GMS INC. Overview
GMS Inc. ("we," "our," "us," or the "Company") 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 many 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 260 distribution centers acrossthe United States andCanada .
COVID-19 Impact and Response
InMarch 2020 , theWorld Health Organization declared the COVID-19 outbreak a global pandemic,the United States and Canadian governments declared the pandemic a national emergency and most states imposed measures to reduce the spread of COVID-19, including orders to shelter in place, social distance and close certain non-essential businesses. The pandemic has caused widespread adverse impacts to the economy and financial markets, and to our employees, customers, suppliers and other parties with whom we do business. The pandemic has already had an impact on our operations including adversely impacting demand for our products beginning inMarch 2020 and disrupting our business operations. We have taken a number of precautionary measures to protect the health and safety of our employees, customers, partners and suppliers. These precautions include suspending non-essential travel, implementing routine cleaning throughout the day at all locations, adhering to social distancing protocols, restricting or modifying access to facilities including limiting walk-in traffic in showrooms, encouraging employees to work remotely when possible and mandating the use of appropriate personal protective equipment. We expect to continue to implement these measures until we determine that the COVID-19 pandemic is adequately contained for purposes of our business, and we may take further actions as government authorities require or recommend or as we determine certain procedures to be in the best interests of our employees, customers, partners and suppliers. In most of our branches throughoutthe United States andCanada , our business was deemed "essential," which enabled us to keep these locations open. In a select number of states and jurisdictions, includingCalifornia ,Michigan ,New Jersey ,Pennsylvania andWashington , our business was deemed non-essential for a period of time. As a result, certain of our locations were under mandated shutdowns for portions of March, April andMay 2020 . Even in markets where our operations were not limited by mandatory shutdowns, certain customers decreased purchases of our products in response to the various impacts of COVID-19 on their business. We also temporarily closed many of our showrooms. We laid off or furloughed 605 employees in areas where construction was not deemed "essential" or where demand was negatively impacted. As of the date of this Annual Report on Form 10-K, we have rehired 540 of these employees after restrictions at these locations were eased and markets re-opened. We expect to rehire more of these employees as operations return to normal levels. Beginning at the end of our fourth fiscal quarter of 2020, we began to see reductions in sales as a result of COVID-19. While fiscal fourth quarter sales were not significantly impacted through mid-March, we did see weaker demand in late March and in April as a result of COVID-19, including the mandated shutdowns in certain markets. Net sales for the three months endedApril 30, 2020 declined on a year over year basis from the same period a year ago as a result of the suspension of construction activity related to mandated shutdowns and as customers focused on responding to COVID-19 and cancelled, delayed or temporarily paused building projects. While we were able to respond quickly to reduce variable costs, we continued to incur certain fixed costs during this timeframe, resulting in a negative effect on the relationship between our costs and revenues. During the fourth quarter of fiscal 2020, we incurred$1.4 million of incremental costs related to the COVID-19 pandemic and recorded$2.2 million of restructuring costs related to a facility we decided to permanently close. In addition, we recognized a$63.1 million non-cash impairment charge to goodwill related to ourCanada reporting unit in conjunction with our annual goodwill impairment test performed in the fourth quarter of fiscal 2020. The primary factors contributing to the impairment was an increase in the discount rate and a decrease in market multiples, combined with a decrease in theCanada reporting unit's forecasted near-term cash flows, primarily resulting from COVID-19 driven economic uncertainty. 29 Table of Contents In response to the COVID-19 pandemic, we have taken meaningful actions to reduce costs, improve our financial flexibility and ensure the strength of our balance sheet. These actions include:
? Proactively drawing
? Deferring or limiting non-essential operating or other discretionary expenses;
? Implementing a wage and hiring freeze and certain permanent headcount
reductions;
? Immediately furloughing employees (with a majority having returned to work
following easing of shutdown restrictions in certain markets);
Utilizing appropriate benefits of the CARES Act, including the temporary
? suspension of certain payment requirements for the employer portion of Social
Security taxes;
?
2020;
? Closing certain underperforming branches and distribution centers;
? Delaying or reducing capital expenditures that are not anticipated to impact
near-term business;
? Temporarily suspending acquisition-related activity; and
? Optimizing all areas of working capital.
We will continue to evaluate further ways to manage costs in line with reduced net sales levels as the impact of COVID-19 develops for the remainder of our fiscal 2021. As a result of these actions, we may incur severance and restructuring charges in future periods. We may also incur additional charges related to decreases in fair value of certain assets, including goodwill and other intangible assets. The extent to which the COVID-19 pandemic impacts our business, results of operations and financial condition will depend on future developments, which are highly uncertain and cannot be predicted, including, but not limited to the duration, spread, and severity, of the COVID-19 pandemic, the effects of the COVID-19 pandemic on our customers, suppliers, and vendors and the remedial actions and stimulus measures adopted by local and federal governments, and to what extent normal economic and operating conditions can resume. Even after the COVID-19 pandemic has subsided, we may experience an impact to our business as a result of any economic downturn, recession or depression that has occurred or may occur in the future. We will continue to actively monitor the COVID-19 pandemic and may take further actions that alter our business operations if required by federal, state or local authorities or that we determine are in the best interests of our employees, customers, suppliers and stockholders. See Item 1A, "Risk Factors," for a discussion of risks which could have a material adverse effect on our operations and financial results.
