;
the influence of AEA Investors LP and certain affiliates thereof on us; and
future sales of our common stock.

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.

4

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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,

2019

    

2019

Assets

Current assets:

 

  

 

  

Cash and cash equivalents

 

$

24,123

$

47,338

Trade accounts and notes receivable, net of allowances of $6,683 and $6,432, respectively

 

 

473,411

 

445,771

Inventories, net

 

 

295,553

 

290,829

Prepaid expenses and other current assets

 

 

17,925

 

18,368

Total current assets

 

 

811,012

 

802,306

Property and equipment, net of accumulated depreciation of $132,815 and $123,583, respectively

 

 

287,535

 

282,349

Operating lease right-of-use assets

111,213

Goodwill

 

 

622,032

 

617,327

Intangible assets, net

 

 

419,250

 

429,313

Deferred income taxes

7,410

4,676

Other assets

 

 

15,942

 

13,583

Total assets

 

$

2,274,394

$

2,149,554

Liabilities and Stockholders’ Equity

Current liabilities:

 

 

  

 

  

Accounts payable

 

$

164,794

$

173,751

Accrued compensation and employee benefits

 

 

36,606

 

62,858

Other accrued expenses and current liabilities

 

 

70,669

 

79,848

Current portion of long-term debt

49,308

 

42,118

Current portion of operating lease liabilities

 

 

32,622

Total current liabilities

 

 

353,999

 

358,575

Non-current liabilities:

 

Long-term debt, less current portion

 

 

1,111,697

 

1,099,077

Long-term operating lease liabilities

83,384

Deferred income taxes, net

 

 

9,647

 

10,226

Other liabilities

 

 

45,191

 

41,571

Liabilities to noncontrolling interest holders, less current portion

 

 

8,181

 

10,929

Total liabilities

 

 

1,612,099

 

1,520,378

Commitments and contingencies

 

 

  

 

  

Stockholders' equity:

 

 

  

 

  

Common stock, par value $0.01 per share, 500,000 shares authorized; 41,589 and 40,375 shares issued and outstanding as of July 31, 2019 and April 30, 2019, respectively

 

 

416

 

404

Preferred stock, par value $0.01 per share, 50,000 shares authorized; 0 shares issued and outstanding as of July 31, 2019 and April 30, 2019

 

 

 

Exchangeable shares

29,639

Additional paid-in capital

 

 

512,244

 

480,113

Retained earnings

 

 

170,414

 

145,594

Accumulated other comprehensive loss

 

 

(20,779)

 

(26,574)

Total stockholders' equity

662,295

629,176

Total liabilities and stockholders' equity

 

$

2,274,394

$

2,149,554

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

5

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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, 

    

2019

    

2018

Net sales

 

$

847,176

$

778,144

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

 

 

573,522

 

533,328

Gross profit

 

 

273,654

 

244,816

Operating expenses:

 

 

  

 

  

Selling, general and administrative

 

 

194,631

 

185,435

Depreciation and amortization

 

 

29,275

 

26,322

Total operating expenses

 

 

223,906

 

211,757

Operating income

 

 

49,748

 

33,059

Other (expense) income:

 

 

  

 

  

Interest expense

 

 

(18,277)

 

(16,188)

Change in fair value of financial instruments

(6,019)

Other income, net

 

 

939

 

634

Total other expense, net

 

 

(17,338)

 

(21,573)

Income before taxes

 

 

32,410

 

11,486

Provision for income taxes

 

 

7,590

 

2,836

Net income

 

$

24,820

$

8,650

Weighted average common shares outstanding:

 

 

Basic

 

 

41,001

 

41,094

Diluted

 

 

41,615

 

42,074

Net income per common share(1):

 

 

  

 

  

Basic

 

$

0.60

$

0.21

Diluted

 

$

0.59

$

0.20

Comprehensive income

 

Net income

 

$

24,820

$

8,650

Foreign currency translation income (loss)

11,860

(3,791)

Changes in other comprehensive income, net of tax

 

 

(6,065)

 

113

Comprehensive income

$

30,615

$

4,972

(1)See Note 15 for detailed calculations.

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

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GMS Inc.

