GMS INC. The following information should be read in conjunction with the unaudited condensed consolidated financial statements and related notes included in this Quarterly Report on Form 10-Q. The following discussion may contain forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to these differences include those factors discussed below and elsewhere in this Quarterly Report on Form 10-Q, particularly in "Cautionary Note Regarding Forward-Looking Statements," and discussed in the section entitled "Risk Factors" included in our Annual Report on Form 10-K for the year endedApril 30, 2019 . Overview Founded in 1971,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 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 acrossthe United States andCanada . Business Strategy Our growth strategy includes increasing our market share within our existing footprint, expanding into new markets by opening new branches, acquiring competitors and growing other products. 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.
Acquisition of Titan
OnJune 1, 2018 , we acquired all of the outstanding equity interests ofWSB Titan ("Titan"), a distributer of drywall, lumber, 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 exchanged for 1.1 million shares of the Company's common stock inJune 2019 . The transaction extended our leadership position inNorth America with expanded scale and footprint, expanded our geographic coverage into the Canadian market and has created opportunities
for further expansion inCanada . Fiscal 2020 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, TX and one location inLa Feria, TX.
On
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ABL Amendment and Debt Prepayment
OnSeptember 30, 2019 , we amended our asset based revolving credit facility (the "ABL Facility") to 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 terms of the ABL Facility remain unchanged. Also onSeptember 30, 2019 , we made a$50.0 million prepayment of outstanding principal of our senior secured first lien term loan facility (the "First Lien Facility"). We recorded a write-off of debt discount and deferred financing fees of$0.7 million , which is included in write-off of discount and deferred financing fees in the Condensed Consolidated Statements of Operations and Comprehensive Income. Our Products
The following is a summary of our net sales by product group for the three and
six months ended
Three Months Ended Six Months Ended
October 31, % of October 31, % of October 31, % of October 31, % of
2019 Total 2018 Total 2019 Total 2018 Total
(dollars in thousands)
Wallboard $ 350,618 40.7 % $ 334,688 40.1 % $ 692,213 40.5 % $ 652,423 40.5 %
Ceilings 122,807 14.2 % 118,376 14.2 % 251,917 14.7 % 234,231 14.5 %
Steel framing 136,159 15.8 % 135,760 16.3 % 267,988 15.7 % 264,872 16.4 %
Other products 252,345 29.3 % 245,013 29.4 % 496,987 29.1 % 460,455 28.6 %
Total net sales $ 861,929 $ 833,837 $ 1,709,105 $ 1,611,981
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Results of Operations
Three Months Ended
The following table summarizes key components of our results of operations for
the three months ended
Three Months Ended
October 31,
2019 2018
(dollars in thousands)
Statement of operations data:
Net sales $ 861,929 $ 833,837
Cost of sales (exclusive of depreciation and amortization
shown separately below) 577,436 565,687
Gross profit 284,493 268,150
Operating expenses:Selling, general and administrative expenses 200,457
185,268
Depreciation and amortization 29,518 30,787
Total operating expenses 229,975 216,055
Operating income 54,518 52,095
Other (expense) income:
Interest expense (17,559) (19,182)Change in fair value of financial instruments -
(376)
Write-off of debt discount and deferred financing fees (707)
-
Other income, net 813 434
Total other expense, net (17,453) (19,124)
Income before taxes 37,065 32,971
Provision for income taxes 7,927 8,059
Net income $ 29,138 $ 24,912
Non-GAAP measures:
Adjusted EBITDA(1) $ 89,905 $ 87,145
Adjusted EBITDA margin(1)(2) 10.4 % 10.5 %
Adjusted EBITDA and Adjusted EBITDA margin are non-GAAP measures. See (1) "-Non-GAAP Financial Measures-Adjusted EBITDA," for how we define and
calculate Adjusted EBITDA and Adjusted EBITDA margin, reconciliations thereof
to net income and a description of why we believe these measures are useful.
(2) Adjusted EBITDA margin is Adjusted EBITDA as a percentage of net sales.
Net sales of$861.9 million increased$28.1 million , or 3.4%, during the three months endedOctober 31, 2019 compared to the three months endedOctober 31, 2018 . The increase in net sales was due to the following:
Wallboard sales, which are impacted by both commercial and residential
construction activity, increased
? three months ended
primarily driven by higher organic volumes and acquisitions, partially offset
by lower pricing and product mix.
