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 ended April 30, 2022. Overview Founded in 1971, GMS Inc. ("we," "our," "us," or the "Company"), through its wholly owned operating subsidiaries, operates a network of approximately 300 distribution centers with extensive product offerings of wallboard, ceilings, steel framing and complementary construction products. GMS also operates approximately 100 tool sales, rental and service centers. Through these operations, GMS provides a comprehensive selection of building products and solutions for its residential and commercial contractor customer base across the United States and Canada. The Company's unique operating model combines the benefits of a national platform and strategy with a local go-to-market focus, enabling GMS to generate significant economies of scale while maintaining high levels of customer service. Market Conditions and Outlook Residential There has been strong underlying demand for residential products since mid-calendar year 2020. We believe this strength in residential demand has been driven by a combination of factors including favorable demographics, historically low interest rates, low levels of supply of new and existing homes for sale, a strong job market, and changes in workplace habits and preferences resulting from COVID-19. While the recent uptick in affordability concerns, including higher mortgage rates along with broader macroeconomic and geopolitical concerns, creates some level of uncertainty in the medium term, we expect the current favorable demand environment for our products to continue through at least the remainder of calendar year 2022. Additionally, we expect the solid underlying demand fundamentals, including favorable demographics and low levels of supply of new homes, to provide support in the longer term. Homebuilders and contractors are facing significant inflationary pressures for products and labor, as well as supply chain constraints, primarily related to products needed during construction phases outside of those serviced by us. These pressures and constraints create significantly increased cycle times and a decreased ability to predict project timing, as compared to historical periods. As a result, and given product inflation, we have experienced an increase in our inventory balances. We expect our inventory levels on a unit basis to return to more normal levels as the supply chain constraints further subside in future quarters. Commercial Demand for commercial projects was severely impacted by COVID-19 and has been slow to recover in certain sectors. However, we are starting to see some improvement, including stronger year-over-year commercial wallboard sales. Construction to support medical, educational and governmental projects has started to rebound, and we are beginning to quote and fulfill a number of hospitality projects, particularly where commercial development has followed residential expansion. Larger office projects, both new and for repair and remodeling ("R&R"), however, remain tempered, particularly in more mature urban markets. Leading indicators of commercial activity, such as the Architectural Billings Index, as well as our own quoting activity and discussions with customers, make us optimistic that, although still in its early stages, the improvement we are seeing will continue.
As with residential contractors, both we and commercial contractors face significant inflationary pressures and availability constraints for fuel, labor, building products and other miscellaneous expenses.
The key elements of our business strategy are as follows:
•Expand Core Products. Our business strategy includes an emphasis on expanding our market share in our core products (wallboard, ceilings and steel framing).
•Grow Complementary Products. We are focused on growing our complementary product lines (insulation, lumber, ready-mix joint compound, tools, fasteners and various other construction products) to better serve our customers and diversify and expand our product offerings while driving higher sales and margins.
•Platform Expansion. Our growth strategy includes the pursuit of both greenfield openings and strategic acquisitions to further broaden our geographic markets, enhance our service levels and expand our product offerings. •Greenfield openings. Our strategy for opening new distribution centers 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. •Acquisitions. We also have a proven history of consummating acquisitions in new and contiguous markets and intend to continue to pursue acquisitions. Due to the large, highly fragmented nature of our markets and our reputation throughout the industry, we believe we will continue to have access to a robust acquisition pipeline 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. •Drive Improved Productivity and Profitability. Our business strategy entails a 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. We expect to continue to capture profitable market share in our existing footprint by delivering industry-leading customer service.