Condensed Consolidated Statements of Stockholders’ Equity (Unaudited)

(in thousands)

 

 

 

Accumulated

 

 

Additional

 

 

Other

 

Total

  

Common Stock

Exchangeable

Paid-in

Retained

Comprehensive

Stockholders'

    

Shares

    

Amount

Shares

    

Capital

    

Earnings

    

Loss

    

Equity

Balances as of April 30, 2019

40,375

$

404

$

29,639

$

480,113

$

145,594

$

(26,574)

$

629,176

Net income

24,820

24,820

Exercise of Exchangeable Shares

1,129

11

(29,639)

29,628

Foreign currency translation adjustments

11,860

11,860

Change in other comprehensive loss, net of tax

(6,065)

(6,065)

Equity-based compensation

1,349

1,349

Exercise of stock options

9

133

133

Issuance of common stock pursuant to employee stock purchase plan

76

1

1,021

1,022

Balances as of July 31, 2019

41,589

$

416

$

$

512,244

$

170,414

$

(20,779)

$

662,295

 

 

 

Accumulated

 

 

Additional

 

 

Other

 

Total

  

Common Stock

Exchangeable

Paid-in

Retained

Comprehensive

Stockholders'

    

Shares

    

Amount

Shares

    

Capital

    

Earnings

    

Income (Loss)

    

Equity

Balances as of April 30, 2018

41,069

$

411

$

$

489,007

$

89,592

$

441

$

579,451

Net income

8,650

8,650

Issuance of Exchangeable Shares

33,194

33,194

Foreign currency translation adjustments

(3,791)

(3,791)

Change in other comprehensive income (loss), net of tax

113

113

Equity-based compensation

358

358

Tax withholding related to net share settlements of equity awards

(7)

(7)

Exercise of stock options

35

431

431

Issuance of common stock pursuant to employee stock purchase plan

35

881

881

Balances as of July 31, 2018

41,139

$

411

$

33,194

$

490,670

$

98,242

$

(3,237)

$

619,280

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,

    

2019

    

2018

Cash flows from operating activities:

 

  

Net income

 

$

24,820

$

8,650

Adjustments to reconcile net income to net cash used in operating activities:

 

Depreciation and amortization

 

 

29,275

26,322

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

 

 

835

825

Provision for losses on accounts and notes receivable

 

 

657

148

Provision for obsolescence of inventory

 

 

119

(22)

Effects of fair value adjustments to inventory

151

4,129

Increase in fair value of contingent consideration

 

 

228

229

Equity-based compensation

 

 

2,071

1,269

Gain on sale and disposal of assets

 

 

(156)

(121)

Change in fair value of financial instruments

6,019

Deferred income taxes

 

 

(1,440)

(571)

Changes in assets and liabilities net of effects of acquisitions:

Trade accounts and notes receivable

 

 

(23,230)

(40,974)

Inventories

 

 

18

(20,943)

Prepaid expenses and other assets

 

 

(1,359)

416

Accounts payable

 

 

(9,526)

(1,696)

Accrued compensation and employee benefits

 

 

(26,347)

(22,945)

Derivative liability

(10,778)

Other accrued expenses and liabilities

 

 

(8,556)

2,219

Cash used in operating activities

 

 

(12,440)

 

(47,824)

Cash flows from investing activities:

 

 

  

 

  

Purchases of property and equipment

 

 

(5,891)

 

(3,793)

Proceeds from sale of assets

 

 

232

 

266

Acquisition of businesses, net of cash acquired

 

 

(10,633)

 

(575,499)

Cash used in investing activities

 

 

(16,292)

 

(579,026)

Cash flows from financing activities:

 

 

  

 

  

Repayments on the revolving credit facility

 

 

(262,107)

 

(176,769)

Borrowings from the revolving credit facility

 

 

274,810

 

392,170

Payments of principal on long-term debt

 

 

(2,492)

 

(2,492)

Payments of principal on finance lease obligations

 

 

(6,021)

 

(3,998)

Borrowings from term loan

996,840

Repayments from term loan

(571,840)

Debt issuance costs

(7,933)

Proceeds from exercises of stock options

133

431

Other financing activities

1,022

873

Cash provided by financing activities

 

 

5,345

 

627,282

Effect of exchange rates on cash and cash equivalents

172

(4)

(Decrease) increase in cash and cash equivalents

 

 

(23,215)

 

428

Cash and cash equivalents, beginning of period

 

 

47,338

 

36,437

Cash and cash equivalents, end of period

 

$

24,123

$

36,865

Supplemental cash flow disclosures:

 

 

  

 

  

Cash paid for income taxes

 

$

18,776

$

958

Cash paid for interest

 

 

17,011

 

10,980

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

8

Table of Contents

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 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 250 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 (“SEC”) that permit reduced disclosure for interim periods. In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all normal and recurring adjustments necessary for a fair presentation of the results of operations, financial position and cash flows. All adjustments are of a normal recurring nature unless otherwise disclosed. The results of operations for interim periods are not necessarily indicative of results for any other interim period or the entire fiscal year. 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, 2019.