Growth Strategy
Our growth strategy entails an emphasis on organic growth through expanding
market share in our core products (wallboard, ceilings and steel framing) and
growing our complementary product lines (insulation, lumber, ready-mix joint
compound, tools, fasteners and various other construction products). Our growth
strategy also includes the pursuit of greenfield branch openings and strategic
acquisitions as we seek to further broaden our geographic platform. We expect to
continue to capture profitable market share in our existing footprint by
delivering industry-leading customer service. Our strategy for opening new
branches is to further penetrate markets that are adjacent to our existing
operations. Typically, we have pre-existing customer relationships in these
markets but need a new location to fully capitalize on those relationships. In
addition, we will continue to selectively pursue acquisitions. Due to the large,
highly fragmented nature of our market and our reputation throughout the
industry, we believe we have the potential to access a robust acquisition
pipeline that will continue to supplement our organic growth. We use a rigorous
targeting process to identify acquisition candidates that will fit our culture
and business model and have an experienced team of professionals to manage the
acquisition and integration processes. As a result of our scale, purchasing
power and ability to improve operations through implementing best practices, we
believe we can achieve substantial synergies and drive earnings accretion from
our acquisition strategy. Finally, our growth strategy also entails a heightened
focus on enhanced productivity and profitability across the organization,
seeking to leverage our scale and employ both technology and best practices to
deliver further margin expansion and earnings growth.
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Fiscal 2020 Highlights
Key developments in our business during fiscal 2020 are described below:
Generated net sales of
the prior year due to an increase in organic sales, sales from new greenfield
? branches and sales from acquired businesses. Net sales for fiscal 2020 was
negatively impacted as customers delayed orders and building projects were
paused due to mandated shutdowns in certain markets or as they focused on
responding to the effects of COVID-19 on their businesses.
Generated net income of
? impairment charge to goodwill and an increase in income tax expense, partially
offset an increase in operating income, a gain on legal settlement and lower
interest expense.
Generated Adjusted EBITDA (a non-GAAP measure, see "Non-GAAP Financial
Measures" in this Item 7) of
? from
business and an improvement in gross margin on sales, partially offset by a
loss in sales leverage resulting from the COVID-19 pandemic.
? Generated cash provided by operating activities of
? Completed three acquisitions totaling four branches in
one branch in
Fiscal 2020 Developments Acquisitions
OnJune 3, 2019 , we acquired the acoustical and drywall operations ofJ.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 inSan Antonio, Texas and one location inLa Feria, Texas . OnNovember 1, 2019 , we acquiredRigney Building Supplies Ltd. ("Rigney"). Rigney distributes interior building products, as well as masonry and landscaping products, through a single location inKingston, Ontario . OnFebruary 1, 2020 , we acquiredTrowel Trades Supply, Inc. ("Trowel Trades"). Trowel Trades distributes interior building materials, as well as masonry and hardscape products, through a single location inColchester, Vermont .
ABL Amendment and Debt Prepayment
OnSeptember 30, 2019 , we amended our asset based revolving credit facility (the "ABL Facility") to, among other things, increase the revolving commitments from$345.0 million to$445.0 million , extend the maturity date toSeptember 30, 2024 and remove the highest pricing level applicable to borrowings under the ABL Facility. The other material terms of the ABL Facility remain unchanged. OnSeptember 30, 2019 , we made a$50.0 million prepayment of outstanding principal of our senior secured first lien term loan facility (the "Term Loan Facility"). OnMarch 6, 2020 , we made an additional$50.0 million prepayment of outstanding principal of our Term Loan Facility. We recorded a write-off of debt discount and deferred financing fees of$1.3 million , which is included in write-off of discount and deferred financing fees in the Consolidated Statement of Operations and Comprehensive Income (Loss). Also inMarch 2020 , we drew down$80.0 million under our ABL Facility and$7.2 million under our Canadian revolving credit facility (the "Canadian Facility") as a precautionary measure to provide financial flexibility and liquidity in response to volatile financial market conditions resulting from the COVID-19 pandemic. 31 Table of Contents Acquisition of Titan
OnJune 1, 2018 , we acquired all of the outstanding equity interests ofWSB Titan ("Titan"), a distributer of wallboard, lumber, insulation and other complementary commercial and residential building materials. Titan isCanada's largest gypsum specialty dealer with 30 locations across five provinces inCanada . The stated purchase price was$627.0 million ($800.0 million Canadian dollars). 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 were exchangeable for the Company's common stock. OnJune 13, 2019 , these shares were exercised by the holders in exchange for 1.1 million shares of the Company's common stock and ceased to be outstanding. The Titan transaction extended our leadership position inNorth America with additional scale and footprint, expanded our geographic coverage into the Canadian market and has created opportunities for further expansion inCanada .
To finance this transaction, on
Factors and Trends Affecting our Operating Results
General Economic Conditions Our business is sensitive to changes in general economic conditions, including, in particular, conditions inthe United States and Canadian commercial construction and housing markets. The markets we serve are broadly categorized as commercial new construction, commercial repair and remodeling ("R&R"), residential new construction and residential R&R. We believe all four end markets were in an extended period of expansion following a deep and prolonged downturn. However, inMarch 2020 ,the United States andCanada economies began to see significant disruption and uncertainty from the impacts of the COVID-19 pandemic. The extent and duration of this disruption and uncertainty are yet to be fully known, and we anticipate that the COVID-19 outbreak will have a negative impact on our customers and the construction industry in general, as it will affect, among other factors, economic activity, employment levels, consumer spending and consumer confidence, which will decrease demand for new construction, adversely affecting our business.
Our addressable commercial construction market is composed of a variety of commercial and institutional sub-segments with varying demand drivers. Our commercial markets include offices, hotels, retail stores and other commercial buildings, while our institutional markets include educational facilities, healthcare facilities, government buildings and other institutional facilities. The principal demand drivers across these markets include the overall economic outlook, the general business cycle, government spending, vacancy rates, employment trends, interest rates, availability of credit and demographic trends. Given the extreme depth of the last recession, despite the growth to date prior to the COVID-19 pandemic, activity in the commercial construction market remains well below average historical levels.
Commercial R&R
We believe commercial R&R spending is typically more stable than new commercial construction activity. Commercial R&R spending is driven by several factors, including commercial real estate prices and rental rates, office vacancy rates, government spending and interest rates. Commercial R&R spending is also driven by commercial lease expirations and renewals, as well as tenant turnover. Such events often result in repair, reconfiguration and/or upgrading of existing commercial space. As such, the commercial R&R market has historically been less volatile than commercial new construction. While there is very limited third-party data for commercial R&R spending, we believe spending in this end market was in a period of expansion prior to the COVID-19 pandemic.