We continue to actively monitor the ongoing impacts of COVID-19 and its contributory effects on the economy on our business. 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 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 ended July 31, 2022, there is no guarantee that COVID-19 or its contributory effects on the economy 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 ended April 30, 2022 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. 25 --------------------------------------------------------------------------------
Key highlights in our business during the three months ended July 31, 2022 are described below:
•Generated net sales of $1,359.6 million during the three months ended July 31, 2022, a 30.5% increase from the prior year period, primarily due to inflationary pricing, active residential construction, volume growth in wallboard, ceilings and complementary products, an improving commercial landscape, and acquisitions over the past year. •Generated net income of $89.5 million during the three months ended July 31, 2022, a 46.2% increase compared to the prior year, primarily due to the increase in net sales noted above, partially offset by an increase in the provision for income taxes. Supply chain dynamics have led to high levels of product inflation, which have been the principal driver of both sales growth and incremental profitability. •Generated Adjusted EBITDA (a non-GAAP measure, see "Non-GAAP Financial Measures" in this Item 2) of $175.0 million during the three months ended July 31, 2022, a 36.6% 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 12.9% for the three months ended July 31, 2022 compared to 12.3% for the three months ended July 31, 2021, primarily due to better operating leverage, as product price inflation on sales outpaced operating cost inflation.
•Completed one acquisition and opened two greenfield locations.
On June 1, 2022, we acquired certain assets of Construction Supply of Southwest Florida, Inc. ("CSSWF"). CSSWF is a distributor of various stucco, building and waterproofing supplies serving markets in the southwest Florida area. For more information regarding our acquisitions, see Note 2 of the Notes to Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q.
In May 2022, we opened greenfield locations in Wildwood, Florida and Cleveland, Ohio. During the three months ended July 31, 2022, we also opened six new Ames Taping Tools Holding LLC ("Ames") stores. 26 --------------------------------------------------------------------------------
The following table summarizes key components of our results of operations for the three months ended July 31, 2022 and 2021:
Three Months Ended July 31, 2022 2021 (dollars in thousands) Statement of operations data: Net sales $ 1,359,553 $ 1,042,076 Cost of sales (exclusive of depreciation and amortization shown separately below) 924,832 706,243 Gross profit 434,721 335,833 Operating expenses: Selling, general and administrative expenses 267,689 214,081 Depreciation and amortization 32,440 27,714 Total operating expenses 300,129 241,795 Operating income 134,592 94,038 Other (expense) income: Interest expense (14,661) (13,657) Other income, net 1,569 792 Total other expense, net (13,092) (12,865) Income before taxes 121,500 81,173 Provision for income taxes 32,030 19,971 Net income $ 89,470 $ 61,202 Non-GAAP measures: Adjusted EBITDA(1) $ 175,014 $ 128,079 Adjusted EBITDA margin(1)(2) 12.9 % 12.3 %
(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.
Three Months Ended July 31, 2022 and 2021
Net Sales Three Months Ended July 31, Change 2022 2021 Dollar Percent (dollars in thousands) Wallboard $ 521,554 $ 390,135 $ 131,419 33.7 % Ceilings 167,275 138,071 29,204 21.2 % Steel framing 274,896 196,276 78,620 40.1 % Complementary products 395,828 317,594 78,234 24.6 % Total net sales $ 1,359,553 $ 1,042,076 $ 317,477 30.5 % 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 ended July 31, 2022 compared to the prior year period was primarily due to inflationary pricing, active residential construction, volume growth in wallboard, ceilings and complementary products, an improving commercial landscape and acquisitions over the past year. The increase consisted of the following: 27 -------------------------------------------------------------------------------- •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 are 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 are principally impacted by commercial construction activity, primarily due to an increase in price/product mix, partially offset by lower volume; and
•an increase in complementary products sales, which include insulation, joint treatment, tools (including ATF tools), lumber and various other specialty building products, primarily due to an increase in pricing in certain product categories, positive contributions from acquisitions and the execution of growth initiatives to increase other product sales. The following table breaks out our net sales into organic, or base business, net sales and recently acquired net sales for the three months ended July 31, 2022 and 2021. 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 2022 2021 Dollar Percent (dollars in thousands) Net sales $ 1,359,553 Recently acquired net sales (1) (73,922) Impact of foreign currency (2) 8,022
(1)Represents net sales of branches acquired by us until the first anniversary of the acquisition date. For the three months ended July 31, 2022, net sales includes sales from the following acquisitions: Westside Building Material ("Westside") acquired on July 1, 2021, Ames acquired on December 1, 2021, Kimco Supply Company acquired on December 1, 2021 and CSSWF acquired on June 1, 2022.