Principles of Consolidation

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

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 stockholders’ equity and other comprehensive income. Gains and losses on foreign currency transactions are recognized in the Condensed Consolidated Statements of Operations and Comprehensive Income within other income, net.

Insurance Liabilities

The Company is self-insured for certain losses related to medical claims. The Company has stop-loss coverage to limit the exposure arising from medical claims. In addition, the Company has deductible-based insurance policies for certain losses related to general liability, automobile and workers’ compensation. The 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 layer 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, actuarial assumptions and historical loss development experience.

As of July 31, 2019 and April 30, 2019, the aggregate liabilities for medical self-insurance were $3.9 million and $3.4 million, respectively, and are included in other accrued expenses and current liabilities in the Condensed Consolidated Balance Sheets. As of July 31, 2019 and April 30, 2019, reserves for general liability, automobile and workers’ compensation totaled approximately $18.2 million and $17.7 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, 2019 and April 30, 2019, expected recoveries for medical self-insurance, general liability, automobile and workers’ compensation totaled approximately $6.2 million and $6.0 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, provincial and state income tax rates in effect to the gross amounts of temporary differences and other tax attributes, such as net operating loss carry-forwards. In assessing if the deferred tax assets will be realized, the Company considers whether it is more likely than not that some or all of these deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the period in which these deductible temporary differences reverse.

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.

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GMS Inc.

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

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 11, “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 8, “Stockholders’ Equity”) were entitled to receive dividends or distributions that are equal to any dividends or distributions on the Company’s common stock. As a result, when the Exchangeable Shares were outstanding, they were classified as a participating security and thereby required 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 stockholders 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

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 twelve 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.

On July 30, 2018, the FASB issued new guidance that provided 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.

The Company adopted the new lease standard on May 1, 2019 using the optional transition method. The Company elected the package of practical expedients permitted in the guidance, which among other things, allows the Company to carry forward the historical accounting relating to lease identification and classification for existing leases upon adoption. The Company also elected to use the practical expedient to not separate lease and nonlease components. The Company did not elect the hindsight practical expedient. The Company made an accounting policy election to keep leases with an initial term of 12 months or less off the Consolidated Balance Sheet.

The adoption of the standard resulted in the recording of operating lease ROU assets and operating lease liabilities of $118.8 million on the Condensed Consolidated Balance Sheet as of the adoption date. The Company also

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GMS Inc.

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

reclassed deferred rent of $4.8 million from liabilities into its operating lease ROU assets. The adoption did not have a material impact on the Company’s Statement of Operations or Statement of Cash Flows. See Note 6, “Leases,” for information and disclosures regarding leases. 

Recently Issued Accounting Pronouncements

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.

Fair Value Measurement Disclosures In August 2018, the FASB issued new guidance that changes certain fair value measurement disclosure requirements. This guidance is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. An entity is permitted to early adopt all of the disclosure changes or early adopt only the removed disclosure requirements and delay adoption of the additional disclosures until the effective date of this amendment. Except for changes to certain disclosures related to fair value measurements, the Company does not expect the adoption of this standard to have a material impact on its financial statements.

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 Note 14, “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.

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GMS Inc.

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

Contract Balances

Receivables from contracts with customers were $457.8 million and $431.4 million as of July 31, 2019 and April 30, 2019, respectively. The Company did not have material amounts of contract assets or liabilities as of July 31, 2019 or April 30, 2019.

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.

On June 3, 2019, the Company acquired the acoustical and drywall operations of J.P. Hart Lumber Company (“Hart Acoustical and Drywall Supply”). Hart Acoustical and Drywall Supply distributes drywall, metal studs, insulation and ceiling tiles through two locations in San Antonio, TX and one location in La Feria, TX. The impact of this acquisition is not material to the Company’s Consolidated Financial Statements.

4. Goodwill and Intangible Assets

Goodwill

The following table presents changes in the carrying amount of goodwill during the three months ended July 31, 2019:

    

Carrying

Amount

(in thousands)

Balance as of April 30, 2019

$

617,327

Goodwill acquired

862

Translation adjustment

 

3,843

Balance as of July 31, 2019

$

622,032

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GMS Inc.