Residential construction activity is driven by several factors, including the
overall economic outlook, employment, income growth, home prices, availability
of mortgage financing and related government regulations,
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interest rates and consumer confidence, among others. While housing starts have generally recovered in recent years, activity in the market remains well below historical levels. Residential R&R Residential R&R activity is typically more stable than new construction activity. Following a prolonged period of under-investment during the downturn from 2007 to 2011, residential R&R activity experienced above-average growth, which we had expected to continue for the next several years. However, the impact of the COVID-19 pandemic could have a material impact on the continued growth of residential R&R activity. The primary drivers of residential R&R spending include changes in existing home prices, existing home sales, the average age of the housing stock, consumer confidence and interest rates.
Seasonality
Our operating results are typically impacted by seasonality. Historically, sales of our products have been slightly higher in the first and second quarters of each fiscal year (covering the calendar months of May through October) due to favorable weather and longer daylight conditions during these periods. Seasonal variations in operating results may be impacted by inclement weather conditions, such as cold or wet weather, which can delay construction projects. To the extent the impacts of the COVID-19 pandemic extend into our seasonally higher months, this could have an additional negative impact on our business, financial condition, operating results and cash flows.
Price Changes
Prices for certain of our products are subject to fluctuations arising from changes in domestic and international supply and demand, labor costs, competition, market speculation, government regulations, tariffs and trade restrictions, and periodic delays in delivery. Price inflation may impact demand for these products while price deflation may reduce our net sales and compress our margins. In general, we have historically been successful in passing on price increases from our vendors to our customers in a timely manner, although there is no assurance that we can successfully do so in the future.
Acquisitions
Our results of operations are impacted by acquisitions, as we complement our organic growth strategy with selective acquisitions. During fiscal 2020, we completed three acquisitions totaling four branches inthe United States and one branch inCanada . During fiscal 2019, we completed three acquisitions totaling three branches inthe United States and 30 branches acrossCanada . During fiscal 2018, we completed five acquisitions totaling seven branches inthe United States . We believe that significant opportunities exist to expand our geographic footprint by executing additional strategic acquisitions and we consistently strive to maintain an extensive and active acquisition pipeline. We are often evaluating several acquisition opportunities at any given time. Due to the impact of COVID-19, we expect that our acquisition activity will be curtailed in the near-term. See Note 3 of the Notes to Consolidated Financial Statements included in this Annual Report on Form 10-K for more information regarding
our business acquisitions. Our Products
The following is a summary of our net sales by product group for the years ended
Year Ended Year Ended Year Ended
April 30, % of April 30, % of April 30, % of
2020 Total 2019 Total 2018 Total
(dollars in thousands)
Wallboard $ 1,329,775 41.0% $ 1,272,068 40.8% $ 1,109,552 44.2%
Ceilings 475,827 14.7% 451,695 14.5% 387,360 15.4%
Steel framing 502,122 15.5% 506,805 16.3% 411,630 16.4%
Other products 933,583 28.8% 885,464 28.4% 602,927 24.0%
Total net sales $ 3,241,307 $ 3,116,032 $ 2,511,469
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Results of Operations
A discussion regarding our results of operations and financial condition for the
year ended April 30, 2020 compared to the year ended April 30, 2019 is presented
below. A discussion regarding our results of operations and financial condition
for the year ended April 30, 2019 compared to the year ended April 30, 2018 can
be found under Item 7 of Part II of our Annual Report on Form 10-K for the
fiscal year ended April 30, 2019 , filed with the Securities and Exchange
Commission on June 27, 2019 .
The following table summarizes key components of our results of operations for
the fiscal years ended
Year Ended April 30,
2020 2019 2018
(dollars in thousands)
Statement of operations data(1):
Net sales $ 3,241,307 $ 3,116,032 $ 2,511,469
Cost of sales (exclusive of depreciation and
amortization shown separately below) 2,178,093 2,111,9131,692,893
Gross profit 1,063,214 1,004,119
818,576
Operating expenses: Selling, general and administrative expenses 784,081 739,460
633,877
Depreciation and amortization 116,533 117,459
65,530
Impairment of goodwill 63,074 - -
Total operating expenses 963,688 856,919 699,407
Operating income 99,526 147,200 119,169
Other (expense) income:
Interest expense (67,718) (73,677) (31,395)
Gain on legal settlement 14,029 - -
Write-off of debt discount and deferred
financing fees (1,331) -(74)
Change in fair value of financial instruments - (6,395)
(6,125)
Other income, net 1,819 2,913 2,279
Total other expense, net (53,201) (77,159) (35,315)
Income before taxes 46,325 70,041 83,854
Provision for income taxes 22,944 14,039 20,883
Net income $ 23,381 $ 56,002 $ 62,971
Non-GAAP measures:
Adjusted EBITDA(2) $ 299,759 $ 295,669 $ 199,258
Adjusted EBITDA margin(2)(3) 9.2 % 9.5 % 7.9 %
The comparison of statement of operations data is affected by our acquisition
(1) of Titan on
our operating results beginning on the acquisition date.
Adjusted EBITDA and Adjusted EBITDA margin are non-GAAP measures. See (2) "Non-GAAP Measures" in this Item 7 for how we define and calculate Adjusted
EBITDA and Adjusted EBITDA margin, reconciliations thereof to net income and
a description of why we believe these measures are important.
(3) Adjusted EBITDA margin is Adjusted EBITDA as a percentage of net sales.
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Net Sales Net sales of
Wallboard sales, which are impacted by both commercial and residential
construction activity, increased
? ended
higher organic volumes and the benefit from acquisitions, partially offset by a
slight decrease in price and a decrease in sales volume due to the impact of
the COVID-19 pandemic.
Ceilings sales increased
? organic volumes, the positive impact of acquisitions and higher pricing,
partially offset by a decrease in sales volume due to the impact of the
COVID-19 pandemic.
