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, 2021 . 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 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 280 distribution centers acrossthe United States andCanada . Business Strategy Our business strategy includes 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 pursue acquisitions. Due to the large, highly-fragmented nature of our markets 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 we believe will fit our culture and business model and we have built 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 continue to 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 other best practices to deliver further margin expansion and earnings growth. COVID-19 Update We continue to monitor the COVID-19 pandemic ("COVID-19") and its impact on macroeconomic and local economic conditions. We will continue to implement, as deemed necessary or advisable, procedures and processes to protect the health and safety of our employees, customers, partners and suppliers. We may take further actions that alter our business operations if required by federal, state, provincial or local authorities or that we determine are in the best interests of our employees, customers, suppliers and stockholders. Furthermore, while COVID-19 had a limited impact on our financial results and operations during the three months endedJuly 31, 2021 , there is no guarantee that COVID-19 will not have a material impact on our future financial results or operations. See Item 1A, "Risk Factors," and Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," in our Annual Report on Form 10-K for the fiscal year endedApril 30, 2021 for a discussion of risks which could have a material adverse effect on our operations and financial results and for more information regarding the impact of COVID-19 and our response. 24 --------------------------------------------------------------------------------
Highlights
Key highlights in our business during the three months ended
•Generated net sales of$1,042.1 million during the three months endedJuly 31, 2021 , a 29.8% increase from the prior year period primarily due to continued strength in the residential market, price inflation in the current year period and the negative impacts of COVID-19 in the prior year period. •Generated net income of$61.2 million during the three months endedJuly 31, 2021 , a 124.9% increase compared to the prior year primarily due to the increase in net sales as noted above, partially offset by an increase in the provision for income taxes. •Generated Adjusted EBITDA (a non-GAAP measure, see "Non-GAAP Financial Measures" in this Item 2) of$128.1 million during the three months endedJuly 31, 2021 , a 54.2% increase compared to the prior year primarily due to the increase in net sales noted above. Adjusted EBITDA as a percentage of net sales increased to 12.3% for the three months endedJuly 31, 2021 compared to 10.3% for the three months endedJuly 31, 2020 primarily due to better operating leverage, as product price inflation on sales outpaced operating cost inflation. Recent Developments Acquisitions OnJuly 1, 2021 , we acquired substantially all the assets ofWestside Building Material ("Westside"), one of the largest independent distributors of interior building products in theU.S. , for preliminary consideration of$139.6 million . Westside is a leading supplier of steel framing, wallboard, acoustical ceilings, insulation and related building products serving commercial and residential markets. Westside's distribution network comprises ten locations, including nine acrossCalifornia (Anaheim ,Hesperia ,Oakland ,Chatsworth ,Fresno ,Lancaster ,Santa Maria ,San Diego andNational City ) and one inLas Vegas, Nevada . For more information regarding our acquisition of Westside, see Note 2 of the Notes to Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q. OnJune 3, 2021 , we acquired the assets ofArchitectural Coatings Distributors, Inc. ("Architectural Coating"). Architectural Coating is an interior building products distributor inCleveland, Ohio . OnAugust 1, 2021 , we acquired certain assets ofDK&B Construction Specialties, Inc., Inc. ("DK&B"). DK&B is a distributor of External Insulation and Finishing Systems (EIFS) and stucco products through one location inOmaha, Nebraska .