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

Intangible Assets

The following tables present the components of the Company’s definite-lived intangible assets as of July 31, 2019 and April 30, 2019:

Estimated

Weighted

July 31, 2019

Useful

Average

Gross

Net

Lives

Amortization

Carrying

Accumulated

Carrying

    

(years)

    

Period

    

Amount

    

Amortization

    

Value

(dollars in thousands)

Customer relationships

5 - 16

12.8

$

527,732

$

229,991

$

297,741

Definite-lived tradenames

5 - 20

16.3

 

56,659

 

7,939

 

48,720

Vendor agreements

8 - 10

8.3

 

6,644

 

3,963

 

2,681

Developed technology

5

4.9

5,322

1,263

4,059

Leasehold interests

1 - 15

7.6

 

3,725

 

1,696

 

2,029

Other

3 - 5

3.4

4,178

1,525

2,653

Totals

$

604,260

$

246,377

$

357,883

Estimated

Weighted

April 30, 2019

Useful

Average

Gross

Net

Lives

     

Amortization

     

Carrying

     

Accumulated

     

Carrying

    

(years)

    

Period

    

Amount

    

Amortization

    

Value

(dollars in thousands)

Customer relationships

5 - 16

12.8

$

520,703

$

214,044

$

306,659

Definite-lived tradenames

5 - 20

16.3

 

56,018

 

6,993

 

49,025

Vendor agreements

8 - 10

8.3

 

6,644

 

3,761

 

2,883

Developed technology

5

4.9

5,209

971

4,238

Leasehold interests

1 - 15

7.6

 

3,707

 

1,502

 

2,205

Other

3 - 5

3.4

4,118

1,182

2,936

Totals

$

596,399

$

228,453

$

367,946

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 flows 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 $16.9 million and $15.7 million for the three months ended July 31, 2019 and 2018, 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 $48.6 million during the remaining nine months in the fiscal year ending April 30, 2020 and $55.4 million, $46.4 million, $38.7 million, $31.5 million and $137.3 million during the fiscal years ending April 30, 2021, 2022, 2023, 2024 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, 2019 and April 30, 2019.

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GMS Inc.

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

5. Long-Term Debt

The Company’s long-term debt consisted of the following as of July 31, 2019 and April 30, 2019:

July 31, 

April 30, 

    

2019

    

2019

(in thousands)

First Lien Facility (1) (2)

$

970,754

$

972,650

ABL Facility

 

53,673

 

43,972

Finance lease obligations

 

114,043

 

109,286

Installment notes at fixed rates up to 5.0%, due in monthly and annual installments through 2024 (3)

 

19,494

 

15,287

Titan Facility

 

3,041

 

Carrying value of debt

 

1,161,005

 

1,141,195

Less current portion

 

49,308

 

42,118

Long-term debt

$

1,111,697

$

1,099,077

(1)Net of unamortized discount of $2,059 and $2,149 as of July 31, 2019 and April 30, 2019, respectively.
(2)Net of deferred financing costs of $11,566 and $12,072 as of July 31, 2019 and April 30, 2019, respectively.
(3)Net of unamortized discount of $1,127 and $1,200 as of July 31, 2019 and April 30, 2019, respectively.

First Lien Facility

The Company has a senior secured first lien term loan facility (the "First Lien Facility") with aggregate principal amount of $984.4 million outstanding as of July 31, 2019. The First Lien Facility is due in June 2025 and the Company is required to make quarterly principal payments of 0.25% of the aggregate principal amount. The First Lien Facility bears interest at a floating rate based on LIBOR plus 2.75%, with a 0% floor. As of July 31, 2019, the applicable rate of interest was 4.98%.

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, 2019, the applicable rate of interest was 4.18%. 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, 2019, the Company made net borrowings under the ABL facility of $9.7 million. As of July 31, 2019, the Company had available borrowing capacity of approximately $281.7 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.

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GMS Inc.

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

Covenants under the First Lien Facility and ABL 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 or repurchase stock or make other distributions; make investments; create restrictions on the ability of our restricted subsidiaries to pay dividends to us or make other intercompany transfers; create liens securing indebtedness; transfer or sell assets; merge or consolidate; enter into certain transactions with our affiliates; and prepay or amend the terms of certain indebtedness. The Company was in compliance with all restrictive covenants as of July 31, 2019.

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, 2019.