Steel framing sales decreased
?
lower pricing and the impact of the COVID-19 pandemic, partially offset by
higher organic volumes and the positive impact of acquisitions.
Other products sales increased
? ended
acquisitions and higher organic growth, partially offset by a decrease in sales
volume due to the impact of the COVID-19 pandemic. Organic net sales increased$61.5 million , or 2.0%, during the year endedApril 30, 2020 compared to the prior year. The increase was primarily driven by an increase in sales inthe United States as a result of the improvement in new housing starts, R&R activity and commercial construction, partially offset by a decline in sales inCanada , which was primarily related to softness in the Canadian single-family housing market, and a decrease in sales volume due to the impact of the COVID-19 pandemic.
The following table breaks out our net sales into organic, or base business, net
sales and recently acquired net sales for the year ended
Year
Ended
(Unaudited) April 30, 2020
(in thousands)
Net sales $ 3,241,307
Recently acquired net sales (1) (68,974)
Impact of foreign currency (2) 5,241
Base business net sales (3)
Represents net sales of branches acquired by us until the first anniversary
of the acquisition date. For year ended
Hart Acoustical and Drywall Supply, which was acquired on
Rigney, which was acquired on
acquired on
(2) Represents the impact of foreign currency translation on net sales.
(3) Represents net sales of existing branches and branches that were opened by us
during the period presented.
Beginning in fiscal 2020, we modified our calculation of organic sales
growth. When calculating organic sales growth for the current period, we now
exclude the net sales of acquired businesses until the first anniversary of the
acquisition date. In addition, we exclude the impact of foreign currency
translation in our calculation of organic net sales growth. Previously, we
excluded net sales of businesses acquired in the current fiscal year, the prior
fiscal year and three months prior to the start of the prior fiscal year.
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Gross Profit and Gross Margin
Gross profit of $1,063.2 million for the year ended April 30, 2020 increased
$59.1 million , or 5.9%, from the year ended April 30, 2019 primarily as a result
of higher net sales, both organically and including the positive impact of
acquisitions. Gross margin on net sales increased to 32.8% for the year ended
April 30, 2020 compared to 32.2% for the year ended April 30, 2019 due to net
favorable price-cost dynamics, Titan purchasing synergies and product mix. In
addition, during the year ended April 30, 2019 , we recognized a $4.1 million , or
0.4%, non-cash cost of sales impact of acquisition accounting adjustments to
increase inventory to its estimated fair value related to the Titan acquisition.
This adjustment had a negative effect on gross margin as the related inventory
was sold.
Selling, General and Administrative Expenses
Selling, general and administrative expenses consist of warehouse, delivery and general and administrative expenses. Selling, general and administrative expenses of$784.1 million for the year endedApril 30, 2020 increased$44.6 million , or 6.0%, from the year endedApril 30, 2019 . The increase was primarily due to growth in our base business, inflationary cost pressures, ongoing investments in business initiatives, an increase in stock-based compensation expense and incremental costs as a result of COVID-19. This was partially offset by a$5.1 million decrease in transaction costs, a$4.7 million decrease in severance costs and a$0.6 million decrease in debt transaction costs. Selling, general and administrative expenses were 24.2% of our net sales during the year endedApril 30, 2020 , compared to 23.7% of our net sales during the year endedApril 30, 2019 . The increase was primarily due to loss of sales leverage resulting from the COVID-19 pandemic, year-over-year declines in the selling prices of certain of our products and continuing inflationary cost pressures. In addition, during the year endedApril 30, 2020 , we made investments in greenfield locations and business initiatives intended to grow sales, leverage scale and drive profitability.
Depreciation and Amortization Expense
Depreciation and amortization includes depreciation of property and equipment and amortization of definite-lived intangible assets. Depreciation and amortization expense was$116.5 million for the year endedApril 30, 2020 compared to$117.5 million for the year endedApril 30, 2019 . The decrease was due to a$5.8 million decrease in amortization expense, partially offset by a$4.8 million increase in depreciation expense. The decrease in amortization expense was primarily due to use of the accelerated method of amortization for acquired customer relationships. The increase in depreciation expense was primarily attributable to an increase in capital expenditures over the prior year as well as incremental expense resulting from property and equipment obtained in acquisitions. The year endedApril 30, 2020 includes an additional month of depreciation expense for Titan property and equipment compared to
the prior year. Impairment ofGoodwill We recognized a$63.1 million non-cash impairment charge to goodwill related to ourCanada reporting unit in conjunction with our annual goodwill impairment test performed in the fourth quarter of fiscal 2020. This charge was included in impairment of goodwill in the Consolidated Statement of Operations and Comprehensive Income (Loss) for the year endedApril 30, 3020 . The primary factors contributing to the impairment was an increase in the discount rate and a decrease in market multiples, combined with a decrease in the reporting unit's forecasted near-term cash flows, primarily resulting from COVID-19 driven economic uncertainty. The impairment charge was equal to the excess of the reporting unit's carrying value over its fair value. This non-cash charge does not affect our cash position, liquidity, debt covenant compliance, nor will it have any impact on future operations. As ofApril 30, 2020 , we had$120.9 million of remaining goodwill related to ourCanada reporting unit. Our annual impairment test during the fourth quarter of fiscal 2020 indicated the estimated fair values of our other reporting units exceeded their carrying values. Our fiscal 2019 and 2018 annual impairment tests indicated the estimated fair value of our reporting units exceeded their carrying values. We test goodwill annually during the fourth quarter of our fiscal year or when events and circumstances indicate that those assets might not be recoverable. Impairment testing of goodwill is required at the reporting unit level. The impairment test involves comparing the estimated fair values of our reporting units with the reporting units' carrying amounts, including goodwill. We identified seven reporting units for evaluating goodwill for the fiscal 2020 annual impairment test, which were Central, Midwest, Northeast, Southern, Southeast, Western andCanada . Each of these reporting units constitutes a business for which discrete financial information is available and segment management regularly reviews the operating results. We estimated the fair values of our reporting units based on weighting of the 36 Table of Contents income and market approaches. These models use significant unobservable inputs, or Level 3 inputs, as defined by the fair value hierarchy. Under the income approach, we calculate the fair value of the reporting unit based on the present value of estimated cash flows using a discounted cash flow method. The significant assumptions used in the discounted cash flow method included internal forecasts and projections developed by management for planning purposes, discount rates, available industry/market data, and the growth rate to calculate the terminal value. Under the market approaches, the fair value was estimated using the guideline company method. We selected guideline companies in the industry in which each reporting unit operates. We primarily use revenue and EBITDA multiples based on the multiples of the selected guideline companies.