Ceilings sales increased
? ended
higher organic volumes and acquisitions, as well as slightly higher pricing and
product mix.
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Steel framing sales increased
? three months ended
primarily driven by higher organic volumes, partially offset by lower pricing
and product mix.
Other products sales, which include insulation, joint treatment, tools, lumber
? and various other specialty building products, increased
compared to the three months ended
due to higher organic growth and acquisitions.
Organic net sales increased$22.1 million , or 2.7%, during the three months endingOctober 31, 2019 compared to the prior year period 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. The following table breaks out our net sales into organic, or base business, net sales and recently acquired net sales for the three months endedOctober 31, 2019 : Three Months Ended October 31, 2019 (in thousands) Net sales $ 861,929 Recently acquired net sales (1) (8,284) Impact of foreign currency (2) 2,332
Base business net sales (3) $ 855,977
Represents net sales of branches acquired by us until the first anniversary
of the acquisition date. For the three months ended
(1) includes net sales of
(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.
Gross Profit and Gross Margin
Gross profit of$284.5 million for the three months endedOctober 31, 2019 increased$16.3 million , or 6.1%, compared to the three months endedOctober 31, 2018 as a result of higher net sales, both organically and including the positive impact of acquisitions. Gross margin on net sales increased to 33.0% for the three months endedOctober 31, 2019 compared to 32.2% for the three months endedOctober 31, 2018 primarily due to net favorable price-cost dynamics, acquisition-related purchasing synergies and product mix.
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$200.4 million for the three months endedOctober 31, 2019 increased$15.2 million , or 8.2%, compared to the three months endedOctober 31, 2018 . The increase was primarily due to an increase in payroll and payroll related costs, a$1.2 million increase in stock-based compensation expense and a$0.8 million increase in severance expense. Selling, general and administrative expenses was 23.3% of our net sales during the three months endedOctober 31, 2019 compared to 22.2% of our net sales during the three months endedOctober 31, 2018 . The increase was primarily driven by the increase in stock-based compensation expense and 32 Table of Contents severance expense, year-over-year price deflation and certain supply-side cost pressures. In addition, we continued to make ongoing investments in greenfields and business initiatives intended to drive growth and productivity.
Depreciation and Amortization Expense
Depreciation and amortization expense includes depreciation of property and equipment and amortization of definite-lived intangible assets acquired in purchases of businesses and purchases of assets from other companies. Depreciation and amortization expense was$29.5 million for the three months endedOctober 31, 2019 compared to$30.8 million for the three months endedOctober 31, 2018 . The decrease was due to a$2.3 million decrease in amortization of definite-lived intangible assets, partially offset by a$1.0 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 due to an increase in capital expenditures over the past year.
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$17.6 million during the three months endedOctober 31, 2019 compared to$19.2 million for the three months endedOctober 31, 2018 . The decrease was primarily due to an decrease in the outstanding amount of debt and a decrease in interest rates.
Income Taxes
We recognized income tax expense of$7.9 million during the three months endedOctober 31, 2019 compared to$8.0 million during the three months endedOctober 31, 2018 . Our effective tax rate was 21.4% and 24.4% for the three months endedOctober 31, 2019 and 2018, respectively. The change in the effective income tax rate from the three months endedOctober 31, 2018 to the three months endedOctober 31, 2019 was primarily due to the impact of equity based compensation. Net Income
Net income was$29.1 million during the three months endedOctober 31, 2019 compared to$24.9 million for the three months endedOctober 31, 2018 . The increase in net income was primarily due to an increase in operating income, a decrease in depreciation and amortization expense and a decrease in interest expense. Adjusted EBITDA Adjusted EBITDA of$89.9 million for the three months endedOctober 31, 2019 increased$2.8 million , or 3.2%, from our Adjusted EBITDA of$87.1 million for the three months endedOctober 31, 2018 . The increase in Adjusted EBITDA was primarily due growth in our base business and the improvement in gross margin on sales, partially offset by softness in the Canadian single-family housing market. See "-Non-GAAP Financial Measures-Adjusted EBITDA," below for how we define and calculate Adjusted EBITDA, reconciliations to net income and a description of why we believe these measures are useful. 33
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