Titan Revolving Credit Facility

Through its WSB Titan (“Titan”) subsidiary, the Company has a revolving credit facility (the “Titan Facility”) that provides for aggregate revolving commitments of $22.8 million ($30.0 million Canadian dollars). 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. During the three months ended July 31, 2019, the Company made net borrowings under the Titan facility of $3.0 million. As of July 31, 2019, the Company had available borrowing capacity of approximately $14.7 million under the Titan Facility. The Titan Facility matures on June 28, 2022.

Debt Maturities

As of July 31, 2019, the maturities of long-term debt were as follows

First Lien

ABL

Finance

Installment

Titan

    

Facility(1)

    

Facility

    

Leases

    

Notes(2)

Facility

    

Total

Years ending April 30, 

(in thousands)

2020 (remaining nine months)

$

7,476

$

$

22,446

$

4,264

$

3,041

$

37,227

2021

 

9,968

28,807

4,874

 

43,649

2022

 

9,968

53,673

25,493

4,438

 

93,572

2023

 

9,968

19,888

4,405

 

34,261

2024

 

9,968

12,958

1,781

 

24,707

Thereafter

 

937,031

4,451

859

 

942,341

$

984,379

$

53,673

$

114,043

$

20,621

$

3,041

$

1,175,757

(1)Gross of unamortized discount of $2,059 and deferred financing costs of $11,566 as of July 31, 2019.
(2)Gross of unamortized discount of $1,127 as of July 31, 2019.

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GMS Inc.

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

6. Leases

The Company leases office and warehouse facilities, distribution equipment and its fleet of vehicles. The Company’s leases have lease terms ranging from one to eleven years. The Company’s facility leases generally contain renewal options for periods ranging from one to five years. The exercise of lease renewal options is typically at the Company’s sole discretion. The Company does not recognize ROU assets or lease liabilities for renewal options unless it is determined that the Company is reasonably certain of exercising renewal options at lease inception. Certain of the Company’s equipment leases include options to purchase the leased property and certain of the Company’s equipment leases contain residual value guarantees. Any residual value payment deemed probable is included in the Company’s lease liability. The Company’s lease agreements do not contain any material restrictive covenants.

The Company determines if an arrangement is a lease at inception and evaluates whether the lease meets the classification criteria of a finance or operating lease. Operating leases are included in operating lease right-of-use assets, current portion of operating lease liabilities and long-term operating lease liabilities in the Condensed Consolidated Balance Sheet. Finance leases are included in property and equipment, current portion of long-term debt and long-term debt in the Condensed Consolidated Balance Sheet.  

Lease ROU assets and lease liabilities are recognized at the commencement date based on the present value of the future lease payments over the lease term. For leases that do not provide an implicit rate, the Company uses its incremental borrowing rate in determining the present value of future payments. The Company determines its incremental borrowing rate based on the applicable lease terms and the current economic environment. Lease ROU assets also include any lease payments made in advance and excludes lease incentives and initial direct costs incurred. Some of the Company’s lease agreements contain rent escalation clauses (including index-based escalations), rent holidays, capital improvements funding or other lease concessions. Lease expense is recognized on a straight-line basis based on the fixed component over the lease term. Variable lease costs consist primarily of taxes, insurance and common area or other maintenance costs for leased facilities and vehicles and equipment, which are paid based on actual costs incurred.

The components of lease expense were as follows:

Three Months

Ended

July 31, 2019

(in thousands)

Finance lease cost:

Amortization of right-of-use assets

$

6,059

Interest on lease liabilities

3,422

Operating lease cost

10,420

Variable lease cost

3,199

Total lease cost

$

23,100

Operating lease cost, including variable lease cost, is included in selling, general and administrative expenses; amortization of finance ROU assets is included in depreciation and amortization; and interest on finance lease liabilities is included in interest expense in the Condensed Consolidated Statement of Operations.

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GMS Inc.

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

Supplemental cash flow information related to leases was as follows:

Three Months

Ended

July 31, 2019

(in thousands)

Cash paid for amounts included in the measurement of lease liabilities

Operating cash flows from operating leases

$

10,236

Operating cash flows from finance leases

3,422

Financing cash flows from finance leases

6,021

Right-of-use assets obtained in exchange for lease obligations

Operating leases

6,241

Finance leases

11,874

Other information related to leases was as follows:

July 31, 2019

(in thousands)

Finance leases included in property and equipment

Property and equipment

$

143,274

Accumulated depreciation

(31,564)

Property and equipment, net

$

111,710

Weighted-average remaining lease term (years)