Interest Expense
Interest expense consists primarily of interest expense incurred on our debt and finance leases and amortization of deferred financing fees and debt discounts. Interest expense was$67.7 million during the year endedApril 30, 2020 compared to$73.7 million for the year endedApril 30, 2019 . The decrease was primarily due to a decrease in the outstanding amount of debt and a decrease in interest rates. This was partially offset by debt related to the financing of the acquisition of Titan. The year endedApril 30, 2020 includes an additional month of interest expense for the Titan debt financing compared to the prior year period.
Gain on Legal Settlement
In
Income Tax Expense
Income tax expense was$22.9 million during the year endedApril 30, 2020 compared to$14.0 million during the year endedApril 30, 2019 . Our effective tax rate was 49.5% and 20.0% for the years endedApril 30, 2020 and 2019, respectively. The increase in the effective income tax rate from the year endedApril 30, 2019 to the year endedApril 30, 2020 was primarily due to the various tax impacts of our non-cash impairment charge to goodwill. Also contributing to the change was equity-based compensation and foreign tax rates and other tax effects associated with ourCanada operations.
Liquidity and Capital Resources
Summary We depend on cash flow from operations, cash on hand and funds available under our ABL Facility to finance working capital needs, capital expenditures and acquisitions. We believe that these sources of funds will be adequate to fund debt service requirements and provide cash, as required, to support our growth strategies, ongoing operations, capital expenditures, lease obligations and working capital for at least the next 12 months. We have taken several measures to preserve liquidity in response to the COVID-19 pandemic. We currently believe that these measures and any others we may determine to take in the future to preserve our cash flows from operations, combined with our current financial resources, will allow us to manage the anticipated impact of the COVID-19 pandemic on our business operations. InMarch 2020 , we drew down$80.0 million under our ABL Facility and$7.2 million under our Canadian Facility as a precautionary measure to provide financial flexibility and liquidity in response to volatile financial market conditions resulting from the COVID-19 pandemic. As ofApril 30, 2020 , we had available borrowing capacity of$353.9 million under our$445.0 million ABL Facility. The ABL Facility will mature onSeptember 30, 2024 unless the individual affected lenders agree to extend the maturity of their respective loans under the ABL Facility upon the Company's request and without the consent of any other lender. As ofApril 30, 2020 , we had available borrowing capacity of$14.4 million under our Canadian Facility. The Canadian Facility matures
onJune 28, 2022 . 37 Table of Contents
For more information regarding our ABL Facility and other indebtedness, see Note
7 of the Notes to Consolidated Financial Statements included in this Annual
Report on Form 10-K for the fiscal year ended
We regularly evaluate opportunities to optimize our capital structure, including through consideration of the issuance or incurrence of additional debt, to refinance existing debt and to fund ongoing cash needs such as general corporate purposes, growth initiatives, acquisitions and our stock repurchase program.
Cash Flows
The following table sets forth summarized cash flow data for the years ended
Year Ended April 30,
2020 2019 2018
(in thousands)
Cash provided by operating activities $ 303,079 $ 193,615 $ 91,263
Cash used in investing activities (47,100) (600,692) (49,209)
Cash (used in) provided by financing activities (91,334) 418,970 (20,178) Effect of exchange rates on cash and cash equivalents (1,074) (992)
-
Increase in cash and cash equivalents $ 163,571 $ 10,901 $ 21,876
Operating Activities
The increase in cash provided by operating activities during the year endedApril 30, 2020 compared to the prior year was primarily due to a$43.4 million increase in net income after adjustments for non-cash items and a$66.1 million increase in cash resulting from changes to our net working capital.
Investing Activities
The decrease in cash used in investing activities during the year endedApril 30, 2020 compared to the prior year was primarily due to a$559.0 million decrease in cash used for acquisitions, which was primarily due to cash used for our acquisition of Titan in the prior year period. The decrease was partially offset by a$6.4 million increase in capital expenditures. Capital expenditures during the years endedApril 30, 2020 , 2019 and 2018 primarily consisted of building and leasehold improvements, vehicles and IT-related spending. Capital expenditures vary depending on prevailing business factors, including current and anticipated market conditions. Historically, capital expenditures have for the most part remained at relatively low levels in comparison to the net sales generated during the corresponding periods.
Financing Activities
The change in cash (used in) provided by financing activities during the year endedApril 30, 2020 compared to the prior year was primarily due to debt financing entered into in the prior year period in connection with our acquisition of Titan, partially offset by an increase in principal payments on debt and finance leases in the current year period and payments of contingent consideration arrangements assumed in our acquisition of Titan. During the year endedApril 30, 2020 , we made prepayments of$100.0 million principal amount on our Term Loan Facility. 38 Table of Contents Contractual Obligations The following table sets forth our contractual obligations and commitments as ofApril 30, 2020 : Year Ending April 30, Total 2021 2022 2023 2024 2025 Thereafter (in thousands) Long-term debt(1)$ 980,413 $ 14,842 $ 14,406 $ 21,566 $ 11,749 $ 90,787 $ 827,063 Interest on long-term debt(2) 140,743 27,888 27,569 27,251 27,006 26,614 4,414 Finance leases(3) 151,394 46,116 39,328 30,525 21,234 10,544 3,647 Facility operating leases(4) 135,888 35,936 28,896 23,301 18,753 12,154 16,848 Equipment operating leases(4) 4,891 3,024 1,491 354 22 - - Total$ 1,413,329 $ 127,806 $ 111,690 $ 102,997 $ 78,764 $ 140,099 $ 851,972
Long-term debt includes principal payments on outstanding debt obligations.
