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 260 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 our product offerings. 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, Texas and one location inLa Feria, Texas .
On
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On February 1, 2020 , we acquired Trowel Trades Supply, Inc. ("Trowel Trades").
Trowel Trades distributes interior building materials, as well as masonry and
hardscape products, through a single location in Colchester, Vermont .
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
nine months ended
Three Months Ended Nine Months Ended
January 31, % of January 31, % of January 31, % of January 31, % of
2020 Total 2019 Total 2020 Total 2019 Total
(dollars in thousands)
Wallboard $ 314,391 41.3 % $ 297,358 41.1 % $ 1,006,604 40.7 % $ 949,781 40.7 %
Ceilings 112,768 14.8 % 105,219 14.5 % 364,685 14.8 % 339,450 14.5 %
Steel framing 118,823 15.6 % 117,432 16.2 % 386,811 15.7 % 382,304 16.4 %
Other products 215,370 28.3 % 203,893 28.2 % 712,357 28.8 % 664,348 28.4 %
Total net sales $ 761,352 $ 723,902 $ 2,470,457 $ 2,335,883
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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
January 31,
2020 2019
(dollars in thousands)
Statement of operations data:
Net sales $ 761,352 $ 723,902
Cost of sales (exclusive of depreciation and amortization
shown separately below) 507,879 489,676
Gross profit 253,473 234,226
Operating expenses:Selling, general and administrative expenses 193,384
178,180
Depreciation and amortization 29,422 30,220
Total operating expenses 222,806 208,400
Operating income 30,667 25,826
Other (expense) income:
Interest expense (16,474) (19,526)Change in fair value of financial instruments - - Write-off of debt discount and deferred financing fees -
-
Other (expense) income, net (498) 957
Total other expense, net (16,972) (18,569)
Income before taxes 13,695 7,257
Provision for income taxes 2,816 1,442
Net income $ 10,879 $ 5,815
Non-GAAP measures:
Adjusted EBITDA(1) $ 62,697 $ 59,717
Adjusted EBITDA margin(1)(2) 8.2 % 8.2 %
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$761.4 million increased$37.5 million , or 5.2%, during the three months endedJanuary 31, 2020 compared to the three months endedJanuary 31, 2019 . 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 higher pricing and product
mix.
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Steel framing sales increased
? three months
primarily driven by higher organic volume and acquisitions, 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
5.6%, compared to the three months ended
primarily due to higher organic growth and acquisitions.
Organic net sales increased$27.7 million , or 3.8%, during the three months endingJanuary 31, 2020 compared to the prior year period. The increase was primarily driven by an increase in sales inthe United States as a result of the improvement in new housing starts, R&R activity and commercial construction, partially offset by a decline in sales inCanada , which was primarily related to softness in the Canadian single-family housing market. The following table breaks out our net sales into organic, or base business, net sales and recently acquired net sales for the three months endedJanuary 31, 2020 : Three Months Ended January 31, (in thousands) Net sales$ 761,352 Recently acquired net sales (1) (8,358) Impact of foreign currency (2) (1,344)
Base business net sales (3)
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
3, 2019, and
2019.
(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$253.5 million for the three months endedJanuary 31, 2020 increased$19.2 million , or 8.2%, compared to the three months endedJanuary 31, 2019 as a result of higher net sales, both organically and including the positive impact of acquisitions. Gross margin on net sales increased to 33.3% for the three months endedJanuary 31, 2020 compared to 32.4% for the three months endedJanuary 31, 2019 primarily due to favorable price-cost dynamics resulting from both higher volume purchases in multiple product groups and other purchasing initiatives. Acquisition-related purchasing synergies and product mix also contributed to the increase in gross margin.
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$193.4 million for the three months endedJanuary 31, 2020 increased$15.2 million , or 8.5%, compared to the three months endedJanuary 31, 2019 . Selling, general and administrative expenses was 25.4% of our net sales during the three months endedJanuary 31, 2020 compared to 24.6% of our net sales during the three months endedJanuary 31, 2019 . The increase was primarily
driven by year-over-year
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declines in the selling prices of certain of our products and continuing inflationary cost pressures. In addition, we continued to make ongoing investments in greenfield locations and business initiatives intended to grow sales, leverage scale and drive profitability.
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$29.4 million for the three months endedJanuary 31, 2020 compared to$30.2 million for the three months endedJanuary 31, 2019 . The decrease was due to a$1.8 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$16.5 million during the three months endedJanuary 31, 2020 compared to$19.5 million for the three months endedJanuary 31, 2019 . 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$2.8 million during the three months endedJanuary 31, 2020 compared to$1.4 million during the three months endedJanuary 31, 2019 . Our effective tax rate was 20.6% and 19.9% for the three months endedJanuary 31, 2020 and 2019, respectively. The change in the effective income tax rate from the three months endedJanuary 31, 2019 to the three months endedJanuary 31, 2020 was primarily due to the impact of equity-based compensation. Net Income
Net income was
Adjusted EBITDA
Adjusted EBITDA of$62.7 million for the three months endedJanuary 31, 2020 increased$3.0 million , or 5.0%, from our Adjusted EBITDA of$59.7 million for the three months endedJanuary 31, 2019 . The increase in Adjusted EBITDA was primarily due to 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. 34
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