Operating leases

4.7

Finance leases

4.2

Weighted-average discount rate

Operating leases

5.5

%

Finance leases

5.4

%

Future minimum lease payments under non-cancellable leases as of July 31, 2019 were as follows:

    

Finance

    

Operating

Year Ended April 30,

2020 (remaining nine months)

$

31,712

$

29,362

2021

 

38,061

 

31,829

2022

 

31,246

 

23,263

2023

 

22,544

 

16,999

2024

 

13,703

 

12,400

Thereafter

 

4,561

 

18,707

Total lease payments

$

141,827

$

132,560

Less imputed interest

 

27,784

 

16,554

Total

$

114,043

$

116,006

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GMS Inc.

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

7. Income Taxes

General. The Company’s effective income tax rate on continuing operations was 23.4% and 24.7% for the three months ended July 31, 2019 and 2018, respectively. The increase in the effective income tax rate over the U.S. federal statutory rate of 21.0% is primarily due to the impact of foreign tax rates and state taxes as well as other tax effects associated with the acquisition of Titan.

The Company is 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, the Company no longer intends to permanently reinvest its accumulated earnings in its non-U.S. subsidiaries and will continue to periodically distribute the earnings on an as needed basis. To the extent there is unremitted earnings in future years, the Company does not anticipate significant tax consequences as there is sufficient paid up capital in Canada to return the cash free of withholding taxes.

Valuation allowance. The Company had a valuation allowance of $1.4 million and $1.1 million against its deferred tax assets related to certain U.S. tax jurisdictions as of July 31, 2019 and April 30, 2019, respectively. To the extent the Company generates sufficient taxable income in the future to utilize the tax benefits of the net deferred tax assets on which a valuation allowance is recorded, the effective tax rate may decrease as the valuation allowance is reversed.

Uncertain tax positions. The Company had no reserve for uncertain tax positions as of July 31, 2019 or April 30, 2019.

8. Stockholders’ Equity

Exchangeable Shares

In connection with the acquisition of WSB Titan on June 1, 2018, the Company issued 1.1 million shares of equity that were exchangeable for the Company’s common stock (“Exchangeable Shares”). The Exchangeable Shares were issued by an indirect wholly-owned subsidiary of the Company. The Exchangeable Shares ranked 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 were entitled to receive dividends or distributions that were equal to any dividends or distributions on the Company’s common stock. The holders of the Exchangeable Shares did not have voting rights.

The Exchangeable Shares contained rights that allowed the holders to exchange their Exchangeable Shares for GMS common stock at any time on a one-for-one basis. If converted, the holders were prevented from transferring such GMS common stock for one year from the Titan acquisition date. On June 13, 2019, the holders of the Exchangeable Shares exchanged all of the Exchangeable Shares for 1.1 million shares of the Company’s common stock. Following such exchange, the Exchangeable Shares ceased to be outstanding.

Share Repurchase Program

On November 30, 2018, the Company’s Board of Directors authorized a common stock repurchase program to repurchase up to $75.0 million outstanding common stock. The Company may conduct repurchases under the share repurchase program through open market transactions, under trading plans in accordance with SEC Rule 10b5-1 and/or

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GMS Inc.

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

in privately negotiated transactions, in compliance with Rule 10b-18 under the Exchange Act of 1934, as amended, subject to a variety of factors, including, but not limited to, our liquidity, credit availability, general business and market conditions, our debt covenant restrictions and the availability of alternative investment opportunities. The share repurchase program does not obligate us to acquire any particular amount of common stock, and it may be suspended or terminated at any time at the Company’s discretion.

The Company did not repurchase any shares of its common stock during the three months ended July 31, 2019. As of July 31, 2019, the Company had $58.5 million remaining under its repurchase program. 

Accumulated Other Comprehensive Loss

The following table sets forth the changes to accumulated other comprehensive loss, net of tax, by component for the three months ended July 31, 2019:

Accumulated

Other

    

Comprehensive

Loss

(in thousands)

Accumulated other comprehensive loss as of April 30, 2019

$

(26,574)

Foreign currency translation adjustments

11,860

Other comprehensive loss on derivative instruments

 

(6,065)

Accumulated other comprehensive loss as of July 31, 2019

$

(20,779)

Other comprehensive loss on derivative instruments for the three months ended July 31, 2019 is net of $1.9 million of tax.

9. Equity-Based Compensation

General

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 $1.2 million and $0.3 during the three months ended July 31, 2019 and 2018, 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, 2019: