GMS(GMS) - 2023 Q1 - Quarterly Report

Cautionary Note Regarding Forward-Looking Statements This report contains forward-looking statements based on current expectations, which are subject to various known and unknown risks and uncertainties that could cause actual results to differ materially from projections - This report contains forward-looking statements based on current expectations, which are subject to various known and unknown risks and uncertainties. These factors could cause actual results to differ materially from projections[10][11] - Key risk factors that could impact future performance include, but are not limited to: - General economic conditions such as inflation, rising interest rates, and supply chain disruptions - Dependency on commercial and residential construction markets - Competition within the highly fragmented industry - Ability to pass on price increases and manage inventory - Successful implementation of growth strategies, including acquisitions - Disruptions in the supply chain or relationships with key suppliers - Cybersecurity breaches and IT system disruptions[12][13][14][15] PART I: Financial Information Item 1. Financial Statements Unaudited Q1 FY2023 financials show strong year-over-year revenue and net income growth, increased assets, and improved operating cash flow Condensed Consolidated Balance Sheets The balance sheet highlights an increase in total assets and stockholders' equity, with a slight decrease in current liabilities Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | July 31, 2022 | April 30, 2022 | | :--- | :--- | :--- | | Total current assets | $1,529,996 | $1,423,127 | | Total assets | $3,212,425 | $3,104,399 | | Total current liabilities | $666,627 | $689,198 | | Long-term debt, less current portion | $1,192,101 | $1,136,585 | | Total liabilities | $2,073,201 | $2,039,901 | | Total stockholders' equity | $1,139,224 | $1,064,498 | Condensed Consolidated Statements of Operations and Comprehensive Income The statement of operations shows robust year-over-year growth across net sales, gross profit, operating income, net income, and diluted EPS Statement of Operations Highlights (in thousands, except per share data) | Metric | Three Months Ended July 31, 2022 | Three Months Ended July 31, 2021 | % Change | | :--- | :--- | :--- | :--- | | Net sales | $1,359,553 | $1,042,076 | 30.5% | | Gross profit | $434,721 | $335,833 | 29.4% | | Operating income | $134,592 | $94,038 | 43.1% | | Net income | $89,470 | $61,202 | 46.2% | | Diluted EPS | $2.07 | $1.39 | 48.9% | Condensed Consolidated Statements of Stockholders' Equity Stockholders' equity increased, primarily driven by net income, partially offset by common stock repurchases - Total stockholders' equity increased from $1.06 billion at April 30, 2022, to $1.14 billion at July 31, 2022. The increase was primarily driven by $89.5 million in net income, partially offset by $23.8 million in common stock repurchases[22] Condensed Consolidated Statements of Cash Flows Cash flow from operations significantly improved, while investing activities decreased due to lower acquisition spending Cash Flow Summary (in thousands) | Activity | Three Months Ended July 31, 2022 | Three Months Ended July 31, 2021 | | :--- | :--- | :--- | | 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 | - The significant decrease in cash used in operating activities was mainly due to smaller increases in inventory compared to the prior year. Cash used in investing activities decreased substantially due to lower acquisition spending ($2.6 million in Q1'23 vs. $123.0 million in Q1'22)[25] Notes to Condensed Consolidated Financial Statements Notes detail operations, a recent acquisition, share repurchase program expansion, and net sales breakdown by product and geography - The company operates approximately 300 distribution centers and 100 tool sales, rental, and service centers across the United States and Canada, serving residential and commercial contractors[27] - On June 1, 2022, the Company acquired certain assets of Construction Supply of Southwest Florida, Inc. ("CSSWF"), a distributor of stucco, building, and waterproofing supplies[45] - On June 20, 2022, the Board of Directors expanded the share repurchase program authorization to $200.0 million. During the quarter, the company repurchased approximately 516,000 shares for $23.8 million[68][69] Net Sales by Product (in thousands) | Product Line | Three Months Ended July 31, 2022 | Three Months Ended July 31, 2021 | | :--- | :--- | :--- | | Wallboard | $521,554 | $390,135 | | Ceilings | $167,275 | $138,071 | | Steel framing | $274,896 | $196,276 | | Complementary products | $395,828 | $317,594 | | Total net sales | $1,359,553 | $1,042,076 | Net Sales by Geography (in thousands) | Geography | Three Months Ended July 31, 2022 | Three Months Ended July 31, 2021 | | :--- | :--- | :--- | | United States | $1,187,871 | $862,790 | | Canada | $171,682 | $179,286 | | Total net sales | $1,359,553 | $1,042,076 | Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management attributes strong net sales growth to pricing and market demand, with improved operating leverage, adequate liquidity, and continued strategic expansion Market Conditions and Outlook The residential market is expected to remain strong, while the commercial market shows signs of continued improvement - Residential Market: Strong demand is expected to continue through the remainder of calendar year 2022, supported by favorable demographics and low housing supply, despite medium-term uncertainty from rising mortgage rates and affordability concerns[95] - Commercial Market: Demand is showing signs of improvement, particularly in medical, educational, and governmental projects. However, larger office projects remain tempered. Management is optimistic that the recovery will continue[97] Business Strategy The company's strategy focuses on market share expansion, product line growth, platform expansion, and improved productivity - The company's key business strategies include: - Expanding market share in core products (wallboard, ceilings, steel framing) - Growing complementary product lines to diversify offerings and increase margins - Pursuing platform expansion through greenfield openings and strategic acquisitions - Driving improved productivity and profitability by leveraging scale and technology[101] Results of Operations Net sales grew significantly, driven by organic growth and acquisitions, with increased gross profit and improved SG&A leverage Net Sales by Product (in thousands) | Product | Q1 FY2023 | Q1 FY2022 | $ Change | % Change | | :--- | :--- | :--- | :--- | :--- | | 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% | - Organic (base business) net sales grew by 24.1% year-over-year, driven by inflationary pricing and volume growth. Recently acquired businesses contributed $73.9 million to net sales in the quarter[109][110][111] - Gross profit increased by 29.4% to $434.7 million, while gross margin slightly decreased to 32.0% from 32.2% in the prior year, attributed to the timing and elasticity of inflationary price-cost dynamics[112] - Selling, general and administrative (SG&A) expenses increased by 25.0% to $267.7 million due to higher sales volume, inflation, and acquisitions. However, SG&A as a percentage of net sales improved from 20.5% to 19.7%, indicating better operating leverage[115] Liquidity and Capital Resources The company maintains adequate liquidity via cash flow and its ABL facility, with substantial borrowing capacity and ongoing share repurchases - The company depends on cash flow from operations, cash on hand, and its ABL Facility for liquidity. Management believes these sources are adequate to fund operations and growth strategies for at least the next twelve months[120] - As of July 31, 2022, the company had available borrowing capacity of approximately $246.8 million under its ABL Facility and $23.4 million under its Canadian Facility[121] - Under its expanded share repurchase program, the company repurchased $23.8 million of its common stock during the quarter. As of July 31, 2022, $187.0 million remained authorized for future repurchases[123] Non-GAAP Financial Measures Adjusted EBITDA significantly increased, and the Adjusted EBITDA margin expanded due to improved operating leverage Reconciliation of Net Income to Adjusted EBITDA (in thousands) | Line Item | Three Months Ended July 31, 2022 | Three Months Ended July 31, 2021 | | :--- | :--- | :--- | | Net income | $89,470 | $61,202 | | Interest expense | $14,661 | $13,657 | | Provision for income taxes | $32,030 | $19,971 | | Depreciation and amortization | $32,440 | $27,714 | | Other adjustments | $6,429 | $5,635 | | Adjusted EBITDA | $175,014 | $128,079 | | Adjusted EBITDA Margin | 12.9% | 12.3% | - Adjusted EBITDA increased 36.6% to $175.0 million for the quarter, and Adjusted EBITDA margin expanded to 12.9% from 12.3% in the prior year, primarily due to better operating leverage as product price inflation outpaced operating cost inflation[105] Item 3. Quantitative and Qualitative Disclosures About Market Risk The company reports no material changes to its exposure to market risks since its last Annual Report on Form 10-K for the fiscal year ended April 30, 2022 - There have been no material changes to the company's exposure to market risks from those reported in the Annual Report on Form 10-K for the fiscal year ended April 30, 2022[142] Item 4. Controls and Procedures Management, including the CEO and CFO, evaluated the company's disclosure controls and procedures and concluded they were effective as of July 31, 2022. No material changes were made to the internal control over financial reporting during the quarter - Based on an evaluation as of July 31, 2022, the Chief Executive Officer and Chief Financial Officer concluded that the company's disclosure controls and procedures were effective[144] - There were no changes in internal control over financial reporting during the quarter that have materially affected, or are reasonably likely to materially affect, these controls[145] PART II: Other Information Item 1. Legal Proceedings The company is involved in various lawsuits in the normal course of business, none of which are expected to have a material adverse effect. It continues to manage asbestos-related personal injury lawsuits, with 988 of 1,037 cases filed since 2002 having been dismissed without payment - The company is not currently a party to any legal proceedings that management believes would have a material adverse effect on its business or financial condition[148] - Regarding historical asbestos-related claims, of the 1,037 lawsuits filed since 2002, 988 have been dismissed without payment, 38 are pending, and 11 have been settled without material financial impact[148] Item 1A. Risk Factors There have been no material changes in the risks facing the company as described in its Annual Report on Form 10-K for the fiscal year ended April 30, 2022 - There have been no material changes to the risk factors previously disclosed in the Company's Annual Report on Form 10-K for the fiscal year ended April 30, 2022[149] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds During the three months ended July 31, 2022, the company repurchased a total of 516,285 shares of its common stock. This was executed under a publicly announced program, which was expanded on June 20, 2022, to authorize up to $200.0 million in repurchases Share Repurchases for the Three Months Ended July 31, 2022 | Period | Total Shares Purchased | Average Price Paid per Share | Remaining Authorization (in thousands) | | :--- | :--- | :--- | :--- | | May 2022 | 134,623 | $47.43 | $12,446 | | June 2022 | 177,509 | $45.86 | $196,285 | | July 2022 | 204,153 | $45.40 | $187,016 | | Total | 516,285 | | | - On June 20, 2022, the Board of Directors approved an expanded share repurchase program authorizing up to $200.0 million of its outstanding common stock, replacing a previous $75.0 million authorization[150] Item 3. Defaults Upon Senior Securities The company reported no defaults upon its senior securities during the period - None[151] Item 4. Mine Safety Disclosures This item is not applicable to the company - Not Applicable[152] Item 5. Other Information The company reported no other information for the period - None[153] Item 6. Exhibits This section lists the exhibits filed as part of the quarterly report, including certifications from the CEO and CFO, and XBRL data files - The exhibits filed with this report include the CEO and CFO certifications pursuant to the Sarbanes-Oxley Act of 2002 and Inline XBRL documents[155] Signatures The Quarterly Report on Form 10-Q was signed on September 1, 2022, by the Chief Financial Officer - The Quarterly Report on Form 10-Q was signed on September 1, 2022, by Scott M. Deakin, the Chief Financial Officer[157][159]