Long-term debt excludes unamortized discounts and deferred financing fees. As
of
2025,
installment notes due in monthly and annual installments through 2024 and
(2) Interest payments on long-term debt includes interest due on outstanding debt
obligations and commitment and borrowing cost under our ABL facility.
(3) Represents remaining payments under finance leases, including interest on
finance lease obligations.
(4) Represents base rent payments under non-cancellable operating leases.
We may, from time to time, repurchase or otherwise retire or extend our debt and/or take other steps to reduce our debt or otherwise improve our financial position. These actions may include open market debt repurchases, negotiated repurchases, other retirements of outstanding debt and/or opportunistic refinancing of debt. The amount of debt that may be repurchased or otherwise retired or refinanced, if any, will depend on market conditions, trading levels of our debt, our cash position, compliance with debt covenants and other considerations. We lease certain office and warehouse facilities and equipment, some of which provide renewal options. Rent expense for operating leases, which may have escalating rents over the terms of the leases, is recorded on a straight-line basis over the minimum lease terms. Rent expense under operating leases approximated$55.4 million ,$53.5 million , and$63.9 million for the fiscal years endedApril 30, 2020 , 2019 and 2018, respectively. As existing leases expire, we anticipate such leases will be renewed or replaced with other leases that are substantially similar in terms, which are consistent with market rates at the time of renewal. During fiscal 2020, we entered into$50.5 million of finance lease obligations for the purchase of equipment and vehicles. We expect to continue to enter into finance lease obligations for the purchase of equipment and vehicles in fiscal 2021.
Share Repurchase Program
InNovember 2018 , our Board of Directors authorized a common stock repurchase program to repurchase up to$75.0 million of our outstanding common stock. The share repurchase program does not obligate us to acquire any specific amount of common stock, and it may be suspended or terminated at any time at our discretion. The timing and amount of any purchases of our common stock will be 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. We did not repurchase any shares of our common stock during the fiscal year endedApril 30, 2020 . As ofApril 30, 2020 , we had$58.5 million stock repurchase authorization available under the repurchase program. 39 Table of Contents Interest Rate Swap InFebruary 2019 , we entered into interest rate swap agreements with a notional amount of$500.0 million to convert the variable interest rate on a portion of our Term Loan Facility to a fixed 1-month LIBOR interest rate of 2.46%. These contracts were effective onFebruary 28, 2019 and terminate onFebruary 28 ,
2023. Debt Covenants The ABL Facility contains certain affirmative covenants, including financial and other reporting requirements. We were in compliance with all such covenants as ofApril 30, 2020 . The Term Loan 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. We were in compliance with all restrictive covenants as ofApril 30, 2020 .
Interest Rates
Our ABL Facility and Term Loan Facility include available interest rate options based on the LIBOR. LIBOR will be discontinued after 2021, andthe United States and other countries are currently working to replace LIBOR with alternative reference rates. The consequences of these developments with respect to LIBOR cannot be entirely predicted; however, we do not believe that the discontinuation of LIBOR as a reference rate in our loan agreements will have a material adverse effect on our financial position or materially affect our interest expense.
Off Balance Sheet Arrangements
As of
Critical Accounting Policies
Our discussion and analysis of operating results and financial condition are
based upon our audited financial statements included elsewhere in this Annual
Report on Form 10-K. The preparation of our financial statements, in accordance
with Generally Accepted Accounting Principles ("GAAP"), requires us to make
estimates and assumptions that affect the reported amounts of assets,
liabilities, net sales, expenses and related disclosures of contingent assets
and liabilities. We base our estimates on past experience and other assumptions
that we believe are reasonable under the circumstances, and we evaluate these
estimates on an ongoing basis. Our critical accounting policies are those that
materially affect our consolidated financial statements and involve difficult,
subjective or complex judgments by management. Although these estimates are
based on management's best knowledge of current events and actions that may
impact us in the future, actual results may be materially different from the
estimates.
We believe the following critical accounting policies are affected by significant judgments and estimates used in the preparation of our consolidated financial statements and that the judgments and estimates are reasonable.
Goodwill
Description. We perform an impairment test of our goodwill annually during the fourth quarter of our fiscal year (February 1 ) or when events and circumstances indicate goodwill might be impaired. Impairment testing of goodwill is required at the reporting unit level. We may first assess the qualitative factors to determine whether it is necessary to perform the quantitative goodwill impairment test. The impairment test involves comparing the estimated fair value of our reporting units with the reporting unit's carrying amount, including goodwill. If the carrying amount of the reporting unit exceeds its fair value, a goodwill impairment loss is measured as the amount by which a reporting unit's carrying amount exceeds its fair value, not to exceed the carrying amount of goodwill. We evaluate our reporting units on an annual basis or when events or circumstances indicate our reporting units might change. 40 Table of Contents Judgments and Uncertainties. Application of the goodwill impairment test requires judgment, including the identification of reporting units, assigning assets and liabilities to reporting units and determining the fair values of reporting units. We estimated the fair values of our reporting units based on weighting of the income and market approaches. These models use significant unobservable inputs, or Level 3 inputs, as defined by the fair value hierarchy. Significant estimates and assumptions inherent in the valuations include the amount and timing of future cash flows (including expected growth rates and profitability), the discount rate applied to the cash flows and the selection of guideline companies. The assumptions with the most significant impact on the fair value of the reporting unit are those related to the discount rate, the terminal value, future operating cash flows and the growth rate. Effect if Actual Results Differ From Assumptions. As ofApril 30, 2020 , we had$553.1 million of goodwill. We recognized a$63.1 million non-cash impairment charge to write off goodwill related to ourCanada reporting unit in conjunction with our annual goodwill impairment test performed in the fourth quarter of fiscal 2020. The primary factors contributing to the impairment was an increase in the discount rate and a decrease in market multiples, combined with a decrease in the reporting unit's forecasted near-term cash flows, primarily resulting from COVID-19 driven economic uncertainty. The impairment charge was equal to the excess of the reporting unit's carrying value over its fair value. As ofApril 30, 2020 , we had$120.9 million of remaining goodwill related to ourCanada reporting unit. Our annual impairment test during the fourth quarter of fiscal 2020 indicated the estimated fair values of our other reporting units exceeded their carrying values. Our fiscal 2019 and 2018 annual impairment tests indicated the estimated fair value of our reporting units exceeded their carrying values. Changes to our business strategy, changes in industry or market conditions, changes in operating performance, a prolonged weakness in general economic conditions, volatility in the equity and debt markets or other similar circumstances could affect the assumptions used in the impairment tests. Although management currently believes that the estimates used in the evaluation of goodwill are reasonable, if the assumptions used in the impairment analysis are not met or materially change, it could cause goodwill to be impaired. Long-Lived Assets Description. We depreciate property and equipment and amortize intangible assets over the estimated useful lives of the assets. Estimates of useful lives are based on the nature of the underlying assets as well as our experience with similar assets and intended use. We periodically review estimated useful lives for reasonableness. We evaluate recoverability of long-lived assets, including property and equipment and intangible assets, when events or changes in circumstances indicate that the carrying amount may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the estimated undiscounted future cash flow expected to be generated by the assets. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the estimated
fair value of the asset. Judgments and Uncertainties. Determining the useful life of an intangible asset requires judgment. Estimates of useful lives can differ from actual useful lives due to the inherent uncertainty in making these estimates. Our impairment tests contain uncertainties because they require management to make assumptions and apply judgment regarding the amount and timing of future cash flows (including expected growth rates and profitability) and the discount rate applied to the cash flows. Effect if Actual Results Differ. As ofApril 30, 2020 , we had$305.5 million of property and equipment,$300.5 million of definite-lived intangible assets and$115.3 million of operating lease right-of-use assets. During the year endedApril 30, 2020 , we recognized a$1.9 million impairment of our operating lease right-of-use assets due to a restructuring plan to close one of our facilities. We did not recognize any other material impairment charges for our long-lived assets during the past three years. We did not have any material changes in useful lives for our long-lived assets during the past three years. However, changes in management intentions, market events or conditions, projected future net sales, operating results and other similar circumstances could affect the assumptions used in the impairment tests. Although management currently believes that the estimates used in the evaluation of long-lived assets are reasonable, differences between actual and expected net sales, operating results and cash flow could cause these assets to be impaired. 41 Table of Contents Business Combinations
Description. We account 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 acquisition accounting 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 Consolidated Statements of Operations and Comprehensive Income (Loss). Judgments and Uncertainties. Accounting for business combinations requires our management to make significant estimates and assumptions about intangible assets, obligations assumed and pre-acquisition contingencies, including uncertain tax positions and tax-related valuation allowances and reserves. Critical estimates in valuing certain of the intangible assets include, but are not limited to, future expected cash flows from customer relationships and developed technologies; the acquired company's brand and competitive position, as well as assumptions about the period of time the acquired brand will continue to be used in the combined company's product portfolio; and discount rates.
Effect if Actual Results Differ. Although we believe the assumptions and estimates we have made in the past have been reasonable and appropriate, they are inherently uncertain. As a result, actual results may differ from estimates.
Subsidiary Equity-Based Deferred Compensation Arrangements
Description. Certain subsidiaries have equity-based compensation agreements with the subsidiary's employees and minority shareholders. These agreements are stock appreciation rights, deferred compensation agreements and liabilities to noncontrolling interest holders. The agreements entitle selected employees of those subsidiaries to participate in increases in the adjusted book value of a specified number of shares of common stock of those subsidiaries. Adjusted book value for this purpose generally means the book value of the relevant shares, as increased, or decreased, to reflect those shares' ratable portion of any annual earnings, or losses, of the relevant subsidiary (based on the total number of outstanding shares of the relevant subsidiary). Since these agreements are typically settled in cash or notes, they are accounted for as liability awards and measured at fair value. For more information regarding these agreements, see Note 13 of the Notes to Consolidated Financial Statements included in this Annual Report on Form 10-K for the fiscal year endedApril 30, 2020 . Judgments and Uncertainties. The determination of fair value is a significant estimate, which is based on assumptions including the expected book value of the subsidiary per share at the time of redemption and the expected termination date of each award holder. To determine the expected book value of the subsidiary at redemption date, we have used a lognormal binomial method. Significant inputs to this estimate include historical book values of the subsidiaries, our expected incremental borrowing rate, the expected retirement age of certain individuals and the expected volatility of the underlying book values of the subsidiary's equity. This estimate is, by its nature, subjective and involves a high degree of judgment and assumptions.
Effect if Actual Results Differ From Assumptions. As ofApril 30, 2020 , we had total liabilities for stock appreciation rights, deferred compensation agreements and liabilities to noncontrolling interest holders of$34.2 million . The amounts recorded in the financial statements for these agreements could vary significantly if we were to use different assumptions. The assumptions used may have a significant effect on our estimates of fair value, and the use of different assumptions, as well as changes in market conditions, could have a material effect on our results of operations or financial condition. Income Taxes Description. Income taxes are accounted for using the asset and liability method. Deferred tax assets and liabilities are recognized based on the difference between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Inherent in the measurement of deferred balances are certain judgments and 42 Table of Contents
interpretations of existing tax law and published guidance as applicable to our operations.
We evaluate our deferred tax assets to determine if valuation allowances are required. In assessing the realizability of deferred tax assets, we consider both positive and negative evidence in determining whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The primary negative evidence considered includes the cumulative operating losses generated in prior periods. The primary positive evidence considered includes the reversal of deferred tax liabilities related to depreciation and amortization that would occur within the same jurisdiction and during the carry-forward period necessary to absorb the federal and state net operating losses and other deferred tax assets. The reversal of such liabilities would utilize the federal and state net operating losses and other deferred
tax assets.
We record amounts for uncertain tax positions that management believes are supportable, but are potentially subject to successful challenge by the applicable taxing authority. Consequently, changes in our assumptions and judgments could materially affect amounts recognized related to income tax uncertainties and may affect our results of operations or financial position. We believe our assumptions for estimates continue to be reasonable, although actual results may have a positive or negative material impact on the balances of such tax positions. Historically, the variation of estimates to actual results is immaterial and material variation is not expected in the future. Judgments and Uncertainties. We consider the probability of future taxable income and our historical profitability, among other factors, in assessing the amount of the valuation allowance. Significant judgment is involved in this determination, including projections of future taxable income. Our liability for unrecognized tax benefits contains uncertainties because management is required to make assumptions and to apply judgment to estimate the exposures associated with our various filing positions. Our effective income tax rate is also affected by changes in tax law, our level of earnings and the results of tax audits.
Effect if Actual Results Differ From Assumptions. Although we believe that the judgments and estimates used are reasonable, changes in estimates and assumptions could materially affect the amount or timing of valuation allowances.
Newly Issued Accounting Pronouncements
See Note 1 of the Notes to Consolidated Financial Statements included in this Annual Report on Form 10-K for information regarding recently adopted and recently issued accounting pronouncements.
Non-GAAP Financial Measures
Adjusted EBITDA and Adjusted EBITDA margin are non-GAAP measures. We report our
financial results in accordance with GAAP. However, we present Adjusted EBITDA
and Adjusted EBITDA margin, which are not recognized financial measures under
GAAP, because we believe they assist investors and analysts in comparing our
operating performance across reporting periods on a consistent basis by
excluding items that we do not believe are indicative of our core operating
performance. Management believes Adjusted EBITDA and Adjusted EBITDA margin are
helpful in highlighting trends in our operating results, while other measures
can differ significantly depending on long-term strategic decisions regarding
capital structure and allocation, the tax jurisdictions in which companies
operate and capital investments and acquisitions.
In addition, we utilize Adjusted EBITDA in certain calculations under the ABL
Facility and the Term Loan Facility. The ABL Facility and the Term Loan Facility
permit us to make certain additional adjustments in calculating Consolidated
EBITDA, such as projected net cost savings, which are not reflected in the
Adjusted EBITDA data presented in this Annual Report on Form 10-K. We may in the
future reflect such permitted adjustments in our calculations of Adjusted
EBITDA.
We believe that Adjusted EBITDA and Adjusted EBITDA margin are frequently used
by analysts, investors and other interested parties in their evaluation of
companies, many of which present an Adjusted EBITDA or Adjusted EBITDA margin
measure when reporting their results. Our presentation of Adjusted EBITDA should
not be construed as an inference that our future results will be unaffected by
unusual or non-recurring items. In addition, Adjusted EBITDA may not be
comparable to similarly titled measures used by other companies in our industry
or across different industries.
43
Table of Contents
We also include information concerning Adjusted EBITDA margin, which is
calculated as Adjusted EBITDA divided by net sales. We present Adjusted EBITDA
margin because it is used by management as a performance measure to judge the
level of Adjusted EBITDA that is generated from net sales.
Adjusted EBITDA and Adjusted EBITDA margin have their limitations as analytical
tools and should not be considered in isolation, or as a substitute for analysis
of our results as reported under GAAP.
The following is a reconciliation of our net income to Adjusted EBITDA for the
years ended
Year Ended April 30,
2020 2019 2018
(in thousands)
Net income $ 23,381 $ 56,002 $ 62,971
Interest expense 67,718 73,677 31,395Write-off of debt discount and deferred financing fees 1,331
- 74
Interest income (88) (66) (177)
Provision for income taxes 22,944 14,039 20,883
Depreciation expense 51,332 46,456 24,075
Amortization expense 65,201 71,003 41,455
Impairment of goodwill 63,074 - -Stock appreciation expense(a) 1,572 2,730 2,318 Redeemable noncontrolling interests(b) 520 1,188 1,868 Equity-based compensation(c) 7,060 3,906 1,695 Severance and other permitted costs(d) 5,733 8,152 581 Transaction costs (acquisitions and other)(e) 2,414 7,858 3,370 Loss (gain) on disposal and impairment of assets(f) 658 (525) (509) Effects of fair value adjustments to inventory(g) 575 4,176 324 Change in fair value of financial instruments(h) - 6,395 6,125 Gain on legal settlement (14,029) - - Secondary public offering costs(i) 363
- 1,525
Debt transaction costs(j) - 678 1,285
Adjusted EBITDA $ 299,759 $ 295,669 $ 199,258
Net sales $ 3,241,307 $ 3,116,032 $ 2,511,469
Adjusted EBITDA Margin 9.2 % 9.5 % 7.9 %
(a) Represents non-cash compensation expenses related to stock appreciation
rights agreements.
(b) Represents non-cash compensation expense related to changes in the redemption
values of noncontrolling interests.
(c) Represents non-cash equity-based compensation expense related to the issuance
of share-based awards.
Represents severance expenses and other costs permitted in calculations under (d) the ABL Facility and the Term Loan Facility, including certain unusual,
nonrecurring costs due to COVID-19.
(e) Represents costs related to acquisitions paid to third-party advisors.
The year ended
our facilities.
(g) Represents the non-cash cost of sales impact of purchase accounting
adjustments to increase inventory to its estimated fair value.
(h) Represents the mark-to-market adjustments for derivative financial
instruments.
(i) Represents costs related to our secondary offerings paid to third-party
advisors.
(j) Represents expenses paid to third-party advisors related to debt refinancing
activities.
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