(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 inflationary pricing, active residential construction, volume growth in wallboard, ceilings and complementary products and an improving commercial landscape.
Gross Profit and Gross Margin
Three Months Ended July 31, Change 2022 2021 Dollar Percent (dollars in thousands) Gross profit $ 434,721 $ 335,833 $ 98,888 29.4 % Gross margin 32.0 % 32.2 % The increase in gross profit during the three months ended July 31, 2022 compared to the prior year period was primarily due to the successful pass through of product inflation, active residential construction and incremental gross profit from acquisitions. The decrease in gross margin on net sales for the three months ended July 31, 2022 compared to the prior year period was primarily due to the timing and elasticity of inflationary price-cost dynamics in the market. On a product line basis, wallboard and steel margins were unfavorably impacted by these dynamics and complementary products and ceilings benefited. 28 --------------------------------------------------------------------------------
Selling, General and Administrative Expenses
Three Months Ended July 31, Change 2022 2021 Dollar Percent (dollars in thousands) Selling, general and administrative expenses $ 267,689 $ 214,081 $ 53,608 25.0 % % of net sales 19.7 % 20.5 % 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, 2022 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, inflationary pressures and incremental selling, general and administrative expenses from acquisitions. Selling, general and administrative expenses as a percentage of our net sales decreased during the three months ended July 31, 2022 compared to the prior year period, primarily due to the impact of inflationary market pricing on sales.
Three Months Ended July 31, Change 2022 2021 Dollar Percent (dollars in thousands) Depreciation $ 14,993 $ 12,925 $ 2,068 16.0 % Amortization 17,447 14,789 2,658 18.0 % Depreciation and amortization $ 32,440 $ 27,714 $ 4,726
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 ended July 31, 2022 compared to the prior year period was primarily due to incremental expense resulting from property and equipment obtained in the acquisitions of Westside and Ames. The increase in amortization expense during the three months ended July 31, 2022 was primarily due to incremental expense resulting from definite-lived intangible assets obtained in the acquisitions of Westside and Ames, 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 2022 2021 Dollar Percent (dollars in thousands) Interest expense $ 14,661 $ 13,657 $ 1,004 7.4 % Interest expense consists primarily of interest expense incurred on our debt and finance leases and amortization of deferred financing fees and debt discounts. The increase in interest expense during the three months ended July 31, 2022 compared to the prior year period was primarily due to increases in interest rates and average debt outstanding. 29 --------------------------------------------------------------------------------
Income Taxes Three Months Ended July 31, Change 2022 2021 Dollar Percent (dollars in thousands) Provision for income taxes $ 32,030 $ 19,971 $ 12,059 60.4 % Effective tax rate 26.4 % 24.6 %
The change in the effective income tax rate during the three months ended July 31, 2022 compared to the prior year period was primarily due to the impact of actions taken during the quarter in anticipation of expected changes in Canadian tax regulations, as well as stock-based compensation.
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. We also believe we would be able to take measures to preserve liquidity should there be an economic downturn, recession or other disruption to our business in the future.
As of July 31, 2022, we had available borrowing capacity of approximately $246.8 million under our ABL Facility. The ABL Facility is scheduled to mature on September 30, 2024.
As of July 31, 2022, we had available borrowing capacity of approximately $23.4 million under our Canadian revolving credit facility (the "Canadian Facility") that provides for aggregate revolving commitments of $23.4 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, 2022.
On June 20, 2022, our Board of Directors approved an expanded share repurchase program under which we are authorized to repurchase up to $200.0 million of our outstanding common stock. This expanded program replaces our previous share repurchase authorization of $75.0 million. We may conduct repurchases under the share repurchase program through open market transactions, under trading plans in accordance with SEC Rule 10b5-1 and/or in privately negotiated transactions, in each case in compliance with Rule 10b-18 under the Securities Exchange Act of 1934, as amended. The timing and amount of any purchases of our common stock are subject to a variety of factors, including, but not limited to, our liquidity, credit availability, general business and market conditions, our debt covenants and the availability of alternative investment opportunities. The share repurchase program does not obligate us to acquire any amount of common stock, and it may be suspended or terminated at any time at our discretion. We repurchased approximately 516,000 shares of our common stock for $23.8 million during the three months ended July 31, 2022, of which $10.8 million was repurchased under the previous authorization and $13.0 million was repurchased under the new authorization. As of July 31, 2022, we had $187.0 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 or repay existing debt and to fund ongoing cash needs such as general corporate purposes, growth initiatives, acquisitions and our stock repurchase program. 30 --------------------------------------------------------------------------------
A summary of our operating, investing and financing activities is shown in the following table: Three Months Ended July 31, 2022 2021 (in thousands) Cash used in operating activities $ (4,403) $ (75,077) Cash used in investing activities (13,277) (129,576) Cash provided by financing activities 22,212 81,394 Effect of exchange rates on cash and cash equivalents 165 (163) Increase (decrease) in cash and cash equivalents $ 4,697 $ (123,422) Operating Activities The decrease in cash used in operating activities during the three months ended July 31, 2022 compared to the prior year period was primarily due to an increase in inventory in the prior year period related to ensuring product availability and managing price inflation amid an environment of tight and less reliable supply. This was partially offset by an increase in cash used for our annual bonuses, which are paid in the first fiscal quarter.
The decrease in cash used in investing activities during the three months ended July 31, 2022 compared to the prior year period was primarily due to a $120.4 million decrease in cash used for acquisitions, partially offset by a $4.1 million increase in capital expenditures.
Capital expenditures during the three months ended July 31, 2022 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.
The decrease in cash provided by financing activities during the three months ended July 31, 2022 compared to the prior year period was primarily due to net borrowings of $53.9 million under our revolving credit facilities during the three months ended July 31, 2022, compared to net borrowings of $92.2 million during the prior year period. During the three months ended July 31, 2021, we used our revolving credit facilities to help fund the Westside acquisition and for general working capital needs. Also contributing to the change was a $19.9 million increase in repurchases of common stock during the three months ended July 31, 2022 compared to the prior year period.
The Term Loan Facility and the indenture governing the Senior Notes contain a number of covenants that limit our ability and the ability of our restricted subsidiaries, as described in the respective credit agreement and the indenture, 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. Such covenants are subject to several important exceptions and qualifications set forth in the Term Loan Facility and the indenture governing the Senior Notes. The Company was in compliance with all covenants contained in the Term Loan Facility and the indenture governing the Senior Notes as of July 31, 2022. The ABL Facility contains certain affirmative covenants, including financial and other reporting requirements. We were in compliance with all such covenants as of July 31, 2022. 31 --------------------------------------------------------------------------------
There have been no material changes to the contractual obligations as disclosed in our Annual Report on Form 10-K for the fiscal year ended April 30, 2022, other than those made in the ordinary course of business.
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 ended April 30, 2022.
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. 32 -------------------------------------------------------------------------------- The following is a reconciliation of our net income to Adjusted EBITDA and Adjusted EBITDA margin: Three Months Ended July 31, 2022 2021 (in thousands) Net income $ 89,470 $ 61,202 Interest expense 14,661 13,657 Interest income (56) - Provision for income taxes 32,030 19,971 Depreciation expense 14,993 12,925 Amortization expense 17,447 14,789 Stock appreciation rights(a) 2,344 892
Redeemable noncontrolling interests and deferred compensation(b) 495
310 Equity-based compensation(c) 3,132 1,958 Severance and other permitted costs(d) 352 147 Transaction costs (acquisitions and other)(e) 386 575 Gain on disposal of assets(f) (284) (78) Effects of fair value adjustments to inventory(g) 44 1,731 Adjusted EBITDA $ 175,014 $ 128,079 Net sales $ 1,359,553 $ 1,042,076 Adjusted EBITDA Margin 12.9 % 12.3 %
(a)Represents changes in the fair value of stock appreciation rights.
(b)Represents changes in the fair values of noncontrolling interests and deferred compensation agreements.
(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.
(g)Represents the non-cash cost of sales impact of acquisition accounting adjustments to increase inventory to its estimated fair value.
© Edgar Online, source Glimpses