Greenfields
During the three months ended
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Results of Operations
The following table summarizes key components of our results of operations for
the three months ended July 31, 2021 and 2020:
Three Months Ended
July 31,
2021 2020
(dollars in thousands)
Statement of operations data:
Net sales $ 1,042,076 $ 802,573
Cost of sales (exclusive of depreciation and amortization shown
separately below) 706,243 542,115
Gross profit 335,833 260,458
Operating expenses:
Selling, general and administrative expenses 214,081 183,112
Depreciation and amortization 27,714 27,097
Total operating expenses 241,795 210,209
Operating income 94,038 50,249
Other (expense) income:
Interest expense (13,657) (14,081)
Other income, net 792 655
Total other expense, net (12,865) (13,426)
Income before taxes 81,173 36,823
Provision for income taxes 19,971 9,604
Net income $ 61,202 $ 27,219
Non-GAAP measures:
Adjusted EBITDA(1) $ 128,079 $ 83,054
Adjusted EBITDA margin(1)(2) 12.3 % 10.3 %
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(1)Adjusted EBITDA and Adjusted EBITDA margin are non-GAAP measures. See "-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 Three Months Ended July 31, Change 2021 2020 Dollar Percent (dollars in thousands) Wallboard$ 390,135 $ 328,085 $ 62,050 18.9 % Ceilings 138,071 114,643 23,428 20.4 % Steel framing 196,276 110,532 85,744 77.6 % Complementary products 317,594 249,313 68,281 27.4 % Total net sales$ 1,042,076 $ 802,573 $ 239,503 29.8 % We generate net sales by providing a comprehensive product offering of wallboard, ceilings, steel framing and complementary construction products. The increase in net sales during the three months endedJuly 31, 2021 compared to the prior year period was primarily due to continued strength in the residential market, price inflation in the current year period, growth in complementary products sales and the negative impacts of COVID-19 in the prior year period. Also contributing to the increase were acquisitions and new greenfield openings over the past year. These increases were partially offset by one less 26 -------------------------------------------------------------------------------- selling day during the three months endedJuly 31, 2021 compared to the prior year period. The increase consisted of the following: •an increase in wallboard sales, which are impacted by both commercial and residential construction activity, primarily due to an increase in price/product mix and higher volume; •an increase in ceilings sales, which is principally impacted by commercial construction activity, primarily due to an increase in price/product mix and higher volume; •an increase in steel framing sales, which is principally impacted by commercial construction activity, primarily due to an increase in price/product mix and higher volume; and •an increase in complementary products sales, which include insulation, joint treatment, tools, lumber and various other specialty building products, primarily due to an increase in pricing in certain product categories, the execution of growth initiatives to increase other products sales and positive contributions from acquisitions. The following table breaks out our net sales into organic, or base business, net sales and recently acquired net sales for the three months endedJuly 31, 2021 and 2020. When calculating organic sales growth, we 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. Three Months Ended July 31, Change 2021 2020 Dollar Percent (dollars in thousands) Net sales$ 1,042,076 $ 802,573 Recently acquired net sales (1) (34,893) - Impact of foreign currency (2) (18,437) -
Base business net sales (3)
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(1)Represents net sales of branches acquired by us until the first anniversary of the acquisition date. For the three months endedJuly 31, 2021 , this includes net sales of D.L. Building Materials , which was acquired onFebruary 1, 2021 , net sales of Architectural Coating, which was acquired onJune 3, 2021 , and net sales of Westside, which was acquired onJuly 1, 2021 . (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. The increase in organic net sales was primarily driven by continued strength in the residential market, price inflation in the current year period, growth in complementary products sales and the negative impacts of COVID-19 in the prior year period, partially offset by one less selling day during the current year period compared to the prior year period. Gross Profit and Gross Margin Three Months Ended July 31, Change 2021 2020 Dollar Percent (dollars in thousands) Gross profit$ 335,833 $ 260,458 $ 75,375 28.9 % Gross margin 32.2 % 32.5 % The increase in gross profit during the three months endedJuly 31, 2021 compared to the prior year period was primarily due to continued strength in the residential market and the negative impacts of COVID-19 in the prior year period. The decrease in gross margin on net sales for the three months endedJuly 31, 2021 compared to the prior year period was primarily due to challenging price-cost dynamics for certain product categories. Included in cost of sales for the three months endedJuly 31, 2021 was a$1.7 million non-cash cost of sales charge to increase inventory acquired in the Westside acquisition to its estimated fair value. This adjustment had a negative effect on gross margin as the related inventory was sold. 27 --------------------------------------------------------------------------------
Selling, General and Administrative Expenses
Three Months Ended
July 31, Change
2021 2020 Dollar Percent
(dollars in thousands)
Selling, general and administrative
expenses $ 214,081 $ 183,112 $ 30,969 16.9 %
% of net sales 20.5 % 22.8 %
Selling, general and administrative expenses consist of warehouse, delivery and
general and administrative expenses. Selling, general and administrative
expenses increased during the three months ended July 31, 2021 compared to the
prior year period primarily due to increases in payroll and payroll related
costs, fuel costs, travel costs and facilities costs, which were driven by
increased sales volume and organic growth. Selling, general and administrative
expenses as a percent of our net sales decreased during the three months ended
July 31, 2021 compared to the prior year period primarily due to the impact of
inflationary market pricing on sales.
Depreciation and Amortization Expense
Three Months Ended
July 31, Change
2021 2020 Dollar Percent
(dollars in thousands)
Depreciation $ 12,925 $ 12,827 $ 98 0.8 %
Amortization 14,789 14,270 519 3.6 %
Depreciation and amortization $ 27,714 $ 27,097 $ 617 2.3 %
Depreciation and amortization expense includes depreciation of property and equipment and amortization of definite-lived intangible assets acquired in purchases of businesses. The increase in depreciation expense during the three months endedJuly 31, 2021 compared to the prior year period was primarily due to incremental expense resulting from property and equipment obtained in the acquisition of Westside, partially offset by assets becoming fully depreciated during the period. The increase in amortization expense during the three months endedJuly 31, 2021 was primarily due to incremental expense resulting from definite-lived intangible assets obtained in the acquisition of Westside and D.L. Building Materials, partially offset by time-based progression of our use of the accelerated method of amortization for acquired customer relationships. Interest Expense Three Months Ended July 31, Change 2021 2020 Dollar Percent (dollars in thousands) Interest expense$ (13,657) $ (14,081) $ (424) (3.0) % Interest expense consists primarily of interest expense incurred on our debt and finance leases and amortization of deferred financing fees and debt discounts. The decrease in interest expense during the three months endedJuly 31, 2021 compared to the prior year period was primarily due to a decrease in average debt outstanding during the comparable periods and a decrease in interest rates. 28 --------------------------------------------------------------------------------
Income Taxes
Three Months Ended
July 31, Change
2021 2020 Dollar Percent
(dollars in thousands)
Provision for income taxes $ 19,971 $ 9,604 $ 10,367 107.9 %
Effective tax rate 24.6 % 26.1 %
The change in the effective income tax rate during the three months ended
July 31, 2021 compared to the prior year period was primarily due to the impact
of state taxes, foreign taxes and a change in the valuation allowance in the
prior year period.
Liquidity and Capital Resources
Summary
We depend on cash flow from operations, cash on hand and funds available under
our asset based revolving credit facility (the "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 twelve months and in the long term. During fiscal 2021, we took several
measures to preserve liquidity in response to COVID-19. We believe we would be
able to take similar measures in the future should there be an economic downturn
or disruption to our business as a result of the continuing COVID-19 pandemic or
other factors.
As of July 31, 2021 , we had available borrowing capacity of approximately $335.5
million under our $445.0 million ABL Facility. The ABL Facility is scheduled to
mature on September 30, 2024 .
As of July 31, 2021 , we had available borrowing capacity of approximately $19.1
million under our Canadian revolving credit facility (the "Canadian Facility")
that provides for aggregate revolving commitments of $24.0 million ($30.0
million Canadian dollars). The Canadian Facility matures on January 12, 2026 .
For more information regarding our ABL Facility and other indebtedness, see
Note 5 of the Notes to Condensed Consolidated Financial Statements included in
this Quarterly Report on Form 10-Q and Note 7 of the Notes to Consolidated
Financial Statements included in our Annual Report on Form 10-K for the
fiscal year ended April 30, 2021 .
We have a common stock repurchase program authorized by our Board of Directors
to repurchase up to $75.0 million of our outstanding common stock. 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 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
repurchased approximately 85,000 shares of our common stock for $3.9 million
during the three months ended July 31, 2021 . As of July 31, 2021 , we had $50.5
million of remaining purchase authorization.
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.
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Cash Flows
A summary of our operating, investing and financing activities is shown in the
following table:
Three Months Ended July 31,
2021 2020
(in thousands)
Cash used in operating activities $ (75,077) $ (15,711)
Cash used in investing activities (129,576) (4,613)
Cash provided by (used in) financing activities 81,394 (51,819)
Effect of exchange rates on cash and cash equivalents (163) 943
Decrease in cash and cash equivalents $
(123,422)
Operating Activities The increase in cash used in operating activities during the three months endedJuly 31, 2021 compared to the prior year period was primarily due to a$100.4 million decrease in cash resulting from changes in our net working capital, partially offset by a$41.0 million increase in net income after adjustments for non-cash items. The decrease in cash from net working capital was primarily due to an increase in inventory, as well as an increase in accounts receivable due to higher sales activity. In addition, in the prior year period we were still conserving cash in response to COVID-19. Investing Activities The increase in cash used in investing activities during the three months endedJuly 31, 2021 compared to the prior year period was primarily due to a$122.8 million increase in cash used for acquisitions and a$2.1 million increase in capital expenditures. Capital expenditures during the three months endedJuly 31, 2021 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 remained at relatively low levels in comparison to the operating cash flows generated during the corresponding periods. Financing Activities The change in cash provided by (used in) financing activities during the three months endedJuly 31, 2021 compared to the prior year period was primarily due to net borrowings of$92.2 million of our revolving credit facilities during the three months endedJuly 31, 2021 , compared to net repayments of$43.7 million during the prior year period. During the three months endedJuly 31, 2021 , we used our revolvers to help fund the Westside acquisition and general working capital needs. During the prior year period, we repaid a portion of proceeds we proactively borrowed inMarch 2020 due to COVID-19. Also contributing to the change was$3.9 million of repurchases of common stock during the three months endedJuly 31, 2021 . No shares were repurchased during the prior year period. Debt Covenants Our senior secured first lien term loan facility (the "Term Loan Facility") contains a number of covenants that limit our ability and the ability of our restricted subsidiaries, as described in the respective 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 covenants contained in the Term Loan Facility as ofJuly 31, 2021 . Our senior unsecured notes dueMay 2029 (the "Senior Notes") contains certain covenants that, among other things, limit the Company's ability and the ability of its restricted subsidiaries to incur additional indebtedness, make certain dividends, repurchase Company stock or make other distributions, make certain investments, create liens, transfer or sell assets, merge or consolidate, and enter into transactions with the Company's affiliates. Such covenants are subject to a number of important exceptions and qualifications set forth in the related indenture. We were in compliance with all covenants contained in the Senior Notes as ofJuly 31, 2021 30 -------------------------------------------------------------------------------- The ABL Facility contains certain affirmative covenants, including financial and other reporting requirements. We were in compliance with all such covenants as ofJuly 31, 2021 . Contractual Obligations There have been no material changes to the contractual obligations as disclosed in our Annual Report on Form 10-K for the fiscal year endedApril 30, 2021 , other than those made in the ordinary course of business. Off-Balance Sheet Arrangements There have been no material changes to our off-balance sheet arrangements as discussed in our Annual Report on Form 10-K for the fiscal year endedApril 30, 2021 . Non-GAAP Financial Measures Adjusted EBITDA 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 our debt agreements. Our debt agreements 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 Quarterly Report on Form 10-Q. 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. 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. 31 -------------------------------------------------------------------------------- The following is a reconciliation of our net income to Adjusted EBITDA and Adjusted EBITDA margin: Three Months Ended July 31, 2021 2020 (in thousands) Net income$ 61,202 $ 27,219 Interest expense 13,657 14,081 Interest income - (37) Provision for income taxes 19,971 9,604 Depreciation expense 12,925 12,827 Amortization expense 14,789 14,270 Stock appreciation rights(a) 892 792 Redeemable noncontrolling interests(b) 310
252
Equity-based compensation(c) 1,958
1,605
Severance and other permitted costs(d) 147
1,947
Transaction costs (acquisitions and other)(e) 575
100
(Gain) loss on disposal and impairment of assets(f) (78)
394
Effects of fair value adjustments to inventory(g) 1,731 - Adjusted EBITDA$ 128,079 $ 83,054 Net sales$ 1,042,076 $ 802,573 Adjusted EBITDA Margin 12.3 % 10.3 %
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(a)Represents changes in the fair value of stock appreciation rights.
(b)Represents changes in the fair values of noncontrolling interests.
(c)Represents non-cash equity-based compensation expense related to the issuance
of share-based awards.
(d)Represents severance expenses and other costs permitted in the calculation of
Adjusted EBITDA under the ABL Facility and the Term Loan Facility, including
certain unusual, nonrecurring costs and credits due to COVID-19.
(e)Represents costs related to acquisitions paid to third parties.
(f)Includes gains from the sale of assets and impairment of assets resulting
from restructuring plans to close certain facilities.
(g)Represents the non-cash cost of sales impact of acquisition accounting
adjustments to increase inventory to its estimated fair value.
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